You are on page 1of 8

January 27, 2011

Healthcare Varian Medical Sys. (NYSE: VAR)


Medical Devices & Diagnostics
GM Expansion Story Outshines Difficult Japan Comp
United States of America
Investment Summary
Risk/reward continues to be compelling as VAR is well positioned to
capitalize on an improving U.S. hospital purchasing environment.
Innovative technology (RapidArc/trueBEAM) should secure market
Company Update share gains in new orders driving top/bottom line growth and support
Price Target Change upside to current F11 and F12 consensus estimates.
Estimate Change

Rating: BUY Event


Price: $71.96 VAR reported slightly lower-than-expected FQ1 revenue, offset by
Price Target: $84.00 material EPS outperformance driven by significant GM expansion.
Previous: $71.00 Solid oncology order growth in N.A., Europe and China was offset by
Bloomberg: NYSE: VAR a steep drop in Japan orders. Management reiterated F11 revenue
guidance and raised their full-year EPS outlook.
Market Data
52-Week Range: $72.19-$35.50
Key Points
Total Entprs. Value (MM): $8,034.2 • GM expansion story comes earlier than expected. Although we
Market Cap. (MM): $8,721.6 have expected VAR to generate GM gains, we didn't expect to see
Insider Ownership: 0.4% them until the end of F11 and into F12. Although GM of 46% in FQ1
Institutional Ownership: 92.3% is not reported to be sustainable, the expected trend is very
Shares Out. (MM): 121.2 promising and should drive earnings power in the out years and
Float (MM): 121.0 continue 'Street' estimates. Significant GM expansion was achieved
Avg. Daily Vol.: 1,107,940
in FQ1 despite 60% of installs occurring in international markets. An
Financial Summary elevated level of Japan installations with their respective higher
Book Value (MM): $2470.9 margins, increased level (although still minimal at ~5%) of
Book Value/Share: $20.40 trueBEAM contribution, continued warranty and service efficiencies,
Net Debt (MM): ($687.4) strong software installs, and a continued detector plate mix shift all
Long-Term Debt (MM): $16.1 contributed to the GM upside. We believe the GM expansion story
will accelerate in F12 as trueBEAM accounts for 30%+ of
USD 2008A 2009A 2010A 2011E installations driving both oncology systems and service GM
Rev. (MM) 2086.2 2214.2 2356.6 2600.0 northward. We believe our new margin assumptions in both F11
Prev. -- -- -- 2620.0 (45.3%) and F12 (45.9%) could prove to be conservative and a
EV/Rev. 3.9x 3.6x 3.4x 3.1x $4.00 EPS number for F12 is more achievable.
EPS • Japan Hiccup drives International Oncology order decline.
Dec 0.43 0.56 0.63 0.80A Against the most difficult comparable quarter (supported by a
Prev. -- -- -- 0.74 Japanese stimulus which ended last March), Varian's Japan
Mar 0.56 0.64 0.73 0.83 business squandered the strong growth garnered in nearly every
Jun 0.54 0.68 0.74 0.85 other international territory. Varian faces one more quarter of a
Prev. -- -- -- 0.83 difficult Japanese comp before returning to a steady state.
Sep 0.75 0.78 0.87 0.97 Ex-Japan international orders reportedly grew 17% Y/Y which we
Prev. -- -- -- 0.99 believe is a testament to the momentum Varian has generated
FY Sep 2.28 2.65 2.95 3.45 globally. We fully expect Varian to achieve double digit order growth
Prev. FY -- -- -- 3.40 ex-Japan and high single digit order growth including Japan.
FY P/E 31.6x 27.2x 24.4x 20.9x • Japan Stings but Rad Onc runway and GM expansion story
Pro Forma EPS still attractive. Although the Japan comp interrupts VARs
Consensus — — — 3.38 consecutive double digit oncology order growth streak, we believe
Diluted VAR is best positioned (i.e. trueBEAM) to capture the Rad Onc
growth opportunity over the next few years. GM expansion will drive
Joshua Jennings, M.D. upside to out year EPS estimates allowing us to maintain our bullish
(212) 284-2016, joshjennings@jefferies.com view.
Anthony Petrone, CFA
(212) 708-2703, apetrone@jefferies.com
Valuation/Risks
Our new $84 price target is a blended avg. of: 1) a C12 20.5x P/E, 2)
Matthew Weiss, CFA
an 8x C12 EV/EBIDTA multiple, and 3) a 10 yr. DCF. Risks: a
(212) 707-6446, mweiss@jefferies.com
deteriorating macro-economic environment, constrained U.S. hospital
budgets.

Please see important disclosure information on pages 6 - 8 of this report.


(NYSE:VAR)
Slight revenue miss and weak Japan order volume off a difficult comp offset by solid EPS beat on GM
strength. VAR reported FQ1:11 revenues of $579.9M (+7% yr/yr; +8% cc), which was slightly below our $586.3M
projection and consensus of $585M. Reported EPS of $0.80 was well ahead of both our $0.74 projection and
consensus of $0.73. VAR reported net oncology orders of $459M, with relative strength in both N.A. and Europe,
though fell short of consensus of ~$484M, as management cited a steep drop in Japan orders on a very challenging
yr/yr comp that benefited from a radiotherapy stimulus, which ceases in March 2010. We remain encouraged by solid
trueBEAM order flow in N.A. (+20%) and Europe and China (up double-digits), particularly in light of concerns
regarding a potential adverse impact in the European region stemming from austerity measures and recent cautious
commentary from bellwethers GE and Philips. Continued trueBEAM strength signals early adoption trends significantly
exceeding our expectations and supports new oncology order growth going forward, which is particularly essential for
the U.S. business.

Reiterates revenue guidance; Raises EPS outlook. Management reiterated their previously issued F11 outlook
calling for revenues to grow ~10%-11% yr/yr (translating to roughly $2,590M-$2,620M). The company raised EPS
guidance to $3.39-$3.45, from a prior range of $3.34-$3.39, which largely reflects this past quarter's upside. Current
F11 consensus estimates call for revenues to grow ~10% yr/yr to $2,587.7M and EPS to grow ~14% yr/yr to $3.38.
While order weakness could result in concerns over revenue growth, we are confident in VAR's ability to generate
top-line growth for the year within its stated range. At the same time, we believe that F11 EPS guidance reflects a
health degree of conservatism as it appears to us that the company's GM story is manifesting itself quicker than
expectations even without a significant trueBEAM P&L impact (~30% of orders, though only ~5% of revenues).

Additional quarterly highlights. Total net orders came in at $592.8M in the quarter, which was up 20% yr/yr. VAR's
backlog at the end of the quarter was up 10% yr/yr to $2.2B. WW oncology revenues orders were $459M (+5%
reported; +6% cc), coming in below consensus expectations of roughly $484M due to aforementioned weakness in
Japan which experienced an approximate $40M decline in revenue on a yr/yr basis. During FQ1:11, VAR went up
against a very tough comp with ~$65M of Japan-related revenue recognized in FQ1:10 vs. ~$22M recognized n
FQ1:11. As the radiotherapy stimulus ended in March 2010, we expect another fairly challenging comp for FQ2:11, but
not nearly to the magnitude we saw this past quarter. International oncology order growth was down ~6% yr/yr after
being +7% last quarter. In addition to weakness in Japan, European order growth was impacted by a stronger dollar
(cc growth in Europe was 17%). International oncology orders ex-Japan were up ~17% yr/yr. North American order
growth remains impressive coming at ~20% in FQ1:11. This was the fourth consecutive quarter of double-digit new
order oncology growth, with three successive quarters of such growth in North America. Oncology revenues benefited
from continued strength in trueBEAM and we believe that the vast majority of related orders represented new orders
vs. upgrades from backlog – a trend that is expected to continue. X-ray revenues came in at $111.6M (+22% yr/yr) and
related orders came in at $111.9M (+13% yr/yr) with management citing higher demand for both X-ray tubes and flat
panel detectors.

Gross margins of 46% in the quarter came in well ahead of our 43.7% estimate and were up 140 bps yr/yr driven by
strength in both Oncology (47.3%) due to higher trueBEAM revenues and X-ray (42.3%) owed to strength in tubes.
Notably, oncology GMs rebounded from last quarter's disappointing print. Management announced on the call that it
had secured an additional three-year contract with Toshiba Medical Systems valued at ~$450M, reflecting roughly a
40% increase in value over the company's prior three-year contract with Toshiba. During the quarter, VAR generated
$138M in cash from operations, with management citing better receivables collections. The company's effective tax
rate during the quarter came in at 29.6% which was ~100 bps lower than management's forecast due to the
reinstatement of the R&D tax credit. For F11, management forecasts an effective tax rate of 31%-32%.

trueBEAM ramp continues. Although total trueBEAM orders of ~45 were down q/q from 60, we attribute this to typical
seasonality, and see no change in underlying demand for the product. During the quarter, trueBEAM accounted for
30% of global unit orders (including the majority of N.A. orders), though continues to represent only ~5% of revenues.
Management indicated that there are ~40 installations that have either been completed or are in progress. We believe
that VAR's trueBEAM platform represents a paradigm shift in radiation oncology treatment that should continue to
boost new order levels going forward. Since the April launch of VAR's trueBEAM system, orders have ramped well
ahead of our expectations, and management noted that they are very pleased with adoption trends thus far. VAR's
trueBEAM platform (170 reported orders to date) and upgrade capabilities should continue to boost new order levels
going forward.

More color around F11 outlook. Management reiterated their previously issued F11 outlook calling for revenues to
grow ~10%-11% yr/yr (translating to roughly $2,590M-$2,620M). The company raised EPS guidance to $3.39-$3.45,
from a prior range of $3.34-$3.39, which largely reflects this past quarter's upside. Current F11 consensus estimates
call for revenues to grow ~10% yr/yr to $2,587.7M and EPS to grow ~14% yr/yr to $3.38. Aided by relatively easy

Please see important disclosure information on pages 6 - 8 of this report.


Joshua Jennings, M.D. , joshjennings@jefferies.com, (212) 284-2016 Page 2 of 8
(NYSE:VAR)
comps in the U.S. put in place by the significant capital equipment crunch, we expect VAR to experience continued
momentum in both the U.S. and international markets and believe that the company is on track to return to low
double-digit oncology order growth in F1H:11, which we believe could sustain top-line growth on the order of the same
magnitude into F12.

In F11, the company now forecasts GMs to rise ~100 bps, up from a prior forecast of 50 bps (driven by higher ASP
trueBEAM systems), with SG&A and R&D each expected to be up slightly as a percentage of sales, contributing to
overall operating leverage of ~50 bps for F11. We believe that F11 EPS guidance reflects a health degree of
conservatism (consistent with the company's managing of Street expectations) as it appears to us that the company's
GM story is manifesting itself quicker than expectations even without a significant trueBEAM P&L impact. We expect
trueBEAM to drive GM expansion going forward offsetting any margin compression from international systems
installation mix shift while continued mix shift to flat panel detectors will drive margins for the X-ray business.
Management issued FQ2:11 guidance for revenue growth of ~9%-10%, which is roughly in line with the Street at ~9%,
and EPS of $0.83-$0.86, which compares to the Street at $0.84.

Numerous positive catalysts provide solid runway for VAR through 2011 and beyond. We believe that Varian's
sales funnel is as strong as it has ever been due to its new product platform and the promise of technological
advancements that will provide increased clinical efficacy in the future. We see numerous catalysts in 2011 for VAR
including 1) Continued accelerated adoption of trueBEAM and trueBEAM STx platforms bolstering new oncology order
growth, top and bottom line outperformance; 2) Proton system orders expected in 2011; 3) quarterly earnings
performances; 4) ASTRO 2011 in Miami; 5) Further development of SRS capabilities (i.e. integration of RapidArc into
SRS treatment algorithms). We believe that the free standing center market, which just began to meaningfully rebound
in FQ4 from the proposed reimbursement schedule last summer, could provide an additional layer of growth for U.S.
orders into F11. Our checks at ASTRO indicate that the trueBEAM funnel in N.A. looks positive and we are encouraged
by the recent pick-up in activity in the U.S. and the relatively easy N.A. comps for 1H:11. Further, although international
orders face more difficult comps, and more recent concerns regarding the impact of austerity measures in Europe
(issues raised in recent quarterly Q4 reports from GE and Philips), international oncology orders ex-Japan were up
~17% yr/yr. Moreover, we believe that VAR's push into new geographies could offset any near-term headwinds from
Europe, as we expect the UNIQUE system to provide VAR access to emerging markets in need of discounted
purchase prices including China.

Adjusting F11 and F12 estimates. Based on the company's F1Q:11 financial results, management's F11 outlook and
our growth expectations for the radiation oncology market, we are adjusting our forward revenue and EPS estimates.
We are adjusting our F11 revenue and EPS estimates to $2,600M and $3.45, from $2,620M and $3.40. Our revised
estimates correspond to revenue and EPS growth of 10% and 16%, respectively. Our new F11 estimates continue to
reside above the current consensus of $2,588M (+10% yr/yr) and $3.38 (+14% yr/yr). During F1Q:11, VAR did not
repurchase any stock outside of the accelerated share repurchase executed in August and anticipated to be completed
by late-February. We believe that the accelerated stock repurchase can support at least $0.05 of accretion in F11,
which is reflected in our estimates. We note that the company has ~4.5M shares authorized for additional repurchase
through F11. In addition, we are adjusting our F12 revenue and EPS estimates to $2,870M and $3.95, from $2,857M
and $3.90, which reflects yr/yr growth of 10% and 14%, respectively, and are above current consensus estimates of
$2,808M (+8.5% yr/yr) and $3.81 (+13% yr/yr).

Raising PT. Our new $84 price target (previously $71) is a blended avg. of: 1) a C12 20.5x P/E, 2) a C12 8x
EV/EBIDTA, and 3) a 10 yr. DCF. Although VAR's valuation may appear rich (~23x C11 EPS), we see VAR as one of
the cleaner MedTech stories in C11 with numerous catalysts, GM expansion and continued upside to Street EPS
estimates. We believe that consistent reliable top- and bottom-line growth stories deserve premium multiples.

Company Description
Varian Medical Systems, headquartered in Palo Alto, California, is the leading provider of integrated systems for
treating cancer with radiation therapy and is one of the premier suppliers of X-ray tubes for diagnostic imaging
applications. The company sells through a direct sales force of 50 reps in the U.S. and through a combination of direct
sales and independent distributors internationally. In April 1999, the company (then known as Varian Associates, Inc.)
spun off its instruments business and its semiconductor equipment business to stockholders as separate companies.
The original company retained the medical systems business and changed its name to Varian Medical Systems, Inc.

Please see important disclosure information on pages 6 - 8 of this report.


Joshua Jennings, M.D. , joshjennings@jefferies.com, (212) 284-2016 Page 3 of 8
(NYSE:VAR)

Varian: Estimated Quarterly Profit and Loss Statement ($MM)

Year Ending Sep 2010 (FY10) Year Ending Sep 2011 (FY11) Year Ending Sep 2012 (FY12)
FQ1 FQ2 FQ3 FQ4 FY10 CY10 FQ1 FQ2E FQ3E FQ4E FY11E CY11E FQ1E FQ2E FQ3E FQ4E FY12E
Revenue $540.9 $585.6 $578.0 $652.1 $2,356.6 $2,395.6 $579.9 $643.4 $645.8 $730.9 $2,600.0 $2,646 $625.9 $709.7 $720.1 $814.3 $2,870.0
Cost of Goods Sold 299.9 331.6 323.6 375.9 1,331.0 1,344.2 313.1 354.2 353.9 401.4 1,422.6 1,448.9 339.3 385.7 389.0 439.1 1,553.2
Gross Profit 241.0 254.0 254.4 276.2 1,025.6 1,051.4 266.8 289.1 291.9 329.6 1,177.3 1,197.1 286.5 324.0 331.2 375.2 1,316.8
R&D 38.4 38.9 38.9 40.5 156.7 156.8 38.5 43.7 43.9 48.2 174.4 178.5 42.6 48.3 48.2 54.6 193.6
SG&A 83.5 79.6 84.7 86.9 334.7 342.5 91.3 99.1 97.5 109.6 397.5 400.1 93.9 105.0 105.1 118.1 422.1
Operating Income 119.1 135.5 130.8 148.8 534.2 552.1 137.0 146.3 150.5 171.7 605.4 618.5 150.1 170.7 177.8 202.6 701.1
Interest (Income) 0.0 0.3 0.9 (0.2) 1.0 0.9 (0.1) (0.7) (0.8) (0.8) (2.4) (3.1) (0.8) (0.7) (0.8) (0.8) (3.1)
Interest Expense 0.3 0.0 0.0 0.0 0.3 0.0 0.0 1.0 1.1 1.1 3.2 4.3 1.1 1.0 1.1 1.1 4.3
Pretax Income 118.8 135.2 129.9 149.0 532.9 551.2 137.1 146.0 150.2 171.4 607.8 617.3 149.8 170.4 177.5 202.3 704.2
Taxes 40.0 44.1 38.0 43.3 165.4 166.0 40.6 45.3 46.6 53.1 185.5 191.4 46.4 52.8 55.0 62.7 217.0
GAAP Net Income 76.3 91.1 91.9 105.7 365.0 385.2 96.5 100.7 103.6 118.3 419.1 425.9 103.3 117.6 122.5 139.6 482.9
Stock Based Comp Expense (Tax effected) 7.4 7.6 6.9 7.0 28.9 28.6 7.1 7.3 7.5 7.7 29.6 30.6 8.1 8.3 8.5 8.7 33.6
Pro Forma Net Income 78.8 91.1 91.9 105.7 367.5 385.2 96.5 100.7 103.6 118.3 419.1 425.9 103.3 117.6 122.5 139.6 482.9
Diluted Shares (MM) 125.1 124.3 124.5 121.4 123.8 122.9 121.2 121.4 121.6 121.8 121.5 121.7 122.0 122.2 122.4 122.6 122.3
Pro Forma EPS $0.63 $0.73 $0.74 $0.87 $2.97 $3.14 $0.80 $0.83 $0.85 $0.97 $3.45 $3.50 $0.85 $0.96 $1.00 $1.14 $3.95
After-Tax "One" Time Charges 2.5 0.0 0.0 0.0 2.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
GAAP EPS $0.61 $0.73 $0.74 $0.87 $2.95 $3.14 $0.80 $0.83 $0.85 $0.97 $3.45 $3.50 $0.85 $0.96 $1.00 $1.14 $3.95
Fully Taxed Cash Net Income 86.2 98.7 98.8 112.7 396.4 413.8 103.6 108.0 111.1 126.0 448.7 456.5 111.4 125.9 131.0 148.3 516.5
Cash EPS ex-SBC, one timers $0.69 $0.79 $0.79 $0.93 $3.20 $3.37 $0.85 $0.89 $0.91 $1.03 $3.69 $3.75 $0.91 $1.03 $1.07 $1.21 $4.22

Margin Analysis
Gross Profit 44.6% 43.4% 44.0% 42.4% 43.5% 46.0% 44.9% 45.2% 45.1% 45.3% 45.8% 45.6% 46.0% 46.1% 45.9%
R&D 7.1% 6.6% 6.7% 6.2% 6.6% 6.6% 6.8% 6.8% 6.6% 6.7% 6.8% 6.8% 6.7% 6.7% 6.7%
SG&A 15.4% 13.6% 14.7% 13.3% 14.2% 15.7% 15.4% 15.1% 15.0% 15.3% 15.0% 14.8% 14.6% 14.5% 14.7%
Operating Income 22.0% 23.1% 22.6% 22.8% 22.7% 23.6% 22.7% 23.3% 23.5% 23.3% 24.0% 24.0% 24.7% 24.9% 24.4%
Pretax Income 22.0% 23.1% 22.5% 22.8% 22.6% 23.6% 22.7% 23.3% 23.4% 23.4% 23.9% 24.0% 24.6% 24.8% 24.5%
Net Income 14.1% 15.6% 15.9% 16.2% 15.5% 16.6% 15.7% 16.0% 16.2% 16.1% 16.5% 16.6% 17.0% 17.1% 16.8%
Tax Rate 33.7% 32.6% 29.3% 29.1% 31.0% 29.6% 31.0% 31.0% 31.0% 30.5% 31.0% 31.0% 31.0% 31.0% 30.8%

Growth Analysis
Total Revenue 6% 6% 13% 2% 6% 7% 10% 12% 12% 10% 8% 10% 12% 11% 10%
Gross Profit 10% 6% 18% -3% 7% 11% 14% 15% 19% 15% 7% 12% 13% 14% 12%
R&D 4% 5% 10% 6% 6% 0% 12% 13% 19% 11% 11% 10% 10% 13% 11%
SG&A 0% -2% 8% -10% -1% 9% 24% 15% 26% 19% 3% 6% 8% 8% 6%
Operating Income 21% 11% 28% -1% 13% 15% 8% 15% 15% 13% 10% 17% 18% 18% 16%
Pretax Income 19% 11% 27% -1% 11% 15% 8% 16% 15% 14% 9% 17% 18% 18% 16%
Net Income 11% 34% 8% 9% 14% 26% 11% 13% 12% 15% 7% 17% 18% 18% 15%
Pro Forma EPS 13% 15% 8% 12% 12% 26% 13% 15% 12% 16% 6% 16% 17% 17% 14%

Sources: Company reports and Jefferies & Company, Inc. estimates

Please see important disclosure information on pages 6 - 8 of this report.


Joshua Jennings, M.D. , joshjennings@jefferies.com, (212) 284-2016 Page 4 of 8
(NYSE:VAR)

Varian: Estimated Annual Profit & Loss Statement ($MM)


2008-11E
2005 2006 2007 2008 2009 2010 2011E 2012E CAGR
Revenue $1,382.5 $1,597.8 $1,776.6 $2,086.2 $2,214.2 $2,356.6 $2,600.0 $2,870.0 8%
Cost of Goods Sold 789.6 934.5 1,042.1 1,216.6 1,253.6 1,331.0 1,422.6 1,553.2
Gross Profit 592.9 663.3 734.5 869.6 960.5 1,025.6 1,177.3 1,316.8 11%
R&D 82.1 100.4 117.4 136.3 147.4 156.7 174.4 193.6
SG&A 205.9 253.5 281.9 326.5 339.0 334.7 397.5 422.1
Operating Income 304.9 309.4 335.2 406.8 474.1 534.2 605.4 701.1 14%
Interest (Income) (8.0) (14.0) (12.2) (11.5) (4.6) 1.0 (2.4) (3.1)
Interest Expense 4.7 4.6 4.8 4.9 4.1 0.3 3.2 4.3
Pretax Income 312.9 323.4 347.4 418.3 478.7 532.9 607.8 704.2
Taxes 101.6 75.1 103.0 130.7 143.1 165.4 185.5 217.0
GAAP Net Income 206.6 245.2 239.6 282.7 318.9 365.0 419.1 482.9
Stock Based Comp Expense (Tax effected) 23.3 26.6 29.7 27.4 29.0 28.9 29.6 33.6
Pro Forma Net Income 183.3 224.5 239.6 291.3 331.5 367.5 419.1 482.9 13%
Diluted Shares (MM) 137.8 135.5 130.7 127.6 125.0 123.8 121.5 122.3
Pro Forma EPS $1.33 $1.66 $1.83 $2.28 $2.65 $2.97 $3.45 $3.95 15%
After-Tax "One" Time Charges $0.0 ($20.7) $0.0 $8.6 $12.6 $2.5 $0.0 $0.0
GAAP EPS $1.50 $1.81 $1.83 $2.22 $2.54 $2.95 $3.45 $3.95 16%
Fully Taxed Cash Net Income 206.6 251.0 269.3 318.7 360.5 396.4 448.7 516.5
Cash EPS ex-SBC, one timers $1.50 $1.85 $2.06 $2.50 $2.88 $3.20 $3.69 $4.22 14%

Margin Analysis
Gross Profit 42.9% 41.5% 41.3% 41.7% 43.4% 43.5% 45.3% 45.9%
R&D 5.9% 6.3% 6.6% 6.5% 6.7% 6.6% 6.7% 6.7%
SG&A 14.9% 15.9% 15.9% 15.6% 15.3% 14.2% 15.3% 14.7%
Operating Income 22.1% 19.4% 18.9% 19.5% 21.4% 22.7% 23.3% 24.4%
Pretax Income 22.6% 20.2% 19.6% 20.1% 21.6% 22.6% 23.4% 24.5%
Net Income 13.3% 14.0% 13.5% 14.0% 15.0% 15.6% 16.1% 16.8%
Tax Rate 32.5% 23.2% 29.7% 31.2% 29.9% 31.0% 30.5% 30.8%

Growth Analysis
Total Revenue 16% 11% 17% 6% 6% 10% 10%
Gross Profit 12% 11% 18% 10% 7% 15% 12%
R&D 22% 17% 16% 8% 6% 11% 11%
SG&A 23% 11% 16% 4% -1% 19% 6%
Operating Income 3% 7% 20% 14% 11% 14% 16%
Pretax Income 22% 7% 22% 14% 11% 14% 15%
Net Income 22% 7% 22% 14% 11% 14% 15%
Pro Forma EPS 25% 11% 25% 16% 12% 16% 14%

Sources: Company reports and Jefferies & Company, Inc. estimates

Please see important disclosure information on pages 6 - 8 of this report.


Joshua Jennings, M.D. , joshjennings@jefferies.com, (212) 284-2016 Page 5 of 8
(NYSE:VAR)

ANALYST CERTIFICATIONS
I, Joshua Jennings, M.D., certify that all of the views expressed in this research report accurately reflect my personal
views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is,
or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
I, Anthony Petrone, CFA, certify that all of the views expressed in this research report accurately reflect my personal
views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is,
or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
I, Matthew Weiss, CFA, certify that all of the views expressed in this research report accurately reflect my personal
views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is,
or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Important Disclosures
As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments
discussed in this report receive compensation based in part on the overall performance of the firm, including
investment banking income. We seek to update our research as appropriate, but various regulations may prevent us
from doing so. Aside from certain industry reports published on a periodic basis, the large majority of reports are
published at irregular intervals as appropriate in the analyst's judgement.

Meanings of Jefferies & Company, Inc, Ratings


Buy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a
12-month period.

Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus
10% within a 12-month period.

Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10%
or more within a 12-month period.

Our focus on mid-capitalization and growth companies implies that many of the companies we cover are typically more
volatile than the overall stock market, which can be amplified for companies with an average stock price consistently
below $10. For companies in this category only, the expected total return (price appreciation plus yield) for Buy rated
stocks is 20% or more within a 12-month period. For Hold rated stocks with an average stock price consistently below
$10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For
Underperform rated stocks with an average stock price consistently below $10, the expected total return (price
appreciation plus yield) is minus 20% within a 12-month period.

NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance
with applicable regulations and/or Jefferies & Company, Inc. policies.

CS - Coverage Suspended. Jefferies & Company, Inc. has suspended coverage of this company.

NC - Not covered. Jefferies & Company, Inc. does not cover this company.

Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy
or applicable securities regulations prohibit certain types of communications, including investment recommendations.

Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which no
financial projections or opinions on the investment merits of the company are provided.

Valuation Methodology
Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value,
volatility and expected total return over the next 12 months. The price targets are based on several methodologies,
which may include, but are not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow
(DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium
(discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value,

Please see important disclosure information on pages 6 - 8 of this report.


Joshua Jennings, M.D. , joshjennings@jefferies.com, (212) 284-2016 Page 6 of 8
(NYSE:VAR)
dividend returns, and return on equity (ROE) over the next 12 months.

Risk which may impede the achievement of our Price Target


This report was prepared for general circulation and does not provide investment recommendations specific to
individual investors. As such, the financial instruments discussed in this report may not be suitable for all investors and
investors must make their own investment decisions based upon their specific investment objectives and financial
situation utilizing their own financial advisors as they deem necessary. Past performance of the financial instruments
recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, and
income from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by
changes in economic, financial and political factors. If a financial instrument is denominated in a currency other than
the investor's home currency, a change in exchange rates may adversely affect the price of, value of, or income
derived from the financial instrument described in this report. In addition, investors in securities such as ADRs, whose
values are affected by the currency of the underlying security, effectively assume currency risk.

Rating and Price Target History for: Varian Medical Systems, Inc. (VAR) as of 01-25-2011

03/10/08 01/05/10 01/28/10 04/09/10 10/26/10


UN:$40 I:B:$55 B:$57 B:$64 B:$71

75

60

45

30

15
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1
2008 2009 2010 2011

Created by BlueMatrix

Distribution of Ratings
IB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY [BUY] 587 51.90 43 7.33

HOLD [HOLD] 496 43.90 26 5.24

SELL [UNPF] 47 4.20 5 10.64

OTHER DISCLOSURES
This material has been prepared by Jefferies & Company, Inc. a U.S.-registered broker-dealer, employing appropriate
expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was
obtained from sources believed to be reliable, but has not been independently verified, therefore, we do not guarantee
its accuracy. Additional and supporting information is available upon request. This is not an offer or solicitation of an
offer to buy or sell any security or investment. Any opinion or estimates constitute our best judgment as of this date,
and are subject to change without notice. Jefferies & Company, Inc. and Jefferies International Limited and their
affiliates and their respective directors, officers and employees may buy or sell securities mentioned herein as agent or
principal for their own account. Upon request Jefferies & Company, Inc. may provide specialized research products or
services to certain customers focusing on the prospects for individual covered stocks as compared to other covered
stocks over varying time horizons or under differing market conditions. While the views expressed in these situations
may not always be directionally consistent with the long-term views expressed in the analyst's published research, the
analyst has a reasonable basis and any inconsistencies can be reasonably explained.

Please see important disclosure information on pages 6 - 8 of this report.


Joshua Jennings, M.D. , joshjennings@jefferies.com, (212) 284-2016 Page 7 of 8
(NYSE:VAR)
Additional information for UK and Canadian investors
This material has been issued by Jefferies & Company, Inc. ("JEFCO") and in the United Kingdom ("UK") is approved
and distributed by Jefferies International Limited ("JIL") which is authorized and regulated by the Financial Services
Authority ("FSA").

In the UK, this material is intended for use only by persons who have, or have been assessed as having, suitable
professional experience and expertise, or by persons to whom it can be otherwise lawfully distributed. For Canadian
investors, this material is intended for use only by professional or institutional investors. None of the investments or
investment services mentioned or described herein is available to other persons or to anyone in Canada who is not a
"Designated Institution" as defined by the Securities Act (Ontario). For investors in the Republic of Singapore, this
material is provided by JEFCO through Jefferies Singapore Limited ("JSL") pursuant to Regulation 32C of the Financial
Advisers Regulations. The material contained in this document is intended solely for accredited, expert or institutional
investors, as defined under the Securities and Futures Act (Cap. 289 of Singapore). If there are any matters arising
from, or in connection with this material, please contact JSL in Singapore at 80 Raffles Place #15-20, UOB Plaza 2,
Singapore 048624, telephone: +65 6551 3950.

The information set forth herein was obtained from sources believed to be reliable, but has not been independently
verified by JIL, JSL or JEFCO. Therefore, except for any obligation under the rules of the FSA we do not guarantee its
accuracy. Additional and supporting information is available upon request. This is not an offer or solicitation of an offer
to buy or sell any security or derivative instrument, or to make any investment. Any opinion or estimate constitutes the
preparer's best judgment as of the date of preparation, and is subject to change without notice. JIL, JSL, JEFCO, their
associates or affiliates, and their respective officers, directors, and employees may have long or short positions in, or
may buy or sell any of the securities, derivative instruments or other investments mentioned or described herein, either
as agent or as principal for their own account. Upon request JEFCO may provide specialized research products or
services to certain customers focusing on the prospects for individual covered stocks as compared to other covered
stocks over varying time horizons or under differing market conditions. While the views expressed in these situations
may not always be directionally consistent with the long-term views expressed in the analyst's published research, the
analyst has a reasonable basis and any inconsistencies can be reasonably explained.

This material does not constitute a personal recommendation or take into account the particular investment objectives,
financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in
this report is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax
advice. The price and value of the investments referred to herein and the income from them may fluctuate. Past
performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may
occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from,
certain investments.

JEFCO research reports are disseminated and available primarily electronically, and, in some cases, in printed form.
Electronic research is simultaneously available to all clients. This report or any portion hereof may not be reprinted,
sold or redistributed without the written consent of JEFCO. JIL has adopted a conflicts management policy in
connection with the preparation and publication of research, the details of which are available upon request in writing
to: The Compliance Officer, Jefferies International Limited, Vintners Place, 68 Upper Thames Street, London EC4V
3BJ; telephone +44 (0)20 7029 8000; facsimile +44 (0)20 7029 8010.

For Important Disclosure information, please visit our website at


https://jefferies.bluematrix.com/bluematrix/JefDisclosure or call 1.888.JEFFERIES.

Upon request Jefferies International Limited may provide specialized research products or services to certain
customers focusing on the prospects for individual covered stocks as compared to other covered stocks over varying
time horizons or under differing market conditions. While the views expressed in these situations may not always be
directionally consistent with the long-term views expressed in the analyst's published research, the analyst has a
reasonable basis and any inconsistencies can be reasonably explained.

© 2011 Jefferies & Company, Inc,

Please see important disclosure information on pages 6 - 8 of this report.


Joshua Jennings, M.D. , joshjennings@jefferies.com, (212) 284-2016 Page 8 of 8

You might also like