Intuitive Surgical (NYSE:ISRG) is a global developer, manufacturer and supplier of robotic surgical systems called da Vinci Surgical Systems, which help surgeons perform minimally invasive surgeries and delivers good postoperative results relative to traditional open surgery. The system is mostly used for prostatectomy and hysterectomy procedures. The company also sells self-manufactured instruments and accessories which enhance the functionality of da Vinci Surgical Systems. Additionally, it offers service contracts which include system service and customer training. Its main competitors are SOFAR S.p.A., Eterne, Titan Medical, Hitachi, Olympus, and Mazor Robotics.
We recently launched coverage of Intuitive Surgical with a price estimate of about $600 for the company’s stock, which is about a 10% premium to the current market price.
We have divided Intuitive Surgical into the following divisions which account for its value:
- da Vinci Surgical Systems – These are computer-assisted surgical systems that helps surgeons perform minimally invasive surgeries by controlling the device sitting at the console. The company sold 534 surgical systems in 2011, up significantly from 335 in 2008, on the back of the launch of a new system in 2009 as well as increased presence in Europe, primarily Germany and France.
- Instruments and Accessories – This consists of a set of devices that facilitate the use of Intuitive Surgical’s da Vinci Surgical Systems. The company has seen an increase in spending on instruments & accessories per unit ($264,000 in 2008 to about $329,000 in 2011) on account of a greater number and range of procedures performed using the devices, which required additional instruments and accessories.
- Services – The division includes full-time support to its customers, from installing its surgical systems to repairing and maintaining them. It also includes fundamental training to surgeons that teaches them how to use the complex da Vinci Surgical Systems during surgery.
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Instruments and Accessories and the da Vinci Surgical Systems themselves are the primary sources of value for Intuitive Surgical.
Benefits Over Traditional Surgeries And Expansion Of Procedures To Drive Growth
With da Vinci Surgical Systems, surgeons get a 3-D view of the entire procedure while 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 generally steadier than a human hand. Additionally, these minimally invasive surgeries have the benefits of reduced surgical complications, faster recovery process and lower hospitalization costs. As such, we foresee incremental growth in the number of hospitals adopting da Vinci Surgical Systems going forward.
Further, in 2011, the most common procedures were Prostatectomies and Hysterectomies, which accounted for over 70% of total procedures using da Vinci systems. However all other procedures increased by 40% year-over-year, and the company believes that wider adoption is likely. A wider range of possible procedures will likely result in greater demand for the company’s systems. Additionally, new procedures may require unique instruments or accessories which would result in incremental revenue for the company.
International Markets: Significant Potential Ahead
International markets also provide a substantial growth opportunity for the business. Intuitive Surgical has been seeking Japanese reimbursement approvals to sell its da Vinci Surgical Systems in the region. Assuming the issue will be resolved in the near term, we expect sales to increase significantly on account growing demand from Japan. While the high upfront cost of systems (between $1 million and $2.3 million per system) is a significant barrier, we see robust long-term demand as economic conditions gradually recover. Additionally as the scope of procedures expands, hospitals could better justify the system costs.
U.S. Healthcare Reform Presents Opportunities
The Patient Protection and Affordable Care Act (“PPACA”) is a U.S. healthcare reform bill passed into law in 2010. The main purpose of the law is to reduce healthcare costs and expand healthcare coverage among Americans. The bill includes an individual mandate, which penalizes individuals who can afford health insurance but choose not to purchase it. It also expands the availability of Medicaid and restricts the ability of insurers to refuse service to customers with pre-existing conditions. As a result, the government estimates that an additional 30 million Americans will have health insurance (either private, Medicare or Medicaid) over the next five years, which in turn will boost the number of surgeries being performed. 
Increasing Spending and Recurring Demand For Instruments And Accessories
The demand for instruments and accessories is directly proportional to the sales of da Vinci systems. While instrument and accessories revenue has increased due to a greater installed base, the company has also seen a steady increase in average instrument and accessories spend per installed unit, on account. This is attributable to the wider scope of procedures, as well as a greater number of procedures performed, as more use speeds up the replacement cycle. These instruments and accessories have a limited life and need to be replaced periodically. As use increases and the company releases new instruments and accessories, we expect a steady increase in instrument and accessories spend per unit.Notes:
- FACT SHEET: The Affordable Care Act: Secure Health Coverage for the Middle Class, White House, June 28 2012 [↩]