Let me be clear from the start, I am an Intuitive Surgical
optimist. But just because I have taken a long-term view that favors
the robotic surgical system developer increasing in value, it doesn't
mean I'm not attuned to the idea that there are near-term headwinds
facing this company.
With that in mind, let's take a look at three headwinds that could keep Intuitive Surgical from having a banner year in 2015.
No. 1: The Affordable Care Act overhang
The Affordable Care Act, which most people know as Obamacare, is widely expected to be a boon to the healthcare sector as a whole over the long run. As more people become insured, the number of prescriptions written and surgical procedures performed is expected to rise, resulting in a windfall of profitability throughout much of the industry.
Unfortunately, Obamacare is about as far from cut-and-dried as it gets. Even though, as the White House noted, approximately 11.4 million people enrolled in health insurance in the 2014-2015 open enrollment period, all eyes are on a pending Supreme Court case, King vs. Burwell. This case, which should get a decision in June, revolves around the legality of the federal government paying out subsidies via Healthcare.gov. As a reminder, Healthcare.gov covers 37 states and enrolled 8.8 million of those aforementioned 11.4 million people. If the justices find in favor of the plaintiff, more than 7 million people would likely lose their subsidies and, subsequently, the ability to afford health insurance.
"What does this have to do with Intuitive Surgical?" you ask? Because this unresolved case is still a few months out, hospitals and primary care providers are likely going to hold off on making large purchases in case of an unfavorable ruling. If millions suddenly lose insurance, it could mean less revenue and profits for these companies. With the da Vinci surgical system costing close to $2 million, it's a potentially easy casualty. On the other side of the coin, the millions of Americans currently receiving a subsidy via Healthcare.gov may hold off on surgical procedures for much of the same reason: uncertainty.
Together, these factors could really sap sales of da Vinci's core machines for the first half of 2015.
No. 2: Ongoing FDA investigations into robotic surgical safety and efficacy
One cloud that won't seem to go away is the ongoing concern regarding the safety and efficacy of the da Vinci surgical systems.
The idea of the da Vinci robotic system is that it gives trained physicians the ability to make smaller incisions for soft-tissue surgeries that should heal more quickly than traditional laparoscopic surgeries. The flip side to that is that robotic-guided surgeries often have a price premium that patients or insurers have to justify.
Following a rising series of complaints against the da Vinci surgical systems, the U.S. Food and Drug Administration opened an investigation in 2013 into the safety and efficacy of Intuitive Surgical's device. It's quite possible the increase in complaints has only to do with a proportionate increase in the number of procedures being performed, but there still is the potential that the FDA may need to reexamine its position on Intuitive's robotic devices.
In the meantime, persistent questions regarding the safety of its
surgical device could dampen Intuitive Surgical's sales potential.
No. 3: A share buyback
Lastly, I'd suggest that Intuitive Surgical's $1 billion share repurchase agreement, which it approved early last month, could actually do more harm than good.
To begin with, investors like to think of Intuitive Surgical as a growth stock. It has strong pricing power as the only dominant and profitable developer of soft-tissue robotic surgical devices. It also has an enormous base of machines already installed, which would make it difficult for any competitors to try to unseat Intuitive's well-established markets and army of trained physicians. But if the company is diverting $1 billion away from research and development and companywide investments toward purchasing its stock instead, it could be a signal to investors that Intuitive's growth may be slowing.
Additionally, investors might wonder why Intuitive didn't just go the route of paying shareholders a dividend. A dividend would be a nice way of putting extra cash directly into investors' pockets. Instead, a share buyback could imply that Intuitive's EPS growth is slowing and it might need the extra valuation boost in order to justify its current valuation.
Either way, I see investors not being all too pleased by the move.
Think long term
While it looks as if Intuitive Surgical could be in for a volatile and perhaps rough 2015, I'd still remind investors to look to the horizon with their investment thesis on Intuitive Surgical. The company is leaps and bounds ahead of its peers in terms of training physicians and installing its robotic surgical machines in hospitals around the country. It's unlikely to lose the pricing power on its machines, procedures, or servicing any time soon. So while the company may be hitting a rough patch in its growth now, I'd still proclaim it to be in pretty good shape over the next five years and beyond.
The $60K Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could ensure a boost in your retirement income of as much as $60,000. In fact, one MarketWatch reporter argues that if more Americans used them, the government would have to shell out an extra $10 billion... every year! And once you learn how to take advantage of these loopholes, you could retire confidently with the peace of mind we're all after. Simply click here to receive your free copy of our new report that details how you can take advantage of these strategies.
Sean Williams has no material interest in any companies mentioned in this article.
With that in mind, let's take a look at three headwinds that could keep Intuitive Surgical from having a banner year in 2015.
No. 1: The Affordable Care Act overhang
The Affordable Care Act, which most people know as Obamacare, is widely expected to be a boon to the healthcare sector as a whole over the long run. As more people become insured, the number of prescriptions written and surgical procedures performed is expected to rise, resulting in a windfall of profitability throughout much of the industry.
Unfortunately, Obamacare is about as far from cut-and-dried as it gets. Even though, as the White House noted, approximately 11.4 million people enrolled in health insurance in the 2014-2015 open enrollment period, all eyes are on a pending Supreme Court case, King vs. Burwell. This case, which should get a decision in June, revolves around the legality of the federal government paying out subsidies via Healthcare.gov. As a reminder, Healthcare.gov covers 37 states and enrolled 8.8 million of those aforementioned 11.4 million people. If the justices find in favor of the plaintiff, more than 7 million people would likely lose their subsidies and, subsequently, the ability to afford health insurance.
"What does this have to do with Intuitive Surgical?" you ask? Because this unresolved case is still a few months out, hospitals and primary care providers are likely going to hold off on making large purchases in case of an unfavorable ruling. If millions suddenly lose insurance, it could mean less revenue and profits for these companies. With the da Vinci surgical system costing close to $2 million, it's a potentially easy casualty. On the other side of the coin, the millions of Americans currently receiving a subsidy via Healthcare.gov may hold off on surgical procedures for much of the same reason: uncertainty.
Together, these factors could really sap sales of da Vinci's core machines for the first half of 2015.
No. 2: Ongoing FDA investigations into robotic surgical safety and efficacy
One cloud that won't seem to go away is the ongoing concern regarding the safety and efficacy of the da Vinci surgical systems.
The idea of the da Vinci robotic system is that it gives trained physicians the ability to make smaller incisions for soft-tissue surgeries that should heal more quickly than traditional laparoscopic surgeries. The flip side to that is that robotic-guided surgeries often have a price premium that patients or insurers have to justify.
Following a rising series of complaints against the da Vinci surgical systems, the U.S. Food and Drug Administration opened an investigation in 2013 into the safety and efficacy of Intuitive Surgical's device. It's quite possible the increase in complaints has only to do with a proportionate increase in the number of procedures being performed, but there still is the potential that the FDA may need to reexamine its position on Intuitive's robotic devices.
No. 3: A share buyback
Lastly, I'd suggest that Intuitive Surgical's $1 billion share repurchase agreement, which it approved early last month, could actually do more harm than good.
To begin with, investors like to think of Intuitive Surgical as a growth stock. It has strong pricing power as the only dominant and profitable developer of soft-tissue robotic surgical devices. It also has an enormous base of machines already installed, which would make it difficult for any competitors to try to unseat Intuitive's well-established markets and army of trained physicians. But if the company is diverting $1 billion away from research and development and companywide investments toward purchasing its stock instead, it could be a signal to investors that Intuitive's growth may be slowing.
Additionally, investors might wonder why Intuitive didn't just go the route of paying shareholders a dividend. A dividend would be a nice way of putting extra cash directly into investors' pockets. Instead, a share buyback could imply that Intuitive's EPS growth is slowing and it might need the extra valuation boost in order to justify its current valuation.
Either way, I see investors not being all too pleased by the move.
Think long term
While it looks as if Intuitive Surgical could be in for a volatile and perhaps rough 2015, I'd still remind investors to look to the horizon with their investment thesis on Intuitive Surgical. The company is leaps and bounds ahead of its peers in terms of training physicians and installing its robotic surgical machines in hospitals around the country. It's unlikely to lose the pricing power on its machines, procedures, or servicing any time soon. So while the company may be hitting a rough patch in its growth now, I'd still proclaim it to be in pretty good shape over the next five years and beyond.
The $60K Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could ensure a boost in your retirement income of as much as $60,000. In fact, one MarketWatch reporter argues that if more Americans used them, the government would have to shell out an extra $10 billion... every year! And once you learn how to take advantage of these loopholes, you could retire confidently with the peace of mind we're all after. Simply click here to receive your free copy of our new report that details how you can take advantage of these strategies.
Sean Williams has no material interest in any companies mentioned in this article.