ViewRay (NASDAQ:VRAY) Q1 2016 Earnings Conference Call May 13, 2016 8:30 AM ET
Zack Cubo - Investor Relations
Chris A. Raanes - President and Chief Executive Officer
David Chandler - Chief Financial Officer
Suraj Kalia - Northland Securities, Inc.
Raymond Myers - The Benchmark Company, LLC
Sebastian Walker - UBS
Good day ladies and gentlemen, and welcome to the First Quarter 2016 ViewRay Earnings 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 follow at that time [Operator Instructions]
As a reminder, this call is being recorded. I would now like to turn the conference over to the ROTH (Ph) Group, please go ahead.
Thanks operator, and good afternoon to everyone. Welcome to the ViewRay first quarter 2016 financial results conference call. Joining me from the company are Chris Raanes, President and Chief Executive Officer; and David Chandler, Chief Financial Officer. This morning, ViewRay issued a press release announcing its first quarter 2016 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 meaning of Federal Securities Laws. These forward-looking statements involve material risks and uncertainties. For discussion of risk factors, I encourage you to review ViewRay Annual Report on Form 10-K and subsequent reports as filed under Securities and Exchange Commission.
Furthermore, the content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast May 13, 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.
Chris A. Raanes
Thank you and welcome to the ViewRay’s first quarter 2016 conference call. I’ll begin with a quick review of our first quarter financial results followed by a broader update before turning the call over to our CFO David Chandler for a detailed review of our financial results. I will then comeback and offer closing statements and then we will open up the call for Q&A.
Turning to our first quarter 2016 performance, revenues were $5.5 million reflecting an installation at VUmc in Amsterdam. Over the last three quarters ending March 31, we have doubled the MRIdian installed base to six systems. We secured new product orders in the first quarter with $11.2 million representing two systems. As a result, our total backlog increased $89.6 million representing 16 sales contracts as of March 31. On the last day, we began trading on the NASDAQ for the market and on the next day we ran the opening [indiscernible].
We’ve had tremendous momentum on the clinical front in the last several weeks. First treatments began a month ago April 7 at the Sylvester Cancer Centre at the University of Miami where they are now starting to ramp up their clinical program and lastly treatments began in VUmc, a free university medical centre at Amsterdam. VUmc has started treating patients with their SMART program, which stands for the Stereotactic MR guided Adaptive Radiation Therapy. Their stated goal of SMART is to improve tumor control while reducing complication through the advantage at MRI Guided Radiotherapy.
During the first quarter, we announced a development of an MRI guided linear accelerator, a linac based technology. We are planning to file a regulatory submission in the second half of the year for FDA clearance in GE marking. Our scientists has solved the problems in patented distributions of combining a linear accelerator and an MRI while keeping the same compact footprint as the current moving system.
We’ve designed the linac to be available either as an upgrade for Cobalt system or as a standalone system. This exciting development is important to our business for two fundamentally reasons. First, radiation therapy clinician are accustomed to using linear accelerator powered systems. More than four out of five out of systems in use to today are linear accelerator. Second, we expect our MRIdian linac technology to have positive product gross margins from the start with further margin improvement expected to scale up. We have already taken an international order of MRIdian linac technology.
Our linac technology attracted a great deal of interest at the annual meeting of ASTRO. The largest European trade show for radiation oncology. As Washington University presented on the first measured technical result of the fully functioning ingredient linac technology under development, including Genedata and [indiscernible].
We doubled the previous year’s number of hospital sales leads from ASTRO measure and hosted expanding [indiscernible] in adaptive therapy with MRIdian system. Highlighting case studies from three MRIdian sites UCLA, Washington University and the University of Wisconsin showing the effectiveness of the MRIdian system as well as a presentations from VUmc on their preparations for the SMART program.
MRIdian was also the subject of five presentation with at ASTRO, covering clinical experience with lung, liver and rectal cancers, specifically on MRIdian’s ability align, adapt and track in real time during treatment to benefit patient. At our [indiscernible] we hosted daily presentation from MRIdian centers covering SBRT a Stereotactic Body Radiation Therapy, a short duration, intensive treatment.
Because of the visibility provided by the MRIdian system, our centers are [indiscernible] they can see more types of patients with SBRT in the traditional radiation therapy systems. SBRT is typically performed within a week, whereas traditional forms radiations therapy takes several weeks. Video of these presentations and the symposium can be found on our website under events/astro. The body of clinical experience using MRI guided radiation therapy is building and much of this experience is summarized in a recent publication offered by UCLA, covering a review of dozens of paper highlighting the multi center clinical experience of the MRIdian over the past few years.
Let me take some movement to translate what this means in human terms. I would like to share with you one patient story that touched me this quarter. Dr. Percy Lee of UCLA treated a single mother with a stage four metastatic breast cancer region was dangerously close to her pancreas stomach bile duct.
Neither surgery nor traditional radiation therapy was option [indiscernible] structures very sensitive to radiation if the dose was by even a few millimeter could cause her damage. Dr. Lee chose to treat the patient with MRIdian, [indiscernible] ability to overcome new challenge. Six months later, the patient went for a follow-up testing of breast cancer showed complete biologic response to the MRIdian treatment. As you can imagine, both Dr. Lee and the patient are delighted.
Preliminary reports from our site indicate that approximately 10% to 20% of the patients treated on MRIdian could not have been treated on other machines. This is a kind that illustrates what I and my colleagues ViewRay do what we do, and I would like to thank them for their passion, their dedication, and their creativity.
Finally this morning, I would like to acknowledge two prestigious addition to our Board of Directors in the last few months, Brian Roberts and Henk McKinnell has joined with ViewRay Board. Brian’s background and his expertise in medical technology and extensive experience as a CFO in both public and private companies. Henk is the former Chairman and CEO Pfizer and his vast experience in medical innovation and other businesses. Their guidance and counsel would be invaluable as we seek to grow ViewRay to the next level.
So to summarize, as I turn the call over to David Chandler for the financial review. We are pleased with our key orders and [indiscernible] for the quarter. our clinical results providing dramatic evidence of our MRI guided radiation treatment helps cancer patients and we are moving fast with our next generation linac technology. David.
Thank you Chris, and good morning everyone. I will begin with a review of our new orders and backlog in the first quarter of 2016. In the first quarter, we closed two orders for a total of $11.2 million. Total backlog was $98.6 million at the end of the quarter, representing 16 singed sales contracts. This compared to 15 signed sales contract representing $84.4 million in backlog as of December 31.
Turning now to revenue, total revenue in the first quarter was $5.5 million compared to $280,000 in the same period last year. The revenue mix for the quarter consisted of $5.2 million from MRIdian products and $216,000 of service revenue. Cost of product sales was $5.9 million for the first quarter of 2016 compared to $154,000 in the same period last year. We anticipate product cost to come down significantly when our linac technology becomes available. Primarily because a single high powered linac take the place of three Cobalt sources in the current architecture of the system.
Cost of service revenue was $601,000 in the first quarter of 2016 compared to $623,000 in the same period last year. As the volume of installations increases, we anticipate service margin will improve. Operating expenses were $11 million in the first quarter 2016 compared to $7.5 million in the same period last year. This reflects our investments in research and development of our product, sales and marketing and higher general and administrative expenses associate with being as public Company.
Interest expense was $1.1 million in the first quarter of 2016, compared to $484,000 in the same period last year. Our cash balance at the end of March was $5.7 million, in March amended CRG debt facility, allowing us to draw $15 million now and a further $5 million upon meeting certain revenue milestone. In April, we notified CRG of our intent to draw down $50 million in fund of which $5 million was received on May 9, and an additional $10 million is expected on or about May 20.
As Chris mentioned, we plan to apply for regulatory clinic this year on our MRI linac technology. Which we believe will broaden our market, salary scale and backlog conversion and improve margins. As we continue to advance our linac technology, we believe it may cause greater than normal quarter-to-quarter fluctuations as some customers may opt to wait for the linac rather than install Cobalt, while others will elect to install Cobalt, and subsequently upgrade to the linac. Accordingly, we thinking it is likely that we will not recognize system revenue in the second quarter.
I will now turn the call back over to Chris.
Chris A. Raanes
Alright thank you David. In closing, we’re very pleased with our clinical results with our linac technology developments and with our first quarters orders and installation. I look forward to keeping you updated on our progress and I now will open up the call for Q&A. Operator.
Thank you [Operator Instructions] And our first question comes from Suraj Kalia of Northland Securities. Your line is now open.
Good morning gentlemen. Thank you taking my questions.
Chris A. Raanes
Good morning Suraj.
Chris can you hear me okay?
Chris A. Raanes
I could hear you great. Thanks.
Pardon with the bad noise, I'm on the road. So Chris on the MRIdian linac, can you give us some idea about the requirements of the 510-K application later this year?
Chris A. Raanes
Requirements for the 510-K, let me start a little broadly there, 510-K clearance which is typical in the radiation therapy industry, requires a predicate device and you compare [indiscernible] current device to it. the predicate device for the current MRIdian system, which is based on Cobalt using linear accelerator. What we’re doing with the next generation is simply changing the output radiation from a Cobalt source to a linear accelerator.
So in essence, we are going closer to our original predicate device. There is a certain amount of technical testing that has to go along with [indiscernible] to measure the various fields and show the different performance. The main type of characteristics are you need to show that the beam is undistorted by the magnetic fields which are system [indiscernible] the whole magnetic scale strength that we’ve chosen and the architecture that we've chosen and that really - it’s pretty straight forward sort of problem that’s what we’re doing.
So just trying to figure [indiscernible] at this point Chris. Specifically on interference of the EMF for age what you are seeing it doesn’t require any sort of clinical testing or no?
Chris A. Raanes
No. So clearly there is no clinical testing required, we prove that the technology and we outputs are essentially equivalent. What you show and I’m not an expert on 510-K testing, but I have done a fair amount of this sort of things. You show that the beam quality is equivalent or better, in other words the day the radiation sponsors enter the system is equivalent or better and therefore it is same with the predicate device. And then you do the same thing on the imaging side, you see imaging is different or better.
And if you recall from the technologies that we talked about at our presentations in the various conferences, the two key technologies are we have magnetic fields that allow the linac to work in the magnetic environment without any distortions at all and then we have RF shields and absorbers that allow the MRI to work in the presence of noise created by linac.
Got it. Chris one question to you and one final question for David and I’ll hop back into queue. Just from what you are seeing in the market conditions. Can you give us a very high level prospective on what the puts and take all of the market for you to moving labor into FY 2016 and FY 2017. And recent [indiscernible] is, some of the competitors, if their order numbers have peaked up softly at least from a growth prospective. That’s for you Chris and David just if you could remind us of the way you will calculate your backlog. That would be great. Gentlemen, thank you taking my questions.
Chris A. Raanes
Okay no problem and thanks Suraj. Market conditions, I’m not sure I can comment on the overall, we’re seeing the tremendous uptick in interest in activity around the announcement of linac. So to us it’s looks like market conditions are very, very good and there is plenty of room for growth. Unfortunately when you are in the middle of something, exciting like that it’s hard to [indiscernible] tell what the over market looks like. We’re seeing awful lot of activity right now.
Yes. So backlog Suraj, the every important metric and our industry off course, to qualify the backlog for us it needs to be a firm signed contract with a substantial deposit. They are by definition non-cancellable under their terms, but of course it is a tight community, I think if a customer really, really wanted to get out then we would look at negotiating that. But they are non-cancellable under the terms. From our prospective the customer or distributor have to have the ability and intent to deploy that system. So it’s pretty tight criteria from our prospective.
Thank you [Operator Instructions] And our next question comes from Raymond Myers of Benchmark, your line is now open.
Thanks for taking the questions. I have a specific question Chris about specifically your clinical experience in lung cancer, given the fairly recent guidelines for screening of patients with 30 [indiscernible] years of smoking?
Chris A. Raanes
Okay, so specifically about what’s going on with one. So long is one of the major indications that we’re seeing treated at the various centers and different folks are looking at it different ways, but let me give you little bit of flavor. One of the advantages with our system and one of the things we’re hearing consistently from multiple sites, is that given the visibility, we are able to see the tumor and all the critical structures nearby. Physicians, clinicians are feeling comfortable performing that SBRT type of treatment, the high intensity short duration treatment on a wide variety of lung tumors.
In other words, you will hear other people say with different kinds of systems if they do lung SBRT, in those cases they are almost always treating a tumor that’s in the middle of the lung, where there is no critical structure nearby and you can afford to be a little bit floppy in the treatment. With our system because you can see so clearly and you get that image, while you are treating and know you are hitting it, they feel very comfortable being able to treat those kind of tumors that are close to critical structures.
So close to the [indiscernible] and close to the heart, close to the esophagus or heading the other way close to the peripheral to the surface of the lung and by being able to track while they are adapt every day before treating. They are able to watch this tumors shrink in size, bringing the margin in and what it does is it expands the number of lung tumor cases that can be treated with radiation therapy. That’s probably among the most exciting think I hear our user talking about.
That’s great thank you and then a may be a quick financial question you may have addressed it before I was able to get on the call. But is there an opportunity for some of these quarters to have any pre-payment or down payment to help you to bridge yourself to cash flow breakeven?
Chris A. Raanes
So let me take that and it’s a really good point. There are multiple sources of cash that come into the Company. Obviously David talked about the ability to draw the CRG line. There are in fact deposits that come with new orders, some of our contracts are structured with progress payments. Many of our international shipments come with letters of credit that are collectable upon shipment and in that case the cash actually comes into the Company before the revenue, because the installation follows after that. So yes, your point is very, very good. There are many ways that cash goes into the Company.
Okay. That’s helpful thank you guys.
Chris A. Raanes
Thank you. And our next question comes from Sebastian Walker of UBS. Your line is now open.
Hi, thanks guys for taking the question. Just going back to MRI linac, I was wondering what kind of ramp up you are expecting here in terms of production. So could we get some kind of indication of how many systems you might be able to deliver in the first of the next few years after the clearance and the launch? Thanks.
Chris A. Raanes
Sure. Thanks for the question. We are in a position where we are not giving guidance right now and I have to respect that. May be I’ll talk about it from capability point of view and if we remember we behaved more like system integrators than manufacturers. So you get our components on major subsystems from various suppliers and there are some big capable manufactures. So our ability to track what the ramp is not going to be at all limited by anything on the manufacturing side, it will be up to the market and we will give some numbers probably as we get closer to the time where we launch the product.
Perfect. Thank you.
Thank you. And I’m showing no further questions at this time. I would like to turn the conference back over to Mr. Raanes for closing remarks.
Chris A. Raanes
Alright operator thank you very much and everybody on the line thank you very much for joining us today and appreciate the questions and I look forward to keeping you updated as we make progress going forward. Have a good day everyone, thank you.
Ladies and gentlemen thank you for participating in today’s conference. This does concludes the program and you may all disconnect. Have a great day everyone.
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