NeuroMetrix 3Q14 – Strong sales for diabetes portfolio; Progress toward launch of OTC pain management device – November 25, 2014

NeuroMetrix reported 3Q14 financial results late last month 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 (which uses transcutaneous electrical nerve stimulation [TENS] technology). Below we include our top five highlights from the presentation, followed by Q&A.

1. NeuroMetrix’s diabetes portfolio posted sales of $780,000 in 3Q14, double the sales from 3Q13 and up 26% sequentially; diabetes products now account for a majority (54%) of the company’s total revenue.

2. NeuroMetrix reported strong progress toward the launch of its over-the-counter (OTC) wearable device for chronic pain, with a launch still planned in 2015.

3. Sensus revenue totaled $164,000 from 951 devices shipped in 3Q14, up from $73,000 and 557 devices shipped in 3Q13 but down from $256,000 and 1,707 devices shipped in 2Q14; the sequential decline appears to relate to seasonality and distributor-level factors.

4. NeuroMetrix launched DPNCheck in Japan in 3Q14 in partnership with Omron Healthcare; management commented during Q&A that the companies also intend to pursue a launch in China.

5. DPNCheck sales remained strong in 3Q14, rising 93% YOY and 70% sequentially to $611,000 largely due to increased testing rates in the Medicare Advantage sector.

Top Five Highlights

1. NeuroMetrix’s diabetes portfolio posted sales of $780,000 in 3Q14, up 100% year over year (YOY) from $390,o00 in 3Q13 and 26% sequentially from $620,000 in 2Q14. This quarter marked the first time that the company’s diabetes products comprised a majority (54%) of total revenues. Overall growth was driven by a strong showing from the DPNCheck.

2. NeuroMetrix reported strong progress toward the launch of its over-the-counter (OTC) wearable device for chronic pain. As a reminder, NeuroMetrix received FDA clearance for the device in July and is planning for a launch in 2015. The device uses the same transcutaneous electrical nerve stimulation (TENS) technology as the Sensus device and can be worn during the day or night. The company is collaborating with the Bay Area firm IDEO on the design process – we’re interested to see what the final OTC device design looks like, as the most current version of the Sensus already has a fairly friendly form factor. The company recently appointed Mr. Frank McGillin, an executive with extensive experience in consumer healthcare, to oversee the business aspects of the launch. The company is also already expanding its marketing staff, according to the financial results press release. During Q&A, management said the device, which will come with an associated smartphone app for personalization and be priced in the ~$200 range.

• The neurological complications of diabetes can be very difficult to specifically diagnose and even more difficult to treat. Unfortunately, the patient population with the lowest access to therapies to control their blood glucose is also likely to have poor access to providers and drug therapies to treat diabetic neuropathy. A price point in the ~$200 range pales in comparison to the out-of-pocket costs of drug treatments and physician visits, and it is not unreasonable to hope that the OTC device should expand the TENS market and open up avenues for access to a much wider population of patients.

3. Sensus revenue and shipments both declined sequentially in 3Q14, which management attributed largely to seasonality and distributor-level factors. Revenue was $164,000 in 3Q14, up 100% YOY from $73,000 in 3Q13 but down 36% sequentially from $256,000 in 2Q14. The company shipped 951 Sensus devices in 3Q14, up from 557 in 3Q13 but down from 1,707 in 2Q14. However, management encouragingly shared during Q&A that ~1,000 devices have already shipped in 4Q14 and attributed much of the slowdown in 3Q14 to seasonal variability as well as to adjustments in inventory by distributors and the termination of several distributors “for strategic reasons.” Management also noted that selling devices in the durable medical equipment category is always challenging due to factors including complex claims processing, limited reimbursement, and Medicare competitive bidding.

Table 1: Sensus Revenue and Unit Shipments

4. NeuroMetrix launched DPNCheck in Japan in 3Q14 in partnership with Omron Healthcare; management commented during Q&A that the companies also intend to pursue a launch in China. Two commercial shipments were sent to Omron in Japan in August and the product was launched in early September – the shipments contributed to the product’s overall strong performance in 3Q14 (see below). During Q&A, management listed several reasons why Japan is a particularly attractive market for DPNCheck: it is a fairly wealthy country with a strong healthcare system, a high rate of diabetes, and a focus on prevention and early detection of complications; it is also one of the few countries with an approved drug (Ono Pharmaceutical’s Kinedak) to treat diabetic neuropathy.

• Management also noted during Q&A that the next market NeuroMetrix and Omron plan to pursue is China, due to the country’s rising diabetes rates and increasingly sophisticated, data-oriented healthcare system. As a reminder, Novo Nordisk recently announced the addition of Chinese cities Shanghai and Tianjin to its “Cities Changing Diabetes” initiative, and we hope to see continued focus on the skyrocketing prevalence of diabetes in that country – the IDF estimates that 96 million people in China have diabetes, and that figure may be a conservative calculation.

5. DPNCheck sales remained strong in 3Q14, largely due to increased testing rates in the Medicare Advantage sector. Revenue totaled $611,000, up from $317,000 in 3Q13 and $360,000 in 2Q14; this represented growth of 93% year-over-year and 70% sequentially. NeuroMetrix shipped 35,800 DPNCheck sensors in 3Q14, up from 21,550 in 3Q13 and 24,325 in 2Q14. Management noted that the rate of testing among patients on Medicare Advantage plans (which account for the bulk of DPNCheck sales in the US) continues to grow, with 26,550 tests performed in 3Q14. NeuroMetrix has suffered from significant seasonal variability in sales among this sector in the past, but management mentioned in 2Q14 that the rate of testing “by larger accounts” had become steadier and led to more stable sales. A successful Japanese launch should contribute to continued strong sales in the coming quarters.

Table 2: DPNCheck Revenue

Questions and Answers

Q: On Sensus, in your prepared remarks you mentioned that 6,000 devices had shipped, but the press release only said 5,000. I assume that means you’ve shipped 1,000 already this quarter?

A: 6,000 reflects the number as of yesterday. I was making the point that we continue to make progress and we’ve moved out of the summer slowdown. So that’s correct.

Q: For DPNCheck, did you book any revenues in Japan or outside the US, or will that show up in 4Q14?

A: We did; the first shipments took place in 3Q14. We first shipped to Omron in early August, and they need to go through an extensive evaluation, particularly with a new supplier, which we are. We shipped in early August and then again in later August, and those devices and biosensors were used to start the launch, which began in early September. It was a substantial shipment, and that was booked in the quarter.

Q: Can you provide any color about the type of design and pricing you’re looking for with the OTC device? I know there are competitors out there like IcyHot that maybe you’re targeting or trying to differentiate yourself from.

A: There are a number of entry-level TENS devices that you can find in chain drugstores like IcyHot. We’re not competing in that market; we’ll be in the premium chronic pain treatment market, with a high premium in terms of price and functionality. We will I suspect by the end of the year or in early 2015 have a website and a lot of details about the product. At its core, it’s the Sensus technology, but we’ve consumerized the product in terms of the types of materials, the form factor, the user interface – it has Bluetooth and it will have a smartphone app to personalize the pain relief. It’s a high-end, wearable pain relief device, so it’s more in the wearable technology sector than the low-end TENS sector. As we get through the balance of the year we’ll provide more detail. The key point is that the technology is the validated Sensus technology but with a different shell and functionality and integration into a digital ecosystem that will create a lot of value for the consumer. On pricing, we’re still working through that. Broadly speaking, we’re talking about the $200 range, plus or minus. We still have a lot of work to do, but it’ll be in that vicinity.

Q: When will we see a product design or a prototype for the OTC device?

A: We’re very confident that we’ll launch in 2015. We’re still working through the exact timing and building up the supply chain and our commercial strategy. We’ll have more details in the future.

Q: You had strong growth for DPNCheck in the US this quarter. Could you talk a bit about what accounted for that growth and what you’re looking for at the year end and next year?

A: The US DPNCheck market is primarily Medicare Advantage accounts, so primarily UnitedHealthcare Optum, the practice management arm of UnitedHealthcare. The growth in 3Q14 vs. 3Q13 represents increased adoption and penetration into UnitedHealthcare as more of the practice groups under that umbrella have had success and it’s spread more broadly. That the primary source of growth. There’s also a seasonality to the Medicare Advantage business; it tends to increase during the course of the year because of the risk adjustment process where all the data has to be provided to CMS by the end of the year, so there’s an incentive to get things done and the third and fourth quarters tend to be the strongest. Some of our customers have been doing this for awhile so they’ve figured out ways to spread it out.

Q: Why is Japan such an attractive market for DPNCheck, and are there any other countries you’re considering entering with Omron outside Japan, particularly in the Asian market?

A: Japan is a very attractive market. It’s a wealthy country with a strong healthcare system, a high rate of diabetes, and a strong focus on prevention and early detection of complications, so DPNCheck fits well into that. There’s strong support for DPNCheck among thought leaders. What’s unique about the market is it’s the only market where there’s an approved drug – Kinedak, or epalrestat is the generic name – to treat diabetic neuropathy. That’s a perfect situation for a device like DPNCheck, where there’s a clear use of the data, which is to put people in therapy. We have a very strong partner in Omron. The next market we’re looking at pursuing is China. We’re well into the regulatory process with Omron there. China has over 100 million diabetics, a growing level of sophistication in the healthcare system, and an orientation to data-driven medicine. We fit in well, so that’s the focus with Omron and the next focus in Asia.

-- by Emily Regier, Manu Venkat, and Kelly Close