ViewRay, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the V-Ray Q3 2021 earnings 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 the session, you need to press star 1 on your telephone. If you require any other assistance, please press star 0. I would now like to turn the call over to your host, Cassie Marhar. You may begin.

Thank you, Operator. Good afternoon, everyone, and welcome to V-Ray's third 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.vray.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, November 4th, 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, Cassie. Good afternoon, everyone, and welcome to our Q3 call. Today we will begin with key patient metrics, then discuss our third quarter results and recent events. We'll share exciting progress in our clinical and innovation pipelines. Zach will cover our financial results, 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 46 Meridian systems installed and over 50 in backlog. About 16,000 patients have been treated on Meridian, thousands of them with clinically reported outcomes that are consistent and compelling. Clinical curiosity on our system is remarkable. Our customers have initiated over 60 clinical trials. This growing body of data is vital to our efforts to change and improve the paradigm of care. Let's begin with our Q3 results on slide four. We continue to have solid financial performance in 2021. This quarter we delivered another seven Meridian orders versus four in Q3 2020. We have received more orders in the first nine months of 2021 than all 12 months in 2020. Our backlog grew $56 million, or 24% over prior year, and now stands at $295 million. Revenue was 19 million for the quarter, based primarily on three revenue units. Total gross margin for the quarter was 10%, an increase of 2,100 basis points over prior year. All of this growth was achieved while keeping operating expenses roughly flat. Finally, from a cash perspective, we used approximately $17 million in the quarter and ended with $150 million of cash on hand. Beyond financial results, we continue solid execution on our clinical, innovation, and commercial pipelines. Turning to slide five, it's important to always anchor on two critical customer desires. First, the number one thing our customers want is meaningful clinical data. And second, they're very clear about how they define clinical success. They want to deliver an ablative dose with tight margins, no implants, in 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. First, to expand the utilization of Meridian Smart, and second, to become frontline therapy. The cycle of more clinical proof leading to more therapy adoption is greatly benefiting our customers' cancer programs and patient care. Turning to slide six. Last week we conducted a webinar with two key opinion leaders who provided insights on Meridian's value in both tough to treat and more ubiquitous cancers. Our goal in tough to treat cancers is to maximize local control and survival while minimizing grade three or higher toxicity. Dr. Michael Chung presented yet another compelling data set in pancreatic cancer. 148 patients were treated in a multicenter prospective study. Median survival was 26 months for Meridian patients, which compares favorably to 12 to 15-month survival, which is commonly delivered with conventional therapy. Two-year survival was 53% on Meridian versus about 20% commonly seen with conventional technology. These data are consistent with what's been demonstrated on Meridian across customer sites. Excellent survival and local control with minimal levels of side effects. On the next slide, Dr. Nagar highlighted the incredible results he delivers in prostate cancer and the upcoming data we eagerly anticipate. In more ubiquitous cancers like prostate, we strive to prove critical quality of life value Dr. Nagar highlighted a series of groundbreaking trials that are designed to prove the value of Meridian. First, the MIRAGE trial is designed to prove that Meridian delivers a 50% or greater reduction in grade two toxicity as compared to conventional radiation therapy. MIRAGE is a phase three randomized control trial and, if successful, represents a landmark event for Bure and prostate patients. Second, the SIMITAR trial is designed to prove that five-fraction meridian SBRT can safely be delivered post-prostatectomy versus the four to six weeks of treatment on conventional technology, another needle-moving trial. Finally, SHORTER, a phase two randomized control trial, and FORT are designed to prove first that five-fraction therapy is as safe and effective as 20 fractions, and second, The Ford trial is designed to prove that we can take five fractions down to just two. Dr. Nogger stressed that this clinical value is translating directly to strategic and economic value for Cornell, with a four-fold increase in their prostate volumes since the inception of Meridian. The aggregate effect of these trials has the opportunity to demonstrate the outstanding safety profile of Meridian SBRT versus conventional therapy and holds the promise for two fraction therapy to be a viable, non-invasive, no catheter alternative to surgery. Turning to slide eight. To summarize on the clinical front, it's important to highlight the depth and breadth of work our customers are doing. They have over 60 trials underway. They're studying dozens of cancer types. They're demonstrating value in the toughest to treat and ubiquitous cancers alike. They're experimenting with cutting edge things like single fraction therapy in a half a dozen tough to treat cancers. Everything from phase one feasibility studies to phase three randomized control trials. According to key opinion leaders, there's nothing else like it in the industry. Slide nine highlights the recent commercial activity at Astro last week. It was great to be back with customers. ASTRO afforded us the opportunity to highlight recent clinical data and our 510 filing. The customer presence and response was terrific. The excitement was palpable, and we cannot wait for imminent clinical data releases and the launch of our newest innovations. Speaking of which, moving to slide 10, on the innovation front, our 510 was recently accepted for review by the FDA on the newest generation of Meridian features focused on enhancing on-table adaptive workflow efficiency and expanding clinical utility. Advancements include features such as new MRI imaging sequences, automated workflow steps, on-table auto-contouring tools, multiplanar tissue tracking with automated beam gating, and the ability for clinicians to work in parallel throughout the workflow. The submission also includes a new brain treatment package and the integration of real-time patient feedback display. These elements are the highest priority items for our customers and prospective customers. Turning to slide 11, momentum in our clinical and innovation pipelines accrue to commercial efforts. We work hard to identify the clinical proof and innovations that really move the needle for our customers. With that clear understanding, we allocate capital and energy to deliver on exactly what our customers desire. This process has led to more and more customers purchasing incremental Meridian systems, an important sign that changing and improving the paradigm of care is actively underway. I will now turn it over to Zach to share our financial results.

Thank you, Scott. We continue to have solid financial performance in 2021. This quarter, we delivered another seven Meridian orders versus four in Q3 of 2020. Our performance in the first nine months of the year is solid and represents 24% growth over our full year 2020 order total. We again grew backlog to a new high, ending the quarter with a balance of 295 million. This represents a 24% increase over Q3 of 2020. Revenue grew 90 percent to $19 million for the quarter, based primarily on three revenue units. Our gross margin was a positive 10 percent for the quarter. As we have commented on in the past, each incremental revenue unit is key to improving our margin profile. The 2100 basis point improvement is largely driven by the step-up in revenue units from one in Q3 of 2020 to three in Q3 of this year. We are growing orders, backlog, and revenue, and enhancing gross margin, all while controlling OpEx, which was roughly flat versus the same period last year. From a cash perspective, we used approximately $17 million in the quarter. Our cash use was adversely impacted by a single payment of $5.2 million that was collected early in Q4. We finished the quarter with $150 million of cash on hand. Earlier this week, we filed an 8K regarding the modification of our debt covenants with SVB. Through a combination of performance and partnership, we were able to lower our liquidity covenant from 1.7 to 1 down to 1.35 to 1, providing access to further liquidity. Slide 14 provides a more detailed view of our Q3 P&L, which will be available when we file our 10Q tomorrow. Turning to slide 15, it is important to look at the business both quarter to quarter and over more extended periods of time. Taking a look at our nine-month 2021 results, we are encouraged by several metrics. Order, backlog, and revenue growth are all tracking nicely. In particular, it's important to look at gross margin over multiple quarters, and the trend is positive when measured over the nine-month period versus prior year. We are operating well and controlling costs with operating expense down slightly year over year. And we are encouraged by how the team is performing and by the growth in demand as evidenced by increases in orders and backlog. Now turning to guidance. On slide 16, we are reiterating our previously issued full year 2021 guidance for both revenue and cash usage. Our team is doing solid work in managing COVID-related project and supply chain disruptions. We anticipate that these challenges will abate sometime in mid-22, and we are encouraged by the opportunity for value creation that lies ahead. I will now turn it back over to Scott for closing remarks.

Thanks, Zach. We're in the midst of an exciting time for the company and for patient care. Meridian therapy again demonstrates excellent clinical results and low levels of toxicity. We anticipate significant data sets from groundbreaking trials such as Mirage, Scimitar, Shorter, and SMART. We highlighted several innovation enhancements that are pending with the FDA, all intended to further the technical and clinical advantages of Meridian. We are bringing world-class institutions into the Meridian family such as Stanford and Northwestern, and more and more customers are purchasing incremental systems evidenced by the recent Baptist Health expansion. The momentum in our clinical and innovation pipelines are visible in our P&L. Orders, revenue, gross margin, and backlog are all up significantly, while op-ex are flat. We are seeking to drive considerable leverage and shareholder value over time. We are in an exciting phase of our company's growth, and the future is bright for patients treated on Meridian. With that, operator, we'd like to open the line for questions.

To ask a question at this time, please press star, then the number one key on your touchtone phone. To remove yourself from the queue, just press the panel key. Once again, that's star one for questions, one more for questions. Our first question is on the line of Jason Bednar. on Piper Sandler. You may begin.

Hey, good afternoon, Scott and Zach. Congrats on another nice quarter here. You guys have been a model of consistency here. You were running four orders per quarter in 2020, and now you're running seven orders per quarter here in 2021. I know it's dangerous to try to connect dots, but How much visibility do you feel like you have into the order funnel remaining near these levels as we think ahead of the next several quarters? And then kind of within that, could you also confirm whether there were any Genesis Care orders in the seven that you booked this quarter?

Yeah, thanks again, Jason. Appreciate the question here. I think you're right. I think we have reached a level of consistency, you point out, both last year and this year, And it feels like we're at a newer, nicer level of commercial activity. And as you know, we monitor that very closely. I'm very pleased with both the qualitative and quantitative nature of our commercial funnel. And I would say our confidence level is increasing. I think it's important to note in many of our metrics, certainly orders included, It is important to look at this business over longer periods than just one quarter. I'm very gratified by the work that our commercial team is doing. They are signing up orders, generally speaking, more at the beginning of the quarter than at the end. I think that's a very nice sign for us. We are holding firm on our pricing because we know the value that we represent to our customers clinically, strategically, and economically. As it relates to specifically any orders with Genesis Care, we don't have anything here to announce, Jason. We are working very closely with Genesis Care on opportunities across target landscapes But I wouldn't overthink any individual customer. We have a lot of opportunities with for-profit chains, academic centers, community hospitals, freestanding centers, and we feel very good about that order funnel. So while we care deeply about our partnership with Genesis Care, I would encourage investors to look very broadly across the landscape of opportunities that we're working on.

Got it. Very helpful there, Scott. Maybe if I flip over on the install side, since that was mostly order focused. It sounds like from maybe Zach's remarks there that you all have some line of sight to some of those installs and activity there on the installs starting to loosen up next year. But maybe expand a bit more on the comment on what you're seeing. Is it hospital access that's opening up? Are construction delays resolving themselves? Yeah, just any additional color there would be great. Thanks.

Jason Gildea Yeah, absolutely. Maybe I'll start and invite Zach to chime in as well. As it relates to the landscape, Jason, I kind of think about it in two ways. Number one, the competitive landscape, and I would say on that front, things are very steadily improving, maybe even significantly improving. I think we are articulating our story, and it is better and better understood by both current and prospective customers. The clinical pipeline that we have, as evidenced by Dr. Michael Chung's presentation at ASTRO, in the toughest to treat cancers is extraordinary. And in more ubiquitous cancers, likewise, there are a series of trials that I think are really groundbreaking for prostate patients in particular, but also breast cancer. And then there's things that our customers are experimenting with, like single fraction therapy in some of the toughest to treat cancers. So I feel like on the clinical side, our customers are more clearly and deeply understanding the value of what Meridian delivers. Then, on the innovation side, likewise, I would say momentum is building there, and that feels very good to us. All of those things that are pending with the FDA as we speak, we highlighted what those attributes are, and it is just a prioritized list of what our customers want, and all of that accrues, the clinical and innovation pipeline accrues to our commercial pipeline. So that's kind of our what we control view of the landscape. And then, of course, we continue to manage challenges as it relates to the pandemic with our construction partners, difficulty with their supply chain and hiring workers, all of the things that you have seen from other companies out there. We do anticipate that those challenges will abate in the next couple few quarters. and really see things hopefully open up to your point in the back half of 22 and into 23. And our goal and our customers' goals are really to accelerate the backlog into revenue, but we do remain challenged in certain locations there. Zach, anything to add?

Yeah, I think that the big key for us is once we get kind of the shovel in the ground on the construction project, we have very good line of sight into ultimate completion and turning the system over to the customer. I think the challenge right now is just, you know, there's a lot of constituencies involved at the hospital level and just kind of coordinating those projects and kind of globally speaking, our customers are in various, you know, positions as a result of the pandemic, but we do see signs of life and, like I said, In the opening remarks, you know, we think some of that will abate kind of mid-next year and hopefully pick up steam in the back half of the year.

All right. Very helpful. I'll hop back in the queue. Thanks, Jason.

Our next question will come from Anthony Patron from Jefferies. You may begin.

Thanks, and congratulations on a good quarter. I wanted to focus on actually installations. The revenue was ahead of our expectations, so it looks like installations got a bit back on track, so maybe an update on installation cycles, and then a follow-up there would just be on hospital access generally as you're working through the funnel. Obviously, we've had the renewed Delta headwinds, and we're hearing a lot about staffing shortages. So I'm just wondering how that's playing out in terms of hospital access for the sales force. Then I'll have a follow-up on data. Thanks.

Yeah, you got it, Anthony. Thank you. Relative to installations and hospital access, I think there's a couple of points that I would make. First and foremost, just acknowledging what is. We continue to be challenged by in a way from location to location in terms of being able to get into accounts, supplier challenges, worker challenges, all of that stuff that we mentioned in the prior question. But I think there's two things, Anthony, that I would point out here. Number one, we did our best to really take that into account when we set our guidance after Q2. And number two, I think our team is doing a very good job managing the challenges that we face. We are not only working directly with our suppliers, we're working with secondary and tertiary suppliers, really trying to mitigate, see around corners, and manage the business to the best possible way that we can. And as Zach mentioned, we believe, you know, we're trying to see into the future here. We believe that mid-next year, back half 22 into 23, we think we get into a really attractive situation, even though our growth numbers from a percentage standpoint are pretty compelling today. We think we can really deliver going forward, even when the numbers get meaningfully larger. So that's our best assessment at this time.

That's helpful. And the follow-up would be on the Baptist study in pancreas. Just noticed it was, you had dosing of 100 gray and certainly at two years a substantial benefit in survival. And I'm just wondering, you know, sort of the takeaways at ASHRO after this data was presented. 100 gray is even higher than some of the dosing, I believe, in the retrospective study. But again, certainly a overly positive outcome here at two years in terms of survival. So maybe just next steps on the pancreatic cancer side and what you're hearing from radiation oncologists as this data was presented. And congratulations again. Thanks.

Thank you, Anthony. Yeah, I would say the reaction at ASTRO was really positive, and we've had a number of conversations since then with customers, and if you look at the data that has been compiled, it's really compelling. You referenced the successful outcome in the high-low dose study. That has been followed by WashU, Moffitt, any number of institutions that have published more data. We followed that on with 148 patients with this multicenter study that Dr. Chung presented. outstanding clinical outcomes, and very low levels of healthy tissue toxicity. And what I would point out here, Anthony, are a couple of things. Number one, not only are we getting those kinds of results in pancreas, but look at the data that has been demonstrated in central lung and ultracentral lung, in cardiac sarcoma, in liver, in kidneys. I know there are some out there that want to talk about, well, we're a niche for pancreas. But you look across the whole landscape of the toughest-to-treat cancers, and we're generating this kind of data in a very consistent and compelling way. Thousands of patients with consistent and compelling data. No safety signal. Then you look at more ubiquitous cancers. We highlighted prostate. The four studies we talked about, Mirage, Scimitar, Shorter, and Fort, the aggregate effect of those studies is just profound for view rate, but even more importantly for prostate patients. So we put a stake in the ground a little over three years ago and said that we were going to lead and differentiate with clinical data. Standing here today, I would tell you I think that was a right-headed move for us to make. And I think what lies ahead, frankly, is even more exciting. So I'm very proud of the work that our team has done in partnership with customers, and I think there's a lot of that that lies ahead.

Thanks again. I'll hop in the queue. Thank you.

Our next question comes from Marie Tabel from VTIG. You may begin. Thank you.

Hey, good afternoon, Scott and Zach. This is Sam Iber on for Marie. Thanks for taking the questions. Maybe here first on the new innovation package submitted a few weeks ago. How should we think about maybe the timing here and the rollout once cleared?

Well, you know, I think, Sam, I guess the context that I would provide is it is our ongoing process that's been very consistent since you know, the team joint view rate to really deeply and clearly understand what's going to move the needle for our customers, teammates as well, but I think you're focused on customers here, both clinically and from an innovation standpoint. And the work that our team has done, deeply and clearly understanding the desires of our customers, has led to the 510K filing that we have in place. It is a a pretty robust list of things that our customers most desire from us. And I would point out that that is true from both current customers and prospective customers. Very important that we understand the voice of the overall market. And so we very much look forward to driving those innovations into the marketplace. We respect the FDA and want them to do the work at their pace. but we very much look forward to getting those innovations into the market.

Understood. Thanks for the call there. And then maybe one on product revenue here, considering roughly three systems installed during the quarter. It looks like ASPs may have come down just a little bit. Anything to read into there? Is that just related to maybe some revenue recognition aspects?

Yeah, I think there's – What's important to keep in mind is the mix between direct orders and distributor orders and how that changes over time. The other thing that can move it, Sam, are upgrades versus true new orders. So, I don't think there's anything to point to as it relates to ASP. I think our team is doing a very good job of holding the line there and extracting the value that we think we deliver to our customers. Zach, would you add anything?

Yeah, Sam, I'd just add that I think that, you know, orders over gross order value is a little bit better reflection of ASP versus, you know, kind of revenue. There's always some nuances in contracts and deals that we do that can dictate, you know, different RevRec considerations. So I think that if you look at orders in the quarter, you know, You know, we're still in that, you know, $5.5 to $6 million range, but revenue, you know, sometimes clouds it a little bit with some of the technical aspects.

Perfect. Makes sense. Thanks for taking the questions.

Thank you, Sam.

Our next question will come from Mike Ott from Oppenheimer. You may begin.

Good afternoon, Scott and Zach. Thanks for taking my questions. Wondering if you guys can provide details Any additional order color by region? I know another name in the space saw some strength in China recently.

Yeah, Mike, I think our business generally reflects the overall market, which is about one-third U.S., two-thirds O.U.S. It changes, obviously, from quarter to quarter when you're talking about the kind of relatively small order numbers for us. But, you know, we really focus on U.S., Europe, Japan at this point in time, the markets that, you know, I think you really need and want to succeed in. We are hopeful that we'll be getting into the China market. We're not at the place yet to be able to call that. But we're really doing quite well in our focus markets and look to expand that over time.

Absolutely. Makes sense. Okay. And then shifting a little bit, curious if you guys had any surprises or have any additional color on the RO-APM that was finalized this week.

Yeah. You know, it really came out, Mike, the way that we anticipated. No surprises in terms of its final form. No surprises in terms of the timing. We have several customers that are included in the RO-APM. We've had a lot of conversations not only with those customers but those outside of the zip codes that are targeted there to understand what kind of impact the ROAPM may have in the marketplace. I would tell you the view is pretty unanimous out there. There are two consequences that we anticipate as a result of the new payment scheme, and that is, number one, driving shorter courses of treatment And number two, as we drive shorter courses of treatment, that excess capacity that our customers will have as a consequence of that, they're gonna wanna fill up that capacity with patients. And so I think, number two, along with shorter courses of treatment, there's gonna be increased competition for patients. And if you think about what we offer, what Meridian offers, give or take the overall US market, is at 14% SBRT, and our customers in the U.S. are delivering SBRT, five-fraction SBRT, about 90% of the time. So if you're looking for short courses of treatment, we're very well positioned to do that. And if you're looking to compete for patients, similarly, you hear consistently from our customers that about 20% to 25% of the patients that they treat on their meridian system come from either outside their catchment area or are patients that they wouldn't or couldn't treat on any other system. So I think we're incredibly well positioned for the ROAPM, and I think that's instigating some conversations with prospective customers as well.

That's all great to hear. Thank you so much for that detailed update. Thanks, Mike.

And once again, that's star one for questions. Our next question will come from the line of Justin Walsh from B. Reilly Securities. You may begin.

Hi. Congrats on the quarter. The Astro presentation was really impressive. I'm wondering if you can share any color around how these types of results facilitate your engagement with current and future customers and Are there any data packages or applications that have particularly excited people? Obviously, I'd imagine pancreatic cancer is up there.

Yeah, Justin, I think the clinical curiosity that we reference certainly is within our customer base. I think they have, give or take, 68 or so, I think was the last number that I heard, clinical trials going on within Meridian. everything from feasibility, phase one work, to phase three randomized controlled trials, and it spans the waterfront of the toughest to treat cancers all the way to more ubiquitous cancers, as we've highlighted. So there's a lot of interest and curiosity there, and I would tell you quite frankly, our customers are leading the way and pulling us. we were not thinking a year or two years ago about single fraction therapy for a half dozen of the hardest to treat cancers. Our customers are really pushing the envelope. And when you see this kind of data, the two-year survival data in pancreas, the demonstrated value in liver, kidney, central lung, cardiac sarcoma, prostate, you name it, it really has the attention of prospective customers as well. And I think a couple of other things are moving in our favor. Number one, patients are traveling for this therapy and virtually all cancer patients or their loved ones go on the internet to find the best care for whatever condition they may have. And number two, we have certain markets now where since patients are traveling, it's instigating incremental commercial interest in Meridian. So, you know, we want to be factual with investors and transparent with what's happening. We want our performance, not our words to speak. But that's very much what's going on in the marketplace right now.

Got it. Thanks. That's very helpful. Maybe a follow-up on that point. Clearly, you guys have been making some – some great investments in R&D to help continue to push that. Obviously, your customers are doing a lot of the trials as well, as you mentioned. I'm curious how you see your sort of R&D spend looking in the next couple of quarters, and if you think that that is going to have a meaningful impact on that post-mid-2022 breakout that you guys are shooting for.

Yeah, Justin, I think you're going to continue to see really nice leverage in our P&L. You saw nice growth in orders, revenue backlog, margin, and operating expenses roughly flat. I do think we will continue to invest more in our P&L. I think we will invest more commercially, but I think that will be significantly outstripped by revenue growth on the top line. We have, I think, a lot of clarity as it relates to what we need to do clinically and from an innovation perspective for customers to continue along the pathway that we see ourselves on. But I think you're going to see significant leverage in the P&L.

Great. Thank you for taking the questions.

Thank you.

Thank you. Once again, that's star one for questions. One more one for questions. And I'm not showing any further questions at this moment.

Perfect. Well, thanks, everybody, for joining us here for our Q3 call. We look forward to doing it again next quarter. Thanks for your interest in V-Ray.

And this will conclude our conference call for today. Thank you for your participation. You may now disconnect. Have a great day.