Under the Spotlight Wall Street: Intuitive Surgical (ISRG)

Robotic-assisted surgery (RAS) may sound like science fiction, but Intuitive Surgical ($ISRG) makes it a reality. Its cutting-edge technology offers less invasive operations, shorter procedure times and better patient outcomes.

Analysts argue the recently approved Da Vinci 5 robotic surgery system will cement the US$157b company as the industry leader against rivals like Johnson & Johnson ($JNJ) and Medtronic ($MDT). Intuitive Surgical shares are up 35% this year, near a record high.

Its focus on RAS since its founding in 1995 has given Intuitive a strong technological moat at a time when healthcare systems are under pressure. There is a need to deliver more surgeries for growing and ageing populations, while also keeping costs down.

Paging Dr Robot

Intuitive shares have moved up 17% since mid-March when the Food & Drug Administration approved its next generation multiport surgical system, the Da Vinci 5. It offers 10,000 times the computing power of its predecessor, allowing multiple upgrades and the integration of artificial intelligence and machine learning capabilities.

It’s not only 3D imaging that impresses analysts, but also the development of Intuitive’s ‘force feedback’ technology, which gives a surgeon a more realistic feel of the pressure being applied to the skin or tissue during an operation. Intuitive claims its Da Vinci 5 can deliver 43% less force on tissue, which may lead to faster patient recovery times.

Analysts estimate the 150+ new features could save between 10 and 15 minutes per procedure. The impact of such time (and cost) savings becomes clear given more than 2.2 million procedures were performed globally using Da Vinci systems in 2023 – an increase of 22% YoY. There are 9,800 of its systems in hospitals globally.

Service please

This procedure growth has driven up revenue by 14% YoY, to US$2.01b in Q2. Meanwhile, net income rose to US$527m from US$421 million. The company placed 70 Da Vinci 5 systems in Q2.

While top line growth has been strong, it’s the composition of revenues that is drawing investor interest. The proportion of high-margin, recurring revenues has increased from 71% in 2016 to 83%. That’s because the company has focused on selling services for the Da Vinci systems, instruments and accessories, and offering equipment leases.

Given the hefty upfront costs of these surgical systems – a Da Vinci 5 unit is well above US$2m – operating leases are viewed by some as another competitive advantage for Intuitive. Many start-up competitors have funding for the development of rival technologies, but lack the balance sheet to carry the cost of leasing arrangements.  

Gut punch

Ironically, Intuitive is feeling some heat from medical innovation of a different kind. The development of GLP-1 weight loss drugs like Ozempic threatens demand for bariatric surgeries, or weight loss surgeries like lap-bands or gastric bypasses.

Company management noted on a Q2 earnings call that bariatric surgeries had declined in the mid-single digits. CEO Gary Guthart warned the impact of GLP-1s on the bariatric surgery market “in aggregate has not bottomed yet”.

But those surgeries account for less than 5% of procedures, and Intuitive has been able to offset the Ozempic effect while growth in other procedures has been strong. There was 35% YoY growth in non-urology operations outside the U.S. and 25% growth in U.S. general surgery.

Final cut

There is no question Intuitive Surgical is a richly priced stock. It trades at over 70 times forecast FY24 earnings.

However, the stock price and analyst ratings have tracked rising EPS estimates for FY25 and FY26 based on ongoing placements of Da Vinci systems. The company narrowed its guidance for procedure growth in FY24 to 15.5% to 17% from 14.5% to 17%.

While there are headwinds from weight loss drugs and the development of rival technologies in big markets like China, Intuitive’s technology remains in demand among hospitals seeking more efficient operating rooms.

Investors are buying Intuitive for growth. To maintain a leading position as healthcare spending increases over coming years, management will have to tap into data from its growing number of machines and keep driving innovation. Otherwise, investors may take the scalpel to its premium valuation.

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.