A Company Obamacare’s Tax on Medical Device Makers Cannot Even Break

By Ryan Guenette - July 13, 2012 | Tickers: ISRG, MAKO, SYK, ZMH | 0 Comments

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On Thursday, June 28^th, the Supreme Court upheld the health care law as 5 out of the 9 Supreme Court judges voted in favor of the law. This is seen as a tremendous win for Obama and the Democrats as they have been pushing this law for a long time. One of the methods to pay for this law included a tax on medical device makers. More specifically, “the ACA imposes a 2.3-percent excise tax on the sale of any taxable medical device by the manufacturer or importer of the device starting in 2013.” These medical device makers includes Stryker Corporation (NYSE: SYK), which offers a diverse array of medical technologies, including re-constructive, medical and surgical, and neurotechnology and spine products, MAKO Surgical Corporation (NASDAQ: MAKO), which offers a robotic arm solution and orthopedic implants for which are used in orthopedic operations called MAKOplasty, and Zimmer Holdings Inc., (NYSE: ZMH), which manufactures orthopedic re-constructive, spinal and trauma devices, biologics, dental implants, and other related surgical devices. Many now believe that this tax will eat into medical device maker’s research and development funds. With less research and development, less innovative devices and methods will be produced, leading to slower growth in the sector. Despite this now evident fear, Intuitive Surgical Inc. (NASDAQ: ISRG) will not be shaken by this new tax on its sales. So why is Intuitive a perfect long-term growth story that will offer handsome returns over the years?

A Fundamental Change in the Way Procedures are Performed

No longer are procedures performed the way they were 100, 50, even 10 years ago. Robotic devices are being produced that increase the probability of a successful procedure, while at the same time making the procedure safer. These robotic devices also decrease the length of time it takes to recover from the procedure. Robotic procedures are now often referred to as “the new revolution” or as a “window into what the world will look like in the future.” Since 1921, when the term robot was originally coined by Karel Capek, robots have had an increasingly important role in the world. Now the difference between life and death is put in the hands of robotics. This fundamental change is simply because robots take away the human mistake factor, and are much more accurate. The utilization of robotics in the act of performing surgeries and operations is undeniably the future of the sector. The future will hold a world where every hospital will contain surgical robots, performing operations that range from cosmetic operations to operations that will make the decision between life and death.      

Explosive Growth

In 2010, Intuitive Surgical Inc.’s earnings per share were $9.47. In 2011, Intuitive Surgical Inc.’s earnings per share climbed to $12.32. That represents a 30.09% percent year over year growth rate in Intuitive Surgical Inc.’s earnings per share. In 2012, earnings per share are expected to climb 20.12% to $14.80. Based on the consensus, earnings per share in 2013 are expected to reach $17.30. This again represents extreme growth with the year over year growth rate reaching 16.89%. Realistically, I believe these estimates are significantly lower than where they should be. Intuitive Surgical Inc. possesses one of the highest growth rates in the industry and has plenty of room to run. Additionally, with a price to cash flow ratio of 29.84, compared to the industry average of 35.56, Intuitive Surgical may just be beginning its ascent to higher levels. Just take a look at this chart of Intuitive Surgical sales, operating profit, net income, net margin, and operating margin over the coming years.

The da Vinci Factor  

One’s of Intuitive’s most innovative products is the da Vinci surgical system. This surgical system is a huge leap into the future. Just listen to the capabilities and advantages of the da Vinci surgical system described in Intuitive Surgical Inc.’s 2011 annual report, “The da Vinci Surgical System enables surgeons to extend the benefits of MIS to many patients typically receiving open surgery by using computational, robotic and imaging technologies to overcome many of the limitations of conventional minimally invasive surgery. Surgeons operate while seated comfortably at a console viewing a high resolution, 3-D, HD image of the surgical field. This immersive visualization connects the surgeon to the surgical field and their instruments. While seated at the console, the surgeon manipulates instrument controls in a natural manner, similar to the way he or she has been trained to do in open surgery. Our technology is designed to provide surgeons with a range of motion in the surgical field analogous to the motions of a human wrist, while filtering out the tremor inherent in a surgeon’s hand.” The da Vinci system eliminates the factor of the human wrist trembling, and makes the operation safer and more precise. The da Vinci surgical system is one of Intuitive’s fastest growing products, growing 21% from 2010 to 2011. Watch the below video to learn more of da Vinci’s capabilities and advantages over classic surgery.

http://www.youtube.com/watch?v=eySp5YMmLuA

The Foolish Bottom Line

Intuitive Surgical Inc. may be expensive having a price to earnings ratio of 41.61, and may now face a tax upon their sales due to the upholding of the health care law, which could be challenged by the Republicans, but possesses some of the most innovative and ground-shaking devices in the sector. Additionally, Intuitive Surgical is growing at an incredible pace, making it very attractive to the long term growth investor. Despite the concerns around the company, Intuitive Surgical will continue to provide handsome returns to its investors, and is a company Obamacare’s tax on medical device makers cannot even break.

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