Accuray Inc. (NSDQ:ARAY) has a tough row to hoe: Cultivate a market that crosses medical specialty lines for a product that costs millions. The Sunnyvale, Calif.-based company’s CyberKnife system is a pioneering device in radiosurgery, using precisely targeted, massive doses of X-ray radiation to non-invasively destroy tumors.
Founded in the 1990, Accuray’s device was based on an idea developed by a team of physicians at Stanford University, led by Dr. John Adler, in the late 1980s. Since its founding the company has seen its share of ups and downs, not least co-founder and former CEO Adler’s not-exactly-friendly departure earlier this year. Since its début as a public company in February 2007, Accuray’s stock price has dropped from a $22.68 start to its current level in the mid-$6.50 range.
But the downs aren’t the whole story. The Food & Drug Administration granted 510(k) clearance to the CyberKnife in 1999 for the treatment of head, neck and upper spine tumors; clearance for treatment of tumors throughout the body followed in 2001.
Soon after that, president and CEO Euan Thomson signed on. Since then, the company has racked up a string of wins, celebrating the 200th CyberKnife installation in June of this year and winning approval from the Japanese Ministry of Health, Labor and Welfare for the G4 version of the system earlier this month. The latest CyberKnife iteration, the VSI, which can track and correct for the movement of a patient’s body during treatment, saw its first installation in May. And Accuray inked a distribution and R&D deal with imaging colossus Siemens (ETR:SIE) that opens up a wealth of possibilities for global distribution and new product enhancements.
MassDevice spoke with Thomson about the company’s origins, the split with Adler ("John left for personal reasons. There was no disagreement over strategy or any other issue," Thomson told us), the Siemens deal and why healthcare reform could be a big boon for Accuray.
MassDevice: Can you delve into what, exactly, the CyberKnife system does?
Euan Thomson: Accuray was founded in the early 90s to develop and eventually commercialize the CyberKnife system. CyberKnife itself came out of Stanford and has a Silicon Valley connection. It’s what we call a robotic radiosurgery system. It’s a image-guided robotic system for delivering high doses of X-rays with the intention of destroying tumors.
Radiosurgery is distinct from more widely known radiation therapy, in which other devices are used. The idea behind radiosurgery is to destroy tumors as an alternative to surgery, whereas radiation therapy tends to use larger fields of radiation after a tumor has been removed, so they are more of an adjunct to accompany surgery.
The normal cancer treatment process is one in which a patient is diagnosed with a solid tumor and they go and see a surgeon who will cut that tumor out. Later they will go for radiation therapy to treat the surrounding region, in case any stray tumor cells have been left behind. Not all patients are eligible for that surgery; they may not be well enough, the tumor may be inaccessible and so surgery really isn’t an option. What we provide is an alternative to surgery. We started with those types of tumors, the tumors that just can’t be cut out. Increasingly, the CyberKnife is used for tumors which could be cut out, but a non-invasive approach is judged to be preferable.
We have FDA market clearance to market the device generally for all applications where radiation is judged to be appropriate. That really includes all solid tumors throughout the body. However, radiosurgery is a very new treatment and it hasn’t really been proven for all types of tumors. We have a lot of clinical trials, clinical studies and protocols in place for validating that radiosurgery works, but it’s not to achieve FDA market clearance. It’s more to validate why doctors would want to use it as an alternative to surgery.
Radiosurgery was invented by neurosurgeons originally to treat brain tumors, because neurosurgery, particularly for certain tumors, is such a risk-intensive process. It’s hard to cut open the brain without risking changing the personality of the patient for good. So it’s always good to look for non-invasive options. They had the idea that if they used hundreds of very, very accurately, precisely targeted beams, all focused on the same point inside the brain, they could give a destructive dose of radiation without damaging the rest of the brain.
That’s where we started. Later, in late 2001 when the final FDA market clearance was given, there really wasn’t a lot of data for radiosurgery for applications outside the brain. The CyberKnife is very well able to treat tumors throughout the body, even if the tumor is moving, such as a lung tumor — we can still target it with some level of accuracy and destroy it with this radiation. The tumors we’ve focused on are tumors where surgery is inherently difficult. For example, the typical surgical option for lung cancer would be making an incision in the patient from front to back around the chest, breaking through the ribs, collapsing the lung and then removing a whole section of the lung that contains the tumor, and then trying to reconstruct the chest. At the end of it the patient would be left, at best, with partial breathing function. That’s clearly not a process which all patients could tolerate, even if the tumor is essentially discrete and easy to identify.
With the CyberKnife, the alternative is the patient comes in and a CT scan shows the position of the tumor. We transfer that data to our sophisticated computer system on the CyberKnife and when the patient comes back, for between one and five treatment sessions lasting half an hour to an hour, they lie on the couch often in their street clothes and the system destroys the tumor. Their normal life continues during that treatment time, there’s pretty much zero recovery time for the procedure, they don’t feel any side effects and normal life continues.
So there’s a huge difference between the non-invasive approach with the CyberKnife and a normal surgical procedure. What we do to minimize the risk leaving tumor cells behind is use multiple imaging modalities. With some tumors, it’s acknowledged that CT scans won’t show the extent of the tumor. Other imaging modalities such as magnetic resonance imaging or PET are better at showing how far the tumor has spread. With the CyberKnife, during the planning process it’s possible to bring in all those different types of images and overlay them just to make sure that the volume that’s finally treated with the CyberKnife really does contain all the tumor cells.
MassDevice: What’s your background and how did you come to join the company?
ET: I joined in early 2002, at the point when the CyberKnife had been through its R&D phase and was ready for commercialization and had just obtained FDA clearance. I’m actually a radiation physicist by training, worked most of my previous career in clinical treatment and at various companies which are in the radiation treatment field. As a result, I have a clinical and technical background and a commercial background too, so it was a good fit for me personally.
MassDevice: Can you spell out what Accuray’s distribution and R&D deal with Siemens means for your company on the global stage?
ET: There are really three elements to it. We’re a capital equipment company, we’re selling the CyberKnife for multiple millions of dollars. Most of the players in the field of capital medical equipment are huge international companies. We’re not, we’re still growing and relatively small. But we’ve been successful and we now have more than 200 systems installed and we do have a worldwide distribution channel. So the key for our relationship with Siemens on the sales side is to look at the type of sale where we may not even be invited to participate. For example, somebody’s building a whole hospital or they’re building a whole department and they’re looking for all the equipment they need from one vendor. With the arrangement with Siemens, we have the ability to include a CyberKnife as part of that purchase. It’s not a customer that we’d normally have seen. There are also certain parts of the world where we’re just not big enough to have effective distribution and we’re working with Siemens to put together some distribution agreements in those territories.
The other elements of the contract relate to research and development. There’s a short-term element whereby we will take some of the very, very high level features of the CyberKnife and make them available to their radiation therapy machines. So even though the clinical objectives of radiation therapy and radiosurgery are somewhat different, there’s still some benefit to making radiation therapy treatments more accurate. We will develop some technologies to go onto the Siemens linear accelerators to make them what we believe will be the best linear accelerators on the market. When that is completed, it will be a new revenue stream for Accuray, in a new market. We don’t compete with radiation therapy machines, we’re in the radiosurgery market which is somewhat different, but we recognize that some of what we’ve developed does have applications in the radiation therapy field and this is a good way for us to get into it without taking our eye off the ball in growing radiosurgery.
In the long term, there’s a mutual agreement, which is less defined, which is that we will look at next-generation equipment together. That could work both ways — it could mean that we have certain things developing for radiosurgery that could continue to help radiation therapy treatments develop generally. Or it could be that they have things in the imaging pipeline — and they’re obviously one of the top imaging companies in the world — that could potentially be applied to CyberKnife.
Another part of that would be, in order to give the most effective treatment to the tumor, should all parts of the tumor receive an equal radiation dose? One of the most aggressive areas of imaging is imaging that show details of what’s happening inside the tumor, perhaps in areas of very rapid tumor growth or tumor cell intensity. It could be that future tumor treatments are designed better if we can match the intensity of the radiation to the intensity of the tumor cells. Siemens is cutting edge. We’re not an imaging company, we’re a treatment company, and they recognize that we have the best and most targeted form of radiation delivery. As an example, we will probably explore ways of mapping those things together to enhance the value both of the imaging and of the treatment.
MassDevice: How did the downturn in the capital expenditures market affect Accuray’s fortunes over the past few years? Do you see signs of improvement in that sector?
ET: The market as a whole seems to be improving. We have some cautious optimism, about the market generally improving and access to capital improving.
In terms of how we weathered the recession, we actually did better than most companies, we feel. The main reason for that is that, from the beginning, because radiosurgery didn’t exist as a field, we’ve been focused on clinical proof. We sell to people who buy into the idea that this is a viable alternative to surgery, and they do that on the basis of the clinical value of the product. If you take, for example, the European market, funding is not through entrepreneurial access to capital as much as it is centralized funding for healthcare based on clinical value. We maintained a very strong sales momentum in Europe because we have proven clinical value and it’s a new product. Where most capital equipment companies stalled during the recession was in the area of equipment replacement. If you have essentially a better mousetrap, and you’re trying to sell on the basis of, “This is a better CT scanner than the current CT scanner you’ve had,” a lot of hospitals particularly in the U.S., responded by saying, “Fine, we agree it’s better, but right now we’re not buying anything. Come back to us next year. We can afford to run the CT scanner we already have before we buy another one or upgrade it.”
With CyberKnife it was a different scenario. We’re saying, “Look, this is a brand-new revenue stream, a brand-new treatment modality. It will bring in new patients and offer a new type of treatment that you just can’t offer right now.” So the model is slightly different and that’s why I think we did better than most companies.
MassDevice: In your view, what’s the biggest challenge facing the medical device industry?
ET: Generally I think people would say it’s the uncertainty of healthcare reform and where that will lead us. We have fairly strong views on that. We’re a cancer treatment company. Healthcare reform should, in the end, lead to greater access throughout the U.S. to early detection techniques; people are more likely to have cancers diagnosed at an earlier stage, simply because a larger group of patients have access to those diagnostic resources. For us, we feel it’s good news. A larger number of patients with tumors that are discovered earlier, rather than later when they may have already spread to the rest of the body, they are patients who would benefit significantly from the CyberKnife treatment. From our perspective, greater general access to these diagnostic imaging and early diagnoses will be of benefit — primarily to patients, but also to Accuray as a company.
What we’re most focused on are the group of patients who either delay going to the doctor with symptoms, because they’re concerned about the financial implications of a diagnosis or simply don’t have healthcare coverage and can’t afford to go to the doctor. Those are people in whom cancer doesn’t stop, it just keeps progressing, but it’s not been identified and the treatment process hasn’t started. If healthcare reform can take away those financial barriers, then we would expect to see a group of patients who are just in with a chance of having their cancer detected earlier. Survival will be better, which has got to be better for the population generally and for Accuray specifically, and will offer us a chance to treat them in a non-invasive way before the cancer progresses too far.
MassDevice: What about the 2.3 percent excise tax that will be levied on device makers starting in 2013?
ET: I think the industry as a whole has yet to decide how that’s dealt with, whether those additional costs are passed on to the end user, the customer, in all or part or whether they’re absorbed inside the company. Either way, pricing will likely be adjusted, so it’s difficult to know who will bear the burden of that. We’ll be a small player in this, so we won’t really get to set the trend, we’ll just have to go along with whatever generally the industry decides. So it’s somewhat of a concern, but I think that we have a very rapidly growing business and a very specific business that’s based on the clinical value of the product. I think in the end we will be able to maintain our R&D momentum because our overall growth rate is significant.
MassDevice: Can you talk about other products Accuray has in the pipeline?
ET: We can talk in generalities; we mostly don’t release details of specific products within the pipeline.
We are an innovation company and there’s a specific reason for that. We have, from the beginning, recognized that CyberKnife started as a generic tool for radiosurgery. As we’ve learned more and more about how it’s used for, say, lung cancer or spine cancer or prostate cancer, we’ve recognized that we need to make continuous improvements as we gather clinical data and as we gather clinical knowledge. So we’ve created a process whereby our clinical findings are mapped onto a very fast-moving R&D channel that operates in parallel and that will continue. The areas we’ve tended to improve in over the years are accuracy, ease of use, the ability for example for the CyberKnife to move and track a moving target such as a lung tumor as the patient breathes, but still maintain the same level of accuracy. That’s one of the pivotal advances to the CyberKnife that’s emerged from our R&D program over the years. That type of effort continues and our overall objective is just to make it better and better for patients, easier and easier for customers and more and more widely applicable.