Intuitive Surgical: How I missed its rise to dominance at three critical junctures but now believe in the company’s franchise power.
Image: Open surgery with scalpel cutting access.
Throughout my med-tech finance career, I have known Intuitive Surgical (ISRG) from close to the beginning. In the early 1990’s Intuitive founder Fred Moll and I met while he was affiliated with Guidant, and he was incredibly gracious, sharing his amazing life story. This living legend catalyzed several important leaps in surgery over the last 50 years.
Image: Laparoscopic instrument set including long-handled tools, trocar tubes for access and video display.
Over that period surgery has changed from open approaches using sharp scalpels making large incisions that provide wide access to less invasive techniques. A major innovation was laparoscopic surgery in which the surgeon operates through tiny holes using fourteen-inch-long instruments while watching their working ends on a video display. An innovative company, US Surgical drove this transition with a suite of devices for reaching into the body. The physicians controlled the working end using a handle outside.
Image: Intuitive Surgical’s Davinci robot with physician console, working robot and control tower.
This laparoscopic technique swept the gall bladder removal procedure and moved into other areas, such as knee surgery. Laparoscopy offered the advantages of a shorter recovery time and little scarring. But the novel approach had its challenges. With long laparoscopic instruments the surgeon would be tying sutures while holding a grasper that was far away from the working end. The surgeon could not see the instrument tips directly but watched their movement on a video screen. There was a modest learning curve.
Further advances would come with robotics. Surgical robotics takes the concept of laparoscopy further in two ways. First, the long straight instruments passing through the trocar holes into the body have wrists and the ability to bend around corners. This maneuverability meant that the surgeon had the feeling that she was manipulating the instrument close to the working end. The second was that the surgeon sat at a console controlling the instruments remotely. The technology also included a sizable apparatus adjacent to the operating table with robotic arms containing the working ends.
Three Strikes
The first time I test-drove Intuitive Surgical’s robot was during the bake off for the IPO. The technology was amazing, and I could throw sutures with ease. The company had a few dozen systems installed and a respectable backlog, but I remained skeptical as it was targeting cardiac surgery, which several struggling public companies were unsuccessfully trying to revolutionize. My assessment was that their robot was a great innovation, but expensive and not a compelling clinical advance.
As a follow-up to that meeting, I sent Fred a VHS tape of the science fiction movie Logan’s Run in which a young Farrah Fawcett assisted in a robotic plastic surgery operation.
After the company was public, there was a group of physicians in the mid-west who found that the robot was good for prostate surgery. Intuitive management initially paid scant attention to their work, but over time they came to embrace it. The prostate gland is hard to reach with an open surgical approach, so using a robot with small flexible arms made the procedure less awkward for the surgeon. But there were two facts that kept me on the sidelines. First, the robotic prostate removal procedure outcomes were no better than the open approach. And second, using a robot was significantly more costly. But despite these factors, Davinci robot sales started to accelerate. Robotics’ availability became a selling point for hospitals as they advertised on billboards and local TV news stations found them to be perfect fodder for the health-beat segment. A first mover in a city would install a robot and the marketing buzz dragged competing hospitals along as they needed to keep up. Today it is almost impossible to get non-robotic prostate surgery in California. And ISRG stock became expensive. Strike One.
After watching the stock appreciate and remain expensive for years, the company began expanding into other procedures, and I sensed that I might have an opportunity to buy in. Hysterectomy and hernia became the company’s next beach heads. But I was skeptical again, and this time I had different reasons. Hysterectomy and hernia repair are relatively simple, so why would a doctor need robotics for these easy procedures? And robotics was a more expensive approach. I was wrong again. Patients preferred smaller incisions and easier recovery. Strike Two
Seeing the enormity of ISRG’s success, Medtronic and Johnson and Johnson would seek to enter the fray and start Robotic Surgery development programs. Years later, the specter of competition arose as Medtronic began publicizing its HUGO robot and I thought that this technology should be a contender. This new entrant was noteworthy as competition in the capital equipment space can have an enormous impact. The new competitor can dramatically slow adoption as hospital purchasers will want to try both options before committing to a million-dollar purchase. The decision process draws out further with team visits, RFP’s, trial periods and bake offs. Just the idea of a second option can give a cost-conscious CFO reason to put a hold on the purchasing process until clarity on both options is available.
But Medtronic’s international launch of their HUGO robot has been a bust. The system had a wearable headset instead of an operator console with seating. In an embarrassing logistical hiccup, initially, there was a shortage of parts. And Medtronic did not have the whole suite of tools including surgical staplers. This surprised me as Medtronic owns the old US Surgical business through its acquisition of Covidien. All the while, the ISRG juggernaut rolled on. Strike three.
Why I believe in Intuitive Surgical today.
The company’s established footprint is almost insurmountable. Intuitive Surgical has an enormous installed base of 9100 robots around the world and they are selling over 1300 more each year. This installed base is no small advantage because other companies seeking to enter the market would need to dislodge it before establishing their own presence. I often use the old technology quote/riddle to describe the challenge of competing against an incumbent.
Q. Why was God able to build the world in 7 days?
A. There was no installed base.
If a second robotic company is trying to sell its robot into a hospital with one or more Intuitive robots, it must overcome significant hurdles. The hospital needs a reason to look at the new firm’s robot in the form of a compelling case that can include better performance, lower cost, faster turnaround, or a combination of these. The competing robot must be significantly better to incentivize the surgical staff to learn how to use it. The team already knows how to run an Intuitive Robot so learning the processes for a second one and running two systems concurrently takes time and energy. (If you had a Comcast cable box in the living room of your house, would you want to install a satellite video system in the bedroom as well?)
To learn a new surgical robotic system, the training time and costs are significant. It is not just a surgeon adapting to a new console. It is the entire surgical team taking time away from their regular revenue producing roles to attend training to come up to speed. Over the past 25 years Intuitive has trained thousands of healthcare teams. Replicating that will be difficult for smaller companies struggling to fund training while they also invest in system development.
The Intuitive team is in the hospital virtually every day, so they know the hospitals’ expansion plans and they are constantly preparing to sell the next additional robot. With this information they can begin pre-selling and position against any potential new entrant. That ready access is important as the new competitor needs to build contacts, schedule appointments and work to gain an audience. Working with one of my venture portfolio companies I saw that it could take several weeks for a new rep in a new market to get an introductory appointment.
If a new competitor such as Medtronic wanted to capture 10% of the installed base of working surgical robots in five years, they would need to sell one system per day, every calendar day through 2029. They are not close to that rate today and even with the full instrument set, the mentioned selling rate is unlikely to happen. So, barring a titanic shift in the competitive landscape, Intuitive is here to stay.
The Intuitive Surgical Robotic System is going mainstream. Physicians enjoy using the Intuitive robots. The machines are part of most, if not all surgical residency programs, so emerging practitioners are familiar with them. Recently, I spoke with a board member at a small, eighty-five bed community hospital and the institution is now bringing in an Intuitive robot as they needed it to attract and keep surgeons. Intuitive still has ample room to grow as there are over 35,000 hospital operating rooms in the US and another 15,000 in surgical centers.
Intuitive Surgical is moving beyond Robotics and expanding into the OR infrastructure. In the recently introduced, next generation DV5 robot the company embedded additional technologies into the tower. Formerly, these extras were independent purchases including the insufflation device (to pump the body cavity up with air,) smoke removal, operating room system controls, navigation, and advanced vision systems. The company is making these technologies available for use in regular laparoscopic procedures at no cost to the hospital. This strategy lowers the effective system cost as the hospital can use it for more procedures, and it could eliminate the purchase of equivalent equipment from other companies. The company is positioning itself to be a broad provider of equipment for the minimally invasive OR.
There are dozens of other robotic companies struggling to capture a piece of this enormous market including formidable players in China. However, while those wannabes are wending their way through clinical trials in pursuit of FDA approval, Intuitive’s footprint will continue to grow, and its engineering teams will continue to broaden the product line and advance their leading technology with haptic feedback, and AI tools. These additions will fortify their leadership position.