Gary Guthart’s comments on GLP-1 drugs have concerned some investors, but I feel fine about them.
It wasn’t that long ago that Intuitive Surgical (ISRG 1.04%) was dealing with pandemic-related issues. The company’s procedure volume dropped noticeably with the outbreak, leading to lower-than-expected revenue and earnings.
Intuitive did bounce back, much to the joy of investors. However, the medical device specialist is now dealing with a completely different issue harming its financial results. During the company’s second-quarter earnings conference call, management had something to say about this issue. Let’s look deeper.
Shifting dynamics
Intuitive Surgical is best known for the da Vinci system, a robotic-assisted surgery (RAS) device that allows physicians to perform various procedures, from kidney removals to hernia repairs. One category of procedures conducted with this device is now attracting a lot of attention: bariatric surgeries. Some analysts predicted that the rise in popularity of GLP-1 medicines like Wegovy and Zepbound would lead to a decline in demand for weight loss procedures.
That is precisely what’s been happening for the past few quarters. During Intuitive Surgical’s second-quarter earnings conference call, its CEO Gary Guthart explicitly addressed this issue again. One thing he had to say would hardly inspire confidence in Intuitive Surgical’s investors: “The GLP-1s are changing … the surgical market.” Guthart also said he believes that the impact of these medicines on his company’s business has not fully run its course yet.
No one knows when it will. In other words, Intuitive Surgical will be dealing with this headwind for the foreseeable future. In the second quarter, said the company, the volume of bariatric surgeries in the U.S. declined in the mid-single-digit range year over year.
What should investors do?
It’s worth noting that Intuitive Surgical’s financial results remain robust. In the second quarter, revenue increased by 14% year over year to $2.1 billion. Procedure volume was up 17% compared to the year-ago period. Its installed base of da Vinci systems ended the quarter at 9,203 — 14% growth compared to the prior-year quarter. And adjusted earnings per share increased to $1.78, up from $1.42.
There’s a simple explanation for why Intuitive’s results are still solid despite the decline in bariatric surgeries. As the company pointed out a few quarters ago, they only account for 4% to 5% of total procedures. The remaining 95% of the company’s procedures seem to be performing well.
Things could get even better for Intuitive Surgical, as it rolls out the fifth generation of its da Vinci system. According to management on the conference call: “Customer feedback points to improvements in precision, imaging, ergonomics and integration — the combination of which, customers indicate, has led to overall efficiency improvements.” Although the company also warned of constrained deliveries of its newest model through the first half of 2025, as it works to expand its capacity, Intuitive has an opportunity to increase the penetration of RAS with a more efficient model.
As of last year, RAS procedures made up only 5% of the total that could be performed robotically, despite their advantages. These include less cutting of the skin, less bleeding, less scarring, and faster recovery. Procedure volume is one of Intuitive’s most important metrics: The more surgeries performed with its devices, the more instruments and accessories it can sell. This business generates most of the company’s revenue, and typically carries healthy margins.
Given the 95% of procedures that could be done with robotic assistance but aren’t, and important long-term demographic changes that will lead to greater procedure volume (because the world’s population is aging), there’s a vast runway for growth.
Furthermore, Intuitive has a strong competitive advantage, including switching costs. Given the price of its da Vinci systems — between $700,000 and $2.5 million — and the time it takes to train medical personnel on them, switching to competing devices hardly makes sense.
Here’s what we can expect from Intuitive Surgical over the long run: The company’s installed base, procedure volume, revenue, and earnings will be on a solid upward path, regardless of what happens with bariatric surgeries. Intuitive’s shares are still worth buying and holding onto over the long run.
