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Varian Medical Systems
has transformed itself into
a great software and service company after only being a hardware company and now has
become an imaging company by putting imaging devices directly onto their cancer treatment
machine
Healthcare
Medical Equipment and Supplies
(VAR-NYSE)
Varian Medical Systems, Inc.
3100 Hansen Way
Palo Alto, CA 94304
Phone: 650-424-6803
Elisha W. Finney
Senior Vice President and CFO
Interview conducted by:
Walter Banks, Publisher
CEOCFOinterviews.com
April 7, 2005
Bio of
Elisha W. Finney, Senior Vice President & Chief Financial Officer
Elisha W. Finney became a senior vice president in January, 2005, overseeing all finance,
investor relations, information systems, regulatory affairs functions and information
technology functions of Varian Medical Systems. She has been serving as a corproate vice
president and CFO for Varian Medical Systems since August, 1998 when Varian Associates
divided into three separate companies. Finney came to this position with a background as
treasurer of Varian Associates, where she managed a staff responsible for Varian
Associates’ domestic and international banking, foreign exchange, corporate finance,
credit, and stock administration activities. In addition, she oversaw the company’s
risk management function.
Finney joined Varian
Associates as a risk manager in 1988 after serving in a similar role with the Fox Group in
Foster City, California and Beatrice Foods in Chicago, Illinois. She was named corporate
treasurer in March 1998. She holds a BA degree in risk management and insurance, from the University
of Georgia’s Terry College of Business. Finney also earned an MBA degree from Golden
Gate University in San Francisco, where she was named Outstanding Finance Student. She has
completed the Executive Management Program co-sponsored by Stanford University and the
American Electronics Association.
Company Profile:
Varian Medical Systems, Inc. (NYSE: VAR) is a leading manufacturer of integrated cancer
therapy systems. Some 4300 Varian Clinac® medical linear accelerators are in service
around the world, treating more than one million cancer patients each day. Prestigious
cancer care institutions worldwide rely on Varian Medical Systems integrated radiotherapy
solutions. The company is also a premier supplier of X-ray tubes and flat-panel digital
subsystems for imaging in medical, scientific, and industrial applications.
Varian’s growth is being driven by its introduction of new technology and products
for more precise, automated, and cost-efficient methods of X-ray imaging and treating
cancer with radiation therapy. The company markets solutions for all forms of radiation
therapy from conventional to newer, more precise treatment techniques, including intensity
modulated radiation therapy (IMRT), dynamic image-guided radiation therapy (IGRT), and
stereotactic radiotherapy and radiosurgery (SRT and SRS). Hospitals and cancer
clinics using these treatment solutions are able to shape beams, track and adjust for
tumor movement, and accelerate treatments of primary as well as early metastatic lesions.
The key components for
radiation therapy treatments are Varian’s Clinac® and Trilogy™ medical linear
accelerators, multi-leaf collimators (MLCs) for beam shaping, as well as On-board
Imager™ devices for locating and tracking tumors, as well as other accessories and
software for planning treatments, processing images, and managing clinical and patient
data.
Varian Medical Systems is the
technology and market leader in radiation therapy systems with a nearly 60% share of the
global market, including 70% in North American and 50% in international markets.
Varian Medical Systems is today organized around several distinct
operations:
The Oncology Systems unit is the world's largest supplier of integrated cancer therapy
systems, including the market-leading Clinac® and Trilogy™ medical linear
accelerators. In addition, Varian manufactures and markets an increasing array of
ancillary radiotherapy products such as radiotherapy imaging and simulation systems, the
VARiS® Vision information management system, and highly sophisticated treatment
accessories. An important element of the Oncology Systems’ product family is
Eclipse™, a software program that allows medical professionals to visualize the
three-dimensional extent of a tumor in the human body and automatically generate plans for
treating the tumor with high-intensity X-ray beams. The company’s linear accelerator
technology is also used for industrial inspection and cargo screening.
The X-ray Products business is the leading independent supplier of X-ray tubes for the
worldwide diagnostic imaging industry, including tubes expressly designed for the most
advanced mammography and computed tomography (CT) scanning applications. Varian is active
in four primary X-ray imaging market segments: CT scanner; diagnostic
radiographic/fluoroscopic; special procedures; and mammography. The company also
supplies a line of tubes for baggage screening systems at airports.
Varian’s X-ray Products
business has also developed an all-digital flat-panel image detector capable of producing
real-time fluoroscopic, radiographic, and cone-beam CT images. Systems incorporating these
amorphous silicon panels are expected to improve the efficiency and quality of diagnostic
x-ray imaging and help to improve the precision of radiotherapy. In addition to supplying
panels for the company’s radiotherapy solutions, X-ray products has established a
profitable business in sales of these products to X-ray equipment manufacturers for
applications in medical diagnostics, dental CT scanners, veterinary medicine and
non-destructive tests.
The company’s Ginzton Technology Center acts as Varian Medical Systems’ research
and development organization. The Center’s mandate is to create market growth
opportunities for Varian Medical Systems by developing technologies that eclipse current
capabilities in radiation therapy and X-ray imaging and/or lead to entirely new
businesses. An important repository of scientific and engineering expertise, the Center
also conducts research in support of product development for each of the company’s
business units.
Varian Medical Systems also operates a BrachyTherapy
business, which develops, manufactures, supplies, and services devices and software for
treating cancer through radiation sources that are placed within the patient. The
business’ financial results are incorporated within results for the Ginzton Technology
Center.
Varian Medical Systems is entering the Neurosurgery Market for Radiosurgery Products. The
new Varian Surgical Sciences organization will market image-guided robotic radiosurgical
solutions built around company’s new Trilogy™ accelerator and On-Board
Imager™ device.
CEOCFOinterviews: Ms. Finney, will you give us an overview of
the changes that have taken place at Varian since you have been there?
Ms. Finney: “I have been with Varian for seventeen
years, and have seen a tremendous amount of change and growth over that period. The most
significant change is that Varian has always been a great engineering company and a great
hardware company. We invented the same standing wave linear accelerator technology about
forty years ago. We have been the only company consistently in this market over that
entire period. What has really changed in the last ten to fifteen years is that we have
transformed ourselves into, not only being a great hardware company but also a great
software and service company. Now, with our latest technology towards image-guided
radiation therapy, we are moving into becoming an imaging company and putting imaging
devices directly on the treatment machine.”
CEOCFOinterviews: How
long has the image guided technology been around?
Ms. Finney: “The image guided technology is very new. We
received FDA 510-k clearance for the product about a year ago today. As of our fiscal year
2004, which ended last October, we have booked 84 orders for this On-Board Imager™
device and we had booked 27 orders for this brand-new Trilogy™ machine that delivers
stereotactic radiation therapy. We are just now starting routine shipments of these
products. We are excited about the uptake of these new products and it is well ahead of
where we were at the same time of the adoption of the predecessor, which was Intensity
Modulated Radiation Therapy (IMRT). We are excited that this will be the next revolution
in screening cancer.”
CEOCFOinterviews: Do you someday see the Trilogy replacing
its predecessor?
Ms. Finney: “I do not think it will ever completely
replace the Clinac® medical linear accelerator and if it did, it would take a long time.
We have about 4,300 installed accelerators around the world. You keep that machine on
average of ten to twelve years. It would take a long time to replace it entirely. I do
think that all major cancer centers will invest in at least one Trilogy™ as we start
to move toward treating metastases cancer with radiation. This machine provides the
ability for us to turn cancer into a chronic manageable disease as opposed to a one-time
life or death battle.”
CEOCFOinterviews: There
are other companies in the IMRT product field; is the Trilogy™ technology exclusive
to Varian?
Ms. Finney: “The Trilogy™ technology is exclusive
to Varian. What is so exciting about this Trilogy machine is that as a $3 million
investment, it is the only machine available today that can do each and every form of
radiation therapy. However, from your most conventional IMRT (Intensity Modulated
Radiation Therapy) to IGRT (Image Guided Radiosurgical Therapy) and all the way up to
doing stereotactic treatments, which is where you burn out a tiny legion with just one or
two doses of radiation, we do have competition. We have announced that we are entering
into the neurosurgery market, where we will compete there with primarily Elekta AB, who
has the Leksell Gamma Knife® machine. Elekta, traded
on the Swedish Exchange, ticker symbol EKTAb, has a $3 million machine that does
stereotactic radio surgery, but only in the brain. It cannot treat any lesions outside of
the head. Accuray Incorporated, which is not publicly traded, also has a $3 million device
that can deliver stereotactic radiation in any part of the body but it cannot deliver
traditional radiation treatment and it is comparatively slow. As we see, Varian is the
only provider of this all-encompassing versatile machine that can improve the quality of
care while reducing the cost of treatment. We can sell into the neurosurgery department as
well as into radiation oncology department.”
CEOCFOinterviews: Are
you approaching current Varian customers with your new technology to start with?
Ms. Finney: “We are. The bulk of the orders that I
talked about were from radiation oncology departments, so with our traditional customers
will start to experiment and start to build protocols on treating metastases cancer with
radiation. We have just announced the formation of Varian Surgical Sciences, which will
act as an independent business unit to address the neurosurgery market. That is because
those doctors want their own tools and you have to market to them differently. We are
building a sales force of four or five people that will address this. We estimated it is a
$250 million annual market.”
CEOCFOinterviews: For
the average facility that is looking to install the Trilogy™, how does it make sense
for them financially to do this?
Ms. Finney: “It depends on if it is used as a versatile
machine for all forms of radiation or if it is going to be exclusive to the neurosurgery
department. The standard radiotherapy machines today that are capable of IMRT, pay for
themselves in about eighteen to twenty-four months. It really depends on the proportion of
your patients getting various treatments. Reimbursements are in-place for IMRT treatments,
for what is required in order to deliver IGRT; and there are reimbursement codes in place
for imaging and for stereotactic treatments. Our belief is that while there is only a
handful of Trilogy units installed, that they will pay for themselves well within a
two-year period.”
CEOCFOinterviews: Does
Varian have any recurring revenues from the Trilogy?
Ms. Finney: “As a company, we are about 30 or 40% of
what I would call recurring revenue stream. We have an annual service business that is
currently running at about $220 million a year. This is after the one-year warranty period
where we would sell service contracts to go in and service our installed base. We also
have about $165 million X-ray tube business and the bulk of that is the replacement market
because the tubes are like light bulbs that go into CT scanners and other diagnostic
equipment when these burn out and need to be replaced. Therefore, I would say that about a
third of Varian’s revenue is recurring.”
CEOCFOinterviews: For
what types of cancers is radiation an applicable therapy?
Ms. Finney: “Radiation therapy is applicable to almost
all solid tumors. Today, about 55-60% of all cancer cases are treated with radiation. It
is usually a multi-modality treatment meaning that it could be a lumpectomy followed by
radiation, or radiation in conjunction with surgery. Radiation can be used on virtually
any type of cancer with the exception of a blood born disease such as Leukemia. The other
place where you cannot treat is in the stomach.”
CEOCFOinterviews: Can
you explain directed radiation and how it works?
Ms. Finney: “It used to be that we would shine a
floodlight of radiation on the tumor. You would hit the tumor but you would also hit a lot
of surrounding healthy tissue because it was a broad beam. What happened back in the late
80’s/early 90’s, is that we developed beam-shaping equipment that allowed you to
precisely shape the beam to the size and shape of the tumor. If you had a tumor the shape
of a peanut, for the first time instead of hitting it with a square, you could actually
shape that beam to the shape of a peanut. Now we can cut down the amount of healthy tissue
exposed to radiation. We are finding that the tumor is still moving because the patient is
breathing or the bladder or bowel might be full one day and empty the next. What we have
found is that they were still treating a golf ball sized tumor with a baseball-sized beam
to take into account tumor movement. IGRT is our solution to that problem. That allows you
to put an imaging device directly on the treatment machine; you take a picture and see
exactly where the tumor is that day. You adjust the position of the patient so that you
are precisely treating that tumor that day. We also have software called RPM Respiratory
Gating that actually will compensate for motion due to breathing, so that the machine will
only treat the tumor at a certain point in the respiration cycle.”
CEOCFOinterviews: Where
are you in the marketplace with your product?
Ms. Finney: “In terms of market share, in our
traditional radiation/oncology market there are three players: Varian Medical Systems
(121102VAR-NYSE)., Elekta AB, and Siemens AG. Varian has 55-60% worldwide market share in
dollars. Siemens Medical and Elekta each have somewhere around 10-15% share. In terms of
our penetration, we have about 4,300 in our installed base. Roughly, 45-50% of those have
IMRT capabilities. Today, less than one percent of that installed base has the IGRT
capability to adjust for tumor motion. That is where our opportunity is, looking out over
the next several years.”
CEOCFOinterviews: Would
you like to talk about your sales team and their efforts?
Ms. Finney: “It is an interesting business model because
it is a relatively small community in radiation oncology. We are about a 1.4 billion
dollar company in total company orders. We are able to cover that with about 50 sales
people in the U.S. and about 60 sales people internationally. The relatively small sales
force is able to capture that 55-60% market share that we are able to enjoy.”
CEOCFOinterviews: Are
you having a specified team for the Trilogy?
Ms. Finney: “Only as it relates to the neurosurgery
market and that will have about four or five people initially to address that
market.”
CEOCFOinterviews: Will
they be addressing the worldwide market?
Ms. Finney: “It will probably start primarily in the U.S.
and then expand internationally. It does not take a huge sales force to address these
niche markets.”
CEOCFOinterviews: Are
there other countries that you foresee breaking into?
Ms. Finney: “After North America, Europe is our second
largest region. It is about 25% of our business. Asia is about 15% and the rest of the
world has about 6%. We have every country covered either through direct sales or in some
of the small areas we will go through distributors. When we get a critical mass and get a
volume that makes sense, then we tend to buy those distributors and go direct at that
point. We can literally service machines in Katmandu today. We have been growing more in
the last year-and-a-half in the international market and that makes sense because half of
the equipment is in the U.S. and clearly the population is not distributed that way. We
expect over the long haul that the international markets will be a big growth engine for
us. In this country, we have twelve machines per million populations; outside of this
country, there are six at best. Even in the most sophisticated western European countries,
we are still at half of what we are at in the U.S. In terms of international distribution,
about a year ago we did a joint venture with Mitsubishi Electric Corp., and they were
exiting the business, so we acquired the rights of service and installed about 400
machines primarily in Japan. They were the number-one player in Japan.”
CEOCFOinterviews: Do you
have finances to go forward with Trilogy shipments?
Ms. Finney: “We are shipping; the Trilogy™ devices
are going out as we speak. The installation of the IGRT equipment is going forward; 30
that were underway as of last quarter. These are ready for primetime.”
CEOCFOinterviews: Do you
have the facilities and financing in-place to support the orders for them?
Ms. Finney: “Absolutely!”
CEOCFOinterviews: What
other growth initiatives should investors be watching for at Varian?
Ms. Finney: “I would like people to focus on continued
strength in our core radiation oncology business, but we are continuing to invest in some
breakout opportunities that I think could bode well for our future. The flat panel imager
technology for doing real-time digital X-ray imaging is now profitable and growing.
We have a growing business in Brachytherapy products for planning and delivering radiation
with seeds or sources that are placed directly within tumors. Our accelerator technology
is also used to X-ray cargo containers and we think that there is a huge opportunity in
cargo screening. Between those three opportunities, we have what is probably about a $100
million business. These are providing some additional growth opportunities going
forward.”
CEOCFOinterviews: Do you
have float out there for investors?
Ms. Finney: “We have about 134 million shares out there
now.”
CEOCFOinterviews: In
closing, what would you like readers to remember about Varian Medical Systems?Ms. Finney: “We have a strong cash flow and a conservative,
strong balance sheet with $360 million in cash which we are using for stock repurchases
and growth-oriented acquisitions. We are also sitting on a backlog of about a billion
dollars, which gives me such good visibility and predictability, looking nine to twelve
months out. That is a luxury for a CFO to have.”
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