Q3 2023 NeuroMetrix Inc Earnings Call

Participants

Thomas Higgins; SVP, CFO; NeuroMetrix, Inc.

Shai Gozani; CEO, President, Chairman; NeuroMetrix, Inc.

Presentation

Operator

Good morning, and welcome to NeuroMetrix third quarter 2023 business and financial highlights update. My name is Norma, and I'll be your moderator on the call. On the call, the company may make statements which are not historical and are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Statements are predictive in nature, that depends 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 or other forward-looking information. You should not rely on forward-looking statements because actual results may differ materially as a result of number of importance, 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. On the SEC's website at SEC.gov. NeuroMetrix does not intend and undertake no duty to update the information disclosed on conference call.
I'd now like to introduce NeuroMetrix Senior Vice President and Chief Financial Officer, Mr. Thomas Higgins. Mr. Higgins?

Thomas Higgins

Thank you, Norma, and welcome to all of you who are joining our CEO, Dr. Shai Gozani and myself for today's Q3 2023 update. By way of background, NeuroMetrix is a commercial stage medical device company addressing unmet needs in chronic pain and diabetes. Our products are noninvasive. They have no direct competition and offer worldwide opportunities.
Our business model is razor-razor blade, with aftermarket revenue as the primary financial objective. Our principal technology is our Quell, which is a wearable neuromodulation platform, which we have transitioned from over-the-counter to a prescription platform, and DPNCheck, a screen technology for peripheral neuropathy, particularly in neuropathy related to diabetes.
We have a solid balance sheet with $17.6 million in liquid assets. Our capital structure is simple and debt-free. There are approximately 8.6 million common shares outstanding and 800,000 employee equity grants which are stock options and RSUs. Today, we reported Q3 revenue of $1.2 million, which was down 39% compared with $2 million in Q3 of last year.
The reduction reflects the contraction in Medicare Advantage patient screening, which follow the substantial reimbursement changes adopted by CMS, Centers for Medicare and Medicaid, in Q1 of this year. Patient risk adjustment rules were modified with a three-year phase-in affecting a range of patient screening procedures, including neuropathy, often performed with DPNCheck.
We've discussed this in the prior quarters, but this year, there's been no update or modification to the new CMS rules. Our DPNCheck business experienced a net revenue reduction of $512,000 or 35% in the third quarter of this year versus last year. In the nine months year to date, DPNCheck revenue is down a cumulative $1.1 million or 23% versus 2022.
Q3 revenue also reflects the strategic transition of our Quell neuromod technology for chronic pain from over the counter sales to prescription indications. This was initiated in late 2022 and continues through a strategic commercial, launch, at the end of Q3 last year, we discontinued marketing Quell over the counter and in Q4 of last year, we initiated our prescription sales of Quell Fibromyalgia. While sales of Quell Fibromyalgia have been growing this year, they have not yet reached the level of Quell over the counter sales in the prior year.
During the third quarter of this year, we expanded our Quell direct sales presence within the large markets of Texas, Florida, and California. Our gross profit of this year in Q3 was $800,000 compared with $1.3 million in Q3 last year. The gross profit reduction correlates with lower revenue in the quarter. Our gross margin rate in the third quarter was 65%, which is consistent with the third quarter of last year.
Operating expenses totaled $2.7 million, down from $3 million last year. The OpEx decrease of $245,000 or 8% primarily reflects the offsetting effects of increased headcount costs from our expanded sales -- Quell direct sales team, and the reduced R&D utilization of outside professional services.
Net loss was $1.8 million or a negative $0.21 per share versus $1.6 million or a negative $0.23 per share in Q3 of last year. Our operating cash usage in the quarter was approximately $2.1 million. As I mentioned, we hold $17.6 million in liquid resources. This is cash and securities, and these are expected to be adequate to support the next phase of our Quell growth initiatives.
NeuroMetrix's common stock is currently trading in the range of $0.65 to $0.70 per share. From an accounting standpoint, as of the end of Q3, our neuro liquid assets were valued at $2.5 per share, and our stockholders' equity was $2.32 per share.
During the third quarter, we received a delisting notice for non-compliance with the NASDAQ minimum bid price rules of $1 per share. Nasdaq has provided us with a 180-day grace period until early February next year to regain compliance.
On October 19, our stockholders authorize a reverse split of our common stock if the Board of Directors believes it would be an appropriate step to address the minimum bid price issue. The Board has not yet made a decision on a possible reverse split. And now for Dr. Gozani's comments.

Shai Gozani

Thank you, Tom. Our growth strategy is built on three core efforts. The first is to establish and grow the Quell Fibromyalgia indication in the US market. The second is to advance the Quell neuro therapeutics program, which will lead to additional indications and an expanded addressable market. And the third is to revise the DPNCheck business strategy to account for the recent changes in Medicare Advantage. I'll now comment on each of these activities.
First is with respect to Quell Fibromyalgia. Quell is our wearables neuromodulation platform. It is based on our proprietary adaptive transcutaneous electrical neuro stimulation technology is the only daily multi-hour wearable treatment for chronic pain syndromes. It is FDA cleared for relief of lower extremity chronic pain and has received FDA de novo authorization as the first and only neuromodulation device indicated to help reduce the symptoms of fibromyalgia. This latter indication is available by prescription only.
At this time, our commercialization efforts are exclusively focused on the fibromyalgia indication. Fibromyalgia is a complex chronic pain syndrome that affects up to 50 million people in the US. The only FDA approved drugs are pregabalin, duloxetine, and milnacipran which can have substantial side effects. There is a critical unmet need for additional safe treatments.
The third quarter of this year was the third quarter of the commercial launch of Quell Fibromyalgia. At this time, we are in a deliberate strategic phase that is intended to optimize the effectiveness of our prescription processing solution to refine the clinical and marketing messaging and to identify the most attractive patient cohorts for our solution.
Our commercial team consists of a national sales director and two regional business managers, which provide us with preliminary coverage of the Florida, Texas, and the California markets. And we expect to decide our next expansion in the second quarter of 2024. We have partnered with the national online pharmacy to fill both initial prescriptions and refills. At this time, Quell Fibromyalgia is available on a cash-pay basis.
There were 125 unique prescribers during the third quarter compared to 123 during the second quarter. The most common prescribers are rheumatologists, pain medicine specialists, and neurologists. The cumulative number of Quell Fibromyalgia prescriptions that have been then increased to 752 in the third quarter from 490 in the second quarter, with over 60% of prescriptions filled by patients.
The cumulative number of monthly refills almost doubled from 348 in Q2 to 663 in the third quarter. Overall we are pleased with our early commercial experience with Quell Fibromyalgia. We expect to see continued progress leading to material revenue in 2024.
Moving on to our broader Quell nerve therapeutics program. As I mentioned, the second element of our growth strategy is to develop the pipeline for Quell neurotherapeutics beyond the initial fibromyalgia indication. The program that is furthest along is for treatment of chronic chemotherapy-induced peripheral neuropathy or CIPN, which affects as many as 30% of the approximately 1 million people who receive chemotherapy every year.
It is a chronic and debilitating side effect of cancer treatment. Quell received FDA breakthrough designation for treating moderate to severe CIPN in January of 2022 based on a pilot clinical study conducted at the University of Rochester. A NIH-funded multicenter, double-blinded, randomized sham-controlled trial completed enrollment in the third quarter of last year, and we have now had the opportunity to review the results and to determine that they support a FDA 510(K) filing for a Quell CIPN indication.
We have largely completed the submission documents, but since the study was externally funded by NIH, we must wait for the results to be published before sending data to the FDA. We hope that this occurs in this quarter or in the first quarter of next year at the latest. Depending on the FDA review timeline and ultimate clearance decision, we believe that we could be positioned to initiate commercialization before the end of 2024.
Now moving on to DPNCheck. DPNCheck as our rapid point-of-care test for peripheral neuropathies such as diabetic peripheral neuropathy, or DPN, which is the most common long-term complication of diabetes. DPNCheck is the only point of care peripheral neuropathy test based on gold standard nerve conduction studies technology.
Our DPNCheck business has been comprised of a B2B sale into the US Medicare Advantage market and international sales in China and Japan through distribution partners. About 80% of DPNCheck revenue has historically come from domestic sales. We have a value-based commercial team that has been focused on increasing DPNCheck adoption in the Medicare Advantage market.
This includes large medical groups, IDNs, health systems, and health assessment companies where a substantial portion of their patients are covered under Medicare Advantage. This business has been growing over the past several years. However, substantial uncertainty was injected into the Medicare Advantage sector due to policy changes announced by the Centers for Medicare & Medicaid Services, or CMS.
In April of this year, CMS announced significant changes to the hierarchical condition categories or HCC risk adjustment model for calendar year 2024. The new model alters the risk adjustment environment in among its many changes, essentially eliminated HCC codes for peripheral neuropathies that are detected by DPNCheck screening programs.
We believe that this uncertainty led our largest Medicare Advantage customer and several smaller customers to spend their medical screening programs, including for DPNCheck, are clearly using GPS DPNCheck. We are evaluating the evolving landscape and at this point, believe it will be necessary to alter our strategy to move away from Medicare Advantage focused business to one more broadly addressing value-based care. Our expectation is that we will finalize our new commercial strategy during the fourth quarter.
As we saw this quarter, the Medicare Advantage changes have caused a material downward pressure on DPNCheck revenues. Implementation of a new strategy will take time, and therefore, we do not see a reversal in 2024. Nevertheless, we expect the DPNCheck business line will continue to generate positive cash flow by virtue of its attractive operating margins, which will help offset our investments in the growing Quell neurotherapeutics business.
And that concludes our prepared comments, and we'd be happy to take questions at this point.

Question and Answer Session

Operator

(Operator Instructions) I am currently showing no questions at this time. I'd like to hand the conference back to Dr. Gozani for closing remarks.

Shai Gozani

Thank you for joining us on the call today, and we look forward to keeping you updated over the balance of the year.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.