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Focused for Growth

Advanced Medical Optics chairman and CEO James V. Mazzo on creating a vision for the future.

COVER STORY

Sidebars:

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. 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.

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Accuray president and CEO Euan S. Thomson on technology development, clinical interest, and company growth.

In this excerpted 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 launch 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.


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 multi-million-dollar capital equipment product tends to take a lot longer. The investment required is much higher, and reaching the point of commercialization takes longer.

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.

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.

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. 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 upgradability. 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.


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.

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.

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.


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 who are still sitting on the sidelines, as they did in the early days of Accuray, just waiting to see what happens next.

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.

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.


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.

Copyright ©2008 MX
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