Tickers in this Article: ISRG, MDT, SYK, GE, SI, STJ, BSX
Although 2010 was a lousy year for medical technology stocks, patient investors know that the buyers will return in time. When they do, high-growth companies like Intuitive Surgical (Nasdaq:ISRG) will surely be on the shopping list. For while there are legitimate concerns about how long this company can sustain double-digit system growth, it is much harder to argue away the rising procedure counts and incredible free cash flow conversion performance.

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A Strong Finish to the Year
Intuitive capped 2010 with another estimate-beating performance. Revenue rose 21%, exceeding even the high estimate, as instrument and accessory sales jumped 33%. System sales grew 10%, while service revenue rose 27% for the same period. Revenue growth in instruments was supported by a 35% increase in DaVinci-assisted procedures and a back-of-the-envelope calculation suggests that procedure counts per machine per week rose about 8% to around 3.7. (For more, see A Checklist For Successful Medical Technology Investment.)

While there was almost nothing to quibble with in the top line numbers, the company's operating leverage was not quite up to the same standard. Gross margin rose about 30 basis points from the year-ago level, a somewhat surprising lack of leverage given the larger contribution of instruments and accessories. The company also posted a sizable increase in SG&A and R&D (though few investors really begrudge higher R&D spending for growth med-tech names), and that limited operating income growth to 20% and resulted in a slight decline in operating margin.

The Road Ahead
Intuitive achieved a milestone of sorts this quarter as gynecological procedures surmounted urology as the primary use of the machine. This is not all that surprising in and of itself - it was a "when, not if" question given the respective sizes of the market and the company's relatively lower involvement in the gynecology space. Nevertheless, the company still has work to do - the ever-present bear story on Intuitive Surgical is that the DaVinci is all well and good for gynecology and urology, but won't go beyond these niches.

Coronary bypass and gastric bypass, for instance, are two large markets where the DaVinci could be theoretically useful but has not yet caught fire. Likewise, other niches like colorectal procedures are promising in theory. If Intuitive Surgical is going to defy the skeptics and keep up a torrid growth rate, penetrating these markets is pretty much a must-do. (For more, see Money To Be Made In Medical Devices.)

Challengers and Challenges
That said, here is a little perspective or context.
St. Jude (NYSE:STJ) reported third quarter sales of $439 million in its ICD business alone and Stryker (NYSE:SYK) had over $1 billion in orthopedic implant sales versus Intuitive's less than $400 million in sales this quarter. The point is basically this - Intuitive has no direct competition and quite a bit of room yet to grow.

Still, Intuitive does have other challenges. There is a murmuring in some parts of the medical community that the DaVinci is unnecessary; that hospitals buy them to appease surgeons and market themselves to patients, but the machines themselves don't justify the costs. These analyses rarely include discussion of patient comfort and shorter recovery times (major advantages of the DaVinci), but they can still sway hospital purchasing decisions. By the same token, it is nothing that Medtronic (NYSE:MDT), Stryker (NYSE:SYK) and Boston Scientific (NYSE:BSX) haven't had to face in segments like cardiac rhythm management, orthopedics and stents, so to a certain extent it's just a regular business risk of medical technology. (For more, see Medtronic Worth The Wait.)

The Bottom Line
It is hard to imagine that Siemens (NYSE:SI), General Electric (NYSE:GE) and other makers of medical "big iron" haven't at least thought about competing in Intuitive's space. After all, seeing as how Japanese companies are more involved with building robots, Hitachi or Toshiba might consider it. And yet, it looks like Intuitive will have a lucrative market all to itself for quite some time.

With a free cash flow margin in the low 30s and a revenue growth runway that lead to the company booking over $3 billion in sales in 2016, Intuitive shares could be worth around $350. That's arguably not enough to entice new buyers today, but it is probably enough to keep existing shareholders encouraged. This stock is volatile, though, so prospective buyers should check in on it from time to time - buying these shares on a dip could be a great opportunity to play one of the few exciting growth markets in med-tech today, and a market that is largely controlled solely by Intuitive Surgical. (For related reading, check out 2010: The Year In Med-Tech Deals.)

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