TOMO Tomotherapy Incorporated (MM)

We upgrade our recommendation on Accuray Incorporated (ARAY) to Outperform following our assessment of its healthy second-quarter fiscal 2011 results and increased visibility on the stock. We are upbeat about the compelling prospect in radiation oncology rendered by the company’s impending acquisition of rival TomoTherapy (TOMO).

Second quarter earnings per share of 7 cents comfortably beat the Zacks Consensus Estimate of a loss of 2 cents. The company swung to profit in the quarter as a decline in operating expenses offset lower revenues.

Revenues declined 5% year over year to $54.2 million, but beat the Zacks Consensus Estimate of $49 million. The California-based company has once again backed its revenue outlook for fiscal 2011.

Accuray is a global leader in the field of radiosurgery and provides a non-surgical treatment option for patients diagnosed with cancer. The company continues to enjoy healthy demand for its CyberKnife robotic radiosurgery systems as evidenced by sustained growth in the number of patients receiving treatment with the device. To date, more than 100,000 people have been treated with CyberKnife globally.

Accuray’s CyberKnife system boasts of a technology that differentiates it from traditional treatments. CyberKnife, a non-invasive alternative to conventional surgery, is the first and only commercially available intelligent robotic radiosurgery system designed to treat solid tumors anywhere in the body.

The company is pursuing a number of strategies to boost CyberKnife’s adoption. As part of these efforts, it has formed a new functional organization dubbed “Medical Affairs” in an effort to boost data collection and utilization of the device.

Accuray is expected to benefit from the recent recovery in hospital capital equipment spending. Moreover, the radiation oncology market is benefiting from improving trends and technology advancements and Accuray is well placed to bolster its foothold in this market with its acquisition of TomoTherapy.

The deal marks the union of TomoTherapy’s best-in-class radiation therapies with Accuray’s coveted radiosurgery systems to create a leading player in the radiation oncology space. The combined entity will offer state-of-the-art therapies, ranging from high-precision radiosurgery to image-guided intensity-modulated radiation therapy, for treating cancer and other diseases.

Besides expanding its global reach, the acquisition will offer a major boost to Accuray’s revenues. Moreover, the transaction will offer opportunities for cost synergies through increased operating efficiencies, complementary patient base and overhead reductions.

That said, we are also cognizant of the reimbursement uncertainties surrounding the company’s products and stiff challenge from competitive products of Varian Medical (VAR). Our recommendation is backed by a Zacks #1 Rank, which translates into a short-term “Strong Buy” recommendation.

 
ACCURAY INC (ARAY): Free Stock Analysis Report
 
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