Free Annual Reports
Intuitive And The High Price Of Scarcity
There is a definite lack of exciting growth stories in medical devices these days, and that is certainly part of the attraction of surgical robot maker Intuitive Surgical (Nasdaq:ISRG). Of course, a monopoly position in a potentially huge market and demonstrated improvements in patient outcomes does not hurt either.
The question is, though, will investors continue to willingly pay such a premium for the shares with current growth rates?
Tutorial: Investing Concepts
A Quarter that Isn't as Strong as It Looks
Intuitive once again surpassed the average revenue estimate, and 18% overall growth is not bad. What's more, instrument revenue growth of 28% was quite good and procedure growth of 30% clearly shows that the daVinci system is gaining share in its targeted procedure base.
On the other hand, system revenue rose less than 8% and the company booked 88 net new placements this quarter - continuing a fairly unimpressive recent trend of net placements. What's more, ASPs fell again - dropping 5% from last year and about 2% from the fourth quarter. Ironically, analysts used to fret when system growth was strong and instrument/procedure growth was not so impressive - now they have it the other way around and are still complaining. (For more, see Med-Tech Choice Is Simply Intuitive.)
Intuitive also showed a disappointing absence of operating leverage. Gross margin fell more than a full point, with mix issues in the systems side (and those lower ASPs) being a key issue. Operating income grew 14% for the quarter, with operating margin falling over a full point.
Challenges - More Training, More Procedures, More Products
The potential of the daVinci is still remarkable, but the company has work to do. Contrary to the company's name, the use of a surgical robot is not purely intuitive and it does require training. Unfortunately, these are expensive machines and training time is not always easy to find. While the company's simulator product should help matters, it nevertheless seems important to get more potential users trained on the daVinci.
The company is doing reasonably well with its pipeline, a new vessel sealer and stapler are on the way, but expanding its procedure base is still a key issue. There are plenty of potential applications for the device, and the company has come this far largely on the basis of two procedures, but surgeons can be a surprisingly stubborn bunch.
On the other hand, Intuitive arguably benefits from the limits of the status quo. Stryker (NYSE:SYK), Covidien (NYSE:COV) and Johnson & Johnson (NYSE:JNJ) have solid surgical tool and scope businesses, but there are relatively limited opportunities for innovation there. Intuitive, though, has the opportunity to take existing products like staplers, saws and so forth and re-engineer them for their own systems. (For more, see A Checklist For Successful Medical Technology Investment)
The Bottom Line
Intuitive still has no real competition. Stereotaxis (Nasdaq:STXS), MAKO Surgical (Nasdaq:MAKO) and Hansen Medical (Nasdaq:HNSN offer highly specialized devices with very little functional overlap (though perhaps MAKO could be a rival if Intuitive was more focused on moving in to orthopedics). Elsewhere, Olympus has talked about surgical robotics and an existing industrial robotics company like FANUC could be a theoretical threat, but any newcomer is looking at a minimum of a decade of hard work and research.
Absent competition and with significant untapped market potential Intuitive certainly deserves a premium. That said, today's premium seems a bit rich and this does not look like an undervalued growth opportunity for new investors. Whether the company stands alone or sells out there is clearly long-term upside potential, but investors are being asked to pay quite a lot for that today. (For more, see Healthy Dividend-Growth Ideas In Healthcare.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
The question is, though, will investors continue to willingly pay such a premium for the shares with current growth rates?
Tutorial: Investing Concepts
A Quarter that Isn't as Strong as It Looks
Intuitive once again surpassed the average revenue estimate, and 18% overall growth is not bad. What's more, instrument revenue growth of 28% was quite good and procedure growth of 30% clearly shows that the daVinci system is gaining share in its targeted procedure base.
On the other hand, system revenue rose less than 8% and the company booked 88 net new placements this quarter - continuing a fairly unimpressive recent trend of net placements. What's more, ASPs fell again - dropping 5% from last year and about 2% from the fourth quarter. Ironically, analysts used to fret when system growth was strong and instrument/procedure growth was not so impressive - now they have it the other way around and are still complaining. (For more, see Med-Tech Choice Is Simply Intuitive.)
Intuitive also showed a disappointing absence of operating leverage. Gross margin fell more than a full point, with mix issues in the systems side (and those lower ASPs) being a key issue. Operating income grew 14% for the quarter, with operating margin falling over a full point.
The potential of the daVinci is still remarkable, but the company has work to do. Contrary to the company's name, the use of a surgical robot is not purely intuitive and it does require training. Unfortunately, these are expensive machines and training time is not always easy to find. While the company's simulator product should help matters, it nevertheless seems important to get more potential users trained on the daVinci.
The company is doing reasonably well with its pipeline, a new vessel sealer and stapler are on the way, but expanding its procedure base is still a key issue. There are plenty of potential applications for the device, and the company has come this far largely on the basis of two procedures, but surgeons can be a surprisingly stubborn bunch.
On the other hand, Intuitive arguably benefits from the limits of the status quo. Stryker (NYSE:SYK), Covidien (NYSE:COV) and Johnson & Johnson (NYSE:JNJ) have solid surgical tool and scope businesses, but there are relatively limited opportunities for innovation there. Intuitive, though, has the opportunity to take existing products like staplers, saws and so forth and re-engineer them for their own systems. (For more, see A Checklist For Successful Medical Technology Investment)
The Bottom Line
Intuitive still has no real competition. Stereotaxis (Nasdaq:STXS), MAKO Surgical (Nasdaq:MAKO) and Hansen Medical (Nasdaq:HNSN offer highly specialized devices with very little functional overlap (though perhaps MAKO could be a rival if Intuitive was more focused on moving in to orthopedics). Elsewhere, Olympus has talked about surgical robotics and an existing industrial robotics company like FANUC could be a theoretical threat, but any newcomer is looking at a minimum of a decade of hard work and research.
Absent competition and with significant untapped market potential Intuitive certainly deserves a premium. That said, today's premium seems a bit rich and this does not look like an undervalued growth opportunity for new investors. Whether the company stands alone or sells out there is clearly long-term upside potential, but investors are being asked to pay quite a lot for that today. (For more, see Healthy Dividend-Growth Ideas In Healthcare.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
Free Annual Reports
