Intuitive Surgical, Inc. (ISRG): Terror and Opportunity

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Intuitive Surgical Inc (ISRG)I thought looking at some medical device companies would be an interesting little trek into an area that I have not looked at in too much detail before. Considering Intuitive Surgical, Inc. (NASDAQ:ISRG) has had earnings and a lot of news in the last few weeks, it looks like an apt time to look at it.

I ended up down the rabbit hole on the negativity surrounding Intuitive Surgical, Inc. (NASDAQ:ISRG)’s da Vinci system. It is a robotic surgical device that is controlled remotely, and allows for minimally invasive surgery to be performed. Recently, there have been issues regarding an uptick in FDA incident reports, as well as a debate regarding the economic benefits.

What the problem is not

Intuitive Surgical, Inc. (NASDAQ:ISRG) released a statement that the increased reports are due to changes in reporting practices, and that a bulk of them are just minor instrument failures involving broken cables that could be quickly fixed on-site with no problems for patients. It could be company spin, but the reports number in the hundreds, about 500. In 2012 alone, there were 450,000 procedures performed on the da Vinci system.

The company gets about $2,000 for every procedure performed as well as the $1.5 million upfront purchase of the equipment and an ongoing service fee. The more procedures that get done, the better, and the company expects about 20% growth in procedures for 2013. It is expanding into Japan and Europe, and barring some major issue with the FDA, I think the company is on a fantastic trajectory. It boasts strong top and bottom line growth, as well as available cash of $1.36 billion, and no debt. The occasional lawsuit is actually not an issue. Everyone gets sued, it is when your product is such a danger that it needs to be outright banned that there is an issue.

Safety is what the FDA is looking at, but they might find that the number of deaths and complications are within acceptable parameters. After all there are many things to parse. First of all, the da Vinci is not an automated surgery. There is a surgeon trained on the system performing it, which means that human error is still possible. Cases involving complications need to be analyzed for the human factor and the human body’s fragility.

The robots could be linked to 70 deaths since 2009. Linked means that the robots were used and people died, not that robots caused the deaths. Human surgeons performing surgeries make mistakes too. Considering the number of yearly procedures, that is a low rate of complication. If those deaths could have been prevented by modifications, then the FDA will tell Intuitive to go back to the drawing board and redesign the machine or engineer a fix. That is a short-term cataclysm, but the long-term stays intact. Robots for surgery are not going away, and Intuitive Surgical, Inc. (NASDAQ:ISRG) is at the forefront of this industry.

The media does love a story. Some articles like to make reference to a Journal of the American Medical Association article about the expensive nature of robotic surgery without reducing complications. The implication is that even the highly regarded journal finds issues with da Vinci. The journal finds that robotic surgery is more expensive without being safer, and no where does it state that robotic surgery is less safe. Not getting better is not ostensibly malpractice or equipment failure, and in the U.S., lawsuits are easier to do than your taxes. My education background is law with a focus on tax, hence my cynicism.

Safer path for the wary

Unless you are a risk-taker, stay away from Intuitive Surgical, Inc. (NASDAQ:ISRG). Even if you like it, stay away. The bottom is probably not in and there are very real concerns with the probe. Just weeks after the bad news, more bad news came with news that the company was warning its customers of a potential problem with invisible fractures on the surgical scissors. No proof that this defect has ever caused internal burns yet, but it is possible. The FDA could make Intuitive stop procedures until they design a fix. Wait for the bottom for the long case if you like Intuitive, like I do.

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