Intuitive Surgical Earnings Call INSIGHTS: What’s Driving Dvp Trends, Lower Procedure Growth in Europe

On Thursday, Intuitive Surgical, Inc. (NASDAQ:ISRG) reported its second quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared.

What’s Driving Dvp Trends

Benjamin Andrew – William Blair: Gary, maybe give us some insights into Dvp trends here and how far you think that may go down, if you can give us some sense of what happened in the quarter? Where does it stabilize in your view based on the trends and it does sound like it’s a broader industry shift in terms of the way patients are being managed? Obviously, it’s becoming less important with all the other pieces, but just wanted to understand and isolate that bit if we can?

A Closer Look: Intuitive Surgical Earnings Cheat Sheet>>

Gary S. Guthart, Ph.D. – President and CEO: The way we look at it is really it being driven by two different effects. One of them has been the scrutiny and discussion around PSA testing and what that impact is. It’s hard for us to exactly handicap what impact on PSA test and discussion is, but clearly as one of the major treatment modalities for prostate cancer care, if there are changes PSA and the number of people going into the pipeline that will flow through to us and then the second quarter part that you’ve described has been if there is a look at nonsurgical treatment modalities and other alternatives like active surveillance, that also will have an impact. Hard for us to predict where that will play out over the long haul. We know for with high confidence that surgery is the best treatment for men with high-risk prostate cancer, there is really no question. On the question, it’s going to be okay while surgical societies and surgeons look at this over the long-term how do they vector patients and through their driven pathways. What we’ve seen in the past, just one more comment is that over time as men are moved into active surveillance and those kind of come in waves, happen to do with the amount of publicity it gets. Over time, people will start coming back out with Active Surveillance – because cancer is progressing or because over time the active surveillance is in and itself a burden. So, hard to predict with a quantitative sense exactly where that will head. But clearly those two factors are having an impact on us in the U.S.

Benjamin Andrew – William Blair: May be to try another way Gary. I mean, was it down single-digit percentage, double-digit and what’s backed into guidance for the balance of the year?

Gary S. Guthart, Ph.D. – President and CEO: On our side, it was a significant push. We don’t usually break out the numbers for your quarterly and so, we’ve gone through and done our best to project. It’s an estimate. If I had a perfect crystal ball I’d share it with you but we don’t.

Benjamin Andrew – William Blair: Then you talked about some of the timing of research projects. Maybe give us some insight as to what those are and are we going to see structural shifts in R&D spending perhaps higher and then also on the operating expense side can you talk a little bit about opportunities for investment in the sales force so you are looking to accelerate that to move things along quicker and maybe offset some of the prostatectomy weakness and other applications or are you happy with where the trends are set there.

Gary S. Guthart, Ph.D. – President and CEO: The first side on the R&D and project side. As you know we have few things that we’ve been working on pretty had. Stapler you should think of Stapler not as a single product, Stapler will ultimately be a family of products, kind of a platform and that will come out in sequential releases. So there is a set of releases and products that make sense for colorectal surgery at different set, that makes sense for thoracic surgery a different set that might make sense for bariatric surgery in the future and so those things will move in sequence. Likewise vessel sealing is a strong instrument for us, right now its pointed at general surgery applications and complex gynecologic cancers. We can see that as being a platform technology as well. So there are investments here that are sequential as you know we also work on Single-Site expansion and other sets of instruments and then other things longer-term in terms of platform improvements. It’s I guess what I’d say is the signal from Q2 to Q3 has more to do with lumpiness and timing that it does kind of seismic shift and the kind of work we are doing. There is some gradual sequential growth in R&D spend, but mostly what you are seeing is lumpiness, turning to the question of sales force investments we are making investments in the sales force. The way you might think about that is significant investments in Japan in terms of our capability. We are happy with our team there and they are growing and that will be to allow us to have a greater presence over time. We are also making investments in Europe, and investments there are around the sales and commercial team, mostly around bringing in experience in selling and support skills, as well as investments in our ability to respond to regulatory needs and reimbursement, and economic analysis needs. So, we are making those investments there. They are kind of investments that are ahead of what you would think of is the U.S. norms. In the U.S. we continue to invest in the U.S. sales force, although about on pace to what you have seen in past quarters. We don’t feel like we are ahead or behind there, but really moving in sync.

Calvin Darling – Senior Director of Finance: Specifically we added about 20 people to our clinical team in the quarter bringing us to about 600 on the clinical side, and we stayed roughly flat at about 90 on the capital side.

Benjamin Andrew – William Blair: If I can sneak in one more quick one, it looks like you had a strong de novo placement effort in the quarter. Talk a little bit about how SIE affected that and I heard the number 200 customers, are you starting to see a lot of productivity from that in terms of initial cases and aren’t people actually doing cases beyond chole already?

Gary S. Guthart, Ph.D. – President and CEO: I will just start it and Aleks can jump in. On the Single-Site versus SEI, something a little bit different, but with regard to Single-Site, initial purchases we did say over 200 hospitals in the U.S. have taken their initial kits. We are seeing good utilization so far, although it’s early. The response, the commentary in terms of safety and efficacy and repeatability, the ability to learn the procedure quickly is strong. So, we are feeling good about that. But we need to caution that we are still in the early quarters there. With regard to people having an interest to doing things beyond cholecystectomy, we are FDA approved in the U.S. for chole. There is surgeon interest OUS and discussed interest inside the U.S. to do some other things and so, we’re seeing interest in certain gynecologic procedures, perhaps some upper GI procedures over time and that’s what our R&D teams are spending their time. I’ll turn it to Aleks.

Aleks Cukic – VP, Strategy: Yeah, I would just reiterate under the comments pertaining to the 200 customers that have purchased initial sites. What we can tell thus far really from that is that there is a lot of general interest to try the system. We can’t – it’s too early to many large clinical claims other than people are looking at reduced cosmetic – improved cosmetics I should say and then whether or not there is pain differences between one technique versus the other. But at this stage, it’s really difficult to say, but the interest is high to try it, the training queue is strong and we’ll look at it for a few more quarters I think before we can assess much more.

Calvin Darling – Senior Director of Finance: In terms of the Si-e impact on the quarter, six of the 150 systems sold were Si-e systems and to remind you, Si-es are three arm versions of Si’s and also have some other feature reductions and they are primarily targeted toward the more price sensitive customers who are engaged in the single-site or engaged in maybe a lesser complex hysterectomy. I think we are seeing interest in this particular segment of our product offering.

Lower Procedure Growth in Europe

Lennox Ketner – Bank of America Merrill Lynch: I guess if we can may be just shift gears and focus on Europe for a minute. I guess I just want to understand in your view kind of what’s driving the lower procedure growth. I know you talked about being some structural issues. But in terms of the Austerity measures impacting it. I guess what I’m struggling a little bit is because it’s – obviously, we’ve seen elective procedures in back there, because it’s a cancer surgery I would have thought we would see less, are you essentially seeing the government just lower their quotas for these surgeries, even though they are cancer surgeries.

Gary S. Guthart, Ph.D. – President and CEO: We definitely see, it depends on which country you are in, I guess I’d start by saying different countries are behaving a little bit differently. So one answer we’ll cover them all. By taking couple as an example, we have seen pressure on quotas, for sure you see total budgets getting pressured and people are making decisions about how they want to spend that money. We think some of it has to do a little bit with how we’ve grown our organization and their training and skill. If I just stand back from a point of view of bringing clinical and economic value to a procedure that would have been open and taking it to basis of da Vinci procedure. We think there is value there and we think we can do well in the presence of even tight budgets, and that’s really the internal part that we are working on.

Lennox Ketner – Bank of America Merrill Lynch: I guess just as a follow-up you had mentioned that you are investing in regulatory and reimbursement. Is that are you focused on changing kind of reimbursement schemes in Europe or was the reimbursement coming more directly towards Japan?

Gary S. Guthart, Ph.D. – President and CEO: Well the answer is a little bit of both, in Japan it tends to be a more direct conversation with surgical societies and the government. In Europe it tends to be a little bit more working with surgical societies and health technology assessment groups to really understand the clinical benefits and the long term, the downstream economy benefits of da Vinci surgery and it really has a way for hospitals and customers to understand what their total economics are.

Lennox Ketner – Bank of America Merrill Lynch: Then just last question on the Single-Site, the attachment for that, is it possible to speak about consensus when hospital does buy the Single-Site attachment how much you are charging for that? Is that revenue recorded as part of upgrade revenue or is that in instruments and accessories?

Marshall L. Mohr – SVP and CFO: Just to let everybody know that the Single-Site is a set of instruments and accessories – really instruments that attach to the da Vinci Si system and so there’s no system upgrade required to do Single-Site procedures. As usually initial customers you need to have the 8.5 millimeter endoscopes as well as the specific instruments for the case and so on. So, it’s an investment on average – out of the gate it might be something like $40,000 investment to kind of get going. It’s recorded on the instrument and accessory line.