ViewRay Inc (VRAY) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2017 ViewRay Earnings Conference Call.

(Operator Instructions) And as a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to Lee Roth of The Ruth Group. Please go ahead.

Thanks, Candace. And good morning to everyone. Welcome to ViewRay's Fourth Quarter and Full Year 2017 Financial Results Conference Call.

Joining me from the company are Chris Raanes, President and CEO; and Ajay Bansal, Chief Financial Officer.

This morning, ViewRay issued a press release announcing its fourth quarter and full year 2017 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 viewray.com, and a replay of the call will be available on the company's website for 14 days.

Before we begin, I'd like to caution listeners that comments made by management during this 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 annual report on Form 10-K for the year ended December 31, 2017, 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, March 12, 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 ViewRay's President and CEO, Chris Raanes. Chris?

Thank you. And good morning, everyone. Welcome to ViewRay's Fourth Quarter and Full Year 2017 Financial Results Conference Call.

It is 2 years since we told you about a fundamental shift we were making in our business. In March of 2016, we announced that we planned to develop a linear accelerator or linac-powered version of the MRIdian system. We said that it would take about a year for us to develop the world's first commercial system to combine MRI for soft tissue visualization with a linear accelerator, paving the way for a new standard of care in radiation oncology. In 2017, we executed on that plan on schedule. In the first quarter of 2017, we received FDA clearance for the MRIdian Linac. In the second quarter of 2017, we received FDA clearance for our advanced multileaf collimator, which we believe creates the sharpest beam in the industry. In the third quarter, we announced that physicians at the Henry Ford Health System's had treated the world's first patients on a MRIdian Linac. And by the end of the fourth quarter, we'd recognized revenue on a total of 6 MRIdian Linac systems. In short, 2017 was an exciting year of transformation as we laid the groundwork for our future success.

We at ViewRay have seen great progress, but more importantly, our clinicians have seen what they were never able to clearly see before, amazing real-time images of cancerous tumors and surrounding tissue while treating with radiation therapy on a linac. As Dr. Benjamin Movsas, the Chair of Radiation Oncology at Henry Ford, put it, and I quote him, "This completely transforms what we do for patients. My colleagues' jaws dropped open. This is easily the most exciting thing of my entire career."

I would like to spend a few minutes reviewing clinical data, the #1 highlight of 2017. We had a strong presence at ASTRO in September with 12 presentations of outcome data from clinicians using the MRIdian system on a variety of cancers, including breast, prostate, liver and pancreas. The pancreatic data was clearly the highlight that we have featured due to the remarkable increase in overall median survival. However, it is not simply the pancreatic results themselves that are the story. It is the breakthrough clinical process behind them. In nearly doubling the dose to the target, our clinicians simultaneously saw a dramatic drop in toxicity from 16% grade 3 toxicities to 0% when using MRIdian's on-table adaptive and fast soft tissue tracking capabilities. It is these capabilities uniquely enabled by the MRI guidance and integrated software of the MRIdian system that we believe will play out again and again, bringing the advantages that we saw in pancreas to many other disease sites in the body. We're excited to be hosting a symposium at the VUmc in Amsterdam on Friday of this week, to which about 34 existing and more than 150 prospective customers will come and hear from clinicians from Henry Ford, from the University of Wisconsin, from Heidelberg university and from Washington University in St. Louis as well as the VUmc. These presentations will range from their experiences with installations to clinical experience treating with on-table adaptive therapy and MRI tracking.

Turning now to our financial results.

We received new orders for MRIdian systems totaling $34.1 million in Q4, making it a total of $113.6 million for the full year 2017 and bringing our backlog at December 31 to over $200 million for the first time. We saw our sales in EMEA take off in 2017 following the receipt of our CE mark in September of 2016. This included competitive tender wins against Elekta in both Denmark and in Switzerland, demonstrating our ability to compete and win in their backyard. With FDA clearance for MRIdian Linac now one year behind us, we are seeing growing interest in the United States market. To capitalize on this interest and to accelerate our U.S. sales, we have doubled the size of our U.S. field force.

Moving to Asia, starting with Japan. We've made good progress in discussions with the Ministry of Health, Labour and Welfare on the MRIdian Linac. And we hope to receive a decision on our shonin application around the middle of this year. We're also very pleased that the National Cancer Center of Japan, a founding member of our global Clinical Cooperative Think Tank, is now treating patients with adaptive therapy.

Moving on to China. While we're not yet in a position to forecast timing of a Chinese FDA decision, together with our distributor, we have formulated a clinical validation strategy. And in fact, we shipped the first of our clinical validation systems to China in the fourth quarter of last year.

Looking ahead, we see 2018 as a year of execution as we continue to build on our achievements in 2017. For the full year 2018, we expect revenue in the range of $80 million to $90 million, primarily from 13 to 15 MRIdian Linac systems. Overall, you will continue to see prestigious academic center names and the sites receiving the MRIdian Linac this year. This will help us build on the 4 years of clinical data that the MRIdian system has already generated. We also expect more traction in the community hospital segment. As you know, we don't give guidance on new orders that we expect to achieve, but I am proud to tell you that, in the first quarter of 2018, we passed a landmark taking the 50th order for a MRIdian system.

Our aim is to enable a new standard of care in helping clinicians and patients to fight cancer. Those of you in the St. Louis area will have seen ads run during the Olympics from Washington University showcasing a list of their top 4 cancer therapy achievements of all time, starting with the first to link cancer to smoking; more recently, the first to decode the genome in a cancer patient; and most recently, the first to treat cancer using MRI-guided radiation. The Paralympics followed the Olympics in South Korea. And today, I'd like to just spend a moment to congratulate Bibian Mentel, a cancer patient I've discussed with you previously, previously treated on a MRIdian system, who won another gold medal.

Innovation is our lifeblood. And you can expect us to continue to expand our innovation lead, especially in imaging technology.

Before turning the call over to Ajay, I'd like to note that we recently announced the appointment of 2 experienced leaders of life sciences companies, Scott Huennekens and Daniel Moore, to our Board of Directors. I'm confident that both Dan and Scott's deep operational experience with fast-growing medical device companies will be invaluable as we seek to bring the benefits of the MRIdian Linac system to patients around the world. And I look forward to working with them to advance our near- and longer-term strategic initiatives.

And with that, I'd like to turn the call over to Ajay for some comments on the financials.

Thank you, Chris. And good morning, everyone.

Total revenue for the fourth quarter ended December 31, 2017, was $19.9 million compared to $16.1 million for the same period last year. Total revenue for full year 2017 was $34 million compared to $22.2 million for 2016.

Our backlog at December 31, 2017, was $203.6 million. This compares to $133.2 million as of December 31, 2016.

In terms of our cash position, we ended 2017 with total cash and cash equivalents of $57.4 million. Earlier this month, we supplemented our cash position through a $59 million equity financing with Fosun.

With that, let me turn the call back to Chris for closing remarks.

Thank you, Ajay.

In summary, 2017 was a year of transformation, in which we've built the springboard for faster growth. With the orders that we have in backlog and the capital that we've raised, we believe that we are well placed to drive continued growth in new orders and shipments of our MRIdian Linac system. We look forward to bringing the benefits of our revolutionary MRI-guided technology to more clinicians and patients around the world.

And with that, I'd like to open up the call for Q&A. Operator?

(Operator Instructions) And our first question comes from Difei Yang of Mizuho.

So very quickly, on installation capacities. Chris, can you talk about how many teams you have for '18 and if you plan to grow that capacity? And along with installation, and what are the gating factors in ramping up installation? Is there key parts that you are waiting for, et cetera?

Thanks, Difei. Yes, that -- great questions. Installation capacity remains as I've discussed before, where we have 3 internal teams and 2 external teams that are qualified, the external teams coming from our distributors. And yes, that will grow through the year as we bring other distributors online. And I think -- look, I think the way to think about how this works is, as the supply chain matures and as we drive down installation times through the year, that will drive our ability to install more and more. That's how I'd model it.

Okay. Also Chris, could you comment on what's the current installation time, how many days per machine now?

Sure. We -- let me talk about ones that we're doing right now, which look like they're going to be in the 60- to 75-day range. And we expect to drive that down continuously through the year.

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

Chris, maybe -- I guess, I wanted to start. Maybe you can expand on your comments about what you're seeing in the market and the interest in MRI linacs. And I guess where I -- maybe more specifically, are you seeing more serious interest with prospective customers? Are there more hospitals that are reaching out to you? Just any color about some of the interest that you are seeing.

Sure, sure. Look, I think, the #1 thing that's really been a boon to selling the MRIdian system was the introduction of linac. People really like the linear accelerator. Maybe tied with that, and I highlighted as the highlight of 2017, is the clinical data, right? People are seeing that the soft tissue tracking and the adaptive therapy are making a difference. So those are big deals, and those are what's generating the interest. And let me give you maybe some color. You were asking sort of have -- can I give you some ideas on what is it like. We hold these sort of symposiums on a regular basis. And I would say, if you hold one of these symposiums at a site and you end up with sort of 50 people coming, it's a big success. You've really leveraged your resources, and it's worth all the organization and such. We're at over 200 people registered for the symposium we're hosting this Friday at the VUmc. We had to get a larger room. We had to rearrange the room. And a large majority, over 150, of the attendees are prospective customers. That's the kind of interest. And these aren't primarily European given the location in Amsterdam. But they're not just European. We've got people flying in from around the world to go to that. So I think that ought to give you a feel for the kind of energy that we're seeing out there.

Great. That's very helpful. If I could follow up, Chris. You obviously talked about the clinical data. You've mentioned it a couple different times, so just wanted to see what clinical data or presentations we can expect, maybe at ASTRO or anything else throughout the year; and then maybe when we can expect to see some clinical data that was generated by the MRI linac.

Yes, good point. Look, I think, throughout the year, we'll continue to see updates on all the ongoing studies. Like I mentioned, there were 12 with outcomes data presented at ASTRO. And I would expect we'll see further follow-on on all of those. And of course, more and more of them will be from linac centers as they go live. I think, from what areas people will be looking at, obviously we've got the ongoing interest in pancreas, but I think you'll also start to see some studies more in tune with the broad market or I'll call the mainstream. If you look at what volumes drive patients through the mainstream hospital and a community hospital, something like 30% of the radiation patients are breast patients. And as you know, we already have some single institution data that shows there are some great advantages in reducing treatment time from 6 weeks down to 1 week and reducing total amount of radiation to the body by 50%. I think, you'll see some of those studies mature. The second most popular or most utilized treatment in a community hospital is for the prostate; it's just behind breast. And again there have been some good data so far, single institution. And I think you'll continue to see that in the coming year.

(Operator Instructions) And our next question comes from Andrew D'Silva, B. Riley.

Sorry if I break up a little bit. I'm calling from Mainland China right now. So just a couple quick follow-ups...

Thanks for calling.

Just a couple quick follow-ups. As far as just gross margin dynamics, could you help me understand what factors you are going to move that from the current range, which showed good sequential growth, but from the current range up to the 40% gross margins that had been talked about in the past? Is it going to be ASP increases or just economies of scale? Any color there would be very useful.

Andy, this is Ajay here. And you're right. We are targeting industry-standard goal -- gross margins in the low 40s. We think we'll get there in 2019. As you noted, last year, our gross margin was around 19% or so. And this was driven by some first-in-market pricing, which tend to be a little bit lower than the standard, $6 million to $6.5 million that we normally charge; and just initial installations. Some initial installations are typically longer and more expensive; as well as small components, small units being installed. Over time, as we scale up and drive down costs, we expect margins to get to the low 40%, the industry gross margins, in 2019. For 2018, we would expect significantly better gross margins than 2017, reaching about 30%.

Okay, great. That's actually ahead of what I was looking for, so that's positive here. Are you seeing any ability to move prices upward? Obviously the only competitor that you would expect to have in the market this year is talking about prices between $8 million to $10 million. And they [wouldn't] likely have much higher construction costs due to their -- the size of their equipment. Is there any sense of where prices could go in the next year or so? Are you pretty satisfied right now at the $6 million, $6.5 million mark?

Yes, right now, Andy, we don't view Elekta primarily as a competition. Our competition is much small, with taking the standard [the next house], which are priced as you know anywhere from $3 million to $4.5 million or so. So while we believe long term we will have more price flexibility on the upper end, right now we're not trying to "test the limits of that flexibility." It's all about market penetration right now, getting more units out there. And we believe that our current pricing of $6 million to $6.5 million is right on spot.

Okay, great. And just my last question. Can you give me a sense as far what the average treatment time is right now for a patient on one of your MRI-guided linacs and if there's any color that you can provide on how that compares to standard linacs and feedback you're hearing from the marketplace right now on the timing differences?

Yes. So I don't have a great deal of data that I can share with you. It's one of the early studies we're doing with some of the sites as they go live, right? We want to both make sure that we've got this thing oiled up to work exactly like it should. We gave some indicative kinds of times early on, and they're holding up. The overall beam-on times are in the order of 5 to 6 minutes or something like that. That's from when you push the button to when you get people off the couch, so you add a little setup time to that, but we're right where we want to be in terms of being in the standard linac slot. We think that will just get better over time. And I know you guys don't want to hear that, so as soon as we get the data from some of those early studies that we're working on, I'll make sure it comes out there.

And our next question comes from Suraj Kalia of Northland Securities.

So Chris, 4 questions. First, let me piggyback on one of the questions that someone asked earlier, and I'll ask it a little differently. From anecdotal evidence, do you all have an idea about what kind of on-table adaptation or reconfig of the beams is MRIdian Linac fostering? I guess, what I'm trying to say is, whether it's in prostate, breast, pancreatic, whatever, 5%, 10% required [or] reconfig and -- to improve outcomes. Do -- are we there yet? Or it's too early in the game.

Interesting. Well, it does -- first of all, it really does depend on the disease site, all right? Not every disease site requires adaptives. Not every disease site requires a tracking. And it varies from one to the next, all right? In fact, some of the most exciting breast work that we've seen so far is almost entirely based on the soft tissue tracking ability, not a lot of adaptive there. The pancreas requires both. So it really depends where in the body it's going to be. The folks at the VUmc in Amsterdam have probably done adaptive on more different kinds of cancers than anyone else. And we expect that data to sort of flow out and tell us where is it making a difference. And I think, to use the summary you had, it might be just a little too early to say where it matters, but clearly, and I'm kind of holding my gut right now, the soft, squishy parts here in the middle, the adaptive is making a difference. And we see that both in the outcomes and in the toxicity, but data will have to flow over time.

Got it. In terms of the pancreatic cancer study follow-up, Chris, what I heard was you guys are going to give an update sometime this year. And I presume the updated median survival numbers will also be given out. Am I fair in assuming that?

Yes, I think that's right, all right? So we'll continue to hear from the institutions that we've already published. And we'll continue to follow those patients, so you'll get an update on that. And then you'll hear throughout the year how the other one's doing in enrollment and where they are, but I would set my expectations to not anticipate a lot of news about the new study this year, all right? We need some time for that data to mature. That's probably going to happen this year, and you'll hear about it next year, but you'll hear follow-up on the other ones throughout the year.

Got it. Chris, FY '18 guidance, what is the split between MRIdian Linac U.S. versus distributors? I guess, what I'm trying to get a sense of is X percent out of the 13 to 15 are distributors, so you guys will recognize revenues immediately, versus -- yes, but there's a 60-, 75-day installation times (inaudible) in the U.S. Any color you could provide there?

I would say a large majority of them will actually be installed by us. Even some of the international ones on here will be first in the region, where we'll be helping them.

Got it. And Chris, final question and I'll hop back in queue. Just trying to triangulate, obviously, Elekta Unity. They are talking about component testing now and then CE mark by end of June. And I know it's not fair to ask you about the Unity, but Chris, how -- when you guys were looking at approval, how -- let's say approval is, I don't know, May 15, right? By when do you all, roughly, component testing has to be finished and the systemwide testing has to go into effect? I guess, what I'm trying to understand is at least from a -- maybe you can give us some color, "Look, this is what we did on the linac. We have finished component testing 6 months in advance." And then we were -- any color there will be great.

Sure, sure. Look, Elekta just had a call. They gave out a number of dates, and we'll just follow. We'll follow their progress. They're more qualified than we are to talk about how they're doing. You're absolutely right, right? To get clearances requires data and a lot of testing. And just the general rule of thumb is we've got to have all your data because you've got to put it in packages. It's got to be audited by third-party companies. And then you submit it, whether it's for CE mark or for FDA. There are different standards, but you need to have your data first. And how long before or after, I can't say. And I'm sure different people do it different ways.

And our next question comes from Andrew D'Silva of B. Riley.

Just cash flow items, if you could, cash flow from operating activities, depreciation and amortization, CapEx and stock-based compensation. If you could give me that for either the full year or the fourth quarter, that would be very helpful.

Yes. So Andy, you will, of course, see the cash flow table in our 10-K as well. So for the year-end, operating activities, we used about $70 million of cash. Note that about $26 million of that was for building inventory. So as we are growing, as we are ramping up, we are spending quite a bit of money in building inventory; of course, alongside with hiring people and all the other projects that we're carrying on. So for the full year, our stock-based comp was $5.3 million. Depreciation was about $2 million. And as I said, you will find the details of that in our 10-K as well...

And then, last one was CapEx.

Yes. CapEx was a modest $2 million.

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to management for any closing remarks.

All right, well, thank you, everyone.

Again, the summary for 2017 was that it was a year of transformation. We're looking forward here to a year of execution in 2018, and I look forward to keeping you all up to date as we move on within that journey.

Thanks all very much. Take care.

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.