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Intuitive Surgical (NYSE:ISRG) has had a roller coaster ride since we initiated coverage on the robotic surgical systems developer last December. First, a scathing research report from influential short selling firm Citron Research, with a target price of $250-350, led to huge selling in the stock. (Read Weekly Healthcare Note: Intuitive Surigcal, Abbott Labs, Pfizer & Medtronic) Then the stock shot up sharply and recovered all the losses with another round of spectacular growth and earnings (Read Intuitive Surgical's Strong Sales And Growing Procedures Lifts Outlook). While the stock has been hovering around $570 since then, we believe the stock will again begin its upwards move to meet our current price estimate of $610. Below we discuss factors that should drive Intuitive Surgical towards our price estimate.

Growing System Sales And Expansion Of Procedures To Drive Growth

Intuitive Surgical's strong marketing push is reaping rewards for the medical device maker, which can be witnessed through continued incremental growth in da Vinci Surgical Systems. (Read Intuitive Surgical's Strong Sales And Growing Procedures Lifts Outlook) Its sales force seems to be aptly convincing the hospitals and patients to opt for surgery through the system citing benefits of reduced surgical complications, faster recovery process and lower hospitalization costs. While there is no significant clinical evidence supporting the system's efficacy, the trend that most of the new systems are being bought by the existing customers suggest that this is not proving as a deterrent.

Expansion in number of procedures being performed is also driving the revenue growth even as there has been a declining trend in prostatectomies (prostate surgery) procedures performed through the system. In May 2012, the U.S. Preventive Services Task Force recommended against routine PSA screening (Prostate-Specific Antigen test to screen Prostate cancer) before being diagnosed as it did not benefit patients. [1] And, fewer PSA tests are resulting in fewer prostate surgeries. Historically, prostatectomies and hysterectomies (surgical removal of the uterus) have been most common procedures and accounted for more than 50% of total procedures done using da Vinci systems.

However, this decline in being significantly outpaced by sustainable growth in other procedures like gynecological and general surgery. Further, the management has prioritized their focus on these procedures to drive growth. A wider range of possible procedures will likely result in greater demand for da Vinci Surgical Systems. Additionally, new procedures may require unique instruments or accessories, which would result in incremental revenue for the company.

Huge Potential In International Markets

International markets also provide a substantial growth opportunity for the business. Despite dwindling economic conditions and various austerity measures in Europe, Intuitive Surgical has managed to grow system sales in the region. Currently, high upfront cost of systems (between $1 million and $2.3 million per system) could be one the factors limiting sales potential. However, when economic conditions begin to gradually improve, demand should increase manifold in the region. Additionally, as the scope of procedures expands, hospitals could better justify the system costs. Another major potential market is Japan, and robots here have also been meeting expectations leading to big growth in system sales. The medical device maker increased the size of the sales force and opened two training centers in Japan during 2012, which should translate into much higher sales going forward.

Healthcare Reforms and New Reimbursement Approvals Provide Opportunity

With the Patient Protection and Affordable Care Act ("PPACA"), the government estimates that an additional 30 million Americans will have health insurance (either private, Medicare or Medicaid) over the next five years, which in turn will boost the number of surgeries being performed. [2] As the Act aims to reduce healthcare costs and expand healthcare coverage among Americans, it could help generating demand for cost-effective da Vinci systems. In addition, Intuitive Surgical has been seeking reimbursement approvals for many procedures. Assuming these efforts will soon bear fruit, we expect sales to increase significantly.

Instruments And Accessories Benefits From Growing Number Of Systems

Instruments and accessories are a set of devices that facilitate the use of da Vinci Surgical Systems. Thus, the demand for instruments and accessories is directly proportional to the da Vinci systems. Further, Intutitive Surgery is seeing a continuous increase in average instrument and accessories spend per procedure due to higher sales of new supplementary products like vessel sealers and single-site kit. A greater number of procedures performed also speeds up the replacement cycle, as these instruments and accessories have a limited life and need to be replaced periodically. As use increases and Intuitive Surgical releases new instruments and accessories, we expect a steady increase in instrument and accessories spend per unit.

Notes:

  1. Screening for Prostate Cancer, U.S. Preventive Services Task Force, May 22 2012
  2. FACT SHEET: The Affordable Care Act: Secure Health Coverage for the Middle Class, White House, June 28 2012

Disclosure: No positions

Source: A Closer Look At Intuitive Surgical's $610 Price Estimate