Intuitive Surgical Continues To Disappoint In Q3

Intuitive Surgical (NASDAQ:ISRG) had another disappointing quarter in Q3 2013 as its total revenue declined by 7% year-on-year, primarily due to a 32% drop in surgical system sales. The company’s future also looks bleak as it revised its growth projections for the full year 2013 from 0%-7% in the previous quarter to just 0%-3.5%. ^[1] Intuitive’s revenues have remained under pressure this year due to ongoing concerns about the effectiveness of its flagship product, the da Vinci surgical system, in hysterectomy procedures.

We expect revenue growth to remain muted in the short term until all the concerns about da Vinci systems are addressed. Our current price estimate for its stock is $442, almost 15% above the current market price. We are in the process of updating our forecasts in light of these earnings.

See our full analysis for Intuitive Surgical

Concerns Weighing On System Sales, Procedures

The company’s third quarter operating income declined by more than 17% year-over-year to $174 million, while net income declined 14% to $157 million.  This was largely related to the decline in system sales, and exacerbated by slowing growth in procedures – gynecology growth slowed during the quarter and urologic procedures were about flat.  While some of this can be attributed to pressures on the healthcare industry as a whole, it is also likely related to the growing number of concerns regarding the efficacy of the company’s surgical systems.

Intuitive Surgical’s da Vinci surgical systems provide an alternative open surgeries by allowing surgeons to perform minimally invasive procedures using robotic arms. The company has been has been marketing these systems mainly on the premise of lower costs. However, several concerns about the efficacy of these systems have surfaced in the past few quarters and have caused sales to decline. First, a comprehensive study conducted by Columbia University earlier this year suggested that surgeries performed using this system may actually cost significantly more than standard minimally invasive procedures, and without any major benefits. According to the study, using da Vinci costs a significant $2,189 more per procedure over laparoscopic hysterectomies; despite the cost difference, the rate of complications and length of stay were similar in both procedures. ^[2] The American Congress of Obstetricians and Gynecologists also echoed these research findings, and has questioned the lack of clinical data to demonstrate the efficacy of robotic hysterectomies over cheaper laparoscopic procedures. ^[3]

Since the study became public, Intuitive Surgical has been seeing a decline in hysterectomies being performed through its systems. Health insurers are seemingly reluctant to approve hysterectomy procedures performed with the systems. Since U.S. hysterectomies constitute nearly 30% of total procedures for da Vinci (~150,000 hysterectomies vs. ~450,000 total procedures in 2012), concerns have affected sales of the da Vinci system in the U.S. Continued procedure growth is required to make the system financially viable for hospitals as the average initial cost of the system is relatively high (ranges from $1 million to $2.3 million per system).

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1. Q3 Earnings Call Transcript, SeekingAlpha, October 17, 2013 [↩]
2. Robotically Assisted vs Laparoscopic Hysterectomy Among Women With Benign Gynecologic Disease, JAMA, Feb 20 2013 [↩]
3. Robot Surgery Isn’t First Choice for Uterus Removals, Bloomberg, March 16 2013 [↩]