NeuroMetrix Is Better Positioned After Share Raise

Feb. 9.12 | About: NeuroMetrix, Inc. (NURO)

Yesterday morning, NeuroMetrix (NASDAQ:NURO) announced that the company was able to raise more than $10,000,000 by offering 10,500,000 shares at $1 per share, plus warrants. While this was more than 10% lower than the prior day's closing price, it should comfort long term investors that the company now has what should be enough money to manage through 2-3 years of losses until the company's primary product, NC-Stat DPN Check, can reach a critical mass in sales. Additionally, the fact that management was able to convince a new round of investors that their product can be successful in the market place bodes well for the company.

The potential for a dilutive capital raise has been one major hurdle for investors looking at the company prior to today's announcement. However, I think that the primary focal point for all investors is the chance of success of the company's primary product, NC-Stat DPNCheck. It is the first product of its type that can accurately evaluate diabetic peripheral neuropathy in the doctor's office. Diabetics frequently visit their doctor multiple times per year to check for potential health issues, including DPN. Historically, doctors have tested for this condition by conducting pinprick and vibration tests. However, these tests are often inaccurate and more often catch symptoms later when the condition has already progressed. Management's thinking is that doctors with diabetic patients will want to use the company's device so that they can keep track of their patient's measurements.

There are substantial hurdles for the company to clear in order to be successful in this niche market. First, the average doctor does not like change in their office unless there is a real financial benefit to them. The estimation is that doctors will attempt to charge $25-$30 per test. Optimistically, doctors would be able to make a net $5,000-$10,000 per year by utilizing the test on their patients. To this end, doctors will need to see the device at trade shows (which the company is invested in attending) and other public arenas to be convinced that they should use it as part of their practice. Second, there is little evidence that insurance companies or Medicare will be willing to reimburse for the test. This means that initially, patients will have to pay for the test out of their pockets. Finally, the company will likely need to spend significant sums of money in sales efforts to convince doctors to begin using it. Due to all of these factors, the business will likely take time to build and investors will have to be patient before they see significant progress.

With that being said, if the device is successful, the upside in the stock could be significant. As you can see in the chart below, if the company is able to reach merely 10% of its target market, assuming $13 per test in revenue (below the guided range of $15-$20) the company could make $0.38 in 2015. Based on a current stock price of $1, that is significant earnings power.

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The clear risks to this story are that it will likely take time to develop this device or that the company is a "one trick pony" with the NC-Stat being the company's primary product. To be clear, NURO is far out on the risk curve. Investors should tread lightly and keep a close eye on how many placements the company is able to execute each quarter as a metric of success. In our estimation, after the first quarter, the company needs to be placing at least 150 devices per quarter to hit the numbers in the chart above. But, if the company can convince doctors that NC-Stat should be a part of their practice, long term shareholders stand to gain.

Disclosure: I am long NURO.