Varian: Cancer Treatment Potential

04/23/2004 12:00 am EST

Focus:

Alexander Green

Chief Investment Strategist, The Oxford Club

"Over the last ten months, we've made no secret about our enthusiasm for the world leader in cancer-treatment systems, Varian," says Alexander Green, investment director for the exclusiveThe Oxford Club. Here, he explains why he remains as bullish as ever on the shares.

"Varian Medical Systems (VAR NYSE) is up 69% since we began buying it last June, and recently reached a new 52-week high. (The S&P 500 is up 12% over the same period.) But I don't believe for a minute that this stock's run is over. On the contrary, things at Varian are looking better than ever. Varian designs equipment and software for treating cancer with radiation therapy. The firm is able to grow its 70% world market share for cancer-treatment systems by continually innovating and improving its technology. And that's about to translate into a major boost in revenues.

"This year the company is unveiling an imaging system, which was only recently approved for sale here in the US. The system allows doctors to track and verify tumor treatment in real time through a pair of robotic arms, which follow the tumor as it moves. It may be the company's biggest precision improvement yet. Another blockbuster product coming down the pike is Varian's new Trilogy system, which includes a next-generation treatment called image-guided radiation therapy (IGRT). Trilogy will begin shipping this summer. And it will have an immediate impact on both the top and bottom line. The machines sell for $2.5 million each. Also launching later this year is Varian's Acuity system. It uses new advances in 3D imaging that can better adapt to a patient's motion during treatment. That makes sure the technology destroys cancerous tumors, not healthy organs nearby.

"Of course, Varian has a side business we believe has big potential too. The firm's Linatron-M linear accelerator X-rays cargo at more than 35 ports around the world. Currently only 2% of all cargo coming into the US is screened. For obvious reasons, however, the Department of Homeland Security would like to secure all 361 US seaports. I continue to believe the company will eventually be tapped for a big national defense job. And while Varian CEO Dick Levy says he doesn't expect any news immediately, he adds, ‘I'd love to be surprised.’ So would we. Meanwhile, we continue to expect the company to surprise on the upside."

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