ViewRay, Inc.
Q2 2018 Earnings Call Transcript

Published: 5 Aug 2018

[Operator:]

Good day, and welcome to the ViewRay Second Quarter 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Lee Roth, from The Ruth Group. Sir, you may begin.

[Lee Roth:]

Thanks, Brian, and good morning to everyone. Welcome to ViewRay's Second Quarter 2018 Financial Results Conference Call. Joining me today from the company are Scott Drake, President and Chief Executive Officer; and Ajay Bansal, Chief Financial Officer. Earlier this morning, ViewRay issued a press release announcing second quarter 2018 financial results. A copy of this 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 website from 14 days. Before we begin, I'd 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, and our 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 302018 as well as subsequent reports filed with the Securities and Exchange Commission. Furthermore, the content of this conference call contains time-sensitive information, accurate only as of the date of this live broadcast, August 3, 2018. ViewRay undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances after the date of this call. With that said, it's now my pleasure to turn the call over to Scott Drake. Scott?

[Scott Drake:]

Good morning, everyone. Welcome to our Q2 call, and thank you for joining us. On our call this morning, I'll first provide some thoughts on why I joined ViewRay and share some early observations. Next, Ajay will share an update on key financial and operational highlights and then we'll open the line for questions. To begin, I'm excited to join the ViewRay team. Over the past year since the sale of Spectranetics, I've had the chance to think deeply about my next venture. After looking at many opportunities across the medtech landscape, 3 criteria became clear. First, I wanted to join a team making a big societal impact. Second, I wanted to get into a space where technology really matters and be part of a company that has a clinically meaningful disruption. And third, I wanted a business we could grow in scale. ViewRay fits these criteria perfectly and I'm really enjoying getting to know our team, customers, clinical data and technology. It's clear to me that we have the opportunity to do something special. We can change and improve cancer treatment for patients around the world. Our groundbreaking MRIdian Linac must become broadly adopted to achieve our goals and we're intensively focused on this mission. To be clear, driving broad adoption will require us to deliver on multiple fronts. Our commercial team must have the reach and resources to win in the marketplace. Our innovation team must protect and extend our leadership position. We must expand our clinical data compendium and we must drive down the time span between a purchase order being received to vault readiness and revenue recognition. Changing and improving cancer treatment for patients live in the trenches, operational excellence, customer service, ease of use, supply chain efficiency and seamless installations are each important pieces of this puzzle. Indeed, there is a lot of work ahead to capitalize on the opportunity. We're going deep into these work streams to build the infrastructure required to support and sustain our growth. This work is nontrivial, but in it lies significant value creation. In short, it's my pleasure to be here, and I'll turn the call back over to Ajay for financial and operational highlights.

[Ajay Bansal:]

Thank you, Scott, and good morning, everyone. In the second quarter, we recognized revenue on 3 MRIdian Linacs and recorded total revenue of $16.4 million. One of these installations for the Loyola Medicine/Palos Health Center, now the first community hospital in the United States with the ability to provide MRI-guided radiation therapy. I would also like to note that our final installation of the quarter was completed in well under 60 days. In the second quarter, we received new orders for MRIdian Linacs totaling $34.6 million. At the end of the quarter, our backlog stood at approximately $200 million, up from $182 million at the end of the second quarter of 2017. Total cost of revenue was $16.4 million for the second quarter. This included a nonrecurring Cobalt related inventory write-off, totaling $2.7 million. Excluding this write-off, our pro forma product gross margin for the second quarter was approximately 22%. In terms of our cash position, we ended the quarter with cash and cash equivalents of $66.1 million. As we recently had reaffirmed, we are maintaining our total revenue guidance of $80 million to $90 million for the full year 2018. Let me know provide a brief recap of some recent highlights. As Scott mentioned earlier, we remain committed to expanding our clinical data set. Last week, the prospective multi-institutional, single-arm study for borderline receptible or inoperable, locally advanced pancreatic cancer was submitted to clinicaltrials.gov. The trials will enroll about 100 patients. The primary endpoint of the trial is Grade 3 GI toxicity at 90 days, with secondary endpoint of overall survival, progression free survival and patient reported quality of life. In addition to driving a clinical initiative, we'll also continue to engage with key thought leaders to build awareness of the MRIdian. This past week we attended the annual meeting of the American Association of Physicists and Medicines or AAPM. This field, the MRIdian Systems was featured in 55 abstracts, nearly double the number from 2017 meeting. At AAPM, our team also demonstrated advancements to MRIdian SmartVISION. These advancements further improve tumor and soft tissue visualization, while potentially allowing assessment and prediction of tumor response to radiation therapy. We recently submitted a 510(k) for these enhancements. Furthermore, last week, 170 attendees joined a webinar presented by VUmc and WashU, St. Louis, highlighting MRIs unique MRI-guided real-time on-table adaptive therapy capability. Looking ahead, we see another meaningful opportunity to engage as world-leading oncologists at our symposium to be held in Miami this September. With that financial and business update, I would like to now turn the call back over to Scott.

[Scott Drake:]

Thanks, Ajay. Let me repeat my excitement for joining the ViewRay team as we pursue better treatment for cancer patients around the world. I look forward to sharing more granularity on our plans as I dig deeper into our business. Operator, please open the line for questions.

[Operator:]

[Operator Instructions]. And our first question comes from the line of Difei Yang from Mizuho Securities.

[Difei Yang:]

Just a couple of questions. First, on cost of goods. So when this operation is fully leveraged, where should we be expecting cost of goods to be at? And what is the unit that you think you can achieve that kind of leverage?

[Ajay Bansal:]

Yes, Difei, as we have mentioned towards the end of fourth quarter, we hope to get to cost of goods that are approaching 30%. We are fairly confident we should be able to get to industry average cost of goods late towards next year. Having said that, let me just reiterate, there are lots of moving pieces in the early days of our business. One of the key things that we are -- as we mentioned on the last call as well, we are looking to reflect on as what's the correct pricing strategy for us, for example, to achieve the growth and the penetration that we desire with our system. So all of that's going to play in, but the system is unique as we have mentioned and we hope to enjoy industry-leading gross margins in the times to come.

[Difei Yang:]

Okay. And then for the new orders, are you seeing competitive pressure in the marketplace or are you seeing -- what are you seeing out there?

[Ajay Bansal:]

As we have mentioned to you before, our main competition comes from Varian and -- for the competition is for the socket, so it's not always that we are just competing with unity. We're competing for the socket and we're competing with standard linacs out there. So far the market penetration of MRI Linac, if you take on a quarterly or an annual basis, is in the range of 3% to 4%, 5%. So all of these units we are selling at key competitive Varian or Elekta or [indiscernible] and they are standard systems. Occasionally we run into competition from Elekta, but the competition is fairly broad.

[Difei Yang:]

Okay. And how should we think about the rest of new orders for the rest of 2018?

[Ajay Bansal:]

As you look back at the last two years, our second half has been quite a bit stronger than the first half, so we expect good growth over first half and the second half for new orders.

[Operator:]

And our next question comes from the line of Craig Bijou from Cantor Fitzgerald.

[Craig Bijou:]

Scott, may be just want to start with you, and I appreciate it's early in your tenure and you did lay out some of your priorities, but thought maybe you could dig in or we could dig in a little deeper into some of the specific things that either you saw with the company previously that you may need to change or ideas that you have thus far, and then along the same lines, just maybe the goals that you're setting for yourself and the company related to some of the priorities and some of the changes you want to make?

[Scott Drake:]

Thanks, Craig, good morning to you. I think the big picture is as follows, if you kind of take a step back what we saw, Sean and I saw, in the several weeks, actually months that we had looking at the company, we believe we have the opportunity to become the standard of care for cancer treatment, that's a really big statement. Our system can enable the radiation oncologist to have surgical like capability without the invasive side effects of surgery, which, I think, is a really big deal, and we've taken traditional radiation therapy to an entirely new level. We see the soft tissue, we adapt the treatment on the table, we can reduce the number of treatments and maximize the opportunity to preserve healthy tissue. And if you look at the macrotrends of where medicine is going to more and more minimally invasive treatment, this therapy is right in line with that current and we're swimming hard with the stream. I think the early pancreatic data is illustrative of that. We doubled the radiation doze yet Grade 3 or higher toxicity completely vanish and the clinical outcome for that small subset of patients was incredibly positive as you've seen. So that's the big picture, that's what we see here and there's a lot that we can leverage that already exists, and as I mentioned in my prepared remarks, there's work to do to recapitalize on that, from the commercial teams to the operational team, to the innovation team, there's work to do but the opportunity to create shareholder value and better treat cancer patients in my estimation is profound and that's the work that we're excited to.

[Craig Bijou:]

Great. That's helpful. As a follow-up on that, and I guess it's also related to the current business, I just want to talk about cash burn and the potential need for additional cash with some of maybe some of the investments, Scott, you want to make within the operations of the company. So just help us understand the current business, the cash burn, how guys see your cash position, and then maybe if some of the -- some of your priorities may require any additional investment in the company?

[Scott Drake:]

Yes, thanks for that. We will need additional funding to fully capitalize on the opportunity that we have, and maximize shareholder value. And we are in the midst of doing that work. I've really got to dig in there with Ajay and the team and understand what's required so we can get more precise on the sizing of what we need and we're going to be opportunistic from a timing standpoint in the capital markets. So I'm not in a position to give you more granularity at this time, but we will need more funding and as we dig in, we will share more.

[Craig Bijou:]

Great. And if I can squeeze one more in may be for Ajay. The ASP on the installed systems, I believe, it came in a little lower than we were expecting, so just anything that you want to call out there and then -- you did make a couple of comments about figuring out the proper ASP for broader adoption, so maybe just elaborate on that quickly also?

[Ajay Bansal:]

Sure. So specifically, talking about Q2 first, there are a couple of systems in the revenue that we recognized in the second quarter that was lower ASP. One of them specifically was a clinical system for China and the other was a system, first--in-territory system that also had lower ASP than usual. So as you're working through some of these first-in market and clinical systems then you should expect ASP to dial backup. And let me clarify the comment about the pricing that you just mentioned. We are getting good traction with our current pricing of $6 million to $6.5 million. What we are trying to fine tune here is, what's the best way for us to capture that value from the institution, as you know many institutions are CapEx limited and in certain cases, it may be advantageous, both for us and the institution to have a lower ASP, but higher ongoing cost for the institution, so that it comes out well for us and it comes out well for them. and the reason I pointed that out was because that clearly, has a direct impact on gross margins, EBITDA, the number of growth systems and that kind of pricing, but we are not -- we are able to sustain the pricing that we have talked about, the $6 million to $6.5 million once you account for everything.

[Operator:]

Our next question comes from the line of Andrew D'Silva from B. Riley.

[Andrew D'Silva:]

Just a few quick ones there. First, just book keeping questions, depreciation and amortization stock-based compensation, cash flow from operations and CapEx, if you could pull that for me, Ajay, that'd be very helpful. And then while you're doing that, obviously I'll ask my next question. Just a little curious on how you're viewing some of your recent commentary from competitors related to cone beam based CT related linear accelerators and other CT based linear accelerators that are thought to now be more proficient than before at viewing soft tissue tumors. Is that something you guys are seeing as the headwind or even talked about when you're in the sales and marketing process?

[Ajay Bansal:]

Yes, so getting to the numbers first, depreciation and amortization for the quarter was $928,000. Stock-based comp was about $1.7 million, and we had amortization of debt discount and interest, the non-cash.Items, for about $900,000. That'd be net cash used in operating activities was $11.4 million, as you know we collected a lot of cash from our accounts receivable this quarter, so that reflects in the total cash usage for the quarter. Coming back to cone beam CT, it's like, may be let me just use a scale, so if visibility in our system on a scale of 1 to 10 stands and visibility on cone beam CT on a scale of 1 to 10 is 2.5, then the improvements that they've made take the cone beam CT from 2.5 to 2.6. So yes, it is better, marginally, compared to what you have today, but does it get you to where you're trying to get to, to compete with an MRI vision? No.

[Andrew D'Silva:]

Okay, great. Great color there. And then Scott, thanks for the info on your prepared remarks. I'm just curious, can you provide just a little insight as to how you're introduced to ViewRay? And just the process you went through for your personal due diligence that you decided -- that actually took you over the top when you decided to join the company?

[Scott Drake:]

Yes, happy to, Andrew. I was introduced to the company from a board member who I know through the years in the industry and the company was looking to potentially bring on a new board member and I had the opportunity to spend a good bit of time with both Chris and Jim Dempsey, and really learn about the company. And I was amazed and the more I dig in, the greater the opportunity becomes clear to me. And then the conversation turned from just being a board member to actually running the company and Chris was a part of that with the board. And so the conversation took a kind of opportunist turn from my standpoint, and I'm thrilled to be here. So I would just say at high level, the more I begin, the more excited I get about the opportunity to better treat cancer patients and thrilled to be here.

[Andrew D'Silva:]

Great, great. So it's fair to assume that Chris and you were on the same page throughout that whole process?

[Scott Drake:]

Yes, he was here yesterday. We did a little toast to him and the incredible work that he's done over the last 5.5 years getting the company to the point where it is today, and very graciously he thought that maybe I was the right person to take us through this next phase of the company, and I'm thrilled and honored to be able to do that.

[Andrew D'Silva:]

That's a good color and great to hear that was the process. And the last question, moving back over to Ajay, cash burn. I think last quarter you mentioned $80 million to $90 million burn for the year. Any revisions or thoughts on how it should shake out now that -- what did you do?

[Ajay Bansal:]

Yes, our current thinking is that our cash burn would be towards the higher end of that and perhaps, a little bit higher than -- that's why I would probably revise the range right now, to $90 million to $100 million for the year.

[Scott Drake:]

One quick question, Andrew, to follow up on that. Ajay, there's a bit of timing element associated with that, correcting in Q4 to Q1, any color you want to add on that piece?

[Ajay Bansal:]

Yes, so our cash burn, obviously, it depends on the installs we're going to do this year and next year, and it also depends on when you're going to collect from our customers, and so some of the cash burn usage that might increase, we are baking in some collections pushing out from Q4 to Q1.

[Operator:]

Our next question comes from the line of Suraj Kalia from Northland Securities.

[Suraj Kalia:]

Can you hear me okay?

[Scott Drake:]

Suraj, we can.

[Suraj Kalia:]

Scott, let me start off and say that it's a great pleasure to have you on board, having covered Spectranetics and sensing how you shepherded the story, at least personally, I have to say, it is a pleasure to have you at ViewRay.

[Scott Drake:]

You're so kind Suraj. I can't tell you how much I look forward to working with you again here and we're just excited for the opportunity that lies ahead.

[Suraj Kalia:]

Right now, Scott, I have a pretty decent idea on what -- how you went about with Spectranetics on the streamlining process excel, so I'll save those questions for later, fully empathize to the fact that it's very early in the process, so I would keep that. Let me start out, Ajay, just from a math perspective, and I know you guys have stopped giving numbers or units, per se, but when I look at the backlog, is it safe to say that there were some age outs or cancellations?

[Ajay Bansal:]

Yes, Suraj, you're absolutely right to observe that. If you do the math, you would see there is a gap of somewhere around $12 million or there about. So we didn't have any order cancellations during the quarter, but because of some of the aging and some of the nonprogress on a couple of accounts, we took them out of our backlog.

[Suraj Kalia:]

And were there any upgrades to Cobalt in this quarter?

[Ajay Bansal:]

No, we did not recognize any revenue from any upgrades from Cobalts to the linac this quarter.

[Suraj Kalia:]

Fair enough. And Scott, one of the things that Chris, Chris Raanes was -- he had articulated to The Street and to us also that his point was, hey, keep an eye on community hospital adoption, that is going to be a key indicator, I'm just paraphrasing it, in terms of MRIdian linac's traction in the bread and butter of hospitals and by extrapolation, breast prosthesis, pancreatic would be -- that's why that's the target segment. Just based on what you've seen so far, can you give us some color on how should we feel over the next 4 to 6 quarters, ViewRay's push into the community hospital? Is it just that we have to wait for press releases? Or is there something different that you believe can be done to increase the traction in community hospitals?

[Scott Drake:]

Yes, Suraj, I would say we're very pleased to see the first install in a community hospital here very recently. I do believe that's a positive sign for us. I'd like to take the conversation may be upper-level regarding our pipeline and say that there is work being done there to expand the top of the funnel, primarily within the academic centers, but also in community hospitals. We want to be very thoughtful about what's coming in through the funnel. We want to improve our batting average in terms of target to purchase order, and then we want to shorten the time frame from purchase order to revenue recognition, so that's our macro goal and we'll continue to keep you updated on that front. But I agree that penetration in the community hospitals is important for the company over time and I'd like to see what we're in the midst of here with some success on that front.

[Suraj Kalia:]

Fair enough. And finally, Ajay, just a housekeeping question. Can you give us the U.S-o-U.S split things you have an idea but I just want to make sure my math isn't wrong, and also the days for installation exiting Q2 where that stood?

[Ajay Bansal:]

Yes, so our backlog, as we have said previously, mirrors the roughly 35% U.S. and 2/3 ex U.S, our backlog roughly mirrors that. And with respect to days of installation as we noted in our prepared remarks, the last installation we did in Q2 was significantly less than 60 days.

[Operator:]

[Operator Instructions]. And our next question comes from the line of Anthony Petrone from Jefferies.

[Anthony Petrone:]

I believe I was on mute, can you hear me now?

[Scott Drake:]

We can.

[Anthony Petrone:]

Okay, great. Scott congratulations on your new appointment and welcome. Couple of questions -- absolutely -- maybe just to start a bit on the pancreatic cancer enrollment, just may be an update there, and also as it relates to other studies, in particular breast or perhaps lung and maybe just an update on the clinical front and then I'll have a few follow-ups.

[Scott Drake:]

Yes. In terms of the pancreatic study, we anticipate first enrollment here in Q3, and I'd like to see what that cadence looks like before we guide to how rapidly we think we can enroll that study. But we're excited to get that underway and from a broader perspective, one of the work streams that we're going deep into now, I think I referred to this in my comments previously, is really getting to work on proving the value of our technology to various subsets of cancer patients. So not prepared quite yet to give you detail associated with that, but you'll see that we're going to focus on clinical data, the commercial work stream, operations as well, and innovation, all 4 of those areas are critically important to capitalizing on the opportunity and maximizing shareholder value and as I get deeper, I'll be sharing with you Anthony, some more details on each one of those fronts.

[Anthony Petrone:]

No, that's helpful. May be a follow-up would be on -- earlier this, couple of weeks ago, company announced unit cancer out of France, congratulations on the tender. Can you, may be, give us a sense this 19 centers that were called out as it relates to the French tender, potentially what does that look like in terms of order cadence? And then may be a little bit of detail on was that a competitive process, I would imagine that, unit cancer also looked at the competitive offering and as we can see from that release, ultimately, with MRIdian, so may be just a little bit on the competitive nature of that win?

[Ajay Bansal:]

Yes, so we do have the tender, Anthony, and you know we have 3 orders from that particular set of hospitals, and with respect to how many more orders will we get and how it transpires in the future, that's difficult to call out. Each hospital makes their own decision and down the road, could Elekta Unity possibly apply for getting on board as well, possibly. But we are very encouraged that we have the tender and we are very encouraged that 3 of them have already fallen our way.

[Anthony Petrone:]

Helpful. And then last on, for me, would just be sort of backlog cadence, in terms of looking at the stability of the backlog, I guess, is the real question. It strikes us that from time to time you're going to get orders that come in and go out of backlog, can you just give us an update as it relates to may be the age of the backlog as it sits today and the likelihood that perhaps that we have stickiness in the backlog?

[Ajay Bansal:]

Yes, so if you look at the orders we took in '16 and the orders we took in '17, we have announced we took 13 orders in '16 and we took 19 orders in '17. So that adds up to 32. So most of our backlog, a large portion of our backlog is fairly current. There are some units in the backlog which are older aged and that primarily has to do with some customers having ordered Cobalt systems earlier and now converting them to the linacs, and with respect to cancellation rate, as I mentioned, before, we took 2 units out of backlog in our cancellations, we have just taken them out of backlog because with a couple of distributors we did not see enough movement on those couple of projects. Overall, in the last year or 2, we've had, I believe, 2 cancellations or 3 cancellations in total. So it's a fairly sticky backlog, as we have shared with you these institutions have to make a very conscious decision to switch from something they've been doing for 30 years with the cone beam CT linac to go for an MRI linac and pay the kind of money that our product it would. So they make these decisions with a lot of thought, and that leads to the stickiness of the backlog.

[Operator:]

And I'm showing no further questions. I would now turn the call back to Scott Drake for closing remarks.

[Scott Drake:]

Thanks, Brian, and thank you, everyone for joining our call here this morning. Look forward to seeing you all in the not-too-distant future. Have a good Friday.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference call. This concludes today's program and you may all disconnect. Everyone, have a great day.