For nearly three decades, Intuitive Surgical has been a leader in robotic-assisted surgical systems. The company is driven by creating a healthcare future that is less invasive and where diseases are identified early and treated quickly. As a mature company, Intuitive is focusing on adoption of its systems.
“We have now three platforms and we have other elements of the of the ecosystem beyond just robotics,” said Jamie Samath, chief financial officer at Intuitive. He spoke at the 2023 Wells Fargo Healthcare Conference in September.
For the next year, Samath said, growth drivers will be consistent. “It’s general surgery in the U.S. and it’s going beyond urology in our international markets. Then it’s our newer platforms: Ion and Da Vinci SP,” he said. “We will see the incremental depreciation, and we will look to leverage our enabling functions.
Its newest platform, the Ion endoluminal system, is designed for minimally invasive biopsy in lungs with a goal of improving precision and efficiency of lung biopsies. Ion’s performance is a function of three things: the clinical differentiation with respect to diagnostic yield and race of pneumothorax, the Intuitive ecosystem and its brand in robotics, and commercial execution.
Intuitive placed its first Ion system in Europe last quarter, and Samath noted that it will be a measured rollout. “We need to build clinical and economic evidence in Europe, and that is going to be market by market. So, I wouldn’t expect that to be a significant ramp. We have to take the time to build the evidence,” he said. “Reimbursements in Europe for a lung cancer biopsy are about half the rate of the U.S. so we have work to do there to position that product for wide adoption.”
Intuitive is in regulatory submission for both Korea and China, but Samath said the company does not expect clearance in either of those markets in 2023 because of lengthy regulatory timelines. Similarly, the Da Vinci SP is on track in a number of markets for clearance and clinical indications.
“We have SP submitted in Europe and recently cleared in Japan. We’re working on China. We’ve completed the ID in the U.S. for thoracic and for colorectal but have not yet submitted by the 510(k). But those are all effectively licensed to sell.”
With respect to clinical value, Samath said that thoracic is likely the bigger opportunity because colorectal will be a transabdominal procedure.
“Our value proposition for SP is narrow access or alternative access. The way you would use SP in a colon procedure as cleared would be conventional retraction surgery. If you could do that procedure transanally, you would get to access a natural orifice. We could see value there, but something over time — not in the plan today.”
Facing the Competition
“We see two players active in tenders in Europe and India and a local player in Japan,” Samath said. “I kind of take a one-year view. We’re pleased with what our win rates are. We think that we do have differentiation that’s relatively significant including the ecosystem that have advanced instruments, for example. The large company is obviously highly capable from a marketing perspective. They have significant presence in a number of accounts. But I think that we’re well positioned, and the fact that we have X, Xi, and SP positions as well from the segmentation perspective.
Da Vinci X is an upgradable system with “cost-conscious options.” It has the same arm architecture as the da Vinci Xi. The da Vinci X also includes streamlined setup and port placement. The da Vinci Xi surgical system is designed to provide flexibility for procedures performed across multiple specialties. It offers broader anatomical access, enhanced ease of use, and complete integration of advanced da Vinci technology, according to the company. The fourth-generation system includes the vision and wristed instruments but in a modular format.
The Operating Environment
Comparing the operating environment from last year to this year, Samath said that there are two highlights in terms of positive changes.
“Staffing levels — particularly in the U.S. and in nursing — looked to have improved particularly into the beginning of this year. And we’ve seen patient flow — an increase in patient admissions into hospitals — as patients returned to normalized healthcare routines and to diagnostic pipelines. That resulted in higher admissions, and that positively benefited da Vinci surgery at least in the first half.”
The capital environment, however, is relatively similar to a year ago from Intuitive’s perspective. “We see customers being cautious. They have constrained capital budgets. We see them tend to invest when they have growing programs, and they understand their economics pretty deeply.
There are two areas the company is watching: developments in China and developments in GLP-1s and their impact on bariatric surgery.
China. Intuitive is watching four risks when it comes to breaking into the Chinese market: pricing pressure, increased competition, increasing risks to the economy, and an anticorruption set of actions by the government.
Anticorruption activities, he said, will last about a year. “They’re going to look at potential for corruption, particularly by decision makers in hospitals that have procurement responsibility. There’s the risk that [these activities] could be disruptive to administrative processes,” said Samath. “What we’ve seen very recently is the start of delays to tenders that we are involved in. So, we expect that to have some modest impact to capital placements in China in the short term. Other companies have mentioned that they’ve seen the same [effect].”
“There’s a defined period during which these activities will occur and that delays the time you have to address a quota.” However, he said that it is not likely to have a significant impact. Recent placements in China have been about 15 per quarter.
“We know that surgeons care about a feature set for clinical robotic systems, and we believe that we are significantly differentiated both on the robotics perspective and in the ecosystem,” Samath said. “Our objective would be to win a significant majority of the quota, but we’ll see how that plays out.” Local manufacturers will win part of that quota, he said.
A couple of smaller provinces have implemented caps on the amount that a patient can pay for a procedure in China. Most of the procedures are paid for by patients. We see the potential for other provinces to adopt that cap on payment. Intuitive’s response in that situation is likely to adjust its pricing, Samath said. China currently represents 5–6 percent of Intuitive’s procedures.
Samath said placing systems in China is relatively low risk currently. The real risk, he said, is when the economy in China gets to a point where the central government tries to cut budgets and that affects impacts hospitals’ ability to buy systems.
GLP-1. GLP-1 is a hormone that plays a significant role in regulating blood sugar levels and appetite. Bariatric surgery procedures can enhance the release of GLP-1, which contributes to improved blood sugar control, reduced appetite, and successful long-term weight loss in individuals with obesity.
“Our CMO is a currently practicing bariatric surgeon,” said Samath. “We talked to bariatric [key opinion leaders] in our customer base, and we obviously read the research that’s been done, including one that called for a 20–30 percent reduction in bariatric surgery volume in the short term.”
The conclusion at this point from the Intuitive perspective is that “it’s too early to tell.” “We think that there’s likely some impact in the in the short term as reflected in the guidance, and we see the same data regarding recidivism rates, which are relatively high. Once you come off the drugs, you tend to put the weight back on. Once the weight back goes back on, you can imagine patients still want to treat their obesity and come back to surgery pipelines.”
For longer term impacts, Samath said Intuitive has seen analysis that says it could be complementary to bariatric surgery. They’ve also seen hypotheses that GLP-1s positively impact overall surgery volumes.
“Lower BMI means you have more candidates for surgery that wouldn’t otherwise have been. So, for us, this is an area that we’re going to watch carefully. It’s an important market for us obviously, but it’s too early to tell what the longer-term impacts are going to be.
Based on the market data Intuitive has seen and what they company sees in its own numbers, he noted there are varied analyses on what the impacts will be.
“We believe the ecosystem is the basis of competition, and we think we have a wide moat with respect to the comprehensiveness and capability in our ecosystem,” said Samath. “When we think about adding to the ecosystem, first question is: ‘Can we be differentiated relative to the alternative?’ And if we can, second question is, ‘What return generate by developing that ourselves?’ If we can be differentiated and generate a return, then we would put it in our R&D pipeline and stack it up in terms of relative priority. If we can’t be differentiated, then we’d look to partner,” he said.
Margins. In 2022, Intuitive reported about 35 percent of margin, which remained steady in Q2 2023. Intuitive has no management objective to be above 40 percent.
“In the nearer term, we think our margin is choppy. We have a set of accumulated stresses from the pandemic that are in our global operations impacting gross margin,” he said. He noted that they have “some work to do” with respect to the product cost structure in Ion, because gross margins there are diluted to corporate averages.
“So that set of activities within gross margin is impacting operating margin, and that will take us some time to work through. We do have significant CapEx this year that will turn into depreciation next year. Those are longer term investments, particularly for facilities and manufacturing capacity. So they have a period of underutilization with respect to their depreciation expense.”
Intuitive expects to leverage its enabling functions next year. The company has an expectation that it can get to gross margins of 70 percent over time, Samath said, and that will lead to operating margins above 35 percent over time. However, the robotics giant is not ready to put a timeline on it, in part because of the environment the company finds itself in and the set of activities and actions that must be executed.