Firm’s Success Lures Investors

Sep. 11–Snubbed by venture capitalists on both coasts, fast-growing TomoTherapy now finds itself being wooed by Wall Street and health care centers around the world.

The 8-year-old, privately owned maker of what some say is a revolutionary system for delivering radiation to cancer patients has added 110 employees since January. It had about $40 million in sales last year, has a nine-month order backlog for its $3.2 million product and is taking orders into the second quarter of 2006, said Frederick A. Robertson, TomoTherapy’s chief executive officer.

The company, which has 280 employees, was “modestly profitable” in 2004, he said.

Analysts from Deutsche Bank Securities, JP Morgan, Morgan Stanley, Piper Jaffray & Co., Robert W. Baird & Co. Inc. and others have traveled to Madison to learn more about the company, said Stephen C. Hathaway, TomoTherapy’s chief financial officer.

TomoTherapy system buyers include the Johns Hopkins Sidney Kimmel Comprehensive Cancer Center in Baltimore, Md., M.D. Anderson Cancer Center Orlando and the University of Virginia Medical Center.

Not bad for a company started by two University of Wisconsin-Madison researchers.

“This company is transforming cancer care,” said Robertson, a pediatric anesthesiologist and former Marquette Electronics and GE Healthcare executive.

The company’s system, which weighs 2 1/2 tons, uses computers to help doctors calculate the best way to deliver radiation to a tumor. A computerized tomography, or CT, scanner verifies the tumor’s location before delivering radiation.

A St. Louis hospital’s marketing campaign uses darts representing radiation and a red balloon to show the tumor to explain the system. One dart pops the tumor, leaving pink balloons that represent unharmed healthy tissue. The conventional radiation darts pop the red balloon and some pink ones, too.

The hospital, SSM DePaul Health Center, decided to buy the TomoTherapy system in four weeks, and it was one of the few such purchase decisions that entire clinical staff agreed on, said Melinda Clark, chief executive officer.

“We have the only TomoTherapy system in the state of Missouri, and they’re one of the up and coming companies,” Clark said.

Not everyone agrees that tomotherapy is revolutionary.

“There isn’t a thing their machine does that can’t be done equivalently or better by a C-arm linear medical accelerator,” said Spencer Sias, vice president of corporate communications and investor relations at Varian Medical Systems Inc. in Palo Alto, Calif.

Varian, which sells the C-arm equipment, dominates the cancer radiation equipment market. The C-arm’s fewer beams expose less healthy tissue to radiation, they can be manipulated to match the size and shape of the tumor, and they target the slight movements of tumors as patients breathe, Sias said.

C-arm equipment is also less expensive than TomoTherapy’s system, with Varian’s unit selling for $2.4 million, he said.

But the parade of Wall Street professionals showing up at TomoTherapy’s Madison headquarters suggests there is money to be made.

Varian should remain the industry leader with an estimated 58 percent of the future market for the type of equipment used by the majority of cancer radiation doctors, but TomoTherapy can expect to get about 26 percent, according to a survey of such doctors published in June by Tycho Peterson, a Morgan Stanley analyst.

The company downplays its potential for going public.

“We like being private, but our venture capitalists will have to have some method for getting their money,” Robertson said.

Venture capitalists own a majority of the company, but co-founders Paul Reckwerdt and Thomas “Rock” Mackie — a UW-Madison professor and TomoTherapy’s research director — have made sure every employee has ownership, Robertson said.

TomoTherapy, which didn’t ship its first product until July 2003, has 41 systems in clinical use, Reckwerdt said. The number of patients being treated on its system has grown to 500 a day, and 40 percent of its orders this year will come from outside the U.S., he said.

TomoTherapy plans to take about 40 orders this year but estimates a market opportunity of 700 to 750 units a year, Robertson said.

“One of the challenges at this point in time is trying to grow in a controlled fashion,” said John Neis, senior partner at Venture Investors LLC in Madison. “They’re just trying to build up their infrastructure as fast as they can to meet the demands of the future.”

When Neis first looked at the firm in 1998, it was too risky for most venture capitalists. The company would have to compete against large competitors in a capital-intensive business, among other challenges.

Neis shopped it around to other Midwestern venture capital firms and eventually led a first financing round to raise $3 million. The company has since raised a total of $28 million because of what its investors call its disruptive technology.

And the technology has drawn kudos. In May the company was named one of the Red Herring Top 100 Private Companies of North America by the weekly technology innovation magazine, and in 2003 it won the Frost & Sullivan Radiotherapy Solutions Excellence in Technology Award.

“It doesn’t take a rocket scientist to figure out you’re talking about old, outmoded technology vs. the new technology of TomoTherapy,” said Gary Shields, a managing partner at AvTech Ventures, a San Diego fund whose former Ann Arbor, Mich., office put money into the first financing round.

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