For those who were unfortunate enough to be involved in the world of Chinese small caps a few years ago, short-seller reports should be of no mystery. One of the most notorious groups from that debacle is Citron Research. While Citron itself has plenty of critics, the company has been accurate on several assessments, helping retail investors see the truth behind various companies. Now, Citron has taken on a big fish -- one that is often the subject of praise from my fellow Fools. Let's see what Citron Research has to say about da Vinci robotics creator Intuitive Surgical (NASDAQ:ISRG) and if you should be as worried as they are.
Before we begin
Given that this deals with some sensitive information, I want to make it very clear that this information is not of my finding, but that of Citron's. Citron Research is a well-known short-seller. Any allegations you see here are not the opinions of myself, nor The Motley Fool. I do believe, however, that investors should be exposed to this in order to make their own investing decisions. That said, let's get to it.
A (alleged) mess
Intuitive Surgical investors woke up Wednesday morning to their stock trading down more than 5%. Looking at the typical news source (for me, the Yahoo! news feed), there wasn't any apparent reason for the drop. But then, while perusing my mailbox full of way too many email blasts from investment research groups, I came across an alert from my old friend, Citron. The headline on the report reads: "Has the Halo Been Broken on Intuitive Surgical?"
Citron believes the richly valued medical device company (ISRG trades at more than 30 times earnings) is headed toward $250 per share, a far cry from its current $513.
The allegations are laid out in plain English: excessive and unjustified marketing, lack of clinical evidence, and legal liability given some patient outcomes.
Before Intuitive lovers jump on my case, it is worthwhile to note that Citron has done well in calling out medical companies in the past. The group released reports on Questcor (UNKNOWN:QCOR.DL) and VIVUS (NASDAQ:VVUS) that were largely accurate. Both stocks are around half the price they were when Citron made its call.
So what is it exactly that Intuitive Surgical is doing that's so deserving of a lashing from Citron?
Citron notes an increasing number of lawsuits, which it claims are credible, against the company. Now, a medical device company getting lawsuits is no news -- that is bound to happen with any company in this field. No one bats 1,000. But for the da Vinci's biggest use, hysterectomies, there have been a few new lawsuits because of (very) bad outcomes. Hysterectomies are relatively simple surgeries to do manually, so this presents a problem for the ultra-expensive da Vinci, which costs well over $1 million to $2 million, plus surgeon training and add-ons.
In these suits -- which involve gruesome details I cannot mention here as they are quite disturbing -- the legal teams allege that Intuitive Surgical misrepresented the da Vinci device, did not accurately present the risks involved, and that the device caused serious long-term consequences.
Do these cases represent the majority of outcomes? No. If this were a life-threatening assassin robot, it would hopefully have drawn the attention of the government before Citron. But we should ask: How long will hospitals be buying these machines, which replace the relatively routine work of surgeons, if they are tied to some seriously dangerous outcomes?
Citron cites 10 different lawsuits filed in 2012 related to hysterectomies, two of them involving death of the patient.
Another suit from a prostatectomy patient includes a statement from the surgeon citing multiple failures on behalf of the device, resulting in truly horrible consequences for the patient.
While these allegations are enough to keep me far from any of these machines, let's look at some of the more business-oriented questions that investors should be aware of.
Citron cites that Intuitive chairman Lonnie Smith sold $50 million worth of his options in the company. There are, of course, plenty reasons for an insider to sell shares. But in light of the other allegations, this does appear to be a large chunk of stock sold at a troubling time.
Looking at GuruFocus, a senior vice president also sold around 6,000 shares in October, with less than 1,000 remaining.
These are not clear indications of a sinking ship by any means, but it is worthwhile to consider in your evaluation of the company.
I doubt anyone at Citron Research has an M.D. These are not medical professionals making these statements. But there are plenty of scholarly journals that give clear opinions on the topic of robotic surgery in general.
The Johns Hopkins Medicine journal noted in 2011 that these robotic surgery devices have yet to be proven superior in any substantial study and that their successes have been overhyped, all while they are promoted by many large hospitals across the country. The American Journal of Obstetrics and Gynecology notes that "Marketing of robotic...surgery is widespread...the content is not based on high-quality data, fails to present alternative procedures, and relies on stock text and images."
Again, none of these factors in isolation indicate that Intuitive Surgical is heading for zero (it's not), but investors need to be aware these ideas are being passed around.
Foolish bottom line
Just as in the Chinese small-cap fiasco, some will find Citron and other short-seller reports to be an effort to make money for the authors and little else. That's your decision to make, not mine.
Do your own research and see what you come up with. Just don't rely on the marketing materials presented by the company itself. As always, be cautious when evaluating a company like this and don't rush into any conclusions.