Over the past 15 years we've witnessed almost uninterrupted growth from Intuitive Surgical (NASDAQ:ISRG), the largest developer and manufacturer of robotic-assisted devices in the world. The company's mission is simple: provide the surgeon and consumer with a device that reduces length of stay, readmission, complications, and surgical site infections relative to traditional minimally invasive open surgery -- and based on its growth, it's done a very good job of that.
However, 2014 brought with it a host of challenges. The official implementation of the Affordable Care Act, better known as Obamacare, caused hospitals and consumers to clamp down tightly on their wallets in an unclear spending environment, and questions arose regarding the true advantage of Intuitive Surgical's da Vinci surgical systems relative to laparoscopic surgery. In fact, Intuitive Surgical's 2014 full-year sales actually retreated from its 2013 full-year revenue.
In 2015 things got back on track, and Intuitive Surgical's CEO Gary Guthart wants everyone to know it. Just yesterday Guthart made a 22-minute presentation at the J.P. Morgan Healthcare Conference (that I strongly suggest you listen to), which is the mecca of all conferences for drug developers, device makers, and other life science companies. During his presentation, Guthart discussed the company's return to growth and issued a preliminary sales growth forecast for 2016 of 9% to 12%.
Here's how Intuitive Surgical could shock Wall Street and investors
But Guthart also hit on three critical points that Wall Street and investors may be overlooking that could drive Intuitive's growth substantially higher.
1. If you're looking at just the machine, you're making a critical mistake
Perhaps the most intriguing point that Guthart continued to hammer home during his presentation at the J.P. Morgan Healthcare Conference is that if you think of Intuitive Surgical as just a company that sells expensive robotic-assisted surgical machines then you're missing a big part of the growth story.
It's definitely true that these machines aren't cheap, and Intuitive does generate a good chunk of revenue from their sale. It has three models currently in production, with its newest being the da Vinci Xi. The majority of orders since the Xi was introduced have been for this machine, with almost all of the remainder being the prior-generation da Vinci Si. The Xi has a retail value of up to $2.5 million. Yet even with Xis dominating new orders, roughly 70% of the company's revenue now comes from higher-margin recurring operations, such as maintenance, training, software, installation, and accessories for the device.
A good way to think about the da Vinci Xi is like a razor and its blades. The margins on the machine, or the "razor", are actually pretty low because it's a highly sophisticated machine that's not cheap to produce. Where the real margins are made over time is in the servicing and accessories provided to this sophisticated device -- in the razor analogy, selling blades.
Services and accessories are high-margin impact items, and as you can see above (note that "Inst & Accy" refers to instruments and accessories), they're now a critical component of Intuitive Surgical's growth. If this trend continues, the company's margins could improve pretty steadily on a year-over-year basis, with the exception of years where new generations of robotic-assisted surgical devices are launched.
2. Cancer is an underlying growth and treatment opportunity of enormous proportions
One of the primary reasons Intuitive Surgical returned to growth in 2015 is because it's made substantial inroads into general surgical procedures. The majority of its procedures are still conducted in urology and gynecology, but as you'll note above we're seeing a rapid expansion in general surgery uses around the world.
Specifically, Guthart noted during the presentation that Intuitive's primary general surgery growth targets in 2016 and beyond are colorectal, ventral hernia, and thoracic. As it stands now, robotic-assisted surgical procedures occur in less than 10% of each of these three indications compared to open surgery, which is being performed for 50% to 70% of patients, depending on the indication. Guthart sees open surgery cases as an opportunity for da Vinci XI, and it really demonstrates just how far robotic-assisted surgery has left to infiltrate.
But most importantly, Guthart noted that about half of all of Intuitive Surgical's surgical opportunities are the result of an underlying cancer. The World Health Organization has forecast that global cancer incidence rates are expected to rise by nearly 60% in two decades to 22 million diagnoses annually. It's not all bad news, as old age is a major risk factor for cancer -- so higher incidence rates imply we're living longer as a whole. For Intuitive Surgical, it means a major opportunity to expand into colorectal cancer and lung cancer robotic-assisted resections, as well as expand its already-dominating grip in prostate cancer surgeries.
3. Intuitive is just touching the tip of the iceberg in international markets
Guthart also spent a lot of time discussing just how early in the cycle he believed the company to be in terms of the development of robotic-assisted surgical devices. With opportunities in thoracic and colorectal, Intuitive Surgical has plenty of market share left to capture.
However, one point Guthart hit on that some on Wall Street may be overlooking is just how rapidly its international procedures are growing. Understandably, it's working with a smaller base, so it's a lot easier to grow rapidly -- but we're talking about 26% year-over-year growth outside of the United States (OUS) in 2015. The company is only getting around 50,000 procedures per year from Asia, although that's up from approximately 10,000 back in 2011. Asia, Europe, and the rest of the world look to be strong growth opportunities for Intuitive Surgical moving forward.
Time to buy Intuitive Surgical?
Do these points mean it's time to consider Intuitive Surgical for your portfolio? The answer to that will depend on your investment timeframe. Intuitive Surgical, in a metaphorical and literal sense, has the tools to succeed, but it needs time to infiltrate new indications and overseas markets before we can put the 2014 revenue hiccup in the rearview mirror for good.
The other concern would be how insurers view robotic-assisted surgery. There's nothing to suggest at the moment that insurers are going to back away from Intuitive's devices in any way, but as the costs of these devices increase, insurers may look to reduce the use of robotic-assisted surgery. These are just some of the concerns that need to be taken into account by investors.
On the other hand, the company operates in a niche with a strong advantage over any would-be competition. This should imply strong profits and pricing for the foreseeable future. I, for one, am fairly optimistic about the company's long-term outlook, and would suggest you dig into the company a bit deeper.