ViewRay, Inc.
Q4 2016 Earnings Call Transcript

Published: 17 Mar 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the ViewRay Fourth 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 follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Nick Laudico. Sir, you may begin.

[Nick Laudico:]

Thanks, operator, and good morning to everyone. Welcome to ViewRay’s fourth quarter and full year 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 fourth quarter 2016 financial results. A copy of the press release will be available on the Investor Relations section of the ViewRay Web site at www.viewray.com. We encourage you to review that document. The 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 the 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 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 16, 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 Raanes.

[Chris Raanes:]

Thank you, Nick and good afternoon everyone. Welcome to the ViewRay fourth quarter and full year 2016 earnings conference call. The last 12 months have been transformative for ViewRay. We finished developing and we gained approval for the MRIdian Linac. We expanded our backlog and our install base and we recently added capital to the balance sheet to help fund our expected growth in 2017. It was just one year ago in early March 2016 that we announced the development of linear accelerator version of our MRI guided MRIdian system. In that one year we completed the development of the MRIdian Linac, we obtained FDA clearance and we secured the CE Mark in Europe. ViewRay now has the world's first and only commercial MR-Linac. Let me remind you why this is so important. Customers prefer Linac to other radiation delivery systems, over 80% of the radiation oncology markets installed base of Linac's. We are now selling an MR-Linac into a Linac market. We believe the MR-Linac has performance advantages over other systems available today. The MRIdian Linac produces the sharpest radiation beams that I've ever seen complementing the sharpest visual images from our MRI. The MRIdian Linac is faster than our first generation system allowing hospitals to treat more patients each day. Finally, we expect installations of MRIdian Linac system to significantly improve our gross margins. In the fourth quarter of 2017 we recognized revenue on three systems and took in four new orders. We achieved good order momentum as 2016 progressed starting the year with two orders in Q1, three in Q2 and four each in Q3, and Q4. Following the FDA clearance that we announced in February we believe that most of the systems currently in our backlog will ship and install as MRIdian Linac's. The few customers that have not yet committed to a Linac are generally from regions where the Linac is yet approved such as China. We've raised $48 million in cash since the beginning of this year putting us in a strong financial position. 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. With FDA clearance in hand we've started ramping up procurement for the new generation systems and have begun installing the first MRIdian Linac's. We expect to recognize revenue for these systems in the second half of 2017 upon system completion and acceptance. With MRIdian Linac we believe we're well positioned to capitalize on the exciting clinical results in MRIdian system. The clinical data from three years of real world experience treating patients with the first generation MRIdian system translates directly to the new MRIdian Linac. And here is what our clinicians have learned from MRI-guided radiation therapy. Reshaping the dose or adapting during the treatment is one of the keys to delivering effective doses to cancer tumors. This is not been practical on any system prior to that ViewRay MRIdian system and cannot be easily copied with any x-ray based system. Put simply you need an MRI to see soft tissue. Dr. Jeffery Olson of Washington University in St. Louis published an article in the Red Journal the premier journal on radiation oncology in December establishing the needs to reshaping the dose distribution to ensure tapping [ph] coverage and preventing the overdosing of nearby healthy tissues. Emerging continuously give clinicians the confidence to treat with smaller margins and higher doses allowing clinicians to treat more quickly and efficiently again this is not practical with an x-ray based system thus requiring MRI. A paper from Dr. Maria Thomas of Washington University in St. Louis also published in the Red Journal cites the reduction of approximately 50% of the volume of breast tissue that needs to be irradiated during treatment when using MRIdian. The same study has demonstrated results of 100% good to excellent cognizes while reducing treatment times from approximately six weeks to one week. Our U.S. centers are already reporting that approximately 20% of the patients they treat with the MRIdian system have no other viable options for treatment. These are numbers, but the value of human lives is incalculable. You may have seen media coverage of one person whose life was transform by the MRIdian system. Bibian Mentel, a world champion Paralympic snowboarder was told last summer that here lung cancer has returned in a location where they could not operate and that as she says 'there was nothing to do left. Fortunately, there was a MRIdian system right in her backyard and BUMC in Amsterdam. Bibian was treated with MRI guidance and on table adapted therapy in five sessions of high dose radiations, the result, she was back on the slopes in September and earlier this year won two gold medals in Canada at the Paralympic World Championships and two more golds at the World Cup last week in South Korea. These examples are the benefit to the MRIdian system how to explain the growing sense of excitement that we are seeing from potential customers around the world. Our penetration of top tier academic centers continued in Q4, at what many regard as the top cancer centers in Japan and in Europe. We delivered a system to the National Cancer Center in Tokyo and we received an order from University of Heidelberg in Germany. At the same time, we're very encouraged by the early adoption of our MRIdian technology in the Community Hospital market segment. Demonstrating this in 2016, we took orders from Health Central Hospital in Florida [indiscernible], Palos Community Hospital in Palos Heights, Illinois and Edogawa Hospital, part of Tokyo. In short the ViewRay system has attracted to the entire radiation oncology market. We continue to believe that it will change the way the market thinks about delivering radiation therapy. So we enter 2017 energized about the value that we can create for clinicians, for cancer patients and for shareholders and I look forward to keeping you updated on our progress with the MRIdian Linac. I will now turn the call over to Ajay, who will provide some key highlight from our financial results. Ajay?

[Ajay Bansal:]

Thanks, Chris and good afternoon everyone. In the fourth quarter of 2016 we recognized revenue on three MRIdian systems. For full-year 2016 we recognized revenue on four MRIdian systems. October revenue for the year was $22.2 million more than double of prior year total of $10.4 million. We received four new orders in the fourth quarter of 2016. Our backlog at the end of '16 was $133.2 million representing 23 signed sales contracts. This compares to backlog of $84.4 million representing 15 signed sales contracts at the end of 2015. In terms of cash position, we ended 2016 with $14.2 million, We've strengthened our cash position by raising $48 million in the first quarter of 2017. In January we completed a private placement of $26.1 million and in February and first half of March we raised $21.9 million from stock sales through our ATM. Finally, I would like to repeat 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 recognition of revenue from seven to eight MRIdian Linac systems in the second half of 2017. I would also like to remind you that we anticipate product gross margins rising to near 50% by early next year. With this gross margin profile of the MRIdian Linac systems we expect to become cash flow positive when we install as few as five MRIdian Linac systems in a quarter. I would now like to turn the call back over to Chris for closing remarks.

[Chris Raanes:]

Thanks, Ajay. In conclusion the last 12 months have been transformative for ViewRay. We had strong growth to both our backlog and our install base, key opinion leaders presented clinical data at several prestigious medical society meetings. We obtained CE Mark and FDA clearance of MRIdian Linac and we've begun to transform the standard of care of our MRI-guided radiation therapy. Finally, we raised significant capital that will help fund our growth in 2017. We're just getting started and look forward to an exciting year. I'll now open up the call for Q&A. Operator?

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Suraj Kalia from Northland Securities. Your line is open.

[Suraj Kalia:]

So, Chris and Ajay a few questions, the seven or eight unit placements as part of FY'17 guidance, can you share with us the cadence of these placements, geographically where you'll expected to be placed and the type of institutions where you'll expected to be placed? I presume the last one is going to be academic, but just for clarity purposes any color on these three would be great.

[Chris Raanes:]

So, the cadence, the way Ajay described it and I've described it, we've begun install and it's going to ramp up and so let's just do the math on the seven to eight recognized in the last two quarters, it's going to be sort of three, four systems a quarter in the second half. The geography is going to be pretty mix. So we’ve got some early ones in the U.S., we’ve got some reasonably early ones internationally. Yes, it’s pretty much matches our markets, trying to decide if it's really one-third, two-thirds, but it’s a nice mix of U.S. and International. And if I think about the first few, there are -- they do tend to be some the bigger hospitals, I think that trend is probably true through the year.

[Suraj Kalia:]

Got it. And in terms of the current install base, our numbers are roughly, I think somewhere close to five or so. Can you give us an updated number of the current installed based U.S. versus ex-U.S.?

[Ajay Bansal:]

So at the end of third quarter, you would recall, we had six systems installed four in the U.S., UCLA, Washington University of Miami and University of Wisconsin Madison and two were ex-U.S. We even seen Netherlands and South Korea. And then in the last quarter, we shipped and installed four systems and all three of there were ex-U.S. two in Japan and one in Italy. And at the end of the year, we have nine systems, four in U.S. and five outside the U.S.

[Suraj Kalia:]

And these are also the placement units that were placed earlier correct, under learning application.

[Chris Raanes:]

All of the systems were sold as commercial systems.

[Suraj Kalia:]

Okay. Got it. Ajay, what is the updated share count after this ATM. Is somebody close to 56 million, the right way of looking at the total share count or am I off?

[Ajay Bansal:]

No, you are right on target, it's 56.2 million shares.

[Suraj Kalia:]

And the 50% gross margins, I heard you say that number, is that existing fiscal ’17 or I guess, how should we look upon the gross margin number as we ramp up through the year?

[Ajay Bansal:]

Yes. We'll be starting close-up with 40% and then ramping up overtime. So the right way to look at it is exiting ’17, early ’18, we should have started approaching 50% gross margins.

[Suraj Kalia:]

Got it. And last question and I'll hop back in the queue. The 23 signed contracts, obviously, you all have a certain number that were in fiscal ’16, there were some, that was signed in fiscal ’15. The question I have is, the seven or eight units, what is age of these units are these more, I should say relatively fiscal ’16, but are they relatively newer units or are they order units? And the reason I ask is, I guess, at what point do you look at the units you all have signed 18 to 24 months out and start determining whether there need to be any age outs or cancelations? Thank you for taking my questions.

[Chris Raanes:]

Happy to do it. It’s a great question. So the 23 units that are in backlog, 13 of them came in in the last year. So what leaves 10 as older one, and if you remember we actually announced this technology development about a year ago in early March. And what we got, we got back from most of our customers that would like to wait for the Linac. So there are well aware of the timeline and we’re working with them. We did install some units in the last year people who didn’t want to wait, remember we did roughly one a quarter last year, but the folks that are remaining, as you've said, have mostly converted over to the Linac. There are few that have not yet, main reasons where it's not approved, like China.

[Suraj Kalia:]

Thank you.

[Operator:]

And our next question comes from Jason Wittes from Aegis Capital. Your line is open.

[Jason Wittes:]

First off, in terms of the Linac approval, has that precipitated some orders and in relation to that, can you give us any kind of sense in terms of how you think orders might cascade or general sense of how orders may look in 2017?

[Chris Raanes:]

Great, question and clearly the announcement has generated a tremendous amount of interest in activity it's been quite remarkable. In terms of how things are going to play out quarter-by-quarter, we're going to give annual guidance and we're going to do that just on the principle that a big capital item business like this tends to vary a lot quarter-to-quarter, but the announcement definitely has sparked a lot of interest from the marketplace.

[Jason Wittes:]

You are going to give annual order rate guidance you said or how do you plan on handling that and I guess what is -- if that's the case, what are you looking for in 2017?

[Chris Raanes:]

Yes, sorry I didn’t mean to imply that. We're giving our annual financial guidance, I will say that we plan to booked more orders than we ship and more orders than we took last year. But that's as far as I'll go.

[Jason Wittes:]

That's fair. And also, is there capacity constraints for '17 in terms of the 7 to 8 system you are placing, is that kind of in relation to how many you can actually build this year or how do we think about?

[Chris Raanes:]

I think the way to think about that is just, it's the right way to roll out a new product. We are not going to roll it. We're not going to go step function up four or five a quarter and then roll it out in a more controlled fashion that way and that's how it turns out. Given when clearance came through, we started the procurement cycle et cetera. In terms of capacity constraints, if you remember, we actually manufacture relatively little, we've got partners around the world that make our parts and among the biggest we get the guts of the MRI from our imaging partners Simmons, we get our magnets or all of our design et cetera, that we have made for us by a joint venture in Japan, that used to make magnets for GE Healthcare. All people that are more than capable of keeping up the material side. The only install constraint that we are working on is building up the teams in order to be able to install that many in parallel. Currently, we can do two to three installs in parallel with the internal staff that we have and we have trained some of our international distributors. For example, the Korean team, our Korean distributor does all of their own. The Japanese team is fully trained. And those people not only do installations in their territories, but they are available to us for surge capacity also and are those who just contract out. So that's how we are building it up and we are investing in being able to do, as the need, four units per quarter, five units per quarter '16 as the quarter going forward.

[Jason Wittes:]

Okay, that's helpful. And also obviously, the Linac, a big deal certainly in terms of [indiscernible] it seems like that's certainly what a lot of people were waiting for. One thing I wanted to ask is it seems as if although you guys did a great job with Cobalt. There was some hesitation to use the system for head and neck, some of the more -- I guess more precise head and neck cases. And I did get a sense that the Linac kind of addresses that issue and even some of your current users were looking for the Linac as a way of going a little more further in head and neck cases. Is that the right way to think about it, is that kind of what you heard from the field? And are we on track with that thought?

[Chris Raanes:]

So, I agree with you that one of the advantages of Linac system is we have even sharper edge beams, allowing you do more types of treatments. Whether that would-be head and neck, I was thinking more of it in terms of the neuro stuff, the brain and the spine. So, I think that's right. I think people will start using it more, because that is certainly a very capable system for that.

[Jason Wittes:]

And also just a sense if you -- I think you kind of alluded to it in your commentary, but when you place the system now, is it -- you're saying it's about a three to six months sort of period before it recognizes revenue in terms of full acceptance by the customer? So related to that, how long does it take to install and how long does it take from one installation for the customer to generally accept or is it just too early to make that determination?

[Chris Raanes:]

No, I think we have a pretty good idea and I think we'd settled down in about 50 to 60 day range for the old system and I'm modeling roughly a 100 day for the early ones of the MRIdian Linac, but I think we'll very quickly get down back to the 50-60. And then we've got plans to drive that down even further probably coming up in 2018.

[Jason Wittes:]

And last question I'll jump back in queue, in terms of your current install base, I think there may be some European Linac, but generally speaking are those Cobalt customers looking to go back and upgrade to a Linac?

[Chris Raanes:]

Well, the answer is yes. We've talked to -- and one of the nice features about the new MRIdian Linac is that it is an upgradable feature for people who have the first generation, we defined it that way, and we've talked to all of our existing customers about when they want to do that and we've some of them already settled.

[Operator:]

And our next question comes from Ryan Zimmerman from BTIG. Your line is open.

[Ryan Zimmerman:]

So, just a follow-up on Jason's question from before, the Linac upgrade in your European customer base is that contemplated in the guidance for '17?

[Chris Raanes:]

Linac upgrade for European is contemplated in the guidance. I'm not 100% sure what that means, but let me say something, and you tell me if I've answered the question. I'm not planning to upgrade any European systems during the year.

[Ryan Zimmerman:]

That answered it, yes. And then just now that you've got the Linac approval, I'm just curious to see what you've gained or that you've made any incremental headwinds in terms of the sales cycle itself for the MRIdian Linac as compared to the Cobalt?

[Chris Raanes:]

Yes, so I don't want to comment on -- that's all Q1 current information, I won't comment on what it's generating in terms of orders, but I will comment that in terms of interest it's been a step function, absolutely then a step function and I see that in the number of customers coming through for health business people that are scheduling visits with our existing customers and making phone calls and doing diligence, it’s really been -- it’s been a dramatic uptick and we’re very pleased by that.

[Ryan Zimmerman:]

Great. And then just lastly for me. Could you give a little color in terms of the reduction in tradesmen time, you talked about it being [indiscernible]. So maybe just commentary on the number of fraction that you’re doing as opposed to what someone may have done on a traditional Linac system, I think will be very helpful as well. Thanks for taking the questions.

[Chris Raanes:]

No. Thanks for the question. And the question was about, quarter for example Maria Thomas breast study and I mentioned that the Bibian Mentel and her treatment, and when I say this in general the high-dose short duration treatment, the standard out there is to do it in five or six sessions, down from 35 to 40. The normal course of business, if you don’t have the ability to see so precisely and target so precisely and guarantee you're going to hit what you want to hit and miss what you need to miss, people will be sort of six to eight weeks, 35 to 40 sessions of low-dose radiation. With our systems given the precise ability to deliver the radiation and hit the tumor guarantee you’re going to miss everything around it, you can turn up the volume and hit it with a much harder dose and you can take that down to five sessions is normal. And that’s how you go from six week breast treatment down to a one week breast treatment.

[Ryan Zimmerman:]

Thank you.

[Operator:]

And our next question comes from Anita Dushyanth from Zacks Research. Your line is open.

[Anita Dushyanth:]

Most of my questions have been answered. I just want to have a clarification on the systems that you have installed in Europe, did you say that they were mostly academic institutions? Did you say it was some health and as well as academic institution?

[Chris Raanes:]

I don’t think I did say, but I’m thinking about our installed base in Europe, tends to be, that’s pretty good center. So it’s primarily academic at this point. Could your focus be different from U.S. or that’s the more traditional, it’s a larger cancer centers with larger number of bunkers.

[Anita Dushyanth:]

And 7 to 8 systems that will be delivered later this year. Those will be going mostly to the health institutions?

[Chris Raanes:]

Well, I think that will mostly larger institutions, I'm thinking through the list, I think they are all, they all tend to be the larger ones, this is the way that worked out.

[Anita Dushyanth:]

Okay, great. Thank you.

[Chris Raanes:]

Sure.

[Operator:]

And at this time, I’m showing no further questions.

[Chris Raanes:]

All right. Well, if there are no further questions operator, why don’t we wrap up the call. So I’d like to thank you operator and I’d like to thank everybody who join today. Thank you for joining our fourth quarter and full year 2016 call. Thanks for your time. Thanks for listening. Thanks for your support and your interest and I look forward to keeping you updated. Have a great day.

[Operator:]

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