NeuroMetrix, Inc. (NASDAQ:NURO) Q1 2023 Earnings Conference Call May 3, 2023 8:00 AM ET
Company Participants
Thomas Higgins – SVP, CFO & Treasurer
Shai Gozani – Founder, Chairman, CEO, President & Secretary
Conference Call Participants
Operator
Good morning, and welcome to the NeuroMetrix First Quarter 2023 Earnings Call. My name is Levay, and I’ll 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?
Thomas Higgins
Thank you, Levay, and thanks to all of you who are joining our CEO, Dr. Shai Gozani; and myself for today’s Q1 2023 earnings call. By way of background, we’re 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. Our neurodiagnostics, our DPNCheck and ADVANCE, and our neurotherapeutics are the Quell product line. Our business model is razor-razorblade. Aftermarket revenue is a principal component of product line profitability. Our strategic focus is to expand DPNCheck in the Medicare Advantage area and the Asian markets and to develop the Quell portfolio for specific disease indications.
Earlier this morning, we reported Q1 revenue of $1.7 million, down 25% from $2.3 million in Q1 of last year. Within that decline, DPNCheck revenue was down 20% year-on-year. Domestic Medicare Advantage sales, down 18%, were largely responsible, and there were 2 opposing aspects to the quarter. Patient testing was suspended by our largest customer. This customer had contributed 62% of domestic revenue — domestic DPNCheck revenue in Q1 of last year.
In the balance of our Medicare Advantage business, there was strong revenue growth. Our commercial team grew the customer base over the last year, while supporting increased patient testing at our existing accounts. Revenue from this section — this segment of the business more than doubled year-on-year. So the net result, a significant revenue loss attributable to a single customer, but an emerging Medicare Advantage business profile with much less customer concentration than in prior years.
International DPNCheck sales, which are generally about 15% of the total product line, were down 10% in Q1 due to the timing of Asian order flow. This is expected to recover in future periods this year. ADVANCE and Quell over-the-counter revenues decline as these product lines are being phased out.
Aftermarket sales across all product lines constituted 74% of revenue in the first quarter versus 85% in the first quarter last year. DPNCheck doubled its new device revenue following the launch of its next-generation device, DPNCheck 2.0. The increase in device placements reduced aftermarket revenue as a percentage of sales. However, unit growth, which was up 25%, may have a positive effect on future aftermarket sales.
Our gross profit was $1.2 million in Q1 versus $1.8 million in Q1 of last year. Gross profit contracted in concert with the reduction in revenue, and it and the gross margin rate of 69.5% were affected by inventory charges for parts costs and valuation reserves. These charges reduced the gross margin rate by about 6%.
Operating expenses totaled $2.9 million versus $2.8 million a year ago quarter. The increase of about $158,000 or 6% was due to higher noncash equity compensation and professional service costs in general and administrative expenses.
The net loss for the quarter was $1.6 million or $0.20 a share versus $1 million or $0.14 a share in Q1 of last year.
Regarding cash flow and our balance sheet, net operating cash usage was $1.1 million in the first quarter. We ended the quarter with $20.3 million in cash and securities, and our capital structure remains simple and debt free. There are approximately 7.8 million common shares outstanding as of the end of the quarter.
We believe that these liquid resources are adequate to support our growth initiatives for 2023 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. I will comment on each of these activities.
First, with respect to DPNCheck. As a reminder, DPNCheck is a 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 study technology. Our DPNCheck business is comprised primarily of business-to-business sales into the U.S. Medicare Advantage market, and international sales in China and Japan through distribution partners. 85% to 90% of DPNCheck revenue comes from domestic sales.
We have a value-based care commercial team 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, in the past 6 months, and in particular in the first quarter of this year, substantial uncertainty was injected into the Medicare Advantage sector due to policy changes announced by the Centers for Medicare & Medicaid Services, or CMS.
On January 30 of this year, CMS issued a final rule regarding the Medicare Advantage Risk Adjustment Data Validation, also called RADV program, that is used to recover improper risk adjustment payments to Medicare Advantage plans. And then on February 1 of this year, CMS issued its 2024 Medicare Advantage advanced notice, which included significant changes to the hierarchical condition categories, HCC, risk adjustment model for calendar year 2024.
CMS announced in early April that the proposal was adopted and will be phased in over the next 3 years. The new model alters the risk adjustment environment and includes limitation on HCC codes for peripheral neuropathies that are detected by DPNCheck programs. We believe that this uncertainty and other related factors may have influenced our largest Medicare Advantage customer to suspend many of their Medicare swinging programs, including DPNCheck.
At this time, we do not know if this is a temporary or permanent decision. Nevertheless, we believe that the majority of our customers will continue to embrace the fundamental clinical premise behind DPNCheck, which is that peripheral neuropathy is a common and debilitating condition in the elderly and that early and accurate detection with DPNCheck is essential to minimize debilitating complications, including falls, diabetic foot ulcers, neuropathic pain and to reduce overall health care costs.
At this time, we have not made fundamental changes to our commercial and product development strategies. However, we are evaluating the evolving landscape and may make certain adaptations later this year and moving into next year. We are speaking regularly with our customers as they adjust their clinical screening programs to the new environment. And we are encouraged by the continued support for DPNCheck screening as the right clinical decision for their patients. But we have also heard of the need to modify these programs to reflect the new risk adjustment environment.
The sum total of these Medicare Advantage changes on our DPNCheck business is difficult to predict. We expect that they will put material downward pressure on DPNCheck revenues. However, it is too early to determine the magnitude and duration of the impact. Nevertheless, we expect that the DPNCheck business line will continue to generate positive cash flow by virtue of its attractive operating margins. We also believe that there is a potential for resumed growth once we get through this period of uncertainty.
Moving on to Quell Fibromyalgia. Quell is a wearable neuromodulation platform, which is based on our proprietary adaptive transcutaneous electrical nerve stimulation technology. It is FDA cleared for relief of lower extremity chronic pain, and recently received FDA De Novo authorization as the first and only medical 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 as many as 10 million people in the U.S. The only FDA-approved drugs are pregabalin, duloxetine and milnacipran, which often have substantial side effects. There is a critical unmet need for additional safe treatments.
Q1 of this year was the first full quarter of the commercial launch of Quell Fibromyalgia that did follow a small amount of activity in December of last year. This initial phase is strategic and intended to optimize the effectiveness of our prescription processing solution to refine the clinical and marketing messaging and to collect key performance indicators.
Our commercial team at this time consists of a single dedicated headcount, which is our National Director of Sales. We have partnered with a national online pharmacy to fill both initial prescriptions, which consists of a device and 1 month of electrodes and refills, which consists of 3 months of electrodes. At this time, Quell Fibromyalgia is available on a cash-pay basis.
At this early stage of commercialization, we will provide what we would call top-of-the-funnel metrics on the business, specifically the number of prescriptions written and the number of prescribers. As the business matures, we will consider reporting additional metrics that characterize conversion of written prescriptions to revenue, for example, the percentage of prescriptions that are filled.
Through the end of the first quarter of this year, 234 prescriptions have been written by 92 different prescribers, and this includes rheumatologists, pain medicine specialists, neurologists and primary care physicians. Our expectation is that we will modestly increase the size of the commercial team in the next few quarters, while continuing to refine the business model. We do not have a predetermined time from when we will transition to a full commercial launch, which will entail a substantial financial investment. We intend to be methodical and will proceed once we are confident that we have a robust understanding of the Quell Fibromyalgia market, and have reliable estimates for the most relevant key performance indicators.
Now moving on to the third element of our growth strategy, which is our Quell neurotherapeutics program. So the third element is to develop this program 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 the approximately 700,000 people in the U.S. who receive chemotherapy every year, and can be chronic and debilitating side effect — it can be a chronically debilitating side effect of cancer treatment. Quell received FDA breakthrough designation for treating moderate to severe CIPN in January of 2022 based on the pilot study conducted at the University of Rochester.
A NIH and National Cancer Institute-funded multicenter double-blinded randomized sham-controlled trial of Quell in CIPN completed enrollment in late 2022, and initial data readout is expected in the third quarter of this year. If the results are supported and additional clinical data is not required for a Quell CIPN indication, then we should be positioned to submit an FDA filing by the end of 2023 with potential commercialization by late 2024. And that represents our prepared comments. We’d be happy to take questions at this point.
Question-and-Answer Session
Operator
[Operator Instructions]. Your first question comes from the line of [indiscernible].
Unidentified Analyst
On the Quell chemotherapy, does that specific sector need additional FDA approval? And as you expand that Quell technology, are they already all FDA approved? Or does each 1 need additional FDA approval?
Shai Gozani
So thanks for the question. The — every such indication, if it’s — if we’re going to market Quell for a specific disease state, such as fibromyalgia or CIPN, they require FDA authorization. So currently, we have FDA authorization for fibromyalgia. And as I mentioned, based on the results of this clinical trial that completed late last year, we would submit to the FDA for authorization for CIPN.
Unidentified Analyst
So as that technology rolls out, it needs additional approval from the FDA then?
Shai Gozani
Yes, for each specific indication for which it will be marketed, it needs FDA authorization from the FDA. Correct.
Unidentified Analyst
And how long does that process take when you submit an application? Is that — are you looking at months, quarters or years?
Shai Gozani
I would say typically on the order of quarters.
Unidentified Analyst
Okay. And was there any reason given for the suspension of the DPNCheck technology in the Medicare Advantage market? And do they give you like any indication of how long a suspension would be?
Shai Gozani
Well, it just — it was 1 specific customer that suspended all their screening programs, not just DPNCheck. So they made a broad-based decision for reasons that are — we can only speculate on to stop their clinical screening programs. And again, DPNCheck was 1 of those screening programs. So we don’t have any further indication as to exactly why they did that and what their time line is for resuming.
Unidentified Analyst
Are you seeing growth then in DPNCheck from other customers?
Shai Gozani
Yes. So as Tom mentioned, if you extract that particular customer, in the first quarter, our other Medicare Advantage business doubled.
Unidentified Analyst
What do you guys look at now given these new consequences in that market? Do you have a forecast for the rest of the year for sales? Do you think you can overcome those losses and come in, say, at equal what you had last year? Or do you think you could actually overcome all that and increase your sales for this year?
Shai Gozani
Well, I would say, at this point, we’re not in a position to make that kind of forecast. It’s — all of these changes in Medicare are — Medicare Advantage are fairly new. And the entire sector, much bigger than just NeuroMetrix, of course, is really grappling with these challenges. So it’s hard to say where everything is going over the next — the balance of this year and even into next year. So I think, at this point, we’re just trying to understand and adapt as best we can, but we’re not positioned to make forecasts.
But as I did point out, it does represent downward pressure on revenue. So I think that’s clear. And how much and for how long, it’s hard to determine at this point. As we learn more, we’ll share more.
Unidentified Analyst
Okay. And with these changes resulting in sales decrease, are you guys taking a more aggressive sales campaign approach to all your products going forward?
Shai Gozani
I wouldn’t say necessarily be — I mean we’re — in all our business lines, we try to be very thoughtful and methodical. So we’re — for example, with respect to Quell Fibromyalgia, just because we’re seeing some weakness right now in the DPNCheck side, we’re not going to just sort of accelerate Quell Fibromyalgia before we’re ready. So we need to be careful and thoughtful and methodical regardless. So I would say this has changed what we’re doing outside of DPNCheck.
Unidentified Analyst
Do you think you will see — or at what point would you think you could get the Quell chemotherapy technology going for sales? Would that be something which would occur this year or next year?
Shai Gozani
I would look for next year.
Unidentified Analyst
Next year, okay.
Shai Gozani
Just to be clear, that’s predicated in getting FDA authorization.
Operator
[Operator Instructions]. And presenters, there are no further questions. I would now like to turn the conference back to Dr. Gozani for closing remarks.
Shai Gozani
Thank you for joining us on the conference call today, and we look forward to keeping you updated as we move through the balance of this year. Thank you.
Operator
Thank you, presenters, and thank you, ladies and gentlemen, for joining us today. This concludes today’s conference call. You may now disconnect.
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