After being a Wall Street darling for over a decade, shares of Intuitive Surgical (NASDAQ: ISRG ) hit a speed bump in 2013, falling 38% from its highs. This year, the stock has recovered some of those losses, and is up over 20% -- thanks largely to an earnings report last month that came in better than analysts were expecting.
That being said, management wants you to know that there are still headwinds for the company to battle, as well as a promising new procedure that could pick up some of the slack.
Don't expect gynecology procedures to rebound to previous levels
In 2012, Intuitive's daVinci robot was used to perform 450,000 procedures. Forty percent of those were hysterectomies that occurred in the U.S., and general gynecological procedures accounted for almost half all operations.
In 2013, there were several medical professionals that began to question the efficacy and cost-effectiveness of using the daVinci for hysterectomies. That led to a slowdown in the use of the machine for such operations. Management made it clear that the total number of gynecological operations is at a new normal, and likely won't rebound to pre-2013 levels.
" ... [gynecological] procedure growth improved compared Q1 though we believe the low single-digit decline in procedure growth we experienced during the first half is likely representative of an overall rate of decline in benign gynecologic surgical volumes," said Intuitive Surgical Director of Finance Patrick Clingan.
The silver lining for investors is that much of this decline has already been priced into the stock.
Hospitals remain tight-fisted with their budgets
For the first time in years, Intuitive Surgical actually sold fewer daVinci machines in 2013 than it had in the previous year. Much of that, management says, was due to uncertainties surrounding the Affordable Care Act.
With hospitals unsure of how the legislation would affect their budgets, they were far less likely to fork over $1.5 million for a new machine. For the time being, that's looking to remain the case.
"We expect capital pressures on hospitals in most regions to continue. Given our new product introduction cycle for systems and broader market conditions, we expect capital margins to remain below prior year levels," said Intuitive Surgical President and CEO Gary Guthart.
This becomes a double-whammy with the introduction of the company's new Xi machine. Though it will likely be a huge driver of growth in the years to come, many hospitals are waiting to see what the machine can do before making a decision to buy it.
That being said, management is confidant that over the long-run hospitals will once again loosen their purse strings, and the daVinci will be a product well worth its price tag.
The next big procedure?
Though there are many different procedures that daVinci is used for, the two most common are hysterectomies and prostatectomies. Such concentration can be dangerous, as investors discovered when gynecological procedures slowed last year.
That's why management went to great lengths to talk about a new procedure that could be the next great driver of growth.
"Procedure growth improved over the first quarter led by...early growth in hernia repair," Guthart said. "Hernia repair is a broad category consisting of several procedure types and techniques for multiple underlying conditions. For some of these repairs, the da Vinci systems provide enhanced visualization and dexterity during the dissection and reconstruction phases of the procedure. We are very encouraged by this growth and we'll pursue those opportunity in coming quarters."
The most important tid-bit came later in the call, when management pointed out that currently, a large number of hernia repairs require open surgery. The use of the daVinci would eliminate that need, and provide, as management stated, "material operating costs that are similar between robotic and laparoscopic ventral hernia repair."
Management wasn't ready to break out how big of an opportunity the hernia market could present, but they were excited enough about it to spend a considerable portion of the company's conference call discussing its potential.
It is definitely something that investors should monitor closely in the coming quarters.
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