VALUATION HIGHLIGHTS

1. Intuitive Surgical Products constitute 79% of the Trefis price estimate for Intuitive Surgical's stock.
2. Intuitive Surgical Services constitute 15% of the Trefis price estimate for Intuitive Surgical's stock.

WHAT HAS CHANGED?

1. ISRG Stock Performance

ISRG stock has shown strong gains of 40% from levels of $275 in early January 2021 to around $380 now (Jan 31, 2024), vs. an increase of about 30% for the S&P 500 over this roughly 3-year period.

However, the increase in ISRG stock has been far from consistent. Returns for the stock were 32% in 2021, -26% in 2022, and 27% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that ISRG underperformed the S&P in 2022.

2. Q4 2023 Performance

Intuitive Surgical's top line grew 17% (y-o-y) to $1.93 billion in Q4 2023. The company placed 415 da Vinci systems during the quarter, reflecting a 12% y-o-y increase. The worldwide da Vinci procedure volume grew a solid 21%, driving top-line growth. The company's adjusted earnings rose to $1.60 per share in Q4 2023, compared to the $1.23 figure in the prior year's quarter.

3. Impact of Coronavirus Crisis On Intuitive Surgical

The 2020 coronavirus crisis weighed on the medical devices companies, including Intuitive Surgical, primarily due to a decline in the number of procedures performed, as many elective procedures were deferred in 2020. However, the number of procedures performed after dipping 19% in Q2 2020 saw a rebound in Q3 2020. For the full year 2021, procedure volume growth was 28%, 18% in 2022, and 22% in 2023.

The company saw a rebound in sales post the pandemic, led by its placement of new systems. The company was able to place 1,264 systems in 2022, reflecting a 6% y-o-y decline. Intuitive Surgical has seen strong growth in the installed base of its robotic systems, and it translates into higher demand for its instruments & accessories, thereby driving sales growth.

Also, the company is debt-free; thus, it does not have any significant risk with regard to its cash flows. While other robotic platforms have received U.S. FDA approvals, so far, there has been no visible threat to Intuitive Surgical's business, and the market itself could grow exponentially over the coming years. As such, Intuitive Surgical could come out strongly from the current crisis, in our view.

4. Expansion of Procedures

The company's surgical systems have been widely adopted for select procedures, but there are still many for which they have not been adopted. The company has been focused on the wider adoption of other procedures, and this has aided its top line over the recent years, a trend that is likely to continue in the near term.

5. FDA Approvals

June 2019: The U.S. FDA clearance for da Vinci Handheld Camera.

February 2019: The U.S. FDA clearance for the Ion endoluminal system, which is designed to navigate through very small lung airways to reach peripheral nodules for biopsies.

February 2019: The U.S. FDA clearance for IRISTM augmented reality product for 3D imaging of the patient anatomy.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

• da Vinci Surgical Systems' Units Sold: da Vinci Surgical Systems are computer-assisted systems that help surgeons perform minimally invasive surgeries by controlling the device sitting at a console. With the aid of this system, human error during surgeries can be minimized. Since the surgeries are minimally invasive, the device helps reduce surgical complications and makes the recovery process post-surgery easier. The advantages associated with minimally invasive surgeries are likely to lure more patients into opting for such procedures over traditional open surgeries.
  Additionally, we expect the ease and benefits to surgeons to drive demand for these devices. Intuitive Surgical sold 1,264 units in 2022, and we expect that figure to increase in the coming years. However, at present, these systems are expensive compared to traditional surgical instruments, and intensive training is required to master the technology. These factors somewhat work against the growth of unit sales. If Intuitive Surgical is able to increase its installed base only to 10,000, compared to over 14,000 per our estimates by the end of our forecast period, it will result in a 20% downside to our current price estimate. On the other hand, if the company manages to grow its installed base to 18,000 units, there could be a 20% upside to our current price estimate.


• Intuitive Surgical's Instrument & Accessories Spend Per Installed Unit: Intuitive Surgical offers many instruments and accessories to enhance the performance of the da Vinci Systems and help to minimize human error during surgeries. Robotic surgical procedures have gained traction in the U.S. in recent years, and there have been significant increases in the number of procedures using robotic instruments conducted annually. As the number of procedures increases, we expect greater demand for instruments and accessories as greater use will result in shorter replacement cycles. Additionally, Intuitive Surgical has been expanding the scope of procedures for which its systems are accepted. Many of these additional procedures have specific accessories that improve performance, which should lead to higher instrument and accessory spending per unit. We expect the average spend per installed unit to increase marginally over our review period, from around $493,000 in 2022 to $610,000 by the end of our review period. However, should the acceptance of da Vinci Systems, and the frequency with which they are used, grow more rapidly than we expect, the additional accessories and shorter replacement cycle could drive the average spend per unit to over $820,000 by the end of our forecast period. This would present an upside of about 20% to the Trefis price estimate.

BUSINESS SUMMARY

Intuitive Surgical manufactures and sells robotic surgical systems. Its primary device is the da Vinci Surgical System, which helps surgeons perform minimally invasive surgeries through directions from a console. It delivers better postoperative results relative to traditional open surgery. The system is mostly used for prostatectomy and hysterectomy procedures. It also sells self-manufactured instruments and accessories, a set of devices that enhance the functionality of da Vinci Surgical Systems. Additionally, it offers service contracts which include system service and customer training.

Intuitive Surgical has a significant patent portfolio and currently faces little direct competition in the robotic surgery market.

Some of its potential competitors are SOFAR S.p.A., Eterne, Titan Medical, Hitachi, Olympus, and Mazor Robotics.

SOURCES OF VALUE

da Vinci Surgical Systems and the accompanying Instruments and Accessories are the major sources of revenue for the company. Largely due to the following factors:

Advantages to patients

Minimally invasive surgeries through da Vinci Surgical Systems can entail fewer and smaller incisions, less blood loss, shorter hospital stays, faster recoveries, and fewer scars than traditional open surgery. These relative advantages will likely lead to more patients opting for such procedures as opposed to open surgeries, which should drive demand for the company's systems.

Benefits to surgeons

Intuitive Surgical's da Vinci Surgical systems provide a multitude of benefits to its customers. Surgeons get a 3-D view of the entire procedure by just sitting at a console. They perform the surgery by operating the hand and foot controllers of the robotic system, which provides greater control over the surgical instruments as it is steadier than a human hand. This ease of use and improvement in outcomes is expected to drive demand from surgeons for these systems.

KEY TRENDS

Geographical expansion

Intuitive Surgical is witnessing an increasing share of international sales that mainly come from Europe. This share of international revenues has increased from 28% in 2017 to 33% in 2022. The company is also expanding its operations in Japan and South Korea as the aging population and growing acceptance of robotic surgery in these countries provide significant growth opportunities.

Healthcare reforms could impact sales

Healthcare reform is leading to an expansion of the publicly insured base and may also result in lower public reimbursements. Additionally, private insurance companies have become more cautious in providing reimbursements. This could affect demand for medical devices, particularly more expensive devices such as da Vinci Surgical Systems.

Efficiency concerns

Intuitive Surgical has been marketing its da Vinci system mainly on the premise of lower costs. However, a comprehensive study conducted by Columbia University suggested that surgeries performed using this system may actually cost significantly more than standard minimally invasive procedures, and without any major benefits. Since the study became public, Intuitive Surgical has been seeing a decline in surgeries being performed through its systems. Sales could remain impacted until the company can successfully address all concerns with respect to its da Vinci system.

Expansion of procedures

The company's surgical systems have been widely adopted for select procedures, but there are still many for which they have not been adopted. The most common procedure was gynecology over the last few years, which accounted for approximately 50% of total procedures using da Vinci systems. The company believes that wider adoption of other procedures is likely. A wider range of possible procedures will likely result in greater demand for the company's systems.

Competition entry

Intuitive Surgical faces little competition in the robotic surgery market as there are significant barriers to entry and the company holds more than 1,000 patents worldwide. However, as its patents begin to expire, the cost of entering the market could decline and competition could increase. While we don't expect any competitor to challenge the company's dominant position, they could still cause some pressure on pricing and therefore margins.