Leading radiosurgery systems maker Accuray Incorporated (ARAY) has agreed to buy one of its rivals TomoTherapy (TOMO) in a cash and stock deal (worth $277 million), which will create a premier player in the radiation oncology market. The transaction has been cleared by the boards of both companies.
Following the announcement, shares of California-based Accuray slipped 10.5% to $8.96 in early trading on March 7 while TomoTherapy’s shares jumped 28% to touch a new 52-week high of $4.70.
The Deal
Under the deal terms, Accuray will acquire Wisconsin-based radiation systems maker TomoTherapy for $4.80 a share in cash and stock, representing a 30.8% premium over TomoTherapy’s closing price of $3.67 on March 4. Shareholders of TomoTherapy will receive $3.15 in cash and 0.1648 shares of Accuray for each TomoTherapy share they hold.
The acquisition, which is subject to customary closing conditions, approval of TomoTherapy shareholders and regulatory clearance, is expected to close by second quarter or early third quarter of 2011.
UBS Investment Bank, a division of UBS AG (UBS), and law firm Gibson, Dunn & Crutcher are serving as financial and legal advisors, respectively, to Accuray on the deal. BofA Merrill Lynch, a unit of Bank of America (BAC), is acting as advisor to TomoTherapy.
Compelling Prospect
TomoTherapy markets advanced radiation therapies for treating multiple cancer types with revenues of roughly $195 million in 2010. Its solutions include the Hi-Art system, which is designed for continuous delivery of radiation (using thousands of narrow beams) from all angles around a patient. It targets tumors more precisely than conventional radiation therapies while sparing surrounding healthy tissues. Daily pre-treatment CT scans ensure the accuracy of the treatment.
The deal marks the union of TomoTherapy’s best-in-class radiation therapies with Accuray’s coveted radiosurgery systems to create a leading player in the radiation oncology space. The combined entity will offer state-of-the-art therapies, ranging from high-precision radiosurgery to image-guided intensity-modulated radiation therapy, for treating cancer and other diseases.
The integrated company (with combined sales of more than $400 million in 2010) will have a global presence with over 1,100 employees and an installed base of more than 550 units across 32 countries.
Besides expanding its global reach, the acquisition will offer a major boost to Accuray’s sales and will reinforce its foothold in the radiation oncology space. The company expects the transaction to be accretive to its earnings in the fiscal year beginning July 1, 2012 and will offer opportunities for cost synergies through increased operating efficiencies, complementary patient base and overhead reductions. TomoTherapy expects to book revenues between $215 million and $235 million in 2011.
Our Recommendation
Accuray is a global leader in the field of radiosurgery and provides a non-surgical treatment option for patients diagnosed with cancer. The company continues to enjoy healthy demand for its CyberKnife robotic radiosurgery systems as evidenced by sustained growth in the number of patients receiving treatment with the device. More than 100,000 people have been treated with CyberKnife globally.
CyberKnife system boasts of a technology that differentiates it from traditional treatments. CyberKnife, a non-invasive alternative to conventional surgery, is the first and only commercially available intelligent robotic radiosurgery system designed to treat solid tumors anywhere in the body. Accuray is pursuing a number of strategies to boost CyberKnife’s adoption.
Accuray is expected to benefit from the recent recovery in hospital capital equipment spending. However, the company remains susceptible to reimbursement uncertainties surrounding its products and its CyberKnife system faces stiff challenge from competitive product offerings of Varian Medical (VAR).
Moreover, a sizable sales deficit (resulting from lower deferred revenues from the CyberKnife systems sold under the legacy Platinum multi-year service plan) may be a drag on the top and bottom lines for fiscal 2011. We currently have a Neutral recommendation on Accuray.
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