NeuroMetrix, Inc. (NASDAQ:NURO) Q4 2022 Earnings Call Transcript

NeuroMetrix, Inc. (NASDAQ:NURO) Q4 2022 Earnings Call Transcript February 23, 2023

Operator: Good morning, and welcome to the NeuroMetrix Fourth Quarter and Full Year 2022 Earnings Call. My name is Latanya, and I will be your moderator on the call. 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 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, you may begin.

Thomas Higgins: Thank you, Latanya, and thanks to all of you who are joining our CEO, Dr. Shai Gozani and myself for today’s Q4 and full earnings — and full year 2022 earnings call. By way of background, NeuroMetrix is a medtech company. Our mission is to reduce the impact of neurological disorders and pain syndromes on individuals and on population health. Our commercial products are noninvasive. They address worldwide market opportunities, and they have no direct competition. Alternatives exist, but not substitutes. Our neurodiagnostics are DPNCheck and ADVANCE, and our neurotherapeutics are the Quell product line. Our business model is razor-razorblade. Aftermarket revenue is the principal component of product line profitability.

Our strategic focus is to expand DPNCheck in the Medicare Advantage and Asia markets and to develop the Quell portfolio for specific disease indications. Earlier today, we reported Q4 revenue of $1.8 million and full year 2022 revenue of $8.3 million. In both the quarter and the full year, revenue was up slightly from the prior year. Aftermarket sales across all product lines were about 82% of total revenue in both periods, and both were up from about 80% in the prior year periods. DPNCheck posted a solid quarter with growth of 18%. Sector-wise, Medicare Advantage was up 21%, reflecting primarily organic growth, and international grew by 9%. For the full year, DPNCheck posted 10% growth with Medicare Advantage up about 13% and offsetting an approximate 9% decline in international sales.

Quell sales declined in the quarter and full year as we terminated over-the-counter sales at the end of Q3 in order to position the Q4 launch of Quell Fibromyalgia. Gross profit was $1.2 million in Q4 and $5.8 million full year. These were slight contractions in both periods. The Q4 gross margin rate was 67% versus 68% in 2021 and full year, the gross margin rate was 70% versus 72% prior year. Each period was down by about 2 percentage points. Margins continued to be burdened by higher raw material costs. However, the 2022 shift in sales mix to higher-margin DPNCheck products provided some offset to these higher raw material costs. And we expect raw material supply and cost pressure to continue during 2023. Our operating expenses totaled $2.1 million in the fourth quarter and $10.5 million for the year.

OpEx was lower by 7% or $161,000 from Q4 of last year, a reduction of $400,000 from last year and R&D raw material costs was partially offset by higher personnel costs across the organization. Full year OpEx increased by $2.3 million, and this is the effect in 2022 of our 2-year $4 million infrastructure program, which covers product development, commercialization talent, IT systems, governance and other topics. We estimate that about 1/2 of the spending will be variable and 1/2 will be fixed recurring. Our net loss in Q4 was $692,000 or $0.09 per share. Full year ’22 net loss was $4.4 million or $0.62 — negative $0.62 per share. Regarding cash flow and our balance sheet. Net cash operating usage was $1.7 million in the fourth quarter and $5.9 million during 2022.

We ended the year with $21.2 million in cash and investment securities, and we maintain a simple debt-free capital structure. There are about 7.8 million common shares outstanding as of year-end. We believe that these liquid resources are adequate to support our growth initiatives for this year and beyond. And now for Dr. Gozani’s comments.

Shai Gozani: Thank you, Tom. Our growth strategy is built on 3 core elements. The first is organic growth in the DPNCheck Medicare Advantage business. The second is to establish and grow the Quell Fibromyalgia indication in the U.S. market. And the third is to advance the Quell neurotherapeutics program, which may lead to additional indications and an expanded addressable market. And I’ll now comment on each of these activities. Regarding DPNCheck, we have a value-based commercial team focused on increasing DPNCheck adoption in the Medicare Advantage market. This includes large medical groups, health systems and health assessment companies, where a substantial portion of their patients are covered under Medicare Advantage. We were pleased that our Medicare Advantage business grew 21% year-over-year in the fourth quarter.

However, in the past several weeks, substantial uncertainty was injected into Medicare Advantage due to sweeping changes proposed by the Centers for Medicare & Medicaid Services, or CMS. On January 30, 2023, CMS issued a final rule regarding the Medicare Advantage Risk Adjustment Data Validation, or what’s called the RADV program, that is used to recover improper risk adjustment payments to Medicare Advantage plans. And then on February 1, 2023, CMS issued its 2024 Medicare Advantage Advance Notice, which included significant changes to the hierarchical condition category, or HCC, risk adjustment model for calendar year 2024. These have broad implications for Medicare Advantage space and if adopted, would substantially revise the risk adjustment environment and do include limitations on HCC codes for some types of peripheral neuropathies.

Overall, these changes have been poorly received by the industry, and that we’re expecting to see significant pushback. These events do not alter the fundamental clinical premise behind DPNCheck that our customers strongly believe, which is that peripheral neuropathy is a common and debilitating condition in the elderly, and the early and accurate detection of DPNCheck is essential to minimizing complications and reducing overall health care costs. However, the eventual impact of the proposed program changes on DPNCheck sales is unclear at this time. If they are implemented without modification, they will create headwinds that we will need to navigate. We have a number of R&D activities that will support continued DPNCheck growth in the Medicare Advantage market and help us manage the aforementioned uncertainty.

First, we fully launched our second-generation device called DPNCheck 2.0 in the fourth quarter. This device has improved usability while maintaining the high diagnostic accuracy and reliability of the original DPNCheck device. Another important R&D program is the DPNCheck cloud, which is a data analytics platform that allows our customers to monitor and optimize their DPNCheck implementation and address key population health questions through a family of web-based dashboards. We anticipate launching DPNCheck cloud in the first half of this year. Finally, we are working to improve integration between the DPNCheck reporting software and our customers’ electronic health record systems. We are collaborating with a leading EHR middleware company to provide comprehensive interoperability.

Moving on to Quell Fibromyalgia. We have now completed the transition of the Quell business from a nonspecific over-the-counter treatment for chronic lower extremity pain to a prescription neurotherapeutic platform. As of the fourth quarter of last year, Quell was no longer available over the counter. And starting with our fibromyalgia indication, Quell technology is now only available by prescription. As a reminder, fibromyalgia is a complex chronic pain syndrome that affects as many as 10 million people in the United States. The only FDA-approved treatments are 3 drugs: pregabalin, duloxetine and milnacipran, which often have substantial side effects. We received FDA breakthrough designation for this indication in July of 2021 and de novo authorization in May of 2022.

Quell is the only FDA-authorized medical device indicated to help reduce the symptoms of fibromyalgia. We are in the midst of the strategic launch which started in late fourth quarter that is intended to optimize the effectiveness of our prescription management solution, to refine the clinical and marketing messaging and to collect key performance indicators that will allow us to plan further commercial expansion. We have a growing number of physicians, many of which are key opinion leaders in fibromyalgia and chronic pain who are now regularly writing Quell prescriptions for their patients with fibromyalgia. And we are now starting to receive and processing prescriptions daily through our partnership with the National Online Pharmacy. Our next commercial decision will occur in late Q2 of this year, at which time we may expand our sales operations if we are satisfied with the business metrics collected during the strategic launch.

If everything falls into place as we hope, Quell revenues may resume growth later this year. Regarding the Quell neurotherapeutics program. As I mentioned, the third element of our growth strategy is to develop the Quell neurotherapeutics pipeline beyond the initial fibromyalgia indication. The program that is furthest along is for chemotherapy-induced peripheral neuropathy, or CIPN, which affects as many as 70% of people who received chemotherapy. It can be a chronic and debilitating side effective of cancer treatment. And NIH and National Cancer Institute funded multicenter, double-blinded, randomized, sham-controlled trial has been underway for the past couple of years and recently completed enrollment. Study results should come out in late Q2 of this year.

If the results are supportive, then we will consider making an FDA filing before the end of 2023. As a reminder, we received FDA breakthrough designation for treating moderate to severe CIPN in January of 2022. And those represent our prepared comments, and we’d be happy to take any questions at this point.

Q&A Session

Operator: And our first question will come from Jarrod Cohen of Cohen.

Jarrod Cohen: Just a quick question. Don’t you have a trial with the Quell in terms of — for cancer pain. I was just wondering when you might see the results of that trial.

Shai Gozani: Yes. Thanks for the question, Jarrod. So that is the trial I mentioned. So it’s for chemotherapy-induced peripheral neuropathy, or CIPN, which manifests as pain, but in addition to other symptoms. So that trial is over. We are expecting to hear results in the second quarter.

Operator: And I’m showing no further questions. I would now like to turn the conference to Dr. Gozani for closing remarks.

Shai Gozani: Thank you for joining us this morning on the conference call, and we look forward to keeping you updated as we go through this year. Thank you very much.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.