Shares of robotic surgery pioneer Intuitive Surgical (NASDAQ:ISRG) have more than doubled since the start of 2019. It may appear this boat has been missed, but this company has been riding a massive secular growth trend that should continue for many years to come. In this clip from Motley Fool Live show “The 5” that aired on Sept. 16, Fool.com contributors Jason Hall, Clay Bruning, and Nicholas Rossolillo discuss why Intuitive Surgical stock is still very much worth a serious look.
Jason Hall: Let’s go ahead and shift over to Intuitive Surgical, ticker ISRG. Clay, so Intuitive Surgical reported a while ago, reported in August and it’s been a little while, but it was certainly a great quarter. We saw so many things have improved coming through the COVID year where so many of the procedures elective even though things that people need to have done were delayed or put off. But their business model is really kicking off and the innovation engine there is still working.
Clay Bruning: Absolutely. For those who aren’t familiar with Intuitive Surgical, it’s a robot-assisted surgical system. So essentially instead of using a human surgeon’s hand, who can have tremors or jerky movements at any given time, which could lead to unfortunate complications, they have surgeries that reduce all of these variables to have more consistent outcomes with the end goal of trying to reduce overall costs, whether it’s for the hospitals, for the patients, etc. As many of you might imagine, surgery was tough in 2020. But it is starting to show signs of rapidly coming back.
A couple of financial notes, 77% year-over-year jump in surgeries in the U.S., quarter-over-quarter for the second quarter of 2021 versus 2020. Then they also were generous enough to compare the two-year growth, so that was 16% annualized growth from the second quarter of 2019 to the second quarter of 2021 in just the U.S. International appears to keep coming back so they had a 51% jump year-over-year internationally. On again, on that two-year basis, just under 20% growth annualized. More importantly, some of the emerging markets, particularly China, are really starting to install more systems. China is very regulated in terms of having a limit to how many surgical systems, whether it’s Intuitive or elsewhere, that they can bring in on an annualized basis. They actually raised that this year, which was an encouraging sign for Intuitive Surgical and they have since seen a 40% jump in installed systems in just China year over year, so very strong demand in China.
Then they’re executing on what they call their quadruple aim. Their quadruple aim in an elevator pitch is, reduce costs for anyone involved in the healthcare system or having surgery. Again, whether that’s hospitals, customers, etc. They reduced a lot of their instrument and accessory costs because they’re introducing a new extended-use instrument. Essentially what that is is they offer products a subscription base, if you will, saying, every time you use an intuitive system, you need the extra knife to cut through the system, XYZ, you name it. You need instruments and accessories to operate these surgical systems. So they reduced all the prices of their legacy instruments and accessories, and they introduced new ones that have an extended life to them. Rather than being, I think the maximum of their previous instruments was 10 use cases, and I think it’s now up to 12-18. They estimate it on average in the U.S. specifically where they did a study, this is going to reduce their customer costs by 10-15%. Just a totally customer-obsessed company and if you think about it, if you’re a hospital, you are going to really, really stick to that supplier that is reducing your costs. Whether it’s reducing the cost of the instruments and accessories, extended the use case, or the life, I should say, of the surgery. Really encouraging signs across the board here and one last stat, quarter-over-quarter, 13% jump in procedures. Procedures is really, really if you were going to look at one metric for this company, it’s procedures because they’re using the system, they’re using the instruments and accessories and hence producing revenue for Intuitive sell. Very encouraging.
Hall: I want to highlight da Vinci units sold over 320. It was like 80% higher than the year-over-year period, which makes sense. Hospitals weren’t doing anywhere near as many procedures in the second quarter. It made no sense to replace or deploy new machines. That part of the business has recovered, which says good things about the continued success of this product. It’s so sticky. Clay you talked about that. It’s more than just for the healthcare providers driving costs down, which is very important. But this is what this generation of surgeons is trained on. This is the way they perform surgeries. That by itself is a massive barrier to entry for any other company to replace the da Vinci system in these hospitals. I don’t think we can overstate that enough. Also the razor and blade model, this is hundreds of thousands of dollars, it’s a six-figure razor. They make money selling the da Vinci robots. They make good money on the robot. But they really make money selling those consumables, Clay, that you were talking about there. I love it. This is one of those under the radar winners that I’ve owned for a long time and never really think about it and now it’s a big piece of my portfolio. Nick, I know you like the business too.
Nicholas Rossolillo: I agree with what you just said, Jason. It’s a nice healthcare play that you can buy and just forget about it. It’s going to do its thing and it’s going to consistently win, I think, over the long term. Over the short-term, it’s still a rebound play too. They said in their last earnings call that especially here in the U.S. and in some other markets, they’re still dealing with impacts from the pandemic, especially as now this delta variant going through there still some restrictions on surgeries taking place in some areas. In the short term, it’s still a rebound play as effects of the pandemic ease and then as Clay was elaborating on, it’s just such a sticky product. It’s not really going to get replaced once it gets installed into a hospital or a surgery center. There’s so many procedures out there that can still benefit from some automation. They also have gotten themselves into the software business, too. Early last year they bought that company, Orpheus Medical. I believe it’s called Orpheus Medical to help hospitals with their information systems, so in addition to the robots, robotic surgery, just tons of optionality for this business.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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