COVER STORY

In the world of medical technologies, it isn't uncommon for start-up companies to spend years in research and development (R&D) before ever seeking FDA clearance to market a product. But even after all that time, building a commercially successful product and company often requires much more.

At the beginning of this decade, just such a market challenge awaited Accuray Inc. (Sunnyvale, CA), creator and marketer of the CyberKnife robotic radiosurgery system. Founded in 1990, the company had spent years in R&D before the CyberKnife system finally received FDA clearance, in 1999, for the treatment of head, neck, and upper spine tumors. Shortly thereafter, in 2001, Accuray received FDA clearance to introduce enhancements to the CyberKnife system for the treatment of tumors anywhere in the body.

In the years since then, Accuray has continued to pursue advances in the field of radiosurgery. A wide range of clinical studies have helped the company to gain adoption of its system for an ever-increasing range of applications. One such study is now being launched at the University of Texas M.D. Anderson Cancer Center (Houston), where researchers are comparing the treatment outcomes of the CyberKnife system with those of surgery in early-stage operable lung cancer.

Leading Accuray's charge into clinical and commercial success is Euan S. Thomson, PhD, who has served as the company's CEO and a member of the board of directors since March 2002, and as president since October 2002. Thomson joined Accuray from Photoelectron Corp., a publicly held medical device company. He previously held various positions as a medical physicist in the United Kingdom's National Health Service, and worked as a consultant for medical device companies, including Varian Oncology Systems and Radionics Inc.

In this interview with MX editor-in-chief Steve Halasey, Thomson describes the long process of research and development that led to Accuray's earliest commercial success, how the company came to launching its initial public offering in February 2007, and how the company is working to build out the clinical applications of its platform technology.

MX: What intellectual property was Accuray originally founded on, and how did that develop over time?

Euan S. Thomson: Accuray was founded in 1990 based on technology that was developed in 1987. The original intellectual property related to the concept of the CyberKnife, which is a robotic delivery system for very accurate radiation treatments—so accurate, in fact, that treatment with the CyberKnife can destroy a tumor without significantly affecting the surrounding tissue.

The initial IP portfolio surrounding the CyberKnife remained relatively unchanged for years. When Accuray moved into its commercial phase, which ramped up between 2000 and 2002, we also started to ramp up intellectual property around the concept of the CyberKnife. We began to focus on the intelligent software that interprets the targeting information and guides the radiation beam with exceptional accuracy. We developed intellectual property around the software and hardware necessary for commercial implementation. Since then, we've been on a very fast intellectual property ramp-up, and, as of the end of last quarter, we have 30 issued U.S. patents. Our intellectual property holdings have grown almost exponentially since 2002.

With a technology like the CyberKnife, there are a lot of areas that you can file in. Were the original patents on the robotics, the radiation delivery devices, or both?

They covered the fundamentals of the device itself and its use of images to guide the radiation delivery.

So the patent areas that you're focused on have a lot more to do with the software and the algorithms used in treatment. Are you also active in researching the robotic component or is that a less important part of the system?

We're more interested in the application of robotics to our particular field than we are into robotics per se. There's a lot of work being done in the field of robotics across many industries. We don't manufacture our own robot. We buy a robot, and we use the robot in a particular way. Thus, we focus our research and our intellectual property on the way that we use it.

I see. In the early stages of the company, before you entered the commercialization phase, were there parts of the company's technology that you held back as trade secrets and did not file on?

Nothing was held back. We filed on what we thought had real value, and we filed on those components as early as we could. Most of the filings were focused on correcting a high-energy radiation beam using a very small, compact accelerator&—small enough to mount onto a robot—and we've continued to grow our portfolio in recent years. The technology for manufacturing the compact linear accelerators that fit onto the robot was part of our portfolio for our entire pre-commercialization phase. And since we went commercial with the system, we've invested heavily in that. That's ramped up significantly. That area was reliant on trade secrets rather than intellectual property when we first entered the commercial phase. Since that phase, we've intensified our efforts and created a portfolio around that technology.

Has Accuray been involved in any litigation relating to its patents?

We've done a pretty good job of creating a fence around the CyberKnife. And we've been able to do it without encountering any litigation. So we haven't had and we don't have any pending patent litigation. I think that's partly a credit to our overall intellectual strategy.

For many years—which is to our credit and to our favor—nobody realized that this was going to be quite the commercial enterprise that it actually is. There were a few inherent believers in the field of extracranial radiosurgery, meaning destruction of tumors using intense radiation beams outside of the head. It started in the field of intracranial radiosurgery for treatment of brain tumors, and we've really branched out from that.

In the early days, when people heard the word radiosurgery, they associated it with a very limited form of treatment for brain tumors. As we created the clinical field, which is part of our overall business plan, it became a bigger and bigger business. But we had the luxury of being able to put a commercial and intellectual property strategy together at the same time that the field was developing. We've created this clinical area, we've created the business, we've created the business opportunity for our product, and we've also simultaneously been able to create a ring of intellectual property. Our business has a long timeline, and I think it's going to be very hard for other companies to move into the field now.

Yes. There's always a bar that prevents other people from just jumping into a field.

Yes. We were able to create a bar before anybody really realized that this was a key area for development of intellectual property. We were the only ones focused on it.

Ramping Up

The company was founded in 1990 and moved into commercialization around 2000. That is a long ramp. What took so long? What was the company doing during that development phase?

It was an R&D phase. It's very difficult to launch a capital equipment product in the medical field. It's not the classic profile of start-up medical device companies, which usually start with relatively small products. Building a company around a large-scale multimillion-dollar capital equipment product tends to take a lot longer. The investment required is much higher, and reaching the point of commercialization takes longer. So a lot of that ramp-up time was spent on engineering as it relates to the complexity of the CyberKnife system. But the need for that long ramp-up period is also reflective of the business itself.

How was the company's early R&D financed? In other words, how did Accuray manage to pay its bills during that long ramp?

We went through a long venture capital phase. But to a large extent, the company was funded by sale of the product itself. This was in the early days. The product was predominantly sold as a beta test system, prior to FDA clearance. On many occasions, it was sold at a price that was less than what it cost to build the system. But nevertheless, that revenue from one-off sales of the prototype systems really did help the company to fund itself.

Even when it was still in conceptual phases, the CyberKnife system performed. Before it was even developed as a product, people liked the idea of it. They could see the attraction. The logic behind using advanced image-guided robotics for this particular application has always appealed to clinical practitioners. So we were able to keep the company going through a very difficult phase based on the value of the product itself.

So aside from your venture capital partners, you were able to avoid partnerships with larger companies, which can sometimes dilute the value of a company during that long ramp-up period.

Yes. All of this occurred before my involvement in the company. I started at the beginning of 2002, right around the point of commercialization. But there are certainly stories of the company approaching some of the larger companies. But again, I don't think anybody really realized or believed that this could be quite the clinical field that it's become. So there wasn't an awful lot of interest from larger companies at that point. They weren't believers.

Not even on an R&D basis?

Since I wasn't there, I'm not speaking firsthand. But my understanding is that they weren't that interested back then.

That's strange, but I can understand that response.

The field was just so new and so radical. There was very much a wait-and-see attitude. Large companies decided that they would stand by the edges and, sooner or later, it would become apparent whether or not there was an opportunity to step in.

The company's initial public offering in 2007 represented a major infusion of capital for the company, beyond just the revenue that had been generated by sales. And that worked out pretty well for the company.

Yes, it did. Following commercialization in 2002, we really focused on creating the infrastructure around the product. There are many excellent products out there, but there are not necessarily many commercial successes. What we needed to do was to create an infrastructure that gave the product its best chance. And that process was very successful.

We focused very hard on customer service and customer support, as well as reliability of the product. After all, we're asking people to invest a lot of money and take a big step to get such an expensive new product, so we wanted to support them well. We invested heavily in the clinical programs to increase the clinical value of the products for our customers. And that led to a fairly rapid ramp-up in sales over a fairly short period of time.

People had known about the product for some time, but when they saw the kind of support that was going behind it, they became willing to take the plunge. So we did ramp up sales, and we did ramp up revenue. We also started to create some attractive long-term service programs—attractive for our customers and attractive for us from a commercial standpoint.

We have a slightly different view of what a capital medical equipment product should be. The majority of companies—even large companies—still position their products as a single salable item without significant upgradeability. That's not what we conceived for the CyberKnife. Because we were developing technology very fast and the clinical field was developing very fast, we put together service programs that offered access to upgrades for the CyberKnife. We positioned the CyberKnife as a platform—a core platform that we would always be supplying with the latest technological upgrades to keep the system up to date. And when those upgrades became embedded in our service programs, we were able to lock in many of our customers—a much higher proportion than would have signed on for mere service offerings. And we were able to offer our long-term contracts at a premium because they included access to upgrades.

When we went forward with our IPO, we had quite a unique profile. I think that was a lot of the attraction. We went into the offering—as is still the case today—with 90% of our U.S. customers under long-term service programs that command about $460,000 per year. And we went into our IPO as a company that already had sales attraction. We were an early stage company that had sales and a vision. We'd proven that we could sell, and therefore we were able to go in with a degree of confidence and present Accuray as a fast-growing organization. We had proven capability, and we also had recurring revenues. New investors recognized that those recurring revenues would smooth out some of the lumpiness that people would normally be worried about with a capital equipment product.

Logistically Speaking

Building up field service and logistics was a significant effort under your direction. Was there a particular sector that you modeled your service offerings after?

No, it's really a homegrown hybrid. It actually derived from the first 10-plus years of my career. I was a customer in this industry segment, and I knew firsthand the frustration of turning up at a trade show and seeing what I could have bought if I'd waited for another six months. These are big investments.

When I started with the company, we had five beta test sites in the United States, and I went to visit each of them. One of the major frustrations I saw at these sites was that the version of the CyberKnife that they had taken a big leap of faith and a big financial leap to buy was rendered almost obsolete by the next version. As a result of that frustration, at the time, we didn't have particularly positive reference centers. Also, there was frustration with regard to the level of service that was being provided by the company. After all, we were a start-up organization supporting very few systems.

Very often, it was the R&D engineers who were making the service calls. And they had many other priorities vying for their time. So, based on my own experience as well as what I was hearing from customers, we put together a different type of model in which both hardware and software are generally available as upgrades to the core platform. And in that way, when we took that offering forward to new customers, we were able to not only bypass some of the existing frustrations, but also turn them into something positive.

What did you have to do in terms of your personnel to get past the point at which it was the R&D engineers doing the service? What kind of service organization have you built since then?

We now have an extensive worldwide service network, and it wasn't rocket science to put it together. It was just standard business development practice. We hired some service specialists and used the experienced R&D engineers to educate the service team on all the service issues. The R&D team was still available as backup while we ramped up the capabilities of the service team. But after that, we developed dedicated service training programs so we were able to accelerate our hiring process. Then, as we grew and as we needed a worldwide sales infrastructure, we already had the core capabilities for training and personnel development.

To what extent do you use real-time communications and remote instrument diagnostics within your service model?

With the absence of the direct communication with the product, we have all of those initiatives in place. We have international offices in Paris, Hong Kong, and Tokyo. Those are hubs for our service and parts network. In the United States, we've always been very self-sufficient. Internationally, we still rely to some extent on our distributors. But we also have service management teams in place to work with the distributors to ensure that all of our customers receive the highest level of service, regardless whether we're working through a distributor or working direct.

When a company asks customers to take on this level of product, the company has to provide high-quality service. If you don't, the whole program can fail. So customer support and customer service are very important to us.

The other thing we do in terms of customer support, which is relatively unique in the capital equipment industry, is provide account management services. We modeled that component on the disposables business, in which there is a postsales representative dedicated to a particular site solely for the purpose of making sure that everything is running smoothly. We've ramped that service up to the point where these account managers now provide local education and training programs for physicians who refer patients to CyberKnife centers. They help with marketing the CyberKnife at each site to ensure it's successful.

One of our mantras at Accuray is that we will not have an unsuccessful CyberKnife center. And we really put resources behind that. Whether customers are motivated by financial success, academic success, or just having a top-class clinical program, we need to provide services that will help them be successful.

You just answered my next question with regard to customer relationship management in connection with service functions. It sounds like you're on top of that one.

Yes. We run these functions as independent programs. What we call customer service is focused on the mechanics of the machine and making sure that it operates smoothly in the hospital. Account management services are focused on patient services, patient referrals, and marketing the CyberKnife to patients and referring physicians.

One of the ways we differentiate ourselves from some of the other capital equipment companies is by the fact that we are building a clinical program. For example, a group of thoracic surgeons in the vicinity of a newly installed CyberKnife wouldn't necessarily realize that radiosurgery is an option for many of their patients. The field is so new. The same goes for a group of urologists who maybe interested in treatment of prostate cancer. So we see it as our job to help our sites connect with local physician groups and educate them on the latest technology and the latest clinical data so they can make a value decision about whether they refer patients.

The Clinical Side

At what point was it recognized that the CyberKnife system was good for use any place in the body?

Well, we're still not there with the 'good for any place' statement, but we're working on it. Our job is to explore the clinical value of the CyberKnife and explore the cases in which radiosurgery can be used. We support our physicians in trying new applications, and we do so through what we call the CyberKnife Society, which is a network of physicians who we fund but leave to manage themselves independently, in order to maintain the integrity of their communications. They support new users by telling them how most people are treating a new application, like how most people are treating prostate cancer or how most people are treating lung cancer. They help them put their clinical protocols together locally and also help them with the appropriate patient selection based on their own experiences.

Establishing the CyberKnife Society was one of the first things we did when we went into the commercial phase. We didn't realize the eventual outcome would be as positive as we have found it to be. But we had an inherent belief that the technology would enable us to explore different applications. And we owed it to ourselves, to our customers, and to patients to put resources behind exploring which clinical applications were going to show the most benefit.

Where was the push coming from? Was there a realization within the company that the technology was suited for different applications? Or were clinicians stepping forward with new uses?

From the beginning, it was clear that the technology had the capability to apply radiosurgery anywhere in the body. So from the very earliest days of the CyberKnife, it was understood that eventually there would need to be a clinical program to explore how useful that was. It all started with the initial FDA clearance that we received for intracranial treatments, which was conventional radiosurgery. And then what really started our commercial efforts at the end of 2001 was FDA giving us clearance to market the device for tumors anywhere in the body. From that point forward, we started to aggressively explore those other clinical applications.

At the time the CyberKnife received FDA clearance, who were your partners in conducting research, driving adoption, and exploring other applications?

There's no one answer to that. It was many of our customers at many different sites. And the more customers we brought on board, the more we were able to broaden our clinical network. That said, there are key sites that have been instrumental in our success. Stanford was our initial site, and that site has always had a very active clinical program. But to be honest, Stanford's program is probably driven more by the original applications in intracranial radiosurgery and then long-term academic programs related to other areas. So that partnership is very, very, very valuable. But it's not as though Stanford has done this single-handedly. We also have very good clinical partnerships at Georgetown University. In fact, Accuray's list of partner sites includes nearly every single site we have. There have been pivotal people at many of our sites for many different clinical applications.

That's one of the benefits of investing in a broader network of relationships with our existing sites. It's enabled us to keep track of who's enthusiastic and who's interested in all of these different clinical applications. We can tap into that enthusiasm and ask them for advice about how we can move forward.

So, radiosurgeons are your constituents?

Interestingly, there is no such thing as a radiosurgeon. It's a little bit like the product—it's a hybrid field. Initially, the drivers for radiosurgery came from neurosurgeons. That drive predated the CyberKnife. Neurosurgeons wanted a device that would noninvasively destroy brain tumors because many brain tumors are inaccessible.

As it moved onwards, radiation oncologists became heavily involved. Radiation oncologists are the core practitioners. They tend to be the managers of the CyberKnife service. But the patients will come from other areas. Patients nowadays come from thoracic surgeons, from neurologists—from many different directions. It's takes a network of local physicians to make a CyberKnife system successful. At least today, there's no such thing as a pure radiosurgeon.

That requires a more complex marketing strategy than other medical device companies are accustomed to. Some companies are able to just enlist the help of the specialty society in their area.

Yes. It's a weakness and a strength when it comes to our selling strategy. It's a weakness because it makes it harder on our sales force. Our sales force rarely has to deal with just one physician at a hospital. They usually have to deal with a group of physicians. So for the project to go ahead smoothly, all of those physicians, as well as the hospital's CEO and the CFO, have to be aligned in their desire to build a new clinical program.

The strength from a sales perspective is that we now have a lot of experience doing this, and I see the sales complexity as another barrier to entry. When I look at some of the other radiation oncology companies that have very good radiotherapy practices, which is the normal radiation treatment inside a hospital, I see that they really just have one customer—the radiation oncologist. Even if they had technology with capabilities comparable to the CyberKnife, it would still be hard for them to build a clinical program simply because they don't have that experience and their sales forces do not have the type of network that we've been able to build.

Plus, bringing in physicians from a lot of other areas enables Accuray to explore the applications that they find urgent for their patients.

That's exactly right. Yes. You've hit the nail on the head. That's a key part of the strategy. We are constantly broadening our customer base, and we are learning at the same time. Our clinical program has been driven by our customers from their initial experiences through to ideas for future experiences.

I gather that their interest in new applications is feeding some of the upgrades that you're building into the system. And the CyberKnife is now in its fourth generation?

Yes. That's exactly right. Physicians feed us their ideas for needed additional capabilities for the CyberKnife, and those ideas play a very large role in our engineering program. Our engineers come up with their own original, creative ideas, but they are also driven by customers' needs and requirements for new clinical applications.

That's one of the reasons our upgrade program is very attractive. For example, several years ago we introduced the CyberKnife's capability to move as the patient breathes. So the CyberKnife is able to lock onto a lung tumor, track the tumor as the patient breathes, and keep the beam moving in synchrony with the restricted motion of the tumor. Prior to that upgrade, lung tumors were not widely treated because doing so involved requiring sick patients—people with serious lung disease and potential breathing difficulties—to hold their breath for the duration of the treatment. That was almost impossible for a large portion of the patients who may have been beneficiaries of the treatment. With the introduction of the Synchrony respiratory tracking feature, patients were able to breathe normally, keep still, and lie in a relaxed way. The system would track the tumor as it moved. When we released that upgrade to the CyberKnife's user base, we saw an immediate impact on the number of lung cancer cases that were treated.

We try to continually observe clinical changes in the market and be responsive to clinical needs for an increasingly diverse group of patients. We produce upgrades that enable treatments to be delivered in a more streamlined way. That creates value for our upgrade program as well as value for the customers. Our upgrades and engineering efforts have a direct impact on clinical practice at every CyberKnife center.

To what extent are you encouraging your sites to publish results about new applications and to circulate that information among potential adopters?

We have a very active clinical publications effort. We encourage our users to present their findings at meetings and to publish their results. We also support various clinical trials that are of interest to the community as a whole. Right now, we have clinical studies taking place for prostate cancer, lung cancer, and liver cancer.

Are those multisite studies?

Yes. Almost invariably, our studies are multisite studies.

And international as well?

Yes.

It must be difficult to keep track those efforts, never mind manage them.

That area is a part of the overhead we carry that we wouldn't have to carry if we weren't creating a new clinical field. We have a team of clinical development specialists, with some people focused on the publication side and others focused on the clinical site-specific development areas, such as brain tumor, fine tumor, or lung tumor treatments. We have a range of specialties inside that clinical development group, and they have built a pretty extensive network and program.

Do you support studies monetarily or does Accuray conduct some of the studies itself—or a little bit of both?

We can't really conduct studies on our own because we don't have access to the patients and we don't own the technology once it's been delivered to a hospital. So our role is very much on the support side. We support our customers in carrying out these studies. And many sites carry out the studies by themselves as well.

Our sites have produced many useful publications, including a recent one from the University of Pittsburgh that looked at treatment of inoperable lung tumors. Considering the size of the field, the study encompassed a reasonably large patient group and produced very encouraging results. That study was something that the university organized and managed itself. So, in addition to what our company supports, there are other very active clinical sites that are investigating the CyberKnife without Accuray's involvement.

I presume that most of those sites are primarily interested in the clinical outcomes. Are you also able to study some of the financial outcomes? What kind of evidence have you put together to support new applications when it comes to reimbursement? And how do you do that?

We have various groups involved in the broader field of reimbursement. We also have groups of our customers who are collaborating to support their own reimbursement requirements. So we both have internal resources and external resources that are focused on reimbursement. In terms of the current reimbursement situation, CMS has identified codes that it feels are appropriate for CyberKnife treatment, and those are used pretty widely for Medicare patients. We've also had increasingly good responses from private payers.

Our job in all of this is one of education. We take clinical data to those groups and help them to understand that, although this is a new technique, it's one that has clinical validation.

And then, of course, we also need to do a cost analysis. This is an area in which we're expecting some very rapid changes. The data that we're seeing now are increasingly focused not only on surgically inoperable patients, but also on surgically operable patients.

And then, of course, the question becomes whether it is more or less cost effective to use radiosurgery versus surgery. Answering that question is an area we're moving into now, and we hope to see some rapid changes in the next 12 to18 months.

That's fascinating. It's one thing to say that you're the only game in town when it comes to dealing with inoperable tumors. It's quite another to say you're more effective than traditional surgery.

Yes. In our CyberKnife Society meetings, we've seen some very good results from a number of different sources with regard to treatment of prostate cancer. And surgery currently is still the number one treatment option for many patients with prostate cancer.

It's very important to recognize that the data as they've been presented at meetings have not been through the peer-review process. So we cannot hold up those data and say they are formally peer-reviewed, qualified data that support a patient switching from surgery to radiosurgery. However, what we've seen presented shows a lower incidence of some of the side effects that are associated with treatment of prostate cancer, such as impotence. We're now focused on trying to track and encourage our sites to get that information through the peer-review process. And, assuming it comes through in the way that we've seen it presented, I think it will be a very positive message for patients as well as the parties considering reimbursement.

But maybe not so positive for surgeons.

We have always encouraged surgeons to work with us, and we've been pretty successful in that effort. As I said, the radiosurgery field was started by neurosurgeons, and it's now an established part of most large neurosurgery practices. Our objective is to work with other surgeons to achieve the same level of acceptance. Clearly we don't think that we'll replace every surgery, but we do want to work with surgeons to explore exactly where the line should be drawn. From what we've seen so far, we know that the line definitely needs to be moved.

Do you feel as though you have the support of surgeons in doing that? A decade ago, robotics was a little bit of a challenge for surgeons. But they seem to be getting more comfortable with robotics now.

We do feel we have the support of surgeons, particularly based on the number of referrals that have taken place. When we initiate new sites with new surgeons, they will tend to refer patients that are inoperable. And, of course, surgeons never like to refer a patient because the patient is inoperable. But we are able to offer them radiosurgery over surgery and show them that the results appear to be comparable. In addition, they maintain their involvement in their patients' clinical programs, an aspect that they usually find pretty attractive.

As they gain experience with radiosurgery, they're more likely to move into the area of operable treatments. One example of that is the study that we recently announced at the University of Texas M.D. Anderson Cancer Center, which was initiated by one of the most renowned thoracic surgeons in the world, Jack Roth, MD. Dr. Roth is chair of the center's department of thoracic and cardiovascular surgery, and the principal investigator on a study that will directly compare surgery with radiosurgery for operable lung cancer.

That's pretty impressive. It indicates the breadth of the physician community that Accuray is including in its clinical program.

Yes. Fundamentally, there may be a lot of cynicism in the marketplace. But doctors really are motivated by what's best for their patients. Of course, we don't have all the answers yet. We don't know yet how the final world of radiosurgery will be carved out. But based on the evidence we've seen so far, we're definitely realizing that it can help many patients. The surgeons are recognizing that too, and they're helping us to explore and evaluate the capabilities of the CyberKnife System.

Growing Sales

Accuray recently announced the fourth-quarter results of its fiscal year. The company saw revenue increases of 50% year over year. I would expect that the shareholders are happy.

It was a very good year for us. We saw strong year-over-year growth. When we went public, we worked hard to explain the uniqueness of the company and the company's approach to the investment community. I'll be the first one to admit that sometimes some investors understand that value and other investors don't see it. Much has been achieved, but at the same time, we still have much left to achieve. And I think there are many people in the investment world that are still sitting on the sidelines, as they did in the early days of Accuray, just waiting to see what happens next.

It's one thing for people to sit on the sidelines when there's not much clinical evidence in favor of the system. But with the adoption that you've achieved and the expanded applications and growth the company has seen, I would think that people would start to wake up.

Yes, I think we're definitely in that phase. It's not something that happens overnight. But if there's a classic tipping point, I believe we're fairly close. With the data that we're seeing coming through regarding the clinical efficacy of the system, we're building a more convincing case every week, every month, every year. We have a very large pipeline of sales right now, which is reflected by the size of our backlog. And it's also reflected in the number of leads that our sales team is working on. With every new CyberKnife that's sold and installed, we get closer to the point where no clinical practice will want to be without one.

What kind of sales force do you have and where is it positioned?

We have a direct sales force in the United States, and internationally we are direct in some countries. But in most countries outside the United States, we work through distributors. That's reflective of the type of infrastructure we would need to support a direct sales approach worldwide.

In the United States, we have different levels of salespeople and different roles within the sales group. We have one team whose job is to go out and tell the academic story of the CyberKnife. Internally, we recognize that if you haven't heard the CyberKnife story within the past six months, you haven't heard the CyberKnife story; the clinical profile is changing so fast. New clinical data, new clinical programs, new patient experiences. So we have a team of people whose job is to just be out there telling the story to people who may have heard of the CyberKnife and have some early interest. They follow up on leads that are developed at trade shows and that come through the Web site. They generally just spread the word about the CyberKnife.

We have a different layer of sales people whose job is to turn identified opportunities into real sales. That job falls to our regional sales directors. They are high-level, experienced senior personnel within the sales field who understand the business and are as comfortable talking to senior surgeons as they are to the CEO, CFO, or director of radiation oncology at a particular institute. They can put together a clinical strategy and a business strategy and draw all the strings together to make the sale happen.

That's a very complicated scenario that you just described because the customer in hospital settings has changed so much over the last decade. The folks at the top end of your sales chain have to be extraordinarily capable to address all those audiences and sell multi-million-dollar capital equipment.

That's true. As I mentioned earlier, our sales model is both a strength and a weakness. The weakness is that it is complicated and involves many different skills. The strength is that we really understand it. We have a great deal of experience with it now, and we have sales training and sales support mechanisms in house that enable our salespeople to be successful.

Do you receive resistance from hospitals and other institutions strictly on the basis of finance—institutions that would love to buy the system but don't have it in their budgets?

Yes, absolutely. We share capital equipment budgets with many other companies, and many physicians inside a hospital compete for the same resources. When we speak to hospitals, the challenges we face include budgets, timing, and space. Our equipment needs a dedicated room that has radiation shielding all the way around. It's a special room that's usually built for the CyberKnife. So finding institutions that have the budget for the machine and the budget for the construction is probably our biggest challenge.

On the positive side, one challenge that we don't face is a competitive challenge. The CyberKnife is unique. At the point when an institution has made the decision to buy a full-body radiosurgery system, we don't face competition from other manufacturers because the CyberKnife is such a unique technology.

Is the point of entrance with a particular clinical group usually the physicians who are saying, 'We've got to have one of these?'

Yes. It usually is. Increasingly, those individuals may have worked on a CyberKnife system somewhere else. They may have heard about the CyberKnife through our sales specialist approach and then visited a CyberKnife center. Again, one of our strengths is that we have a very strong physician network. And because we focus on making our customers successful, they tend to reciprocate by being advocates for both the technology and the company. We have many people we can draw on to validate what our salespeople are saying.

During the fourth quarter you reported 28 new contracts, 17 of which were international. Are you seeing faster growth internationally than in the United States?

The reason our international business has accelerated so much over the past year or two is because we've invested heavily in building our global footprint. In addition, the clinical data have matured. In the United States, a device company can achieve commercial success for a product on the basis of good reimbursement and a good U.S. business model. Outside of the United States, there are lots of different pressures on countries. In particular, they want to know that the clinical data are there to support the program. So the fact that our international business has started to grow so fast is indicative of the maturity of our clinical data and our clinical program.

So you've penetrated their reimbursement systems and finally gotten on their budget lines.

Right. Exactly. We've made a good clinical case. Many countries in Europe, as well as Canada and various other countries, have socialized medical systems that are not based on the business case of a product. There models are more based on health economics and the ability to save money while achieving the same clinical outcome. It's the clinical outcome side of things that has enabled us to start selling in those countries today.

At the end of June, Accuray reported a backlog of $647 million, which is impressive. How long will it take for the company to build all those machines and pull in that money?

Constructing the machines isn't the challenge. One of the biggest challenges we face is getting customers who are ready to receive the machines. The construction program that takes place at a customer site is often our biggest holdup. But some of that backlog is product. Some of it is service. These are service contracts. So even if we shipped all of the systems in backlog in the next 12 months, all of the backlog wouldn't disappear because much of it relates to ongoing service programs and ongoing customer commitments.

Where do you manufacture? Is all of Accuray's manufacturing in Sunnyvale?

All of the manufacturing we do is based in Sunnyvale. But we've reached the point now where the CyberKnife is a very modular product and we're able to receive modules from third-party providers. We've become more of a system integrator.

However, we have a high level of manufacturing capability. The manufacturing we keep in house is centered on the linear accelerator, not the CyberKnife as a whole.

Of the $647 million backlog, do you expect to see a fairly good chunk of it turning into revenue in the next fiscal year? What is your projection for next year?

We've given revenue guidance of between $230 million and $250 million. One of the reasons that we're not expecting more of the backlog to come to fruition over the next 12 months is that, as I said earlier, many of our customers need to get themselves ready for the installation. Going forward, we have to keep investing in the clinical programs. We have to keep supporting our customers. We have to keep building on the service side so we encourage our customers to keep buying our high-level service portfolios. But in addition to all that, we also need to reach out to our customers to find ways of accelerating the installation process. Encouraging hospitals to get their rooms ready sooner will enable us to install systems faster.

Into the Future

Beyond the growth figures that you're projecting, where do you see the company going into the future?

For the foreseeable future, we'll stay focused on the CyberKnife product. We're not anticipating or planning for massive product diversification. We feel that the clinical development of the CyberKnife itself is progressing extremely well. And we're seeing dramatically increased utilization for all of our clinical applications. In addition, we're seeing very good clinical programs coming together.

We're waiting for some key publications that will validate the clinical model for prostate cancer. Such validation should increase demand immensely amongst both patients and physicians. In addition, we are initiating a study for treatment of operable lung cancer cases. I think the study itself is a form of validation of the CyberKnife as a credible product for the treatment of lung cancer. The main focus of Accuray's activities right now is to keep investing and supporting these clinical activities because the field for radiosurgery with the CyberKnife is huge.

Do you see the company investing a lot in growing its sales force over the next year or so?

We grew the sales force quite significantly last year. So there's unlikely to be a massive investment and expansion in the sales force again this year. Most of our investment now will be in broadening our global footprint and making sure we can reach all geographic regions.

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