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Investor confidence in Intuitive Surgical strong despite leadership shuffle – analyst

By Poornima Weerasekara | 7 Feb 2010

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Sunnyvale, Calif. – Institutional investors and mutual funds snapped up Intuitive Surgical Inc. (Nasdaq: ISRG) stocks as prices shot up to an all time high of $346.29 last week, following strong ‘09  performance and despite a recent shuffle in leadership.

Last October, the company announced that its President and Chief Operating Officer Gary Guthart would assume the job of chief executive effective Jan. 1, 2010.”This announcement is the result of a succession plan that has been in process for the past several years,” the company said in a statement at the time. SEC filings on Jan. 1 note that the former CEO Lonnie Smith would assume a part-time position as the Chairman of the Board of Directors.

According to Deutsche bank medical equipment market analyst Tao Levy, “institutional investors earlier adopted a wait and watch strategy on Intuitive stocks, due to the recent change in leadership. But now they have gone back to a full throttle buying mode after its strong ‘09 performance.”

Intuitive Surgical Inc, a maker of robotic surgical products, posted a 53 percent increase in fourth quarter net profits reporting $77.6 million, or $1.95 per share, from $50.8 million, or $1.27 per share, a year ago. That performance exceeded analysts’ consensus expectations by 24 cents a share, according to Thomson Reuters I/B/E/S. According to financial results announced on Jan. 21, the year-end revenue for 2009 increased by 20 percent to just over $1 billion from $875 million in 2008.

“The medical equipment subsector is also one of the few areas that have remained buoyant despite the recession. It is expected to grow at a moderate pace in 2010,” Levy said at the Deutche Bank 2010 Small and Mid Cap Conference in Naples, Florida that concluded on Feb 10.

According to SEC filings, three institutional investors have upped their stakes in the company since Jan. 21, when 2009 financial results were announced.

Marsico Capital Management LLC increased its stake in Intuitive to 5.2 percent from 2.8 percent on Feb 11. On the same day, Price T. Rowe Associates Inc., the largest institutional investor in the company with a 7.9 percent stake increased its holdings to 8.5 percent. On Jan. 29, Blackrock Inc. increased its stake in the company to 8.2 percent from 6 percent.

“Institutional investors and mutual funds hold 84 percent of Intuitive shares,” said Ben Gong, the company’s VP of Finance adding that the company planned to push more aggressively into international markets in the coming year. “Strong investor confidence is an approval of our growth strategy,” he said.

Gong also said that Guthart, the company’s new CEO was keen on expanding the types of procedures conducted by Intuitive’s da Vinci surgical platform.

Guthart 43 was part of the core team that developed the foundation technology for computer enhanced-surgery at SRI International (formerly known as the Stanford Research Institute). He joined Intuitive Surgical in April 1996 and became the Vice President of Engineering in November 1999. He was promoted to Senior Vice President for Product Operations in 2002 and President and Chief Operating Officer in 2006.

According to Gong, the new CEO aims to reduce the cost per surgery while promoting the da Vinci system as the standard of care for a wide variety of minimally invasive procedures. “This gives more hospitals an incentive to install the da Vinci surgical platform and would also increase the number of surgeons who adopt the system, making robotic surgery widely available for more patients,” he said.

The company’s SEC filings in March 2009 show that. Gurthart’s annual base salary rose by 4.9 percent to $ 430,000 from $ 410,000 in the previous year.

However a larger component of his benefits package include stock options.  The company’s latest proxy statement valued Gurthart’s stock options at over $12 million. Gurthart also is expected to receive an annual bonus, 60 percent of this base salary, according to the company’s executive compensation committee report.

According to Intuitive’s Compensation Committee Chairman Keith Grossman the company reviews its executive compensation program in connection with the annual performance review process, which concludes in May each year. Any changes to compensation would be proposed by July 1.

According to the company’s compensation committee report, included in the company’s 2008 annual report, performance goals for the CEO and the Vice Presidents comprised of procedural growth, system sales growth and revenue growth, and goals related to fixed costs, marketing objectives, customer training effectiveness, product development, regulatory approvals and compliance. It also sets the base amount for granting bonuses at achieving 80 percent of the targets specified for each individual. According to the report in 2008 the management team at Intuitive achieved 125 percent of the established goals.

Equilar, an executive compensation research firm based in Redwood Shores, Calif., estimates that the overall compensation package for Intuitive’s executives  is likely to go up,  given the company’s strong 2009 performance.

Equilar spokesperson Alexander Cwirko-Godycki noted that Intuitive’s competitor Medtronic, Inc., a Minneapolis based medical equipment manufacturer increased the compensation of its CEO William Hawkins by 60 percent to $7.5 million in 2008 from $4.6 million.

He also noted that Varian Medical Systems, Inc., a competing medical device manufacturer in the Silicon Valley paid its CEO Timothy E. Guertin an annual base salary of $773,00 with $6 million worth of stock options.

“Intuitive surgical is currently on the top 5 percent in terms of overall executive compensation in the medical equipment sub-sector. However, their reward system heavily relies on stock options. This strongly links executive rewards to the long-term performance of the company,” Cwirko-Godycki said.

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