Intuitive Surgical reported spectacular results compared to their medical technology peers in the market. The medical equipment provider reported $3.48 earnings per share (EPS) for the quarter, beating the consensus estimate of $3.38 by $0.10. Investors should pay close attention to future studies on the efficacy of robotic surgery as Intuitive Surgical is likely to continue generating good growth in 2020.

The company is the leading manufacturer and servicer in the robotic surgery field. Despite its consistent sales growth and gains in procedure growth, a lack of consensus on the effectiveness of robotic surgery compared to conventional surgeries poses a risk to this healthcare stock.

Why Robotic Surgery Matters?

Robotic surgery system by Intuitive Surgical

Robotic surgery is a type of minimally invasive surgery. Intuitive Surgical produces the da Vinci system which consists of a console and a movable platform with robotic arms. A surgeon sits at the console and views a high definition 3D image of the surgical area. Intuitive Surgical’s EndoWrist device is attached to the surgeon’s wrist which allows the robotic arms to mimic a human wrist. The surgeon can control the movable platform and robotic arms to perform the surgery. 

The big selling point for these machines is the idea that the surgery is more precise than conventional laparoscopy, resulting in fewer complications for patients.

The da Vinci systems range in price from $0.5 million to $2.5 million and carry recurring costs such as service contracts, and replaceable instrument and accessory costs. Leasing arrangements are growing in popularity as 126 units shipped under operating lease agreements in the fourth quarter of 2019 compared to 84 in the fourth quarter of 2018. The company believes that its leasing program allows for faster market adoption.

Positive Numbers For 2019

In its most recent earnings report, Intuitive Surgical yielded impressive results. In 2019, the company’s total revenue rose 20% and net income per share rose over 20% continuing several years of solid performance. The stock, which grew 23.4% in 2019, lagged behind the growth of the S&P 500, which saw 29% growth over the year. 

In addition, the market for robotic surgery is expected to grow over the coming years. One report pegged the global robotic surgery market at $56 billion in 2017 and predicted it will grow to $99 billion by 2024.

However, there are some problems investors should keep an eye on.

Efficacy is still a big concern

While the robotic surgery industry seems to remain viable for the future, there are concerns that the benefits touted in its marketing are being exaggerated. To date, there are no significant studies that show robotic surgery is superior to laparoscopy. A large analysis of various studies published in January 2018 concluded that despite higher operative costs, robotic surgery does not produce better outcomes compared to conventional laparoscopy except that robotic surgery does lower blood loss. Operative time and complication rates are superior when using conventional laparoscopy. 

Intuitive’s stock shed about 5% from the start of 2018 until March when it rebounded showing that the market is not too concerned with individual studies showing traditional laparoscopy as more effective than robotic surgery. There is far from a consensus on the issue and until one develops Intuitive should continue to grow.

High Costs To Reduce The Profit Margin

On top of concerns about efficacy, there is a developing consensus that robotic surgery is costlier than conventional laparoscopy as well as open surgery. As healthcare shifts from an industry that pays on volume to one that is increasingly taking value into consideration, robotic surgery will have to find a way to cut costs if it is going to become a major player in the healthcare market.

Intuitive’s leasing of its systems has helped to address this concern. Patients increasingly demand robotic surgery. For hospitals and clinics the leasing arrangements-which accounted for 33% of Intuitive’s total placements for the fourth quarter-make it much easier and much more likely institutions can meet that demand.

Intuitive Surgical Expected To Continue Growing

Intuitive has seen and will continue to see growth in the coming year. It is the leading player in a fast-growing market with a product that patients increasingly demand. While investors should keep a watchful eye for news about the efficacy of robotic surgery, there is not likely to develop a consensus one way or another on the issue anytime soon.

Investors should expect Intuitive to be trading around $630 by the time of the next earnings release in late April, which would represent a nearly 3% increase from today’s price.

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