Radiation oncology company Varian Medical Systems raised its full-year sales guidance after beating consensus analyst expectations in its third quarter.
A double-digit increase in oncology sales helped Varian ease past third-quarter earnings projections and move the midpoint of its full-year revenue outlook up 2%.
Weak spots in the financials included a slowdown in oncology orders and a big drop in sales in its proton business.
Varian recorded third-quarter sales of $825.8 million, up from $709.1 million a year ago. The growth in sales was driven by the performance of Varian’s oncology unit, which sells medical devices and software for use in radiation therapy. Sales at Varian’s oncology unit grew 19% in the quarter, with all geographies contributing to the increase.
At the same time, gross oncology orders slowed about 7% under estimates, according to Jefferies analysts who questioned whether it was temporary or a "canary in a coal mine."
"The extent of the slowdown is notable and likely to trigger a debate on whether or not it was normal lumpiness or something more structural (RO bundle in US; capital equipment slowdown in Japan/Australia). Unfortunately, it is simply too soon too tell in the current cycle,'" the analysts wrote in a research note.
Still, overall performance led Varian to raise its full-year revenue range to $3.18 billion to $3.21 billion, up from $3.09 billion to $3.18 billion going into the third quarter. After back-to-back increases to the sales outlook, the midpoint of Varian’s range has risen by 3% over the course of 2019.
Despite the rising revenue outlook, Varian chose to tighten rather than increase its expectations for full-year earnings. Varian’s inability to translate rising revenues into higher earnings partly stems from its plans to invest in recently acquired businesses. In recent months, Varian has moved more deeply into the interventional oncology market through the acquisitions of Endocare, Alicon and assets from Boston Scientific.
Varian CEO Dow Wilson said the deals will open up a $1 billion market with a "very generously accretive gross margin rate." However, in the near term, Varian will need to invest in the businesses, he said.
"These acquisitions serve as the first step in creating a comprehensive interventional oncology platform that includes a consumables business and leverages Varian’s unique software expertise," Wilson said on a third-quarter results conference call with investors. "Our challenge is to bring that to global scale."
Some of the spending will help Varian build out a sales force to promote the drug-loadable microsphere and bland embolic bead products it's set to acquire from Boston Scientific for $90 million.
The move into interventional oncology could provide Varian with a source of growth at a time when there are concerns about other parts of its business.
In addition to the oncology orders slowdown, sales at Varian's proton unit fell 26% in the quarter and Varian expects it to continue to face challenges.
"Our aspirational goal to achieve near-term break-even earnings for the proton business is impacted by slower-than -expected order volumes," Varian CFO Gary Bischoping told investors.
The situation led Varian to take a $51 million goodwill impairment charge on the proton business in the third quarter.