Intuitive Surgical Falls On U.S. Prostatectomy Concerns

Jul.20.12 | About: Intuitive Surgical, (ISRG)

So far I'm 5 out of 5 when it comes to my short picks - Nokia (NOK), RIM (RIMM), Hewlett-Packard (HPQ), Akamai (AKAM), and my latest Intuitive Surgical (ISRG). All have crumbled since initiating my sell advice.

My fear for Intuitive: Medical treatment of prostate cancer is shifting away from surgery. While still a mainstay, watchful waiting and other modalities are becoming more accepted. In fact, even PSA screening is being questioned. As I wrote:

The U.S. Preventive Services Task Force argued against routine PSA screening because treatment did not decrease mortality in patients with prostate cancer found through screening. Fewer PSA tests would result in fewer diagnosed cases and hence, less prostate surgery.

Those concerns turned to be spot on. Intuitive Surgical got crushed in after hours on worries concerning the pullback in its bread-and-butter prostatectomy division. Per their CEO:

Our solid second quarter revenue and earnings performance is the result of robust US gynecological and general surgery procedure growth offset by pressure in Europe and US prostatectomy.

Sales were weak in Europe and there was a decline in U.S. da Vinci prostatectomies. It turns out U.S. prostatectomy numbers had been soft but this quarter were much more so. As the CEO described the decrease in U.S. prostatectomies, there was a "significant push." As far as Europe is concerned, the company switched its leadership to turn around that business.

Their CEO echoed my concerns about the impact of fewer PSAs in the conference call:

It's hard for us to exactly handicap what impact on PSA test and discussion is, but clearly as one of the major treatment modalities for prostate cancer care, if there are changes PSA and the number of people going into the pipeline that will flow through to us and then the second quarter part that you've described has been if there is a look at nonsurgical treatment modalities and other alternatives like active surveillance, that also will have an impact. Hard for us to predict where that will play out over the long haul.

Prostatectomy has been the driver of Intuitive. Gyn and general won't cut it. Robotic surgery is unlikely to displace laparoscopy, the gold-standard for gynecological and general surgery. Laparoscopy is firmly entrenched: It's safe, fast, quick recovery time.

Intuitive Surgical is still overpriced, trading at 38 times earnings. Its prostactomy business may be slipping.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.