Beating out 34 other bidders, Sunnyvale, CA-based Intuitive Surgical (NASDAQ: ISRG) won a Department of Defense (DoD) deal that could be worth up to $430 million, which would simplify putting the company?s flagship da Vinci surgical robot system into military and government hospitals.
As of Friday, March 6, Intuitive stock closed down 5.48 (-1.10%) to close at $494.04. Leerink Partners issued an Outperform rating with a $590 price target; while Leerink analyst Richard
Newitter saw a positive reaction to news that ?the Defense Department authorized the Defense Logistics Agency to purchase up to $430 million in systems, supplies and upgrades from Intuitive Surgical though February of 2020.?
It?s believed that the 5-year deal might increase the company?s 2015 sales by 3?4 percent. However, there are no guarantees in the contract that the Department of Defense (DoD) is committed to award Intuitive the full $430 million, noting that the deal does simplify the ordering process for surgical robot systems as well as related instruments, accessories, and service.
The deal covers the Army, Navy, Air Force, Marine Corps and federal civilian agencies.
Government acceptance of surgical robotics
Intuitive has been increasing its military and government business since 2012, when it inked a deal with the Navy for $34 million, and a similar deal with the Department of Veterans Affairs in 2014.
Newitter wrote today in a note to investors: “If we were to assume: (a) the government does fully use the authorized amount, (b) spreads purchases evenly over a 5-year period, and (c) this revenue does in fact end up being incremental to our current forecasts, this would represent ~ $86M/year sales upside to our 2015-2017 sales estimates.
“At a ~33% cash EBIT margin (below the corporate avg. to assume some level of discount on these sales), this would imply up to ~$0.50/year of potential incremental [earnings per share].”
“The sizable contract demonstrates a certain level of acceptance for robotic surgery, reported MassDevice, which has remained somewhat controversial since any errors in the system or its use can have major implications for the efficacy and safety of surgical procedures.
“The FDA recently announced that it would hold a two-day public workshop in late July to address the “challenges and opportunities” raised by robotic surgery.
“It’s a sizable deal for Intuitive, which had $605 million in fourth-quarter revenue–a gain of 5% over the same quarter a year earlier.
“The company’s share price gapped up on the news to as high as about $510 from around $502 in early trading on March 3, but then settled to around $505 in trading on the morning of March 4.”
Concerns still linger
Biospace commented: “The decision to award the contract to Intuitive is interesting in light of the company’s legal troubles.
“In April 2014, when Intuitive released its 2014 first quarter earnings, it announced a “pre-tax charge of $67 million to reflect estimated costs of settling a number of product liability legal claims against the company.” The claims were related to “alleged complications from surgeries performed with certain versions of Monopolar Curved Scissors (MCS) instruments that were the subject of a recall in 2013 and with a first-generation MCS tip cover that was the subject of a market withdrawal in 2012,” the company said in the statement.
“In Intuitive’s 2014 Form 10-K report filed in February 2014 with the U.S. Securities and Exchange Commission (SEC), the company said it was a defendant in approximately 76 individual product liability lawsuits filed in federal and state court and in a class action filed in federal court,” reported the LexisNexis Litigation Newsroom blog.
“In addition, the company reported in the same filing that it faced a lawsuit by Illinois Union Insurance Co. and Navigators Insurance Co., as well as a shareholder class action lawsuit.”