Intuitive Surgical: Riding on trend of keeping surgery and healthcare affordable
Nasdaq-listed Intuitive Surgical (ISRG) develops, manufactures and markets robotic-assisted systems that help empower doctors and hospitals to make surgeries less invasive. To recap, ISRG’s key innovations are the Da Vinci Surgical System and the recently-approved Ion Endoluminal System last year, which generate recurring revenue through its sales and from operating leases. Alhough ISRG registered a 0.3% loss for the six-month period, it still outperformed the other three benchmark indices, Dow Jones, S&P 500 and MSCI US which lost 9.7%, 5.2% and 4.7% respectively.
The impact of Covid- 19 on ISRG has mostly been negative, if not uncertain. ISRG notes in its latest earnings release that it experienced a significant decline in procedure volume and postponements of system placements in the latter half of March in the US and Western Europe as healthcare systems in those areas diverted resources to meet the increasing demands of managing Covid-19. However, ISRG’s management is confident it is well-positioned financially and organisationally to weather the pandemic through its five-pronged financial plan which covers customer financing flexibility, employee welfare policies, securing supply chain resources, reduction of ineffective spending and protecting shareholder interest.
ISRG performed fairly in line with expectations in 1QFY2020 ended March. However, management painted a slightly bleak outlook for 2QFY2020, but with possible recovery for the second half of its financial year. Compared to 1QFY2019, worldwide procedures using the Da Vinci system grew by 10%, driven primarily by growth in US general surgery procedures and worldwide urologic procedures. This significantly contributed to the 13% and 2% growth in revenue and net income respectively over the same period. The company’s gross and operating margins remained strong at 67.1% and 25.7% respectively as well. ISRG’s liquidity and solvency is excellent, with a current ratio of 4.96 times and no debt respectively. Free cash flow yield, although positive at 1.8%, is only marginally attractive compared to the risk free rate of 0.7%.
ISRG’s business model is sustainable and attractive compared to the alternative, which is traditional open surgery. First, ISRG’s systems are more accurate due to decreased variability of surgeries and acute care which improves the surgery success rate. Also, the systems have a lower total cost of treatment per patient, which is not only beneficial for hospitals and healthcare institutions but also more affordable for patients. Furthermore, in line with ISRG’s mission, by creating minimally invasive surgeries, the patient experience can be improved which creates more inelastic demand for its systems.
Analysts have given ISRG a 12- month target price of US$548.87 ($764), which is much lower than the current trading price of US$587.53. The target price across analysts have a wide range from US$365 to US$729 with 12 “buy” calls, five “hold” calls and three “sell” calls. We do not expect ISRG to perform strongly over 2QFY2020 but are confident of its medium- and long- term prospects. We think the company is fairly valued based on its prospects over the next six months. E