Accuray Incorporated (ARAY) Earnings Call Transcript & Summary

Good afternoon. I'm Josh Jennings from the medical devices team, along with Bryan Kennedy, Eric Anderson, Neil Chatterji. We are wrapping up the management team fireside chat portion of day 2 of the 41st Annual Cowen Health Care Conference, and we're happy to have the Accuray executive team with us this year, and this afternoon, Josh Levine, President and CEO; Shig Hamamatsu, Chief Financial Officer; and Suzanne Winter, Chief Operating Officer. Accuray team, thanks so much for participating in our conference this year.

Thanks for having us, Josh.

Thank you.

Absolutely. And we did -- you guys were generous enough to spend time with us last week, too, as part of our mid-cap management team conference call series. And so there may be a couple of overlapping questions, but there's never enough time to dig into the Accuray story. And I think we left a little bit on the table when we were discussing the innovative new technologies that are now in the ARAY portfolio. So we'd love to start there. And sorry to ask you to repeat a little bit of what we talked about last week, but -- and I think we got a touch on ClearRT, the approval there, the upcoming launch. And maybe we can talk quickly about the clinical value proposition, maybe not quickly, but the clinical value proposition of integrating diagnostic quality CT imaging into the Radixact platform, and then we can start there, Josh.

No problem. Suzanne, I guess I'll lead on this. So Josh, in our space, clearly, the introduction of technologies over the last several years like MR Linac, the ongoing development of adaptive -- true intra-fractional adaptive therapy. These things have been catalysts for, in a general sense, imaging being kind of a table stakes or minimum price of admission kind of requirement. Again, the better image quality, the better visualization capabilities you have, the more precise you can be with regards to treatment delivery. And so we have -- as you know, we've been working hard at this. The interesting thing for us with ClearRT, we think, is that we have a near diagnostic CT quality capability, better soft tissue resolution across the entire image, better conformity across the entire image. And from a comparative standpoint, when you look at the value proposition, we believe we'll have a -- if you think about -- let me back up, if you think about where the historical reference point for image on linac platforms has been, it's been cone beam kVCT. While we talk and the market's gotten a lot of buzz around MR-Linac the truth is from an adoption standpoint, there may be 100 or 110 devices, MR-Linacs involved in actual treatment around the world today. So it hasn't -- this device -- that device hasn't really kind of captured a lot of market share per se. And the bulk of the installed base or the served market, if you will, continues to be cone beam kV in terms of general capability. So that's one end of the spectrum. Call it MR-Linac at the upper end of the spectrum. And when you look at the 2 endpoints, we believe that, that range or real estate, if you will, between the 2 endpoints is where the opportunity for our value proposition resides. We think we're going to have new diagnostic quality CT capability at, quite frankly, a fraction of the economics involved from a cost standpoint to the customer and a dramatically refined and more efficient workflow and process management as it relates to setting up a patient and delivering treatment. So that's really kind of the thought process around value proposition and positioning. Suzanne, maybe you can talk a little bit about what our plan is for the next several quarters, registration and other markets, et cetera?

Great.

Absolutely. So we -- you saw our announcement that we got 510(k) approval. We are in the early phases of our launch with a broader launch really planned for Q4 of our fiscal year. And at that time, we expect, should things proceed, to get shown in and CE Mark there as well. And we'll do a much broader launch. But just to echo what Josh is saying. We developed ClearRT because there's customer demand for improved visualization and getting the highest quality image. And so we're really excited by the feedback that we are getting from our clinical site in terms of the image quality and comparison with their diagnostic CT. And again, it really stems from our fundamental TomoTherapy platform and in comparison to -- with the conventional linac that is in the marketplace today, which is really -- they're at the edge of what they can produce from an image quality standpoint. Our system, because it's really a large bore CT with a linac on it, has the ability for even more growth in imaging. So we're excited that this, in combination with our Synchrony motion synchronization where we're doing tumor tracking, this combination is going to be a real winner in terms of being able to provide precise personalized treatment.

That's a fantastic download. And I just want to make sure I'm understanding this clear. When you guys talk about other systems using cone beam CT, that's not an integrated CT imaging platform like what you've had in Radixact even prior to ClearRT. That's a CT may be even days before the treatment that then is integrated into the planning process, not a CT right before the treatment, which mean, intuitively, it makes a lot more sense just for the patient and there are many landmarks that other technologies used to take that days prior CT and use it to map out and then treat the patient on the day of the treatment? Is that right? Am I thinking about that correctly? And I mean, that's another kind of arguable -- real -- not arguably, the real advantage as well to having that -- the helical CT and the linac delivery in the same park? And that's basically the foundation of the TomoTherapy platform back in the day?

Exactly.

Okay.

Yes. No, that's exactly right.

Great. And then just as you mentioned, Suzanne, adding Synchrony on board. I mean, Radixact is a high-end machine, but also in a bread and butter system. I mean, is the right way to think about the capabilities now? I mean you can you basically take in the motion management platform that was so proprietary for the robotic SRS system and CyberKnife and move it over to the Tomo platform, the advanced Tomo platform, Radixact. And so talk about bread and butter, you can do everything from a point and shoot breast cancer case to complex SRS, SBRT on one system. And I don't think we've talked about this before, but I mean, how does that position you for the majority of the U.S. market and those single and dual vault centers where -- I mean, you guys haven't had as much success as you've had in other major centers that have more than 1 or 2 vaults, but maybe we could talk about that dynamic and what all these technology adds or Radixact does for Accuray that 1- or 2-vault channel?

Yes, I'll start, and I'll let Josh chime in. But our product development has been to increase the value in utility as a workhorse solution for the Radixact. And yes, with the introduction of Synchrony, now we're able to do ultra hypofractionated treatment regimens for SBRT in addition to IMRT and the addition of Synchrony as well -- I mean the addition of ClearRT, now we have this incredibly powerful system -- workhorse system that can do everything from the very simple to the complex. And so if you are a provider that has 1 vault -- or 1 to 2 vaults, this is a system that -- it's high-value, high utility.

Josh, let me add a couple of things to Suzanne's overview, which is all factual in all the right areas of focus. Our listeners may not realize this or remember it, but you guys -- you specifically, and Galen, were one of the early supporters of TomoTherapy. When TomoTherapy was a stand-alone public company, I mean, I think you started covering the company at its IPO, and so your perspective on this probably is really relevant in this regard. Tomo always had traditionally a very, very strong following in the physicist community, the medical physicists community. And as a consequence, its ability to customize dose or paint dose was highly valued in very, very complex cases, cases where like as an example, ENT cases, head and neck cancers, where you had very tight anatomical structures and you really needed what Tomo was good at in terms of the dose customization capability. The reality is that in its earliest generation is that product was great in those complex cases but less efficient and less user-friendly in more routine cases like breast or prostate or other disease sites. And what's happened over time from an improvement in functionality on -- as you went from Tomo H series, that second-generation device to where we are today with Radixact with ClearRT and Synchrony, you've taken a quantum leap in regards to functionality and the device's breadth of capabilities across a very, very -- I would argue, one of the largest or broadest case mix and disease site treatment requirements of anything in the market. So as you go back to old school, old days, because we were very complex case mix focused and capable, we showed up more in large academic research-based medical centers, which had a larger footprint, more bunker capability or capacity. But as the device has improved through these generations and functionality has taken a pretty significant leap forward with regards to routine case mix, we show up now in much broader account profiles and just academic med centers. I mean, I think that if you go back and look at -- we've got 200 orders, 200-plus orders since we launched Radixact. And probably 100 of those are in the ground actually treating patients. I think what you find is in terms of account profile, we show up now in maybe 1/3 of the accounts that we're in with that device. They're in something other than an academic medical center, Two-vault setting, stand-alone, freestanding treatment center to solo vault. That speaks to the market's comfort level with how the product has evolved functionality-wise over time.

Understood. That's great intel. And just where do you guys stand with the Tomo platform just in terms of penetrating that single or dual-vault segment of the market? My understanding is that you were underrepresented. I mean, you just detailed that, but any hard numbers around that? Just because I mean, it seems like that's a big opportunity for the Tomo side of the business with Radixact, ClearRT, Synchrony now on board, to penetrate this kind of open runway for you guys, but just wanted to stand and check that.

I think over time, since Radixact's launch, I mean, I think roughly 15% to 20% of our order activity has been Radixact-related. And a healthy portion, probably better than 50% of that order activity has been in single- and dual-vault settings. And again, they may be satellites of existing customers, so more installed base related. But quite frankly, again, the price of admission to make it into single and dual-vault settings was the ability to be able to be effective, both clinically and efficient and workflow-efficient and user-friendly in the context of a patient setup and the amount of time it took to deliver treatment.

Excellent. Excellent. And then just moving over to CyberKnife S7. I mean I think you guys have been clear about the advancements there. But I wanted to just touch on the versatility of the CyberKnife S7, where it stands now. I think the 2 topics I was hoping to bring forward, which was just treatment times, treatment planning. And then just there have -- back a couple of years ago, there were some the advancements in terms of using CyberKnife in IMRT-like cases instead of SRS and making it more versatile on that front. I don't know if that's still in play, but maybe to update on those topics and then how CK S7 is playing into that?

Yes. Oh, go ahead, Josh.

No. Go ahead, Suzanne.

I was just going to say, yes, we just introduced the S7 really last December virtually. But it's been well received by the market. In fact, we talked about a 17% increase in CyberKnife sales this past quarter. But this is really as a result of the performance enhancements that we are seeing that really have incorporated speed into both treatment planning and also delivery. And our customers are seeing a 24% increase in patient throughput, and treatment times is less than 15 minutes. And so I think just a tremendous increase in an overall efficiency in addition to effectiveness. As we look forward with CyberKnife, one thing that we are seeing is at least 50% of our procedures are intracranial or neurosurgical. And so that is an area we're going to continue to invest. We've talked and it's public that we have an agreement, collaboration agreement with Brainlab and Brainlab is a big -- a player in surgical navigation. And so we are working very closely with them to improve our contouring capabilities so that they're even more useful for neurosurgical-type applications. And then just in terms of the full body, I mean, I think CyberKnife is -- we have been a pioneer in SBRT and SRS. And are continuing to see very good work and clinical work -- and our customers and very small volume tumors, one thing we're seeing from patients is at least 25% are coming back with some sort of oligomets or metastases. And the CyberKnife is just -- the precision is outstanding in those type of applications. We just had a trial for accelerated partial breast imaging where there was excellent cosmesis in alternative to surgery. And so I think CyberKnife is just -- there's a tremendous runway for that platform as well.

Josh, I think your question around -- how much IMRT gets done with CyberKnife today. I think the reality is it's still primarily a stereotactic radiosurgery tool. We have IMRT capability today, though, with the improvement in functionality over time. But I think the biggest impact that some of the functional improvements and feature set improvements or additions that we've made to the devices, what started out to Suzanne's point earlier as truly a dedicated intracranial SRS device has really become truly a full-body radiosurgery system and platform. 50% of the case mix is intracranial, but we do literally -- we can treat every part of the body and there are very -- a growing number of practices that recognize that it still has unique capability as a full-body system and are using it to do just that, treat a very broad mix of patients. It also has some unique positioning capabilities from a marketing standpoint for customers as well. Not too dissimilar, I would say, from, let's say, the da Vinci system. It's unique in technology and architecture. And you find it being used in that way as well.

No, absolutely. And I mean the robotic -- only robotic SR system out there, I think we've historically thought that once a practice had enough SRS cases to fill a full schedule on a regular basis, that's when the CyberKnife would be a premier option. There were a lot of hybrid technologies put forward by your competitors. They didn't have the capabilities to treat the real complex tumors that were typically near central structures in the thorax or even the abdomen, like the CyberKnife could. And I think -- is the ROAPM model going to nudge the market towards our thesis, where there's going to be more and more SRS cases or SBRT cases performed, and you guys obviously have kind of pointed investors towards this dynamic that Accuray is the pioneer there. But is that specifically for the CK platform? I mean, as this ROAPM reimburse model kicks in, are you guys expecting or should investors expect demand and interest in CK, CyberKnife to surge, particularly now you have the S7?

We think ROAPM and what it entails, what it requires, quite frankly, in terms of customer, conscious customer decision-making with regards to the nature of the platforms that they're treating patients on, we think it helps CyberKnife for sure. The product, again, it's -- the breadth of its capability will get -- will catch some tailwind, we think, based on the ROAPM model. The other thing that I think we recognize and believe strongly as the growth catalyst here for CyberKnife is what Suzanne mentioned earlier, which is the -- our presence in intracranial work has traditionally been in radiation oncology and less in neurosurgery. And the opportunity for us -- for the device in it's fully functional form today is a whole range of other areas inside of neuro that are, I would say, burgeoning areas of clinical interest and of treatment need like functional neuro, things that might be essential tremor or a whole bunch of other areas, trigeminal neuralgia, things that the device is uniquely capable based on how it delivers treatment to use and utilize in those kind of cases. And there are, quite frankly, there are practices in a number of parts of the world that have developed a business model, if you will, and clinical focus around just those functional neural capabilities.

Absolutely. You're seeing some focused ultrasound technologies looking to that area. Elekta's Gamma Knife is -- there's programs there. And thinking about that opportunity and just the launch of CK with neuro capabilities, I mean any time lines that you guys can help us with just in terms of when we should start thinking about, including CK orders for -- with the CK neuro applications with those -- with those neuro capabilities, excuse me, got a little tongue tied there.

Yes. And I don't know what we've said publicly, but just in terms of -- it will be in phases. So the first phase will be more of the neurosurgical capabilities for a shared system between radiation oncology, and we're thinking that will be more toward the end of this calendar year. And then the second phase will be more of what Josh has been talking about, which is really going after nononcology, functional type of applications. And that will be more long term.

Great. The China opportunity, the China JV that Accuray has established, both big deals, all kind of blended together, one big deal, the China opportunity. We spent a fair amount of time last week in our conference call, and I'd encourage investors to get some more details on the China bit -- opportunity on the replay of that. But one of the topics that I didn't address last week was just the Type A opportunity after the domestic Type B system is -- development is being completed, manufacturing is ongoing, and you have a commercial product. Just want to understand how you guys are thinking about Accuray's Type A opportunity. I mean, our view is that nothing really changes. I guess the one risk would be if the JV sales force that is your distributor for the Type A channel is distracted because of the Type B rollout. But I mean, how are you going to incentivize them to not be distracted? And does the CyberKnife and Radixact systems and that opportunity in China change once the Type B system is in play?

Josh, the good news here on that front is that the sales and marketing, the core of the sales, marketing and commercial organization that is currently involved with the JV structure today are the former Accuray Mainland China team that our former VP GM in Asia Pacific, who is now the CEO of the JV, it's his team. It's hand picked. They are people that know long sales cycle, long revenue cycle equipment. Many of them worked with him in prior organizations like Siemens, and so there's a continuity there that's really important, number one. Number two, we've augmented that or he's augmented that with basically the -- a sub-dealer network, if you will, that are more focused out in the farther-flown geographies in the provinces where those opportunities exist. And so he's got this nice hybrid mix of sales marketing capabilities, major population centers, more out in the provinces. The real -- we think we're well positioned to continue with the momentum that we've demonstrated with Type A. The thing that I think we need to stress for people to keep in mind is, over time, there will be a natural transition or mix shift to more of the Type B focus. Type A doesn't go away completely, but the number of institutions that the central government and the Ministry of Health think are capable of handling Type A products will -- the penetration in those segments or channels will grow over time and ultimately land at a place where the bigger opportunity for us is in the Type B segment. And that's kind of front and center in our strategy. And our thought process development about why the JV structure was appropriate and unique in its orientation, certainly compared to competitors, we needed to be an ethnic Chinese brand. We wanted to be viewed as an inside the tent, so to speak, player. And our partner at China Isotope and Radiation Corp. gives us that capability, along with our in-country manufacturing expertise and capability now. And so we think we've got the right strategy lined up around the components, Type A today, Type B in the future.

And I wanted to ask about the Type B opportunity. It's a pretty specific question. So forgive me, but thinking about the ONRAD and TomoWave systems that are currently selling as Type B systems into the China market through your JV distributor today. And then I think about the revenue recognition that Accuray will generate by selling the proprietary components to the JV and their manufacturing of the domestic Type B system. Is there any way you guys can break out the delta there? I mean, just for -- just for round numbers, if a Tomo H or ONRAD is $1 million per system, do you guys capture half of that with just from selling the important system components to the JV? Would it be 25%? Or is that just way too granular question. I think my thrust is just kind of trying to quantify the per system revenue that Accuray can recognize in its revenue line once that Type B system is up and commercialized?

Yes. So I'll take a question. And again, obviously, there's a limitation as to how specific we can be at this point. But I think the best way to think about it is you're correct in that when JV starts to manufacture, what Accuray is doing is supplying the kits to the joint venture. So they can take those kits that we sell, Accuray sells to JV, they can locally assemble and test and make it to finished goods and sell to end user. So if you compare it to that today, where we sell finished goods, you can imagine that price point on that kit will be lower because the value-added activity is not quite as much as the finished goods. So naturally, the price point was slightly lower than what we sell finished goods today. However, obviously, that means a lower cost for us because we are not adding as much value to it, meaning less labor going into it, right? So long story short, we think that when we start to do Type B in volumes through local manufacturing in China, that you may see a slightly lower margin profile on a per unit basis. But I think the volume will more than make up for that, slightly lower unit economics because really, the volume -- the Type B market in China is a volume play. And we want to offer a compelling value in combination of value and pricing to be very competitive. And I think we're on a path to do that. So that's the one data point I can give you on a high level. But having said that, don't forget that we would pick up the 49% of the profit that JV generates. So I think what I'm saying is mechanically speaking, methodically speaking, you can't just look at the unit economics on a gross margin level for Type B at Accuray accurate because Accuray will also pick up 49% of margin at the bottom. So in totality, we think it's still a very economically valuable transaction that we're going to have when we start to sell the kits to a Type B market.

No, that's super helpful. And maybe one last question as we're running out of time, but thinking about that -- what's coming to that 49% that's coming in from the JV underneath net income in the Accuray P&L and wanted to just ask, typically we think about med tech companies hitting profitability in the $100 million to $150 million revenue kind of run rate, any clues in terms of when the JV could hit profitability and you could -- we should start to think about higher levels of that net income, their profitability from the JV falling into Accuray's P&L?

Right. So they started -- this calendar January, I would say, 2.5 to third year operations. And so we always thought that the -- by the time it gets to the tail end of third year going to fourth year, in particular, that they can be profitable. And at this point, this is self-sustaining, not requiring additional capital input to be -- get to that bridge to the profitability. So long story short, I think next 12 to 18 months, you're going to start to see they're going to start to be better than breakeven. They're kind of close to breakeven today. And -- but if you go beyond 18 months, 24 months and 36 months, I think they're going to be more than profitable and start to contribute to our profitability through the 49% pickup on our part.

That's super helpful. Well, it's been great hanging out with the Accuray team 2 weeks in a row virtually. And thank you guys so much for the extra time, and we truly appreciate you guys participating in the Cowen Healthcare Conference. Thanks so much.

Thanks, Josh.

Thank you for having us.

Thank you.

Thanks, guys.