Intuitive’s $68 Billion Rally Has Bears Warning Heyday Is Over

The advance of robotic surgery that has propelled Intuitive Surgical Inc. shares more than 540% in the past ten years has sparked increasing caution on Wall Street.

Analysts expect the stock to fall 4.5% over the next 12 months, or roughly $30 a share. Last month, the gap between the average analyst price target and where the shares were trading hit a record $85.31 on July 17. The discrepancy is almost unprecedented in health care, where sell-side analysts typically swoon over high-growth names, especially those that have a stranglehold on their market.

Intuitive’s biggest Wall Street skeptic, Oppenheimer analyst Suraj Kalia, predicts the stock will shed almost half of its value in the next 12 months. Kalia sees the company’s rapid growth as likely to falter due to Covid-19 and weak demand from cash-strapped hospitals.

“A closer look at fundamentals tells you that the hyper-growth days are behind us,” Kalia wrote after the company’s second-quarter earnings report last month. “In the current environment of complete disconnect between valuation and fundamentals, we are losing the battle to ascribe irrational multiples” despite a worldwide drop in medical procedures amid the pandemic.

Three of the 20 banks tracked by Bloomberg recommend selling shares, while five others have hold-equivalent ratings, meaning they view Intuitive as fairly priced after being one of the better performers in the S&P 500 since it replaced Bear Stearns in 2008.

Intuitive’s $68 Billion Rally Has Bears Warning Heyday Is Over

Evercore ISI analyst Vijay Kumar, who rates the shares underperform, warned clients that the recovery for procedures will be “a long one” as the resurgence of the coronavirus in some states has made patients delay non-essential surgeries. He expects procedures fell further in July and says hospitals will be unable to buy new robotic systems.

The Sunnyvale, California-based seller of the da Vinci Surgical System reached a record $704 a share late last month. Wednesday’s closing value of almost $80 billion compares with about $12 billion in August of 2010. The company has a larger market value than Stryker Corp. -- a medical-device maker with more than three times the annual revenue -- or health insurers like Anthem Inc. and Cigna Corp.

Shares of Intuitive have also benefited from hiccups by heavyweights looking to break into robot-assisted surgery. Johnson & Johnson disclosed what Bernstein called a “significant delay” last month for its robotic surgery program. Oppenheimer said J&J is taking a sensible, but more extensive path to approval, while other rival platforms also continue to progress.

Medtronic Inc. has long been viewed as the most likely player to dent Intuitive’s dominance. Medtronic gave a live demonstration of its robot in September but said on its earnings call in May that testing had been delayed due to Covid-19 disruptions.

With investor focus predominantly on competition from Medtronic and J&J, a joint venture of Kawasaki Heavy Industries Ltd. and Sysmex Corp. surprised some on Wall Street when its hinotori Surgical Robot System quietly won approval from Japanese regulators for urology surgeries. The news came with limited details on pricing; however, the presence of a competitor in a major market dispels expectations that competition will be delayed for years, Evercore ISI’s Kumar wrote Wednesday.

Extended Use Program

Later this year, Intuitive plans to introduce an extended use program that will lower the price of some instruments in an attempt to drive more use of its da Vinci robots in less complex procedures. Critics say the program will pressure the company’s gross margins.

The strategy could also deliver a “material blow to current and future competition,” according to Raymond James analyst Lawrence Keusch. “Given potential competitors, specifically Medtronic, have discussed trying to get costs on par with non-robotic modalities, we think beating them to this threshold extends the competitive advantage for Intuitive,” he wrote.

Flexible financing options will help drive broader adoption of Intuitive’s robots ahead of U.S. competition starting sometime around 2022, according to bulls. Intuitive is planning to launch the program in October, a decision that will allow customers to work through their existing inventories before transitioning over to the more affordable instruments.

©2020 Bloomberg L.P.

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