Intuitive Surgical (ISRG) has admittedly been Valuentum’s worst call, and soon, it will be the only long position that will have been removed from the Best Ideas portfolio at a loss. We’ve been whipsawed around so much with this company that getting a pulse on the business has become near impossible. You can read about ‘The Curious Case of Intuitive Surgical…” here and our now-embarrassing note here about how happy we were to get back to even, but the final straw came in the past few weeks.
We understand that the firm is navigating through a difficult market environment that was punctuated by the growing negative perception regarding robotic surgery, even if robotically-assisted minimally-invasive surgery is a favorable long-term trend for investors. On April 8, the company issued preliminary first-quarter results, and while they weren’t pretty, we accepted them as any investor would with a firm going through a difficult period. The company noted that it expected revenue to be down 24% compared with a year ago (in part due to the timing of its new system launch), much lower than consensus at the time, and that it would take a pre-tax charge of $67 million to reflect estimated costs of setting a number of product liability legal claims. We weren’t completely disappointed – companies are impacted by the timing of revenue recognition and liability claims all the time, and analysts over- and under-estimate results in dynamic situations more often than not.
With that news out of the way, we had thought Intuitive Surgical was setting the Street up for ‘acceptable’ news when it released first-quarter results on April 22. After all, why would the firm make a disappointing pre-announcement when it was just going to add to that disappointment at the time it reported quarterly results. We thought the odds would be long that Intuitive Surgical would disappoint again, but it did. On the company’s first-quarter conference call, the firm revealed that it is reducing its 2014 procedure growth estimate to the range of between 2%-4% growth, down from 9%-12% previously, and that it will not be providing revenue forecasts going forward:
Starting with procedures, on our last call we estimated full-year 2014 procedure growth of 9% to 12% above the approximately 523,000 procedures performed in 2013. Now based upon factors described earlier on the call impacting U.S. for GYN, gynecology and other elective procedures, we’re adjusting our 2014 procedure growth estimate to a range of between 2% and 8%. This is a wider range than we have previously communicated giving consideration to increased volatility in elective procedures and the recent FDA statement discouraging the use of power morcellation techniques and the potential impact this may have on our procedure business.
Moving to revenues, as it has been discussed earlier several factors are pressuring our business making it difficult in the near term for us to predict system sales volumes and as a consequence total revenue, specifically the breadth and evolving nature of our procedure growth. As a reminder procedures are a primary driver of capital sales and the relationship between procedure growth rates and capital sales is highly sensitive. Our recent introduction of the da Vinci Xi System an upcoming period of transition in advance of its release in international markets and ahead of the availability of Xi versions of certain advanced instruments, continued economic pressure and uncertainty at hospitals associated with the implementation of the Affordable Care Act, evolving utilization patterns and point of care dynamics and likely variability in the timing of Japan system sales given the timeline for obtaining additional procedure reimbursement and beyond dVP anticipated no sooner than 2016. Due to these factors affecting the capital side of our business, we will not be providing a revenue forecast at this time. As mentioned on last quarters call, we expect to sell fewer systems in 2014 than the 546 systems sold in 2013.
Though we don’t think management can or will admit it, the firm has been taken down by a highly-influential doctor and the proliferation of negativity brought about by short sellers. In our view, these two forces have been overwhelming. In the uncertain world of medicine, when negative perception can be used against a firm, it can really hurt performance. The stock could very easily hit $200 per share before it ever reaches $500 per share again, in light of the uncertainty of its future range of fundamental outcomes. Management no longer has the visibility it once had, and we’ll be moving out of the position in the Best Ideas portfolio in coming weeks.