Varian Keeps Beaming

By Stephen D. Simpson, CFA | October 30, 2008 AAA

On its fiscal year-end conference call Varian (NYSE:VAR) management seemed to borrow a page from Mark Twain. As it pertains to the availability of financing for medical device purchases, reports of the death of the credit market are greatly exaggerated. While the stock of this mid-cap med-tech has sold off this year, both the business and the stock have held up relatively better than many of Varian's peers.

The Strong Survive
Although management indicated that some of its competitors are cutting prices in an attempt to gain (or preserve) market share, it doesn't seem to be having a lot of impact on the business yet. Sales for this quarter rose 15%, margins improved and operating income rose about 19% from last year.

The health of the hospital market is robust. Varian logged a solid decrease in days sales outstanding, and that's hard to do if the customer doesn't have the cash. The company also reported that net orders rose 15% from last year, and Varian has over three-quarters' worth of revenue in its backlog (based upon this quarter's run-rate).

In fact, the company booked more than 150 orders for its RapidArc products. While this platform has a higher average selling price than older versions and some competitive offerings, the greater speed of the device allows for better patient throughput and higher ultimate profitability for the hospital.

What's the Competition Up To?
General Electric (NYSE:GE), Siemens (NYSE:SI) and Philips (NYSE:PHG) have all sounded notes of caution regarding their healthcare businesses and the current economic situation, but both Varian and Intuitive Surgical (Nasdaq:ISRG) have sounded rather upbeat. That may be a testament to good marketing, but I think it's more likely a testament to superior products and compelling economics for the paying customer (the hospital).

All that said, investors who own Varian should keep an eye on what's going on with competitors like Accuray (Nasdaq:ARAY), Siemens, TomoTherapy (Nasdaq:TOMO) and Sweden's Elekta. Varian has leading market share for a good reason (namely, strong products and service support), but aggressive price competition will eventually take its toll if the competition decides to go that route.

Limited Time Offer
I feel like I'm writing this all the time these days, but Varian's trading at valuation levels today that haven't been seen in nearly 10 years. Unfortunately, cancer is still a huge market opportunity in healthcare and this company has retained a leading technology and product position. In other words, the market opportunity looking ahead a few years is as good as it's ever been and the stock is a whole lot cheaper. That sounds like the set-up for a solid long-term investment.

To learn more, read A Checklist For Successful Medical Technology Investment.

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