On June 26, 2017, ViewRay (VRAY) announced that the National Cancer Center (NCC) in Tokyo, Japan, treated its first patients for cancers of the lung, liver and pancreas using ViewRay's revolutionary MRIdian System.
VRAY’s system is the world's first and only clinical MRI-guided radiation therapy system.
As overviewed in our recent article about VRAY, the MRIdian System combines MR imaging and radiation delivery so clinicians can visualize soft tissue and adjust their dosing, giving them the ability to target and adapt during the treatment of tumors within the body that may be changing shape or position within the body, for instance, due to the movement of internal organs. MRIdian allows clinicians to offer this kind of treatment without exposing the patient to the additional ionizing radiation that is common with other imaging modalities.
Jun Itami, M.D., Ph.D, chair of the Department of Radiation Oncology at the National Cancer Center, noted that the results were already impressive. "We're pleased to have commenced patient treatments with our MRIdian System and are already seeing firsthand the benefits of combining MRI with radiation delivery and the value of adapting our plan during treatment to account for motion and changes in the tumor and nearby anatomy," Itami noted. "MRIdian will allow us to expand the number and types of cancer patients we treat, including some patients who may have been considered untreatable previously with conventional radiation therapy."
Dr. Itami went on to note how groundbreaking the VRAY technology was, saying that “MRIdian offers significant advantages in its real-time soft-tissue tracking and on-table adaptive delivery, and we're pleased that patients in Japan are now experiencing the benefits of this important advance in cancer care."
Superior Technology on Display
Why is this technology so important in treating cancer, particularly in soft tissue? The MRIdian System combines MR imaging with radiation delivery so clinicians can visualize soft tissue and adjust their dosing as the radiation is being delivered. The ability of clinicians to adjust therapy and monitor the movement of soft tissues and organs is the key to this technology.
While VRAY’s system will be used to treat all types of cancers, the technology is especially beneficial for tumors where there is typically movement during treatment, including tumors in the liver, pancreas, adrenal and lung areas. ViewRay notes that other types of cancer this advanced system will deliver a new level of care to include breast, prostate, kidney, and gynecologic cancers, among others.
In a multi-institution study that compared treatments for pancreatic cancer with and without adaptive dose reshaping – it was found that MRI-guided on-table adaptive radiotherapy enabled delivery of a higher biological does and this may lead to improved survivability in locally advanced pancreatic cancer. Additional studies have highlighted the benefits of MRIdian for reducing the exposure of healthy tissue to radiation.
Installation of VRAY’s Technology at the Henry Ford Cancer Institute Should Help to Boost Sales
While VRAY’s MRIdian system is already up and running in Tokyo, more U.S. patients will be able to access the technology this month at the Henry Ford Cancer Institute at Henry Ford Medical Center-Cottage in Grosse Pointe Farms. VRAY’s website notes that it expects the Henry Ford Cancer Institute to begin treating patients using the system this month.
We believe that, especially in light of the successful use of the technology in Japan, successful installation of the system at Henry Ford will only help to draw more investor attention to VRAY in the upcoming weeks.
When treatment becomes available at Henry Ford this month, it’s likely that the use of the machine will help VRAY sell more systems to hospitals looking to upgrade and replace older linacs with state of the art technology.
We strongly believe that revenue from orders for replacement linacs could significantly boost VRAY's share price during 2017 and 2018.
VRAY's Technology Featured at Several Important Oncology Conferences
Our Investment Team at DRD Investments has done some digging into recent medical conferences and presentations by VRAY. We believe that the exposure that VRAY has been getting via the company's presence and presentations at recent oncology conferences will help to boost sales and orders.
One prominent and notable appearance by ViewRay was at the radiation oncology workshop on June 9-10 at UCLA. We spoke with an attendee at this conference who told our team that there were more than 145 attendees at the conference. We believe that this number is significant because of the focused nature of the conference, VRAY's presentation and the display of VRAY technology at the conference.
VRAY's MRI linac was featured at the conference, and the company had a booth that highlighted the technology. The target audience for the conference - radiation oncologists, medical physicists, medical oncologists, surgical oncologists, and biologists interested in implementing recent advances related to radiation treatment delivery - are exactly the type of professionals that VRAY needed to get in front of.
The DRD Investment team also reviewed materials from the conference and several of the speakers, including James Lamb, PhD, DABR, directly addressed the importance of new MRI technology. Lamb's talk, "Challenges for MRI-Guided Real-Time Adaptive Radiotherapy: Physics Perspective," was only one of several presentations to highlight this rapidly developing area of medicine.
Speakers highlighted how important the ability to image in real time using new technology - like the kind employed by VRAY's linac - would have big advantages over older linac systems that use CT imaging because of how quickly tumors can change during the course of treatment.
Why We Think VRAY is Better Than The Competition
One of VRAY's competitors - Elekta (OTCPK:EKTAY) - is attempting to bring a competing product to market. We believe, however, that VRAY has an advantage.
Elekta is developing a competing machine that the company says will be FDA approved by the end of the year, but they have missed their targets before and we suspect it's possible that they will delay again. Importantly, if Elekta receives approval on time, VRAY has a head start.
Additionally, we contacted several industry sources and have learned that the Elekta machine is much larger than the VRAY model, and many hospitals would have to build a larger bunker to accommodate the machine.
We believe that many hospitals will be looking to avoid the kind of costly renovations that would be needed to accomodate the larger bunkers for the Elekta model. We think it is much more likely, from a practical standpoint, that hospitals would select VRAY's machine, which is a standard size piece of equipment that will fit in existing MRI bunkers. From an installation perspective, the VRAY machine just makes more sense.
We also believe that the magnet that VRAY will be using in these new machines will have an advantage over the magnet that Electra uses. Elekta's incoming Unity platform uses a 1.5T magnet. VRAY's 0.35T magnet causes less beam distortion and can actually treat more high-risk cancers like full breast cancer as compared to the Elekta magnet.
We believe that this magnet is a significant competitive advantage when compared to the 1.5T magnet used by competitors like Elekta because low field (0.35T) magnets reduce image and dose distortion and prevent heating of tissue within the patient. MRIdian use of TRUFI (true fast gradient echo imaging with steady state precession) is known to provide the best signal-to-noise ratio at very high speed.
A Look Inside VRAY's Financials
Projections and Valuation
Given the above research, and in particular the important initial clinical data that indicates VRAY’s machine could have real benefit for patients over existing technology, some projections that could be considered reasonable for the company are described below.
VRAY’s most recent 10-K notes there is a rapid adoption curve in the radiation therapy equipment market. For instance, the 10-K provides the historical example of image guided radiation therapy (which mostly use on-board X-ray systems), for which the percentage of sites using the technology went from 15% to 83% from 2004 to 2012. The 10-K also estimates the annual global market for linear accelerators is 1,100 per year, the majority of which are replacement orders, and makes note of an IAEA Human Health Campus statistic that there were 11,000 linear accelerators worldwide in 2015.
A swift rate of adoption for MRI-guided linear accelerators can also be projected, and at the end of a five-year projection period, VRAY could have 25% market share for annual linear accelerator orders. It can also be estimated that the 1,100-machine market size will increase by 2.4% per year – in line with overall estimated economic growth for the OECD countries. This could end up being conservative if growth in the healthcare sector eclipses overall economic growth due to aging populations, and/or if VRAY is successful in emerging markets, where growth may be quicker.
By the end of 2016, the company had signed orders for 23 machines at a value $133.2 million, again, according to the 10-K. Dividing the dollar amount by the number of machines gives an estimated cost per machine of almost $5.8 million. A conservative projection can keep this price constant through the next five years, given that inflation and demand should ensure the price can increase. Service revenue was an average of 6.4% of product revenue in the past two years (5.5% in 2015 and 7.3% in 2016), and it can be estimated that this will persist over the next five years, which would also be conservative when it is considered that the company is in its growth phase and thus its installed base is small relative to new product orders, so the service revenue may actually increase as the installed base of machines increases as a proportion of new machine orders.
Projection for revenue follow from the projections for machine orders. It can be assumed that revenue for year X will be equal to the year end backlog for year X-1. So, for example, we are projecting 20 outstanding machine orders by the end of 2017, which would imply revenue from products of 20 * $5.8M, or $116M in year 2018. Plus the above noted service revenue at the assumed 6.4% of product revenue results in an estimate for 2018 revenue of $123M.
Operating margins can be projected to turn positive in 2018 and plateau at about 16% in 2020. A weighted average cost of capital of 11.36% can be used for the high growth phase and 11.07% for the steady state.
Using the above projections, a discounted cash flow model provides an output for the price target of $8.18. (This assumes reinvestment needs will rise over the next four years, and then level off in year five and thereafter once their technology is mature and the company is an established market entity.)
Taking a look at the above price target relative to the 2018 sales estimate, if the stock traded at $8.18, the P/S multiple would be 3.8 times 2018 sales. Currently, VRAY trades at 3 times the sales estimate. Using consensus estimates on Zack's for competitor Varian, the stock is trading at 3.3 times 2018 sales. Given that we believe VRAY's growth prospects are superior to VAR's up to and beyond 2018, a premium of 3.8 seems fair. Also, even if a premium is not assigned, and our 2018 sales estimate receives the same multiple as VAR's multiple of 3.3, the result would be a price for VRAY of $7.11.
With regards to the health of the company’s balance sheet, the company increased its cash in the first quarter of 2017 through private placements with first rate investors who are very knowledgeable in this medical equipment field.
Cash on the balance sheet increased from $14.2 million at the end of the fourth quarter of 2016 to $49.3 million at the end of the first quarter of 2017. This brought the company’s quick ratio up from 0.49 to 1.21 over the same time period.
As the population ages, demand for healthcare will continue to increase.
Medical devices should be resistant to political pushes for lower prices in healthcare, since presidential and media focus has been more focused on drug prices.
VRAY and other device makers will be beneficiaries of these macroeconomic trends.
We believe that there is a very compelling case to invest in VRAY.
The company's installation of their MRIdian machine at the NCC in Japan and early, positive reviews, bode well for the completion of the upcoming installation state-side at the Henry Ford Hospital this month.
The technology - especially the company's advantageous use of low-field magnets - and the various academic studies continue to impress us. The ability to deliver treatment with such precision is a huge advantage.
VRAY's machines are easy to install, and we believe that the new VRAY technology will be replacing older models in cancer treatment centers across the country.
There is a bright future for VRAY and we are more convinced more than ever that this is a key time for aggressive growth investors to consider purchasing shares.
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Disclosure: I am/we are long VRAY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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