Intuitive Surgical Inc. (NASDAQ:ISRG) Goldman Sachs 43rd Annual Global Healthcare Conference June 14, 2022 4:20 PM ET
Calvin Darling - Senior Director of IR
David Rosa - Executive VP and Chief Strategy and Growth Officer
Conference Call Participants
Amit Hazan - Goldman Sachs
Everybody, good afternoon. We're going to keep going here at the Goldman Sachs Healthcare Conference. I'm Amit Hazan, the medical technology analyst and always exciting to have the next company in conversation with us. It's Intuitive Surgical, and we've got Calvin Darling here for, I think, sadly, the last time Director of Investor Relations. And we've got David Rosa here, which is kind of unique and interesting and exciting because we don't get a chance to have you here very much, Chief Strategy and Growth Officer.
So first of all, let me turn it over to you, Calvin, and get the forward statements out of the way.
Thank you, Amit. Thank you, everyone, for joining Dave and I this afternoon. Thanks for being with us.
Before we get started, I'd like to mention that comments mentioned this afternoon may be deemed to contain forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, which are described in detail in our SEC filings. Investors are cautioned not to place undue reliance on such forward-looking statements.
Q - Amit Hazan
Good. Well, so we've been doing this at every conversation, as you might guess just talking about the macro and COVID, and so maybe let's get some of the business update out of the way and then get to the fun stuff with David, the unveiling of the new system behind these curtains, all that good stuff. So let's talk about COVID and procedure recovery. I don't know how much you can say, but in the U.S., especially, how have these been going here in the last few months?
Yes. I mean, looking back to the first quarter, we had 19% procedure growth overall, which exceeded our expectations in the quarter. It was very positive in the sense that we were in the midst of a very severe COVID outbreak with the Omicron variant earlier in the quarter, especially in the U.S. and the recovery was very steep as the quarter progressed.
Folks got back to doing surgery with da Vinci, which was very strong. We took our guidance up from 11% to 15% up to the 12% to 16% as a result. We're not going to comment today on an inter-quarter basis on how procedures are running. But as you look back historically, it's always been a pretty tight connection between the hospitalizations associated with COVID and as they wane and the procedures go up, and we'd expect those trends to -- or that relationship to maintain.
Okay. Okay. So maybe let's talk about new patient formation. That's something that you have talked about. You've had data in the past that you've been able to share. And just talk to the feeder categories and what you're seeing there. Is there a continued improvement there, especially in areas like cancer where they've been lagging in the recovery? Just a sense of whether you're seeing an improvement there, too, are patients more willing to enter the healthcare system?
Yes. And talking a little bit towards the diagnostic pipeline, right? So during the pandemic, of course, we saw pretty substantial decline in procedures such as the colorectal colonoscopies, I'm about due for once, I'm getting nervous, and screenings for lung cancer as well as prostate.
And even last quarter, our data lags a little bit, but it still shows that we haven't recovered back to pre-COVID levels, which would suggest there's still some backlog for some of these cancer procedures. And on the other hand, unfortunately, some of these folks there, if they do have cancer, their cases may have progressed to where they're even beyond where cancer is an option for therapy.
So we'll see. I wouldn't say that there's a large bolus backlog, right, that's likely to reverse in any one quarter or near quarter. I think gradually, over time, as things hopefully normalize that these things will settle out.
Okay. Okay. Let's talk for a minute about the supply chain and the semi chip situation. You guys have been pretty good about giving us updates there fairly regularly. I think you said some components getting better, some not. So the level of pressure now it seems changed. Can you talked to just, is it still similar level of pressure, better, worse?
No, overall, in aggregate, it seems pretty similar, right? So it is a challenging environment. It has been, continues to be. Our teams are doing a great job and working closely with our suppliers and understanding where the constraints are, working with them.
Up till now, fortunately, our supply chain environment has not caused material impacts on our business and ability to deliver products. In aggregate, the number of products now that are affected by severe issues is lower than it was previously. And where we've had opportunity, we have acquired inventory. So our inventory go up in the first quarter.
So we've had the chance, we've kind of stocked up on these items. Then -- but the parts where we continue to have issues, it becomes all the more challenging after the passage of time and all the more stressful. So it continues to balance. We continue to work and see where it heads.
So the kind of more medium-term question to that is you have these challenges that are going on right now. I imagine things will get better eventually. Internally in your supply chain, are you all reacting and changing more structurally to what you're seeing today for the medium term as well?
Yes. I think right now, it's a lot about managing our risk on a day-to-day basis. I think we're taking a lot of steps, I think, even prepandemic. You may have noticed inventory levels [Technical Difficulty] pardon me. How is that? Our inventory came up pre-pandemic as we were looking to bolster safety stocks and some of our critical components, and I think that served us well during the pandemic and looking to reduce to the extent possible sole sourcing of components, it's not always possible and then entering the best positioning, right, of the suppliers that we have. And so it's an ongoing scenario. But right now, I think it's kind of managing the day-to-day.
Okay. Okay. So then we get to the capital trends. This quarter, you guys kind of laid out 2 hypotheses on what might be happening either kind of more of a pull forward from the fourth quarter? Or maybe that things were weakening with the U.S. hospital capital spending.
I might add a third and say, maybe we as a sell side, even myself included, might have been ahead of you and you just needed to correct from where we were from an expectation standpoint because you don't guide to that. When do you fall on those three? I'll give you 1 more option than even you gave.
Yes, there's maybe even another option in there. It was about the trade-in cycle too, that's ongoing, the existing installed base of our older generation machines. That's a factor in there as well as macros and pull forwards and things like that.
So a huge part of our capital business in the past, if you look at last year, I think 500 of the 1,300 or so systems from last year were trade-ins, 400 in the U.S. and about 260 or so remaining of size in the field. So that's just part of that dynamic.
So I would put that under RMS modeling because we kind of all knew that. And so is that -- has the -- what are the conditions like? And we all know what's going on from a macro perspective, hospitals are being pressured. How does that translate to your business? Do you have a different view than you did back then about the health of hospital systems in the U.S.?
Yes. In my conversations and our conversations at work, we're seeing interest rates and inflation and staffing, pressuring hospitals. The one thing that I'd say in there, though, is that surgery is a profit center, it's a revenue stream. And they're dedicated to it. They're trying to support at the very best they can.
So it's an area of focus of the hospitals that they're trying to navigate in spite of these external macro environmental things. And that -- and as a result, high-quality MIS is even a further sort of double-click into that surgical environment. So they can get patients come in, get great surgery and then get out of the hospital and not take resources up in post anesthesia and things like that.
Yes. So various scenarios can unfold. Obviously, over the next few months, quarters, what have you and more so than we've seen and unbelievably, we're bringing back this idea of a potential recession. And so we've been through this. I've covered you guys through a big one.
And there's this idea that you've always talked about, which is utilization growth in your systems is going to drive new system sales. And I wonder if you can reflect on back in the day, go back to the '09, 2010, '11 time frame, where utilization was also improving, how you guys did in the face of what was hopefully a much worse recession than anything that we'll see if we do see a recession?
Yes. I don't remember how the comparison worked. But I always -- you just said it to me is the core -- I mean surgery is not -- doesn't go away because of a recession. People need surgery, you need to take care of what problems they have, and high-quality surgery is a component of that.
So as procedures grow and we continue penetration, I think that pulls along that capital pipeline. So from my perspective, that is a core focus. And we can support that desire through -- different from back then is flexible acquisition models that we have today between leasing and per-procedure pricing and other things that I think help support that high-quality MIS and desire to treat patients and get them back as fast as we can.
Okay. Okay. Let's get to the fun stuff, let me push everybody's imaginations in here myself included and see what you have to say. So let's start with the big picture one. And just leave it to you to answer it however you want, but how do you see your industry evolving over time, the products, competition and applications?
Yes. So I'm an engineer by training. And the first thing I always ask is what problem are we trying to solve? And so when I think about evolution of the industry and what robotics might -- what does it bring, I look get places where outcomes are not great.
And so that could be lung cancer where 24% 5-year survival, it could be other areas where complications exceed 30% reoperations are super high. And the question is, okay, those are outcomes that shouldn't be acceptable to any of us. and why? What is behind that?
And if you start asking why and double clicking innings, like, why are there complications? Why are -- I asked a surgeon one time, what do you think the source of complications one of them is, and she answered surgeons make holes in things they shouldn't.
And so you start saying, okay, what is it then that we could do that says, we're going to help a surgeon not make that hole in the thing that shouldn't. And that's where I get pretty excited that mechatronics, data imaging, those things can combine to actually improve outcomes, if you will. I really believe that.
And so if you wind the clock forward in surgery as a whole, there are just a myriad of opportunities where outcomes -- core outcomes can be improved. And I think that's just a huge piece of the puzzle.
The other, I think, general dynamics. So if you look at -- we have an emerging platform called Ion, that's about lung bronchoscopy. And if you look at what's going on, just kind of directionally in the world, it feels like to me more and more we're going to see cancer earlier, liquid biopsies, better imaging, those sorts of things. And if you are able to catch cancer earlier, you should be able to treat it earlier. And so more and more, we might see focal ablation, local resections of cancer as compared to taking out an organ.
And so definitely better for the patient, better for the health care system and everything else. And so that's another area where I think opportunities and platforms like Ion to navigate through the lung as an example, and have the navigation required, the stability required to get to a lesion and do something.
Today, biopsy it, hopefully, tomorrow, ablate it. That can really make a difference in the health care or the patient journey, those sorts of things in the future.
Okay. So you touched on a lot there. And I know we're going to get to that. Again, one, we're obviously -- you leave us no choice. We always are chasing and trying to figure out when that new system is going to come out and what it's going to look like and we're in a race like everybody else. And I think the last kind of tidbit, breadcrumb that we all saw was the FCC filing. And I don't think there's much to talk about there.
I think the one thing that kind of struck me in the cover letter, one of the filings that we read was that you guys kind of positioned, and this is kind of trying to keep certain trade secrets, that you have spent a substantial effort in developing this product, whatever it is, and it is one of the first of its kind in the industry.
So that to me does not sound like another incremental advancement to da Vinci Xi. I don't know how much you can talk about that, but what -- how do we interpret that sentence?
Yes. I guess we're always trying to advance the state-of-the-art. But it comes back again to exactly what problem are we trying to solve? And I can't give you a lot of detail about some of the investments we're making in the advances that we're innovating into.
But what -- I guess what I would say is, you mentioned it, but I think it's super important to say, in the areas that we're in today, so the types of our soft tissue surgery, head and neck to pelvis, those areas are super well served by our fourth gen platform and the ecosystem. And there are areas of innovation and improvement that we can make.
And so we continue to invest in our fourth gen platform. And although not perfectly aligned to the answer, some of those, I think, are actually going to be quite innovative. And so if you look at some of the work that's going on in imaging, I think it really changed sort of the nature of outcomes if we look into the future.
The work that we're investing in the digital platforms and how we might change the way surgeons learn, highly innovative and I think impactful, hopefully to the future.
So our R&D, our innovation spend is broad in a lot of areas that I think moving the ball on the Quad Aim doesn't necessarily require a new platform.
So R&D, so I mean I think since 2017, it's doubled. I mean you guys are spending far more than anyone else in R&D. And so much, though, to your point, is just if we think about some of the -- a lot of the things that you talked about, we probably could have been talking about back in 2017 as well, but now you've got a lot more dollars going at those things.
And so help us understand roughly how that's allocated, what's the focus -- number of focus points that you're -- that all those dollars are going to?
Yes. No, thanks. So one of the things -- we have multiple platforms now that are in the market. So we have Xi is our flagship multiport platform X as a more cost-effective multiport platform, SP and Ion. And so all those platforms are requiring investment. It's not the same as when we had a single multiport platform in years past.
And so that's part of the R&D spend is the innovation and the ongoing development in each one of those. And SP and Ion are earlier in their cycle, right? So they're kind of eating more than they're returning to the world today, but are on a strong ramp. And so that's part of the innovation.
And the other part that you kind of mentioned Amit in our digital world, too. So that's been, I think, our largest incremental spend increases around the digital products and where does analysis of video take us where does connection with electronic medical records, where might that lead? And if you double click in there and say, what are we focused on? Because it's a huge term, right? Almost means anything to the industry.
For us, it's around three primary areas. One is how do surgeons learn. And so one of the causes of the variance out there between surgical outcomes is the surgical team, right? And it's been shown over and over and over, that you can get a wide disparity of outcomes depending on who you go see.
And so how do you close that gap? And I think one way is to say, how do surgeons perform in surgery and how might that differ from an expert surgeon with known good outcomes? And so we can look at video, use machine learning and AI and other things to help understand the differences between that learning surgeon or a surgeon who does not get great outcomes and an expert surgeon who would demonstrate great outcomes.
And so that, I think, has a big -- potentially big impact for the Quad Aim and sort of an outcome narrowing the outcome distribution. So an area around surgeon learning is one.
We have another one around outcomes in particular. So how do we optimize outcomes for surgical patients using data? What's their journey look like through the care pathway?
And then the final one is one that we've been doing for quite a while. Most of our systems are connected to the Internet. We can monitor all sorts of data streams from it.
And so it's through those data streams that we can look at the operational efficiencies of our program how often is being used, the time of the operations, number of instruments, things like that, that can help when we can consolidate that and return that back to a surgeon or to the hospital administration they can say, okay, here's how we want to utilize that capital in the future, optimize block time, optimize instrumentation, those sorts of things and really try to impact the cost equation.
Ambulatory surgery centers. I think I was struck -- I might be wrong on this, but to my memory, at least, the first time in the prepared remarks for Gary this year, he mentioned the words ambulatory surgery centers. And I know how selective you are in the words that you all choose. So that really stuck with me. And so I'm wondering what you think ASCs would want to see in a robotic platform in order to more meaningfully adopt?
Yes. So the surgery done in ASCs is the same that's done inside of a HOPD or an inpatient. It's maybe lower acuity patients, but it's not a different surgery per se. So the platform itself, I think, is highly amenable to the ASC environment. It's not that it doesn't fit in the room, it doesn't need to change in order to address the population that may go to an ASC.
And in fact, surgeons oftentimes split time, right, between the main hospital and an ambulatory facility. And they want the same experience. And so we see -- if they're working on an Xi in the main hospital, oftentimes they just want the same experience and work on the Xi in the ambulatory setting.
So I think from a technology perspective, there's not a lot to change there, from a financial perspective is where the pressures are. So in CMS, you move from inpatient to HOPD to ASC and reimbursement gets truncated each time. So now you have to get really efficient programs in high -- volume, standardization, very effective, high uptime, those sorts of things. And so -- and we can do that.
But for me and my -- and where I think it's going, is CMS, there's got to be a change here in reimbursement, if we really want to see soft tissue surgery move out of the hospital environment where they're getting higher revenue and do their best to manage costs. And then we're going to have to see a change there in some way, maybe in the same way that the orthopedic industry saw years ago.
Okay. So I'll ask you a little differently and we take away the setting implied to outpatient or inpatient, just less complex procedures. So when I think about the barbell, you more complex on one side, less complex on the other, almost by definition, I just feel like the volume opportunity is much higher on the less complex side.
In order for you to further penetrate that side is a long way to go, is it a technological challenge? Or is this just, like you said, with the ASCs, it's just financial at this point where as prices come down, and this becomes more available, they're just going to be doing more and more?
I think for lower acuity procedures and really regardless of the site of care, it's largely not a technology issue. And so more and more as you get into those environments and if you look in the regions around the world, and it differs wherever you look, economics become more part of the story, but not the only part of the story.
You still need training, a system repeatability, standardization, an ecosystem that can support high volume utilization because what you don't want there is something that takes a long time to set up, a long time to kind of remember how to use. You're doing one every other week. It's about volume and repeatability and great outcomes. And that's what I think robotics can bring.
And so the piece of the puzzle that so many -- it's so easy to focus on is the price, right, where it's harder to understand what the overall cost equation is. So look at the total cost to treat a patient, readmissions, conversions to open, which happen more often with laparoscopy complications.
All of those are part of the cost equation that sometimes aren't as measured -- easily measured as the price, right? And so that whole thing, which is an area of investment for us in our markets as we do get into lower acuity procedures, is helping customers better understand the economics behind it. So our market access folks, our health care economic folks that are out there saying, okay, this is how to look at that whole equation versus how much does it cost.
So I'm listening to your remarks across a number of the responses. And I don't know, maybe I haven't heard it yet, but on the hardware side, whether we think about actually multiport or single port, I wonder what you think about what innovation is left there in order to open up these additional markets or procedures.
It's not hard for all of us to imagine, okay, they're just going to come out with inner instruments, right? One day you will, there's no question about it or even with the SP, maybe you -- an elbow and a shoulder, maybe you'll have a wrist, right? It's like it's not hard to imagine.
I have to imagine that's coming. But is there more to the hardware side than what I just described? And is what I described going to be what enables you to also open up new markets?
Yes. So I -- you're asking specifically about opening new markets. And again, it really depends. And if we look at complex surgeries, there's room for improvement of outcomes, right? And hardware, there I'm personally really excited about some of the imaging advances that are happening. And so I don't know if you consider the hardware or not. But those, I think, have the potential to really impact outcomes for the better.
So if you look at fluorescent imaging, real-time intraoperative imaging that will -- it should allow surgeons to differentiate anatomy, biliary anatomy, cancer perhaps, ureters, things like that. That's where I go back to the complication.
If you could show surgeons during surgery, where those things are that they care about and either should preserve and not make a hole in or they want to resect out and you get more negative margins as a result and less adjuvant therapy longer term, awesome, right? That's only better for the health care system.
So is there room for innovation? Unequivocally, in my mind. It just may not always be in the form of like a wrist or a joint. It could be imaging preoperatively or intraoperatively, might be other forms of doing better white-light performance, resolution, color fidelity, those sorts of things.
So I think there's a lot of room for investment, a lot of room for improvement. If you were to say what is it about? How would you better optimize the lower acuity procedures? Could you better gain traction in those markets?
Some of those technologies may not be as applicable as with the complex procedures, although we see a lot of use of Firefly for cholecystectomy surgery. And part of the -- a bigger part of the equation of the pie of variables becomes economics like you talked about. And we'll work through that with our customers.
Okay. So you alluded to Iris. When we see -- like you said, I mean, some of the things real-time imaging and what you have today, even with Iris, but we can see where that could be going as well. We see other platforms where real-time ultrasound is already out there, not with robotics, but is out there.
So where are we in terms of the ability to integrate that into a console and into a robotic system? Is that just I know I'm probably underestimating how challenging that is. But how far are we from -- how far is that from being reality?
Yes. So we -- there are different ways to integrate. And I think when people ask the question, oftentimes they're thinking about an overlay onto the image that takes a preoperative segmented image that -- and says, here's the kidney, here's the tumor. I'm looking at intraoperatively and just stick it on top, so I know exactly where it is.
That is challenging, right, because soft tissue deforms and those sorts of things. It's also I'm not sure is the most effective way to present the information, to be honest.
So there is perhaps a different way to just present it as a picture-in-picture view. It's super simple. And it's actually what we can do today even with our tile imaging. And what you're trying to do is get the information to the surgeon so that he or she can go, am I going to change the operation perhaps because of the information I see from a total nephrectomy or a partial nephrectomy?
Huge benefit to the patient, or perhaps what I can do is kind of change the way I was going to clamp the vascular structures off and do a better job keeping the kidney perfuse while I take out the tumor. There's multiple layers of benefit there. And part of it is how it's displayed, and part of it is the actual clinical impact it has, ultimately.
Okay. Okay. So since we're on the topic of imaging, too, I'll just talk about imaging agents a little bit more specifically and you got an identification of a new compound, I think it's in Phase II. Is that...
I don't remember. It's making its way through the process.
And I don't know if that's kind of the leading ones. It feels like we're -- we've all been talking about this. We still have a little bit of ways to go before that becomes more of a reality for various cancers and such.
Yes. So Intuitive, we have our own investments and then there's a big ecosystem, a bunch of companies out there investing in molecules, too. Unfortunately, as follows a drug pathway. And so these are multiyear, larger patient trials that just take a while. So Phase I, II and III to get all the way out, I don't have exact timing for you. It's -- but I think it will be worth the wait. That's what I truly believe.
Okay. Okay. Ion, we'll just spend a minute on that. We should spend more, but we're going to run out of time in a little bit. And that's just been -- it's been really, really good results in the last few quarters, and you're clearly seeing an uptake, and we still have data that is out there and coming out that you've always talked about as a potential real catalyst.
Just talk us through what you're hearing from your customers that are adopting at probably a little faster rate than what we expected?
Yes. So you mentioned it. We're hearing a lot of peer-to-peer interaction with our customer set, where they're talking about the yields. So Ion is a bronchoscopic system. It can navigate to the outer periphery of the lung very precisely, have stability as it tries to take a biopsy of the lesion and determine if it's cancer or not a diagnostic yield. And so we're seeing really good results.
We're seeing a much higher than the standard diagnostic yield percentages and very small lesions. And so one centimeter-ish kind of lesions, which matter a lot in terms of catching it early and taking care of the patient.
So in terms of what we had tried to do when we started the design of that system and how we're seeing it perform, we're pleased with its efficacy and what's going on. The PRECIsE trial early results support that. We'll see more results towards the end of the year.
One of the things that we're seeing a little bit more of, and so we're -- you asked what the surgeons were saying or the IPs was we're seeing more and more of these single anesthesia events, which is, I think, pretty fascinating for a select number of patients, where they're a high-risk patient, they have a CT or an incidental finding, a screen.
And a lesion is shown on the scan and they're going to go in and get a biopsy just to determine if it's cancer or not. So they go under anesthesia, Ion is used, a biopsy is taken. It's immediately given to a rapid on-site cytology, determining if it's cancer or not. If it is cancer, that patient still under anesthesia is transferred into the OR and undergoes a da Vinci lobectomy, let's say, to remove the cancer and is woken up.
So they entered the hospital, worried about if it was cancer or not, and now we're exiting having it treated, all in one anesthesia event as compared to what could be a multi-week or multi-month back and forth with scans and scheduling and waking up and going back to sleep in the next operation. Pretty exciting.
Yes. No doubt. Ablation is probably going to be the next thing that you add there. How challenging is it going to be to get that on the market? How long does it take?
Yes. So any time you treat cancer, right, there's going to be a high hurdle. And today, surgery and SBRT are well -- serve that population well with lung cancer patients. But there is no question that for a segment of patients, probably with kind of Stage 1 disease or maybe Stage 2, the idea of ablating that tumor is it's super promising.
It's like, can you imagine, you're in there, a biopsy, yes, it's cancer, ablate it and you don't want to get surgery. And so there's a lot of work to be done, a whole bunch of therapies, immunotherapy, chemotherapy, all sorts of ablative energy therapies. And it's early, early. Can it ablate tissue? Yes. Is it effective in treating cancer is the question, and that will take time.
Okay. Where do you go beyond lung with this?
With Ion, right now, we're focused in one, right? So -- and there's a lot to do because lung cancer is one condition of a lung. There are other ailments and disease states of the lung. So really, I think for the near term and for the medium term, we are really deeply focused on going into the lung and providing outstanding results. Are there other places where a very manipulable precise location type of system could be used? The answer is yes, and we're looking at those.
Okay. And your competitors talked about kidney stones openly recently, 10-K filing and seems to be closer, I don't know how long, before they aggregate enough data and build that into a market, but they're already talking about it publicly. Is there any reason to think that you're not going to follow suit here?
Yes. I guess we -- I'm not going to comment specifically on the stone market. What I would say is the lung is our focus. There is a lot of work to be done, and we want to make sure we are outstanding there before we start broadening our perspective too far.
Okay. Okay. We left with not too much time for questions on SP but I'll try to sneak one in because there too, especially in South Korea, I mean, there's areas where you're just seeing incredible traction with SP. And I wonder what the kind of a teachable moment for you is the takeaways there that you take to other regions, why they're using it so much and having so much success in what that means for SP's future?
Yes, it's a great question. So quickly, it's kind of a tale of two geographies I think. South Korea that you mentioned has a broad set of indications. So we see it being used across many specialties in the U.S. or other market, we have urology and transoral surgery. And so that's kind of the 1 of the cores there, the differences between -- so a takeaway for us is why there is a difference. And so that's why you see us investing in IDE trials and adding indications and adding markets so we can get that broader utilization.
Okay. Okay. Very good. Well, listen, we're unfortunately out of time. I could have gone on for longer, for sure, but David, it's great to see you and especially, if it is the last time, we'll miss you. You've been great to all of us. Thank you.