Varian Has Big Plans for Cancer TreatmentVarian Has Big Plans for Cancer Treatment

Varian Medical Systems' decision to spin off it imaging components business shows that it wants to be a global cancer firm, not just a radiation oncology company.

Arundhati Parmar

Varian Medical Systems, a maker of radiation oncology equipment, announced this week that it will spin off its imaging components business as a separate company through a tax-free distribution to shareholders.

The transaction is expected to be complete by the end of the year when the business, which employs about 1300, will become independent with headquarters in Salt Lake City, UT.

The medical device industry has seen a slew of mergers in recent years. But medtech companies have also been engaged in pruning their portfolios in the last few years to adjust to a rapidly changing healthcare industry. Some big divestments include Johnson & Johnson shedding its Cordis business--the unit that pioneered the drug eluting stent category-- that Cardinal Health scooped up for nearly $2 billion last year.

More recently, Smith & Nephew shed its gynecology business, which Medtronic is buying for about $350 million.

For Varian, the spin out is more about increasing its focus on being a cancer treatment company.

"The spin-off will create two strong, independent companies," said Dow Wilson, CEO of Varian Medical Systems, in a statement.  "It will enable Varian to focus on expanding its position as a global cancer company with leading technology and services. The objectives and growth strategies of our imaging components and oncology businesses are now taking them in different directions."

Varian Imaging Components makes x-ray tubes, flat panel detectors, connectors, and accessories for imaging. It also functions as a supplier of workstations and software for computer-aided diagnostics and image processing.  

This business, which generates about $575 million in revenue had lately become a drag on the rest of the business, according to Brandon Henry, an analyst with RBC Capital Markets.

In a research note published Monday, he wrote: "Imaging Components has recently struggled due to: 1) a significant decline in security and inspection revenues as customers, particularly in oil-based economies, slowed spending; 2) major flat panel pricing declines, as the company was forced to lower pricing to retain market share amid currency moves, which benefited [Varian's] overseas competitors; 3) a large flat panel customer (Carestream) deciding to in-source manufacturing; and 4) Toshiba reducing inventory in tubes after announcing plans to sell its Medical Systems unit to Canon."

Henry applauded the decision to jettison the business, noting that spinning of a non-core business like Imaging Components makes strategic sense.

"...we believe management is looking to redefine [Varian] as more of a cancer company versus just a radiation oncology company."

However, this may not mean that Varian is planning big deals.

"We do not expect any transformational M&A, as management likes to keep a relatively conservative balance sheet." Henry said.

Still, tuck-in M&As may be able to provide more revenue growth to the overall company than in the past, he said.

One area that Henry believe may make sense for Varian to do some M&A: radioembolization ablative therapy.

Arundhati Parmar is a senior editor at UBM.

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