Analyst: Victor Sula, Ph.D.

Initial Report
February 19th, 2009

02/18/09
ISRG daily
150

140

130

120

110

100
Intuitive Surgical, Inc.
1266 Kifer Road, Building 101 90

Sunnyvale, CA 94086-5304 volume © BigCharts.com

10

Phone: 408-523-2100

Millions
Fax: 408-523-1390 5

Website: www.intuitivesurgical.com
0
Dec 09 Feb

MARKET DATA

Share Statistics NASDAQ 2007 2008 %Chg

(12/23/08)
Symbol ISRG Revenues, $ Mn. 600.8 874.9 46%
Current price $112.09 Gross margin 69.9% 71.0% 2.0 b.p.
Low/ High 52 weeks $87.14-357.98 Operating margin 34.4% 35.5% 1.1 b.p.
Average Volume 1,741,926 Net margin 24.0% 23.3% -0.7 b.p.
Market Capitalization $4,397 Mn
Shares Outstanding 39.19 Mn EPS, $ 3.70 5.12 28.4%

Source: Reuters.com, SEC Filings.

Background
Intuitive Surgical Inc. is a global technology leader in robotic-assisted mini-
mally invasive surgery (MIS). Together with its subsidiaries, the Company en-
gages in the design, manufacture and marketing of da Vinci surgical systems
for use in cardiothoracic, urologic, gynecologic and general surgeries. The da
Vinci Surgical System allows surgery to be performed remotely, using robotic
manipulators. ISRG also manufactures various EndoWrist instruments, in-
cluding forceps, scissors, electrocautery and scalpels. In 2008, the Company
launched the EndoWrist Grasping Retractor, a multi-functional 8-millimeter
instrument to facilitate soft tissue management. In addition, ISRG sells vari-
ous accessory products, including sterile drapes used to protect the sterile
field during surgery; and vision products, such as replacement 3D stereo en-
doscopes, light guides, camera heads and other miscellaneous items.

The original prototype for ISRG’s da Vinci System was developed in the late
1980s at the former Stanford Research Institute under a contract to the U.S.

Intuitive Surgical Inc. (NASDAQ: ISRG) 1

 Analyst: Victor Sula, Ph.D.
Initial Report
February 19th, 2009

Army. In 1999, the Company launched the da Vinci Surgical System, and in 2000, it became the first robotic
surgical system cleared by the FDA for general laparoscopic surgery. The da Vinci Surgical System consists of a
surgeon’s console, a patient-side cart, a high-performance vision system, proprietary “wristed” instruments and
surgical accessories. The system translates the surgeon’s natural hand movements on instrument controls at the
console into corresponding micro-movements of instruments positioned inside the patient through small punc-
ture incisions, or ports. The da Vinci system includes a 3D endoscope with two separate vision channels linked
to two separate color monitors, along with high resolution video cameras and specialized edge enhancement
and noise reduction equipment.

As of December 31, 2008, the Company had an installed base of 1,111 da Vinci Surgical Systems. During 2008,
surgeons around the world using ISRG’s technology had successfully completed approximately 136,000 surgical
procedures, up approximately 60% from 2007. The Company sells its products through sales representatives and
distributors in North America, South America, Europe, the Middle East, Australia and Asia. It was ranked No.
4 in Fortune’s 100 Fastest Growing Companies, 2007. The Company was founded in 1995 and is headquartered
in Sunnyvale, Calif.

Highlights

Impressive revenue growth to continue despite the challenging economic environment

ISRG’s revenue increased by 46%, 61% and 64% during the years ended December 31, 2008, 2007 and 2006, re-
spectively, driven by strong demand for the da Vinci System and an increase in procedures performed. In the last
five years the revenue’s CAGR neared 57%.

Since its first da Vinci System shipment in 1999, the Company has expanded its installed base to more than 1,000
academic and community hospital sites. As of As of December 31, 2008, the Company had an installed base of
1,111 da Vinci Surgical Systems compared with 800 systems at the end of 2007 and 560 at the end of 2006.

Revenue, $ Mn

Source: SEC filings; Company estimates; Reuters.com.

Intuitive
Intuitive Surgical
Surgical Inc.
Inc. (NASDAQ:
(NASDAQ: ISRG)
ISRG) 22
 Analyst: Victor Sula, Ph.D.
Initial Report
February 19th, 2009

Despite the cutbacks in hospital spending due to economic downturn, the Company expects its revenue to in-
crease by 15% in 2009, being sustained by increased procedures, which are expected to grow 35% to 40% this year,
and which in turn will generate recurring revenue comprised of instrument, accessory and service sales.

Solid gross margins due to economy of scale and continues cost reductions programs

In 2008, the gross margin rose to 71.0% compared to 69.0% in 2007 and 66.5% in 2006. The margins improvement
is driven by the continued adoption of da Vinci surgery, as well as instrument and system material cost reductions
and leveraging manufacturing costs across higher production volumes. In addition, the increasing established
systems contribute to leveraging service costs across a larger base of installed systems and lower service parts
consumption and repair costs per system. For 2009 ISRG plans to maintain the margin in the 70%-71% range.
Gross Margin, %

Source: SEC filings.

$902 million in Cash and Investments and no Debt

As of December 31, 2008, the Company’s cash and investments increased to $901.9 million from $635.4 million at
December 31, 2007. ISRG’s principal source of liquidity is cash provided by operations and the exercise of stock
options. The Company invested significant amounts in high quality, fixed income securities such as US Treasury
and U.S. government agency securities, taxable and/or tax exempt municipal notes, corporate notes and bonds,
commercial paper and money market funds.

Selected consolidated balance sheet data, $ Mn

31-Dec-07 31-Dec-08

Total Assets, including 1,040 1,474

Cash and short term investments 427.5 451.4
Long term investments 207.9 450.5
Liabilities, including 151.3 207.9
Debt 0.0 0.0
Equity 888.7 1,266

Source: SEC Filings; year-ending December, 31.

Intuitive Surgical Inc. (NASDAQ: ISRG) 3

 Analyst: Victor Sula, Ph.D.
Initial Report
February
January 15th,
19th, 2009

During the last several years, the Company has financed its activities from cash generated from operations re-
ported has no debt.

A new version of da Vinci system to sustain the growth track

In January 2006, the Company introduced the da Vinci S Surgical System, which shares some of the same core
technology as the standard da Vinci Surgical System; the system integrates the world’s first 3D HD vision, pro-
viding 20% more viewing area, and state-of-the-art robotic technology to virtually extend the surgeon’s eyes and
hands into the surgical field. In addition, the da Vinci S Surgical System features a motorized patient cart for easy
setup and docking. A single fiber optic cable connects the patient cart to the surgeon’s console. The robotic arms
have greater range of motion and the EndoWrist instruments are 2 inches longer, which together facilitate multi-
quadrant access and enable surgeons to perform more procedures through 1 cm-2 cm incisions. A programmed
memory chip inside each EndoWrist instrument performs several functions that help in determining how the
system and instruments work together. The da Vinci S Surgical System enables surgeons to perform nearly 100
different types of surgical procedures. The new system is also designed to allow surgeons to import and view a
variety of video images without leaving the surgeon’s console.

Strong intellectual property portfolio

As of December 31, 2008, ISRG held exclusive field-of-use, as well as non-exclusive licenses for more than 260
U.S. patents and more than 165 foreign patents and owned outright U.S. patents and more than 60 foreign
patents. Moreover, the FDA has approved ISRG’s systems for laparoscopic, prostatectomic and thoracoscopic
surgeries, cardiac procedures performed with adjunctive incisions, revascularization, pediatric, urologic and
gynecologic procedures and others. The Company’s research and development expenses were approximately
$79.4 million in fiscal 2008, $48.9 million in fiscal 2007 and $29.8 million in fiscal 2006.

In addition to developing its own proprietary technologies, the Company has established relationships with
several industry leaders including IBM Corporation, Massachusetts Institute of Technology (MIT) and Heartport
Inc. (Johnson & Johnson). The Company has also entered into industry collaborations with companies including
Ethicon Endo-Surgery (Johnson & Johnson), Medtronic and Olympus Optical.

Favorable long-term outlook for medical devices market

The market for healthcare products and services, including the medical device segment, has exhibited strong
growth recently, driven by increasing demand for health-
care worldwide. The growth in the medical device sector
has averaged between 8% and 9% over the past four years,
and is projected at 7.2% per year over the next four years,
with the global market exceeding $330 billion in 2008.

Many hospitals are delaying expansion plans, putting

new equipment purchases on hold, blaming an ongoing
financial crisis. A survey of 639 hospitals released in Janu-
ary 2009, indicates that as a result of the economic crunch,
45% of hospitals have postponed upcoming improvement
projects and 13% have halted expansions already under-
way. However in the mid- and long-term perspective, the

Intuitive Surgical Inc. (NASDAQ: ISRG) 4

 Analyst: Victor Sula, Ph.D.
Initial Report
February 19th, 2009

medical device market is expected to continue its growth, reflecting aging populations and the greater physician
need for better and more precise devices.

Investment sentiment
ISRG is the global leader in the rapidly emerging field of robotic-assisted surgery. The Company’s da Vinci Surgi-
cal System offers surgeons superior 3D HD visualization, enhanced dexterity, greater precision and ergonomic
comfort for the optimal performance of MIS. Today, more than 1,100 da Vinci Systems are installed in hospitals
worldwide. Despite the da Vinci Surgical System’s cost of $1 million-$1.5 million, it is still prohibitive to small ru-
ral hospitals, and the demand for the Company’s products is continuously increasing. In addition, ISRG is work-
ing diligently to reduce cost and make the da Vinci Surgical System more widely available.

In 2008 surgeons around the world completed 136,000 surgical procedures, up approximately 60% from 2007. The
Company’s revenue for the year ending December 31, 2008, totaled $874.9 million, increasing 46% from $600.8
million for the year ending December 31, 2007. Procedures are expected to grow 35% to 40% in 2009, which will
increase sales of disposable instruments and accessories by 25% to 30%. Overall, ISRG estimates its revenue will
increase 15% in 2009 being conscious of current economic conditions.

The Company has no long-term debt or short-term debt, and maintains a balance sheet with hundreds of millions
of dollars on hand. ISRG has also maintained 65+ % gross margins and 20+ % profit margins during last years.

Since September 2008, ISRG stock price has declined from nearly $300 to $110 in February 2009, mainly due
to downgrades, disappointing management outlook, falling energy prices, concerns about consumer spending
and hospital budgets in a tough economy, etc. But fundamentally, ISRG represents a robust business with solid
offering, strong visibility and recognition within the industry, growing revenues and operating cash flows, and
exceptional long-term potential.

Comparative analysis
P/E P/S
Price Mrkt.
Company Name Ticker per Cap.
17.02.09 symbol Share, $ $ Mn 2008 2009 2008 2009
Johnson & Johnson JNJ 57.10 160,314 12.69 11.80 2.58 2.49
Siemens AG SI 59.20 51,729 n/m n/m 0.53 0.51
Medtronic Inc. MDT 31.75 36,677 10.91 9.92 2.51 2.40
American Medical Systems Holdings Inc. AMMD 10.79 776.9 16.10 14.20 1.56 1.50
Hologic Inc. HOLX 14.45 18,487 12.79 11.20 11.18 10.28
Baxter International Inc. BAX 58.74 36,695 15.71 13.85 2.96 2.76
Hitachi Ltd. HIT 28.64 9,689 n/m n/m 0.08 0.09

Median 12.79 11.80 2.51 2.40

Intuitive Surgical Inc. ISRG 112.09 4,397 21.56 17.76 4.54 3.87

The Company is traded with premium to peer group P/S and P/E multiples, but the premium trading is fully
warranted. Moreover, we believe there is a strong upside potential; therefore we rate ISRG as a Speculative Buy.

Intuitive Surgical Inc. (NASDAQ: ISRG) 5

 Analyst: Victor Sula, Ph.D.
Initial Report
February 19th, 2009

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I, Victor Sula, Ph.D, the author of this report, certify that the material and views presented herein represent my personal opinion regarding the content and
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this report.

Victor Sula, Ph.D. - Senior Analyst

Victor Sula, Ph.D. has held the position of Senior Analyst with several independent investment research firms since 2004. Prior to 2004, Mr. Sula held Senior
Financial Consultant positions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Produc-
tivity and Competitiveness of Moldova, where he was involved in corporate reorganization and liquidation. He is also employed as Associate Professor at the
Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D. degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic
Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.

Intuitive Surgical Inc. (NASDAQ: ISRG) 6