Intuitive Surgical’s (NASDAQ:ISRG) Q4 results released on January 23 were consistent with the preliminary financial results released by the company last week. Total revenue for the fourth quarter was $576 million, down 5% year-over-year (y-o-y), but up 15% sequentially. This is about 5% higher than consensus estimates compiled by Thomson Reuters for the company. While sales of its da Vinci systems declined in the fourth quarter by 23% y-o-y to $205 million, Instruments and Accessories revenues increased 6% from the prior-year quarter to $268 million. The Instruments and Accessories sales growth is attributed to an increase in the number of procedures and sales of new products such as Single-Site and Firefly, partially offset by lower da Vinci system sales. Procedures increased about 12% in the fourth quarter, compared to the corresponding quarter last year, led by general surgery in the U.S. and international urology procedures. ((Q4 Earnings Call Transcript, SeekingAlpha, Jan 23, 2014))
The earnings release confirmed Intuitive Surgical’s expected $2.27 billion revenue for 2013, up 4% from 2012. Although sales in the U.S. declined 6% y-o-y, that was offset by strong sales in Japan and Europe. The da Vinci system maker expects implementation of the Affordable Care Act and moderating growth of gynecologic surgery in the U.S. to continue to impact its domestic sales in 2014. However, we expect the company to benefit from growth in procedures, in the U.S.as well as the international market, and growing acceptance of its new products.
We have updated our price estimate for Intuitive Surgical’s stock to $454, which is about 10% ahead of the current market price. The updates are largely in accordance with the earnings release, with a slight increase in our units sold forecast, lower capex estimates and a slightly lower near-term income tax rate.
Strong International Performance Offsets da Vinci Sales Decline In U.S.
Intuitive Surgical’s revenue in the international market grew about 50% in the fourth quarter y-o-y. This was driven by growth in all its divisions- Instruments and Accessories, da Vinci systems and Service. However, its revenue in the U.S. declined by over 20% in Q4 2013, compared to Q4 2012 because of a 57% decline in da Vinci system revenues. In Q4 2013, Intuitive Surgical sold just 138 da Vinci Surgical system units, compared to 175 in the corresponding quarter last year. This is a result of an almost 50% decline in unit sales in the U.S., from 133 in Q4 2012 to 72 in Q4 2013, compared to 20% growth in the international market in the same period. The lower U.S. sales were primarily a result of a decline in Urology procedures and moderating growth in benign gynecology procedures. The Affordable Care Act in the U.S. also changed institutional capital-spending priorities, resulting in hospitals putting off purchases of da Vinci systems, which cost over $1.5 million each. International sales grew on the back of increasing da Vinci system sales in Europe and Japan. Procedures increased 23% in the international market, led by urology, general surgery and da Vinci Prostatectomy (dVP) volumes.
Several research findings released in 2013 questioned the benefits and cost effectiveness of Intuitive Surgical’s da Vinci systems. The American Congress of Obstetricians and Gynecologists also echoed these research findings, and questioned the lack of clinical data to demonstrate the efficacy of robotic hysterectomies over cheaper laparoscopic procedures.  Without the negative publicity and concerns surrounding da Vinci systems, Intuitive could have seen much better growth in its sales performance, both domestically and in the international market.
Rise In da Vinci Procedures To Drive Revenue Growth In 2014
Intuitive Surgical’s revenues come not only from selling its robotic systems, but also from Instruments and Accessories used in surgical procedures. A greater number of procedures generally means a greater number of instruments, as well as a shorter replacement cycle. Therefore, the number of procedures directly impacts the company’s revenue. Procedures grew 12% in the fourth quarter y-o-y and 8% sequentially, on the back of growth in the U.S. as well as international market. In the U.S., procedures increased because of growing use of the da Vinci robotic systems among different specialties within general surgery, including cholecystectomy and colorectal resections. International procedures increased 23% y-o-y due to growth in urology, general surgery and dVP, especially in Japan and Europe.
For the full year 2013, procedures grew 16% y-o-y because of growing use of da Vinci systems in general surgery in all markets. U.S. general surgery procedures increased 93% in 2013 over 2012 on the back of increased use of da Vinci systems among specialties within general surgery and use of new products like Single-Site, Vessel Sealer (Stapler) and Firefly. Single-Site surgery provides a low cost alternative for procedures involving minimally invasive techniques. The da Vinci Stapler is an improved instrument for precise positioning and stapling around vital structures as its stable tip minimizes the tremor associated with regular handheld staplers.
We expect procedures to increase going forward as the company focuses on promoting the use of da Vinci systems in gynecology and urology procedures worldwide. A focus on rolling out the low cost Single-Site kit of instruments and accessories for hysterectomy and expansion of the da Vinci Stapler in the U.S. could also positively impact procedure volumes for the company in the new year. Notes:
- Robot Surgery Isn’t First Choice for Uterus Removals, Bloomberg, March 16 2013 [↩]
- Q4 Earnings Call Transcript, SeekingAlpha, Jan 23, 2014 [↩]