New Study Provides Good News For Intuitive Surgical

| About: Intuitive Surgical, (ISRG)

An independent study on hysterectomy procedures has brought in positive news for Intuitive Surgical's (NASDAQ:ISRG) da Vinci surgical systems. The study, led by Dr. Martin Martino of Lehigh Valley Health Network, revealed that robot-assisted hysterectomy procedures performed on women with non-malignant conditions provided better results than non-robot assisted surgery on several parameters. It also unveiled that robot-assisted hysterectomy patients were less than half as likely as laparoscopic hysterectomy patients to be readmitted to the hospital within a month of surgery. [1] According to the Centers for Medicare & Medicaid Services (CMS), readmission is a major factor contributing to rising patient costs and should be minimized for efficient patient care. [2]

This is a significant development for Intuitive Surgical because its da Vinci system received a lot of negative publicity last year from research reports which questioned its benefits and cost effectiveness, especially in hysterectomy procedures. [3] As a result of the negative sentiment, da Vinci unit sales declined by more than 11% year-over-year to 546 systems in 2013.

The new study also suggested that robot-assisted hysterectomies were more efficient than other procedures in terms of blood loss during operation, duration of hospitalization and readmission costs (see full research report here). We expect these research findings to have some positive impact on customer confidence in da Vinci surgical systems, which could help its sales growth in the future.

We currently have a price estimate of $455 for Intuitive Surgical, which is about 10% ahead of the market price.

How Lower Readmission Rates Impact da Vinci Sales

According to the Lehigh Valley Health Network study, total readmission cases (readmission within 30 days) for robot-assisted surgery patients was around 1%. In comparison, it was more than 2.5% for laparoscopic surgery patients and 3.5% for patients who underwent abdominal hysterectomy surgery. Moreover, robot-assisted hysterectomy procedures had a significantly lower readmission cost of about $33,000 as compared to more than $50,000 incurred in laparoscopic procedures and about $330,000 in open abdominal surgeries. This suggests that robot-assisted hysterectomy surgeries provide substantially better results in terms of medical costs and operation efficacy than non-robotic procedures in many cases.

Lowering medical costs and improving quality of patient care are important goals of the U.S. government's Affordable Care Act. The Act established a "Readmissions Reduction Program" under which hospitals with excessive re-admissions are to be paid less for procedures by the Centers for Medicare & Medicaid Services (NYSE:CMS). [4] Therefore, hospitals now have a financial incentive to reduce re-admissions and costs for patients. If da Vinci robotic surgical systems can help achieve this objective, its unit sales could see an upward trend this year.

Rise In da Vinci Procedures Can Further Drive Revenue Growth

Intuitive Surgical has three main business divisions - da Vinci systems, Instruments & Accessories and Services. The company's revenues come not only from selling its da Vinci robotic systems, but also from Instruments and Accessories used in surgical procedures. A greater number of procedures generally means a greater number of instruments, as well as a shorter replacement cycle. Therefore, the number of procedures directly impacts the company's revenues.

Moderating growth in gynecological procedures (including hysterectomy surgeries) negatively impacted da Vinci system sales last year. However, if robot-assisted surgical systems can indeed provide all the benefits as indicated in the study, da Vinci assisted procedures could potentially increase going forward since da Vinci is the only FDA-approved robotic surgical system available in the U.S. If da Vinci surgical system sales pick up in 2014, we can expect procedures to increase as well. Since improvement in da Vinci system sales influences all of Intuitive Surgical's business divisions, it could drive overall top-line and bottom-line growth for the company in 2014.

Disclosure: No positions.

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