Varian Medical Systems Inc. (VAR:US), a maker of equipment used to treat tumors with radiation therapy, fell the most since April 26 after the government proposed cutting payment rates to cancer clinics in 2013.
Varian declined 3.3 percent to $57.96 at 2:52 p.m. New York time, after earlier dropping to as low as $57. The Palo Alto, California-based company, which also makes and sells x-ray tubes and flat-panel digital detectors, slumped 11 percent this year through July 6.
The U.S. Centers for Medicare and Medicaid Services, known as CMS, announced plans July 6 that would update payment policies and rates for services to Medicare beneficiaries in hospital outpatient departments and ambulatory surgical centers beginning Jan. 1.
“When you look at the proposal, the first thing you look at is the size of reimbursement cut and it’s almost like a slap in the face,” Jeff Johnson, an analyst at Robert W. Baird in Milwaukee, said in a telephone interview today.
While he rates the stock outperform, Johnson reduced the target price to $71 a share from $76. He estimates reimbursement cuts of about 33 percent for radiation therapy in free-standing centers and about 17 percent for proton therapy in hospitals. Hospital radiation therapy payments would rise by a greater- than-expected 5 percent, he said.
‘Weigh on Shares’
While CMS’s proposed cuts for 2013 are “sizeable” and “will weigh on shares today, investors should keep in mind the near-to-intermediate term financial impact to Varian is relatively modest,” Johnson wrote in a note to investors today. He estimates the risk to earnings is 6 cents to 8 cents a year.
“The other part of the news that people are ignoring is that there is an increase for hospital radiation therapy and that accounts for about 85 percent of Varian’s U.S. orders,” he said. “So their business there got a better outcome. You can’t ignore bad news in 15 percent of the business, but you need to keep perspective.”
Other analysts had different estimates of how much reimbursement reductions would affect Varian.
Based on CMS’s proposal, cuts to payment rates for radiation cancer therapy at free-standing clinics would be “significantly greater than expected,” Citigroup Inc. analyst Amit Bhalla wrote in a note to investors this morning.
Reimbursement for Varian’s radiation therapy at free- standing clinics, based on 40 treatment sessions lasting six-to- eight weeks, would drop 29 percent for the average patient, compared with expectations for a 5 percent decline, Bhalla wrote in his note. He cut the price target on Varian to $63 a share, from $69, and reiterated a neutral rating on the stock.
At the same time, reimbursements for hospital outpatients who receive the therapy would increase 8 percent, compared with expectations of a 1 percent increase to 1 percent decrease, Citigroup said in the note.
Varian is expected to weather the CMS proposals to cut 2013 reimbursement for radiation and proton therapy, in part because “they have a strong balance sheet and strong cash flow so they can buy back shares,” Johnson said. “It’s really a buying opportunity.”
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