I haven’t written much about Rob Fannon and his Phase 1 Investor newsletter lately — this is the high end newsletter published by the folks at Stansberry and Associates, it’ll run you about $4,500 a year, and it’s largely focused on biotech companies.
So is their advice worth more than the advice from less expensive newsletters? I can’t tell you that — I’ve written about half a dozen or so teaser stocks that Fannon has put out there for us, and most of them have not done terribly well, but they certainly haven’t done as badly as many, many other stocks. Everything’s relative, and biotech is more hit-and-miss than most sectors — his picks for the Medical Investor newsletter, which he runs with George Huang, have done a little better, largely because they include several health care REITs that have held some value during this awful year. And Phase 1 isn’t tracked by Hulbert, so there’s no objective report of performance that I know of.
But that’s all really beside the point — If there are some Phase 1 subscribers who’d like to share with us their experience with that newsletter, I’d be delighted to hear it. But what I really want to know is: What stock does he think we should buy today?
Or, put more bluntly, which stock is he talking about when he says, “Don’t let this chance at a 10-bagger pass you by.”
Boy, that terminology really got into the vernacular, didn’t it? It’s a Peter Lynch term, itself stolen from baseball — a one bagger is a single, which Lynch would call a 100% gain. A 10-bagger is a 1,000% gain, a stock that goes up to 10X the price you paid.
And yes, we all like those. Heck, in this environment we’d probably be happy with a one-bagger. So what is this potential “ten bagger”?
It’s a cancer fighter, which is always good for business.
It’s a machine or device, not a drug.
The letter is generally based on the premise that Rob is kicking himself for missing the huge returns from Intuitive Surgical over the last few years, and tells us that “Rob just discovered another opportunity exactly like Intuitive Surgical five years ago.”
And here’s the spiel where they share their clues:
“The company that invented this miracle machine raked in $210 million in sales last year… not including any of the $647 million in backlog orders as well.
“Demand from patients is soaring… hospitals are eager to earn the revenue these machines will generate… and doctors are now recommending its use whenever they can.
“Based on demand and figures, we conservatively predict 35 to 55 of these machines will be installed per year over the next five years.
“Even with the current U.S. economic problems, installations should be on the high end of this spectrum.
“So, by 2013, somewhere around 400 machines should be installed and ready for use.
“And as all of this happens, the value of the company stands to increase in value by up to five times… generating huge gains for investors.
“You could earn as much as the 2,800% Rob Fannon missed out on five years ago… turning a small $5,000 stake into an incredible $146,000.”
Sounds good, huh?
Some of you can probably guess this one based on those clues, but the rest of the ad is a little bit interesting and shares some more thoughts about the company, so let’s have a look at some more of the ad:
“Imagine lying down peacefully…
“Dozing off while your favorite music plays in the background… thinking about the tennis match you’ll play later.
“Now, imagine while you’re doing this, a machine is eliminating prostate cancer from your body.
You might think that sounds far-fetched. But Darrell Walker sure doesn’t…
“‘I didn’t have pain,’ says Darrell. ‘I didn’t require a hospital stay, and I had no lingering effects.’
“Instead of being a depressed, 71-year-old who had just been diagnosed with a life-threatening disease, Darrell simply opted to let the newest technology in medicine heal him.
“In fact, it was the second time he’s had cancer and been cured. He also had a brain tumor removed, using the very same technology.”
So, just to cut through the tension as you wait for the answer, the machine is called the Cyberknife, and the company is Accuray (ARAY).
And those clues are all true — and the estimates may well be reasonable. Accuray has sold about 30 Cyberknife systems in each of the last two years, and does have a nice big backlog, so they may be able to reach those numbers of 35+ installations per year. These are expensive machines, running at something like $4 million, so a couple machines either way makes a big difference for a company that has annual sales (last year, at least) of just about $210 million.
Analysts are not all that optimistic about ARAY right now, but they do see them becoming more profitable over the coming year, giving them a forward PE that’s just a bit higher than pseudo-competitor Intuitive Surgical — ARAY has a forward PE of 31, ISRG is 26. They don’t have any debt, thanks to their IPO about 18 months ago (at about five times the current price, so OUCH for those IPO investors).
The Cyberknife is essentially a radiation treatment machine — they call it “radiosurgery” — that’s mounted on a robotic arm and controlled by computer. The machine’s promise is that it can allow doctors to more closely target tumors and to allow the robotic arm to track the slight movements of tumors during treatment, reducing the “extra” radiation that hits other nearby parts of the body, giving “surgical” precision to radiation treatment.
And that story about Darrell is actually one that Accuray uses in their marketing campaigns — though of course, since this is a newsletter teaser ad, they changed the names to protect, well, themselves. His name’s really Donald, don’t know what his last name is, and you can read his whole story here (PDF file), if you happen to be interested. He’s what they call a “cyberknife ambassador,” so obviously he’s one of the really happy stories.
Donald’s story actually does have an interesting corollary with Cyberknife’s history — he had radiosurgery first for brain cancer, and later for prostate cancer. Radiosurgery’s core business is brain surgery, and Accuray believes that they can expand that market by increasing the approvals of and use of the machine in other cancer treatments — including lung cancer, prostate cancer, and several others.
Essentially, what Accuray promises with the Cyberknife is not a wild new technology that skips several steps, it is a use of the existing technology for radiation treatment, combined with active monitoring and robotic tracking to make radiation delivery more precise and more targeted. This means that the surrounding, healthy tissue isn’t subjected to extra radiation, and that nearby cells are therefore not harmed.
That plays nicely into brain cancer, obviously — don’t want to radiate other parts of your brain. Lung cancer is another “no brainer” for this, at least conceptually — it’s awfully hard to keep your lungs from moving, so if you could treat a moving cancer while someone breathes that would certainly count as “good.” And it can play into prostate cancer, too, since a huge part of the reason for the growth of the da Vinci robot for surgery is that robotic surgery can help surgeons be more precise and reduce the problems of incontinence and sexual challenges following prostate surgery.
Perhaps Accuray can be the next wave, making it unnecessary to have even the da Vinci’s minimally invasive surgery — I’m certainly far from being as informed about this as Rob Fannon is, and I’m neither a doctor nor a medical analyst, so that’s your call to make. Do note that although da Vinci is now really the standard of care for prostate surgery (I think they’re right around a 50% market share now in that surgery), it took them many years to get there, and they first had to build a pretty compelling academic case with studies that indicated the da Vinci prostatectomy would be better for the patient than conventional open or laparascopic surgery. I think Accuray probably still has a ways to go in making that case to doctors and patients, though they’re certainly trying — and the idea of being essentially nonsurgical is certainly a nice way to get patients interested.
I’ve written about Accuray a few times over the last year or two, and about Intuitive Surgical, and have owned both (I still own Accuray, and I was actually on the verge of buying into ISRG again now that it’s getting more reasonably priced, but since I’m writing about it I can’t buy either one for at least three days).
There are clearly some similarities, and there is some competition, albeit probably fairly minor so far, in the prostate cancer treatment market. Still, it’s probably useful to note that we are at the front end of what will probably be the biggest bull market for prostate treatment in history … the Baby Boom generation is just hitting the early 60s, and are entering the prime age for the onset of prostate trouble. Of course, almost all cancers will probably be in an upswing for some time, unfortunately, with the aging of the population, and it seems that anyone with effective solutions has a chance at profitability — I would guess that the big battle for treating these types of cancers will probably end up being between surgeries, whether radio or traditional or robotic, and new drugs, and perhaps “battle” is the wrong word, since there’s no reason not to try everything if you’re fighting for your life and your insurance (or the government) is paying for it. Which could also change at any time, if insurers aren’t willing to reimburse for the higher prices necessitated by many of these expensive machines.
So what do you think? I know I’ve had a few readers who actually went under the knife with the da Vinci, but even if you haven’t seen a Cyberknife or a da Vinci, which one sounds more appealing? Though I currently own Accuray, I find myself more interested in ISRG at the moment just because their massively larger installed base (almost 1,000 machines, versus about 140 Cyberknife installations) means a certain level of almost guaranteed use, even without big additional system sales — if you buy a milllion dollar robot, you’re going to use it, and you’re going to buy those semi-disposable attachments and tools that are used in every surgery, and keep up your service contracts. ISRG is probably the more stable performer at this point, which is probably why I find it appealing again with the incredible instability of everything, but Intuitive is not going to be the “next Intuitive” — Accuray may not be either, but it is an interesting company with some potential.
Oh, and this idea that Accuray is the “next Intuitive Surgical” is, beyond probably being wishful thinking to some degree, far from new — Brian Hicks said the same thing back in August of 2007, and Karim Rahemtulla started teasing it as a “Cancer Blaster” a couple months later, since which time investors have continued to see their ARAY shares dip, and dip, and dip.
Full disclosure: I do own shares in Accuray as of this writing, so you should probably consider that as one reason for my relative optimism about a stock that has fallen from $30 to $5 in a year and a half.