Is This Gloomy Warning a Telltale Sign for the Medical Devices Industry?

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On July 9, Intuitive Surgical (NASDAQ: ISRG) warned of second-quarter financial results coming in at disappointing levels, although the company does not officially report until July 18.

The company stated that it expects sales to come in at $575 million for the second quarter, nearly 9% south of the consensus of Wall Street analysts. Year over year, growth is still anticipated to top 7%; however, it will be the first time in four years the company has failed to post a double-digit growth rate.

In respect to profit, the company displays the number coming in 10% below projections when the company formally reports. As a result of this warning being issued by the company, shares fell $80.78, erasing more than $3.2 billion in market value, marking the stock’s largest one-day decline in more than four years.

This warning follows months of negative news reports that have questioned the safety and cost-effectiveness of the company’s cornerstone product, the da Vinci Surgical System, which has revolutionized the industry by allowing surgeons to operate robotic machines in minimally invasive procedures.

Some studies have brought into question the true value of the system, including a February article in the Journal of the American Medical Association which found that robot-assisted hysterectomies did not reduce complications compared to laparoscopic surgery, an alternative minimally invasive type of surgery. In addition, medical guidelines have cautioned performing prostatectomies, a procedure which has pressured the growth in da Vinci procedures. In February, the U.S. Food and Drug Administration announced that it was surveying physicians about adverse events linked to da Vinci procedures, after which the firm issued several recalls of instruments utilized in robotic surgeries.

So what?

So what importance does this warning assume over the medical device industry?

Intuitive Surgical blamed the disappointing results largely on a considerable slowdown in spending by hospitals. The company additionally pinned blame on hospital administrators reeling in spending and more conservative treatment strategies on the part of physicians.

Analysts have confirmed these beliefs in recent months, as hospitals have held back on major purchases amid uncertainty regarding the financial impact of the health-care overhaul law, and since da Vinci robots range from $1.5 to $2.2 million, a significant capital investment is required to obtain only one of these machines.

Goldman Sachs’ analyst David H. Roman described how many health-care providers have put a greater emphasis on cost and return on investment in a research note released on Tuesday. Reports that have been released this year have signaled that patients continue to hold off on hospital procedures, in turn pressuring new capital expenditures.

This industry wide trend impacts the entire medical device market, encompassing Becton, Dickinson and Company (NYSE: BDX), Medtronic (NYSE: MDT), and Baxter International (NYSE: BAX), all of which have substantial exposure to the medical devices industry.

Now What?

One of the primary culprits causing a slowdown in hospital spending is the health-care overhaul law, which is to be resolved as the new system is adopted and adjusted to. This process is anticipated to take its course and finish by 2014, when new policies are fully implemented. Patients holding back on procedures should also have their questions answered in the near future, allowing greater clarity in the industry.

So, with current market conditions, which of these companies present strong investment opportunities?

Intuitive Surgical’s top line is projected to rise from 2012’s $2.17 billion to 2015’s expected $3.19 billion, representing consistent 12.5%-15% year-over-year growth. Net income for the company is anticipated to rise from $357 million in 2012 to the anticipated $937 million by 2015, representing 35%-40% growth annually.

Presently, the company holds a price to earnings ratio of 24.76 and does not pay out a dividend. In total, Intuitive Surgical earns 4 out of 5 stars, and is an attractive investment only if the company affirms investors that double digit growth will be reinstated despite the rough quarter.

Becton, Dickinson, and Company’s top line growth is predicted to sustain in the 2.5%-5% range annually through 2015, with revenue increasing from 2012’s $7.71 billion to $8.69 billion by 2015. The bottom line for the company is expected to grow in the 2.5%-5% range annually through 2015, with net income rising from 2012’s $1.16 billion to 2015’s anticipated $1.29 billion.

The company presently holds a price to earnings ratio of 17.64 and pays out a dividend yielding 2.00%. Overall, BD earns 3 out of 5 stars and is a strong and stable investment possessing consistent and proven slow-paced growth.

Medtronic’s top line is projected to rise from 2012’s $16.59 billion to 2015’s expected $18.04 billion, representing consistent 2%-3% year-over-year growth. Net income for the company is anticipated to rise from $3.47 billion in 2012 to the anticipated $4.23 billion by 2015, representing 5%-7.5% growth annually.

Presently, the company holds a price to earnings ratio of 15.68 and pays out a dividend yielding 2.11%. In total, Medtronic earns 3 out of 5 stars and is an attractive investment for an investor looking for stability and stable slow-paced growth.

Baxter’s top line growth is predicted to sustain in the 7%-8% range annually through 2015, with revenue increasing from 2012’s $14.19 billion to $17.77 billion by 2015. The bottom line for the company is expected to grow in the 9%-10% range annually through 2015, with net income rising from 2012’s $2.33 billion to 2015’s anticipated $3.05 billion.

The company presently holds a price to earnings ratio of 17.23 and pays out a dividend yielding 2.75%. Overall, Baxter earns 4 out of 5 stars and is a solid company producing steady growth that is trading at reasonable valuation currently.

The Foolish bottom line

Intuitive Surgical’s warning regarding its looming earnings report spooked investors, and the reasoning behind the disappointing results unveiled an apparent weakness in hospital spending, a trend that effects all medical device companies. However, due to the extreme high cost of the da Vinci system, Intuitive Surgical is of particular concern, especially because of the recent speculation that has circled around the effectiveness of the machine. However, uncertainty in the sector should fade as the health-care overhaul law fully takes effects and adjustments are made, and therefore the reaction may be overdone, presenting an opportunity to invest in the strongest of the industry.

Obamacare will undoubtedly have far-reaching effects. The Motley Fool’s new free report, “Everything You Need to Know About Obamacare,” lets you know how your health insurance, your taxes, and your portfolio could be impacted. Click here to read more. 


Ryan Guenette has no position in any stocks mentioned. The Motley Fool recommends Becton Dickinson and Intuitive Surgical. The Motley Fool owns shares of Intuitive Surgical and Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus