Intuitive Surgical (ISRG)

“Part of the reason we did the da Vinci surgery was because Dr. Oey told me that I would have much less pain and less recovery time. The day I got out of the hospital I took a pain pill. The next day I took another one, and the third day I was back doing everything I needed and haven't taken a pain pill since. There is very little pain doing the da Vinci System. It's no scars, no pain."

Testimonial - Gallbladder Removal Surgery with da Vinci Robot

Since its inception in 1995, Intuitive Surgical has led the field of minimally invasive surgery (MIS) through pioneering technological advances. The development of robots such as the now famous Da Vinci surgical system, which allows assisted and less invasive surgery, is changing the global paradigm of modern surgery.

Currently, open surgery is still the most common type of surgery for any part of the body throughout the world. However, the large incisions of open surgery can cause complications in the patient that result in longer recovery and hospitalization times and, as a consequence, higher costs for private hospitals or for the governments of countries with public healthcare. By using robotic technologies and 3D imaging, which can overcome some of the limitations of more conventional surgery, Da Vinci surgical systems allow surgeons to extend the benefits of MIS to patients who would otherwise undergo much more invasive (such as open surgery) or slightly more invasive procedures (such as laparoscopy). The technology aims to replicate the natural movements of the surgeon, eliminating the inherent unsteadiness of the human hands.

The first generation of systems that helped advance robotic surgery were initially used to perform prostatectomies in the US and improved clinical efficacy by being less invasive to the patient. Not even 15 years after the first prostate cancer surgery with the Da Vinci system, more than 90% of all prostatectomies in the country are performed with this robot. Intuitive Surgical has continued to expand its services to different international markets and fields, such as gynecology, thoracic surgery or general surgery, to the point that in 2022, more than 1,875,000 surgeries were performed with Da Vinci systems. With this technology and the other systems and services that Intuitive Surgical is working on, the company aims to revolutionize a market in which robotic surgeries still account for less than 3% of surgeries performed each year worldwide. According to the company, its current TAM (without exploring new applications) is 6 million surgeries per year, and they hope to take advantage of growth opportunities in international markets, where the prospects for economic development and population growth are more attractive. In fact, out of the 7,544 da Vinci surgical systems in operation, only 2,981 are outside of the US.

But where and how was the Da Vinci system born?

The research that led to the development of the Da Vinci system was carried out in the 1980s at the Stanford Research Institute. The initial idea was to improve and increase the surgical instruments available in the field of minimally invasive surgery, which was becoming increasingly popular among surgeons. The concept of MIS dates back to the 5th century BC, when Hippocrates first mentioned a rectal speculum, but the principles of endoscopy (a technique for visual exploration of a cavity or passageway in the body) were not established until the 19th century. At the turn of the century, the concept of laparoscopy was introduced, a technique in which a small incision is made, usually in the abdomen, to allow for the exploration of the abdominal and pelvic organs and treatment of some conditions. The same technique was used in 1973 to observe and perform liver biopsies in patients suspected of cancer. Laparoscopy gained more popularity when video cameras became available in the 1980s, making it possible to remove gallbladders and ovarian cysts.

In the early 1990s, the Stanford Research Institute began receiving funding from the National Institutes of Health to develop the first prototype robotic surgical system known as the SRI System. The prototype also caught the attention of the Defense Advanced Research Projects Administration (DARPA), which saw in the surgical robot a way to do "tele-surgery" on the battlefield. The idea was that through satellite transmission, military surgeons could use the SRI system remotely to save the lives of the wounded in remote locations so that they could later be evacuated to nearby hospitals.

The Stanford Research Institute wanted to extend the application of the SRI system to non-military fields and tried to capture the attention of venture capitalists. It wasn’t successful until 1994, when Frederic Moll, who obtained his medical degree from the University of Washington as well as a B.A in Economics from the University of California, became fascinated by the SRI system. Frederic Moll, a great entrepreneur and businessman, had co-founded Origin Medsystems, a company that developed laparoscopic instruments, which was eventually acquired by the pharmaceutical company Eli Lilly for $100 million in 1992. Dr. Moll believed that the SRI system could bring great advances in laparoscopic surgery. He was fascinated by the fact that the system eliminated the need for the surgeon to manipulate instruments inside the patient's body, as some long instruments were very difficult to maneuver and complicated surgery.

In 1995 Moll, who did have experience in attracting financing from venture capital funds, gradually raised the necessary capital to acquire the rights to the license of the SRI system and ended up founding Intuitive Surgical Devices months later. He partnered with Harvard Medical School graduate John Freund and with electrical engineer Robert Younge to perfect the SRI system. Finally, the prototype would go on to be marketed under the name of Da Vinci, in honor of Leonardo, who had already designed the first humanoid robot in 1495. By the end of the 1990s, Intuitive Surgical, already under its current name, had managed to raise $127 million.

Over the next decade, Intuitive Surgical obtained the necessary regulatory clearances to market its first Da Vinci system outside the US. The company reinvested its cash flows to accelerate investments in R&D, and was able to develop new generations of robots with better functionalities and enter new surgical specialties (the Da Vinci system currently has more than 70 clinical uses). Robotic assisted surgery was gaining more and more popularity, and Da Vinci became something of an industry standard in the absence of competition. In just 22 years, Intuitive Surgical's stock has multiplied by more than 100.

Intuitive Surgical intends to continue leading the field of minimally invasive surgery through its comprehensive ecosystem of products and services, which includes a wide variety of systems, instruments and accessories, data analysis services for clients to make better decisions, 24/7 support and training to speed up the learning curve for surgeons so that hospitals can be more efficient. The company has captured the attention of investors, doctors and patients alike, because its objective is not only to treat conditions with less invasive surgery, but to be able to identify them sooner, which has historically increased the survival rate in many of several types of cancer.

Although advances have been notable in the last decades, there is still a wide margin for improvement, in which innovation and the development of better surgical solutions will play a fundamental role. It doesn’t look like the healthcare sector will solve its HR challenges any time soon, mainly because the world population is expected to continue growing and have an increasingly higher life expectancy. Governments will have no choice but to boost healthcare funding, so they are more than willing to embrace new systems that can cut costs per patient.

The Da Vinci system has been relatively well received around the world because it has demonstrated it can greatly benefit surgeons and patients alike. Many surgical complications (those that are associated with extended recovery times or even double surgeries) have to do with surgeons inadvertently making small incisions in places they should not. The Da Vinci system’s technology is designed to transform the natural movements of the surgeon's hand outside the patient's body into micro-movements within the patient's body. The robotic arm of the system holds the surgical instruments, while the surgeon operates using controls and a screen. Surgeons can even set Da Vinci's motion scale to transform a 3-millimeter hand movement into a 1-millimeter one, allowing a level of precision and control that would be impossible to replicate without robotic assistance.

The Da Vinci system also represents a step forward over other minimally invasive techniques such as laparoscopies. Laparoscopy itself, while much more beneficial than open surgery, is still less precise than robot-assisted surgery. Instruments are usually guided by a 2D imaging system, and in order to move the instrument from left to right inside the patient's body, surgeons must perform a movement from right to left outside the patient's body while maintaining a steady hand, as they directly manipulate the instrument. Wrist movements are also much more restricted in laparoscopies, so freedom of movement is limited. In general, laparoscopic suturing (or any laparoscopy) requires much more skill and precision than robotic surgery. In fact, in order for surgeons to perfect this technique, they usually need 4-5 years of training, whereas Da Vinci's learning curve is much lower.

Laparoscopic surgeries are also much more physically demanding than robotic surgeries. Surgeons must control their precision while standing next to the patient and must keep the same posture for hours, sometimes hunched over. Surgeons perform Da Vinci-assisted surgery while sitting, and therefore suffer from less fatigue. Laparoscopies, on the other hand, can eventually cause chronic injuries to the surgeon, who must adopt complex postures. The ability for a surgeon to operate while sitting, pause the surgery and rest while robotic arms hold the instruments in the same position inside the patient's body is a large part of Intuitive Surgical's value proposition. Now that laparoscopic imaging systems have similar functionalities to Da Vinci cameras (3D, HD, and 360 degrees), this value proposition is even clearer than it was two decades ago. Many surgeons who have embraced robotic surgery as their preferred procedure have been able to extend their careers beyond age 65 and increase the number of surgeries performed every day. The latter is especially important because a large number of surgeons in the US have a variable bonus depending on the number of surgeries they are capable of performing.

The patient indirectly benefits from this ergonomic improvement as well. The specific instruments used in laparoscopic procedures to access the abdominal organs through the skin are called trocars. The most commonly used ones usually have a diameter of 10 to 12 mm, compared to the Da Vinci’s trocars, which are 5 to 8 mm. Sutures aren’t even necessary in some cases with these smaller incisions, reducing abdominal trauma and consequently, pain in the patient. The chance of wounds, hernias, seromas or infections also decreases as the inherent movements of the surgeon’s hand are reduced, allowing the patient to have a faster recovery time and return to their usual routine sooner. For surgeons with a few years to go before retirement, control and precision are not usually as optimal as when they were 40. From what I have gathered, the reduction in blood loss during surgeries with the adoption of the Da Vinci system has been so remarkable that a urologist stated in an interview that he had become the reference surgeon for Jehovah's Witnesses, who are extremely reticent to blood transfusions. Until not long ago, 70% of gynecologic oncology procedures in the US were open surgeries and the remaining 30% were laparoscopies. Currently, 85% are MIS, out of which the majority use the Da Vinci system.

But if the benefits seem so evident, why isn't the Da Vinci more widespread outside the US? What is the argument against robotic versus traditional laparoscopic surgery? The answer is simple: the cost. The Da Vinci surgical system can cost between $500,000 and $2.5 million, depending on model and location. Some $200,000 in initial instruments and $150,000 per year in maintenance service costs should be added to that amount. The Da Vinci system represents a significant investment for hospitals that would only be offset by a high volume of annual surgeries. Intuitive Surgical, which has always had an EBIT margin above 30% (pre-pandemic) and a high net cash position, chose to leverage its strong balance sheet and offer flexibility to clients in order to accelerate its growth, especially in still developing countries with fewer resources. Aware of the limitations to grow its installed base, since 2013 the company has offered hospitals the option to rent the systems for an annual fee ranging from $80,000 to $190,000 (plus the initial instrumentation and annual maintenance fees) or even usage-based arrangements, where hospitals are charged for the systems as they are utilized. Intuitive Surgical's business model has also benefited from this strategy, since sales cycles were previously very long and could be affected by macroeconomic factors that forced hospitals to prioritize other expenses. Today, about 80% of total revenue is recurring and predictable.

However, despite the fact that Intuitive has reduced the initial outlay for hospitals, some remain reluctant to purchase this technology. Why? The truth is that, theoretically, robotic surgery usually costs between $600 and $1,500 more than traditional procedures. And I say theoretically because although some hospitals have internal reports that speak favorably of the repayment terms of the Da Vinci, these are private documents of purely informative nature. Each hospital or surgeon has their opinion about the direct impact of robotic surgery on the patient compared to other minimally invasive techniques. While it’s true that surgeons need less assistance thanks to the Da Vinci's robotic arms and certain accessories (such as the Integrated Table Motion) and the hospital is able to reduce the number of operating room nurses, there are still not enough public studies that conclude that the patient's recovery time is shorter and, therefore, the per capita hospitalization spending is lower. In fact, according to a 2017 report from the Royal Australasian College of Surgeons and Australian health insurance provider Medibank, there’s a strong correlation between robotic surgery and the average cost of prostate cancer surgery in Australia rising from AUD 14,553 to 55,928 in a few years.

Intuitive Surgical, on the other hand, claims that these reports only take service and instrument costs into account and ignore the fact that if open surgery were performed, hospitalization costs per patient would be higher than the cost of the surgery with the Da Vinci system. According to the company, while in a prostatectomy with open or laparoscopic surgery the patient would need an average stay of at least five or three days respectively, with the Da Vinci system the patient could be discharged the same day of surgery. The company also claims to have documentary evidence that conversions to open surgery (when complications arise in minimally invasive surgery and surgeons must open the patient) are significantly lower with Da Vinci than with laparoscopic surgery. A faster and less painful recovery (where the patient doesn’t need painkillers during the postoperative period) is especially important in the United States, where opioid abuse is generating a social crisis like never before in history. In summary, Intuitive Surgical is saying that some hospitals and governments only take the surgical costs of one surgery versus another into account, when all costs until the patient is discharged should be included, as well as the potential financial risks of complications of more aggressive techniques (complications in the US can range from $60,000 to $120,000 per patient).

Collecting the necessary data to back up the benefits of the Da Vinci system with documentary evidence requires thousands and thousands of surgeries for there to be a minimum of scientific validity. It’s a complicated job and it takes time. After all, no surgeon would choose a surgical technique that is not the most appropriate for a patient simply for the sake of comparing results. While Intuitive Surgical works to collect all the necessary data to justify that its products really aren't that expensive, the company depends on its sales representatives to accelerate the global adoption of the system. Basically, although it’s hospitals or governments that buy the Da Vinci system, Intuitive Surgical's main customer is the surgeon, who doesn't want to be hunched over and prefers to sit comfortably at the console, while the robot uses force and controls precision. The job of sales representatives is not to persuade the management of the hospital to buy a Da Vinci system, but to identify surgeons who may be interested in robotic-assisted surgery and convince them of the benefits so that they are the ones who end up convincing the hospital management instead. The goal is to show them first-hand the benefits of Da Vinci to the point that they believe they can't work without it. For example, demonstrating to a surgeon that, with robot motion control and 3D cameras, that surgery he performed years ago in which he inadvertently cut part of the artery and had a huge bleed is much less likely to happen again with this technology. Knowing how to identify the right surgeons (those who perform a large number of surgeries and, therefore, are more valuable to the hospital) is essential because, once they are convinced that they need a Da Vinci system in order to increase the volume of surgeries performed, work more ergonomically and offer patients a better recovery, the hospital management can either acquire the system or risk losing one of its best surgeons, who could switch hospitals and go work in another that does have the robot.

The pressure for hospitals isn’t only internal. Information access has become so democratized that many patients are as well versed about the benefits of Da Vinci as surgeons themselves. They have read reports on how minimally invasive robotic surgery can treat complex tumors and provide a faster recovery in order to receive complementary postoperative therapies sooner (radiotherapy, chemotherapy, etc.) and positively influence their prognosis. Many hospitals have no choice but to pay Intuitive Surgical a couple of million dollars.

Whether for one reason or another, more and more hospitals have at least one Da Vinci system in their facilities (currently, the number of hospitals with at least seven systems is five times higher than in 2016). The system is used in a wide variety of surgical procedures, but its biggest impact has been in urology, where they have a complete monopoly on prostatectomies (removing the prostate and surrounding tissue to treat prostate cancer, the most common in men after lung cancer). In 2003, less than 1% of surgeons in the US were performing robotic-assisted prostatectomies. In less than 10 years, Da Vinci-assisted surgeries accounted for more than 90% of the total.

Technology has revolutionized the industry and the lives of many people, but even so regulators are not entirely happy. Intuitive Surgical enjoys a unique competitive position because they were the first to disrupt the industry and became the standard, and the barriers to entry and the difficulty to succeed caused other projects that tried to compete with the Da Vinci to fail. That’s not what concerns regulators, though, but the fact that the company has not hesitated to benefit financially from this lack of competition. The average sale price of a Da Vinci system (along with the average price of instruments) has doubled in the last two decades, and this directly impacts surgery cost. Instruments are estimated to have a lifespan that ranges from 12 to 18 uses and cost and an average cost of $1,800 per surgery, reaching $3,500 in more complex surgical procedures. After maintenance services (usually performed remotely), instrument sales are Intuitive Surgical's most profitable line of business. Revenue from instrument sales has grown at a faster rate than system sales, mostly because of the company's pricing power. Currently, instrument sales account for 56% of total sales. What worries regulators (rightly so) is that Da Vinci systems are only compatible with instruments and accessories designed and manufactured directly by Intuitive Surgical, whereas in the case of laparoscopies surgeons can either use original trocars or compatible ones from another manufacturer. Each instrument is equipped with an electronic chip, and each time it’s inserted into the Da Vinci, the robot verifies whether it is original; otherwise, it won’t work.

Some organizations express concern about the gap between hospitals that can afford a Da Vinci and those that cannot, especially in markets where hospitals compete for patients. In a 2019 article for the World Health Organization, Richard Sullivan, Professor of Cancer and Global Health at King's College London and Director of the Cancer Policy Institute in the UK, found that competition between hospitals with and without surgical robots contributed to the closure of 25% of the radical prostatectomy centers of the British National Health Service. There is also a strong divide between developed and developing countries, making it more difficult than ever for surgeons to work in countries with fewer resources and no access to robotic systems. Most junior surgeons who will replace the most seasoned ones have been trained with the Da Vinci system in medical school, as Intuitive Surgical sponsors medical school courses around the world as a strategy to protect its legacy. The newer generation doesn’t want to be trained in laparoscopy, which is much more physically demanding and requires between 4 and 5 years of training to be mastered. The Da Vinci system has become a fundamental piece for hospitals to attract younger talent, who will prioritize hospitals with at least one robot in their facilities. Intuitive Surgical, with more than 1,400 simulators spread across different medical schools around the world, has done a great job of increasing switching costs and strengthening the barriers for new entrants.

The company has become the industry standard, and not by chance. They have been the first, which has been key to distance themselves from the competition from the beginning. The rapid adoption of Da Vinci systems has allowed the company to gain scale, be able to put more sales representatives in hospitals than the competition, and invest more in R&D than all competitors combined. Since 2017, the company has doubled its R&D investments and currently holds more than 4,300 patents, with more than 2,100 pending approval related to artificial intelligence, augmented reality and data analytics. The Da Vinci is so critical to American hospitals that any system collapse would halt almost all prostatectomies and most lung resection and gynecologic surgeries across the country. Its monopoly is so obvious that even CEO Gary Guthart gets uncomfortable when asked about it and has to be the one to defend the efforts of the competition:

Robert Marcus, J.P. Morgan analyst: So right now, it's pretty much a monopoly around the world. You have some new competitors coming in. How are you treating the competition? And what are you doing to make sure that it basically remains a near monopoly?

Gary Guthart: Yes. I'll reject the framing of monopoly and near monopoly, so let's just stop that. What do we look at and what do we think about? First, customers appreciate choice, and they have it. There are systems being sold by competitive companies all over the world in Korea, local competition in Japan, local competition in Europe and additionally, there's actually competitors in the U.S., and there will be more. 

The truth is that the capital and time required to develop a new robotic platform is a barrier to entry in itself, especially for small companies trying to disrupt the market. It takes at least one or two years to develop a robot (and that doesn’t mean it will rival Da Vinci's technology) and at least three more years to bring it to market. In the same way as in the aerospace industry, the regulation is very demanding and approval processes are slow. There’s no assurance of success, which means that new competitors must invest for years with no guarantee of returns. Giants J&J and Medtronic, after delaying the launch of their respective robots for years and years, seem to be the only two companies that will compete head-to-head with the Da Vinci system in the future. The objective of both companies is none other than to democratize robotic surgery and make it more accessible to all hospitals, and reach even those with fewer resources, which is very good news for society and not so much for Intuitive Surgical’s shareholders. But make no mistake: J&J and Medtronic are not driven by charity. It’s unlikely that anyone would be able to compete with the Da Vinci system today if it’s not offering a much more affordable robot. There is hardly any public information on the prototypes, but I would find it hard to believe that both J&J and Medtronic wouldn’t try to sell their hardware at production cost to encourage hospitals to stop using the Da Vinci or to consider working with two robots from different manufacturers. The strategy makes a lot of sense because the business isn’t really selling robots, but charging annual maintenance and selling instrument replacements. Both J&J and Medtronic are reputable enough to gain a foothold in the industry, especially when there isn't a huge learning curve for surgeons. From what I've been able to read, both the motion controls on the Medtronic Hugo and J&J's Ottava system closely resemble those of the Da Vinci. Intuitive Surgical's strategy of training a surgeon with only 10 to 20 simulated operations with the Da Vinci system to compete with laparoscopies, which require 4-5 years of training, seems to have backfired against them.

In any case, I think the hardware was destined to be commoditized and a replicable product sooner or later. The added value of the Da Vinci system against the Hugo and Ottava is the database that they have compiled in the last 25 years. 90% of Da Vinci systems are connected to the internet in real time, so Intuitive Surgical can analyze that data and help surgeons and hospitals make better decisions. Surgeons can compare times with one another because the system gives them all the information they need to be more efficient. It seems complicated, to say the least, to replicate a database that has been enriched by the 11 million surgeries performed by Da Vinci systems since the first system arrived on the market. That's why J&J's alliance with Alphabet, which will handle the data analysis part, is so important. In a way, I get the impression that Intuitive Surgical is investing 20% of its revenue in R&D (about $2.6 billion) not to continue gaining market share against open surgery or laparoscopy, but to defend its legacy against new disruptors that have more financial resources (J&J’s FCF was above $15 billion in 2022).

Robotic surgery will continue to evolve and what we’re witnessing now may have little to do with what we’ll see in the coming decades. It’s tremendously difficult to estimate what the industry will be like in the future. It’s also rather complex to predict the movements of regulators, who could focus on the incompatibility of non-original instruments in Da Vinci systems and encourage some kind of Heico to emerge (link) to significantly reduce surgical costs for hospitals. The variables at play are many and, as always, you should draw your own conclusions.

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