Shareholders of NeuroMetrix Inc. (NSDQ:NURO) appealed a federal judge’s dismissal of their case to the U.S. District Court of Appeals for the First Circuit, spurning the company’s attempt to settle the case over reimbursement for its NC-Stat device for $350,000 in legal fees.
Judge Rya Zobel of the U.S. District Court for Massachusetts granted the Bedford, Mass.-based company’s motion to dismiss in December, 2009, ruling that the plaintiffs, the pension fund of the IBEW-NECA electrical workers’ union, failed to establish that NeuroMetrix and its then-management team misled investors in quarterly regulatory filings and in conference calls with analysts discussing quarterly results.
The case stems from the reimbursement structure for the company’s NC-Stat, a non-invasive device that measures nerve conduction. Before a January decision setting a lower rate for reimbursement for such treatments, the company instructed physicians to bill using one of three codes for neurological procedures.
“Initially, doctors were successful in billing NC-Stat to the neurology CPT codes. However, in late 2005 Blue Cross Blue Shield of both North and South Carolina began to deny reimbursement, and in the fall of 2006 and during 2007 a growing number of insurers followed suit,” according to court documents. “At the same time, many insurers continued to reimburse for NCStat.”
The lawsuit accuses NeuroMetrix and some of its managers of deliberately withholding or concealing the possibilities that insurance companies would deny reimbursement at the higher neurological code rates or that new, lower rates would go into effect.
Zobel found that, to the contrary, the company’s executives and its regulatory filings delivered explicit warnings about the possibility of adverse reimbursement decisions, in terms of increasing severity as the problems grew.
“Plaintiffs’ central allegation that these warnings were insufficient, or that non-reimbursement was a certainty known to defendants, is more than the factual allegations in the complaint will bear,” she wrote. “Put simply, the reimbursement environment was uncertain; there was risk. The alleged misstatements contain express warnings of this risk, in more severe terms as reimbursement problems developed, that third-party payer reimbursement was essential to NC-Stat’s success and insurers may cease reimbursement.
“Further, the warnings contain express disclosures of defendants’ belief that existing CPT codes applied to the NC-Stat and the basis for that belief … and of the contrary policy pursued by some insurers. … Investors were fully informed as to both defendants’ reimbursement strategy and the substance of the dispute with insurance companies, and they could make their own judgment as to whether that strategy was wise or ill-considered.”
NeuroMetrix posted third-quarter sales of $6.3 million during the three months ended Sept. 30, 2009, down 10.6 percent compared with $7.1 million during the same period last year. Net losses widened 18 percent to $9.3 million, compared with $7.9 million during the third quarter of 2008.
But CFO Thomas Higgins — whom the company wooed from Caliper Life Sciences to be its own finance chief — told MassDevice that the bulk of the net loss was due to a one-time, $7.4 million accounting charge on the valuation of warrants related to a $17.3 million private equity placement during the quarter.