Intuitive Surgical, Inc. (NASDAQ:ISRG) JPMorgan Healthcare Conference Call January 14, 2020 1:30 PM ET
Gary Guthart - CEO & Director
Conference Call Participants
Tycho Peterson - JPMorgan Chase & Co.
Okay. We're going to go ahead and get started. I'm Tycho Peterson from the Life Science team. It's my pleasure to introduce our next company this morning, Intuitive Surgical. We'll do a breakout right after in the Georgian room, which is across the hall. With that, let me turn it over to Gary.
Good morning. Tycho, thank you. Appreciate the opportunity to speak to you today. We will take you through some forward looking statements and some estimates. We'll also show you some things that we're working on that are not yet cleared for use in the United States, or in some cases, other parts of the world, I highly encourage you to look at our SEC filings and our website.
Let me start with why we do what we do, kind of what's our motive force. For those of you who know a little bit about surgery. The reality is, it's important. It's an important tool in treatment and it's hard and highly variable. If you look out at some of the things that we work on, take all-comer patients and all-comer surgeons that need rectal cancer surgery or rectal -- benign rectal surgery, and you look at total complication rates, it's above 1 in 3. This is U.S. data, it's not intuitive data.
Reality is that 1 in 3 people go home with something that needs to be worked on or corrected. And you might say, well, okay, you chose a hard one. Rectum is deep in the pelvis. It's hard to access, how about something a little easier? How about a hernia in the abdomen? So a tear in the muscle wall or somewhere in the abdomen. And reality is short-term complications for surgeries in the tear of the abdomen, not just the kind we do, but all patients, all surgeons in the U.S., run about 1 in 5, and that's after 90 days, that isn't even after a year. So surgery is highly variable and it's hard. It requires innovation and that is what drives us.
Just a quick check-in of how we're doing. Company was founded in 1995. As of 2019, in the year, in the trailing 12 months, 2,400 peer-reviewed clinical articles were written about the da Vinci, a little more than that. 1.2 million procedures were performed by surgeons using our products globally and another 1,100 of our systems went into the world.
If you look at our experience since inception, our first 510(k) clearance was in 2000. There are now over 21,000 peer-reviewed articles on the use of our device. If you think about a high level of evidence, comparative studies, that numbers about 1,500. Today, total experience has been over 7 million procedures and there are 5,500 systems or so in the clinical install base.
I'd like to talk about what went well in the year and the things we want to continue to work on. This is what we told you we would work on last year, we wanted to see continued adoption in general surgery. We wanted to continue development of our core markets in Europe and Asia. We have new platforms coming to the market, in their first phases of launch, that's our da Vinci SP, I'll show that to you in a minute. Our Ion system for exploring along and advanced instrumentation, and we continue to invest in clinical evidence generation and economic validation around the world.
We had a lot of areas of strength in 2019. U.S. general surgery has been an area of strength for us in that adoption. I'll show you a little bit of that in a minute.
The growth of advanced instrumentation. These are things like vessel sealers and staplers, for those of you who are familiar with the surgical market, have been strong for us. Our innovation pipeline is healthy, I think, it's well targeted and it's being well accepted. Market access, developing core markets. It's more than commercial teams, and I'll show you a little bit of what we've been doing and how that's been going. And overall performance in the beginning of some economic returns from some of the countries we've been investing in for the past few years, particularly Germany, China and Japan, not everything was perfect.
We have some slower countries in Europe than I'd like, largely around market access issues, and we're working on that. Our SP program has been a little slower than I would like for a couple of reasons. Some of it is in our control, some of it is around regulation. We're working through those things, but it's a little bit delayed relative to where I'd like it.
Looking at procedures. This is where we came in for the last several years, 2019, for the year, came in at about 18%. In the colors, you can see the contributions by different parts of the body. You see growth in just about every category. I'll break this out for you in another slide. Our guidance for 2020, 13% to 16% growth. A couple of things going on there. One is the law of large numbers as these get bigger growth rates tend to come down a little bit. The second thing is we're highly adopted in some of these categories. And as we reach maturity, that tends to slow. Good opportunity in several places, however, and we'll speak to that.
I like this view of the world. Just looking back the last 10 years around parts of the body. So color-coded by where we are in the body. You can see what the growth trajectories have looked like. For those of you who were following us in 2009, our highest category was urology, that's in green. Gynecology then eclipsed. Urology as the main growth engine, and that's the yellow, that's grown through. And you see rising from the bottom and now becoming quite a steep adoption curve is general surgery. General surgery, of course, not one thing, multiple different procedures around the abdomen. We also see growth in the thoracic cavity, a lot of value for us there in terms of lung, and the purple line is robotic surgery in the oral cavity. It will never be a huge market. It's just not a huge number, but a high-value market for the people who need it.
Turning to what this looks like in the world. We sell systems, da Vinci systems. System placements were 21% growth in 2019. That's a combination of new installs and the upgrading of prior generation systems. We are now on our fourth generation of product, it's called the X and the XI. So people who are a part of generations and upgrade will do that. You see the install base, so the number of new slots in ORs that are created is 12%. The difference between those 2, of course, is upwards.
You can see the breakout strength in U.S., strength in Asia. Europe, okay, but not a lot of growth in terms of unit placements. We'll show you a little bit on Europe procedure growth and then rest of the world in green. Revenue growth has been healthy. We break it out here in terms of recurring, that means the things that are used on a per-procedure basis every surgery, also things like service contracts or lease payments, capital install, so nonrecurring. Those are -- capital purchases are in the light.
This year, 2019, give or take, 20% growth. You can see that the solid blue, the dark blue and the recurring side is pretty steady and predictable, and you can see the light blue is wavy year-to-year and a little bit harder to predict, and that's because capital equipment cycles in the health care space can be subject to environmental change, and we expect that kind of volatility in the light blue. It's just inherent to the market.
I will speak a little bit to where we see the market pivoting. I'm sure a lot of you think a lot about data and health data, we do too. We play a part in this, and we're seeing a shift in how our customers view this. Give or take, 21,000 articles, everything from single case studies to single center studies to multicenter, real-world evidence, registry databases to RCTs. You kind of asked the question, do hospitals or surgeons change practice based on a single implication in surgery? And the evidence is not really. It's not really like drug trials because these kind of national databases and otherwise are really hard to run. Their methodologies are sophisticated, and yet we're seeing a change. And if you ask what's driving that change? It's the adoption of electronic health records and then the analytic power behind those within the institutions that we service that we sell to. And combined with some of the Internet of Things capabilities that intuitive has, we've been the Internet of Things in surgical robots for a decade, I'll speak to that in a minute.
People are able to start looking at their own experience through comparative studies in their own institutions with their own surgeons who are working and make assessments in real time or near real time, and we've been doing a lot of that with them under clinical trial agreement, data share agreements and so on. And that's starting to get pretty exciting and really starts to change the way the nature of the conversation goes. And I'll show you what that looks like.
For those of you who have been with us for some time. In the beginning, Phase I, you put a system in and people started to use it. Single system is kind of a pilot for an institution, what kind of value do they get. They take a little bit of risk to understand the value. When a single institution, single hospital campus buys a second one, it's an investment. They know what they have, and they're investing. And what we're starting to see now is not 2 systems in hospitals, but 5 and greater. And this is the growth in hospital campuses. This isn't an ownership institution, that is a campus that has 5 or more of our systems working on campus. And it's grown, give or take, 400% in the last 3 years.
And if you start asking, why is that? Why are they doing that? Why did they make that choice, they had them. They're doing it because they can use analytic power or electronic health records plus us to look at the true value for these products in their institution. I think it's powerful, that's interesting and it's changing, and I think we have a part of that.
Clearly, I started with, look, outcomes need to be better. There's no question about it. I didn't -- I haven't talked to you about surgeon-to-surgeon variability, but it's substantial. And so there's a need for innovation, and we use and prioritize based on our customers' view of the world. They -- this is their words, not ours, they're quadrupling. There is absolutely a need for better outcomes. There is absolutely a need to lower total cost of care per patient episode.
Let me be really clear. A cheap knife is not the way to drive lower cost of care. When surgical outcomes are such that complication rates are around 1 in 5 or 1 in 3. You can make a really cheap knife that will change the tool cost to treat almost 0. You have to innovate, and that's where we're committed, better patient experiences, bad outcomes create bad patient experiences. Rescheduled procedures create bad patient experiences and better care team experiences. And I'll talk to you a little bit about that.
What does it take? Clearly, technologies like robotics, data analytics, cloud computing, that's all good. You need to validate your data insights. Data insights that are not validated are confusing and worse than not helpful. And I think a deep understanding of how humans interact. And I'd like you to think for a minute. How many people had to do the right thing for you to fly here the day of your flight? It's easy to think about the pilot and flight attendants, maybe the gate agents, maybe the mechanics, traffic control and baggage handlers and -- so a lot. And if you do the study and you ask, how many people have to do the right thing in a surgery the day of surgery?
I want you to think, how many do you think that is? How many folks in the room have had a surgery? Thank you. So the question is how many people? When people study this. And the answer is 70 to 100 of people have to do the right thing the day of your surgery for it to happen. It's not just the surgeon, it's not just nurses, not just the anesthesiologist. It's the schedulers. It's the people who clean the instruments. It's the people who check you in and check you out and get the pharmacy right and so on. It's a major thing. So understanding the total workflow and how these technologies step into it is really important. That's why we invest in more than robots. I don't think you should think about this as you build a robot and it's done. I don't think you should think that robots are all made the same. They're not. So we think in an ecosystem that's in layers. The first layer is to make sure that we understand the customer base real deeply. The next ring around it is to make sure that we have the right technologies that help them, instruments and accessory, systems, imaging systems and so on. The next layer is to make sure that the operating processes work well, training, optimization, service and support, marketing, sales, organizations. And the last layer on the outside is analytic power. And we do that really carefully and have started to become quite good at it. These are investments, and they take time.
So if you're following our company or you're following any company in our space, and there will be a lot of them. Then you need to think about how you build these ecosystems out and invest to do so. We will invest. We have been investing. We will continue to do so. You need the systems and the instruments, and you need to engage with regulatory agencies to get the clearances and claims that you need to get. You need to know how to train, you need to know how to optimize. You have to generate clinical evidence. You have to get your sales and service team's confident. You have to have the marketing capability, engage the academic surgical societies and get economic validation, and this happens country by country, procedure by procedure. Clear?
So far, so good. We have been busy. In the last year, we've put our Ion endoluminal system out into the marketplace. I'll touch on that in a minute. Our SP system, a single port surgery system out, our next-generation of stapling. I'm going to show you how that's going shortly. Next-generation of advanced energy. It's called our SynchroSeal. We are into the market with a 510(k) clearance for our augmented reality, mixed reality system that allows surgeons to look at pre-optive images real time. And continued innovation in core technologies. The best stereo endoscopic imaging system in the market.
Next-generation of camera systems that allow surgeons to do what they need to do. I'll show you a little bit about that, going to warn you, there's a surgical video. We're a surgical company. If you need to look away, do so.
Okay. This is a ceiling and transaction device. It is wristing, it is precise, and it is fast. For those of you who know something about surgery wristing these devices is really hard. That means allowing search to get around tight corners. That's what this does. It's first generation of this type for us. Initial response has been fantastic. We're in the early innings of launch. It comes with an energy box, and I'll show you one of the differences. The newest one is on the left in terms of speed and precision, it's done, the benchmark is on the right, it takes more than twice as long.
Somebody might do 20 or 30 of these little ceiling steps in a case. So you go, it's only a few seconds. It's a few seconds applied tens of times in a single case. Imaging systems. One of the major things that surgeons need to do is see. We're on our fifth generation of endoscopy. I see a difference here between our last generation, Gen 4 and Gen 5. This is a really powerful product Endoscope Plus. It is more robust than our prior product. It does have a better economic value proposition, and it is higher performance in color addition and in resolution. It's fantastic.
We acquired long time imaging partner in Germany. We acquired the 3D business, so this is now part of our company itself. If you think about adoption in systems and you think a little bit about where the world is going to go. Utilization depends a lot on 2 things: the regulatory clearances you have; and the core design of your product.
So on the left, you're seeing procedures per system per year over time by a system generation. Our second-generation system, pardon me, I missed that. Second-generation system is here, da Vinci S, and you see this growth in utilization. So this is the same hospital use of a single system, and this is new clearances. And then it starts to taper off, and that has a lot to do with the product design. Our next gen, Gen 3, starts higher, that's great. It gets the additional clearances and moves a little higher because we made some design changes that make it more effective. Gen 4 starts here and rockets past in a throughput as a single system that has entirely to do with design, design-free usability, fantastic. In terms of the right innovation mattering in stapling and vessel sealing, advanced instrumentation, our Gen 1 systems pop up. This is revenue for advanced instruments.
We kind of settle in. We go to Gen 2, that helps us, kicks up the next leg of growth. We go to Gen 3, and we're really starting to see accelerated growth. So again, delves in the details. SP, so as SP stands for single port. We have 2 clearances in the U.S., 1 for transoral robotic surgery, 1 for urology. Outside the United States, particularly in Korea, we have more broad clearances clinically. There are more -- there are 40 of these so far installed, you're looking at a transoral robotic surgery. This is a system that comes through an incision the size of a quarter. So you have 4 arms, 1 holds an endoscope, 3 whole arms that can cumulate, they come through a whole about this big.
In the U.S., transoral and urologic, transabdominal. Outside the U.S., in Korea, transoral, transumbilical, transanal, transvaginal approaches to disease. So this is all about getting access to higher-precision surgery without doing additional damage to healthy tissue by the route of entry. Okay. SP, so far, so good. Almost 50 or a little more than 50 peer-reviewed publications on SP thus far. We're working on additional indications in the United States. It's something we need to keep driving, and we're working on longevity of our camera system, something that's in our control that I think we'll nail pretty soon.
Ion. This is transoral or a natural orifice approach to getting into the lung to explore the periphery of the lung for suspicious lung nodules that might be cancered. This is a particular case, you see a suspicious nodule in the preoperative imaging, this goes in through the mouth. It has sensing continuously along its length. It is image guided, uses a segmented preoperative imaging system along with guidance at a console by the surgeon you can see, or the interventional pulmonologists to see what's happening here, really amazing. So mixed reality, again, a computer model and the real thing. We have clicks -- 6 clinical site out collecting, we're, give or take, close to 300 cases so far. There are 10 commercial installs. We're a little bit less than a year in the market. Clinical response thus far has been outstanding. Clinical response relative to conventional manual techniques looks really good. Relative to some competitors in the market, we also look really good. So I'm quite pleased with the architectural decisions and the performance of this team. Cloud enablement and data. It's something a lot of people talk about, given it's not new to us. 90% of da Vinci systems are cloud enabled. We run through all those cybersecurity and privacy protocols you'd expect.
Just to give you a sense of what we can do with that. 30% of questions from our customers, having to do with system performance can be resolved without ever having to send somebody out to touch it because we can inspect the system at a distance. In terms of surgical training, think about flight training. We are -- we have provided over 3,400 simulators in the world. In the last 12 months, give or take, 6,000 surgeons have spent 17,000 hours on our simulators. These are networked. So we have a chance to understand performance. They've run over 200,000 different surgical simulations and tasks. That's a rich data set that allows us to understand surgeon variance, surgeon preference. Pretty powerful, and we're excited about it.
We have done more than just innovate in technology. We've been innovating for access. Those of you who have followed us have seen that we've lowered the barrier to our capital entry through leasing and usage-based models that has been growing for us. We are aligned in this way. This makes sense for our customers and, therefore, makes sense to us. So you see both the percentage of systems going out into lease rising. I think that makes sense. It's also increasing our lease revenue. Of course, there's a risk here, and that is, it's easier to turn over an installed base, that's leased than it is that's owned, both for us and for a competitor coming in.
I think that's worth it. From our point of view, I'd much rather have our customers experience our products and compare based on knowledge, than be afraid that others will come out with something that looks better. We measure very carefully in a blinded way how our customers perceive us. We use validated tools. This is an NPS score from J.D. Power. We look at a set of cohort of medical device companies, many of which you all know.
Intuitive is ranked #1 amongst that cohort. At 70, that's generally believed to be outstanding. I think we can do better than that, and it has been increasing over the years. So we care also not only how we're doing but how our customers perceive us, and we measure it. As I said before, we're in the early days of computer-assisted surgery and acute intervention broadly, and we invest. Our investment priority, #1, is -- organic opportunity is to make changes to the quadrupling. The second priority for us is to look for scale advantages, operational efficiency will allow us to produce these at higher quality and lower cost and to share that with our customer base, and we have been doing that assertively in the last 3 years.
We pursue opportunities to partner. We're not inventor shop. So we have partnered and/or acquired technologies or people when we need to, and we do that. And lastly, when we think you all have got it wrong, we will return cash to shareholders through repurchases with an idea for -- towards long-term value creation.
I talked a little bit about investing outside the United States. This has been our experience in Japan. You can see that it is a multiyear set of investments, from working on reimbursements to opening direct offices, to training our own staff as well as customers, to additional reimbursements over time. You've seen really nice growth, and we're pleased with our progress in Japan. It is not limited to Japan. This is what it looks like in Germany. By the way, this is on the same scale of procedures. And likewise, having a holistic view of the market, being deeper than just commercial.
Appointing our GM, getting our product set in terms of da Vinci X, optimized for the marketplace has been powerful. We started in-country operations. We've opened offices, and we've seen the market respond nicely. You will see from us a set of additional investments in the U.K. and Germany. We'll invest further in France this year. We have built manufacturing locations in various places. The biggest one being in Mexicali this year to take advantage of scale.
Our China JV is doing well, and I'm pleased with our progress in China. We took the Taiwan market direct in Q4 of '18 and have been integrating them. Likewise, India, and we've been increasing our cloud and telemedicine capabilities with a partnership with InTouch that deepened in Q3 of '18, and has been progressing well for us.
So the final slide for us, kind of capping what we always do every year, what are we working on next? U.S. general surgery is still in early innings, and we will continue to pursue and support that market, hernia repair, bariatrics,, colorectal surgery. OUS is still early innings, particularly in Asia and Europe. There's an opportunity for us to start to grow beyond urology, which is the first place in the U.S., it's also in the first place we've grown of U.S.
We are making good strides in launch of SP and Ion. We expect to start moving through Phase 1, which is early analytics and stabilizing our supply capabilities and start to broaden that. Likewise, in imaging, and our analytic power, and that has been exciting for us. And lastly, we will always invest in expanding the clinical and economic validations in ways that are meaningful to our customers in the markets in which we participate.
So with that, thank you for your attention, and I look forward to Q&A.
End of Q&A