Before You Go Under the Knife, Learn About This
By George Huang, editor, S&A FDA Report
August 14, 2008
Tom, a family friend, went for an annual health screening last year.
Doctors found a two-inch mass in his left lung. It turned out to be early-stage lung cancer. Within a week, his doctors rushed Tom into surgery, removing one of two lobes in his left lung.
I went to see him in the hospital soon after. He couldn't move, but was in good spirits. I winced at the stuff dripping from his drainage tubes into a large jug under the bed. He said the recovery would take weeks. Precautionary chemotherapy would follow.
With all the technology we have at our disposal, open chest surgery to remove a small tumor seems barbaric. I started researching new alternatives to traditional surgery. That's when I came across the stunning developments in the field of radiosurgery...
Radiosurgery uses radiation to kill tumors. It's been used since the 1950s. The goal of a radiosurgical device is to restrict the killing effects of radiation to only the tumor areas. But the early radiosurgery devices weren't so accurate. They helped control the location of radiation to some extent... But doctors couldn't dose their patients with enough radiation to kill the tumors for fear of frying healthy tissues in the process.
That all changed in the early 2000s. Huge increases in computing power, coupled with improved software and robotics, spawned a new generation of radiosurgery machines.
These machines allow doctors to deliver high doses of radiation with sub-millimeter accuracy (the width of a hair). The robotics tracks the tumor position automatically, making adjustments in real-time. Most importantly, these radiosurgery procedures are pain free. Patients can walk out of the hospital after treatment without help. It's a stark contrast to opening up someone's chest.
Today, three companies dominate the market for high-end radiosurgery machines – Varian Medical Systems (VAR), TomoTherapy (TOMO), and Accuray (ARAY). Each company sells or leases radiosurgical platforms to hospitals. And they aren't cheap. For example, Accuray's machines come with a $4 million price tag, not including a half-million dollar annual service fee.
Each player is following the razor-to-razor blade business model. So they're selling expensive machines to hospitals, knowing once the hospitals buy the machines, they can generate recurring revenue through surgical consumables and service contracts. However, with recent economic downturns, it's getting harder to convince hospital administrators to fork over the huge up-front costs.
Company |
Enterprise Value (EV) |
Sales (trailing 12 months) |
EV / Sales Ratio |
Varian Medical |
$7.6 billion |
$2 billion |
3.8x |
TomoTherapy |
$160 million |
$230 million |
0.7x |
Accuray |
$320 million |
$200 million |
1.6x |
|
Varian, the biggest player of the three, has been less hurt by the spending slowdown. Its shares recently hit a 52-week high. The company reported an 18% jump in revenue and a 48% increase in profits. Accuray and Tomo haven't fared so well. Tomo shares bounced off an all-time low last week after the company came out with lower revenue guidance for the next few quarters. Accuray is not far from its 52-week lows, either... The company reports its quarterly earnings next week.
If I or a family member faced surgery as a cancer treatment option, I'd opt for radiosurgery as opposed to the old-fashioned method of going under the knife. As more patients realize they actually have this option, I believe the demand for these procedures will skyrocket. Increases in procedure volumes will drive the demand for these machines, resulting in a windfall for these companies.
My colleague Rob Fannon, editor of Phase 1 Investor, and I will be visiting and speaking with these three companies in the coming weeks. It's likely we'll feature one in Phase 1, our small-cap biotech and medical investment letter, in coming months. If you are interested in investing in this medical trend, I recommend you use this short list as a starting point.
Good investing,
George Huang
