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Intuitive Surgical: Cheap After a Speed Bump, or Heading For Spinout?

Dee Gill

Intuitive Surgical (ISRG) has taken some hits recently, as some doctors and researchers question whether the benefits of its robotic surgical equipment justify the expense in using it. But the resulting share price decline, as seen in a stock chart, has just made the company even more popular with Wall Street insiders, a group that still sees Intuitive Surgical as a very high growth company with an all-but untouchable product.

ISRG Chart

Both Cantor Fitzgerald and Canaccord Genuity upgraded Intuitive to buys in past weeks even as the share price sank. Unlike this time last year when most analysts gave it hold ratings, buys now outnumber holds three-to-one. The buyers say this sell-off is overdone. The company, which has a market cap of $19.5 billion, has backed that sentiment with a $1 billion stock buyback plan announced on March 21.

The recent sell-off started in late January with a report in a major medical journal that suggested the benefits of robotic assisted surgery in hysterectomies might be overrated. The study found that the much more expensive robotic surgery produced no difference in complication rates and little difference in the length of hospital stays. Since Intuitive’s da Vinci System is very popular for such surgery – and the only robot available for it -- it was rather a personal hit.

Shortly afterward came news that the U.S. Food and Drug Administration was asking doctors to provide information about the safety and performance of the da Vinci system after noting an increase of “adverse events” reported. Intuitive countered that it wasn’t aware of any safety concerns. It believes the increase in events relates to a change in the way they are reported and the growing use of its products.

Today’s New York Times carried what may be the sharpest critique of the use of Intuitive’s machines, as well as its sales and doctor-training process. The issues raised in the article are troubling. Investors mulling an entry to the stock now need to consider whether the Times story is a one-time critique, or whether coverage of the safety and cost issues will intensify. Bloomberg BusinessWeek posted a story on the litigation that gave rise to the Times story today. Sustained coverage in major news outlets can, shall we say, encourage regulators to take a closer look at issues that previously didn't much concern them.

A few physicians have of late openly argued for and against using the da Vinci system, in which a robot moves instruments inside the patient to mimic the movements of a surgeon sitting at a console. Those against usually cite costs, which is about a third higher (in the case of hysterectomy) than the old fashioned minimally invasive procedure, laparoscopy.

But the fact is, Intuitive’s products remain hugely popular and have grown to become the preferred tools for several procedures, including prostate surgery. Revenues continue to skyrocket, and gains in the high teens are expected again this year and next. The recent pullback by the stock has knocked down the PE ratio some, but the shares remain somewhat expensive.

ISRG Revenue TTM Chart

As the only company making such a system, Intuitive and its shareholders have become very wealthy selling it. The share price is up more than 4,000% in the past 10 years, even considering the recent controversy. A lot of investors are not ready to let go of this growth story yet.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.

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