A Surgeon’s Magic Wand

10/10/2007 12:00 am EST


Jim Collins

Chairman and CEO, Insight Capital Research & Management, Inc.

Jim Collins, editor of OTC Insight, likes a company’s innovative virtual surgical techniques. This is the last issue for the 20-year-old newsletter, a top performer during that time.

Intuitive Surgical (NASDAQ: ISRG) designs, manufactures, and markets the da Vinci Surgical System, [which] translates a surgeon’s natural hand movements on instrument controls at the console into corresponding micro-movements of instruments positioned inside the patient through small puncture incisions.

Using hardware, software, algorithms, mechanics and optics, the system translates the surgeon’s hand movements into precise real-time micro movements of the EndoWrist instruments positioned inside the patient, [which Intuitive also makes.]

In January 2006, Intuitive Surgical announced the addition of the da Vinci S Surgical System to its da Vinci Surgical System product line. The da Vinci S features fast setup, rapid instrument exchange, multi-quadrant access and multi-image display capabilities. At the time of introduction, the da Vinci S listed for $1.53 million, which was approximately $200,000 more than the standard da Vinci system.

The company’s EndoWrist instruments are approximately five and eight millimeters in diameter. The instruments mount onto the electromechanical arms that represent the surgeon’s left and right hands and provide the mechanical capability necessary for performing complex tissue manipulations through ports. As a percentage of total revenue, recurring revenue from the EndoWrist product line increased to 45% in 2006, from 22% in 2002.

Lonnie Smith has been chief executive officer since June 1997. Mr. Smith previously served as [a senior executive] with Hillenbrand Industries, which he joined in 1978. Marshall Mohr has been chief financial officer since March 2006, [having] previously served as CFO of Adaptec.

For the quarter ended June 30th, Intuitive Surgical reported earnings of 79 cents per share, compared with 44 cents per share in the same period [of 2006]. Revenues increased 61% to $140 million. Revenue growth was driven by the increased adoption of procedures performed with the da Vinci Surgical System.

Because the company’s products represent a fundamentally different means of performing surgery relative to current practices, Intuitive Surgical is subject to the risk that the market will not accept its products. Furthermore, the company experiences long sales cycles, driven by the fact that its products are major capital expenditures and thus require the approval of senior management at purchasing institutions. Finally, the company requires regulatory approval to market its products, and any delays or failures to obtain the required approvals would adversely impact results.

The company’s stock is trading near its 52-week high. (It closed Tuesday above $258, up from less than $100 at the beginning of the year—Editor.) Banks and mutual funds own 41% of shares outstanding. The stock has a relative strength rating of 98.

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