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NeuroMetrix, Inc. (NASDAQ:NURO)

Q4 2009 Earnings Call

February 10, 2010 8:00 am ET

Executives

Shai N. Gozani M.D., Ph.D. - Chairman of the Board, Chief Executive Officer, President, Secretary

Thomas T. Higgins - Chief Financial Officer, Senior Vice President

Analysts

Bill Plovanic - Canaccord Adam

Operator

Good morning and welcome to the NeuroMetrix fourth quarter 2009 conference call. My name is Onika (ph) and I will be your moderator on the call. NeuroMetrix is a science-based health care company that is transforming patient care through neuro technology. The company's mission is to provide innovative products preservation and restoration of nerves and spinal cord function and pain control.

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 other similar expressions and forward looking statements. Any forward looking statements reflect current reviews of NeuroMetrix about future results and of operations and other forward looking information.

You should not rely on forward looking statements because actual results may differ materially as the result of a number of important factors including those set forth in an earnings released issued earlier today. The risks and uncertainties include the factors described under the heading item 1A, risk factors, the company's annual report on Form 10-K for the fiscal year ended December 31st 2008 and any update contained in subsequently filed quarterly reports on Form 10-Q and other SEC filings.

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

Shai N. Gozani M.D., Ph.D.

Thank you, Onika. I'm joined on the call today by Tom Higgins our Chief Financial Officer and Walter Christensen our Head of Global Sales. In this conference call we will discuss financial highlights for the fourth quarter and recent business developments. Following our prepared remarks we'd be pleased to respond to your questions. Tom, I'd like you to take us through the financial highlights, please.

Thomas T. Higgins

Sure, Shai. Thanks. At a top level there were no surprises in the fourth quarter. Financial results were in line with our internal expectations, revenues were essentially flat with the prior quarter, margins were consistent, OpEx spending continued under control, and cash burn was where we expected it.

Underlying the financial results, Q4 utilization within our install base — in other words, nerve conduction and needle EMG studies done with our technology, was down about 10% from the third quarter. This was a similar pattern to prior years where the combination of Q4 holidays and weather conditions causes a drop in physician visits from the fall. In spite of the drop in utilization, consumables revenue was consistent with the third quarter. This indicates a build in inventory at our customers which could adversely affect Q1 revenue.

Turning to the Q4 highlights in the income statement that was attached to the press release, total revenue was $6.2 million versus $7.2 million in the fourth quarter of 2008. The more relevant comparison is Q3 '09 and in comparison with Q3, the fourth quarter was within $100,000 of that previous quarter. The revenue split was 9% device revenue, 91% consumables, and if you'll recall, in Q3 we had a large stocking order from our UK orthopedics distributor in the amount of $280,000. If you address Q3 revenue for that stocking order, Q4 revenue is in fact up about $200,000 from the third quarter.

Device sales were $600,000 versus $1 million in the prior year and $700,000 in the prior quarter. The majority of new device accounts were NC stats sold through the physicians' office channel. This is consistent with the last several quarters. Also, we booked an initial order from our distributor in the Netherlands who is enthusiastic about opportunities in that market.

Consumables revenue was $5.6 million down from $6.2 million in the prior year and level with the previous quarter. Consumables are primarily preconfigured electrodes used for nerve studies, the electrode mix was consistent, electrode ASP dropped to about $32 per electrode versus $35 in the prior quarter, reflecting end of year promotions.

Moving down to our gross margin, that remains strong at 70.5%. in fact, it's an improvement from 67.8% in the prior year and down slightly from 71% in the third quarter. Gross margin dollars were down $500,000 from last year's Q4. Over the past two years, margins have been tightly clustered around 70% and have ranged between 67.8%-73.5%. We do expect downward pressure on revenue and margins in 2010 following adoption of the new Medicare Reimbursement Code which Shai will be addressing in a moment.

Total OpEx spending, and OpEx includes R&D, sales and marketing, and G&A, was $6.3 million versus $5.7 in the prior year, excluding one-time charges, and $6.4 million in Q3. So our programs and run rates were consistent over the second half of the year and Q4 was about right on Q3.

If you look at OpEx on a full-year basis, 2009 OpEx spending was $25.6 million and that was down by $6.7 million from $32.3 million in 2008, again setting aside one-time charges in 2008. And so this reduction is as we scaled back the business, particularly sales and marketing in 2009, and settled several long outstanding issues.

In 2010, some of that spending will be restored, likely in the range of $3.5-$5 million increase in OpEx spending, and this primarily reflects critical investments we intend to make in our sales channel and new product launches. Broadly talking about OpEx, in R&D we'll be completing development and clinical work on Vantage and Ascend for nerve localization. Both Vantage and Ascend are targeted to launch this year. We will also invest in clinical studies supporting the neurodiagnostic business and continue preclinical work on a nerve regeneration compound NM101.

Within sales and marketing we're fielding a new clinician educator team to support customer utilization within our installed base. In addition, we'll be providing increased marketing support to the two new product launches, modestly increasing sales support staff and adding a small dedicated staff focused on international markets, international opportunities.

Returning to the P&L in our Q4 results, our operating loss was $1.9 million versus an operating loss of $800,000 in the fourth quarter of '08, excluding one-time charges, and an operating loss of $1.9 million in the third quarter. So Q4-Q3 operating loss of about the same level.

Below operating loss we recorded a credit of $2.2 million to adjust to fair value warrants that were issued in the Q3 financing. These warrants have contained a cash settlement feature which required measurement and reporting of a warrant liability. The warrant terms were modified in the fourth quarter. As a result there was a final mark to market adjustment and that is the $2.2 million and the related warrant liability which totalled $19.7million was then reclassified into paid in capital and so that's the final accounting for the warrants that were issued in the Q3 financing.

That warrant credit contributes to net income for the quarter of $363,000 or $0.02 a share. If you include the warrant credit, we incurred a loss of $1.9 million or $0.08 a share.

Moving down to the balance sheet highlights, we ended the quarter with $30 million in cash after beginning the year with about $20 million in cash. We raised $17.5 million during the year and we burned about $6.9 million. The cash burn included $3.2 million in operating burn plus $3.7 million in a litigation settlement. Our Q4 cash burn was $1.6 million.

Other current assets primarily consist of receivables and inventory; receivables of $3.3 million and inventory of $4.6 million were under good control and they presented no year-end valuation issues.

And so in summary, the quarter's financial results were in line with forecast. There were no surprises. We enter 2010 with a strong balance sheet. So those are the highlights, and Shai, back to you for a broader look at the business.

Shai N. Gozani M.D., Ph.D.

Thanks, Tom. As Tom noted, Q4 results were consistent with our expectations. As we've previously discussed, consistent and adequate position reimbursement for nerve conduction studies performed using our neurodiagnostic devices is essential to our efforts to build our US business and thereby deliver the significant clinical benefits of this technology to patients.

A positive step was taken on reimbursement in the fourth quarter when CMS published in its physician fee schedule for 2010 a new Category 1 CPT code 95905 which described nerve conduction studies performed with preconfigured electro (inaudible) such as are used with the NC-stat device.

This is an important development as this code reaffirms the clinical utility of the NC-stat and supports its use by primary care physicians and internal medicine specialists when medically appropriate. As for any new code, adoption will take time and may have some challenges. However, we believe that physicians using the NC-stat will find this new code useful and supportive of their efforts to deliver optimal patient care.

Unlike the preexisting Medicare nerve conduction codes, but similar to many other diagnostic procedures, CPT95905 is billed per limb tested as opposed to per nerve. Although practice patterns will vary, we believe that fewer units of 95905 will generally be billed for patients under the existing nerve conductor study codes. Lower physician reimbursement under CPT95905 could affect testing patterns and in the near term we expect we'll see downward pressure on our revenues and margins.

Looking out further however, we believe the new CPT code may also be a positive influence on reimbursement by commercial insurance. It's difficult to predict adoption and utilization of this new CPT code in the near team as (inaudible) in play, however, we believe that ultimately the effect will be positive and will allow us to return the company to a growth track.

In the meantime we see a period of readjustment that could span several quarters or perhaps longer. Our hope is that we will begin to see signs of return to stability in the second half of 2010. During the readjustment period, revenues may not be the best barometer for emerging trends and of the overall health of the business. We are closely monitoring trends in our installed base and in our testing activity and we'll report some of these metrics.

Specifically we will be reporting on our total number of active customers and on studies performed within these accounts. We feel that these are relevant indicators for our business. As a point of reference, active customers at the end of 2009, and this is a 12-month look back at customers using our technology, totalled 4,493, and there were 35,649 studies performed in the fourth quarter of 2009. These are patient studies with any of our consumables using our information technology systems so we believe that this is an accurate estimate of the number of studies performed with our technology.

We've anticipated this period of readjustment. To position ourselves we've taken several important measures. First, we have rebuilt our senior management team with new leadership in both sales and finance. We've also strengthened our balance sheet, adding $17.5 million in new operating resources with an equity financing of the third quarter. Importantly, we have revamped our sales organization and customer interface, including the following. We've organized North American sales into two groups, dedicated a physician office market, and the neuro intervention market. The physician office market is primary care physicians, internal medicine, endocrinology and rheumatology. Our neurointerventional market is neurology, physical medicine, and rehabilitation, orthopedics, and pain medicine.

We have initiated a clinical educator program which supports our physician office sales effort and provides direct clinical support to customers. We have refocused our physician office sales representatives on new account acquisition, we have merged our customer service and account management organizations into a single customer entity, and we have sharpened our European focus with an on-site employee in the UK and extended customer service hours.

Finally, we have focused our R&D pipeline with multiple product launches planned for 2010 in both the neurodiagnostic and neuro globalization markets. We're also developing several clinical outcome studies relating to the use of preconfigured electrode arrays which we will be launching this year.

Although we see business challenges in 2010 we believe that we have the right organization and strategy to be successful in the long term. Our goal is to exit the year showing meaningful improvement in key business metrics which point us to a return to growth.

Those are our prepared comments, we would like to take questions now.

Question-and-Answer Session

Operator

(Operator's Instructions) Your first question comes from the line of Bill Plovanic of Canaccord Adams.

Bill Plovanic - Canaccord Adams

Great, thank you. Good morning. Just a housekeeping question to start out with, Tom, what was the actual sales out for the quarter and for the year? It wasn't in the press release.

Thomas T. Higgins

So at the end of the quarter and the year it was about $23 million. And did you want the weighted average for the year too?

Bill Plovanic - Canaccord Adams

Actually so we can plug them into our models, because like I said, we didn't have the exact number in the press release so if you have a more accurate number that'd be great.

Thomas T. Higgins

Sure. The weighted average shares outstanding in the quarter were $22.966 million. The weighted averages shares outstanding for the year were $16.784 million.

Bill Plovanic - Canaccord Adams

Great, thanks. And then just I was wondering, a little more color on the distribution channels in terms of the sizes, and then if there's any granularity you could give us on new product introduction and timelines as to when the Vantage come out? Is it a second quarter event, first quarter event? When do you expect all the submissions and the 510-K approvals, what have you?

Thomas T. Higgins

Okay. I'll start this question and Walt can jump in. We have, as I noted, essentially three field organizations in North America. We have the physician office sales force that is at fully staffed, 21 sales representatives. That is supported by the clinical educator group which fully staffed is 10 supporting that group, and then we have our neurointerventional group which is 12 sales representatives. And then as we noted in Europe we have one full time employee and then we go through distribution of course.

Shai N. Gozani M.D., Ph.D.

In terms of product launches we have two major product launches planned for the year. We have not announced specific timelines for those. We do expect both to be this year. One is Vantage which is the next generation nerve conduction platform that would be sold primarily through the physician office channel, but also to a more limited extent through the neuro interventional channel. We have not so much regulatory hurdles there, but some product ramp up and product development, but it's definitely a 2010 launch. And Ascend, which is our nerve localization platform which we'll be launching into the anaesthesia market, looks like a second half of the year launch. There is a — we already have several 510-Ks for that product, but in terms of the full range of indications per use that we're looking for, we want to achieve one more 510-K and that's probably a third quarter type of timeline so we're looking for the second half of the year for that launch.

Bill Plovanic - Canaccord Adams

Okay. And then with the kind of changing in the codes and how they're reimbursing per limb rather than per test, does the current electrode configuration that you sell address the new codes in reimbursement or do we really need the Vantage to kind of get that going where you're actually selling a product that kind of addresses the reimbursement codes as they stand now?

Shai N. Gozani M.D., Ph.D.

They don't line up as neatly as they did under the prior codes. As a limb-based reimbursement obviously you get paid per limb regardless of the number of nerves you test, and in some cases you need to test multiple nerves and the reimbursement obviously is fixed per limb. Again, this is not uncommon and actually for example needle EMG testing is done the same way. It's per limb and so are many other types of procedures, so that's part of the transition and part of the kind of realignment. We haven't been able to adapt the current and customers are adapting their utilizations to the new codes. Obviously it's very early. We're only five weeks into the new codes so I'll probably have more to say about this after the first quarter.

We are looking and we are in the process of developing combined electrodes. We've talked about those a little bit and those will be launched later in the year which I think would fit more nearly with the current reimbursement structure.

Bill Plovanic - Canaccord Adams

And then just for clarification, really the Vantage system is a replacement in the next generation NC-stat, is that how we should look at that?

Shai N. Gozani M.D., Ph.D.

Yeah. Well, it has a broader array of functionality so it would work with both preconfigured electrodes, but also conventional electrodes so it would be a replacement for the NC-stat in many cases, but also an expansion in functionality. We will transition from NC-stat sales to Vantage sales, we don't expect we're beyond maybe a quarter or two to have parallel sales.

Bill Plovanic - Canaccord Adams

Okay. And then I'm sorry, you were speaking quickly, but the Q4 metrics that you said that you had about 4,493 active customers and how many studies were performed?

Shai N. Gozani M.D., Ph.D.

About 36,000 studies so these are patient studies of any type. So that could be using one or more of the nerve specific electrodes or neurologists using it with needle electrodes and conventional electrodes. So it's the universe of activity with our products. Obviously the bulk of that is with neuro-specific electrodes.

Bill Plovanic - Canaccord Adams

And the way to think of it again, so this is almost 36,000 studies would be basically 36,000 patients?

Shai N. Gozani M.D., Ph.D.

Correct. We think that's the most important metric for the business because it speaks to how many patients are being tested and as the utilization, and in a sense addressing your question earlier, as the number of electrodes or types of electrodes are adjusted to fit with the current reimbursements and clinical utilization, the way a study is implemented may change, but what's important is that the activity in terms of patient study is stable and then starts to go up because that will reflect the growing business.

Bill Plovanic - Canaccord Adams

Okay, great. Thanks a lot, Shai. Thanks, Tom.

Operator

(Operator's Instructions) At this time there are no further questions. I would now like to turn the call back over to Dr. Shai Gozani for closing remarks.

Shai N. Gozani M.D., Ph.D.

Well thank you for joining us on this conference call and we look forward to reporting on our progress as we move through this important year. Thank you very much.

Operator

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you and have a good day.

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Source: NeuroMetrix Q4 2009 Earnings Call Transcript
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