Accuray - news and comments

Yesterday, Aray announced that the CFO resigned. Although this is usually perceived as bed news by the financial community, there are comments in the opposite directions on the Yahoo board.

This is an interesting post from a long time follower of the Company, posting under the nickname PauvrePapillon, describing also a meeting with Aray CEO:

>>Meeting with Dr. Thomson... Moving Forward with Ms. Grey.

First a brief word about our so-called competition. No, neither RapidArc nor Novalis are comparable to CyberKnife. They are both gantry-mounted machines. These devices do not have the six-degrees of freedom necessary to create the complex treatment patterns necessary for optimum delivery of radiation and compensation for patient movement during treatment. When they say 360 degrees, they are actually referring to 180 degrees within a single plane. CyberKnife can fire from 180 degrees within multiple planes, basically from any direction to any direction although as a practical matter, beams are generally not fired from beneath the patient.

Yes, these bogus reports absolutely do affect the share price… and not for the better.

I met with Dr. Thomson one-on-one for about an hour week before last in Sunnyvale. It was a very cordial and informative meeting. Dr. Thomson gave me additional background and detail on a variety of issues.

You might find it interesting that Dr. Thomson started out as an advocate for CyberKnife working in the therapeutic radiation department of a hospital. He participated (as a CyberKnife customer) at the first meeting of the CyberKnife Society at which the total attendance was eight persons including Dr. Adler.

Dr. Thomson did not show up on Accuray’s doorstep trying to figure out how best to cash in. After getting to know him through the CyberKnife Society, he was recruited by Dr. Adler because he understands the technology and has a resume that fits in very nicely with what is required to head up Accuray. The fact that he came to the company first as a CyberKnife user, not only gives him credibility as a advocate for the technology, it also gives him the perspective of seeing Accuray from the customer's point of view.

One of the reasons why Accuray’s business model has developed along the lines of an R&D partnership with its end users stems from Dr. Thomson’s hospital experience. He knew that upgrades would be a big issue. Hospitals put off buying new technologies when they fear that important upgrades are just around the corner.

Dr. Thomson turned this problem into an opportunity by setting up the service/upgrade program that enables end users to keep their equipment state-of-the-art while providing a recurrent income stream for Accuray. He strengthened end users’ commitment to the program and enhanced Accuray’s R&D effort by establishing a strong clinical development program that partners with end users to assist in the further development of the platform.

This approach has been extremely successful not only in terms of developing Accuray’s recurrent revenue as well as enhancing its R&D program but has also resulted in a higher and more uniform standard of care throughout the CyberKnife network worldwide.

One of the first issues that Dr. Thomson attempted to address, even before he was an Accuray employee, was that of standardized protocols. The consensus at the time was that you would never be able to get all these cutting edge CyberKnife teams to agree to standard protocols. They were all experimenting trying to find the best treatment patterns. Dr. Thomson correctly understood that without standardized protocols, excellent results would not be able to be easily reproduced. After numerous heated discussions, the consensus began to shift and today we operate with standard protocols throughout the system so that good results can indeed be replicated.

One of CyberKnife’s significant advantages over DaVinci is that treatment patterns can be replicated exactly. Yes, DaVinci helps but at the end of the day still relies on the surgeon to execute the operation. CyberKnife is completely automated. Once the optimum treatment patterns are discovered, they can be replicated at any CyberKnife Center independent of the skill (or lack thereof) of the individual surgeon.

One of the first major issues that Dr. Thomson needed to address after coming over to Accuray as its CEO was that of manufacturing time and consistency. We were bringing in components from various vendors, testing them and assembling them in Sunnyvale. One problem was that we were doing too many activities in a linear fashion. We needed to do subassemblies in parallel. Further, we were having problems with component failures to such an extent that our manufacturing times, slow as they were, had also become totally unpredictable.

Dr. Thomson revisited both the component assembly schedule and Accuray’s relationships with its vendors. Each major component would now be assembled independently. Further, instead of taking in units that were not up to speed, testing them at Sunnyvale and then sending them back for replacement, Dr. Thomson set up a new system whereby the vendors were given a stringent set of tests that they were required to perform before shipping the units to Accuray. The units are still tested again at Sunnyvale but now the failure rate is nil. This is better for Accuray and better for the vendors as well. Now, this may seem like an obvious move, a lot of moves seem obvious after they are completed, but the point is it hadn’t been done, it needed to be done and Dr. Thomson got it done.

Another refinement was that teams were set up to concentrate on each component of the system such that one group was focused on the imaging system, another on the linac and so on. This has resulted in a stepped up rate of innovation as well as a smoother manufacturing process.

One particular success is that of increasing the power of the linac. Schoenberg, the original designers of the miniature linac, created that technology for a non-medical industrial use. They were making money off their design in that field of use and had no real interest in applying the sort of energy, expense and focus necessary to further the linac’s development along the lines that would be of greatest benefit to CyberKnife. Not only that, they didn’t really believe that the power output of their miniature linac could be significantly increased. Schoenberg was getting royalties from Accuray, to whom they had licensed the medical field of use, and they were content with that deal.

Solution: Buy out Schoenberg and take their medical version linac, both ownership and development, totally in house.

Why did Schoenberg agree to sell out to Accuray? I don’t know. That’s something I’ll try to get into with Drs. Thomson and Adler perhaps at this year’s annual meeting.

The bottom line here is that, under Dr. Thomson’s leadership, Accuray was able to obtain outright ownership of its linac technology and, subsequently, improve the design such that the output was significantly increased. Further, we now have a manufacturing system that is highly reliable in terms of quality control as well as efficiency and predictability of output. This is called measurable and substantive progress and Dr. Thomson is, and has been, right in the middle of it.

We also discussed the whole financing issue. Here are a few details that I feel appropriate to disclose at his juncture.

One, I know of one very credible group that is interested in assisting Accuray with financing for their CyberKnife placements. They had met with McNamara but those discussions were going nowhere. I remember when I decided that there was no way that McNamara was going to work out. It was during one of those meetings at which I was present.

Just to keep both sides on track, I asked McNamara if it would be helpful for Accuray if the group, represented by another gentlemen seated at the conference table, would be willing to come into certain transactions with an equity investment that would bring the credit worthiness of certain shared-ownership system operators up to a level where they could then get more or less conventional lease financing to buy Accuray out of these deals… pretty simple and straightforward question, right, the sort of question that makes sense to ask when you are trying to find common ground and bring two parties together on a deal, right? You would figure that question would get either a simple “yes” or a “no” followed by an explanation of why it wouldn’t work, right?

What McNamara did was go off on a convoluted, round Robin Hood’s barn analysis that was only marginally related to what we were even talking about. No “yes”. No “no”. Not even a hint really as to whether he was leading to a yes or a no.

Now, as he was going through this, let’s call it a process, it dawns on me. He’s not really trying to piss me off. He’s not consciously trying to be evasive. It’s just his basic instinct to be evasive. It’s just who he is. Now, to test this theory, I, literally, let him go on for as long as he wanted and I discretely, I hope, timed him... for nearly 12 minutes.

Then, I politely but firmly returned to the question and, after several repeats, and about 20 minutes out from the original question, I finally got a simple “yes”. At which point, I said to him, and from memory, I believe this is more or less verbatim, “Look, this is exactly how you alienate the analysts in these conference calls. Look at what just happened. I asked you a simple question and you went off on a tangent that just reeks of evasiveness. Do you really have to do that? Do you really see that as working? Why couldn’t you have just said 'yes' in the first place and then, if you felt a more detailed answer was necessary, follow up with your qualifiers and contingencies?”

His response? A very curt, and again, I believe this is more or less word-for-word, “The answer was too obvious.”

Oh, so you figure it’s beneath you to clarify exactly where Accuray stands on certain issues so that we can move a discussion forward with less chance of a misstep or misunderstanding? No, I didn’t say that. But everyone at the table thought it. And it was right then and there that I also said to myself, this guy is never going to work out, not at Accuray and probably not anywhere at least in terms of the CFO chair at a publicly traded company.

And, yes, I went through this whole scene with Dr. Thomson and others and, yes, I’m feeling really good about getting Ms. Grey into and Mr. McNamara out of that CFO position.

It’s not only the conference calls. It’s also the financing. Now that McNamara is out, I believe that certain deals will be revisited and, ultimately, put together with the end result being more financing options for CyberKnife buyers.

Now, to the issue of the hospitals versus the freestanding centers and the related financing issues. When you make a sale to a hospital, it’s not just a question of getting the physicians on board. That’s just the first step. Then you need to get a whole host of constituencies on board as well. So what was happening was that Accuray’s sales people would get the docs on board but as soon as they encountered resistance at any administrative level, they would go straight to plan B which was, why not just set this up as a freestanding center? And that seemed to be the easiest way to do it.

But then the billing and reimbursement arrangements became problematic in that regulators began cracking down on hospitals billing directly for offsite diagnostic procedures and, even though CyberKnife is a therapeutic and not a diagnostic procedure, there were concerns, particularly from financing sources, that these CyberKnife deals might be effected and, if they were, then they might not make economic sense.

Now, the short-term solution, which management discussed two conference calls ago, was to redirect their sales force to focus on in-hospital deals… and to scrub these freestanding deals from their backlog. And that’s what they’ve done.

But the reality is that these are still viable deals. There is still both a patient demand and a physician interest in doing these deals. So there are two ways to go. Get back into process with hospital management, solve the issues and close the deals is one. The other is to restart these deals as freestanding centers once the regulatory environment has been clarified.

Now you don’t have to necessarily pick A or B. You can work on A and go to B if A gets held up or if B just becomes too attractive not to pursue. But the point is these are still viable deals and, sooner or later, one way or the other, these locations are going to have their own CyberKnife Centers. So it is my opinion that at least the contingent portion of the backlog is actually undervalued and to a significant degree.

After going through all these issues, and others, with Dr. Thomson, I am convinced that we have an excellent fit here for both Accuray and Dr. Thomson. He has a sincere passion for the technology and especially for the benefits, both immediate and future, that CyberKnife brings to the patient. He is very, very good at explaining the technology and can take it down to whatever level of detail you want. He is also an astute businessman with a very unique and insightful point of view as to how to make this company work as a business. He has already added enormous value to both the operational structure and the business model and beyond that he has the right instincts both in terms of how to deal with people and how to make things work. Yes, he was loyal to a fault in that he continued to give McNamara way too many second and third and fourth chances. But we’re past that now and moving on.

I guarantee you that not only is the next conference call going to be handled much differently, you are going to start to see a sea change in the way that analysts relate to this management team. As I said to Dr. Thomson, you come out and make a very open and convincing, concise and compelling case for Accuray and CyberKnife and then McNamara takes the floor and immediately casts doubt, suspicion and confusion over everything that you have just worked so effectively to establish. So that’s over with. Hallelujah! And, yes, it’s going to make a huge difference.

And we won’t even have to wait for the next conference call. Dr. Thomson and Ms. Grey are going to present at the ASTRO investor conference and at the UBS conference two days later. Last year, we got a bump, as we always have when Dr. Thomson presents, even though we had McNamara following up with his usual routine. This year, even if we only get a neutral performance out of Ms. Grey, that will be an improvement but I have sources and even though I have never met Ms. Grey, based on my sources both within and outside Accuray, I am predicting an outstanding performance on her part. So now with a true one-two punch, we are finally going to get the full benefit out of these investor conference opportunities.

Now I’m still pressing for that animated video. I would really like to have it ready for ASTRO.

If you want to help, send Tom Rathjen an email and tell him you want to see this CyberKnife versus gantry-mounted device thing cleared up once and for all. Tell him that you are damn sick and tired of seeing these bogus press releases out there confusing the market as to what SRS is and what sort of equipment you need to have in order to do it. Tell him that Accuray has actually made great progress since the shares were bid up over $30 by investors that correctly understood the technology to be unique and that we can get some if not most of that back if we can only reestablish the understanding that CyberKnife holds a unique technological advantage in this market. Tell him that you are excited to see the CFO issue finally resolved and are anxious to see both Dr. Thomson and Ms. Grey get off to a great start (or restart at the case may be) and that ASTRO is the perfect venue for that and the animated video will help immensely

And, by the way, also tell Tom that we need Dr. Thomson to get to as many investor conferences as will have us. He does a great job at those. We have seen a bump in our share price, literally, ever single time he has presented at an investor conference. Especially now that we have jettisoned our anchor, we need him out there promoting our stock and our technology.

So that’s my pitch. No, I’m not taking credit for getting rid of McNamara but, yes, that was part and parcel of my activist shareholder agenda so, wherever you want to lay the credit or the blame, fine with me. I am just real pleased to see that change finally happen.

Now, we need that video. So let’s keep the pressure on.