Intuitive Surgical: What Are the Limits of Robotic Surgery?

Quite a comprehensive story via Barron's on Intuitive Surgical (ISRG) - worth a read. Touches on a complaint I've been voicing of late - how few true growth opportunities there are outside the now hated commodity complex... which means one must "really pay up" for other growth opportunities.

Specific to ISRG the question has always been, once past the "saturation point" with the prostate market, what are the new growth opportunities? Once growth slows in a momentum growth stock, the resulting affect in your portfolio is usually quite painful. But again, as other countries grow in wealth, this could become quite the international story as a phase II of its growth cycle. Yet the question is what exactly is the amount of robots that could be placed worldwide? The answer will determine how long this remains a hyper growth company.

• At 322 each, the shares now go for more than 75 times trailing 12-month earnings, giving Intuitive one of the handsomest multiples in the Standard & Poor's 500. That multiple reflects the alacrity with which surgeons have adopted the company's da Vinci robot, a four-armed marvel the doctor controls from an operating-room console. Patients have less bleeding and scarring, and can get back on their feet without a long, expensive hospital stay.
• But Intuitive's volatile and pricey shares also bespeak the desperation of investors mobbing a quality growth story in a lousy economy and stock market. That momentum mob seems heedless of how suddenly this expensive stock could become a victim of the robot's success.
• About 40% of the country's large hospitals already have at least one da Vinci robot. When Intuitive finishes placing its robots, it will see a falloff in the systems sales that have contributed more than half of its revenue.
• Sales of disposable instruments and accessories for each operation will continue, but the growth rate of those revenues will also decline once the da Vinci gets its share of the relatively fixed number of surgical procedures performed each year.
• In its report last week, Intuitive allowed that procedure growth has slowed for the kind of robotic prostate surgery that I had last fall. The robot took seven years to garner the majority of the 90,000 prostate procedures conducted annually.
• Robotics is gaining share more quickly in the larger market for hysterectomies and other surgeries performed by gynecologists. But after that, there are only a handful of remaining high-volume procedures in the U.S. and abroad.
• What stock multiple investors would put on such steady-state earnings is harder to predict. Shares of profitable medical-device makers that saturated their markets, like coronary-stent maker Boston Scientific (BSX), have settled into earnings multiples in the high teens. Even if that earnings arithmetic proves too stingy, Intuitive shares could fall by at least 25% once most people get their surgery robotically, as I did.
• The company and its fans say growth is far from slacking. "We don't think we are anywhere near saturation in anything," says Intuitive's vice president of finance, Benjamin Gong.
• da Vinci procedures have burgeoned. About 55,000 fellows around the world went under the da Vinci in 2007. With other kinds of da Vinci surgeries, there were a total of 85,000 robotic operations last year, an increase from 2006 of almost 75%
• That demand drives hospitals to invest in robot systems. The worldwide installed base of da Vinci robots grew 42% last year, to almost 800, with about 600 of those in North America. A system sells for more than $1.3 million. The hospital pays another $135,000 a year for service and support. Each procedure consumes $1,500 to $2,000 in disposable instruments and accessories.
• Gross margins on both systems and consumables are 70%. Operating margins are almost 35%, and if you add back noncash charges for stock options, cash margins from operations approach 45%.
• The thousand largest hospitals in the U.S. (those with more than 325 beds) should be good for three systems each, says the company. The next thousand hospitals could have one da Vinci apiece. Hospitals in the rest of the world could buy 2,000 more, Intuitive says, for a worldwide total of 6,000 robots. Through June, the company had sold 946 da Vincis worldwide, so Intuitive thinks it has penetrated only 15% of the hospital market.
• THE COMPANY'S MEASURE OF THE MARKET FOR ROBOTS may be far too optimistic. Jose J. Haresco, an analyst at Merriman Curhan Ford in San Francisco, thinks there's room for about 1,800 da Vinci robots in the U.S. and 600 more abroad. Intuitive's dream of three robots in every big hospital isn't yet supported by the evidence.
• Finance V.P. Ben Gong, and bulls like Deutsche Bank's Tao Levy, are quick to change the subject to hysterectomies. There are an estimated 600,000 performed in the U.S. each year. Many of these procedures already qualify as minimally invasive; gynecologists pioneered surgery through laparoscopic key-hole incisions. Yet Intuitive thinks surgeons could use the da Vinci for about 250,000 complex hysterectomies currently done with open incisions.

Disclosure: Author has no position.

Comments

[MedTechInve...:]

At the latest call they cited a study showing that the outcome was favorable vs laparascopic hysterectomy too. Patients went home an average of a half day sooner. With 600,000 abdominal hysterectomies performed each year, that's alot of beds potentially freed up.

Also, the study they talked about comparing coronary bypass procedures showed a dramatic advantage for the Da Vinci. I think it makes the case for significant inroads in heart surgery as well.

When you add the other urological and gynecological procedures that are already showing rapid growth, and consider the procedures that are still being developed, I think we can be confident that the ISRG's estimates of the total number of robots globally are a lower bound on the potential market.

2008 Jul 28 06:43 PM

[25 hydroxy:]

One interesting problem for ISRG in terms of its prostate surgery market is that -are you sitting down- it turns out that prostate cancer in many if not most cases may be a manifestation of vitamin d deficiency. Vitamin d deficiency is epidemic (particularly in hispanics and african-americans). Over the next few years the Federal Government will be pressured to raise the daily requirement of vitamin d to 1000units a day or higher for adults which while still not optimal has been shown to reduce the incidence of multiple different kinds of cancer by 17% in a prospective study. The sad and sick thing is that this has been known for at least 10 years, particularly in the case of prostate cancer. Your governments (NIH) and the industries response? Try to find some patentable molecule that they could use instead of plain old vitamin d as a "chemopreventive" (vitamin d3 -the preferred form-is literally cheaper than dirt). And so they have patented 2000 analogs of vitamin d in the past 10 years to try to make some money. Now I am not against making money, but when you think of how many needless cases of prostate cancer and other cancers have occurred because they couldn't rouse themselves (particularly at NIH) to give a damn about a nonpatentable vitamin even if it will probably turn out to be one of the most cost effective disease prevention strategies ever discovered. That should piss you off! (Have you ever watched someone die of metastatic prostate cancer?) (I've seen the pictures of the prostate cancer cells being destroyed when plain old vitamin d is added to a petrie dish of them.) But I digress, if this eventually turns out to be true (and having read a vast majority of the literature and having 5 years now of experience in this area-I believe it will) what will happen to ISRG if it eventually looses 20-30% of the volume of prostate cancer surgeries to public awareness or public health campaigns regarding vitamin d deficiency? It has happened before, before drugs like tagamet and zantac stomach ulcer surgery was big business (some surgeons that's all they did-remember the highly selective vagotomy-would have been a great surgery for the robot) now those surgeries are hardly ever done. Just a little give back to the community here; have your doctor measure your 25 hydroxy-vitamin d level (particularly if you are african-american) and educate yourself about vitamin d deficiency at vitamindcouncil.com.

2008 Jul 28 11:34 PM

[Polaris:]

25 Hydroxy

Even if you are correct and supplements of Vit D can prevent prostate cancer- which is still unproven to my satisfaction- though I do my best to get adequate exposure to UV and eat full fat butter - it will take some years to persuade the population to follow this advice. And we are talking here of a minority of the population who are at risk of Vit D deficiency.

Furthermore will administration of Vit D in later life reverse 50 or 60 years of deficiency. Yet to be proven. So there will still be a large number of the population in the 50 to 60 age group -the key age group for prostate surgery- for whom this advice is far too late.

In the long run you may be quite right and Vit D may be very effective in preventing prostate cancer. But that will be in the long term. ISRG will have been very successful in treating those many hundreds of thousands of patients now in their forties and fifties for whom Vit D therapy will not be an option.

You may be right that in the long term there will be threats to ISRG that we have not yet foreseen - Black Swans. But that is the long term and as J M Keynes once said - "In the long run we are all dead" - including ISRG

2008 Jul 29 08:54 AM

[speculari:]

What's next gentlemen? How many angels can dance on the head of a pin? What credentials does Mr. Haresco bring to this party anyway? And, while we're at it - I thought it was a lack of zinc in most male diets that contributed to prostate cancer! ISRG has blown away most every "analysts" earnings & sales growth estimates for the last 22 quarters if my feeble memory serves me & I imagine they will continue to do so with regard to the total number of machines they ultimately place in the market.
In addition, struggle to use your imaginations - any method (or machine) can be improved! Todays ( and yesterdays ) daVinci will be improved, perhaps several times over. And, we have'nt even discussed the Veterinary market yet have we? I say they will place 8000 machines out there - so there!

2008 Jul 29 11:45 PM

[the critica...:]

I find it interesting that the author's name does not appear with this article. It's like being a hit-and-run driver.

2008 Jul 30 08:38 AM

[Larry MDR:]

It always amazes me that many analysts miss 'the larger point' (probably because they're too busy writing opinions on other stocks the don't know much about, are shorted sighted, inexperienced, have done limited research on the subject on the subject they're writing about). They are totally missing that the market for robotic surgery in the rest-of-the-world is FAR BIGGER than the US market. Believe me, men with prostate problems throughout Europe and Asia want to get out of the hospital quicker, with much less recovery time. The last I time I heard US population divided by world population: 300-million/ 6-billion = US is only 5% of world population. So the Barron's article cites:

"THE COMPANY'S MEASURE OF THE MARKET FOR ROBOTS may be far too optimistic. Jose J. Haresco, an
analyst at Merriman Curhan Ford in San Francisco, thinks there's room for about 1,800 da Vinci robots in the
U.S. and 600 more abroad."

So in a changing world where the US is no longer the 'only game in town', Barron's thinks 95% or 5,700,000,000 will only want/need access to 600 Da Vinci systems, while the 'elite US population' will have a max of 1,800? Not much logic in this projection IMO.

Lastly, after attending the annual meeting and getting to know the ISRG executives first hand, I believe there is no telling where their ingenuity will lead the company. Ie if they can manage to imagine, develop, manufacture, sell, train, deal with the FDA/hospitals/medicare and support the Da Vinci operating system across the US (and across the globe), there is 'no telling' how far they can go in the broader field of healthcare technology.

2008 Jul 30 10:56 AM

[Been there,...:]

I was lucky enough to have a Doctor who could perform an ovarian cyst removal via robotics, I had a cyst the size of a grapefruit and it was removed with this technology, I went home the next day , only because it was late on the day of my surgery,and I was fully recovered and able to go back to work three weeks later, and I am 55 years old, so my age didn't play in the fast recovery time.

2008 Dec 31 12:44 PM