Well, this is something that doesn’t happen every day: we’ve got a repeat customer for one of the stocks we teased out in the past. This is a new teaser from Karim Rahemtulla for the Xcelerated Profits newsletter, but it happens to be for a stock that was previously recommended, in a poorly timed pre-earnings email, by Brian Hicks at Quantum Confidential.
And, just to pile on a bit, the Gumshoe recently picked up shares in this one, too — in the end, I couldn’t resist a little gamble … and to be clear, I do think this one is pretty high-risk.
“Hey Gumshoe,” says my intrepid reader, “get to the point … what’s the company?”
Patience, grasshopper. We’re getting there.
This teaser is for a company that has created a “cancer blaster” that has half a billion dollars worth of backorders.
This is the Gumshoe writeup from Brian Hicks’ teaser email, by the way — he called this “wealth care” investment the “Next Da Vinci.” But if you go read it now, you’ll miss the surprise!
And they’ve got some pretty good hyperbole to get us all hot and bothered about this company, and inspire a devoted subscription to Xcelerated Profits (just $49.50, to be fair, but still … who doesn’t like a free idea better?):
“So, Forget About Pipe-Dream Drugs And Someday FDA Approvals … THIS COMPANY’S BREAKTHROUGH DEVICE DESTROYS CANCER TUMORS NOW … And That Includes Stubborn Prostate Cancers and Lung Cancers.”
And anyone who has invested in medical technology or biotech will tell you, perhaps with a ghoulish look in his eye, that there’s some big money in cancer … if you can get the treatment right. Those baby boomers are getting older, after all.
Plus, if you buy into a company like this, or like Genentech selling it’s hugely expensive Avastin cancer drug, you can tell yourself that you’re helping to save lives and loading up on filthy lucre (and health insurance companies are picking up the tab for these new treatments, most of the time, so it’s not “real” money, right?)
So yes, we all love to invest in cancer fighters … and this one’s a doozy, at least in Rahemtulla’s words:
“You walk into the hospital with a tumor – what was once a death sentence – and this machine lines up the tumor – then blasts it … No surgery … No hospital stays … No chemotherapy … Less brutal fatigue … No hair loss … Just a series of outpatient treatments … You go home healthy… CANCER FREE.”
There are quotes from a half dozen doctors, all proclaiming the effectiveness, patient-friendliness, and value of this device.
With plenty of argument for why you need to know about this company right now, of course:
“And now that the device is being successfully used in more than 70 clinics and hospitals across the globe … the old drug companies are quaking because hospitals around the world are now demanding … ‘How can I get my hands on one of these machines?'”
So that’s pretty impressive — and they gild the lily a little further, essentially saying that pent up demand is growing quickly because they have created a new market from whole cloth … that essentially means this can treat, with minimal discomfort, almost any kind of cancer.
And, perhaps the most compelling part, this is “A groundbreaking product that is only made and delivered by one company…”
Ooohh, a monopoly! It’s like sweet, sweet music to an investor’s ears!
And he compares it to Google and Apple, and subtly mentions their meteoric rise (recent only, in AAPL’s case). Kind of odd — I thought it more apt when Brian Hicks compared this one to Intuitive Surgical, which is a much more similar company.
So what other clues does Karim give:
This came public “a few months ago” on the Nasdaq, and has done relatively poorly in the market since.
The shares are under $30 somewhere in a “huge miscalculation.”
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And of course, more colorful language:
“Like Jim Brown In A Wide Open Field … Or Ted Williams With A Belt-High Fast Ball … You Just Need To Let ‘Er Rip With This One.”
Seriously? I’m no spring chicken, to be sure (though I was born after both of their playing careers were over), but even I wouldn’t be using sports metaphors from the forties and fifties (and OK, the first half of the 1960s for Jim Brown). Though I guess many of the older baby boomers, many of whom have lots of investable cash, have fond memories of both of these stars, so perhaps this is a brilliant move.
But moving on from baseball and football, what’s this product?
It’s less invasive than surgery.
It’s a hugely expensive machine, but potentially a profit center for hospitals.
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Treatment is much less expensive than surgery for insurers.
So, this device that aims to replace much cancer surgery is the Cyberknife …
and it’s made by Accuray (ARAY).
As I noted above, Brian Hicks teased it back in August as the “next Da Vinci,” and then watched, somewhat crestfallen, perhaps, as it fell dramatically on a disappointing earnings report. But it did catch my eye on the weeks following that, and very recently I finally decided to open a small position. So, just to be clear, I’m an owner of this one and you should assume that I’m either lying or looking through rose-colored glasses in a desperate ploy to justify my own investment.
And though the price fell significantly, to $12 or so, when they released their earnings in August, they have rebounded quite nicely here — thanks to some progress in the prostate cancer market, and, last week, to an analyst day that boosted their shares briefly above $19. They’re back in the $17s now. Analysts are clearly not putting this machine on par with the da Vinci just yet, or even with mainstream medical devices — the forward PE is only 20, quite low for a brand new, fast growing (at least, in theory) company, even though that’s for the year that ends in June of 2009. I don’t think ISRG ever traded at a PE as low as 20.
Just to be clear, analysts are predicting that for the current fiscal year, they’re going to earn something a hair shy of fifty cents a share — but there are a broad range of estimates, from 38 to 68 cents, so I’d take all of that with a grain of salt. Part of the reason the shares got hit in August, after all, was that they reported 1 cent in earnings when 3 cents was expected. Go figure. I can also personally testify that Intuitive Surgical acted somewhat like this in the early days when they were just barely becoming profitable — lots of blowout numbers and badly missed numbers, because there was no easy way to estimate them very effectively.
For those who are more familiar with Intuitive Surgical and the da Vinci surgical robot, there are a few similarities — though the two devices are competitors, too, in the broad sense, especially in prostate surgery.
Both use robotics — the da Vinci uses them to replicate a surgeon’s movements inside the body and make more minimally invasive surgery possible, and with better results. They’ve become dominant in prostate surgery, and are building a big business in gynecological and heart valve surgeries (and I own ISRG, too, so again, this may all be a tissue of lies that I’m spinning).
The Cyberknife uses robotics and computer software to track and irradiate tumors, which means that radiation treatment can be much more targeted and effective. Their robotics lock on to a tumor, and are able to track it even if the patient moves (by breathing, or a similar inconvenient activity) or the tumor changes shape or moves (strangely common, apparently).
So it looks kind of like an x-ray machine, but the little radiation emitter part (can you tell I don’t know what I’m talking about yet?) makes constant tiny movements to keep in contact with the little tumor that it’s trying to irradiate.
They started with brain tumors because being very focused is extra important in the brain, but now they’re moving out into the prostate and lungs (that last one certainly makes sense — it’s hard to stop the lungs from moving without more serious side effects, like death).
Intuitive Surgical has had a heck of a run for the last couple years — I last bought shares a long time ago at $113, and I’ve mostly watched, slack-jawed, as they’ve gone up like a rocket this year. So you can see, any company with a similar promise was likely to catch my attention.
So, you already know that I own shares, though I think there’s a good chance that we’ll have some really big dips in the future on lumpy earnings. What’s the bad news?
Well, these Cyberknife machines are godawful expensive. Not so bad for the seller, you say? True, but you still have to convince hospitals to buy them, and they have to come up with a big pile of cash to do so. I’ve heard a lot of arguments between hospital administrators about the da Vinci system, which costs about 1/5 as much as the Cyberknife, and it seems likely that many hospitals just can’t easily buy, regardless of justification or effectiveness, a machine that costs $5 million.
But there are two sides to that argument, depending on your level of optimism:
First, the market might be somewhat limited — who knows how many hospitals are big enough or wealthy enough to buy these. So maybe there’s a ceiling here, and perhaps it’s closer than the analysts believe. And if the effectiveness, over time, turns out to be only slightly better than cheaper options or alternative strategies (or, God forbid, less effective), Accuray’s sales staff is going to have to really fight for orders.
But, on the other hand, it also might be that we’re so early in the adoption of this product, and that the market is massive enough, that this limitation doesn’t matter yet. After all, HCA, the hospital chain that has nearly 300 hospitals and outpatient centers, only owns 7 of these machines so far. If it really is revolutionary, and really does have better proven results — which may take years and years to prove, and some time after that to gain broad acceptance among doctors, if ISRG is any indication — then hospitals will really have no choice but to buy a machine.
After all, MRIs are expensive, too, but eventually all hospitals had to have them, and I’m sure the same was true of X-ray machines when they were introduced, too, not to mention all those other beeping gargantuans that we’ve all seen in the hospital.
And the backlog Rahemtulla talks about? That’s probably the best news for this company at the moment, even in the presence of generally disappointing news when they released earnings in August. The earnings showed a profitable quarter for the first time, even if it or the guidance were below expectations, but the backlog grew by about 10%, so they have over $600 million in order backlog now to keep them going. That’s over 100 machines, as I do the math, pretty significant for a company that has recently gotten between 20 and 30 orders per quarter.
This is a newly public company, so that adds extra risk, too — and with a big purchase price per machine we can see that it’s certainly possible for the earnings to be extremely lumpy. If they sell 15 machines in a quarter instead of 20 for whatever reason, that would kill any chance of hitting analyst estimates — and the shares could be punished. Add that to the fact that analysts don’t have much of a track record with this firm yet, and we’re early in the game where both opportunity and risk are fairly high, in my opinion. But me, I’m just a sucker for bit medical robots.
OH … one other thing. That “monopoly” idea? It’s a little tenuous. Aside from competition from drugs and from surgery, there are other companies that sell or plan to sell other machines that precisely target radiation at tumors, and even aim to compensate for the kinds of movement that the Cyberknife responds to. One of the more advanced competitors is Varian Medical, with their SmartBeam device, but there are probably others that I’m unfamiliar with. My layman’s opinion is that the Cyberknife is on the leading edge and is a more compelling product for patients, but there’s never a guarantee that that I’m right or that the lead is permanent — situations like Intuitive Surgical’s, where there is virtually no competition even close to coming to market, are extremely rare, and this doesn’t appear to me to be one of them
This is a cutting edge device, which means there’s always risk that someone out there has a better device ready to go, and medical devices generally move through the FDA approval process much faster than drugs … and you never know, China Medical or Mindray could maybe throw together a copy, sell it cheap, and kill the market for this, at least overseas. That’s a bit of an overstatement, but you get the idea.
So, sorry to be even more long-winded about this one than I usually am — just want to be clear about what I see as some of the obstacles, especially because I happen to be a shareholder.