Mr. Husain: My current coverage universe is a miscellany of different stocks, but it is segmented into different buckets. The first bucket is radiation oncology, and I am one of two analysts who cover the triumvirate of publicly traded radiation oncology names, Varian Medical Systems (VAR), Accuray (ARAY) and TomoTherapy (TOMO). And then also rounding out capital equipment, I also cover Hologic (HOLX). And then I have the straight up medical supply names as well — Hospira (HSP), Baxter (BAX) and ICU Medical (ICUI) — and I'm starting to move into the diagnostic space with my coverage of Sequenom (SQNM).
TWST: Why focus on the radiation oncology space? What's the appeal?
Mr. Husain: In radiation oncology the appeal is that even in a tough market,
even in a tough economy, it is still a big ticket revenue generator for
hospitals. Hospitals make a lot of money on radiation oncology patients. It's a
very profitable component of hospitals. And we know in 2009 the capital medical
equipment is getting kicked in the gut; names that are levered to capital
equipment are getting dumped on. I think part of it is obviously when you look
at the price tag for radiation oncology systems, it's a hefty price tag and
we're talking 2 to 3 million pieces of equipment — even more so for Accuray's
CyberKnife System. So it's tough to make that kind of sell in this capital
equipment environment when hospitals are really feeling it; it's tough to find
some dollars to pay up for this equipment.
That said, I think that hospitals, in their efforts to prop up their income
statement, are going to look eventually — when the capital equipment spending
environment starts to pick up — at radiation oncology as a good investment
because it does generate good cash flows for hospitals. Which companies will
they look at in my space? I like Varian Medical Systems. I choose Varian Medical
Systems because quite frankly Varian has got the better, faster, cheaper
solution with their linear accelerator technology — more so now than they did a
couple of years ago.
Varian invested in new technology and they have what I like to refer to as one
of the best product rollouts in radiation oncology history with their RapidArc
software. This is a software that is bolted onto their radiation oncology box.
Basically what RapidArc does is that it makes radiation oncology that much more
efficient; you can get 50% more patients through the radiation oncology suites
than before. So in this tough hospital spending environment, when a Varian sales
rep goes into a hospital and says to the CFO, "I can improve your patient
throughput in your big box radiation oncology suite to the tune of 50% or more,"
that's a very compelling sales pitch. So I think that Varian has had a lot of
success with RapidArc. The RapidArc launch has been very good for them and I
continue to expect this rollout to proceed well.
For the other two names in radiation oncology, Accuray and TomoTherapy, I think
it's going to be a little tougher. TomoTherapy and Varian I really view as the
pair trade and I think that as folks gravitate to Varian equipment, especially
with the RapidArc installed, it makes purchasing TomoTherapy equipment less
compelling. And then on the Accuray side, Accuray's box is very expensive.
Accuray could face some greater pressures as we head into the new reimbursement
rate decisions for stereotactic radiosurgery; the preliminary reimbursement
decisions for 2010 will come up in July and Accuray could see some downward
reimbursement pressure, given the environment that we're in.
Tickers included in this excerpt: ARAY, BAX, ICUI, JNJ, TOMO, VAR
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