ViewRay, Inc.
Q3 2016 Earnings Call Transcript

Published: 15 Nov 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the ViewRay Inc. Third Quarter 2016 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 be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I will now turn the call over to Zack Kubow. You may begin.

[Zack Kubow:]

Thanks, operator, and good morning to everyone. Welcome to the ViewRay’s third quarter 2016 financial results conference call. Joining me from the company are Chris Raanes, President and Chief Executive Officer, and Ajay Bansal, Chief Financial Officer. This morning, ViewRay issued a press release announcing its third quarter 2016 financial results. A copy of the press release and the company's Form 10-Q will be available on the Investor Relations section of the ViewRay website at www.viewray.com. We encourage you to review these documents. 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 will include forward-looking statements within the meaning of federal securities laws; these forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the ViewRay annual report on Form 10-K and subsequent reports as filed under 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, November 14, 2016. 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 ViewRay.

[Chris Raanes:]

Thank you, Zach and good morning everyone. I would like to thank you for joining us today and welcome you to our third quarter 2016 earnings conference call. On today's call, I will provide three key updates; first, I'll review our growing momentum both in terms of sales and in terms of clinical data. Second, I'll provide an update on European launch of Linac system and our submission to the FDA. And third, I'll give you a preview of our business model, which we expect to change significantly with the introduction of the MRIdian Linac technology; then I'll turn over the call to our CFO, Ajay Bansal, who will provide a more detailed review of our financial results; after which I'll open up the call for questions. We are clearly building positive sales momentum; we took four orders in the third quarter following three orders in the second quarter and two orders in the first quarter; the four new product orders we secured in Q3 were $24.5 million included a second order from Japan and two from existing customers who ordered the second system. Notably the demand for our system have come in from both academic centers and now from community hospitals; demonstrating the broad field of MRIdian in the market. In total, we've secured $52.8 million in new product orders in the first nine months of the year; already eclipsing the $40.1 million of orders, we received in the full year of 2015. Turning now to the September meeting of ASTRO, there were 19 clinical presentations and posters on the MRIdian system demonstrating the clinical advantages of using MRI guided radiation therapy. I will give you four highlights from the meeting. Data from a multi institutional study using [SPRT] (Ph) time-sensitive short duration treatment for pancreatic cancer demonstrated the ability to raise radiation dose while reducing radiation exposure to healthy tissues. The team at the University of Wisconsin presented on the MRIdian system signature on-table adaptive capabilities, which lead to reduction in toxicity to help the tissue and on-table adaptive treatment for key differentiator for our technology was also the subject of Washington University abstract, which receive the Physics award at ASTRO. Finally, the UCLA team highlighted a real-time MRI guidance helps manage motion control in IMRT specifically for post operative gynecological malignances. These and many other ASTRO highlight can be seen at our website www.viewray.com. Results from the MRIdian system are not confined to scientific meetings. Four days ago, a remarkable story of a patient treated with MRIdian system was the focus of the segment on the syndicated TV show The Doctors, highlighting its ability to attack cancerous tumors that would otherwise be “almost impossible to treat”. You can view the segment of that show also through a link on our website. Let me now update you on our MRIdian Linac technology, the initial feedback from customers were booked at our fully functional system in Mountain View is very favorable and we achieved two very important milestones in Q3. We received the CE mark approval in Europe and we submitted our 510(k) applications to the FDA. We are very excited by our MRIdian Linac technology and have told you previously that we expect it to be significant catalyst to new orders breaks for inspirations and above all a except function improvement in financial performance and profitability. Let me now outline for a framework in which to think about our business model pending FDA clearance. We enjoy industry leading pricing with the MRIdian cobalt system today, with an average selling price around $5.8 million. Internationally, we are seeing a $1.5 million to $1 million premium for the Linac system not surprising for an MRI guided Linac technology, which we believe has the sharpest beams in the industry and all the advantages of MRI guidance. Given this premium pricing and the lower cost of goods associated with the Linac technology we are confident that the MRIdian Linac technology will achieve gross margins starting at 40% and growing quickly to 50% as we scale up. In other words, off scale Linac system will generate more than $3 million in gross profit per system. Even anticipating reasonable expense growth of our current base of approximately $10 million a quarter, we believe that our business will become cash flow positive when we install as few as five MRIdian Linac system in a quarter. So in conclusion, here are things for you to watch for as we move forward. One, watch for the FDA decision on our 510(k) submission of the MRIdian Linac technology. Two, watch for continued sales momentum; and three watch for the first Linac research system installation in Q1 with growing installation momentum after that. I will now turn the call over to Ajay, who will provide a more detailed look at our third quarter financial results. Ajay.

[Ajay Bansal:]

Thank you, Chris and good morning everyone. I'll begin with a review of our new orders and backlog, to which Chris has already provided some commentary. In the third quarter, we closed four new orders for a total of $24.5 million to bring backlog at the end of third quarter to $125.2 million representing 22 signed sales contracts. This compares to 18 signed sales contracts representing $100.7 million in backlog as of June 30th and 15 signed sales contracts representing $84.4 million at December 31, 2015. In our full-year 2015 earnings call, we told you that would be a transition year as some of our customers, systems and backlog would choose to lead for the Linac technology rather than going ahead with installation of our cobalt power system. In Q1 this year, we installed and recognized revenue on one MRIdian system. We then shipped one system in Q2 and another system in Q3. We expect to begin shipment for one additional system in Q4. From a revenue perspective, we expect to recognize revenue on two systems in the fourth quarter. This will yield roughly $10 million in revenue for the fourth quarter and give us total revenue of about $16 million for full-year 2016. As you have noted from our press release, we ended the quarter with $14.6 million in cash. I would now like to turn the call back over to Chris for his closing remarks.

[Chris Raanes:]

Thank you, Ajay. To summarize, we are very pleased with our growing order momentum; we are very pleased to have received the CE Mark and to have filed the 510(k) submission for our Linac technology with the FDA; and finally we are very excited about the profitability potential of our Linac technology. With that, I'll now open up the call for Q&A. Operator.

[Operator:]

[Operator Instructions] Our first question comes from Suraj Kalia of Northland Security. Your line is open.

[Suraj Kalia:]

Good morning gentlemen. Can you hear me all right?

[Chris Raanes:]

We hear you great Suraj. Good morning.

[Suraj Kalia:]

Chris, between 1million and 1.5 million ASP increase, you indicated internationally, I presume that’s based on the quarter bookings, correct.

[Chris Raanes:]

It was between 0.5 million and a 1 million premium and yes, that's based on orders that we've taken.

[Suraj Kalia:]

And Chris I did not hear any commentary, the status of clinical studies for the Linac, any update on that?

[Chris Raanes:]

So, I mentioned clinical studies that were presented at ASTRO; obviously all of those are still done on the cobalt system, because those are the ones that are currently installed. I had mentioned that the first Linac research system would go into installation in the first quarter.

[Suraj Kalia:]

And finally Chris just for the audience, can you just give a sort of an overview in terms of the reimbursement payments for MRIdian; how things stack up relative to other modalities, the ROI analysis because that’s a question that comes up regularly in our [indiscernible] service? And then just maybe you can provide that in terms of your perspective and present it to the audience? Thanks for taking the questions.

[Chris Raanes:]

Sure, thanks Suraj. And the question was about reimbursement for the MRIdian versus other units out there. So the first high level summary is eventually no change to reimbursement that affects the MRIdian system. The second is just to remind everyone, the MRIdian system can build all the same quotes that you can build on any system out there. And then finally for our signature treatment, the adaptive planning for the MRIdian which the system really does automatically every day, if the clinician decides there is a need to make a change based on the data that system provides, there is very good existing reimbursement for the re-planning quotes. And order of magnitude both the hospital reflect a technical fee on the order $2,500 for re-plan and our positioned will record a professional fee about a $1,000 for the re-planning. And we are seeing that being used on average wiped during a normal course of treatment over about 35 to 40 fractions and more often in the very intensity short duration because of so critical to make sure that you get everything exactly right in doing what is called SPRT.

[Suraj Kalia:]

And one last question for Ajay. Ajay, the two units that you recognized this revenues in Q4, at the [Indiscernible] Europe and with MRIdian Linac, is that a fair assumption on my thoughts?

[Ajay Bansal:]

No, they are not MRIdian Linac, they are cobalt based system. As we mentioned that some of our customers has chosen to take cobalt base system and these are all the three shipment that are referred to, as we mentioned we recognize revenue on one in Q1 and then one shipment in Q2, one in Q3, one in Q4 all of those three shipments are cobalt system.

[Suraj Kalia:]

Great. Thank you for taking my question.

[Chris Raanes:]

Thank you Suraj.

[Operator:]

[Operator Instruction] Our next question comes from Sean Lavin of BTIG. Your line is open.

[Ryan Zimmerman:]

Great, this is actually Ryan Zimmerman on for Sean, can you hear me okay?

[Chris Raanes:]

Hi Ryan, we can hear you great.

[Ryan Zimmerman:]

Great. So Chris, just given your time in fairly around margin on the Linac system. Could you potentially possibly characterize the backlog of that process and give us little more color in terms of how we should be thinking about the backlog in terms of the split in Linac versus cobalt systems?

[Chris Raanes:]

It’s a really, really good question. And we told everybody in the beginning of the year that we thought most people would want to wait and then go ahead and upgrade their cobalt system to a Linac and in fact, that’s almost exactly what we seeing. Throughout the year, we have shipped about one of quarter as Ajay just told and those have been the cobalt system and while they are probably not the last they are close to be and almost everyone has either indicated or began negotiating with us to convert their backlog over. So of these systems still sitting in backlog I would estimate 85% to 90% plus will convert over to Linac.

[Ryan Zimmerman:]

Okay great, that’s very helpful. And then, just the second question, just in terms of the two systems that were sold into existing customers, can you just maybe characterize the competitive environment for us in terms of those sales and kind of what you are seeing at those potentially sales that you were in the running for with other high end systems, just any color there would certainly be helpful?

[Chris Raanes:]

In general, like the way this industry works is as system comes up sale when the existing unit that's sitting in their vault in the room where treatments are done becomes about 10 years old, and the hospital decides to replace it. And in both of these cases in fact, that's what happens, that another system came up and we are very-very pleased that they came back to us for a second system and it bodes to our fundamental thesis that essentially all radiation therapy will be MRI guided; there is no reason with everyone to do it without the MRI guidance. So, we see it as a really important validation, we are very pleased.

[Ryan Zimmerman:]

That’s it for me. Congrats, on strong order his quarter.

[Chris Raanes:]

Thank Ryan.

[Operator:]

Our next question comes from Anita Dushyanth of Zacks Investment. Your line is open.

[Anita Dushyanth:]

Hello good morning. So, my first question will be [indiscernible] expect the approval from the FDA covering Q1 in this year or sometimes in the first half of the year maybe? Are there any ongoing discussions or any feedback that you are getting?

[Chris Raanes:]

Anita good question, unfortunately it's not something I can help you with. The rules of the game are we made the application in September and we are just going to have to wait and see what the FDA does. We will obviously let everyone know as soon as we hear anything back from them.

[Anita Dushyanth:]

Okay. And my second question will be, based on those backlog, the systems that you have, can you give any guidance on how many you might be shipping in the coming quarter? Same like two or one or two?

[Chris Raanes:]

Again, its great question, unfortunately what is gaiting that is getting the FDA clearance. So I think once we get decision from the FDA, we will be right back to you and then let you know how is it going to roll out.

[Anita Dushyanth:]

Okay. Thank you. That’s it from me.

[Chris Raanes:]

Thank you.

[Operator:]

Our next question comes from Raymond Myers of Benchmark. Your line is open.

[Raymond Myers:]

Thank you. Chris I was hoping you might be able to touch on the cash flow implications of the nice quarter you said you expect to be delivering on in the fourth quarter? My understanding was that sometimes you received that cash either upfront or fairly soon and that would help to bridge the company?

[Chris Raanes:]

Well thanks for the question. I'll remind everyone that how it works in general is that we take a deposit at the time of the order; so our backlog is characterized by signed contracts with deposits and those deposits are in the order of 15 plus percent. And then most of the remaining payment comes when the system is couple of milestones delivered installed and through testing; so, you are right, we will in fact receive some cash from the systems that we are recognizing revenue on here in fourth quarter.

[Raymond Myers:]

That’s encouraging. Can you give us a sense of how long the company's current cash is likely to last given your visibility to inspiration over the next few quarters?

[Ajay Bansal:]

Yes, so Raymond, I’ll take that question, Ajay here. So our cash usage depends upon a number of things and of course Chris already spoke to a couple of them and the other big driver of cash usage is what initial deposits we take in. So for example, for the nine-months of year, our cash usages has been a total of about 35 million, so averaging towards the $12 million a quarter. But our cash usage in the third quarter was just north of 8 million. So significantly, less cash usage in Q3 compared to Q1 and Q2. So in Q4 the cash usage is also depends upon, how many initial deposits we collect from our customers, we are quite optimistic about that given the feedback, we are seeing about the system in the market place. But there is still a few weeks left in the quarter that will guide what happens on our cash usage perspective. From where we are with the quarter ending cash of $14.6 million, this should take us well into the early part of next year, but obviously, we have to go and generate some cash in the coming months.

[Raymond Myers:]

Thank you and good luck.

[Chris Raanes:]

Thank you.

[Operator:]

Our next question comes from [indiscernible]. Your line is open.

[Unidentified Analyst:]

Yes thank you very much [Indiscernible] Just a few question in terms of you little bit general how many patients that you think you can treat today on the system to systems at ASTRO there was a little bit from Holland and other clinics as well, it varies between 47 and 90 minutes treatment. And if you can say little bit about how you think this is now and also how you think it will be once you have your Linac system, I assume that would be a little short as you don’t have this cobalt reloads in this respect? Then also if you could tell me a little bit about the feedback get from the hospitals or the impression you have, whether you are expanding into new cancer cases or more complicated cases rather than treating tumor cells of where you currently you have for a longer in treating tumor cells, so is it expanding or not? And then I’ll revert with another question afterwards.

[Chris Raanes:]

Sure, great, great questions. So you mentioned some of the treatment times people reported at ASTRO and interestingly of course the presentation people give at ASTRO are the most interesting and complicated cases, which do take a little bit longer. What we are seeing with the cobalt system is probably half hour kind of slots for in normal treatment and as you correctly pointed out with the Linac that goes down dramatically. There should be absolutely no difference between treating on our system and treating on any regular radiation therapy machine. We have Linac there, it's giving the same dose rate as the other machine, it's projecting the same field as the other machine and it will allow the depend again how much of the extra features people use. But there is no reason to interest put people through with the same rate as we can on the normal system.

[Unidentified Analyst:]

And that is then assumed there is no treatment adoption, because I assume if you have treatment adoption and you have [indiscernible] then of course there would be some additional time.

[Chris Raanes:]

That’s correct. So if in fact the physician decides to do an adaptive treatment that adds about 15 minutes to a treatment so it’s like taking up an extra slot and a half sort of thing. All right and remember if that happens, average usage today about twice during the normal course of treatment and more often for the high intensity SPRTs. Your second question was about, feedback in the hospitals in terms of patient mix; and we are very proud of the fact that we have designed a system that can be used to treat a broad spectrum of cancers. You can use it to treat any disease; you can treat on a normal Linac; and in fact people do that; so they just use it, it's part of their normal work flow; however, and here's this is a really exciting part for us. What we are hearing from our U.S. sites, is that their patient mix is something like 20% of the patients, are patients that previously would not have been treated in radiation therapies at all. And in fact we are hearing in some cases, didn't have any other option including surgery, but 20% new patients coming in into the radiation treat is a very, very exciting statistics for us. And I suggest that if you are - to go watch that segment on The Doctor’s show, because that patient was a patient with the metastatic tumor in the abdomen that was refused in surgery, was refused from radiation elsewhere and the doctors at UCLA were able to treat her on the MRIdian system and she is now 12 months out cancer free. It's really rather remarkable.

[Unidentified Analyst:]

And I guess, in this respect also, you told us this quarter that you have received second order, so I guess everyone including me would like to know if you are a hospitals with let's say five regular Linac, how many Linac with those guides ideally go for or realistically go for? And is this a one step to 20% or what are the feedback you get there?

[Chris Raanes:]

Well, look, my view is that the hospital would have five radiation therapy systems got to have five MRIdian's in there, because I don't see why a doctor would ever want to go back.

[Unidentified Analyst:]

Are you crazy or bias, what are the hospitals saying?

[Chris Raanes:]

Well I think its early days and that's why it's so encouraging to us that we are seeing second orders. So we are now starting to place our second systems into some of these hospitals and I guess we are just going to have to see how it plays out. But if I think about it, how many of typical radiation suite are the high end machines within guidance and it's usually a 100% and if you are having this guidance, I don't see why you wouldn't want MRI image guidance.

[Unidentified Analyst:]

Ok. Now you have a Linac business also, so less of a pushback in the space of the cobalt, what is the reason not to buy and MRI guided Linac and is that the price or time for the patient or so when you negotiate now you are having your marketing campaigns or the dialogue with the potential hospitals. What are the push backs that you get, is it the price or something else?

[Chris Raanes:]

So listen, first of all it's very few with Linac, you correctly pointed out that it's a big difference in terms of reaction we seeing at cobalt system and seeing in Linac system. And I’ll remind everyone on the call that roughly 80% plus not even closer to the 90% and so base around the world are Linac systems, so people are familiar with that and that’s what they like. We now offer them a Linac system, we offer with incredibly sharp beams and that refining our plans are better than most of our units out there. And we believe that will continue and so why not, possibly delivery times not wanting to wait at this point you can do the - 23rd in line to get something.

[Unidentified Analyst:]

Okay, very good answers. Thank you very much.

[Chris Raanes:]

Thank you.

[Operator:]

There are no further questions. I would like to turn the call back over to Chris Raanes for any closing remarks.

[Chris Raanes:]

All right. Thank you operator and thanks to everyone for joining our call today. Again, to summarize, we are really very pleased with the growing order momentum. The CE mark, to have a filed the 510(k) submission or our Linac with the FDA and very excited about the profitability potentially that that Linac technology brings. I look forward to keeping you all informed as the business progresses. Have a great day.

[Operator:]

Ladies and gentlemen thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Everyone, have a great day.