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Varian Medical Systems (NYSE: VAR) Health Care – Medical Devices

April 12, 2019 Stock Rating: SELL

Year 2017 2018 2019E 2020E 2021E EPS $2.70 $1.64 $3.75 $3.99 $4.17

$ 12,700 90.7

$ 3.75 37.74

ROA 4.61% R&D / Sales 8.00%

Sarah Langholz Scott Tribbey Sarah-Langholz@uiowa.edu Scott-Tribbey@uiowa.edu Ian Jongewaard Nathan Kelsay Ian-Jongewaard@uiowa.edu Nathan-Kelsay@uiowa.edu

Varian Medical Systems designs, manufactures, and markets medical devices and software related to oncology treatments through radiotherapy, brachytherapy, and proton therapy. Varian has two reportable operating business segments: Oncology Systems and Proton Solutions. Along with hardware and software used to diagnose and treat a variety of cancers, Varian also services equipment and parts as well as training and preparation courses meant to help health care professionals effectively use their products. Varian is headquartered in Palo Alto with offices in Europe, Asia and Latin America. The company was founded in 1948 and had its initial public offering in 1999.

Krause Fund Research Spring 2019

Analysts

Investment Thesis

DCF Model DDM Model Current Price

$ 120.63 $ 82.52

$ 141.52

52wk high 52wk low Beta

$ 142.50 $ 101.42

0.858

Market Cap (M) Shares Outstanding (M) EPS (2019E) Forward P/E

We recommend a SELL rating for Varian because of stagnating US Oncology Systems revenue and the company’s inability to generate demand for the Proton Solutions business which we project to have a growth rate of -5.53% in 2019.

Drivers of Thesis • Radiation therapy market saturation: Varian’s US sales will grow at a

rate of less than 4% in the next 3 years because the radiation oncology market is fully saturated.

• Slowed revenue growth following spin-off: prior to the divesture of its imaging components business, Varex, Varian was averaging 6.89% revenue growth. Since the spin-off in 2016, they have averaged -3.48% revenue growth despite development of their Proton Solutions business

• New cancer treatments replacing radiotherapy: More effective treatments such as immunotherapy and biotechnology will replace radiation treatment, Varian’s only product

Risks to Thesis • Increased global demand has potential to increase sales: China may

increase its demand for advanced cancer treatments such as the Halcyon, a main driver of sales in the Oncology Systems business

• High sub-industry barriers to entry: The company has maintained its global market share of over 50% in radiation oncology

ROE Profit Margin

5.14% 9.44%

Company Description

Earnings Estimates

12 Month Performance

Company Performance Highlights

Stock Performance Highlights

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Target Price: $116 – $124

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Our team is issuing Varian (NYSE:VAR) a SELL rating for the Krause Fund Portfolio. Our sell rating is based on both our positive and negative outlooks that we have outlined in this report. Although Varian is a strong competitor in their niche Radiation Therapy market, they have experienced slowed revenue growth, kept R&D expenditures stagnant suggesting lacking development of innovation to drive sales, and compete in a saturated industry with little market share left to be claimed. Because of this, we believe they are currently overvalued and are therefore recommending a sell rating. Our Discounted Cash Flow and Economic Profit model resulted in an intrinsic value of $120.63, which indicates the stock is overvalued as of April 12, 2019. Varian’s current price of $141.52 implies a more than realistic growth in revenues in the next year. The market price is overly optimistic and had failed to price in the saturation of the US radiation therapy market, medical device industry maturity and Varian’s inability to replace its recently spun off Imaging Components business with the new Proton Solutions segment.

Demographics

Changing demographics in the United States are a driving factor affecting the health care sector on a broad scale. Demographic trends are one of the contributing factors of the continued growth of the health care sector. Americans age 65 and up made up 15.6% of the United States population in 2016, according to the latest census data.3 Statista estimates the senior population will grow to 22.1% by 2050 as baby boomers continue to age.4 The aging population is at greater risk for chronic diseases and injury and therefore demand additional medical services.5

Source: US Census Bureau11

In addition, the life expectancy in the U.S. has experienced slight declines since 2014 due largely to premature deaths related to substance abuse and increasing rates of suicide.6 An increasing mortality rate has contributed to higher health care

costs and a sicker workforce which can result in a less competitive economy. We believe the increase in people of retirement age will be a beneficial factor for the health care industry. With older people requiring more medical treatment, pharmaceuticals and health care insurance companies will benefit financially from this demographic transition. The aging of America will provide a long-term investment opportunity for people seeking investment in the health care sector.

As the population ages, more incidences of cancer naturally arise. Cancer is among the leading causes of death worldwide. The number of cancer cases per year is expected to rise to 23.6 million by 2030.8 With the wide application of radiation therapy to nearly all cancer types, this will increase the demand for radiation therapy systems.

Source: National Cancer Institute8

Government Regulation

Government regulation is one of the most important macro-economic factors affecting the health care industry. U.S. health care expenditures in aggregate amounted to $3.5 trillion in 2017 which accounted for roughly 18% of U.S. GDP.10 Health care spending is projected to grow at a rate of 5.5%, slightly higher than average yearly GDP growth. Growing demand for health products from an aging population will expose the industry to more potential government intervention in medicine pricing and insurance distribution.

The Congressional Budget Office projects the U.S. Federal Government will have spent roughly 5.2% of 2018 U.S. GDP on health care related programs such as Medicare, Medicaid, Children’s Health Insurance Program, and subsidized health insurance purchased on ACA established exchanges.13 This number is projected to increase to 6% of total U.S. GDP during 2019-2028, growing by more than a percentage point in the following decades. The expectation for health care to become a larger portion of GDP provides a positive outlook for health care companies in the medium-term outlook (5-10 years).

Given the state of a congressional gridlock, we believe there will be limited regulatory changes in the short term (1-2 years). However, depending on the 2020 Presidential election,

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significant unraveling or strengthening of current regulation could occur.

With the loss of control of the House of Representatives during the 2018 midterm elections, Republicans have a much lower possibility of repealing the ACA. The Tax Cuts and Jobs Act repealed the individual mandate for people to be covered by health insurance which will go into effect in 2019.14 With no mandatory fee, new enrollment in Federally subsided health care is likely to decline.

Fortunately for Varian, Medicare Part A, Medicare Part, as well as Medicare Advantage cover radiation therapy treatments. Increases in coverage and spending for radiation therapy provides a positive outlook for Varian’s Oncology Systems business segment.16 None of the Medicare plans provide full treatment coverage, but stipulate up to 20% coverage can be attained by the individual seeking treatment. Currently, proton therapy is not seen as a medical necessity since it is not as cost-effective as radiation or chemotherapy. As shown in our modeled revenue decomposition, Varian’s Proton Solutions segment has struggled to gain ground and even experienced shrinking revenues in 2018. Receiving FDA approval as a medically necessary device is a headwind the Proton Solutions segment needs to overcome in order to grow its market share.

Medical Device Excise Tax

In 2012, the IRS issued a new excise tax on the manufacturing and importing of medical devices. This tax was 2.3% on most devices but was suspended on January 1, 2016 and will be in moratorium until December 31, 2019. If the tax is not indefinitely suspended it poses a risk to Varian’s operating margin as the company both manufactures and imports its technology. This factor presents a significant risk to Varian because of its international operations.

U.S. Real Gross Domestic Product (GDP)

Real GDP is an inflation-adjusted measure of the total value of the country’s annual production and is a main indicator of the health of the U.S. economy. The current administration has emphasized prioritization of economic growth and introduced the Tax Cuts and Jobs Acts of 2017 (TCJA) which we believe was the main driver in experiencing real GDP growth of 2.9%, the highest since 2015. We expect real GDP growth to slow in the coming quarters as the effects of the current trade war with China settle into U.S. companies. Our team expects slowed GDP growth to have little effect on the health care industry because health care spending is relatively inelastic when consumer spending decreases.

Source: US Real GDP Growth Trading Economics1

Real GDP relates closely to health care spending as nearly 18% of GDP in 2017 was due to health care expenditures.6 According to the Centers for Medicare and Medicaid Services (CMS), “National health spending is projected to grow at an average rate of 5.5% per year for 2018-2027 and grow 0.8% faster than GDP during the same time frame.”7 Although we expect Real GDP in the U.S. to slow in the coming year, we think that health care expenditures will increase in proportion to Real GDP and continue to grow irrespective of Real GDP growth primarily due to demographic trends with baby boomers requiring health care. With health care spending outpacing Real GDP growth, we expect the increased spending to fuel growth in health care.

We are forecasting a more reserved real growth rate due to the challenges in continuing to increase labor productivity in the long term. Varian will grow at a similar rate to the overall economy because of it being at a mature stage in the company lifecycle. We do not believe the company will have any extreme growth phases in the next decade but will also be able to weather downturns in the economy or other challenges because of its strong capital structure and proven history of evolving to changes the last 70 years it has been in business.

Inflation

The rising costs of health care in the US has been detrimental to the industry’s public image. Many Americans and politicians view the health care industry as exploitative and unnecessarily increasing prices annually. This public image factor is largely against the pharmaceutical industry and does not affect Varian as significantly. If inflation continues to hold around 2%, Varian should be able to make the incremental price increases each year without scrutiny from doctors and patients.

Unemployment

The unemployment rate, which represents the percentage of the labor force without a job, largely impacts the health care sector since employed individuals often have more access to private, adequate health care insurance. The Bureau of Labor Statistics reported that the unemployment rate stood at 3.8% in March of

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3 Year U.S. Real GDP Growth

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this year. We believe this has a positive macroeconomic effect on the health care industry since a lower unemployment rate will result in more people able to enroll in a health care plan provided by their employer. According to the U.S. Census Bureau, 56% of people with a health insurance plan were enrolled through a private employer, the largest portion of total coverage. Increased private coverage signals a positive outlook for health care companies in the current labor force climate.

Source: Bureau of Labor Statistics10

Although a low unemployment rate is beneficial to the health care sector, our team is near-term pessimistic about the unemployment rate as we believe it will rise above 4% before the end of 2019. Historically, the United States has not been able to sustain an unemployment rate below 4% for an extended period and our expectations are consistent with that notion. We do not anticipate a spike in unemployment in the next 12-18 months, however we believe the unemployment rate will increase 1-2% between now and through 2020. An increase in unemployment could be a concern for Varian because of its high cost cancer treatments which are frequently covered by employerthe health care industry as fewer people would have access to health insurance.

Treasury Yields

The current treasury yields in the United States have been low in recent years. Capital expenditures increase during a low interest environment since it costs relatively less money to borrow during this time. The current 30-year bond yield is 2.94% and our team expects the 30-year bond to remain close to 3.00% for the remainder of 2019 and into 2020 where it we expect it to rise slowly and end 2020 around 3.25%. A low interest rate environment will allow companies in the health care space to grow and expand, mainly through M&A.

Source: U.S. Department of the Treasury13

Low treasury yields historically spur M&A deals due to the nature of borrowing at a low cost. M&A in the health care sector is abundant and deal volume and value has increased in recent times. In 2018, there were 1,182 deals completed, a 14% increase compared to the year prior. Deal value declined 31.4% from the previous year, due to the CVS-Aetna megadeal at the end of 2017.14 Although deal value dropped from the previous year, we believe increased deal volume still suggests room for growth which is a positive indicator for companies in the health care sector.

Tariffs

Varian has manufacturing plants in China and was adversely affected by the tariffs on both the importing on component parts as well as the final sale of finished products. The Trump Administration imposed a 25% tariff on a series of imports which included radiotherapy systems and component parts which are in China. Currently, Varian is participating in the Office of the U.S. Trade Representative process to consider their products for exclusion from tariffs. If the outcome of these discussions is positive for Varian and leads to removal of tariffs on their products, they would experience financial relief. The Trade War has a significant likelihood of constraining Varian’s operating margins with increased cost of sales.

Industry Overview

The Global Industry Classification Standard (GICS) classifies Varian in the Health Care sector. The sector is known for its relatively inelastic demand, heavy government involvement, and growing global market. Within the Health Care sector, Varian is classified in the Health Care Equipment and Supplies Industry falling within the medical device manufacturing sub-industry. According to the Federal Food, Drug, and Cosmetic Act of 1938, medical devices are defined as “an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent or other similar article that is intended for use in the

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Industry Analysis

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diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease.”19

Source: S&P Dow Jones Index Trading Economics1

As global growth cools from the decade long expansion following the financial crisis, the health care sector will remain resistant from a slowdown. Growth in the next two years will be characterized by new technology and reduced government regulation through oversight by the Trump Administration.

The Health Care Equipment and Supplies Industry is highly diverse incorporating the manufacturing and selling of thousands of products with varied capital costs. The equipment produced in this sub-industry can be divided into two categories: conventional and high-tech. Firms producing conventional products such as trays, scalpels, and furniture tend to have lower margins and high production volumes. Conversely, high-tech products are more advanced requiring higher R&D funding resulting in firms with high margins. The industry is continuously adapting to new technology and innovation and often makes patents obsolete before their expiration.

Regulatory Environment

Governmental oversight affects the ability of health care equipment firms to develop and market new products. The FDA approval process can be lengthy and costly depending on the risk associated with a company’s proposed product. There are three regulatory classes defined by the FDA, with Class I defined as least risky and Class III exhibiting the most risk.19 Varian does not currently produce any Class III products, which require extensive pre-market approvals (PMAs) prior to marketing products.15 For Class I and II products, a 510(k) pre-market notification clearance is required. The FDA is adjusting its De Novo classification process to simplify procedures and shorten time frames for product approval processes. This will benefit Varian as it will shorten the time it takes to bring a product to market and cut down on associated costs. However, the updated De Novo classification creates the same advantage for smaller competitors who previously lacked the resources

required to complete the approval process creating a friendlier environment for increased competition.

As the shift to value-based care continues, Medicare and Medicaid are developing new payment models to reduce costs to patients and limit unnecessary services previously incentivized with “fee for service” payment plans. In 2018, the Centers for Medicare and Medicaid introduced the Bundled Payments for Care Improvement (BPCI) model aimed at reducing patient costs and streamlining the care process.20 However, this new model which will run through 2023, has negative implications for medical equipment and device companies. With a predicted reduction in medical services as a result in the change of payment, device companies can expect revenues to be impacted. BPCI will increase pricing pressure for device companies and cause them to focus on cost reduction while maintaining and improving device quality. Consequently, the medical device industry could experience slowed growth over the next five years. Trends

As companies attempt to stay competitive, two major trends are emerging within the industry: a focus on incorporating technology into treatment and expansion into global markets.

As technology becomes an ever-important part of our daily lives, health care equipment companies aim to incorporate technology into their equipment to streamline procedures for patients and capture data to improve care plans. Health care firms are establishing partnerships with technology companies to develop products that will ultimately drive a shift from treatment and cure to prevention. However, there are concerns surrounding cybersecurity as health care devices begin incorporating technology and tracking data. Focusing on data security will be a key factor in the success of these med-tech partnerships.

In addition to product development, health care equipment companies are penetrating global markets to secure a stake in the growing need for health care internationally. The U.S. medical device market is the largest and most profitable in the world, but the observed wealth accumulation in other countries, notably Asia, is garnering attention from companies seeking to penetrate new markets. China increased per-capita health care spending by 467% over 10 years, compared to the world’s average growth of 47%. As shown in the graphs below, significant growth is expected in global markets and we believe companies should prioritize global growth as a long-term strategy.

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Source: Health Care Equipment & Supplies March 201921

Competition

Competition in the Health Care Equipment and Supplies industry is intense as firms strive to develop technology superior to peers to capture market share. Companies operating within this industry prioritize Research and Development funding as a means to increase innovation resulting in new products and increased sales. The top companies in the industry dominate the market with the top 10 firms comprising 40% of the global medical technology market.22

Source: EvaluateMedtech22

Below is the FY18 revenue, D/E, and operating margins of Varian and the five main competitors within this industry.

Ticker Revenue D/E Operating Margin

VAR $2,191 0% 16.50% ABT $30,578 64% 12.57% MDT $29,953 51% 23.21% JNJ $81,534 51% 26.07% DHR $1,983 35% 17.46% BSX $9,823 81% 17.68%

Source Factset18

Porter’s Five Forces Analysis

Barriers to Entry: High

Due to economic, regulatory, and legal obstacles, the Health Care Equipment sub-industry has high barriers to entry making it difficult for new competitors to enter the market. Large, diversified device manufacturers dominate the industry and create difficulty for smaller firms to compete for contracts with purchasers. Significant R&D expenses, risks associated with bringing new products to market, and established physician-manufacturer relationships are all factors creating high barriers to entry.

With Varian being an established company in the industry, they have a loyal customer base as a result of their relationships with physicians allowing them to win contracts. The industry average for R&D expenses is between 7-10% of total sales. Varian has kept their R&D expenses at 8% of sales since 2014 and plans to continue to do so for the foreseeable future.15 R&D expenditures have been increasing among firms in the industry as companies seek competitive advantages through innovation and are expected to grow by 4.5% (CAGR) through 2024.22 We believe Varian will lose market share if they keep R&D expenses stagnant as management plans to.

Power of Suppliers: Low to Moderate

The suppliers within the Health Care Equipment industry are globally located contributing to their weakened influence. However, some suppliers may provide unique, complex supplies that are difficult for other suppliers to replicate or be substituted. Additionally, suppliers are held to steep regulatory standards and if they are able to remain in regulatory compliance, may garner more power in the industry than suppliers who lack the resources to meet regulatory requirements and provide customers with the individualized supplies needed to produce their products.

Varian obtains materials from various suppliers but requires some components from an exclusive group of suppliers who manufacture product parts. Varian runs the risk of these limited suppliers being acquired by their competitors which could disrupt their supply chain and result in less predictable revenues. The loss of a single supplier could force Varian to redesign or modify certain parts without the lost part previously provided by the lost supplier which would warrant increased costs and delays in product delivery.

Power of Buyers: Moderate

As is common in the medical device industry, the buyers are often not the end users. Within this industry, hospitals and other health care providers represent a large portion of the buyers. As these buyers have consolidated and merged together in recent years, they have gained a substantial amount of leverage over the medical equipment and supplies industry. These hospitals

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are attracted to companies that can manufacture and supply them with a variety of products, making smaller manufacturers like

Threat of Substitutes: Moderate

The threat of substitutions is often low when dealing with expensive equipment because of the significant costs associated with switching products. Health care equipment substitutes require removal costs of the previous product, physicians to be retrained, and significant financial investment in new technology. Many physicians and patients become accustomed to certain medical devices and their associated procedures and switching to new products can be accompanied with adverse sentiments from both physicians and patients receiving treatment.

Varian has an established customer base of physicians and hospitals who are familiar with their products and associated procedures. As Varian introduces new products, we believe it will be imperative for them to prioritize educating their customers with the benefits and functions of their new devices to increase the adoption rate within the market. As common within the medical device industry, when physicians are unaware of a product’s capabilities, they will be unlikely to purchase products because of the long-term investment that typically accompanies these high-tech products. Marketing will be key to distinguishing Varian’s products from potential substitutes.

Rivalry Among Existing Competitors: High

There is intense competition within the Health Care Equipment sector as companies compete to create the most cost-effective versions of products to attract more buyers and capture additional market share. The product life cycle is typically short as companies are constantly working to develop new versions of past products or bring new technology to market. Because of the constant reproduction of existing products, companies are always searching for growing markets to penetrate and usually take advantage of these opportunities through some combination of increased R&D expenditures and M&A activity.21

Where Varian is concerned, the cancer market is highly competitive as there are continuous product entrants and regular technological innovations resulting in pricing pressure to remain competitive. They compete globally with firms who have greater financial resources and abilities to produce more efficiently. In the cancer treatment space, radiation therapy will continue to be the primary source of cancer treatment, but there are constant developments occurring promoting drug-based oncology treatment which will threaten Varian’s primary revenue source of radiation oncology products and services.23

Corporate Strategy Varian is a global leader in radiation therapy capturing over 50% of worldwide market share. They are working to establish themselves as a leader in multi-disciplinary cancer care solutions by prioritizing a long-term growth and value creation strategy. Emphasis is placed on maintaining their leadership in radiation therapy, expanding their global footprint, and growing their product offerings through acquisitions and product development.15

Recent 2018 acquisitions were the primary contribution to Varian’s modest 4.19% revenue growth. This inorganic growth suggests the company is lacking in product development. Varian realized record orders in their Oncology Systems business totaling $1 billion. They achieved 17% annual growth in EMEA; marking their fifth consecutive quarter of double digit growth15. Their focus on international expansion aligns with their corporate strategy and will enable them to claim share in the growing international market. Competitive environment The market for cancer treatment is characterized by intense competition, rapidly evolving technology, and pricing pressure. In addition to competing within their specific treatment category (i.e. radiotherapy, immunotherapy), companies are constantly in competition with alternative treatment methods and working to prove their product is superior in cancer treatment. The recent focus on M&A transaction in the industry is enabling companies to further diversify their offerings and provide an array of treatment options. Varian produces high-tech products and has effectively claimed over 50% of market share in their niche market of radiation therapy. The market for radiation oncology in North America is primarily characterized by replacements of older machines and is near saturation

Production and Distribution Manufacturing process and costs Varian’s manufacturing plants are spread throughout the globe with a larger presence in the western hemisphere. Plants are located in the U.S., China, Brazil, UK, France, Canada, Germany, Switzerland, and Finland. Due to the technicalities of the manufacturing processes employed in each of the products, the plants are generally located in developed countries with employees that have highly specialized skills.

Suppliers and raw materials Varian obtains multiple components from a single supplier source which could provide issues if this supplier is acquired by one of its main competitors such as Elekta. Multiple parts, which are crucial in Varian’s product assembly, including radioactive sources, klystrons (a vacuum tube that amplifies

Company Analysis

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microwaves), magnets, gantry hardware components, and patient positioning systemsi. Varian uses raw materials such as tungsten, lead, copper, steel, and iron in its manufacturing processes which leaves it susceptible to volatile movements of these commodities. Personnel As of 2018, Varian had 7,174 employees with roughly 3,000 in the US and 4,000 abroad15. According to 482 reviews on Glassdoor, the company has an aggregate rating of 3.8 out of 5 while 86% approve of the CEO.24 Roughly 75% of the company’s respondents say they would recommend a friend get a job at Varian. Compared to its competitor Elekta which scores a 2.9 out of 5 and only half the respondents approve of the CEO and only 41% would recommend to a friend, Varian is doing quite well.25 Accuray, another competitor scores only 2.8 with only 39% approving of the CEOs actions.26 Compared to competitors in the medical hardware industry, Varian has a satisfied and loyal workforce. Management Dow Wilson has been CEO since 2012 and was previously COO from 2011-2012. Before joining Varian Medical Systems Wilson spent 19 years at General Electric, most notably as the CEO of Health care Information Technologies from 2003-2005. Although Wilson has been working in the health care industry most of his career and has a great understanding of international operations, he does not have medical training and is a businessman15.

Business Segments

Varian operates through two different business segments: Oncology Systems and Proton Solutions. Oncology Solutions is the main driver of revenue with roughly 95% of sales coming from this division.

The Oncology Systems segment develops and markets products including the volumetric intensity modulated radiotherapy technology, radio surgery, and linear accelerators all designed to deliver radiation in different forms and doses. These systems require specially trained staff and radiologists. Varian also offers integrated software services and cloud-based applications with third party compatibility.

Proton Solutions is Varian’s newest and most uncertain segment due to its innovative yet unproven technology. The Proton Solutions business segment is the weaker link of Varian’s products. Proton therapy facilities are labor- and capital-intensive projects which has made their availability limited as a treatment method. As a result, the proton therapy business is vulnerable to general economic and market conditions. As is the case with radiation oncology, the customer decision making process is lengthy and the funding environment constrained. Proton therapy is a more advanced, customized delivery method of radio therapy using proton beams. This delivery method is

preferred for specific cancer types such as pediatric cancer due to the sensitivity of the patient as well as important organ structures like the eye. Proton solutions has failed in generating significant demand from pediatric cancer patients, which it hoped the technology would be used for, due to its high costs.

In 2016, Varian spun off its Imaging Components business segment into a new company called Varex Imaging. The Imaging Components segment represented roughly 20% of their annual revenues which Varian has failed to replace with the company’s investment in Proton Solutions15. This divesture exemplifies management’s resistance to diversifying its product offerings outside of radiation therapy.

Varian’s focus on building up its Proton Solutions business failed to gain traction. One significant barrier is the cost of building and operating proton therapy centers. Varian does not open their own proton centers but instead helps finance the building projects. Varian has encountered significant trouble financing these centers and has had to impair millions of dollars in loans when the centers go bankrupt. With its high starting price point, Varian has struggled to convince hospitals and research institutions that this product is worth the price. We are more pessimistic than management and forecast negative growth in 2019 for Proton Solutions while the products are still being developed and Varian works to lower the initial price.

Varian has been very successful at marketing its service contracts such as the Planned Maintenance Program and SmartConnectPlus. These follow-on service contracts allow Varian to maintain the relationship and a stream of revenue from the purchasing hospital or care center.

Year 2018 2017 2016 Product (M) $1,570 $1,394 $1,436 Cost (M) $1,024 $951 $989 Margin 34.7% 31.8% 31.2%

Year 2018 2017 2016 Service (M) $1,349 $1,225 $1,158 Cost (M) $621 $555 $501 Margin 54.0% 54.7% 56.8%

Source Varian 2018 10K15

The company’s growth in service revenue is noteworthy, but Varian’s ability to sell service contracts is dependent on first executing with hardware sales to hospitals and other care providers. Management does not have targeted percentages for revenues by item, but we believe the company should move towards a 40% services and 60% product sales. If Varian puts too much focus on service contracts this will boost short term sales and earnings, as they have higher margins on service contracts which can be seen in the table below.

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Products and Markets Product line and new products Both the Oncology Systems and Proton Solutions business segments sell hardware, software, and service contracts. Varian’s primary products are linear accelerators which deliver the radiation through external beam radiation. Theyinclude the newest Halcyon, TrueBeam, VitalBeam, Edge Radiosurgery System, Clinac, and the Trilogy. Varian’s current focus is marketing the Halcyon, an advanced radiotherapy system launched in 2017. Varian has booked 182 orders for the new system and currently has an installed base of 8057 linear accelerators15. Varian offers service contracts which include delivery, installation, and maintenance of its treatment delivery systems. Varian provides customer service contracts for assistance with their software programs as well as education and training for all company devices. Varian is susceptible to cannibalization because of nature of their products. New innovation in radiotherapy often slows the sales of other products especially with new customers. Varian will likely experience cannibalization against its older radiotherapy systems such as Trilogy and VitalBeam systems as it promotes the implementation of the Halcyon.

Market for the company’s products Growth drivers include increasing rates of cancer diagnosis internationally as more people gain access to better health care, patients desiring better more effective cancer treatments, competition among hospitals to offer the highest levels of treatment, as well as the growing ability of emerging market doctors to diagnose cancer, growing middle class in emerging markets, and emerging market governments wanting better health care for their patients.

Marketing strategy and customer support Due to the capital-intensive nature of Varian’s products, the sales cycles are often lengthy with customers adjusting capital budgets years in advance. The extended length of the sales cycle contributes added risk of sales loss due to potential order cancellations in response to economic conditions, hospital budget cuts, and customer preferences. Due to the complexity of their products, Varian invests in customer service to aide in the customer decision making process and promote their product competencies against competitors. Varian warrants Oncology Systems products for 12 months and provides post-warranty equipment service contracts for customers. They utilize a support network of service engineers and customer specialists to provide timely service and assistance in the installation process.

Acquisition Strategy

During 2018, Varian acquired five different companies totaling $109 million: Noona Health care, HumediQ, Cooperative CL Enterprises, Evinance, and Mobious Medical Systems15.

Varian’s recent acquisitions have targeted its software and cloud-based applications business as it aims to utilize the user data collected by hospitals and therapy centers. All of their recent acquisitions have prioritized the strengthening of their Oncology Systems and its global presence. We believe management is needs to invest further in its Proton Therapy business. Although Oncology Systems is their main revenue source, the business line is forecasted to provide less than 6% annual nominal organic growth. To generate additional development, Varian should acquire companies that will boost their Proton Solutions business.

Varian’s 2018 increase in acquisitions suggests challenges in creating organic growth, a fundamental driver of value. Although half of their acquisitions in the last three years have been software focused, the other half have been purchases of distributors who they were already doing business with. Specifically purchases of Candela’s Radiotherapy Business and Cooperative CL Enterprises were acquisitions of companies they had previously booked revenue from. These acquisitions are helpful in achieving a global presence but do not add new technology or innovations.

International Sales Growth

Varian’s management believes the best way to expand the company is through an increased focus on international sales. Currently the company makes 47% of its revenues in North America while the other 53% come from international sales. These international operations are mostly through sales in the Oncology Solutions segment since the Proton Solutions segment has had an even harder time expanding overseas than it has growing in the US. Varian has only helped give financing for one proton therapy center abroad, the Rinecker Proton Therapy Center in Germany which went bankrupt in July of 201715.

Source Varian 2018 10K15

According to Varian’s management team, China will require 3,800 radiotherapy treatment machines by 2035. Varian has aggressively expanded into China and increased its Oncology Systems orders in Asia Pacific by 9% in fiscal year 201815. The challenge with international expansion comes through

48.8%31.9%

19.3%

Oncology Systems Revenues by Region

Americas Europe, Middle East, Africa Asia Pacific

10

downward pricing pressure. Although Varian has seen tremendous growth in emerging markets, particularly China, it continues to feel the push to lower its price on its large radiation treatment devices. The company continues to invest in research and development at a healthy pace but recently, competitors have introduced smaller, more cost-effective devices which can be appealing to emerging markets governments needing to treat large amounts of people on small budgets.

SWOT Analysis

Strengths

Varian’s major strength is its current market share within the niche market of radiotherapy. Varian is by far the industry leader in current technology and has over a 50% market share within the space. In radiation therapy device technology it competes with Accuray and Elekta. Both of these companies are much smaller as shown below and command a smaller share of the market. Varian has been able to outcompete these two companies mainly because of their large sales presence. Varian currently has 70 sales offices throughout the US and overseas compared with only 37 for Elekta and 7 for Accuray26. As seen in the table below, Varian is also able to earn more operating income per sales dollar. It also does this with a lower research cost as a percentage of sales although the aggregate amount Varian spends on research is more than Eekta and Accuray due to its size. Varian’s global presence has allowed it to diversify its revenue stream with over 53% of its sales coming internationally, making it more resistant to downturns in the US economy.

Ticker Mkt Cap (M) R&D/Sales Operating Margin

VAR $12,845 8.0% 15.7%

EKTA.B $4,549 9.7% 10.1%

ARAY $387 14.1% -1.3% Source Factset18

Weaknesses

Internally, the company must find a way to bring down the initial cost of creating a proton therapy center. These centers are highly capital intensive, but poor consumer financing has only made the business segment more riddled with troubles. Proton Solutions should not be financing customers that show an inability to generate demand for their proton centers. Due to the recent launch of Proton Solutions as its own independent reportable segment, we believe Varian has been too lenient in granting credit and entering into loan agreements with these proton centers. The company currently has $168.4 million in loans outstanding for various proton centers and has been forced to impair multiple of these outstanding loans such as the Maryland, Scripps, and Rinecker facilities. This further shows Varian’s inability to attract legitimate customers to make large capital investment in proton therapy centers. It also points to the fact that there is not enough demand for proton beam therapy

from patients and oncologists. This is mainly due to insurers’ lack of willingness to reimburse treatment at these facilities since there are more cost-effective treatments already available.

As mentioned in the Industry Analysis, research and development as a percentage of sales has been increasing the last two years on an industry average basis. Varian’s management continually gives guidance for 8% of revenues and has maintained that they will stick to this budget. An unwillingness for Varian to grow its research and development budget shows they are not aggressive enough in searching for innovation. Maintaining the same cost structure is indicative of a maturing company, as is the company’s average annual revenue growth of 4.3% since 2010. The company has carved out a niche in radiation therapy for oncology treatments, but as more effective technologies are introduced, Varian will be forced to branch into other treatments.

Opportunities

Expansion to China has driven revenues for all industry leaders as the economy ages and moves into a more developed economy. Euromonitor estimates that China will have a middle-class population of 700 million people by 2020, nearly twice the size of the entire US population.28 This presents a growth opportunity as the Chinese government has promised to increase its health care expenditures. Additionally, China’s population is getting older as the after effects of the one child policy have begun to show.

Threats

The largest threat to Varian’s business is changing technology and new research breakthroughs. The Health care Equipment and Supplies Industry is constantly adapting to new technology. In the last decade, there has been a significant focus on cancer prevention and early detection, both of which would lower the future demand for Varian’s products. Another more recent innovation is immunotherapy which allows a patient to have customized treatments.

Immunotherapy uses components of living organisms to target the cancer. Often, cancer is not discovered in the body until it has grown into a possibly life-threatening tumor because of cancer’s ability to hide from the immune system. Immunotherapies use and enhance the body’s own defense mechanisms in order to battle the cancer. Two currently used immunotherapies called CAR-T cell therapy and checkpoint inhibitors make use of the body’s white blood cells or T-cells to treat the tumor. New research shows that immunotherapy can lead to longer remissions due to the training of the immune system that occurs.27 Radiation therapy effectively kills cancer cells affecting the body while the tumor is active but has no effects on lengthening the period of remission. Immunotherapy can often have less side effects than traditional treatments such as radiation therapy and chemotherapy because it uses the body’s natural defenses.27 Harsher treatments like radiation and chemotherapy are unable to target the tumor as directly as

11

immunotherapy and frequently affect healthy organs and tissue surrounding the cancer cells.

Varian has benefited from growing cancer incidence and treatment rates but has made no research announcement about forging into immunotherapy or other treatments. Although the company’s mission is aimed at seeing a cancer-free world, management has only strengthened its commitment to external beam therapy with its Proton Therapy business. For Varian to succeed in the next decade it must begin developing treatments outside of radio therapy and radio surgery. Although radiation therapy is an industry standard for treating many types of cancers and tumors, biotechnology and pharmaceutical companies are investing heavily in research to get into the profitable and growing oncology market. These new treatments could make Varian’s technology obsolete.

Financial Summary: Recent earnings release and guidance Varian generated revenues of $2.92 billion in fiscal year 2018 which ended on September 28, 2018. During the last year, Varian grew its revenue by 11.4%, up from $2.62 billion in fiscal year 2017. Varian has a market capitalization of roughly $12 billion and its common stock has traded between 141.31 and 101.42 in the last yearii. Varian is very efficient in its service business through extension contracts and warranties it sells as adds on to its medical hardware. During FY18, services generated 46% of the company’s revenue while only accounting for 38% of the company’s total cost of goods sold. Varian could increase its operating margins and profitability by expanding its add on offerings to new customers. The services business has no research and development costs and generally the service expenses are mostly from labor and parts which are less costly than manufacturing new hardware.iii

Source Varian 2018 10K15

The Tax Cut and Jobs Act decreased corporate taxes from 35% to 21%, this greatly reduced the value of a deferred tax asset and the company will continue to revalue the asset. Varian realized a tax rate of 66.7% compared to a roughly 25% effective tax rate the last two years which greatly diminished its stronger pretax earnings in FY1815.

Methods of Valuation

Our target stock price was determined after considering the financial, economic, and strategic factors that drive the equity value of Varian. We took consideration to health care industry trends that may influence projected growth rates, future cash flows, or capital expenditures. We used three different valuation models to gain better understanding of Varian’s intrinsic value. In our analysis we used a Discounted Cash Flow model (DCF), an Economic Profit model (EP), and relative valuation metrics with specific comparable firms in Varian’s space. We believe the DCF model gives the best representation of Varian’s intrinsic value with the specific assumptions we assigned to capture the most influential variables that affect Varian’s share price. We considered Varian’s growth strategies, financial decisions, and business operations to make specific assumptions that reflect our expectations for the performance of Varian’s stock. We projected Varian’s cash flows over the next 8 years to capture its value in the health care industry. We used the DCF intrinsic share value of $120.63 as the strongest factor in considering the target price and our investment recommendation.

Revenue Decomposition & Growth

2018 revenues totaled $3.07 billion from combined oncology systems and proton solutions sales. We predict revenues to grow at a modest 1.45% to $3.10 billion in 2019. Based on historical trends and significant headwinds from tariffs, we believe Varian will growth its Oncology Solutions revenues in in the first forecast year 1.09% with -5.53% growth in Proton Solutions. Varian’s service and software revenues have picked up in the last two years but these factors will not be enough to drive abnormal delivery treatment machine replacement in the US.

Varian’s management team has given guidance of revenue growth of 5%-8% year over year. We are confident in Varian’s ability to growth total sales on a yearly basis, however, we are not as optimistic as the management. Starting in 2021 we have total revenue growth picking up again to 4.41% based on Varian’s ability to fulfill orders in China while keeping in mind the maturity of the radiation therapy market in the United States. Our sales growth assumptions are built on Varian’s success in international markets, specifically China and its ability to market its products to foreign government and win government bids. In two of the last eight years, Varian had negative revenue growth which has influenced our choice of a low single digit year over year growth.

$4.22

$1.64

$5.48

$0

$1

$2

$3

$4

$5

$6

16 17 18 19 20 21 22 23 24 25 26

Historical & Forecasted EPS

Valuation

12

Research and Development Expense (R&D)

We chose to model research and development expenses as percentage of sales. Management gives guidance of the expense being 8% of annual revenues and Varian has spent roughly that much the entire last decade. We believe management will continue with this percentage and therefore chose to keep the number consistent in our model.

Marginal Tax Rate

As part of the Tax Cuts and Jobs Act of 2017 instituted by the Trump Administration, Varian had to significant revalue a deferred tax asset (DTA) on their balance sheet. Varian incurred a one-time charge and recorded an effective tax rate of 66.8% due to the write down of the DTA. Varian currently has $102.2 million in tax loss carry-forwards which they hold as a DTA. We expect them to use $20.44 million each year until forecast year 2023. This will not materially affect the marginal tax rate so we assume a 21% tax in the forecast.

Share Repurchases

Varian has consistently bought back shares of common stock each year as a way to reward investors. In 2017, Varian announced it would be buying back another 8 million shares. During fiscal year 2018, the company repurchased 500,000 of these shares on the open market. There are currently 3.6 million shares left to be repurchased and we believe Varian will accelerate buybacks to 900,000 per year over four years which is more consistent with the company’s buyback pace in the past. This results in share repurchases of $126.9 million per year which we modeled as going into Varian’s treasury stock account.

Capital Expenditures

Similar to the R&D expense, Varian’s management is very forthcoming about its expectations for capital expenditures. Management has continually reiterated the capital expenditures will be roughly 2% of annual revenues. We have no reason to stray from management’s guidance and have modeled 2% for our entire forecast period.

Continuing Value (CV) Growth

CV growth was projected based on the long-term estimate we expect for real GDP growth in our macroeconomic analysis. We projected a CV growth of NOPLAT at 3.3% to reflect a balanced estimate we thought Varian would continue to grow at in relation to real GDP and inflation.

For the DCF we calculated the continuing value using a perpetuity formula based on FCF after capital expenditures is subtracted from NOPLAT divided by the NOPLAT growth subtracted from WACC. We chose a 3.3% NOPLAT growth rate because of our belief that real GDP will grow at 2% in the

forecasted period and the US economy will experience 1.3% inflation therefore leading to our growth rate.

Weighted Average Cost of Capital (WACC)

We calculated Varian’s weighted average cost of capital to be 6.57%. The WACC is used in the Discounted Cash Flow valuation and Economic Profit valuation to find Dexcom’s intrinsic share price. To arrive at the WACC we multiplied the market capitalization by the cost of equity which was added to the present value of the operating leases multiplied by the cost of debt.

Cost of Debt

Risk-Free Rate: 2.56% Default Spread: 2.822%

Pre-Tax Cost of Debt 5.38% Varian does not have any debt on their balance sheet. In 2016, the company paid down all of its long term debt worth $287.5 million. For our calculation we used the yield to maturity on the US 10 Year Treasury Note for our risk-free rate which was 2.56% as of 4/12/20191. To determine Varian’s yield spread over the 10 Year, we used a Bloomberg estimation. With a marginal tax rate of 21%, we computed Varian’s pre-tax cost of debt to be 5.38%. Although there is no long-term debt on the balance sheet, this value was used to calculate lease interest on operating leases.

Cost of Equity

Risk-Free Rate: 2.56%1

Firm Beta: 0.858 Equity Market Risk Premium: 4.69%

Cost of Equity: 7.49% To find the cost of equity we used the Capital Asset Pricing Model (CAPM) which is a good proxy showing a risk to reward trade-off based on the company’s risk level measured as beta. Mentioned above, we use a risk-free rate of 2.50%. For our equity risk premium value of 4.69%, we consulted Damodaran.com run by New York University Professor of Finance Aswath Damodaran^23. The CAPM shows that a company with a higher beta, or systematic risk, should have a higher cost of equity and generate higher returns over time. The final value for Varian’s cost of equity was 6.58%.

Beta

We have chosen to calculate our beta on a 2Y monthly basis because the risk structure of the firm has changed on other time horizons. Over the last few years, Varian Medical Systems has acquired multiple business as well as spun off a business which was worth roughly 20% of their sales in 2016. Due to this, a shorter time horizon more accurately reflects the risk of the

13

firm. Varian’s beta is 0.858, showing it is less volatile than the overall market measured as the S&P 500.

14

Important Disclaimer This report was created by students enrolled in the Applied Equity Valuation (FIN:4250) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

References 1. “United States GDP Growth Rate.” United States

GDP Growth Rate | 2019 | Data | Chart | Calendar | Forecast, tradingeconomics.com/united-states/gdp-growth

2. “GDP and Spending - Real GDP Forecast - OECD Data.” TheOECD, data.oecd.org/gdp/real-gdp-forecast.htm.

3. US Census Bureau. “The Population 65 Years and Older: 2016.” The Population 65 Years and Older: 2016, 29 Oct. 2018, www.census.gov/library/visualizations/interactive/population-65-years.html.

4. “U.S. - Seniors as a Percentage of the Population 1950-2050 | Statistic.” Statista, www.statista.com/statistics/457822/share-of-old-age-population-in-the-total-us-population/.

5. “Eight Demographic Trends Transforming America's Older Population.” Population Reference Bureau, www.prb.org/eight-demographic-trends-transforming-americas-older-population/.

6. “National Obesity Rates & Trends.” The State of Obesity, stateofobesity.org/obesity-rates-trends-overview/.

7. Hales, Craig M. “Prevalence of Obesity Among Adults and Youth: United States, 2015–2016.” NCHS Data Brief, www.cdc.gov/nchs/data/databriefs/db288.pdf.

8. Cancer Statistics. (n.d.). Retrieved April 16, 2019, from https://www.cancer.gov/about-cancer/understanding/statistics

9. Cancer Statistics. (n.d.). Retrieved April 16, 2019, from https://www.cancer.gov/about-cancer/understanding/statistics

10. “THE EMPLOYMENT SITUATION — MARCH 2019 .” Bureau of Labor Statistics, 5 Apr. 2019, www.bls.gov/news.release/pdf/empsit.pdf.

15

11. “EMPLOYEE BENEFITS IN THE UNITED

STATES – MARCH 2018.” Bureau of Labor Statistics, 20 July 2018, www.bls.gov/news.release/pdf/ebs2.pdf.

12. “NHE-Fact-Sheet.” CMS.gov Centers for Medicare & Medicaid Services, 20 Feb. 2019, www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NHE-Fact-Sheet.html.

13. “CMS Financial Report.” Center for Medicare and Medicaid Services, 15 Nov. 2018, www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/CFOReport/Downloads/2018_CMS_Financial_Report.pdf.

14. “Individual Mandate Penalty You Pay If You Don't Have Health Insurance Coverage.” Health care.gov, www.health care.gov/fees/fee-for-not-being-covered/.

15. Varian Medical Systems Form 10-K 2018. (n.d.). Retrieved April 16, 2019, from https://www.sec.gov/Archives/edgar/data/203527/000162828018014588/varian10-k2018.htm

16. Radiation Therapy Coverage. (n.d.). Retrieved April 16, 2019, from https://www.medicare.gov/coverage/radiation-therapy

17. Bloomberg LP 18. FactSet Research Systems. (n.d.). Varian Medical

Systems, Inc.: Targets and ratings. Retrieved April 16, 2019, from FactSet database

19. Center for Devices and Radiological Health. (n.d.). Medical Devices - Premarket Approval (PMA). Retrieved from https://www.fda.gov/MedicalDevices/ucm2007514.htm

20. Bundled Payments for Care Improvement (BPCI) Initiative: General Information. (n.d.). Retrieved April 16, 2019, from https://innovation.cms.gov/initiatives/bundled-payments/

21. Huang, K., & Goon, X. (march 2019). Health Care Equipment & Supplies March 2019. CFRA Industry Survey. Retrieved April 16, 2019.

22. Moore, T. (September 2018). World Preview 2018, Outlook to 2024. EvaluateMedTech. Retrieved April 16, 2019.

23. Huang, K. (2019, April 06). Varian Medical Systems Stock Report. Retrieved April 16, 2019, from CapitalIQ S&P NetAdvantage.

24. Working at Varian Medical Systems. (n.d.). Retrieved February 12, 2019, from https://www.glassdoor.com/Overview/Working-at-Varian-Medical-Systems-EI_IE9111.11,33.htm

25. Working at Elekta. (n.d.). Retrieved February 12, 2019, from https://www.glassdoor.com/Overview/Working-at-Elekta-EI_IE258541.11,17.htm

26. Working at Accuray. (n.d.). Retrieved February 12, 2019, from https://www.glassdoor.com/Reviews/Accuray-Reviews-E33929.htm

27. Immunotherapy. (n.d.). Retrieved April 16, 2019, from https://www.cancer.gov/about-cancer/treatment/types/immunotherapy

28. China: Number of middle class population 2002-2020 | Statistic. (n.d.). Retrieved April 16, 2019, from https://www.statista.com/statistics/875874/middle-class-population-in-china/

VarianRevenue Decomposition

Fiscal Year Ending 9/30 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E(in millions)Oncology Systems

Product  1,435.90  1,394.00  1,431.00  1,431.00  1,459.62  1,503.41  1,563.54  1,641.72  1,723.81  1,827.24  1,936.87 YOY growth 5.85% ‐2.92% 2.65% 0.00% 2.00% 3.00% 4.00% 5.00% 5.00% 6.00% 6.00%Service 1,157.80  1,225.30  1,339.20  1,379.38  1,434.55  1,506.28  1,581.59  1,676.49  1,777.08  1,865.93  1,959.23 YOY growth 17.25% 5.83% 9.30% 3.00% 4.00% 5.00% 5.00% 6.00% 6.00% 5.00% 5.00%

Total Oncology Revenue 2,593.70  2,619.30  2,770.20  2,810.38  2,894.17  3,009.69  3,145.14  3,318.21  3,500.89  3,693.17  3,896.10 YOY growth 10.65% 0.99% 5.76% 1.45% 2.98% 3.99% 4.50% 5.50% 5.51% 5.49% 5.49%

Proton SolutionsProduct  153.10      172.50      138.90      130.57      130.57      133.18      137.17      144.03      151.23      158.79      166.73     YOY growth 0.00% 11.25% ‐24.19% ‐6.38% 0.00% 1.96% 2.91% 4.76% 4.76% 4.76% 4.76%Service 9.50           10.00        10.00        10.10        10.40        10.72        10.72        11.14        11.59        12.05        12.66       YOY growth ‐             5.00% 0.00% 1.00% 3.00% 3.00% 0.00% 4.00% 4.00% 4.00% 5.00%

Total Proton Revenue 162.60      182.50      148.90      140.67      140.97      143.89      147.89      155.17      162.82      170.85      179.39     YOY growth 0.00% 12.24% ‐18.41% ‐5.53% 0.22% 2.07% 2.78% 4.93% 4.93% 4.93% 5.00%

Imaging Components (X‐ray Products)Product  559.30      ‐             ‐             - - - - - ‐             ‐             ‐            Service 38.30        ‐             ‐             - - - - - ‐             ‐             ‐            

Imaging Components Total Revenue  597.60      ‐             ‐             ‐             ‐             ‐             ‐             ‐             ‐             ‐             ‐            YOY growth ‐2.23% ‐            ‐            ‐            ‐            ‐            ‐            ‐            ‐            ‐            ‐           

Total Revenue 3,353.90  2,801.80  2,919.10  2,951.04  3,035.14  3,153.58  3,293.03  3,473.39  3,663.71  3,864.02  4,075.49 YOY growth 13.49% ‐16.46% 4.19% 1.09% 2.85% 3.90% 4.42% 5.48% 5.48% 5.47% 5.47%

VarianIncome Statement

Fiscal Years Ending 9/30 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E(in millions, except per share data)Oncology revenue 2,593.70       2,619.30       2,770.20       2,810.38          2,894.17          3,009.69          3,145.14          3,318.21          3,500.89          3,693.17          3,896.10         Proton revenue 162.60           182.50           148.90           140.67             140.97             143.89             147.89             155.17             162.82             170.85             179.39            Imaging revenue 597.60           ‐                 ‐                 ‐                    ‐                    ‐                    ‐                    ‐                    ‐                    ‐                    ‐                   Total revenues 3,217.80       2,668.20       2,919.10       2,951.04          3,035.14          3,153.58          3,293.03          3,473.39          3,663.71          3,864.02          4,075.49         

Cost of goods sold (1,856.50)     (1,512.60)     (1,645.50)     (1,753.65)        (1,803.63)        (1,874.01)        (1,956.88)        (2,064.05)        (2,177.15)        (2,296.19)        (2,421.85)       Depreciation (64.20)           (58.50)           (52.10)           (50.36)              (54.72)              (58.66)              (62.43)              (66.14)              (70.01)              (74.05)              (78.26)             Amortization (15.60)           (18.40)           (20.60)           (18.20)              (18.70)              (14.10)              (12.70)              (12.00)              (9.96)                (3.32)                (3.32)               Cost of sales (1,936.30)     (1,589.50)     (1,718.20)     (1,822.21)        (1,877.04)        (1,946.77)        (2,032.00)        (2,142.20)        (2,257.13)        (2,373.55)        (2,503.44)       

Research and development (253.50)         (210.00)         (233.90)         (236.08)            (242.81)            (252.29)            (263.44)            (277.87)            (293.10)            (309.12)            (326.04)           Selling, general and administrative (573.90)         (603.70)         (598.10)         (495.78)            (509.90)            (529.80)            (553.23)            (583.53)            (615.50)            (649.15)            (684.68)           Earnings from operations 454.10           265.00           368.90           396.97             405.38             424.72             444.35             469.79             497.98             532.19             561.33            

Interest income 17.40             13.60             17.30             7.58                  16.62                17.27                18.04                19.02                20.07                21.16                22.32               Interest expense (11.80)           (10.70)           (6.80)              ‐                    ‐                    ‐                    ‐                    ‐                    ‐                    ‐                    ‐                   Interest income / expense, net 5.60               2.90               10.50             7.58                  16.62                17.27                18.04                19.02                20.07                21.16                22.32               Earnings before taxes 465.30           270.80           389.90           412.12             438.63             459.27             480.42             507.83             538.12             574.51             605.97            Current income tax expense (153.70)         (87.70)           (301.80)         (86.55)              (92.11)              (96.45)              (100.89)            (106.65)            (113.00)            (120.65)            (127.25)           

Earnings / loss from discontinued operations, net‐                 (6.80)              ‐                 ‐                    ‐                    ‐                    ‐                    ‐                    ‐                    ‐                    ‐                   

Net income (loss) 311.60           176.30           88.10             325.58             346.52             362.82             379.53             401.19             425.11             453.87             478.72            

Net earnings attributable to noncontrolling interests

(0.40)              (0.70)              (0.40)              (0.91)                (0.97)                (1.02)                (1.06)                (1.12)                (1.19)                (1.27)                (1.34)               

Net earnings attributable to Varian 402.30           249.60           149.90           324.66             345.55             361.80             378.47             400.07             423.92             452.60             477.38            

Basic earnings per share 4.22               2.70               1.64               3.55                  3.78                  3.95                  4.14                  4.37                  4.63                  4.95                  5.22                 

Weighted average shares outstanding 95.40             92.50             91.50             91.50                91.50                91.50                91.50                91.50                91.50                91.50                91.50               

Dividend per share ‐                 ‐                 ‐                 ‐                    ‐                    ‐                    ‐                    ‐                    ‐                    ‐                    ‐                   

VarianBalance Sheet

Fiscal Years Ending 9/30 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

(in millions)AssetsCash and cash equivalents 843.50          716.20          504.80          740.51           1,009.50        1,287.25          1,578.18          1,998.00          2,388.51          2,798.93          3,231.79         Short‐term investment 95.30            ‐                 ‐                 75.55              77.70              80.73                84.30                88.92                93.79                98.92                104.33             Accounts Receivable, net 891.80          823.50          1,009.90      850.79           875.03           909.18              949.38              1,001.38          1,056.25          1,114.00          1,174.96         Inventories 639.70          439.70          438.10          510.29           524.84           545.32              569.43              600.62              633.53              668.17              704.73             Prepaid expenses and other current assets 145.70          199.80          233.30          161.58           166.19           172.67              180.31              190.18              200.61              211.57              223.15             Deferred tax assets ‐                 11.10            2.30               ‐                  ‐                  ‐                     ‐                     ‐                     ‐                     ‐                     ‐                    Total Current Assets 2,616.00      2,190.30      2,188.40      2,338.72        2,653.25        2,995.15          3,361.60          3,879.10          4,372.68          4,891.58          5,438.97         Property, plant and equipment, net 379.20          255.30          274.60          298.35           319.86           340.40              360.67              381.75              403.75              426.75              450.83             Goodwill 294.70          222.60          293.60          293.60           293.60           293.60              293.60              293.60              293.60              293.60              293.60             Intangible assets, net 104.70          71.60            101.10          82.90              64.20              50.10                37.40                25.40                15.44                12.12                8.80                 Other assets excluding intangible assets 282.50          300.80          292.80          295.92           304.36           316.23              330.22              348.30              367.39              387.47              408.68             Long‐term deferred tax assets 138.90          138.80          102.20          81.76              61.32              40.88                20.44                ‐                     ‐                     ‐                     ‐                    Total Assets 3,816.00      3,179.40      3,252.70      3,391.26        3,696.59        4,036.36          4,403.93          4,928.16          5,452.86          6,011.52          6,600.88         

Liabilities and EquityAccounts payable and accrued liabilities 613.80          557.00          610.00          573.37           589.71           612.73              639.82              674.86              711.84              750.76              791.85             Deferred revenues 620.60          640.60          729.70          577.98           594.45           617.65              644.96              680.28              717.56              756.79              798.21             Advance payments from customers ‐                 ‐                 ‐                 ‐                  ‐                  ‐                     ‐                     ‐                     ‐                     ‐                     ‐                    Short‐term borrowings 329.60          352.50          ‐                 265.14           272.69           283.33              295.86              312.07              329.17              347.16              366.16             Current maturities of long‐term debt 50.00            ‐                 ‐                 ‐                  ‐                  ‐                     ‐                     ‐                     ‐                     ‐                     ‐                    Total Current Liabilities 1,614.00      1,550.10      1,339.70      1,416.49        1,456.86        1,513.71          1,580.64          1,667.21          1,758.57          1,854.71          1,956.22         Long‐term debt 287.50          ‐                 ‐                 ‐                  ‐                  ‐                     ‐                     ‐                     ‐                     ‐                     ‐                    Other long‐term liabilities 170.30          130.00          324.30          146.15           150.32           156.18              163.09              172.02              181.45              191.37              201.84             Total Liabilities 2,061.50      1,680.10      1,664.00      1,562.64        1,607.17        1,669.89          1,743.73          1,839.23          1,940.01          2,046.08          2,158.06         

Common stock 772.30          807.80          869.30          911.45           953.61           995.76              1,037.91          1,066.58          1,066.58          1,066.58          1,066.58         Treasury Stock ‐                 ‐                 ‐                 (126.90)          (253.80)          (380.70)            (507.60)            (507.60)            (507.60)            (507.60)            (507.60)           Retained earnings 1,069.00      756.00          780.40          1,105.06        1,450.61        1,812.41          2,190.89          2,590.95          3,014.87          3,467.47          3,944.85         Accumulated other comprehensive loss (100.80)         (68.80)           (65.30)           (65.30)            (65.30)            (65.30)               (65.30)               (65.30)               (65.30)               (65.30)               (65.30)              Noncontrolling interests 3.70               4.30               4.30               4.30                4.30                4.30                  4.30                  4.30                  4.30                  4.30                  4.30                 Total stockholder's equity 1,744.20      1,499.30      1,588.70      1,828.62        2,089.42        2,366.47          2,660.20          3,088.93          3,512.85          3,965.44          4,442.82         Total Liabilities and Stockholder's Equity 3,816.00      3,179.40      3,252.70      3,391.26        3,696.59        4,036.36          4,403.93          4,928.16          5,452.86          6,011.52          6,600.88         

VarianCash Flow Statement

Fiscal Years Ending 9/30 2010 2011 2012 2013 2014 2015 2016 2017 2018(In Millions)Cash flows ‐ Operating Activities   Net earnings 360.42     398.93     427.05     438.25       403.70       412.02     402.70     250.30     150.30       Adjustments to reconcile net earnings to net cash provided by operating activities   Non‐cash items

Depreciation Expense 44.97        49.64        56.10        58.53          57.68          60.08        64.20        58.50        52.10       Amortization Expense 3.32          2.95          4.88          4.33            4.78            8.44          15.60        18.40        20.60       Share‐based compensation expense 39.81        42.02        47.88        42.64          39.64          46.30        48.30        41.20        45.90       Tax benefits from exercises of share‐based payment awards 18.28        24.44        7.89          10.71          10.90          12.58        3.00          0.70          ‐           Excess tax benefits from share‐based compensation (15.07)      (22.57)      (8.93)        (9.58)          (10.89)        (12.61)      (3.90)        (1.00)        ‐           Deferred taxes 30.11        35.23        (2.35)        (3.95)          15.87          5.41          (23.90)      (14.90)      48.00       Income / loss from equity investment in affiliate 0.73          (4.28)        (0.25)        (2.46)          0.82            (0.34)        ‐            ‐            12.80       Impairment of a privately‐held equity investment 1.08          (0.40)        1.27          1.67            8.11            1.70          4.30          54.40        19.30       Provision for doubtful accounts receivable 1.32          2.51          10.35        5.98            7.15            1.12          3.50          43.70        4.00         Other, net 1.81          (4.67)        1.02          (5.98)          8.24            1.27          4.30          54.40        26.60       

Changes in working capital accountsAccounts receivables, net (12.87)      (41.58)      (87.43)      (43.30)        (74.50)        (79.39)      (168.30)    (52.60)      (76.10)     Inventories (53.33)      (42.24)      (42.46)      (76.40)        (43.34)        (41.56)      (27.70)      (0.10)        (16.40)     Prepaid expenses and other assets (13.75)      (13.29)      (47.03)      (15.69)        (3.24)          (8.19)        8.00          (46.70)      (3.90)       Accounts payable 2.96          35.52        19.28        7.78            1.97            6.46          9.70          5.50          21.90       Accrued liabilities and other long‐term liabilities (17.29)      (27.50)      72.19        (32.73)        (0.84)          (14.00)      61.00        11.70        175.60    Deferred revenues and advance payments from customers 121.06     43.26        137.57     74.60          31.87          71.63        (40.20)      30.00        0.80         Product warranty 1.84          (4.03)        3.31          ‐              ‐              ‐            ‐            ‐            ‐           

Net cash provided by operating activities 460.79     472.78     492.77     455.18       448.99       469.56     356.30     399.10     454.90    Cash Flows ‐ Investing Activities

Purchases of property, plant and equipment (67.54)      (70.93)      (61.10)      (76.28)        (89.65)        (91.38)      (80.40)      (59.10)      (47.70)     Acquisitions of businesses, net of cash acquired (1.80)        (9.12)        (28.24)      ‐              (31.50)        (95.30)      (21.10)      (3.00)        (109.00)   Other excluding acquisitions of businesses, net of cash acquired and notes receivable (6.33)        (4.35)        (8.29)        0.36            0.69            0.67          0.40          0.90          (1.00)       Investment in available‐for‐sale securities ‐            (19.21)      (30.50)      (10.04)        (45.21)        (1.76)        (3.30)        (13.40)      (17.80)     Sale of available‐for‐sale securities ‐            ‐            ‐            ‐              38.08          0.57          8.60          ‐            15.90       Other (Notes Receivable, Restricted Cash, Loans to CPTC) 0.86          (14.33)      5.85          (10.31)        (5.50)          (23.71)      (13.40)      (55.50)      (24.40)     

Net cash used in / provided by investing activities (74.82)      (117.93)    (122.29)    (96.27)        (133.09)      (210.92)    (109.20)    (130.10)    (184.00)   Cash Flows ‐ Financing Activities

Repurchases of common stock (497.50)    (505.28)    (257.44)    (419.93)      (627.74)      (422.03)    (461.30)    (294.50)    (181.90)   Proceeds from issuance of common stock to employees 84.43        137.70     60.33        129.58       99.65          90.97        60.60        72.10        60.70       Employees' taxes withheld and paid for restricted stock and restricted stock units (8.03)        (14.82)      (10.12)      (9.56)          (8.76)          (16.32)      (11.00)      (10.70)      (11.60)     Excess tax benefits from share‐based compensation 15.07        22.57        8.93          9.58            10.89          12.61        3.90          1.00          ‐           Borrowings under credit facility agreement ‐            ‐            ‐            500.00       ‐              145.00     83.00        231.00     503.30    Repayments under credit facility agreement (9.01)        (7.26)        (9.88)        ‐              (68.75)        (195.00)    (133.00)    (223.50)    (503.30)   Net borrowings / repayments under credit facility agreements with maturities less than 90 days 15.60        161.40     (26.40)      (155.00)      ‐              108.55     217.10     (322.00)    (350.00)   Other (Segment Distributions, Contribution from NCI, Contingent Liability hold back, FEC's) (22.74)      (105.64)    (0.10)        (3.03)          (0.76)          (0.46)        (10.20)      151.00     (4.20)       

Net cash provided by / used in financing activities (422.17)    (311.33)    (234.68)    51.65          (595.47)      (276.68)    (245.80)    (392.40)    (487.00)   Effects of exchange rate changes on cash and cash equivalents 2.90          0.72          4.31          2.73            10.99          14.24        (3.30)        (3.90)        4.70         Net increase / decrease in cash and cash equivalents (33.31)      44.24        140.11     413.29       (268.59)      (3.81)        (2.00)        (127.30)    (211.40)   Cash and cash equivalents at beginning of period 553.53     520.22     564.46     704.57       1,117.86    849.28     845.50     843.50     716.20    Cash and cash equivalents at end of period 520.22     564.46     704.57     1,117.86    849.28       845.47     843.50     716.20     504.80    

VarianCash Flow Statement

Fiscal Years Ending 9/30 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026ECash flows ‐ Operating Activities    Net earnings 324.66         345.55         361.80         378.47         400.07         423.92         452.60         477.38           Adjustments to reconcile net loss to cash used in / provided by operating activities:         Depreciation Expense 50.36            54.72            58.66            62.43            66.14            70.01            74.05            78.26                    Amortization Expense 18.20            18.70            14.10            12.70            12.00            9.96              3.32              3.32                Changes in working capital accounts:         Change in receivables 159.11         (24.25)          (34.15)          (40.20)          (52.00)          (54.87)          (57.75)          (60.97)                  Change in inventories (72.19)          (14.54)          (20.48)          (24.11)          (31.19)          (32.91)          (34.64)          (36.57)                  Change in prepaid expenses and other current assets 71.72            (4.60)            (6.49)            (7.64)            (9.88)            (10.42)          (10.97)          (11.58)                  Change in deferred tax asset 22.74            20.44            20.44            20.44            20.44            ‐                ‐                ‐                        Change in other assets (3.12)            (8.43)            (11.88)          (13.98)          (18.09)          (19.09)          (20.09)          (21.21)                  Change in accounts payable and accrued liabilities (36.63)          16.34            23.01            27.09            35.04            36.98            38.92            41.09                    Change in deferred revenue (151.72)        16.47            23.20            27.31            35.32            37.28            39.23            41.42                    Change in other non‐current liabilities (178.15)        4.16              5.87              6.91              8.93              9.43              9.92              10.47           Net cash used in / provided by operating activities 204.98         424.55         434.09         449.42         466.80         470.29         494.59         521.62        Cash flows ‐ Investing Activities:   Change in short‐term investments (75.55)          (2.15)            (3.03)            (3.57)            (4.62)            (4.87)            (5.13)            (5.41)              Capital Expenditures (74.11)          (76.22)          (79.20)          (82.70)          (87.23)          (92.01)          (97.04)          (102.35)          Borrowings under credit facility agreement 265.14         7.56              10.64            12.53            16.20            17.10            18.00            19.00           Net cash used in / provided by investing activities 115.48         (70.82)          (71.59)          (73.74)          (75.64)          (79.78)          (84.17)          (88.76)         Cash flows ‐ Financing Activites:   Proceeds from issuance of notes payable & long‐term debt ‐                ‐                ‐                ‐                ‐                ‐                ‐                ‐                  Payments of notes payable & long‐term debt ‐                ‐                ‐                ‐                ‐                ‐                ‐                ‐                  Cash Paid for Treasury Stock (126.90)        (126.90)        (126.90)        (126.90)        ‐                ‐                ‐                ‐                  Proceeds from issuance of common stock 42.15            42.15            42.15            42.15            28.66           Net cash provided by financing activities (84.75)          (84.75)          (84.75)          (84.75)          28.66            ‐                ‐                ‐               Decrease / increase in cash and cash equivalents 235.71         268.98         277.75         290.93         419.82         390.50         410.42         432.86        Cash and cash equivalents, beginning of period 504.80         740.51         1,009.50      1,287.25      1,578.18      1,998.00      2,388.51      2,798.93     Cash and cash equivalents, end of period 740.51         1,009.50      1,287.25      1,578.18      1,998.00      2,388.51      2,798.93      3,231.79     

VarianCommon Size Income Statement

Fiscal Years Ending 9/30 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E(in millions)Oncology revenue 80.60% 98.17% 94.90% 95.23% 95.36% 95.44% 95.51% 95.53% 95.56% 95.58% 95.60%Proton revenue 5.05% 6.84% 5.10% 4.77% 4.64% 4.56% 4.49% 4.47% 4.44% 4.42% 4.40%Imaging revenue 18.57% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Cost of goods sold ‐57.69% ‐56.69% ‐56.37% ‐59.42% ‐59.42% ‐59.42% ‐59.42% ‐59.42% ‐59.42% ‐59.42% ‐59.42%Depreciation ‐2.00% ‐2.19% ‐1.78% ‐1.71% ‐1.80% ‐1.86% ‐1.90% ‐1.90% ‐1.91% ‐1.92% ‐1.92%Amortization ‐0.48% ‐0.69% ‐0.71% ‐0.62% ‐0.62% ‐0.45% ‐0.39% ‐0.35% ‐0.27% ‐0.09% ‐0.08%Cost of sales ‐60.17% ‐59.57% ‐58.86% ‐61.75% ‐61.84% ‐61.73% ‐61.71% ‐61.67% ‐61.61% ‐61.43% ‐61.43%

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Research and development ‐7.88% ‐7.87% ‐8.01% ‐8.00% ‐8.00% ‐8.00% ‐8.00% ‐8.00% ‐8.00% ‐8.00% ‐8.00%Selling, general and administrative ‐17.84% ‐22.63% ‐20.49% ‐16.80% ‐16.80% ‐16.80% ‐16.80% ‐16.80% ‐16.80% ‐16.80% ‐16.80%Earnings from operations 14.11% 9.93% 12.64% 13.45% 13.36% 13.47% 13.49% 13.53% 13.59% 13.77% 13.77%

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Interest income 0.54% 0.51% 0.59% 0.34% 0.34% 0.34% 0.34% 0.34% 0.34% 0.34% 0.34%Interest expense ‐0.37% ‐0.40% ‐0.23% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Interest income / expense, net 0.17% 0.11% 0.36% 0.26% 0.55% 0.55% 0.55% 0.55% 0.55% 0.55% 0.55%Earnings before taxes 14.46% 10.15% 13.36% 13.97% 14.45% 14.56% 14.59% 14.62% 14.69% 14.87% 14.87%Current income tax expense ‐4.78% ‐3.29% ‐10.34% ‐2.93% ‐3.03% ‐3.06% ‐3.06% ‐3.07% ‐3.08% ‐3.12% ‐3.12%Earnings / loss from discontinued operations, net 0.00% ‐0.25% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Net income (loss) 9.68% 6.61% 3.02% 11.03% 11.42% 11.51% 11.53% 11.55% 11.60% 11.75% 11.75%

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Net earnings attributable to noncontrolling interests ‐0.01% ‐0.03% ‐0.01% ‐0.03% ‐0.03% ‐0.03% ‐0.03% ‐0.03% ‐0.03% ‐0.03% ‐0.03%Net earnings attributable to Varian 12.50% 9.35% 5.14% 11.00% 11.38% 11.47% 11.49% 11.52% 11.57% 11.71% 11.71%

VarianCommon Size Balance Sheet (% of sales)

Fiscal Years Ending 9/30 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E(In millions)Total assetsCash and cash equivalents 26.21% 26.84% 17.29% 25.09% 33.26% 40.82% 47.92% 57.52% 65.19% 72.44% 79.30%Short‐term investment 2.96% 0.00% 0.00% 2.56% 2.56% 2.56% 2.56% 2.56% 2.56% 2.56% 2.56%Accounts Receivable, net 27.71% 30.86% 34.60% 26.67% 26.67% 26.67% 26.67% 26.67% 26.67% 26.67% 26.67%Inventories 19.88% 16.48% 15.01% 17.29% 17.29% 17.29% 17.29% 17.29% 17.29% 17.29% 17.29%Prepaid expenses and other current assets 4.53% 7.49% 7.99% 5.48% 5.48% 5.48% 5.48% 5.48% 5.48% 5.48% 5.48%Deferred tax assets 0.00% 0.42% 0.08% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total current assets 81.30% 82.09% 74.97% 77.09% 85.25% 92.81% 99.92% 109.52% 117.19% 124.43% 131.29%Property, plant and equipment, net 11.78% 9.57% 9.41% 10.11% 10.54% 10.79% 10.95% 10.99% 11.02% 11.04% 11.06%Goodwill 9.16% 8.34% 10.06% 9.95% 9.67% 9.31% 8.92% 8.45% 8.01% 7.60% 7.20%Intangible assets, net 3.25% 2.68% 3.46% 3.13% 3.13% 3.13% 3.13% 3.13% 3.13% 3.13% 3.13%Other assets excluding intangible assets 8.78% 11.27% 10.03% 10.03% 10.03% 10.03% 10.03% 10.03% 10.03% 10.03% 10.03%Long‐term deferred tax assets 4.32% 5.20% 3.50% 2.77% 2.02% 1.30% 0.62% 0.00% 0.00% 0.00% 0.00%Total assets 118.59% 119.16% 111.43% 114.92% 121.79% 127.99% 133.73% 141.88% 148.83% 155.58% 161.97%Liabilities and EquityAccounts payable and accrued liabilities 19.08% 20.88% 20.90% 19.43% 19.43% 19.43% 19.43% 19.43% 19.43% 19.43% 19.43%Deferred revenues 19.29% 24.01% 25.00% 19.59% 19.59% 19.59% 19.59% 19.59% 19.59% 19.59% 19.59%Advance payments from customers 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Short‐term borrowings 10.24% 13.21% 0.00% 8.98% 8.98% 8.98% 8.98% 8.98% 8.98% 8.98% 8.98%Current maturities of long‐term debt 1.55% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total Current Liabilities 50.16% 58.10% 45.89% 48.00% 48.00% 48.00% 48.00% 48.00% 48.00% 48.00% 48.00%Long‐term debt 8.93% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other long‐term liabilities 5.29% 4.87% 11.11% 4.95% 4.95% 4.95% 4.95% 4.95% 4.95% 4.95% 4.95%Total Liabilities 64.39% 62.97% 57.00% 52.95% 52.95% 52.95% 52.95% 52.95% 52.95% 52.95% 52.95%Common stock 24.00% 30.28% 29.78% 30.89% 31.42% 31.58% 31.52% 30.71% 29.11% 27.60% 26.17%Retained earnings and accumulated other comprehensive loss 0.00% 0.00% 0.00% ‐4.30% ‐8.36% ‐12.07% ‐15.41% ‐14.61% ‐13.85% ‐13.14% ‐12.45%Retained earnings 33.22% 28.33% 26.73% 37.45% 47.79% 57.47% 66.53% 74.59% 82.29% 89.74% 96.79%Accumulated other comprehensive loss ‐3.13% ‐2.58% ‐2.24% ‐2.21% ‐2.15% ‐2.07% ‐1.98% ‐1.88% ‐1.78% ‐1.69% ‐1.60%Noncontrolling interests 0.11% 0.16% 0.15% 0.15% 0.14% 0.14% 0.13% 0.12% 0.12% 0.11% 0.11%Total Varian stockholders' equity 54.20% 56.19% 54.42% 61.97% 68.84% 75.04% 80.78% 88.93% 95.88% 102.62% 109.01%Total Liabilities and Stockholders' equity 118.59% 119.16% 111.43% 114.92% 121.79% 127.99% 133.73% 141.88% 148.83% 155.58% 161.97%

VarianValue Driver Estimation

Fiscal Years Ending 9/30 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E(in millions)EBITA   Operating Revenues 3,217.80       2,668.20       2,919.10       2,951.04     3,035.14     3,153.58     3,293.03     3,473.39     3,663.71     3,864.02     4,075.49       ‐ Cost of Products Sold (1,856.50)     (1,512.60)     (1,645.50)     (1,753.65)    (1,803.63)    (1,874.01)    (1,956.88)    (2,064.05)    (2,177.15)    (2,296.19)    (2,421.85)      ‐ Selling, General and Admin Expenses (573.90)         (603.70)         (598.10)         (495.78)       (509.90)       (529.80)       (553.23)       (583.53)       (615.50)       (649.15)       (684.68)         ‐ Depreciation and Amortization Expenses (79.80)           (76.90)           (72.70)           (68.56)         (73.42)         (72.76)         (75.13)         (78.14)         (79.97)         (77.37)         (81.58)           ‐ Research and Development Expenses (253.50)         (210.00)         (233.90)         (236.08)       (242.81)       (252.29)       (263.44)       (277.87)       (293.10)       (309.12)       (326.04)         + Implied Interest on Operating Leases 5.72              5.75              6.06              5.59             6.00             6.38             6.76             7.16             7.57             8.00             8.45            EBITA 459.82          270.75          374.96          402.56         411.38         431.10         451.11         476.94         505.55         540.19         569.78        

Less: Adjusted Taxes:   Provision for Income Taxes 153.70          87.70            301.80          86.55           92.11           96.45           100.89         106.65         113.00         120.65         127.25           + Tax Shield on Interest Expense 2.48              2.25              1.43              ‐               ‐               ‐               ‐               ‐               ‐               ‐               ‐                 ‐ Tax on Interest or Investment Income (3.61)             (2.86)             (3.63)             (1.59)            (3.49)            (3.63)            (3.79)            (3.99)            (4.21)            (4.44)            (4.69)              + Tax Shield on Non‐Operating Losses 0.65              0.65              0.65              0.65             0.65             0.65             0.65             0.65             0.65             0.65             0.65            + Tax on Operating Lease Interest 1.20              1.21              1.27              1.17             1.26             1.34             1.42             1.50             1.59             1.68             1.77            Total Adjusted Taxes 153.22          87.74            300.25          85.61           89.27           93.47           97.75           103.30         109.44         116.85         123.22        

Change in Deferred TaxesDef. Tax Liab.  ‐ Def. Tax Assets Current Year (138.90)         (138.80)         (102.20)         (81.76)         (61.32)         (40.88)         (20.44)         ‐               ‐               ‐               ‐              Def. Tax Liab.  ‐ Def. Tax Asset Year Pior ‐                (138.90)         (138.80)         (102.20)       (81.76)         (61.32)         (40.88)         (20.44)         ‐               ‐               ‐              Change in Deferred Taxes (138.90)        0.10              36.60            20.44           20.44           20.44           20.44           20.44           ‐               ‐               ‐              

NOPLAT: EBITA ‐ Adjusted Taxes + Change in DTA/DTL 167.70          183.11          111.31          337.40         342.54         358.07         373.80         394.08         396.11         423.33         446.56        

Operating Current Assets:Normal Cash 843.50          716.20          504.80          740.51         1,009.50     1,287.25     1,578.18     1,998.00     2,388.51     2,798.93     3,231.79    Accounts Receivables 891.80          823.50          1,009.90       850.79         875.03         909.18         949.38         1,001.38     1,056.25     1,114.00     1,174.96    Inventory 639.70          439.70          438.10          510.29         524.84         545.32         569.43         600.62         633.53         668.17         704.73        Prepaid Expenses Other current ooperating assets 145.70          199.80          233.30          161.58         166.19         172.67         180.31         190.18         200.61         211.57         223.15        Operating Current Assets: 2,520.70      2,179.20      2,186.10      2,263.18     2,575.55     2,914.42     3,277.30     3,790.18     4,278.89     4,792.66     5,334.64    

Operating Current Liabilities:Accounts Payable and accrued expenses 613.80          557.00          610.00          573.37         589.71         612.73         639.82         674.86         711.84         750.76         791.85        Deferred Revenue 620.60          640.60          729.70          577.98         594.45         617.65         644.96         680.28         717.56         756.79         798.21        Operating Current Liabilities: 1,234.40      1,197.60      1,339.70      1,151.35     1,184.16     1,230.37     1,284.78     1,355.15     1,429.40     1,507.55     1,590.06    

Net Operating Working CapitalPlus: Other Operating AssetsNet PP&E 379.20          255.30          274.60          298.35         319.86         340.40         360.67         381.75         403.75         426.75         450.83        Capitalized PV of Operating Leases 90.22            90.43            95.63            103.90         111.39         118.55         125.61         132.95         140.61         148.62         157.01        Intangible Assets, net 104.70          71.60            101.10          82.90           64.20           50.10           37.40           25.40           15.44           12.12           8.80            Other Operating Assets, net 282.50          300.80          292.80          295.92         304.36         316.23         330.22         348.30         367.39         387.47         408.68        Less: Other Operating LiabilitiesLong‐Term Portion of Deferred Revenue ‐                (7.20)             (38.60)           (38.60)         (38.60)         (38.60)         (38.60)         (38.60)         (38.60)         (38.60)         (38.60)        Invested Capital 856.62          710.93          725.53          742.48         761.21         786.68         815.29         849.81         888.59         936.36         986.72        

NOPLAT 167.70          183.11          111.31          337.40         342.54         358.07         373.80         394.08         396.11         423.33         446.56        Beg. Invested Capital 455.58          856.62          710.93          725.53         742.48         761.21         786.68         815.29         849.81         888.59         936.36        ROIC 37% 21% 16% 47% 46% 47% 48% 48% 47% 48% 48%

Beg. Invested Capital 455.58          856.62          710.93          725.53         742.48         761.21         786.68         815.29         849.81         888.59         936.36        Spread (ROIC‐WACC) 30.24% 14.81% 9.09% 39.94% 39.57% 40.47% 40.95% 41.77% 40.05% 41.07% 41.12%EP 137.79          126.86          64.63            289.75         293.79         308.09         322.14         340.54         340.31         364.98         385.08        

NOPLAT 167.70          183.11          111.31          337.40         342.54         358.07         373.80         394.08         396.11         423.33         446.56        Capital Expenditures (change in Working Capital) 54.65            401.04          (145.70)         14.61           16.95           18.73           25.47           28.62           34.51           38.78           47.77          FCF 113.06          (217.93)        257.01          322.79         325.60         339.34         348.33         365.46         361.60         384.55         398.80        

VarianWeighted Average Cost of Capital (WACC) Estimation

Cost of EquityRisk‐free rate 2.56%Market Risk Premium 4.69%Beta 0.858Cost of Equity 6.58%

Cost of DebtPre‐tax 5.38%Tax rate 21.00%After‐tax Cost of Debt 4.25%

Market Value of EquityShare Price $141.00Shares Outstanding 90.778Market Value of Equity $12,799.70

Market Value of DebtSTD & Current Portion LTD ‐               LTD ‐               PV Op. Leases 95.63           Market Value of Debt 95.63

Market Weights% Equity 99.26%% Debt 0.74%

WACC 6.567%

VarianDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:     CV Growth 3.50%     CV ROIC 47.69%     WACC 6.57%     Cost of Equity 6.58%

Fiscal Years Ending 9/30 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

DCF ModelNOPLAT 337.40        342.54        358.07        373.80        394.08        396.11        423.33        446.56        CapEx 16.95           18.73           25.47           28.62           34.51           38.78           47.77           50.36          FCF 320.45        323.81        332.60        345.18        359.57        357.33        375.56        396.20        Continuing Value    13,492.92 

Cash Flow to Discount 320.45        323.81        332.60        345.18        359.57        357.33        375.56        13,492.92  Discount Periods 1.00 2.00 3.00 4.00 5.00 6.00 7.00 7.00PV of Cash Flows 300.70        285.14        274.83        267.65        261.62        243.97        240.62              8,644.79 

Value of Operating Assets 10,519   Add: Marketable Securities ‐                 Add: Other non‐operating assets 393.90   Less: Debt 0.00   Less: PV of Operating Leases (95.63)   Less: ESOP (157.68)Value of Equity 10,660Shares Outstanding 90.78Intrinsic Value (per share) 117.43

 EP Model NOPLAT 337.40        342.54        358.07        373.80        394.08        396.11        423.33        446.56        Beginning Invested Capital 725.53        742.48        761.21        786.68        815.29        849.81        888.59        936.36        ROIC 46.50% 46.14% 47.04% 47.52% 48.34% 46.61% 47.64% 47.69%WACC 6.57% 6.57% 6.57% 6.57% 6.57% 6.57% 6.57% 6.57%Economic Profit 289.75 293.79 308.09 322.14 340.54 340.31 364.98 385.08Continuing Value 12,557

Cash Flow to Discount 289.75 293.79 308.09 322.14 340.54 340.31 364.98 12556.56Discount Periods 1 2 3 4 5 6 7 7PV of Cash Flows 271.90 258.70 254.57 249.78 247.78 232.35 233.84 8,045

Value of Economic Profit 9,793.79     + Beginning Invested Capital (T=0) 725.53       Value of Operating Assets 10,519.32    Add: Other non‐operating assets 393.90          Less: Debt ‐                 Less: PV of Operating Leases (95.63)           Less: ESOP (157.68)      Value of Equity 10,659.91 Shares Outstanding 90.78          Intrinsic Value (per share) 117.43       

Model Date 3/3/2019Next FYE 9/30/2019Last FYE 9/30/2018Days in FY 365Days to FYE 154Elapsed Fraction 0.422Adjusted Target Price 120.63

VarianDividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending  2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

EPS 3.55$           3.78$       3.95$       4.14$       4.37$       4.63$       4.95$       5.22$      

Key Assumptions   CV growth 3.50%   CV ROE 10.78%   Cost of Equity 6.58%

Future Cash Flows     P/E Multiple (CV Year) 27.03     EPS (CV Year) 5.22$           Dividends Per Share ‐               ‐            ‐            ‐            ‐            ‐            ‐            ‐                Future Cash Flows 141.00$  

     Discounted Cash Flows 90.23$    

Intrinsic Value 90.23$        

For Discounting:Number of Periods 1 2 3 4 5 6 7 8

Adjusted Target Price 93.41$        

VarianRelative Valuation Models

EPS EPSTicker Company Price 2019E 2020E P/E 19 P/E 20ARAY Accuray $4.55 ($0.17) $0.01 (26.76)      455.00    EKTA.B‐SE Elekta B $12.05 $0.34 $0.43 35.44       28.02      IBAB‐BE Ioan Beam Applications $16.89 $0.63 $0.62 26.81       27.24      

RAY.B‐SE RaySearch Laboratories $10.62 $0.28 $0.42 37.93       25.29      CERN Cerner $56.93 $2.61 $2.86 21.81       19.91      SOON‐CH Sonova Holding $197.12 $7.37 $8.43 26.75       23.38      COO Cooper Companies $297.59 $12.01 $13.23 24.78       22.49      

Average 28.92       24.39      

VAR Varian $141.00 3.55          3.78          39.7          37.3         

Implied Relative Value:   P/E (EPS19) 102.61$     P/E (EPS20) 92.10$    

VarianKey Management Ratios

Fiscal Years Ending 9/30 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026EForumla 

Liquidity RatiosCurrent Ratio (Current Assets / Current Liabilities "CL" 1.62           1.41           1.63           1.65           1.82           1.98           2.13           2.33           2.49           2.64           2.78          Quick Ratio (Cash + ST Investments + A/R ) / (CL)  1.22           1.13           1.31           1.29           1.46           1.62           1.77           1.97           2.13           2.28           2.42          Times Interest earned Ratio EBIT/Interest Expense 38.97        25.30        55.14        ‐             ‐             ‐             ‐             ‐             ‐             ‐             ‐            

Activity or Asset‐Management RatiosTotal Assets Turnover Total Sales/Average Total Assets 0.84           0.84           0.90           0.87           0.82           0.78           0.75           0.70           0.67           0.64           0.62          Capital Intensity Ratio  Total Assets/Total Sales 1.19           1.19           1.11           1.15           1.22           1.28           1.34           1.42           1.49           1.56           1.62          Inventory Turnover Ratio COGS/Average Inventory 5.03           6.07           6.66           5.78           5.78           5.78           5.78           5.78           5.78           5.78           5.78          

Financial Leverage RatiosDebt to equity Ratio Debt/Equity 0.01           0.01           0.00           0.26           0.24           0.20           0.16           ‐             ‐             ‐             ‐            Debt Ratio Debt/Total Assets 0.01           0.00           0.00           0.13           0.12           0.09           0.08           ‐             ‐             ‐             ‐            Equity Ratio Equity/Total Assets 0.46           0.47           0.49           0.54           0.57           0.59           0.60           0.63           0.64           0.66           0.67          

Profitability RatiosProfit Margin Net Income/Sales 12.50% 9.35% 5.14% 11.00% 11.38% 11.47% 11.49% 11.52% 11.57% 11.71% 11.71%Return on Assets Net Income / Average Total Assets 10.54% 7.85% 4.61% 9.57% 9.35% 8.96% 8.59% 8.12% 7.77% 7.53% 7.23%Return on Equity Net Income/Total Stockholders Equity 23.07% 16.65% 9.44% 17.75% 16.54% 15.29% 14.23% 12.95% 12.07% 11.41% 10.74%

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol VARCurrent Stock Price $141.00Risk Free Rate 2.56%Current Dividend Yield 0.00%Annualized St. Dev. of Stock Returns 25.46%

Average Average B‐S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 600,000 65.72 3.60 81.73$         49,039,956$      Range 2 200,000 74.45 2.60 72.05$         14,409,150$      Range 3 800,000 82.38 4.60 70.81$         56,647,827$      Range 4 700,000 111.51 6.30 57.85$         40,494,245$      Total 2,300,000 85.82$         4.68 68.56$         157,680,714$   

Present Value of Operating Lease Obligations (2018 Present Value of Operating Lease Obligations (2017 Present Value of Operating Lease Obligations (2016 Present Value of Operating Lease Obligations (2015 Present Value of Operating Lease Obligations (20

Operating Operating Operating Operating OperatingFiscal Years Ending 9/30 Leases Fiscal Years Ending 9/30 Leases Fiscal Years Ending  Leases Fiscal Years Ending  Leases Fiscal Years Ending  Leases2019 25.9            2018 24.9            2017 27.5            2016 22.2            2015 20.5           2020 22.4            2019 20.3            2018 20.8            2017 18.4            2016 16.4           2021 19.3            2020 17.0            2019 15.3            2018 13.0            2017 12.5           2022 15.4            2021 13.9            2020 12.3            2019 9.2              2018 8.1             2023 11.8            2022 11.7            2021 11.0            2020 7.3              2019 5.6             Thereafter 17.8            Thereafter 19.1            Thereafter 19.4            Thereafter 20.9            Thereafter 10.0           Total Minimum Payments 112.6          Total Minimum Payments 106.9          Total Minimum Payments 106.3          Total Minimum Payments 91.0            Total Minimum Payments 73.1           Less: Interest 17.0            Less: Interest 16.5            Less: Interest 16.1            Less: Interest 14.6            Less: Interest 10.2           PV of Minimum Payments 95.6            PV of Minimum Payments 90.4            PV of Minimum Payments 90.2            PV of Minimum Payments 76.4            PV of Minimum Payments 62.9           

Capitalization of Operating Lease Capitalization of Operating Lease Capitalization of Operating Lease Capitalization of Operating Lease Capitalization of Operating Lease

Pre‐Tax Cost of Deb 5.38% Pre‐Tax Cost of Deb 5.38% Pre‐Tax Cost of Deb 5.38% Pre‐Tax Cost of Deb 5.38% Pre‐Tax Cost of Deb 5.38%Number Years Implied by Year 6 Paym 1.5 Number Years Implied by Year 6 Paym 1.6 Number Years Implied by Year 6 Paym 1.8 Number Years Implied by Year 6 Paym 2.9 Number Years Implied by Year 6 Paym 1.8

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 25.9            24.6            1 24.9            23.6            1 27.5            26.1            1 22.2            21.1            1 20.5            19.5           2 22.4            20.2            2 20.3            18.3            2 20.8            18.7            2 18.4            16.6            2 16.4            14.8           3 19.3            16.5            3 17.0            14.5            3 15.3            13.1            3 13.0            11.1            3 12.5            10.7           4 15.4            12.5            4 13.9            11.3            4 12.3            10.0            4 9.2              7.5              4 8.1              6.6             5 11.8            9.1              5 11.7            9.0              5 11.0            8.5              5 7.3              5.6              5 5.6              4.3             6 & beyond 11.8            12.8            6 & beyond 11.7            13.7            6 & beyond 11.0            13.9            6 & beyond 7.3              14.5            6 & beyond 5.6              7.2             PV of Minimum Payments 95.6            PV of Minimum Payments 90.4            PV of Minimum Payments 90.2            PV of Minimum Payments 76.4            PV of Minimum Payments 62.9           

Present Value of Operating Lease Obligations (2013 Present Value of Operating Lease Obligations (2012 Present Value of Operating Lease Obligations (2011 Present Value of Operating Lease Obligations (2010

Operating Operating Operating Operating#REF! Leases Fiscal Years Ending  Leases Fiscal Years Ending  Leases Fiscal Years Ending  Leases2014 20.0            2013 18.4            2012 15.2            2011 14.5           2015 17.0            2014 13.6            2013 12.2            2012 9.9             2016 12.5            2015 10.8            2014 7.9              2013 7.9             2017 9.1              2016 8.6              2015 5.4              2014 5.9             2018 5.9              2017 6.1              2016 3.4              2015 3.6             Thereafter 12.0            Thereafter 6.5              Thereafter 3.9              Thereafter 4.4             Total Minimum Payments 76.5            Total Minimum Payments 64.0            Total Minimum Payments 48.0            Total Minimum Payments 46.2           Less: Interest 11.1            Less: Interest 8.7              Less: Interest 6.0              Less: Interest 6.0             PV of Minimum Payments 65.4            PV of Minimum Payments 55.3            PV of Minimum Payments 42.0            PV of Minimum Payments 40.2           

Capitalization of Operating Lease Capitalization of Operating Lease Capitalization of Operating Lease Capitalization of Operating Lease

Pre‐Tax Cost of Deb 5.38% Pre‐Tax Cost of Deb 5.38% Pre‐Tax Cost of Deb 5.38% Pre‐Tax Cost of Deb 5.38%Number Years Implied by Year 6 Paym 2.0 Number Years Implied by Year 6 Paym 1.1 Number Years Implied by Year 6 Paym 1.1 Number Years Implied by Year 6 Paym 1.2

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 20.0            19.0            1 18.4            17.5            1 15.2            14.4            1 14.5            13.8           2 17.0            15.3            2 13.6            12.2            2 12.2            11.0            2 9.9              8.9             3 12.5            10.7            3 10.8            9.2              3 7.9              6.8              3 7.9              6.8             4 9.1              7.4              4 8.6              7.0              4 5.4              4.4              4 5.9              4.8             5 5.9              4.5              5 6.1              4.7              5 3.4              2.6              5 3.6              2.8             6 & beyond 5.9              8.5              6 & beyond 6.1              4.7              6 & beyond 3.4              2.8              6 & beyond 3.6              3.2             PV of Minimum Payments 65.4            PV of Minimum Payments 55.3            PV of Minimum Payments 42.0            PV of Minimum Payments 40.2           

Key Assumptions Sensitivity Analysis

$120.63 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% $120.63 ‐14.00% ‐15.00% ‐16.00% ‐16.80% ‐18.00% ‐19.00% ‐20.00%51.00% 209.20       165.64       139.05         121.13      108.24    98.52        90.92       ‐1.90% 151.40    142.17    132.94     125.56     114.48     105.25     96.02      50.00% 208.79       165.36       138.85         120.99      108.13    98.44        90.87       ‐2.10% 149.79    140.56    131.33     123.95     112.87     103.64     94.41      49.00% 208.37       165.07       138.65         120.84      108.02    98.36        90.81       ‐2.30% 148.18    138.95    129.72     122.33     111.26     102.03     92.80      47.69% 207.79       164.68       138.36         120.63      107.87    98.24        90.73       ‐2.51% 146.48    137.24    128.01     120.63     109.55     100.32     91.09      47.00% 207.47       164.46       138.21         120.52      107.78    98.18        90.68       ‐2.70% 144.95    135.72    126.49     119.11     108.03     98.80       89.57      46.00% 206.99       164.14       137.98         120.35      107.66    98.09        90.62       ‐2.90% 143.34    134.11    124.88     117.50     106.42     97.19       87.96      45.00% 206.50       163.80       137.73         120.17      107.53    97.99        90.55       ‐3.10% 141.73    132.50    123.27     115.89     104.81     95.58       86.35      

$120.63 ‐56.00% ‐57.00% ‐58.00% ‐59.43% ‐60.00% ‐61.00% ‐62.00% $120.63 4.40% 4.50% 4.60% 4.69% 4.80% 4.70% 5.00%‐6.50% 166.09       156.86       147.63         134.47      129.17    119.94     110.71    2.40% 138.67    134.44    130.46     127.08     123.18     126.71     116.68    ‐7.00% 161.47       152.24       143.01         129.86      124.55    115.32     106.09    2.45% 136.18    132.10    128.25     124.99     121.22     124.64     114.93    ‐7.50% 156.86       147.63       138.40         125.24      119.94    110.71     101.48    2.50% 133.77    129.84    126.13     122.97     119.32     122.63     113.22    ‐8.00% 152.24       143.01       133.78         120.63      115.32    106.09     96.86       2.56% 131.00    127.23    123.67     120.63     117.12     120.30     111.25    ‐8.50% 147.63       138.40       129.17         116.01      110.71    101.48     92.25       2.60% 129.22    125.55    122.08     119.12     115.70     118.80     109.97    ‐9.00% 143.01       133.78       124.55         111.40      106.09    96.86        87.63       2.65% 127.06    123.51    120.15     117.29     113.97     116.98     108.41    ‐9.50% 138.40       129.17       119.94         106.78      101.48    92.25        83.02       2.70% 124.97    121.54    118.29     115.52     112.30     115.22     106.90    

$120.63 18.00% 19.00% 20.00% 21.00% 22.00% 23.00% 24.00%6.00% 125.73       124.07       122.41         120.76      119.10    117.44     115.78   5.75% 125.68       124.02       122.37         120.71      119.05    117.39     115.73   5.50% 125.63       123.97       122.31         120.66      118.99    117.33     115.67   

Pre‐tax Cost of Debt 5.38% 125.61       123.95       122.29         120.63      118.97    117.31     115.65   5.00% 125.54       123.87       122.21         120.55      118.89    117.22     115.56   4.75% 125.49       123.82       122.16         120.49      118.83    117.16     115.50   4.50% 125.44       123.77       122.11         120.44      118.77    117.11     115.44   

R&D as % of Sales

Marginal Tax Rate

Equity Risk Premium

Risk Free Rate

SG&A

CAPEX as % of Sales

CV Growth of NOPLAT

CV Growth of 

ROIC

COGS as % of Sales