Varian Medical Systems, Inc. (VAR)
Interview with: Elisha W. Finney, CFO, Vice President
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Varian Medical Systems IMRT treatment for cancer is driving the marketplace today



Healthcare
Medical Equipment & Supplies
(NYSE: VAR)

Varian Medical Systems, Inc.

3100 Hansen Way
Palo Alto Ca  94304
Phone: 650-424-6803

Elisha W. Finney
Chief Financial Officer
Vice President

Interview Conducted By:
Diane Reynolds, Co Publisher

CEOCFOinterviews.com
December 2002

Bio of Elisha W. Finney, Vice President & Chief Financial Officer

Elisha W. Finney comes 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 1986 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 1988.  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.

In August 1998, when Varian Associates, Inc. announced its intention to separate into three independent businesses, Finney was selected to serve as vice president, finance and chief financial officer for Varian Medical Systems, Inc.  This transaction became effective on April 2, 1999.

Company Profile:
Varian Medical Systems, Inc. (NYSE: VAR) is a leading manufacturer of integrated cancer therapy systems. Some 3700 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 SmartBeam Intensity Modulated Radiation Therapy (IMRT), a new cancer treatment technique that builds on the prior state-of-the-art, which was 3-D conformal radiotherapy. IMRT uses precise 3-D computer imaging to plan and then deliver even more tightly focused radiation beams to cancerous tumors than is possible with conventional conformal therapy. With this capability, clinicians can exquisitely "paint" a precise radiation dose so that it conforms to the three-dimensional shape of the tumor, while avoiding the adjacent organs, structures, and tissues. This significantly reduces adverse side effects while allowing radiation oncologists to increase the cancer-killing doses directed at tumors. The key components for SmartBeam IMRT are Varian Clinac® medical linear accelerators, multi-leaf collimators (MLCs) and other accessories, and the software used to process diagnostic image data and to shape radiation beams.

An MLC is a computer-controlled device that has between 52 and 120 metal leaves or fingers, which is affixed to the head of a Clinac, in the path of the radiation beam. Under computer control, the MLC leaves precisely shape the beam to the actual tumor profile, while minimizing radiation exposure to the surrounding tissue. The device has been welcomed by the market, and hundreds are now in use worldwide. The latest 120-leaf MLC offers the most precise beam control available today.
 
Varian Medical Systems is today organized around several distinct operations:

Oncology Systems is the world's largest supplier of integrated cancer therapy systems, including the market-leading Clinac® medical linear accelerator.  In addition, Varian manufactures and markets an increasing array of ancillary radiotherapy products such as radiotherapy imaging and simulation systems, the VARiS® information management system, and highly sophisticated treatment accessories. An important new addition to the Oncology Systems product family is Eclipse™, a computer 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, cargo screening, and sterilization.

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 and radiographic images. Systems incorporating these amorphous silicon panels are expected to improve the efficiency of diagnostic x-ray imaging.

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.

CEOCFOinterviews: Ms. Finney, please give us a brief history of Varian Medical Systems.

Ms. Finney: We have a 45-year-old heritage. We were a part of Varian Associates Inc. and one of the first companies in Silicon Valley, yet we enjoy the excitement of a start-up company. We split Varian Associates into three separate companies about three and half years ago, in April of 1999. Varian Medical Systems emerged as the world’s largest medical device company almost exclusively dedicated to the treatment of cancer. Unfortunately, we are in a growth industry right now, because cancer is quickly becoming the number one cause of death around the world.

Radiotherapy is a mainstream cancer treatmentused to treat about 55% of all cancer patients in North America. Forty-five years ago, Varian pioneered a linear accelerator that treats cancer with very high energy X-rays. While the base technology has not changed that drastically, we have seen a revolution in the last three to four years with IMRT (Intensity Modulated Radiation Therapy). In a nutshell, this allows you to precisely put the beam on the tumor and spare the healthy tissue—and that is the name of the game when treating cancer.  You want to put as much radiation as possible right where it needs to go to kill the cancer, but not hit any healthy structures.  IMRT is what is driving our market place today.”

CEOCFOinterviews: What is your estimated market penetration?

Ms. Finney: “Varian has about a 55 percent share of the worldwide market for radiotherapy systems.  We estimate at this point that we have equipped about  20 % of the world’s cancer clinics, with systems for giving IMRT treatments. However, only a fraction—less than 200 centers around the world—are clinically treating with IMRT. So there is a lot of room for growth.

One of the pioneers in this area has been  Memorial Sloan-Kettering Cancer Center in New York.   They have had three-year follow up results in a prostrate cancer study  that involved hundreds of patients.   The 3-year relapse-free survival rates for favorable, intermediate, and unfavorable risk patients were 92 percent, 86 percent, and 81 percent, respectively, for patients treated with IMRT.  Patients who received a more conventional treatment had comparable 3-year relapse-free survival rates of only 75 percent, 55 percent, and 35 percent.  In addition, complication rates that had been running as high as 17% went down to 2%with IMRT..  These outcomes were overwhelmingly positive.  

CEOCFOinterviews: Is your IMRT treatment economical for the hospitals?

Ms. Finney: “Yes, it is. With the reimbursement rates in place today for IMRT treatment, you get about two times as much for IMRT treatments than you would for a course of traditional radiation treatments. Consequently, the payback for the hospital for a machine that can cost almost $2 million dollars is now as low as 18 months on average.  It used to be 24 to 36 months. Hence, we have great outcome data coupled with a healthy reimbursement environment.  A hospital can recoup its investment in a very short period of time.”

CEOCFOinterviews: How are you getting the word out there?

Ms. Finney: When a hospital buys an IMRT-capable machine, we help them promote it.  We give them ready-made marketing materials so they can create billboards, radio and television spots, and press releases.  We help them advertise the fact they are doing this world-class new treatment. This creates a kind of “system envy” among competing hospitals in a local area. If you were to drive into Manhattan today, you might see a billboard from St. Vincent’s Comprehensive Cancer Center, advertising their IMRT capability. 

Also, our CEO has appeared on television a number of times in the last several years and Forbes magazine just published an article about our IMRT technology. We are doing our part to spread the word, and working to reach patients, who turn around and place demands on the hospitals—they want access to state of the art care. There are about 800 sites today that have all of the equipment required to do IMRT, so 800 of our machines are out there equipped to do this treatment. But as I said, less than 200 are actually clinically treating with IMRT. This is because IMRT is a paradigm shift in the way that you treat cancer. It involves a lot of planning, and a lot of sophisticated physics work.   There’s a training and learning curve involved.  But over the last four years, we have been annually doubling the number of clinics actually treating with IMRT and we expect that trend to continue.”

CEOCFOinterviews: Are you addressing this on a global basis?

Ms. Finney: “As a very general comment, the US does tend to be a big technology buyer, but we are making efforts to take this technology outside of the US, where the market is obviously huge. Outside of the US, most places have only a fraction of the machines needed to get the rest of the world up to an acceptable treatment level. We are sponsoring IMRT seminars, we distribute press releases, and we present at international medical conferences..  There was a half-hour documentary about our technology on German television last year.  So we are trying to get the word out on a global basis.”

CEOCFOinterviews: Where will the majority of your growth come from? Will it be through expanded exposure, partnerships or acquisitions?

Ms. Finney: “I think our growth is going to come from a combination of all of those things.  Being only  20% of the way to full   market penetration with IMRT, we believe we still have several years of growth ahead with IMRT . That being said, IMRT is not the ‘end all’ of cancer treatment; we continue to have a very strong emphasis on R&D.

We are also actively looking for acquisitions. We made two small acquisitions this year. We have a worldwide market share of somewhere between 55 and 60% with more than 70% in the US. Therefore, the purchase of something in radiation oncology is difficult.  So we are looking for “touching” technology—business opportunities that enhance or complement what we already do. We are also looking for different ways to expand the use of radiation machines in completely different areas. An example of that would be to use radiation to look at the contents of cargo containers.   Our linear accelerators can penetrate up to 17 inches of solid steel to produce high-quality images of what’s inside cargo containers coming into U.S. ports.   We have a small emerging business today, generating about $ 15 million dollars or so annually, doing just that.”

CEOCFOinterviews: Is the IMRT treatment standalone or does it need to be combined with surgery or chemotherapy?

Ms. Finney: “Unfortunately today, cancer treatment is as much an art as a science. It really does depend on the type of cancer, where it is located, the stage of cancer, and many other factors, including doctors’ training and preferences.   For example, with prostrate cancer, there are many patients receiving IMRT alone; there are others choosing IMRT combined with other therapies.  For breast cancer, the gold standard today—depending on the stage of the cancer—is to do a lumpectomy first and then follow it with radiation therapy. Therefore, when I say that radiation is used in about 55% of all cancer treatments, I mean either alone or in combination with other treatments.  As I mentioned, Varian is also involved in the brachytherapy business—placing radioactive sources directly into a tumor with a catheter or needle.   Hence, our business interests cover a range of approaches to cancer care.”

CEOCFOinterviews: This must be very exciting for you since cancer is one of the leading causes of death in the world today.

Ms. Finney: “Exactly. It is a disease of age and I also think that improving diagnostics will continue to play an important role in expanding our market.  The enhanced screening that is possible with PET scanning and mammography, for example, means we are catching cancer earlier, when it is most susceptible to radiation and before it has spread. Radiation is effective in treating localized cancer, while drugs are used to treat more  disseminated cancer.  So our technology does not compete with chemotherapy and other drug therapies; it is used in combination with them.”

CEOCFOinterviews: Can you give us a closer look at what a hospital or clinic would need in an IMRT treatment package?

Ms. Finney: “Our IMRT treatment package includes a treatment simulation machine, a treatment delivery machine, or medical linear accelerator, and various software products—for managing diagnostic images and patient information, for treatment planning, for treatment delivery, and for treatment verification processes.   This is a digital technology that involves a lot of data processing.  We are the only supplier that offers an integrated package that ties together all of the tools required to for planning and delivering IMRT. We also have a partnership with GE Medical Systems to bundle their diagnostic equipment, so we are selling GE imaging technologies into our marketplace to complement our own radiation therapy offerings. 

CEOCFOinterviews: Does that give you a competitive advantage?

Ms. Finney: “Full integration is the number one competitive advantage that I feel we have over our competitors.”

CEOCFOinterviews: Do you have an upgrade system that you offer your customers?

Ms. Finney: “We do have a very healthy upgrade program. We have about a $50 or $60 million dollar upgrade business.  Hospitals that have a Varian machine that was purchased after 1988, which is when we went from an analog machine to a digital platform, can get those machines upgraded.   Our upgrade business is very healthy.

CEOCFOinterviews: Does Varian offer leasing and financing to your customers?

Ms. Finney: “I have two people on staff that follow the sales people around and offer Varian financing. We are just facilitating the financing. We sell the notes back to a finance company. A small fraction of our customers wind up leasing because our equipment is so profitable, it pays for itself quickly.”

CEOCFOinterviews: What should an investor be looking at when considering your company for the first time?

Ms. Finney: “I think that backlog is the best indicator of our business going forward, and I have the luxury of a significant backlog. I am sitting on a backlog of just under $700 million dollars today. Typically, when something is booked into backlog, it sits there for nine to twelve months before we ship products, because the hospital is building or renovating a room to house the equipment. I can manufacture product more quickly than that, but again, we have to wait until our customer is ready to take shipment.  By virtue of that backlog, I have about a year’s worth of sales that we know will occur over the next twelve months.  Hence, this gives me very good visibility and predictability over a long period of time.  I am not at the mercy of one quarter’s orders to meet the sales targets for that quarter, so we really do have a good view of our business going forward.

Also, a potential investor should know that we have a very conservative balance sheet.   We are sitting on $299 million dollars in cash and marketable securities. Cash flow from operations this year was $156 million dollars. This company throws off a tremendous amount of cash and we are serving a market that unfortunately will continue to grow as the population ages. We also enjoy a solid technological lead over our competition. There is a very high barrier to entry into this business.  And we are looking at some breakthrough opportunities in terms of security, screening, and other products coming down the pipeline.”

CEOCFOinterviews: Where are your machines made and do you have enough facilities to store your backlog?

Ms. Finney: “The linear accelerators themselves are manufactured at our headquarters in Palo Alto—and have been for the last 40 years. We just did expand into Las Vegas, where we have a facility for manufacturing our industrial accelerators—the ones that are used for non-destructive testing and cargo screening. So we have a back-up facility if we need it. We are shipping around  325 machines per year and have the capacity in Palo Alto to increase that number.  Our capacity should remain sufficient over the next couple of years.  It will be some time before we have to worry about adding capacity. We have very low capital requirements in Palo Alto; our capital expenditures here amount to only about $20 or $25 million dollars a year.”

CEOCFOinterviews: That is great.  You have everything lined up just the way you want it.

Ms. Finney: “Well, we never get smug, because there is always risk—title doesn’t transfer on the day you expected, or something gets caught in the longshoreman’s strike and is sitting on a dock somewhere.  When I talk about visibility, I’m looking out over a nine- to twelve-month timeframe.   Nevertheless, quarter in and quarter out, I have to worry about execution. We have to stay in constant contact with our customers about their readiness, to hit their target installation dates, and know when title is going to transfer.  I have a saying around here that people have twenty-four hours to celebrate after a quarter then it is back to the grind.”

CEOCFOinterviews: In closing, what would you like to say to shareholders, potential investors and individuals in the medical community?

Ms. Finney: “I think we hit on all of the high points. I would say that in terms of operating margins—just to put it into perspective—when we started the company three and a half years ago, we had an operating margin of 11 percent for fiscal year 1999.  We just ended this fiscal year at 16 and a half percent and based on our guidance for fiscal year 2003, we will be up one point to about 17 and a half percent. I think this puts it in perspective.  We generate shareholder value by focusing on what we do best, which is helping to cure cancer.”

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Varian Medical Systems Continues Rapid Growth In Earnings, Sales, Net Orders, And Backlog In First Quarter Of Fiscal 2004

PALO ALTO, Calif.--(BUSINESS WIRE)--Jan. 28, 2004--Varian Medical Systems (NYSE:VAR) today reported continued strong growth in net earnings, sales, net orders, and backlog for the first quarter of fiscal 2004. Net earnings for the quarter were $29 million ($0.41 per diluted share) versus $21 million ($0.30 per diluted share) in the year-ago period. First-quarter sales were $267 million, up 29 percent from the year-ago quarter. Net orders were $308 million, up 23 percent from the year-ago period. Backlog at the end of the quarter stood at a record $850 million, up 14 percent from the total at the end of the first quarter in fiscal 2003.

Posted: 3/1/04 - CEOCFOinterviews.com
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Varian Medical Systems Announces New Brachytherapy Applicator for Treating Uterine and Cervical Cancer