ViewRay, Inc.
Q1 2017 Earnings Call Transcript

Published: 16 May 2017

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to ViewRay Incorporated’s First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would like to introduce your host for today's presentation, Mr. Zack Kubow. Sir, please begin.

[Zack Kubow:]

Thanks, operator, and good afternoon to everyone. Welcome to ViewRay’s first quarter 2017 financial results conference call. Joining me from the company are Chris Raanes, President and Chief Executive Officer; and Ajay Bansal, Chief Financial Officer. This afternoon, ViewRay issued a press release announcing its first quarter 2017 financial results. A copy of the press release will be available on the Investor Relations section of the ViewRay website at www.viewray.com. We encourage you to review that document. This call is also being broadcast live over the Internet at www.viewray.com and a replay of the call will be available on the company's website for 90 days. Before we begin, I would like to caution listeners that comments made by management during this conference call may include forward-looking statements within the meaning of Federal Securities laws. These forward-looking statements involve material risks and uncertainties. Actual results could differ materially from those projected in any forward-looking statements due to numerous factors including those discussed under the heading Risk Factors in ViewRay’s quarterly report on Form 10-Q for the quarter-ended March 31, 2017, and subsequent reports filed with the Securities and Exchange Commission. Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 15, 2017. ViewRay undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call. With that said, I would now like to turn the call over to Chris.

[Chris Raanes:]

Thank you, and good afternoon, everyone. Welcome to ViewRay’s first quarter 2017 financial results conference call. The big news for us this quarter obviously was the FDA clearance of the MRIdian Linac, which we received at the end of February. A reminder for everyone as to why this is so important. Number one, the market prefers Linacs, the linear accelerators. Second, the Linac has performance advantages to our users, and finally, the MRIdian Linac also provides us with the opportunity to make a step function improvement in our product gross margins. During the first quarter, we received new orders worth $12.3 million and our backlog increased to $144.9 million at the end of the quarter. We also received orders for upgrades to the MRIdian Linac worth a total of $5.8 million. With the MRIdian Linac now commercially available in Europe and in the United States, we see strong interest from the market and expect increasing momentum in terms of new orders and upgrades. As we are launching the MRIdian Linac, we strengthened our balance sheet in Q1, ending the quarter with $49 million in cash. As we look to broaden our sales pipeline still further, we have launched several targeted marketing initiatives and we are expanding our commercial presence. For example, everyone who received the top radiation oncology journals in the United States and Europe, who read journal and the green journal and the run-up to our industry's second biggest tradeshow saw an advertisement on the cover for the MRIdian Linac. Last week, the annual meeting of the European Society for Radiotherapy and Oncology, ESTRO, took place in Vienna. Our press release this morning gave highlights from the clinical presentations at ESTRO on the MRIdian system. Early clinical data on inoperable pancreatic cancer patients was covered in three separate talks. Clinicians also reported that on table adaptation, a breakthrough that is unique to the MRIdian system is typically done in less than 15 minutes. If you've been following radiation therapy for a while, you will be aware of the benefits of SBRT, or stereotactic body radiation therapy, in which patients typically complete their course of treatment within a week instead of six to eight weeks. SBRT delivers higher doses of radiation in one to five treatment sessions instead of lower doses spread across 30 to 40 sessions. Even though SBRT has clear advantages, today it can only be delivered safely by x-ray guided or standard Linacs when the tumor isn't near any critical structures, like certain parts of the lung. That's why today SBRT is limited to fewer than 20% of radiation treatments. ViewRay brings the advantages of MRI visualization to radiation treatments for the first time, clearly delineating the patient's anatomy including soft tissue. The MRIdian systems guidance and integrated software enable clinicians to reshape the dose at the start of each treatment to fit the patient’s changed anatomy and to automatically track throughout the treatment. With these advantages, MRIdian users are using SBRT in tumors throughout the body and including those very close to sensitive structures and organs. On MRIdian, they are treating a much higher percentage of patients with SBRT, 2x to 3x the market average, which is good for patients, good for hospitals and good for the healthcare system. In fact a number of ViewRay users called the MRIdian the ultimate SBRT machine. Not only does on-table adaptive and real-time tracking on the MRIdian enable SBRT treatments throughout the body. It also allows for delivery of very high doses of radiation and that's where the story becomes even more interesting, because SBRT with very high doses of radiation has previously been shown to be equivalent to surgery in certain lung tumors. At ESTRO, a retrospective look at early pancreas data from four leading academic institutions was presented, showing a compelling increase in survival for inoperable pancreatic patients treated with adaptive therapy, involving very high doses of radiation on the MRIdian system. The hope is with these very high doses could substitute the surgery in such patients and save lives. This is a potential game-changer. In light of the compelling clinical data that’s emerging from the use of MRIdian, ViewRay plans to support a prospective single-arm clinical trial of SBRT in inoperable pancreatic cancer patients. Overall, ESTRO demonstrated how far MRIdian has come since it was just an exciting new technology over three years ago. MRIdian has developed into a compelling and well differentiated treatment modality with clear clinical advantages that we believe will service well in the years ahead. You can expect to see lot of the focus on clinical evidence from us in the future, now that the MRIdian has been in use for several years, and we expect to have further results at ESTRO in Q3. And with that, I'll now turn the call over to Ajay to provide some key highlights from our financial results.

[Ajay Bansal:]

Thanks, Chris, and good afternoon, everyone. Before I summarize our financial results, let me tell you about a change we are making bring our reporting in line with industry practice. Starting with this quarterly report, we will refer to orders, backlog and installation by their total dollar value only. Revenue in the first quarter was $1.2 million, compared to $5.5 million in the first quarter of 2016. As expected, we did not have any product revenue in the first quarter, as we did not complete any MRIdian installations. Our backlog at March 31, 2017, was $144.9 million. This compares to a backlog of $89.6 million at March 31, 2016. In terms of our cash position, we ended the first quarter with $49.3 million. This included the $48 million that we had raised in the first quarter from the January private placement and through at the market stock sale in February and March. In addition, during the second quarter, we have raised an additional $7.4 million through our ATM program. With the first installations of MRIdian Linac systems underway, we have a clearer picture of our cost of goods, as we ramp up our installations. We are now targeting industry level product gross margins of about 40% in 2018. Finally I would like to reiterate our financial guidance. For the full-year 2017, we anticipate total revenue to be in the range of $45 million to $50 million, primarily from seven to eight MRIdian Linac systems. I would now like to turn the call back to Chris for closing remarks.

[Chris Raanes:]

Thanks Ajay. In conclusion, we are excited by the early clinical results of the world's first MRI-guided radiation treatment system. The early pancreatic cancer data reported at ESTRO is compelling. With the MRIdian system, clinicians can direct very high doses of radiation to the tumor throughout the body enabled by on-table adaptive therapy. No other commercially available machine can do this. As a result, our system is transforming the way clinicians at MRIdian sites around the world treat a wide range of cancers, offering new hope to cancer patients and their loved ones. We aim to change the way the radiation therapy is delivered and to expand the number of patients that can benefit becoming a new standard of cancer care. We look forward to updating you on our progress. And with that, I'll now open the call for Q&A. Operator?

[Operator:]

[Operator Instructions]. Our first question or comment comes from the line of Sean Lavin from BTIG. Your line is open.

[Ryan Zimmerman:]

Hi. This is Ryan on for Sean. Can you hear me okay?

[Chris Raanes:]

Hi, Ryan. Hear you great.

[Ryan Zimmerman:]

Great. Thank you. Thanks for taking the question. So, Chris, just on the prospective single-arm clinical trial, do you have any timelines or additional detail that you could share on that trial in terms of number of participants, number of sites, et cetera? Any color there would be helpful.

[Chris Raanes:]

Yes, Ryan. That's a great question. I don't have any of that to share at this time. It's being run through our consortium under a clinical cooperative think tank, and I look forward to telling you more about it as it gets underway.

[Ryan Zimmerman:]

Fair enough. And then just looking at the service margins in the quarter, compared to last quarter a little bit lower than, I think, we were expecting. Was there anything in one-time in nature there that we should be aware of that impacted the service margins in the quarter? And then just additionally, given the higher-than-expected service revenue that we saw in the quarter, should we think of this as your new base for your existing customer base? Thank you.

[Ajay Bansal:]

The service revenue for this quarter, Ryan, includes a catch-up payment from one of the institutions. So the run rate of service revenue without the catch-up would have been closer to $0.5 million. And with respect to margins, I mean, these numbers are so low right now that the margin is going to jump around as the service revenues become meaningful.

[Ryan Zimmerman:]

Okay, fair enough. And then just lastly for me and I'll hop back in queue. The data I think was pretty compelling coming out of ESTRO just from the presentations we saw, and I'm just curious if you could expand on how you plan to leverage that data, particularly around reduced margins and lower adaptation times, certainly something that I think would be really something that would drive a lot of interest in this technology.

[Chris Raanes:]

Great. Ryan, thanks for all your questions. Look, we are excited too. The data was in fact compelling. Look, it’s a retrospective look and it seems like the key is using adaptive to shape the dose on a daily basis allowing them to get these very, very high doses of radiation. And as I said in the script, it’s not really a surprise given that the other place in the body where people have done these very, very high doses in the lung, were getting results - SBRT results equivalent to surgery. So we think that's the key. We think adaptive radiotherapy probably on a pretty regular basis when we are doing SBRT in five fractions maybe three or four times is what we are seeing out there. That's what makes the difference. And we will be tracking with our users and our consortium as they try that on different places. But I will remind you of the study that came out at ESTRO last year showing that they successfully used adaptive to deliver very high doses in the abdomen without any grade 3 or higher toxicity. So we are excited about what the future might bring.

[Ryan Zimmerman:]

Thanks for taking the question, Chris.

[Chris Raanes:]

Thank you.

[Operator:]

Thank you. Our next question or comment comes from Suraj Kalia from Northland Securities. Your line is open.

[Suraj Kalia:]

Good afternoon, everyone. Thank you for taking my questions. So, Chris, coming out of ESTRO, obviously a lot of data was presented in terms of adaptive planning. The 15 minutes or so, at least if I remember correctly, one of the numbers that was presented on additional time needed for adaptive planning. Chris, can you give us a perspective on the additional 15 minutes needed whether it's for pancreatic, prostate or other, or liver, versus the entire workflow logistics and uptime required for machines? I guess what I'm trying to - would love your color on this. These machines have to run 99% plus uptime. Can you fit that additional time and give us a perspective on here is how it works on a short-term basis on their workflow logistics. Here is how it works longer term?

[Chris Raanes:]

Sure. Thanks for the question, Suraj. So you're absolutely right that machine for this purpose has to run with very, very good reliability and uptime. And the good news is we are, and it's continuing to improve. We track that on a regular basis. We have a great program around making sure that our users have very high uptime, and the numbers are in the high 90s. So we're very pleased with the reliability and the uptime of our system. In terms of the 15 minutes, it was reported by a number of different users that that’s the on average number. We had one group that’s consistently doing it a lot faster. But I think 15 right now is a good number. Of course we are working with them watching the workflows working on the technologies to help them speed that up, but it seems like in a world where exactly 15 minute slots, one extra slot for this kind of improvement to the care of a patient is a pretty good trade.

[Suraj Kalia:]

Fair enough. And Chris, obviously you guys doing the multi-institutional single-arm study on unresectable pancreatic cancer. You have to have a certain level of confidence because this is not - pancreatic cancer in and of itself is not an easy thing to deal with. It wasn't clear to me, Chris, how many patients have been treated in pancreatic cancer using the MRIdian Cobalt so far? Is it 50? Is it 100? I guess, I'm just trying to understand the background experience that gave you all - the totality 80 of confidence to start this trial?

[Chris Raanes:]

Yes, so the number is - I don't know it yet, but it's largely 50. I could probably go add them all up but I'm just in my head doing a number of the different series that I've seen. So it’s certainly larger than 50. And the question as to, what is it, confidence in going forward. Look, we see a potential opportunity to help patients and we are going to jump on it. Our users are excited about it. They are organizing the trial. We are providing support as we can. Obviously we are interested in it, so we'll encourage them. And we’ll - like I said to the first caller, I don't have any details yet how many patients it's going to be or how long or anything like that but we'll be happy to talk about it in the future as it gets going.

[Suraj Kalia:]

Fair enough. And Ajay, one last question for you and I'll hop back in the queue. The upgrade from Cobalt to Linac. Can you walk us through the mechanics? Let's say Mount Sinai has a MRIdian Cobalt - or MD Anderson has a MRIdian Cobalt installed, and six months later they haven't completely installed, and let's say six months later, they decide to change it to a Linac. Can you walk us through the mechanics, timing, accounting, how it works because this could happen for some of the additional units also? Thank you for taking my questions

[Chris Raanes:]

Thanks Suraj. I'm going to take that one. It sounded little on the technical side of the unit. But let's go through how do you do an upgrade, and it was a primary design feature of the MRIdian Linac so we didn't believe anybody behind. But if you can imagine, our split magnet with the rotating gantry in the middle that contains everything necessary to deliver radiation, the upgrade to the Linac literally involves taking that middle ring out but as the cobalt equipment on it and putting those new middle ring in that has a Linac on it. Our current estimate is it’s going to take somewhere in the four to six week timeframe between all the commissioning and testing and everything, people will want to do to bring that up. And when the site wants to do it, it’s really up to them. There is nothing that stops them from doing an immediate upgrade right after they get it, or they may want to use it for a few years and do it afterwards. It doesn't change at all in the complexity. As to the counting, since it’s a capital sale upfront, they would have bought a machine and then they bought the upgrade. When we install the upgrade, we recognize revenue on the upgrade.

[Suraj Kalia:]

Thank you.

[Operator:]

Thank you. Our next question or comment comes from line of Difei Yang from Aegis Capital. Your line is open.

[Difei Yang:]

Hi, good afternoon, and thanks for taking my question. Just a few here. Chris, I was wondering if you could talk about competitive dynamics. With the competitors around the corner, how do you - would you remind us what are the key differentiation point between ViewRay’s technology and competitors’ technology?

[Chris Raanes:]

Sure. I'd be happy to talk about competitors. I'm guessing that the main competitor you're interested in hearing about is the elective [ph] machine.

[Difei Yang:]

Yes.

[Chris Raanes:]

And they had a presence - I just came back from ESTRO show, the second biggest radiation therapy show of the year, and they liked to have a presence there when they announced the new product name for their system. And look, in general, I’ve said this before and I'll repeat it again, we have a very similar view of the importance of MRI guidance to the radiotherapy market. They make statements. We make statements. And we more or less agree that this is the future that it can enable things that just weren’t possible before, and then it gets down to the details of implementing the system and we've made different choices. And I think probably the most important things that differentiate us is that we design the machine that can address the mainstream replacement market. That is you can take an existing linear accelerator out of an existing room and you can put our system into the room, and we have our IP-ed both around how the system stays compact enough to fit in the room and how you actually get it in and out of a room, because if you remember these are big thick concrete walls with small doors and a full-size MRI magnet just doesn't get through that. And the whole technique and process for splitting it and getting it through the door is part of our invention. I think the other major difference is that we now have over three years of experience and over 1,500 adaptive radiotherapy fractions that have been delivered to patients, and all of that history and knowledge has been incorporated into our second-generation machine, which has a clearance both by the FDA and a CE Mark, all of which differentiate us from the competition. And then going back to the clinical results that I was discussing earlier, it seems that the real key differentiator here is the ability to reshape the dose, the on-table adaptive, the 15-minute process we were talking about. And that is integrated into our system. It's software that grabs the images, allows the clinicians to make these changes rapidly by helping him or her do all the basics, do the calculations and deliver on-table adaptive. That requires a complete integrated software suite. And to the best of our knowledge, we are the only people that have that.

[Difei Yang:]

Okay, thank you. And would you also comment on the price between the two machines?

[Chris Raanes:]

Well, I don't know what they are going to charge. The last time I've heard is that there is still a list price up in the $8 million to $10 million range, and I don't know what the reality is going to be. Without clearance, they shouldn't be selling in the United States, so I don't have any real ASP data or anything like that. Hard for me to compare.

[Difei Yang:]

Okay. Thank you. So moving onto the other question is with regards to turning converting orders into revenues. So what are the key bottlenecks, I guess, financial certainly - the financial concerns certainly has been removed. So I'm wondering if there is any key steps that may impact the capacity on your end? Is it the training of the technicians or engineers, or is it buying key components? Is there anything you can do on your end to speed up that conversion process?

[Ajay Bansal:]

Difei, this is Ajay here. As you are aware, we guided to seven to eight installations this year. And it’s a valid question, given the fact that we have ended the year with a much larger backlog. Typically in this industry, the number of installations that happen in a year are almost the same as the number of orders taken the previous year. So last year we took 13 orders, and so this year we were in a steady-state, we should have been installing 13 plus/minus systems. And of course this being our first year, we are a little bit behind that curveball, but our goal is going to be to get up to similar sort of installation rate starting from ‘18. So if we take X number of orders this year, we would expect to install a number close to X next year and maybe a little more to begin to clear the backlog. With respect to the capabilities part of it, we have trained installers to reach a capacity of installing somewhere around three systems a quarter and our goal would be to have that increase to somewhere around four to five systems a quarter by the end of this year. Our installations, other than installation capacity, also ask for two additional items. One being the walls ready at the institutions where we are doing the installations, and of course now all of the people who have placed orders with us are very interested in getting our machines and we're working with them from the timing of their walls being ready. As we've also talked about, most of our machines are going into existing walls. So we have to calibrate that quite finely, so that they take down their existing machines in a timely fashion but not too soon so they can keep treating the patients and then they take them down when - and taking into account the wall readiness time when we are ready to deliver. The third element is ordering key components and there are certain components that require lead times. We have talked about magnets being one of the components that requires the longest lead time. So we monitor that very carefully. And now as you said, the capital constraints, somewhat behind us compared to where we were at the end of last year. We are marching along looking at that piece of ordering, so that we can do sufficient installs for our guidance this year and many more next year.

[Difei Yang:]

Okay. Thank you.

[Chris Raanes:]

Let me add one thing to that. In addition to the installed capacity that we've developed in-house, we've also trained our international distributors. So we have trained teams, for example, in Korea and Japan that are qualified to install systems and they do work for us outside of their own territory. In other words, if we meet a peak or a surge capacity in the U.S. or in another territory, we can contract out to those folks and they will help us out, and we are about to sign off some more. So we have internal capacity and then we have this external capacity where we can draw from.

[Difei Yang:]

Okay. Thank you for the additional color. My last question is on the Linac upgrade. So during Q1 there were three upgrades for a total of $5.8 million. That number is somewhat above our expectation. Is that how we should, on a move forward basis, think about the revenue generation of the upgrades?

[Ajay Bansal:]

Yes, that’s reasonable to think about it. Difei, although note that we have a total of nine Cobalt machines out there and we already talked about the fact that three of them have called in their upgrades. So in terms of what is going to totally impact us in the future, it's going to be a very small component, small story in our overall revenues story.

[Difei Yang:]

Okay. Thank you.

[Chris Raanes:]

Thank you.

[Operator:]

Thank you. Our next question or comment comes from the line of Anita Dushyanth from Zacks. Your line is open.

[Anita Dushyanth:]

Hi. Thank you for taking my question. Some of them have already been answered. I just wanted to get clarification on the systems that will be installed in the second half of this year. Are the seven or eight systems mostly equally distributed in between the two quarters under this year?

[Ajay Bansal:]

Hi Anita.

[Chris Raanes:]

Yes, good question, and I'm going to stick with giving annual guidance instead of by quarter. I think that's just going to be a principal of ours because it is such a lumpy business. But given what we just talked about in terms of installed capacity, we probably can't do eight in the fourth quarter, so it will be somewhat distributed between the two but I'll just leave it at that.

[Anita Dushyanth:]

Okay, great. Thank you.

[Operator:]

Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

[Chris Raanes:]

All right. Thank you, operator, and thanks, everyone. Thanks for joining the first quarter 2017 conference call. Great to have you all listening in. I appreciate your support and interest in ViewRay and our unique MRIdian system, and we look forward to keeping you updated. Have a great day.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.