Intuitive Surgical : Set For Huge Growth
Think high-tech. Think space-age. Now imagine a surgery in the future. What you inevitably get is Intuitive Surgical : medical robotic surgery. They are the only company currently in the game.
I first came across ISRG when I was reading through the Forbes list of fastest growing companies. They are growing impressively and profits are strong (Q3 2010 operating income 132 million $ up from 105 million in 2009).
Needless to say I found this pretty exciting and decided to check out their share price.
This is the 5 year graph of ISRG v S&P 500 (Source: Yahoo finance):
The share has outperformed the market, but surprisingly, its price in 2010 has fallen from a high of 393$ to a current 263$. What’s wrong ? The numbers are good, but the PE is currently at 31,6. It therefore appears that the market’s view is: Yes, this is a growing and profitable company, but their expansion is already reflected in the share price and the numbers may be too optimistic. The growth rate may not remain as strong as it currently is.
They are wrong.
I believe that the market underestimates the long term prospects of ISRG. Why? Because this technology will take far longer to be adopted than most other modern techs. It's growth will be running for many years to come.
The graph below illustrates the speed with which various technologies have been adopted in the past.
Traditionally new technologies would take between 30 and 40 years to achieve general market penetration. However in recent decades, the adoption rate has been at least twice as fast. New techs achieve market penetration within 10 to 15 years.
In my opinion, ISRG is an exception to this rule. I believe that we are looking at a 30 year adoption curve, which -considering the company is 10 years old- would give us sustained growth for the next two decades.
My reasons are the following:
- Medical innovation is a slow process and long-term empirical evidence only comes to light years after the product has been used.
- Developing and certifying a machine for a specific surgical use takes a long time and is expensive. Yet, this needs to be done for every individual type of surgery (over 100 types), in every country.
- The FDA (or FDA equivalents) and insurers tend to be slow to act.
- Each surgeon needs to be trained on the new system which requires significant resources and time.
- Hospital will first buy 1 unit (if they can afford it and once the training is done) and will then consider buying more.
- Switching to the new system involves a significant cost, which means that each new purchase will require budgeting and managerial approval at the highest level. Again, a slow process.
- The old generation of doctors have been taught to operate with their hands. For many, the old ways will always be better.
All of the above makes for slow progress. This brings me to the question: where is ISRG in the technology adoption curve (which is illustrated bellow)?
There are about 21,500 surgeons practising in the US today. (source: www.medicalnewstoday.com/articles/131515.php) . There are currently 1228 machines operating in the US, which gives us the ration of 1 machine per 11,76 surgeon. If we assume that market saturation is 1 machine for every 2 surgeons, this would give us a current adoption percentage of 17%. Consequently as regards the US market we are in the Early Adopters market, just entering the Early Majority . As regards the rest of the world, excluding the US, there are less than 500 machines in operation (ISRG Q3 2010 Investor Presentation). Consequently as regards the global market for robotic surgery we are very much in the ‘Innovators’ bracket.
Conclusion: the potential for growth is huge.
In addition I think that the market is disregarding a fundamental point. The technology is still in its infancy. Think of mobile phones, or cars, or computers when they first came out. They were impressive at the time, but their capabilities were nothing compared to what they are today. It is an absolute certainty that the machines will become much, much better in the years to come. New systems and new implementations are bound to appear. Two points I can think of are: 1) remote operations enabling surgeries in far-away locations such as islands, ski resorts and cruise ships (same tech as pilot-less drones) and 2) autopilot systems in surgeries (same tech as that which is used on commercial jets).
Finally this product is positioned in a growing market which will continue to exist as surely as death and taxes.
ISRG has the first mover advantage as well as market leadership; It is perfectly positioned to take advantage of future growth. At a PE of 31,6 it’s a buy.
Disclosure: I do not own shares in ISRG but intend to buy as soon as my financial position allows me to do so.