Everyone's Talking About ROLARR Heading Into Intuitive Surgical Earnings: Here's What It Means

is scheduled to report its second quarter results after Tuesday's market close.

clinicaltrials.gov.

Commenting on ROLARR, Lavin noted that the trial is receiving "significant" investor attention but will probably not reveal a lot of information as it is "very tough to call results" and the trial is not a "fair comparison." "While some docs may be very experienced with a robot, some may not be," Lavin wrote. "In general, we believe the use of robotics results in fewer conversions to open surgery, fewer morbidities, shorter hospital stays and probably higher costs than laparoscopic surgery for colorectal cancer." Lavin continued that he expects the most likely outcome from the study will show similar conversion rates, slightly better cancer-free margins for robotics, slightly higher complications with robotics in inexperienced hands and higher costs with robotics. The analyst concluded that this outcome implies that Intuitive Surgical offers a higher cost solution without better outcomes.

Vijay Kumar of Evercore ISI commented in a note in early June that results of the first randomized ROLARR study were released at the ASCRS conference in Boston. The analyst noted that early commentary from attendees suggested that the results were "strong in both arms with no notable statistical difference between lap and robot)." Kumar commented that the results indicate a "major positive" for Intuitive Surgical given that 600,000 colorectal procedures are still performed "open." The results reaffirm the thesis that many of these "open" cases will be converted to a minimally invasive procedure using a robot over time. Finally, the analyst suggested that the results offers "incremental confidence" that Intuitive Surgical will post high single digits to double digits top-line over the next few years.

Richard Newitter of Leerink commented in a note in early June that based on discussions with doctors who were present at the ASCRS conference, the ROLARR's results were "better than feared" as non-inferiority shows robotics is not worse than lap, and that the study "should be viewed as a clinical validation of robotics in an area (rectal surgery) where docs generally have already come to accept robotics' role in hard-to-perform rectal cases." Newitter further suggested that the study reinforces the case that rectal surgery represents an "important procedure volume growth driver" for Intuitive Surgical, especially among the toughest-to-perform cases which occur deep in the pelvis.

David Lewis of Morgan Stanley commented in a note on July 6 that Intuitive Surgical's market opportunity is "large" but it is already reflected in the stock's valuation. According to Lewis, the company could boost its revenue at a seven percent plus compounded annual growth rate over the next 10 years. However, the company has the highest OM/GM ratio in the space even following recent softer top-line growth. The analyst added that investors may view this as temporary with consensus estimates assuming an operating margin above 38 percent by 2017. Lewis continued that his estimates assume a margin expansion "to a lesser extent" than consensus, even with 30 to 50 basis points of annual pressure due to product mix and trade-in headwinds. As such, "structural margin pressures will drive earnings growth more inline with sales." Finally, Lewis concluded that shares are trading at 26x 2016 estimates (versus large cap peers at around 17x) and represents a premium based on growth, but its earnings may not materially outpace its peers.