Accuray on Growth Track

Accuray Incorporated ( ARAY - Analyst Report ) recently celebrated the successful one year completion of its takeover of TomoTherapy Incorporated at the Wells Fargo Healthcare Conference in Boston. Derek Bertocci, the company’s chief financial officer, suggested certain strategies at the conference, which are expected to drive growth for the company following the first anniversary of the transaction.

Based on the successful integration of TomoTherapy, Accuray not only reaffirmed its goal to generate profits by the end of fiscal 2013 but also announced additional milestones for fiscal 2013. The specific guidance regarding fiscal 2013 will be provided during the fourth quarter fiscal 2012 results.

Accuray, on March 7, 2011, had announced its acquisition of Wisconsin-based radiation system maker TomoTherapy in a cash and stock deal worth $277 million. TomoTherapy makes advanced radiation therapies for treating multiple cancer types. The acquisition was completed on June 10, 2011, following the approval of the transaction by TomoTherapy shareholders.

The acquisition of TomoTherapy has bolstered Accuray’s foothold in the radiation oncology space. The merger marked the union of TomoTherapy’s best-in-class radiation therapies and Accuray’s popular radiosurgery systems to create a leading player in this market. The combined entity is now offering 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 has provided a major boost to Accuray’s growth on the back of higher revenues, solid service gross margin and higher installed base. Accuray reported healthy service gross margin of 16.1% in the third quarter of fiscal 2012, buoyed by better dependability and lower service costs related to TomoTherapy Systems. The sustained strong service gross margin reported in the last three quarters of fiscal 2012 led Accuray to raise its guidance for fiscal 2013 to the range of 20-22%.

The company had raised its research and development (R&D) spending by 23% for the first three quarters of fiscal 2012 after the acquisition of TomoTherapy to maintain its leading position in the radiation oncology market. Also, it expects operating expenses to reduce by 45% or less by end of fiscal 2013 attributable to its increased scale.

Accuray is a global leader in the field of radiosurgery and provides a non-surgical treatment option for patients diagnosed with cancer. Most of the company’s growth comes from acquiring market share from its rivals for two of its flagship products, the Cyberknife and the TomoTherapy Systems.

However, Accuray remains susceptible to reimbursement uncertainties and faces stiff challenges from competitive product offerings of Varian Medical ( VAR - Analyst Report ) . We currently have a Neutral recommendation on the stock, which is backed by a short-term Zacks #3 Rank (Hold).