Companies may be innocent until proven guilty, but Intuitive Surgical (NASDAQ:ISRG) shareholders will have none of it as they took the stock to the ringer in the final minutes of trading yesterday after a federal probe into the safety of its da Vinci robotic surgical systems was disclosed.
I have to admit that, even though I have no financial interest in Intuitive Surgical, it irks the heck out of me that Citron Research might in any way, form, or shape, be correct about Intuitive Surgical. If you recall, Citron Research, a noted short-seller, released a report in December that outlined five bullet points (link opens PDF) why Intuitive Surgical could be headed lower. Specifically, those bullet points all tied back to the fact that Intuitive Surgical did a poor job disclosing the risks associated with its robots, that it failed to show substantial evidence that its robots improved the quality of surgeries performed, and that it failed to adequately train physicians to perform these procedures.
Up until now, Intuitive Surgical's quarterly results had done all of the talking. In its most recent quarter, Intuitive silenced Citron by recording a 23% increase in revenue to $609 million with systems revenue jumping 18% to $265 million as it sold 175 da Vinci surgical systems. That will, in the meantime, be put on the back burner as U.S. regulators probe the adverse event profile of its robotic system.
Make no mistake about it; I understand that this probe isn't a good thing. As I've noted previously, probes by U.S. regulators can lead to hefty fines as in the case of Johnson & Johnson (NYSE:JNJ), which paid $2.2 billion in settlements for its role in how it marketed anti-psychotic drug Risperdal, as well as two other drugs. Still, numerous other probes end with either inconclusive findings or a slap on the wrist. ABIOMED just last week (NASDAQ:ABMD) had U.S. regulators drop a 20-month investigation into the marketing of its blood-pumping device, the Impella Recover LP 2.5. Financial penalties really are a last resort unless gross negligence on the company's part is demonstrated.
Another factor worth considering is that while U.S. regulators are more closely examining the adverse events reported by physicians, they have to understand that as a percentage of patients being treated, the number of adverse event incidences has remain stable. As Intuitive Surgical sells more da Vinci systems and the number of procedures increases, it would be logical to expect the probability of adverse events to rise a bit.
Studies also exist that demonstrate that the da Vinci surgical system is perfectly safe. According to the Journal of the American Medical Association, a study chronicling the results of 264,758 women who underwent a hysterectomy between 2007 and 2010 revealed an extremely similar adverse event profile as compared to standard laparoscopic procedures. While the robotic procedures cost an average of $2,189 more, patients who underwent the robotic surgery often spent less extended recovery time in the hospital (19.6% spent more than two days in the hospital compared to 24.9% for laparoscopic surgery) with an almost identical adverse event profile (5.5% for the da Vinci system versus 5.3% for standard surgery).
What does this all mean for shareholders? Primarily, it means they can sleep easily at night. Intuitive Surgical's business is based on repetition, and with more than 2,000 systems having been sold since inception, that's a business primed for continued success. If there were a notable problem with the da Vinci robotic system, I'd like to think we would have heard about it from physicians a long time ago. To me, this probe looks to be nothing more than an assurance to former and future patients that the increase in adverse events is consistent with the rates we witnessed a few years ago. To that end, I'm forecasting that Intuitive Surgical will again emerge smelling like a rose.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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