Radiosurgery Technology Merits Investor Attention and Concern

Includes: ARAY, VAR
by: Steven Bulwa

Radiosurgery is a very interesting area of medicine that merits investment consideration. Accuray (NASDAQ:ARAY) is the developer of the CyberKnife, one entrant in the field and, in my opinion, the technology leader. These tools allow surgeons to target tumors with great precision and remove them with a minimally invasive process leaving healthy surrounding tissues unaffected. This was not previously possible with traditional surgery methods and offers new options for patients with tumors in areas previously considered inoperable.

From the company:

Accuray Incorporated designs, develops, and sells the CyberKnife system, an image-guided robotic radiosurgery system used for the treatment of solid tumors. The CyberKnife system combines continuous image-guidance technology with a compact linear accelerator to deliver high doses of radiation to a tumor from different directions. It tracks, detects and corrects for tumor and patient movement in real-time during the treatment. The CyberKnife system components and technologies include compact X-band linear accelerator, which generates the radiation to destroy the tumor; robotic manipulator that allows doses of radiation to be delivered from any direction and position; real-time image-guidance system to continuously monitor and correct for patient and tumor movements; X-ray sources to generate X-ray images to determine the location of bony landmarks or implanted fiducials; and image detectors to capture high-resolution anatomical images.

I have owned shares in ARAY at different times over the years and the stock has done nothing after a long fall after its post IPO high near $30/share. It currently trades near $7/share where it has traded for nearly three years. A series of events have held back the shares:

(1) Management issues including founder Dr. Jon Adler leaving the company and joining competitor Varian Medical (NYSE:VAR) over disagreements on the direction of the company;

(2) Changes in accounting/revenue recognition policies and struggles to be recognized/eligible for insurance coverage and patient reimbursement; and

(3) Competition from Varian Medical, the industry leader for X-ray products for treating cancer entering the radiosurgery market.

Looking at ARAY now, it is not an expensive stock. It has a market valuation of $400 million, over $140 million in cash (over $2/share) and is profitable on revenues of over $200 million. Revenues are projected to grow 13% next year to almost $250 million, generating earnings of 0.14/share.

There is little doubt that this technology has tremendous growth potential as it revolutionizes how doctors treat cancer tumors. The devices will be able to treat an increasing number of tumor locations over time as the process is improved and gains new FDA approvals for a growing number of indications. The Cyberknife was recently approved for lung cancer. The company’s 10k indicates the product is used outside the brain for tumors on or near the spine, in the lung, liver, prostate and pancreas.

Recent events have brought me back to ARAY for another look. A series of injuries arising from treatments using Varian machines has some questioning the safety of the company’s products when adapted for radiosurgery.

Just yesterday this appeared in the New York Times - A Pinpoint Beam Strays Invisibly, Harming Instead of Healing.

On January 23, 2010 a similar piece ran again in The New York Times - Radiation Offers New Cures, and Ways to Do Harm.

These articles call into question whether these retrofitted Varian systems are safe to operate. The number of instances of mishaps leading to serious and irreparable injury described in these articles certainly has me concerned.

From the January 23 article:

In June, The Times reported that a Philadelphia hospital gave the wrong radiation dose to more than 90 patients with prostate cancer - and then kept quiet about it. In 2005, a Florida hospital disclosed that 77 brain cancer patients had received 50% more radiation than prescribed because one of the most powerful - and supposedly precise - linear accelerators had been programmed incorrectly for nearly a year.Dr. John J. Feldmeier, a radiation oncologist at the University of Toledo and a leading authority on the treatment of radiation injuries, estimates that 1 in 20 patients will suffer injuries.

The Times found that on 133 occasions, devices used to shape or modulate radiation beams - contributing factors in the injuries to Mr. Jerome-Parks and Ms. Jn-Charles - were left out, wrongly positioned or otherwise misused.On 284 occasions, radiation missed all or part of its intended target or treated the wrong body part entirely. In one case, radioactive seeds intended for a man’s cancerous prostate were instead implanted in the base of his penis. Another patient with stomach cancer was treated for prostate cancer. Fifty patients received radiation intended for someone else, including one brain cancer patient who received radiation intended for breast cancer.

From the December 28th article:

Because the radiation is so concentrated and intense, accuracy is especially important. Yet, according to records and interviews, the SRS unit at Evanston lacked certain safety features, including those that might have prevented radiation from leaking outside the cone.

The mistakes in Evanston involve linear accelerators - commonly used for standard radiation therapy - that were redesigned by the manufacturer, Varian Medical Systems, so they could also perform SRS. As the devices became more versatile and complex, problems arose when vital electronic components could not communicate with one another.

In the last five years, SRS systems made by Varian and its frequent German partner, Brainlab, have figured in scores of errors and overdoses, The New York Times has found. Some mistakes were caused by operator error. In Missouri, for example, 76 patients were overradiated because a medical physicist did not realize that the smaller radiation beam used in radiosurgery had to be calibrated differently than the larger beam used for more traditional radiation therapy.

My take away from this information is that this a horrible series of events. My heart goes out to everyone injured in these accidents. I urge some sort of investigation into the safety of these devices so there are no more incidents. The benefits of radiosurgery should be realized by patients in need and the proper and safest systems should be employed.

I am currently shorting Varian (VAR) - amazed that there is not fallout from this especially considering this is not new information - and adding ARAY as a long based on its superior technology and the benefits of radiosurgery in general for patients with cancer.

Disclosure: I am long ARAY. I am short VAR