Intuitive Surgical's (NASDAQ:ISRG) primary business is the manufacture, sales and service of the da Vinci surgical robot. The da Vinci is the only widely capable surgical robot approved by the FDA, and essentially enjoys a monopoly position in its niche.
Key Factors for da Vinci's Success
Robot-assisted surgery stands every chance of becoming the standard for several different types of surgeries, in my opinion, and is already making inroads in several areas. There are a few key things that will impact ISRG's development, including insurance reimbursement rates, FDA approvals, encroaching competition (eventually), and the health of hospital capital budgets.
But the key for ISRG is going to be new surgery approvals, patient awareness, and physician adoption.
Surgery volume and patient demand is by far the most important driver of the economic success of the da Vinci system. The machines cost well over a million dollars and require the ongoing purchase of regular maintenance contracts and proprietary accessories, so it is important to have both growth in the number of machines sold, and in the number of procedures performed.
The lumpy earnings that the company has experienced over the last year or two (though mostly they've reported blowout earnings) have related to the uneven timing of purchases of da Vinci robots by hospitals. Moving forward, the installation income will become less and less significant and the ongoing instrument and service income will become the core of ISRG's earnings.
And the only way to get instrument sales up is to build a bigger network of the machines and the doctors who are trained to use them, and to build public awareness among both doctors and patients about the virtues of the system to keep the utilization rates high.
So far, that has really already happened with prostatectomies. The da Vinci has steadily been taking market share in these surgeries, to the point that they expect to see the da Vinci used in 35% of all prostatectomies performed this year, roughly twice as many as last year.
In many ways, prostatectomies have been an easier sell than some surgeries might be, since in addition to the benefits conferred by all minimally invasive surgeries (less blood loss, less chance of infection, shorter hospital stay, less pain), da Vinci prostatectomies have been shown to have fewer complications and a good chance of regaining urinary function and sexual function faster than with traditional prostatectomies. That has led to men actively seeking out and demanding the da Vinci, and I expect the market share will continue to grow. As will the market size, since the baby boomers are just now entering their prime prostatectomy years.
But I think Intuitive Surgical really needs more procedure growth in additional areas. While use is growing for mitral valve repair and other heart surgeries, and for gastric bypass surgery, I expect the next key market share move will be in gynecological surgery, specifically in hysterectomies.
Hysterectomies are relatively complex surgeries, I've been told, and they are fairly standardized and extremely common (about five times as many hysterectomies are performed each year as prostatectomies), which makes them well suited for minimally invasive robot-assisted surgery and a great growth market for Intuitive Surgical.
The benefits, for those unfamiliar with robotic surgery, are laid out nicely in this table, borrowed from the da Vinci explanation at Women's Specialty Health Centers, P.C.:
So what has been going on with gynecological surgery and the da Vinci since I last did some "channel checks" in April? Well, there have been plenty more machines written about in the press, and plenty of hospitals advertising their robots for hysterectomies ...
For example, here's a UNC page advertising their "high precision" robotic surgery options for women in cervical cancer, for hysterectomies, and other applications.
The following are a list of additional hospitals that are also using the technology:
There have also been stories about surgeons doing gynecologic surgery using the da Vinci for the first time in hospitals around the country, like this one from Memphis.
And if you're not too squeamish, you can watch a da Vinci hysterectomy here. The market machine is in full swing.
Factors in the Adoption of Da Vinci Technology
But what I've been thinking about lately is the advance of research, and whether the volume of research studies has any predictive power vis a vis the adoption of the da Vinci. According to the company, it took about two years of intensive research study and publication to make the benefits of the robot clear, to make physicians aware, and to therefore build the da Vinci's market share in prostatectomies.
So I thought I'd look at the number of research reports involving the da Vinci in prostatectomies over the last several years, and in hysterectomies more recently, and see if the information is at all valuable.
Here's what I found:
The FDA approved the da Vinci for laparoscopic prostate surgery in June 2001 (just about a year after the first approvals came through for the da Vinci in other applications), and for laparascopic gynecological surgery in April of 2005.
I used the Medline database to analyze the number of articles that mentioned either prostatectomies or hysterectomies (broadly defined) and also mentioned the da Vinci system, Intuitive Surgical, or robotic surgery in each of the past several years.
1999 -- 7 articles
2000 -- 11
2001 -- 13
2002 -- 13
2003 -- 29
2004 -- 47
2005 -- 77
2006 -- 84 so far
2002 -- 3 articles
2003 -- 4
2004 -- 3
2005 -- 10
2006 -- 4 so far
That's a pretty underwhelming comparison, and my guess is that it's going to take another couple years of positive research studies (I've seen nothing negative about the da Vinci in gynecological surgery yet, aside from cost issues) before hysterectomies can take off in the way that prostatectomies have for Intuitive Surgical.
That's too bad, but with new indications for the robot coming along every day, I think we can afford to be patient with gynecology. It took the da Vinci Prostatectomy five years to get a 30%+ market share. If the da Vinci Hysterectomy can get even a third of that (10% of the hysterectomy market) within its first five years (that would be mid-2009), that would be another huge growth driver
However, unless studies give a clear preference for the da Vinci hysterectomy over other laparascopic, vaginal or open surgeries (as studies in the past couple years have done for the da Vinci Prostatectomy), it's possible that 10% might even be too optimistic a target.
I'll be keeping an eye on the performance of the company, their sales of new systems, and their instrument income. But what I'll really be looking for, and the company is great about covering these details in their conference calls, are additional inroads into gynecological and other non-urological procedures.
It's always possible that keeping an eye out for other procedures will cause us to lose sight of the critical near-term driver of da Vinci usage, however. I need to remind myself that the da Vinci has come to prominence and proven its supremacy at possibly an ideal time, just before what may be a perfect storm in the world of prostatectomies: The cusp of the baby boomers are just entering their early 60s with good general health and an interest in maintaining a high quality of life (of which peeing and having sex are some key elements); the average prostate cancer diagnosis is now made in the late 60s (and declining); and prostatectomies have more than quadrupled in number in the last 20 years as diagnosis and treatments have improved.
I did some analysis of the valuation of ISRG last December, when the price was quite close to where it is now. I thought it was reasonably priced then in relation to its growth, and I think it's even more reasonable now. For full disclosure, I do own shares of Intuitive Surgical, bought over the last year or so at $112, $109, $90, and $70, and my average cost per share now stands just a hair under one hundred dollars.
ISRG 1-yr chart: