The next ISRG ?

Intuitive Surgicals needs no introduction. The company's daVinci surgical robot is allowing the company to grow at a heady rate, and added to this, ISRG makes a gamut of disposable tools [which serve as the "working end" of the robotic arm used in surgery] which need to be "renewed" for every surgery. The tools provide ISRG a stream of revenue in a manner that is similar to Gillette's blades. ISRG's revenues are almost at a billion dollars a year run-rate, and it sports a market cap of over $10 Billion. The largest company that exclusively focuses on medical devices is Medtronic [MDT]. MDT's market value was at $10 billion - back in 1995 - the same year that ISRG was founded.

While there is still a lot of money to be made - in ISRG, there always is room for newer disruptive technologies in the field of MIS [minimally invasive surgery]. The two companies of today - which are often compared with ISRG - albeit with ISRG from about a half a dozen years ago, are: HNSN - Hansen Medical and STXS - Stereotaxis. Hansen¹ develops, manufactures and sells a new generation of medical robots designed for accurate positioning, manipulation and stable control of catheters and catheter-based technologies. Stereotaxis² focuses on the cardiac surgery market, and enables physicians to complete more complex interventional procedures by providing image guided delivery of catheters and guidewires through the blood vessels and chambers of the heart to treatment sites.

STXS has an extensive array of patents covering their magnetically guided catheter systems. HNSN has an equally impressive array of patents protecting their Sensei system. After a review of both patent portfolios, I'm confident that STXS has an edge over HNSN. Plus, STXS's system has a huge operational advantage - their catheters are substantially slimmer than HNSN's comparable ones. This is due to the fact that STXS's catheters have a magnetic tip, and are guided by a magnetic field surrounding the patient - while HNSN's guidance wires are bundled with the catheters [and hence thicker]. STXS's system has one huge disadvantage - the room in which the system is located - needs to be custom built - with magnetic shielding. Also, operational procedures similar to those taken by MRI facilities [no ferrous/ferric/magnetic stuff anywhere close to the system or the room it is in] need to be taken into account. In short, once a STXS magnetic guidance system is in place, it is cost-prohibitive to even think of moving it.

HNSN's most recent quarterly numbers were hampered by "sales lumpiness", but the company fell short of their goal for quarterly system sales [system sales drive the sale of disposables]. STXS has the edge in system sales for now - despite the fact that their systems are a lot more difficult to deploy. But, STXS had their own missteps - where they had to go back and re-engineer their magnetic irrigated catheter [it needs to be re-approved by the FDA]. Optimistically, this will contribute to revenues in calendar Q1-2009.

	STXS Q2, 2008	STXS Q2, 2007	HNSN Q2, 2008	HNSN Q2, 2007	ISRG Q2, 2001	ISRG Q2, 2000
Revenues	10.66M	7.84M	5.8M	2.4M	12.72M	5.13M
R&D	4.8M	7.1M	6.3M	4.4M	3.3M	2.8M
Gross profits	6.5M	3.5M	1.08M	0.781M	6.1M	1.6M
EPS	(0.35)	(0.42)	(0.60)	(0.37)	(0.12)	(0.23)
Shares	36.5M	36.1M	24.7M	21.5M	35.6M	19.8M

From the table, once can see similarities in the numbers....... ISRG had a reverse 1 for 2 split in July 2003 - which means that there was 100% dilution from the point of time that I chose to pick in 2001 for ISRG. STXS has been smart with their money, and got a $18Million payment in royalty from Biosense Webster - their partner in the manufacture of ablation catheters. Looking at numbers from other 10Q's filed by ISRG, ISRG extracted much more in sales - for the amount of expenditure on R&D - even in the early stages of the company.

The bottom-line:
1. There is no clear winner here in the battle for becoming the next ISRG. In fact, the next ISRG is ISRG - as it has another half a decade of growth left in it.
2. Between STXS and HNSN, my pick is STXS - for their technology has been through 10,000 cardiac procedures - some so complex that they were not attempted before STXS's Niobe entered the fray.
3. HNSN can use the fact that they are more easily deployable - to get an edge over STXS, but at the end of the day, the thinner, more routable STXS catheters will be able to perform surgeries that HNSN's Sensei cannot touch.
4. Both companies are burning money now, and will probably continue to do so for another three years. So, there is no urgency to get into either stock.

Operating rooms are rarely re-located. Neither are MRI labs. So, STXS's biggest negative is probably not a big deal in most cases.

Notes:
0. I have no positions in either stock. May initiate in the near future.
1. From Hansen's latest 10Q.
2. From Stereotaxis' latest 10Q.
3. ISRG's 2001 10Q.

The most brilliant marketing pitch by a company - bar none.

Intuitive Surgicals [ISRG] is a company that I have a deep amount of respect for. Much like US Surgicals - that revolutionized minimally invasive surgery [MIS] in the 1990's, ISRG is definitely revolutionary. It is the first robotic surgical instrument with "wrists" and hence a surgeon can - after a years' training, perform surgeries which result in shorter hospital stays, less pain, less need for blood transfusions, less scarring, and a couple of other advantages that I will talk about in the next few paragraphs.

ISRG had stunning results. Looking at the 10Q [for the quarter ending June 30, 2008], ISRG's sales were $219M - up from $140M in the corresponding period in 2007. Basic EPS was $1.32 - up from $0.81 for Q2, 2007. The fully diluted numbers were $1.28 in 2008 vs $0.79 in 2007. Recurring revenue grew 56% to $103.0M from $66.1M. Instruments and accessories revenue grew 61% to $73.6M from $45.8M during the second quarter of 2007. ISRG sold 85 da Vinci Surgical Systems during the second quarter of 2008, an increase of 52% compared with 56 in Q2 2007.

The stock now has a market value of almost $12 BIllion - leaving no room for error from the management. ISRG is expected to best the top end of analyst's estimates for the next several years, but I am not making a bear or a bull case for the stock in this article. I think that - apart from the four robotic arms with redundant circuits that can produce superior outcomes, I think that their brilliance in marketing is contained in the following paragraph that I'm quoting verbatim from their marketing material.

For most patients, dVP offers substantially less pain and a much shorter recovery than traditional prostatectomy. Other advantages include reduced need for blood transfusions; less scarring and less risk of infection. Moreover, studies suggest that dVP may offer improved cancer control and a lower incidence of impotence and urinary incontinence. [I added the bold/italics].

Prostatectomies drove ISRG's first growth spurt [till now], there will be hysterectomies and mitral valve repairs, but I think that if you offer a guy these two alternatives:
a. dVP [da Vinci Prostatectomy]
or
b. Open surgery
and mention the magic words from the ISRG marketing document, his choice will be (a) with not a second thought given to (b). Brilliant, even Freudian.

Disclosures: I currently have no positions in ISRG.
Note: I am in no way making fun of cancer. In fact, I am a lucky survivor.

The next ISRG.

Everyone wants to find the next Cisco, the next Microsoft, the next ISRG. ISRG has carved out a niche in the prostate surgery market - with the key buzzwords being POTENCY and CONTINENCE - enough to scare any self-respecting man to cower at the thought of near-castration [yeah, that includes me]. Forget the robotic arms, the $1.3M price tag, the cost of disposables, blah, blah. I am convinced that without these magic words in the marketing material, ISRG will be languishing today, with surgeons and surgees [what do you call a person who is going under the knife - I want a better word than patient], not clamoring for time under the robotic knives.

Yeah, there will be hysterectomies, and mitral valve repairs - but it was the old Freudian scare that vaulted ISRG into the S&P 500. OK - so I am looking for the next ISRG. I think I have found it, but irrigated catheters pale in comparison to increased potency and decreased incontinence.

So the search continues........

Bapcha

ISRG - irrational exuberance ?

Here's a quiz question - anyone remembers the day when Greenspan said the magic words "Irrational Exuberance" ? Answer: The day was December 5th 1996. Yes it was almost a dozen years ago.....

Back to ISRG - a very well run company, and local [off Kifer in Sunnyvale]. Nice profit margins, explosive growth, etc. etc. What is to not like here ?

Valuation. When a stock like ISRG is valued at 15x sales and 75x TTM earnings, there is little room for mistakes. Plus, the usual suspects are working on similar operating robots [though daVinci has the edge of being first, and being excellent]. While I have thoughts of robots going berserk - when a person is anesthetized and being operated on, daVinci has redundant circuits that will allow it to work even if the primary circuits fail.

Back to valuation. Even Cisco stumbled during their historic run in the 1990's. I guarantee that ISRG will stumble. While in ISRG investors' eyes, it will be a minor miss of heck, say 10% below the 50% projected growth rate, it will be enough to kill the stock to a TTM PE of 25.... while I do not sport a beard and wear Italian Suits, I GUARANTEE IT.