Intuitive Surgical Fighting Off Short Sellers

| About: Intuitive Surgical, (ISRG)
This article is now exclusive for PRO subscribers.


In December and again in January Intuitive Surgical (NASDAQ:ISRG) saw a wild ride after short seller firm Citron Research issued parts 1 and 2 of a negative report on the company.

After falling to $485.80, the shares reversed and ended 3 percent higher.

Citron, for its part, sees the stock headed down to $300 over the next 12 months, citing outrageous marketing claims, a fierce legal challenge, and the end of the medical arms race due to Obamacare.

A quick reversal in share price may have been driven by Intuitive's stellar year-end results and the comments made by Goldman Sachs in a research note.

Goldman said that a not yet announced next-generation product with expanded device add-ons (i.e. EndoWrist vessel sealer, stapler system, dual consoles) could be a driver for new growth.

Goldman also commented on the legal liability.

"We see ISRG's relative safety profile as an attractive alternative when compared to other surgical options. Additionally the company's strong cash and investment holdings ($3.3 billion as of 3Q12) and significant free cash flow generation (we estimate $800+ million for 2013E) should be more than sufficient to settle any legal proceedings with plenty of room to spare."

Procedure growth

In the US total procedures grew to approximately 373,000 in 2012, up from 292,000 in 2011.

The largest contributors to procedure growth were Benign hysterectomy, Cholecystectomy, colon and rectal resections, endometriosis resection (removal part of the uterine endometrial lining), partial nephrectomy, and sacrocolpopexy. The growth in these specialties have more than offset the decline in the prostatectomy business.

Prostate cancer procedures, Intuitive's traditional strong suit, has declined from approximately 73,000 to 62,000 procedures. The decline is 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.

Technical innovations

Response to the da Vinci Vessel Sealer and Single-Site instrument kit was positive during the year.

The Vessel Sealer

The Vessel Sealer, approved in January 2012, is a bipolar electrosurgical sealing and cutting instrument for vessels up to 7 mm in diameter and tissue bundles. It gives the surgeon control, high surgical precision, stability, and 3-D HD visualization.

The Vessel Sealer draws most interest from colorectal surgeons and gynecologists.


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.

But 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,'" said 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.

450 Si customers purchased Single-Site starter kits.

The da Vinci Si model, introduced in 2009, offers new features like the dual-console capability to support training and collaboration.


Firefly, attached to the da Vinci system, 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.

Smaller arteries are sometimes not appreciated on CAT scan. Maybe ten to fifteen 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.

88 customers purchased the Firefly systems in the fourth quarter, as part of their da Vinci purchase.

Adding procedures

Intuitive is constantly looking for new types of procedures, especially complicated ones, that could make their equipment more useful.

Two examples:

Laparoscopic rectal cancer resections have for years proved challenging for even the most skilled laparoscopic surgeons and as a result, clinical adoption remains low.

A recent three arm study from Yonsei University College of Medicine (Korea) compared results of 165 patients undergoing robotic, laparoscopic and open rectal cancer surgeries.

The study showed that robotic surgery for the treatment of mid to low rectal cancer significantly decreased the amount of pain medication needed and the length of hospital stay.

Another promising area is gynecology.

Da Vinci Sacrocolpopexy (pelvic prolapse surgery) volume trails only da Vinci Hysterectomy (removal of the uterus).

Physicians from the University of South Florida reported the results of their 164 patient study comparing da Vinci Sacrocolpopexy to Open Sacrocolpopexy.

Average length of stay for the da Vinci group averaged two days as compared to three days for the Open Sacrocolpopexy group. However 48% of the women treated within the da Vinci group experienced a length of stay of less than 24 hours as compared to just 1% for the women undergoing in Open Sacrocolpopexy.

This study also compared costs, considering both system and maintenance costs. The overall costs reported for the robotics group was $9,725 as compared to $12,485 for the Open Sacrocolpopexy group with similar readmission rates at 30 days.

The authors stated that while da Vinci sacrocolpopexy took somewhat longer to perform than the open sacrocolpopexy, both the direct and indirect cost for the da Vinci procedure was less than for the open procedure.

Investor's summary

Worldwide procedures grew by approximately 25%. Intuitive sold 620 da Vinci Surgical Systems during the year, up from 534. Total revenue grew to $2.178 billion, up 24 percent over 2011.

Recurring revenue grew to $1.246 billion, up 27 percent and comprising 57 percent of total revenue.

Net income was $657 million or $15.94 per share compared with $495 million or $12.32 per share last year.

Intuitive ended the year with cash and investments of $2.9 billion, up $220 million compared with September 30, 2012.

The company bought back 102,000 shares at an average price of $524 per share, and have $330 million Board authorized buybacks remaining.

For 2013, Intuitive expects procedure growth to be driven by U.S. gynecology, U.S. general surgery and international prostate procedures. In 2013 total procedures are expected to grow approximately 20 to 23% from the base of approximately 450,000 procedures performed in 2012.

For 2013 the company projects annual revenue growth of between 16% and 19%.

The share price ranged in the past 52 weeks from $451.35 to $594.89.

Intuitive Surgical has the financial muscle and brainpower to face up to short sellers but further attacks may be expected and along with them a heavy fluctuation in the share price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.