NeuroMetrix, Inc. (NASDAQ:NURO)
Q3 2016 Results Earnings Conference Call
October 20, 2016, 08:00 AET
Shai Gozani - Chairman, President & CEO
Thomas Higgins - SVP & CFO
Yi Chen - Rodman & Renshaw
Good morning and welcome to the NeuroMetrix Third Quarter 2016 Earnings Call. My name is Brian and I will be your moderator on the call. NeuroMetrix is a commercial stage, innovation driven healthcare company combining bioelectrical and digital medicine to address chronic health conditions including chronic pain, sleep disorders, and diabetes. The company is located in Waltham, Massachusetts.
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 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, including the factors described under the heading Risk Factors in the company's periodic filings with the SEC, available on the company's investor relations website at NeuroMetrix.com, and on the SEC's website at SEC.gov. 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 Senior Vice President and Chief Financial Officer, Mr. Thomas Higgins. Mr. Higgins?
Thank you, Brian. I'm joined on the call today by Dr. Shai Gozani, our President and CEO, and we both appreciate your participation in this Q3 review.
A couple of background observations before getting into the financials. As you probably know, we operate in two markets, wearable therapeutics and point-of-care diagnostics. Our platform technologies in both markets are based on deep expertise in precision neurostimulation to achieve a therapeutic or a diagnostic result.
We have two lead products, Quell and DPNCheck, both address large market opportunities. Quell is an over-the-counter wearable device for chronic pain, and DPNCheck, a test for diabetic nerve disease, addresses a condition of about half [ph] of patients with diabetes for about 5% of the US population.
We are in early stage of Quell commercialization. Internally we focus on two primary metrics of business health, devices place, which is a proxy for growth in the user base and eventual electrode reorders and invoice shipment, which is an indicator of overall commercial activity. These metrics point to another successful Quell quarter.
Device shipments totaled 12,086, up 8% from the preceding quarter. The invoice value of Quell shipments totaled $2.9 million, up 15% from the preceding quarter. Over the six quarters of launch both metrics have consistently track road.
The Q3 metrics indicate that we are currently shipping devices at an annual rate just under 50,000 devices with a $12 million invoice value and this is after a 16 months in the marketplace.
So now the financial highlights. We reported total revenue of $3.4 million, an increase of 65% year-on-year and 28% sequentially. Within that, Quell GAAP revenue was $2.1 million, up 28% sequentially and Quell contributed 62% of the total revenue.
Quell deferred revenue recorded in the balance sheet that we anticipate will be recognized in future income was about $760,000 versus $734,000 in the second quarter. Deferred revenue reflects shipments to retail distributors not yet sold through to ultimate costumers and net of estimated return. Our sales returns vary depending on sales channel and have grown in the range of approximately 25% of shipments.
DPNCheck was $800,000 in revenue or 23% of the total this quarter. This represented 26% year-on-year growth. It was also the strongest sales quarter in the products history. Through the several positive DPNCheck developments in Q3, the US Medicare Advantage business was steady and continues to show attractive growth, it is the foundation of this product line.
Our OUS business which was up about 65% in the quarter was quite strong, reflecting a large shipment for our Mexico distributor were sell-through to a new account. This new account which is the second of six major governmental departments which are now using DPNCheck to screen employees for diabetic neuropathy.
Our DPNCheck Asia business is also showing promise [ph] Omron Healthcare has continued to reduce its overstocked inventory position in Japan and we now expect biosensor shipments to resume in the fourth quarter after a hiatus since last December.
Our China efforts over the past three years are showing progress. A China patent was issued on the core DPNCheck technology in September and also in September we received regulatory clearance from the China FDA to market DPNCheck in that market.
We will this week be introducing prominent Chinese medical practitioners to DPNCheck at a China focused conference sponsored by the University of Sheffield in the UK. Planning for China launch is well underway. Omron Beijing will lead a limited launch focused on high-value hospitals in the fourth quarter and this would be followed by a broader rollout in early 2017.
Our legacy products SENSUS and ADVANCE contributed revenue of about $500,000 or 15% of the total. Our gross margin in the quarter was $1.4 million or 40.1% of revenue and that's consistent with the last several quarters. It's lower than our historical and target [indiscernible] margin because it reflects the shift in product mix to lower margin Quell devices as we build our user base in that business. We should see margin improvement over time and with growing electrodes sales and the positive effects of volume
OpEx $5.3 million, was up about $1 million from Q3 of 2015. The largest contributor to this change was the $1 million increase in sales and marketing spending due to Quell TV promotion and other marketing efforts.
Our net loss was $3.9 million compared to $3.2 million in Q3 of prior year. Net loss per share was $0.76, reflecting a weighted average of 5.1 million shares outstanding in the quarter. This compares to the net loss per share of $1.06 in Q3 of last year on approximately 3 million weighted average shares outstanding.
Our cash consumption in the quarter was $3.8 million. This was a sequential quarter improvement from $4.2 million cash usage in Q2, 2016, the end of the quarter was $7.6 million in cash.
And so to summarize the quarter, we posted good positive growth in Quell and overall revenue. We got new growth opportunities for DPNCheck particularly outside the US in China and Mexico and a reduction of about 10% in cash usage from our peak $4.2 million cash usage in the second quarter of the year.
So those were the financial highlights and now Dr. Gozani will review of our business and strategy.
Thank you, Tom. I will focus my comments on Quell, which is our primary growth driver. We believe that Quell is well-positioned to address unmet needs in the $20 billion global market for devices and drugs that treat chronic pain.
In the US alone there are over 100 million people with chronic pain of which our market research indicates about one fifth or 20 million are ideal targets for Quell. I will address the following aspects of our Quell efforts, TV promotion, development of our retail channel, international expansion in our innovation and clinical program.
So starting first with TV promotion. We believe that the most effective way to reach our core audience to both drive near-term sales and build long-term brand awareness is through TV advertising.
Therefore starting the second quarter, we have been investing in TV promotion. We are constantly optimizing our approach in terms of the specific channels, commercial spotlight in time of day and other factors, such as the present time managing through the election cycle.
For the most part we have been focused on short response on national cable news channels including CNN and Fox News. We expect to continue a similar level of TV promotion through the balance of the year.
In respect to the retail channel, we believe the availability of Quell in top retail outlets is important, their continued growth and expansion of the brand. Our market research indicates that many consumers with chronic pain are most comfortable learning about and purchasing chronic pain treatments in and around the pharmacy where they are obtaining a prescription medication and other OTC over the counter healthcare products.
Therefore, our goal for 2016 has been to make substantial progress towards availability of Quell and pharmacy affiliated retail settings. Quell is now available in 1,500 retail stores, approximately evenly distributed among Target, CVS and Walgreen’s.
A primary objective of this initial roll out is to understand how to most effectively position and market Quell for success in the OTC section of these leading retailers. We believe that the retailers are generally satisfied with these initial retail results. Ultimately, we are looking to position Quell for the next phase of retail expansion. As a result, we are looking for significant additional retail expansion in the 2017 time frame.
In addition to pharmacy centric retailers, we also believe there are attractive opportunities for Quell with specialty and chronic retailers. We are currently working on several of such opportunities and maybe positioned to announce one or more such pilots later this year or more likely early in 2017.
In terms of international expansion, our commercial focus has been and will continue to be the North America market. The U.S. consumer healthcare market is the largest in the world and we intend to directly build Quell into a premium, high value consumer brand under NeuroMetrix ownership. At the same time, we see large opportunities for Quell outside of the US.
We are starting to put the pieces in place to tap into these opportunities. Our initial effort is directed at the EU market. We believe that we will receive the CE Mark in the fourth quarter.
In connection with that event, we are starting to put our EU launch plan together. It is our expectation that our efforts in Europe will be some combination of direct-to-consumer sales, such as via Amazon and partnerships with one or more consumer healthcare focused companies. We will provide more details as we approach the Europe launch, where we hope to start seeing sales in the first half of 2017.
With respect to our innovation in clinical program, one of the core strength in NeuroMetrix is our RD sophistication and ability to rapidly innovate. I believe that we have the most advanced engineering team and capabilities in the wearable nerve stimulation sector. Over half of our technical team holds MDs, PhDs or Master's Degrees in engineering [indiscernible]
Our Quell product roadmap is exciting with several important product enhancements and launches planned for the next several years. As a general matter, we will not preannounce details in upcoming products. However, as a guideline we will typically target major product launches for the consumer electronics show in January, and other major consumer health and/or wearable technology events.
We are also wrapping up our clinical program. We announced in the second quarter that we are sponsoring a study of Quell for chronic cancer pain and at The Scripps Translational Science Institute in San Diego.
In this randomized double-blinded, sham controlled study the Scripps investigators are evaluating the ability of Quell to reduce prescription opioid use and provide pain relief in patients with cancer pain. This form of chronic pain is among the most challenging of all types of chronic pain. The study is about 130 enrollments [ph] at this point.
We also recently announced the clinical study by Brigham and Women's Hospital in Boston, which is the Harvard Medical School teaching hospital that will assess the utility of Quell technology in patients with chronic low back pain.
In this study subjects will be randomized with treatment with Quell or treatment as usual, I mean, standard treatment, we expect the study to start enrolling in November with initial reno [ph] results in late 2017. We also expect to launch additional studies in 2017 and we'll report those to you as they proceed.
Those are our prepared comments. We'd be happy to take questions at this point.
Thank you. [Operator Instructions] Our first question comes from the line of Yi Chen with Rodman & Renshaw. Your questions please?
Hi. Thank you for taking my questions. My first question is what kind of revenue impact can we expect from DPNCheck China?
Yi, good morning. And thanks for being on the call. This is Shai. So obviously the forward we're in the market it’s difficult to provide guidance. But we would say a few things. One is that, not only is this a large market in terms of population. But this is a population that has one of the largest incidents of diabetes in the world and a growing incident of diabetes. So we wanted to be in the market for a while.
Second thing I'd say is that we have chosen while in terms of how to get into the market. Of course we here don't really, we don't know the Chinese market and we need a partner and on Omron's China subsidiary, Omron Beijing is well entrenched in that country. So we think we've chosen a partner well.
In terms of the growth of sales and this is really just speculation, I think what you'll see is during the fourth quarter and the first quarter of 2017 relatively modest DPNCheck sales as we support pipeline sales in China for the launch. I think beyond that there will be progressive growth as we expand from our principal – two principal markets which are the Shanghai region and the Beijing region out beyond – and beyond there. But its really is just too early a point to provide any specific guidance in terms of units or value. I will say we're very excited to be getting into the market though.
Thanks. The second question is regarding the European market, are you already in talk with initial partners to distribute Quell in that market and when - about what time roughly and about what time frame [indiscernible] can we expect commercial launch, if it's CE Mark?
Yes, we do expect the CE Mark, so we're pretty confident about that – and Yi, this is Shai. We are in – we are starting discussions. We have not gone deeply into those discussions yet as we were trying to A, we've been focused on the US market and B,we wanted to get timing down to the CE Mark. So those will accelerate this quarter.
We have opportunities to get into – because as we look at the CE Mark with an over [indiscernible]over-the-counter labeling, so we can go direct to European consumers. So we have options to get the consumers through the various Amazon division in the various countries and we'll problem do that to get some initial traction.
I would look for major – sort of major adoption within Europe to start in the middle of 2017 after several quarters of kind of understanding the market and getting initial REIT [ph] So probably the back half of 2017 as we look to be pretty strong in Europe and relatively modest sales in Europe as we begin here this quarter and then next couple of quarters.
Thank you. Final question regarding the – probably US market, regarding the potential expansion in 2017 in terms of the size of expansion and how many more stores will be carrying Quell, can you give us any additional color on that?
It’s hard to put a number on that because we obviously - we don't have the direction yet from the retailers. But we would be looking for a pretty substantial increase in the number of stores carrying Quell. I can't state a specific multiple of the current number of 1500, but a significant increase from that number.
And of course this will depend on what the individual retailers want to do and how they want to roll it out and still a lot of unknowns there. But we do expect to see a significant up-tick in the number stores.
Thank you. One additional question, is the return rate of Quell remaining the same as historically as it was historically. And also at which point do you plan to give some financial guidance regarding revenue? Thank you.
The return rate is holding very steady, very much tracking the history of the product since launch, as well as the clinical data. We have - as far as giving forward guidance, we're still – I think we're still ways away from that, but we revisit that every quarter.
I don't expect we'll do that next quarter, but as soon we're in the field we have enough understanding of the various channels and can look forward and give some reliable information we would consider that. But I still think we're several quarters away from doing that.
All right. Thank you very much.
Absolutely. Thank you.
Thank you. [Operator Instructions]
Brian, this is Tom. I have one question that was sent in by email from Sherry Grisewood at Dawson James, who was unable to make the call, so let me read that out now. So her question is, what was the feedback from the recent NCADS show and can we expect any further announcements on marketing partner?
And it’s to be absolutely with the large retailers mass merchandising show. We had a very good show in partnership with Advantage Healthcare our distributor and broker and partner. We had a very good meeting - very good meetings probably 15 to 20 such meetings. We had identified a number of additional opportunities, as well as followed up on some existing conversation and we do think that that will lead to some additional retail expansion in the - probably in the early 2017 time frame. Again, as some of these retailers go through their store resets.
Thank you. [Operator Instructions] I'm showing no follow-up question. So at this time, I would like to hand the call back over to Dr. Shai Gozani for closing comments and remarks.
Thank you. And thank you for joining us on this conference call today. We are encouraged by the continued strong response to Quell and the new opportunities for DPNCheck in China. We look forward updating on our progress in the fourth quarter 2016 and talk to you soon. Thank you very much.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program. And you may all disconnect. Everybody have a wonderful day.
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