January 25, 2019 | 8:34 AM by Jay Kunstman | jkunstman@jaguaranalytics.com

Behind The Numbers – Varian Medical Systems (VAR)

Varian Medical is the world’s leading manufacturer of medical devices for treating cancer and other medical conditions with radiotherapy, radiosurgery, proton therapy, and brachytherapy. The company has two main reporting segments: Oncology Systems (~94% of total revenues) and Proton Therapy (~6% of total revenues).

After the close yesterday, Varian reported Q1 earnings that saw it miss on EPS, but beat on Revenue. Shares would close higher by only 1.66% in today’s session. In addition, management would also report that:

-Total Company Revenue increased 9%
-Oncology Revenue increased 8%
-Oncology Orders increased 16% (Highest growth in a decade)
-Proton Solutions Revenue increased 32%
-Worldwide Net Installed Base is now 8,198 Units, an increase of 4%
-Halycon Orders increased 67%
-HyperArc Orders increased 50%

However, Oncology gross margins were 44.4%, down 209 basis points. Approximately, 100 basis points of decline were driven by tariffs. And looking at Proton Solutions, gross margin dollars were $7 million, up $4 million. While the company continues to make good progress on profitability, they said their aspiration to achieve operating breakeven in this fiscal year may be delayed due to the timing of orders.

Tariffs – CEO Dow Wilson, in his prepared remarks, noted, “We received notification in December that the United States Trade Representative granted our exclusion request for Halcyon systems manufactured in China and subject to tariffs, resulting in approximately $1 million anticipated positive impact on fiscal year 2019 earnings. We thank the U.S. Trade Representative and the U.S. government for recognizing the impact of Varian’s cancer technologies on millions of patients by excluding Halcyon from the current trade dispute. We are hopeful that China will reciprocate but until further notice, tariffs on products imported into China from the U.S., effective as of August 23, remain in place.”

Halycon – JPMorgan analyst Tycho Peterson, in a post-earnings note, commented that after experiencing a surprising spike in orders last quarter (84 units), Varian’s Halcyon placements fell back to 20 units in F1Q, bringing total orders since launch in May 2017 to 202. Management attributed the spike in F4Q18 to pent-up demand, and noted F1Q orders as being in line with internal expectations. As we have noted previously, “the bigger question around Halcyon is how much the system can expand VAR’s installed base in emerging markets where the main opportunity lies, with >40% of orders since launch having been from emerging markets. The company continues to explore the price elasticity of emerging market customers with a defeatured version, but the effectiveness of this approach remains to be seen.”

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