Staff Writer

Intuitive Surgical Inc. is up almost 45 percent so far just this year, driven by unexpectedly strong first quarter earnings and broader market enthusiasm. The Sunnyvale, Calif.-based robotic surgery company has long dominated the field and now believes it is starting to reap the benefits of widespread acceptance of its technology.

A lower priced surgical robot, which recently launched in Europe, as well as an eventual entry with a new flexible catheter-based robotic tool for use in biopsy, diagnosis and treatment could help maintain momentum. The company partnered last fall with China's Shanghai Fosun Pharmaceutical Group Co. Ltd. to develop this system via a joint venture backed by $100 million; Fosun markets Intuitive robot systems in China.

But, at least in the near term, some on Wall Street have started to wonder if the company's valuation hasn't peaked for now.


An unexpectedly strong first quarter may have been shaped by higher-than-expected surgical procedure demand in the U.S., which may have been shaped in part as patients hurried to have upcoming surgery completed ahead of any upcoming health care reform. In the long term, though, Intuitive views the further health care changes in the U.S. as a potential negative.

"Our procedure performance exceeded our expectations during the quarter," said Patrick Clingan, Intuitive VP of Finance and Sales Operations on the April earnings call. "In the United States, both mature and growth procedures, such as general and thoracic surgery, outperformed our plan. Though difficult to assess, strength in the U.S. may have been due to a short-term uptick in patients seeking care ahead of any potential health care reform."

This could have just been a temporary bump in procedures and not extend further into 2017, the company cautioned. Intuitive added that political tinkering with the Affordable Care Act (ACA) is making its cash-constrained hospital customers nervous.

"In the margins right now, the ACA has injected some caution on the part of capital buyers. So on the positive side, I think, robotics and the value it can bring is pretty well understood. On the negative side, I think ACA uncertainty has been a slight negative," added Intuitive President and CEO Gary Guthart.

In addition to an ACA bump, Intuitive hopes it's benefitting from a broad-based acceptance of robotic surgery, which for years suffered from concerns about safety issues and adequate surgeon training. The company has become dominant in robotic surgery, but within the last few years a couple of other players have been making an effort to round out the competitive field.


Most prominent among them are Verb Surgical Inc., a joint venture backed by Johnson & Johnson and Google parent company Alphabet; Auris Surgical Robotics Inc., which was founded and is headed by Intuitive Surgical co-founder Frederic Moll and is backed by Peter Thiel's Mithril Capital Management; and Mazor Robotics Ltd., a small cap Israeli company that came to the fore a year ago when it became a Medtronic partner in the med-tech giant's first effort on this front.

Mazor markets its Mazor X surgical system in the U.S. Last month, it received an FDA clearance for its Mazor X Align software for planning spinal deformity correction and spinal alignment procedures. Mazor is focused on robotic surgery in spine and brain applications.

Auris also has received FDA clearance for its Auris Robotic Endoscopy System (ARES), which is intended to offer bronchoscopic visualization of patient airways. The San Carlos, Calif.-based company has raised more than $200 million to back its efforts, but has remained largely mum on its plans thus far.

For its part, Verb rolled out a prototype in January that it demonstrated to partner J&J; it's aimed at combining robotics, visualization, advanced instrumentation, data analytics and connectivity in an effort at making robotic surgery available globally.

These competitors remain far behind Intuitive Surgical, which focuses on cardiac, thoracic, urology, gynecologic, colorectal, pediatric and general surgery. The company also believes that robotic surgery may have reached something of a tipping point in terms of use, as hospitals buy-in to the benefits in patient outcomes and cost reduction.

"There is a lot more consensus now out in the world about the place of robotics and, in surgery, on the benefits that they are driving. There are less critics and naysayers on robotics and more people just getting on with it--implementing programs and getting results," observed Intuitive SVP and CFO Marshall Mohr at the Bank of America Merrill Lynch conference in mid-May.


Intuitive has launched its lower-cost da Vinci X Surgical System in Europe after it received a CE mark in April. It's priced at €1.3 million, which is roughly €500,000 less than its flagship da Vinci Xi system.

It also plans to publish or present data within the next 6 months on its clinical testing in lung biopsy. The company expects this could lead to a low-cost, flexible catheter-based, diagnostic and treatment robotic tool that utilizes the body's natural tubular passageways. Intuitive isn't expecting revenue from any such product until 2019.

Wall Street analysts are evincing a mix of enthusiasm and caution about Intuitive's prospects in the near term, given its rapid run-up already this year. While Jason Mills at Canaccord Genuity downshifted his rating to Hold from Buy on the argument that the company is already fully valued, Larry Biegelsen of Wells Fargo recently bumped his share price target up to $1,000. That was when shares (NASDAQ: ISRG) were at right around $900 apiece, now they are at about $915.

"We see several near-term growth drivers in hernia repair and colorectal surgery which are both at the early stages of their ultimate penetration, in our view," said Biegelsen in a note. "Beyond those, we think the early surgeon excitement for the robot in thoracic and bariatric procedures sets the stage for these procedures to become key growth drivers in the future once ISRG dedicates more resources to them. Additionally, we expect the launch of the da Vinci X robot to expand the type of procedures done in international markets."

In April, Intuitive bumped up its 2017 guidance to a procedure growth rate of 12 percent to 14 percent from the prior estimate range of 9 percent to 12 percent on a base of the 752,000 procedures performed in 2016. That rate was 18 percent in the first quarter, but is expected to cool throughout the rest of the year.

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