Illumini, Intuitive: This Healthcare Outperformance Brought to You by the Letter 'I'

Last night was a good one for health care companies whose name start with the letter 'I'. Both remain very 'rich' in valuation.  A quick review of each:

Illumina (ILMN)

• Genetic analysis company Illumina Inc. said Tuesday its second-quarter profit rose 66 percent on a surge in product sales, prompting the company to boost its third-quarter and full-year outlooks.
• The company earned $15.4 million, or 23 cents per share, compared with profit of $9.3 million, or 16 cents per share, during the corresponding period a year prior. The per-share results reflect a 5.5 percent increase in the number of outstanding shares in the 2008 quarter. Excluding stock compensation expenses, a manufacturing equipment write-off and other charges, the company said it earned 44 cents per share.
• Revenue rose 66 percent to $140.2 million from $84.5 million last year.
• The majority of the company's revenue came from product sales, accounting for $128.6 million, while service and other lines contributed $11.6 million.
• Looking ahead, the company said it expects third-quarter profit between 42 cents and 45 cents per share, on revenue between $142 million and $147 million. Analysts forecast third-quarter profit of 31 cents per share on revenue of $136.7 million.
• For the full year, Illumina expects profit between $1.65 and $1.75 per share on revenue between $550 million and $560 million, while analysts expect $1.21 per share on revenue of $535.5 million.

Huge increase in guidance versus analysts expectations, but the stock has priced much of this in; full earnings release here. (Conference call transcript here.)

Intuitive Surgical (ISRG)

• Intuitive Surgical Inc. on Tuesday said its second-quarter profit jumped 66 percent as sales of its surgical robotics soared. (Conference call transcript.)
• For the three months ended June 30, the company reported net income of $51.2 million, or $1.28 per share, compared with $30.7 million, or 79 cents per share, in the corresponding period a year earlier.
• Revenue climbed 56 percent, to $219.2 million from $140.2 million.
• Analysts polled by Thomson Financial, on average, expected profit of $1.18 per share on revenue of $208.6 million.
• Intuitive Surgical said its revenue growth was driven by wider adoption of robotic procedures, and higher sales of both instruments and accessories and its da Vinci Surgical System. Product sales rose 58 percent to $189.8 million, while service and training revenue jumped 44 percent to $29.4 million.

This company has that excellent razor-and-blade model, and in the end the blade will be the real winner - it's starting to really show. Full earnings release here.

This is the conundrum that is investing in this sector - the few companies with true growth, and without FDA risk (unlike drug companies), are priced at stratospheric levels. So one must either ignore traditional valuation measures, or not own them at all. At least with overachieving results like this, they get a bit less expensive.

Disclosure: Long Illumina in fund; no personal position

Comments

[User 38311]

A Fundamental Upclose Perspective:
My wife is a surgical nurse who assists ISRG's surgical robot on a regular basis. She loves this medical device and the results for her patients. She also loves the company's reps for their high level of medical expertise and technical support all tied together with excellent training.
She owns the stock as a direct result of her contact with the company.
In attending Operating Room Nurse's conventions, I've surveyed many nurses from around the country, assuming that the price tag of approx. $1.5 million would make these devices a rarity. Not so! It turns out that any hospital of any significance has one or MORE of these devices. A hospital status symbol and more!
I expressed concern to my wife that hospitals may purchase fewer of this units during the current economic credit situation. She reminded me that these sales are global in scope. She also said that the level of sales for maintenance, training and individual surgical renewable items would cause a steady cash flow to ISRG.

[TraderMark]

Hi User,

The "renewables" are the blade part of the model. The machines are the razors. In the long run the beauty of the business model will be the reoccuring revenue from many a blade.

There was some scuttebutt last quarter about the economic slowdown hurting hospitals ability to finance the purchases but it appears this was overblown - but it was one cause of the pressure in the stock the last 90 days.

Very unique company - that is for sure.