TomoTherapy keeping the faith: Economy, rival take toll on tech start-up

Mar 28, 2009 (Milwaukee Journal Sentinel - McClatchy-Tribune Information Services via COMTEX) -- TTPY | Quote | Chart | News | PowerRating -- The future could scarcely have looked brighter for TomoTherapy Inc. two years ago.

The company had successfully melded a combination of technologies to develop a more accurate way of targeting tumors in radiation therapy.

Sales were on track to top $200 million for the year, up from $45.5 million three years earlier. And the company would soon net $184.7 million in a public stock offering.

That bright future proved to be short-lived.

TomoTherapy has lost money for four straight quarters, ending last year with a $36.9 million loss. It expects to lose money this year. Its stock trades for less than $3 a share, down about 90% from its high of $27.58.

Sales were down last year and are projected to drop again this year as hospitals cut costs and postpone purchases of new equipment amid the economic crisis. At the same time, TomoTherapy faces strong competition from a larger company that brought a similar product to market sooner than expected.

"We remain optimists for the long term," said Frederick Robertson, TomoTherapy's president and chief executive. "Short term, we have some challenges to overcome."

On the list of challenges is a proxy fight with an early investor who owns 4.8% of the company.

Avalon Portfolio LLC, an affiliate of the private investment company of Ted Waitt, co-founder of computer company Gateway Inc., has put up a slate of four dissident directors, contending that TomoTherapy needs to change course. It wants the company to consider:

--Becoming a niche player, focusing on the segment of the market where it has a technological advantage.

--Adjusting its cost structure to match its potential sales.

--Exploring options, including selling the company or forming a joint venture with a larger company.

--Returning excess cash to stockholders through a special dividend or stock buyback.

The outcome will be announced May 1 at the annual meeting in Madison.

$700 million in sales

Few companies become successful without overcoming their share of challenges. And TomoTherapy's accomplishments are not to be dismissed.

It has sold more than 230 of its systems worldwide, racking up more than $700 million in sales. It has continued to invest heavily in research and development, spending $42.6 million last year. And it had $154.8 million in cash and equivalents as of Dec. 31.

It also overcame an array of technological challenges to develop its Hi-Art radiation system.

The system, partly an outgrowth of research done at the University of Wisconsin-Madison, combines computed tomography with an advanced component that improves the ability to shape radiation beams.

TomoTherapy's system enables clinicians to define the size and shape of the tumor, including changes during the course of treatment, and then to maximize the radiation delivered to the tumor while limiting damage to healthy tissue.

It also can deliver the radiation in a spiral pattern, 360 degrees around the body, and from thousands of angles.

"What's exciting to us is we retain the technology leadership position," said Robertson, a physician who once was president and chief executive of the former Marquette Medical Systems.

A recently published study found that the company's radiation system produced better results for all but the simplest cases.

"This technology does make a difference," Robertson said.

A bigger competitor

But building a better mousetrap doesn't guarantee success.

Last year, Varian Medical Systems Inc., a company with revenue of more than $2.2 billion, introduced a new system, called RapidArc, that it contends is as effective and faster than TomoTherapy's system.

TomoTherapy contends its system is more integrated, allowing images to be taken before each treatment, can deliver radiation from 360 degrees rather than from an arc, and delivers a more controlled dose of radiation than Varian's system.

"It's head and shoulders above anything out there," said Del Coufal, vice president of global marketing for TomoTherapy.

But Avalon Portfolio estimates that Varian sold 200 more of its systems than TomoTherapy last year. And not everyone is convinced TomoTherapy has a significant technological advantage.

"There are very comparable pieces of equipment," said Stuart Blacher, a radiation oncologist with Wheaton Franciscan Healthcare. "They all are very good pieces of equipment and they all allow us to give treatment better than we could."

TomoTherapy also is competing with Varian and other companies at a time when hospitals are wary of spending. Its systems cost more than $3 million, and several customers last year canceled or postponed orders because of the economy.

Analyst's view

In an update to investors on Feb. 12, Oppenheimer & Co. analyst Amit Hazan projects sales of $174.5 million this year and $199.8 million next year for TomoTherapy. Both projections are below TomoTherapy's sales of $232.8 million in 2007.

Hazan also expects the company to lose money this year and in 2010.

TomoTherapy has taken steps to cut costs, eliminating 62 jobs in January. It has re-engineered components that are costly or have high failure rates. And it is focusing its sales efforts in areas with existing customers, with the goal of lowering service costs.

It also continues to add improvements to its system.

In the second half of this year, the company plans to introduce software that will enable its system to be used for simpler cases that can be treated by fixed beams of radiation. This would enable hospitals to treat more patients using its system, potentially making it more competitive with traditional radiation systems.

"It improves the versatility of our system," Robertson said.

About half of all cancer centers have only one system. And some customers have been wary of buying a TomoTherapy system because its takes more time to treat patients. That limits the number of patients that can be treated in a day -- and that means less revenue.

For now, TomoTherapy finds itself in a worldwide battle for market share in which victories are counted in ones and twos.

But Robertson said TomoTherapy's system will gain greater acceptance over time. "When I go on a sales call, we generally win on the strength of the technology."

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