Here are two scary facts about the delta variant of the virus that causes COVID-19. First, it is more than twice as contagious as previous variants. Second, it is now responsible for the vast majority of new COVID-19 cases -- of which there are still thousands every week. These facts paint a clear picture. Despite the progress we've made, the pandemic isn't over.
That's concerning for the public. We'd all love to get back to pre-COVID normalcy. It's also concerning for those companies whose businesses suffered at the peak of the outbreak. One of these companies is medical devices giant Intuitive Surgical (ISRG +1.07%). Let's see how the spread of the delta variant could present obstacles ahead.
Delayed elective surgeries
Intuitive Surgical generates more than half of its revenue from selling instruments and accessories that go along with its da Vinci robotic surgical system. In the second quarter ended June 30, the company's revenue from this segment totaled $796.4 million -- or 54.4% of its top line. There is one critical number that determines instruments and accessories revenue for the company: the volume of elective surgeries physicians perform with its crown jewel.
Image source: Getty Images.
More procedures equal more revenue. Rising cases of COVID-19 due to the delta variant could affect this dynamic. If healthcare facilities are swamped with coronavirus patients, they will be inclined to delay elective surgeries, leading to lower sales volume for companies like Intuitive Surgical.
The healthcare company fell prey to this precise headwind last year. In a press release posted to its website on April 8, 2020, the company announced it was experiencing "disruption of procedures in countries with healthcare systems impacted early by the COVID-19 outbreak." As a result, Intuitive Surgical's first-quarter 2020 revenue dropped about 14% to $1.1 billion.
Should investors expect the same to happen if we can't contain the spread of the delta variant?
Focus on the long term
Here's an even more important question, does it matter? Let me explain. Elective surgeries aren't the same as optional surgeries. A small number of procedures are classified as "emergency," often (though not always) because a person's life is immediately at risk. Everything else, including surgeries to remove a tumor, falls under the broad umbrella of "elective."
Many of these relate to severe medical conditions, and postponing them does not magically cure patients. Even if the volume of elective procedures decreases due to the delta variant, this merely creates a backlog of patients waiting for their turn. In other words, the disruption to Intuitive Surgical's business will be temporary; that's what we observed in the past 18 months.
After suffering for much of last year, Intuitive Surgical's business rebounded this year as things started getting back to normal. Even if there's a regress on the coronavirus front, investors should focus on the company's long-term potential. Intuitive Surgical is one of the leaders in the robotic-assisted surgery (RAS) market. It held a 79.8% share of this space in 2020.
The company also benefits from various competitive edges. For example, its business model boasts high switching costs. The company's da Vinci system costs between half a million dollars and $2.5 million. After spending that much, healthcare facilities aren't likely to want to switch. Also, Intuitive Surgical's devices, instruments, and accessories have thousands of patents in the U.S. and abroad that help protect them against competing platforms.
Further, breaking into this industry is capital intensive, not to mention the strong regulatory barriers to entry. That's why Intuitive Surgical will remain one of the leaders in this field which, by the way, still has a long runway for growth. In 2019, Medtronic estimated that robotic-assisted surgeries made up only 2% of worldwide procedures.
The RAS market is projected to continue expanding rapidly in the coming years, and Intuitive Surgical is ideally positioned to profit from this opportunity. That's why this healthcare stock is a buy regardless of what happens with the delta variant.
