Negative rating slashes 10% from Intuitive Surgical | Wall Street Beat Wall Street Beat

A research report blasting Intuitive Surgical (NSDQ:ISRG) spooked investors on Wall Street yesterday and today, prompting a selloff that’s shaved some 11% from the medical device company’s share price.

Citron Research, citing several factors that investors had ignored, said yesterday that it expects ISRG shares to drop to $350 over the next year and as low as $250 over the next 18 months.

ISRG shares began yesterday at $547.33 each, but as The Street digested the Citron report unusually heavy trading plunged the stock to a $515.45 close, down 5.7% on the day. Shares opened today at $508.82 and slipped another 5.3% to close at $488.31 apiece.

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The Citron researchers said the stock’s high earnings multiple belies "a track record of excessive and unjustified marketing claims, the utter lack of clinical evidence of superior medical outcomes when using its product for surgery, and the gathering storm of legal liability accruing to the company due to its failure to adequately disclose risks prior to its technology causing adverse surgical outcomes, scattered among the hundreds of thousands of surgeries performed with its robotic surgery devices," according to their report (PDF).

"Intuitive Surgical (ISRG) is unique because the da Vinci is a product that has not been sold to meet patient need, as most medical devices are, but rather it has been sold using fear to hospital management purchasing committees. Aggressive salespeople have escalated a ‘medical arms race’ into high technology, regardless of whether surgeries with this device produce significant medical benefit or not," the researchers wrote, citing key developments over the past 4 weeks:

  • “Three new, highly credible lawsuits over hysterectomies with bad outcomes have been filed – in addition to 6 really ominous ones from earlier in the year.”
  • "Large insider sales. Within the last month, chairman Lonnie Smith sold shares from options exercise (not 10(5)b) netting over $50 million, a rather large percentage of his recently apportioned stake."
  • “Peer criticism – a number of recent articles summarizing from highly credible, recent studies that highlight the gap between the company marketing materials’ claims and full scientific disclosure of the true risks and differentials in medical outcomes. This gap creates the basis for legal challenges to the company due to inadequate disclosure of the risks of bad outcomes.”
  • "Further skepticism about the true cost/benefit of robotic surgeries."
  • "Indications of loss of morale and sharp erosion of confidence in management and oversaturation coming through the sales force."

And that’s not all, at least according to Citron, citing a "severe vacuum of real scientific evidence" backing use of the da Vinci system.

"The most serious issue facing Intuitive is that, while its deployment is well past the 10-year point into mainstream healthcare in the U.S., there is still a severe vacuum of real scientific evidence that the da Vinci is of any clinical benefit, when the full arc of costs and outcomes are weighed, in the most commonly performed surgeries in which it is utilized. While this is not a new thought, the current legal cases will bring this issue to the forefront," according to the researchers.

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 Analysts’ ups and downs

  • Abbott (NYSE:ABT): William Blair & Co. initiates coverage with "outperform" rating.
  • Conceptus (NSDQ:CPTS): Stifel Nicolaus initiates coverage with "buy" rating, $26 price target.
  • Cytomedix (OTC:CMXI): LifeSci Advisors initiates coverage.
  • Henry Schein (NSDQ:HSIC): Stifel Nicolaus initiates coverage with "hold" rating.
  • Stryker (NYSE:SYK): Standpoint Research cuts to "hold" from "buy" rating.

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