Welcoming Back an Old Friend (ISRG)

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With the lucky money received from my MAKO investment, I decided to put it back into another medical equipment manufacturer, and an old friend.

At a Glance:

Symbol: US-ISRG
Price: $389.95
Market Cap: $15.49B
Yield: N/A
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Stock
Option

Initially, with Stryker’s $1.65B buyout of Mako Surgical, I was going to just let my options sit idle and wait around for another offer.  However, with a few months until expiry and a new bid unlikely to happen given the high premium, two other medical device companies came to mind – Mazor Robotics (MZOR) and Intuitive Surgical (ISRG).

Looking back (over just the two weeks), MZOR would have already provided a 30% return – and would be investing in the same area as Mako – in the orthopedic space. I suspect much of the rise in the past two weeks was the result of the MAKO acquisition; potentially being acquired as well.  However, given my unfamiliarity with the company, I decided to go back to an old friend.

I’m no stranger to Intuitive Surgical; having invested in it many years ago and hoping that Mako would follow in its footsteps. My only regret was selling ISRG too soon and seeing it run up another 50+%. Now the company is under fire – dropping 30% off its all time high; lawsuits being conducted (with some pretty horrific results); FDA warnings/notices; and reduced hospital spending (either because of budget or because of the FDA/lawsuits). Even the infamous Citron Research has picked ISRG as their prime target having issued multiple negative reports over the past year – with a new report with a price target of $200 (down another 50% from the stock’s current price).

So, why would I be investing in something with so much negativity? Am I getting too personal and tied to my past history with the company – I’m sure there’s a bit of that.  A lot of the time, the best time to invest IS when there is so much negativity – investments in Key REIT, Facebook, AIG, and Bank of America all come to mind where negativity surrounded the company and provided great buying opportunities.  Is Intuitive Surgical in the same boat?

For my sake, I hope so – for all the recent negative news, I don’t see it really impacting the long term picture for robotic surgery.  The lawsuits, while sad to hear operations go bad, sound more like human error than machine error – and it’s no doubt that victims are looking for someone to blame, especially in cases where a “normal” procedure turned fatal.  Intuitive won it’s first trial in May of this year – although the first of many lawsuits that still have to be tried; and even if the company were to win them all, would probably take a toll on the company and its reputation. The FDA warning looked to be around a recommended fix for a machine deficiency, in which the agency should have been notified before the company took action.  However, they are now also looking into a growing number of “adverse effect” reported on surgeries made by a Da Vinci.  According to the Citron Research report issued in December, there are 4600 reported incidents; of which 3900 of them are reported to occur between 2007 to 2012.  If you consider that there have been 1.5M surgeries to date using the machine, 4600 is still a small percentage, even if those incidents are reported by the company itself.

So yes, in the short term, I expect some growing pains for the company, but in the long run, I think the overall picture is in tact.  This is a company whose product improves lives – it has been proven to be better than open surgery alternatives.  It can be debated about its benefit vs. standard laporascopic procedures. Although primarily approved for urological and gynecologic procedures, there is tons of experimental work being done using the Da Vinci and applying it in other areas.  In many cases, it allows a surgery to be done with a minimally invasive approach where ordinary laparoscopic surgery would be too complex.

Most recently, they just announced FDA clearance for single-site instrumentation for laparoscopic cholecystectomy procedures (aka gall bladder removal).  Now, gall bladder surgery through laparoscopy has been done for decades and as mentioned above, I doubt there is much benefit to using this machine over the current standard of care (besides the use of one hole, vs. the 3 that are in the standard procedure).  However, by gaining approval for more surgeries, it enables hospitals to start building a more sound business case for buying and utilizing the machine.  If ISRG can keep costs to the hospital inline or even lower than non-robotic means, it adds to the business case for hospitals – use the machine as a superior alternative to open surgery; and use it with no additional costs for laparoscopic surgeries.

One of the far-distant future benefits I’ve always thought could be part of ISRG’s potential is engaging a surgeon to operate a Da Vinci robot halfway around the world (i.e. there’s a cardiac specialist in Germany who can operate the machine in Miami).  This was even asked when the company first started getting publicity back in 2005.

Anyways, as I mentioned in my post discussing ISRG and MAKO, the investment in ISRG has always been around adoption across new surgeries.  While system sales appear to be down this year (likely due to all the negative publicity), surgery procedures continues to grow on the 2500+ installed base.  That will continue to be the key metric to watch going forward (apart from lawsuits, FDA notices, and more Citron reports).

At the end of the day, Stryker bailed me out and gave me back some capital to invest.  Coupled with all the negativity surrounding the company today has provided me a great opportunity to invest back in an old friend.

Disclaimer: The author owns shares of ISRG, Facebook, Bank of America, and AIG.  He does not own shares in Mako Surgical, Stryker, or Mazor Robotics.  A full list of holdings can be found here.

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4 thoughts on “Welcoming Back an Old Friend (ISRG)

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