Intuitive Surgical

$ by Darrin Scilley

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S&P 500 Healthcare ISRG (L)

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Total Return Percentage

ISRG S&P 500 Healthcare

Sector Components

• Managed Care• Facilities• Biotechnology• Pharmaceuticals• Healthcare Products and Supplies

Sector Analysis• Facilities eliminated

– Decreasing revenues + Increasing costs• Pharmaceuticals eliminated

– Slowing growth• Biotech possible

– High growth, but FDA/legal hurdles• Managed Care possible

– Rising GDP = rising costs– Possible Medicare/Medicaid penetration

• Medical Products and Supplies likely– High growth, recession resistant

Selection Process

• Debt Maturity

• Leverage

• Multiples

• Historical Growth

  P/E2008Growth

Intuitive Surgical 21.38 45.83%

Bard 21.01 12.36%

St. Jude Medical 33.68 15.45%

Medtronic 16.58 9.89%

Stryker Corp 15.17 11.97%

Baxter International 18.58 9.59%

Varian Medical Systems 17.19 17.89%

Becton, Dickinson and Co. 15.92 12.52%

Multiples Forward Mutliples

  P/EBITDA EV/EBITDA 1 yr CAGR 2 yr CAGR 5 yr CAGR2009EV/EBITDA

2010EV/EBITDA

2013EV/EBITDA

Intuitive Surgical (ISRG) 12.04 9.35 15.00% 25.00% 21.00% 8.13 6.51 3.61

Johnson and Johnson (JNJ) 7.45 7.40 -1.10% 8.70% 8.25% 7.48 6.89 4.98

St. Jude Medical (STJ) 14.44 14.55 9.10% 13.50% 13.10% 13.34 11.75 7.86

Medtronic (MDT) 7.16 7.68 12.70% 9.60% 11.35% 6.82 6.22 4.49

Stryker (SYK) 6.81 5.71 9.50% 12.80% 14.20% 5.21 4.62 2.94

Baxter (BAX) 9.94 10.46 10.70% 13.40% 12.48% 11.58 8.33 5.81

Pfizer (PFE) 6.31 5.10 -16.00% 12.00% 0.75% 4.28 5.42 4.91

Expected Return

EarningsPrice Per Share

Dividend/Share Repurchase

Forward Shares P/E

End P/E

Yearly Decay

ForwardP/E

2009 CAGR Expected Return

Intuitive Surgical (ISRG) 204,315 $103.03 0.00 300,000 36,338 19.79 15.08 -0.94 18.85 15.00% 18.30%

Johnson and Johnson (JNJ) 12,949,000 $50.64 1.80 2,000,000 2,730,506 10.83 15.08 0.85 11.68 -1.10% 11.74%

St. Jude Medical (STJ) 353,020 $36.67 0.00 0 346,150 35.96 15.08 -4.18 31.78 9.10% -3.57%

Medtronic (MDT) 2,169,000 $28.58 0.53 0 1,102,000 14.76 15.08 0.06 14.82 12.70% 16.90%

Stryker (SYK) 1,147,000 $33.81 0.50 600,000 378,784 11.69 15.08 0.68 12.37 9.50% 22.76%

Baxter (BAX) 2,014,000 $51.16 1.25 1,200,000 590,394 15.59 15.08 -0.10 15.49 10.70% 16.78%

Pfizer (PFE) 8,026,000 $14.54 1.28 5,000,000 6,406,121 12.23 15.08 0.57 12.80 -16.00% 1.44%

Who is ISRG?

Who is ISRG?

• 205,000 procedures in 2009– Up 51% from 2008

• Revenue $1,050M, up 20% from 2008• Operating Profit $377M, up 21% from 2008• 71% Gross Margin, 36% Operating Margin• $1,171M Cash

– 25% Mkt Cap 9% Mkt Cap

ISRG’s Fit in Healthcare• Healthcare Keys to Success

– New/existing product innovation– International expansion– Form strategic alliances– Lower managed care costs– Improve patients’ lives

• How ISRG fits– Pioneers of RAS/MIS– See international map– Numerous acquisitions/partnerships– ROI 20%-30%+– 3-4 year payback period– Inpatient Outpatient conversion– Decreased length of stay– Decreased nursing/staffing– Decreased blood loss/complications– Improved patient satisfaction

Risk Factors

• Competition• Economic/political environment• Continued market acceptance• Malfunctions• Single Source Suppliers

Valuation Key 1: Revenue

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 20230.00%

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ProcedureSystemOverall

PROCEDURE

SYSTEM

Procedures

Adoption Curve

International Adoption

Revenue Split

Key Driver 2: Market Share

Scenario Analysis