Intuitive Surgical (NYSE:ISRG), a developer of robotic surgical systems called da Vinci Surgical System, released its Q1 earnings on April 18. The medical device maker continued with its streak of beating market expectations as revenues grew over 23% on the back of continued growth in da Vinci systems.  The growing installed base of surgical system coupled with higher number of procedures helped generate more revenues from Instruments and Accessories. 
However, the key point that emerged out of the earnings report was that physicians and patients may be getting less comfortable using the da Vinci system in gynecological procedures. Owing to the development, the device maker pegged its procedure growth for 2013 at 20%, which is at the lower end of its 2013 guidance.  This fueled worries that recent cost-benefit and safety issues may be taking a toll on the company and will impact growth going forward. Below we discuss the trends observed during the quarter.
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- Scenarios That Can Change Our Valuation For Intuitive Surgical
Robust Revenue Growth
As expected, the medical devices maker saw incremental growth in da Vinci Surgical Systems as nearly 164 of these were sold compared with 140 systems during the same period last year. This, coupled with a better mix of systems and direct selling to customers drove 23% growth in revenues. Nearly half of the new systems (75) were bought by repeat customers. 
In line with our expectations, Japan became the major growth driver with 25 da Vinci systems sold in the country, significantly up from 7 and 10 in Q1 2012 and Q4 2012, respectively. Despite dwindling economic conditions, Europe continued to add new systems, which also comes as a positive.
Instrument and accessories revenue increased due to growing installed base of da Vinci system. Over 2,650 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 demand for the da Vinci systems and number of surgeries performed. Average instrument and accessories spend per procedure increased to $2,110, from $2050 in Q4 2012 and $1990 in Q1 2012, due to higher sales of new supplementary products like vessel sealers and single-site kit. 
But, Tepid Growth In Procedures Pose A Concern
However, what comes as a concern is tepid growth in the number of procedures performed through the surgery. While the number of procedures grew by 18% (20% after adjusting for one extra day in Q1 2012), the figure was lower than witnessed in previous quarters. This was due to slower growth in key surgery area of benign hysterectomies. Further, the management expected procedures growth to remain around 20% for 2013. This is at the lower end of its earlier expectations of 20%-23% growth. 
It is unclear if the recent inflow of adverse news played any role in hurting demand. Earlier in February, a detailed study conducted by the researchers at Columbia University had indicated that the cost-benefit ratio of using da Vinci surgical system to perform hysterectomies is not favorable at all. According to the study, using da Vinci costs a significant $2,189 more per procedure over laproscopic hysterectomies. Also the rate of complications and length of stay are similar in both procedures.  This was followed by an adverse comment from the American Congress of Obstetricians and Gynecologists (represents over 56,000 U.S. physicians) that robotic surgery for hysterectomies doesn’t improve outcomes and it should not be the first choice of procedure. 
As prostatectomies (prostate surgery) have been declining in the last couple of quarters, Intuitive Surgical has increasingly been relying on gynecological procedures like hysterectomies and general procedures for conditions like stomach cancer and gallbladder disease to maintain growth momentum. While the management maintained its stand on da Vinci’s cost effectiveness, any more setbacks in expected demand here could hurt the medical device maker significantly (Read Downside Risks To Intuitive Surgical’s $600 Fair Value). Historically, prostatectomies and hysterectomies have been the most common procedures accounting for more than 50% of total procedures done using da Vinci systems
We are updating our price estimate of $600 to incorporate the results and recent trends.Notes:
- Intuitive Surgical Announces First Quarter Earnings, Intuitive Surgical, April 22 2013 [↩] [↩]
- Intuitive Surgical’s CEO Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, April 18 2013 [↩] [↩] [↩] [↩]
- Robotically Assisted vs Laparoscopic Hysterectomy Among Women With Benign Gynecologic Disease, JAMA, Feb 20 2013 [↩]
- Robot Surgery Isn’t First Choice for Uterus Removals, Bloomberg, March 16 2013 [↩]