Wednesday, July 23, 2014

Robots invade the rest of the world

There's a lot of good news in this story by Jaimy Lee at Modern Healthcare, but there is also a warning.  The good:

Intuitive Surgical saw its revenue and income fall again in the second quarter as sales of its da Vinci robotic surgery systems continued to drop.

The use of robotic surgery systems in gynecologic procedures such as hysterectomies continued to decline, and that trend is not expected to reverse, company officials noted during a call with investors.

The warning:

Worldwide procedure volume for the company's products went up 9%, led by . . . a higher number of urologic procedures outside of the U.S.

This reminds me of what happened when demand for cigarettes went down in the US.  The tobacco companies then focused on new markets abroad.  The company reports:

The da Vinci Surgical System is being used in hundreds of locations worldwide, in major centers in the United States, Austria, Belgium, Canada, Denmark, France, Germany, Italy, India, Japan, the Netherlands, Romania, Saudi Arabia, Singapore, Sweden, Switzerland, United Kingdom, Australia and Turkey.

Gary Schwitzer presents comments, though, that suggest that some of our Canadian friends are looking at this all a bit more rationally:

With surgical robots popping up all over Ontario and other provinces, eventually the public will be asked to cover the costs of these robotic surgeries. Perhaps these robots should be regionalized to maximize efficiencies and thereby lower operating costs? However, every institution wants to be on the cutting edge and have their own robot. Currently in Ontario there are daVinci robots in London, Ottawa, Hamilton and at 5 sites in Toronto. A number of high-volume community hospitals have successfully raised funds to purchase a robot in the near future. With the proliferation of robots, individual institutional volumes will be lower, driving up costs per case. Perhaps regional robotic centres of excellence in each province would be more efficient and cost effective.

Will other countries learn from the US experience?


Barry Carol said...

I was unable to access the entire article but I note that ISRG stock is up 13% this morning because earnings, adjusted for special items, far exceeded analysts’ expectations.

This may have been covered before but if the robotic approach in urological cases produces at least comparable long term outcomes to laparoscopic surgery but with less time in the hospital and / or a faster recovery time, I can understand why patients might prefer robotic surgery if they are insulated from any incremental cost. Just about everyone will prefer a five star hotel to a three star hotel if it doesn’t cost them any more money. The same principle applies here, I think.

Surgical procedures are among the most profitable services hospitals offer. I think the best way to mitigate the proliferation of robots is for payers to move to reference pricing which means they will pay the same price for the episode of care no matter which surgical approach is used. If robotic surgery cost more, let patients pay the additional cost in exchange for the benefits they perceive they are getting.

Paul Levy said...

Barry, here's a comment from one financial analyst:

We would remain on the sidelines in ISRG after the Q2 print. While the stock is slated to open up nearly 10% Wednesday morning, we think the strength has more to do with a change in the reporting methodology of financial results (from GAAP to non-GAAP) than the underlying fundamentals of the company. We are not fans of the methodology as we believe it distorts earnings rather than augments clarity, and we continue to advocate the use of GAAP earnings/FCF to value mid/large-cap med-tech. Moreover, coming off four straight quarters of negative top-line growth and declining operating margins, ISRG is trading at a lofty 32x 2014E EPS, well above large-cap peers. We think the stock is overvalued at pre-market trading levels, thus would take profits.

Barry Carol said...

Thanks Paul. With four straight quarters of negative revenue growth, I’m amazed that the stock has held up as well as it has.

Paul Levy said...

It's the efficient market hypothesis at work! :)

Anonymous said...

You're sick, Levy. No wonder they don't let you run a hospital anymore. Get over your vendetta. Robotic surgery has its pluses and minuses. Way more MIS done since than before - and that's a good thing. It's OK to market a product you believe in.