Intuitive Surgical's da Vinci System Strong, Cost Woes Linger - Analyst Blog

On Dec 18, we issued an updated research report on Intuitive Surgical, Inc. (ISRG). We remain optimistic about the new da Vinci Xi surgical system, which has received both the FDA approval and CE Mark. The upgraded system is expected to help the company gain significant revenue share in the minimally invasive surgery market over the long term. However, increasing operating expenses related to new product launches and international expansion poses a major headwind.

Although high price of the da Vinci system may slightly hinder its widespread adoption, we firmly believe the system will be instrumental in driving the company's top-line growth, going forward.

Of late, Intuitive Surgical has been receiving a number of clearances for advanced technologies that enhance the capabilities of the da Vinci system. We think the superior technologies innovated by the company for its surgical systems will boost penetration in the minimally invasive surgery market over the long term. Also, Intuitive Surgical operates in a niche market with no direct competition, which is a major positive in our view.

On the down side, Intuitive Surgical faces the risk of adoption of its procedures. Adoption growth takes time, as each procedure needs to gain credibility.

Moreover, Intuitive Surgical faces the risk of lower capital spending by hospitals particularly owing to the current changes emanating from healthcare reforms in the U.S. and austerity measures in Europe. Thus, pricing pressure accounts for considerable risk.

At the same time, Intuitive Surgical's profitability is staggering under the implementation of the medical device excise tax of 2.3% on U.S. sales of medical products, as it has increased the company's operating expenses.

Also, the da Vinci Surgical System has a long sale and purchase order cycle as it is a major capital investment for hospitals that requires the approval of senior management at purchasing institutions. The time lag may act against the best interests of the company.

Currently, Intuitive Surgical carries a Zacks Rank #3 (Hold). Some better-ranked stocks that warrant a look in the medical instruments sector are EnteroMedics Inc. (ETRM), Inogen, Inc. (INGN) and Edwards Lifesciences Corp. (EW). While both EnteroMedics and Edwards Lifesciences hold a Zacks Rank #2 (Buy), Inogen sports a Zacks Rank #1 (Strong Buy).