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VRAY: A Strong Balance Sheet To Bolster 2017 Operations; Update On Financial Guidance And Expecting Profitability by 2019

By Anita Dushyanth, PhD


On March 16, 2017 ViewRay (NASDAQ:VRAY) announced financial results for the fourth quarter and fiscal year 2016.

The company reported revenue of $16 million for Q4 2016.  Sale of four MRIdian systems resulted in revenue of close to $22 million for fiscal 2016.  Gross profit for Q4 2016 was negative $1.2 million, and for the full year 2016 was negative $3.6 million.

Operating expenses amounted to approximately $10 million for the fourth quarter 2016 and about $40 million for fiscal 2016.

Net loss in Q4 2016 amounted to $11 million (EPS of -$0.25) and ~$50 million for the full year 2016 (EPS of -$1.26).  VRAY exited the fourth quarter 2016 with close to $14 million in cash and cash equivalents.

ViewRay has federal net operating loss carryforwards of ~$210 million, which will begin to expire in 2024 and ~$131 million in state net operating loss carryforwards, which will begin to expire in 2019.  The company had federal R&D tax credit carryforwards of close to $3 million, and state carryforwards of roughly $250,000 which will expire during the year 2024.

The firm raised close to $48 million in cash in Q1 2017; approximately $26 million from a private placement (closed on January 18, 2017) from the sale of 8.6 million shares of common stock and warrants (exercise price of $3.17/share and are exercisable after six months and expire seven years from the date of issuance) and from the sale of approximately 4 million shares of common stock (in February and  March 2017) to FBR Capital Markets & Co at an average market price of $5.64 per share, resulting in aggregate gross proceeds of approximately $22 million.

The FDA 510(k) application to market the MRIdian Linac system in the U.S. (submitted in August 2016) was approved end of February 2017.  Since there is an enormous amount of familiarity and efficiency associated with Linac systems and VRAY being the first and the only firm in the industry to roll-out a commercial MRI Linac, we think most centers will readily adopt this system.  The MRIdian Linac is an MRI-guided radiotherapy system that offers several technical advantages including improved target localization, non-invasive motion management, and the potential to adapt radiotherapy treatment in real-time for anatomical movements as well as functional changes.  Further, the MRIdian-Linac upgrade maintains the footprint of the legacy system warranting an easy upgrade since the pop-apart model allows replacing the Cobalt with the Linac gantry.

The next generation MRIdian Linac employs the patented RF cloaking technology that isolates the magnet from the impact of the radio frequency waves from the Linac.  Additionally, the MRIdian Linac uses double-focused multi-leaf collimator (MLC) technology, allowing for delivery of sharp radiation beams which significantly reduces the possibility of a photon leaking through.  Another advantage of the MRIdian Linac is its ability to deliver superior dose to the tumor site while maintaining nominal dose to critical structures.  This is particularly important to clinicians since they can visualize the critical structures at the time of treatment that enables adaptive treatment planning.  Applications of the MRIdian Linac in radiotherapy include treating many different types of cancers in difficult-to-treat sites including those of the head and neck, lung, liver, prostate, breast and bladder.  Images at these sites are difficult to capture due to the continuous physiological motion from breathing or swallowing and the MRIdian Linac is capable of offering benefits in adaptive radiotherapy that supports precision medicine and personalized care.

In addition to completing the development of MRIdian Linac within the past year, VRAY obtained regulatory approvals for marketing the device in the European Union (CE Mark) as well as the U.S. (FDA 510(k)).  2016 demonstrated a validation of VRAY’s MRIdian technology as the backlog (23 signed contracts) and installed base expanded (six systems) globally.   The step function improvement in the technology could foster a steep adoption rate in the radiotherapy market.  On the horizon, we think ViewRay is rolling-out a system that could potentially become the gold standard in adaptive treatment using radiotherapy.  Market giants such as Varian are yet to introduce any such system and Elekta AB's Atlantic System is significantly bigger than the MRIdian.  Even though the company could face competition from these established players, VRAY’s backlog of 23 signed orders as of March 17, 2017 translates to a total value of ~$133 million that provides a significant lead to its competitors.

In the first half of 2017, the firm anticipates selling MRIdian Cobalt systems in markets where Linac system is yet to be approved (primarily in China).  Management hopes to install seven to eight MRIdian Linac systems in the U.S. and international markets in the second half of 2017 from which the firm anticipates recognizing potential revenue of around $50 million in 2017.  Management is relentlessly working on improving their productivity.  Assuming a stable economic environment with no changes to currency levels, the firm anticipates widening gross margins to 40% in 2017.  The stock price has doubled since the beginning of this year from $3.13/share (January 3, 2017) to $6.24/share (March 16, 2017).  We think that an expansion in gross margin, primarily driven by higher sales and operating leverage could drive the stock price even further.

Currently, it takes roughly 100 days to complete installation and testing a single system per site.  The firm plans to bring this down to 45-60 days shortly.  If the sales continue with favorable momentum and the firm is able to sell close to five systems per quarter, it could potentially achieve operating profitability by 2019.

We anticipate OpEx to remain high as per management’s guidance.  As per the company’s 2016 annual report, ViewRay plans to continue investing in R&D.  ViewRay does not plan to slow down but anticipates expanding their sales team to increase marketing efforts.  The report mentions that the firm will see an increase in SG&A spend which includes expenses associated with sales, marketing and customer support personnel, regulatory and other administrative personnel, third-party consulting, legal, audit, accounting services, stock-based compensation, employee benefits as well as travel expenses related to trade shows and marketing programs.

Our financial model has been updated with 2016 annual earnings result and as per management’s financial guidance.  Starting the new year (2017) with a strong cash position, VRAY is well poised to carry on its business strategy.  We like the firm's strong balance sheet, with an estimated cash position of over $45 million.  We think 2017 could serve as a transformational year for VRAY assuming their financial guidance is met.  Our fundamentals remain strong and we continue to believe in VRAY’s story.


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