Exclusive: Accuray, TomoTherapy chiefs explain merger

by Brendon Nafziger, DOTmed News Associate Editor | March 10, 2011
Accuray CEO Euan S. Thomson
Monday's announcement that radiosurgery device maker Accuray Inc. would buy radiation therapy business TomoTherapy Inc. in a $277 million cash-and-stock deal drew mixed reactions from observers.

TomoTherapy's stock shot up 24 percent, but Sunnyvale, Calif.-based Accuray's tumbled about 9 percent.

Acquiring companies usually experience some "headwinds" but the news also brought out vocal skeptics.

Seeking Alpha writer and TomoTherapy investor Stephen D. Simpson, who thinks Madison, Wisc.-based TomoTherapy is undervalued, didn't believe Varian Medical Systems Inc., the market leader, and Elekta, a Swedish rival, had much to worry about.

"This deal may raise an eyebrow or two at Varian and Elekta, but neither company is likely to sweat too much until the combined company shows that 'one plus one' equals something more than two," he wrote.

But in conversation with DOTmed News, both Accuray CEO and President Euan S. Thomson and TomoTherapy CEO Dr. Frederick A. Robertson have hopes the transaction will have an "emergent" property greater than the sum of its parts.

Both men argue the combined companies will streamline overhead expenses and also combine technological know-how to make TomoTherapy's previously struggling service business break even by the end of the year. They also see benefit to what they're viewing as a melding of Silicon Valley marketing and Madison's engineering strengths.

"I do expect when people step back and look at the transaction, they'll realize what an exceptional value this is for shareholders," Thomson said.

TomoTherapy also thought it was a good deal for the company. "I would point out that TomoTherapy has been trading in the mid three dollar range for the past two and a half years," Robertson said. "Even with the recently released 2010 financials, where we had 19 percent revenue growth, 17 percent year-over-year growth and new orders with a view toward profitability...the transaction as announced on Monday involves almost a 33 percent premium."

Bigger installed base, increased efficiency

One of the main "vital signs" of a capital equipment company is its installed base, Thomson said.

Accuray has installed, worldwide, about 220 of its CyberKnife systems, devices that use radiation to treat solid tumors. And TomoTherapy has installed around 350 Hi-Art systems, a CT-guided intensity modulated radiation therapy system which delivers precisely sculpted doses of radiation.

"The level of stability of a capital equipment company can be to some extent measured by the size of its installed base, because it represents the level of ongoing revenue that can be expected," Thomson said. "Going from 220 plus systems to all the way 500 plus systems is truly a transformative transaction."

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