18 Nov TomoTherapy shareholder Avalon Portfolio demands change in business strategy
Madison, Wis. – In an attempt to change business strategy and boost shareholder value, Avalon Portfolio, LLC, which owns four percent of TomoTherapy’s outstanding shares of stock, today urged TomoTherapy’s board to consider all available strategic options, including a possible sale, in the wake of the steep fall in the company’s stock price.
In a Nov. 17 letter, Avalon Portfolio, which is managed by the La Jolla, California-based Avalon Capital Group, Inc., cited a series of strategic missteps by TomoTherapy management, and called on the Madison-based company to reconsider recent moves to expand its sales and service operations amid declining market demand and tightening credit.
TomoTherapy confirmed receipt of the letter, and indicated that it was “actively engaged” with management on a strategic plan to address business challenges and maximize the potential of its technology.
TomoTherapy, which markets the Hi-Art radiation therapy system to hospitals and cancer centers, is coming off a disappointing third quarter in which it reported a $13 million net loss, or 26 cents per share, on revenues of $27.4 million. During the first three three quarters of 2008, TomoTherapy posted a net loss of $26 million on revenue of $118 million, down from net income of $5.8 million on revenue of $154 million for the same period in 2007.
In addition, its stock price has dropped from a 52-week high of $22.58 per share to $2.56 at the close of trading on Monday. At the time of its May 2007 initial public offering, the stock opened at $24 per share, and Avalon stated that the bulk of the stock price decline occurred before the recent turmoil in the financial markets.
Sub-optimal use of capital?
Avalon Capital Group is the private investment company of Ted Waitt, co-founder of Gateway, Inc., the personal computer manufacturer. Avalon invests in an array of industries, including technology and healthcare.
Given what Avalon called the “niche nature” of TomoTherapy’s Hi-Art system, and what it characterized as a “limited installed customer base,” Avalon asserted that TomoTherapy’s investments in sales and service infrastructure were a “sub-optimal use” of shareholder capital.
Instead, Avalon recommended that TomoTherapy’s board focus on monetizing TomoTherapy’s technology via the outright sale of the company, a joint venture, or a licensing deal.
Avalon said equity markets now believe the company will exhaust its cash if it continues with its current strategic direction.
In its letter, Avalon contends that it has been rebuffed by TomoTherapy CEO Fred Robertson and the board in “numerous attempts” to meet and discuss strategic alternatives to “reverse the company’s fortunes and monetize its technology.”
Avalon contends that TomoTherapy’s missteps have virtually squandered its technological and market leadership, and that the board is making decisions without a full understanding of available strategic options.
“TomoTherapy’s insular board has been unwilling to hear opinions different from Dr. Robertson’s,” said Jonathan McCloskey, portfolio manager for Avalon, in a statement released by the company. “Although the company’s products can yield better treatment plans and patient outcomes, the company cannot let pride of its technology guide its future at the expense of shareholder value.”
The Hi-Art technology was created in the early 1990s by scientists and researchers at the University of Wisconsin-Madison, and was eventually commercialized through TomoTherapy. Despite declining orders for the system, economic uncertainty, and competitive products from the likes of Varian, Inc., Avalon said TomoTherapy employed 721 people as of Sept. 30, 2008, up from 618 employees on the same date in 2007.
Tim Dooling, a portfolio analyst with Avalon, said while his organization has four percent of the shares, it has emerged as the “sharp end of the spear” on this matter. “We’ve heard from other shareholders who share these views,” Dooling said. “They have expressed their independent dissatisfaction with all of this.”
Despite the view of some industry analysts and investors that Varian may have a better radiation treatment product, Avalon said it still believes in the superiority of the Hi-Art. The system is considered an advanced radiation therapy system for the treatment of a variety of cancers. It is marketed as a combination of integrated CT imaging and radiation therapy that can deliver treatments with speed and precision while reducing radiation exposure to surrounding healthy tissue.
“We have faith in the technology, not the management,” Dooling said.
According to Dooling, TomoTherapy’s sales were fine as long as it went after the low-hanging fruit of academic and research centers. But when it went up against Varian in commercial, single-unit carrier centers, it was at a disadvantage because Varian could exercise the leverage of its broader product lines. While TomoTherapy claims to have adjusted with products like TomoDirect, which is designed to add functionality to the Hi-Art, Dooling said it represents more of a renovation than an innovation.
“As the fruit got higher on the tree, execution became more of a necessity,” he stated, adding that TomoTherapy’s cost, sales, and service structures need to be realigned.
“Our view is clear – TomoTherapy is more of a product line than a company. More value could be released as part of a larger organization.”
In a written response, TomoTherapy cited a number of material misstatements in Avalon’s letter. Most notably, TomoTherapy said Avalon was offered the opportunity to meet directly with several independent directors, but Avalon did not agree to the meeting.
The invitation to meet remains open.
“We appreciate constructive input from all of our shareholders, we take Avalon’s views seriously and we are committed to acting in the best interests of all shareholders,” the company said in a prepared statement. “The Board continues to be actively engaged with management on a strategic plan to address business challenges and opportunities to maximize the potential of our technology and products, which Avalon has rightly recognized produce better treatment plans and clinical outcomes for patients.
“The Board fully recognizes its fiduciary duty to shareholders.”