Intuitive Surgical's Quintuple Walled Monopoly

Intuitive Surgical (ISRG) has a quintuple walled monopoly in the robotic surgery industry:

1. The patent wall: Intuitive has all the obvious patents, and some not so obvious ones, that make it extremely difficult for anyone else to do robotic surgery well. So far so obvious.

2. The FDA wall: Each surgical procedure requires FDA approval. The studies and documentation are an expensive and time consuming proposition.

3. The user base wall: As with any new computer application, it takes a fair bit of time to become fully proficient with Intuitive's equipment. And with surgery there is not an undo key -- nor is their time to consult the user manual. This means that nothing less than full proficiency is required. Recall the last time you tried to learn a new type of desktop application. Surgeon time is expensive and the system is now used by several specialties in limited ways. Put simply, Intuitive is developing a large and increasingly entrenched user base of surgeons. Path dependency among users with exceedingly valuable time.

4. The select only one robotic surgery system wall: At first thought, one wonders if a cheaper and non-universal system might be a competitor for Intuitive. However on deeper evaluation, it seems that there may be problems with surgeons using two robotic surgery systems with differing interfaces. Using two differing systems may lead to some degree of erroneous movement, or delay during surgery. In the event of malpractice lawsuits arising out of an unfortunate surgical outcome, the machine logs may be analyzed for the slightest erroneous movements that could be construed to imply confusion. Therefore many surgeons (or their insurers) may purposely exclude working with two robotic surgery systems.

5. The leader in the field wall. I asked my cousin the practicing surgeon about Intuitive. He cautioned me that Intuitive's systems are not being bought primarily for their capabilities.

• That their capabilities have awesome potential, but are still a little too limited in the number of procedures they can do to justify their cost, except perhaps in one hospital per city.
• That the systems are being purchased to show that the hospital is state of the art.
• That once one hospital gets the system, the other hospitals have to get it or they look like they are definitely not the leader in town. It seems that a $1 million Da Vinci system is a good investment for a $300 million hospital even if nobody ever uses it. Just having such a machine makes the rest of the hospital seem more state of the art.

The fifth wall is that any competitors in robotic surgery can't compete the way Advanced Micro Devices (AMD) competes with Intel (INTC). Intuitive surgical is selling something of a medical Veblen good now, and the only way to compete is to be a more valuable and more expensive Veblen good.

Robotic surgery is the future. I have complete faith that IT will, in a number of years, transform surgery as it has with many other things. Intuitive looks likely to control the de facto monopoly for robotic surgery. I don't really care why hospitals are buying Da Vinci systems now; the fact that ISRG is fast growing and accelerating and has a PE around 100 sure does make me feel more comfortable holding an outsized position.

And one more thing: why can't we get our heads around the fact that health care costs are supposed to spin out of control? I mean, once we satisfy all of our basic needs for food, clothing, housing, education, and entertainment, we just accumulate money. However, we will spend every last dime to save or extend our own lives. (Spending collectively on this is another story altogether.) Health care will come to be the largest part of the economy in 20 to 50 years. As it should be.

And who looks likely to control the robotic surgery monopoly going in?

Disclosure: Author has a long position in ISRG

Comments

[oink]

Bought at $3-$5 and $8.00. Sold at $120 and thought it had hit top. Oh what a mistake! Not sure if we should buy back in or wait to see if it comes down.

[FXTrader40]

ISRG technicals suggest a decent pullback is coming soon. Unless the technology is extremely costly or difficult to reproduce, at some point a competitor will appear or gain. A good analogy would be the ERP systems space over the last 10 years. Right now, it's SAP and Oracle. Many companies are locked into SAP for similar reasons as you have stated about ISRG at hospitals. 10 years ago, it was SAP, Baan, Oracle, Siebel, Lawson, etc. That said, if the focus is on a few high impact surgery areas, I would suspect niche players to come into the scene. If insurers or hospitals won't take different robotic surgery systems, it won't be because the different systems focus on different areas. Best of breed will still rule. However, if ISRG is seen as a platform for robotic surgery, with pluggable components for different surgery techniques, that could in effect interface with one another, and with the platform, in a meaningful way, either clinically or from an administrative standpoint, then ISRG will be the defacto 800 pound gorilla in robotic surgery (like SAP in ERP). Perhaps then competitors will get bid up along with ISRG, with the anticipation of an ISRG buyout. Either way the stock will likely keep moving up over the long term. I'm waiting for at least a pullback to a 50 day moving average.

[genomik]

isrg is like msft. Once ya know how to use msft applications ya dont wanna use any others. Apple exists so msft would not be a monopoly (remember msft gave them 200?mil to stay in business ) . maybe hansen will be isrg's apple, and hansen is isrg little brother. Stereotaxis is promising tho.

[Donald E.L. Johnson]

The queston I have about ISRG is how big is the market. If, as the article implies, the systems are bought by hospitals, there are only 4,000 hospitals, or so, in the U.S., plus how many surgery centers? How many have the system? And if few surgeons are using the system, how saturated is the market, or when will it become saturated. If it won't become saturated, why not?