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TRANSCRIPT
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Investor Meeting and Mid Year Review
May 7, 2012
Webcast will begin at Noon Eastern Time
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Tim Guertin – President and CEO
Elisha Finney – Exec. VP, CFO
Kolleen Kennedy – Sr. VP, President Oncology Systems
Bob Kluge – Sr VP, President X-Ray Products
Lester Boeh – VP, Emerging Businesses
Dow Wilson – Exec. VP, COO
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Forward-Looking Statements
Except for historical information, this report on Varian Medical Systems’ financial performance contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements concerning industry outlook, including growth drivers; the company’s orders, revenues, backlog, or earnings growth; future financial results; market acceptance of or transition to new products or technology such as RapidArc therapy, image-guided radiation therapy (IGRT), stereotactic radiosurgery, filmless X-rays, proton therapy, and security and inspection, and any statements using the terms “estimate,” “believe,” “expect,” “can,” “grow,” “could,” “should,” “continue,” “sets the stage” or similar statements are forward-looking statements that involve risks and uncertainties that could cause the company’s actual results to differ materially from those anticipated. Such risks and uncertainties include demand for the company’s products; the company’s ability to develop and commercialize new products; the company’s ability to meet demand for manufacturing capacity; the company’s ability to complete the planned sale of instruments portion of the company’s ACCEL proton therapy business; the company’s reliance on sole or limited-source suppliers; the impact of reduced or limited demand by sole purchasers of certain X-ray tubes; the company’s ability to maintain or increase operating margins; the impact of competitive products and pricing; the effect of economic conditions, currency exchange rates, and tax rates; the effect of changes in accounting principles; the company’s ability to meet Food and Drug Administration and other regulatory requirements for product clearances or to comply with Food and Drug Administration and other regulatory regulations or procedures; the ability to make strategic acquisitions and to successfully integrate the acquired operations into the company’s business; the possibility that material product liability claims could harm future revenues or require the company to pay uninsured claims; the effect of environmental claims and expenses; the company’s ability to protect the company’s intellectual property; the impact of managed care initiatives, other health care reforms, and/or third-party reimbursement levels and credit availability for capital expenditures for cancer care; the potential loss of key distributors or key personnel; consolidation in the X-ray tubes market; the risk of operations interruptions due to terrorism, disease or other events beyond the company’s control; and the other risks listed from time to time in the company’s filings with the Securities and Exchange Commission, which by this reference are incorporated herein. The company assumes no obligation to update or revise the forward-looking statements in this report because of new information, future events, or otherwise.
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Six Years of Earnings Growth
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Varian’s Order Growth Opportunity
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4000
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2012 2013 2014 2015 2016
SIP VPT XRP OS
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Financials
Elisha Finney, Exec. VP, CFO
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Net Orders and Revenues (FY12 YTD ended 03/30/12)
110011501200125013001350140014501500
Q211 YTD Q212 YTDOrders Revenues
Q2 FY12 YTD
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Operating Margin and Net Earnings (FY12 YTD ended 03/30/12)
050
100150200250300350
Q211 YTD Q212 YTD
Op Earnings Net Earnings
Q2 FY12 YTD
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Backlog $2,653M (As of 03/30/12)
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FY 2009 FY 2010 FY 2011 FY 2012
Q1Q2Q3Q4
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Q2 FY12 Balance Sheet / Cash Flow
Conservative balance sheet $617M cash and cash equivalents $32M short-term investment $162M total debt $1,436M stockholders’ equity
*DSO 83 days - up 4 days from year ago quarter - down 3 days from prior quarter Cash Flow $105M cash flow from operations $22M proceeds from employee stock option exercises $75M used to repurchase 1.1M shares in Q212 $26M net of new debt borrowing and pay down
*Days Sales Outstanding
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Questions of the Day
Margins
Margins
Margins
Margins
Margins
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Margins
Where are they headed?
Why didn’t you see slip coming?
How does Siemens affect margins?
Is 50bpts ROS leverage still possible?
What is the impact of proton business?
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Fiscal 2012 Outlook (As of end of Second Quarter, Fiscal 2012)
Revenues growth estimated at ~ 10% for FY 2012
EPS growth estimated at ~ 9% to 12%, or $3.76 to $3.84 for FY 2012
Tax Rate estimated at ~ 28% for Q3 FY12 and FY 2012
Revenues growth estimated at ~ 9% to 10% for Q3 FY 2012
EPS growth estimated at ~ 10% to 14%, or $0.91 to $0.95 for Q3 FY 2012
Varian updates its outlook once per quarter when it reports financial results. The outlook is for Continuing Operations.
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Oncology Systems
Kolleen Kennedy, President Oncology Systems May 7, 2012
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15 | VARIAN ONCOLOGY SYSTEMS
VARIAN ONCOLOGY SYSTEMS
ONCOLOGY SYSTEMS
MAY 7, 2012
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16 | VARIAN ONCOLOGY SYSTEMS
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17 | VARIAN ONCOLOGY SYSTEMS
Varian Oncology Hallmarks
• Market leadership • Financial strength • Product innovation • Integrated solutions • Affordable care • Customer Services organization • Quality & Performance
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18 | VARIAN ONCOLOGY SYSTEMS
Mid-year Financials
Q2 FY12 1H FY12
Net Orders 565 9% 1,050 7%
Revenues 565 11% 1,053 10%
Gross Margin 42% -3 pts 44% -3 pts
R&D 30 59
SG&A 75 149
Op Earnings 126 -3% 237 -5%
ROS 22% -3 pts 23% -3 pts
Headcount 4,307 Note: Dollars in millions.
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19 | VARIAN ONCOLOGY SYSTEMS
• Strong Q2 top line growth after slow Q1 start
• International mix continues at 55% - 57%
• Services performance mid-teens growth %
• First TrueBeam orders in Japan! Clinical go-live in Korea and Thailand
• Siemens strategic alliance announcement
• ARIA ARRA HITECH customer satisfaction phase launch
1H FY12 Highlights
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20 | VARIAN ONCOLOGY SYSTEMS
TrueBeam Update
• ~490 Orders -- ~ 230 Installations
• First TrueBeam orders in Japan. Go-live systems in Korea and Thailand
• Installed base of ~5600 high-energy linac machines • Average age: 50% 7 years or older • Replacement cycle: 12-15 years • Approximately 70% of NA high energy machine orders • To replace 40% of installed base: 2240 machines. • Only 22% of the way there!
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21 | VARIAN ONCOLOGY SYSTEMS
Siemens Partnership Broad strategic partnership in RadioTherapy and Diagnostic Imaging Annual revenue potential is significant Varian and Siemens market and represent each other’s products worldwide Maintain control of our channel through specific agency assignments Siemens improves coverage in emerging markets and multi-modality sales Collaboration for joint product development for image-guided RT and RS Immediate RadioTherapy benefits Software connectivity between Aria and Siemens linacs Opens a market segment that had been exclusive to Elekta Customers with Siemens accelerators now have more options Improves workflow and streamlines operations Facilitates smooth customer transition to Varian systems
Siemens is our optimal imaging partner Expands our imaging partnership to encompass the global market Attractive incentives to place CT, PET/CT and MRI in RT clinics
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22 | VARIAN ONCOLOGY SYSTEMS
Siemens strategic alliance Broad global partnership in Radiotherapy and Diagnostic Imaging Annual revenue potential: $100-200M Varian and Siemens represent each other’s products worldwide, non-compete Collaboration for future product development Varian immediate benefits Software connectivity to Siemens linacs Opens an entire market segment that had been exclusive to Elekta Siemens strength in emerging markets and bundled multi-modality sales Siemens will facilitate customer transition to Varian systems Priorities for partnership Aria connectivity interfaces and mARC integration in Eclipse Marketing and commercial roll-out DI portfolio innovation and future joint projects (R&D) Component sales and finance
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23 | VARIAN ONCOLOGY SYSTEMS
Oncology market mega trends
• Cost effective, clinically relevant disease site specific tools/approaches • Government focus - healthcare supplemental spending
Emerging Markets growth
• More practices adopting SABR/SRS techniques • Convenience attractive to patients • Comparable outcomes clinical trials underway
Hypofractionation adoption continues
• Stricter local interpretations of rules/guidelines • Multiple device clearances burden • Patient health information security & integrity
Increasing Regulatory oversight worldwide
• Smart Systems with Self-monitoring & Status Notification • Growing Internet Access, Users Comfortable with SW Systems
Services
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24 | VARIAN ONCOLOGY SYSTEMS
Oncology market mega trends
• Consolidation RO/MO/SO merged together to provide a comprehensive cancer treatment solution
• Focused mandate to clinical efficiencies in healthcare
Global Cost Reduction efforts
• Internet driving education of patients/social networking • On-line health communities • Telemedicine becoming widely adopted • Mobile Applications required for healthcare providers and patient access
(leveraging smartphones, iPad, etc)
Accessibility to Information
• Lack of training/education in many geographies with developing cancer programs
• Desire for global sharing of healthcare expertise; telemedicine applications • Creative solution partnerships: Government, healthcare providers,
professional societies, and industry
Education/Knowledge gaps
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25 | VARIAN ONCOLOGY SYSTEMS
Radiation Therapy Today
Source: IAEA and World Health Organization
Radiotherapy Machines per Million People
Over 64 Years
* Machines include Linac and Cobalt Units
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26 | VARIAN ONCOLOGY SYSTEMS
723 873 985 1,091 1,205 1,468 1,599
1,883 1,650 1,761 1,803 367
402 508
615 754
826 919
1,080
1,133 1,225 1,289
213 213
272
323
375
419
476
690 701
919 1,036
46 20
19
34
40
55
74
86 94
87
112
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
$Mill
ion
s
North America EMEA APAC LASA
26
AAGR by Region
‘01 – ’06
‘06 – ’11
‘01 – ’11
Worldwide 15% 9% 12%
North America 15% 5% 10%
EMEIA 18% 9% 14%
APAC 15% 21% 18%
LASA 14% 16% 15%
Total Market (in $Millions) 1,348 1,508 1,784 2,062 2,374 2,768 3,068 3,739 3,578 3,992 4,240
Growth from outside NA
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BRIC Orders driving Growth
-
50,000
100,000
150,000
200,000
250,000
2007 2008 2009 2010 2011
Russia Systems
Russia Service
India Systems
India Service
China Systems
China Service
Brazil Systems
Brazil Service
Systems CAGR% 40% Service CAGR% 29%
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Brazil Today Opportunity
Sao Paulo offices 60 employees
Sales, Service, Finance, Regulatory IB Leader
Varian facility • Hub for LASA operations • Manufacturing: assembly and final testing • Education Center with vault & live beam accelerator • Software Development & Localization • Science without Borders internships
Expand government relations Luminary customer relationships
Government partnership focus • Ministry of Health • Brazilian Industrial Development Agency • Ministry of Science, Technology & Strategic Products
Luminary Clinical Collaborations • INCA – National Cancer Institute • Hospital Albert Einstein • Hospital Sirio Libanese
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Russia Today Opportunity
Moscow office Sales, Service
Varian expansion • Partner with local manufacturing entities • Davidoff Education Center • Software Development & Localization • Logistics network investment • Leverage Siemens sales channel
Expanding government focus Strong customer relationships
Strengthen government partnership focus • Ministry of Health • Skolkovo • Ministry of Modernization & Nuclear Cluster • Radiation Technology Program
Invest Education & Marketing programs • Russia Oncology Summit • Broker clinical affiliate relationships
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30 | VARIAN ONCOLOGY SYSTEMS
India Today Opportunity
Mumbai, Delhi, Chennai & Pune offices
New Managing Director Sales, Service, Finance,
Regulatory, Logistics, Engineering
Mumbai Education Center
Operations expansion • Grow Sales, Service, Engineering teams • Expand facilities footprint • Focused marketing investments • India Oncology summit • Extend education center programs • Leverage strong Siemens infrastructure
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China
Today Opportunity
Beijing HQ: Factory,
Education Center Offices Shanghai, Guangzhou,
Chengdu Sales, Service, Finance,
Regulatory, Logistics
Operations expansion • Grow Sales, Service teams • Expand facilities footprint • Establish software development & localization team
• Focused marketing investments • China Oncology summit • Extend education center programs • Leverage strong Siemens infrastructure
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Disease Site Solutions
• Lung
• Prostate
• Liver
• Breast
• Head & Neck
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IGRT in Treatment of Prostate Cancer
Study at Memorial Sloan-Kettering Cancer Center showed image-guided IMRT superior to IMRT without image guidance. Zelefsky et al. Improved Clinical Outcomes with High Dose Image Guided Radiotherapy Compared with Non-IGRT for the Treatment of Clinically Localized Prostate Cancer. Int. J. Radiat. Oncol. Biol. Phys. 2011 “In press,” doi:10.1016/j.ijrobp.2011.11.047.
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34 | VARIAN ONCOLOGY SYSTEMS
RapidArc Radiosurgery for Brain Metastases
Clark GM et al. Plan quality and treatment planning technique for single isocenter cranial radiosurgery with volumetric modulated arc therapy. Practical Radiation Oncology (2012). “In press.” doi:10.1016/j.prro.2011.12.003.
• Doctors at UAB treated up to four metastases simultaneously
• Used RapidArc Radiosurgery • Treatments completed within 15
minutes
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RapidArc Radiosurgery for Spine Tumors
• Using TrueBeam in High Intensity Mode: CNS tumors treated within a standard RT timeslot
• Average patient time in room: less than 11 minutes
Prendergast BM et al. Improved clinical efficiency in CNS stereotactic radiosurgery using a flattening filter free linear accelerator. Jour. of Radiosurgery and SBRT, 2011 Nov-Dec; 1(2): 117–122
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Services $1B trajectory
$398 $436 $477 $522
$197 $213 $230 $248 $114
$131 $151
$173 $57
$709 $779 $857
$944
$-
$200
$400
$600
$800
$1,000
$1,200
FY12 FY13 FY14 FY15
Rev
enue
(In
M$)
Gap APAC EMEA Americas
Fully implement service sales organization
Support service sales & value proposition with marketing programs & products
Incubate new professional services & grow existing ones
Drive emerging market installed base growth using education & training
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Varian Oncology Hallmarks
• Market leadership • Financial strength • Product innovation • Integrated solutions • Affordable care • Customer Services organization • Quality & Performance
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Strategic initiatives
• Expanding in emerging markets
• Building services portfolio
• Developing disease site solutions that address the global cancer care need
• Extending the reach and effectiveness of radiotherapy/radiosurgery with innovation
• Leveraging the power of our Siemens alliance
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X-Ray Products
Robert Kluge, President X-Ray Products May 7, 2012
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Tube and Panel Sales Growth by Year m
illio
ns
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1st Half FY12 = $236M 1st Half FY11 = $229M
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XRP First Half FY12 Highlights
Slow Start to the Year … Weak Q1 in Japan Strong Q2 Margin Performance
Cost Reduction Activity Quality Cost Improvement dpiX Fab (Cost Benefit)
InfiMed Workstation Acquisition Complete
Panel / Workstation Packages Introduced to the Market
Big New Product Push Introductions in Second Half
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EBIT +15%
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InfiMed Strengthens Varian Offerings
Enables Varian X-Ray to: Leverage panel value with software
Offer workstation packages for retrofits
Accelerate OEM time to market with integrated panel and software
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New Flat Panel Detectors
DR Radiography High Resolution Fast Workflow - No Retakes
Portable Wireless Panel
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Large field of view Cardiology, Angiography Cone Beam CT High resolution
PaxScan® 4343CB Flat Panel Detector
Large Dynamic Panel Opportunity
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FP 1000 X-Ray Tube Beam Optimized for Panels
Greater Clarity - Less Fog in Picture
Lighter Weight
New Digital X-Ray Tubes Optimized for Flat Panel Detectors
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New Mammography Solutions Transition to Digital Imaging
PaxScan Flat Panel Detector
PaxPower Mammography X-Ray Tube
Varian well positioned Right Technology
Right Cost
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Aftermarket X-Ray Tube
New Rotating Anode X-Ray Tubes
Replaces GE Tube Gives users new choice
New High Tier CT Tube Excellent Resolution Motion-stopping speed Sets new performance standard
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Maintain Technology Leadership X-ray Tubes Optimized for Flat Panel Environment High Performance CT Tubes High End Fluoroscopy / Cone Beam Panels Tiered RAD Panel Strategy
Provide Best Value Equation to Customer Competitive Cost Structure Customer Cooperative Engineering Strategy Tube/Panel/Workstation Package Offerings
Effective Worldwide Distribution Strong Customer Relationships Support Capability in Major Markets
XRP Key Strategies
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Security and Inspection Products
Lester Boeh, Vice President
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Varian Security and Inspection Products
Market leading provider of high-energy imaging components Products: Linear accelerators, detectors, software, systems, service
Cargo/Border Screening (85% of SIP business)
Non-destructive Testing (NDT) (15% of SIP business)
Customers include all major systems integrators
End-users include customs, defense agencies and manufacturers
~$85M annual business
High-Energy x-Ray Sources High-Energy Detectors
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Security market shifting to broad scale deployment in international locations Saudi Arabia, Russia, Mexico, Brazil
Bulk orders creating lumpiness in financials
Sets stage for service growth and cost reduction
Domestic cargo/border screening activity Slow, small deployments
Antiquated procurement process
5 IntellX sites operating or going on-line
New procurement models developing Pay-per-use vs. capital purchase
IntellX
Varian Security and Inspection Products
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Challenge: Security at the Speed of Business
US/Mexico Border Saudi/UAE Border
Central Asia Critical Infrastructure
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Reduce System Cost/Increase Capability
Varian High-Resolution Radiograph
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Reduce System Cost/Increase Capability
Varian Materials Discrimination Technology
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Varian Auto-Threat Resolution
Reduce System Cost/Increase Capability
High confidence threat resolution in under a minute
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High-Speed Car Scanner
>100 vehicles per hour Dual view operation reveals all
Infrastructure Protection
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Varian SIP: Keys to Success
Very fast auto-threat resolution with materials discrimination
New procurement models enabling faster adoption and deployment
Result: Security at the Speed of Business
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Particle Therapy
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1st Half Highlights
Orders/Sales: Saudi Arabia order booked ($72.6M)
St. Petersburg, Russia order booked ($50.25M)
Scripps PTC installation on schedule
Munich Clinical Site >1,000 patients treated
1st IMPT – capable system in the world
15 minute treatment times routine
Cyclotron uptime sustained >98%
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First External Beam April 18th $17.5M payment milestone triggered
Installation to beam out
Scripps – Beam On
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Scripps Installation Status
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• RPTC Munich • Four rooms
operational
• APT/SPTC San Diego
• Delivery ‘11, 1st patient ‘13
• King Fahd, Saudi Arabia
• Delivery ‘13, 1st patient ‘14
Active Proton Projects
• St Petersburg, Russia
• Delivery ‘14, 1st patient ‘15
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Pending Proton Projects
• APT/Emory Atlanta
• Delivery ‘14
• APT/MPTC Maryland
• Delivery ‘13, 1st patient ‘15
• Mestre, Italy • Delivery ‘14,
1st patient ‘15
Pending Proton Projects • APT/UTSW
Dallas • Delivery ‘15
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Path To Profitability
2012 2013 2014 2015 2016 2017
Scripps Installation Operations & Service
King Fahd Installation Operations & Service
2018
PT Business Break-Even Target
Project 5 Installation Operations & Service
Project 6 Installation Operations & Service
2019
RPTC Munich Operations & Service
Project 7 Installation Operations & Service
Project 8 Installation Operations & Service
Project 9 Installation Op. & Service
St. Petersburg Installation Operations & Service
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Market Conditions Market Share – Behind But Catching Up
* Based on corporate press releases, March 2011 – 2012
0
50
100
150
200
250
Varian Hitachi IBA Mevion Protom
Ord
ers
Book
ed (M
$)
Orders booked over last 12 months
Booking of 70 MUSD order Knoxville not confirmed
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Why Protons? Sparing critical structures/Reduction of Unwanted Dose
Pediatric Cancers
Ocular melanoma
Head & Neck
Central nervous system
Sarcomas
Lung
Liver
Breast
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Why Varian is in Protons
Significant number of Varian customers want PT and PT research
Convergence of technologies
~$10B total market
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Summary
Dow Wilson, Exec. VP, Chief Operating Officer
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Keys to Growth
Globalization
Innovation
Affordable Care
Quality
Unsurpassed Customer Service
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Varian Services Growth
• Oncology primary contributor • Proton Services Business begins in 2014 • XRP not factored into roll-up
$725 $813 $920 $1,040
$1,171
$- $200 $400 $600 $800
$1,000 $1,200 $1,400
FY12 FY13 FY14 FY15 FY16
Rev
enue
in $
M
Combined Service revenues (Oncology + Proton + SIP)
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Varian Medical Systems (NYSE:VAR)
Investment Summary Market and technology leader Multiple global growth platforms Radiotherapy/Radiosurgery Filmless X-ray imaging Proton Therapy Port and border protection
>$700M annual service business Management focus on execution, innovation Strong balance sheet, significant cash flow, stock buybacks
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Questions and Answers