In a previous analysis, we talked about how Intuitive Surgical can be a $1,000 stock. To justify such a price, the company will need to maintain gross margins in the 70% range, sell nearly 800 da Vinci systems annually by the end of 2023, and grow its average instrument/accessory spend per unit to nearly half a million dollars. In this note, we take a look at a less optimistic scenario wherein Intuitive loses a critical advantage that it has enjoyed for years – market monopoly. The company has virtually no competitors in the robotic surgery market, which has helped it push sales of da Vinci surgical systems despite a hefty upfront price tag of $1.5 million. Intuitive makes much more over the lifetime of the surgical system through sales of accessories and instruments. However, the growth in the installed equipment base, pricing, and accessory sales will come under pressure if other players successfully market competitive products. The most promising candidates in this area appear to be Medtronic and Verb. Below we take a look at the threat they pose, and the potential downside for Intuitive.
Our price estimate of $791 for Intuitive Surgical is more than 10% below the market.
Competitive Threat For Intuitive Surgical
The most imminent threat appears to be from Medtronic, which has been working on building its own surgical robot and plans to launch it in 2018. Medtronic is expected to start with the Indian market, which likely suggests that the company intends to bring the cost of robotic surgery down given the dynamics of the market. This could have meaningful consequence on Intuitive’s value proposition, and may force it to reduce prices over time. Additionally, Medtronic already has a strong presence in minimally invasive surgery, which can allow it to target all relevant procedures right from the start. It also has strong relationships with a much larger base of health care providers as compared to what Intuitive has.
Verb Surgical, a joint venture formed between Alphabet and Johnson & Johnson in 2015, is working on integrating big data and machine learning with robotic surgery. It could be a formidable competitor considering the two companies’ deep pockets and Google’s technological prowess. There are also other companies, such as TransEntrix and Titan Medical, which are working on creating competing products.
Scenario: Strong Competition By 2020
The image below shows a pessimistic scenario for Intuitive Surgical where competitive launches not only reduce the incremental number of da Vinci units sold, but the anticipation of competition and the eventual competitive product launches force the company to reduce the upfront price of the surgical system and the prices of accessories and training services.
In the above scenario, we assume that Intuitive will be forced to reduce the upfront price of da Vinci surgical systems by nearly 33% to $1 million. Additionally, we assume that average annual accessory/instrument revenue per installed unit will decline to $300,000, and average service revenue per installed unit will come down from nearly $130,000 to $110,000. In such a scenario, we estimate that Intuitive’s EPS in 2023 may fall nearly 25% below what we currently forecast.
See More at Trefis | View Interactive Institutional Research (Powered by Trefis)
Like our charts? Embed them in your own posts using the Trefis WordPress Plugin.
