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(NURO) Company Overview
NeuroMetrix is a commercial stage healthcare company which combines bioelectrical and digital medicine to address chronic health conditions. These include chronic pain, sleep disorders, and diabetes. NeuroMetrix is a fully-integrated business which manages its own product development, manufacturing, compliance, sales, marketing, and customer support. The company was formed in 1996 as a spinoff from the Harvard-MIT Division of Health Sciences and Technology, and is headquartered in Waltham, Massachusetts.
Products
NeuroMetrix derives revenue from the sale of medical devices in addition to various consumable products and accessories. The two primary product lines are wearable neuro-stimulation therapeutic devices and point-of-care diagnostic tests. Following is a breakdown of the company’s revenue by product:
Source: Company Presentation
Quell is a wearable device designed for the management of chronic pain. Quell uses a proprietary non-invasive neuro-stimulation technology to provide relief from chronic pain caused by diabetes, fibromyalgia, and arthritis. Users can track and manage therapy options using a mobile application. Recent survey data indicates that nearly 81 percent of users reported an improvement in their chronic pain.
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Quell is cleared for sale by the U.S. Food and Drug Administration (FDA) without a prescription, and is distributed through e-commerce, retail merchandisers, and various healthcare professionals. The company also markets Quell via direct response television networks such as QVC.
From Quell’s launch in the second quarter of 2015 through December 2016, NeuroMetrix has shipped approximately 59,500 units. As shown above, Quell is now the main revenue driver for the company, producing $7.4 million for the year ended December 31, 2016.
DPNCheck is a diagnostic testing device used to evaluate systemic neuropathies such as diabetic peripheral neuropathy (DPN). It is used by clinicians at the point-of-care to objectively detect, stage, and monitor DPN. The device measures nerve conduction velocity and response amplitude of the sural nerve, widely recognized as sensitive and specific biomarkers of DPN.
NeuroMetrix primarily markets to providers within the Medicare Advantage system who assume financial responsibility and the associated risks for the health care costs of their patients. The company believes that early detection of neuropathy can help mitigate its effects on patient quality of life and cost of care. Also, the data provided by DPNCheck can be used to clarify patient health profiles, which in turn could increase Medicare Advantage premium payments received by providers.
DPNCheck became commercially available in the fourth quarter of 2011, and approximately 3,400 devices have been placed with customers through December 31, 2016. Related revenues for the years ended December 31, 2015, and December 31, 2016, totaled $2.3 million and $2.5 million, respectively.
SENSUS is a prescription wearable pain management device that served as a foundation for the neuro-stimulation technology within Quell. The device has been on the market for approximately three and a half years and is in the process of being wound down.
ADVANCE is another legacy product and the predecessor of NeruoMatrix’s DPNCheck diagnostic tool. This device was launched in 2008 and is also being wound down. As of December 31, 2016, the ADVANCE system had an installed base of approximately 400 customers.
Both Quell and DPNCheck have consumable accessories which must be purchased from the company.
In addition to its existing products, NeuroMetrix is actively researching additional applications of neuromodulation to detect and treat chronic diseases, with a focus on chronic pain, degenerative nerve disease, and restless leg syndrome.
Market Overview
Chronic pain, defined as any pain lasting longer than 12 weeks, is a significant public health problem. It affects more than 100 million adults in the United States and 1.5 billion people worldwide. In 2012, the global market for pain management drugs and devices was valued at $35 billion. Furthermore, the estimated impact of chronic pain on health care costs is more than $250 billion. In the United States alone, out-of-pocket spending on chronic pain is estimated at $20 billion.
Chronic pain is typically treated with medications. These include, over-the-counter drugs, anti-convulsants, anti-depressants, topical creams, and narcotic pain medication. Due to the difficulty of treating chronic pain, the company estimates that between 25 and 50 percent of patients seek alternatives to prescription pain medication, accounting for more than $4 billion in annual spending.
Recent Developments
- In November 2016, NeuroMetrix won approval from the EU to market Quell directly to European consumers.
- On December 20, 2016, NeuroMetrix announced a public equity offering with gross proceeds of $26.5 million. The offering was priced at $0.70 per share of common stock, including one warrant to purchase one share of common stock (exercise price of $0.70).
- However, on December 28, 2016, the company announced this plan would be put on hold in favor of a $7 million Series E round of financing.
- The aforementioned transaction closed on January 5, 2017. NeuroMetrix sold 7,000 Series E preferred shares (at a price of $1,000 per share) with warrants to purchase approximately 10 million shares of common stock. The company received a first tranche immediately with gross proceeds of $4 million; the remaining $3 million tranche is subject to shareholder approval and an effective resale registration statement.
- On February 21, 2017, NeuroMetrix announced that Quell would be available in 450 Best Buy stores nationwide and at BestBuy.com
Full-Year Earnings Review
NeuroMetrix reported fourth quarter and full-year earnings on January 26, 2017. Revenue for the year ended December 31, 2016 totaled $12.0 million, a significant increase from the $7.3 million reported in the prior year. This was driven by a full year of Quell sales which only launched in 2015. Gross margin fell slightly from 46 percent to 41 percent. The company has indicated that a portion of its research and development spending is dedicated to cost of goods sold (COGS) improvements for Quell which could benefit gross margins in the future.
Operating expenses were $20.1 million for the year ended December 31, 2016, driven primarily by a 50 percent increase in sales and marketing costs. However, sales and marketing costs fell from 100 percent of revenue to approximately 90 percent. General and administrative costs declined slightly. Overall, NeuroMetrix’s operating loss increased slightly to $15.2 million.
As of December 31, 2016, the company reported a cash balance of $3.9 million. After the financing transaction reported above, pro forma cash is estimated at $7.6 million. Cash usage rate in the fourth quarter of 2016 was $3.6 million and is trending downward.
First Quarter Earnings Preview
On the most recent earnings call, NeuroMetrix CEO Shai Gozani noted that due to New Year’s resolutions, 1Q is typically a good quarter for healthcare spending. Rodman & Renshaw analyst Raghuram Selvaraju expects revenue of $4.2 million, a 12 percent increase from the fourth quarter of 2016 and an 83 percent increase from the same period last year.
An important figure to watch will be the gross margin. Historically this has ranged from 50 to 60 percent, but ranged from 40 to 45 percent in 2016. NeuroMetrix CFO Thomas Higgins has acknowledged that the company employs a ‘razor blade’ business model, and that the sale of consumable electrodes for Quell is an important source of recurring revenue. Gross margin expansion would be a positive sign.
Cash usage will also be noteworthy. The company was expected to start the quarter with approximately $7.6 million, with another $3 million available from the Series E financing, subject to shareholder approval.
Stock Influences
- Agreements and approvals to expand sales internationally;
- Exercise of warrants and further equity offerings to raise cash;
- Significant changes in Quell sales; and
- Monetization of the DPNCheck unit.
Risk Factors
- The company does not have significant cash reserves and additional financing may not be available when necessary;
- As noted above, shareholders face dilution from additional equity offerings and warrant exercises;
- The success of the company depends on continued sales growth of Quell which may not occur as planned; and
- The company could be adversely affected by FDA regulations and changes to payment reimbursement guidelines for its diagnostic products.
Stock Performance
As of April 17, 2017, NeuroMetrix shares had a closing price of $0.61, up three percent on the day, yielding a market capitalization of $5.1 million. In the past year, the stock has traded as high as $2.36 and as low as $0.52. Over the same period, the annualized daily volatility was 68 percent. Daily trading volume (trailing 12 months) averaged 112,000 shares, and generally fell between 50,000 and 500,000 shares. However, we note that volume spiked to 1.5 million upon the announcement of the public equity offering in December.
Following are selected analyst ratings and price targets:
| Analyst | Firm | Rating | Price Target | Date |
| Raghuram Selvaraju | Rodman & Renshaw | Buy | $4.50 | 1/27/2017 |
Summary
First quarter results will be helpful to determine whether revenue from Quell is growing as anticipated, and if the company is on track to reach its target product mix between Quell units and consumable electrodes. International expansion is unlikely to have a significant impact in the short-term, but could impact revenue growth in the future. Cash and ongoing financing requirements remain a concern, as shareholders face further dilution.
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