Intuitive Surgical (NSDQ:ISRG) finds itself at the intersection of two significant factors for a med-tech stock – the stock has long been controversial for investors due to the high multiple and implied growth, while the utility of company’s surgical robots has become a very controversial subject among doctors. With the debates about the efficacy, safety, and cost-benefit of robot-assisted surgery getting more heated, the stock has lost about 15% of its value in about two months, but still stands as one of the more expensive stocks in the med-tech space.
Lively debate and discussion is normal whenever a new approach catches on in medicine, but in the case of Intuitive Surgical it seems to be going a little overboard. Given past experience with prostatectomy and what is now happening in hysterectomy, Intuitive Surgical shareholders should probably make their peace with the idea that controversy and debate is always going to surround this name.
A Supposed "Government Probe"
There has always been debate and disagreement about just how necessary or useful Intuitive Surgical’s daVinci robot surgical system is, and whether it makes sense for the healthcare system to support its use. A JAMA article in mid-February stirred the pot once again with an assertion that the benefits of robot-assisted hysterectomy did not justify the costs, and the controversy has built since then.
Earlier in March, Bloomberg ran a headline that claimed the government was "probing" Intuitive Surgical and its daVinci system. Although that was true to a point, there was a lot of sensationalism packed in there as well. What actually was happening was routine post-market surveillance from the FDA, where the agency called about 10 hospitals with a variety of open-ended questions about their experience with the daVinci system.
It’s worth noting that the FDA was polling less than 1% of the installed user base – hardly a "government probe" as most readers would commonly understand the term. Now it’s certainly possible that the FDA uncovered disturbing data that will lead it to a deeper/wider investigation, but the only way to know that today is if there is a leak within the FDA. At the same, it’s worth noting that the rate of adverse event reports to the FDA’s MAUDE database has remained pretty steady as a percentage of overall procedures.
Sharper Criticism From Experts Stings More
While the Bloomberg report may be relatively easy to ignore, the same is not true of the recent comments from Dr. James Breeden, the president of the American Congress of Obstetricians and Gynecologists. Dr. Breeden referred to "marketing hype" and "misleading marketing" as being at least partly responsible for the procedure growth of robot-assisted hysterectomy, and took aim at the cost-benefit of the procedures, as well as asserting that dVH is not the best minimally invasive approach for hysterectomy.
There is nothing really new in Dr. Breeden’s assertions, but his position does lend them more credibility and attention. It’s also worth noting, though, that a group of ACOG member surgeons wrote a letter protesting Dr. Breeden’s comments, pointing out that the daVinic robot system expands the possibilities of minimally invasive approaches, and that "the vast majority of gynecologists in this country cannot offer a minimally-invasive approach to even half their patients, much less all".
And here we come back to a familiar debate with Intuitive Surgical and the daVinci system. Compared to a skilled and experienced surgeon, it is indeed true that the daVinci offers little incremental benefit and it does so at a high cost. Once again, though, it’s worth remembering that not every surgeon is above-average and it’s simply not feasible for all hysterectomy patients to seek out only these above-average surgeons for their operations.
Moreover, while there have been multiple studies indicating that the Intuitive Surgical approach produces results equivalent to laparoscopic approaches, I have not seen studies that compare the results of robot-assisted surgeries to similar procedures performed by those same surgeons by other laparoscopic methods. In other words, Intuitive’s robots may not make a surgeon better than good minimally-invasive surgeons, but that does not mean that it doesn’t produce better outcomes in those surgeons using the robots.
This Is Starting To Feel Like A New Normal
I’ve followed Intuitive Surgical for over ten years now, and these complaints about what the robots can and cannot do are starting to feel pretty routine. I remember similar debates about the utility of the robots in prostatectomy, with many surgeons loudly claiming that there was no need for these "toys", and that patients simply needed to find better surgeons. Likewise, I expect that the growth of robot-assisted cholecystectomy (gall bladder removal) is going to generate similar debate in the year(s) to come.
Debate is part and parcel of how medical science advances. It wasn’t all that long ago that doctors at TCT told me that stents were a "fad" and that they’d soon disappear because they offered only minimal incremental benefits and higher cost. Sometimes these predictions are valid – IVUS still hasn’t caught on in the U.S., and transmyocardial laser revascularization is a niche procedure. Moreover, it’s certainly worthwhile to have surgeons monitoring and commenting on the benefits and costs of new procedures.
To a certain extent, though, it now feels like the pro-robot and anti-robot factions are largely talking past each other. Robot advocates probably use the robots more often than necessary and overstate their benefits, while the detractors don’t seem to appreciate that the robots allow doctors to perform procedures as minimally-invasive that would otherwise be done as open surgeries. In the meantime, analysts and investors twitch with the release of the next study comparing robots to traditional approaches and rumors of increasing adverse event counts.
The Bottom Line
For investors who aren’t comfortable with the uncertain future of surgical robot adoption and utilization, I would observe that companies like Covidien (NYSE:COV), Johnson & Johnson (NYSE:JNJ), and Stryker (NYSE:SYK) not only offer competing tools and technology for minimally-invasive surgery, but also have reasonably attractive stocks today.
For investors interested in Intuitive Surgical, my strongest piece of advice is to get used to the controversy and use it to your advantage – using these periods of concern as opportunities to start/build positions. At the same time, understand the down-side to the story. This is a richly-valued stock, and it may be the case that this renewed debate leads hospitals to hold off on robot purchases. Along those lines, investors should keep a close eye on the quarter-by-quarter procedure counts; dVH represents almost 30% of Intuitive’s procedure base and cooling enthusiasm for this approach will translate pretty clearly into the reported financial results.
