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Ryan Tong

Intuitive Surgical (NASDAQ: ISRG) is a medical technology company that manufactures the da Vinci Surgical System, a line of robotic surgical equipment used to conduct cardiac, urological and cancer related minimally-invasive surgeries. The da Vinci Surgical System translates a surgeon's hand movements at the controls into corresponding mirco-movements of surgical instruments positioned inside a patient on the operating table, allowing for precision movement and fine surgical manipulation. Despite high upfront costs ($1.0-$1.7 million), the machine's ability to improve operating time, reduce post surgical complications and shorten hospital stays have made the system a cost effective investment among large hospitals.

In fiscal year 2007, the company's revenues grew by 61.2%. However, sales growth for new systems have been gradually declining for the past two years (from 71.62% in 2005 to 64.7% in 2007). ^[1] The company expects recurring revenues from service contracts and instrument/accessories to become a larger percentage of total revenue in the future, largely due to the fact that ISRG has a only a limited number of large hospitals that are willing and able to pay for its surgical equipment. The company's future growth will depend largely on its ability to successfully expand the number of conditions that da Vinci is approved to treat. Each new condition, translates into incremental revenue from sales of new attachments needed to operate on that specific condition. Moreover, new conditions lead to greater utilization of the machines, increasing the chance that a large hospital will need to purchase a new system.

In 2003, ISRG acquired Robotic Motion acquired its main competitor, giving it a monopoly over minimally invasive surgically robotics. While other companies are working on their own versions of da Vinci, as of the end of 2007, its closest potential competitors are several more years away from releasing their own systems.

Business Financials

Intuitive Surgical pioneers and develops a line of robotic surgical equipment used by surgeons in conducting various types of minimally-invasive surgeries. The company designs and manufactures the da Vinci Surgical System and its related medical accessories. It sells its advanced surgical machines world wide to academic and community based hospitals.

Main Products

The company’s main product is the robotic da Vinci Surgical System, which consists of four components:

• The Surgeon’s Console: lets the surgeon to sit and operate using master instrument controls that translate the surgeon’s hand movements into precise corresponding real-time surgical instruments positioned inside the patient.

• Insite 3D Vision System: high resolution display that provides 3-D view of operative field.

• Patient side cart: movable bedside apparatus that holds electromechanical arms that manipulate instruments inside the patient.

• EndoWrist Instruments: the company’s proprietary line of surgical tools that are extensions of the machine’s robotic arms.

In 2007, 86% of Intuitive Surgical’s revenue was generated from sales of individual da Vinci system priced between $1.0-$1.7 million along with instruments and accessories averaging $1,500-$2,000 per procedure. The remaining 14% came from service contract agreements of $100,000-$150,000 per year. The company anticipates long term growth in recurring revenues from accessories, instrument sales and service contracts to upwards of $3.2 billion.^[2]

Annual Data Information

In FY2007, the company’s revenue grew by 61.2%, or $228.1 million, to $600.8 million. More than three quarters, 78.1%, of its revenue were from domestic sales while 21.9% came from international sales to hospitals in number of countries. ^[3] As of the end of 2007, Intuitive Surgical has sold over 800 da Vinci Surgical Systems and surgeons using its technology has completed more than one hundred and fifty thousand surgical procedures. Hysterectomies, removal of the uterus, were the fastest growing procedures on a percentage basis (increased 183%) and prostatectomies, removal of the prostate gland, were the largest volume procedures (over 55,000 procedures).^[4]

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Acquisitions

On June 30, 2003 Intuitive Surgical closed an all stock acquisition of its sole competitor, Computer Motion (formerly: RBOT) for $148.5 million. Prior to this acquisition, ISRG’s da Vinci System had competed with Computer Motion’s Zeus System. Since its acquisition of Computer Motion, Intuitive Surgical has had a monopoly over the robotics surgical market.^[9] As of Q1 2008, there are several innovative robotic-assisted minimal invasive surgery platforms in various stages of development by both private and public companies world wide. However, given that the da Vinci Surgical System is categorized as a Class II medical device by the FDA, any new competitor would have to apply for a 510(k) application and approval. Given that the da Vinci system was approved only after extensive clinical studies, the emergence of a real competitor is projected to take years. As of 2007, the two closest potential competitors are at least 12 to 18 month away from even starting a clinical study program to validate their technology platforms.

Trends/Forces

Impact of Aging Baby Boomer Generation:

The growth and adoption of Intuitive Surgical’s robotic medical systems are strongly dependent on the need for Da Vinci’s approved surgical procedures. The increasing elderly population in developed countries such as U.S., Western Europe and Japan can raise the demand for minimally invasive surgical procedures. Because the company’s technology is used primarily in the surgical treatment of diseases such as cancer and cardiovascular abnormalities that have a high occurrence in later stages of life, Intuitive Surgical can stand to potentially profit from these opportunities.^[10]

Approval for New Indication Use

The Da Vinci system has been FDA approved for a list of surgical procedures. Starting in July 2000, the Da Vinci was approved for General Laparoscopic procedures, followed in 2001-2005 with the approval for Non-cardiac thoracoscopic, Prostatectomy, Cardiotomy, Cardiac revascularization, Urologic and Gynecologic surgical procedures. ISRG's most recent approval was for Pediatric surgical procedures in June 2005. Increased approval of new treatment therapies for the Da Vinci system not only increases the incentive for hospitals to purchase the robotics platform, it also promotes the sale of new surgical instrument attachments associated designed especially for each indication. This is a crucial strategy for the expansion of the company's future sales of new units and accessories.

Growing Uncertainty in Medicare and Medicaid

Unlike most other medical device companies, Intuitive Surgical’s products have no problems qualifying for healthcare reimbursement because the company targets surgeries that are considered non-experimental and non-cosmetic, which qualify for full reimbursements from government and private insurance plans. Nonetheless, 71.9% of its equipment sales happen domestically and are funded by hospital revenues dependent on Medicare, Medicaid and other third party payors. As Medicare Part A (hospital insurance) is expected to go cash-flow-negative in next 5 years, reduced medical coverage for over 40 million elderly and disabled American patients is likely to put constraints the installment and sales of ISRG’s surgical systems.^[11]

Obesity and Related Diseases

Many of surgical procedures performed using the company’s da Vinci system, such as cardiothorasic, cardiac bypass and gastric bypass surgeries, are a result of diseases stemming from obesity. With over two thirds of U.S. adults overweight and more than half of those obese, there remains a growing need in the future for precise, robotic based treatments to conditions stemming from Obesity related ailments. ISRG's da Vinci machines are used in Laproscopic Roux-en-Y gastric bypass surgeries that reduce the size of a patient's stomach to restrict food consumption and removal of a part of the small intestine to reduce nutrient absorption. Specifically, da Vinci's use by surgeons to suture the bowel to the small intestine has dramatically decreased surgical complications compared to hand sutures. ^[12]

Competition and Market Share

While the company considers the entire range of open surgery, minimally-invasive-surgeries (MIS), drug therapies, radiation treatment and emerging interventional surgical approaches to compete for its market in the treatment of cardiac, cancerous and urological diseases, there are no direct commercial competitors in the robotic-assisted MIS space since Intuitive Surgical’s acquisition of its major competitor Computer Motion in 2003.

In the larger medical devices industry, Intuitive surgical competes indirectly with various manufactures and distributors of endoscopic surgical devices, catheters and stints used in the treatment of cardiovascular disease.

References

1. ↑ ISRG 2007 10-K, Pg.37
2. ↑ ISRG 2007 10-K, Item 3, Pg.41
3. ↑ ISRG 2007 10-K, Item 7, Pg.41
4. ↑ ISRG 2007 Annual Report, Pg.4
5. ↑ ISRG 2007 Annual Report, Item 5, Pg.40
6. ↑ ISRG 2007 Annual Report, Item 7, Pg.41
7. ↑ ISRG 2007 10-K, Item 7, Pg.45
8. ↑ ISRG 2007 10-K, Item 5, Pg.41
9. ↑ ISRG 2003 8-K, Pg. 2
10. ↑ USA Today: "Who will take care of an older population?"
11. ↑ [http://money.cnn.com/2008/03/03/news/economy/104239768.fortune/index.htm Fortune Magazine: "The $34 Trillion Problem"]
12. ↑ [http://www.time.com/time/subscriber/covers/1101040607/article/how_we_grew_so_big_diet01a.html Time Magazine: America's obesity crisis]
13. ↑ [http://sec.gov/Archives/edgar/data/64670/000089710107001326/medtronic072487s1_10k.htm Medtronic 2007 10-K, Item 8, Pg.36]
14. ↑ [http://sec.gov/Archives/edgar/data/203077/000089710108000412/stjude080794_10k.htm#A013 St. Jude Medical 2007 10-K, Item 8, Pg.21]
15. ↑ [http://finance.google.com/finance?q=snn Smith & Nephew Income Statement, Google Finance]