A Medical Device Daily

Avalon Portfolio, which is managed by Avalon Capital Group (La Jolla, California), said it has urged the board of TomoTherapy (Madison, Wisconsin) to immediately consider all available strategic options in the wake of the precipitous fall in TomoTherapy's stock price since its 2007 initial public offering, including a possible sale.

It also called on the company to reconsider recent moves to expand its sales and service operations amid declining market demand and tightening credit availability.

In a Nov. 17 letter, Avalon told the board that it believed the company's investments in sales and service infrastructure were a "sub-optimal use of shareholder capital," given the niche nature of the company's single product and limited installed customer base. Avalon pushed the board, instead, to focus on boosting shareholder value by monetizing TomoTherapy's technology via the outright sale of the company, a joint venture or a licensing deal.

TomoTherapy markets an integrated CT scanning and radiation therapy — known commercially as the Hi Art system — to hospitals and cancer centers. The technology was created in the early 1990s by scientists and researchers at the University of Wisconsin at Madison. The company employed 721 people as of Sept. 30, up from 618 employees on the same date in 2007, despite declining orders for its machines, economic uncertainty and growing competition.

In its letter, Avalon, which owns about 4% of TomoTherapy's outstanding shares, contends it has been rebuffed by 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 asserts that, given the company's low enterprise value, the equity markets now perceive TomoTherapy will exhaust its cash if it continues with its current strategic direction. Avalon believes a series of strategic missteps by TomoTherapy management has "virtually squandered" its technological and market leadership, arguing that the board is "making decisions without a full understanding of the (strategic) options available."

"TomoTherapy's insular board has been unwilling to hear opinions different from Dr. Robertson's," said Jonathan McCloskey, portfolio manager for Avalon. "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 board needs to face the harsh reality of the competitive environment and realize that shareholder value would be significantly increased by monetizing the company's technology, rather than continuing on its current course."

According to its most recent 10Q filing with the SEC, for the first 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. Since Nov. 9, 2007, the company's stock price has plummeted from $20.51 to $2.65, the closing price on Nov. 14, 2008. The stock opened at $24 in its May 2007 IPO, in which the company raised more than $186 million (Medical Device Daily, May 10, 2007).