The interest rate swing, and the impact on the radiotherapy business
Future
Radiotherapy technology has advanced rapidly in the past 30 years. Are these technological advances sustainable in the new world of higher interest rates?
The number of radiotherapy companies since the early 1950s correlated with the Federal Funds Effective Rate, as compiled by the St. Louis Fed.
Now that 2024 is coming into the fall season and ASTRO is upon us, it is always fun to speculate about industry trends, and future directions for the business. Of course, as an old Danish proverb goes, and supported by Yogi Berra, predictions are always difficult, especially about the future.
So maybe looking back at some notable industry events in the recent past can help with understanding future trends.
The big news in radiotherapy for 2023 was the bankruptcy of Viewray on July 17, 2023. However other notable industry news was Genesis care goes into Chapter 11 on June 1, 2023, and Varian quietly exiting the proton therapy business in the fall of 2022.
Sadly, these are not happy stories - they may simply be uncorrelated bad luck stories for a few companies. Given the size of the radiotherapy business, we may never know the backstory of these events, and whether they represent a trend.
The excellent commentary by Corey Zankowsky on the perils of high cost medical devices and pharmaceuticals for cancer is insightful. He argued convincingly that technology innovations need to provide tangible benefits to a broad patient use, and that the measure of this is what patients are willing and able to pay for. This begs the question about the amount of investment in the radiotherapy business that has gone into technology improvements (MR guidance in Viewray’s case) and what radiotherapy patients need today.
The other important trend in 2023, that is still lingering in 2024, is the environment of higher interest rates. After about 15 years of very low rates, bottoming to almost zero after the pandemic, interest rates were on the upswing in 2023, and a year later we know that this has caused waves in many sectors of the economy including the now famous failure of SVB, Silicon Valley’s flagship bank.
The Silicon Valley Bank failure on March 10 was attributed to interest rate increases that left the bank overexposed to long terms bonds whose value had dropped when interest rates increased. When the bank tried to raise capital to balance losses on its bond portfolio, this caused some account holders to withdraw funds, leading to a run on the bank.
Scott Drake, the then President and CEO of Viewray declined to answer a question about Viewray’s line of credit with SVB on an investor conference call on May 10, 2023. This leads one to wonder how the failure of Viewray has been influenced by the failure of SVB. If true, this shows a potential direct link between the radiotherapy business and interest rates for one business.
Is this the start of a trend?
Building new medical technology is expensive and requires much investment to fund the innovations for new techniques. There is a well-known link between interest rates and the value of new technologies. Due to the high cost of technology development, valuations of technology companies tend to drop when interest rates increase due to the increased difficulty of technology companies to raise investment funds when interest rates increase.
Interest rates have increased before, most recently in the 1970s. Can we learn anything about radiotherapy from this? The accompanying plot of the number of linear accelerator manufacturers vs the federal reserve overnight rate shows correlation from the 1950s to about the financial crisis in 2008, with interest rates lagging the number of linac manufacturers by about 10 years. At this point, as interest rates continued to drop, the number of new entrants in the radiotherapy sector started to increase, which is consistent with availability of investment funding for new therapies such as MR-Linacs and PET guided radiotherapy.
With raising interest rates, what does this mean for the radiotherapy sector? According to this simple thesis, there may be downward pressure on the number of companies that are able to continue operating, with more companies suffering a fate like Viewray’s.
This is also consistent with the exit of Varian from the proton business, where profit margins are notoriously small. Genesis care’s failure in the USA may be more reflective of a changing radiotherapy economy with reimbursement rates changing and radiotherapy techniques moving to hypofractionation and increased SABR (Stereotactic Ablative Body Radiotherapy) more common now for early-stage lung cancer and palliation for metastases.
These trends are also being driven by an increased understanding of our need for palliation. Our approach to oligo-metastases has evolved since the idea this idea was introduced in the late 1990s. Also, the medical oncology community is being transformed by new immunotherapy treatments that are converting previously non-treatable diseases into one where patients are being managed over a much longer time frame. In radiotherapy, we now see many patients coming for multiple courses of treatment to manage metastases as they arise, prolonging survival, but increasing the need to access radiation treatments. The needs of radiotherapy for these patients are changing from the precision techniques needed for dose escalation, to treatments that are more easily accessible to patients. What is the appropriate technology for these patients? Is it the same precision driven, image guided techniques, or do we need something different?
Time will tell.
