“The best work anyone has ever written is the one that is about to embarrass them, always.“-Arthur Miller
The last time we took an in-depth look at the ViewRay radiotherapy problem (NASDAQ: VRAY) was back in early 2019 when we concluded it was an interesting small cap name, but it was bleeding too much money for anything other than a very small ‘watch the article‘ position. We also said that we may revisit the company at some point in the future. Given some recent large insider buying, it seems like the time is right to ‘return circle‘ on this concern. An analysis follows below.
ViewRay is based just outside of Cleveland, OH. The company designs and markets magnetic resonance imaging or MRI-guided radiation therapy systems to image and treat cancer patients. Its main product is called MRIdian, which is an MRI-guided radiation therapy system that treats beam distortion, skin toxicity and other problems. Each system costs approximately $6 million and generates an equal amount in recurring/lifetime support revenue.
The stock currently trades at just over three dollars per share and has an approximate market capitalization of $540 million.
First quarter results:
On May 5, ViewRay released first quarter numbers. The company posted a loss of 14 cents per share on a GAAP basis, slightly worse than expected. Revenue rose nearly 22% year-over-year to just south of $19 million, well above consensus.
The company received seven new orders for MRIdian systems totaling nearly $41 million. Backlog now stands at nearly $331 million, up significantly from just under $265 million a year ago. Management reissued guidance calling for revenue of between $84 million and $104 million for fiscal 2022.
Analysts’ comments and review:
Analysts are largely optimistic about the company’s prospects. Earlier this year, B. Riley Financial and Stifel Nicolaus upgraded or floated the stock for a buy. Both with identical price targets of $7. So far in May, BTIG ($9 price target) and Piper Sandler ($7 price target) have reissued buy ratings on the stock while Morgan Stanley ($4 price target) maintained its holding rating.
Several insiders also stepped in in May, racking up nearly $5 million in total stock, including the CEO and CFO. Approximately six percent of the overall stock float is currently held short. The company ended the first quarter of this year with about $183 million in cash and marketable securities on its balance sheet after posting a net loss of $25.6 million in the quarter.
The company used just over $35 million in cash in the first quarter, which tends to be a cash-heavy quarter seasonally. Management expects to use between $68 million and $83 million of cash to support all operations in fiscal year 2022. Management also said it has the liquidity to achieve break-even cash flow. .
The current analyst consensus has the company losing about 60 cents per share in fiscal 2022 as revenue grows just over 35% to just over $95 million.
The MRIdian system appears to be gaining more market acceptance and the company has a large and growing order book. The challenge for the company appears to be to quickly convert backlog into installed sales, which will generate their own recurring revenue and improve margins. Gross margins for 1Q 2021 were down from a year ago and cash usage also increased by approximately $7 million in the quarter. Management is focused on driving a 750 basis point to 1,000 basis point improvement in gross margins in fiscal year 2022.
Even with the stock’s decline over the past six months, equities are nearly six times forward sales. ViewRay is an interesting name to watch and recent insider buying is encouraging. However, until margins improve and cash burn dissipates, except for a small ‘watch the article‘ Reserved for long-term investors, we have no investment recommendation for the stock at this time.
“The attempt to escape pain is what creates more pain.“- Gabor Mate
Bret Jensen is the founder and author of articles for the Biotech Forum, the Busted IPO Forum and the Insiders Forum