Seeking Alpha
Long only, growth at reasonable price, value, research analyst
Profile| Send Message| ()  

Intuitive Surgical (ISRG) has garnered ample attention for its daVinci surgical robots - both from investors who lust for Intuitive's revenue and earnings growth, and clinicians looking to either use or question the use of these surgical robots. A recent paper once again highlighted the obvious - robot-assisted surgeries cost more - but a closer look at the details of what the paper did, and did not, say suggests minimal incremental risk to Intuitive Surgical.

Comparing dvH to Laparoscopic Hysterectomy

On February 20, the Journal of the American Medical Association published a paper by Drs Wright et al comparing the costs and outcomes of robot-assisted hysterectomies ("dvH") and more conventional laparoscopic hysterectomy. While this was a relatively sound study (and more comprehensive than past studies that have examined the cost-benefit of robot-assisted prostatectomy), the outcomes were not surprising - Intuitive Surgical's outcomes are comparable to traditional laparoscopic procedures, but cost more.

Rather than indulge in extensive copy/pasting, I would encourage interested readers to read the paper for themselves. That said, I'll note a few major points - to a large extent, the doctors did a good job of creating patient cohorts that were "apples to apples," making it easier to draw high-quality conclusions.

Frankly, the conclusions were not very surprising. The complication rates were very similar (5.5% for dvH, 5.3% for traditional laparoscopic procedures), the amount of "resource utilization" (transfusions, reoperations, etc.) were also very similar. Where there was a difference was at the hospitalization line - patients who received a traditional laparoscopic procedure were more likely to require a hospital stay of two days or more than dvH patients (24.9% versus 19.6%).

Likewise, the cost results were very predictable. All-in costs were higher for the dvH group; about $8,900 versus $6,700 for traditional procedures. Likewise, the variable costs (that is, excluding the cost/depreciation of the robot itself) showed a higher sum for the daVinci ($4,700) than a minimally invasive procedure using tools from companies like Johnson & Johnson (JNJ), Covidien (COV) and Stryker (SYK).

Like Silver Blaze, What's Missing Is What Matters

So is this an open-and-shut case against Intuitive Surgical? After all, the authors of the paper saw no real procedural/complication benefits to robot-assisted hysterectomies and pointed out that the incremental costs of wider adoptions could top $2 billion.

As in the case of the Sherlock Holmes story Silver Blaze (the one where the dog didn't bark), what's not in the paper is highly relevant in my opinion.

First, let's not forget a key detail about the daVinci robot - in many cases, it allows doctors to perform procedures that they couldn't otherwise do (or do as well). Consequently, it's impossible to say what the procedural outcomes would have been if you took away the robots and made the dvH surgeon group use the same laparoscopic tools.

Along this line, this study doesn't seem to acknowledge what the daVinci is really all about in the hysterectomy space. Intuitive Surgical considers its addressable dvH market to be a roughly 300,000/year group of procedures that CANNOT be done laparoscopically. I would note, for instance, that the paper did not include the patients' BMIs, as a high BMI can make traditional minimally-invasive surgery nonviable. Roughly along those lines, there was a statistically significant difference in co-morbidities between the two groups - only about 43% of the robot group had no co-morbidities, while the laparoscopic group had more than 48% with no co-morbidities.

It's also important to note that the all-in costs are not completely comprehensive. What I mean is this - while the incremental cost of additional hospital stays doesn't hurt the hospital, the study did not include an opportunity cost for those extended stays and the incremental revenue potential for the hospitals if those beds hadn't gone to recuperating hysterectomy patients.

So it would seem that the study authors were not exactly comparing like for like - the dvH group almost certainly included procedures that couldn't (or shouldn't) have done with conventional laparoscopic approaches, and this study's authors did acknowledge that robot-assisted procedures are preferable to open hysterectomies (which should be the real comparable group if doctors are following Intuitive's intentions).

This is the key detail for robot companies like Intuitive Surgical and MAKO Surgical (MAKO) - the value-add is in enabling procedures that would otherwise be difficult or impossible. If companies like Covidien, Johnson & Johnson, Stryker and Zimmer (ZMH) can introduce tools to expand the patient pools eligible for less-invasive procedures, that is the real threat.

This Changes Little Or Nothing

By no means am I attempting to discredit or "bash" the study authors - this was a legitimate study conducted in a reasonable fashion. I do worry, though, that the study authors really missed the point. While there may be some surgeons or patients who think "ooh, a robot … let's have that" and want to use the daVinci in cases where it's not necessary, the real utility of the system is in procedures where the alternatives (generally open procedures) are much worse than minimally invasive procedures.

Consequently, I don't see this study changing much of anything. Maybe administrators will re-examine their policies to make sure that dvH procedures aren't being performed unnecessarily, but that would be about it. Moreover, this study's confirmation of the relatively similar complication rate should be a feather in the cap of Intuitive's lawyers in fighting recent allegations/rumors of unacceptably high complication rates.

The Bottom Line

I'm still not a major fan of Intuitive Surgical, as it is trading above fair value. That said, Intuitive Surgical is likely to grow more than 10% a year for quite some time and that will help push the shares higher on a year-by-year basis. Accordingly, while it's not at the top of my wish list (and the multiple *will* decline eventually), it's not a bad med-tech growth stock today.

Source: A New Paper In JAMA Unlikely To Jam Up Intuitive Surgical