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Intuitive Surgical (NASDAQ:ISRG) has a virtual monopoly over robotic surgery involving human organs. It appears that not too many things can hurt this giant company at this point. The competition is minuscule, and the company keeps well ahead of it.

But ISRG is defenseless when facing certain political and economic challenges. Additionally, prostate cancer procedures growth -- Intuitive's strong suit -- has slowed in the third quarter.

The prostatectomy decline appears to be driven by a combination of the U.S. Preventive Services Task Force recommendation against PSA testing, and a change in treatment recommendations for low-risk prostate cancer away from surgery.

Another challenge is the financial weakness of Europe. They purchase less capital equipment and spend less on treatment.

In spite of this, the company experienced strong growth, including growth in colon and rectal surgery for cancers, as well as cholecystectomy (removal of the gallbladder), the latter following the introduction of Single-Site earlier in the year.

Gynecology performance was solid. And like general surgery, gynecology was broad-based, including hysterectomy (removal of the uterus), sacrocolpopexy (repair of pelvic prolapse) and myomectomy (removal of fibroids).

Da Vinci single-site gallbladder surgery

ISRG is moving into new directions, and one of them is single-site laparoscopy.

Single-site means that instead of making multiple incisions through which to insert instruments, the surgeon makes one incision through which several instruments are inserted. The advantage is mainly cosmetic because the incision typically is going through the belly button, and leaves little or no scars.

Patients love the idea of virtually scarless surgery. "It might be a nice marketing thing for a hospital to say, 'scarless operations are really here now,'" says Marc Bessler, director of minimally invasive surgery at New York-Presbyterian Hospital/Columbia University Medical Center. "We hide the scar in your belly button, and you can have your operation and be out the same day."

Single-site laparoscopy has been around for awhile, but it is technically too difficult for some surgeons, and the robot offers an alternative to open surgery.

In December 2011, the FDA cleared for marketing the single-site instrumentation for gallbladder removal.

Potential benefits of the single-site gall bladder surgery for the patient include minimal scarring, less pain, low blood loss, lower infection risk, faster recovery, short hospital stay.

Laparoscopy is now used in many surgical realms, including general surgery, thoracics, colorectal cancer, bariatrics, cardiology, gynecology, pediatrics, head and neck surgery, so it can be assumed that ISRG may soon expand from gallbladder into other segments. It has already applied for expansion of the single-site instruments for use in benign hysterectomy (removal of the uterus) and salpingo-oophorectomy ( removal of the ovary), but the FDA asked for more data before approval.

During the third quarter, the company sold single-site instrument and accessory kits to over 350 U.S. customers.

Firefly

Partial nephrectomy is partial kidney removal. Part of the kidney containing cancer is removed, leaving the rest of the organ behind. The obvious benefit is that the patient is left with 1 1/2 kidneys instead of just one.

The difference between doing a partial and a radical kidney surgery depends on the urologist's experience and the availability of appropriate technology.

Firefly, attached to the da Vinci system, is the latest technology. It uses near-infrared imaging to detect an injected dye of indocyanine green in the blood. The dye helps identify vascular flow to the kidney and distinguish between normal tissue and cancer tissue. "In the viewer, you're seeing everything in black and white, then suddenly bright green shows up where the dye emerges," says one surgeon.

The injection is done in three steps. The first injection of the dye by the anesthesiologist helps identify the arteries leading to the kidney.

Smaller arteries are sometimes not appreciated on CTs. Maybe 10 to 15 percent of the time, the surgeon finds an extra artery that's not been recognized on the pre-op imaging. Firefly is very helpful finding those and preventing unexpected excessive bleeding.

The second injection of dye helps distinguish the normal tissues from the tumor, because there is less blood flow in the tumor.

After the tumor is removed, surgeons inject the dye a final time to ensure the kidney function has fully resumed. "Before this, it was unconfirmed," says Lee Hammontree, MD, with Urology Centers of Alabama. "Now we can watch the kidney turn green and then the renal vein turn green and that gives us confirmation that the remaining kidney is functioning properly."

There is a very small risk that some cancer may be left behind, however. Current data suggest that recurrence rate is very similar to radical surgery over a five year period.

64 customers purchased Firefly systems as part of their initial system purchases in the third quarter.

The Vessel Sealer

In January 2012, the FDA approved the Vessel Sealer, a bipolar electrosurgical sealing and cutting instrument.

The wristed, disposable instrument is intended for bipolar coagulation and mechanical transection of vessels up to 7 mm in diameter and tissue bundles. It gives the surgeon control, high surgical precision, stability, and 3-D HD visualization.

Vessel Sealer is mainly used in general surgery and gynecologic procedures, and customer response has been positive in both segments.

Investors' summary

In the third quarter, the company sold 155 da Vinci Surgical Systems, up from 133 during the third quarter of 2011. That brings the global cumulative total of da Vinci systems installed to 2,462, of which 1,789 was placed in the U.S., 400 in Europe and 273 in rest of the world.

Procedures grew approximately 22% over the third quarter of 2011.

Instrument and accessory revenue was $218 million, up 24% over the same period in the previous year.

Total revenue was $538 million, up 20% over 2011. Total recurring revenue grew to $306 million, up 24% from prior year, and comprising 57% of total revenue.

Net income was $183 million, up 50% over last year.

ISRG ended the quarter with $2.7 billion in cash and investments, up $70 million from last quarter.

Summarizing the results for the first nine months of 2012:

  • Procedures grew by 25%, total revenue was $1.57 billion, up 25% from $1.26 billion in 2011. The revenue increase included recurring revenue growth of 27% and an increase in systems revenue of 21%.
  • Net income was $482 million, or $11.72 per share compared with $344 millio,n or $8.55 per share last year. Year-to-date cash flow from operations was $597 million compared with $464 million last year.
  • The company bought back 343,000 shares at an average price of $495 per share, and has $383 million board-authorized buybacks remaining.
  • The share price's 52-week range: $410.37 to $594.89, and the market cap is $21.56 billion.
  • Analysts' current recommendations: seven Buys, eight Holds and one Sell.

Conclusions

Can ISRG's share price go even higher?

By all means, although major uncertainties are also lurking.

The robotic surgery market has plenty of room for expansion. The global surgical robot market is about $1 billion, and could grow to $5 billion by 2015, with potential for placement of 6,000 robotic systems, according to Titan, a Canadian company and prospective competitor to ISRG. So far, Intuitive has installed about 2,500 da Vinci systems worldwide.

Competition is existent, but minuscule and far removed from commercial success. The entry barrier into the industry is pretty high. Selling capital equipment to hospitals is a slow and painful process. It appears that as time goes by, ISRG is getting better creating a demand for its product, but the same may prove very difficult for newcomers.

The economy in Europe may improve eventually, and the Asian markets, especially Japan, are promising.

A major uncertainty is politics. There are voices claiming that the value provided by robotic surgery has not been proven with comparative studies. Of course, such studies usually ignore patients' convenience and the ease and precision of the procedure on the surgeon's part since these factors are difficult to express in numbers, but are the major positives in robotic surgery.

Reimbursement in the U.S. does not seem to be the problem so far, and may continue that way, since the types of surgeries ISRG is moving into are usually standard and approved for payments already.

All in all, ISRG is a great investment if you can afford it.

Source: Giant Intuitive Surgical Moves Into New Types Of Surgeries