Taking robot arms to the bank
Intuitive Surgical's stock has jumped six-fold as hospitals snap up its cutting-edge product. Is it too late to buy?
By Aaron Smith, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Robotic arms could be the future for surgery, and the future looks bright, but it won't come cheap.

The stock of Intuitive Surgical (down $1.28 to $115.32, Charts), a high-tech company with a monopoly selling robotic surgical arms in the United States, has surged nearly 500 percent over the last two years, and analysts believe that the rally isn't over.

The da Vinci robotic surgical arm.

That's because demand is growing, and so far the Sunnyvale, Calif., company has the market all to itself.

The surgical arm, known as the da Vinci Surgical System and approved by the Food and Drug Administration for general surgery in 2000, is controlled remotely by surgeons.

The system is considered to be more precise and less invasive than traditional surgical tools that include small handheld surgical cameras inserted into the body during surgery.

A recent Deutsche Bank report cited a study showing less bleeding and less time spent in the hospital for hysterectomy patients whose surgeons used the da Vinci system versus the surgical cameras.

"What you can do with the robots - with the capabilities in manipulation and visualization - you just can't do any other way," said Tao Levy, analyst for Deutsche Bank North America, who rates the company a "buy" with a price target of $140, versus its current level of about $116 a share.

"It's like having your hands inside the body, but through two or three small, puncture-type holes," said Timothy Nelson, analyst at Piper Jaffray, who rates the company a "buy" with a 12-month price target of $130.

The robotic arms are used mainly for a delicate procedure to remove all or part of the prostate gland known as prostatectomy.

Levy of Deutsche Bank North America said that men undergoing the procedure with the da Vinci system return to sexual function more quickly, and spend less days wearing diapers and suffering from incontinence, than in procedures using the surgical cameras.

Intuitive Surgical spokesman Ben Gong said his company's robotic arms performed 20 percent of the 90,000 prostatectomies in the U.S. last year, and the company is aiming for 35 percent of the market by the end of 2006.

The da Vinci system is also gaining traction in the gynecological market, specializing in hysterectomy, the complete or partial removal of the uterus. Of the 600,000 hysterectomies performed in the U.S. every year, Gong said that Intuitive Surgical is targeting the 250,000 procedures that are considered radical or complex, requiring greater precision.

There are more than 300 da Vinci systems operating in American hospitals, but with a price tag ranging from $1 million to $1.5 million, the systems don't come cheap.

"The chief obstacle is cost, and doctors have to learn how to use it," said Les Funtleyder, analyst for Miller Tabak who rates the company a "buy" with a 12-month price target of $150.

But sales have grown rapidly despite the steep cost. First-quarter sales jumped 60 percent to $72 million, and are projected to jump another 55 percent in the second quarter, according to analysts surveyed by Thomson Financial.

Analysts said the lack of competition is driving sales, as no other company provides a similar surgical system.

"This is a highly protected, highly proprietary, very unique technology," said Nelson of Piper Jaffray. "In terms of robotics, [Intuitive Surgical] is the clear leader. Nobody's going to touch them for several years."

But it's not just the company's da Vinci system that's expensive - its stock trades a rich multiple of about 49 times projected 2007 earnings, as investors are betting on more rapid growth to come.

But small companies like Intuitive Surgical can be risky. It's unclear how long the firm's high-priced monopoly will last, and other factors could hurt its business.

On the other side, there could be growing demand from hospital administrators who feel their institutions need to own the da Vinci system to stay competitive, some analysts said.

"At the end of the day, patients will go to the hospital that has the robotic system," said Levy of Deutsche Bank North America.

The analysts interviewed here do not own stock in Intuitive Surgical. Miller Tabak and Deutsche Bank North America do not conduct business with the company, but Piper Jaffray does make a market in the securities of Intuitive Surgical.

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