ViewRay, Inc.
Q2 2017 Earnings Call Transcript

Published: 8 Aug 2017

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Second Quarter 2017 ViewRay, Inc. Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I will now turn the conference over to our host, Zack Kubow. You may begin.

[Zack Kubow:]

Thanks, Operator and good afternoon to everyone. Welcome to ViewRay's Second 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 second quarter 2017 financial results. A copy of the press release is 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 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 June 30, 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, August 7, 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 Second Quarter 2017 Financial Results Conference Call. Let me start by talking about the achievement last month of a major milestone for ViewRay, one which we believe will be looked back upon as the beginning of a new era in cancer treatment, that is, the first patients were treated by the ViewRay MRIdian Linac or linear accelerator. I was at Henry Ford on July 19 to witness the first patients ever treated with curative intent on any MRI-guided linac. As you know, linacs are the overwhelming choice of clinicians around the world. So ViewRay has now entered the mainstream with the most advanced technology, the MRIdian Linac. I would like to quote from our vision and mission statements. Our vision is better. We believe that better vision leads to better treatment. To that point, we have already seen some exciting clinical data for more than 3 years' experience with our first-generation MRIdian System, experience which translates directly to the MRIdian Linac and that is only the beginning. Turning now to an overview of the second quarter. We gained good commercial momentum following FDA clearance of the MRIdian Linac at the end of February. In Q2, we secured new orders totaling $37.3 million, a company record. All of the orders in the quarter were from the MRIdian Linac System. As a result, our backlog increased to $182.1 million. These are signed contracts with deposits. Henry Ford in July was the first installation on which we recognized revenue in 2017 following a pause, as almost all customers in our backlog chose to wait for the MRIdian Linac rather than install the first-generation Cobalt system. We have additional MRIdian Linac installations underway and are on track to achieve our guidance of recognizing revenue on 7 to 8 systems in the second half of 2017. We further strengthened our balance sheet in Q2, increasing our cash to $53.9 million at the end of the quarter. This positions us well to execute on our growth strategy and to continue converting backlog into revenue. In June, the National Cancer Center in Japan started treating patients with the MRIdian System and we filed an application for a shonin for the MRIdian Linac. We expect Japan to become a strong market for our next-generation technology. On our Q1 earnings call, I reported on The Annual Meeting of ESTRO, the European SocieTy for Radiotherapy & Oncology which took place in May. We're now about to launch a prospective clinical trial for patients with advanced inoperable pancreatic cancer following the impressive early retrospective data that was reported there. Last week saw the Annual Meeting of the American Association of Physicists in Medicine, the AAPM, in Denver, the largest gathering of medical physicists. Our MRIdian System was the focus of 30 abstracts selected by the AAPM and they were in-booth presentations from 5 of the nation's top cancer centers, Washington University in St. Louis, University of Wisconsin-Madison, UCLA, University of Miami and Henry Ford. Clinicians reported on the significant advantages of using MRI-guided, on-table adaptive therapy which is currently possible only with the MRIdian System. ViewRay's on-table adaptive therapy gives clinician a simple tool kit to reshape the prescription immediately before each treatment, accounting for the significant anatomical changes that may have taken place between treatments. It is a revolutionary capability, enabling clinicians to paint the target rather than shooting in the dark and it is unique to ViewRay. As you would expect at a medical physicists meeting, measures were presented confirming several key MRIdian advantages, such as the sharpness of our radiation beams, lack of distortion and high-quality images. In fact, the MRIdian Linac meets every applicable MRI diagnostic quality standard of the American College of Radiology. The MRIdian System is also optimized to avoid the dose distortion and trapped dose concerns that have been reported on high-field magnet research systems. As a result, MRIdian is able to tackle the full range of cancers treated by radiation therapy centers from breast, including whole breast; prostate; lung cancer; to the toughest sites such as pancreatic cancer. We view this broad capability as a crucial performance advantage, along with our on-table adaptive therapy and our real-time, high-quality MR images. No other technology can do what the MRIdian Linac can do. The talks at AAPM included a presentation from Henry Ford on early experience with the new MRIdian Linac, reporting delivery times of just over 6 minutes for a stereotactic body radiation therapy treatment and 5 minutes for a prostate-intensity modulated radiation therapy treatment. Also presented was a replayed movie of the prostate treatment which showed how the system's real-time imaging automatically detected and paused the treatment when the patient's prostate moved suddenly and unexpectedly. You can see some video highlights of these presentations at AAPM on our website, www.viewray.com. We're now looking forward to our largest meeting of the year, the Annual Meeting of ASTRO, the American Society for Radiation Oncology, at the end of September. This will be the first ASTRO post-FDA clearance, meaning that we're free to promote the MRIdian Linac and this should help us generate more order momentum in Q4 following the traditionally slower Q3 summer quarter. There will, of course, also be some important presentations on clinical experience with the MRIdian System and the MRIdian Linac. In late-breaking news, we were informed on Friday that the MRIdian Linac is now cleared in Canada. We look forward to bringing the advantages of MRI-guided radiotherapy to Canadian patients and to patients around the world. In summary, my key takeaways are first patients treated with the MRIdian Linac at Henry Ford; good order momentum; strong cash position; and a number of presentations at AAPM, bringing home the clinical and technical superiority of the MRIdian technology. I'd like to turn the call over to Ajay, who'll provide some key highlights from our financial results.

[Ajay Bansal:]

Thanks, Chris. And good afternoon, everyone. Revenue in the second quarter was $0.7 million compared to $0.3 million in the second quarter of 2016. As expected, we did not have any product revenue in the second quarter, as we did not complete any MRIdian installation. Our backlog at June 30, 2017, was $182.1 million. This compares to a backlog of $100.7 million at June 30, 2016. In terms of our cash position, we ended the second quarter with $53.9 million in cash. This includes $17.6 million that we raised in the second quarter from sale of common stock to add the market offerings. 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 7 to 8 MRIdian Linac Systems. I would now like to turn the call back to Chris for closing remarks.

[Chris Raanes:]

Thanks, Ajay. In summary, we're very excited about the first installation of our second-generation system and the first patients treated with the MRIdian Linac at Henry Ford. We're excited about good order momentum. We're excited about our strong cash position and we're excited about a number of presentations at AAPM and the general feedback from the market about the clinical and technical superiority of our MRIdian technology. And with that, I'd like to open up the call for Q&A. Operator?

[Operator:]

[Operator Instructions]. Our first question coming from the line of Suraj Kalia with Northland Securities.

[Chris Raanes:]

Suraj, are you there? Operator, we might have lost Suraj. We want to move on to the next one.

[Operator:]

Sure. Our next question coming from the line of Travis Steed.

[Travis Steed:]

Can you just talk about how the sales process has changed now that you've got the linac version approved? Are customers more receptive? Are you getting -- finding it easier to get a seat at the table?

[Chris Raanes:]

I'm sorry. Could you repeat the first part, how the what process has changed?

[Travis Steed:]

The selling process, meeting with customers and getting in the door.

[Chris Raanes:]

Right, right. No, that's a great question. And I talked about it before that the excitement that we're seeing in the market from the announcement of the linac and getting the FDA clearance, we can just see a different energy level at the various shows that we're attending, the number of people coming into the booths, the quality of the conversations. There's been a noticeable difference as we transitioned to the linear accelerator. And as we pointed out in the earlier part of the call, we're -- we're now part of the mainstream. It's what people prefer. It's what they're used to and they like linacs and of course, they like all the advantages you get from the high-quality MR images. And let me put it in a very sort of colloquial term. We've got a staff member here who says that selling a linac is like dinner with friends, people just want to sit down with you and talk about this next-generation technology.

[Travis Steed:]

Okay, that's helpful. And can you remind us how we should be modeling gross margins in the second half?

[Ajay Bansal:]

Yes. We have guided before that we expect to be shooting towards industry gross margins in 2018. Initially, the gross margins are going to be a little bit lower. So as we install the first few systems, our expenses would be a little higher. And some of those systems are at lower prices. So we would expect the gross margins to be lower than sort of the industry margins that we're targeting for 2018.

[Operator:]

Our next question coming from the line of Anita Dushyanth with Zacks Investment Research.

[Anita Dushyanth:]

The first one would be -- you have approximately 30 signed orders on the backlog and out of those are -- 11 of those, are they for the linacs? Because as per Q1, you had 2 orders for linac, 3 upgrades. And then in Q2, you had about 6 -- 5 or 6 systems for linac orders. Am I right?

[Chris Raanes:]

So good question. The way to look at it is almost every one in the backlog has converted over to the linac. So the expectation is that from now on we will be shipping linear accelerators. And there are approximately 3 in the backlog still that have not confirmed switching over and that's because they're in an Asian territory where the clearance hasn't been granted yet. And they may still want to take 1, 2 or maybe all 3 of those units as Cobalt. If that's what they want to keep their market going, we'll go along with that. But the way to look at it is the backlog is all over to the linac product now.

[Anita Dushyanth:]

Okay, great. My second question is, are we moving towards the 60 day for the complete installation? Or are we still around the same 100 days?

[Chris Raanes:]

We're definitely moving in that direction. We're gaining experience with every one that we're putting in the ground. And I would say that's where we were with the Cobalt units. And if you look at the number of systems we're going to put in, it's probably not a bad guess by the end of the year we'll be there.

[Anita Dushyanth:]

Okay. Okay, great. And my last question is, will you be able to tell us where and when these systems are installed during Q3?

[Chris Raanes:]

Yes. They're not all public, so I can't give out the where and when. Sorry about that. We're -- we reconfirmed our 7 to 8 for the second half and that's as much as I can do.

[Operator:]

[Operator Instructions]. I'm showing we have a follow-up question from Suraj Kalia with Northland Securities.

[Suraj Kalia:]

Chris, can you hear me okay?

[Chris Raanes:]

I can hear you now. I can hear you now.

[Suraj Kalia:]

Okay, perfect. So forgive me. I was just hopping in between calls and in case somebody has already asked this, Chris. The sudden jump in backlog, Chris, what portion of it is OUS? And can you characterize -- I know you don't specifically break out net orders or net backlog similar to some of the other more mature companies. Can you give us some color on age-outs? Or what percent of these orders are getting to the 2-year time mark, if we're there?

[Chris Raanes:]

Sure. Well, look, in terms of net versus gross backlog, since we announce it every quarter, you can go back and you can go look at that, right and you'll see that the backlog simply went up by the amount of the orders we took this quarter. So that answers that one. Then in terms of the age of the backlog, et cetera, I strongly believe that the criteria we have right now is absolutely right. We don't give out the age of the backlog. But given that we last year pivoted the whole business from Cobalt to linac and almost everybody decided to wait, that automatically added sort of a year plus to everyone in the backlog. So I think right now, the criteria we have is correct. We take it very, very seriously. The criteria is out there. It's published for everyone to read. And I think your other question was about U.S. versus OUS. And I didn't do the exact math, but last time I looked at the overall backlog, including the new ones, it was still very closely sticking to the 2/3 outside the U.S., 1/3 inside the U.S. and that includes the current quarter.

[Suraj Kalia:]

Fair enough. So what I was really trying to get at in terms of there age-outs were -- and correctly, you clarified it. Everything has been transferred over to the linac. So technically, there is no risk of anything in the backlog of getting -- a lot of time being elapsed between when appeal was taken to when it's going to be installed. Chris, obviously, there has been a lot noise recently in terms of the image quality of 0.35 Tesla. And again, forgive me if you've already answered and if somebody brought this question before. But can you oversimplify this for the retail crowd, in particular, as to how and why the 0.35 Tesla configuration in the linac is -- and this is my language, "good enough" for the current applications using the MRIdian? Any color there, again, in an oversimplified manner would be greatly helpful for the audience.

[Chris Raanes:]

All right. Thanks, Suraj. Yes, I would actually -- I appreciate your commentary too. I think it's right on. But I would go a little bit further. I would say it's not only good enough it is absolutely the right answer for our application. The 0.35 Tesla magnet was chosen quite intentionally. As you all know or most of you know, we partnered with Siemens. They've been our imaging partner from the beginning and we designed this system with their input with our own scientists specifically to address dose, right? We want the radiation to the patient to be pristine and that's why we chose 0.35 magnet, 0 dose distortion, 0 dose trapping, no skin dose issues, no trapped dose issues. That's what was important to us. So we fixed the magnet strength from there and we do have that essentially perfect dose delivery now. And then the next question was what kind of images can you get from 0.35? And the answer is you can get amazing images. Starting from the set-up and therefore the planning scan with our algorithms and today's DSP capability, we're getting images with a signal-to-noise ratio equivalent to almost 4 Tesla magnets out of the 0.35. And on the wide-imaging side, once you started treating and you want to continue to track the tumors and make sure that everything's always in the safe place, the field strength that we've chosen allows us to do that continuously without setting up -- without hitting any kind of boundaries as set by the FDA. So we feel that it is absolutely the right choice and is the superior technology.

[Operator:]

[Operator Instructions]. Our next question coming from the line of Ben Haynor with Aegis.

[Benjamin Haynor:]

First for me on -- well, first off, congrats on the Canadian approval. Have you had any conversations with potential installs or potential centers that could be become customers there? And then I'm assuming any orders that you do receive and the installations will be conducted by the U.S. team and you don't plan to train installers in Canada.

[Chris Raanes:]

Yes -- no, great question. And in fact, there is -- there's a little bit of activity we know about right now in Canada that we're -- well, we're having some great, great discussions and so we're particularly pleased by the Canadian centers coming through as well. And you're absolutely right, that our intention would be to install and service the Canadian centers with a direct team.

[Benjamin Haynor:]

Okay, great. And then with the ASTRO conference coming up and I apologize if I might have missed this, I jumped between 2 calls, but any particular publications or presentations that you're especially excited about and you think investors should pay particular attention to?

[Chris Raanes:]

We'll put out, as we always do, a press release right before the show that highlights the most important things. There's actually rules around preannouncing what things have been accepted [indiscernible]. So to some degree, I don't even know. And the ones that I know, I can't say. So we'll put something out right before the show.

[Operator:]

And our next question coming from the line of Donald Dion with DRD Investments.

[Donald Dion:]

We're long term shareholders and we're troubled by the short sellers that appear to be attacking your company and making allegations that are obviously out of bounds. And we're just wondering what steps besides delivering solid results that you're taking to try to get the story out.

[Chris Raanes:]

Well, thanks for asking about that. And look, the answer is we're really comfortable about where our business is and we're focused on running the business, right? The best answer is in fact to execute as we've done in the recent months. We're pleased with the orders, obviously pleased with the first linac patients treated at Henry Ford, pleased with the cash position, focused on continuing down that path and continuing to convert backlog into revenue. And really, that's what's important to this business and that's where we're focusing our management attention time on.

[Donald Dion:]

I think the results will speak for themselves.

[Chris Raanes:]

Appreciate the comment.

[Operator:]

I'm showing no further questions. At this time, I'm showing no further questions. I would like to turn the call back to management.

[Chris Raanes:]

All right, operator. Thank you and thank you all for joining the Second Quarter 2017 Conference Call. In summary, we've got growing momentum in all areas of the business and in the market. And that's evidenced to us by the frequent reports we get from MRIdian sites, treating a wide range of cancer, opening -- offering new hope to cancer patients and their loved ones and we look forward to updating you on our progress. Thanks, everyone, again, for listening in and have a great day.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may now disconnect.