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Edited Transcript of NURO earnings conference call or presentation 24-Jan-19 1:00pm GMT

Q4 2018 NeuroMetrix Inc Earnings Call

WALTHAM Jan 28, 2019 (Thomson StreetEvents) -- Edited Transcript of NeuroMetrix Inc earnings conference call or presentation Thursday, January 24, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Shai N. Gozani

NeuroMetrix, Inc. - Founder, Chairman, CEO, President & Secretary

* Thomas T. Higgins

NeuroMetrix, Inc. - Senior VP, CFO & Treasurer

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Conference Call Participants

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* James Rybacki

* Jarrod M. Cohen

* Li Wang Watsek

H.C. Wainwright & Co, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Good morning, and welcome to the NeuroMetrix Fourth Quarter and Full Year 2018 Earnings Call. My name is James, and I will be your moderator on the call.

On this call, the company may make statements that 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 the 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 their 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 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?

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Thomas T. Higgins, NeuroMetrix, Inc. - Senior VP, CFO & Treasurer [2]

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Thank you, James. I'm joined on the call by Dr. Shai Gozani, our President and Chief Executive Officer. NeuroMetrix is a health technology company with proprietary neurostim technology applied to chronic pain, sleep disorders and diabetes. Our primary commercial products are Quell, which is an over-the-counter wearable device for managing chronic pain and DPNCheck, a point-of-care test for diabetic peripheral neuropathy.

Our operating objectives are to position the company for future profitable growth while delivering meaningful innovation and spending within our present cost structure.

Among the 2018 highlights indicating progress, we reported full year profitability with improving gross margins, operating spending flat with 2017, launch of our next-generation Quell technology, Quell 2.0 and the expansion of our Quell IP position through multiple issuances of utility patents and nondilutive funding via our GSK collaboration.

On the other side of the equation, Q4 revenue was adversely impacted by marketing challenges.

Turning to the financials which were included in the press release this morning. Q4 total revenue was $3.7 million, down from $4.9 million in Q4 of 2017. And on a full year basis, revenue was $16.1 million, down from $17.1 million the prior year.

Quell in the fourth quarter contributed $2.8 million revenue compared with $3.7 million prior year fourth quarter.

For the full year, Quell revenue was $10.5 million versus $12.4 million in '17.

Several factors affected Quell revenue. We shed uneconomical distribution channels throughout the year, including TV home shopping and several retailers. This reduced device shipments, but it did not improve -- but it did improve the quality of revenue. The fourth quarter efficiency of our advertising spending was significantly below our expectations, and consequently, we cut spending. In addition, 2018 full year advertising spending was reduced from 2017. The combination of more costly promotion on a per unit basis in Q4 and lower spending during the balance of 2018, resulted in reduced device placements and lower revenue.

Quell aftermarket sales, which are primarily electrodes, were about flat quarter-to-quarter and year-to-year.

DPNCheck Q4 revenue of $600,000 was down from $800,000 in Q4 of the prior year. For the full year, DPNCheck revenue of $4.2 million was up 34% from $3.1 million last year. It was a good year for DPNCheck.

In 2018, we saw a strong demand, both in the U.S. Medicare Advantage market and internationally. The quarterly revenue variations which depressed Q4 are the result of the timing of our customer orders.

Legacy diagnostic products contributed $300,000 in Q4 and $1.4 million in full year. This was flat quarter-on-quarter and down 14% annually. Legacy products are strictly managed for cash flow.

Our gross profit in Q4 of $1.7 million compared with $2.1 million in Q4 2017. For the full year, $7.4 million in gross profit was higher by $0.5 million versus $6.9 million in 2017, and this was achieved on a smaller revenue base.

Gross profit dollars reflect an expansion in the margin rate by 4.9 percentage points in Q4, to about 47%. And for the full year, by 5.8 percentage points, to about 46%. Contributing to this, Quell distributor rationalization improved the margin quality of our revenue as I just mentioned. E-commerce, which is our most profitable channel, expanded from 40% of units shipped in 2017 to 60% of units shipped in 2018, and against an ultimate goal of 80% of Quell shipments which we intend to have processed through e-commerce channels.

The Quell 2.0 launch in September at a higher price point and with lower cost of goods, favorably impacted the margin rate. And the strong 2018 growth of our high-margin DPNCheck business also played a significant role in the overall margin improvement.

OpEx in the fourth quarter was $4.6 million, down by $400,000 from $5 million in prior year. And full year OpEx of $19.7 million was down $200,000 compared with the prior year. Within OpEx, the increased R&D spending was related to the launch of Quell 2.0 and also to support for the new GSK collaboration.

Sales and marketing while up $300,000 or 15% in the fourth quarter, was lower in the full year by $1.1 million or 11%. The quarterly and annual variances in sales and marketing were primarily due to advertising spending.

G&A reductions, both Q4 and full year, reflected lower employee compensation and reduced spending on professional services.

Moving down the income statement. Collaboration income full year was $12.3 million, net of cost. This is comprised of GSK milestone payments. In addition to the collaboration income recognized, we received $2 million in a payment in the fourth quarter upon signing an amendment to the GSK deal. In conformity with GAAP, this payment was deferred and will be booked into income in connection with future performance obligations. The total GSK milestone funding received in 2018 was $14.7 million.

Net income in Q4 was a negative $2.8 million. That was a negative $0.38 a share compared with a negative $2.9 million or $1.16 a share in the fourth quarter of the prior year. Full year net income was a positive $24,000 or on a per share basis just under $0.01 compared with a negative $12.9 million or a negative $11.60 a share in 2017.

Our cash balance at the end of the year was $6.8 million. Our capital structure was largely unchanged in the quarter and the year. It remains a simple equity-only, debt-free structure. Common shares outstanding are about 7.7 million and fully diluted shares are about 14.9 million.

Dr. Gozani will now address our overall strategy.

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Shai N. Gozani, NeuroMetrix, Inc. - Founder, Chairman, CEO, President & Secretary [3]

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Thank you, Tom. As Tom had noted, unfortunately, our fourth quarter results were a disappointment. We anticipated higher revenues driven by the launch of Quell 2.0 product.

On the positive side, we have received positive feedback on Quell 2.0 and our ASP and gross margins were up substantially from prior quarters. We're also encouraged by early evidence for a strong user engagement with Quell 2.0, that we believe could lead to attractive long-term aftermarket sales of electrodes.

However, our overall unit sales were below expectations. In particular, we saw an increase in customer acquisition costs in the fourth quarter and decided against boosting advertising spending to overcome this increase.

Going into the fourth quarter, we had seen a steadily decreasing trend in customer acquisition costs over the past of couple of years. We anticipated this trend would continue in the quarter, particularly given that the fourth quarter has traditionally been our most efficient period for advertising. However, we encountered a surprising trend reversal, and in fact, customer acquisition costs increased. We do not believe that the reason for this was a higher price associated with Quell 2.0, where it went from $249 to $299. We suspect that one factor was increased media costs triggered by the midterm elections, another factor may have been our decision to exit unprofitable channels such as home shopping, but other factors may have also been in play.

Whatever the causes, we have concluded that we need to revisit our commercial strategy and evaluate all elements, including market segmentation, pricing, promotional strategy and product configuration to make sure we are making the best decisions.

We are reviewing proposals from a number of consumer and healthcare consultancies to lead a comprehensive project to study these questions. We believe that a fresh set of eyes is the fastest way to help us modify our core commercial approach and put the product into long-term profitable growth. Recent publications and peer-reviewed journals and scientific presentations and pain medicine conferences have further confirmed the clinical benefits of Quell in people suffering from chronic pain. As such, we remain quite bullish about the commercial prospects for the product line. However, we also believe it is imperative that our Quell strategy generates profitable growth rather than just top line growth.

We anticipate launching our updated commercial strategy in the second half of the year. While we are revamping our Quell strategy, we will be reducing our advertising spending to a modest level to preserve our cash while maintaining brand momentum. We will continue to focus on our collaboration with GSK in support of their market launch of the Quell technology outside the U.S.

During the fourth quarter, we agreed with GSK on a 2019 joint-development program which incorporates ambitious objectives for Quell 2.0 and beyond, that's been functionality and costs. We believe that our current balance sheet and commercial activities, combined with anticipated milestones from our GSK collaboration and shared R&D funding from our joint development plan will provide sufficient resources to fund our operations throughout the year and we do not expect a need to raise additional capital this year.

Finally, we will continue to build the DPNCheck business, which is growing. It generates over 60% operating margins and strong cash flow.

That represents our prepared comments, we'd be happy to take questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from James Rybacki with Medicine Information.

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James Rybacki, [2]

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This is Dr. Rybacki, the Medicine Information Institute. With all of the hoopla and all of the valid concern about opioid addiction, where have you positioned yourself relative to a opioid-free strategy hoping for earlier adopters? And then part two of the question, looking at DPNCheck which seems to be a really high-margin device for you, how are you moving into the diabetic market with the American Diabetes Association or other alignments?

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Shai N. Gozani, NeuroMetrix, Inc. - Founder, Chairman, CEO, President & Secretary [3]

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Thank you for the question. Regarding the opioid epidemic and our positioning relative to that, we've taken the position that we are advocating for the chronic pain community, which -- as opposed to positioning ourselves against opioids. And so while we see ourselves as definitely part of the solution and a potential approach to reducing opioid use, we haven't taken a direct alternative to opioid strategy to this point. One sort of obvious reason for that is our FDA labeling is for the treatment of chronic pain. It's not as an opioid-sparing or opioid alternative, at least at this point. We have conducted and will continue to conduct studies in specific patient groups looking at the specific question of opioid reduction, and if those studies are positive, we might take a stronger positioning vis-a-vis opioids. On your question on DPNCheck, the -- obviously, the primary application of DPNCheck is in the early screening of diabetic neuropathy, meaning the nerve disease associated with diabetes. Our focus in the U.S. has not so much been the ADA, but Medicare Advantage plans, which are quite focused on early detection and characterization of their beneficiary pool vis-a-vis diabetes complications. We have sort of -- that's been the commercial strategy. The -- we have had conversations with the ADA and will continue to, particularly as the scientific literature in support of DPNCheck continues. But I don't think included in the ADA guidelines is going to be a near-term outcome.

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James Rybacki, [4]

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I understand. That makes sense. And in a longer-term strategy though, it seems to make great sense to leverage that early diagnosis because as you look at that -- the sequelae then and other challenges that will come up if you don't catch that neuropathy early, obviously, are potentially catastrophic. Nicely done.

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Shai N. Gozani, NeuroMetrix, Inc. - Founder, Chairman, CEO, President & Secretary [5]

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Yes, I absolutely agree with you. And I think just one additional piece of information. The Japanese Diabetes Association, which is sort of the ADA equivalent in Japan is actually looking at incorporating DPNCheck into their guidelines. So that's a good kind of test case for us for how to approach the ADA.

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James Rybacki, [6]

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I would leverage that very strongly. When you look at guideline penetration, although some people look at guidelines as cookbook medicine, that's a position to say, here we are, this is what we can do, and early diagnostics are just the way to go. Very good.

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Operator [7]

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(Operator Instructions) Our next question comes from the line of Jarrod Cohen with JM Cohen and Company.

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Jarrod M. Cohen, [8]

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Yes, I know you're doing some more direct marketing over the Internet. I was just curious what your -- what are you seeing -- if that's been a better channel to get more responses from?

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Shai N. Gozani, NeuroMetrix, Inc. - Founder, Chairman, CEO, President & Secretary [9]

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Yes. I mean, good question. Right now, or historically, our spending has been about 75% to 80% TV, and the remaining primarily digital. We have found that TV is essential in building awareness. That generally then drives potential customers to the -- to our various digital properties like quellrelief.com, where they learn about the product, and ultimately place the order. But to kind of get the input into the funnel, which ultimately is a digital funnel, but the open -- the open part of the funnel awareness is built by TV. So at this point, we don't have a good alternative to TV in terms of generating that preliminary awareness. But that's something we're going to be looking at and seeing if we can more heavily weight our advertising towards digital, which could be more cost-effective ultimately than TV.

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Operator [10]

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Our next question comes from Andrew Fein with H.C. Wainwright.

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Li Wang Watsek, H.C. Wainwright & Co, LLC, Research Division - Associate [11]

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This is Li Wang for Andrew. So thanks for the update. Just wondering if you can talk a little bit more of your recent publication of the randomized controlled trial of Quell. And how do you plan to set a leverage -- the data for the uptake?

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Shai N. Gozani, NeuroMetrix, Inc. - Founder, Chairman, CEO, President & Secretary [12]

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Yes, thanks for the question. So just to put a little more color on that. We just -- a study was just published. There was a randomized controlled trial looking at Quell against -- we call it sort of treatment as usual, which is kind of conventional treatment for low back pain. This was a sample size of around, I think it was 60, 65 or 70 subjects. The study was conducted at Harvard Medical School. And what they found was substantial reductions in pain and disability and pain catastrophizing, which is the kind of the psychological burden of chronic pain in those subjects using Quell for 90 days versus those who use conventional therapy. So really strong results. It got -- just got published in Pain Practice in the last several weeks. It dovetails with other studies that we've done in low back pain and in fact, other studies that we think will be published here in the near term on chronic low back pain. It's going to -- it's forming the basis for, what I would say, be more specific and targeted promotion of Quell for low back pain. We typically approach the promotion as fairly generic for chronic pain and haven't focused on specific conditions. But as our clinical story for -- in clinical support for specific conditions enhances, such as with this study and related studies, we'll start to be more specific on those conditions and I think that will help with adoption because I think as you talk about specific conditions that registers more easily for consumers than talking about chronic pain in a generic sense.

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Operator [13]

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(Operator Instructions) I'm not showing any further questions in queue. So I'd like to turn it back for any closing remarks.

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Shai N. Gozani, NeuroMetrix, Inc. - Founder, Chairman, CEO, President & Secretary [14]

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Well, thank you for listening to the call today and for the questions. And we look forward to updating you over the balance of this year.

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Operator [15]

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Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Everybody, have a wonderful day.