Accuray Remains 'Neutral'

We maintain our Neutral recommendation on Accuray Incorporated (ARAY - Analyst Report) following its first-quarter fiscal 2012 results. The company’s losses widened in the quarter as higher revenues were more than masked by hefty charges including costs associated with its acquisition of rival TomoTherapy in June 2011.

However, the California-based company registered strong growth in the top-line, boosted by contributions of the newly acquired TomoTherapy business as well as the growing adoption of its popular CyberKnife robotic radiosurgery system. Accuray backed its adjusted revenue forecast for fiscal 2012, which is expected between $400 million and $415 million.

Accuray is a global leader in the field of radiosurgery and provides a non-surgical treatment option for patients diagnosed with cancer. More than 200,000 people have been treated with the company’s technology globally. The company continues to enjoy healthy demand for its CyberKnife radiosurgery systems.

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.

The acquisition of TomoTherapy has bolstered Accuray’s foothold in the radiation oncology space. The merger marks the union of TomoTherapy’s best-in-class radiation therapies and Accuray’s popular radiosurgery systems to create a leading player in this market. Solid installations of TomoTherapy systems contributed to healthy first quarter revenues. Accuray expects the acquisition to be accretive to earnings in fiscal 2012.

Accuray is expected to benefit from the gradual recovery in hospital capital equipment spending. However, the company remains susceptible to reimbursement uncertainties surrounding its products and its CyberKnife system faces stiff challenges from competitive product offerings of Varian Medical (VAR - Analyst Report). We are also aware of the integration risks associated with the TomoTherapy acquisition. Our recommendation is in tandem with a short-term Zacks #3 Rank (Hold).

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