Tickers in this Article: ISRG, JNJ, SYK, COV
It wasn't so long ago that Intuitive Surgical (Nasdaq:ISRG) was one of the cleanest growth stories in med-tech, as hospitals seemingly couldn't buy the company's surgical robots fast enough. Not only did Intuitive's daVinci robot come to all but dominate the prostatectomy market, but it was well on its way to taking significant share in hysterectomy as well.

Then the bad news began. From reports of surgical complications to multiple papers alleging that robotic surgery is not cost-effective, the news flow turned decidedly negative even as procedure counts continued to grow.

Now we have a major quarterly earnings miss to digest. While there are enough rumblings out there to suggest that it's not a solely Intuitive-specific issue and the procedure growth numbers still look decent, it looks this highly-valued stock is going back into the penalty box. I do believe Intuitive continues to offer above-average growth in the med-tech space, though, and the reality is that this stock only seems to get cheap when the news flow gets pretty scary.

A Big Miss For Q2, But Maybe Not Where You'd Expect
Intuitive Surgical doesn't miss very often, so the company's warning that second quarter earnings would significantly miss expectations is rare enough all on its own. Against an average estimate of about $630 million, Intuitive management is calling for $575 million in revenue in the quarter – a 9% miss that is also about 6% below the lowest estimate on the Street. Although the company didn't give EPS guidance, the net income number would suggest an EPS miss of similar magnitude assuming that the company didn't repurchase a huge number of shares during the quarter.

So what happened?

On first blush, it's tempting to think that Intuitive is finally falling victim to all of the bad press. The combination of more conservative prostate cancer management and the growth of new drugs like Johnson & Johnson's (NYSE:JNJ) Zytiga and Medivation's (Nasdaq:MDVN) Xtandi has been reducing prostatectomy volumes, and it sounds as though more conservative management is coming into vogue for hysterectomy cases as well. Couple that with a steady drumbeat of negative press about robot-assisted surgical complications and the cost-benefit of these procedures, and maybe hospitals are easing back on the reins.

I don't know about that. Although instrument/accessory growth of 18% suggests some softness in procedure volumes, it's not nearly enough to account for the miss.

On the other hand, US system placements plunged almost 30% to 90 (against an expectation of about 120 to 125) and total system placements declined (from 150 last year to 143) for the first time since the miserable capital equipment market of 2009.

SEE: A Checklist For Successful Medical Technology Investment

Is Intuitive Surgical No Longer Special?
That there is pressure in the med-tech cap-ex space is not exactly news. Radiation oncology Varian (NYSE:VAR) has been seeing iffy order patterns, and other vendors of permanent (or semi-permanent) equipment like General Electric (NYSE:GE), Philips (NYSE:PHG), and CareFusion (NYSE:CFN) have been getting more cautious. What is news is that it's impacting Intuitive Surgical – a company that heretofore often seemed impervious to the economic conditions that affect demand for hospital cap-ex.

But it may also not be an “either or” situation. As prostatectomy and hysterectomy volumes weaken, hospital administrators are likely not seeing nearly so much pressure to buy additional units. Likewise, pushback from payors may be leading hospitals to take more of a “start slow and go from there” approach with new units – making sure that a new daVinci system is fully utilized before shelling out the $1.5 million-plus for a new system.

The Bottom Line
Intuitive's stock is getting hammered today, but it won't really be clear what's going on in the market until we hear from others in the space like Stryker (NYSE: SYK) and Covidien (NYSE:COV) and get a better sense of what is going in terms of surgery volumes, cap-ex, and so on. What's more, even with this expected decline it is not as though Intuitive will look cheap by traditional metrics like EV/EBTIDA or P/E.

All of that said, more risk-tolerant investors who've been waiting for a chance to get into Intuitive shares may welcome this opportunity. I continue to believe that the Intuitive platform offers a compelling proposition for doing procedures on a minimally-invasive basis that would otherwise have to be done as open surgeries, with the attendant risks, pain, side-effects and so on. Accordingly, I think that so long as the utilization numbers hold up, this is a stock worth considering on weakness.

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