Start out with a smallish company, the surviving remnant of a three-way spin-off, all of whose components keep variants of the same name – almost as if you were planning to confuse investors. Then, don’t go to the investment bankers and the stock market for money, and explain that you have no intention of doing so. Seems like a recipe for IR disaster, but three years later Varian Medical Systems has half a dozen analysts following it, and a stock price that has shown solid appreciation as most peers’ shares have collapsed.
The original Varian Associates was launched shortly after World War II, specializing in products based on high-energy physics. In 1999, the company divided into three companies: Varian, a supplier of analytical instruments; Varian Semiconductor Equipment Associates; and Varian Medical Systems. The first two spin-off companies listed on Nasdaq and Varian Medical Systems went to the NYSE.
Apart from the name confusion, shareholders reaped rich benefits from the split. The parent stock price at the time of the spin-off was $35. Within a year, it accelerated geometrically rather than linearly, and any stockholder who’d kept all three stocks would have had $120 in total. Even now, in these bearish times, their stake would be $150, of which Varian Medical contributes some two thirds.
At the time of the spin-off, the Street thought of Varian Associates as specializing in semiconductors and electronics, not medical products. So Varian Medical Systems had to introduce its business, which is developing linear accelerators and other products for radiotherapy including X-ray tubes for medical imagining. No-one covering Varian Associates knew anything about this business so senior management had to hit the road and tell their story over and over. ‘Our CEO, Dick Levy, and our CFO, Elisha Finney, had to get the story in front of the analysts,’ says Spencer Sias (right), director of corporate communications and IR for Varian Medical Systems. ‘Between us we’re a three-person IR team, and we’re still out talking to the sell side and buy side regularly. We work hand in hand on IR-related issues.’
Convincing the Street
Getting analyst coverage was not as simple as telling a story, it turns out. For many medical analysts, radiotherapy was old news. They had not heard of new technologies that focused tumor-killing radiation more tightly, resulting in far fewer side effects for patients. Therefore, the team – Levy, Finney and Sias – had to convince the Street that radiotherapy was in fact today’s news, not yesterday’s.
The next challenge was one few IR professionals will empathize with today. Militating against analyst coverage, according to Sias, was Varian Medical Systems’ cash. ‘About $160 mn a year at the time,’ he specifies. ‘And we’re now sitting on top of $321 mn in cash and marketable securities, while at the time of the spin-off we had $100 mn in short-term debt.’ Since the company clearly had no need for investment banking business, it was tough to get analyst coverage. Still, analysts were listening and liking what they heard. ‘After four years, we have six people covering us,’ notes Sias. ‘One of the analysts following us is a doctor,’ he adds.
In retrospect, the fact that the company had deep pockets both helped and hindered its ability to gain sell-side coverage. ‘The people that elected to cover us did so assuming there would not be a lot of banking business because we were always generating a lot of cash. They picked us up for the story,’ says Sias. ‘Not that they wouldn’t mind having a crack at something if we did do something but they have been with us for some time and they know better than anybody what our cash needs are or aren’t.’
Beyond fundamentals
Once the fundamentals were explained, investors and analysts were eager to hear about what drives the business. ‘They wanted to hear about the technology, and how the products are doing in the marketplace as much as they wanted to know about what’s going on in the ledger,’ says Sias. The best way to introduce the technology to investors was to show it to them, suggests Sias. With consent from doctors and clinics, the investor relations team set up tours for analysts and fund managers to walk through clinics and have a doctor show them how the technology works. They also started hosting IR days at different facilities to back up mid-year and end-of-year analyst meetings.
Tours and IR days proved to be a great way to explain the company’s story and meet with analysts. As Sias says, ‘It all comes down to face time and transparency.’ Following this mantra, the IR team schedules the company’s annual meeting to coincide with the board meeting in New York so that investors can meet management and the board and, as Sias notes, ‘see the cut of their jib.’
At the time of the spin-off, most shareholders were value investors. But as Varian Medical Systems’ particular story got out into the market, ‘More growth investors have moved into the stock,’ notes Sias. ‘Unlike many companies claiming to be growth stocks in recent years, this one has real earnings and growth.’
And of course there’s the cash. Recently the company repurchased 2 mn shares with some of that spare cash. ‘We’ve discussed a dividend but not acted because the tax law on dividends hasn’t changed yet, so it’s unattractive. And we are always looking at the possibility of acquisitions.’
Shareholders in Varian Medical Systems are 95 percent institutional. There is a small retail base made up mostly of doctors and patients who find out about the company through using its technology. There are a few foreign holders but not as many as the company would expect after traveling to Europe to tell the story. ‘Before the spin-off, management went to Europe and did a series of lunch meetings and then nothing happened,’ recalls Sias. ‘The problem may have been lack of consistency; we weren’t there often enough to develop a relationship.’ Sias has thought about targeting retail investors but concludes the investment of time and effort is not warranted for now.
Future targeting may point more to overseas and retail investors, but currently both would take a pretty big commitment, so domestic institutional investors remain the top priority. ‘We understand that in order to follow the company, you really have to believe that the technology works and that there is a growing market for it,’ says Sias. ‘We’ve got a lot of important information for investors and for the medical community. It is a great story to tell and it’s the best company I’ve ever worked for. The things we are doing are making a huge difference in the lives of cancer patients.’
Bucking the trend
So far Varian Medical Systems is one of the rare small to mid-cap companies that is bucking the trend of today’s downward market. Sias says the company has some very specific advantages that help the stock price swim upstream. First, the company’s main product is an innovative and more effective radiotherapy system for fighting cancer. Health spending is rising steadily, and demographics are on the side of the product. ‘Cancer is a disease of age, and baby boomers are entering the years when cancer is more likely.’ There were 1.3 mn cancer patients diagnosed last year in the US alone, with 55 percent getting radiotherapy as part of their treatment.
‘Varian Medical,’ Sias says, ‘is both the market leader and the technology leader.’ Even more tellingly, the company has a $743 mn backlog, which is typically delivered over the following three to four quarters, way beyond the event horizon for most of the Street. ‘We offer pretty explicit guidance,’ Sias comments. ‘Talking about 2003, we are hoping for growth in the mid-teens and for EPS growth of around 26 percent. That makes us attractive.’
In addition to the medical business, the company is equally poised to tap into another growth sector – paranoia. ‘The same linear accelerator that you point at a tumor, you can aim at a cargo container and generate a beam that goes through 17 inches of steel, so you can scan a cargo container the same way you can scan a carry-on suitcase,’ notes Sias.
It’s always helpful to have a good, timely story to tell but understanding how to convey that story is what can really get analysts interested. Having come from a journalism and public relations background, Sias knew how to narrate Varian Medical’s story. ‘If there’s one thing that ten years in daily journalism does, it teaches you to learn quickly,’ he says. His reason for joining Varian Medical was partly his excitement over its technology, which made it easy to communicate its message to the Street.
Of course it helped that Sias had a background in technology writing as well. ‘My introduction to technology was in public relations writing about vac-ion pumps and chromatographs and oscilloscopes,’ he reminisces. There he found he enjoyed learning how complicated technology works and figuring out how to explain it to others. Transitioning from journalism to PR and then IR has not been difficult, he says, because he uses the same core competencies. ‘The thing that excites me about going to work every day is that we have a good story to tell, and I am imparting information that is useful and valuable to people.’
The bottom line, according to Sias, is that he and his team are excited about the technology and about telling that story to the Street – over and over. ‘Getting out there and consistently telling the story, consistently meeting the goals, no surprises, easy access and passion.’ These are the ingredients for successful IR, he says. ‘We all communicate a passion for what we are doing, not just because of the finances, but because we’re making a difference to people’s lives, and investors like that.’
What the analysts say
Kate Sharadin, Gerard Klauer Mattison & Co
‘They go beyond reading a script, which is what so many people do these days; they go the extra degree to help you understand. They give access to people in the company who can help, and not many in their position do that either. I get great responsiveness from Spencer and the whole group. They do a great job of answering questions whether very dry and academic or not, and from a technology point of view they will always help you to understand.’
Bruce Jacob, Deutsche Bank Alex Brown
‘The good news is they have a good product. But from the IR team up to the CEO they are always very forthright with their investors, and in a difficult market investors always like more information.
They are good with the details and as forthright when it comes to problems as they are with causes for optimism. And they are very amenable to getting out on the road and doing one-on-ones and group meetings as well as arranging access to their management and facilities.’
Dr Chris Shibutani, Chase Hambrecht & Quist
Out of the 17 companies I cover, Varian Medical stands out. The CEO and CFO had to struggle after the spin-off. They did not have the IR experience, but instead of reacting negatively with bruised egos, they did something unique. They took advice and redeveloped their approaches in a very intelligent way. Along with Spencer Sias, they are very patient, hardworking and open in their approach. But they also listen, which is very useful for one-on-ones.’
