Signs Of Life In Radiation Therapy

By Stephen D. Simpson, CFA | September 03, 2010 AAA

Nobody in the medical technology sector has exactly been doing handsprings over the past few years, as lower patient visit volumes, reimbursement pressure, regulatory changes and sharply lower capital spending have all conspired to keep this supposedly-safe sector mired in the muck. Worst off of all, though, have been those companies that depend upon big-ticket capital equipment sales.
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Radiation therapy is a classic healthcare capital equipment sub-sector. The machinery built to deliver radiotherapy for cancer patients is incredibly expensive; sometimes the most expensive equipment a hospital will consider in any given time period. Although it is far too early to say that the sector is out of the woods, there are certainly some signs of life in the sector and investors may want to bone up on some of the major names.

Varian
Varian (NYSE:VAR) is the big dog in the sector and has a long history of improving profit margins and excellent returns on capital. Varian already has more than two-thirds of the U.S. market for radiation therapy systems, and a sizable share outside the U.S. as well. Not content to rest on its laurels, the company continues to roll out new products, like the recently-released TrueBeam system.

TomoTherapy
TomoTherapy (Nasdaq:TOMO) ran into a bad capital equipment market just at the wrong time. While the company's initial Hi-Art product was a big step forward with its integrated imaging, 360-degree delivery and treatment times, the slowdown (or shutdown, in some cases) of orders in the sector really took the wind of the company's sails. Instead of gaining a solid foothold in the sector on the basis of its technology, the company instead was forced to muddle through an industry that hit "pause", during which its competitors begin to catch up in terms of some product features. (For more, see A Checklist For Successful Medical Technology Investment.)

There is a big opportunity outside the U.S. for image-guided radiation therapy, and the company's new TomoHD product should improve the company's competitive position. At the same time, though, the company has had difficulty marketing against industry leaders like Varian and Elekta. While TOMO is seeing a recovery in orders, this company may be one to watch for getting bid from a larger company like Philips (NYSE:PHG) or General Electric (NYSE:GE) that wants to move from imaging into therapy delivery.

Siemens
Siemens is a somewhat-distant third place in the radiation therapy business after Varian and Elekta. As many investors probably know, Siemens is a widely diversified company with a business model somewhat similar to GE - in other words, radiation therapy is not a huge segment of Siemens' business. That said, Siemens looks to be getting more serious about this niche - there are rumors that the company is considering spinning it out and the company has been making a fair bit of noise about rolling out new product lines that can go head-to-head with Varian, TomoTherapy and Elekta.

Accuray
Accuray (Nasdaq:ARAY) is the platypus of this group - it is not exactly a radiation therapy company, but it does not fit anywhere else any better. Accuray sells the CyberKnife and dominates the stereotactic radiosurgery market. While systems from Varian and TomoTherapy generally deliver moderate doses of radiation over a general area in a number of sessions, the CyberKnife is more like a surgical device in that it delivers a very high, concentrated, and precisely-focused dose that is designed to destroy the tumor quickly (like surgery).

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While Varian and TomoTherapy systems can be used in radiosurgery, the CyberKnife is custom-built for it and does the job well. Accuray's technology and products were interesting enough to attract Siemens attention, and the two companies recently formed a partnership whereby Siemens will market the CyberKnife and Accuray will produce some components for Siemens' new linear accelerators for the radiotherapy market.

Elekta
Elekta may be last, but it is by no means least. Elekta is the number two company in the industry, with a strong business in Europe. As a Swedish company with an illiquid ADR, it is not an investable stock for most investors. Still, it is a formidable competitor to these other investable names and investors should keep in mind that Elekta's Volumetric Arc Therapy has narrowed some of TomoTherapy's advantages in the market.

The Bottom Line
It may be time for radiation therapy companies to get off the mat. A horrible hospital CAPEX environment is slowly improving (and cancer therapy tends to be a budget priority) and the sector escaped some potentially scary Medicare cuts. Varian has already had a decent rebound, but risk-tolerant investors may want to take a long look at TomoTherapy and Accuray as both have struggled to recapture investor optimism.

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