Intuitive Surgical (NYSE:ISRG), a developer of robotic surgical systems called da Vinci Surgical System, released its Q4 earnings on January 22 after the market close. The medical device maker continues with its streak of beating market expectations as revenues grew over 23%.  While Q4 is usually a seasonally strong quarter, wider adoption of other da Vinci surgery procedures contributed to its growth. Growing system sales and procedures also helped generate more revenues from Instruments and Accessories. While operating margins slightly improved during the quarter, higher taxes resulted in a decline in net earnings.
Intuitive Surgical stock price jumped following the earnings announcement, and we expect it to move towards our current price estimate of $600, which we are in the process of revising to incorporate the results.
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Growing da Vinci Surgical Systems and Procedures….
As expected, the medical devices maker saw incremental growth in da Vinci Surgical Systems as nearly 175 da Vinci Surgical Systems were sold compared with 152 systems during the same period last year. This coupled with a better mix of systems and direct selling to customers drove 18% growth in revenues. Most of the new systems (114) were bought by repeat customers, which is important given the fact that recently concerns were raised around the efficacy of the systems. The confidence of existing customers proves otherwise.
Despite dwindling economic conditions, Europe saw stronger growth in system sales, which also comes as a positive. Japan, however, disappointed as the company sold 10 da Vinci systems in the country, down from 16 in the third quarter.  The number, however, was significantly higher from the 5 systems sold last year.
Prostatectomies (prostate surgery) procedures performed through the system declined during the period. This, however, was expected as U.S. Preventive Services Task Force recommended against routine PSA screening (Prostate-Specific Antigen test to screen Prostate cancer) before being diagnosed as it did not benefit patients.  And, fewer PSA tests resulted into fewer prostate surgery. However, overall procedures increased 25% as strong uptake in procedures like gynecological and general surgery more than offset the decline in prostatectomies. 
….Benefit Instruments and Accessories
Instrument and accessories revenue increased due to growing installed base of da Vinci system. Over 2,500 da Vinci systems are now placed globally. Instruments and accessories are a set of devices that facilitate the use of da Vinci Surgical Systems. Thus, the demand for instruments and accessories is directly proportional to the da Vinci systems. Average instrument and accessories spend per procedure increased to $2050 from $1980 due to higher sales of new supplementary products like vessel sealers and single-site kit. 
Significant Growth Ahead
With the Patient Protection and Affordable Care Act (“PPACA”), 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.  As the Act aims to reduce healthcare costs and expand healthcare coverage among Americans, it could help generating demand for cost-effective da Vinci systems.
Further, company management has prioritized its focus on other procedures including gynecological and general surgery. They have been increasing efforts to generate demand from international market and increased the size of the sales force and opened two training centers in Japan during 2012. The company is also aggressively seeking reimbursement approval for additional procedures. We expect these efforts to translate into a significant increase in the number of systems sold during the quarter.
Europe, however, could see slow growth in near-term amid the economic slowdown. 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.Notes:
- Intuitive Surgical Announces Fourth Quarter Earnings, Intuitive Surgical, Jan 22 2013 [↩]
- Q3 10-Q, Intuitive Surgical [↩]
- Screening for Prostate Cancer, U.S. Preventive Services Task Force, May 22 2012 [↩]
- Intuitive Surgical 2012 Earnings Call Transcript, Morningstar, Jan 22 2013 [↩] [↩]
- FACT SHEET: The Affordable Care Act: Secure Health Coverage for the Middle Class, White House, June 28 2012 [↩]