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Varian Medical Systems, Inc. (NYSE:VAR)

February 26, 2013 8:45 am ET

Executives

Dow R. Wilson - Chief Executive Officer, President and Director

Analysts

Amit Bhalla - Citigroup Inc, Research Division

Amit Bhalla - Citigroup Inc, Research Division

Hi, everyone. I'm Amit Bhalla from Citi's Life Science Tools and Diagnostics Team, and we're pleased to have Varian Medical for our second keynote presentation. With us from the company are CEO, Dow Wilson; and Vice President of Investor Relations, Spencer Sias. Dow has been CEO of the company since August 2012 and prior to that, he was the company's COO and President of the Oncology systems business. He had a 19 year career at GE Healthcare prior to coming to Varian. If you're not familiar with Varian, the company is a global leader in the development of medical devices and software for cancer treatment including radiotherapy, radiosurgery and brachytherapy. Dow is going to take us through a few initial slides, and then we'll jump into the discussion.

Dow R. Wilson

Usual forward-looking statements for what we say today. Our goal at Varian Medical Systems is to help save millions of lives every year, around the world. Huge movements especially outside the U.S. that we'll talk a little bit about. Clearly the biggest single trend we see looking out is globalization of our business. Today, not quite 60% of our business is outside of the U.S. and we just see that trend growing. Interestingly, over the next 25 years, there are forecasts that the cancer-burdened population will double. Here in the U.S., it's mostly demographically driven with the baby boomers moving through their cancer years so to speak. But outside of U.S., it's more diagnosis and the more people living to cancer ages. U.S. market is stable. In our scenario, kind of looking out to a number of years, but emerging markets are really driving the growth. They're under equipped. Value is a big deal on these markets. They're looking for very high patient throughput. And a lot of flexibility with their equipment as well. And as their economies expand, we see the pace that which people are putting in assets for taking care of cancer growing. And then on the kind of the radiology side of the business, a major movement towards digitization. We have seen big growth in our x-ray Components business, business has been growing strong double-digit for a number of years. It's now $550 million and continuing to put up very good growth rates and we see that continuing. Clearly, the trends in digitization are value driven as well. It's about better outcome. On the oncology side, it's tumor control and lower complications. And on the radiology side, it's better image quality at lower costs and lower dose. So seeing that impact, both of our businesses. Kind of in terms of innovation and what's driving our innovation basket more and more, it's a really a disease site solution. Radiation is not going out of favor. It's probably the gold standard for cancer killing. A lot of the therapies that are emerging in the market do a nice job of flowing cancer or arresting growth. But citotaxology is great with radiation, remains a gold standard for killing the cancer cells. And we see that role just growing in importance with what's emerging on the medical side of cancer. But really, a disease site solution for each of the cancers I think right now we're in a very early innings of lung and liver cancer. Fortunately here in the U.S., we don't have much liver cancer, but outside of the U.S., there's a very significant amount of liver cancer and where lung cancer might be in the second inning of its evolution, liver cancer is probably in the top of the first inning. So we see some very good growth in some of these new areas. So that's just kind of from a high-level some of the big trends that we see in the marketplace that are going to evolve over the next half dozen years. And with that, Amit, I'll turn it over to you for questions.

Question-and-Answer Session

Amit Bhalla - Citigroup Inc, Research Division

Since this is a global healthcare conference and we're looking at a lot of different silos within healthcare. Put radiation therapy for cancer, in the context of surgery, brachytherapy, biopharma and take us through the value proposition that you're bringing to the table.

Dow R. Wilson

Sure. Depending on the cancer. So for example on breast cancer probably 80% of patient, 80% of cancer patients in breast cancer receive radiation. And prostate cancer, by the time they're done, it's probably close to half, radiation is not always the modality of first Choice. It's probably the modality of first choice and maybe a third of prostate cancers, but by the time most prostate cancers are done, half of them will receive radiation. In lung cancer, today, most of the -- when radiation gets used, it tends to get used for taliative intent, rarely for curative intent. And that's what's changing with the development of stereotactic body radiation therapy, and we're very excited about the potential for radiation in lung cancer. There are estimates that there will be more lung cancer in China alone in a dozen years than there is total cancer burden in all the world today. And we think our tools are really evolving quickly. The clinical evidence is coming with it. It might take us another year or 2 to kind of accumulate all the evidence that we really need, but there's already very good studies being published to show the benefits of stereotactic body radiation therapy in lung cancer. So that's kind of a high-level, by disease site round out. So today in lung cancer from a therapeutic intent point of view, radiation is very seldomly used, so big opportunity.

Amit Bhalla - Citigroup Inc, Research Division

So this brings me to the next point of comparative effectiveness. We're hearing that discussed quite a bit in the healthcare system and even at the conference here. Cancer therapy, especially prostate cancer therapy is one of the top areas of comparative effectiveness research. How do you think radiation therapy fits in versus something as low-cost as watchful waiting. How do you...

Dow R. Wilson

I think it's going to be interesting to watch. The good news is we whenever point radiation at anybody who does not have cancer. So it's not over used from that point of view. Now, does radiation get used maybe too early or any cancer therapy get used too early in prostate cancer, there may be some overtreatment of patients, that's what the -- that's what some of the papers point too. One of the issues we have in the country is while that may be true at the same time, deaths due to prostate cancer are more than 50% down in the last 15 years. So we have made at a dramatic impact in the reduction of risk of death from prostate cancer. So that's kind of the flip side to this. So which patient gets it and which one doesn't. It's usually -- it's always okay as long as it's Spencer. But when it's knee, it's not. And that's the way it kind of evolved out there. So we're going to see more watchful waiting, especially here in the U.S. I think outside of the U.S., the world is already that way. They already -- kind of only do patients that are higher risk. And don't tend to do the lower risk patients outside of the U.S.

Amit Bhalla - Citigroup Inc, Research Division

Okay. So hop on issue for healthcare in general and for their Varian is reimbursement? It always comes up as a question. But yesterday, in the keynote session, there was a discussion about more of a move towards bundled payments across the healthcare system. So both of these topics are certainly questions for you and your perspective will be great to hear on those too.

Dow R. Wilson

We've already seen some impact from bundled payments over the last half dozen years. We've seen some bundling of the image guidance into some of the codes. I think as we go forward, there are certainly going to be alternatives looked at both with radiation and maybe even more broadly at a higher level, take care of my prostate cancer. You decide what tool you want to do. Here is the reimbursement, whether it's medical, surgical or radiation or all 3. Go sort it out. We may see that kind of model evolve in some places. There are some experiments going on. I would maybe go out on a limb here. I don't know that we'll see that this year. We may see that a little further out.

Amit Bhalla - Citigroup Inc, Research Division

So do you think it ultimately gets as simple as that, this is the cancer, doctor figure it out because today, the way radiation therapy works is you're building multiple codes over multiple weeks.

Dow R. Wilson

I think the first path will be with radiation alone and how do you bundle all the different radiation services together through planning, motion management, image guidance, the radiation delivery itself. We'll probably see bundling on those capabilities first. And then maybe after that, we'll see some higher-level bundling.

Amit Bhalla - Citigroup Inc, Research Division

So how do you ultimately -- I think when we've talked in the past, you talked about 5% cuts in reimbursement and the internal modeling for the company, how does that play out?

Dow R. Wilson

Our kind of ongoing forecast is that whatever means, the use to kind of get there, it'll be kind of a 48% reduction in here. I think we're still kind of in that range. As we've talked before, the good news is, it's never quite been that bad. And so, the hospitals and the non-hospital business is now pretty much on the same ground. So now, they'll move together. I think there's been some effort from a CMS point of view over the last several years to kind of equalize the freestanding reimbursement to the hospital reimbursement. So it wasn't an unfair economic advantage either way there. Those are more or less equal now, and hope they'll move together.

Amit Bhalla - Citigroup Inc, Research Division

Okay. So the point -- well, actually...

Dow R. Wilson

Which maybe for 2013, one of the things that we -- there was a fairly substantial reduction in freestanding reimbursement for 2013, which is about 10% of our global market. But our U.S. hospital market customers actually got a raise. And their reimbursement is up 2% this year. So that was some -- all these kind of doom and gloom of reimbursement, that was some good news.

Amit Bhalla - Citigroup Inc, Research Division

So from a product perspective, the way I think you address this and you've talked about in the past is trying to make your machines more conducive to higher throughput. So take us through that balance in your portfolio and the products, how do you -- you're addressing these lowering costs by making your products more efficient?

Dow R. Wilson

The good news to throughput in our space is it means both productivity for our customer they can be more efficient in the way that they deliver care. And it's an advantage for the patients. You can get the patient on and off the table faster. A lot of these patients tend to be older and have several co-morbidities and being able to do them fast is a big deal. So the single biggest trend in our space is hypofractionation, meaning in the old days, where we'd treat a patient 35x, 40x over a month, 1.5 months for their radiation treatment. Today, depending on the cancer and the treatment protocol, it can be done in 1 to 5 fractions. So that's obviously, less invasive on the patient's life and from a "get back to work" point of view, and trips to the hospital. But it also really reduces the time on table. So it's RapidArc and a number of other innovations we've had in our product line, we've taken treatment times in over the last 5 years from say half hour to minutes and really driven huge productivity for our customers.

Amit Bhalla - Citigroup Inc, Research Division

So how much of the market today is a hypofractionation market and where do you think it can go?

Dow R. Wilson

In breast cancer, it's very small hypofractionation today. I think we'll start to see some experimentation with hypofractionation in breast. But that will be very slow to evolve. In prostate cancer, I'd say it's still small. Maybe 10% is hypofractionated today. That will probably pick up over the next couple of years. Maybe it's a quarter of the market in 2 or 3 years, 4 years. In lung cancer, again, as I said before, it's very, very small today, it's all palliative care and so we do very little curative intent. The curative intent that comes will all be hypofractionated in lung and liver cancer.

Amit Bhalla - Citigroup Inc, Research Division

So if I remember from a year -- a few years ago when we talked about hypofractionation, the technology wasn't fully there. There were still safety concerns at the physician level. Have we gotten past that and is it now just an awareness issue?

Dow R. Wilson

It's all about confidence of being able to deliver the dose to where the tumor is. Simulating you kind of look at what's happened with image guidance, with beacons and other fiducial kind of markers. Now, I think there's a lot more confidence about where, where we're putting the dose in a tumor that's moving. So it's a complex clinical scenario. But I think there's a lot more confidence about where actually we are delivering that dose in our ability to just at the tumor and nothing else around it. I think that's still emerging. I think the kind of cutting-edge academic community is there. But the rest of the clinical community is still coming along. So I think we're still very early in the kind of development of this as a standard of care in lung cancer.

Amit Bhalla - Citigroup Inc, Research Division

So you did recently launched a new platform, the Edge platform that has capabilities directly tied to radiosurgery. Maybe, it's a good point to talk us through how that compares to and the other former products in your portfolio?

Dow R. Wilson

We did a couple of things with Edge. First, let me talk a little bit about the market it's going after. The gamma knife, from one of our competitors, sells about 50 units a year. The CyberKnife, from another one of our competitors, sells about 75 units a year. So this is that dedicated hypofractionation market. And so we're really targeting the Edge, we've really targeted against those 2 products and see if we can get our fair share of that 125 unit business. That's the high end of the market. These are expensive machines and very nice profitability. So if we could get 40% to 50% of that market, a dedicated market, we'd be very pleased. We launched the product as you know at Astra last year. We received 510(k) approval in December. So we just -- end of December, actually not quite the last day of the year. I think it was 28 or 27 of December. But the -- so we're just kind of entering the commercial phase this quarter. I expect that we'll -- that the impact of this product will be more second half and early next year if customers kind of get it in their budgeting cycle and start ramping up. But it brings a new 6-degree of freedom couch. It integrates all of the Motion Management capability that we have. We made an acquisition of Calypso 1.5 years ago and it integrates the Calypso has a beacon -- makes a beacon that you put in the tumor, so that you always know where that tumor is and you can kind of dial the radiation dose to the beacon and it integrates that device. That device is kind of a standalone before. It totally integrates it with the hardware. So if the beacon moves outside of the kind of treatment window, the machine shuts off and doesn't deliver dose. And when the machine is right where it's supposed to be and the tumor is right where it's supposed to be, radiation dose is delivered to the tumor. So it's very nice Motion Management capability. Anyway, so those are some of the highest level, those are the big features on that product. One of the exciting things is that we can take those features as well and upgrade the TrueBeam install base. So it will be -- so besides just that 125-ish unit market, it's also an upgrade opportunity for us in our install base.

Amit Bhalla - Citigroup Inc, Research Division

So what I did find interesting just a few weeks ago, is I saw that you guys lobbied the government pretty hard and successfully, that led to a change in your competitor's reimbursement rates. And take us through the logic behind that. And how that ties in the strategy to capture this high end of the market.

Dow R. Wilson

So for stereotactic radiosurgery treatments in the brain, the Gamma Knife has enjoyed a 2x, 2.5x reimbursement advantage over Linac-based stereotactic radiosurgery. Now a unit dose of radiation both have the capability of delivering a unit dose of radiation to a point in space in the brain and there's no difference, and there's a huge body of clinical evidence that the customer community has undertaken to show that. So from a critical point of view, they are the same. There are some early claims that the Gamma Knife was more precise and those claims were all made in a pre-image guidance world. So the Gamma Knife does not have image guidance capability, Linac-based radiation treatment -- does have image guidance today and that's really kind of what this growing body of clinical evidence suggest. So the clinical capability is the same. So we have actually been trying to get these reversed for a half a dozen years. It used to be pre-2007, they were reimbursed the same. A Gamma Knife and Linac-based treatment were reimbursed exactly the same. And then in 2007, as part of a bill on the hill, the Gamma Knife received this kind of premium in reimbursement, and we've been trying to get that reimbursed, get that change for the last half dozen years. It was put in the bill at the end of the year. And now that reimbursements are the same and that will save the federal government I think over 10 years $300 million over 10 years. So this is something that's good for patients. It's good for competition. It's good for the community. And it kind of levels the playing field from Linac-based treatment whether that Linac is made by Varian, Elekta or AccuRay and the cobalt-based treatment for the Gamma Knife.

Amit Bhalla - Citigroup Inc, Research Division

My only concern in this is, are you just -- are you accelerating the downward trend in reimbursement? You're shooting yourself in the foot at the end of the day.

Dow R. Wilson

I mean, there's going to be reimbursement changes. And it's -- we might as well go after those things that are not productive for the community because where there's referrals happening on the basis of reimbursement, it's not good. And what this does is, it levels the playing field. And that's what when we talk about comparative effectiveness, that's what the world is going to and that's kind of been our argument for 6 years. It's from a comparative effectiveness point of view with image guidance, there's no difference. We would have preferred to take ours up. So from that point of view, you're right. And we had that argument for a longtime in Washington. And given the environment, nobody was going there. So we kind of ended up with well, we don't care so much what they are, just make them the same and take away the economic incentive and let's make sure it's just clinical incentive that's driving where patients go.

Amit Bhalla - Citigroup Inc, Research Division

Fair enough. So just one question on the competitive landscape. One of your competitors has signaled that they plan to make a big announcements in the next week or so. What are your early thoughts on what that announcement may be for new technology?

Dow R. Wilson

There's a number of things that they've talked about. We don't have great intelligence on this. We think they're probably trying to figure out how to respond to a combination of the news on the Gamma Knife reimbursement. And our introduction of the Edge product. So our guess is that in some way, a response to those 2 things that are happening in the market.

Amit Bhalla - Citigroup Inc, Research Division

Okay. So...

Dow R. Wilson

And the good news is we only have to wait like 4 more days and we're going to know right? They think it's next week, early next week.

Amit Bhalla - Citigroup Inc, Research Division

Right. Right. So if I look at the radiation oncology sector as a whole, over the last 10 or so years, what we've constantly seen is the biggest players in this market, or the big multinational players have all exited, Siemens, GE, Toshiba, and you're the most recent beneficiary of the Siemens exit with the partnership. Take us through how that partnership has been playing out and how it helped you with market share?

Dow R. Wilson

I think the strategic piece for us here is -- there's a 2,000 unit Siemens install base that over the next 5, 10 years is totally up for grabs. Some of that is happening already. We were on a call with our team yesterday, there's a big account in the Southeast that's a big Siemens account that we think we got a shot at winning. And a year ago, we wouldn't even be competing in this account. There's Siemens radiology shop, there's Siemens IT shop, there's Siemens anesthesia shop. Maybe there's a Siemens cogeneration in the back of the hospital anyway, it's got brand S all over it, and we've just never been able to compete in that account. We think we're going to win on Linac deal in that hospital. Anyway, so there are those kind of conversations at a tactical level that are happening everyday. But again, the real strategic piece for us is, as that install base trades out, we want to figure out how we can advantage ourselves to those customers. So historically, our information technology products have not been able to communicate to their installed base. It was a proprietary interface that they had codeveloped with Impact before Impact was acquired by Elekta. And so Elekta has been their partner in the information system space for cancer. And we have not been virtually kind of a one competitor market for Elekta. So with this partnership with Siemens, the first thing that we get is the protocols that allow us to take our ARIA information system product and communicate to those customers. So for example, this account that we're looking at in the Southeast, they have a couple of Varian machines in their network. They have a half a dozen Siemens machines. They will probably phase out those Siemens machines, 1 or 2 at a time over the next 5, 6 years. But what they'd like to do is put it in the information network now that they can manage through that process as they upgrade their hardware, and so they'll actually put ARIA in and then that will be -- they won't have to have 2 different information systems and then they can switch out the hardware to Varian. So I think it's a nice example of kind of what's happening out there and why this deal is important to us. There's some other smaller elements of the deal, which are important, but maybe not that strategic. We used to have a partnership with GE in the U.S. to distribute their CT scanners into the radiation oncology market. That's a commission driven -- we're a commission sales agent in that arrangement. So we'll be flipping GE to Siemens. We think Siemens CT position is very, very good. And then the other thing we do that partnership is it'll be a global partnership not just a U.S. partnership. And then there's also some distribution elements to the agreement where we're looking at where we each have whitespace, how can we help each other out in markets where we may not be strong. So Siemens is already helping us out in some parts of Africa, some parts of Russia, where they have very strong presence and because of our scale and size, we maybe don't have much distribution capability.

Amit Bhalla - Citigroup Inc, Research Division

Can you help us just put some numbers around this market that are Siemens heavy in the emerging space. Are we talking 10 20 Linacs 100 200 Linacs? Just some perspective would be helpful.

Dow R. Wilson

I think in the long term, if this is there's 2,000 units out there and let's just kind of assume that they trade out over 10, 12 years, we're looking at, call it, 150 to 200 units a year. Now some of that market we're already getting. So not really sure kind of what the incremental piece is. There's going to be a small piece, if it's IT and then the hardware, if we can get some of that hardware. It will be great. If you look at market shares in our space over the last few years, there's been consolidation. So in fact, both Electa and Varian have grown market share. But it's been at the expense of Siemens TomoTherapy and Accuray, Siemens exiting, so that was half a dozen to 10 points market share up for grabs. And then AccuRay and TomoTherapy, the consolidation there is probably put 3 or 4 more points in market share up for grabs.

Amit Bhalla - Citigroup Inc, Research Division

So as we talk about some of the markets outside of the U.S., Brazil comes to mind and certainly a topic on the last few conference calls as well. What can you give us in terms of an update on how Brazil -- Brazil tender is coming along?

Dow R. Wilson

The latest update is there will be an auction. It will be in March scheduled here for a week next. I believe maybe next week. But -- so they are proceeding with the reverse auction. There will be round 1 where it gets limited to 2 bidders. And then 2 bidders will enter a reverse auction process. At the end of that reverse auction, you're going to contracting. So there will be a winner named after the auction. But that doesn't mean you actually have a purchase order. So contracting will actually be after the reverse auction. So there'll be some kind of announcement, if somebody can make here in a few weeks I presume whether it hits the order book or not. I think we'll have to kind of wait and see. It is maybe as you know, an 80 unit tender. I think this is the single largest tender in radiation oncology ever to happen. Probably by almost a factor of 2. So we do not see the consolidation of these kind of big bulk buys very often. We've seen it every now and then from customers in Canada, Western Europe, we'll get a $15 million or $20 million kind of bulk buy. But this will probably be 3x or 4x times that size. So it's big. It's big that way. They're buying. The specification is for fairly basic radiation therapy equipment. So the tender specification has been issued. And I expect that it will be both Electa and Varian will want this business and will compete aggressively to get it.

Amit Bhalla - Citigroup Inc, Research Division

So it sounds like there will be a nice arm wrestling match between you and in a few weeks.

Dow R. Wilson

I'm stronger. I mean, I don't know.

Amit Bhalla - Citigroup Inc, Research Division

Do you see -- my question is, do you really want to win this one?

Dow R. Wilson

Well, I think this is one of those kind of damned if do you, damned if you don't scenarios. I do think both of us would love to win this one. It's going to be competitive from a pricing point of view. At the same time, it's going to give whoever wins nice position to build a big long-term business in Brazil. So is it going to really help or really hurt whoever wins it? 80 unit sounds like a lot and clearly if that were to hit somebody's P&L in a quarter or a year, that would be huge. But we do 650 to 700 units a year. This will probably happen over -- those 80 units will probably be delivered over 2 or 3 years. So you're looking at 20 or 30 units a year over 3 or 4 years. And you don't want a total unit volume of 650, 700 units for us. So it's not everybody's going to compete hard to go get it. I think pricing is going to be the issue and whoever wins is going to be grateful that they've got a nice beach ad to build a really significant long-term business in Brazil.

Amit Bhalla - Citigroup Inc, Research Division

And it really sounds like it's really the tail that's the real profit point of this whole deal.

Dow R. Wilson

Yes.

Amit Bhalla - Citigroup Inc, Research Division

Okay. All right. The last piece I want to just to quickly ask on Brazil is, it's all our understanding that some of the delays were more on the Brazil government, the way they were pricing this tender on a piece-by-piece basis for the Linacs and we all know that you sell a system. It's not like buying a car, like buy the engine, the doorknob. Is that how Brazil government was putting this tender out initially?

Dow R. Wilson

Some of the delay was around getting the tender specification for the equipment right. And then some of the delay was around what their strategy was going to be for building the vaults and getting the whole turnkey systems set up. So they've given us visibility to how that's going to be conducted, that is part of the tender. And -- so that will be -- we'll have to have partners to do that part of it.

Amit Bhalla - Citigroup Inc, Research Division

Got it. If there is any questions in the audience, raise your hand we'll make sure to get a mic to you quickly. So let's move to proton therapy. In the context of the discussion of value, these are very high-priced systems, data is currently being generated. I don't know if there's a conclusive statement on proton systems outside of pediatric and retinal cancers. But talk to us about strategy in pushing proton therapy forward.

Dow R. Wilson

I mean it's clear from a value point of view, it's expensive. It's also clear from a physics point of view that it's very cool, and the physics are terrific. If I could offer proton therapy at the price of a TrueBeam, that's what my whole probably my whole product basket would look like. So we do view this as a very long-term R&D development, and that's our children and grandchildren they're probably going to be treated by proton therapy. That kind of managing that when a system is $100 million we're going to 1 or 2 years. When the system is $3 million, I'd sell 650 of them. And as we kind of live that cost curve, we'll see the evolution of this product. That's not going to happen fast. We do think we can get the business to breakeven if we can ship 2 units a year. So we have commitments today from Scrips Institute in San Diego and APT, proton therapy company. We have commitments from a customer, King Fahd Medical Center in Riyadh. From a customer in St. Petersburg, Russia. And we have 2 letters of intent with customers here in the U.S. as they complete their financing, I think we've disclosed those ones at University of Maryland and one at Emery. But I think where we really kind of need to get to is, can we deliver reliably 2 units a year and have it, have the sales hit the P&L and kind of get to breakeven so that we can fund this kind of development effort and get the cost down. So the good news is, is we are working on designs that get out to substantial amount of the cost. As the world goes to hypofractionation, there's another cost-benefit, hypofractionation maybe -- may mean significant things to proton therapy because you can do it in one treatment or one to 5 treatments instead of 35 to 40, and we may see more uptake in proton therapy there from a hypofractionation point of view.

Amit Bhalla - Citigroup Inc, Research Division

There's a question right here.

Unknown Analyst

Alan from TCI. I've got couple questions, actually. Although you and Elekta both been gaining market share, Elekta's reported growth rate has certainly being higher than Varian's over the last 3 years. Do you feel that they've been more aggressive in the market than you've been?

Dow R. Wilson

There's a couple of ways to look at market share. Clearly, when you do look at order share, they have been growing faster than we have. We do like things we can put in our wallet. So when you look at revenue growth, our revenue growth has been same or higher than theirs. So there's some differences in how we account for orders. We account for net orders and take cancellations into our -- cancellations and order glamances into our -- into every quarter's order number. They net it against their backlog. And there might be some other differences on how they book orders. And a lot of their growth has been acquisition driven. So a lot of that has been from consolidation of industry share and not organic growth. But from a sales point of view, our share is growing.

Unknown Analyst

My second question is how much does a Linac cost today relative to 5 years ago?

Dow R. Wilson

It depends on the configuration. In China, we have -- in the emerging markets, we have price points that begin at $850,000 and we can price a high end product all the way to $3.5 million.

Unknown Analyst

And how have those price points have compared for similar Linacs 5 years ago?

Dow R. Wilson

The -- there's more coverage at both the low-end and the high-end. 5 years ago, there were very few price points above $2.6 million, $2.5 million and very few price points below $1.25 million.

Unknown Analyst

When I speak to hospital, it seems roughly speaking that the price of a Linac for a similar system has remained constant for fairly longer period of time. Would that be a fair reflection on price, you think?

Dow R. Wilson

I actually think -- again, it depends on the market. But in the developed country, I think the actual price has gone up pretty substantially.

If you look back over the last 10 years, we've added IMRT capability, portal imaging capability, high definition collimators, RapidArc, software, so there had been half a dozen big drivers that impact both outcome and productivity for our customers. And so price points for, I mean, if you look at the same Linac, same configuration, it's actually probably down just a hair. But the product is a much richer mix, much more meaningful clinically and so the average price of what we sell in the developed world is, over the last 10 years, is up significantly.

Unknown Analyst

Right, okay. I think we're going to have to just stop it there and maybe we can take the next questions off-line. I just want to make sure we keep everything on schedule. Thanks a lot, Dow. Thanks a lot, Spencer, for the time.

Dow R. Wilson

Thank you.

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Source: Varian Medical Systems' CEO Presents at Citi 2013 Global Healthcare Conference (Transcript)
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