Venture Investors

TOMOTHERAPY IS RADIATING OPTIMISM

TomoTherapy is hoping the sun will shine on the company during the second half of 2010.

With several new formats for its specialized cancer treatment radiation technology and the nation’s economy trying to emerge from a recession, things could align in TomoTherapy’s favor, company officials said.

And it would be none too soon, after a couple of difficult years during which competition increased and hospitals cut back on major equipment purchases.

Considered a star in Madison’s high-tech economy, TomoTherapy’s luster has paled a bit. The company trimmed employment twice, eliminating nearly 150 jobs. The company now has about 600 employees, half of them in Madison.

Its stock price, which traded as high as $27 a share shortly after its 2007 initial public offering on the Nasdaq market, has been below $5 for the last 52 weeks. Research analysts are cautious about the stock, giving it a 3.0 recommendation, comparable to a “neutral” or “hold” on the stock, with an average $4 projected share price, according to Thomson/First Call.

“If you look at the history of TomoTherapy, three to five years ago, they seemed to be way out in front of the competition in a couple of areas. Today, some of the larger competitors who control 80 percent to 90 percent of the market — Varian and Elekta — really made some progress in closing that technology gap with TomoTherapy,” said Jeffrey Johnson, senior research analyst with Robert W. Baird & Co., Milwaukee.

“It’s tough for any small competitors,” Johnson said.

But Fred Robertson, chief executive officer, is looking up. He said new versions of TomoTherapy’s Hi-Art radiation treatment machine are opening it to more markets, and the company has tweaked its process for servicing the machines. While revenue last year was down 20 percent from 2008 — at $164 million, down from $204.6 million — cash and equivalents ended 2009 at $76.1 million, up from $66 million in 2008. Long-term debt remains negligible, below $600,000.

Early investors, Venture Investors and the State of Wisconsin Investment Board (SWIB), still hold stock in TomoTherapy; SWIB is one of the top 10 investors, with more than 1.2 million shares, according to March 31 information filed with federal regulators.

“In a tough environment, as a business, we have made a lot of progress,” Robertson said.

When TomoTherapy’s technology, discovered at UW-Madison, hit the market, it was unique. Instead of delivering radiation using a fixed machine and one beam pointing in a single direction, TomoTherapy’s Hi-Art system spirals around the patient, shooting a stream of potent, narrow beams at tumors.

It has been effective, the company says, in treating a wide range of cancers, from individual tumors to full-body radiation before a bone marrow transplant. Setting up a computerized dosage plan for a complicated case can take time, though, and not all cases are as complex.

Competing machines work faster, analyst Johnson said. “And in today’s health care reform environment … ability to see more patients in a day is a key clinical advantage for these hospitals,” he said.

So TomoTherapy has adapted its technology, all in the past year and a half, to make it more flexible.

TomoDirect

TomoDirect gives patients a fixed, single dose of radiation at a time, from up to 12 angles. This means each appointment is shorter. Fifteen medical centers are using it.

“This is really a key product launch for us,” Robertson said. “This gives (hospitals and clinics) a very efficient means of treating more straightforward types of cancer.” During the first three months of 2010, more than 40 percent of orders received included TomoDirect.

Up to now, most of TomoTherapy’s orders have come from large cancer centers where a large enough number of patients will have complicated cases, making it worthwhile to spend $2 million to $4 million for a Hi-Art machine. TomoDirect is aimed at competing for business from clinics with only one or two radiation treatment machines, or more than 80 percent of cancer centers in the U.S., Robertson says.

TomoMobile

TomoMobile is the “only relocatable radiotherapy treatment system in the world,” Robertson said. Built in a trailer, it can be used, for example, while a clinic is being built or remodeled or while older equipment is removed from a site to be upgraded. The first unit is in use in Muskogee, Okla.

Tomo HD

Tomo HD is the company’s premium machine, with both spiral and straight-line beams, as well as technology advances. “That really gives us access to a much larger target market,” Robertson said. Shipments will begin later this year.

Compact Particle Acceleration Corp.

Compact Particle Acceleration Corp., an offshoot of TomoTherapy, continues a collaboration with the Lawrence Livermore Laboratory in California, developing a new type of proton radiation treatment machine.

Meanwhile, TomoTherapy has made improvements behind the scenes, buying a Chinese company that makes linear accelerators, which create the high-energy X-rays used for treatment. That gives TomoTherapy a second supplier of the devices in addition to Siemens and cuts downtime for the Hi-Art machines.

Also, digital oscilloscopes are being installed in the machines, letting technicians troubleshoot problems from other locations.

TomoTherapy now has 300 systems installed in more than 20 countries.

“This has been a very tough environment. We didn’t foresee the financial crises that devastated the U.S. market and we underestimated the competitive response to our technology. But we have a very bright future,” Robertson said. “We see a lot of opportunities.”

Johnson, of Robert W. Baird, said he applauds TomoTherapy’s product advances but is “cautious” about the company and its challenges.

“I think TomoTherapy has a place, especially in those centers that want to differentiate themselves from a marketing standpoint as the absolute highest quality. But the bulk of the market today is trying to find a middle ground between speed of treatment and the gold standard,” Johnson said.

He said a survey of about 60 U.S. hospitals conducted in January showed they expect to increase spending about 7 percent this year.

“With new products and hospital budgets starting to improve a bit, I think the next year or two will really be telling on what TomoTherapy’s future holds,” Johnson said.