Item 1. BUSINESS
The Company
Accuray Incorporated is a radiation oncology company that develops, manufactures, sells and supports precise, innovative treatment
solutions which set the standard of radiation therapy care with the aim of helping patients live longer, better lives. Our innovative technologies, the CyberKnife and TomoTherapy Systems, are designed
to deliver advanced treatments, including stereotactic radiosurgery (SRS), stereotactic body radiation therapy (SBRT), intensity modulated radiation therapy (IMRT), image guided radiation therapy
(IGRT), and adaptive radiation therapy. The CyberKnife Systems and the TomoTherapy Systems have complementary clinical applications, enabling customers to deliver the most precise treatments while
minimizing side effects and maximizing patient comfort and care. Each of these systems serves patient populations treated by the same medical specialty, radiation oncology, with advanced capabilities.
The
CyberKnife Systems are fully robotic systems that deliver SRS and SBRT, and are used to treat multiple types of cancer and tumors throughout the body. The CyberKnife Systems
automatically track, detect and correct for tumor and patient movement in real-time during the procedure, enabling delivery of precise, high dose radiation with sub-millimeter accuracy while patients
breathe normally, without manual user intervention. Treatment with the CyberKnife Systems requires no anesthesia, and treatment sessions are done on an outpatient basis. In addition, the CyberKnife
Systems are designed to minimize many of the risks and complications associated with other treatment options. The CyberKnife Systems are the only robotic radiosurgery systems available today which
deliver such high precision treatments for intra- and extra-cranial disease sites throughout the body, including prostate, lung, brain, spine, liver, pancreas and kidney. The latest generation
CyberKnife M6 Series System is
available with the new InCise Multileaf Collimator (InCise MLC), the world's first multileaf collimator (MLC) to be available on a robotic platform. With the addition of the InCise MLC, clinicians can
deliver the same precise radiosurgery treatments they have come to expect with the CyberKnife Systems, while significantly reducing treatment times, for a wider range of tumor types, including larger
and different kinds of tumors than were previously treated. Additional options include the fixed collimator, and the Iris Variable Aperture Collimator, giving clinicians a range of collimation forms
to choose from to meet the needs of their patients.
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The
TomoTherapy Systems represent the only radiation therapy platform specifically designed for image-guided intensity-modulated radiation therapy (IG-IMRT). Based on a ring gantry CT
scanner platform, the TomoTherapy System provides continuous delivery of radiation from 360 degrees around the patient, or delivery from clinician-specified direct beam angles. These unique
features, combined with daily 3D image guidance, enable physicians to deliver dose distributions which precisely conform to the shape of the patient's tumor while minimizing dose to normal, healthy
tissue, resulting in fewer side effects for patients. The TomoTherapy Systems are capable of treating all standard radiation therapy indications including breast, prostate, lung, and head and neck
cancers, in addition to complex treatments such as total marrow irradiation, while minimizing side effects; and enable efficient daily imaging to ensure the accuracy of the patient position before
each treatment delivery. The latest generation TomoTherapy System is the Radixact that includes the following options: TomoHelical, TomoDirect, and TomoEdge dynamic jaws. The system configuration
depends on the options chosen by the customer.
We
are also introducing Onrad, a lower priced, direct delivery system, to China. The Onrad System is designed to meet the ease of use and throughput demands of a market segment in which
Accuray has not previously competed.
We
were incorporated in California in 1990 and commenced operations in 1992. We reincorporated in Delaware in 2007. Our principal offices are located at 1310 Chesapeake Terrace,
Sunnyvale, CA 94089, and our telephone number is (408) 716-4600.
Market Overview
Despite significant improvements in cancer diagnosis and treatment, cancer rates continue to increase globally and are a leading cause
of death. According to the
International Agency for Research on Cancer, the specialized cancer agency of the World Health Organization, annual cancer rates around the world are projected to increase by over 56% to
22.0 million new cases in the year 2030 from 14.1 million cases in 2012.
Cancers
can be broadly divided into two groups: solid tumor cancers, which are characterized by the growth of malignant tumors within the body in areas such as the brain, lung, liver,
breast or prostate, and hematological, or blood-borne cancers, such as leukemia. The American Cancer Society (ACS) estimates that solid tumor cancers will account for approximately 1.5 million,
or approximately 91% of new cancer cases diagnosed annually, and will account for approximately 0.5 million cancer related deaths in the United States in 2015.
Traditional
methods for the treatment of solid tumor cancers include chemotherapy, surgery and radiation therapy. The most common type of radiation therapy is external beam radiation
therapy, in which patients are treated with high-energy radiation generated by medical equipment external to the patient. The global radiotherapy equipment and software market has three main segments:
Linear Accelerators (Linacs), Treatment Planning Systems, and Radiation Therapy Simulators. According to the January 2015 Radiation Therapy Equipment Report by Global Industry
Analysts, Inc., Linear Accelerators represent the largest segment of radiotherapy equipment and are forecast to expand from an estimated $3.4 billion for 2014 to reach
$5.2 billion by the year 2020. Treatment planning systems are poised to grow to $1.9 billion by 2020, up from an estimates $1.1 billion in 2014. Increasing preference for
non-surgical options is a major factor promoting radiotherapy. Approximately 60% of cancer patients worldwide will undergo some form of radiation therapy during the course of their treatment. While
radiation therapy is widely available in the United States and Western Europe, many developing countries currently do not have a sufficient number of linacs to adequately treat their domestic
cancer patient populations. We believe increasing demand for advanced medical treatments in many international markets and growth in cancer incidences worldwide will continue to drive demand for
advanced linacs in the coming years.
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Emerging
markets are especially underequipped with external beam radiation therapy systems. According to publication in the International Journal of Radiation Oncology Biology and
Physics in 2014, radiation therapy is required in more than half of the newly diagnosed cancer patients and of those cured, 40% are by radiotherapy alone or in combination with other modalities. It is
estimated that by 2020, low and middle income countries will need over 9,000 additional radiation therapy systems. China alone is estimated to have a shortfall of over 3,800 systems
because of increasing cancer incidence and an aging population that is estimated to more than double by 2040.
Radiation Therapy
Radiation therapy is used to treat a wide range of cancer and tumor types by using high-energy radiation to destroy cancer cells and
shrink or control the growth of tumors. Radiation therapy works by exposing clusters of cancer cells, or tumors, to a dose of high-energy radiation sufficient to cause cell death and prevent cells
from multiplying. During external beam radiation therapy, the clinician's goal is to target radiation delivery to the tumor as precisely as possible in order to maximize the radiation dose delivered
to cancerous tissue and minimize the exposure of healthy tissue. Recent advances in radiation therapy technologies have allowed clinicians to further improve the ability to target the radiation dose
more precisely at cancer cells while minimizing the exposure of healthy tissue. These advances include the following:
Intensity modulated radiation therapy.
Intensity modulated radiation therapy involves varying, or modulating, the radiation beam intensity
across the treatment area. This technique aims to conform the high dose region of the radiation beam more closely with the shape of the tumor, enabling the delivery of higher doses of radiation to
tumors with a reduced impact on surrounding healthy tissue.
Image guided radiation therapy.
IGRT involves delivering radiation guided by images of the treatment area taken shortly before and/or
during treatment using CT scan, x-ray, ultrasound or other imaging technologies. By combining imaging with radiation treatment, clinicians can adjust the patient's position relative to the radiation
source prior to each treatment to target the tumor more precisely.
Radiosurgery and Stereotactic Body Radiation Therapy.
Radiosurgery is a form of radiation therapy that uses precisely targeted radiation to
destroy tumors. Radiosurgery is non-invasive; there is no cutting involved. It is commonly used by neurosurgeons to treat conditions within the brain and spine. SBRT is a treatment that uses precisely
targeted radiation, like radiosurgery, to destroy tumors located outside the brain and spine. Radiosurgery and SBRT typically involve the delivery of a single high dose radiation treatment or a few
fractionated radiation treatments (usually up to five) to ablate (destroy) all tissue within the tumor. To achieve the accuracy and precision required for both radiosurgery and SBRT, image guidance
during treatment, the ability to adjust the aim of the beam in real-time to compensate for tumor motion and a wide range of beam angles, are critical for treatment.
Adaptive radiation therapy.
Adaptive radiation therapy involves adjusting a patient's radiation therapy plan during or between fractions to
account for changes in the patient's anatomy, the amount and location of the radiation received by the patient, and the size, shape and location of the tumor. While there is no widely accepted
definition of adaptive radiation therapy, it has been characterized to include as little as an adjustment to the physical position of the patient relative to the radiation source prior to treatment,
as occurs during IGRT, rather than an adjustment to the treatment plan. Our approach is based on the belief that adaptive radiation therapy requires monitoring and adjustments to the treatment plan
facilitated by both the regular acquisition of updated quantitative images showing the
location, size, shape and density of the tumor, and verification of the radiation dose received by the patient throughout the entire course of treatment.
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Hypofractionation.
Hypofractionation involves the delivery of higher doses of radiation in fewer fractions than are used in conventional
radiation therapy. Higher doses of radiation have been shown to provide greater local control of the tumor. The advent of innovative technological features in radiation therapy treatment planning and
delivery has enabled clinicians to maximize the radiation dose administered to tumors in the patient, improving local tumor control and, in some cases, improving patient survival rates. Additional
benefits of hypofractionation include minimal side effects, fewer treatments and greater scheduling convenience for the patient. Hypofractionation is often used to treat small targets throughout the
body, especially when located near critical structures, including the brain, head and neck, spine, lung and prostate. It is also being used more frequently in clinical applications where the
radiobiology is appropriate for fewer fractions of higher doses, including the prostate and breast.
Despite
advances in radiation therapy techniques, most commercially available radiation therapy systems from other manufacturers still present significant limitations that restrict
clinicians' ability to provide the most precise treatment possible. These limitations include:
Limited versatility and precision.
The C-arm configuration of traditional radiation therapy systems has a limited range and speed of motion
because of its size and mechanical structure. C-arm linac architecture is limited to delivering radiation in a single plane (coplanar) thus limiting its radiation delivery capability for complex and
advanced cases. Additionally, most previously existing MLCs, which modulate or shape the radiation beams, have mechanical limitations that reduce their beam-shaping ability and the speed at which they
operate. These design elements limit the motion and dynamic range of IMRT intensities capable of being delivered by traditional radiation therapy systems and often make it challenging to achieve the
precision needed to maximize dose to the tumor while avoiding damage to healthy tissue and minimizing side effects. These limited treatment angles reduce the ability to deliver precisely targeted
radiation that minimizes exposure to healthy tissue. Such imprecision may prevent clinicians from treating tumors near sensitive anatomic structures, such as the eye or the spinal cord, or from
re-treating patients in an area of the body that was previously exposed to radiation and may be unable to tolerate additional exposure.
Limited ability to provide frequent, quantitative images.
Precise radiation therapy requires frequent images that accurately depict the
size, shape and location of the tumor. Many traditional radiation therapy systems use imaging technologies that are not generally used on a daily basis to generate a quantitative assessment of the
patient's and/or target volume's position due to concerns about the additional radiation exposure. In addition, traditional radiation therapy systems measure the amount of radiation emitted by the
device based on the system's performance specifications. This calculation does not provide the clinician with data regarding the amount of radiation that was received by the patient or
what tissue within the patient's body received any particular amount of radiation. Since it is common for internal organs to shift and for the size of the tumor to change during the course of
treatment, failure to obtain updated images and adapt the patient and/or plan throughout the course of treatment may result in a portion, or potentially all, of the radiation dose missing the tumor
and instead being absorbed by healthy tissue.
Failure to integrate multiple functions.
The basic architecture for traditional radiation therapy systems pre-dates many recent advances
that enable integrated imaging, treatment planning, dose verification or quality assurance capabilities necessary for more advanced treatment protocols. Some conventional systems have been
subsequently adapted to include certain elements of this functionality by incorporating modular add-on devices to legacy linac designs. These separate modular components can provide imaging, treatment
planning, quality assurance procedures or post-treatment analysis functionality. However, this add-on architectural approach can have safety, accuracy, and workflow implications because of the manual
methods used for checking proper system operation.
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Development of Radiosurgery
Advanced radiation therapy systems designed to deliver radiosurgery or stereotactic body radiation therapy differ from traditional
radiation therapy systems in that they are designed to deliver a very high cumulative dose of radiation, in a single or a small number of treatments precisely targeted at the tumor rather than at a
region that consists of the tumor plus healthy tissue that surrounds the tumor area. The more accurate delivery of radiation allows higher doses to be delivered, increasing the probability of tumor
cell death and better local control. In addition, radiosurgery can be administered to patients who have inoperable or surgically complex tumors, or who may prefer a clinically effective, non-surgical
treatment option.
Our Strategy
Our goal is to develop equipment and technology that enable physicians to deliver precise, customized, leading-edge treatment solutions
that help cancer patients live longer, better lives. We endeavor to achieve this goal by expanding the clinical options for healthcare providers,
helping them offer the best radiation treatment for each patient and by providing patients with treatment tailored to their specific needs. Our vision is a future where the fear, pain and suffering of
cancer are a thing of the past. We believe our current technologies and our future innovation can help to achieve this. Some of the key elements of our strategy include the following:
Increase physician adoption and patient awareness to drive utilization.
We are continually working to increase adoption and
awareness of our systems
and demonstrate their advantages over more traditional treatment methods. We hold and sponsor symposia and educational meetings and support clinical studies in an effort to demonstrate the clinical
benefits of our systems. We regularly meet with clinicians to educate them on the expanded versatility that our systems offer in comparison to more traditional radiation therapy products or surgery.
To support awareness of all of our product offerings, we assist our customers with increasing patient awareness in their communities by providing them tools to develop marketing and educational
campaigns.
Continue to expand the radiosurgery market.
While radiosurgery has traditionally been used to treat brain tumors, the CyberKnife
Systems received
U.S. Food and Drug Administration (FDA), clearance in 2001 to treat tumors anywhere in the body where radiation is indicated. Our system data demonstrate that over 55% of CyberKnife utilization
is for cancers and tumors in the body in places other than the brain. There are now hundreds of peer-reviewed publications supporting use of CyberKnife in treatment of various cancer and
tumor types.
Continue to innovate through clinical development and collaboration.
The clinical success of our products is largely the result
of the collaborative
partnerships we have developed over the last decade with clinicians, researchers and patients. We proactively seek out and rely on constructive feedback from system users to learn what is needed to
enhance the technology. As a result of this collaborative process, we continually refine and upgrade our systems, thereby improving our competitive position in the radiation therapy and radiosurgery
markets. Upgrades to our systems are designed to address customer needs in the areas of improving the ease of use and accuracy of treatment, decreasing treatment times, and improving utilization for
specific types of tumors.
Expand sales in international markets.
We intend to continue to increase our sales and distribution capabilities outside of the
United States
to take advantage of the large international opportunity for our products. Outside of the United States, we currently have regional offices in Morges, Switzerland, Hong Kong, China, Shanghai,
China and Tokyo, Japan and direct sales staff in most countries in Western Europe, Japan, India and Canada. Combined with distributors in Eastern Europe, Russia, the Middle East, the Asia Pacific
region and Latin America, our sales and distribution channels cover more than 92 countries. However, many of these countries are not highly developed at this time and
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therefore
sales opportunities may be limited. We intend to increase our international revenue by focused additions of direct sales and marketing personnel in targeted areas to further penetrate our
most promising international markets, and additional distributors where opportune.
Strategic partnerships and joint ventures.
We intend to pursue strategic partnerships and joint ventures we believe will allow us
to complement our
growth strategy, increase sales in our current markets and expand into adjacent markets, broaden our technology and intellectual property and strengthen our relationships with our customers. In fiscal
2016 we signed an agreement with RaySearch which will lead to the integration of treatment planning support for the TomoTherapy and CyberKnife Systems in the RayStation treatment planning system
(TPS). We also signed an agreement with medPhoton GmbH to collaborate on integration of its ImagingRing system, a new technology for volumetric image guidance, with the CyberKnife System.
Our Products
Our suite of products includes the CyberKnife Systems, the TomoTherapy Systems, and the Radixact Delivery Treatment Platform.
The CyberKnife Systems
Our principal radiosurgery products are the CyberKnife Systems, a robotic full-body radiosurgery system designed to treat tumors
anywhere in the body non-invasively, which include the CyberKnife M6 Series with configuration options of fixed collimators plus the Iris Variable Aperture Collimator (FI), fixed collimators
plus the InCise MLC (FM) and fixed collimators plus the Iris Variable Aperture Collimator plus the InCise MLC (FIM).
Using
continual image guidance technology and computer controlled robotic mobility, the CyberKnife Systems are designed to deliver precise radiation from a wide array of beam angles and
automatically track, detect and correct for tumor and patient movement in real-time throughout the treatment. This design is intended to enable the CyberKnife Systems to deliver high-dose radiation
with precision, which minimizes damage to surrounding healthy tissue and eliminates the need for invasive head or body stabilization frames. Our patented image-guidance technology correlates low dose,
real-time treatment X-rays with images previously taken with a CT scan of the tumor and surrounding tissue to direct each beam of radiation with increased precision versus treatments without this
real-time feedback. This, in turn, enables delivery of a highly conformal, non-isocentric dose of radiation to the tumor, with minimal radiation delivered to surrounding healthy tissue. With its
autonomous ability to track, detect and correct for even the slightest tumor and patient movement throughout the entire treatment, the CyberKnife System is intended to provide clinicians with an
effective and accurate treatment.
Our
configurations of CyberKnife Systems include the following:
The CyberKnife M6 Series with configurations of FI, FM and FIM.
The M6 Series has been approved/cleared by the FDA, and
is able to be
sold in most major markets globally. It is used with either of the following options: an Iris collimator (I) or a multileaf collimator (M). With the InCise MLC, larger tumors previously thought
untreatable with radiosurgery and SBRT are able to be treated efficiently and with unrivaled accuracy and tissue sparing. The InCise MLC and IMRT planning tools enable expansion of indications that
can be treated with a CyberKnife to include many IMRT indications. The CyberKnife M6 Series includes disease-specific tracking and treatment delivery solutions for brain, spine, lung and
prostate tumors, treatment speed improvements, more options to configure the treatment room, expanded number of nodes leading to more coverage and sparing of healthy tissue.
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We believe the CyberKnife Systems offer clinicians and patients the following benefits:
The only truly robotic system in the market.
Combining the benefits of continual image guidance and non-isocentric, non-coplanar
treatment delivery,
the CyberKnife Systems precisely contour radiation delivery to spare healthy tissue while maintaining sub-millimeter accuracy, even for targets that move during treatment. The CyberKnife Systems are
the clinical solution to choose when accuracy, flexibility, efficiency and patient comfort are essential.
Treatment of inoperable or surgically complex tumors.
The CyberKnife Systems may be used to target tumors that cannot be easily
treated with
traditional surgical techniques because of their location, number, size, shape or proximity to vital tissues or organs, or because of the age or health of the patient. The CyberKnife Systems'
intelligent robotics enable the precise targeting of a tumor, while at the same time minimizing damage to surrounding healthy tissue.
Treatment of tumors throughout the body.
The CyberKnife Systems have been cleared by the FDA to provide treatment planning and
image-guided
radiosurgery treatment for tumors anywhere in the body where radiation treatment is indicated. By comparison, traditional frame-based radiosurgery systems are generally limited to treating brain
tumors and use cobalt 60 radioactive material, which decays over time and is difficult to replace. The CyberKnife Systems are being used for the treatment of primary and metastatic tumors
outside the brain, including tumors on or near the spine and in the lung, liver, prostate, kidney and pancreas in addition to tumors in the brain, with the same sub-millimeter accuracy in every
disease site.
Real-time tracking of tumor movement.
The CyberKnife Systems are designed to enable the treatment of tumors that change position
because of
respiration, or tumor or patient movement during treatment. The CyberKnife Systems offer the following features which enhance image guided robotic radiation surgery: Synchrony Respiratory Tracking
System, Xsight Lung Tracking System, Xsight Spine Tracking System, InTempo Adaptive Imaging System and Lung Optimized Treatment (optional).
Significant patient benefits.
The CyberKnife Systems maximize patient comfort. Patients may be treated with the CyberKnife
Systems on an outpatient
basis without anesthesia and without the risks and complications inherent in traditional surgery. Patients do not require substantial pre-treatment preparation, and typically there is little to no
recovery time or hospital stay associated with CyberKnife Systems' treatments. In addition, the CyberKnife Systems eliminate the need for an invasive rigid frame to be screwed into the patient's skull
or affixed to other parts of the body, or for artificial breath holding or gating instruments.
Additional revenue generation through increased patient volumes.
We believe clinical use of the CyberKnife Systems allows our
customers to
effectively treat patients where extreme precision and ability to account for motion are important, and patients who otherwise would not have been treated with radiation or who may not have been good
candidates for surgery.
Upgradeable modular design.
The CyberKnife Systems have a modular design, which facilitates the implementation of upgrades that
often do not require
our customers to purchase an entirely new system to gain the benefits of new features. We continue to work to develop and offer new clinical capabilities enhancing ease of use, reducing treatment
times, improving accuracy and improving patient access. The main components and options of the CyberKnife Systems include: the compact X-band
linear accelerator; robotic manipulator, the real-time image-guidance system with continuous target tracking and correction; X-ray sources; image detectors. Key features of these components include:
Robotic manipulator arm.
The robotic manipulator arm, with six-degrees-of-freedom range of movement, is designed to move around the patient
to position the linac and direct the radiation with an extremely high level of precision and repeatability. The manipulator arm provides what we believe to be a unique method of positioning the linac
to deliver doses of radiation from nearly
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any
direction and position, without the limitations inherent in gantry-based systems, creating a non-isocentric composite dose pattern with a high level of conformance to the shape of each treated
tumor. This flexibility enhances the ability to diversify beam trajectories and beam entrance and exit points, helping to minimize risks of radiation damage to healthy cells near the tumor.
Furthermore, the rapid response time of the manipulator arm allows tracking of tumors that move with respiration.
Real-time image-guidance system with continuous target tracking and correction.
Without the need for clinician intervention or treatment
interruption, the CyberKnife Systems' real-time image-guided robotics are designed to enable continuous monitoring and correction for patient and tumor movements throughout each treatment as it is
being delivered.
X-ray sources.
The low-energy X-ray sources generate the X-ray images that help determine the location of bony or other anatomic landmarks,
or implanted fiducials, which are used for tracking throughout the entire treatment.
Image detectors.
The image detectors capture high-resolution anatomical images throughout the treatment. These live images are continually
compared to the patient's CT scan to determine real-time patient positioning. Based on this information, the robotic manipulator automatically corrects for detected movements.
In
addition to the main components listed above, we also offer the following components and options: Synchrony Respiratory Tracking System; Xsight Spine Tracking System; Xsight Lung
Tracking System; Lung Optimized Treatment; RoboCouch Patient Positioning System; Xchange Robotic Collimator Changer; Iris Variable Aperture Collimator; 4D Treatment Optimization and Planning System;
InTempo
Adaptive Imaging System; MultiPlan Treatment Planning System; MultiPlan MD Suite; CyberKnife Data Management System; MultiPlan Quick Review; Radiosurgery DICOM Interface; Monte Carlo Dose Calculation;
Sequential Optimization Treatment Planning; Robotic IMRT; AutoSegmentation; QuickPlan; PlanTouch; and the InCise MLC. Key features of these components are as follow:
Synchrony Respiratory Tracking System.
The CyberKnife Systems' proprietary motion tracking system, the Synchrony Respiratory
Tracking System, is the
first and only technology to continuously synchronize beam delivery to the motion of the tumor in real time, enabling the delivery of highly conformal radiation beams while reducing healthy tissue
exposure. It is used to continuously track tumors that move with respiration as beams are synchronized in real-time to tumor position while adapting to changes in breathing patterns. The Synchrony
system provides what we believe is unsurpassed clinical accuracy of approximately 1.5 millimeters for tumors that move with respiration without the need for implanted fiducials. It makes it
possible and practical for clinicians to deliver radiation dose with sub-millimeter precision, even for tumors that move with respiration.
Iris Variable Aperture Collimator.
The Iris Variable Aperture Collimator enables delivery of beams in 12 unique sizes with
a single
collimator, which significantly reduces treatment times and the total radiation dose delivered to the patient.
4D Treatment Optimization and Planning System.
The 4D Treatment Optimization and Planning System is designed to optimize
treatment by taking into
account the movement of the tumor and the movement and change in shape of the surrounding tissue, thereby minimizing margins and radiation exposure to healthy tissue.
MultiPlan Treatment Planning System.
The MultiPlan System enables physicians to generate high quality treatment plans for the
CyberKnife Systems,
through a comprehensive set of planning tools for image fusion, contouring, dose calculation and treatment plan review that can be remotely accessed by a secure connection from outside the clinic. The
MultiPlan system uses input images from multiple
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modalities,
including computed tomography (CT), magnetic resonance imaging (MRI), positron emission tomography (PET), and 3D angiography.
CyberKnife Data Management System.
The results of a patient's treatment delivery, such as dose delivered from each beam, each
path and each fraction,
and details about the images acquired and corrections applied are recorded and stored in the data management system and are recorded and stored in the data management system.
Radiosurgery DICOM Interface.
Data management systems, such as the CyberKnife Data Management System, utilize industry-standard
interface protocols,
such as DICOM, to export patient information to the OIS. The Radiosurgery DICOM Interface integrates the CyberKnife Systems with oncology departments' Oncology Information System (OIS) electronic
medical record to generate a comprehensive export of the radiosurgery treatment history.
Monte Carlo Dose Calculation.
Our optional Monte Carlo Dose Calculation software uses Monte Carlo simulation algorithms in
treatment planning and
dose calculation. Our Monte Carlo dose calculation algorithm can perform the necessary treatment planning calculations in a significantly shorter time frame as compared to conventional Monte Carlo
dose calculation methods, thereby accelerating the treatment planning process.
QuickPlan.
Our QuickPlan technology enables a complete treatment plan to be generated automatically, and the results presented
to the user
for review.
PlanTouch.
PlanTouch is the first commercially available, fully integrated software application in radiation oncology that allows
physicians to
remotely review and approve patients' radiation treatment plans on the iPad.
InCise Multileaf Collimator.
The InCise MLC is designed specifically for the CyberKnife M6 Series. It delivers the same
precise SRS and SBRT
treatments clinicians expect from the CyberKnife Systems, while significantly reducing treatment times. With the InCise MLC, the CyberKnife M6 Series can be used to treat larger and irregular
tumors more efficiently.
The TomoTherapy Systems
The TomoTherapy Systems include the TomoTherapy H Series with configuration options of TomoH, TomoHD and TomoHDA. The TomoTherapy
System is cleared for sale by the FDA and in most major markets globally. These systems consist of fully integrated and versatile radiation therapy systems used by healthcare professionals in the
treatment of a wide range of cancer types. We believe the TomoTherapy Systems offer clinicians and patients the following benefits:
Versatile treatment capabilities.
The TomoTherapy Systems' ring gantry platform enables precise and efficient treatments with a
high degree of dose
conformity. The high-speed binary InCise MLC, is integrated with the linac and consists of 64 individual low leakage tungsten leaves that move across the beam to either block or allow the
passage of radiation, effectively shaping the beam as it is emitted. The combination of the ring gantry and the high-speed InCise MLC (which we refer to as TomoHelical) enable treatment to be
delivered continuously in a 360-degree helical pattern around the patient's body. Additionally, the TomoDirect feature provides the TomoTherapy Systems added versatility to provide high quality, fixed
angle beams for those cases suited to simple tangential beam radiation delivery. All TomoTherapy Systems enable an operator to provide non-isocentric three-dimensional conformal image-guided IMRT or
stereotactic treatments within a typical cylindrical volume of 80 centimeters in diameter and up to 135 centimeters in length. This expansive treatment field allows large areas of the
body to be treated in a single session and the treatment of widely distant tumors. The TomoTherapy Systems' versatility, efficiency and precision offer clinicians an extensive range of effective
treatment possibilities.
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Daily, quantitative imaging for better identification of tumors, dose verification and treatment planning.
The TomoTherapy
Systems offer integrated
quantitative CT imaging capabilities, which depict the density of
tumors and healthy tissue more accurately than traditional radiation therapy systems. Our integrated mega-voltage computed tomography (MVCT), which we market as our CTrue imaging technology, uses a
low-intensity, fan beam CT to collect quantitative images prior to each treatment. These images allow lung tissue, fat, muscle and bone to be clearly distinguished. In addition, because of the low
radiation dose involved, the clinician can collect daily, quantitative images, which can be used to monitor changes in the patient's internal anatomy and quickly adapt the plan if deemed clinically
necessary. We believe daily, quantitative, relatively low dose images are essential to optimizing patient treatment by enabling clinicians to adapt the treatment plan in response to anatomical
changes.
Integrated treatment system for precise radiation delivery.
We believe the integration of our CT imaging technology, treatment
planning and helical
delivery mode of radiation beams enables highly accurate and precise radiation delivery. Our adaptive software allows clinicians to establish at the time of treatment the contours of a tumor and any
sensitive structures at risk. The TomoTherapy Systems use a highly efficient dose optimization algorithm to ensure the radiation beam conforms to the patient's tumor and minimizes exposure to
sensitive healthy tissue structures, providing a highly-targeted dose distribution. These features significantly benefit patients by increasing the radiation delivered to cancerous tissues while
reducing damage to nearby healthy tissues and minimizing side effects.
Efficient clinical workflow for Image Guided Radiation Therapy, or IGRT, and adaptive radiation therapy.
The TomoTherapy Systems
integrate into a
single system all of the key elements for radiation therapy, including treatment planning, CT image-guided patient positioning, treatment delivery, quality assurance and adaptive planning. The imaging
and treatment planning capabilities of many traditional systems are more modular or require cumbersome add-ons or separate treatment planning systems that result in clinicians taking more steps
between scanning, planning and treatment of patients. Conversely, the integrated CT imaging and treatment features of the TomoTherapy Systems allow clinicians to scan, plan and treat cancer patients
efficiently. Daily images can be easily accessed remotely, via our TomoPortal web-enabled interface, to verify patient positioning and collaboratively define patient treatment strategies. Taking
advantage of this integration capability, our StatRT software allows the full radiation therapy process, CT scanning, treatment planning and treatment delivery, to be completed rapidly.
Low barriers to installation and implementation.
All external beam radiation systems must be housed in rooms which have special
radiation shielding
to capture any radiation not absorbed by the patient. The TomoTherapy Systems' size and self-contained design allow customers to retrofit them into existing treatment rooms previously used for legacy
radiation therapy systems and avoid, or reduce, the significant construction costs that can be associated with building new, larger treatment rooms, which are often required to install many other
radiation therapy systems. With both imaging and radiation delivery capabilities in its ring gantry, the TomoTherapy Systems require less space than other linac systems, which use large moving arms to
position the linac or incorporate adjacent imaging equipment used for treatment planning. In addition, because the TomoTherapy Systems have an integrated radiation beam stop, which captures radiation
that passes through the patient, they require less radiation shielding in treatment room walls as compared to the shielding required by a traditional
system. We also preassemble, test and commission each TomoTherapy Systems at our manufacturing facility, and ship the system almost fully assembled. This assembly process typically allows radiation
"beam on" within four days after delivery and first patient treatments to begin within 30 to 45 days after delivery.
Platform for further technological advancements in adaptive radiation therapy.
We believe the TomoTherapy Systems are uniquely
positioned to enable
truly adaptive radiation therapy because of
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their
unique ability to provide daily, quantitative images, high speed delivery of radiation from fixed beam angles or helically from 360 degrees around the body and real-time verification of
the dose received by the patient. We believe the combination of these design features and our integrated treatment planning and optimization software will allow us to continue to enhance the
TomoTherapy Systems' adaptive capabilities to enable clinicians to routinely and easily adjust a patient's treatment as needed, thereby remaining true to the intent of the original
treatment plan.
In
addition to the functionality listed above, the TomoTherapy Systems may be enhanced with the following product options: TomoDirect Treatment Mode; Planned Adaptive; OIS Connect
TomoTherapy Remote Software Solutions (Remote Planning and TomoPortal); Tomo Quality Assurance (TQA) Package; VoLO Technology; TomoEdge Dynamic Jaws, and Delivery Analysis. Key features of these
options are as follow:
TomoDirect Treatment Mode.
The TomoDirect mode is a discrete angle, non-rotational delivery mode for the TomoTherapy Systems that allows
the user to create a treatment plan that defines up to twelve target-specific gantry angles. Treatment planning is completed rapidly by all beams for each target being delivered sequentially with the
couch passing through the bore of the system at an appropriate speed for each gantry angle. The TomoDirect mode enables users to plan and treat routine cases with greater efficiency, while achieving
the quality of TomoTherapy's unique beamlet-based delivery.
OIS Connect software option.
The OIS Connect software option is a DICOM standard-based solution that provides the ability to interface a
TomoTherapy System to a compatible OIS.
Tomo Quality Assurance (TQA) package.
The TQA application offers trending and reporting of many system and dosimetric parameters that allow
physicians to monitor the performance of their TomoTherapy Systems.
VoLO Technology.
The VoLO Technology is a treatment planning system that leverages advanced graphics processing technology and a new
calculation algorithm to increase clinical efficiency, throughput and flexibility in developing even the most complex radiation plans. This solution features high-speed parallel processing for both
dose calculation and optimization, based on Graphics Processing Unit (GPU) technology. In addition, VoLO represents the first use of a new Non-Voxel Broad Beam (NVBB) calculation algorithm that takes
advantage of both the GPU's unparalleled speed and the TomoTherapy Systems unique beamlet radiation delivery system to develop dose distributions from the perspective of each beamlet
(up to tens of thousands in any given plan) as they pass through the patient's body. VoLO technology empowers clinicians to create highly customized treatment plans in less time, with greater
flexibility to work interactively and in real time to efficiently develop the best IMRT treatment plans for even the most complex cases.
TomoEdge Dynamic Jaws.
TomoEdge is standard on the TomoTherapy HDA model and is also available on H and HD models. By dynamically varying
the width of the collimator jaws during treatment delivery, dose to normal tissues immediately adjacent to the tumor is reduced, contributing to the minimization of radiation side effects.
Additionally, overall irradiation time is shortened because the jaws are allowed to open more broadly throughout much of the delivery. The resulting gains in treatment quality and speed expand the
TomoTherapy Systems clinical and market reach within the conventional and stereotactic radiotherapy spaces.
Delivery Analysis.
A new FDA cleared option designed to enable easy pre-treatment patient QA and also offers an innovative capability to
monitor doses throughout the patient treatment using detector signals to ensure that the patient is receiving the expected dose from treatment to treatment. The product option provides both high level
analytics for summary display as well as detailed analysis capability.
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In
2016 we received FDA and CE Mark approval for the new Radixact Treatment Delivery Platform. We also received 510(k) clearance for our new treatment planning and data management
systems, Accuray Precision Treatment Planning System and iDMS Data Management System. These next generation hardware and software solutions which, together, make up the new Radixact System, enable
faster, more efficient delivery of extremely precise treatment to a wider range of cancer patients, including those undergoing retreatment. The new Radixact System represents a major step forward in
the evolution of the TomoTherapy System in treatment speed and ease of use.
In
addition, we received approval from the China FDA for the Onrad System in 2016, a direct delivery only system designed to meet the ease of use and throughput needs for this market,
which provides us with the ability to be competitive in this market sector.
Sales and Marketing
In the United States, we primarily market to customers directly through our sales organization, and we also market to customers
through sales agents and group purchasing organizations. Outside the United States, we market to customers directly and through distributors. We have sales and service offices in many countries
in Europe, Japan, China, and other countries in Asia, Latin America, and throughout the world.
In
direct sales markets, we employ a combination of territory sales managers, training specialists and marketing managers. Territory sales managers and product specialists are
responsible for selling the systems to hospitals and stand-alone treatment facilities. Our marketing managers help market our current products and work with our engineering group to identify and
develop upgrades and enhancements for our suite of products. Our training specialists train radiation oncologists, surgeons, physicists, dosimetrists and radiation therapists.
We
market our products to radiation oncologists, neurosurgeons, general surgeons, oncology specialists and other referring physicians in hospitals and stand-alone treatment facilities.
We intend to continue to increase our focus on marketing and education efforts to surgical specialists and oncologists responsible for treating tumors throughout the body. Our marketing activities
also include efforts to inform and educate cancer patients about the benefits of the CyberKnife and TomoTherapy Systems.
Under
our standard distribution agreement, we generally appoint a distributor for a specific country. We typically also retain the right to distribute the CyberKnife and TomoTherapy
Systems in such territories, though we remain bound by certain agreements entered into by TomoTherapy prior to our acquisition that did not retain such rights in certain jurisdictions. In most
territories, our distributors generally provide the full range of service and sales capabilities, although we may provide installation and service support for certain distributors.
Manufacturing
We purchase major components for each of our products from outside suppliers, including the robotic manipulator, treatment couches,
gantry, magnetrons and computers. We closely monitor supplier quality, delivery performance and conformance to product specifications, and we also expect suppliers to contribute to our efforts to
improve our manufacturing cost and quality.
Some
of the components are obtained from single-source suppliers. These components include the gantry, couch, magnetron and solid state modulator for the TomoTherapy Systems and the
robot, couch, and magnetron for the CyberKnife Systems. In most cases, if a supplier was unable to deliver these components, we believe we would be able to find other sources for these components
subject to any regulatory qualifications, if required. In the event of a disruption in any of these suppliers' ability to deliver a component, we would need to secure a replacement supplier.
Additionally, any disruption or interruption of the supply of key subsystems could result in increased costs and delays in deliveries
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of
our treatment systems, which could adversely affect our reputation and results of operations. To help mitigate these risks, we negotiate long-term supply contracts or submit long-term orders and
forecasts to our single-source suppliers with the goal that our demand can be satisfied and any capacity problem can be mitigated.
Currently,
we manufacture our CyberKnife and TomoTherapy Systems in Madison, Wisconsin. We manufacture the linear accelerator for our TomoTherapy Systems at our Chengdu, China facility
and we manufacture the linear accelerator for our CyberKnife Systems at our Sunnyvale, California facility. Our facilities employ state-of-the-art manufacturing techniques and equipment. The
components manufactured at this facility are produced under an International Standard Organization (ISO), 9001:2008 certified quality management systems. The completed medical devices are designed,
manufactured, installed, serviced and distributed at our Sunnyvale, Madison and Morges facilities under quality management systems which are compliant to the internationally recognized quality system
standard for medical devices ISO, 13485:2003, and the Quality System regulations enforced by the FDA. We believe our manufacturing facilities will be adequate for our expected growth and foreseeable
future demands for at least the next three years.
The
manufacturing processes at our facilities include fabrication, subassembly, assembly, system integration and final testing. Our manufacturing personnel consist of fabricators,
assemblers and technicians supported by production engineers as well as planning and supply chain managers. Our quality assurance program includes various quality control measures from inspection of
raw material, purchased parts and assemblies through on-line inspection. We have also incorporated lean manufacturing techniques to improve manufacturing flow and efficiency. Lean manufacturing
techniques include reducing wasteful and extraneous activities, balancing assembly and test flow, as well as better utilizing production assets and resources.
Intellectual Property
The proprietary nature of, and protection for, our products, product components, processes and know-how are important to our business.
We seek patent protection in the United States and internationally for our systems and other technology where available and when appropriate. We may also in-license the technology, inventions
and improvements that we consider important to the development of our business. In addition, we also rely upon trade secrets, know-how, trademarks, copyright protection, as well as confidentiality
agreements with employees, consultants and other third parties, to protect our proprietary rights and to develop and maintain our competitive position.
As
of June 30, 2016, we held exclusive field of use licenses or ownership of approximately 354 U.S. and foreign patents, and approximately 93 U.S. and foreign patent
applications. These patents and applications cover various components and techniques incorporated into the CyberKnife and TomoTherapy Systems, or which may be incorporated into new technologies under
current development, all of which we believe will allow us to maintain a competitive advantage in the field of radiation therapy systems. We cannot be certain that any patents will be issued from any
of our pending patent applications, nor can we be certain that any of our existing patents or any patents that may be granted to us in the future will provide us with protection.
We
periodically monitor the activities of our competitors and other third parties with respect to their use of intellectual property.
Research and Development
Continued innovation is critical to our future success. Our current product development activities include projects expanding clinical
applications, driving product differentiation, and continually improving the usability, interoperability, reliability, and performance of our products. We continue to seek to develop innovative
technologies so that we can improve our products and increase our sales. Some of our product improvements have been discussed above under the heading "Our Products."
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Our research activities strive to enable new product development opportunities by developing new technologies and advancing areas of existing core technology such
as next generation linac, adaptive therapy, patient imaging, motion management, or treatment planning capabilities.
The
modular design of our systems supports rapid development for new clinical capabilities and performance enhancements by generally allowing each subsystem to evolve within the overall
platform design. Access to regular product upgrades protects customer investment in the system, facilitates the rapid adoption of new features and capabilities among existing installed base customers,
and drives increasing value in our multiyear service plans. These upgrades will generally consist of software and hardware enhancements designed to increase the ease of use of our systems, improve the
speed and accuracy of patient treatment and meet other customer needs.
As
of June 30, 2016, we had 176 employees in our research and development departments. Research and development expenses for the fiscal years ended June 30, 2016,
2015 and 2014 were $56.7 million, $55.8 million and $53.7 million, respectively. We anticipate research and development expenses for fiscal 2017 to be lower than fiscal 2016 due
to the completion of key development projects toward the end of fiscal year 2016.
A
key component of our research and development program is our collaboration with research programs at selected hospitals, cancer treatment centers, academic institutions and research
institutions worldwide. Our agreements with these third-party collaborators generally require us to make milestone-based payments during the course of a particular project and often also require that
we make up-front payments to fund initial activities. Generally, we obtain non-exclusive worldwide rights to commercialize results from the collaboration with an option to negotiate an exclusive
license. For inventions resulting from the collaboration that we own or exclusively license, we generally grant a royalty-free license for the purpose of continuing the institution's research and
development, and from time to time, we also grant broader licenses. Our research collaboration programs include work on clinical protocols and hardware and software developments. We also work with
suppliers to develop new components in order to increase the reliability and performance of our products and seek opportunities to acquire or invest in the research of other parties where we believe
it is likely to benefit our existing or future products.
We
have entered into collaboration agreements with a variety of industrial partners within the fields of radiation oncology and medical imaging to provide us with opportunities to
accelerate our innovation capability and bring complimentary products and technologies to market. We continue to seek out new partnerships to complement our internal developments and implement our
product strategies.
Competition
The medical device industry in general, and the non-invasive cancer treatment field in particular, are subject to intense and
increasing competition and rapidly evolving technologies. Because our products often have long development and regulatory clearance and approval cycles, we must anticipate changes in the marketplace
and the direction of technological innovation and customer demands. To compete successfully, we will need to continue to demonstrate the advantages of our products and technologies over
well-established alternative procedures, products and technologies, and convince physicians and other healthcare decision makers of the advantages of our products and technologies. Traditional surgery
and other forms of minimally invasive procedures, brachytherapy, chemotherapy and other drugs remain alternatives to the CyberKnife and TomoTherapy Systems.
New
product sales in this competitive market are primarily dominated by two companies: Elekta AB (Elekta) and Varian Medical Systems, Inc. (Varian). Some manufacturers of standard
linac systems, including Varian and Elekta, have products that can be used in combination with body and/or head frame systems and image-guidance systems to perform both radiosurgical and radiotherapy
procedures.
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Our
other competitors include Mitsubishi Heavy Industries (Mitsubishi), BrainLAB AG (BrainLAB), ViewRay Inc. (ViewRay), and other companies in the radiosurgical and radiation therapy markets.
Furthermore,
many government, academic and business entities are investing substantial resources in research and development of cancer treatments, including surgical approaches,
radiation treatment, MRI-guided radiotherapy systems, proton therapy systems, drug treatment, gene therapy, and other approaches. Successful developments that result in new approaches for the
treatment of cancer could reduce the attractiveness of our products or render them obsolete.
Our
future success will depend in large part on our ability to establish and maintain a competitive position in current and future technologies. Rapid technological development may
render the CyberKnife and TomoTherapy Systems and their technologies obsolete. Many of our competitors have or may have greater corporate, financial, operational, sales and marketing resources, and
more experience in research and development than we have. We cannot assume that our competitors will not succeed in developing or marketing technologies or products that are more effective or
commercially attractive than our products or that would render our technologies and products obsolete or less useful. We may not have the financial resources, technical expertise, marketing,
distribution or support capabilities to compete successfully in the future. Our competitive position also depends, among other things, on:
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Widespread awareness, acceptance and adoption of our products by the radiation oncology and cancer therapy markets;
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Innovations that improve the effectiveness and productivity of our systems' treatment processes and enable them to address emerging
customer needs;
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Availability of reimbursement coverage from third-party payors (including insurance companies, governments, and/or others) for
procedures performed using our systems;
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Published, peer-reviewed data supporting the efficacy and safety of our systems;
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Limiting the time required from proof of feasibility to routine production;
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Limiting the time period and cost of regulatory approvals or clearances;
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The manufacture and delivery of our products in sufficient volumes on time, and accurately predicting and controlling costs associated
with manufacturing, installation, warranty and maintenance of the products;
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Our ability to attract and retain qualified personnel;
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The extent of our intellectual property protection or our ability to otherwise develop proprietary products and processes;
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Securing sufficient capital resources to expand both our continued research and development, and sales and marketing
efforts; and
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Obtaining and maintaining any necessary United States or foreign regulatory approvals or clearances.
Our
customers' equipment purchase considerations typically include reliability, treatment quality, service capabilities, patient throughput, price, payment terms and equipment supplier
viability. We believe we compete favorably with our competitors on price and value based upon the technology offered by our treatment systems. We strive to provide a technologically superior product
that covers substantially all aspects of radiation therapy to deliver precise treatments with high-quality clinical outcomes that meet or exceed customer expectations.
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In
addition to competition from technologies performing similar functions as our treatment systems, competition also exists for the limited capital expenditure budgets of our customers.
For example, our treatment systems may compete with other equipment required by a radiation therapy department for financing under the same capital expenditure budget, which is typically limited. A
purchaser, such as a hospital or cancer treatment center, may be required to select between the two items of capital equipment. Our ability to compete may also be adversely affected when purchase
decisions are based solely upon price, since our products are premium-priced systems due to their higher level of functionality and performance.
US Reimbursement
In the United States, healthcare providers that purchase capital equipment such as the CyberKnife and TomoTherapy Systems
generally rely on government and private third-party payors for reimbursement for the healthcare treatment and services they provide. Examples of these types of payors include Medicare, Medicaid,
private health insurance plans, and health maintenance organizations, which reimburse all or a portion of the cost of treatment, as well as related healthcare services. Reimbursement involves three
components: coverage, coding and payment.
Coverage
There are currently no national coverage determinations in place under Medicare for CyberKnife or TomoTherapy treatment. Coverage
criteria for treatment with CyberKnife
and TomoTherapy is outlined in local determinations or, in the absence of a formal policy, treatment is covered as long as it is considered reasonable and necessary. The most common indications
covered by Medicare in local coverage determinations for robotic radiosurgery are primary and metastatic tumors in the brain, spine, lung, liver, kidney, pancreas, adrenal gland, prostate as well as
other cancers that have failed previous treatment. Intensity modulated radiation therapy is generally covered for cancers of the brain, spine, head and neck, prostate, thoracic, abdominal and
retroperitoneal regions, other cancers (e.g. breast) meeting certain criteria, and tumors requiring re-irradiation or where dose tolerance may be exceeded with conventional treatment.
Commercial
payor policies vary with most covering radiosurgery for tumors in the brain, spine, lung, and increasingly prostate. Other indications such as renal, liver, and pancreatic
cancers are also covered by some national and local commercial payors. IMRT and 3D Conformal are typically covered by commercial payors for the indications covered by Medicare.
Coding
The codes that are used to report radiosurgery treatment delivery in 2015 for the hospital outpatient department are Current Procedural
Terminology (CPT) codes 77372 and 77373 for single fraction intracranial radiosurgery and single fraction extracranial/multi-session radiosurgery/stereotactic body radiation therapy. For single
session cranial SRS, CMS proposes to retain in 2016 the Comprehensive APC (C-APC) it implemented in 2015 for several services delivered on the day of treatment, but will also allow for billing of some
ancillary services that will be tracked for two years. For freestanding centers, Centers for Medicare and Medicaid Services (CMS) has retained the robotic radiosurgery Healthcare Common Procedural
Codes (HCPCs) G codes that are currently regionally priced by Medicare Contractors and has not proposed replacing them with the CPT codes 77372 and 77373, currently in use in the hospital outpatient
setting. The nonrobotic SRS/SBRT codes 77372 and 77373 have also been maintained as payable codes in the freestanding site of service.
In
2015, in the hospital outpatient department, the code historically used to bill for IMRT delivery, 77418, was replaced by two codes to designate simple and complex IMRT; CPT code
77385 for prostate, breast and physical compensator IMRT and 77386 for all other treatments. Prior to 2015, 3D
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Conformal
treatment had typically been billed under multiple CPT codes; 77413 were used by hospitals to bill for TomoTherapy treatment. In 2015, the 3D conformal codes were replaced by codes to
designate simple, intermediate and complex 3D-CRT. TomoTherapy is now reported under the complex 3D-CRT code 77413. In December 2015, the Patient Access and Medicare Protection Act stopped
these
codes and their associated payment rates from being implemented in the freestanding center setting until 2019. Until 2019, a series of temporary G codes will be used. We expect all valid delivery
codes should be recognized by commercial payers. Other codes are used to report treatment planning, dosimetry, treatment management, and other procedures routinely performed for treating radiosurgery
or radiotherapy patients.
Payment
The majority of procedures using the CyberKnife and TomoTherapy Systems are performed in the hospital outpatient department. Medicare
payment for CyberKnife and TomoTherapy procedures delivered in the hospital outpatient setting is developed by CMS, which calculates rates based on costs submitted by hospitals to perform outpatient
procedures. Every year, CMS reviews hospital cost data for outpatient procedures, including radiosurgery and radiotherapy, makes adjustments to rates for the following year, and publishes national
unadjusted averages for all procedures eligible for payment in this site of service. In 2017, CMS proposes to track, and pay separately, certain ancillary in addition to the comprehensive APC for
single session radiosurgery. After two years we expect CMS will likely repackage all services in the C-APC. The changes proposed for 2017, if implemented, would result in an approximate 3% increase in
total technical services for single fraction intracranial SRS over 2016. For single fraction extracranial/multi session SRS/SBRT delivery code (77373), CMS proposes to reduce payment by 1% in 2017,
however, when adding in ancillary codes no significant changes in total payment to hospitals are proposed for 2017.
Payments
for treatment with CyberKnife and TomoTherapy Systems are also available in the freestanding center settings. In 2016 and proposed for 2017, the primary treatment delivery codes
for robotic radiosurgery are carrier priced under Medicare and range from low payment to payment at parity with hospital outpatient departments to slightly above outpatient rates. TomoTherapy
procedures are set by CMS and the American Medical Association nationally, with adjustments to account for geographic market variations. With the exception of a few ancillary codes that CMS has
identified as potentially misvalued, no major cuts to payment will be made in 2017 as the 2015 Patient Access and Medicare Protection Act freeze payment at 2016 levels through 2018. Non robotic
SRS/SBRT payment is also linked to 2016 levels which increased by 8% over 2015, primarily due to changes in practice and malpractice expense inputs.
The
federal government and Congress review and adjust rates annually, and from time to time consider various Medicare and other healthcare reform proposals that could significantly
affect both private and public reimbursement for healthcare services, including radiotherapy and radiosurgery, in hospitals and free-standing clinics. In the past, we have seen our customers'
decision-making process complicated by the uncertainties surrounding reimbursement rates for radiotherapy and radiosurgery in the United States. State government reimbursement for services is
determined pursuant to each state's Medicaid plan, which is established by state law and regulations, subject to requirements of federal law and regulations.
Foreign Reimbursement
Internationally, reimbursement and healthcare payment systems vary from country to country and include single-payor, government-managed
systems as well as systems in which private payors and government-managed systems exist side-by-side. In general, the process of obtaining coverage approvals has been slower outside of the
United States. Our ability to achieve adoption of our treatment systems,
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and
significant sales volume in international markets, will depend in part on the availability of reimbursement for procedures performed using our products.
Regulatory Matters
Domestic Regulation
Our products and software are medical devices subject to regulation by the FDA, as well as other regulatory bodies. FDA regulations
govern the following activities that we perform and will continue to perform to ensure medical products distributed domestically or exported internationally are safe and effective for their
intended uses:
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Product design and development;
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Document and purchasing controls;
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Production and process controls;
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Labeling and packaging controls;
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Product storage;
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Recordkeeping;
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Servicing;
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Corrective and preventive action and complaint handling;
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Pre-market clearance or approval;
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Advertising and promotion; and
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Product sales and distribution.
FDA pre-market clearance and approval requirements.
Unless an exemption applies, each medical device we wish to commercially
distribute in the
United States will require either 510(k) clearance or pre-market approval from the FDA. The FDA classifies medical devices into one of three classes. Devices deemed to pose lower risks are
placed in either class I or II, which requires the manufacturer to submit to the FDA a pre-market notification requesting permission to commercially distribute the device, known as
510(k) clearance. Some low risk devices are exempted from this requirement. Devices deemed by the FDA to pose the greatest risks, such as life-sustaining, life-supporting or implantable devices, or
devices deemed not substantially equivalent to a previously cleared 510(k) device, are placed in class III, requiring pre-market approval. All of our current products are class II
devices requiring 510(k) clearances.
510(k) clearance pathway.
When a 510(k) clearance is required, we must submit a pre-market notification demonstrating that our
proposed device is
substantially equivalent to a previously cleared and legally marketed 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for
the submission of pre-market approval applications (PMA). By regulation, the FDA is required to clear or deny a 510(k) pre-market notification within 90 days of submission of the application.
Clearance generally takes longer as the FDA may require further information, including clinical data, to make a determination regarding substantial equivalence.
In
January 2002, we received 510(k) clearance for the TomoTherapy Hi-Art System intended to be used as an integrated system for the planning and delivery of IMRT for the treatment
of cancer. In August 2008, we received 510(k) clearance for our TomoDirect System. In June 2016, we received 510(k) clearance for the Radixact Treatment Delivery Platform. We also
received 510(k) clearance for our new treatment planning and data management systems, Accuray Precision Treatment Planning System and iDMS Data Management System.
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In
July 1999, we received 510(k) clearance for the CyberKnife System for use in the head and neck regions of the body. In August 2001, we received 510(k) clearance for the
CyberKnife System to provide treatment planning and image guided stereotactic radiosurgery and precision radiotherapy for lesions, tumors and conditions anywhere in the body where radiation treatment
is indicated. In April 2002, we received 510(k) clearance for the Synchrony Motion Tracking System as an option to the CyberKnife System, intended to enable dynamic image guided stereotactic
radiosurgery and precision radiotherapy of lesions, tumors and conditions that move under influence of respiration. In October 2012, we received 510(k) clearance for the InCise MLC with
clearance from the FDA on July 1, 2015.
Pre-market approval (PMA) pathway.
A PMA must be submitted to the FDA if the device is not eligible for the 510(k) clearance
process. A PMA must be
supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate reasonable evidence of the device's safety and efficacy to
the FDA's satisfaction. Currently, no device we have developed and commercialized has required pre-market approval.
Product modifications.
After a device receives 510(k) clearance or a PMA approval, any modification that could significantly
affect its safety or
effectiveness, or that would constitute a significant change in its intended use, will require a new clearance or approval. The FDA has issued draft guidance that, if finalized and implemented, will
result in manufacturers needing to seek a significant number of new clearances for changes made to legally marketed devices.
We
have modified aspects of our CyberKnife and TomoTherapy families of products since receiving regulatory clearance, and we have applied for and obtained additional 510(k) clearances
for these modifications when we determined such clearances were required. The FDA requires each manufacturer to make this determination initially, but the FDA can review any such decision and can
disagree with a manufacturer's determination. If the FDA disagrees with our determination not to seek a new 510(k) clearance or PMA approval, the FDA may require us to seek 510(k) clearance or PMA
approval. The FDA could also require us to cease marketing and distribution and/or recall the modified device until 510(k) clearance or pre-market approval is obtained. Also, in these circumstances,
we may be subject to significant regulatory fines or penalties. During our fiscal year ended June 30, 2014, we submitted one 510(k) clearance notification for modifications made to the
operation of the CyberKnife System and one 510(k) clearance notification for the TomoTherapy System. The initial CyberKnife submission was cleared on October 26, 2012 and the TomoTherapy
submission was cleared on August 29, 2012.
Pervasive and continuing regulation.
After a device is placed on the market, numerous regulatory requirements apply.
These include:
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Quality System Regulation (QSR), which require manufacturers, including third-party manufacturers, to follow stringent design,
testing, documentation and other quality assurance procedures during product design and throughout the manufacturing process;
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Labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label uses; and
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Medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or
contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur.
The
FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA and the Food and Drug Branch of the California Department of Health
Services to determine our compliance with the QSR and other regulations, and these
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inspections
may include the manufacturing facilities of some of our subcontractors. Our Sunnyvale facility, where we manufacture the CyberKnife Systems, was most recently inspected by the FDA in
June 2015. The June 2015 inspection resulted in no observations. In addition, our Madison facility, where we manufacture the finished TomoTherapy and CyberKnife Systems, was most
recently inspected by the FDA in July 2012. The July 2012 inspection resulted in no observations. We believe we are in substantial compliance with the QSR. Failure to comply with
applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:
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Fines, injunctions, consent decrees and civil penalties;
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Recall or seizure of our products;
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Operating restrictions, partial suspension or total shutdown of production;
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Refusing our requests for 510(k) clearance or pre-market approval of new products or new intended uses;
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Withdrawing 510(k) clearance or pre-market approvals that are already granted; and
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Criminal prosecution.
The
FDA also has the authority to require us to repair, replace or refund the cost of any medical device that we have manufactured or distributed. If any of these events were to occur,
they could have a material adverse effect on our business.
Radiological health.
Because our CyberKnife and TomoTherapy Systems contain both laser and X-ray components, and because we
assemble these components
during manufacturing and service activities,
we are also regulated under the Electronic Product Radiation Control Provisions of the United States Federal Food, Drug, and Cosmetic Act. This law requires laser and X-ray products to comply
with regulations and applicable performance standards, and manufacturers of these products to certify in product labeling and reports to the FDA that their products comply with all such standards. The
law also requires manufacturers to file new product reports, and to file annual reports and maintain manufacturing, testing and sales records, and report product defects. Various warning labels must
be affixed. Assemblers of diagnostic X-ray systems are also required to certify in reports to the FDA, equipment purchasers, and where applicable, to state agencies responsible for radiation
protection, that diagnostic and/or therapeutic X-ray systems they assemble meet applicable requirements. Failure to comply with these requirements could result in enforcement action by the FDA, which
can include injunctions, civil penalties, and the issuance of warning letters.
Fraud and abuse laws.
We are subject to various federal and state laws pertaining to healthcare fraud and abuse, including
anti-kickback laws and
physician self-referral laws. Violations of these laws are punishable by significant criminal and civil sanctions, including, in some instances, exclusion from participation in federal and state
healthcare programs, including Medicare and Medicaid. Because of the far-reaching nature of these laws, there can be no assurance that we would not be required to alter one or more of our practices to
be in compliance with these laws. Evolving interpretations of current laws, or the adoption of new federal or state laws or regulations could adversely affect many of the arrangements we have with
customers and physicians. In addition, there can be no assurance that the occurrence of one or more violations of these laws or regulations would not result in a material adverse effect on our
financial condition and results of operations.
Anti-kickback laws.
Our operations are subject to broad and changing federal and state anti-kickback laws. The Office of the
Inspector General of the
Department of Health and Human Services (OIG), is primarily responsible for enforcing the federal Anti-Kickback Statute and generally for identifying fraud and abuse activities affecting government
programs. The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or providing
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remuneration
directly or indirectly to induce either the referral of an individual, or the furnishing, recommending, or arranging of a good or service, for which payment may be made under a federal
healthcare program such as Medicare and Medicaid. "Remuneration" has been broadly interpreted to include anything of value, including such items as gifts, discounts, the furnishing of supplies or
equipment, credit arrangements, waiver of payments, and providing anything of value at less than fair market value.
Penalties
for violating the federal Anti-Kickback Statute include criminal fines of up to $25,000 and/or imprisonment for up to five years for each violation, civil fines of up to
$50,000 and possible exclusion from participation in federal healthcare programs such as Medicare and Medicaid. Many states have adopted prohibitions similar to the federal Anti-Kickback Statute, some
of which apply to the referral of patients for healthcare services reimbursed by any source, not only by the Medicare and Medicaid programs, and do not include comparable exceptions.
The
OIG has issued safe harbor regulations which set forth certain activities and business relationships that are deemed safe from prosecution under the federal Anti-Kickback Statute.
There are safe harbors for various types of arrangements, including, without limitation, certain investment interests, leases and personal services and management contracts. The failure of a
particular activity to comply in all regards with the safe harbor regulations does not mean that the activity violates the federal Anti-Kickback Statute or that prosecution will be pursued. However,
conduct and business arrangements that do not fully satisfy each applicable safe harbor may result in increased scrutiny by government enforcement authorities such as the OIG.
The
OIG has identified the following arrangements with purchasers and their agents as ones raising potential risk of violation of the federal Anti-Kickback
Statute:
-
-
Discount and free good arrangements that are not properly disclosed or accurately reported to federal healthcare programs;
-
-
Product support services, including billing assistance, reimbursement consultation and other services specifically tied to support of
the purchased product, offered in tandem with another service or program (such as a reimbursement guarantee) that confers a benefit to the purchaser;
-
-
Educational grants conditioned in whole or in part on the purchase of equipment, or otherwise inappropriately influenced by sales and
marketing considerations;
-
-
Research funding arrangements, particularly post-marketing research activities, that are linked directly or indirectly to the purchase
of products, or otherwise inappropriately influenced by sales and marketing considerations; and
-
-
Other offers of remuneration to purchasers that are expressly or impliedly related to a sale or sales volume, such as "prebates" and
"upfront payments," other free or reduced-price goods or services, and payments to cover costs of "converting" from a competitor's products, particularly where the selection criteria for such offers
vary with the volume or value of business generated.
We
have a variety of financial relationships with physicians who are in a position to generate business for us. For example, physicians who own our stock also provide medical advisory
and other consulting or collaboration services. Similarly, we have a variety of different types of arrangements with our customers. In the case of our former placement program, certain services and
upgrades were provided without additional charge based on procedure volume. In the past, we have also provided loans to our customers. We also provide research or educational grants to customers to
support customer studies related to, among other things, our CyberKnife and TomoTherapy Systems.
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If our past or present operations are found to be in violation of the federal Anti-Kickback Statute or similar government regulations to which we or our customers
are subject, we or our officers may be subject to the applicable penalty associated with the violation, including significant civil and criminal penalties, damages, fines, imprisonment, and exclusion
from the Medicare and Medicaid programs. The impact of any such violation may lead to curtailment or restructuring of our operations. Any penalties, damages, fines, or curtailment or restructuring of
our operations could adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that some of these
laws are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert
our management's attention from the operation of our business and damage our reputation. If an enforcement action were to occur, our reputation and our business and financial condition could be
harmed, even if we were to prevail or settle the action. Similarly, if the physicians or other providers or entities with which we do business are found to be non-compliant with applicable laws, they
may be subject to sanctions, which could also have a negative impact on our business.
Transparency laws.
The Physician Payment Sunshine Act (the Sunshine Act), which was enacted by Congress as part of the
Patient Protection and
Affordable Care Act on December 14, 2011, requires each applicable manufacturer, which includes medical device companies such as Accuray, to track and report to the federal government on an
annual basis all payments and other transfers of value from such applicable manufacturer to U.S. licensed physicians and teaching hospitals as well as physician ownership of such applicable
manufacturer's equity, in each case subject to certain statutory exceptions. Such data will be made available by the government on a publicly searchable website. Failure to comply with the data
collection and reporting obligations imposed by the Sunshine Act can result in civil monetary penalties ranging from $1,000 to $10,000 for each payment or other transfer of value that is not reported
(up to a maximum of $150,000 per reporting period) and from $10,000 to $100,000 for each knowing failure to report (up to a maximum of $1 million per reporting period). In
addition, we are subject to similar state and foreign laws related to the tracking and reporting of payments and other transfers of value to healthcare professionals. These laws require or will
require that we implement the necessary and costly infrastructure to track and report such payments and transfers of value. Failure to comply with these new tracking and reporting laws could subject
us to significant civil monetary penalties.
Physician self-referral laws.
We are also subject to federal and state physician self-referral laws. The federal Ethics in
Patient Referrals Act of
1989, commonly known as the Stark Law, prohibits, subject to certain exceptions, physician referrals of Medicare and Medicaid patients to an entity providing certain "designated health services" if
the physician or an immediate family member has any financial relationship with the entity. The Stark Law also prohibits the entity receiving the referral from billing any good or service furnished
pursuant to an unlawful referral.
In
addition, in July 2008, CMS issued a final rule implementing significant amendments to the regulations under the Stark Law. The final rule, which was effective
October 1, 2009, imposes additional limitations on the ability of physicians to refer patients to medical facilities in which the physician or an immediate family member has an ownership
interest for treatment. Among other things, the rule provides that leases of equipment between physician owners that may refer patients and hospitals must be on a fixed rate, rather than a per use
basis. Prior to enactment of the final rule, physician owned entities had increasingly become involved in the acquisition of medical technologies, including the CyberKnife System. In many cases, these
entities entered into arrangements with hospitals that billed Medicare for the furnishing of medical services, and the physician owners were among the physicians who referred patients to the entity
for services. The rule limits these arrangements and could require the restructuring of existing arrangements between physicians owned entities and hospitals and could discourage physicians from
participating in the acquisition and ownership of medical
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technologies.
The final rule also prohibits percentage-based compensation in equipment leases. As a result of the finalization of these regulations, some existing CyberKnife System operators have
modified or restructured their corporate or organizational structures. In addition, certain customers that planned to open CyberKnife centers in the United States involving physician ownership
have restructured their legal ownership structure. Certain entities were not able to establish viable models for CyberKnife System operation and therefore canceled their CyberKnife System purchase
agreements. Accordingly, these regulations have resulted in cancellations of CyberKnife System purchase agreements and could also reduce the attractiveness of medical technology acquisitions,
including CyberKnife System purchases, by physician-owned joint ventures or similar entities. As a result, these regulations have had, and could continue to have, an adverse impact on our product
sales and therefore on our business and results of operations.
A
person who engages in a scheme to circumvent the Stark Law's referral prohibition may be fined up to $100,000 for each such arrangement or scheme. In addition, any person who presents
or causes to be presented a claim to the Medicare or Medicaid programs in violations of the Stark Law is subject to civil monetary penalties of up to $15,000 per bill submission, an assessment of up
to three times the amount claimed, and possible exclusion from federal healthcare programs such as Medicare and Medicaid. Various states have corollary laws to the Stark Law, including laws that
require physicians to disclose any financial interest they may have with a healthcare provider to their patients when referring patients to that provider. Both the scope and exceptions for such laws
vary from state to state.
Federal False Claims Act.
The federal False Claims Act prohibits the knowing filing or causing the filing of a false claim or
the knowing use of
false statements to obtain payment from the federal government. When an entity is determined to have violated the False Claims Act, it may be required to pay three times the actual damages sustained
by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim. Suits filed under the False Claims Act, known as "qui tam" actions, can be brought by any
individual on behalf of the government and such individuals, sometimes known as "relators" or, more commonly, as "whistleblowers," may share in any amounts paid by the entity to the government in
fines or settlement. In addition, certain states have enacted laws modeled after the federal False Claims Act. Qui tam actions have increased significantly in recent years, causing greater numbers of
healthcare companies to have to defend a false claim action, pay fines or be excluded from Medicare, Medicaid or other federal or state healthcare programs as a result of an investigation arising out
of such action. We have retained the services of a reimbursement consultant, for which we pay certain consulting fees, to provide us and facilities that have purchased a CyberKnife or TomoTherapy
System, with general reimbursement advice. While we believe this will assist our customers in filing proper claims for reimbursement, and even though such consultants do not submit claims on behalf of
our customers, the fact that we provide these consultant services could expose us to additional scrutiny and possible liability in the event one of our customers is investigated and determined to be
in violation of any of these laws.
HIPAA.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA), created two new federal crimes: healthcare fraud
and false statements
relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. A violation of
this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or
covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of
this statute is a felony and may result in fines or imprisonment.
As
a participant in the healthcare industry, we are also subject to extensive laws and regulations protecting the privacy and integrity of patient medical information, including privacy
and security
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standards
required under HIPAA. The HIPAA privacy standard was amended by the Health Information Technology for Economic and Clinical Health Act (HITECH), enacted as part of the American Recovery and
Reinvestment Act of 2009. HITECH significantly increases the civil money penalties for violations of patient privacy rights protected under HIPAA. Although we are not a covered entity under HIPAA, we
have entered into agreements with certain covered entities under which we are considered to be a "business associate" under HIPAA. As a business associate, we are required to implement policies,
procedures and reasonable and appropriate security measures to protect individually identifiable health information we receive from covered entities. Furthermore, as of February 2010, business
associates are now directly subject to regulations under HIPAA, including a new enforcement scheme, criminal and civil penalties for certain violations, and inspection requirements.
Foreign Corrupt Practices Act.
The United States and foreign government regulators have increased regulation, enforcement,
inspections and
governmental investigations of the medical device industry, including increased United States government oversight and enforcement of the Foreign Corrupt Practices Act. Whenever the
United States or another foreign governmental authority concludes that we are not in compliance with applicable laws or regulations, such governmental authority can impose fines, delay or
suspend regulatory clearances, institute proceedings to detain or seize our products, issue a recall, impose operating restrictions, enjoin future violations and assess civil penalties against us or
our officers or employees, and can recommend criminal prosecution to the Department of Justice. Moreover, governmental authorities can ban or request the recall, repair, replacement or refund of the
cost of any device or product we manufacture or distribute. We are also potentially subject to the UK Bribery Act, which could also lead to the imposition of civil and criminal fines. Any of the
foregoing actions could result in decreased sales as a result of negative publicity and product liability claims, and could have a material adverse effect on our financial condition, results of
operations and prospects.
International Regulation
International sales of medical devices are subject to foreign government regulations, which vary substantially from country to country.
The time required to obtain clearance or approval by a foreign country may be longer or shorter than that required for FDA clearance or approval, and the requirements may be different.
The
primary regulatory environment in Europe is that of the European Union and the three additional member states of the European Economic Area (EEA), which have adopted similar laws and
regulations with respect to medical devices. The European Union has adopted numerous directives and the European Committee for Standardization has promulgated standards regulating the design,
manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices that comply with the requirements of the relevant directive will be entitled to bear CE conformity
marking, indicating that the device conforms to the essential requirements of the applicable directives and, accordingly, may be commercially distributed throughout the member states of
the EEA.
The
method of assessing conformity to applicable standards and directives depends on the type and class of the product, but normally involves a combination of self-assessment by the
manufacturer and a third-party assessment by a notified body, an independent and neutral institution appointed by a European Union member state to conduct the conformity assessment. This relevant
assessment may consist of an audit of the manufacturer's quality system (currently ISO 13485), provisions of the Medical Devices Directive, and specific testing of the manufacturer's device. In
September 2002 and February 2005, our and TomoTherapy's facilities, respectively, were awarded the ISO 13485 certification, which replaces the ISO 9001 and EN
46001 standards, which have been subsequently maintained through periodic assessments, in accordance with the expiration dates of the standards, and
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we
are currently authorized to affix the CE mark to our products, allowing us to sell our products throughout the European Economic Area.
We
are also currently subject to regulations in Japan. Under the Pharmaceutical Affairs Law in Japan, a pre-market approval necessary to sell, market and import a product (Shonin), must
be obtained from the Ministry of Health, Labor and Welfare (MHLW), for our products. A Japanese distributor received the first government approval to market the CyberKnife System from MHLW in
November 1996. In December 2003, we received approval from the MHLW to market the CyberKnife System in Japan for
clinical applications in the head and neck, and a new distributor, Chiyoda Technology Corporation, was appointed to distribute the CyberKnife System. In June 2008, we received approval from the
MHLW to market the CyberKnife System for treatments throughout the body where radiation treatment is indicated. On June 30, 2009, our subsidiary, Accuray Japan KK, became the Marketing
Authorization Holder in Japan, which allowed the Company to directly sell our products in Japan. In August 2010, we received Shonin approval from MHLW to market the CyberKnife G4 System
to treat tumors non-invasively anywhere in the body, inclusive of head and neck. Hi- Art Co. Ltd., the original distributor for TomoTherapy in Japan, received the Shonin approval from
the MHLW to market the TomoTherapy System for use as an integrated system for the planning and delivery of IMR for the treatment of cancer in January 2006. The Shonin was transferred to another
distributor, Hitachi Medical Corporation in January 2009. During September 2011, Hitachi Medical Corporation received a Shonin approval for the marketing of the TomoHD model. In
July 2012, we took over the Shonins and the service operations of the TomoTherapy Systems in Japan from Hitachi Medical Corporation. In March 2014, we received Shonin approval from MHLW
for CyberKnife M6 Series as well as the InCise MLC.
We
are subject to additional regulations in other foreign countries, including, but not limited to, Canada, Taiwan, China, Korea, and Russia in order to sell our products. We intend that
either we or our distributors will receive any necessary approvals or clearance prior to marketing our products in those international markets.
State Certificate of Need Laws
In some states, a certificate of need or similar regulatory approval is required prior to the acquisition of high-cost capital items or
the provision of new services. These laws generally require appropriate state agency determination of public need and approval prior to the acquisition of such capital items or addition of new
services. Certificate of need regulations may preclude our customers from acquiring one of our systems, and from performing stereotactic radiosurgery procedures using one of our systems. Several of
our prospective customers currently are involved in appeals of certificate of need determinations. If these appeals are not resolved in favor of these prospective customers, they may be precluded from
purchasing and/or performing services using one of our systems. Certificate of need laws are the subject of continuing legislative activity, and a significant increase in the number of states
regulating the acquisition and use of one of our systems through certificate of need or similar programs could adversely affect us.
Backlog
For a discussion of the Company's fiscal 2016 backlog, please refer to the section entitled
"Backlog,"
in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Employees
As of June 30, 2016, we had 959 employees worldwide. None of the employees are represented by a labor union or covered by
a collective bargaining agreement. We have never experienced any employment related work stoppages and we believe our relationship with our employees is good.
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Geographic Information
For financial reporting purposes, net sales and long-lived assets attributable to significant geographic areas are presented in
Note 15,
Segment Disclosure,
to the consolidated financial statements, which are incorporated herein by reference.
Available Information
Our main corporate website address is
www.accuray.com
. We make available on this web
site, free of charge, copies of our annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and our proxy statements, and any amendments to those reports, as soon as reasonably practicable after filing such material
electronically or otherwise furnishing it to the Securities and Exchange Commission, the SEC. All SEC filings are also available at the SEC's website at
www.sec.gov
. In addition, the Corporate
Governance Guidelines and the charters of the Audit Committee, Compensation Committee, Nominating and Corporate
Governance Committee, and Disclosure Committee of our Board of Directors are also available on the investor relations page of our website. The contents of our web site are not intended to be
incorporated by reference into this report or in any other report or document we file or furnish, and any references to our web site are intended to be textual references only.
We
operate in a rapidly changing environment that involves significant risks, a number of which are beyond our control. In addition to the other information contained in this
Form 10-K, the following discussion highlights some of these risks and the possible impact of these factors on our business, financial condition and future results of operations. If any of the
following risks actually occur, our business, financial condition or results of operations may be adversely impacted, causing the trading price of our common stock to decline. In addition, these risks
and uncertainties may impact the "forward-looking" statements described elsewhere in this Form 10-K and in the documents incorporated herein by reference. They could affect our actual
results of operations, causing them to differ materially from those expressed in "forward- looking" statements.
Item 1A. RISK FACTORS
Risks Related to Our Business
If the CyberKnife or TomoTherapy Systems do not achieve widespread market acceptance, we will not be
able to generate the revenue necessary to support our business.
Achieving physician, patient, hospital administrator and third-party payor acceptance of the CyberKnife and TomoTherapy Systems as
preferred methods of tumor treatment is crucial to our continued success. Physicians will not begin to use or increase the use of the CyberKnife
or TomoTherapy Systems unless they determine, based on experience, clinical data and other factors, that the CyberKnife and TomoTherapy Systems are safe and effective alternatives to traditional
treatment methods.
We
often need to educate physicians about the use of stereotactic radiosurgery, IGRT and adaptive radiation therapy, convince healthcare payors that the benefits of the CyberKnife and
TomoTherapy Systems and their related treatment processes outweigh their costs and help train qualified physicians in the skilled use of these systems. In addition, we also must educate prospective
customers regarding the entire functionality of our radiation therapy systems and their relative benefits compared to alternative products and treatment methods. We have expended and will continue to
expend significant resources on marketing and educational efforts to create awareness of stereotactic radiosurgery and Robotic IMRT as well as adaptive radiation therapy and IGRT generally and to
encourage the acceptance and adoption of our products for these technologies. We cannot be sure that our products will gain significant market acceptance among physicians, patients and healthcare
payors, even if we spend significant time and expense on their education.
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In
addition, the CyberKnife and TomoTherapy Systems are major capital purchases, and purchase decisions are greatly influenced by hospital administrators who are subject to increasing
pressures to reduce costs. These and other factors, including the following, may affect the rate and level of market acceptance of each of the CyberKnife and TomoTherapy
Systems:
-
-
the CyberKnife and TomoTherapy Systems' price relative to other products or competing treatments;
-
-
our ability to develop new products and enhancements and receive regulatory clearances and approval, if required, to existing products
in a timely manner;
-
-
increased scrutiny by state boards when evaluating certificates of need requested by purchasing institutions;
-
-
perception by patients, physicians and other members of the healthcare community of the CyberKnife and TomoTherapy Systems' safety,
efficacy, efficiency and benefits compared to competing technologies or treatments;
-
-
willingness of physicians to adopt new techniques and the ability of physicians to acquire the skills necessary to operate the
CyberKnife and TomoTherapy Systems;
-
-
extent of third-party coverage and reimbursement rates, particularly from Medicare, for procedures using the CyberKnife and
TomoTherapy Systems; and
-
-
development of new products and technologies by our competitors or new treatment alternatives.
If
the CyberKnife or TomoTherapy Systems are unable to achieve or maintain market acceptance, new orders and sales of our systems would be adversely affected, our revenue levels would
decrease and our business would be harmed.
We have a large accumulated deficit, may incur future losses and may be unable to achieve
profitability.
As of June 30, 2016, we had an accumulated deficit of $420.8 million. We may incur net losses in the future, particularly
as we improve our selling and marketing activities. Our ability to achieve and sustain long-term profitability is largely dependent on our ability to successfully market and sell the CyberKnife and
TomoTherapy Systems, control our costs, and effectively manage our growth. We cannot assure you that we will be able to achieve profitability. In the event we fail to achieve profitability, our stock
price could decline.
If we do not effectively manage our growth, our business may be significantly harmed.
In order to implement our business strategy, we expect continued growth in our infrastructure requirements, particularly as we expand
our manufacturing capacities and our sales and marketing capabilities. To manage our growth, we must expand our facilities, augment our management, operational and financial systems, hire and train
additional qualified personnel, scale-up our manufacturing capacity and expand our marketing and distribution capabilities. Our manufacturing, assembly and installation process is complex and occurs
over many months, and we must effectively scale this entire process to satisfy customer expectations and changes in demand. Further, to accommodate our growth and compete effectively, we will be
required to improve our information systems. We cannot be certain that our personnel, systems, procedures and internal controls will be adequate to support our future operations. If we cannot manage
our growth effectively, our business will suffer.
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Our ability to achieve profitability depends in part on maintaining or increasing our gross margins
on product sales and services, which we may not be able to achieve.
A number of factors may adversely impact our gross margins on product sales and services,
including:
-
-
lower than expected manufacturing yields of high cost components leading to increased manufacturing costs;
-
-
low production volume which will result in high levels of overhead cost per unit of production;
-
-
the timing of revenue recognition and revenue deferrals;
-
-
increased material or labor costs;
-
-
increased service or warranty costs or the failure to reduce service or warranty costs;
-
-
increased price competition;
-
-
variation in the margins across products installed in a particular period; and
-
-
how well we execute on our strategic and operating plans.
If
we are unable to maintain or increase our gross margins on product sales and service, our results of operations could be adversely impacted, we may not achieve profitability and our
stock price could decline.
Our operating results, including our quarterly orders, revenues and margins fluctuate from quarter
to quarter and may be unpredictable, which may result in a decline in our stock price.
We have experienced and expect in the future to experience fluctuations in our operating results, including gross orders, revenues and
margins, from period to period. Drivers of orders include the introduction and timing of announcement of new products or product enhancements by us and our competitors, as well as changes or
anticipated changes in third-party reimbursement amounts or policies applicable to treatments using our products. The availability of economic stimulus packages or other government funding, or
reductions thereof, may also affect timing of customer purchases. Our products have a high unit price and require significant capital expenditures by our customers. Accordingly, we experience long
sales and implementation cycles, which is of greater concern during the current volatile economic environment where we have had customers delaying or cancelling orders. When orders are placed,
installation, delivery or shipping, as applicable, is accomplished and the revenues recognized affect our quarterly results. Further, because of the high unit price of the CyberKnife and TomoTherapy
Systems and the relatively small number of units sold or installed each quarter, each sale or installation of a CyberKnife or TomoTherapy System can represent a significant percentage of our net
orders, backlog or revenue for a particular quarter.
Once
orders are received and booked into backlog, factors that may affect whether these orders become revenue (or are cancelled or deemed aged-out and reflected as a reduction in
net orders) and the timing of revenue include:
-
-
delays in the customer obtaining funding or financing;
-
-
delays in construction at the customer site; or
-
-
delays in the customer obtaining receipt of regulatory approvals such as certificates of need.
Our
operating results may also be affected by a number of other factors some of which are outside of our control, including:
-
-
timing of when we are able to recognize revenue associated with sales of the CyberKnife and TomoTherapy Systems, which varies
depending upon the terms of the applicable sales and service contracts;
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-
-
the proportion of revenue attributable to our legacy service plans;
-
-
timing and level of expenditures associated with new product development activities;
-
-
regulatory requirements in some states for a certificate of need prior to the installation of a radiation device;
-
-
delays in shipment due, for example, to unanticipated construction delays at customer locations where our products are to be
installed, cancellations by customers, natural disasters or labor disturbances;
-
-
delays in our manufacturing processes or unexpected manufacturing difficulties;
-
-
the timing of the announcement, introduction and delivery of new products or product upgrades by us and by our competitors;
-
-
timing and level of expenditures associated with expansion of sales and marketing activities such as trade shows and our overall
operations; and
-
-
how fluctuations in our gross margins and the factors that contribute to such fluctuations, as described in the Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Because
many of our operating expenses are based on anticipated sales and a high percentage of these expenses are fixed for the short term, a small variation in the timing of revenue
recognition can cause significant variations in operating results from quarter to quarter. Our overall gross margins are impacted by a number of factors described in our risk factor entitled "Our
ability to achieve profitability depends in part on maintaining or increasing our gross margins on product sales and services, which we may not be able to achieve." If our financial results fall below
the expectation of securities analysts and investors, the trading price of our common stock would almost certainly decline.
We
report on a quarterly and annual basis our orders and backlog. Unlike revenues, orders and backlog are not defined by U.S. GAAP, and are not within the scope of the audit
conducted by our independent registered public accounting firm; therefore, investors should not interpret our orders or backlog in such a manner. Also, for the reasons discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations, our orders and backlog cannot necessarily be relied upon as accurate predictors of future revenues. Order cancellation or
significant delays in installation date will reduce our backlog and future revenues, and we cannot predict if or when orders will mature into revenues. Particularly high levels of cancellations or
age-outs in one or more periods may cause our revenue and gross margins to decline in current or future periods and will make it difficult to compare our operating results from quarter
to quarter.
If we encounter manufacturing problems, or if our manufacturing facilities do not continue to meet
federal, state or foreign manufacturing standards, we may be required to temporarily cease all or part of our manufacturing operations, which would result in delays and lost revenue.
The CyberKnife and TomoTherapy Systems are complex, and require the integration of a number of components from several sources of
supply. We must manufacture and assemble these complex systems in commercial quantities in compliance with regulatory requirements and at an acceptable cost. Our linear accelerator components are
extremely complex devices and require significant expertise to manufacture, and we may encounter difficulties in scaling up production of the CyberKnife or TomoTherapy Systems, including problems with
quality control and assurance, component supply shortages, increased costs, shortages of qualified personnel, the long lead time required to develop additional radiation-shielded facilities for
purposes of testing our products and/or difficulties associated with compliance with local, state, federal and foreign regulatory requirements. If our manufacturing capacity does not keep pace with
product demand, we will not be able to fulfill orders in a timely manner, which in turn may have a negative effect on our financial results and overall business.
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Conversely,
if demand for our products decreases, the fixed costs associated with excess manufacturing capacity may adversely affect our financial results.
In
October 2012, we introduced our new CyberKnife M6 Series Systems. We now offer the option of a fixed collimator, Iris Variable Aperture Collimator, and/or InCise MLC.
The initial supplier producing the MLC for our CyberKnife M6 Series Systems experienced low manufacturing yields and initially delivered only a small number of units. Our initial life-cycle
testing revealed that the units did not have the durability that we, and our customers, expected in our products. As a result of these durability concerns and the complexity of the MLC we conducted
internal testing and evaluation of the MLC in the field, prior to commercially releasing the InCise MLC to our customers. Despite the delay in the launch of the InCise MLC upgrade, we continued to
book orders and install the CyberKnife M6 Series Systems with fixed and Iris collimators and now are in the process of fulfilling such orders as capacity permits. The occurrence of new
manufacturing and supply issues related to the InCise MLC for our CyberKnife System may adversely affect market acceptance of our CyberKnife M6 System and negatively impact our revenue and
overall business.
Our
manufacturing processes and the manufacturing processes of our third-party suppliers are required to comply with the FDA's QSR for any products imported into, or sold within, the
USA. The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, production process and controls, manufacturing, labeling, quality assurance, packaging,
storage and shipping of our products. Furthermore, we are required to verify that our suppliers maintain facilities,
procedures and operations that comply with our quality requirements. We are also subject to state licensing and other requirements and licenses applicable to manufacturers of medical devices, and we
are required to comply with ISO, quality system standards in order to produce products for sale in Europe and Canada, as well as various other foreign laws and regulations. Because our manufacturing
processes include the production of diagnostic and therapeutic X-ray equipment and laser equipment, we are subject to the electronic product radiation control provisions of the Federal Food, Drug and
Cosmetic Act, which requires that we file reports with the FDA, applicable states and our customers regarding the distribution, manufacturing and installation of these types of equipment. The FDA
enforces the QSR and the electronic product radiation control provisions through periodic inspections, some of which may be unannounced. We have been, and anticipate in the future being subject to
such inspections. FDA inspections usually occur every two to three years. During such inspections, the FDA may issue Inspectional Observations on Form FDA 483, listing instances where the manufacturer
has failed to comply with applicable regulations and procedures, or warning letters. Our Sunnyvale facility, where we manufacture the CyberKnife Systems, was most recently inspected by the FDA in
June 2015. The June 2015 inspection resulted in no observations. In addition, our Madison facility, where we manufacture the finished TomoTherapy and CyberKnife Systems, was most
recently inspected by the FDA in July 2012. The July 2012 inspection resulted in no observations.
If
a manufacturer does not adequately address the observations, the FDA may take enforcement action against the manufacturer, including the imposition of fines, restriction of the
ability to export product, total shutdown of production facilities and criminal prosecution. If we or a third-party supplier receive a Form FDA 483 with material or major observations that are
not promptly corrected, fail to pass a QSR inspection, or fail to comply with these, ISO and other applicable regulatory requirements, our operations could be disrupted and our ability to generate
sales could be delayed. Our failure to take prompt and satisfactory corrective action in response to an adverse inspection or our failure to comply with applicable standards could result in
enforcement actions, including a public warning letter, a shutdown of our manufacturing operations, a recall of our products, civil or criminal penalties, or other sanctions, which would cause our
sales and business to suffer. In addition, because some foreign regulatory approvals are based on approvals or clearances from the FDA, any failure to comply with FDA requirements may also disrupt our
sales of products in other countries. We cannot assure you that the FDA or other governmental authorities would agree with our interpretation of applicable regulatory requirements or that we or our
third-party suppliers have in all instances fully complied with all
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applicable
requirements. If any of these events occurs, our reputation could be harmed, we could lose customers and there could be a material adverse effect on our business, financial condition and
results of operations.
If
we cannot achieve the required level and quality of production, we may need to outsource production or rely on licensing and other arrangements with third parties who possess
sufficient manufacturing facilities and capabilities in compliance with regulatory requirements. Even if we could outsource needed production or enter into licensing or other third-party arrangements,
this could reduce our gross margin and expose us to the risks inherent in relying on others. We also cannot assure
you that our suppliers will deliver an adequate supply of required components on a timely basis or that they will adequately comply with the QSR. Failure to obtain these components on a timely basis
would disrupt our manufacturing processes and increase our costs, which would harm our operating results.
Our industry is subject to intense competition and rapid technological change, which may result in
products or new tumor treatments that are superior to the CyberKnife and TomoTherapy Systems. If we are unable to anticipate or keep pace with changes in the marketplace and the direction of
technological innovation and customer demands, our products may become obsolete or less useful and our operating results will suffer.
The medical device industry in general and the non-invasive cancer treatment field in particular are subject to intense and increasing
competition and rapidly evolving technologies. Because our products often have long development and government approval cycles, we must anticipate changes in the marketplace and the direction of
technological innovation and customer demands. To compete successfully, we will need to continue to demonstrate the advantages of our products and technologies over well-established alternative
procedures, products and technologies, and convince physicians and other healthcare decision makers of the advantages of our products and technologies. Traditional surgery and other forms of minimally
invasive procedures, brachytherapy, chemotherapy or other drugs remain alternatives to the CyberKnife and TomoTherapy Systems.
We
consider the competition for the CyberKnife and TomoTherapy Systems to be existing radiation therapy systems, primarily using C-arm linacs, which are sold by large, well-capitalized
companies with significantly greater market share and resources than we have. Several of these competitors are also able to leverage their fixed sales, service and other costs over multiple products
or product lines. In particular, we compete with a number of existing radiation therapy equipment companies, including Varian, Elekta, Mitsubishi, BrainLAB and ViewRay. Varian has been the leader in
the external beam radiation therapy market for many years and has the majority market share for radiation therapy systems worldwide. In general, because of aging demographics and attractive market
factors in oncology, we believe that new competitors will enter the radiosurgery and radiation therapy markets in the years ahead. The CyberKnife System has not typically been used to perform
traditional radiation therapy and therefore competition has been limited with conventional medical linacs that perform traditional radiation therapy. However, the CyberKnife VSI System, which we
introduced in November of 2009, may be used to perform Robotic IMRT, an advanced method of traditional radiation therapy, which products of Elekta and Varian are also capable of performing. The
CyberKnife M6 Series, which we introduced in October 2012, now includes the option of an InCise MLC which may further the use of the CyberKnife Systems to perform radiation therapy. In
October 2012, Varian announced a new line of C-arm gantries, called the Edge systems, which Varian claims are specifically designed for radiosurgery to compete with our CyberKnife Systems. In
addition, some manufacturers of conventional linac based radiation therapy systems, including Varian and Elekta, have products that can be used in combination with body and/or head frames and image
guidance systems to perform both radiosurgical and radiotherapy procedures.
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Furthermore, many government, academic and business entities are investing substantial resources in research and development of cancer treatments, including
surgical approaches, radiation treatment, MRI-guided radiotherapy systems, proton therapy systems, drug treatment, gene therapy (which is the treatment of disease by replacing, manipulating, or
supplementing nonfunctional genes), and other approaches. Successful developments that result in new approaches for the treatment of cancer could reduce the attractiveness of our products or render
them obsolete.
Our
future success will depend in large part on our ability to establish and maintain a competitive position in current and future technologies. Rapid technological development may
render the CyberKnife and TomoTherapy Systems and their technologies obsolete. Many of our competitors have or may have greater corporate, financial, operational, sales and marketing resources, and
more experience and resources in research and development than we have. We cannot assure you that our competitors will not succeed in developing or marketing technologies or products that are more
effective or commercially attractive than our products or that would render our technologies and products obsolete or less useful. We may not have the financial resources, technical expertise,
marketing, distribution or support capabilities to compete successfully in the future. Our success will depend in large part on our ability to maintain a competitive position with our technologies.
If we are unable to develop new products or enhance existing products, we may be unable to attract
or retain customers.
Our success depends on the successful development, regulatory clearance or approval, introduction and commercialization of new
generations of products, treatment systems, and enhancements to and/or simplification of existing products. The CyberKnife and TomoTherapy Systems, which are currently our principal products, are
technologically complex and must keep pace with, among other things, the products of our competitors and new technologies. We are making significant investments in long-term growth initiatives. Such
initiatives require significant capital commitments, involvement of senior management and other investments on our part, which we may be unable to recover. Our timeline for the development of new
products or enhancements may not be achieved and price and profitability targets may not prove feasible. Commercialization of new products may prove challenging, and we may be required to invest more
time and money than expected to successfully introduce them. Once introduced, new products may adversely impact orders and sales of our existing products, or make them less desirable or even obsolete.
Compliance with regulations, competitive alternatives, and shifting market preferences may also impact the successful implementation of new products or enhancements.
Our
ability to successfully develop and introduce new products, treatment systems and product enhancements and simplifications, and the revenues and costs associated with these efforts,
will be affected by our ability to:
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properly identify and address customer needs;
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prove feasibility of new products in a timely manner;
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educate physicians about the use of new products and procedures;
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comply with internal quality assurance systems and processes timely and efficiently;
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limit the timing and cost of obtaining regulatory approvals or clearances;
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accurately predict and control costs associated with inventory overruns caused by phase-in of new products and phase-out of
old products;
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price new products competitively;
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-
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manufacture and deliver our products in sufficient volumes on time, and accurately predict and control costs associated with
manufacturing, installation, warranty and maintenance of the products;
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meet our product development plan and launch timelines;
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improve manufacturing yields of components; and
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manage customer demands for retrofits of both old and new products.
Even
if customers accept new products or product enhancements, the revenues from these products may not be sufficient to offset the significant costs associated with making them
available to customers.
We
cannot be sure that we will be able to successfully develop, obtain regulatory approval or clearance for, manufacture or introduce new products, treatment systems or enhancements, the
roll-out of which involves compliance with complex quality assurance processes, including QSR. Failure to obtain regulatory approval or clearance for our products or to complete these processes in a
timely and efficient manner could result in delays that could affect our ability to attract and retain customers, or could cause customers to delay or cancel orders, causing our backlog, revenues and
operating results to suffer.
We could become subject to product liability claims, product recalls, other field actions and
warranty claims that could be expensive, divert management's attention and harm our business.
Our business exposes us to potential liability risks that are inherent in the manufacturing, marketing and sale of medical device
products. We may be held liable if a CyberKnife or TomoTherapy System causes injury or death or is found otherwise unsuitable during usage. Our products incorporate sophisticated components and
computer software. Complex software can contain errors, particularly when first introduced. In addition, new products or enhancements may contain undetected errors or performance problems that,
despite testing, are discovered only after installation. Because our products are designed to be used to perform complex surgical and therapeutic procedures involving delivery of radiation to the
body, defects, even if small, could result in a number of complications, some of which could be serious and could harm or kill patients. Any alleged weaknesses in physician training and services
associated with our products may result in unsatisfactory patient outcomes and product liability lawsuits. It is also possible that defects in the design, manufacture or labeling of our products might
necessitate a product recall or other field corrective action, which may result in warranty claims beyond our expectations and may harm our reputation and create adverse publicity. A product liability
claim, regardless of its merit or eventual outcome, could result in significant legal defense costs. We may also be subject to claims for property damage or economic loss related to, or resulting
from, any errors or defects in our products, or the installation, servicing and support of our products, or any professional services rendered in conjunction with our products. The coverage limits of
our insurance policies may not be adequate to cover future claims. If sales of our products increase or we suffer future product liability claims, we may be unable to maintain product liability
insurance in the future at satisfactory rates or with adequate amounts of coverage. A product liability claim, any product recalls or other field actions or excessive warranty claims, whether arising
from defects in design or manufacture or labeling, could negatively affect our sales or require a change in the design, manufacturing process or the indications for which the CyberKnife or TomoTherapy
Systems may be used, any of which could harm our reputation and business and result in a decline in revenue.
In
addition, if a product we designed or manufactured is defective, whether because of design or manufacturing, or labeling defects, improper use of the product or other reasons, we may
be required to notify regulatory authorities and/or to recall the product, possibly at our expense. We have voluntarily initiated recalls and product corrections in the past, including one recall for
the CyberKnife
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System
in fiscal year 2014. While no serious adverse health consequences have been reported in connection with these recalls and the costs associated with each such recall were not material, we cannot
ensure that the FDA will not require that we take additional actions to address problems that resulted in previous recalls. A required notification of a correction or removal to a regulatory authority
or recall could result in an investigation by regulatory authorities of our products, which could in turn result in required recalls, restrictions on the sale of the products or other civil or
criminal penalties. The adverse publicity resulting from any of these actions could cause customers to review and potentially terminate their relationships with us. These investigations, corrections
or recalls, especially if accompanied by unfavorable publicity, patient injury or termination of customer contracts, could result in incurring substantial costs, losing revenues and damaging our
reputation, each of which would harm our business.
Our reliance on single-source suppliers for critical components of the CyberKnife and TomoTherapy
Systems could harm our ability to meet demand for our products in a timely and cost effective manner.
We currently depend on single-source suppliers for some of the critical components necessary for the assembly of the CyberKnife and
TomoTherapy Systems, including, with respect to the CyberKnife System, the robot and imaging detectors, and, with respect to the TomoTherapy Systems, the ring gantry, the solid state modulator, the
radiation detector and the magnetron. If any single-source supplier was to cease delivering components to us or fail to provide the components to our specifications and on a timely basis, we might be
required to find alternative sources for these components. In some cases, alternative suppliers may be located in the same geographic area as existing suppliers, and are thus subject to the same
economic, political, and geographic factors that may affect existing suppliers to meet our demand. We may have difficulty or be unable to find alternative sources for these components. As a result, we
may be unable to meet the demand for the CyberKnife or TomoTherapy Systems, which could harm our ability to generate revenue and damage our reputation. Even if we do find alternate suppliers, we will
be required to qualify any such alternate suppliers and we would likely experience a lengthy delay in our manufacturing processes or a cessation in production, which would result in delays of shipment
to end
users. We cannot assure you that our single-source suppliers will be able or willing to meet our future demands.
We
generally do not maintain large volumes of inventory, which makes us even more susceptible to harm if a single-source supplier fails to deliver components on a timely basis.
Furthermore, if we are required to change the manufacturer of a critical component of the CyberKnife or TomoTherapy Systems, we will be required to verify that the new manufacturer maintains
facilities, procedures and operations that comply with our quality and applicable regulatory requirements and guidelines, which could further impede our ability to manufacture our products in a timely
manner. If the change in manufacturer results in a significant change to the product, a new 510(k) clearance would be necessary, which would likely cause substantial delays. The disruption or
termination of the supply of key components for the CyberKnife or TomoTherapy Systems could harm our ability to manufacture our products in a timely manner or within budget, harm our ability to
generate revenue, lead to customer dissatisfaction and adversely affect our reputation and results of operations.
We depend on key employees, the loss of whom would adversely affect our business. If we fail to
attract and retain employees with the expertise required for our business, we may be unable to continue to grow our business.
We are highly dependent on the members of our senior management, sales, marketing, operations and research and development staff. Our
future success will depend in part on our ability to retain our key employees and to identify, hire and retain additional personnel. Competition for qualified personnel in the medical device industry
is intense, and finding and retaining qualified personnel with experience in our industry is very difficult. We believe there are only a limited number of individuals
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with
the requisite skills to serve in many of our key positions and we compete for key personnel with other medical equipment and software manufacturers and technology companies, as well as
universities and research institutions. A significant portion of our compensation to our key employees is in the form of stock related grants. A prolonged depression in our stock price could make it
difficult for us to retain our employees and recruit additional qualified personnel. We do not maintain, and do not currently intend to obtain, key employee life insurance on any of our personnel. If
we fail to hire and retain personnel in key positions, we may be unable to continue to grow our business successfully.
Disruption of critical information technology systems, infrastructure, and data could harm our
business and financial condition.
Information technology helps us operate more efficiently, interface with customers, maintain financial accuracy and efficiency, and
accurately produce our financial statements. If we do not allocate and effectively manage the resources necessary to build, sustain and secure the proper technology infrastructure, we could be subject
to transaction errors, processing inefficiencies, the loss of customers, business disruptions, or the loss of or damage to intellectual property through a security breach. In addition, we have moved
some of our data and information to a cloud computing system, where applications and data are hosted, accessed and processed through a third-party provider over a broadband Internet connection. In a
cloud computing environment, we could be subject to outages and security breaches by the third-party service provider. If our data management systems do not effectively collect, store, process and
report relevant data for the operation of our business, whether due to equipment malfunction or constraints, software deficiencies, computer viruses, security breaches, catastrophic events or human
error, our ability to effectively plan, forecast and execute our business plan and comply with applicable laws and regulations will be impaired, perhaps materially. Any such impairment could
materially and adversely affect our financial condition, results of operations, cash flows and the timeliness with which we internally and externally report our operating results.
Our
information systems require an ongoing commitment of significant resources to maintain, protect, and enhance existing systems and develop new systems to keep pace with continuing
changes in information processing technology, evolving legal and regulatory standards, the increasing need to protect patient and customer information, and the information technology needs associated
with our changing products and services. There can be no assurance that our process of consolidating the number of systems we operate, upgrading and expanding our information systems capabilities,
continuing to build security into the design of our products, protecting and enhancing our systems and developing new systems to keep pace with continuing changes in information processing technology
will be successful or that additional systems issues will not arise in the future.
If
we are unable to maintain reliable information technology systems and prevent data breaches, we may suffer regulatory consequences in addition to business consequences. Our worldwide
operations mean that we are subject to data protection and cyber security laws and regulations in many jurisdictions, and that some of the data we process, store and transmit may be transmitted across
countries. In the U.S., HIPAA privacy and security rules require us as a business associate to protect the confidentiality of patient health information, and the Federal Trade Commission has begun to
assert authority over protection of privacy and the use of cyber security in information systems. In Europe, the General Data Protection Regulation requires us to manage individually identifiable
information in the E.U. and, in the event of violations, may impose significant fines. China and Russia have also passed laws that require individually identifiable data on their citizens to be
maintained on local servers and that may restrict transfer or processing of that data. We believe that the ongoing costs and impacts of ensuring compliance with such rules are not material to our
business. However, there is no guarantee that we will avoid enforcement actions by governmental bodies. Enforcement actions can be costly and interrupt regular operations of our business. In addition,
there has been a developing trend of civil lawsuits and class actions relating to breaches of consumer data held by large companies.
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While
we have not been named in any such suits, if a substantial breach or loss of data from our records were to occur, we could become a target of such litigation.
Likewise,
data privacy breaches by employees and others with permitted access to our systems may pose a risk that sensitive data may be exposed to unauthorized person or to the public.
There can be no assurance that any efforts we make to prevent against such privacy breaches will prevent breakdowns or breaches in our systems that could adversely affect our business. Moreover, we
manufacture and sell products that allow our customers to store confidential information about their patients. We do not have measures to secure our customers' equipment or any information stored in
our customers' systems or at their locations, which is the responsibility of our customers. A breach of network security and systems or other events that cause the loss or public disclosure of, or
access by third parties to, sensitive information stored by us or our customers could have serious negative consequences for our business, including possible fines, penalties and damages, reduced
demand for our solutions, an unwillingness of our customers to use our solutions, harm to our reputation and brand, and time-consuming and expensive litigation, any of which could have an adverse
effect on our financial results.
If we fail to maintain an effective system of internal control over financial reporting, we may not
be able to accurately report our financial results. As a result, current and potential stockholders could lose confidence in our financial reporting, which could have an adverse effect on our business
and our stock price.
Effective internal controls are necessary for us to provide reliable financial reports and to protect from fraudulent, illegal or
unauthorized transactions. If we cannot maintain effective controls and provide reliable financial reports, our business and operating results could be harmed.
A
failure to implement and maintain effective internal control over financial reporting could result in a material misstatement of our financial statements or otherwise cause us to fail
to meet our financial reporting obligations. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect
on our business and operating results and our stock price, and we could be subject to stockholder litigation.
We may have difficulties in determining the effectiveness of our internal controls due to our
complex financial model.
The complexity of our financial model contributes to our need for effective financial reporting systems and internal controls. We
recognize revenue from a range of transactions including CyberKnife and TomoTherapy Systems sales and services. The CyberKnife and TomoTherapy Systems are complex products that contain both hardware
and software elements. The complexity of the CyberKnife and TomoTherapy Systems and of our financial model pertaining to revenue recognition requires us to process a broader range of financial
transactions than would be required by a company with a less complex financial model. Accordingly, deficiencies or weaknesses in our internal controls would likely impact us more significantly than
they would impact a company with a less complex financial model. If we were to find that our internal controls were deficient, and/or we would be required to amend or restate historical financial
statements, this would likely have a negative impact on our stock price.
If third-party payors do not provide sufficient coverage and reimbursement to healthcare providers
for use of the CyberKnife and TomoTherapy Systems, demand for our products and our revenue could be adversely affected.
Our customers rely significantly on reimbursement from public and private third-party payors for CyberKnife and TomoTherapy systems
procedures. Our ability to commercialize our products successfully will depend in significant part on the extent to which public and private third-party payors provide adequate coverage and
reimbursement for procedures that are performed with our products.
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Third-party
payors, and in particular managed care organizations, frequently challenge the prices charged for medical products and services and institute cost containment measures to control or
significantly influence the purchase of medical products and services. If reimbursement policies or other cost containment measures are instituted in a manner that significantly reduces the coverage
or payment for the procedures that are performed with our products, our existing customers may not continue using our products or may decrease their use of our products, and we may have difficulty
obtaining new customers. Such actions would likely have a material adverse effect on our operating results.
On
October 31, 2015, the Centers for Medicare and Medicaid Services (CMS) issued the final rule for 2016 Medicare payment rates for hospital outpatient services, physicians, and
services performed in the freestanding center setting. The final rule included certain proposals that impact reimbursement rates for radiation therapy services, such as changes to the equipment
utilization assumptions, which have resulted in small changes in reimbursement in the freestanding center setting.
While
these coding changes were implemented in 2016 they have resulted in no significant differences in reimbursement for services delivered with our products. However, CMS reviews
reimbursement rates annually and may implement significant changes in future years, which could discourage existing and potential customers from purchasing or using our products.
The safety and efficacy of our products for certain uses is not yet supported by long-term clinical
data, and our products may therefore prove to be less safe and effective than initially thought.
Although we believe that the CyberKnife and TomoTherapy Systems have advantages over competing products and technologies, we do not
have sufficient clinical data demonstrating these advantages for all tumor indications. In addition, we have only limited five-year patient survival rate data, which is a common long-term measure of
clinical effectiveness in cancer treatment. We also have limited clinical data directly comparing the effectiveness of the CyberKnife Systems to other competing systems. Future patient studies or
clinical experience may indicate that treatment with the CyberKnife System does not improve patient survival or outcomes.
Likewise,
because the TomoTherapy Systems have only been on the market since 2003, we have limited complication or patient survival rate data with respect to treatment using the system.
In addition, while the effectiveness of radiation therapy is well understood, there is a growing but still limited number of peer-reviewed medical journal publications regarding the efficacy of highly
conformal treatment such as that delivered by the TomoTherapy System. If future patient studies or clinical experience do not support our beliefs that the TomoTherapy System offers a more advantageous
treatment for a wide variety of cancer types, use of the system could fail to increase or could decrease, and our business would therefore be adversely affected.
Such
results could reduce the rate of reimbursement by both public and private third-party payors for procedures that are performed with our products, slow the adoption of our products
by physicians, significantly reduce our ability to achieve expected revenues and could prevent us from becoming profitable. In addition, if future results and experience indicate that our products
cause unexpected or serious complications or other unforeseen negative effects, the FDA could rescind our clearances, our reputation with physicians, patients and others may suffer and we could be
subject to significant legal liability.
We rely on third parties to perform spare parts shipping and other logistics functions on our
behalf. A failure or disruption at our logistics providers would adversely impact our business.
Customer service is a critical element of our sales strategy. Third-party logistics providers store most of our spare parts inventory
in depots around the world and perform a significant portion of our spare parts logistics and shipping activities. If any of our logistics providers terminates its relationship
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with
us, suffers an interruption in its business, or experiences delays, disruptions or quality control problems in its operations, or we have to change and qualify alternative logistics providers for
our spare parts, shipments of spare parts to our customers may be delayed and our reputation, business, financial condition and results of operations may be adversely affected.
Third parties may claim we are infringing their intellectual property, and we could suffer
significant litigation or licensing expenses or be prevented from selling our product.
The medical device industry is characterized by a substantial amount of litigation over patent and other intellectual property rights.
In particular, the field of radiation treatment of cancer is well established and crowded with the intellectual property of competitors and others. We also expect that other participants will enter
the field. A number of companies in our market, as well as universities and research institutions, have issued patents and have filed patent applications which relate to the use of radiation therapy
and stereotactic radiosurgery to treat cancerous and benign tumors.
Determining
whether a product infringes a patent involves complex legal and factual issues, and the outcome of patent litigation actions is often uncertain. We have not conducted an
extensive search of patents issued to third parties, and no assurance can be given that third-party patents containing claims covering our products, parts of our products, technology or methods do not
exist, have not been filed, or could not be filed or issued. Because of the number of patents issued and patent applications filed in our technical areas or fields, our competitors or other third
parties may assert that our products and the methods we employ in the use of our products are covered by United States or foreign patents held by them.
In
addition, because patent applications can take many years to issue and because publication schedules for pending applications vary by jurisdiction, there may be applications now
pending of which we are unaware, and which may result in issued patents which our current or future products infringe. Also, because the claims of published patent applications can change between
publication and patent grant, there may be published patent applications that may ultimately issue with claims that we infringe. There could also be existing patents that one or more of our products
or parts may infringe and of which we are unaware. As the number of competitors in the market for less invasive cancer treatment alternatives grows, and as the number of patents issued in this area
grows, the possibility of patent infringement claims against us increases. Regardless of the merit of infringement claims, they can be time-consuming, result in costly litigation and diversion of
technical and management personnel. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater
resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise funds, if necessary, to continue
our operations.
In
the event that we become subject to a patent infringement or other intellectual property lawsuit and if the relevant patents or other intellectual property were upheld as valid and
enforceable and we were found to infringe or violate the terms of a license to which we are a party, we could be prevented from selling our products unless we could obtain a license or are able to
redesign the product to avoid infringement. Required licenses may not be made available to us on acceptable terms or at all. If we are unable to obtain a license or successfully redesign our system,
we might be prevented from selling our system. If there is an allegation or determination that we have infringed the intellectual property rights of a competitor or other person, we may be required to
pay damages, pay ongoing royalties or otherwise settle such matter upon terms that are unfavorable to us. In these circumstances, we may be unable to sell our products at competitive prices or at all,
and our business and operating results could be harmed.
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We may be subject to claims that our employees have wrongfully used or disclosed alleged trade
secrets of their former employers.
As is common in the medical device industry, we employ individuals who were previously employed at other medical equipment or
biotechnology companies, including our competitors or potential competitors. We may be subject to claims that we or those employees have inadvertently or otherwise used or disclosed trade secrets or
other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against claims of this nature, litigation
could result in substantial costs and be a distraction to management.
It is difficult and costly to protect our intellectual property and our proprietary technologies,
and we may not be able to ensure their protection.
Our success depends significantly on our ability to obtain, maintain and protect our proprietary rights to the technologies used in our
products. Patents and other proprietary rights provide uncertain protections, and we may be unable to protect our intellectual property. For example, we may be unsuccessful in defending our patents
and other proprietary rights against third-party challenges. As key patents expire, our ability to prevent competitors from copying our technology may be limited.
In
addition to patents, we rely on a combination of trade secrets, copyright and trademark laws, nondisclosure agreements and other contractual provisions and technical security measures
to protect our intellectual property rights. These measures may not be adequate to safeguard the technology underlying our products. If these measures do not protect our rights adequately, third
parties could use our technology, and our ability to compete in the market would be reduced. Although we have attempted to obtain patent coverage for our technology where available and appropriate,
there are aspects of the technology for which patent coverage was never sought or never received. There are also countries in which we sell or intend to sell the CyberKnife or TomoTherapy Systems but
have no patents or pending patent applications. Our ability to prevent others from making or selling duplicate or similar technologies will be impaired in those countries in which we have no patent
protection. Although we have several issued patents in the United States and in foreign countries protecting aspects of the CyberKnife and TomoTherapy Systems, our pending United States
and foreign patent applications may not issue, may issue only with limited coverage or may issue and be subsequently successfully challenged by others and held invalid or unenforceable.
Similarly,
our issued patents and those of our licensors may not provide us with any competitive advantages. Competitors may be able to design around our patents or develop products
which provide outcomes comparable or superior to ours. Our patents may be held invalid or unenforceable as a result of legal challenges by third parties, and others may challenge the inventorship or
ownership of our patents and pending patent applications. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the
United States. In the event a competitor infringes upon our patent or other intellectual property rights, enforcing those rights may be difficult and time consuming. Even if successful,
litigation to enforce our intellectual property rights or to defend our patents against challenge could be expensive and time consuming and could divert our management's attention from our core
business. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against a challenge. In addition, we may not prevail in any lawsuits that we
initiate, and the damages or other remedies awarded, if any, may not be commercially valuable. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent
applications at risk of not issuing. Additionally, we may provoke third parties to assert claims against us.
We
also license patent and other proprietary rights to aspects of our technology to third parties in fields where we currently do not operate as well as in fields where we currently do
operate. Disputes with our licensees may arise regarding the scope and content of these licenses. Further, our ability to
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expand
into additional fields with our technologies may be restricted by our existing licenses or licenses we may grant to third parties in the future.
The
policies we have in place to protect our trade secrets may not be effective in preventing misappropriation of our trade secrets by others. In addition, confidentiality agreements
executed by our employees, consultants and advisors may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized
use or disclosure. Litigating a trade secret claim is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to
protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge methods and know-how. If we are unable to protect our intellectual property rights, we may be unable to
prevent competitors from using our own inventions and intellectual property to compete against us and our business may be harmed.
Unfavorable results of legal proceedings could materially and adversely affect our financial
condition.
We are and may become a party to legal proceedings, claims and other legal matters in the ordinary course of business or otherwise.
These legal proceedings, claims and other legal matters, regardless of merit, may be costly, time-consuming and require the attention of key management and other personnel. The outcomes of such
matters are uncertain and difficult to predict. If any such matters are adjudicated against us, in whole or in part, we may be subject to substantial monetary damages, disgorgement of profits, and
injunctions that prevent us from operating our business, any of which could materially and adversely affect our business and financial condition. We cannot guarantee that our insurance coverage will
be sufficient to cover any damages awarded against us.
If we are not able to meet the requirements of our license agreement with the Wisconsin Alumni
Research Foundation, or WARF, we could lose access to the technologies licensed thereunder and be unable to manufacture, market or sell the TomoTherapy Systems.
We license patents from WARF covering the multi-leaf collimator and other key technologies incorporated into the TomoTherapy Systems
under a license agreement that requires us to pay royalties to WARF. In addition, the license agreement obligates us to pursue an agreed development plan and to submit periodic reports, and restricts
our ability to take actions to defend the licensed patents. WARF has the right to unilaterally terminate the agreement if we do not meet certain minimum royalty obligations or satisfy other
obligations related to our utilization of the technology. If WARF terminates the agreement or if we otherwise lose the ability to exploit the licensed patents, our competitive advantage would be
reduced and we may not be able to find a source to replace the licensed technology. The license agreement reserves to WARF the initial right to defend or prosecute any claim arising with respect to
the licensed technology. If WARF does not vigorously defend the patents, we may be required to engage in expensive patent litigation to enforce our rights, and any competitive advantage we have based
on the licensed technology may be hampered. Any of these events could adversely affect our business, financial condition and results of operations.
International sales of our products account for a significant portion of our revenue, which exposes
us to risks inherent in international operations.
Our international sales, as a percentage of total revenue, have increased over the last five fiscal years. The percentage of our
revenue derived from sales outside of the Americas region was 60% in 2016, 54% in 2015 and 58% in 2014. To accommodate our international sales, we have invested significant financial and management
resources to develop an international infrastructure that will meet the needs of our customers. We anticipate that a significant portion of our revenue will continue to be derived from sales of our
products in foreign markets and that the percentage of our overall revenue
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that
is derived from these markets may continue to increase. This revenue and related operations will therefore continue to be subject to the risks associated with international operations,
including:
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economic or political instability in foreign countries, including the market volitlity caused by the recent approval by voters in the
U.K. of a referendum to leave the EU;
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import delays;
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changes in foreign regulatory laws governing, among other matters, the clearance, approval and sales of medical devices;
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the potential failure to comply with foreign regulatory requirements to sell and market our products;
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longer payment cycles associated with many customers outside the United States;
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adequate coverage and reimbursement for the CyberKnife and TomoTherapy treatment procedures outside the United States;
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failure of local laws to provide the same degree of protection against infringement of our intellectual property;
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protectionist laws and business practices that favor local competitors;
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the possibility that foreign countries may impose additional taxes, tariffs or other restrictions on foreign trade;
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risks relating to foreign currency, including fluctuations in foreign currency exchange rates possibly causing fewer sales due to the
strengthening of the U.S. Dollar; and
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contractual provisions governed by foreign laws and various trade restrictions, including U.S. prohibitions and restrictions on
exports of certain products and technologies to certain nations.
Our
inability to overcome these obstacles could harm our business, financial condition and operating results. Even if we are successful in managing these obstacles, our partners
internationally are subject to these same risks and may not be able to manage these obstacles effectively.
In
addition, future imposition of, or significant increases in, the level of customs duties, export quotas, regulatory restrictions or trade restrictions could materially harm
our business.
We face risks related to the current global economic environment, which could delay or prevent our
customers from obtaining financing to purchase the CyberKnife and TomoTherapy Systems and implement the required facilities, which would adversely affect our business, financial condition and results
of operations.
Our business and results of operations are materially affected by conditions in the global capital markets and the economy generally. A
general economic slowdown and the volatility in current economic conditions could adversely affect our business including our ability to raise financing. Concerns over the slow economic recovery, the
level of U.S. national debt, currency fluctuations and volatility, the rate of growth of Japna, China, and other Asian economies, unemployment, the availability and cost of credit, the
U.S. housing market, inflation levels, negative interest rates, energy costs and geopolitical issues have contributed to increased volatility and diminished expectations for the economy and
the markets.
Additionally,
uncertain credit markets and concerns regarding the availability of credit pose a risk that could impact consumer and customer demand for our products, as well as our
ability to manage normal commercial relationships with our customers, suppliers and creditors, including financial institutions. If the current situation continues to deteriorate or does not improve,
our business could be
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negatively
affected, including by reduced demand for our products resulting from a slow-down in the general economy, supplier or customer disruptions and/or temporary interruptions in our ability to
conduct day-to-day transactions through our financial intermediaries involving the payment to or collection of funds from our customers, vendors and suppliers. For example, in the
United States, some of our customers have been delayed in obtaining, or have not been able to obtain, necessary financing for their purchases of the CyberKnife or TomoTherapy Systems. In
addition, some of our customers have been delayed in obtaining, or have not been able to obtain, necessary financing for the construction or renovation of facilities to house CyberKnife or TomoTherapy
Systems, the cost of which can be substantial. These delays have in some instances led to our customers postponing the shipment and installation of previously ordered systems or cancelling their
system orders, and may cause other customers to postpone their system installation or to cancel their agreements with us. An increase in delays and order cancellations of this nature would adversely
affect our product sales, backlog and revenues, and therefore harm our business and results of operations. In addition, the recent approval by voters in the U.K. of a referendum to leave the EU
has caused, and may continue to cause, uncertainty in the global markets. The U.K.'s proposed exit from the EU, if implemented, will take some period of time to complete and could result in regulatory
changes that impact our business. We will review the impact of any resulting changes to EU or U.K. law that could affect our operations, such as labor policies, financial planning, product
manufacturing, and product distribution. Political and regulatory responses to the vote are still developing and we are in the process of assessing the impact the vote may have on our business as more
information becomes available.
Because the majority of our product revenue is derived from sales of the CyberKnife and TomoTherapy
Systems, which have a long and variable sales and installation cycle, our revenues and cash flows may be volatile and difficult to predict.
Our primary products are the CyberKnife and TomoTherapy Systems. We expect to generate substantially all of our revenue for the
foreseeable future from sales of and service contracts for the CyberKnife and TomoTherapy Systems. The CyberKnife and TomoTherapy Systems have lengthy sales and purchase order cycles because they are
major capital equipment items and require the approval of senior management at purchasing institutions. Selling our systems, from first contact with a potential customer to a complete order, generally
spans six months to two years and involves personnel with multiple skills. The sales process in the United States typically begins with pre-selling activity followed by sales presentations and
other sales related activities. After the customer has expressed an intention to purchase a CyberKnife or TomoTherapy System, we negotiate and enter
into a definitive purchase contract with the customer. The negotiation of terms that are not standard for Accuray may require additional time and approvals. Typically, following the execution of the
contract, the customer begins the building or renovation of a radiation-shielded facility to house the CyberKnife or TomoTherapy System, which together with the subsequent installation of the
CyberKnife or TomoTherapy System, can take up to 24 months to complete. In order to construct this facility, the customer must typically obtain radiation device installation permits, which are
granted by state and local government bodies, each of which may have different criteria for permit issuance. If a permit was denied for installation at a specific hospital or treatment center, our
CyberKnife or TomoTherapy System could not be installed at that location. In addition, some of our customers are cancer centers or facilities that are new, and in these cases it may be necessary for
the entire facility to be completed before the CyberKnife or TomoTherapy System can be installed, which can result in additional construction and installation delays. Our sales and installations of
CyberKnife and TomoTherapy Systems tend to be heaviest during the third month of each fiscal quarter.
Under
our revenue recognition policy, we generally do not recognize revenue attributable to a CyberKnife or TomoTherapy System purchase until after installation has occurred, if we are
responsible for providing installation. For international sales through distributors, we typically recognize revenue when the system is shipped and we have evidence of a purchase commitment from the
end user. Under
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our
current forms of purchase and service contracts, we record a majority of the purchase price as revenue for a CyberKnife or TomoTherapy System upon installation or delivery of the system. Events
beyond our control may delay installation and the satisfaction of contingencies required to receive cash inflows and recognize revenue, including delays in the customer obtaining funding or financing,
delays in construction at the customer site or delays in the customer obtaining receipt of regulatory approvals such as certificates of need.
The
long sales cycle, together with delays in the shipment and installation of CyberKnife and TomoTherapy Systems or customer cancellations, could adversely affect our cash flows and
revenue, which would harm our results of operations and may result in significant fluctuations in our reporting of quarterly revenues. Because of these fluctuations, it is likely that in some future
quarters, our operating results will fall below the expectations of securities analysts or investors. If that happens, the market price of our stock would likely decrease. These fluctuations also mean
that you will not be able to rely upon our operating results in any particular period as an indication of future performance.
We depend on third-party distributors to market and distribute our products in international
markets. If our distributors fail to successfully market and distribute our products, our business will be materially harmed.
We depend on a number of distributors in our international markets. We cannot control the efforts and resources our third-party
distributors will devote to marketing the CyberKnife or TomoTherapy Systems. Our distributors may not be able to successfully market and sell the CyberKnife or TomoTherapy Systems, may not devote
sufficient time and resources to support the marketing and selling efforts and may not market the CyberKnife or TomoTherapy Systems at prices that will permit the product to develop, achieve or
sustain market acceptance. In some jurisdictions, we rely on our distributors to manage the regulatory process, and we are dependent on their ability to do so effectively. In addition, if a
distributor is terminated by us or goes out of business, it may take us a period of time to locate an alternative distributor, to seek appropriate regulatory approvals and to train its personnel to
market the CyberKnife or TomoTherapy Systems, and our ability to sell and service the CyberKnife or TomoTherapy Systems in the region formerly serviced by such terminated distributor could be
materially and adversely affected. Any of these factors could materially and adversely affect our revenue from international markets, increase our costs in those markets or damage our reputation. If
we are unable to attract additional international distributors, our international revenue may not grow. If our distributors experience difficulties, do not actively market the CyberKnife or
TomoTherapy Systems or do not otherwise perform under our distribution agreements, our potential for revenue and gross margins from international markets may be dramatically reduced, and our business
could be harmed.
The high unit price of the CyberKnife and TomoTherapy Systems, as well as other factors, may
contribute to substantial fluctuations in our operating results, which could adversely affect our stock price.
Because of the high unit price of the CyberKnife and TomoTherapy Systems and the relatively small number of units installed each
quarter, each installation of a CyberKnife or TomoTherapy System can represent a significant percentage of our revenue for a particular quarter. Therefore, if we do not install a CyberKnife or
TomoTherapy System when anticipated, our operating results will vary significantly from our expectations. This is of particular concern in the current volatile economic environment, where we have had
experiences with customers cancelling or postponing orders for our CyberKnife and TomoTherapy Systems and delaying any required build-outs. These fluctuations and other potential fluctuations mean
that you should not rely upon our operating results in any particular period as an indication of future performance.
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As a strategy to assist our sales efforts, we may offer extended payment terms, which may
potentially result in higher Days Sales Outstanding and greater payment defaults.
We offer longer or extended payment terms for qualified customers in some circumstances. As of June 30, 2016, customer contracts
with extended payment terms of more than one year amounted to approximately 12% of our total accounts receivable balance. While we qualify customers to whom we offer longer or extended payment terms,
their financial positions may change adversely over the longer time period given for payment. This may result in an increase in payment defaults, which would affect our revenue, as we recognize
revenue on such transactions on a cash basis.
Our operations are vulnerable to interruption or loss because of natural disasters, epidemics,
terrorist acts and other events beyond our control, which would adversely affect our business.
We have facilities in countries around the world, including three manufacturing facilities, each of which is equipped to manufacture
unique components of our products. The manufacturing facilities are located in Sunnyvale, California, Madison, Wisconsin and Chengdu, China. We do not maintain backup manufacturing facilities for all
of our manufacturing facilities or for our IT facilities, so we depend on each of our current facilities for the continued operation of our business. In addition, we conduct a significant portion of
other activities, including administration and data processing, at facilities located in the State of California which has experienced major earthquakes in the past, as well as other natural
disasters. Chengdu, China, where one of our manufacturing facilities is located, has also experienced major earthquakes in the past. We do not carry earthquake insurance. Unexpected events at any of
our facilities, including fires or explosions; natural disasters, such as hurricanes, floods, tornados and earthquakes; war or terrorist activities; unplanned outages; supply disruptions; and failures
of equipment or systems, or the failure to take adequate steps to mitigate the likelihood or potential impact of such events, could significantly disrupt our operations, delay or prevent product
manufacture and shipment for the time required to repair, rebuild or replace our manufacturing facilities, which could be lengthy, result in large expenses to repair or replace the facilities, and
adversely affect our results of operation.
We may attempt to acquire new businesses, products or technologies, or enter into strategic
collaborations or alliances, and if we are unable to successfully complete these acquisitions or to integrate acquired businesses, products, technologies or employees, we may fail to realize expected
benefits or harm our existing business.
Our success will depend, in part, on our ability to expand our product offerings and grow our business in response to changing
technologies, customer demands and competitive pressures. In some circumstances, we may determine to do so through the acquisition of complementary businesses, products or technologies, or through
collaborating with complementary businesses, rather than through internal development. The identification of suitable acquisition or alliance candidates can be difficult, time consuming and costly,
and we may not be able to successfully complete identified acquisitions or alliances. Other companies may compete with us for these strategic opportunities. In addition, even if we successfully
complete an acquisition or alliance, we may not be able to successfully integrate newly acquired organizations, products or technologies into our operations, and the process of integration could be
expensive, time consuming and may strain our resources, and we may not realize the expected benefits of any acquisition, collaboration or strategic alliance. Furthermore, the products and technologies
that we acquire or with respect to which we collaborate may not be successful, or may require significantly greater resources and investments than we originally anticipated. In addition, we may be
unable to retain employees of acquired companies, or retain the acquired company's customers, suppliers, distributors or other partners who are our competitors or who have close relationships with our
competitors. Consequently, we may not achieve anticipated benefits of the acquisitions or alliances which could harm our existing business. In addition, future acquisitions or alliances could result
in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or
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expenses,
or other charges such as in-process research and development, any of which could harm our business and affect our financial results or cause a reduction in the price of our
common stock.
Multiple factors may adversely affect our ability to fully utilize certain tax loss carryforwards.
As of June 30, 2016, we had approximately $325.3 million and $145.6 million in federal and state net operating
loss carry forwards, respectively, which expire in varying amounts beginning in 2019 for federal and 2016 for state purposes. In addition, as of June 30, 2016, we had federal and state research
and development tax credit carryforwards of approximately $17.9 million and $17.6 million, respectively. The federal research credits will begin to expire in 2019, the California
research credits have no expiration date, and the other state research credits will begin to expire in 2017. Utilization of our net operating loss and credit carry forwards is subject to annual
limitation due to the application of the ownership change limitations provided by Section 382 of the Internal Revenue Code and similar state provisions to us. However, none of the federal and
state net operating loss carryforwards are expected to expire as a result of the ownership change limitation.
Our results may be impacted by changes in foreign currency exchange rates.
Currently, the majority of our international sales are denominated in U.S. Dollars. As a result, an increase in the value of the
U.S. Dollar relative to foreign currencies could require us to reduce our sales price or make our products less competitive in international markets. For example, the announcement of Brexit
caused severe volatility in global currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business. We believe
the strengthening of the U.S. Dollar has caused a potential delay in orders and we may continue to see our sales decline due to the strengthening of the U.S. Dollar. Also, if our
international sales increase, we may enter into a greater number of transactions denominated in non-U.S. Dollars, which would expose us to foreign currency risks, including changes in currency
exchange rates. If we are unable to address these risks and challenges effectively, our international operations may not be successful and our business would be materially harmed.
Changes in interpretation or application of generally accepted accounting principles may adversely
affect our operating results.
We prepare our financial statements to conform to United States Generally Accepted Accounting Principles. These principles are
subject to interpretation by the Financial Accounting Standards Board, American Institute of Certified Public Accountants, the Public Company Accounting Oversight Board, the Securities and Exchange
Commission and various other regulatory or accounting bodies. A change in interpretations of, or our application of, these principles can have a significant effect on our reported results and may even
affect our reporting of transactions completed before a change is announced. Additionally, as we are required to adopt new accounting standards, our methods of accounting for certain items may change,
which could cause our results of operations to fluctuate from period to period. For example, due to the significance of the software component in certain of our products, we are currently bound by the
software revenue recognition rules for a portion of our business.
Our liquidity could be adversely impacted by adverse conditions in the financial markets.
At June 30, 2016, we had $119.8 million in cash and cash equivalents and $47.2 million in investments. The
available cash and cash equivalents are held in accounts managed by third-party financial institutions and consist of cash in our operating accounts and cash invested in money market funds. The
investments are managed by third-party financial institutions and primarily consist of U.S. agency and corporate debt securities. To date, we have experienced no material realized losses on or
lack of access to our invested cash, cash equivalents or investments; however, we can provide no
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assurances
that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets.
At
any point in time, we also have funds in our operating accounts that are with third-party financial institutions that exceed the Federal Deposit Insurance Corporation (FDIC),
insurance limits. While we monitor daily the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial
institutions fail or become subject to other adverse conditions in the financial markets. To date, we have experienced no loss or lack of access to cash in our operating accounts.
Our ability to raise capital in the future may be limited, and our failure to raise capital when
needed could prevent us from executing our growth strategy.
While we believe that our existing cash, cash equivalents and investments will be sufficient to meet our anticipated cash needs for at
least the next twelve months, the timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors, including the other risk factors
described above and below.
If
our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or debt securities or obtain other debt financing, which
could be difficult or impossible in the current economic and capital markets environments. Our debt levels may impair our ability to obtain additional financing in the future. The sale of additional
equity securities or convertible debt securities would result in additional dilution to our stockholders. We cannot assure that additional financing, if required, will be available in amounts or on
terms acceptable to us, if at all.
Risks Related to the Regulation of our Products and Business
Modifications, upgrades and future products related to the CyberKnife or TomoTherapy Systems or new
indications may require new FDA 510(k) clearances or premarket approvals, and such modifications, or any defects in design, manufacture or labeling may require us to recall or cease marketing the
CyberKnife or TomoTherapy Systems until approvals or clearances are obtained.
The CyberKnife and TomoTherapy Systems are medical devices that are subject to extensive regulation in the United States by
local, state and the federal government, including by the FDA. The FDA regulates virtually all aspects of a medical device's design, development, testing manufacturing, labeling, storage, record
keeping, adverse event reporting, sale, promotion, distribution and shipping. Before a new medical device, or a new intended use or indication of or claim for an existing product, can be marketed in
the United States, it must first receive either premarket approval or 510(k) clearance from the FDA, unless an exemption exists. Either process can be expensive, lengthy and unpredictable. The
FDA's 510(k) clearance process generally takes from three to twelve months, but it can last longer. The process of obtaining premarket approval is much more costly and uncertain than the 510(k)
clearance process and it generally takes from one to three years, or even longer, from
the time the application is filed with the FDA. Despite the time, effort and cost, there can be no assurance that a particular device or a modification of a device will be approved or cleared by the
FDA in a timely fashion, if at all. Even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses of the product, which may limit the market
for those products, and how those products can be promoted.
Medical
devices may be marketed only for the indications for which they are approved or cleared. The FDA also may change its policies, adopt additional regulations, or revise existing
regulations, each of which could prevent or delay premarket approval or 510(k) clearance of our device, or could impact our ability to market our currently cleared device. We are also subject to
medical device reporting regulations which require us to report to the FDA if our products cause or contribute to a death or a serious injury, or malfunction in a way that would likely cause or
contribute to a death or a serious
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injury.
We also are subject to Quality System regulations. Our products are also subject to state regulations and various worldwide laws and regulations.
A
component of our strategy is to continue to upgrade the CyberKnife and TomoTherapy Systems. Upgrades previously released by us required 510(k) clearance before we were able to offer
them for sale. We expect our future upgrades will similarly require 510(k) clearance; however, future upgrades may be subject to the substantially more time consuming data generation requirements and
uncertain premarket approval or clearance process. If we were required to use the premarket approval process for future products or product modifications, it could delay or prevent release of the
proposed products or modifications, which could harm our business.
The
FDA requires device manufacturers to make their own determination of whether or not a modification requires an approval or clearance; however, the FDA can review a manufacturer's
decision not to submit for additional approvals or clearances. Any modification to an FDA approved or cleared device that would significantly affect its safety or efficacy or that would constitute a
major change in its intended use would require a new premarket approval or 510(k) clearance. The FDA has recently issued a draft guidance that, if finalized, will result in manufacturers needing to
seek a significant number of new or additional clearances for changes made to legally marketed devices. We cannot assure you that the FDA will agree with our decisions not to seek approvals or
clearances for particular device modifications or that we will be successful in obtaining premarket approvals or 510(k) clearances for modifications in a timely fashion, if at all.
We
have obtained 510(k) clearance for the CyberKnife Systems for the treatment of tumors anywhere in the body where radiation is indicated, and we have obtained 510(k) clearance for the
TomoTherapy Systems to be used as integrated systems for the planning and delivery of IMRT for the treatment of
cancer. We have made modifications to the CyberKnife and TomoTherapy Systems in the past and may make additional modifications in the future that we believe do not or will not require additional
approvals or clearances. If the FDA disagrees, based on new finalized guidance and requires us to obtain additional premarket approvals or 510(k) clearances for any modifications to the CyberKnife or
TomoTherapy Systems and we fail to obtain such approvals or clearances or fail to secure approvals or clearances in a timely manner, we may be required to cease manufacturing and marketing the
modified device or to recall such modified device until we obtain FDA approval or clearance and we may be subject to significant regulatory fines or penalties.
The
FDA and similar governmental authorities in other countries in which we market and sell our products have the authority to require the recall of our products in the event of material
deficiencies or defects in design, manufacture or labeling. A government mandated recall, or a voluntary recall by us, could occur as a result of component failures, manufacturing errors or design
defects, including defects in labeling and user manuals. Any recall could divert management's attention, cause us to incur significant expenses, generate negative publicity, harm our reputation with
customers, negatively affect our future sales and business, require redesign of the CyberKnife or TomoTherapy Systems, and harm our operating results. In these circumstances, we may also be subject to
significant enforcement action. If any of these events were to occur, our ability to introduce new or enhanced products in a timely manner would be adversely affected, which in turn would harm our
future growth.
We are subject to federal, state and foreign laws applicable to our business practices, the
violation of which could result in substantial penalties and harm our business.
Laws and ethical rules governing interactions with healthcare providers.
The Medicare and Medicaid "anti-kickback" laws, and similar
state laws,
prohibit soliciting, offering, paying or accepting any payments or other remuneration that is intended to induce any individual or entity to either refer patients to or purchase, lease or order, or
arrange for or recommend the purchase, lease or order of, healthcare products or services for which payment may be made under federal and state healthcare
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programs,
such as Medicare and Medicaid. Such laws impact our sales, marketing and other promotional activities by reducing the types of financial arrangements we may have with our customers,
potential customers, marketing consultants and other service providers. They particularly impact how we structure our sales offerings, including discount practices, customer support, product loans,
education and training programs, physician consulting, research grants and other service arrangements. Many of these laws are broadly drafted and are open to a variety of interpretations, making it
difficult to determine with any certainty whether certain arrangements violate such laws, even if statutory safe harbors are available.
In
addition to such anti-kickback laws, federal and state "false claims" laws generally prohibit the knowing filing or causing the filing of a false claim or the knowing use of false
statements to obtain payment from government payors. Although we do not submit claims directly to payors, manufacturers can be held liable under these laws if they are deemed to "cause" the submission
of false or fraudulent claims by providing inaccurate billing or coding information to customers, or through certain other activities, including promoting products for uses or indications that are not
approved by the FDA.
We
are also subject to federal and state physician self-referral laws. The federal Ethics in Patient Referrals Act of 1989, commonly known as the Stark Law, prohibits, subject to certain
exceptions, physician referrals of Medicare and Medicaid patients to an entity providing certain "designated health services" if the physician or an immediate family member has any financial
relationship with the entity. The Stark Law also prohibits the entity receiving the referral from billing any good or service furnished pursuant to an unlawful referral. Various states have corollary
laws to the Stark Law, including laws that require physicians to disclose any financial interest they may have with a healthcare provider to their patients when referring patients to that provider.
Both the scope and exceptions for such laws vary from state to state.
If
our past or present operations are found to be in violation of any of these "anti-kickback," "false claims," "self-referral" or other similar laws in foreign jurisdictions, we may be
subject to the applicable penalty associated with the violation, which may include significant civil and criminal penalties, damages, fines, imprisonment and exclusion from healthcare programs. The
impact of any such violations may lead to curtailment or restructuring of our operations, which could adversely affect our ability to operate our business and our financial results.
Anti-corruption laws.
We are also subject to laws regarding the conduct of business overseas, such as the U.S. Foreign Corrupt
Practices Act
(FCPA), the U.K. Bribery Act of 2010, the Brazil Clean Companies Act, and other similar laws in foreign countries in which we operate. The FCPA prohibits the provision of illegal or improper
inducements to foreign government officials in connection with the obtaining of business overseas. Becoming familiar with and implementing the infrastructure necessary to ensure that we and our
distributors comply with such laws, rules and regulations and mitigate and protect against corruption risks could be quite costly, and there can be no assurance that any policies and procedures we do
implement will protect us against liability under the FCPA or related laws for actions taken by our employees, executive officers, distributors, agents and other intermediaries with respect to our
business. Violations of the FCPA or other similar laws by us or any of our employees, executive officers, distributors, agents or other intermediaries could subject us or the individuals involved to
criminal or civil liability, cause a loss of reputation in the market, and materially harm our business.
Laws protecting patient health information.
There are a number of federal and state laws protecting the confidentiality of certain
patient health
information, including patient records, and restricting the use and disclosure of that protected information. In particular, the U.S. Department of Health and Human Services (HHS), has
promulgated patient privacy rules under the HIPAA. These privacy rules protect medical records and other personal health information of patients by limiting their use and disclosure, giving patients
the right to access, amend and seek accounting of their own health
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information
and limiting most uses and disclosures of health information to the minimum amount reasonably necessary to accomplish the intended purpose. The HIPAA privacy standard was amended by the
HITECH, enacted as part of the American Recovery and Reinvestment Act of 2009. Although we are not a "covered entity" under HIPAA, we are considered a "business associate" of certain covered entities
and, as such, we are directly subject to HIPAA, including its enforcement scheme and inspection requirements, and are required to implement policies, procedures as well as reasonable and appropriate
physical, technical and administrative security measures to protect individually identifiable health information we receive from covered entities. Our failure to protect health information received
from customers in compliance with HIPAA or other laws could subject us to civil and criminal liability to the government and civil liability to the covered entity, could result in adverse publicity,
and could harm our business and impair our ability to attract new customers.
Transparency laws.
The Sunshine Act, which was enacted by Congress as part of the Patient Protection and Affordable Care Act on
December 14,
2011, requires each applicable manufacturer, which includes medical device companies such as Accuray, to track and report to the federal government on an annual basis all payments and other transfers
of value from such applicable manufacturer to U.S. licensed physicians and teaching hospitals as well as physician ownership of such applicable manufacturer's equity, in each case subject to
certain statutory exceptions. Such data will be made available by the government on a publicly searchable website. Failure to comply with the data collection and reporting obligations imposed by the
Sunshine Act can result in civil monetary penalties ranging from $1,000 to $10,000 for each payment or other transfer of value that is not reported (up to a maximum of $150,000 per reporting
period) and from $10,000 to $100,000 for each knowing failure to report (up to a maximum of $1 million per reporting period). In addition, we are subject to similar state and foreign
laws related to the tracking and reporting of payments and other transfers of value to healthcare professionals, the violation of which could, among other things, result in civil monetary penalties
and adversely impact our reputation and business.
Conflict Minerals.
The Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules promulgated by the SEC under such act
require
companies, including Accuray, to disclose the existence
in their products of certain metals, including tantalum, tin, gold, tungsten and their derivatives, that originate from the Democratic Republic of the Congo and adjoining countries. Under these rules,
we are required to obtain sourcing data from suppliers, perform supply chain due diligence, and file annually with the SEC a specialized disclosure report on Form SD covering the prior calendar
year. These requirements could adversely affect the sourcing, availability, and pricing of minerals used in the manufacture of components used in our products. We may also encounter customers who
require that all of the components of our products be certified as conflict free. If we are not able to meet this requirement, such customers may choose not to purchase our products, which could
adversely impact sales of our products, and impact our results of operation. In addition, we have incurred and expect to incur additional costs to comply with these disclosure requirements, including
costs related to determining the source of any of the relevant minerals and metals used in our products.
If we or our distributors do not obtain and maintain the necessary regulatory approvals in a
specific country, we will not be able to market and sell our products in that country.
To be able to market and sell our products in a specific country, we or our distributors must comply with applicable laws and
regulations of that country. In jurisdictions where we rely on our distributors to manage the regulatory process, we are dependent on their ability to do so effectively. While the laws and regulations
of some countries do not impose barriers to marketing and selling our products or only require notification, others require that we or our distributors obtain the approval of a specified regulatory
body. These laws and regulations, including the requirements for approvals, and the time required for regulatory review vary from country to country. The governmental agencies regulating medical
devices in some countries, for example, require that the user interface on medical device
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software
be in the local language. We currently provide user guides and manuals, both paper copies and electronically, in the local language but only provide an English language version of the user
interface. Obtaining regulatory approvals is expensive and time-consuming, and we cannot be certain that we or our distributors will receive regulatory approvals in each country in which we market or
plan to market our products. If we modify our products, we or our distributors may need to apply for additional regulatory approvals before we are permitted to sell them. We may not continue to meet
the quality and safety standards required to maintain the authorizations that we or our distributors have received. It can also be costly for us and our distributors to keep up with regulatory changes
issued or mandated from time to time. If we change distributors, it may be time-consuming and disruptive to our business to transfer the required regulatory approvals, particularly if such approvals
are maintained by our third-party distributors on our behalf. If we or our distributors are unable to maintain our authorizations, or fail to obtain appropriate authorizations in a particular country,
we will no longer be able to sell our products in that country, and our ability to generate revenue will be materially adversely affected.
Within
the European Union, we are required under the Medical Device Directive to affix the Conformité Européene, or CE, mark on our products in order to
sell the products in member countries of the EU. This conformity to the applicable directives is done through self-declaration and is verified by an independent certification body, called a Notified
Body, before the CE mark can be placed on the device. Once the CE mark is affixed to the device, the Notified Body will regularly audit us to ensure that we remain in compliance with the applicable
European laws or directives. CE marking demonstrates that our products comply with the laws and regulations required by the European Union countries to allow free movement of trade within those
countries. If we cannot support our performance claims and/or demonstrate or maintain compliance with the applicable European laws and directives, we lose our CE mark, which would prevent us from
selling our products within the European Union.
Under
the Pharmaceutical Affairs Law in Japan, a pre-market approval necessary to sell, market and import a product, or Shonin, must be obtained from the Ministry of Health, Labor and
Welfare (MHLW), for our products. Before issuing approvals, MHLW examines the application in detail with regard to the quality, efficacy, and safety of the proposed medical device. The Shonin is
granted once MHLW is content with the safety and effectiveness of the medical device. The time required for approval varies. A delay in approval could prevent us from selling our products in Japan,
which could impact our ability to generate revenue and harm our business.
In
addition to laws and regulations regarding medical devices, we are subject to a variety of environmental laws and regulations regulating our operations, including those relating to
the use, generation, handling, storage, transportation, treatment and disposal of hazardous materials, which laws impose compliance costs on our business and can also result in liability to us. For
example, the recast Directive on Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (the RoHS Directive), which began applying to medical devices in
July 2014, bans placing new electrical and electronic equipment on the EU market containing more than certain specified levels of lead, mercury, cadmium, hexavalent chromium, polybrominated
biphenyl or PBB and polybrominated diphenyl ether. We believe that the RoHS Directive does not impose any restrictions on our products because our products are exempt as large scale fixed
installations. The Notified Body which audits our compliance efforts has indicated that they share our view in this respect and that we are and will remain in compliance with the RoHS Directive
because the RoHS Directive's restrictions do not apply to our products. Nevertheless, there can be no guarantee that the EU will not challenge such determination and, accordingly, we intend to comply
with the RoHS restrictions, whether or not they apply, and are in the process of updating the way our products are built with a view toward achieving such compliance gradually over time.
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Healthcare reform legislation could adversely affect demand for our products, our revenue and our
financial condition.
In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were
signed into law. The Affordable Care Act (ACA) provides for, among other things, a 2.3% excise tax on U.S. sales of medical devices, including our products, effective as of 2013. The excise tax
was suspended for a two year period beginning January 1, 2016. This tax burden may have a material, negative impact on our business, results of operations and cash flow. In addition, these two
pieces of legislation include a large number of other health related provisions, including expanding Medicaid eligibility, requiring most individuals to have health insurance, establishing new
regulations on health plans, establishing health insurance exchanges, requiring manufacturers to report payments or other transfers of value made to physicians and teaching hospitals, modifying
certain payment systems to encourage more cost-effective care and a reduction of inefficiencies and waste and including new tools to address fraud and abuse. The laws also include a decrease in the
annual rate of inflation for Medicare payments to hospitals and the establishment of an independent payment advisory board to suggest methods of reducing the rate of growth in Medicare spending. There
continue to be many programs and requirements for which the details have not yet
been fully established or consequences not fully understood, and it is unclear what the full impact of the legislation will be.
In
addition, since the adoption of the Affordable Care Act, other legislation designed to keep federal healthcare costs down has been proposed or passed. For example, under the
sequestration required by the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012, Medicare payments for all items and services under Parts A and B
incurred on or after April 1, 2013 have been reduced by up to 2%. Future federal legislation may impose further limitations on the coverage or amounts of reimbursement available for our
products from governmental agencies or third-party payors. These limitations could have a negative impact on the demand for our products and services, and therefore on our financial position and
results of operations.
Since
the enactment of the ACA, CMS continues its efforts to move away from fee-for-service payments for furnishing items and services in Medicare. In the past several rulemaking cycles,
CMS has increased packaging policies and created larger payment bundles across the Medicare Hospital Outpatient Prospective Payment System (OPPS). One example is CMS' expansion of Comprehensive
Ambulatory Payment Classifications (C-APCs), under which payment for adjunctive and secondary items, services and procedures are packaged into the most costly primary procedure at the claim level.
Beyond the OPPS, CMS' Innovation Center has launched a number of alternative payment model (APM) demonstrations that involve episode-based payment. Since 2011, for example, CMMI has created or is in
the process of creating major federal initiatives to test episode-based payments, such as the Bundled Payments for Care Improvement (BPCI), Oncology Care Model (OCM), and Specialty Practitioners
Payment Model Opportunities.
Furthermore,
the Patient Access and Medicare Protection Act (PAMPA) of 2015 froze payment for some radiation therapy delivery and related services, and requires CMS to provide a report
to Congress on the development of an APM for radiation therapy services provided in non-facility settings. While these types of payment packaging policies and episode-based payments may impact
reimbursement for overall patient care, including items and services furnished to patients, they also create incentives for providers to carefully assess the value proposition of technology purchases
and uses. The impacts of these payment and delivery system changes are in their infancy and their overall effects remain under review.
Future
legislative or policy initiatives directed at reducing costs could be introduced at either the federal or state level. We cannot predict what healthcare reform legislation or
regulations, if any, will be enacted in the United States or elsewhere, what impact any legislation or regulations related to the
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healthcare
system that may be enacted or adopted in the future might have on our business, or the effect of ongoing uncertainty or public perception about these matters will have on the purchasing
decisions of our customers. However, the implementation of new legislation and regulation may materially lower reimbursements for our products, materially reduce medical procedure volumes and
significantly and adversely affect our business.
Risks Related to Our Common Stock
Our major stockholders own approximately 42.6% and directors and executive officers own
approximately 2.9% of our outstanding common stock as of June 30, 2016, which could limit other stockholders' ability to influence the outcome of key transactions, including changes
of control.
As of June 30, 2016, our current holders of 5% or more of our outstanding common stock held in the aggregate approximately 42.6%
of our outstanding common stock, while our directors and executive officers held in the aggregate approximately 2.9% of our outstanding common stock. This concentration of ownership may delay, deter
or prevent a change of control of our company and will make some transactions more difficult or impossible without the support of these stockholders.
The price of our common stock is volatile and may continue to fluctuate significantly, which could
lead to losses for stockholders.
The trading prices of the stock of high-technology companies of our size can experience extreme price and volume fluctuations. These
fluctuations often have been unrelated or out of proportion to the operating performance of these companies. Our stock price has experienced periods of volatility. Broad market fluctuations may also
harm our stock price. Any negative change in the public's perception of the prospects of companies that employ similar technology or sell into similar markets could also depress our stock price,
regardless of our actual results.
In
addition to the other risk factors described above and below, factors affecting the trading price of our common
stock include:
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regulatory developments related to manufacturing, marketing or sale of the CyberKnife or TomoTherapy Systems;
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political or social uncertainties;
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changes in product pricing policies;
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variations in our operating results, as well as costs and expenditures;
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announcements of technological innovations, new services or service enhancements, strategic alliances or significant agreements by us
or by our competitors;
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recruitment or departure of key personnel;
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changes in earnings estimates by analysts or changes in accounting policies; and
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market conditions in our industry, the industries of our customers and the economy as a whole.
The sale of material amounts of common stock by our stockholders could encourage short sales by
third parties and depress the price of our common stock.
The downward pressure on our stock price caused by the sale of a significant number of shares of our common stock, or the perception
that such sales could occur, by any of our significant stockholders could cause our stock price to decline, thus allowing short sellers of our stock an opportunity to take advantage of any decrease in
the value of our stock. The presence of short sellers in our common stock may further depress the price of our common stock.
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Future issuances of shares of our common stock could dilute the ownership interests of our
stockholders.
Any issuance of equity securities could dilute the interests of our stockholders and could substantially decrease the trading price of
our common stock. We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy (including in connection with acquisitions, strategic
collaborations or other transactions), to adjust our ratio of debt to equity, to satisfy our obligations upon the exercise of outstanding options or for other reasons.
In
August 2011, we issued $100 million aggregate principal amount of our 3.75% Convertible Senior Notes due August 1, 2016 (the 3.75% Convertible Notes), and
in February 2013, we issued $115 million aggregate principal amount of our 3.50% Convertible Senior Notes due February 1, 2018 (the 3.50% Convertible Notes). In
April 2014, we issued approximately $70.3 million aggregate principal amount of our 3.50% Series A Convertible Senior Notes due February 1, 2018 (the 3.50%
Series A Convertible Notes, and collectively with the 3.75% Convertible Notes and the 3.50% Convertible Notes, the Convertible Notes) and paid approximately $0.4 million in cash to
refinance approximately $70.3 million aggregate principal amount of our 3.50% Convertible Notes. Following such transactions, approximately
$44.7 million aggregate principal amount of the 3.50% Convertible Notes remained outstanding. To the extent we issue common stock upon conversion of any outstanding Convertible Notes, that
conversion would dilute the ownership interests of our stockholders.
Increased leverage as a result of the Convertible Notes offering may harm our financial condition
and operating results.
As of June 30, 2016, we had total consolidated liabilities of approximately $409.4 million, including the short-term
liability component of the 3.75% Convertible Notes in the amount of $36.4 million and the Term Loan of $3.5 million, and the long-term liability component of the 3.50% Convertible Notes
in the amount of $43.2 million and the 3.50% Series A Convertible Notes of $66.6 million as well as the Term Loan in the amount of $60.7 million.
In
April 2014, we refinanced approximately $70.3 million aggregate principal amount of the 3.50% Convertible Notes held by certain investors (the Participating
Holders) with approximately $70.3 million aggregate principal amount of the 3.50% Series A Convertible Notes. In connection with such transactions, we also paid the Participating Holders
approximately $0.4 million in cash.
On
January 11, 2016, the Company closed a $70.0 million debt financing agreement with Cerberus Business Finance, LLC, an affiliate of Cerberus Capital Management,
L.P (the Secured Loan). The net proceeds of the loan are required to be used, in addition to $30.0 million of cash funded by the Company, to retire $100.0 million of Convertible
Notes at the earlier of August 2016 or when otherwise redeemed. This financing consists of a $70.0 million first lien senior secured term loan with a 700 basis point margin and
1 percent LIBOR floor. The loan principal amount will be amortized at an effective rate of 5% annually with final payment due in 5 years and is subject to certain maintenance-based
covenants. The Secured Loan also includes certain financial covenants, customary events of default, and other customary covenants that limit, among other things, the ability of the Company and its
subsidiaries to (i) incur indebtedness, (ii) incur liens on their property, (iii) pay dividends or make other distributions, (iv) sell their assets, (v) make certain
loans or investments, (vi) merge or consolidate, (vii) voluntarily repay or prepay certain indebtedness and (viii) enter into transactions with affiliates, in each case subject to
certain exceptions. As required by the terms of the financing, upon the closing of the financing in January 2016, we used a portion of the net proceeds from the financing to repurchase
approximately $63.4 million in aggregate principal amount of the 3.75% Convertible Notes for $66.6 million in cash. In August 2016, we settled the remaining approximately
$36.6 million in aggregate principal amount of the 3.75% Convertible Notes and accrued interest for $37.3 million in cash.
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Our
level of indebtedness could have important consequences to stockholders and note holders, because:
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it could affect our ability to satisfy our obligations under the Convertible Notes;
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a substantial portion of our cash flows from operations will have to be dedicated to interest and principal payments and may not be
available for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes;
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it may impair our ability to obtain additional financing in the future;
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it may limit our flexibility in planning for, or reacting to, changes in our business and industry; and
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it may make us more vulnerable to downturns in our business, our industry or the economy in general.
The conditional conversion features of the 3.50% Series A Convertible Notes, if triggered,
may adversely affect our financial condition and operating results.
In the event the conditional conversion features of the 3.50% Series A Convertible Notes are triggered, holders of the 3.50%
Series A Convertible Notes will be entitled to convert such notes at any time during specified periods at their option. If one or more holders elect to convert such notes, unless we elect to
satisfy our conversion obligation by delivering solely shares of
our common stock (other than paying solely cash in lieu of any fractional share), including if we have irrevocably elected full physical settlement upon conversion, we would be required to make cash
payments to satisfy all or a portion of our conversion obligation based on the applicable conversion rate, which could adversely affect our liquidity. In addition, even if holders do not elect to
convert such notes, if we have irrevocably elected net share settlement upon conversion we could be required under applicable accounting rules to reclassify all or a portion of the outstanding
principal of such notes as a current rather than long-term liability, which could result in a material reduction of our net working capital.
The
3.50% Convertible Notes do not provide for such a conditional conversion feature.
Provisions in the indenture for the Convertible Notes, our certificate of incorporation and our
bylaws could discourage or prevent a takeover, even if an acquisition would be beneficial in the opinion of our stockholders.
Provisions of our certificate of incorporation and bylaws could make it more difficult for a third-party to acquire us, even if doing
so would be beneficial in the opinion of our stockholders. These provisions include:
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authorizing the issuance of "blank check" preferred stock that could be issued by our board of directors to increase the number of
outstanding shares and thwart a takeover attempt;
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establishing a classified board of directors, which could discourage a takeover attempt;
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prohibiting cumulative voting in the election of directors, which would limit the ability of less than a majority of stockholders to
elect director candidates;
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limiting the ability of stockholders to call special meetings of stockholders;
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prohibiting stockholder action by written consent and requiring that all stockholder actions be taken at a meeting of our
stockholders; and
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establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be
acted upon by stockholders at stockholder meetings.
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In
addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change of control of our company. Generally, Section 203 prohibits
stockholders who, alone or together with their affiliates and associates, own more than 15% of the subject company from engaging in certain business combinations for a period of three years following
the date that the stockholder became an interested stockholder of such subject company without approval of the board or 66
2
/
3
% of the independent stockholders. The existence of these
provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock.
A
change of control will also trigger an event of default under our term loan credit facility. If an event of default occurs, the collateral agent may, at its discretion, declare all or
any portion of the loan then-outstanding under the loan credit facility, including all accrued but unpaid interest thereon, applicable fees and early payment premiums, to be accelerated and
immediately due and payable.
Furthermore,
if a "fundamental change" (as such terms are defined in each the indentures of the Convertible Notes) occurs, holders of the Convertible Notes will have the right, at
their option, to require us to repurchase all or a portion of their Convertible Notes. A "fundamental change" generally occurs when there is a change in control of Accuray (acquisition of 50% or more
of our voting stock, liquidation or sale of Accuray not for stock) or trading of our stock is terminated. In the event of a "make-whole fundamental change" (as such term is defined in each of
the indentures for the Convertible Notes), we may also be required to increase the conversion rate applicable to the Convertible Notes surrendered for conversion in connection with such make-whole
fundamental
change. A "make-whole fundamental change" is generally a sale of Accuray not for stock in another publicly traded company. In addition, each of the indentures for the Convertible Notes prohibits us
from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Convertible Notes.
We have not paid dividends in the past and do not expect to pay dividends in the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all future earnings for the operation
and expansion of our business and, therefore, do not anticipate declaring or paying cash dividends in the foreseeable future. The payment of dividends will be at the discretion of our board of
directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, and other factors our board of directors may deem relevant. If
we do not pay dividends, a return on a stockholders' investment will only occur if our stock price appreciates.