Intuitive Surgical is not exactly a secret among investors. The stock is up 35% year to date and up about 12% in just the last month. Goldman analyst Isaac Ro estimates just 4% of U.S. surgeries are using robotics and the market will double over the next few years. In fact, Ro thinks robot-assist procedures will rise by 100% in the next two years due to increasing usage during gall bladder and hernia surgeries.
Back in October, I thought Intuitive Surgical shares could work their way higher. I thought the consensus analyst estimates in the back half of 2016 were low and ISRG would easily beat the estimates.
In fact, the company's business remained strong through the first quarter. On April 18, Intuitive Surgical reported fiscal-first-quarter earnings of $5.09 per share, $0.11 better than the consensus estimate. Revenue rose 13.4% to $674.2 million.
Importantly, the number of procedures jumped nearly 18%, driven by growth in U.S. general surgery and worldwide urological procedures. Procedure growth of 18% was the fastest rate since the first half of fiscal 2013. U.S. procedures grew 14%, with gynecological and urology procedures growing faster than expected. International procedures grew 28%. The company saw particular strength in China and Germany.
The company shipped 133 Da Vinci Surgical Systems, compared with 110 in the first quarter of 2016.
On the call, management told investors to expect a seasonal slowdown in procedure growth, especially in China and Japan. Despite the seasonal weakness, the company sees procedure growth in that range of 12%-14%, which is up from the prior guidance of 9%-12%. Because of the growth in procedures (and strong sales of consumables), gross profit margin is expected to be at the high end of the previous guidance of 69%-71%.
With several new products in the works, management sees fiscal 2017 operating expenses at the high end of their previous guidance of 15%-18%.
Intuitive Surgical is scheduled to report second-quarter results on July 18 after the close.
On Wednesday, the company presented at the Merrill Lynch 2017 Health Care Conference in Las Vegas. Calvin Darling, senior director of investor relations, and Marshall Mohr, senior vice president and chief financial officer, spent about 30 minutes answering questions from analysts and investors.
Mohr said thoracic surgery is a big opportunity for the company going forward. For example, there are approximately 100,000 lung cancer surgeries done annually in the United States and Intuitive has just a 10% market share. Mohr believes the company's new Xi Platform and its new 30-millimeter stapler will help gain share in lung cancer. Overseas, in places like China, the company sees a big opportunity in lung cancer because of higher rates of smoking and greater air pollution.
Mohr couldn't account for the stronger-than-expected growth the company saw in the first quarter. Although Intuitive tracks procedures closely, he speculated the number of procedures rose because some patients fear losing their health insurance under the Trump administration, so they rushed to the doctor to take care of that nagging hernia before the law changed.
Investors are particularly interested in the company's opportunity in China, especially since the company has fewer than 70 installed Da Vinci systems in China and Hong Kong. The systems have some of the highest utilization rates in the world.
The Chinese government has a quota system that budgets a fixed number of systems allowed into the country. In 2015, Intuitive had a quota of 38 total systems. The quota excludes the Chinese military and Hong Kong. But it's been a year and a half since ISRG has had any sales into China. Right now, the company has no visibility into the Chinese market in terms of the size of the next quota or when the country will announce the next quota. From Mohr's comments, China will not be a driver of fiscal 2017 revenue.
The company also updated investors on the Da Vinci X platform, which was recently approved in Europe. The X has many of the same features as the XI platform, but comes at a lower price point because of a few key differences. The company launched the X platform in Europe because European hospitals are price sensitive and can't (or won't) dish out 1.9 million euros for the full Xi platform. The X is estimated to cost about 1.187 million euros.
Mohr said the company plans to file for 510(k) FDA approval of the Da Vinci SP platform in the second half of the year because engineers are making a few changes to the user experience. Investors shouldn't expect any revenue from the SP in 2017.
The stock is up 35% year to date and it seems investors have high hopes for the rest of the year. But at the current quote of $850, the stock is already trading at 36x fiscal 2017 consensus estimates of $23.61, which is almost four times the estimated revenue growth rate of 9.7%.
Even though I think ISRG is a cut above the rest of the medical equipment group, the good news seems priced into the stock. I would wait for a correction to add to my position.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.