Time for a look at ISRG?

Investment Analysis Clubs Saul’s Investing Discussions
1

https://www.therobotreport.com/news/as-intuitive-surgical-co…

http://www.gurufocus.com/news/482776/baron-funds-baron-fifth…

in 2016, roughly 750,000 procedures were performed worldwide using Intuitive’s robotic systems, an increase of 15% year-over-year

Management has defined its current addressable market as four million procedures, but we believe Intuitive will continue to expand its addressable market by entering new procedure areas.

. In the fourth quarter, the stock pulled back despite a strong fundamental outlook because investors became concerned that the repeal of the Affordable Care Act would cause Intuitive’s hospital customers to cut capital spending, which would negatively impact Intuitive’s system sales. We saw this pull-back as short-sighted and bought the stock. We think Intuitive can grow revenue and earnings at attractive rates over the long term.

competition is coming. Has ISRG grown fat lazy and soft? Or will competition stir them to bigger things ? The biggest problem of the daVinci is lack of haptics. Has ISRG introduced nothing because it can’t or because there was no need as long as they had a monopoly??
Because I think this is solvable and I know ISRG is hiring haptic experts.As far as the mechanical system goes I thought of one simple way to measure strains, no doubt there are others.

A large addressable market, obvious paths toward product improvement, first starter, etc.

One point da Vinci is easier to learn than remote chopsticks and thus probably has better results than laparoscopy for many surgeries i.e. if it takes 1000 operations to give best quality care with laparoscopy and 500 operations to achieve equal quality results with da Vince, 500 patients are better off with the robot. You don’t want to be first few where a surgeon is trying something new.

7 Likes
2

This is a stock I followed a long time ago and should have bought a long time ago but maybe the time is past, price growth is slowing dramatically:

http://invest.kleinnet.com/bmw1/stats16/ISRG.html

the price appreciation for the past 15 years has been as follows:

15 years: 31.2%
10 years: 14.5%
5 years: 6.0%

It’s not just a worry about ACA, investor exuberance drove the stock to great heights and now the P/E ratio is compressing. Yahoo reports P/E TTM 38.27 still much too high for the current growth rate. ISRG is certainly worth keeping on the watch list but it does not look like a buy just now.

Denny Schlesinger

3 Likes
3

I sold ISRG a few years ago for the following reasons.

From what I read the Da Vinci did not improve outcomes of the patients that were treated. It might give the hospital a marketing angle, but as a patient, meh.

The average monthly monthly procedures seemed anemic to me. At one point it was something like ten procedures, a month. If I’m spending $2 million on a machine I’d want it used five times a day. If I’m selling the machine I want the number up so I could sell more disposables.

Surgeons already know how to do traditional surgery, so why would they want to take the time learn robotics when there is no benefit to them or their patients?

I investigated a company that was making much smaller robotic equipment that could potentially disrupt ISRG. And one of the ways they could do this is that their robots are cheap enough that the decision to purchase could be made at the operating room level and not have to go through the board of directors. https://www.innovationtoronto.com/2011/05/turning-to-biomech…

I made my money and moved on.

Jeb

4 Likes
4

if it takes 1000 operations to give best quality care with laparoscopy and 500 operations to achieve equal quality results with da Vince

That’s quite a presumptive “if”. Data?

1 Like
5

<<<From what I read the Da Vinci did not improve outcomes of the patients that were treated. It might give the hospital a marketing angle, but as a patient, meh.>>>

Really?!? What about, as an example, formerly open heart procedures, where they cut down your chest, ripped open your rib cage, ad the accessed the heart. Now this can be done in many cases laproscopically, through your right side, with small holes, and recovery time as 3 weeks.

That is an incredible advance in medicine.

At this point in time, from an investment perspective, that argument is “meh”. Rather true or not, then or now, it clearly was irrelevant and still is. Amazing how some memes remain no matter how much real world proof of product adoption and use exists. These were the same arguments that scared people out of ISRG 10 years ago, along with the stock always being overvalued, and even today that seems to be the case.

I learn from my mistakes (and then of course ignore those lessons for sadly long periods of time) and one was that I could have bought both ISRG and Baidu on multiple occasions at very low prices, and had multiple opportunities to do so.

It was arguments like this, all of which may sound true, but are false when compared to real world actions. Come up with the issues, and then compared it to what the market is saying (stock market yes, but also actual business results) and then buy at the bottom of the Wall of Worry (WoW). That is where the best investments are found in the end.

A lesson learned. As for now, I agree with Denny, current results are much less than they once were, but on deep market drops it may be a name worth looking at.

Tinker

15 Likes
6

Good point Tinker. What my post should have said was that the Da Vinci doesn’t improve outcomes over other minimally invasive surgery. It has been described as a solution in search of a problem.

And I also agree with Denny, as I often do. :slight_smile:

Jeb

1 Like
7

It should be obvious that neither you or I or anybody has exact figures on learning time. It’s illustrative. Why I used "IF ".
It varies from doctor to doctor but the general idea is true

I am not going to even commenting on the advantages of a process making small holes in the body vs large holes in the body. . There is reason why da Vici has gone from experimental to standard of care at least for prostate surgery . “Conventional” means open surgery not laparoscopic surgery . In the majority of operations today where quality minimally invasive surgery of either type is available and indicated patients are just asking for lots more post op problems , especially pain, if they submit to open conventional surgery.

Nor am I gong to defend “robotics”, people who got in early on ISRG made a small fortune. There was no end to the bear comments then.

To me the question is whether ISRG is a good investment at today’s prices using the Saul method. Which I do not use as the primary tool but think is worth listening to.

3 Likes
8

That is an incredible advance in medicine.

The valid comparison is not between ISRG and open heart, but between ISRG and the same operation done laproscopically manually. I haven’t seen much discussion of recent studies, but the big difference between ISRG and manual laproscope seemed to be the time required to become highly skilled and the ability for a less skilled surgeon to do a first class job … both valuable, but a different level of contrast.

9

On the ticker comparison, I believe EW (in which I have a full investment) is a more interesting prospect and with attractive fundamentals.

10

I’ve been involved with many robotic surgeries. In my opinion, its one of the major problems with modern medicine today. There is little to no difference in outcomes with robotic versus laparoscopic surgeries and that includes prostatectomy. Vast majority of studies are compared to “open” surgeries which is definitely not the standard today. The robotic surgery is pure marketing. One surgeon or hospital marketing they can do robotic operations versus those that don’t. Sounds sexy doesn’t it? But it makes simple operations longer, expensive with minimal benefits.
But back to that sexy sound. Part of the issue is new trainee surgeons are being taught to operate robotically. And when they enter the workforce, they are looking for hospitals that have the robot because they wish to market themselves as robotically trained. Its the newer thing, not necessarily better. Therefore, I believe more hospitals over time will acquire a da Vinci system to be able to compete.
So my problem with ISRG is an ethical one. A major problem with medicine today is its sky rocketing costs. Instead of a simple operation, we have it done by an expensive robot. As a business, that is another story.
Scott

13 Likes
11

Scott:

This is amazing! A post just like yours was written ten or more years ago. Nothing has changed.

What no one has commented on is the current revenue ratio of machines to consumables. Back then it was a big deal that consumables was growing much faster than machines.

Denny Schlesinger

2 Likes
12

As a surgeon, the robot saves me from having to need a surgical assistant for my minimally invasive, laparoscopic approach. It also doubles or triples my OR time to complete the same procedures, and longer OR times are costly both in dollars, but also for elderly patients and sicker patients who are under anesthesia longer. The robotic system costs $1M+, so out of reach for most community hospitals that are smaller and found in ex-urban and rural areas. Once each tertiary care center gets a robotic system, and the private hospitals too, they’ve maxed out their addressable market.

I can do 3 minimally invasive laparoscopic procedures in the time it takes for 1 robotic procedure, with the same number of small incisions, and the same risks to my patients, with no worse outcome than can be had using a robot.

Methinks the money has already been made in ISRG, and unless their costs drops dramatically, they’ve priced themselves out of being affordable to the smaller hospitals that remain without a robot.

Wandern

27 Likes
13

tams has it right. A corollary of that is that a mediocre da vince surgeon is likely to be better than a mediocre laparoscopic surgeon. And even good surgeons have off days when their skill level slips a little bit (just hope you aren’t under the knife when he just found out he is being audited by the IRS.)
I have never tried a daVinci but have briefly piddled around (not on people) with laparoscopic instruments. It is really hard . Both are an order of magnitude harder than most open surgery (have done some of that) Almost by definition most surgery is going to be done by people not in the top 3% or 4%. Which is fine, that level is not needed for the vast majority of cases.

In any case my question is not whether daVinci is the best of all possible worlds but whether ISRG is a good stock investment at this time and this price. Windows was not the best possible OS but millions were made buying MSFT.

3 Likes
14

Windows was not the best possible OS but millions were made buying MSFT.

Man, is that true!!!

15

Once each tertiary care center gets a robotic system, and the private hospitals too, they’ve maxed out their addressable market.

They are also in Asia and Europe so they’re not just bound to the US.

I can do 3 minimally invasive laparoscopic procedures in the time it takes for 1 robotic procedure, with the same number of small incisions, and the same risks to my patients, with no worse outcome than can be had using a robot.

This is where you have to think long term. That robotic surgery will decrease risk and cost less because the systems will evolve. (Remember when there we didn’t have smartphones? Or even the internet?)

So yes, in the meantime they cost $1M and people say they’re not worth it.

-Chris

2 Likes
16

Yeh - I think that ISRG has had its time. It remains expensive but no longer represents a growth stock. For medical equipment I might be more interested in biomarker and screening technologies like Humana etc, from a medical robotics point of view I have preferred holding Mazor since Mako was taken out of play whilst keeping an eye on: Nuvasive and Stereotaxis. Mazor has had a great year with its tie up with Medtronic and launch of its Mazor X spinal surgery solution.

http://finance.yahoo.com/news/mazor-robotics-reports-record-…

I’ve also parked money in the ROBO ETF.

Ant

1 Like
17

Ant, what do you like about ROBO?

Denny Schlesinger

18

That robotic surgery will decrease risk and cost less because the systems will evolve.

That may well be, but in the meantime … what value is it bringing?

19

“people say they’re not worth it.” what lots said about the Mac and the iPhone and multiple other now popular items.
They are worth it when your business is going elsewhere because you don’t have one.
Complex difficult surgery will migrate away from small hospitals, just like it is doing now.

3 Likes
20

At one point it was something like ten procedures, a month. If I’m spending $2 million on a machine I’d want it used five times a day. If I’m selling the machine I want the number up so I could sell more disposables.


Year	EoY	SysGr	Proc	Proc/Ma	SysASP	Ser/Sys
2010	1,752		280k			
2011	2,132	21.7%	360k	185		
2012	2,585	21.2%	450k	191		
2013	2,966	14.7%	523k	188	$1.52	145,000
2014	3,266	10.1%	570k	183	$1.50	140,000
2015	3,597	10.1%	652k	190	$1.55	138,000
2016	3,919	9.0%	754k	201	  TBD	137,573

The machines cost about $1.5 million and the number of procedures per machine per year is about 200, or about 17 per month. The amount of procedures per machine per year is creeping up as time goes by. It’s not growing really fast. But it’s growing nonetheless.

I have no idea how many procedures per machine per year could be done. If you consider 52 weeks a year and 5 days a week for surgery, there are 260 surgery days. If 2 procedures per day are doable, there is a potential for each da Vinci machine to 520 procedures per year. This seems extremely unlikely. Perhaps 4 days per week and 1.5 procedures per day is reasonable. This would yield a potential to do a bit more than 300 per year per machine.

Here are historical revenue numbers:


Total	1	2	3	4	Tot
2009				323	
2010	329	351	344	389	1,413
2011	388	426	447	497	1,757
2012	495	537	538	609	2,178
2013	611	579	499	576	2,265
2014	465	512	550	605	2,132
2015	532	586	590	677	2,384
2016	595	670	683	757	2,704
					
YoY	1	2	3	4	Tot
2009					
2010				20.5%	
2011	18.1%	21.4%	29.7%	27.6%	24.4%
2012	27.6%	26.0%	20.4%	22.5%	24.0%
2013	23.5%	7.8%	-7.2%	-5.4%	4.0%
2014	-24.0%	-11.5%	10.2%	4.9%	-5.9%
2015	14.5%	14.4%	7.2%	11.9%	11.9%
2016	11.7%	14.3%	15.8%	11.9%	13.4%

Here are the Instrument & Accessories and Services as well as the Systems segments breakouts:


InsAcc	1	2	3	4	Tot		Svc	1	2	3	4	Tot
2009				113			2009				48	
2010	123	128	128	151	529		2010	51	55	57	61	224
2011	157	172	176	196	701		2011	64	68	72	75	278
2012	208	224	218	253	903		2012	81	83	88	91	343
2013	261	265	239	268	1,033		2013	94	98	101	103	397
2014	255	262	273	281	1,070		2014	104	107	109	110	429
2015	277	297	298	326	1,198		2015	114	113	117	120	465
2016	322	339	348	386	1,396		2016	125	128	130	135	517
												
YoYGr	1	2	3	4	Tot		YoYGr	1	2	3	4	Tot
2010				33.5%			2010				26.8%	
2011	28.3%	34.5%	37.9%	30.0%	32.6%		2011	25.7%	22.0%	25.3%	24.4%	24.3%
2012	32.0%	30.4%	24.0%	29.0%	28.8%		2012	27.0%	23.4%	22.3%	20.2%	23.1%
2013	25.6%	18.2%	9.7%	5.9%	14.4%		2013	16.8%	17.6%	15.5%	14.1%	16.0%
2014	-2.4%	-1.0%	14.1%	4.7%	3.6%		2014	10.1%	8.7%	7.0%	6.4%	8.0%
2015	8.8%	13.3%	9.3%	16.0%	11.9%		2015	9.6%	6.3%	8.2%	9.3%	8.3%
2016	16.2%	14.3%	16.8%	18.6%	16.5%		2016	9.3%	13.1%	10.5%	12.1%	11.2%

Sys	1	2	3	4	Tot
2010	155	168	160	178	660
2011	167	187	199	225	778
2012	207	229	232	265	933
2013	256	216	159	205	835
2014	106	144	169	214	633
2015	141	176	174	231	722
2016	148	203	205	236	792
					
YoYGr	1	2	3	4	Tot
2011	7.6%	11.2%	24.7%	26.7%	?
2012	23.6%	22.9%	16.5%	17.7%	19.9%
2013	23.9%	-5.9%	-31.7%	-22.8%	-10.5%
2014	-58.6%	-33.4%	6.5%	4.6%	-24.2%
2015	33.0%	22.5%	3.2%	7.8%	14.1%
2016	4.9%	15.2%	17.7%	2.3%	9.7%

Instruments and accessories growth is the largest revenue segment and it’s the fastest growing showing a bit of acceleration in 2016, especially in the fourth quarter.

I don’t know how long a machine lasts (I could probably figure it out with the numbers I have). But once a machine is in place, Instruments and accessories revenue has a pretty lot of room to grow.

This probably has influence on the company’s valuation. Also, the optionality Intuitive Surgical has to expand its business, especially given its competitive position.

This is not a Saul stock. But it does have a pretty good chance to rise significantly in value over time.

Unfortunately, I sold about half my position a while back and missed 40% upside to today’s price. I used the proceeds to buy some Skechers & Skyworks, the aggregate positions of which are in the red at this time.

DJ

6 Likes