Q1 2023 NeuroMetrix Inc Earnings Call
Speaker 2: Good morning and welcome to the NeuroMetrics first quarter 2023 earnings call. My name is Fiwe 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.
Speaker 2: 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.
Speaker 2: Please refer to the risks and uncertainties, including the factors described under the heading Risk Factors in the Company's Periodic Filings for the SEC available on the company's investor relations website at Neurometrics.com and on the SEC's website at SEC.gov. Neurometrics does not intend and undertakes no duty to update the information...
Speaker 3: 2021-2023 Earnings Call.
Speaker 3: 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 unpopulation health. Our commercial products are not invasive. They address worldwide market opportunities and they have no direct competition.
Speaker 3: Our neurodiagnostics are DPN checked and advanced, and our neuro therapeutics are the Qwell product line.
Speaker 3: Our business model is Razor Razer Blade. Aftermarket revenue is the principal component of product line profitability. Our strategic focus is to expand DPN check 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.
Speaker 3: Within that decline, DPN checked revenue was down 20% year on year.
Speaker 3: Domestic Medicare Advantage sales down 18% were largely responsible, and there were two opposing aspects to the quarter.
Speaker 3: Patient testing was suspended by our largest customer.
Speaker 3: This customer had contributed 62% of domestic DPN check revenue in Q1 of last year.
Speaker 3: In the balance of our Medicare Advantage business, there was strong revenue growth.
Speaker 3: Our commercial team grew the customer base over the last year while supporting increased patient testing at our existing accounts.
Speaker 3: Revenue from this section, the segment of the business more than double year on year.
Speaker 3: 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 DPN check sales, which are generally about 15% of the total product line,
Speaker 3: We're down 10% in Q1 due to the timing of Asian order flow.
Speaker 3: This is expected to recover in future periods this year.
Speaker 3: Advanced and quell over the counter revenues to client disease product lines are being phased out.
Speaker 3: Aftermarket sales across all chronic lines constituted 74% of revenue in the first quarter.
Speaker 3: versus 85% in the first quarter last year. DPN checked double its new device revenue following the launch of its next generation device, DPN checked 2.0. The increase in device placements reduced after market revenue as a percentage of sales. However, unit growth, which was up 25%, may have a positive effect on future after market sales.
Speaker 3: Gross profit contracted in concert with the reduction in revenue and the gross margin rate of 69.5% were affected by inventory charges for parts costs and valuation reserves. These charges reduce the gross margin rate by about 6%. Operating expenses total 2.9 million versus 2.8 million year ago quarter. The increase of about 158,000 or 6% was due to higher non-cash equity compensation and professional service costs.
Speaker 3: main simple and death-free. There are approximately 7.8 million common shares outstanding as of the end of the quarter.
Speaker 3: We believe that these liquid resources are adequate to support our growth initiatives for 2023 and beyond.
Speaker 3: And now for Dr. Grasani's comments.
Speaker 3: Dr. Ghazani's comments. Thank you, Tom.
Speaker 3: Our growth strategy is built on three core elements. The first is organic growth in the DPN check Medicare Advantage business. The second is to establish and grow the Qwellth Barbermialgia indication in the US market. And the third is to advance the Qwellth Neurotheraputics program, which may lead to additional indications and an expanded addressable market. I will comment on each of these activities. First we respect the DPN check. As a reminder, DPN check is a rapid...
Speaker 3: Our DPN Check Businesses comprise 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 percent of DPN Check revenue comes from domestic sales. We have a value-based care commercial team focused on increasing DPN Check adoption in the Medicare Advantage Market. This includes large medical groups, IDNs, health systems, and health assessment companies, or a substantial portion of their patients are covered under Medicare Advantage.
Speaker 3: This business has been growing over the past several years. However, in the past six 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 and Medicaid Services or CMS.
Speaker 3: On January 30th 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.
Speaker 3: And then on February 1st of this year, CMS issued a 2024 Medicare Advantage Advanced Notice, which included significant changes to the hierarchical condition of 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 three years.
Speaker 3: The new model alters the risk adjustment environment and includes limitation on HEC codes.
Speaker 3: For peripheral neuropathies, they are detected by DPN check programs.
Speaker 3: We believe that the substance certainty and other related factors that may have influenced our largest Medicare-Advanced customer to suspend many of their Medicare-Swimming programs.
Speaker 3: We believe that this uncertainty and other related factors that may have influenced our largest Medicare advanced customer to suspend many of their Medicare-sweaning programs.
Speaker 4: including DPN check.
Speaker 4: 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 DPN check, which is that thoughtful neuropathy is a common and debilitating condition in the elderly.
Speaker 4: and that early and accurate detection with DPN check is essential to minimize debilitating complications including falls, diabetic foot ulcers, neuropathic pain, and to reduce overall health care costs.
Speaker 4: However, we are evaluating the evolving landscape and name external adaptations later this year and moving it to 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 deep-and-trick 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 deep-and-trick businesses is difficult to predict.
Speaker 4: We expect that they will put material down with pressure on dp-antric revenues. However, it is too early to determine the magnitude and duration of the impact.
Speaker 4: Nevertheless, we expect that the deep-pianchic 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.
Speaker 4: Quiles are wearable neuromodulation platform, which is based on our proprietary adaptive transcutaneous electrical nerve stimulation technology.
Speaker 4: FDA is clear for relief of low-wrecks-training chronic pain and recently received FDA-denovo authorization as a first and only medical device indicated to help reduce the symptoms of fibromyalgia. The slider indication is available by prescription only.
Speaker 4: At this time, our commercialization efforts are exclusively focused on the pharma-analogy indication.
Speaker 4: FarmerMialgia is a complex chronic pain syndrome that affects as many as 10 million people in the US.
Speaker 4: The only FDA-approved drugs are pregabalin, duloxetine, and memasopran, which often have substantial side effects.
Speaker 4: There is a critical unmet need for additional safe treatments.
Speaker 4: The Q1 of this year was the first full quarter of the commercial launch of QualfiberMyalgia.
Speaker 4: And that did follow a small amount of activity in December of last year.
Speaker 4: 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.
Speaker 4: Our commercial team at this time consists of a single dedicated health count which is our national director of sales.
Speaker 4: We have partnered with a national online pharmacy to fill both initial prescriptions, which consists of a device in one month of electrodes and refill, which consists of three months of electrodes.
Speaker 4: At this time, Qualfarmualgia 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.
Speaker 4: At 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.
Speaker 4: 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.
Speaker 4: Now moving on to the third element for growth strategy, which is our QALNNARO-3P-0-3P-0-3P-0 program. So the third element is to develop this program beyond the initial pharma-mialgia indication. The program that is further still long 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. It can be chronic and debilitating side effects of cancer treatment.
Speaker 4: Quail received FDA breakthrough designation for the Fraterity Moderna to severe CIPN in January of 2022 based on a pilot study conducted at the University of Rochester. ANIA, a National Cancer Institute-funded multi-center double-blinded randomized sham-controlled trial of Quail and CIPN completed an enrollment in late 2020.
Speaker 4: And that represents our prepared comments. We'd be happy to take questions at this point.
Speaker 2: So much, ladies and gentlemen, to ask a question, please press star-1-1 on your telephone and wait for your name to be announced. And through there are questions, please press star-1-1 again and please send by the Q&A roster.
Speaker 4: Your first question comes from the line of Steve Stopfer. Your line is now open. Hi, I'm the Quail Chemotherapy. Does that specific sector need additional FDA approval? And as you expand that Quail technology, are they already all?
Speaker 4: 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.
Speaker 4: So as that technology rolls out, it needs additional approval from the FDA then.
Speaker 4: Yes, for each specific indication for which it will be marketed and needs the authorization from the FDA.
Speaker 4: And how long does that process take when you submit an application? Are you looking at months, quarters, or years?
Speaker 4: I would say typically on the order of quarters. Okay. And was there any reason given for the suspension of the DPM check technology in the Medicare Advantage market and did they give you like any indication of how long a suspension would be? Well, it was just one specific customer.
Speaker 4: that suspended all their screening programs, not just DPN checks. They made a broad-based decision for reasons that we could only speculate on to stop their clinical screening programs. And again, DPN check was one of those screening programs. So we don't have any further indication as to.
Speaker 4: exactly why they did that and what their timeline is for resuming.
Speaker 4: Are you seeing growth them in DPN check from other customers?
Speaker 4: Yes, so as Tom mentioned, if you extract that particular customer in the first quarter or other Medicare Advantage business doubled.
Speaker 4: 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 that you had last year? Or do you think you could?
Speaker 4: actually overcome all that and increase your sales for this year. Well, I would say at this point we're not in 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 Neurometrics of course is really, you know.
Speaker 4: grappling with these challenges. So it's hard to say where everything is going over the next, you know, 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.
Speaker 4: But as I did point out, it does represent downward pressure on revenue. So I think that's clear in how much and for how long it's hard to determine at this point.
Speaker 4: 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 look more share more.
Speaker 4: Okay, and with these changes in, you know, resulting in sales decrease, are you guys taking a more aggressive sales campaign approach to all your products going forward?
Speaker 4: I would say necessarily be more. I mean, in all our business funds, we try to be very thoughtful and methodical. So, you know, we're, for example, to respect the Qualfiber Myology just because we're seeing some weakness right now in the DPN checks side. We're not.
Speaker 4: could just accelerate, clarify myology before we're ready. So we need to be careful and thoughtful and thoughtful regardless. I would say this has changed what we're doing outside of DPN check. Do you think you will see or at what point would you think you could get the quail chemotherapy?
Speaker 5: Correct, okay.