Showing posts with label Accuray. Show all posts
Showing posts with label Accuray. Show all posts

Saturday, February 5, 2011

Accuray CEO Euan Thomson

Dr. Euan Thomson, CEO and President of Accuray (ARAY). Congrats to Mr. Thomson for Accuray's most recent results (2011), which drove up the company's share price approximately 30%.

Bonus: review of Accuray's 2010 shareholder meeting here.

Disclosure: I have owned shares of Accuray (I haven't checked, but I might still own a few shares). My ownership positions may change at any time.

Under no circumstances do any statements here represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence. To summarize, I do not provide investment advice, nor do I make any claims or promises that any information here will lead to a profit, loss, or any other result.

Wednesday, November 24, 2010

Accuray's Annual Shareholder Meeting (2010)

[Note: the third paragraph from the end of this article discusses the TSA's full body scan machines from the perspective of a medical doctor and a Ph.D. in radiation physics.]

After I attended Accuray’s (ARAY) annual shareholder meeting, I had a chance to tour its Sunnyvale campus, where I learned more about CyberKnife. CyberKnife is a radiosurgery tool that attacks and destroys cancerous tumor cells using highly precise radiation beams. CyberKnife is much less invasive than “scalpel” surgery. Its high accuracy (hence, the name Accuray) allows patients to minimize exposing their healthy organs and body parts to radiation. I rarely feel optimistic after shareholder meetings during this Great Recession, but Accuray gives me hope not only for its own future, but the future of medicine.

THE ANNUAL MEETING

Accuray’s annual meeting took place in a well-known law firm in Palo Alto. Shareholders were offered orange juice, coffee, various fruits, bagels, and pastries. About 25 people attended the meeting, including founder Dr. John Adler. Prior to the meeting, Dr. Adler seemed well received by most Board members, who engaged him in friendly conversation.

President and CEO Euan Thomson opened the meeting by introducing the Board of Directors. There was one Asian and one female on the Board.

General Counsel Darren Milliken, a Santa Clara Law graduate, set forth the shareholder proposals and asked after each proposal if shareholders had any questions about them. (Some companies make the mistake of not allowing shareholders to ask questions or make comments during the introduction of shareholder proposals, which makes a farce of the voting process. Accuray did not make this mistake and followed best practices.)

After the formal portion of the meeting concluded, Accuray said it would not have an open Q&A session; instead, if shareholders had questions, they were welcome to ask them one-on-one with any executive team members or Directors. I have attended many shareholder meetings, and it’s highly unusual for companies to avoid an open Q&A session. (One notable exception is Cisco (CSCO), which asks shareholders to write down their questions on index cards, but its meeting is much larger and not restricted to shareholders.)

When a shareholder–not me–protested the Q&A format, Accuray said that its 1-on-1 approach was common in some business meetings. Instead of calming the waters, this explanation prompted Dr. Adler to deliver a verbal smackdown. This is the second year in a row that Accuray has attempted to avoid a public Q&A session, only to be trumped by the Adler family. (Last year, it was Mrs. Adler who delivered the fireworks.)

Now, before I tell you about Dr. Adler’s comments, it is important to note that Dr. Adler left Accuray and now works for a competitor, Varian (VAR). Dr. Adler said that he had heard people speak of their “disgust” at the way they had been treated by Accuray’s management. He said that Accuray is a “reflection of me and Marilyn [his wife], who named this company,” and he was “dismayed by [Accuray's] deteriorating business reputation.” Dr. Adler did not mention specific incidents, but lamented what he felt was a general lack of passion on the part of the executive team.

I usually have one or two questions for management, centering on Warren Buffett’s “wide moat” analysis. Accuray allowed me to ask my question, but directed me to the CFO. I read from page 29 of Accuray’s 10K, which lists Accuray’s various competitors, and I asked Accuray about the competitive advantages of its products. I felt a little guilty about asking CFO Derek Bertocci a technical question, but he actually answered it very well. After he was done, CEO Thomson jumped in and explained that Accuray’s CyberKnife uses over 100 different positions and can correct for any patient movement. I asked if other products could do the same thing–he responded, “Not to the extent of the CyberKnife.”

After the meeting, I had a chance to talk to CEO Thomson one-on-one. He said that he had a great deal of respect for Dr. Adler and his achievements. He also informed me that the Board (including CEO Thomson) "unanimously" voted for Dr. Adler to stand for re-election, and Dr. Adler chose to resign. CEO Thomson politely explained that it wasn’t unusual for a founder of a company to feel less involved as time passes. As a company matures, he said, it tends to listen more to its customers and persons with business-oriented perspectives. Consequently, said Mr. Thomson, it’s not unusual for a founder’s “personal vision” to be changed. The trick, CEO Thomson said, is to progress forward “without losing passion.”

You might wonder how Dr. Adler, a genius who has advanced radiosurgery by light years, and CEO Thomson, an accomplished Medical Physicist with a Ph.D. in radiation physics, can both mention passion and yet reach different conclusions about its levels at Accuray. After spending time with both men, my theory is that the difference is cultural. Dr. Adler is a very direct, charismatic man who commands attention wherever he goes; in contrast, CEO Thomson is British and more low-key. While it is hard to get a word in edgewise when Dr. Adler speaks, CEO Thomson encourages others to speak when he sees they have something to say. In short, both men have different communication styles and come from different cultural backgrounds.

CEO Thomson and Dr. Adler are clearly passionate, competent, and knowledgeable, but their personalities could not be more different. Having lived in England and the States, I can see the cultural differences very clearly, but Americans who've never crossed the Atlantic must have also heard of the famous British stiff upper lip, where Brits are expected to handle adversity and pain with stoicism. Such stoicism--generally speaking--tends to promote a culture of outwardly reserved emotions. (Side note: when I was jogging in Hove/Sussex as a teenager, I remember waving at various people and saying hello, only to have all the Brits in my path quite shocked that I was a) crazy enough to be exercising in the cold weather; and b) greeting strangers along the way. No one waved back or said hello.) Some Americans may not know it, but we are some of the friendliest people in the world. Unlike Europe, our ability to avoid years of war on home soil has allowed our culture to be generally more open and friendly.

Yet, it is not surprising that Dr. Adler would see others as less passionate–indeed, almost anyone would appear less passionate when compared to him. Within the field of medicine, Dr. Adler is the closest thing to a rock star. When I posted on my Facebook wall about the CyberKnife, I almost immediately got the following comment: “I actually had the CyberKnife done on a tumor by Dr. Adler himself (the inventor). It is amazing, sci-fi, and scary at the same time. He is AWESOME!” How many doctors can garner such adoring fans?

POST-ANNUAL MEETING

A few days after the annual meeting, CEO Thomson was kind enough to take me on a tour of the company and, along with Dr. Omar Dawood, teach me more about CyberKnife. Before I tell you about my introduction to CyberKnife, I will summarize a meeting I had with Accuray’s general counsel, Darren Milliken.

I have never heard anyone at Accuray speak negatively about Dr. Adler, but Accuray continues to receive major criticism from Dr. and Mrs. Adler. I asked the company’s lawyer, Darren Milliken, to discuss his thoughts on Dr. Adler’s criticism of Accuray.

Mr. Milliken said that Dr. Adler had left Accuray to pursue other interests. Moreover, under SEC and federal rules, when a director resigns, a company and director must disclose any disagreement on issues surrounding the director’s departure. Mr. Milliken said that Dr. Adler not only failed to raise any issues of disagreement with the company’s 8K filing relating to his departure, he actually approved of the 8K in an email to Mr. Milliken. According to Mr. Milliken, “If there was a disagreement with Adler, we would have filed an 8K [as the law requires].” No 8K was filed relating to any disagreement with Dr. Adler by Accuray.

Mr. Milliken also informed me that Accuray’s corporate governance committee and its Board of Directors recommended that Dr. Adler remain with Accuray as a Director. In fact, according to Mr. Milliken, Dr. Adler stood for election as a Director–even though he could have opted out–only to resign shortly after he was elected.

I asked Mr. Milliken about his opinion of Dr. Adler. Mr. Milliken said, “What he invented here is over-the-top incredible, [and] John [Adler] invented that, and that’s amazing to me.”

I then went to meet CEO Thomson and Dr. Dawood to learn about CyberKnife. I have never been so impressed with a medical device in my entire life. Both CEO Thomson and Dr. Dawood were able to explain the CyberKnife to me in about an hour, even though I have no medical training or expertise. The main points I learned are as follows:

1. According to Accuray, competitors’ products rely either on radiation therapy or a Gantry-based system, which is not as focused or accurate as Accuray’s CyberKnife. For example, let’s say you want to treat a cancerous tumor in your prostate. Well, if your body parts around the prostate are still reasonably healthy, you probably want to minimize the level of radiation you receive. According to Accuray, the CyberKnife is able to pinpoint the location of the tumor and deliver hundreds of quick, highly-concentrated doses of radiation directly to the tumor itself--leaving non-infected parts alone.

According to Accuray, other products are not able to move around to the same extent as the CyberKnife; as a result, the company believes that CyberKnife is more accurate than the competition, which minimizes the risk of collateral damage to a patient.

(I said the CyberKnife compared to Gantry-based systems sounded like the difference between a sniper and cluster bombs. They didn’t disagree with me, but they said they preferred not to use military terminology.)

2. What’s amazing about the CyberKnife is that its software is able to locate the tumor automatically. Think about that–there's no one using any levers or buttons to sync up data–the CyberKnife takes the pictures, finds the tumor, and attacks it automatically. (I am still enthralled about the idea that a machine can do that without major and constant human intervention.) Because the process is mostly automated, Accuray believes that using the CyberKnife tends to reduce human error.

3. According to Accuray, the CyberKnife’s higher accuracy allows patients to receive fewer treatments to destroy cancerous tumors. For example, using radiation therapy instead of radiosurgery might require forty separate treatments. According to Accuray, most patients need only one to five CyberKnife treatments. Thus, if someone is working, or is located in an area far away from a hospital, or has other responsibilities to handle, the CyberKnife reduces forty treatments/fractions to perhaps five. The fewer number of treatments may also result in cost-savings for insurance companies and Medicare, which supply approximately 90% of reimbursement for CyberKnife treatments. (According to another person within Accuray, Aetna and Blue Shield of California have already seen the value of CyberKnife.)

I will leave you with an interesting anecdote. The TSA has received a lot of flak for its handling of travelers who “opt out” of its backscatter radiation body scanners. I asked CEO Thomson and Dr. Dawood what they thought about the risk of radiation from the airport full body scanners. Both doctors indicated that there is currently not enough information to make a valid judgment about the safety of the full body scanners. Although we receive radiation in small doses almost every single day, much of it is “non-ionizing.” A cell phone, for example, has non-ionizing radiation; however, the TSA scanners use ionizing radiation. Ionizing radiation can alter a person’s cells to the point where the cells cannot recover. In contrast, non-ionizing radiation will jumble or vibrate your cells but will not permanently alter them. More here. In case you're wondering, I'll be opting out when I travel.

Disclosure: I currently own about 400 shares of Accuray (ARAY); however, my holdings may change at any time. Other than ARAY, I do not own individual shares in the other companies mentioned in this article.

I have emailed Dr. Adler and Mrs. Adler several times and have done an interview with Dr. Adler in the past. The 2010 meeting was the first time I met Dr. Adler in person. I have a tremendous amount of respect for Dr. Adler, and I feel lucky to know him.

Friday, February 26, 2010

Interview with Accuray's Founder, Dr. John Adler

Dr John Adler recently left Accuray's (ARAY) Board of Directors. Below is his departure letter and a personal interview:

Friends and colleagues,

Many of you have asked why I withdrew from the Accuray board, and more recently, even stopped consulting for the company. Because of our friendship and your close involvement with Accuray, I know that I owe you an explanation, but until now my previous board status prevented me from saying much of anything.

The decision to leave Accuray stemmed from the fact that my vision for both the future of The CyberKnife technology and how business should be conducted increasingly diverged from management. My several year effort to serve as a constructive contrarian voice on the board and within the company at large was so unwelcome (by the CEO) that I was twice issued threatening letters by Accuray-paid lawyers, demanding silence and including allegations of defamation. As my voice was muted, I felt constructively terminated from providing any meaningful company leadership.

As the founder, visionary, and passionate spokesman for Accuray, I have felt deflated by this turn of events. But I am hardly the first company founder to be rebuffed, as so beautifully described in the above video excerpted from Steve Jobs’s 2005 Stanford commencement speech: Short: http://www.youtube.com/watch?v=kRt4VUv90Gw, Long: http://www.youtube.com/watch?v=UF8uR6Z6KLc

The realization that even an innovative business genius like him once felt “rejected” by “his” company, does provide solace.

Despite past events, I love what I do and remain energized by the possibility of helping to shape the still emerging field of radiosurgery. Even if our baby, the CyberKnife, is to date THE BEST radiosurgical instrument, I am convinced the future will bring yet better technology and even cooler clinical applications for precision radiation, and with this will come the potential to impact unimaginable types of disease and numbers of patients. However, if I am to be part of this future, I must find or create a partner who shares my enthusiasm for the field of radiosurgery and values my input. As I seek to make this transition, I urge you, no matter what, to remind yourself of my primary purpose. Thank you for your past and continued support.

Matthew Rafat's Interview with Dr. John Adler:

1. You recently left Accuray’s (ARAY) Board of Directors. Did you feel your departure was voluntary or involuntary? Without repeating statements you’ve published elsewhere, please explain.

For all intents and purposes my position at Accuray was “constructively terminated” over the past few years and I ceased to have any meaningful leadership role within the company or on the board of directors. For a long time I tried to be a constructive contrarian voice but Accuray’s current culture tends to mistake disagreement for disloyalty, and when coming from me, criticism was interpreted as merely the whining of a never-satisfied founder. Painful or not, it was time for me to move on and seek out or create a partner who valued my leadership and was genuinely interested in my vision for radiosurgery’s future.

2. When you first founded Accuray, what were your aspirations for the company and for CyberKnife?

At its inception, I dreamed Accuray could dominate the field of radiosurgery, especially the now rapidly emerging field of extracranial radiosurgery. A lot of my dream has come to fruition; a broad range of clinical applications, as first enabled by the CyberKnife, are now becoming ever more accepted. Hopefully someday it will be widely acknowledged that the formation of Accuray proved a decisive moment in this incipient, but very real, surgical revolution.

3. What do you believe are the main reasons CyberKnife has not experienced more widespread adoption within the medical community? How do you think Accuray could improve CyberKnife’s prospects?

Revolutions rarely happen in an instant, but rather take time for ideas to be understood and accepted. This is especially true in surgery. Today it seems unbelievable, but most of the leading hospitals in the 1800s resisted Joseph Lister’s advice for surgeons to wash their hands and sterilize their instruments before operating. Ideas and technology are not enough in themselves. For Accuray to effect meaningful change, the entire culture and eco-system of surgery and radiation therapy need to change in part, a process that involves longer term clinical outcome studies, training, government regulations, product design, the control of hospital budgets, professional and hospital re-imbursement, and more. Meanwhile, with a CyberKnife, we are talking about a very expensive product that crosses current medical specialty lines and requires the construction of a dedicated treatment facility. Moreover, one should not be surprised to realize that physician egos play a huge role at every level. Thrust in the middle of this incredibly complex and turbulent marketplace, Accuray has accomplished a lot over the life of the company. To my way of thinking it is unrealistic to have expected appreciably more success at this stage. Unfortunately expectations for Accuray were allowed to get way ahead of reality the past few years and this has engendered the current disappointment among investors with Accuray’s performance. However, I cannot emphasize enough that given the complexity of the radiosurgery marketplace, this is not a sprint but a marathon. Accuray is fortunate to have a head start because the CyberKnife is such an outstanding product. With the above understanding, it is important to build a business and company culture designed for the long haul.

It would be glib of me to suggest a few simple strategies and imply that they would miraculously transform Accuray’s prospects. It is going to be a long drawn out battle for market share over a decade or more, and to pretend otherwise is disingenuous. However this very realization in itself can help to guide corporate strategy. For example, developing the right long term allies is so critical; ultimately, salesmen don’t sell CyberKnifes, but one set of doctors, typically, but not always in academia, sells to another set of doctors. Moreover, a long drawn out battle implies being very mindful of your cash position. Meanwhile, one should avoid the frequent temptations of losing focus on your core product and customer base. Accuray’s success will be determined by literally thousands of decisions as it navigates the still undefined radiosurgery eco-system. Improving Accuray’s prospects will require a nuanced understanding of this emerging marketplace and deft hand on the leadership tiller. Management and board composition should have the requisite skills and background to make this happen. If Accuray is to succeed in its mission, it is not going to be enough for the board of directors to merely ensure that financial statements are clean.

4. Accuray may believe the medical data relating to CyberKnife patients isn’t yet sufficient to gain FDA approval. Without FDA approval, however, CyberKnife may not experience widespread adoption. This Catch-22 results because so many facilities rely on FDA approval prior to buying and using complex medical equipment. If Accuray’s current Board of Directors were to say that you are being impatient, and there is nothing they can do until CyberKnife has at least fourteen total years of post-operation medical data before FDA approval, what would be your response?

I don’t know that any response is required because I have never been at odds with the Accuray board over this general issue. However, it is important to point out that the CyberKnife has been cleared by the FDA for a broad range of clinical applications. Instead the issue to which you allude is not FDA clearance but governmental and private health insurance reimbursement. In this regard, for many years now I have tried to emphasize, and drive within Accuray, the organizational structures which can help CyberKnife users demonstrate through clinical outcome studies the benefits of radiosurgery for a range of clinical applications. So practically speaking I am among the converted. Moreover, if you are going to demonstrate clinical benefit at 5 years, it is going to take at least five years to produce credible research papers…there is no other way around it and you sometimes have to be patient. However, for many clinical applications, one can still make a compelling argument for CyberKnife radiosurgery today by cleverly utilizing shorter term data, as well as studies created by competitors.

5. In many cases, a company’s founder will cede control and guidance of his or her company in order to promote the company’s growth. eBay (EBAY) is one successful example of a founder accepting a more business-savvy CEO in order to maximize shareholder value. Why is your departure from Accuray different from the usual tensions between founders and less technically-knowledgeable but more business-savvy executives?

When a company transitions from a start-up to a more financially driven enterprise there may come a time when it makes sense for a company to bring in a “professional” CEO. Sometimes a so-called “business-savy” CEO can also burnish company image just prior to an IPO; eBay and Google (GOOG) being cases in point. But then if the CEO is smart, he should step aside and get out of the way! The greatest technology companies are routinely guided for years and years by their founders…HP, Intel, Oracle, Apple, Amazon and Microsoft all come to mind. Eric Schmidt may be the CEO of Google but it is widely understood that his job is to execute the vision of Google’s founders. Meanwhile, the loss of the founders can doom a leading-edge technology company as so aptly illustrated by what happened to Apple after Steve Jobs was fired. The more murky the future, and the greater the need for continued product innovation, the more important it is to keep the founder directing company vision. However, in the event that it becomes necessary to replace the founder, the onus should be on the board of directors to ensure beyond all reasonable doubt that they have the right man or woman! And if a new CEO is brought in who doesn’t measure up, the board should ‘fess up and either promptly recruit a replacement or bring the founder back to take charge.

For Accuray much of the future depends not on making elaborate business deals or driving down the cost of goods (although both of these can be useful objectives), but rather successfully navigating the myriad pitfalls of product development and clinical research. If Accuray is to reap the long term success for which it was once positioned, company leadership, including the board, should have a nuanced view of the most complex medical marketplace imaginable. This emerging radiosurgical marketplace is going to require non-stop innovation, especially in product design and changing the medical eco-system in which radiosurgery resides. If you look at Silicon Valley’s most successful companies, which tend to depend on continuous innovation, the founding team stayed engaged for a very long time.

6. What do you feel Accuray is doing well?

Up until now The Cyberknife continues to be the best overall dedicated radiosurgery system in the medical marketplace. Moreover, Accuray, in conjunction with the not-for-profit CyberKnife Society, which it once helped to create, has been instrumental in working with users to generate vital outcome studies demonstrating radiosurgery’s clinical benefits. In doing so, the CyberKnife has established itself as the gold standard to date for many if not most radiosurgical applications. Once upon a time Accuray was unique in the radiation field for its ability to attract a broad cross section of surgeons. In addition, the company was very successful in getting differentiated technical re-imbursement for CyberKnife radiosurgery. The above is particularly laudable when one is reminded that Intuitive Surgery, arguably the most successful capital equipment medical device company in Silicon Valley over the past decade, has neither conclusive outcome data to support the utilization of its Da Vinci device nor is there special re-imbursement for using its surgical products; so far the Da Vinci is merely an intrinsically cool and rather expensive surgical gizmo. Despite Accuray’s many shortcomings and Intuitive Surgical’s lionization, it is notable that CyberKnife radiosurgery is miles ahead of the Da Vinci concept for surgery when measured by clinical validation and cost effectiveness.

7. What do you feel Accuray is doing poorly?

In planning for unrealistic growth, Accuray scaled operations prematurely and needlessly burned through a lot of cash, and at the same time, communication with investors deteriorated terribly. Of note, since the arrival of CFO Derek Bertocci’s, both of the above issues have improved. However, the company has tragically lost touch with what was once a credible and very unique base of surgical users. The CyberKnife product is increasingly becoming bloated and overly expensive. In parallel, internal company processes have the complexity of a company 10 times the size, which is not a good thing for a company so dependent on rapid innovation. Many CyberKnife features were poorly conceived and in the process of development, robbed engineering talent from more important projects. Rather than envision and drive new clinical applications for radiosurgery, Accuray has chosen to spend a lot of energy and focus backtracking into the traditional radiation oncology market, long dominated by Varian and others. Internally, dissenting opinions are frowned upon, and the Accuray board has virtually no background in any of the medical or technical fields that are relevant to company business. For many years now Accuray has done a very poor job of selling to major US academic centers, which represent vital hubs of clinical research going forward. Moreover, because it’s under represented at major medical centers, Accuray lacks political clout within major medical societies and the government. In belatedly following my mother’s admonition “to not say anything, if you can’t say something nice,” I will stop here.

8. What are your favorite memories during your time with Accuray?

I loved my years as CEO between 1999 and 2000. Going into the company, I was a complete neophyte in the business world, and had so much to learn. Although these were very challenging years from the standpoint of hiring (the competition from technology companies was fierce) and at the same time the ensuing economic downturn was ferocious (making fund raising incredibly tough), during this period the business was finally righted after 5 years of repeated near death experiences. We turned the business around by simply focusing on the product, creating the right team and aggressively selling.

9. Your son, John “Trip” Adler, is an accomplished gentleman in his own right. Please tell us more about him and his company, Scribd.com. What would people be surprised to know about Trip?

Although a very young CEO, Trip has been incredibly successful with Scribd, the company he founded 3 years ago at age 22. If Trip wasn’t my son, I’d be very jealous! However, the nature of Scribd and its business is almost the diametric opposite of Accuray. For those interested in knowing how different I suggest they listen to a podcast at:

http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2333

The world might be surprised to know that Trip is an incredibly talented Jazz saxophone player. I wish he played more often.

[Disclosure: I (the interviewer) own shares of Accuray (ARAY).]

Friday, December 4, 2009

Accuray Annual Shareholder Meeting (2009)

I attended Accuray's (ARAY) annual shareholder meeting on November 20, 2009. The Palo Alto, California law firm of Wilson Sonsini Goodrich & Rosati hosted the meeting. The law firm provided coffee, orange juice, pastries, and fruit for shareholders.

Accuray sells "CyberKnife," which is used to remove tumors. CyberKnife allows doctors to remove tumors using non-invasive radiation instead of traditional surgery. According to the company, CyberKnife is a "robotic radiosurgical system [that uses] high doses of precisely delivered radiation to destroy tumors anywhere in the body where radiation is indicated."

Over 70,000 patients have been treated with the CyberKnife system, mostly for tumors outside the brain (although brain tumors account for approximately 40% of CyberKnife treatments). Because CyberKnife is a complex product, it requires a large upfront investment from hospitals and/or surgeons. As of September 30, 2009, there were 180 CyberKnife systems installed worldwide, with 117 in the Americas, 20 in Europe, 21 in Japan and 22 in the rest of Asia. A single CyberKnife system costs approximately 4 million dollars. During the meeting, the CEO indicated that in the future, the European Union would be the fastest growing market for Accuray's products.

Accuray's stock performance has been disappointing, and large individual shareholders may feel that the problem is management, not the product. One shareholder, Marilyn Adler, came spoiling for a fight. As the wife of one of the company's founders (Dr. John Adler, Jr.), she began criticizing Accuray's CEO Euan Thomson immediately. She demanded to know why the Board of Directors--absent from this meeting--includes financial experts rather than doctors familiar with cancer research. She accused management of not buying/holding shares because they themselves didn't have confidence in the company (CEO Thomson denied this particular allegation). As he was being subjected to Mrs. Adler's passionate verbal volleys, CEO Euan Thomson appeared as tense as a Buckingham Palace guard. Clutching his glass of water in one hand and a folder in the other hand, CEO Thomson actually got up from his chair during Mrs. Adler's comments, prompting her to say, "I'm not going to let you off so easily."

Afraid the meeting would be over and the CEO would immediately exit the room, I began asking some questions to keep CEO Euan Thomson, General Counsel Darren Milliken (a fellow SCU Law grad), and CFO Derek Bertocci present at the table.

I asked why CyberKnife is more effective than general surgery or other products. The CEO, relieved to get a neutral question, explained that CyberKnife is highly accurate and can better track the patient as s/he moves. Most surgeons use rudimentary tools allowing only a single rotation of radiation treatment, whereas CyberKnife uses a robotic arm with multiple and fluid rotations. Also, CyberKnife’s imaging capabilities do not require the patient to be subjected to an uncomfortable frame. In contrast, if a surgeon wants to use traditional methods to operate in a patient's brain, s/he would typically screw a rigid frame into the patient's skull. This frame would restrict the patient's movement during surgery. The patient would then remain in a fixed position, which limits the angles of treatment and tumor removal techniques. (After reading up on CyberKnife's technology, it struck me that it was something akin to Linux or RedHat--perhaps revolutionary from a technical standpoint, but lacking the broad-based acceptance required to actually cause a revolution in the marketplace.)

I asked the CEO how the amendments to the Stark Law (The Ethics in Patient Referral Act of 1989) would affect his business (see pages 42-44 of the 10K for more information). In a nutshell, the Stark law restricts a physician from referring patients to services or programs in which the physician holds a financial interest. The CEO looked surprised for a second, but General Counsel Milliken immediately jumped in. GC Milliken indicated he believed the Stark Law amendments would not impact sales.

I asked about an unusual line in the 10K, on page 31: "Since the software component is significant in our solution, we are bound by the software revenue recognition rules for our business." I asked what this sentence meant, and whether the company was engaging in accounting gimmicks to boost short-term revenue at the expense of long-term growth. CFO Bertocci said the sentence related to SEC rules on software sales. Basically, it sounds like Accuray must amortize its software sales over several years (spread out its revenue) instead of reporting an immediate lump sum profit when it sells a CyberKnife system. To use a simplistic example, if I buy a business software program for 100 dollars and I intend to use it for five years, I can't deduct the 100 dollars immediately--I have to deduct 20 dollars a year for 5 years, because I plan on using the software for 5 years. However, the CFO also said that sales under the post-2006 CyberKnife contracts allow Accuray to record revenue as soon as the product is "shipped, installed, and accepted" by the customer. I am not an accountant, so I didn't ask how the 2005 contracts differed from the 2006 contracts. As with any company that relies on software sales, I am now concerned Accuray seems able to record short term revenue using methods that might inflate quarterly results. (Note: see the very end of this article for the company's take on the SEC accounting rules.)

I asked why Accuray seemed focused on international markets. CEO Thomson said international markets were growing faster and it was easier to get reimbursed for sales. He said that in the States, hospitals and doctors must negotiate a price with insurance plans each time they use CyberKnife, because Medicare and other insurance plans do not have a pre-set price for a CyberKnife treatment. The CEO indicated the company spends lots of money lobbying Congress to resolve these issues. From my own research, it appears that hospitals may bill each CyberKnife treatment at between 40,000 and 90,000 dollars--obviously a wide range of reimbursement rates.

Ultimately, reimbursement prices and issues should be fixed with time. Medical groups and insurance companies don't want to advocate or reimburse a treatment method unless they are certain it is safe. To analyze whether a treatment is safe, they usually want at least five and sometimes up to fourteen years of data on post-op patients. Due to CyberKnife's relatively new technology and large upfront costs (around 4 million dollars per system), there just haven't been enough patients who've had CyberKnife surgeries to generate a large supply of post-op data. Over time, probably in about seven years, there will be plenty of data showing the effects and efficacy of the CyberKnife product, which should make reimbursement easier if the results are positive.

Based on other comments and questions at the meeting, Accuray is focused on marketing its products through hospitals and physician networks. When questioned about why Accuray didn't use more patient testimonials in advertising, CEO Thomson said he intended to build a "clinical case at hospitals" and didn't want to use patients in a way that would seem "tacky." When Mrs. Adler continued to question the Board of Directors' lack of medical experience, CEO Thomson responded that the Board "is not going to sell" the CyberKnife product.

Mark D., a former CyberKnife patient, made several comments during the meeting. He said he had a good experience with CyberKnife. He believes using CyberKnife instead of traditional cancer treatments caused "fewer secondary effects," such as less radiation-induced nausea. He also indicated CyberKnife treatments could be completed more quickly than traditional cancer treatments, which would save patients money. The fewer treatments needed, the cheaper it can be for the patient, because if s/he lives in a rural area and needs multiple cancer treatments, s/he would have to spend money commuting long distances or staying in a hotel.

Overall, I am conflicted about Accuray shares. On the one hand, I like the product, but I am concerned about reimbursement problems. Insurance companies will probably fight tooth and nail to deny a CyberKnife treatment if a patient can use a cheaper cancer treatment. It saddens me that patients may not be receiving the best treatment possible because of bureaucratic hurdles, but the realist in me understands the situation. I will keep a close eye on Accuray shares and hope to hear good news about the company.

Disclosure: I own an insignificant number of shares of Accuray (ARAY).

Note: prior to publication, I sent my article to Accuray. I have included some of their comments below:

On the SEC software revenue recognition rules: "This rather complex yet conservative accounting approach to revenue recognition applies to older contracts. Per the SEC, Accuray had to defer the recognition of revenue for these legacy agreements until all contractual elements were satisfied. At that point, revenue for the system and service could be ratably recognized over the remaining length of the contract. This is a accounting method used by software companies. While most of this legacy revenue has been recognized, the company will continue to recognize the remaining deferred revenue over the next two years. It is important to note that these contracts stopped being written in 2005, with subsequent contracts subjected to a more standard revenue recognition policy."

On CyberKnife's competitive advantages: "The CK has the ability to track the location of the tumor throughout treatment, with the robot automatically correcting for movement and thereby keeping the radiation beams directed at the tumor. The result is accuracy in the delivery of radiation to the tumor while minimizing the involvement of healthy tissue. Traditional radiation therapy systems are mounted on a gantry, which limits the number of beam angles. Since CK uses a robotic arm with almost unlimited beam angles, the tumor can be 'painted' with radiation beams more effectively. This also helps to spare healthy tissue."

On reimbursement issues: "Throughout most of the country, Medicare and most private insurance companies have set reimbursement rates for CK procedures. There are some exceptions and the company is providing assistance to address these issues."

Bonus: interview with Dr. John Adler, Accuray's founder, HERE.