Factors That Could Impact Intuitive Surgical’s Valuation

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ISRG: Intuitive Surgical logo
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Intuitive Surgical

Intuitive Surgical (NASDAQ:ISRG), the global surgical robot manufacturer, has seen significant volatility in its stock price in the last five years. This stems from FDA regulations, competition from laparoscopic procedures and the Affordable Care Act (ACA), which has altered the capital spending priorities of healthcare institutions in the last few years. However, there are certain potential developments that could lead to a spike in the company’s earnings potential, as well as its stock price. Specifically, these include Intuitive Surgical’s ability to prove its cost-effectiveness and efficacy relative to laparoscopic procedures, its ability to diversify the da Vinci system’s use for different surgery types and/or prove itself against potential competition from other emerging medical device companies. Below we will discuss the impact of these potential events on the company’s valuation.

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

See our full analysis for Intuitive Surgical

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Case 1: Intuitive Surgical Proves Cost Effectiveness

Our base model estimates that sales of the da Vinci system are likely to witness moderate growth in mid-single digits by the end of our forecast period. The company recently received FDA clearance for two new surgical systems, the da Vinci Xi and da Vinci Sp.  Both of these systems are equipped to perform multi-port procedures with better mobility, ease-of-use and visual quality than the previous models. Even though da Vinci unit sales have declined in double-digits in the last couple of years, we expect the new models to help reverse this trend. In the last quarter of 2014, the company sold 206 da Vinci Xi units, which accounted for 48% of the total units sold in the entire year. Additionally, the company recently won a $430 million five-year contract with the U.S. Department of Defense, which should also contribute to future sales.

da Vinci system sales were under pressure due to the PPACA last year, as healthcare institutions re-prioritized their spending budgets. Robotic surgery can have an incremental cost of around $3,500 over laparoscopic surgery; considering that the reimbursement rate for robot surgeries is the same as it is for all minimally invasive surgeries (according to the ACA), the incremental cost of $3,500 is currently unlikely to be reimbursed by insurance companies. This creates an additional out-of-pocket expense for patients, which could in turn deter them from undergoing robotic surgery when they have the option of a cheaper laparoscopic procedure. [1]

If the da Vinci system is able to convincingly prove its efficacy over laparoscopic procedures in terms of total cost, post-op patient health, readmission rates and the duration of hospitalization, there could be a significant jump in system sales as well as procedure volumes. Last year, a study was published that revealed significant benefits of da Vinci robotic surgery over laparoscopic procedures, but it only focused on hysterectomy procedures. The study, led by Dr. Martin Martino of Lehigh Valley Health Network, revealed that robot-assisted hysterectomy procedures performed on women with non-malignant conditions provided better results than non-robotic surgery on several parameters. These parameters included blood loss during operation, duration of hospitalization and readmission costs (see full report here). According to this study, robot-assisted hysterectomy patients were less likely to be readmitted to the hospital within a month of surgery as compared to laparoscopic hysterectomy patients. [2]

According to the Centers for Medicare & Medicaid Services (CMS), readmission can cause the patient to incur significant additional costs. [3] According to the study, total readmission cases (readmission within 30 days) for robot-assisted surgery patients was around 1%, compared to 2.5% for laparoscopic surgery patients. Moreover, robot-assisted hysterectomy procedures had a lower readmission cost of about $33,000 as compared to more than $50,000 incurred in laparoscopic procedures. This suggested that robot-assisted hysterectomy surgeries could provide substantially better results in terms of medical costs and operation efficacy than non-robotic procedures in many cases. The “Readmissions Reduction Program” of the ACA also incentivizes hospitals to reduce re-admission rates. [4] If the efficacy and cost effectiveness of da Vinci system over laparoscopy can be proven for more than just hysterectomy procedures, we could expect to see a positive spike in sales of da Vinci units.

In 2014, the average selling price of the da Vinci surgical robot was about $1.5 million and the number of units sold was 431. However, a medical study conclusively proving da Vinci’s efficacy could increase our system sales forecast by around 15% over our current estimates. This could increase the company’s valuation by 10%, keeping all other variables constant.

In a subsequent article we will discuss the impact of a diversification of uses for the surgical robot and potential competition emerging from medical device companies.

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Notes:
  1. Is da Vinci Robotic Surgery a Revolution or a Ripoff?, Healthline News []
  2. Press Release, Intuitive Surgical, Feb 05 2014 []
  3. Medicare Hospital Readmissions Reduction Program, HealthAffairs.org, Nov 12, 2013 []
  4. Readmissions Reduction Program, CMS, 2012 []