Euan Thomson realized Accuray faced a tall order when he joined the company as CEO in 2002. Despite Accuray’s promising radiosurgery technology and the field’s equally promising vistas, the company needed to make fundamental changes if its CyberKnife Robotic Radiosurgery System was to emerge from its R&D phase and succeed in the marketplace. One of the chief challenges was the nature of the medical equipment business, which is dominated by manufacturers with deep pockets and large reputations, Thomson says.
“From the beginning, it was very clear what needed doing,” says Thomson of the Sunnyvale, CA–based equipment manufacturer. “What needed doing” included changes in Accuray’s infrastructure and a “cultural shift” in the company’s direction. Five years after Thomson became president and CEO, the company went public in 2007 and today has a market cap of just under $400 million. Accuray’s robotic CyberKnife System noninvasively treats tumors throughout the body in real-time, delivering precise, high-dose radiation that lessens the impact on the surrounding healthy tissue, the company says. The system doesn’t require the use of head or body stabilizers. “It’s a completely bloodless outpatient procedure that patients find very attractive,” Thomson says. The CyberKnife System has been used to treat more than 80,000 patients worldwide so far, according to the company.
Under Thomson’s leadership Accuray continues to advance. In June 2010 the company announced that the Mount Vernon Cancer Center in Middlesex, England, had become the first hospital operated by the UK’s National Health Service (NHS) to acquire the system. The purchase marks the 200th installation of the CyberKnife. In that same month Accuray signed a strategic alliance with Siemens giving the healthcare products giant the global rights to sell the CyberKnife System. The two firms will also collaborate on R&D, and Siemens will buy and integrate elements of Accuray’s technology in its linear accelerators. In August Accuray received Shonin approval from Japan’s Ministry of Health, Labor, and Welfare to market the CyberKnife in that country.
Before joining Accuray Thomson served as president, CEO, and board member during various periods for Photoelectron Corp., a Massachusetts-based manufacturer of miniature x-ray systems for medical and other uses. Thomson has also held positions as a medical physicist for NHS and has worked as a consultant for Varian Oncology Systems, Radionics, and other medical device companies before going to Photoelectron. He attended the University of London, where he received a BS in physics, an MS in radiation physics, and a PhD in physics with an emphasis on stereotactic brain radiotherapy.
In this conversation with MX Thomson touches on the high standard for clinical data in Europe, long-term developmental needs versus short-term financial considerations, investor perceptions, the importance of customer feedback, and how Accuray has “broken the mold” of the usual path for medical capital equipment companies.
MX: Congratulations on the 200th installation. Are the bulk of the systems in the U.S.?
Euan Thomson: Thank you. About two-thirds are in the United States and the remaining third is fairly divided between Europe and Asia. The strongest growth is in Europe.
The market in Europe is very dependent on clinical data. One of the important things to realize about Accuray as a company is that we have a great product in CyberKnife. It’s designed for a field that is still developing and uses an intense dose of radiation [to remove tumors.]
We have all the FDA market clearance we need, so we can sell the device for treatment of tumors throughout the body, but there isn’t necessarily the clinical evidence yet to support that. So one of the biggest jobs for Accuray is to develop the field of radiosurgery and to really get to clinical acceptance.
In Europe in particular it’s a fairly conservative market, and it’s got strengths and weaknesses from a company perspective. It needs clinical data, which means that it can be a fairly slow-developing market. And that’s one of the challenges: Their standard for data is very high.
On the positive side, once you have that data funding for this type of capital purchase is much more centralized than it is in the U.S. And what we found in an environment of economic turmoil is that Europe remained a fairly robust market for us.
Did your position as a former medical physicist with NHS help Accuray in getting the first CyberKnife System installed at the Mount Vernon Cancer Center?
My medical physics training gave me deep product knowledge of radiosurgery. I also worked as a consultant for several U.S. companies [and had experience in the European market] before entering the market full time. That consultancy experience gave me a solid understanding of the U.S. market pressures while arming me with a detailed understanding of the European market dynamic. The groundwork Accuray created in Europe helped us gain acceptance. As we came through tough economic times, it helped that Accuray approached the European market in the right way. My background in medical physics and my consulting experience gave me an understanding of the technology and the market worldwide, helping Accuray succeed abroad.
Speaking of the global market, earlier this month Accuray received premarket approval for the system’s use in Japan. What challenges does an Accuray, or any device firm, face in dealing with the different regulatory schemes and business cultures?
Particularly in the early days as you try to develop into a global organization, you have to have a very broad range of expertise and a very broad understanding of cultural diversity when it comes to the regulatory environment. That definitely can be a challenge if you look at your global profile.
Was there any one thing that was particularly challenging?
I think I referred to it earlier. It’s the very high academic [requirements] that are demanded in order to be successful in the medical equipment environment. That was probably the biggest hurdle we faced. It took many years to overcome that.
Our first customers were very important to us. They were academic sites. To explore the overall use of CyberKnife has been a key part of our strategy. I’m a firm believer that there are manufacturing technologies that have a short life cycle. Their business case is based on temporarily favorable reimbursement. There are few examples of products that have a good clinical grounding that succeed in the long run.
In other words, I think that the investment the company makes in really proving the clinical value of a product is really money and time well spent. It guarantees the long-term success of the product.
Because of that approach, is there tension, say, between long-term technology development needs and short-term shareholder interests?
I think there is. And particularly for a capital equipment company, as we are. Each individual unit of CyberKnife that we install does impact our quarterly finances significantly. So the perception of one delayed or accelerated shipment can really affect investors’ perspective on how the company is progressing. Whereas the reality is for a business that’s growing a new clinical field and installing high-value, high-cost products such as CyberKnife, you really have to take a medium- to long-term view.
Do you think that your shareholders understand that?
I think our existing shareholders understand that. I think it’s a hurdle we have to overcome in order to attract new shareholders. New investors have to look harder at the Accuray story than they do at other stories. Those who do really recognize the potential that the product and the company have.
If you look at the profiles of most capital equipment companies selling medical products, they’re much larger players. You’re talking about Siemens and GE and Philips. There are very few examples of successful start-ups involving equipment. To some extent, we’ve broken the mold of that. But I think, going back to the shareholders, there can still be the perception that we’re vulnerable to some of the larger players, particularly Varian, that have a dominant place in the field. Investors can be worried about potential threats from larger companies.
On that note, are you pleased with your stock performance?
Overall, we’re not pleased with the stock performance. We’re an undervalued company. And I think many of the issues relate to the type of commercial threat I discussed. What we’re finding investors are looking for, and we’re happily able to deliver, is sales performance. We have an extra level of proof that we have to go to that we can sell against these larger companies. We have a robust technology that is well protected by IP, but you need commercial position. We have done that and we continue to do that.
In the last three quarters that I can talk about, we took orders for 41 systems, and we shipped 26 systems. In the context of an installed base of 200 units, to sell 41 in 3 quarters and to have a book-to-bill ratio in excess of 1.6 shows that the CyberKnife is truly a differentiated product in the market and that we as a company have the ability to sell it. When I spent time recently with investors I saw they are definitely starting to gain confidence in the ability of the product to continue to gain rapid acceptance.
How does the pricing of the CyberKnife System affect its acceptance among healthcare providers?
We’ve been very good about maintaining a high selling price and achieving good growth margins as an organization. Historically, we have growth margins in the mid-40% to 50% range, and for a capital equipment company, if you compare us with our peers, that’s actually pretty good, considering that we don’t have the order of scale that some of the companies have in their manufacturing operations. Again, we wouldn’t be able to get the margins we do for this product if it wasn’t a well-differentiated product in the market. The funny thing I actually say to investors is we probably face 10 times more questions about differentiating the CyberKnife from competitive products when we talk to Wall Street than we do when we talk to our potential customers.
The challenge is they’re much bigger companies, and many investors already have an investment in those companies, and [those companies] have a longer track record than we do. They have a very established place, so they have to whisper what we have to shout.
Given the economic downturn, has financing become a problem for your customers?
It was, specifically in the U.S. in the depths of the recession. Again, I can only speak to the three quarters [of financial results] that I can publicly disclose. We did talk about the improving mood of capital investment. We’re finding customers at that point showing signs of having better access to capital. And we did talk about growing optimism in the U.S. sales force.
Do you have plans to introduce new models or upgrades for the CyberKnife?
This question speaks to our core strategy. We need to grow in the field of radiosurgery, and we can only do that through our customers by working closely with them, because in the end they’re the ones who treat patients. We want to gain clinical experience, for example, for treating lung cancer. If we want to do that we have to provide our users with the right technology for treating lung cancer. We decided early on that we wouldn’t follow the normal capital equipment model, which is to ‘obsolete’ over time the last-generation of product and encourage people to accelerate the replacement cycle. We decided to do an upgrade strategy based on the existing installed systems.
Your approach is to incrementally add new system features.
Right, exactly. We see the CyberKnife as a core technology. As we learn more about the clinical requirements of a new application we make product-relevant appropriate upgrades, and we roll those upgrades out to our installed base. It’s a continuous process. We track ourselves on kind of an annual basis. We aim to have significant improvements and upgrades to CyberKnife.
You’d need a topnotch sales force then.
You’re right. It needs a different approach to selling, as well. Once we’re done, once we’ve developed a track record for producing these upgrades, we start to include them in our service program. So today we sell a high-level service program that includes access to upgrades, and our customers really like what they can get. For example, in a hospital …there will be this high-level service program. The users, the doctors and technicians that are actually using the system, then decide which of the upgrades they want, and they don’t have to go back to administration or regulatory affairs and ask for an incremental budget.??As an example, in about 2005 we produced an upgrade that made it much easier to treat lung cancer. Since that time we’ve seen what amounts to exponential growth in the uses of CyberKnife for lung cancer. [This approach] has multiple advantages. It keeps customers engaged an excited about the technology. And it encourages clinical experimentation of new applications for the CyberKnife. And it enables everybody to participate in the clinical growth in the radiosurgery field.
So there’s a sort of buy-in where the customers feel like they’re part of something larger.
Absolutely. It starts with clinical innovation. The clinical innovation drives technical innovation, and those two together—clinical and technical improvements—drive sales and marketing activities for both the product and for the upgrades. If both of those get installed in hospitals, we have more clinical adoption; it’s a loop that drives the business. The acceptance level is growing, but we’re still at the very early stage of total adoption.
I’m certain most patients would opt for noninvasive tumor removal rather than go under the knife. But is there a premium for using CyberKnife that could make it prohibitive for some?
We have reimbursement for most applications of CyberKnife in most locations. We have a team that works with customers, continually making a case for improvement in reimbursement environment. We’re proud of the fact that we’ve already made the CyberKnife successful to most patients. We have teams inside the company as well that work with patients in the hospital if they have challenges in reimbursement.
How did the Siemens alliance come about?
They’re one of the big capital equipment companies that still have a direct interest in radiation treatment. They produce radiation equipment but the applications of that treatment don’t overlap with those of CyberKnife. They have some expertise that we’re trying to tap into. The relationship helps both parties. We have some very high-level intellectual property and expertise inside Accuray that can help them. And obviously they have a huge brand name and market presence that can help us. It’s a very strategic relationship. As well, they can help us to gain access to customers, and we can help them from a technology standpoint.
Does the alliance expand your distribution?
It adds to our distribution capacity. It doesn’t replace the sales team that we already have. I can give you an example that would clarify. For example, there are many cases where an entire hospital may be built or an entire new wing of a hospital cancer center may be built. The customer under those circumstances is often looking for one vendor that can supply all of its equipment. Clearly, they’re not going to come to Accuray with our one very specialized piece of equipment. They’re going to be coming to the big producers, and Siemens is one of those. And now they have the ability to include the CyberKnife as part of their equipment portfolio.
In practical terms how else does the alliance benefit Accuray?
We have a good infrastructure for managing the engineering side and equipment. It’s really more about customer access and relationships.
CyberKnife received regulatory approval in 1999, and you became president in March of 2002. Can you describe some of the highlights and lowlights of the years that brought the company to the 200th installation?
Let’s see. We received FDA-clearance to treat tumors anywhere in the body in 2001, our first clearance came in 1999 for the head and brain. The reality was when I started in 2002 we only had five beta test systems in the United States with approximately 300 patients treated in the prior year.
The recent recession has been one of the biggest challenges Accuray, like all companies, has faced. We launched our initial public offering in 2007 in the midst of a tough economic climate. Despite that challenge, Accuray has continued to evolve and hit major milestones like our recent Shonin approval in Japan, forming a strategic alliance with Siemens, and installing our latest CyberKnife product, the CyberKnife VSI System.
Most important, Accuray continues to improve patient treatment, making treatment faster, less invasive, and with fewer side effects. With more than 200 CyberKnife Systems installed, more and more patients have access to Accuray’s technology, leading to a promising future for this company.
Were there any particular lows getting to that point?
Yes. (Laughs.) There were, no doubt. It was very hard in the early years. There were few customers; the company had limited funding, a small team, and just many challenges.
Was there any time when you were particularly frustrated?
From the beginning it was very clear what needed doing. The company needed a lot of infrastructure changes and a big cultural shift from being an R&D organization to being a true commercial entity. That’s never easy. You have to make changes to an established team that’s been operating in a particular way for a long period of time. The company was about 10 years old at the time and just stuck in the R&D phase. It definitely takes you through a number of low points until you start to see growth and the transition.
When was that?
I would say it was fairly clear when I started that we would have to make significant changes over the first 18 months, and it would be at least that long before we started to see results, and that was about right. We became cash-flow positive about a year from the time I started, which was the first time in the company’s history. And we have been able to maintain the growth profile since then.
Because of its noninvasive nature, do you think CyberKnife will benefit from the effort to improve efficiency in healthcare delivery, one of the goals of healthcare reform?
We believe so. We’re first and last a cancer-treatment company. And having broader access to healthcare throughout the population should result in earlier diagnosis of cancer and earlier treatment of cancer. And those are patients who should benefit from CyberKnife.
What do you foresee for radiosurgery generally and the CyberKnife System specifically over the next few years?
We see a future that contains continued clinical growth and acceptance for radiosurgery. We have a number of important clinical studies coming up. For example, we have ones for prostate cancer and lung cancer that we believe should significantly expand the market. Those studies are being carried out exclusively on the CyberKnife.
When will you have the results?
It’s difficult to forecast exactly when those are coming. We expect results for some applications over the next year to two years. We already have good data from some applications. This is really broadening the market as much as possible. In the end we feel there could be around 900,000 patients per year in the United States who would benefit from CyberKnife treatment.