Surgical renaissance

Bringing a bright idea to fruition, for US$6.70 a share

You’re strapped on a hospital gurney and wheeled towards the pungent and incessantly beeping operating room.

The anesthesiologist gets ready to do his magic, remarking to you that it’s about time you got the old ticker fixed. After a short while you feel yourself floating up into the air. And then you look down.

What you see doesn’t look like any normal operating room to you. In fact, you’re pretty alarmed to see robotic arms maneuvering inside your body. And there’s no doctor in sight. That is, until you see him comfortably seated… six feet away from you. He’s behind what looks to be a giant virtual reality video monitor.

Actually, he’s performing a CABG (coronary artery bypass graft) on your heart. How’s he doing this without even touching your body? By using the product of a blindingly inventive new company.

A stroke of genius

Intuitive Surgical (ISRG:NASDAQ) is the market leader in surgical robotics and has developed the  da Vinci Surgical System, still the only surgical robot cleared by the Food and Drug Administration for sale within the United States.

The da Vinci Surgical System is the first totally intuitive laparoscopic surgical robot. It has received FDA clearance for many surgical procedures, including general laparoscopic surgery, thoracoscopic (chest) surgery and laparoscopic radical prostatectomies.

The da Vinci system has a bit of a complicated setup, but once you see it, everything becomes clear. The system consists of a surgeon console, patient-side cart, instruments and image processing equipment.

The surgeon operates while seated comfortably at a console viewing a 3-D image of the surgical field. The surgeon’s fingers grasp the master controls below the display with wrists naturally positioned relative to his or her eyes.

The technology seamlessly translates the surgeon’s movements at the controls into precise, real-time movements of the surgical instruments inside the patient.

The patient-side cart provides two robotic arms and one endoscope arm that execute the surgeon’s commands. The arms pivot at the 1-cm operating port, eliminating the use of the patient’s body wall for leverage and so minimizing tissue and nerve damage.

Can ISRG back it up?

You bet. It may seem like

this idea is too far-fetched to have any serious financial

backing, but ISRG will surprise you.

Sales for the year ended December 31, 2002, were $72.0 million, up 39% from $51.7 million for the year ended December 31, 2001. Sales growth was driven by higher da Vinci Surgical System placements and increased revenue.

ISRG shipped 14 da Vinci Surgical Systems during the third quarter of 2002, compared to 10 in the third quarter of 2001. Total system revenue for the year ended December 31, 2002, was $56.9 million, compared to $44.7 million in the year ended December 31, 2001.

ISRG did run into some trouble early in their existence. In 2000, shortly after their IPO, ISRG was sued by a similar company for patent infringement.

After several years of bickering back and forth, ISRG has now made enough money that they are soon slated to buy out the rival company in a US$63 million deal.

With the people largely refusing to take care of their bodies, expect the number of critical surgeries to increase. And expect ISRG to increase in value at the same time.

Buy ISRG around US$6.20. n

Profit update on our Chinese Dragon plays

China Petroleum & Chemical Corp. (SNP:NYSE) was added to Taipan’s portfolio in January 2002 with a sell target of US$20. In March 2003 that target was met. But for those who missed the sell target, you had the chance to sell again on April 30, 2003. That’s a 48% profit!

SNP reported an increase in its first-quarter 2003 profit due to surging oil prices and strong demand for its petroleum products.

Of course, China has been getting a lot of bad

press lately. Does this mean we should liquidate all

the Chinese holdings in our portfolio? Absolutely not. Despite the SARS outbreak, exports and manufacturing remain strong. After a pullback on its earnings announcement and the SARS scare, China Yuchai International Limited (CYD:NYSE) is rebounding.

But there are a couple of rumors circling around China Yuchai. First, Guangxi Yuchai Machinery Holdings Company has yet to pay past dividends to its parent company, China Yuchai. But the company has already paid its minority shareholders. So it looks like Guangxi Yuchai and China Yuchai’s management are butting heads.

Second, there’s speculation that there may be a problem with the company’s listing filing in China, and that the Chinese government will delist the company because of it. We saw a selloff in the stock. But it’s been recovering since then, a positive sign.

We already knew about the dividends dispute from the earnings release. But I’m confident that management will come to a compromise. As for the delisting rumor, I find it hard to believe that there will not be some kind of compromise there also.

We saw a similar pattern last year when the stock ran up in November and pulled back the following month before continuing its run. The company is in a growing market and the stock will continue to grab market attention.

Hold China Yuchai for more profits. But in case the parties are unable to compromise, I want you to still be able to lock in profits, so maintain a 20% trailing stop. We’re currently up 39% •