It's been a chaotic year for robotic surgical systems developer Intuitive Surgical (ISRG -1.69%), with its stock rallying as high as $541 and dipping briefly below $350. But where is this robotic-assisted surgical system developer headed next? That's what we asked two of our healthcare analysts.
Source: Intuitive Surgical.
Sean Williams: Prior to last year it didn't look as if anything could stop robotic surgical system developer Intuitive Surgical, but a confluence of factors knocked the company well off its highs.
Over the past year Intuitive has dealt with weak hospital spending in lieu of the implementation of the Affordable Care Act, known better as Obamacare. Additionally, consumers have used the uncertainty associated with premium pricing to hold off on elective procedures. Compound this with an ongoing investigation by the Food and Drug Administration examining the safety and efficacy of the da Vinci surgical system and you have a quick summary of why the short-sellers have come out of the woodwork.
As for me, I suspect investors have let emotions go to their head.
To begin with, Intuitive Surgical has a stranglehold on the soft tissue robotic-aided surgical market. Since inception, and through June 30, 2014, more than 3,100 da Vinci surgical systems have been installed worldwide. Even if a competitor were to enter the market, it would take years to properly train physicians and install these multimillion-dollar machines. In other words, Intuiitve's pricing power for its da Vinci surgical system is unmatched.
Secondly, the long-term effects of Obamacare should be positive. Although hospitals and consumers were relatively unsure of spending and premium pricing last year, as time passes I'd be surprised if we didn't begin to see an uptick in procedural volume. Furthermore, as more people gain insurance in the U.S., previously costly robotic-assisted procedures could become more commonplace.
Finally, I believe investors need to calm down and look past the FDA's investigation into da Vinci's safety and efficacy. While there's been an increase in the number of adverse events reported by patients, there have also been an equally larger number of procedures being performed. Put another way, da Vinci's safety and efficacy have remained constant; it's just being used more than, say, five years ago.
With these points in mind, there's little reason in my mind to believe Intuitive Surgical can't grow in the high single digits to low double digits throughout the remainder of the decade and push its stock higher over the long run.
Cheryl Swanson: It's tough to be negative about a company that creates technology that has the potential to save lives. And there's no doubt that Intuitive Surgical's da Vinci machines are wildly impressive, and have created a paradigm shift in healthcare.
But here's the rub for potential investors. Intuitive Surgical is in a major trend reversal. Thanks to weaker demand for its robotic surgical systems, the company has shifted from increasing revenue to steadily declining revenue, and there's little reason to believe that slide will end anytime soon.
Specifically, Intuitive Surgical posted its fifth straight quarterly earnings decline last quarter. This once fast-growing company's revenue fell 11% to $512.2 million in Q2. Net profit also slumped badly -- from $159.1 million, or $3.90 per share a year ago, to $104 million, or $2.77 per share.
Intuitive Surgical has a major problem it can't fight off. Money now follows outcomes in American healthcare. As a result of the Affordable Care Act, hospitals and providers are increasingly being financially incentivized based on quality long-term patient outcomes, rather than the number and type of surgeries.
The result is more cost-consciousness on the part of insurers, as well as hospital capital budgets stiffening. While Intuitive Surgical owns the robotics market currently, its surgical robots carry a premium price tag, and challengers are scrambling to enter the market with a cheaper system.
In 2015, Titan Medical plans to make commercially available a platform with a projected price of less than $1 million, as opposed to $1.5 million-$2.3 million for da Vinci's. Other coming robotic or telesurgical systems include the University of Washington's Raven II, SOFAR's Telelap ALF-X, and the ARAKNES project (pegged below $600,000), to name a few.
Meanwhile, business is not going on as usual at Intuitive Surgical. Hospital administrators know they have other options coming, and last quarter only 96 da Vinci Systems shipped. While that was better than the dismal 87 shipped in the first quarter, it was way off the mark of the 143 da Vinci Systems sold in the second quarter a year ago.
Medical robots will continue to change and leap into new areas. But in the face of European austerity, U.S. healthcare reform, and newcomers entering the fray, Intuitive Surgical has a difficult road to travel before resuming its upward trajectory.
