NeuroMetrix, Inc. (NASDAQ:NURO)
Q1 2013 Earnings Conference Call
April 25, 2013 08:00 am ET
Shai Gozani - President & CEO
Tom Higgins, - CFO
Good morning and welcome to the NeuroMetrix’s First Quarter 2013 Conference Call. My name is Sue and I’ll the moderator on your call. NeuroMetrix is a medical device company focused on the neurological complications of diabetes.
On this call the company will 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 depends upon or refer to future events or conditions that include words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “plan,” or other 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. Please refer to the risks and uncertainties include the factors described under the heading “Risk Factors” in the company’s 2012 Form 10-K filed with the SEC in February 2013, and available on the company’s Investor Relations website at http://www.neurometrix.com and on the SEC’s website at http://www.sec.gov and any updates contained in 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 please proceed sir.
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 the first quarter of 2013. Following our prepared remarks we will be pleased to take questions.
The quarter was highlighted by an important milestone for NeuroMetrix, the launch of our first therapeutic product, the SENSUS pain management system. The SENSUS launch was a combination of a focused 18-month product development and regulatory effort, which was based on our decade long experience in design devices and electrically stimulate nerves. Before SENSUS, our commercial product line was comprised entirely of diagnostic devices.
SENSUS is a transcutaneous electrical nerve stimulator intended for the symptomatic relief in management of chronic intractable pain. It is the only device designed specifically for people with neuropathic pain. The most common cause of such pain in people with diabetes is painful diabetic neuropathy or PDN, which is a severe debilitating chronic form of pain. PDN affects 16% to 26% of people with diabetes or 3 million to 5 million patients in the U.S. alone. Most patients with PDN have moderate to severe pain and half have sleep disturbances due to their pain. We believe this represents a U.S. market opportunity that we estimate in excess of $300 million annually.
SENSUS offers physicians and their patients a non-narcotic on-demand pain relief option as a complement to pain medications. The device is lightweight, as a low profile so can be worn during the day, and may be used at bedtime before going to sleep. It is activated by the press of a single button.
Importantly SENSUS is a platform technology with potential to respond to a series of products with expanded indications and functionality. We are currently working on a sleep enabled sensors model that will provide enhanced support for monitoring and managing pain during sleep, which is a major issue for patients with PDN and neuropathic pain in general.
We recently filed a 510(k) in support of this product, which we hope to launch by the end of the year or early next. While diabetes and PDN is our initial market focus this technology could migrate related to neurological disorders.
The SENSUS business model as a razor blade structure as with our diagnostic products. The device is used with a proprietary disposable electrode that last about two weeks with normal use. The key to success will be establishing a large number of patients using SENSUS and thereby requiring electrodes on a regular basis. Reasonable economics are in place to Medicare and private payer reimbursement benefits that are fairly consistent.
Product awareness and cost effective distribution are our immediate challenges. We are developing a tired U.S. distribution channel consisting of national distributors and direct customers, regional distributors and diabetes mailer or suppliers. The interest levels in encouraging.
We currently have 10 regional distributors. There are discussions underway with several national businesses which could lead to agreements later in the year. Typically, distributors are durable medical equipment or DME suppliers who stock SENSUS create demand with their sales force deliver SENSUS to patients and hand the reimbursement. Our point of sale is product shipment to the DME supplier.
During the first quarter, which is our initial commercial quarter with SENSUS, we shipped 145 devices. Early patient feedback has been encouraging with many reports of a substantial decrease in pain and improved sleep. Feedback from distributors has also been positive based on physician and patient reaction and early experience of the reimbursement.
We have designed our first post-market clinical study for SENSUS, which will begin this quarter. The study will be a 6-week open label evaluation of pain relief in patients with moderate to severe PDN. The primary outcome measure is to statistically significant improvement in the pain and interference scores on the Brief Pain Inventory or BPI weeks 3 and 6. We hope to report study results by the end of the year.
Our early assessment is SENSUS is off to a good start. You see attractive potential for revenue growth. Important market characteristics were success are in place and include established demand for pain therapeutics, a straight forward sales message established reimbursement and economics and roadmap for scaling the business.
2013 is a year to build the foundation of a broad national sales national channel of positive patient experience and initial post-market clinical study. The process is underway and progress to-date is encouraging.
Our complementary product in the diabetic space is NC-stat DPNCheck which is a rapid accurate and quantitative point of care test for diabetic neuropathy. This product is used to test diabetic neuropathy at early stage and to guide treatment. We are focused on the single domestic market segment Medicare advantage. This is the largest near-term revenue potential because of a compelling offer clinical and financial proof of DPNCheck to these healthcare plans and their associated providers.
In mid-February, CMS published an advisory online proposal 2014 Medicare advantage rates and coding, which indicate a lower funding level from 2013. After a strong industry and political reaction funding was restored by CMS on April 1, final advisory.
The value proposition for NC-stat DPNCheck continues to be attractive particularly for testing patients with diabetes. The CMS activity in the first quarter caused (and allowed) new customer adoption of DPNCheck with that now behind us, we believe the market will respond to its previous level and new account adoption should resume. We view the Medicare advantage market as an attractive $20 million to $25 million annual and niche opportunity with strong operating margins reflecting our very low sales and marketing cost.
Our efforts to build international markets for DPNCheck particularly in Asia have progressed. Over the past few months we signed distribution agreements with two prominent Asian entities. In South Korea where our product has completed a regulatory process, we sign an exclusive distribution agreement with Handok Pharmaceuticals. Handok is a $300 million revenue pharmaceutical and device company with distribution capabilities to its direct sales force in relation with independent distributors in Korea. Diabetes is a major focus of the company and its product offering includes hemoglobin A1c testing, blood glucose meters, test strips and insulin pump infusion supplies.
In Japan, we announced a distribution partnership with Omron Healthcare, a $600 million division of the $6 billion dollar Omron Company, which is a healthcare and industrial automation organization.
Omron Healthcare which also has a diabetes focus will lead the effort to secure regulatory approved NC-stat DPNCheck in Japan and will be the exclusive distributor following licensing. The Japan market is particularly attractive because it is the only market globally which as an approved drug for treating diabetic neuropathy.
In summary, the first quarter was a milestone quarter saw the evolution of our business into therapeutic products. We are encouraged by the early market response to SENSUS, the product is performing well and patient satisfaction has been positive.
We believe the market opportunity is large and have a clear plan for billing adoption. NC-stat DPNCheck also moved forward with significant Asian distribution partnerships.
I will now turn to Tom for discussion of the financials.
The financial results for Q1 were straight forward. We reported revenue of $1.4 million in the quarter, this compares with $1.5 million in the preceding quarter and $2.1 million in the first quarter a year ago.
Q1 was a launch quarter for SENSUS, we shipped a 145 devices plus electrodes to our stocking distributors. There was a modest amount of early revenue. Our objective is to get the devices into the hands of distributors and from there the patients for usage will drive future electrode purchases.
We recognized SENSUS revenues upon shipment to distributors and they are typically are no undelivered transaction element. Sales term provides for a traditional 30-day right to return. Distributors own the product, they create demand among physicians and ship directly to patients. They bill and collect from insurers and they bear the risk of loss from any denied clients.
NC-stat DPNCheck revenue was $315,000 in the quarter compared with $352,000 in the preceding quarter and $137,000 in the first quarter of 2012. Uncertainty over prospective Medicare advantage rates for 2014 which have since been resolved slowed new account adoption for DPNCheck. We signed international distributional agreements with Handok Pharmaceuticals for South Korea and with Omron Healthcare for Japan.
The legacy advance business contributed $1.1 million in Q1 revenue in comparison with $1.2 million in the preceding quarter and $1.9 million in the first quarter of last year. We expect continued contraction of ADVANCE revenue due to the reimbursement challenges, we managed this business for cash and we had few direct costs. Through 2013, we expect to shift in revenue mix towards SENSUS and DPNCheck and continued contraction of ADVANCE.
Our Q1 gross profit up $832,000 was 59.3% of sales. This was a 3.7 percentage point improvement from the preceding quarter in comparison with the first quarter of last year, if you exclude the effect of non-cash inventory charges a year ago which had depressed margins in that year earlier period, third quarter is 5.3 percentage point improvement over that Q1 2012.
The margin gains in Q1 2013 were primarily due to DPNCheck pricing particularly OU- U.S. sales which drove DPNCheck overall margins to nearly 70%. SENSUS margins in Q1 were about 36% reflecting a mix weighted toward low margin devices rather than consumable electrodes where we expect 60% plus margins over time.
During 2013, we forecast gross margins in the mid 50% range. Operating expenses total $3.1 million in the quarter. This is in comparison with $2.7 million in the fourth quarter of last year and $3.7 million in the first of this year. The fourth quarter of last year benefited from about $235,000 in credit adjustments to incentive comp expense. If you exclude those favorable and unusual adjustments and assume a normal incentive comp cost, Q4 would have been about a $100,000 higher than we reported in the first quarter of this year.
During the course of last year, we reduced our operating cost particularly in sales and marketing as we migrated to cost effective and leverageable sales channels that utilize independent distribution.
During the remainder of 2013, we expect that OpEx would be in the quarterly range of about $2.7 million to $3 million. Our net loss was $2.3 million in Q1 versus $2.8 million in the first quarter of last year, on a per share basis that was $6 in this quarter and a $99 in the first quarter of last year.
The balance sheet account that we managed closely, inventory and receivables remained solid. Our quarter end receivables of $532,000 reflect 35 day sales outstanding. Our quarter end inventory of $795,000 reflects a turnover rate of about 2.8 times per year.
Turning to liquidity. At the end of March, we had $6.9 million in cash and we utilized $1.8 million in cash during the first quarter. These cash resources give us a cash runway through 2013 and into the first quarter of next year. While we carefully (inaudible) our cash resources, we will require new capital to support our operations and particularly SENSUS.
Our $20 million Universal Shelf Registration statement allows us to issue Registered Equity Instruments over time, however, it’s used as restricted to about 30% of our market capitalization or only about -- $1.5 million currently. We intend to file shortly a Form S-1 Registration statement with the $10 million phase to further increase our fund raising capability and flexibility. This will trigger an SEC review process which can take several months. We have not yet committed to a firm plan to raise capital of the S1.
And so, those are the financial and liquidity highlights for the quarter and Shai back to you.
Thank you, Tom. So, those are our prepared comments. We will be pleased to take questions now.
(Operator instructions). Your first question comes from the line of Bob (inaudible). Please proceed.
Hi, Shai. Congratulations on the good product, SENSUS launch this quarter. Could you give us a little more color on SENSUS? I know that you said that you shipped 145 devices in the first quarter. Maybe a little bit more color on, on what type of accounts and what type of, if you know offices are buying this. And also maybe, I know it’s early but go over a little bit the first 12 months what the revenue rollout per device would look like? I know you said that you’re looking for the two-week disposable but maybe you have some idea how that (inaudible) next 12 months for example?
Okay. Thank you for the compliment first, Bob. So we have about, I think I mentioned 10 durable medical equipment suppliers carrying the product just as few of them during the early part of the quarter then as the quarter progress we added more. So, that was really just the initial shipments from a few DMEs.
The initial target physicians are fairly distributed, we’ve seen a very strong reception from pain medicine physicians not surprisingly because they have experience with transcutaneous nerve stimulation for other syndromes. We’ve seen a strong reception from neurologists who sees some of the most difficult neuropathic pain patients, the sort of – kind of the endpoint for tumor refractory patients.
So, pain medicine and physicians and neurologists had been very rapid adopters not surprisingly because they really seeing the most difficult patients. We’ve seen endocrinologists and internists with high diabetes patient SENSUS, its high number of patients using SENSUS.
So, it, it’s been fairly broad but more (inaudible) I think at this point to the more typical physicians to deal with a more complicated cases as often it is typical with new pain products it goes to the most difficult patients and that’s why the initial reception has been so encouraging as we have reports from patients who are on chronic morphine and methadone in order to control their pain or hearing about dramatic decreases in the amount of pain medication they have to take.
So, that’s the profile early on. As we move into some larger national distributors in the balance of the year, I think we’ll see more primary care internal medicine adoption. In terms of revenue utilization so forth, this year is really about building distribution and getting an initial set-up, physicians using the product. Our target is to have ship 2000 devices this year, so that would be a somewhere between 1500 patients as some patients use one device, some patients use two devices. That’s kind of the target and then rapidly growing from there.
Our expectation is that patients will use the product and thereby utilize electrodes for over 12 months on an average we expect about 18 months potentially longer. So, the revenue comes downstream after placing the device with the patients in terms of -- so we’re looking at typically 12 months, 18 months, 24 months of electrodes per patients but obviously at this early stage we don’t have that specific experience. And as we go through the year, we’ll start to see the stickiness of the electrodes with these early patients.
Okay, thanks. Thanks for answering me.
Thank you. (Operator Instructions). Sir, you have no questions at this time. (Operator Instructions). Thank you, ladies and gentlemen, I would now like to turn the call back to Dr. Shai Gozani for closing remarks.
Thank you very much for joining us on the call today, we look forward to reporting on our progress for SENSUS and our business in general over the balance of the year. Thank you.
Thank you for your participation in today’s conference. That concludes the presentation. You may now disconnect. Thank you for joining. And have a very good day.
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