Tuesday, June 4, 2013

NeuroMetrix (NURO): A Five Bagger in the Making



What if I told you that there is a little known biotech company with a tiny market cap of  approximately $4.5 million and a public float of only 1.9m shares, that has the only recently FDA approved device to treat Painful Diabetic Neuropathy (PDN), a condition that represents a market opportunity of approximately $300 million in the U.S. alone. What if I told you further that this company has also just recently filed a 510(k) with the FDA for this device that will provide for managing and monitoring pain while the patient sleeps?  Furthermore, PDN is only the company's initial target market, the technology could eventually evolve to the treatment of neurological disorders.  On top of this, this tiny little biotech trades at only around $2.00 but has more than $3.00 in cash per share alone. Let me introduce to you NeuroMetrix (NURO).

Diabetic Epidemic
According to the World Health Organization (WHO) there are 347m people in the world who have diabetes. WHO projects that diabetes will be the 7th leading cause of death in 2030. There are approximately 25.8m people in the USA alone with diabetes and 79m whom are pre-diabetic. The annual direct cost of diabetes in the USA alone is estimated to be $100bln. Painful Diabetic Neuropathy (PDN), causes pain, numbness, infections and foot ulcers that may lead to amputation.  There is a serious unmet need in the detection, confirmation, monitoring and treatment of PDN. PDN is often not diagnosed leading to missed chances for early intervention and once the nerves have degenerated there are no treatment options. Foot ulcers represent the most expensive complication of PDN and treatment options can cost $5-$50,000 per episode.The American Diabetes Association recommends annual screening for PDN. The current tools identify only late stage PDN, most people diagnosed with diabetes do not get annual  testing or foot exams.

NeuroMetrix solutions:

NeuroMetrix completed the 510(k) clearance process for SENUS Pain Management Device on November29, 2012 and subsequently launched on January 7, 2013. From the Company's April 25th, 2013 earnings conference: "SENSUS is a transcutaneous electrical nerve stimulator intended for the symptomatic relief in management of chronic intractable pain. It is the only device designed specifically for people with neuropathic pain. The most common cause of such pain in people with diabetes is painful diabetic neuropathy or PDN, which is a severe debilitating chronic form of pain. PDN affects 16% to 26% of people with diabetes or 3 million to 5 million patients in the U.S. alone. Most patients with PDN have moderate to severe pain and half have sleep disturbances due to their pain. We believe this represents a U.S. market opportunity that we estimate in excess of $300 million annually During the first quarter, which is our initial commercial quarter with SENSUS, we shipped 145 devices. Early patient feedback has been encouraging with many reports of a substantial decrease in pain and improved sleep. Feedback from distributors has also been positive based on physician and patient reaction and early experience of the reimbursement."

During the first quarter of 2013, the initial SENUS commercial quarter, 145 devices were shipped and early feedback has been encouraging with many patients reporting major decreases in pain and improved sleep. Under the SENUS business model they will sell devices and electrodes to durable medical equipment suppliers, DMEs, who stock the product, create demand through their sales reps, fulfill prescriptions and also bill insurers. The company has stated that they wish to have 100 DMEs  in place by midyear and 250 by year end. For 2013, the goal is shipping 2000 SENUS devices , which would mean about 1500 patients using the device. NeuroMetrix is counting on the revenues that comes after placing the device with patients, the "Razor Model", as the device is used with proprietary disposable high margin (60%+)electrodes. There are currently 10 regional distributors in place and they are in discussions with "several national businesses that could lead to agreements later in the year". A six week  post market open label study is designed and scheduled to begin this quarter with study results hoped for by end of the year.  As reported on April 25th, an additional catalyst could be 510(k) clearance for device use during sleep.
  • Filing of a 510(k) for expanded indications relating to device use during sleep. The current device may be used at bedtime prior to sleep. This 510(k) submission, if successful, will give SENSUS unique regulatory labeling for electrical stimulation during sleep.

2013 is set to be a year to build a solid foundation of a broad national sales channel for SENUS and to build on positive patient experiences and the initial post-market study.
NeuroMetrix's complementary product, launched in Q4 2011, in the diabetic space is NC-STAT DPNCheck. This is a rapid point of care test that may aid in the early detection, confirmation and monitoring of diabetic peripheral neuropathy (DPN). The test is used at an early stage to guide treatment and will be focused on the single domestic market segment Medicare advantage plans. They view the Medicare advantage plan market as the largest near term market opportunity, $20-25 million annually, providing strong margins(60%) with very low marketing costs. Currently, they have three plans with a total of 130,000 covered lives that are scheduling or carrying out pilot programs and are in early discussions with prospective customers totaling another 250,000 covered lives. Several distribution agreements have been signed recently, most notably with; Handok, a $300 million revenue South Korean pharmaceutical and device company and in Japan with Omron Healthcare, a $600 million division of the $6 billion Omron Company. The company ended 2012 with an installed base of 939 devices, which was slightly below their goal of 1000.

Conclusion
NeuroMetrix at around $2.00 per share has a market cap of approximately just $4.5m and has no long term debt. The company is trading at a substantial discount to it's $6.9m cash as reported in the March 31, 2013 10Q, which is enough resources to fund operations through the first quarter of 2014. There is a $20M shelf registration in place but its use is restricted to 30% of market capitalization, or about $1.3M currently.  Another factor is that on February 29, 2013 the company announced a  one for six reverse stock split, subsequently there are approximately 2.1M shares issued and outstanding and a public float of only 1.9M shares.

As reported in the company's 10K for the year ended 12/31/12, the company had $7.6m in total revenues. The company has streamlined operations, reduced expenses and has completely narrowed down their commercial focus to their two novel and proprietary diabetes products.  If the SENSUS device alone can capture just 25% of the estimated $300m USA alone market opportunity, annual revenues would increase 10 fold.

Technically, the stock is developing a very strong base in the $1.84-$2.04 area, a move above $2.04 with volume may signal a trend reversal and a possible move back to $3.25. On a longer term basis, there is an unfilled gap in  the chart at $6.90 from 2/8/12 that needs to be filled.

As with any small cap biotech company, NeuroMetrix is a very speculative investment, the company has realigned and is laser focused in attacking the diabetic epidemic. I believe that NeuroMetrix has tremendous potential and even if the stock should trade at a price of $10 sometime in the next 12-24 months, the company would still only have a market cap of approximately $22M.

Disclosure: I am long NURO. I wrote this article myself,  this is NOT investment advice, it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with NeuroMetrix.