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Executives

Shai Gozani – President & Chief Executive Officer

Tom Higgins – Senior Vice President & Chief Financial Officer

Analysts

Juan Sanchez – Ladenburg Thalman

NeuroMetrix, Inc. (NURO) Q4 2012 Earnings Call February 19, 2013 8:00 AM ET

Operator

Good morning and welcome to NeuroMetrix’s Q4 2012 Conference Call. My name is Deanna and I’ll be your moderator for the call. NeuroMetrix is a medical device company focused on the neurological complications of diabetes.

On this call the company may make statements which are not historical facts and are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature that depend upon or refer to future events or conditions that include words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “plan,” or similar expressions are forward-looking statements.

Any forward-looking statements reflect current views of NeuroMetrix about future results of operations and other forward-looking information. You should not rely on forward-looking statements because actual results may differ materially as a result of a number of important factors including those set forth in the earnings release issued earlier today. The risks and uncertainties include the factors described under the heading “Risk Factors” in the company’s prospectus filed with the SEC on February 8, 2012, and available on the company’s Investor Relations website at http://www.neurometrix.com and the SEC website at http://www.sec.gov and ant updates contained in the subsequent SEC filings.

NeuroMetrix does not intend to and undertakes no duty to update the information disclosed on this conference call. I’d now like to introduce the NeuroMetrix President and CEO, Dr. Shai Gozani. Dr. Gozani?

Shai Gozani

Thank you very much. I’m joined today on our call by Tom Higgins, our Chief Financial Officer. We appreciate the opportunity to review our business highlights for Q4 2012. Following our prepared remarks we will be pleased to take questions.

2012 was a productive year for the company. We made progress and in many cases exceeded the goals that we set for the business a year ago. These goals were designed to build the foundation for our high-growth, profitable diabetes franchise focused on diabetic peripheral neuropathy or DPN.

As a reminder, DPN is the most common complication of diabetes effecting over half the people with diabetes. DPN causes significant morbidity including pain, increased risk of falling in the elderly; and is a primary trigger for diabetic foot ulcers which may require lower extremity amputations. The annual cost of diabetic neuropathies has been estimated at $14 billion in the United States alone.

The company’s diabetes business has two products – a diagnostic test called NC-stat DPNCheck which was launched in Q4 2011 and the SENSUS pain management system which was launched in January of this year, 2013. NC-stat DPNCheck is a rapid, accurate and quantitative point of care test for diabetic neuropathy or DPN. This product is used to detect diabetic neuropathy at an early stage and to drive treatment.

The SENSUS pain management system is a noninvasive nerve stimulator for treating chronic pain. We believe that the product is well suited to managing chronic pain in patients with diabetes such as those due to painful diabetic neuropathy which is a debilitating form of chronic pain that affects 25% of people with diabetes.

Here are a few key highlights for 2012 as well as for Q4: over the course of the year we significantly advanced commercialization of NC-stat DPNCheck by testing and then refining our initial multi-segment market approach. We are now focused on a single domestic segment, Medicare Advantage. This is the largest near-term revenue opportunity because of the compelling clinical and financial profile of DPNCheck to these healthcare plans and their associated clinical providers.

We currently have three active customers with a total of about 130,000 total covered lives. An additional three Medicare Advantage plans with another 130,000 covered lives are scheduling or carrying out pilot programs. Our early stage pipeline includes discussions with prospective customers totaling another 250,000 covered lives. We recorded about $600,000 in Medicare Advantage revenue last year and we believe that can double or more in 2013.

NC-stat DPNCheck has now been field tested for over a year and has performed to our high expectations. We have implemented software upgrades designed to improve performance and enhance IT and electronic medical record integration and compliance reporting for our Medicare Advantage customers. Total NC-stat DPNCheck revenue for 2012 was $1.4 million. We ended the year with a customer install base of 939 devices, slightly below our goal of 1000 devices.

Our channel focus on Medicare Advantage allowed us to shut down our direct sales force in Q4 which was selling for individual endocrinology and podiatry clinics. As a result, sales and marketing costs will be lower in 2013. We also identified several promising international opportunities for NC-stat DPNCheck which are in development. We hope to report progress in the coming months. These are primarily in the Pacific Rim and will be addressed through corporate partners and local distributors.

We also broadened our product line last year with the introduction of the SENSUS Pain management system which was our major goal for the year. The SENSUS electrode received FDA clearance on November 29th last quarter, thereby completing the regulatory process. Commercial shipments began in early January of this year. We are starting out with a small number of regional distributors and will stay in close contact, looking for any market feedback that needs to be addressed.

It is too early to draw product or market conclusions, however, to date we have shipped over 60 SENSUS devices to distributors and it is our understanding that between 10 and 20 patients are already on therapy. Most of the anecdotal feedback we’ve received thus far has been positive with respect to ease of use and reports of pain relief.

Under the SENSUS business model we sell devices and electrodes to durable medical equipment suppliers, also called DMEs, who stock the product, create demand through their sales representatives, fulfill prescriptions and bill insurers. Product success will be closely linked to broad distribution. Currently we have seven suppliers under contract with a total of thirty sales representatives. Discussions are underway with additional regional and national DMEs. Our goal is to have 100 DME sales representatives detailing physicians by mid-year and 250 by the end of the year. In terms of product usage, our 2013 goal is 2000 patients using the SENSUS pain management system.

Our core strength has always been our R&D capabilities and we remain committed to product development and innovation as well as sustained engineering and clinical development. Our core R&D focus for 2013 is a second-generation NC-stat DPNCheck device which we plan to launch at the end of the year, and continued technical and regulatory enhancements to SENSUS. The second-generation DPNCheck device will have usability enhancements and certain technical improvements involved in the biosensors.

One particular SENSUS focus is on sleep interference due to painful diabetic neuropathy. We believe that SENSUS can have a profound impact on the devastating effects of painful diabetic neuropathy on sleep in patients with diabetes. We expect to make regulatory filings and release key software updates this year in support of the sleep indication. We look forward to reporting further on our R&D efforts over the course of the year.

We have an active clinical program underway for NC-stat DPNCheck and will be launching a similarly aggressive…

[technical difficulties]

Shai Gozani

Thank you very much. We apologize for the technical difficulties. Apparently we lost the connection. So what we need to do because we need to have a clean presentation of the earnings call, we’re going to start at the beginning of my comments not knowing exactly where the call dropped off. So I apologize if we’re repeating content that you’ve heard before.

So to begin again, thank you again for joining us today and I apologize for the technical difficulties. On the call I’m joined by Tom Higgins, our Chief Financial Officer. We very much appreciate the opportunity to review our business highlights for Q4 2012 and following our remarks we’ll be happy to take your questions.

2012 was a very productive year for the company. We made progress and in many cases exceeded the goals that we set for the business a year ago. These goals were designed to build the foundation for our high-growth, profitable diabetes franchise focused on diabetic peripheral neuropathy or DPN.

As a reminder, DPN is the most common complication of diabetes. It affects over half the people with diabetes and causes significant morbidity which includes pain, increased risk of falling in the elderly; and is the primary trigger for diabetic foot ulcers which may require lower extremity amputations. The annual cost of diabetic neuropathies has been estimated at over $14 billion in the United States alone.

The company’s diabetes business has two products – a diagnostic test, NC-stat DPNCheck which was launched in Q4 2011, and the SENSUS pain management system which was launched in January 2013. NC-stat DPNCheck is a rapid, accurate and quantitative point of care test for diabetic neuropathy. This product is used to detect the disease at an early stage and to guide treatment.

The SENSUS pain management system is a noninvasive nerve stimulator for treating chronic pain. We believe that the product is very well suited to managing chronic pain in patients with diabetes such as due to painful diabetic neuropathy which is a debilitating form of chronic pain affecting about a quarter of people with diabetes.

Some of the key highlights for 2012 and Q4 of last year are as follows: over the course of the year we significantly advanced commercialization of DPNCheck by testing and then refining our initial multi-segment market approach. We are now focused on a single domestic segment, Medicare Advantage plans. This is the largest near-term revenue opportunity because of the compelling clinical and financial profile of DPNCheck to these plans and their associated clinical providers.

We currently have three plans with a total of about 130,000 total covered lives, and an additional three plans with a total of another 130,000 covered lives that are scheduling or carrying out pilot programs. Furthermore, our early stage pipeline includes discussions with prospective customers totaling another 250,000 covered lives. We recorded about $600,000 in Medicare Advantage revenue last year and believe that we more than double that this year.

NC-stat DPNCheck has now been field tested for over a year and has performed to our high expectations. We have implemented various upgrades to improve performance and particularly enhancing IT and electronic medical record integration to support our Medicare Advantage customers. Total DPNCheck revenue for 2012 was $1.4 million. We ended the year with an installed base of 939 devices, which was slightly below our goal of 1000.

However, our channel focus on Medicare Advantage allowed us to shut down our direct sales force in Q4 which was selling to individual endocrinology and podiatry clinics which we did not find to be particularly efficient. And as a result our sales and marketing costs will be lower in 2013. We also identified several promising international opportunities for NC-stat DPNCheck. We will hope to report on these further in the coming months. These are largely focused in the Pacific Rim and will be addressed through corporate partners and local distribution.

Importantly, we broadened our product line with the introduction of the SENSUS Pain management system which was a major goal for 2012. The SENSUS electrode, which was the second part of the system, received FDA clearance on November 29th, thereby completing the regulatory process for the product. Commercial shipments began in early January and we are starting out with a small number of regional distributors and will stay in close contact, looking for any market feedback that needs to be addressed.

It is too early to draw product or market conclusions, however we have shipped over 60 SENSUS devices to our distributors and somewhere between 10 and 20 patients are already on therapy. Most of the anecdotal feedback to date we have received has been positive with both respect to ease of use of the device and reports of pain relief.

As a reminder, under the SENSUS business model we sell devices and electrodes to durable medical equipment suppliers, or DMEs, who stock the product, create demand through their sales representatives, fill prescriptions and bill insurers. Product success will be closely linked to broad distribution. Currently we have seven DME suppliers under contract with a total of thirty sales representatives. Discussions are underway with additional regional and national DMEs. Our goal is to have 100 DME sales representatives detailing physicians by mid-year and 250 by the end of the year. In terms of product usage, our 2013 goal is 2000 patients using the SENSUS pain management system.

Our core strength has always been our R&D capabilities and we remain committed to product development and innovation as well as sustained engineering and clinical development. Our core R&D focus for 2013 is a second-generation NC-stat DPNCheck device which we plan to launch at the end of the year, and continued technical and regulatory enhancements to SENSUS. The second-generation DPNCheck device will have usability enhancements and certain technical improvements involved in the biosensors.

From the SENSUS perspective our focus will be on sleep interference due to painful diabetic neuropathy. We believe that SENSUS can have a profound impact on the devastating effects of painful diabetic neuropathy on sleep in patients with diabetes. We expect to make regulatory filings and release key software updates this year in support of the sleep indication. We look forward to reporting further on our R&D efforts over the course of this year.

We also have an active clinical program underway for NC-stat DPNCheck and will be launching a similarly aggressive SENSUS program next quarter. There are currently seven DPN-check studies underway at various leading academic institutions and other settings. These studies will act as the broad clinical and scientific support for the device. We also expect to launch the first post-market study for SENSUS in Q2. A key purpose of the SENSUS study is to continue to build support for the device among payers and to protect and enhance long-term reimbursement.

With that I will turn it over to Tom to provide a discussion on the financials.

Tom Higgins

Thanks, Shai. I’d like to first expand on your operations comments. The steps we’ve taken to consolidate our operating structure are significant. With a narrow market focus on DPNCheck and SENSUS we’ve put in place an organization capable of supporting revenue growth without proportionate cost increases. We believe it is both flexible and leverage-able. It conserves cash today and lowers our future cash flow breakeven point.

Our sales channels are designed for domestic DPNCheck sales to be handled by a small senior level of commercial operations team plus our in-house customer service department. This effort is supplemented by independent distribution outside the US. Domestic sales of SENSUS will rely exclusively on DME suppliers.

We’ve redefined the core headcount in our business model to be 30 to 35 employees. We believe this is sufficient to cover our diabetes sales initiatives, the product development pipeline, the legacy ADVANCE business and essential public company administrative support. The near-term implication of this structure is that operating expenses in 2013 are forecasted to drop by $2.5 million from 2012.

We forecast cash usage for 2013 in the range of $1.5 million to $2.0 million per quarter based on our 2013 revenue outlook of about $7 million. Quarterly cash usage should decline during the year as SENSUS and DPNCheck revenue grows. Looking forward we project that our cash flow breakeven point has been reset to a revenue level of about $20 million.

Our capital structure has also changed. We remain committed to our public company status and NASDAQ listing. In December our shareholders authorized a reverse split of our common stock if it was necessary to maintain that NASDAQ listing and last week we concluded that it was essential. On Friday we executed a 1-for-6 reverse split after the market closed. The measure is intended to increase the trading price of our stock above the $1.00 level required by NASDAQ. The split does not change any individual shareholder’s percentage ownership in the company; it’s just math. It has no effect on the fundamentals of the business.

We continue to have a simple capital structure. Post-split our equity accounts consist of 2,141,000 common shares, 782,000 warrants with an average strike price of $7 per share, and 52,000 stock options mostly with exercised prices above $20 per share. We are debt-free. In January, we renewed our credit facility with Comerica Bank in the amount of $2.5 million. This is available for working capital support and other uses should we need it. We maintain an equity registration statement with the SEC; in other words a shelf. Its statutory three-year term is ending and we intend to renew it with the filing of our 10(k) next week. The shelf provides us a degree of flexibility in future equity offerings.

Turning to the results we reported this morning, revenue was $1.5 million in Q4 and $7.6 million for the year. Our Q4 gross margin of $847,000 was 56% of revenue, an improvement from 53% gross margins over the full year 2012. DPNCheck diabetes business contributed revenue in Q4 of $352,000. This was 23% of total revenue. For 2012, the first full year of DPNCheck sales, it contributed $1.4 million in revenue or 19% of our total revenue.

Quarter-on-quarter revenue from diabetes trended upwards during 2012 with Q2 our highest revenue quarter being above the trend line due to large initial sales from two large customers. Taking a closer look at the $1.4 million diabetes revenue, in the markets of our primary focus we recorded $600,000 in Medicare Advantage sales and $300,000 in international DPNCheck sales. It’s from these initial positions that we expect strong growth in 2013.

Diabetes gross margins finished the year strong. For DPNCheck we achieved 69% margins in Q4 and 60% for the full year. Margins were enhanced by the shift in market focus to Medicare Advantage and international, where we achieved higher average sales prices over the course of the year. The Q4 DPNCheck margin of 69% compares favorably with 45% margins we reported in Q1 when sales were directed at endocrinology and podiatry. Q4 particularly benefited from international sales into Europe.

The legacy neuro-diagnostic business of ADVANCE devices and consumables continued to make a positive contribution. Q4 neuro-diagnostic revenue was $1.2 million and full year revenue was $6.1 million. Gross margins on this business were stable at about 51% in Q4 and for the full year.

Operating expenses were $2.7 million in Q4 and $14.0 million for the full year. Q4 OPEX dropped by $900,000 or 25% from the $3.6 million in Q3. This sequential quarter drop reflects the consolidation of business operations that we’ve discussed as well as a $400,000 benefit from year-end adjustments to our incentive comp plans. Operating expenses in 2013 should be in the range of $2.8 million to $3.0 million per quarter.

Our net loss was $1.9 million in Q4 and $10.0 million for the year. After giving effect to the reverse split the net loss was $0.89 per share in Q4 and $5.22 full year. We ended 2012 with $8.7 million in cash and consumed $2.2 million in cash during Q4. The balance sheet accounts that we closely manage, inventory and receivables, remain solid. Year-end receivables of a little under $600,000 reflected 33 days sales outstanding. Year-end inventory of $835,000 reflected a turnover rate of 3.2x per year.

That summarizes the financial highlights. Back to you, Shai.

Shai Gozani

Thank you, Tom, and again we apologize for the technical difficulties and appreciate your patience in staying with the call. So with that, those are our prepared comments and we’d be happy to take any questions you might have at this point.

Question-and-Answer Session

Operator

(Operator instructions.) We have a question from the line of Juan Sanchez at Ladenburg Thalman.

Juan Sanchez – Ladenburg Thalman

Hi guys, how are you? I think I have a good understanding of the SENSUS and the DPNCheck but should we assume that the ADVANCE legacy business is slowly disappearing or do you see this business will flatten out at some point in the near future?

Shai Gozani

Well, it’s continuing to deteriorate as we have no focus on it. As you know, we just basically ship electrodes to existing customers and are running the business for cash flow. So at this point it continues to deteriorate on a quarter-by-quarter basis and we don’t really have a sense of when or if that would even out at some point or flatten out. So at this point I would view it as continuing deterioration but generating positive cash flow.

Juan Sanchez – Ladenburg Thalman

Got it. And on the disposables for the SENSUS and the DPNCheck, at which point, at what kind of volumes do you need to have to lower your cost of goods? This is the beginning and the volumes are low so we will have to wait for a while to see some leverage here? Or what’s the situation here?

Shai Gozani

Our gross margins on both electrodes at current volumes are in the 60% plus range for the most part. So there is some potential to increase that into the high-60%’s I think, maybe even low-70%’s. But even where we’re starting today it’s in the low-60%’s and what you have to kind of keep in mind is obviously the overall margins are somewhat weighed down by the cost of the devices themselves which are lower-margin and in some cases are provided at a discount or even no charge in support of an initial order. So the consumables are actually quite attractive from a margin perspective with some potential improvement with volume, but we’re starting out in a pretty good place.

Juan Sanchez – Ladenburg Thalman

Perfect, thank you Shai.

Shai Gozani

Absolutely.

Operator

(Operator instructions.) There are no more questions at this time. I’d like to turn the call back to the President and CEO, Dr. Shai Gozani for closing remarks.

Shai Gozani

Thank you very much for joining us on the call. Again, I apologize for the technical issues and we look forward to reporting on our progress as we progress through this year. Thank you very much.

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