Intuitive Surgical Declines on Warning Letter From FDARobert Langreth
Intuitive Surgical Inc.’s sales trajectory may have hit a wall amid regulatory scrutiny over adverse events during operations using its surgical robots and concerns on whether the $1.5 million devices are cost effective.
The company’s revenue since 2006 has increased at least 20 percent each year to about $2.18 billion in 2012 while its stock price jumped fivefold. Then in February, Bloomberg News reported that U.S. regulators were surveying surgeons on the robots following a rise in reports that included as many as 70 deaths since 2009. A review of Food and Drug Administration records now shows reports of injuries involving robot procedures doubled in the first six months of 2013 compared with a year earlier.
The Sunnyvale, California-based device maker has lost about $7 billion in value since the doctors’ survey was reported. Intuitive disclosed July 18 that an FDA warning letter had been received and cut its 2013 revenue forecast by more than half, saying sales growth may range from unchanged to 7 percent.
“The company will survive but maybe not as-is,” said Erik Gordon, a business professor at the University of Michigan in Ann Arbor. “The pounding down of the share price is fresh bait for activist investors like Carl Icahn and for strategic acquirers. The warning letter puts a dent in the reputation of a company that had once been viewed as a shiny new Porsche.
‘‘They enjoyed some easier, boom years when doctors and patients were awed by the thought of surgical robotics turning surgeons into super-surgeons,’’ Gordon said in an e-mail. ‘‘Now, the people who pay for the surgery are stepping in and questioning whether the robots are worth the extra cost.’’
The da Vinci system robots, found in more than 1,300 U.S. hospitals, cost $1.5 million each and were used in 367,000 U.S. procedures in 2012. They are the company’s primary product and have been the subject of negligence lawsuits alleging that patients were injured during surgeries. Cancer surgery, hysterectomies and gall bladder removals are among the procedures conducted with the robot.
On July 8, the Sunnyvale, California-based company reported that sales slowed in the second quarter, and four days later Intuitive said that 30 of its devices were recalled because they may not have been properly tested. The new forecast, coming after the close of trading July 18, prompted JMP Securities LLC to cut its rating on Intuitive to market underperform with a target of $275, a drop from the closing price of $421.27 before the announcement.
‘‘We see little reason to own shares at the current levels,’’ J.T. Haresco, a San Francisco-based analyst at JMP Securities, said in a note to investors.
Intuitive’s shares fell 6.8 percent yesterday to $392.67 at the close in New York. The company has lost 32 percent of its market value, or about $7 billion, since Feb. 27, the day before Bloomberg News reported that the FDA was surveying surgeons about the safety of its robot products.
FDA inspections in April and May found a number of deficiencies, including that the company in some cases hadn’t adequately reported device corrections and patient adverse events, according to a report dated May 30. Chief Executive Officer Gary Guthart told investors on a July 18 conference call about the warning letter from regulators arising from those inspections. Guthart said the agency is asking for additional steps to resolve two of the observations in the inspection report.
‘‘We believe these issues are addressable and will continue to work with the FDA to ensure this is resolved to their satisfaction,” Angela Wonson, a company spokeswoman, said in an e-mail.
Safety and cost effectiveness of the robots have been under scrutiny since the disclosure of the FDA’s review. With more changes approaching from the Affordable Care Act, community hospitals are likely to reconsider whether it makes sense to do “money-losing procedures” on the pricey robot, Suraj Kalia, an analyst for Northland Securities, wrote in a report to clients. In particular, using the robot for simple gall bladder surgeries is “prohibitively expensive,” he wrote.
Intuitive’s forecast suggests new installations of the expensive robot in the U.S. are “hitting a brick wall,” Kalia wrote.
JMP’s Haresco also questioned the company’s future, saying that more use of personalized medicine will make it easier for physicians to tailor medical therapy and treat patients conservatively, that insurers will continue to drive procedures to outpatient settings, limiting the need for robotics, and that recent declines in benign hysterectomy appear to be the start of a long-term decline.
“While we still believe that robotic surgery will play a central role in the delivery of medicine, we also believe that some of the underlying assumptions that define the market potential are questionable, if not outright invalid,” Haresco said in his note.
Intuitive generates about 80 percent of its revenue in the U.S. and while the company said second-quarter sales increased in Asia and Europe, Kalia questioned whether the trend will continue.
“How reliable will international revenues be? We don’t know,” Kalia wrote. “We still harbor long-term concerns about expectations on procedure growth, price sustainability, and a realistic assessment of the clinical utility of the robot.”