NeuroMetrix, Inc. (NASDAQ:NURO) Q1 2016 Earnings Conference Call April 21, 2016 8:00 AM ET
Shai Gozani - Chairman, President, and CEO
Tom Higgins - SVP and CFO
Jared Cohen - JM Cohen & Company
Good morning and welcome to the NeuroMetrix First Quarter 2016 conference call. My name is Joy and I will be your moderator on the call. NeuroMetrix is an innovative healthcare company that develops wearable medical technology and point-of-care tests that help patients and physicians better manage chronic pain, nerve diseases and sleep disorders. The company is located in Waltham, Massachusetts.
On this call, the Company may make statements which are not historical facts, and 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, 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 President and CEO, Dr. Shai Gozani. Dr. Gozani?
Thank you very much and good morning. I'm joined on the call today by Tom Higgins, our Chief Financial Officer. We appreciate this opportunity to review our first quarter 2016 business highlights and plans for the year. Following our prepared remarks, we will be pleased to take your questions.
We have three sources of revenue at NeuroMetrix. The first is our legacy business consisting of the ADVANCE and SENSUS products, which we manage with cash flow without significant associated operating expenses. The second is DPNCheck, our rapid point of care test for peripheral neuropathy such as diabetic peripheral neuropathy or DPN and the third is Quell, our over-the-counter wearable therapeutic device for chronic pain.
As expected our legacy business is declining. That again is ADVANCE and SENSUS. However we expect it to continue generating positive cash flow through 2017. Regarding DPNCheck we are enthusiastic about the near and long-term potential for the DPNCheck business. The primary application of this device is the early detection of DPN, again that is diabetic peripheral neuropathy, which is the most common and expensive long-term complication of diabetes.
The diabetes epidemic is growing unchecked throughout the world and there is no better way to detect DPN early than using DPNCheck. There are numerous published clinical studies validating DPNCheck and moreover it is being used in many ongoing studies as a key outcome measure.
We believe that DPNCheck will increasingly become a standard diabetes biomarker. However that is a slow process, which unfortunately we have relatively little inputs. Our DPNCheck revenue in 2015 was $2.3 million, which was up from $1.8 million in 2014 and $1.3 million in 2013.
Our first quarter 2016 revenue of $478,000 was mostly comprised of domestic sales to Medicare Advantage Plans, which use the technology as part of their risk management process. We believe that international revenue will kick in later this year. In particular, we are optimistic about further sales in Mexico and the launch of our product in China with our Asian partner, Omron Healthcare.
Now moving onto Quell. Quell 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.
We launched Quell in the second quarter of 2015 with a goal of demonstrating initial adoption, strong user satisfaction and reliable product performance. For this end we shipped just about 14,000 devices last year. These results were achieved through online channels including our website, quellrelief.com, and Amazon, QVC, physician dispensing and several other smaller channels.
We continue to build on this momentum in the first quarter of this year with shipments up to 8138 devices. Most of these shipments were through the same channels as in 2015. As we have previously stated, we believe that the availability of Quell in top retail outlets is essential to 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 already obtaining their prescription medication and other over-the-counter healthcare products.
Therefore our goal for 2016 is to make substantial progress towards widespread availability of Quell in pharmacy affiliated retail settings. We announced in March that about 500 Target stores will carry Quell as part of their Smart Health Solutions initiative. In connection with this program we have had our first shipment to Target in March and are now seeing the product on some store shelves with an expectation that all participating Target stores will be set up by the end of the month.
As many of you know, nearly all Target stores include pharmacies, which are now in the process of being transitioned to CVS. Target continues to manage the over-the-counter space in front of the pharmacy where Quell is located. In addition to pharmacy-centric retailers we also believe that there are good opportunities for Quell with specialty and electronics retailers.
As an example Hammacher Schlemmer has been successful marketing Quell to their customers through their catalog and website. It is our belief that we will add additional retailers throughout the rest of this year. In parallel with retail distribution we must build product awareness and enhance our brand identity so that consumers are informed that Quell is available in their preferred local retail locations.
Our 2016 media campaign includes television promotion, online advertising and various PR activities. The television effort was piloted in the first quarter and is now active. This promotional campaign is intended to support all of our partners, retail QVC and online. A core strength of NeuroMetrix has always been our research and development, an ability to rapidly innovate. Our Quell product roadmap is exciting with important product enhancements and launches planned for the next several years.
We will report these events as they approach. We are also ramping up our clinical efforts. In terms of specifics, we have several studies related to cancer pain or chemotherapy induced neuropathic pain underway or that will launch in the next couple of quarters. It is our intention to substantially expand the clinical study and support for Quell over the next several years.
All in all 2016 is an important and exciting year for Quell and for NeuroMetrix. We look forward to keeping you informed as we proceed.
I'll now turn it over to Tom for a discussion of the overall financial results.
Thanks, Shai. We had a strong start to 2016. Financial highlights included another consecutive quarter of Quell revenue growth and a strong domestic performance by DPNCheck.
Operationally we released an advanced version of Quell, developed and tested content for TV promotion, prepared our IT systems for retail, built Quell inventory and began the crossover into retail. It was a busy quarter.
On the financials, Q1 revenue was $2.3 million, up 77% versus $1.3 million in Q1 of last year. This revenue growth was delivered by Quell. Quell demand reflected shipments of 8138 devices and 7902 electrode reorders. Total sales value of these shipments was 1.7 million. Device shipments were up 22% sequentially and electrodes were up 17%. And this activity included the initial shipments to Target which are now on store shelves and will be shortly.
Accounting for these shipments is complex, reflecting distributor contracts and customer rights of return. Under GAAP, revenues recorded on distributor shipments under both sell to and sell through methods depending on the underlying agreements. Further we defer revenue recognition where we have insufficient experience to estimate customer returns.
For Q1 and several quarters to come retail shipments, which are building the supply pipeline to store shelves will be particularly difficult to measure for revenue recognition, and this may contribute to lack of clarity in the business. However, we believe that the key metric should continue to be the sales value of shipments that we make in the quarter.
On a GAAP basis in Q1 we recorded Quell revenue of $1.2 million and we deferred $550,000 to future periods and to cover returns. Quell was launched in Q2 2015. So there is no comparable revenue in Q1 of last year. Our cumulative product return rate remains in the range of about 20% to 25%.
DPNCheck revenue in Q1 was $478,000. This was down 5% from $504,000 in Q1 of last year. However there is positive news here. The domestic Medicare Advantage business had record volumes and record revenue with the shipment of 31,675 biosensor tests. The story was different OUS, where we had a very strong fourth-quarter including some unexpected orders from Japan and Mexico late in the fourth quarter and consequently OUS contributed little in the first quarter of this year.
OUS accounts tend to be spotty and somewhat unpredictable in the timing of orders. Our legacy SENSUS and ADVANCE products contributed $591,000 in revenue this quarter versus $779,000 last year. As Shai indicated, we do not actively promote these products but manage them for cash flow and there are few associated direct costs.
We estimate they contributed about $400,000 in cash in the first quarter this year. Our gross profit was $793,000 reflecting a gross margin rate of 34.8% versus 50.3% in the first quarter last year, which was prior to our launch of Quell. The low-margin reflects two factors, an increasing proportion of Quell devices in our product mix as we build our installed base of Quell users and relatively low utilization of our new Woburn manufacturing facility.
Over time shifting balance to our higher margin Quell electrodes and higher plant utilization will have a positive effect. Q1 operating expenses totaled $5 million. This was an increase of about $1.1 million from the prior year. R&D and G&A spending did not change significantly. Sales and marketing spending of $2.4 million was up about $1 million from Q1 of the prior year and this reflects promotional activity and in-house marketing support for Quell since its launch in Q2.
The increase covers headcount costs, product awareness spending for online advertising and paid search, and for TV content development and testing for the Quell launch into retail which is starting in the second quarter of the year.
The income statements reflect non-cash credits for revaluing our outstanding common stock warrants at fair value at the end of each period. Our net loss for Q1 was $4.1 million. Our weighted average shares outstanding were 4.1 million. Our cash usage in the quarter was $3.7 million, and we ended the period with $8.7 million in cash. So from an operational standpoint we had a busy and productive quarter and a quarter with strong financial highlights. So, Shai back to you.
Thank you, Tom. That concludes our prepared comments and we'd be happy to take any questions at this point.
[Operator Instructions] The first question comes from the line of [Indiscernible]. Please proceed.
Hi, thank you for taking my question. First question is just for clarification that the value of Quell shipments was $1.7 million in the first quarter but that was not - not all of that was recognized in the first quarter revenue, is that correct?
That is correct, yep.
Okay, thank you. So, is that that Quell will be available in April in over 500 Target stores, so I understand that Target currently runs over 1700 stores? So how those 500 stores were chosen and whether Quell will be displayed in a permanent way in the stores to promote the consumption of the product?
Yes, this is Shai. So happy to take that question. So the Target has a digital health initiative. So they have a section of the - over-the-counter section which is near the pharmacy, where they are promoting a selected group of medical devices, medical equipment over-the-counter that are all connected health devices. So they all are smart phone enabled with - most of them with Cloud enabled capabilities behind that.
So this is a section of the consumer health part of the store, where they are specifically promoting connected health solutions. They picked approximately 500 stores to launch that digital health initiative. So that defines the 500 stores that we are in. They will then evaluate how that overall digital health initiative went and decide on potentially expanding it to more stores.
They could also decide to take any of the products within that initiative and put them in other parts of the store, other parts of over-the-counter space. So those decisions will be made later this year.
How consumers can - how can consumers find out whether their neighborhood Target store carry Quell or not?
Right. So if - it is also the - the way you do that is you go on to - if you go to target.com and the product is also available on target.com. It will show you which stores have the product. So you enter your ZIP code, it will show you the nearest store that has your product, and we will be linking to that through our website as well as we - as we inform potential customers about the availability on Target.
Okay, got it. Regarding operating expenses, do you expect these expenses to remain relatively stable for the rest of 2016?
Yes, of course there is a little bit of variation quarter-to-quarter, but I would expect R&D and G&A to be relatively stable in the range that you saw in the first quarter, and in terms of sales and marketing I think that the overall number that you saw in the first quarter is probably a pretty good indicator for Q2 and then it might decline a little bit during Q3 and Q4. And that is because early in the year, we had some spending in sales and marketing that relates to development of content that was then later used for promotion.
And finally, I don't know whether you will be able toprovidea revenue breakdown between how much actual revenue has been recognized for Quell and how much revenue has been recognized for the rest of the product offerings?
Sure. Yes, we are going to be filing our 10-Q later today, and so that will have a breakdown by product line in the MD&A section.
Okay, got it. Thank you very much.
You are welcome.
Okay, that is good. Thank you.
[Operator Instructions] The next question comes from the line of [Indiscernible], a private investor. Please proceed.
My name is [Indiscernible], thank you. I know you are trying to do a lot of things, but I started with the DPNCheck, one thing I know is - I know you don't make a lot of money; you got to do a mass product. What other countries are you applying for approvals with major populations like Brazil, India and EU, should I stop or you want to give all the questions at one time?
Well, we will take that one. I think if I may repeat the question to make sure I understand it, you are asking what is our plans - what our plans with DPNCheck in additional countries beyond those that we are currently in?
Yes, it is a mass marketing product. You don’t - it is not a unit you sell for $300. You need massive effort like meaning [Indiscernible] approvals. I'd like to see some speed of action because there is only so much limited money and money keeps on running out, and you got to get more money. I want the DPNCheck, I don't know I am an amateur in this business, but I watch a lot of companies. This product has a lot of potential with regard to move for approvals in all countries and get the distribution going and that is one questions. I got a couple of more questions if you have the time?
Sure. So we have - we actually have regulatory approval for DPNCheck now in many countries. We have CE Mark. So we are approved in EU. We are approved in India. We are approved in China. We have a couple of more - one more step in China to formally get on the market. We are approved in Japan, Mexico, obviously US and several other countries.
Our partner in the Far East and that includes India is Omron Healthcare, so we are actually - we are obviously in the market in Japan. We are launching later this year in China and we are currently with Omron evaluating how best to proceed in the India market. We have launched in Mexico. We announced initial sales at the end of last quarter, and we expect - we have high expectations for additional sales this year.
So the product is quite international and it is being distributed either through individual distributors, through our partner Omron Healthcare or through us in the US. So we are actually making efforts all over the world. DPNCheck it is a medical product. It is a slow process, and we have had growthover the last several years and we expect to continue to see that. But it is a deliberate process. It is just - you just have to develop the science behind it, and convince physicians and others in the medical system to adopt it. We are doing that. It is just…
I understand that. Omron Healthcare is in Japan, right. They are not a local in South America or - I'd like to see a direct local distributor in each country, which they understand the business better. Omron is a wholesale distributor. I would rather have your company contact people. It is not very difficult nowadays with the communication so good through all types of media. Have a distributor directly with the company that is what - you may have some problems doing that, then the other issues, but that can speed up the process because we can get the feedback quickly, directly from a local distributor because they know the country, they know the territory and they know the situations, how can they market directly and we can help them succeed.
No, we do. We have local distributors in Mexico, Middle East and Omron has local distribution arms in these various countries. So I think we are in agreement with what you are saying.
[Operator Instructions] The next question comes from the line of Jared Cohen of JM Cohen & Company. Please proceed.
Just a quick question since you have to go to market with Quell directly against basically the use of it against some of the drugs that are marketed like [Indiscernible] or something like that, have you seen how people compare these to those types of things?
Yes, I wouldn’t say - we are not marketing it against any particular pain medication. It is on our FDA label to replace medications. That being said, our - overall our clinical data, which is we reported it recently at a pain medicine conference - it is actually just been submitted for publication. It does show that most Quell users do reduce their overall use of pain medications, and so we have got clinical data to support that. We have a lot of external data and in fact we will be launching clinical studies, specifically looking at opioid use, prescription opioid use in people who are using Quell to see if we can show reduction. So we are seeing it and we are going to explore it more in a more detailed fashion using clinical studies.
Okay, because I was wondering if you can try and use that in terms of - particularly in the direct marketing approach with Target or any of those types of marketing campaigns?
I don't think that we would do that. I don't think that is consistent with our regulatory labeling. I think that people in chronic pain are taking many medications. They themselves and their physicians are looking for ways to reduce those. But I think in terms of actively marketing and advertising I don't think that would be appropriate.
Okay, right. Thank you.
Absolutely. Thank you for the question.
There are no further questions in queue at this time. I would now like to turn the call back over to Dr. Gozani. Please proceed.
Thank you very much for joining us today on the conference call. We are encouraged by our strong early response to Quell and we look forward to continuing to update you as we proceed through the balance of the year. Thank you.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.
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