Accuray has gotten a fair amount of attention from investors and from investment newsletters, in part because of the spectacular success of the “kind of similar” robotic medicine company Intuitive Surgical. I’ve owned shares of both companies in the past, but currently hold only Accuray shares, and at a signficant loss. Intuitive Surgical makes the da Vinci, which is a surgical robot that allows for minimally invasive, more precise (many argue) laparascopic-like surgery through small incisions. Accuray makes the CyberKnife, which is a robotically-controlled radiation machine that offers extremely precise, motion-tracking radiation treatment for various tumors.
One of the major links between the two companies, aside from the fact that they’re both makers of medical robots, broadly defined, is that prostate cancer, the biggest market for da Vinci surgeries, is also a possible huge market for CyberKnife radiosurgery, so they may end up being in direct competition.
CyberKnife is primarily used for a few different cancers right now, particularly those where the surrounding tissue is very sensitive or where surgery is either very risky or impossible — their big markets so far seem to be prostate cancer, brain cancer, and lung cancer. And while brain tumors have been a traditional target of what they call radiosurgery (very precise application of radiation), that was in part because brain tumors don’t move as much as others, and the skull can be immobilized nicely to make sure the aim of the devise is precise enough. The CyberKnife’s claim to fame is that it doesn’t need the tumor to be immobilized, it targets the tumor extremely precisely and uses a robotic arm to follow the movement of the tumor and make sure the right dosage is applied at the right place. That’s part of what seems to make it appealing for lung cancer, for example, since if you keep the lungs from moving for too long the cancer becomes a moot point.
And they compete not just with chemotherapy and other treatments, and with surgery (whether robotic or traditional), but also with other radiation-delivery devices. There are several companies offering innovation in radiosurgery (including Varian Medical, to name one publicly traded competitor), though they may or may not be as promising — and it does appear that the CyberKnife, at least according to the company, is by far the most widely used radiosurgery device, at least for extracranial tumors (that is, any tumors except those in the brain). Clearly there’s huge potential for better treatments in lung cancer and prostate cancer, since those are very high volume cancers that affect huge numbers of people, so if this treatment catches on as “mainstream” perhaps it will bring big bucks for Accuray.
But as I’ve said, I own shares in this one and I’m probably quite biased — it’s not a sure thing, as could be clearly shown by a look at the stock chart (steadily down from $30 or so when they made their IPO two years ago to the current price around $5). And the newsletters have touted it just as breathlessly as they do today in the $20s and in the teens, so there may not be any rush or any magic to the current price point. I’m no expert on the clinical development of the CyberKnife, though it appears that it’s still gaining usage in various different cancers, but one of the main problems with the machine, during these extremely trying financial times, is its massive cost. Even the da Vinci is selling at a bit less volume than we might expect thanks to fact that some hospitals aren’t able to raise the money to buy these showpiece machines, and the CyberKnife is much less mainstream (so far) and several times more expensive.
Analysts keep predicting that the company is on the verge of selling enough systems to become steadily profitable, and the company has been unable to break over that level of sales just yet — they are consistently on the verge of profitability, earning a couple cents or losing a couple cents each quarter, and they have plenty of cash still left from their IPO and no long term debt, so they don’t seem to be in any kind of distress … but they do certainly need to ramp up sales in the coming years. The expectation is that once they’re able to push sales a a bit higher, their profitability could grow very quickly as the big fixed costs of designing and manufacturing these expensive machines are absorbed by a bigger sales number. Currently the forward PE ratio is at about 31, and analysts expect the company to grow at least 30% a year … but with lumpy sales figures that could easily be pushed way up or down by just a few CyberKnife sales it’s notoriously difficult to make those estimates — a year and a half ago they were predicting forward earnings of 60 cents and a forward PE of 20, but the 60 cents didn’t appear as scheduled.
So … I still like the long term potential and am willing to leave my bet laying on the table for this speculative stock, but I have no idea what’s going to happen in the coming months, or if the current price represents a bargain. They currently have a big backlog of orders, close to $600 million, and only about 25% of that backlog represents “contingent” orders (which, as I understand it, means something like “the buyer has to raise the money first”) — and about half of that backlog represents potential recurring, high margin services (training, maintenance, attachments, etc.), and the installed base of systems — which is the real key to underlying growth and future profitability — does continue to grow, though growth has tailed off slightly in recent quarters. There are about 150 CyberKnife systems currently in use around the world.
Do your own research on this one of course, as always — and let us know what you think.
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