November 22, 2012 - 10:52pm EST by
2012 2013
Price: 68.86 EPS $3.76 $4.27
Shares Out. (in M): 109 P/E 18.0x 16.0x
Market Cap (in $M): 7,533 P/FCF 17.0x 14.0x
Net Debt (in $M): 593 EBIT 594 665
TEV ($): 6,940 TEV/EBIT 11.6x 10.4x

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  • Medical Devices
  • medical equipment
  • secular tailwinds
  • Recurring Revenues
  • Buybacks


VAR is a highly defensible business with long-term growth prospects that should drive earnings and command a premium multiple (18-20X forward PE) for its shares.  Trading only at 16X PE and 10X EBIT, VAR is an attractive play for investors to gain health care exposure with a dominant company that should benefit from secular tailwinds (radiation oncology growth), emerging market penetration, and an eventual rebound in hospital spending (in the U.S. and EU). 
VAR has consistently generated strong financial results: in the past five years, despite a challenging macroeconomic enviroment, VAR has posted robust top line growth (~10% CAGR), margin expansion (~200bps, from 21% to 23% EBITDA margins) and consistent EPS growth (15% CAGR).  In addition, over the past decade, VAR has generated ROIC of 25-30% and maintained dominant market share (~65%) in the radiation oncology market (and likely to increase as one of its competitors has exited the market) through its installed base of loyal users and machines and superior products and innovation.  With continued secular tailwinds and international growth prospects to drive further growth and operating leverage (high fixed costs via R&D) we expect VAR earnings to continue to grow 10-15%pa and command a 20X PE multiple, as a premium stock in the medtech universe.  
VAR is the leading worldwide provider of radiation oncology and x-ray imaging supplies.  The company’s radiation oncology division comprises ~78% of total revenues and hence is the leading driver of the company’s growth and its primary business (x-rays are a solid, growing business but not critical to the VAR story).  Hence, VAR primarily manufactures and designs advanced radiation oncology equipment in the U.S. and worldwide.  Its products include linear accelerators, brachytherapy afterloaders, treatment simulation, verification equipment, and accessories; as well as ancillary software services.  (The company's many products and business overview are well described in the company’s filings and hence not summarized here).
For the past 10 years, VAR has had a dominant market position (~65% market share) which has driven continued success for the company.  Barriers to entry in this industry are high, and VAR’s installed base of highly sophisticated oncology machines (approximately 6,000 linear accelerators, with an average useful life of 12-14 years) limits competition and allows for economies of scale in this market.   Specifically, the market for radiation oncology equipment (similar to most medical device companies) requires significant R&D fixed costs as products are protected by patents, regulatory approvals and physician acceptance.  As a result of decades of VAR’s market leadership, VAR has consistently spent more R&D dollars per year (2-3X the nearest competitor) on product innovations and spent more marketing dollars per year on its sales force gaining physician and hospital administrator acceptance of their products and growing its installed base.  Physicians and hospital administrators are a fairly loyal and sticky customer base of radiation oncology equipmnent – less not focused on price than on proven clinical outcomes, physician acceptance, customer service, and interoperability with other existing VAR machines or third party products.  As a result, VAR’s installed base of machines and loyal users provides a valuable asset that competitors are unable to replicate.  (Interestingly, Siemens, recently exited earlier this year).  As a result, VAR is able to offer premium prices for their products, yet can claim a lower total cost of ownership (and or risk) for hospitals.  Despite its higher product pricing, VAR equipment is estimated to still have a ~18-24 months payback to hospitals, generating a strong ROI to its customers.  
With the company’s dominant position, and radiation oncology used in 50-60% of all cancer treatments, VAR is well positioned to capitalize on continued growth in the incidence of cancer as a result of favorable demographics trends (aging U.S. population) and increased utilization of radiation oncology therapies worldwide (greater acceptance in developed and emerging markets).  Specifically, in the past 10 years the industry has grown ~15% per year, and is expected to grow ~50% over the next 10 years.  The aging population in the U.S. clearly provides tailwinds to this industry (cancer is the #2 case of death in the U.S.) and growing acceptance amongst clinicians of radiation oncology treatments worldwide has also increased demand for VAR products.  (Estimated procedures per thousand people have increased due to new procedures technologies, preventative / early detection of cancers, technological improvements leading to better clinical outcomes, increased focus of practitioners on non-invasive therapies, and growing middle class in emerging nations).  
Despite selling capital equipment, VAR revenues have high visibility and meaningful recurring reveneue.  Specifically, sales of VAR products have a long lead time (i.e. considered part of a hospital’s capital budgets due to the $2-$4MM price tag per unit).  Hence equipment purchases can take years to develop.  Impressively, VAR’s current backlog is ~$2.8BN (up 12% YOY) which provides visibility on the near-term revenues of the business.  Importantly, 25% of VAR’s revenues from ongoing service revenue (recurring contracts for warranties and software support services that provide additional high margin earnings from existing installed machines) which have been an increasingly important part of the company’s revenue mix (up from ~16% of revenue in 2006).  Finally, with an estimated~15-20% of product sales for replacement demand of equipment, an estimaed ~40% of the company’s revenues appear to be recurring cash flows.  The long lead time and meaningful recurring revenues of VAR have best been demonstrated by the stable earnings profile in the past seveeral years, despite recent macroeconomic weakness.   VAR stable earnings should continue going forward.  
Importantly, the company with its long-standing management team has a deep bench of strong operators.  Management has been shareholder friendly and earlier this summer announced a large share repurchase (~8MM shares or 8% of shares outstanding) which will provide continued price support to the security.  Additional events to efficeintly use, repatriate or reinvest the company's cash (~$590MM net cash on the balance, or 8% of the market cap) could continue to drive the stock price.  
In the past quarter, VAR shares have appreciated materially largely as a result of 4Q results (above expectations).  VAR was able to withstand most of the headwinds facing the medical technology industry and benefit from growing acceptance in emerging markets such as China and India.  In addition, resolution of 2013 reimbursement rates (reimbursement cuts that appeared in-line with expectations) have alleviated some investor concerns in the name.  Hence, shares have appreciated ~20% in the past two months. 
Though shares have appreciated, given the stability of the business and the strength of the underlying industry drivers, VAR is still an attractive investment which should trade closer to 18-20X forward earnings as a premium operator in the space.  For those investors willing to gain long term exposure to a rebound in hospital spending, and invest in a strong underlying business with secular tailwinds and international exposure, then VAR should provide significant upside to its current valuation from underlying earnings growth and potential multiple expansion.
Changes to reimbursement rates in the U.S.
Weak hospital capex spending enviroment in the U.S.
Technological obsolences (failure to execute on continued product innovation)
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.


Rebound in hospital spending
Continued international expansion in excess of investor expectations
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