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VRAY: Financial Results For Third Quarter 2017. Revising Revenue Guidance

11/20/2017
By Anita Dushyanth, PhD

NASDAQ:VRAY

Financial Update

On November 13, 2017 VRAY (NASDAQ:VRAY) announced third quarter financial results.

The firm recorded revenue of little over $12 million for the quarter.  Management had originally guided for total sales of 7-8 systems for 2H 2017.  We had accordingly estimated revenues of $16.8 million and $30.8 million for Q3 and Q4 of 2017 respectively resulting in an estimate of $47.6 million for 2H 2017.  However, the company recorded sales of only two systems during Q3, resulting in lower than anticipated revenue for the quarter.  The firm modestly revised their revenue guidance to be between $42 and $47 million for 2017.  Based on this revised guidance, we model five installations of the MRIdian systems for the fourth quarter.

R&D expenses came in at $3.6 million, S&M at $2.5 million and G&A at $7.5 million, which were close to our estimates.  Cash used in operating activities was $44 million and financing activity provided cash of $65 million for the nine months in 2017.  The CRG term loan has an outstanding balance of approximately $45 million, which is repayable on June 26, 2020.  The term loan bears interest at a rate of 12.5% per annum and has an interest-only payment period through March 31, 2020.

VRAY exited the quarter with close to $34 million in cash.  The company raised gross proceeds of approximately $50 million through sale of 8.4Mshares of common stock in October.  The additional capital is expected to support R&D activities and general operational expenses through 2018. 

We had valued VRAY at $8.00/share back in August 2016.  Since the beginning to November this year, shares are trading at more than $8.00/share.

Business Update

As of Q3 2017, the company had installed eight MRIdian cobalt systems and two MRIdian Linac systems at ten cancer centers located at Washington University in St. Louis; University of California, Los Angeles; University of Wisconsin, Madison; Sylvester Comprehensive Cancer Center at the University of Miami; Seoul National University in South Korea; VU University Medical Center in the Netherlands, Policlinico “A. Gemelli” Hospital in Italy; National Cancer Center in Japan; Henry Ford Hospital in Michigan; and Sheikh Khalifa Specialty Hospital in the United Arab Emirates. One additional MRIdian with cobalt system has been delivered and is expected to be installed in early 2018 at Edogawa Hospital in Japan.  Physicians have already used MRIdian to treat a broad spectrum of radiation therapy patients with more than 45 different types of cancer, as well as patients for whom radiation therapy was previously not an option.  

ViewRay formed a group called the Clinical Cooperative Think Tank (C2T2) consisting of MRIdian clinical users (leading clinicians from 18 global institutions) focused on gathering evidence to support MR-guided radiation therapy.  Under this initiative, in September of this year, the firm launched a multi-center prospective clinical trial for locally advanced unresectable pancreatic cancer using MRIdian system.  

The study was initiated based on compelling early evidence from a retrospective review of 42 locally-advanced pancreatic cancer patients treated at four institutions using the MRIdian.  The researchers examined survival and toxicity rates for two cohorts of patients: one group received a higher biologically effective dose using the MRIdian adaptive radiotherapy while the other received a lower, more conventional biologically effective dose using nonadaptive therapy.  This retrospective study found that the treatment led to a significantly prolonged patient survival.  By Kaplan–Meier estimates, median overall survival increased to 27.8 months compared to 14.8 months.  Patients treated with higher radiation doses reported no grade 3 or higher toxicities.  Conversely, patients receiving lower doses via non-adaptive treatments experienced 15.8% grade 3 or higher toxicities.  

The new (prospective) trial aims to demonstrate the benefits of MRIdian's daily on-table adaptive SBRT and real-time tissue tracking capabilities, with a focus on toxicity, local cancer control and overall survival outcomes.  This trial is intended to explore new opportunities for improving survival and quality of life for patients with pancreatic cancer.  Should results from further studies be favorable, it seems that treatment using the MRIdian could become the standard of care for many pancreatic cancer patients.  This also opens up the possibility that the MRIdian could be used in other indications as well. 

The company received FDA clearance for the MRIdian Linac in February and marketing clearance in Canada was granted in August of this year.  In June 2017, the National Cancer Center (NCC) in Tokyo, Japan treated its first patients with lung, liver and pancreatic cancers using the MRIdian System.  ViewRay has applied for a Shonin approval to the Japanese Ministry of Health, Labor and Welfare (MHLW) for the MRIdian Linac.  The Japanese regulatory agency is generally regarded as having relatively rigorous standards in the verification and validation of medical devices.  

By the end of the third quarter, ViewRay’s backlog of orders grew to a hefty $195 million.  Even though management did not disclose the specific regions where they will be installing these systems, we know that the geographic mix is such that 1/3 of the systems are in the U.S. and the remaining OUS (Taiwan, China, Korea, Italy, Germany, Belgium, the Netherlands, the U.K., France and the U.A.E).  Of VRAY’s entire backlog as of Q3 2017, more than a third of orders are for the MRIdian Linac system.  Those customers who require the Cobalt system are in territories that do not have the authorization to market the Linac.  Depending on timing of receipt of requisite marketing approvals, there is a possibility that the few Cobalt systems on the backlog could be replaced with a Linac system.  
Having a sizable number of orders on backlog is construed as a positive since it means there is a growing acceptance of the technology in the community.  Nevertheless, it also means that the company needs to increase its production/installation efficiency.  Management hopes to eventually reduce per-unit installation and testing time down to 30 days, with an initial goal to get it down to 60 days by currentyear-end.  This process could help manage multiple installations in parallel if there are trained personnel on site.  Thus far, management has trained the team in Korea, Japan and China.  With 60 days lead time for installation and trained personnel, we can expect install capacity to be around 3-5 systems per quarter beginning next year.  Once the supply constraint is removed, we think management can complete 5-6 installations per quarter from 2020.  

Valuation

Management revised their 2017 revenue guidance to be between $42 and $47 million.  While guidance was lowered by about $3 million, it still implies 100%+ growth from 2016.  For the company to significantly increase their sales they need to increase their production efficiency as well as improve installation time for new systems.  The potential growth in sales could be enormous as 
➢ awareness of this innovative technology builds among physicians
➢ cost benefits over traditional therapies are understood  
➢ hospitals and other healthcare facilities improve their medical infrastructure

Consequently, we expect sales to double in 2018 as the company brings down the installation time and increase the number of trained personnel to meet existing and future demand for MRIdian systems.  While the U.S. is the leading radiotherapy market in North America, Japan (in addition to India and China) continues to be one of the fastest growing markets in Asia.  We believe this region offers significant upsidefor the MRIdian Linac, if and when the MRIdian Linac gets approved.  We forecast sales of 5 - 6 systems per quarter in FY 2020.  ViewRay’s service revenue will also expand as system utilization increases.  

We are modeling incremental expenses associated with anticipated expansion of VRAY’s sales and marketing team as they implement plans to increase market adoption of MRIdian systems.  As the company continues to invest in developing and improving MRIdian we expect operational expenses to grow modestly through 2018.  We think that the firm could achieve positive operating income in 2020 and positive net income as soon as 2021 if they are able to meet their goals discussed above.  The stock is up 221% since our initiation in August 2016, with the shares currently trading at $9.58.  Our valuation has increased from $8.00 to $11.00/share reflecting Q3 earnings and revised financial forecast.  With a strong balance sheet, VRAY is well-poised to carry on its operations as they head into 2018.

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