IPO Report: ViewRay (VRAY)

Francis Gaskins |

ViewRay_logo.jpgViewRay (VRAY) designs, manufactures and markets MRIdian, the first and only MRI-guided radiation therapy system to image and treat cancer patients simultaneously.

VRAY is one of three new IPOs scheduled for this week. The full IPO calendar is available at IPOpremium.

VRAY scheduled a $52 million IPO on Nasdaq. The market capitalization is $189 million at a price range midpoint of $13. The IPO is planned for Thursday, March 26, 2015. The company is based in Oakwood Village, Ohio.

The manager and joint managers are  Cowen; Stifel. The co managers are  BTIG; Brean Capital. SEC filings

ViewRay Overview

MRIdian is a new technology in the radiation therapy systems sector.

ViewRay Valuation

Glossary

Valuation Ratios

Mrkt Cap (mm)

Price /Sls

Price /Erngs

Price /BkVlue

Price /TanBV

% offered in IPO

ViewRay (VRAY)

$189

29.5

-5.5

3.4

3.5

28%

ViewRay Conclusion

Neutral

Dec '14 backlog is $55mm, 8.6 times 2014 sales

40-60% of backlog expected to be converted to 2015 sales

If 50% of backlog converted to sales, '15 sales will be up 430%

Rev +103%, '14 vs '13

-43% gross margin, -528% loss for '14

P/E of -5.5, indicates high cash burn rate relative to market cap

3.4 times book, 30 times sales

VRAY is worth watching after the IPO

ViewRay Business

VRAY designs, manufactures and markets MRIdian, the first and only MRI-guided radiation therapy system to image and treat cancer patients simultaneously.

MRIdian is a new technology in the radiation therapy systems sector.

MRI is a broadly used imaging tool that has the ability to differentiate between types of soft tissue clearly, unlike X-ray or computed tomography, or CT, which are the most commonly used imaging technologies in radiation therapy today.

MRIdian integrates MRI technology, radiation delivery and proprietary software to locate, target and track the location and shape of soft-tissue tumors while radiation is delivered.

These capabilities allow MRIdian to accurately deliver radiation to the tumor while reducing the amount delivered to healthy tissue, as compared to other radiation therapy treatments today.

VRAY believes this leads to improved patient outcomes and reduced side effects from off-target radiation delivery.

ViewRay Backlog

In 2013, VRAY executed new sales contracts with a total value of $17.4 million, and in 2014 executed new sales contracts with a total value of $37.6 million.

At December 31, 2014, VRAY had 10 signed sales contracts for MRIdian systems in backlog with a total value of $54.7 million, of which VRAY expects to recognize approximately 40% to 60% as revenue in 2015 representing four to six MRIdian systems.

Can be Used for Different Types of Cancer

The MRIdian system can be used to treat lesions, tumors, and conditions anywhere in the body where radiation therapy is prescribed.

Physicians are finding MRI-guided radiotherapy to be of particular interest in the treatment of tumors that move significantly—tumors in areas like the lungs or liver, where the body's soft tissues shift naturally and the delivery of precise treatments is more challenging.

ViewRay technology may also be beneficial in monitoring movement with tumors in prostate, breast, bladder, head and neck, and other types of cancer where tumor and organ motion can affect treatments.

ViewRay 501(k) Marketing Clearance

VRAY received initial 510(k) marketing clearance from the FDA for treatment planning and delivery software in January 2011 and for MRIdian in May 2012.

VRAY also received permission to affix the CE mark in November 2014, allowing MRIdian to be sold within the European Economic Area.

At December 31, 2014, over 100 patients had received radiation treatment on MRIdian systems at three cancer centers located at Washington University in St. Louis, University of California, Los Angeles and the University of Wisconsin—Madison.

ViewRay Marketing

VRAY currently markets MRIdian through a direct sales force in the United States and distributors in the rest of the world.

VRAY markets MRIdian to a broad range of worldwide customers, including university research and teaching hospitals, community hospitals, private practices, government institutions and freestanding cancer centers.

THe sales and revenue cycle varies based on the customer and can be lengthy, sometimes lasting up to 18 to 24 months or more from initial customer contact to sales contract execution.

Following execution of a sales contract, it generally takes nine to 12 months for a customer to customize an existing facility or construct a new vault.

Upon the commencement of installation at a customer’s facility, it typically takes two to three months to complete the installation and on-site testing of the system, including the completion of acceptance test procedures.

ViewRay Existing Installations

VRAY has only been selling MRIdian since 2013 and its three MRIdian systems installed have only been used for treating patients since early 2014.

ViewRay Installation

Following execution of a sales contract, it generally takes nine to 12 months for a customer to customize an existing facility or construct a new vault.

Upon the commencement of installation at a customer’s facility, it typically takes two to three months to complete the installation and on-site testing of the system, including the completion of acceptance test procedures.

On-site training takes approximately one week and can be conducted concurrent with installation and acceptance testing.

Sales contracts generally include customer deposits upon execution of the agreement, and in certain cases, additional amounts due at shipment or commencement of installation, and final payment due generally upon customer acceptance.

Intellectual Property Already Used as Collateral

At December 31, 2014, VRAY had $15.0 million in outstanding debt to Hercules. Borrowings under the  loan and security agreement with Hercules are secured by substantially all of VRAY's personal property, including intellectual property.

ViewRay Intellectual Property

VRAY holds the exclusive worldwide license for certain patents and applications covering the  combination of MRI and radiation therapy technologies.

Specifically, VRAY holds a license to two issued U.S. patents, two pending U.S. applications, 13 issued foreign patents (eight of which were issued in Great Britain, Germany, France and the Netherlands as a result of two applications filed and allowed through the European Patent Office) and five pending foreign applications at December 31, 2014.

VRAY owns an additional five issued U.S. patents, one issued foreign patent, 16 pending U.S. patent applications and 48 pending foreign patent applications, and at December 31, 2014, three of VRAY's U.S. applications and four foreign applications were allowed.

Assuming all required fees are paid, individual patents or applications owned or licensed by VRAY will expire between 2025 and 2034. VRAY also has a joint ownership interest with Case Western Reserve University in one U.S. patent application

ViewRay Competition

VRAY competes with a number of existing therapy equipment companies, including Elekta AB, Varian Medical Systems, Inc. and Accuray Incorporated.

In addition, VRAY may compete with certain MRI-linear accelerator research projects that are currently in development and may be commercialized, including projects by the University of Alberta’s Cross Cancer Institute and a partnership of the University of Sydney, Ingham Institute and the University of Queensland.

Existing technologies may offer certain advantages compared to the MRI technology used by VRAY's  MRidian system.

For example, computed tomography, or CT, is known to hold certain potential advantages over MRI technology for use in radiation therapy.

Diagnostic CT is currently the most widely adopted imaging modality for treatment planning, and can be used to directly measure the electron density of patient tissues, which enables more accurate dose computation.

In addition, CT imaging provides superior imaging of bones and boney anatomy than MRI, which is advantageous when imaging those structures for planning and alignment for treatment.

Finally, CT is a less expensive technology than MRI and might be preferred by customers seeking a lower cost solution.

ViewRay 5% Shareholders Pre-IPO

Aisling Capital II, LP 23%

Beacon Bioventures Fund II Limited Partnership 23%

Entities affiliated with OrbiMed Private Investments III, LP 23%

Entities affiliated with Kearny Venture Partners, L.P. 13%

Harbour Tycoon Limited 8%

ViewRay Dividends

No dividends planned.

ViewRay Use of Proceeds

VRAY expects to receive $45 million from its IPO. Proceeds & cash are allocated as follows:

$18.0 to $25.0 million to support the ongoing commercialization of MRIdian, including, sales and marketing activities, manufacturing and supply chain management, installation, customer support and product quality; and $17.0 to $20.0 million to fund research and development capital and expenses related to continued product development activities; and remainder for general corporate purposes, including working capital.

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