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Intuitive Surgical's Million Dollar Robots Continue to Move -- For Now

Intuitive Surgical da Vinci Surgical SystemIntuitive Surgical, a maker of surgical robotics for minimally invasive procedures, reported robust third quarter 2008 revenue growth of 50 percent. The company cited expanding acceptance of its surgical robots and higher sales of its da Vinci Surgical Systems, particularly for hysterectomies and prostate surgery. The system, however, which can sell for anywhere from $1 million to $1.7 million depending on configuration, is a major capital item for Intuitive's academic- and community-hospital customers. As a result, credit problems could slow sales if its customers have trouble arranging financing, as the company acknowledged in its recent 10-Q filing:

Due to the recent tightening of credit markets and concerns regarding the availability of credit, particularly in the United States, our customers may be delayed in obtaining, or may not be able to obtain, necessary financing for their purchases of the da Vinci Surgical System. Delays of this nature would adversely affect our product sales and revenues, and therefore harm our business and results of operations.
    On a year-to-date basis, selling price has averaged $1.35 million per system, and management expects it to remain at approximately at this level for the reminder of the year. Inventory turns at September 30 decreased to 4.8 times compared with 5.7 turns at the end of the previous quarter, which management attributed to planned increases in inventory needed for future growth. This performance metric is slightly troubling to me: as the da Vinci Surgical System typically has a lengthy sales cycle, Intuitive Surgical should have enough lead time to better manage inventory.

    Moreover, the credit crunch is leading many hospitals to slow their expansion plans, which would presumably include major capital expenditures such as Da Vinci systems.

    Nonetheless, Jerry McNamara, Intuitive's vice president for worldwide sales, said on the company's third-quarter earnings call that the company's field representatives had seen no material delays or cancellations in orders. In addition, sales hires increased by six percent in the third quarter to a total of 340 people now in the field, with about 60 of the representatives focused on selling systems and more than 210 people focused on convincing surgeons to use the system in place of conventional surgeries:

    The procedures that have driven the most growth in our business recently are the da Vinci Prostatectomy (dVP) and the da Vinci Hysterectomy (dVH). dVP procedures are expected to grow at least 30% from 2007 to 2008 and dVH procedures are expected to grow at least 150% from 2007 to 2008. Other urologic procedures such as nephrectomies, cystectomies and pyeloplasties, other gynecologic procedures such as myomectomies and sacral colpopexies, cardiothoracic procedures such as mitral valve repair and cardiac revascularization have also contributed to our growth. dVP and dVH represented approximately 79% of the procedures performed during the nine months ended September 30, 2008 and no other procedure represents a significant part of our business at this time. [Third-quarter 2008 10-Q filing]
      Despite the domestic and global economic downturn, Intuitive management increased top-line revenue forecast for 2008. The company now expects revenues to grow 49 percent to 50 percent over 2007 sales of $600.8 million, which is up from a previous estimate of 45 percent to 47 percent.
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