Intuitive Surgical (NYSE:ISRG) has been one of the success stories of the decade in the medtech industry with its sales growing 1500% and stock appreciating more than 3000% in the last 10 years. However, the company has faced significant headwinds in the past year owing to concerns over efficiency and cost effectiveness of its flagship da Vinci surgical robot, which costs up to $2.3 million per unit.
Intuitive Surgical’s performance has been majorly impacted due to declining da Vinci sales in its U.S. This may be attributable to a critical report by Columbia University last year which questioned the benefits of da Vinci surgery over traditional surgery in hysterectomy procedures. Since hysterectomy procedures account for about 30% of all surgeries performed using the da Vinci system in the U.S., sales were significantly impacted. There were several other reports that questioned da Vinci surgeries over cost effectiveness, which brought in a lot of negative publicity to the company. Uncertainty still clouds the company’s near future, on account of: 1) concerns over safety and efficacy of its da Vinci system; 2) charges of under-reporting of adverse events by the company; and, 3) implications of the Affordable Care Act. Although Intuitive Surgical’s stock has recovered since a 30% decline earlier in the year, it is still down 15% from its high.
We currently have a price estimate of $455 for Intuitive Surgical, which is about 5% ahead of the market price.
Concerns In the U.S. Likely To Remain
Concerns over efficacy and cost effectiveness of the da Vinci system first surfaced in February last year. Researchers at Columbia University showed that hysterectomies performed through the da Vinci system cost a significant $2,189 more per procedure than laparoscopic hysterectomies, even though the rate of complications and length of stay were not significantly different than the latter. 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. 
In addition to efficacy concerns, there is uncertainty regarding the Affordable Care Act and how it is going to impact hospital spending. As a result, many hospitals have put off their plans to buy da Vinci surgical systems for the time being. This was reflected in da Vinci unit sales in the U.S., which declined by about 30% year-over-year to 342 units in 2013. It is likely that these concerns will continue in the near term unless a major study can comprehensively prove that the benefits of da Vinci outweigh its concerns.
International Sales Could Partially Offset Sluggish U.S. Performance
Intuitive Surgical has improved its international presence in recent years with international revenue accounting for 28% of total sales in 2013, up from 21% in the prior year, driven by over 40% increase in da Vinci unit sales. Procedures increased 23% to over 100,000 in the international market, led by urology, general surgery and da Vinci Prostatectomy (dVP) volumes. We expect sales to increase further going forward as the company consolidates its presence in developed markets such as Europe, Japan and Australia and taps new markets such as South Korea, China and India. Growth in gynecological and general surgery procedures and the addition of other cardiac and thoracoscopic procedures should also help improve sales in the long term.
Growth in the number of procedures helps the company improve sales as more procedures require more instruments, which results in a shorter replacement cycle. This leads to higher sales of instruments and accessories which correspondingly also increases service revenues. Therefore, even if Intuitive Surgical is unable to rapidly improve doubts on the efficacy of hysterectomy use, its revenues can still increase with the rise in the number of these new procedures.
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. Reducing the cost of its da Vinci system, as well as instruments such as Single-Site, Vessel Sealer (Stapler) and Firefly could further help the company in improving procedure growth in international markets in the future.Notes:
- Robot Surgery Isn’t First Choice for Uterus Removals, Bloomberg, March 16 2013 [↩]