Intuitive Surgical

The robot-surgery pioneer

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When Intuitive Surgical first launched its da Vinci system, doctors were extremely skeptical.

Will robots replace me? Why should I use this? Is this really worth the cost?

However, as time went on, the product proved itself.

A da Vinci surgical system enables doctors to make micro-movements and get a 3D view of surgery.

This video will do a better job than I ever could of explaining how it works:

Further, the technology can even balance out the natural tremor in a surgeon’s hand. Over time, doctors realized that this machine was not there to displace them but rather enable them to do minimally invasive surgery.

The company measures its value using this simple formula: efficacy/invasiveness.

Another way to put this is: surgery success/time in hospital.

Shorter patient recovery times mean lower hospital costs and lower insurance premiums for patients. So while the da Vinci system is expensive, the average selling price being $2 million, it can eventually pay for itself.

The da Vinci’s include a console that the doctor puts his hands into and a 3D-HD visual system, along with the patient side of the cart, where the four mechanical arms are attached. It looks just like this:

Interestingly though, the company doesn’t even make most of its money from the sale of these machines, but rather the accessories and instruments that accompany them.

The instruments and accessories include the EndoWrist attachments which are the robotic hands the surgeon is manipulating. These are used for between 12-18 surgeries and then they must be replaced. Accessories also include staplers, vessel searers, sterile drapes, sensors, lights, and cameras. These are all recurring add-ons that allow the company to continue making revenue after the sale of a big system. The company actually makes 72% of its revenue from recurring sources.

Ok, so we’ve covered the sale of the “Systems” and “Instruments and accessories” but there is one more main segment: “Services.”

The company enters into annual service agreements when a new system is sold. This is high-margin revenue as the hospital is locked into the agreement and the configuration is typically not extensive.

So the systems provide the foundation for the other two segments. Without a system, there are no recurring revenues. Think of it as a giant razor and blades model. Instead of a $10 razor though, the hospital is laying out $2 million.

What’s interesting is that the company’s consumables have grown much faster than the systems. Below is the annual growth for the three revenue segments.

And here is another way to visualize the data.

This chart was created with Stratosphere.io. You can use our promo code: investingcity to get 25% off a premium plan. Note that the full set of KPIs are only available on the pro plan.

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The revenue segments now look like this as a percentage of total sales.

The likely reason for this is that the company has already eaten up a lot of market share. Of the 7,500+ systems that have been sold, over 4,500 of them are in the US. Yet there are only about 6,000 registered hospitals in the US, and it’s unlikely that all of them can afford a da Vinci. Granted, there are big hospitals like Mayo Clinic that probably have quite a few of Intuitive’s machines but these stats show how dominant the company is.

Another crucial point is that the business is really tied to procedure growth. If people don’t need as many procedures, hospitals will delay capital outlays and then consumables revenue will dry up as well.

You can see that international growth has been faster than in the US but it still only accounts for 27% of revenue. One interesting fact here is that there were 316,000 urology surgeries using da Vinci systems outside of the US but only 162,000 in the US. That means 53% of all international surgeries were urology but only 13% in the US. I have no idea why that is but I thought it was especially interesting.

And here is what the growth numbers look like for procedures.

It comes as no surprise then that the only two negative revenue growth years Intuitive has posted were 2014 and 2020, when procedure growth was negative. Since procedure volume dropped-off a bit, so did everything else. The 72% of recurring revenue depends on procedures happening.

Below is probably the most interesting chart for the company. It shows what the average revenue per procedure is for the “instruments and accessories” segment.

This goes to show that this segment, the fastest-growing one for the company, has been driven solely by procedure volumes.

In other words, show me the procedure growth and I’ll show you Intuitive Surgical’s business. This, of course, doesn’t just mean that people are having more surgeries, though that could be part of it; it simply means that Intuitive is taking more and more share. In short, it’s not because of pricing power that the company has grown as fast as it has — it’s because it has built a better mousetrap that actually helps surgeons immensely once they are trained on the system. This dynamic also contributes to the company’s moat. Surgeons are taught how to use da Vinci’s early on and any new systems have a learning curve and would render the da Vinci a sunk-cost. Not many hospitals would drop $2 million on a system and then let it fall by the wayside. Now, some hospitals do lease the systems rather than buy them but it’s not the majority — it’s less than 1/3rd. There is a high switching cost for these hospitals and as long as Intuitive incrementally improves their instruments, it is extremely sticky.

To conclude, as minimally invasive surgery becomes the norm, the company’s product will likely continue to ride that tailwind. This, coupled with an aging population, should propel Intuitive’s growth for years to come, even though they are such a dominant force in surgery.

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