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Accuray Reiterated at Neutral

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We maintain our Neutral recommendation on Accuray Incorporated (ARAY - Free Report) , a renowned radiosurgery systems maker, following its fourth quarter fiscal 2012 results.

Accuray’s adjusted loss per share of 20 cents was wider than the Zacks Consensus Estimate of a loss of 13 cents in the fourth quarter. Consolidated revenues of $100.5 million trailed the Zacks Consensus Estimate of $108 million. Sales dropped 8.5% when compared with the year-ago combined (including TomoTherapy) pro forma revenues of $109.8 million.

However, reported net loss attributable to shareholders in the quarter was $20.3 million (or 28 cents a share) versus a loss of $25 million (or 40 cents a share) in the prior-year quarter. Controlled operating expenses along with higher service margins contributed to improved fourth quarter results.

Accuray, a global leader in the field of radiosurgery, provides non-surgical treatment options to patients diagnosed with cancer. The CyberKnife system, its leading product, boasts of a technology that differentiates it from traditional treatment. More than 200,000 people have been treated with this company’s technology globally. Worldwide installation base for its therapy systems comprises more than 600 units.

Moreover, 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, to treat cancer and other diseases.

The market size for the global radiation therapy market is expected to reach $3.6 billion by 2018, based on which Accuray is focusing on investing in emerging markets to expand its business. The CyberKnife system has also been deployed in Mexico and has been recently introduced in the Instituto Neurologico de Colombia (INDEC) of South America, for the first time.

However, Accuray has been incurring losses for quite some time now and the total accumulated deficit as of June 30, 2012 stands at $216.4 million. The company is totally dependent on sales of CyberKnife and TomoTherapy systems for its long-term profitability.

Apart from shipment delays outside the U.S., we also remain concerned about double-digit decline (27% year over year in fiscal 2012) in CyberKnife sales due to end-market headwinds and difficulties in sales force integration in the U.S. Moreover, the company expects future sales to be down due to potential delay in shipments and challenging end-market demand in the U.S.

Additionally, although the TomoTherapy acquisition has strengthened Accuray’s position in radiation oncology and has provided opportunities for attractive synergies, the company faces associated integration risks. The company needs to achieve the anticipated synergies from the acquisition so that it does not turn out to be a mere wastage of resources.

Accuray is exposed to significant competition in the radiation oncology market, which is characterized by rapid technological changes. The company competes head-to-head with Varian Medical (VAR - Free Report) and Integra LifeSciences (IART - Free Report) . The company also faces reimbursement uncertainties for its products. We currently have a Neutral recommendation on the stock, which carries a short-term Zacks #3 Rank (Hold rating).

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