Intuitive Surgical Wins Big With Department of Defense

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ISRG: Intuitive Surgical logo
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Intuitive Surgical

Intuitive Surgical (NASDAQ:ISRG) has won a five-year contract to supply its daVinci surgical robots to the Defense Logistics Agency.  The Defense Logistics Agency, an agency within the U.S. Department of Defense, chose Intuitive Surgical over 34 other bidders for the $430 million contract.  The surgical robots will be used in government hospitals by the Army, Navy, Air Force, and Marine Corps. ((DOD Awards $430M Surgical Robotics Contract, Law360.com))

The contract is a significant milestone for Intuitive Surgical, which will help its products gain acceptance in the Urology, Gynecology, General Surgery and Cardiothoracic markets to which it caters. The contract also marks a significant vote of confidence for a product and company that faced headwinds over a number of factors, including concerns over the efficacy and cost effectiveness of the systems, reduced sales due to budget constraints following the Affordable Care Act, and lawsuits stemming from complexities arising from the use of its equipment.

Under the terms of the contract, there is no limit on the quantity of the robot or related instruments and accessories that would be ordered by the DoD. Although it is not necessary that the DoD will use up the entire $430 million allocated for the surgical system and its components, the contract is going to simplify the purchase process and increase the footprint of its product in the market.

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The decision to award the contract to Intuitive comes shortly after the company successfully received FDA approval for two of its new surgical systems last year – da Vinci Xi and da Vinci Sp. The da Vinci Xi system is built with 3D and high-definition visuals that will help to perform minimally invasive procedures with better mobility and ease-of-use. [1]

We currently have a price estimate of $479 for Intuitive Surgical, which is about 15% below the market price.

See our full analysis for Intuitive Surgical

How Will The Contract Benefit The Company?

If the government spends $430 million, equally spread out over the next five years, the company can expect to add around $86 million to its total revenue each year. This is a notable amount, as the company’s 2014 revenues were around $2.13 billion, which represented a 6% year-over-year decline. The decline in revenue was primarily caused by a significant fall in revenues from the da Vinci product division, as the company was in the legal limelight for safety concerns associated with procedures performed by the systems. The da Vinci product segment saw a 23% y-o-y decline in revenues, whereas the instruments and accessories partially offset this decline by reporting a 4% increase in total revenues. The company predominantly generates revenues from the instruments and accessories, which account for over 50% of the company’s total revenue. This contract could help both divisions as an addition of $86 million each year from the contract can uplift sales estimates by around 4%. However, as spending on these systems are at the government’s discretion, there is also a possibility that the amount spent is significantly lower than $430 million. In this scenario, the earnings will likely show only a marginal improvement.

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Notes:
  1. Intuitive Surgical Gets FDA Clearance for Robotic Surgical System, Wall Street []