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Why Varian Medical Systems’ Profitability Is Improving

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Varian Medical Systems’ profitability

In 3Q17, Varian Medical Systems reported a gross margin of approximately 44.5%, representing an 18-basis-point improvement in the quarter. YTD (year-to-date), the margin has improved by around 138 basis points.

In 3Q17, the company’s Oncology Systems business witnessed a gross margin improvement of 200 basis points to reach 48.1% of the segment’s total sales, and Proton Therapy’s gross margin growth was flat. So far this year, Oncology Systems’ gross margin has improved by around 200 basis points, whereas Proton Therapy’s gross margin narrowed by 400 basis points. The company’s operating margin improved by 3% in 3Q17.

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Profitability drivers

Oncology Systems’ margin growth was driven by supply chain efficiencies and an improved services mix. The growth is expected to continue, due to solid pricing and operating leverage following the Varex spin-off. However, the Proton Therapy business witnessed a decline in profitability in 3Q17 due to currency headwinds on its two UK projects and the March 2017 bankruptcy of the Scripps Proton Therapy Center, which was opened in 2014.

The company’s operating margin widened by 3% in 3Q17 and is expected to witness growth driven by supply chain efficiencies and an improved services mix. The services mix improvement contributed 100–150 basis points. The services business registered order growth of approximately 7% in the quarter.

Varian Medical Systems believes that Oncology Systems’ gross margin will be 44%–45%, which may translate to EBIT (earnings before interest and tax) of 18.5%–20% in the near term. Investors can gain exposure to the company and participate in its growth potential by investing in the Vanguard Mid-Cap Growth ETF (VOT), of which Varian accounts for ~0.54%.

Peers Accuray (ARAY), Boston Scientific (BSX), and Intuitive Surgical (ISRG) reported gross margins of approximately 36.4%, 72%, and 71%, respectively, in their recently ended quarters. Next, let’s look Oncology Systems’ business mix and and how it affects the company’s sales.

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