Biotech Values

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ISRG Mea Culpa

Before disappearing again, I must make amends for not replying to a post of Dew’s several months ago. He asked for an update of my thoughts on Intuitive Surgical and its growth performance.

Intuitive’s year-over-year procedure growth rate has plummeted from 50% in 1Q09 to 30% in 1Q11. For a while I thought the rapidly decreasing procedure growth rate (in %) could be explained as the temporary impact of a bad economy (which caused people to postpone elective procedures), because there seemed to me to be a lot ‘more juice in the tank’ - enough procedures in the queue to keep the rate of adoption of the technology near 50% for a few more years.

I no longer think that.

The numbers suggest Intuitive may have reached a linear growth phase, with procedures growing ~75-80K/yr and revenues growing ~$225m/yr. If so, over the next 5 years, the revenue CAGR would be a modest ~12.4%. Margins are pretty well saturated, so EPS would probably grow at about that rate as well.

If this is the case, the stock may be fully valued or worse.

I don't see any huge procedures in the early stages ready to provide the fuel for more-than-linear growth, with the possible exception of single-site cholecystectomy (gall bladder removal). Each year there are between one and two million cholecystectomies (depending on what you read) carried out in the U.S. alone. They are very easy to do minimally invasively, but Intuitive hopes patients would prefer if they are done even more minimally invasively – with the instruments all going through the umbilicus (belly button). And who cares about a scar there?

But getting another shot of exponential growth out of single-site cholecystectomies within the next few years is kind of a long shot, given that the company hasn't even gotten FDA approval for its single site surgical instruments yet. They'll be starting from scratch and competing with a very routine, cheap and well-established laparoscopic procedure.

So maybe the linear growth will continue.

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