Intuitive Surgical (NYSE:ISRG), a developer of robotic surgical systems, is set to release its Q1 2013 earnings on April 18. We expect the surgical system maker to continue to exhibit double digit revenue growth on continued growth in surgical system sales, particularly in the U.S. and Japan. This, coupled with a better mix of systems and direct selling to customers, should drive revenue growth. Growth should also be supported by an expected increase in procedures performed through the system. Overall margins should remain stable. Below we take a detailed look at the trends during Q1.
Growing da Vinci Surgical Systems and Procedures
We expect incremental growth in da Vinci Surgical Systems (currently the total system base is around 2,500) mainly due to repeat business from existing customers in the U.S. In addition, Japan should continue to add more systems following strong marketing and sales efforts from the surgical system maker. During the last couple of months, it increased its sales force in the country in addition to opening two training centers in 2012.
The company is also aggressively seeking reimbursement approval for additional procedures. We expect these efforts to translate into a significant increase in the number of systems sold during the quarter. In Q4, the company sold 10 da Vinci systems in Japan,  significantly higher than the 5 systems it sold in the same period in 2011. Despite dwindling economic conditions, Europe may continue to surprise, in line with the Q4 earnings where it exhibited positive growth.
Prostatectomy (prostate surgery) procedures performed through the system should continue to decline after U.S. Preventive Services Task Force recommended against routine PSA screening (Prostate-Specific Antigen test to screen Prostate cancer) before being diagnosed as it did not benefit patients.  Also, fewer PSA tests are resulting in fewer prostate surgeries. However, the number of overall procedures should continue to increase as a strong uptake in other procedures like gynecological surgery and general surgery should more than offset the decline in prostatectomies. Further, hysterectomies (uterus surgery) should also continue to see steady growth.
Increasing Spending and Recurring Demand To Add To Growth
The company also sells instruments and accessories that facilitate the use of da Vinci Surgical Systems. Thus, demand for instruments and accessories is directly proportional to the existing base of da Vinci systems. While instrument and accessories revenue will increase due to a greater installed base, the key will be an expected increase in average instrument and accessories spend per installed unit. This could be attributable to the wider scope of procedures as well as a greater number of procedures performed as more use speeds up the replacement cycle. These instruments and accessories have a limited life and need to be replaced periodically.
What Are We Watching?
We, however, will be closely watching the earnings to see management’s detailed views on some concerns. A recent comprehensive study by Columbia University suggested that surgery through the system costs significantly more than the standard minimally invasive procedure, and without any major benefits. Further, the da Vinci system has seen a significant increase in adverse event reports, including incidences of deaths and injuries. This, coupled with the news that the FDA is asking surgeons at major hospitals to list complications witnessed with the surgical system, triggered selling in the stock as investors feared a potential backlash from the FDA.
Adding to the selling pressure was an adverse comment from the American Congress of Obstetricians and Gynecologists, stating that robotic surgery for hysterectomies doesn’t improve outcomes and it should not be the first choice of procedure.
These events present downside risks to our $600 price estimate for Intuitive Surgical, which is about a 25% premium to the current market price. While the management signaled its confidence in the company through an increase in its buyback program, the move has failed to boost the stock to its previous highs.Notes: