Palo Alto, Calif.-based Varian Medical Systems Inc. has joined the ranks of other companies in withdrawing its guidance even as at least one analyst saw positive news for the second quarter. For her part, BTIG’s Marie Thibault noted that the company missed on Americas oncology gross order metric, while falling short on consensus non-GAAP earnings per share (EPS) by five cents.
“If investors remain focused on the Americas order metric, [Varian] shares may trade off Tuesday, but we felt the result and overall commentary was more positive than many anticipated,” she added. She reiterated her organization’s buy rating.
Thibault also noted that the company is a leader in radiation therapy and stereotactic surgery, with better, faster treatments vs. its competitors. “Demand for the Halcyon product, software offerings, and value-added services is driving [Varian] to higher growth rates. We think this trend should continue to increase orders over the next few years. It's true that [Varian] is spending to drive growth, but the company is still growing EPS faster than its peers.”
During the call, Chris Toth, president of Varian oncology systems, noted that there will be an impact on capital equipment purchases as a result of the pandemic. He added that the second-quarter performance was ahead of last year until March, when COVID-19 hit the Americas, as well as Europe, the Middle East and Africa (EMEA).
“Based on our current visibility, we believe orders and revenues will be stressed in the second half of our fiscal year due to lockdowns restricting access to sites and delaying vault construction,” Toth said. “We believe this will have higher impact in our fiscal third quarter, followed by a sequential improvement in our fiscal fourth quarter, assuming no second wave of infections or lockdowns.”
He went on to highlight geographies, including the Americas, where in late March, the company experienced a delay in new orders of about $40 million due to the pandemic. “While order activity resumed in April, it is too early to estimate when it will return to pre-pandemic levels.” Toth predicted that a Latin American recovery will follow one in North America.
With EMEA, Toth said customer behavior varied by country, based on how severe the pandemic was. To that end, Germany saw strength, while the severity of the pandemic in Spain and Italy likely will hit tenders and new equipment orders.
“In India, while demand for our equipment and expansion of cancer care remains strong, the extension of the lockdown has momentarily impacted activity substantially over the past 30 days,” he continued. Meanwhile, China's new tender issuances have resumed close to pre-pandemic levels, indicating stabilization. In Japan, the company has seen some new tenders slow, while a high number of active tenders and customer conversations continue toward order placement.
For his part, CEO Dow Wilson clarified that the $30 million impact the company experienced was not due to cancellations of installations. Rather, “[t]hese are $30 million of pushouts in the quarter. So they were sites in Americas and EMEA, where we were not able to get into the site because of COVID-19 restrictions to complete the installation.”
Returning to normal
Thibault asked for more color around a return to normal in the U.S., particularly compared with China and South Korea. Wilson acknowledged that he did not have a full answer to that question.
“[W]e are seeing recovery [in] China. It is more centrally mandated. It's not so much susceptible to kind of the free market, so to speak,” he continued. “[I]n China, the patients were having to go into a hospital, into more of a COVID environment, it's more outpatient, whether hospital or nonhospital based here in the U.S. and a little more COVID-friendly, so to speak.” As a result, treatment volumes did not move down.
The quarter also saw the U.S. FDA clearance of the Ethos therapy solution. During the quarter, the company received 15 orders, to include a win against an MR-Linac system. Toth noted that the decision was made because the solution offers multi-modality imaging and includes artificial intelligence. Further, it has the flexibility to treat both adaptive and conventional cases. “We think this is going to be something that actually accelerates in terms of importance based on the current environment,” he said in response to a question from Tycho Peterson with J.P. Morgan about the product.
When the product was cleared, Toth noted that it is designed to deliver an entire adaptive treatment in a 15-minute slot and is intended to put the patient at the center of care. "This solution represents a new chapter in democratized cancer care,” Toth added.
Jason Bednar with Piper Sandler asked when the company expected a regulatory nod in China for the product. Toth noted that it is in the 12 to 14-month range in terms of clearance.