Nobody ever said the specialized surgical market was ever going to be an easy sell, but I certainly thought that Accuray at least had a chance at success. It still may, but in the meantime it looks like more pain for shareholders.

Accuray, the company behind the CyberKnife and TomoTherapy systems designed to deliver radiosurgery and modulated, image-guided radiotherapy, is taking a swan dive of massive proportions after reporting its preliminary second-quarter results after the bell last night and warning that it will be restructuring its operations.

Scalpel, please...
For the second quarter, Accuray anticipates that revenue will come in at only $72 million-$75 million, implying a product revenue decline of 45%-50% from the prior year, while service revenue will have risen by roughly 13%-15%. Accuray placed the blame on its revenue shortfall - it recorded $106.4 million in revenue during the second-quarter last year - on both supply and manufacturing issues that delayed the launch of new products, as well as "salesforce transitional issues."


Looking ahead, Accuray plans to cut costs by shedding about 13% of its workforce, primarily in the United States, and has updated its guidance to reflect its weaker outlook by forecasting a full-year loss of $0.87-$0.95 and revenue of $320 million-$330 million versus Wall Street's current expectation, which had called for a loss of just $0.55 and revenue of $406 million.

The takeaway
This might seem like just another earnings miss from the medical device and specialized robotic surgery sector (and it is!), but there are three other key takeaways from this miss.

The first point is that few robotic surgery companies have been successful despite their revolutionary technology because of the time needed to build the systems and train physicians to use the system. Intuitive Surgical has been the exception to the rule with its da Vinci surgical system, which has maintained its premium price and is practically the only choice in robotic surgery at the moment. Both MAKO Surgical and Hansen Medical have struggled to get their products -- for MAKO the MAKOplasty osteoarthritic device, and for Hansen the Sensei Robotic Catheter System -- beyond the conceptualization stage, and it appears that Accuray is going through the same growing pains.

The second factor worth noting is that Accuray plans on reducing its workforce primarily in the United States. Although Accuray didn't come out and blatantly say so, this seems like another move by a medical device company facing a new 2.3% medical device excise tax to reduce its exposure in the U.S. and move its operations abroad where the cost of both labor and taxation are less. Medical device company Boston Scientific invested $150 million in China recently while announcing layoffs in the U.S. To put it mildly, we could be witnessing the tip of the iceberg in a major medical device manufacturing shift from the U.S. to cheaper and more tax-favorable markets, with the Affordable Care Act as the impetus.

The final point worth noting -- and perhaps a reason to give Accuray some lenience -- is that Joshua Levine, the company's new CEO, has only been on the job for a quarter, taking over after the departure of Euan Thomson in October after a 10-year tenure as CEO. Leadership transitions rarely go smoothly and could account for some of today's drop.

Foolish roundup
I haven't given up on Accuray just yet as I feel its unique combination of robotic surgery and guided radiation therapy systems can make the company very profitable. Unfortunately, for investors, that's going to take patience in terms of training physicians, training a new staff, and adjusting to a scaled-down operation.

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The article Accuray Shares Go Under the Knife originally appeared on Fool.com.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of MAKO Surgical. Motley Fool newsletter services have recommended buying shares of Intuitive Surgical and MAKO Surgical. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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joecfornow

CyberKnife should be completely separated from products like Da Vinci or Mako's RIO. The latter are utilized in operating rooms with disposable components that lead a different business model than CyberKnife. It is not even close to comparison. CyberKnife is used to deliver radiation in high doses in a shorter period of time to reduce side effects and give an alternative to surgery in most instances. There is actually no surgery involved - hence the "Cyber" aspect to the name. Investors should not be evaluating CK in comparison to ISRG or MAKO. That would be FOOLISH.

January 04 2013 at 10:56 AM Report abuse rate up rate down Reply