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Accuray Inc. (ARAY)

JPMorgan Global Healthcare Conference

January 7, 2013; 12:00 pm ET

Executives

Joshua Levine - President & Chief Executive Officer

Tycho Peterson - JP Morgan - Life Science Tools, Diagnostics & Med Tech

Tycho Peterson

Okay, good morning. We are going to go ahead and get stared. I’m Tycho Peterson from the life science tools, diagnostics and med tech team. It’s my pleasure to introduce our next company this morning, Accuray. Just two thing to note; one, if you have cell phones on, please turn them off, and second, we are going to have a breakout in the Olympic Room after the presentation.

So let me turn to over to Josh Levine to tell you a little bit more about Accuray.

Joshua Levine

Thanks Tycho. I want to call everyone’s attention on forward-looking statements and the Safe Harbor guidelines that are included on the front of the presentation.

For those of you that are not familiar with our company, let me just give you a little bit of a very brief overview. We are one of three companies in the Global Linear Accelerator Space. We manufacture equipment for radiation oncology that are providing cancer treatment for cancer patients.

The company is global in footprint. We are headquartered in Sunnyvale, California and we’ve got locations in Madison, Wisconsin and international headquarter in Switzerland and offices in the Asia Pacific region as well. We manufacture and assemble equipment in Sunnyvale, California, Madison, Wisconsin and Chengdu China.

We have in rough numbers about 700 systems installed globally and a topic that you’ll hear a lot more about from me in the presentation going forward is in June of 2011 we made an acquisition of a company based in Madison, Wisconsin called TomoTherapy, which I believe has transformitive potential to impact the company going forward.

Just to get people level set, we made an announcement last Thursday around preliminary quarter two. We are not on a fiscal calendar, so this was our fiscal quarter, second quarter and we released preliminary results last Thursday with revenue estimates in the non-GAAP revenue range of between $72 million and $75 million.

Preliminary order estimates in terms of value of new orders in that range are between $15 million and $17 million. We updated full year fiscal guidance for 2013 full year to finish between $320 million and $330 million for our full year bases and we announced a pretty significant fundamental reset of the company’s cost structure, with a restructuring announcement that we believe will take annual operating expenses down about $40 million a year.

We’ll talk a lot more about what we did and what we expect tog out of that, but the general gist of this is we essentially right sized the ongoing cost structure of the company and we are reallocating and reprioritizing resources towards our commercial strategy going forward.

As we think about where we are at right now, I wanted to give some highlights around just investment pieces and overall investment highlights for those of you that again may not be familiar with the story. We participate in a Global Linear Accelerator Space, which is a large and growing market, in round numbers about $2 billion annual served market revenue. A little bit more than 60% of that is outside of the U.S. I’m a new CEO. I’ve been in this job now coming up on a 100 days and we had a significant amount of activities taking place at the company as a result of my new involvement.

We are a company that has really taken a quantum leap forward as it relates to our product portfolio and the capabilities of that product portfolio. We have been traditionally accompanied, that’s been very technology focused, not as commercially focused and that is a cultural realignment that’s taking place right now as a result of my involvement, and again, a little bit about the restructuring, which we’ll go into in a little bit greater detail later.

We recognize that we got a responsibility to do two things and to do them concurrently. One is to accelerate revenue growth in this business model and to drive to a sustainable level of profitability. And in order to do that we, have to position our products and our capabilities in a way that creates economic value for customers and for our shareholders.

This will give you just a little bit of a background on the global LINAC space. Again, roughly $2 billion in 2012 in terms of served market opportunity. You can see the breakout; again, a little bit more than 60% of this entire market opportunity is outside of the U.S.

I mentioned before, we are a third player in a three horse race. We’re the smallest company in this space and we have I think a significant opportunity to grow our business in the U.S. market and in Europe, but also have opportunities in the Asia Pac region, Latin America as well. So there really isn’t an area that we don’t have opportunities in.

For us though in terms of significant impact going forward, we need a winning strategy quite frankly in the U.S. market. The U.S. market is too big a market for us to continue with the kind of share position that we’ve had historically.

We’re going to talk a lot about product portfolio and shift in product capability and functionality and feature set. We launched two new products, two new true platforms – introduced two new platforms at the ASTRO meeting in October 2012.

On the TomoTherapy side of the business we launched a product called the H series, which is a product that is fundamentally different from what it had been in its previous incarnation. It’s a product that now positions itself truly as a mainstream workhorse product. It will do basically the entire range of patient cases from 3D conformal to IMRT. Probably no product has the same kind of breadth in terms of its ability to treat the broad spectrum of radiation therapy cases. It allows itself now to be considered as a single wealth solution, which we’ll talk a little bit more in greater depth about it going forward.

The CyberKnife was the Legacy product that Accuray was founded around. This is a radio surgery product built on a robotic platform. It’s the premier solution for full body radio surgery and we launched in the ASTRO meeting in October last year, a version of this product with a multi-leaf collimator, which is essentially the aperture that changes beam size and targets to beam in terms of patient treatment area. This allows for a greater standard patient universe opportunity for us and moves the product more from a practical and an economic standpoint, a product that would drive better treatment times and better patient throughput for the facility to use it.

Lets spend a little bit of time about TomoTherapy and the new products we launched there. Prior to the ASTRO meeting last October, this product was seen as a niche product. It was seen as a niche product because it was really primarily used for more IMRT, which was Intensely Modulated Radiation Therapy for complex cases, head and neck cases primarily. This was a specialty a system or was perceived as a specialty system in terms of its positioning.

The product that we launched in October of last year, really fundamentally changes the products capability and functionality and feature set. It now allows us to treat an entire spectrum of radiation therapy patients. It treats them from a treatment time standpoint in more normal time slots, 15-minute time slots and provides overall a better throughput for the facility.

The new version of this product has all of the liability operatings quite frankly that we’ve been working on over the past 18 months since we acquired TomoTherapy. TomoTherapy basically was a company that manufactured terrific products. Some of the early generations of this device had some reliability issues. We inherited those reliability issues and if you follow the company, you’ll know that we’ve made pretty significant progress in improving the service margins, which really represents the reliability work that we’ve been bringing to the installed base on the TomoTherapy side.

The new version of the product includes all of those reliability upgrades. It also takes a product that was inherently very accurate and it actually enhances its accuracy. The focus here obviously is to try and keep the beam where you want it in terms of cancer tissue and scale healthy tissue around it.

So the product is unique in a number of regards. The helical delivery, and when you see a picture of the card, you’ll understand that. The helical delivery provides better accuracy than the competitor systems that it competes against and the treatment planning system is now included on this product. It basically takes planning time from hours down to minutes.

So when you think about product capability and functionality, this product is addressing a much broader array of patients in cases. Its treating them faster, its treating them from an accuracy standpoint with a greater degree of accuracy and the planning work that goes into the treatment set ups and prep, all substantially reduced in terms of times.

With the introduction of the TomoTherapy H series, we have a chance to play in terms of market opportunity and market access in a way that we haven’t in the past. If you look at the left side of this bar graph, this represents the number of sites, the number of radiation vaults included in those facilities. The red piece of the graph is a single vault location, the yellow is a two vault location and the blue is a three plus vault location.

With the previous incarnation of the TomoTherapy product line, the product line that we essentially inherited in the acquisition, we were really only playing in the very top piece, that 15% piece of the market. We did not have for the reasons I just described, a relatively slow throughput, challenges with reliability, very long treatment planning prep time.

We didn’t have the chance to position this product from a functionality perspective as a single vault solution or like a two vault solutions and what we’ve done feature set wise, now allows us to play in this much broader piece of the market. So just as a start, just if we could get into single vault locations, there’s another 1,220 sites in the U.S. market alone that have a single LINAC vault type configuration, and this product because of its mainstream capability, work force capability, gives us a chance to compete in that piece of the market now where we couldn’t before. So we have really substantially changed the product portfolio and its positioning capacity for us as a company going forward.

We were really the originators of radio surgery with the original CyberKnife product. This was a product that was revolutionary and highly innovative when it first came out, but it was seen as a niche product or really a specialty product and the product started out its life really focused on radio surgery, which was very effective for it, but the product for a variety of reasons really didn’t have the kind of patient throughput and treatment speed that would allow us to have the kind of economic value and ROI for a facility that wanted to use this type of the device.

With the product that we launched in October of last year, the CyberKnife M6, it has as an option, it has a multi-leaf collimator, which essentially expands the universe of the patients that the device can treat. It vastly improves treatment speed and provides better patient throughput, so it really changes the economic model for customers now from an ROI standpoint.

The interesting thing about positioning going forward for this device is that there is a trend towards hypofractionation, which basically is defined as greater dosage over fewer treatment interactions, usually five or less treatment interactions and this product basically is really a gold standard product in that regard for a hypofractionation type of treatment.

As an example, you could take potentially a prostrate cancer case that with normal and conventional equipment might take nine weeks of treatment paradigm and treatment planning window to effectively treat and the CyberKnife M6 can take that nine weeks and compress it into a week. So a fairly large paradigm shift in terms of patient experience, time and potential economic impact.

We are a company in pretty substantial transition right now. I think I alluded to in the beginning of the talk, we have been a technology and R&D focused organization. We have been a real innovator as it relates to radio surgery products and radiation therapy products. Much of the work that we did though was viewed from a perception standpoint as products that were really more knit to a specialty in their positioning, in their configuration.

Our future company and the future culture that we are trying to build really is going to put the customer at the top of the food chain in terms of priorities for us. We are going to be much more aggressive as it relates to market facing activities and prioritizing and doing the things internally that support a much more aggressive commercial strategy.

I think as I mentioned in just the previous couple of slide, I think the thing I’m most excited about is the TomoTherapy H series product line. It gives us really for the first time an opportunity to have a product that we can play in the broadest sense of the market opportunity that’s available out there. If we can get that portfolio lined up with the right commercial strategy and the right commercial support, we’re going to win and that really is going to be the focus going forward.

So the TomoTherapy product and the CyberKnife with the MLC really give me the confidence that we got a product portfolio that we can compete with going forward. We need to bring the higher level model sophisticated and more aggressive approach of bring a commercial focused market facing organization to bear on Accuray going forward.

Strategic imperatives for the company in my mind are fairly simple. The first one is, do you have a product line to compete and I believe we do. But we need to make sure that we take the products now that we’ve launched in October of last year and get them appropriately positioned to fully unlock the value that they represent and to ensure that the value proposition that’s there translates into customer perception in terms of economic value creation for the customer as well.

The next piece is really the go-to-market strategy, which was what I just alluded to in terms of thinking about what its going to take to be a more formidable competitor in our key markets; improving our selling focus, putting your resources and more energy behind downstream marketing capabilities and go-to-market capabilities and those are the things quite frankly that will help in addition to the product portfolio, really unlock value for our customers and for our shareholders.

And lastly, kind of keying on the theme of the announcement that we made last Thursday on January 3, we need to have the financial discipline to run the company, with an appropriately sized operating expense space and that was quite frankly a big part of the message last Thursday in our announcement. We kind of – we talked a bit more specifically about that.

I want to take a couple of minutes and talk about commercial execution, because its got a really I think central place in the transformation of our company going forward. It’s about creating value through new products positioning and repositioning the strategic product portfolio that we have based on some of the feature sets and capabilities I’ve just described.

Its around improving our selling focus and its about improving and getting much more aggressive about how we are going to compete in the market place, because I think the will has been there, the desire has been there, but I don’t think the tools and I don’t think the energies and the resources have been there, to allow us to be a very formidable competitor over time.

So, in terms of product positioning, again, we have a product line now both on the TomoTherapy H side and on the CyberKnife side that meet a much broader and can position against a much broader universe of patient and treatment opportunities. So that larger volume of patients can and does translate into better economic value, better throughput, better speed, better mainstream type positioning and translates the economic value for customers.

We need to be able to demonstrate that value proposition for customers through getting equipment into reference sites, letting them know and showing them what is taking place in terms of patient throughput, product reliability and driving those kind of elements as a value proposition in terms of feature set and value.

I would say that between the two products right now, we have as good, if not the best accuracy in terms of what the equipment provides and how it performs in terms of patient treatment accuracy. Obviously the goal here is to get the beam on and keep it on the areas of tissue in target location that you need to treat the patient with and minimize damage and sparing healthy tissue around organ systems around the target area in both TomoTherapy H series and the new CyberKnife M6, both do just that.

Talked about improving selling focus. We have historically had a large group of people selling both of these platforms, both of these systems. Going forward we are going to be breaking apart and dedicating a specific selling group for TomoTherapy and a specific selling group for CyberKnife. They are different products. They are targeted to different customers and we need better-dedicated focus and better energy on each individual platform if we are going to take advantage of leveraging the opportunities that we have.

We are also taking the opportunity to separate the selling responsibility from the installed base of business, which would be upgrades or trade-outs from new equipment into comparative accounts.

Again, different sales process, different thought process about what the targeting and the activities and the sales activities look like in those two situations and we have I think at times had some ambiguity in terms of the margin between the selling actives between installed base and new accounts, and I think from my experience the last thing you want is confusion or ambiguity around what the sales people think they should be doing when they swing their legs out of the bed in the morning.

So we are going to get much better focus on our ability to drive sales in competitive accounts and competitive vaults, by taking the steps that I’m talking about here; both of those increases in selling focus. We’re translated to quite frankly better visibility in terms of ongoing activity and better performance management accountability.

I’ve been a sales manager early in my career for several decades and a commercial manager primarily and the truth is that you can’t hold people accountably if you can’t cleanly measure what they are doing and what they are focused on and tie activates very specifically back to their individual efforts. So the separation of selling responsibilities here will accomplish that as well.

Last, but not the least its interesting for me after three decades in the med tech, med device space and a lot of national account and strategic account selling experience, we have had very little of this capability or activity taking place in the company over time. And I think part of that challenge historically had been that again we had a product line that by feature set and capability was difficult to position as aggressively as it needed to be in the context of a national account selling saturation.

Going forward with our new product portfolio, we absolutely have an opportunely, especially in those single vault locations that I mentioned, to position the business much more aggressively. This is really an issue of market access. Today we are not a presence at all really, a very limited presence in freestanding cancer centers, community based cancer centers. That’s actually where some of the largest volume of activity and growth is taking place by procedure activity and we can change that degree of market access, I think pretty substantially, with putting a national account and a strategic account selling capability in place to access that opportunity. So that’s going to be a change going forward as well.

Last but not the least, I talked about we need to become a more formidable comparator. Our sales people are good, but they can’t compete without the right tools and we are realigning resources to put the right tools in their hands, better activity to generate leads and manage the front end of our sales pipeline in terms of funnel management. The kind of programs and products and tools for them that drive order momentum and drive revenue generation. And last but not least, the kind of information visibility that allows for better more crisp forecast accuracy.

We went through a restructuring that I spoke about earlier, that we announced last week, the primary focus on this was to establish a fundamentally new cost structure to drive the company to sustainable profitability. We rationalize for the most part R&D and G&A costs and we are reallocating those costs or reallocating some of those dollars into commercial activities that are going to drive order and revenue momentum.

Along with the cost takedown, we are realigning the company to better support the commercial strategy. Those market facing activities now that are support revenue, drive revenue, help manage revenue are all reporting to out Chief Commercial Officer, which is a different approach than we’ve used in the past.

From a value creation model, this is how we are thinking about the future. We need to generate increased product revenue. We need to grow the product revenue side of this business and to do that we have to drive improvement in order momentum and the backlog conversion. If we can do that at maintaining the same gross margins historically that we’ve been involved with in the past, we are going to have a pretty big impact of this business.

For those of you that know the company and follow it, we know that we have grown service revenue nicely overtime. We’ll see margins expand there and we will continue to do that as we continue to see better reliability in install TomoTherapy base.

So this is already talking place and lastly, we come back to the discussion about restructuring that we announced last Thursday, taking annual operating expenses down by roughly $40 million, from a $191 million in terms of non-GAAP OpEx at the end of our last fiscal year to something that would be a $150 million or $151 million in OpEx.

Going forward, I believe that we have a lot of reasons to be optimistic. We’ve got products that fundamentally improve our market access and our opportunity, we are transforming the company to be more commercially oriented and we are restructuring and resetting the bar on fundamental cost structure to drive our sustainable profitability going forward. Thank you.

Question-and-Answer Session

[No Q&A session for this event]

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