As feared, recent cost-benefit concerns seem to have started taking a toll on Intuitive Surgical (NYSE:ISRG) (read our note here for full details). In its preliminary results, the robotic surgical device maker mentioned that it will miss its own as well as the market’s expectations. Until now, the company has had a history of beating market expectations by a wide margin.
While the company expects revenues for Q2 to grow by 7% to $575 million, the growth figure is well below the historical high-teen growth witnessed by the company and the average forecast for the quarter.  What comes as a significant concern is that the sales of its da Vinci robotic surgery system slid 6% in the second quarter to $215 million, from $229 million in the same period last year.  Significant weakness in the U.S. sales numbers weighed on overall da Vinci sales. Sales in the U.S. sales plunged a significant 27% even as international markets including Europe (surprisingly) and Japan continued to grow.
The company attributed the dismal domestic sales to delay in purchases by hospitals and declining rates of benign gynecologic procedures, as insurers encourage more conservative treatments. While the former can be a temporary blip due to economic pressure, the latter issue can harm the company more in the long term.
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Intuitive Surgical usually targets open surgeries on the premise that the robotic system reduces surgical complications and leads to a faster recovery process and lower hospitalization costs, compared with open surgeries. System sales and the number of procedures grew substantially due to these claims, coupled with a strong marketing push. A lack of large-scale randomized trials comparing robotic surgery with other minimally invasive surgeries has also worked in its favor historically. However, a recent detailed study conducted by researchers at Columbia University indicated that the cost-benefit ratio of using the robotic surgical system to perform hysterectomies is not favorable. This was followed by similar observations from the American Congress of Obstetricians and Gynecologists, an influential group that represents over 56,000 U.S. physicians.
These concerns now clearly seem to have been driving hospitals and open surgery patients toward more cost-effective laparoscopic hysterectomies. Should these concerns spill over to other gynecological and general surgery procedures, it could further hamper da Vinci sales and growth in these procedures going forward. A lower number of procedures will result in lower revenues from instruments and accessories. Additionally, the Patient Protection and Affordable Care Act (“PPACA”), which will come into full force beginning 2014, could have an impact on robotic surgery. As the act aims to reduce healthcare costs, the company may find it difficult to get reimbursement approvals. It could even lose existing approvals for procedures using its devices, particularly if the concerns around da Vinci systems’ cost-effectiveness continue to rise.
Since the company is mostly dependent on its da Vinci system sales and number of procedures to derive revenues, the slow down in growth could trigger a significant downside to our $600 price estimate for Intuitive Surgical, which is now about 40% ahead of the current market price. We will wait for Q2 earning release, which is scheduled on July 18, before revising our price estimate.Notes:
- Intuitive Surgical Announces Preliminary Second Quarter 2013 Results, Intuitive Surgical, July 08 2013 [↩] [↩]