Intuitive Surgical, Inc. (NASDAQ: ISRG) Memo

Transcription

1 Name: Haroon Masood College/School: CLAS Year: 2nd Important Company Financial Data Price: Market Cap: 16.48B 50W Range: Avg Vol: 396,730 P/E (ttm): EPS (ttm): Gross Margin (ttm): 72.32% Operating Margin (ttm): 39.34% Net Profit Margin (ttm): 28.19% Thesis / Key Points Increasing Patient & Doctor Driven Demand: Demand for Intuitive Surgical s da Vinci surgical systems is increasing dramatically worldwide. Patients prefer da Vinci surgeries primarily because they are less invasive, reduce pain, shorten recovery periods, and limit future complications. Patients are forcing hospitals to purchase the systems to compete. Doctors have also pushed for their broader implementation because they allow for greater precision and facilitate less stressful surgical procedures. Unlike other laparoscopic procedures that offer 2D visual feedback, da Vinci systems allow doctors to see 3D, high- definition, high- magnification for doctors. Furthermore, since the robotically controlled instruments are fully flexible and highly responsive, doctors have unprecedented freedom and control during surgery. Doctors have also reported greater comfort while performing da Vinci surgeries because they do not have to worry about hand tremors and can sit comfortably at the ergonomically designed control consoles during the process. Intuitive Surgical s numbers convey this surge in demand. Its 5- year sales CAGR is 30.5%. Correspondingly, da Vinci s 5- year procedure count CAGR is 41%. Currently, close to 300,000 surgical procedures are performed annually using the da Vinci system. The company sees a potential for another 2 million procedures in the future with its existing FDA approvals. New surgical equipment along with growing procedure acceptance should drive de novo system sales and more importantly, recurring revenue growth. Sustainable Robot- Assisted Surgery Monopoly: Intuitive Surgical has virtually no competitors in the robot- assisted surgery industry. This is partially because the company owns 1000 patents around the world, with another 900 being reviewed. Entry into the market is further hampered by the role of regulatory agencies around the world, including the U.S s FDA. The FDA, according to its website, can take well over 5 years to approve a product, so if an entity does manage to produce a competitor, it will have to wait several years before it can enter the market. The barriers to entry are further strengthened by the widespread implementation of da Vinci systems in residency programs, the company s partnerships with leading institutions such as MIT, IBM and Johns Hopkins and it s ability to acquire new competitors with its massive pool of free cash. International Expansion: Currently, there are less than 600 da Vinci systems around the world, in comparison, to 1500 in the U.S. Intuitive s global potential for growth is therefore tremendous. Following da Vinci s recent expansion into international markets, procedures have increased abroad at a 41% 5- year CAGR. Global expansion will pick up as doctors become more familiar with the procedure abroad and developing economies such as China achieve higher levels of household income. It will also increase since Japan, a market for high- end healthcare products, recently approved domestic da Vinci system use. Financial Strength: The company s financial position is stellar. It has no debt and levered free cash (ttm) of $441M. Furthermore, it has managed to achieve the high levels of sales growth mentioned above while improving margins. This has reflected in the company s 4- year EPS CAGR of 25.8%. Revenue growth for Intuitive is sustainable because a growing portion (56%) of it is derived from recurring revenue sources. This is 8% higher than Misperception Overvalued: Some suggest that the stock is overvalued because it has a P/E (ttm) of Interestingly, these individuals said the same about the company when it was at $100, $250 and $360. Intuitive deserves a premium valuation to other players in its industry for numerous reasons. Firstly, it has a tremendous potential for growth. Robot- assisted procedures are growing more and more popular in various surgical disciplines because they have clinically proven to work more effectively and are less intrusive. As the company receives further procedure approvals, this number will grow. Secondly, the company has a sustainable monopoly in the industry. As the demand for robot- assisted surgeries increases, it will continue to be one of, if not the only firm capable of supplying the demand. So how realistic is a 15%+ return in one year? Over the last five years, Intuitive s EPS has grown at 26% YoY. With 30% YoY revenue growth in 3Q11 and historically high Q4 earnings, the company should easily achieve a minimum of 23% YoY growth in EPS in Q4. If it manages another 20% growth in EPS in 2012, the stock will reach approximately $485 in a year and return more than 15% even with a 10% P/E multiple contraction. Mispriced Products: Some claim that da Vinci surgical systems are too expensive and thus, company growth is unsustainable. Staggering revenue growth suggestz otherwise - hospitals are fine with these prices. In fact, it seems that they can improve net economic benefits in the long run by using da Vinci systems to decrease patient hospital recovery time, chances of complications and surgery staff requirements, as well as increase revenue by attracting more customers. A study by Brown University reveals that a da Vinci machines can reduce costs by as much as $7,000 per heart procedure. That is, one can pay off the $1 million system cost with less than 150 procedures. A similar study from Stanford Professor, Catherine Mohr, reveals that da Vinci systems can reduce costs for hospitals by $1,200 per procedure. As more studies reveal the economic benefits of da Vinci systems, greater government/insurance- sponsored product adoption will take place.

2 VAR Dr. Ash Tewari s Team (Cornell University): Recently we had just published a paper in the British Journal of Urology International The bottom line: this new technique for robotic prostatectomy was adopted in 209 consecutive cases. We compared its effect on apical margin positivity against those of our previous 1,665 consecutive cases (during which our approach to urethral transection was primarily an anterior one). Patients receiving the new technique had significantly lower apical positive margins compared to the control group (1.4% versus 4.4%). The overall positive margins also decreased from 9.8% to 5.3%... Positive surgical margins double a patient s risk of cancer recurrence. Dr. Robert Cerfolio s Team (University of Alabama): "The newly refined 4- arm robotic lobectomy is safe and yields an R0 resection with complete lymph node removal. It has a lower morbidity, mortality, shorter hospital stay and better quality of life than rib and nerve- sparing thoracotomy. EAES and SAGES Joint Clinical Study: A rapid learning curve to a competent level using the da Vinci system is possible aided by the systems intuitive motion. Motion analysis is a useful tool to measure performance in the da Vinci system compared to OSATS and time alone. Heart Surgeon in Pakistan: Its cardiac surgeons who have been using this system to perform cardiac by- pass surgeries everyone is aware of this new technology here and they all agree that it holds a lot of promise. Mitral Valve Repair Patient: My cardiologist said sternotomy would not be the best choice, he recommended robotic- assist. You're only in the hospital 2-3 days, as opposed to 5-6 days. Because they don't break any bones, there's no hard tissue damage. You're completely well and up and running in three weeks, not three months. It takes so much longer for bones to heal and that sternum to heal up. Also, as a 45- year- old woman, I can live without that (scar) up the middle of my chest. Morgan Keegan Equity Analyst (paraphrased): I m sure the Healthcare Bill will impact da Vinci like most other healthcare companies, but there is little indication that it will have a significant impact. How It Plays Out Robot- assisted surgery is the way of the future and Intuitive Surgical will lead this way. The company has therefore, a great long- term growth story. The street thinks that top- line growth may contract significantly in the upcoming years and lead to lower valuations. Here is why they are wrong. While Intuitive s system sales growth has declined from the mid- 30% range to the mid- 20% range recently, recurring revenue will continue to grow in the 30% range as annual procedures increase in the U.S. The adoption of da Vinci systems for procedures is perhaps best depicted in the market- share growth of robot- assisted hysterectomies (2 nd most popular female surgical procedure) from 6% in 2008 to 23% in Surgeons and patients realize the benefits of Intuitive Surgical s products and this will drive recurring revenue going forward. Growth should be further propelled by increased system installments in Europe and Japan in the short/medium term, and BRIC countries, where household income is rising, in the long term. Additional growth shall come from several new devices, including the colon stapler, the single incision surgical system and the fluorescent imaging system that have the potential to take- off. Finally, even if the company experiences declining top- line growth rates, the simple EPS analysis above reveals a minimum of 15% upside within a year. The likelihood is, however, that these declines will not persist because of the reasons stated above and the reality that existing da Vinci systems in hospitals, which were acquired only recently, will be replaced by new systems periodically. Risks / What Signs Would Indicate We Are Wrong? Dramatic Revenue Growth Stagnation: We should definitely keep an eye out for Intuitive s revenue growth. If next year s growth rate drops below 20%, we should reexamine whether or not the U.S. market for new systems is becoming saturated and assess Intuitive s ability to drive growth from new products in the pipeline. Significant Regulatory Changes: Significant healthcare regulatory changes could affect Intuitive s performance. In particular, it is important to examine countries policies regarding the reimbursement of hospitals that provide da Vinci surgeries. Currently, most insurance companies in the U.S. and Europe reimburse hospitals for such procedures, but this may change and adversely affect Intuitive. Signposts / Follow- Up Track revenue growth and watch out for stagnation. Review product utilization (procedure growth) and de novo system sales growth. If there is stagnation in both, the company will not grow without new product breakthroughs. Watch out for new product offerings, regulatory approvals and regulatory environmental changes. In Japan, watch out for Shonin s hospital reimbursement decision for robot- assisted surgeries Company Description [NASDAQ: ISRG] designs, builds, and sells da Vinci robotic surgical systems that facilitate minimal invasive surgical procedures. Da Vinci systems are currently used in general, urologic, gynecological, cardiothoracic, colorectal, head and neck surgeries. The systems consist of two key components, a controller console that surgeons use to command the robots and a patient side- cart consisting of robotic arms. These arms use the surgeons commands to perform the surgery. There are over 2000 installed da Vinci devices around the world.

3 (Page of Exhibit/s) From University of Chicago Website From Intuitive Surgical Website

4 (Page of Exhibit/s)

5 (Page of Exhibit/s) Compilation of Clinical Evidence by Intuitive Surgical Compilation of Clinical Evidence by Intuitive Surgical