ViewRay, Inc.

Good day, and thank you for standing by. Welcome to the second quarter 2021 ViewRay Incorporated earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you'll need to press star 1 on your telephone. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Ashley Kluth, Head of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to V-Ray's second quarter 2021 financial results conference call. Joining me today are Scott Drake, our president and chief executive officer, and Zach Stassen, our chief financial officer. Earlier today, V-Ray issued a press release and presentation for today's call. The presentation can be viewed live on our webcast or downloaded from the financial events and webinars portion of our site at www.investors.vrae.com. Today's call is being broadcast and webcast live, and a replay will be available on our website for 14 days. Before we begin, I would like to caution listeners that comments made by management during this call may include forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties, and actual results could differ from those projected in any forward-looking statement due to numerous factors. For a description of these risks and uncertainties, please see V-Ray's annual report on Form 10-K for the fiscal year ended December 31, 2020, and its quarterly reports on Form 10-Q as updated periodically with the company's other SEC filings. Furthermore, the content of this conference call contains time-sensitive information. accurate only as of today, August 5th, 2021. V-Ray undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances after the date of this call. I will now turn the call over to Scott.

Thank you, Ashley. Good afternoon, everyone, and welcome to our Q2 call. Today, we'll begin with key patient metrics. We'll discuss our second quarter results and highlight recent events. We'll share some color on the value of Meridian directly from our customers. Zach will cover our financial results and guidance for the remainder of 2021, and then we look forward to answering your questions. If you're not on the webcast, I'll be referring to slides from the presentation on our investor relations site. Turning to slide three, our mission is to treat and prove what others can't. We now have 45 Meridian systems treating patients, We've surpassed 14,300 patients treated and have about 3,200 patients with clinically reported outcomes. This growing body of clinical data is critical to our efforts to change and improve the paradigm of care. Let's begin with our Q2 results on slide four. We continue to have solid performance. We delivered seven meridian orders in the quarter versus four in Q2 2020. In the first half of the year, we have booked 14 orders, a step up from eight in the first half of last year. Our backlog grew $46 million, or a nearly 20% increase from Q2 last year, bringing the balance to $278 million. Revenue was about $15 million for the quarter, based primarily on two revenue units. And finally, from a cash perspective, We used approximately $15 million in the quarter. This represents a $13 million sequential improvement from Q1. We ended the quarter with $167 million of cash on hand and continue to drive efficiencies in our business. Beyond financial results, we continue solid execution on our clinical, innovation, and commercial pipelines. Everything begins with and flows from the amazing clinical results our customers deliver with Meridian. Turning to slide five, it's important to stay anchored in two critical customer desires. First, the number one thing our customers desire is meaningful clinical data. And second, they are very clear about how they define clinical success. Customers want to deliver an ablative dose with tight margins, no implants, five or fewer fractions, and low to no grade three or higher toxicity. These elements represent the critical Meridian 5. Meridian continues to drive the only meaningful body of work that meets these criteria. Customer input has shaped our clinical pipeline and goals, which are twofold. Number one, to expand the utilization of Meridian Smart, and number two, become frontline therapy. The cycle of more clinical proof leading to more therapy adoption is greatly benefiting our customers' cancer programs and patient care. Slide six highlights some recent events in our three pipelines. Our customers have made significant progress on the clinical front, specifically on the SMART-1 and LungSTAR trials. We'll take a closer look at these trials in just a moment. On the innovation front, We're driving toward our goal of sub-20-minute treatment times and improving workflow and automation. In the future, you can expect enhanced MRI imaging, increased dosing, a brain treatment package, and remote access. We are concurrently driving cost efficiencies to improve margin over time. Efforts on the clinical and innovation pipelines are leading to commercial success. Our early pioneer customers who have purchased incremental systems such as AOMC have led others to follow suit. We are seeing more and more customers purchase incremental systems. Recently, customers such as Penn State, Jefferson Health, Henry Ford, and Genesis Care have doubled down on Meridian. The incremental system purchases are direct evidence of the value of Meridian. While we are bullish on our therapy adoption path, I will point out that the pandemic continues to have a dampening effect on our business from an order and revenue standpoint. I'm very proud of the work our team has done in the face of these headwinds and how they have set us up for future growth. We have solid traction in each of our three pipelines. Changing the paradigm of care is underway. Now diving deeper into our clinical pipeline on slide seven. Everything begins with and flows from our clinical value. We view the process of developing clinical evidence longitudinally. Phase one represents feasibility work that can result in an interesting signal that leads to phase two confirmatory trials. When required, effort progresses to definitive phase three. Currently, our customers are conducting over 60 trials. The breadth and depth of this work reflects extraordinary clinical curiosity. Other than the SMART pancreas trial, our pipeline is predominantly investigator-led. Let's turn to slide eight and highlight recent activity in two of these studies. Last month, MCI enrolled initial patients in the SMART-1 trial, which is being led by Dr. Michael Chung. Conventional LINACs are used to deliver single-fraction therapy in tumors distant from vital structures such as peripheral lung. SMART-1 is a feasibility study to demonstrate safe and effective delivery of ablative doses in a single fraction to multiple tough-to-treat tumors, including lung, pancreas, liver, kidney, adrenals, and lymph nodes. Another advancement in our clinical pipeline is in central lung. Central and ultracentral lung represents a sizable opportunity for Meridian to treat patients with limited treatment options. Alarming numbers were published in April regarding a multicenter, prospective central lung study on conventional LINACs. 34% grade 3 or higher toxicity were reported, along with a stunning 15% grade 5 or patient death. the limitations of conventional radiation therapy are sadly evident for these patients. LungSTAR is a prospective multi-center phase two trial led by Dr. Rupesh Kotecha at MCI, intended to demonstrate that Meridian can safely and effectively treat these patients. Preliminary Meridian data published in high-risk lung cancer patients reported only 8% grade three toxicity and zero treatment-related death. This is a positive signal the investigators and we hope to confirm. As you can see, we're striving to do in lung what we're doing in pancreas. Our goal is to open new avenues of Meridian therapy for patients in need. As we've stated many times, Meridian's clinical value unlocks strategic and economic value. Let's take a closer look at this value chain through the eyes of our customers. On slide nine, we see the department chairs and executives from two leading cancer centers, Dana-Farber Brigham and Women's and the Miami Cancer Institute. During the quarter, we held a customer roundtable to demonstrate how Meridian programs can deliver clinical value, which translates into strategic and economic value. This webinar is available on our website. Each customer shared their experience, and they were effusive in their praise. We were delighted to hear their quotes regarding Meridian, such as game-changer, mind-blowing, exceeded all clinical and financial expectations, and highlights around net new patients due to Meridian, especially those they could not or would not treat on any other system. More specifically, turning to slide 10, Dana-Farber referenced several important facts that are illustrative to what we see time and again with our customers. For example, they expected to treat 50% of Meridian patients with SBRT, and they are actually treating 98%. Conversely, they expected to treat 50% of patients via IMRT versus actual results of only 2%. They expected 13% net new patients and achieved 25%, a significant number of them coming to the program specifically because of Meridian. Perhaps most importantly, they're thrilled by the fact that they are treating many patients on Meridian that they would not or could not treat on any other system. We heard similar thoughts from MCI. About a quarter of patients treated on Meridian came from outside their traditional catchment area. By year three, they have nearly doubled the expected ROI, they are adapting a significant percentage of fractions, and believe that Meridian will be APM-friendly. These proof points give us confidence that we're on the right track. Turning to slide 11. Our customers' feedback on Meridian's clinical, strategic, and economic value Combined with the momentum in our clinical, innovation, and commercial pipelines gives us the confidence to accelerate investments in our R&D and commercial teams. We've proven that a successful Meridian program can and increasingly does lead to another. These investments will help us accelerate customer success and system enhancements. Obviously, our goal is to speed the virtuous cycle of a successful Meridian program leading to more successful Meridian programs. With that, I'll turn it over to Zach to review our Q2 financials and guidance for 2021. Zach Lowenstein Thank you, Scott.

Turning to slide 13, we will discuss some key financial highlights. We received seven Meridian orders, including one upgrade in the quarter, totaling $38 million. This represents a 54 percent increase in total order value versus Q2 of 2020. Excluding the upgrade order, the ASP in the quarter was $6.1 million, further evidence of the value customers see in Meridian. We ended the quarter with a backlog of $278 million, including the removal of two systems. Compared to the same period last year, this is a $46 million or 20% increase. Revenue for the quarter was $15 million, primarily from two revenue units. Gross margin in the quarter was a loss of $1.7 million. We recognized several one-time charges that ultimately impacted our system margin. Excluding the one-time charges, our system gross margin would have been effectively break-even. On the service side, we have experienced higher material and associated freight costs, along with increased wages as compared to the second quarter of last year when we implemented COVID-related salary reductions. We continue to focus on driving cost efficiencies and maximizing our cash savings initiatives. These efforts resulted in operating expenses remaining flat when compared to Q2 of 2020, which had salary reductions in place and high travel restrictions. In short, we are doing more with less. Net loss for the quarter was $31 million as compared to $26 million in the same period last year. Net loss for the quarter was impacted by the revaluation of warrants resulting in an approximately $3.7 million expense driven by the increase in our stock price. In contrast, we recorded a $400,000 gain in Q2 of 2020. Turning to cash use, we used $15 million during the quarter. This represents a $13 million decrease from Q1 this year. We finished the quarter in a strong liquidity position with $167 million of cash on the balance sheet. The success our customers are having with Meridian is encouraging. It gives us confidence in the investments we are making, and our current cash balance positions us well to capitalize on these investments. Now turning to guidance on slide 14. We are issuing guidance for full year 2021 for both revenue and cash usage. We expect to deliver revenue in the range of 63 million to 73 million. This represents year-over-year growth of 11 to 28 percent. Regarding cash usage, excluding our January 2021 equity financing, we expect to deliver cash usage between 58 and 68 million dollars. This represents an annual decrease of 3 to 17% and includes the incremental investments we mentioned. Our guidance contemplates ongoing COVID-related challenges and delays. We are seeing improvements in certain areas of the business, most notably our order flow. However, challenges continue with revenue as we have seen some delays in construction projects and revenue timing. We are managing the items we control, but external risks primarily related to the pandemic are difficult to forecast. Recently, we have seen some of our prospects and customers reestablish pandemic-related restrictions on travel and in-person meetings. Despite these challenges, we are pleased with our results and activity in the first two quarters, and we are working to drive our clinical innovation and commercial pipelines in the second half of 2021. With that, operator, we will now open the line for questions.

Thank you. As a reminder, ladies and gentlemen, if you have a question at this time, please press star then 1 on your touchtone telephone. To withdraw your question, please press the pound key. Our first question comes from the line of Jason Bednard with Piper Sandler. Your line is open. Please go ahead.

Hey, Team Kim, you okay? We can, Jason. Hey, guys. Congrats on another strong order quarter here. I want to first start on the revenue guidance. You know, the implication here seems to be that you recognize revenue on maybe four to six systems here in the back half of the year. You know, that would be consistent with maybe a modest step up from where we've been here the last couple of quarters. So I guess kind of with that preamble there, I've got a bit of a two-parter, you know, First, should we interpret the fact that you're giving guidance here as a sign that your access to hospitals is becoming more predictable? I can't tell there from Zach, just from your last comments there. But it would seem like and does seem like maybe you have a little more visibility on some of the installs here in the back half of the year. And then the second part of the question is, Given this more defined outlook that you have, can we start to think about maybe a slightly faster install pace looking beyond 21, or are we getting too premature if we do that?

Yeah, I'll go ahead and touch on it real quickly here, Jason. I would share with you that the overall conditions are improving, but the challenges still persist. We're dealing with permitting delays, construction delays, challenges getting into certain countries, and therefore, certain accounts. So, that continues, but we do have increased visibility, I would say, into our installations here in the back half, and I think things will indeed, if they go as we anticipate, you're going to have a nice acceleration beyond the end of 21 timeframe. I think we're very well set up for future growth in 22 and in 23. Okay.

And just to put a finer point on that, Scott, I mean, is this what we're talking about here, it sounds more permitting construction related, which I know you've referenced in the past, but in the past it's also seemed more like hospital access and travel restrictions, especially in some of your international markets. Is that becoming lesser of an issue for you, and it's more the former on the construction and permitting, or am I just overreading some of those comments?

It's both. It's on the permitting front, the construction front, and our access continues to be restricted, for example, in certain parts of Europe and certainly in Asia as well. You know, we have conversations with our counterparts about that do vault preparation and construction for our customers, you know, to validate what we're seeing. And they are, you know, seeing those challenges permitting, construction, even getting workers hired is a challenge for them. And then we have our own challenges on the installation front, primarily in the form of accessing accounts. So I think your read is exactly right in terms of the challenges that we and our vendor counterparts have. Okay.

Okay. That all makes sense. And maybe just a quick one here on R&D. You know, this was a new absolute high for you in this quarter, which I guess makes sense given the growth in the clinical work and the system enhancements you've been driving towards. And again, I don't want to overread a single line item here or a single quarter, But are you feeling a bit more comfortable loosening the purse strings here on some of these items, given maybe the better intermediate-term revenue outlook, in light of that order book that you've been building here the last couple quarters and the big backlog we're now sitting on?

Yeah, Jason, I would tell you from a macro perspective, when you look at our three pipelines, our clinical pipeline has never been more robust than it is. Our innovation pipeline is gaining speed, and our commercial pipeline obviously is increasing in its depth and breadth as well. And that's what has led us to, as we said in our prepared remarks, to increase our investments both in the R&D side of our business and on our commercial team. And on the commercial side, it's primarily in teammates that will help deliver the our customers' success. So we feel great about our clinical and innovation pipeline. We feel increasingly more comfortable about the growth of the business going forward, and that's what's given us the confidence to increase our investments. And I would tell you, in 21, just to kind of dimensionalize what we're talking about, we estimate that here in the back half of the year, we'll increase R&D and our commercial investment by about $4 million. All right. Very helpful caller. Thanks, Scott. Thank you, Jason.

Thank you. And our next question comes from the line of Anthony Patron with Jefferies. Your line is open. Please go ahead.

Thanks, and I hope everyone's doing well. I may start with orders in the Court of the Seven Orders section. And just looking at the announcement in late June on Genesis Care for 14 systems, just want to clarify if any of those systems were in that order number in the quarter. If not, how those 14 systems will be reflected in orders going forward, and then I'll have a couple of follow-ups.

Yeah, thanks, Anthony. We hope you're doing well also. Two of the seven orders in the quarter were from Genesis Care. And, you know, as we share with investors, you know, frequently, the way we view that MPA with Genesis Care is the way that we have viewed our relationship from the very beginning. Those guys said to us a couple of years ago, you know, put one system in the ground and prove that it's as good as they think it is and as we think it is. We did that at Oxford. That worked well. very well for them, as you can see on their social media. That led to a second system, and now we have two more for a total of four. And then the incremental systems represented in the MPA, the way we view that is we earn those one at a time by just having great clinical, strategic, and economic performance with them. So that's how we view it. And again, to answer your question, two of the seven orders in Q2 were from Genesis Care. That's helpful.

And then the follow-up would be just, you know, when you sort of think about orders sort of picking up here overall, regardless of where we are in a COVID cycle, maybe just a little bit on the Meridian funnel. And, you know, are there any large tenders that are out there and how you see that evolving through the back half of the year? And the last one I'll sneak in is just an update on timing for the UCLA season. prostate study, is that still expected in the second half? Thanks.

Yeah, a couple of things there. As it relates to kind of orders in the back half of the year, I would say qualitatively and quantitatively, our pipeline on the orders front is more robust than it's ever been. That's true across academic centers, community hospitals, for-profit chains, et cetera. So we feel very good about that. I don't want to go any further and get ahead of myself. I will reinforce, as we said in our prepared remarks, that COVID challenges have not helped us over the last 18 months. From an order and revenue standpoint, it's put pressure on the business. And as I said, I think we're very well set up for the long-term And I don't want anybody getting in front of us here in the short run because of what we perceive happening in the next several years in the business. So we feel very good there. On the clinical side, yes, specifically the UCLA study is still on track for the timing that we mentioned previously. I think we'll get some very interesting data here in the 22 timeframe. on a number of studies, including the UCLA prostate study. Thanks again. Thanks, Anthony.

Thank you. And our next question comes from the line of Marie Heibel with BTIG. Your line is open. Please go ahead.

Hi, good afternoon. This is Sam Iberon for Marie. Thanks for taking the question. I think just going back to the Genesis care, when, hey, how are you? Just going back to the Genesis Care win there, wondering if that agreement came with any kind of ASP discount. And then you also talked about increasing the MSPs there. Any potential for an increase from the up to 14 systems today to something even larger down the road? Thanks.

Yeah, Sam, I would say the agreement that we have with Genesis Care carries a slight discount to the ASP that you saw in the quarter, which was excluding the one upgrade from a little north of 6 million. So I would say a slight discount from an ASP perspective. And in terms of what the future is with Genesis Care, you know, again, I don't want to get ahead of where we are. My view is we earn those orders one at a time, even though we have a 14 system MPA and we've received two orders. I think the value that we deliver to customers broadly is Genesis Care and beyond is really reflected in the clinical, strategic, and economic value that you saw from Dana-Farber, Brigham and Women's, and MCI. And that's what's really driving our success in the marketplace across all customers across all regions of the world. Great.

Thanks for taking the question. Thank you.

Thank you. And, again, if you have a question at this time, please press star, then 1. And our next question comes from the line of Andrew DeSilva with B. Riley Security. Your line is open. Please go ahead.

Hey, good afternoon. Congrats on the progress. So just to pop back on the Genesis Care question line, I believe a substantial portion of elective unity backlog is tied to Genesis Care as well. Any sense of how that will be apportioned or if that's being phased out given your recent agreement with Genesis Care? It seems like they wouldn't have both systems running in all their facilities unless there was some strategic reason to do it.

Yeah, Andy, thanks first of all for your comments on the progress in the business. We feel really good about the work that the team is doing, so thank you for that. You know, I wouldn't care to comment on anybody else's backlog there. I would tell you that we feel very good about the relationship that we have with Genesis Care. And more broadly, you know, as I mentioned on the previous question, the clinical value translating into strategic and economic value, we have heard this story now across 45 different customers that are clinically active treating patients. And that gives us a lot of confidence in terms of the future of our business. And you put that together, understanding our customer's definition of clinical success, ablative dose type margins, no fiducials, five or fewer fractions, and low to no grade three or higher toxicity, and the fact that we're the only system consistently generating that kind of data, we search constantly for it, we think the combination of those factors is really moving us along. And then you put in there the continuous flow of really positive clinical data and the work that we're doing right in line with our customers' desires on the Meridian system, things like sub-20-minute treatment times, brain treatment package, et cetera. We feel as though that's really driving our success across all customer types and across the globe. So I'll leave it there, and we will continue to be transparent with future Genesis Care orders, and we only put two in our backlog. I want to be really clear about that. I think we do treat our backlog a little bit differently than some others do. We only put two in our backlog, and we'll only do that with firm purchase orders.

Okay, perfect. And then as it relates to Genesis Care's systems that have been put in the backlog, Are the two systems replacement systems, or are they actually a new build-out?

When you say replacements, do you mean replacements for current systems that they have or empty vaults? Is that your question? Yes. These are replacements for other systems that were previously in use. Okay.

Okay, that's useful context. And then what's interest been like post that announcement? I'm sure Genesis there is noteworthy enough where this one's on the radar of other facilities. Has there been any uptick post that announcement?

I think, you know, anytime you make an announcement like that, it catches the attention of the marketplace. I think it certainly is helpful. to us, it's a real validation point that one system led to two systems, has led to four systems with them, and an opportunity via the MPA to go north of that. And I think, likewise, the other thing that we hear a lot about from prospective customers is the fact that so many of our customers have purchased incremental systems. We made the point in our prepared remarks You know, whether you're talking about AUMC or Henry Ford or Genesis Care or Jefferson Health, that doesn't happen unless you have a system that not only works clinically but works strategically and economically for a customer. So there's kind of an aggregate effect of things that are catching the attention in the marketplace, and all of that value begins with and flows from the clinical value of Meridian.

Okay, perfect. And then a last question for me, has there been any change in where orders are coming from? Specifically, are you seeing regions where there are existing systems being utilized for treatment having increased interest relative to regions that they don't have a meridian system installed? And the area that I'm looking at as a point of reference is Florida, but I'm curious if that's resonating in other regions.

Yeah, I think, you know, it kind of continues, Andy. I think the interest in Meridian is increasing across the globe. I do think, to your point, in areas where Meridian is, in essence, taking patients competitively, there is more activity. We see that in the UK market. We see it in Florida. I think we're going to start to see it with more intensity in the mid-Atlantic region, in the upper Midwest region. So I do think there's a competitive factor here, and patients are definitely traveling for the system. Again, reference back to what you heard from Dana Farber and MCI, something like a quarter of their patients are traveling from outside of their traditional catchment area, and a non-trivial number of them are patients they wouldn't or couldn't treat on any other system. So as that word gets out and spreads, It obviously means very good things for cancer care, but it also means good things for our order book.

Okay. Well, great. Congrats on the progress again, and good luck going forward. Thank you, Andy. Thanks, Andrew.

Thank you. And I'm showing no further questions at this time, and I would like to turn the conference back over to Scott Drake for any further remarks.

Thank you, Operator, and thanks, everybody, for joining us on our Q2 call. We look forward to doing it again in Q3. Have a good day.

This concludes today's conference call. Thank you for participating. You may now disconnect.