Surgical-Robot Maker Has More Room to Operate

Robots can help. It's not just that they can poke a few small holes in a patient and make their way to the prostate using a camera, rather than cut him open. Or that they can cauterize incisions as they make them. Both capabilities reduce blood loss and shorten recovery time. It's that robots that read and mimic human movements can also filter and downscale them, transforming a centimeter worth of clumsiness into a millimeter of precision.

This column was late, but not too late, in introducing Intuitive Surgical (ISRG) to readers in October. Its da Vinci system is the world pioneer in the field of operating-table robotics, and is protected by both patents and sheer complexity. Brake pads and design software are high risks for intellectual property theft in less-trademark-observant nations. A $1 million suite of consoles weighing more than a ton, only 241 of which were installed last year, is not. Intuitive had already completed a 13-fold stock price gain over seven years when we noted that its sales growth was quickening. It went for $240 a share, a whopping 79 times forecast 2007 profits, but we found the stock no more expensive than the broad market after accounting for the company's projected growth. Since then the market has dipped 11%, but Intuitive has soared 45%, to $347 a share. And so it warrants a fresh look.

This time around the stock turned up in a screen for earnings momentum. Intuitive has beaten Wall Street's earnings estimates four times in four quarters, by an average of 21%. Over the past 90 days the forecast for this year has climbed to $5.12 from $4.71. Both trends bode well for the stock. Studies show that one positive earnings development is more likely than not to be followed by another, because analysts only cautiously revise their former assumptions. Run our earnings momentum screen anytime you like using SmartMoney's stock screener and the full list of search criteria. It recently produced seven survivors in total.

A da Vinci system consists of three main components. There's the robotic tower, which fiddles with the patient using three arms and, for an extra $175,000, a fourth. One arm generally holds the camera. The rest can be fitted with a multitude of tools. There's a video cart, which handles the image processing. And there's the surgeon's console: Picture a seated submarine captain peering into a periscope. In 2006 Intuitive introduced the da Vinci S, which features improved fiber optics, a motorized patient cart, more comfortable seating for the surgeon and a quick-change attachment design for tools. It sells for $1.3 million with a fourth arm (which most customers opt for), vs. $1 million for the original. Last year all but 16 da Vinci installations (of 241, recall) were S machines; 159 of them were the newest high-definition S machines, which cost $1.5 million.

Last year, sales for Intuitive Surgical swelled 61% while profits nearly doubled. This year the company is seen installing 328 machines and ringing up $858 million in sales, a 43% increase over last year. Machines generate recurring revenue, since attachments last for only a dozen or so surgeries, and then must be replaced. (Unlike your car, which only nudges you back to the dealer with a warning light when it's time for an oil change, the da Vinci senses when attachments have been used enough, and then disables them.)

Robotic surgery is already used for half of prostate removals, and within a few years is expected to be used for an overwhelming majority of them. "If a hospital wants to have a urology practice in the U.S. in 2010, it will need one to three da Vinci robots," reckons Stephen Ogilvie, who covers Intuitive for Think Equity Partners, a New York investment firm. Ogilvie foresees an expansion of da Vinci use in other urological procedures, like vasectomy reversals, and sees huge potential in hysterectomy (uterus removal) and other gynecologic procedures, for which the system received regulatory approval in 2005. Heart surgeons might be slower to adopt robotics than doctors who already perform mostly minimally invasive scope surgery; a doctor who cracks open a patient's rib cage today surely has grave reasons for needing the access. Lung, kidney and gall bladder procedures offer more promise. Some doctors note that a da Vinci system is particularly helpful with overweight patients.

Intuitive is projected to produce 38% profit growth this year and 35% next year, far slower than last year's increase but enviable growth the same. Shares go for 68 times this year's profit forecast. That's not an outlandish price. It does, however, push the limit of how much one should pay for shares of a top-performing company, even one with a protected product in a promising field.

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