Intuitive Surgical: A Leader in Surgical Robots
- By Christopher De Sousa, CIM® | Portfolio Manager
- 4 Min Read
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Intuitive Surgical designs and manufactures the da Vinci surgical robot, which allows surgeons to perform minimally invasive surgeries. Clinical studies show robotic surgeries are typically less invasive, lead to less time spent in the hospital and quicker recovery times – which is beneficial for the patient, as well as the hospitals (by reducing costs). Surgeons can use the da Vinci system, which is now in its fourth generation, in surgical operations in areas such as urology, gynecology, and general surgery. The da Vinci system is not a self-operating robot – at least for now. Instead, a surgeon sits at a console station a few feet away from the operating table to manipulate da Vinci’s four robotic arms with endoscopic instruments (see image below). The da Vinci system provides surgeons greater flexibility, precision, and control than conventional techniques.
To date, surgeons have used the da Vinci surgical robot in more than 8.5 million procedures, of which 1.25 million da Vinci surgeries were performed in 2020 (see image below). We believe 1.25 million procedures is a small number compared to what the opportunity is in the future. The opportunity set for Intuitive Surgical in the disciplines that it serves (e.g. urology, gynecology, general surgery, etc.) is about 20 million soft tissue surgeries per year. Given Intuitive Surgical’s existing products and clearances in markets today, the company estimates there are about six million procedures that can be performed using its surgical robots annually. We believe hospitals are still in the early adoption stages of robotic-assisted surgery globally. Intuitive Surgical is the market leader, but there remains significant upside to grow the business through new products, innovations, and clearances to expand the current market opportunity.
RISING ADOPTION OF ROBOTIC SURGERY
In 2021, Intuitive Surgical expects da Vinci surgical procedures to grow 22-26% – indicating a need for hospitals to return to surgery as Covid-19 delayed and/or halted elective surgical procedures last year. Intuitive Surgical is seeing a rebound in da Vinci surgical procedure volumes combined with strong utilization of installed systems, and healthy hospital spending on new system purchases and placements. In addition, hospitals that own seven or more da Vinci systems increased 20%. Intuitive Surgical expanded the installed base of da Vinci systems by adding 298 systems in the first quarter of 2021 (vs. 231 consensus), an increase of 26% compared with 237 systems in the same period in 2020. There is now a total installed base of 6,142 da Vinci systems globally, an 8% increase from last year.
Hospitals are purchasing systems in preparation for a post pandemic environment and upgrading in order to access or standardize on fourth generation capabilities. Intuitive Surgical benefits from high switching costs, driven by the time to train surgeons on the robotic system and capital requirements. The customer becomes very sticky once the hospital and surgeon builds the da Vinci into their daily schedule and standardize it. At that point, it is very hard to switch them out of da Vinci and onto a different system. Utilization of the da Vinci system, measured by procedures per system, has been steadily increasing each year. An increase in system utilizations is a leading indicator for potential future system purchases and placements, and more importantly, the increasing adoption and acceptance of robotic surgery.
FORTIFYING THE WALLS OF THE MOAT
Last year, Intuitive Surgical introduced two new pricing platforms that will help the company build a deeper moat against current and future competition.
- First, Intuitive Surgical is extending the use of high volume da Vinci X and Xi surgical instruments (see image below). The new instruments will allow surgeons to use them 12 to 18 times compared to the prior 10-use limit. Surgeons attach instruments at the end-points of each of da Vinci’s four arms to perform a procedure. As tools expire or wear out, the hospital must order replacements. This makes for an attractive razor-and-blade business model with steady recurring revenues and cash flows. The pricing on the extended use instruments will be higher, but the costs per procedure will decline.
- Second, Intuitive Surgical is lowering prices on certain instruments used in lower acuity procedures (i.e. cholecystectomies, inguinal hernias, and benign hysterectomies).
We believe the combined impact of these changes will effectively lower the cost of many procedures that are competitive with non-robotic minimally invasive surgical procedures and expand the company’s robotic procedure total addressable market.
STILL IN THE EARLY INNINGS
We think Intuitive Surgical is an excellent business with an established ecosystem of surgical robots in hospitals that are protected by over 4,000 patents and over 24,000 peer-reviewed clinical journal publications (making it one of the most clinically studied medical devices). These factors create meaningful barriers to entry, switching costs, and network effects. Intuitive Surgical has a clean balance sheet with no debt and $7.2 billion in cash and investments. This puts the company in a great financial position to invest further into developing new products (i.e. Ion, which enables minimally invasive biopsies in the lung) and scaling da Vinci’s ecosystem into hospitals in international markets. We believe Intuitive Surgical will continue to be a valuable partner to hospitals and surgeons as they adopt robotic surgery.
We continue to view Intuitive Surgical as a core holding in client portfolios.
Risk factors include 1) cuts in hospital budgets, 2) the rise of Covid-19 cases creating delays or halts of elective surgical procedures, 3) product recalls, 4) price reductions, and 5) competition.