ViewRay Inc. (NASDAQ:VRAY)
Q4 2015 Earnings Conference Call
March 28, 2016 17:00 ET
Zack Cubo - IR
Chris Raanes - President & CEO
David Chandler - CFO
Good day ladies and gentlemen, and welcome to the ViewRay Fourth Quarter and Full Year 2015 Financial Results Conference Call. At this time all participants are on 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 would now like to turn the conference over to Zack Cubo from the ROTH [ph] Group, please go ahead.
Thanks operator, and good afternoon to everyone. Welcome to the ViewRay fourth quarter and full year 2015 financial results conference call. Joining me from the company are Chris Raanes, President and Chief Executive Officer; and David Chandler, Chief Financial Officer. This afternoon ViewRay issued a press release announcing its fourth quarter and full year 2015 financial results. A copy of this press release and the company's Form 10-K are available on the Investor Relation 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 one year.
Before we begin I would like to caution listeners that comments made my management during this conference call will include forward-looking statements within the within the meeting of Federal Securities Laws. These forward-looking statements involve material risks and uncertainties. For discussion of risk factors, we encourage you to review ViewRay Annual Report on Form 10-K and subsequent reports filed for 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 March 28, 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 Chris Raanes.
Thanks, Zack. I would like to welcome everyone to our first quarterly earnings conference call since we became a public company. To start I would like to thank our investors and our customers and employees and business partners for recognizing how much innovative technology can help Cancer patients and for supporting us as we continue to develop momentum on three continents.
Next I would like to announce some late breaking news. In our 10-K filed today we announced that we have been approved for listing on the NASDAQ with trading expected to begin there within the next week or so.
For those of you that may be new to the ViewRay story, I want to start with a quick review of our unique MRI guided Radiation Therapy System, our ongoing commercialization efforts and the clinical benefits that our users are already seeing. I will also tell you why we are so excited about our recently announced on our MRI linear accelerator or LINAC technology and finally I will summarize our financial results for 2015 and review our progress more generally before handing over to David Chandler our CFO for a more detailed financial review. At the end I will come back briefly to take questions.
Let me begin with the review of ViewRay's significant opportunity in the radiation therapy market. Our MRIdian system is the first and only MRI guided radiation therapy system treating cancer patients today, why is MRI guidance for cancer treatment so important? As you know MRI scans are used today all over the world to diagnose cancer because MRI provides clear, soft tissue contracted used to pinpoint tumors. Prior to MRIdian radiation treatment of cancer took place largely in the dark. Because X-Ray upon being treating images cannot define soft tissue tumors nor can they image soft tissues continuously during treatment. That is to say clinicians were essentially blind while treating before ViewRay.
It seems obvious that everyone would want to use MRI to see clearly during treatment. The progress was limited but the fact that MRI interferes with the delivery radiation and the delivery radiation interferes with MRI imaging. ViewRay has solved that problem with our patented MRIdian system introducing full and continuous MRI visibility for radiation therapy. What does this mean from the patient's perspective? Expert estimates between one and two and one and three people will develop cancer during their lifetime. It is estimated that nearly two-thirds of all treated cancer patients in the United States will receive some form of radiation therapy during the course of their treatments.
On non-MRIdian technologies, the patient will initially be given some sort of a diagnostic scan on a machine that simulates radiation therapy machine to map the tumor and internal organs radiation delivery. When the patient reports for treatment a week or more later technicians try to align the patient to the exact same position they were in when they were scanned the previous week. The problem is that if the technician aligns the patient up to an external marker he or she can miss the anatomy changes inside the body where internal organs are constantly shifting or moving. If the system uses X-Ray scans clinicians appearing through the fog inside the patient and X-Ray's cannot define soft tissue cancer tumors. Because they cannot define the tumor and their priority is to kill the cancer they typically allow a greater margin around their target to ensure the tumor receives sufficient dose therefore running the risk of radiation damage to healthy tissues and serious side effects that require additional treatment.
Treatment plans are rarely if ever changed during the course of treatment on non-MRIdian systems. On our MRIdian system by contrast and I use that word deliberately, given the exclusive soft tissue contrast visible with MRI, when the patient comes in for treatment, he or she is automatically given a full MRI scan everyday so that the clinicians can align the tumor and the internal organs precisely for the treatment plan and because the clinicians can see clearly inside the patient, they are able to change the treatment plan right then and there to account for changes in tumor size and shape and for how vital organs are moved within the body.
This can be done with a toolkit that we provide and is called Adaptive Radiation Therapy. While other systems are blind once the treatment begins MRIdian never stops watching. In effect it supplies a real time movie of the tumor and the surrounding organs turning the beam on and off automatically when there is movement within the patient's body ensuring that the treatment is delivered exactly as planned. We are pleased with the clinical results of more than two years of real world experience with the MRIdian system. Clinicians have treated more than 25 different cancer sites with MRIdian and are using adaptive therapy on a regular basis.
Two clinical studies were reported in Q4 at Astro, the annual meeting of the American Society for Radiation Oncology. An initial abdomen study using higher dose adaptive treatment has resulted in zero serious that is grade 3 or higher toxicities. And in a breast study also using higher dose short course treatment, the outcomes show 100% of good or excellent Cosmesis likely due to MRIdian's ability to track the Lumpectomy Cavity and resulting in the reduction of total treatment time from six weeks to one week. As for reimbursements, in the U.S. hospitals and physicians are being reimbursed using existing codes. They tell us they are receiving additional reimbursement for on-table adaptive treatments.
The complete visualization of the anatomy provided by MRIdian is enabling our users to perform shorter higher intensity treatments for more of their patients. This trend is good for patients, good for hospitals and physicians and good for pairs. The MRIdian market opportunity is very large with 11,000 radiation therapy machines around the world. Roughly 10% of user replaced each year and others are installed at new sites to more than a thousand machines are sold in annual market worth $3.7 billion. Several hundreds of these machines are in the high end segment where we currently play.
We are in the early stages of commercialization and are building a pipeline of highly influential centers including some of the world's top academic sites which will help us to validate in clinical outcomes with conditions already known intuitively about MRI guided radiation therapy. In addition to having a unique technology and a large market opportunity we are continuing to bring new innovation to our MRIdian system. We are very excited about the recent announcement about our new MRIdian linac technology. Our scientists have solved the fundamental problem of combining a linear accelerator and an MRI while maintaining the same compact footprint as the current MRIdian system.
This technology is important to the market one, because it is more familiar. At least 80% of existing systems used linac based technology and two, it is important to our business model because we expect it will greatly accelerate our ability to achieve industry standard gross margins. We also expect the linac technology will accelerate our sales cycle and our backlog conversion process since there are few regulatory steps involved. We expect to apply for FDA clearance in European CE marking in the second half of 2016. We have designed linear accelerator technology so they will be simple for existing MRIdian users to upgrade.
With this introduction, let me now give you fourth quarter and full year 2015 financial highlights. Q4 revenue was $4.6 million and full year revenue was $10.4 million, an increase of more than 60% from the prior year. Full year 2015 new product orders totaled $40.1 million representing 7 systems increasing backlog to $84.4 million or 15 systems. We are generating good momentum in converting backlog to revenue. Our first international installation occurred in Asia in Q3 at Seoul National University Hospital followed in Q4 by the Sylvester Cancer Center at the University of Miami and in Q1 as you may have seen from our announcement last Thursday our first installation in Europe occurred in VUmc in the Netherlands.
So in summary, we have made good progress against our 2015 goals. With growing momentum in new orders, revenues from new installations and clinical results and we are very pleased with the progress we have made on our next generation technology.
I am now turning the call over to David Chandler for his financial review.
Thank you, Chris. In the fourth quarter, we closed two orders for a total of $11.3 million and for the year 2015 we closed 7 orders for $40.1 million. Our average selling price in 2015 increased approximately 7% over the prior year. We ended 2015 with $84.4 million in system order backlogs representing 15 systems. That is an increase in backlog from $77.9 million and 14 systems at the end of September and an increase of $54.7 million and 10 systems at the end of 2014. Hospitals typically order a year or more in advance resulting in order backlog.
Backlog is an important metric in the industry because it provides directional indication of anticipated future revenue. We are currently seeing backlog convert to revenue over four to eight quarters and we expect that to shorten to the industry -- industry average of about four quarters overtime as we gain installation experience and our international partners become proficient at installing systems. Backlog includes only the system, no service contracts or upgrades. Our backlog includes only binding contracts with deposits. In addition, we only include orders from customers whom we judge have the ability and the intent to install a system.
Total revenue for 2015 was $10.4 million up over 60% over last year. The revenue blend for the year consisted of $9.6 million for MRIdian products, $530,000 for service and $240,000 of other revenue. Significantly over 90% of our revenue for the year was earned in the second half of the year as we completed a system installation in each of the third and the fourth quarters. As with most radiation oncology systems, ours comes with a first year of service included in some cases that can be longer. For accounting purposes the value of that service is deferred at the time of installation and recognized over the service period.
On the cost of good side as most of you know we own the system designed and outsource the manufacturing. This avoids the high fixed costs of manufacturing. However, one of the impacts of this approach is the cost of the sales of these early units are higher because they include the initial design build cost. Cost of product reflects these costs at $12.7 million for the year and $6.3 million for the fourth quarter. We anticipate product cost to come down significantly later this year as the results of our cost reduction programs work their way into inventory and cost of sales. One example is our proprietary magnet.
We moved it to a higher volume manufacturer in Japan and in so doing, we have reduced the $1.2 million cost by roughly half this year. We are implementing cost reduction programs for other subsystems and expect to reach positive product to gross margin by later this year. We further anticipate that our recently announced linac technology will provide a significant improvement to the cost of the product because its single high powered radiation source takes the place of three radiation sources in the current architecture of the cobalt system. We anticipate the linac technology will enable us to reach industry standard margins sooner.
Cost of service was $1.9 million for the year and $480,000 for the fourth quarter reflecting the investments we have made in the service teams to ensure our customers are well supported. We are in the process of training our overseas distributors who are responsible for first line support in their markets. As the volume of installations increase we anticipate service margins will improve. Operating expense were $10.8 million for the quarter and $37.3 million for the year which includes $10.4 million research and development for the year including investment in our linac technology.
Interest expense was $3.5 million for the year. As many of you may have recalled we have a $50 million debt facility from CRG formerly known as Capital wealthy group. We borrowed $30 million at closing last summer and with that paid off $13 million of venture debt with less favorable terms. We have another $20 million available to us to draw during this year. $15 million of that is immediately available until August at our election and the remainder through the end of this year upon meeting our revenue milestones.
Cash was $20.7 million at December 31, 2015 and we anticipate that our cash and cash receipts from MRIdian sales and the additional borrowing capacity will provide adequate capital for at least the next 12 months. In summary, we are well under the process of converting backlog to revenue although keep in mind that any given quarter can be variable as installations could move from one quarter to the next as most of you know. As Chris has mentioned we anticipate applying for regulatory clearance this year on our MRI linac technology which we believe will broaden our market and accelerate sales and backlog conversion and improved margins.
However, in the short term we believe may cause greater quarter to quarter fluctuations as some customers may want to wait for the linac rather than install cobalt and others may install cobalt and subsequently upgrade to the linac. Given the short term choppy impact of introducing the MRI linac technology we are not providing guidance for 2016 at this time.
And with that, I will hand it back to Chris.
Thank you, David. In summary, 2015 was the year in which ViewRay grew as a company with customers on three continents and we are delighted to be informed that we have qualified for listing on the NASDAQ. We are encouraged by early clinical results that we reported in 2015 and we look forward more exciting results as MRIdian technology has dropped a bear on cancer treatments in more centers in 2016. For 2016, we will continue to focus on generating new orders, converting backlog to revenue and achieving positive product gross margins and of course we look forward to filing for regulatory approvals on our new linear accelerator technology.
So thank you very much and with that we will take any questions.
Thank you. [Operator Instructions] I am now showing no questions from the phone line at this time. I would now like to turn the conference back to Chris Raanes, the CEO.
All right, well thank you everybody for joining the Q4 and 2015 conference call and we look forward to talking to you after Q1 of this year.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, you may all disconnect. Everyone have a great day.
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