Memorandum

NeuroMetrix 1Q14 – Strong Sensus growth with 1,448 devices shipped in 1Q14; DPNCheck filed in Japan – May 7, 2014

Executive Highlights

  • Strong Sensus growth: revenue totaled $195,000 representing 1,448 devices shipped in 1Q14, up from $34,000 and 145 devices in 1Q13 and $67,000 and 358 devices in 4Q13. Gains driven by new distribution agreement with DJO Global.
  • OTC pain management product could be developed in time for a 2Q15 launch; go/no-go decision planned for 3Q14.
  • DPNCheck revenue totaled $278,000, down from $315,000 in 1Q13, which included a one-time six-figure sale to a Korean distributor. DPNCheck has been filed in Japan.
  • NeuroMetrix ended the quarter with $7.6 million in cash and cash equivalents.

NeuroMetrix reported 1Q14 financial results on April 24, 2014 in a call led by CEO Dr. Shai Gozani. As a reminder, NeuroMetrix markets two products related to diabetic peripheral neuropathy (DPN): the NC-Stat DPNCheck diagnostic device and the Sensus Pain Management device (a transcutaneous electrical nerve stimulation [TENS] device). For background, the company estimates that about 50% people with diabetes are affected by neuropathy, and it is a disease area with high unmet medical need due to lack of disease-modifying treatment options and the insufficiency of current treatment options to relieve many patients’ symptoms. This report contains our top five highlights from the call.

Top Five Highlights

1. Sensus sales have begun to take off – NeuroMetrix shipped 1,448 devices in 1Q14, up from 145 devices in 1Q13 (the quarter it launched) and 358 devices in 4Q13. Sensus revenue (which includes sales of both the Sensus device and disposable electrodes) rose in tandem, totaling $195,000 in 1Q14, up from $34,000 in 1Q13 and $67,000 in 4Q13. The spike in Sensus sales is largely attributable to NeuroMetrix’s new distribution agreement with DJO Global. DJO Global is a manufacturer and distributor of pain therapy and rehabilitation products with national sales reach through its direct sales force. DJO is currently promoting Sensus to its primary call points in pain medicine and podiatry, as well as endocrinology, neurology, and primary care. Pricing for Sensus devices varies based on channel and purchasing volumes, and DJO’s large purchasing came with substantial price discounts. The Sensus is sold on the razor/razor blade model where margins on the device are low, and margins on the disposable electrodes are in the 50-60% range. Units shipped tend to be lumpy, as shown in table 1.

Table 1: Sensus Revenue and unit shipments.

 

1Q13

2Q13

3Q13

4Q13

1Q14

Revenue

$34,000

$32,000

$73,000

$67,000

$195,000

Units Shipped

145

210

557

358

1448

2. As previously announced, NeuroMetrix launched a second-generation Sensus device during 1Q14, which is thinner and has some important hardware improvements. It began shipping the second-generation device mid-quarter and “quickly” discontinued the first generation device.

3. Management also commented on the previously announced intent to explore a potential OTC pain management product. Management estimated that it could complete the development process, including seeking regulatory approval, and launch in 2Q15. It hopes to make a decision on whether to go through with the launch in 3Q14. As a reminder, the company decided to pursue this option based on the results of a market research study that found that an OTC product could likely expand the market for its pain therapy technology.

4. DPNCheck performance in 1Q14 was subject to some seasonality. Revenue totaled $278,000, which represented a decline from $315,000 in 1Q13; management emphasized that 1Q13 sales were boosted by a one-time six-figure sale in 1Q13 to a Korean distributor. 1Q14 revenue also represented a sequential decline from ~$500,000 in 4Q13 due to expected seasonality in Medicare Advantage testing. Based on electrode sales, management estimates that domestically, about 16,050 tests were performed in 1Q14 compared to only 3,900 in 1Q13 and about 28,200 in 4Q13.

  • DPNCheck sales come mostly from Medicare Advantage plans, which submit risk assessment numbers on an annual basis. Therefore, a substantial amount of DPN testing tends to happen at the end of the year, which means the sequential comparison between 1Q14 and 4Q13 will likely always be challenging. Management noted that seasonality had a lesser effect on the 4Q13-1Q14 transition than the 4Q12-1Q13 transition.
  • DPNCheck revenue has not shown signs of sustained growth since its launch in 2011. While seasonality and the long life-cycle of the product act as confounders, the general trend has been pretty flat (see Table 1 below).

Table 2: DPNCheck Revenue.

 

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

Revenue

$85k

$137k

$648k

$306k

$350k

$315k

$129k

$317k

$539k

$278k

5. NeuroMetrix filed the DPNCheck in Japan in 1Q14. A commercial launch is feasible in 2Q14, depending on approval timelines. NeuroMetrix sees Japan as a particularly attractive market for several reasons:

  • Japan’s population is relatively wealthy and rapidly aging. According to the most recent IDF Diabetes Atlas, Japan has a 5% rate of diabetes amongst adults aged 20-79.
  • Providers would receive positive reimbursement for such a device.
  • Japan is the one of the only markets in the world where a disease-modifying drug has been approved to treat DPN. Ono Pharmaceutical’s Kinedak (epalrestat) is an aldose reductase inhibitor and may delay progression of DPN. In contrast, all other current treatments for DPN treat only the symptoms. Various forms of epalrestat may also be available in India, although its status there is unclear. In the US, approved products for DPN symptoms include J&J’s opioid Nucynta ER (extended release tapentadol), Pfizer’s anticonvulsant Lyrica (pregabalin), and Eli Lilly’s antidepressant Cymbalta (duloxetine). Pregabalin is the only level “A” recommended treatment (pharmacologic or otherwise) for DPN in the guideline developed by the American Academy of Neurology, the American Association of Neuromuscular & Electrodiagnostic Medicine and the American Academy of Physical Medicine and Rehabilitation. A host of other options (both approved and off-label) are recommended as level “B” (including TENS devices) with no algorithmic guidance for which of the myriad options should be used because patient responsiveness is so variable.
  • NeuroMetrix has an existing partnership with Omron Healthcare for the DPNCheck, and the company is based in Japan.
  • Omron currently markets products in Japan that are complementary to the DPNCheck.

Questions and Answers

Q: Could you give a little more detail on the DJO Global revenue model? It looks like you shipped a lot of Sensus devices in 1Q14, and I was wondering if the revenues for the quarter came from device sales or if there is an electrode included there? When do you think those would get to the field and start generating recurring revenue?

A: There were electrode orders along with the device orders, but the way most of the units are sold, they’re sold with the first month or two of electrodes in the initial shipment with the device so the electrode sales tend to occur several months after initial placement of the device with the patient. So we’ll see more electrode sales coming this quarter and beyond. That’s why we’re focused on getting devices to patients. DJO, like most of our distributors, keeps a fairly low inventory so most devices that were shipped were pretty quickly put on patients. We believe that distribution inventories are low. We’re expecting to see increased electrode sales as we go forward. In terms of where DJO is,– they have quite a few reps selling the product and are still ramping up. We only trained the sales force at the end of January so we’re quite encouraged by what we saw in the first quarter and what we’ve seen thus far with the launch through their sales force.

Q: You also mentioned the second-generation Sensus. Is that mostly going to DJO? Also, can you comment on comparative margins with the second-generation device and on electrodes vs. device sales?

A: The second-generation device is going to all of our partners. We made a complete switch over. It’s a very similar device. What we were primarily focused on was making the device thinner. What we found over the course of the first year was that patients were wearing it extensively, including at night. So it’s not just DJO but all the distributors. The margins on the first- and second-generation devices are basically the same. We have a program in place to lower costs on the Sensus device through improvements in manufacturing processes, assembly procedures, and through volume. Volume will definitely drive better margins. The electrode margins are already pretty strong. Depending on the distributor and circumstances, they are north of 50% and in some cases in the 60% range. So those are already strong even at current volumes and may get a little better.

Q: You mentioned you are ramping up manufacturing in the first quarter. Do you think there’s more growth in DJO for Sensus or will that rely on getting new partners or the OTC model?

A: We see growth for Sensus in many different places. So we expect growth through DJO and other distributors, and clearly if we decide to proceed with the OTC product, we’ll see tremendous growth opportunities. We’re really ramping up on all fronts.

Q: Can you talk a bit more about the seasonality factor with DPNCheck and Medicare Advantage?

A: The seasonality is largely due to the fact that Medicare Advantage plans have to submit their risk assessment numbers on an annual basis so they have a December end of year target. There’s a natural inclination to try to get a lot of testing done before the end of the year, so given priorities and such, the testing tends to get pushed toward the latter part of the year, and that’s what we saw last year. That being said, because there seems to be more overall stability in the Medicare Advantage program overall, the plan seems to have more confidence in what they’re seeing, so they may be moving up testing earlier in year and also expanding the testing. Maybe most importantly, they have now one-to-two years of experience using DPNCheck in their screening programs so they’re more comfortable with the application in their screening and risk adjustment models.

Q: Can you talk a bit more about your agreement with Omron in Japan and how that’s progressing with DPNCheck? What you might expect?

A: Our agreement with Omron covers Japan and China. They’re in the latter stages of the regulatory process and moving towards launch in Japan. They are in the early stages on the regulatory side in China. These are both exclusive distribution agreements with minimums. In Japan we won’t get into specific numbers, but they have targets for the first three years, and they expect to launch in the second quarter depending on regulatory timelines. What’s most important from our perspective is the amount of resources and emphasis they’ve placed on DPNCheck. They have quite a large team focused on the product for the Japan launch. They have engaged a fairly sizeable sales force. Japan is an attractive market for us for some of the reasons noted in our prepared remarks. In addition, Japan has a high rate of diabetes, a focus on controlling diabetes, and physicians who use DPNCheck will get reimbursed for the test. It’s the only market in the world where there’s an approved drug to treat DPN. It has the perfect profile for the DPNCheck.

--by Jessica Dong and Kelly Close