Radiating Success
IBD profiles Varian Medical Systems (VAR):
It’s not every day that a hospital spends a couple of million dollars on a new piece of equipment.
But it’s happening a lot more often, thanks to a new product from Varian Medical Systems.
Varian’s cancer therapy systems are used to treat thousands of patients a day. The company dominates the market for radiation therapy treatment, which is used for a number of types of cancer.
Varian is just now entering the first stages of a new product cycle. That fuels sales for Varian as well as the industry as a whole.
Of course, it’s nice when your firm practically is the industry. Varian controls about 60% of the global share of radiotherapy treatment, says analyst Mark Lanyon of Morningstar. That number is more like 70% in North America.
“You rarely see a company in any industry with that level of global market share,” Lanyon said. “They dominate this niche.”
With the new product cycle, Varian is cranking out even more business. The impact is just taking effect.
“The last few quarters, we’ve started to see acceptance ramp up,” Lanyon said.
On Target
Varian’s image-guided radiation therapy system, known as IGRT, is leading the new cycle.
The product features the same core technology as its previous version, called intensity modulated radiation therapy, or IMRT, which launched in 1999.
The IGRT system is designed to be more accurate and efficient than its predecessor. When you’re zapping cancerous cells with radiation, the more accuracy you have, the less likely healthy tissue is damaged.
IGRT lets hospitals account for a tumor’s small movements. It can even adjust for shifts of up to one inch that take place when a patient breathes in and out.
“People have been talking about a magic bullet for a long time,” said Varian Chief Executive Dick Levy. “That’s usually a drug that kills damaged cells and leaves healthy ones untouched. IGRT is getting close to the magic bullet.”
Varian’s IGRT sales accelerated in the last two quarters of fiscal 2005, which ended in September. That should continue. Acceptance of the product has already come three times faster than IMRT. And IGRT just picked up Medicare reimbursement starting Jan. 1.
“That should really facilitate order growth,” said Ryan Rauch, analyst at Jefferies & Co. “Reimbursement has improved, so this is really profitable for hospitals.”
A survey Rauch’s firm did of 450 radiation oncologists showed 61% plan to upgrade to an IGRT system in the next year.
Varian is getting higher prices per sale, too. Its prior system sold for about $1 million. The upgraded system runs about $2 million.
Tight Focus
The new product helped Varian’s fiscal fourth-quarter sales rise 12% from the prior year to $386 million. Earnings increased 22% to 45 cents a share. Sales for all fiscal 2005 gained 12% to $1.38 billion, while earnings rose 27% to $1.50 a share.
Analysts polled by First Call expect Varian’s profit this year to climb 18% to $1.77 a share.
The company battles huge firms such as Siemens and Philips. Varian’s advantage is that it’s been tightly focused on this area for decades, while the others run far-flung companies.
Varian’s research strength helps it carry the best technology and the most diverse product set while it offers the best service, Rauch says.
Global Play
Beyond IGRT, Varian has other factors boosting its results. It’s getting a boatload of growth from its international business, Lanyon says. And it has the chance to gain share in Eastern Europe and Asia.
“They can win business that didn’t exist before,” Lanyon said.
Even in Western Europe, the number of radiation machines per capita is one-third what it is here, Levy says. Many countries there are committed to boosting that percentage.
Varian’s international order growth rate has ranged from 20% to 30% the past four years, Lanyon says. The U.S. rate has been less than 10%.
A rise in the cancer rate also will boost Varian’s sales. The rate in the U.S. is projected to swell by 50% by 2020, Lanyon says.
Meanwhile, Varian looks to increase sales of other products. Sales for its smaller X-ray products unit rose 18% last fiscal year, thanks partly to its new line of flat-panel image detectors. These replace the need for film and let doctors read X-rays instantly.
The market for flat-panel detectors is around $150 million, Levy says. It could reach $2 billion in the next decade.
Varian uses the X-ray unit’s technology to make detectors used in busy ports like the one in Long Beach, Calif. The product can screen cargo containers for bombs.
How much business could this market generate?
“It could be enormous or it could be nothing,” Lanyon said.
Another uncertainty is how much reimbursement Medicare will offer for Varian’s radiation products. If governments change their minds, they could slash payments by half, Lanyon says.
“That’s one of those land mine risks that could derail it,” he said.
Levy, 67, is retiring next month, to be replaced by President Timothy Guertin. Analysts don’t see that as a concern. Levy will remain as chairman, and Guertin has been with the firm for 30 years.
“I don’t want to downplay the importance of Dick Levy,” Rauch said. “He’s going to be missed. But I don’t think they’ll miss a beat.”
Posted by Eddy Elfenbein on January 18th, 2006 at 5:39 am
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
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