Can't Resist the Robot (ISRG)

Nov.18.05 | About: Intuitive Surgical, (ISRG)

Well, as we close out a very successful week in the markets, it turns out that I can no longer resist the siren song of Intuitive Surgical (NASDAQ:ISRG). I've been researching them in some detail since buying my first two positions in recent months, and the information I find leads me to the same answer I had when it was at $70 ... then at $90. $109 is a lot of money, but it's still a reasonable price to pay for this kind of growth potential. I don't expect to keep buying it at $20 increments all the way up, though ... for me, this is a full position for now and I'll sit back and watch.

But I did buy some more today. Purchased Intuitive Surgical (ISRG) on November 18 for $109.02.

You can read my earlier writeups on Intuitive Surgical -- my first buy, and second -- if you're interested in all I've got to say. I was first turned on to them by a Fool newsletter, and I have now gotten over my initial fear of paying too much for these shares.

There are a few caveats: It's still not cheap, and this is betting against the analysts to some extent -- they're predicting pretty flat sales and taxes due in 2006 for a forward PE of around 70 according to Yahoo Finance, which I think is extremely pessimistic. But they're probably smarter than I am, so buyer beware -- because as long as I maintain faith in management and the long term potential of this business, I'm not selling even if the analysts are right.

Patients are looking for this kind of minimally invasive surgery now, and we appear to be at a tipping point where it is prevalent enough (about 300 systems installed) that patients may begin to demand or expect it. And for all intents and purposes, they've got not only first-mover status in this area, but a monopoly.

Even so, Intuitive thinks they've hit less than 10% of their addressable market. And add to that the fact that those 300 or so systems are spread around about 230 hospitals in the US and maybe 30 or so elsewhere in the world (they just sold their first in China ... but even Australia only has two, and the UK one), and you can see that there's also ample room for selling multiple systems to the larger hospitals who perform the lion's share of major surgeries.

Hospital centers everywhere are releasing press releases or web pages that brag about their experience in robotic surgery ...

like Penn ...

or Shawnee Mission in Kansas ...

or the Henry Ford Health System in Michigan...

or Swedish Medical Center in Seattle ...

And it's showing up in regular advertising -- like this commercial from the DC Urology Center at GWU (video).

There's even a robotic surgery blog from a doctor in New Jersey -- and he's predicting an almost exponential increase in the number of da Vinci surgeries he will perform.

If you don't know much about the field, a class at Brown University did an interesting looking report that has a lot of details -- it's slightly out of date, but well worth reviewing. Also a little out of date, a Business Week article from March provides a nice overview.

The success of the da Vinci system with prostatectomies is, I believe, just the first wave. That was the first major type of surgery for which FDA approval was granted and the first to reach a critical mass of trained surgeons and happy patients. Intuitive Surgical even has a special website just for patient information on the da Vinci prostatectomy.

But there are other types of surgeries performed every day in the US that could benefit from these minimally invasive techniques -- heck, those with strong stomachs could have watched a live heart valve surgery using the da Vinci back in January. And In March, doctors discovered that the da Vinci can be very effective in treating Oral cancer and doing other otolaryngological surgeries.

To sum up my investment philosophy for ISRG, and why I think the growth will continue (even if not at quite this same rate):

The growing BREADTH of hospitals and doctors who own and are trained on this machine is the first huge growth engine, but the growing DEPTH of procedures for which the machine is commonly used should be the second.

And don't forget, maintenance costs about $100,000 a year on these machines, and you can easily spend that much in accessories and replacement parts ... and doctor training can run a quarter of a million dollars, though I understand it's usually included in the purchase price. That $100,000 of high-margin income for ISRG will grow as each machine performs a larger number of surgeries of different types, and the overall steady income from this source will grow significantly as each new system is brought online.

I intend to hold these shares for many years and enjoy the ride, though I fully expect that this rapid growth will come with some hiccups along the way (and sometime over the next few months I'll probably regret that I didn't wait to fill out my position).