All hands are on deck at Intuitive Surgical (NASDAQ: ISRG ) after the market's most prominent robotic surgical stock plunged by double digits in after-hours trading on Thursday. Intuitive released earnings, and the company's latest financial report dazzled no one, a sharp contrast to the stellar performance investors have gotten used to from this innovative health-care star.
However, it wasn't the numbers that sent Intuitive's stock nuclear on Thursday after the closing bell. The FDA has picked and prodded at the robotic surgical device maker for some time, but regulators' investigations came to a big climax that culminated in a gut-wrenching one-two punch for investors. Is it time to be worried about one of health care's most innovative companies?
Turning up the fear machine
Even looking beyond the FDA's latest warning, Intuitive's last quarter certainly was a departure from the growth investors have come to expect from this standout stock. Intuitive's net income turned higher by 2.7% for the quarter, but the company's sales rose by 7.8%. That's a number many companies would be happy with, but not Intuitive: This firm posted sales growth of more than 23% over the full year in 2012, and Thursday's release was a downturn from what the company's offered in the past.
Wall Street certainly thought so. Average estimates had projected revenue of $596 million for the quarter, which was nearly $20 million more than the company's actual quarterly sales.
What was behind the slow growth? Da Vinci system sales dipped by 6% in the prior quarter, and while an 18% growth in sales of accessories and instruments helped mitigate those losses, they weren't enough to repair the lost luster of Intuitive's quarter. Selling instruments and accessories is important: Intuitive needs to continue growing uses and procedures for its da Vinci surgical systems around the world, and this sales growth speaks to the fact that hospitals already using the system are continuing to invest in it.
However, the slump in system sales means that the increasing talk regarding safety and legal issues at the company are catching up to Intuitive's financials -- and investors. Thursday's warning by the FDA may only exacerbate that trend.
The FDA warning letter isn't anything new. Intuitive simply noted that it had received the warning from the regulatory agency after the FDA cited the firm for failing to report some system and device corrections adequately. The agency also cited Intuitive for failing to clarify the need for surgeons to clean da Vinci system accessories.
Neither of these incidents is reason alone to panic over Inituitive's long-term future. Indeed, the company won its first lawsuit over da Vinci patient safety and negligent surgeon training back in May. However, negative PR has ramped up over Intuitive this year, and as questions swirl over the advantages and safety issues of robotic surgery, Intuitive will find it tougher in the future to sell new systems with the same kind of growth it's seen in the past.
Other troubles are circling. Questions over the da Vinci's effectiveness over traditional surgeries in gynecological procedures have hounded the firm recently, particularly as some health-care experts cite the da Vinci's cost as a drawback when compared to ordinary surgeries. According to Intuitive, gynecological procedures are slowing and hurting overall procedural growth, which the company expects to increase by 15% to 18% this year -- far below analyst expectations of 20% to 23% full-year procedural growth. The cost per system is also hampering Intuitive's future sales, given the current poor economic climate that's hit hospital budgets badly. It's harder for Intuitive to justify paying big money for a new machine with all the questions around it.
There's still reason for optimism
Ultimately, this company's still the innovative star it's always been. If Intuitive can weather this storm, I'm confident that the stock can bounce back -- although the company's astronomical growth of the past may be over. However, Intuitive's near future is murky. Thursday's earnings miss will only intensify criticisms of the company's future and the da Vinci system's potential, and while the FDA's warning may be nothing new, Intuitive's still facing plenty of legal trouble that it will have to overcome.
Intuitive's long-term future has been shaken, but not truly endangered, by the company's recent woes. However, these fears won't go away soon, and expect them to leave a dent on this stock in the near future. Get ready for a volatile, bumpy read ahead.
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