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VRAY: 2018 Could Be Pivotal For ViewRay

03/21/2018
By Anita Dushyanth, PhD

NASDAQ:VRAY

Financial Update:

On March 12, 2018 ViewRay, Inc. (NASDAQ:VRAY) announced financial results for the fourth quarter and fiscal year 2017.  

In just the first year after receiving 510(k) FDA clearance (February 2017), VRAY  was able to sell six MRIdian linac systems and record revenue of around $30 million for the year.  This was a 53% increase versus the prior year.  Product sales increased 24% in Q4.  Meanwhile, the increase in the installed base correspondingly boosted service revenue, which was up 1.5% in Q4 ($701k vs $691k) and 106% for the full year ($3.1M vs $1.5M).  
Operating expenses came in close to our estimates.  The firm reported expenses related to R&D of ~$15 million.  Selling and Marketing expenses totaled a little more than $8 million.  General and Administrative expenses amounted to roughly $31 million.  Excluding ~$17 million in expenses associated with changes in the fair value of warrant liability, net loss for the year was $55 million, or $(0.95) per share.

VRAY exited 2017 with $57 million in cash.  Subsequent to fiscal 2017, the company closed an equity financing with Fosun International Limited, raising gross proceeds of close to $60 million.  Fosun almost doubled (~10% to 18.4%) its ownership stake in ViewRay from this transaction.  This has pushed Fosun to be VRAY’s largest institutional shareholder.  

Business Update:

On March 15, 2018 the MRIdian linac system received Shonin approval, clearing it for marketing in Japan, one of the world’s largest medical device markets.  VRAY has collaborated with ITOCHU Corporation as their Japan-based representative for commercialization.    A cobalt system is currently under installation at Edogawa Hospital in Japan. 

As of December 31, 2017, 15 MRIdian systems have been installed at 14 cancer centers, including six in the U.S. and nine OUS.  Management is guiding for 2018 revenue in the range of $80-$90 million, facilitated by the expected sale of 13-15 systems.  On the earnings call management mentioned that they are currently selling the systems for roughly $6 million and do not plan on increasing the price at this time.  However, additional long-term clinical data supporting differentiation and competitive performance advantages, could further drive demand and provide greater pricing power in the future.  We think this is a reasonable expectation.   

Installation time of the MRIdian system has been reduced from about 100 to roughly 60-75 days.  While lengthy installation times have been an obstacle, reducing the time to commission the system and increasing installation capacity remain priorities and are something that management expects will continually improve throughout 2018.  As it is now, we think VRAY will be able to complete installation of about 3-4 systems per quarter in the first half of the year.  As system installation time reduces, we expect more units to be installed in the latter half of the year.  Established markets such as the U.S. have the infrastructure and financial resources to adopt new technology and several healthcare facilities in this country are looking to replace aging equipment.  As of fiscal 2017, VRAY’s order backlog was valued at over $200 million.  With thirty signed orders throughout 2017 and distribution agreements in nine countries, we think consumers remain committed to VRAY’s technology.  As the installed base ramps up, we also expect maintenance contracts to increase, which would benefit the firm with a steady stream of recurring revenue.

Management also mentioned on the earnings call that a majority of their installations will be local (within U.S.).  This implies two things: 

‣ VRAY will have to increase the number of trained personnel to manage multiple installations and 
‣ Revenue will be recorded only after installation is complete.  

Due to the above-mentioned reasons, gross margins might fluctuate between consecutive quarters.  Nevertheless, we believe gross margin could ramp up closer to 30% by end of this year and reach 40% or better by 2019, driven mostly by volume-related manufacturing efficiencies.  This would be significantly better than the 18% gross margin in 2017. 

Currently, the firm has three installation teams.  We forecast R&D expenses to increase relatively moderately but think SG&A expenses will grow at a much higher rate as the firm anticipates expanding their installation, sales and marketing team.  The strong balance sheet will support the ongoing commercialization of the MRIdian-Linac.  We think that the firm could achieve positive net income as soon as 2022 if they are able to execute on their plan.  Currently, ViewRay has NOLs of about $266 million (federal), which begin to expire in 2024 and ~$145 million (state), which begin to expire in 2019.  

Medical device industry veterans Scott Huennekens and Daniel Moore became part of the company’s Board in early February.  This is a welcome addition to ViewRay’s team as both Mr. Huennekens and Mr. Moore bring decades of operational experience from medical device firms. 

Mr. Huennekens is currently chairman, president and chief executive officer of Verb Surgical, which he joined in August 2015.  Previously, Mr. Huennekens served as president and chief executive officer of Volcano Corporation from its start-up in 2002 through its IPO in 2006, and to its eventual sale to Royal Philips in 2015.  Prior to his work at Volcano, Mr. Huennekens served as president and chief executive officer of Digirad Corporation, a diagnostic imaging solutions provider.  Mr. Huennekens is a board member and past chairman of the Medical Device Manufacturer's Association (MDMA).  He graduated magna cum laude with a Bachelor of Science in Business Administration from the University of Southern California in 1986 and earned his Masters of Business Administration from the Harvard Business School in 1991.

Mr. Moore has served as chairman of LivaNova's board of directors since 2015.  Previously he served as a member of the board and chief executive officer of Cyberonics from 2007.  Mr. Moore joined Cyberonics from Boston Scientific, where he held positions in sales, marketing and senior management in the U.S. and in Europe.  His last position at Boston Scientific was president, International Distributor Management.  Prior to that role, he held the position of president, Inter-Continental, a business unit of Boston Scientific.  Mr. Moore earned a Bachelor of Arts from Harvard University, and a Masters of Business Administration with High Honors from Boston University.

The firm entered 2018 with a strong financial position with over $100 million in cash, sufficient to fund their commercial plan for the MRIdian linac system.  We think fundamentals remain strong and maintain our price target of $11.00/share.

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