Intuitive Surgical: Concerns Remain But Expansion Into Emerging Markets Could Revive Growth

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ISRG: Intuitive Surgical logo
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Intuitive Surgical

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. This was reflected in its Q2 2014 financial report where it reported an 11% year-over-year (y-o-y) decline in revenues and a 35% drop in net income. In this article, we discuss the key factors impacting the company’s performance and also highlight some opportunities which could drive growth in the near term.

We currently have a price estimate of $455 for Intuitive Surgical, which is in line with the market price.

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Cost and Safety Concerns

Intuitive Surgical’s recent performance has been negatively impacted by a number of factors such as concerns over the efficacy and cost effectiveness of its da Vinci systems, changed institutional capital-spending priorities because of the Affordable Care Act in the U.S., and negative publicity due to increasing liability lawsuits against the company. The surgical robot maker’s performance has been especially lackluster in the U.S., where unit sales of da Vinci systems have dropped almost 30% over last year. [1]

The initial decline was attributed 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 related to their cost effectiveness, which brought in a lot of negative publicity to the company as well. [2] However, the biggest limiting factor for an increase in da Vinci system sales in the U.S. right now is the impact of the Affordable Care Act on spending priorities of hospitals and health institutions.

Although some independent studies have indicated the benefits of robot-assisted surgery in terms of shorter hospital stays and lower readmission costs, critics argue that there is still not enough evidence to justify the high initial cost of da Vinci surgical robot machines ($1.5 million on average) in comparison to alternate methods such as laparoscopic surgery. [3] ((Medicare Hospital Readmissions Reduction Program, HealthAffairs.org, Nov 12, 2013))

Opportunities

The fact that there are still some concerns about robotic surgery and the da Vinci surgical system certainly does not indicate that Intuitive Surgical has reached the end of the road. Of course, there is immense scope for improvement in terms of cost effectiveness as well as the versatility of its machines, but that also suggests that there is a lot of opportunity for growth for robot-assisted surgery in general, and Intuitive Surgical in particular. With continued research and innovation, Intuitive Surgical can expand the utility of its da Vinci surgical system beyond the presently prevalent general surgery, gynecology, urology, thoracic and colorectal procedures.

A greater number of procedures generally means a greater number of instruments and accessories, as well as a shorter replacement cycle. Therefore, the number of procedures directly impacts the company’s revenue. Despite the lukewarm sentiment, Intuitive Surgical reported a 9% increase in procedures last quarter and also adjusted its procedure growth forecast from 2-8% to 5-8% for full-year 2014. The total number of procedures performed  in 2013 was 523,000.

Another important growth opportunity is expansion into international markets. A recent report by Grand View Research suggests that the global market for medical robotic systems is estimated to reach almost $18 billion by 2020, from less than $8 billion in 2014. The report also indicates that the factors likely to drive this growth are the increasing penetration of Information Technology in healthcare, the growing geriatric population and a large unmet demand for such procedures in emerging markets including China, India and Brazil. ((Global medical robotic systems $17,901.5M by 2020, Online TMD.com, Sept 3 2014))

Surgical robots contributed a dominant 65% share of the global medical robotic system market in 2013 and this is expected to continue going forward as market penetration increases and new products are introduced. The aforementioned report also suggested that Asia-Pacific is likely to be the fastest growing region of this market owing to improving disposable incomes, increasing healthcare expenditures and growing awareness about medical procedures. This is a huge opportunity for Intuitive Surgical to take a first mover advantage considering that it does not have any formidable competitors on the global stage at present.

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Notes:
  1. Q2 2014 Report, Intuitive Surgical []
  2. Robot Surgery Isn’t First Choice for Uterus Removals, Bloomberg, March 16 2013 []
  3. Press Release, Intuitive Surgical, Feb 05 2014 []