5-Star Stocks on the Upswing

• Report this Comment On October 07, 2009, at 4:50 PM, PauvrePapillon wrote:

  When the market (correctly) understood that CyberKnife was a truly unique and revolutionary technology, investors bid Accuray’s post-IPO shares up to an intraday high of $31.09 (9 February 2007). As Varian and others made repeated claims, in numerous press releases, interviews and conference calls, that their gantry-mounted machines could do the same thing as the robotically controlled CyberKnife, Accuray’s market cap shrank even though its economic fundamentals actually improved.

  On 6 December 2008, Accuray, finally, fired back with the release of two animated videos that effectively demonstrate what CyberKnife is and why it is fundamentally different from gantry-mounted radiation sprayers. You can see them for yourself at http://www.accuray.com.

  Since then, Accuray shares have gone up 61.71 percent and Varian’s shares have gone down 0.53 while the NASDAQ is up 39.83 percent as of close of market to day (7 October 2009).

  Because of the way the revenues are recognized for this type of company, neither the quarterly revenue nor the EPS are really all that important at this stage. What’s important is the fact that the cash flow is positive – to the tune of $2 million in this past quarter – while the installed base, patient demand and recurring revenues all continue to increase.

  With respect to guidance for fiscal 2010, Accuray is managing its way through a transition out of deferred revenues recognized out of the now obsolete (and non-cash producing) Platinum Plan used to incentivize early, post-investigational device (IDE) adopters, to new revenues, which are both cash producing and with respect to most all of the domestic installs include a recurring component as well.

  If guidance is correct, fiscal 2010 will see a substantial increase in net free cash flow as approximately $38 million in Platinum Plan non-cash producing revenues are replaced with approximately $20 to $30 million of new cash producing revenues. There were also $5.8 million in non-recurring charges during fiscal 2009 that, hopefully, will not be repeated in 2010. Bottom line: you have something like $25 to $35 million in additional cash flow cued up for fiscal 2010 that didn’t happen in 2009.

  Cash producing revenues exclusive of Platinum Plan and one-time bulk sale revenues grew at a rate of 14.5 percent from fiscal 2008 to 2009 and are projected to grow at a rate of 15 percent from fiscal 2009 to 2010. A steady 15 percent growth rate in cash producing revenues is impressive given all of the uncertainties that Accuray’s main customers are facing in the current macro economic environment.

  Backlog is no cause for concern. Management has been tightening up its backlog calculations as it gains more experience with the order and install process of this particular product. This is to be expected. The slight drop off in backlog is more the result of a tighter definition of non-contingent contracts than orders actually falling out of the pipeline. New order growth is more than sufficient to maintain the 15 percent growth rate. Accuray added 15 new contracts worth about $75 million during the last quarter. Non-contingent backlog still exceeds $400 million. When the company went public, that number was slightly more than $300 million.

  It’s also very important to note that management has continued to grow cash-producing revenues at a 15 percent clip despite headwinds in the form of difficulties with bank financing, controversies over reimbursements as well as uncertainties with respect to the healthcare system in general. With both Obama and Obamacare now sinking in the polls, there is a good chance of seeing at least some relief from these conditions sometime over the next 12 months. The recent Palmeto and First Coast CyberKnife for prostate Medicare coverage decisions are also signs that Accuray is making headway in the reimbursement area.

  From CyberKnife Treatment for Prostate Cancer Now Covered by Medicare:

  “’This is great news for prostate cancer patients,’ said Dr. Lipani. ‘CyberKnife is rapidly becoming a favored radiation treatment for prostate cancer and this decision will make it available to many more patients.’

  “’Importantly, other health insurers usually take their lead from Medicare in terms of what treatments are covered, so this will potentially give many more men the option of CyberKnife treatment,’ said Dr. Lipani.”

  http://www.capitalhealth.org/news.cfm?action=detail&ref=...

  Also impressive are the recurring revenues, which are fast approaching $20 million per quarter and now account for nearly one-third of total revenue. As Accuray continues to add to its installed base, these recurring revenues will begin to overtake their SG&A expense and the company’s operating margins and EPS will benefit greatly.

  If you look at Intuitive Surgical as a model for how a disruptive technology rolls out in the medical space, you would have to conclude that it’s a rocky road. Intuitive Surgical languished beneath its IPO price for more than four years and dropped into the $3s twice before taking off to $200 per share and beyond.

  As clinical data emerges and public awareness increases, CyberKnife will become the treatment of choice for early stage prostate and lung cancer (two huge markets) as well as many other cancers. There are not nearly enough CyberKnife Centers, either in the United States or abroad, to accommodate all of the patients that will soon be seeking this treatment. We’re still in the early stages of the adoption curve but, clearly, this technology is coming mainstream. Not only is Accuray a special company with a special mission, it’s also a multi-bagger in the making.

• Report this Comment On October 08, 2009, at 11:29 AM, EnigmaDude wrote:

  PP - you write excellent commentary on every blog and/or article that appears on MF regarding ARAY. Even if you are biased in your opinion, you present a convincing argument. Convincing enough that I have picked up a few shares of ARAY for my Roth IRA.

  As a 50-year old male, I may require the use of CyberKnife at some point in my future. If so, I hope that I can pay for it with my meager investment that will hopefully turn into the multi-bagger that you proclaim!

• Report this Comment On November 13, 2009, at 10:04 PM, chopchop0 wrote:

  EnigmaDude, I am sorry you took his advice, and obviously have lost some of your investment. Cyberknife is in no way a long-term buy.

  It's amazing that PauvrePapillon pumps Cyberknife and ARAY so much, and trashes Varian at the same time, considering he knows so little of how the technology even works.

  The fact is, Gantry-mounted LINACS do (and have always been able to) deliver non-coplanar therapy. Each company (varian, elekta, seimens, etc.) has produced their own radiosurgical solution which, unlike the cyberknife, has the capability for on-board 3D/CT imaging. In addition, these machines can be used for standard radiation therapy delivered over several weeks, unlike the cyberknife.

  The standard of care for prostate cancer continues to be standard radiotherapy, surgery, or prostate seed implants, as all 3 of these techniques have >10 years of follow-up data in large series of patients, unlike the data for cyberknife or proton therapy.

  As any oncologist will tell you, 5-10 year data at a minimum is necessary to truly determine efficacy as well as any toxicity from treatment.

  With capital budgets being slashed, hospitals and cancer centers are going to go with machines that can do it all (radiosurgery and standard radiation therapy).

  The Varian Trilogy, Novalis TX, Elekta Synergy S, and the Seimens Artiste all have the ability to do non-coplanar radiosurgery (like the cyberknife) with onboard 3D imaging and respiratory gating, along with the delivery of stanrdard radiotherapy. Many patients receive standard therapy and radiosurgery on the same machine

  Why buy one tool, when you can own a swiss army knife?

• Report this Comment On November 13, 2009, at 10:04 PM, chopchop0 wrote:

  EnigmaDude, I am sorry you took his advice, and obviously have lost some of your investment. Cyberknife is in no way a long-term buy.

  It's amazing that PauvrePapillon pumps Cyberknife and ARAY so much, and trashes Varian at the same time, considering he knows so little of how the technology even works.

  The fact is, Gantry-mounted LINACS do (and have always been able to) deliver non-coplanar therapy. Each company (varian, elekta, seimens, etc.) has produced their own radiosurgical solution which, unlike the cyberknife, has the capability for on-board 3D/CT imaging. In addition, these machines can be used for standard radiation therapy delivered over several weeks, unlike the cyberknife.

  The standard of care for prostate cancer continues to be standard radiotherapy, surgery, or prostate seed implants, as all 3 of these techniques have >10 years of follow-up data in large series of patients, unlike the data for cyberknife or proton therapy.

  As any oncologist will tell you, 5-10 year data at a minimum is necessary to truly determine efficacy as well as any toxicity from treatment.

  With capital budgets being slashed, hospitals and cancer centers are going to go with machines that can do it all (radiosurgery and standard radiation therapy).

  The Varian Trilogy, Novalis TX, Elekta Synergy S, and the Seimens Artiste all have the ability to do non-coplanar radiosurgery (like the cyberknife) with onboard 3D imaging and respiratory gating, along with the delivery of stanrdard radiotherapy. Many patients receive standard therapy and radiosurgery on the same machine

  Why buy one tool, when you can own a swiss army knife?

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