Investor's Business Daily
Intuitive, Accuray Jockey For Position In Robotics Sector
Friday June 6, 5:33 pm ET
Peter Benesh
It's the battle of the robots.
Intuitive Surgical (NasdaqGS:ISRG - News) and Ac-curay (NasdaqGM:ARAY - News) are both pioneers in robotic technologies to treat cancer and other diseases.
The companies are located just three miles apart in Sunnyvale, Calif. Both were founded in 1999. Both integrate sophisticated imaging with their own science. And both find their systems are used more for treatment of prostate cancer than any other disease.
That's where the similarities end.
Intuitive Surgical's robot is called Da Vinci. With a surgeon at the controls, it performs minimally invasive surgery.
Accuray's CyberKnife uses a tightly focused radiation beam to zap tumors without surgery and without damaging surrounding tissue.
Sliding Shares
The two firms see each other as competitors in the prostate cancer market, and they might overlap in some other cancers. Both also target medical problems the other doesn't.
And both have seen their share prices slide in recent months.
Intuitive's stock neared its 52-week high on April 10 before closing the day at 353.88. Since then, shares have fallen more than 18%, though they've still more than doubled over the past year.
That huge appreciation led some analysts to dub Intuitive the "Google (NasdaqGS:GOOG - News) of medical technology." But for now, the steam seems to have leaked out.
Intuitive's recent stock drop is a function of "natural fluctuations," says Ben Gong, the firm's vice president of finance. "We look at the broader picture and the long term."
The company has seen plenty of growth. Quarterly sales have increased by more than 50% for years, though sales growth is expected to decelerate to 48% this quarter, 42% next quarter and 33% each of the following two quarters.
Intuitive shares "couldn't go perpendicular forever," said Les Funtleyder, an analyst with Miller Tabak and author of the forthcoming book, "Health Care Investing: Profiting from the New World of Pharma, Biotech, and Health Care Services."
"It's now a case of the company growing into its valuation -- like a kid growing into bigger clothes," he added.
Credit Crunched
Accuray hasn't done nearly as well on Wall Street. Its shares went public in February 2007 at 18, leapt immediately to 31, and have been on a pretty steady downtrend ever since. Shares currently trade near 9.
Many of Accuray's prospective customers got hit by the credit crunch, says Chief Executive Euan Thomson. As financing got tighter, they delayed or canceled orders.
The problems occurred at what Thomson calls "entrepreneurial, free-standing centers." These are treatment facilities, established often by physicians or physician groups, outside of hospitals.
The entrepreneurial centers sprang up because many hospitals couldn't find room or money for the CyberKnife. So the centers negotiated prices locally and got paid by the hospitals, many of whose patients were on Medicare.
But uncertainty over how Medicare will decide on reimbursement rates for the centers -- including the CyberKnife machines -- has cast a shadow on the business, experts say.
"Prospective buyers won't know what the reimbursement rate will be until after they buy the equipment," Thomson said.
And with lenders reluctant to take risks, centers have had trouble getting loans. That made a mess of Accuray's order backlog, says Peter Bye, analyst with Jefferies & Co.
Accuray has broken out which orders look solid and which are contingent. About 90% of the contracts cut from the backlog had been from entrepreneurial ventures, Bye noted in a recent report.
Accuray is countering the slump by working harder at overseas sales.
The company has seen robust top-line growth since going public -- sales have grown at least 48% the last four quarters -- but it, like Intuitive, is expected to see growth decelerate in coming quarters. Thomson Reuters analysts project sales growth of 33% this quarter and 14% next quarter.
Battle Lines
Where Accuray and Intuitive intersect -- or perhaps cross swords -- is in the prostate cancer market.
"Intuitive should see us as its chief competitor," Thomson said. "All medical equipment companies compete for procedures."
But Intuitive's Gong says the main direct rival to Da Vinci is radiation therapy. "Most direct competition is in different ways to treat disease."
For Intuitive, prostate cancer accounts for 65% of Da Vinci operations.
Accuray would not say what percentage of CyberKnife procedures treat prostate cancer, though it did say such procedures increased by 80% in the third quarter.
Science has yet to publish data proving which method is best in killing tumors and preserving sexual and other physical functions.
Gong makes the case for Da Vinci. If cancer is encapsulated within the organ, the prescribed treatment is to remove it.
Pathology will tell if the entire tumor was removed, Gong says. "With radiation treatment you don't know until later."
Thomson counters that CyberKnife's cure rate is 90%, so "people focus on the side effects." Surgery can lead to erectile dysfunction, while with CyberKnife there's "no impact" on ED, Thomson says.
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