Authored by Adrian Moeller
Fall 2021
Williams Insight
Intuitive Surgical
Recommendation
Intuitive Surgical is a strong buy over a long-term, 5-7 year horizon. The Ion Endoluminal Platform and the post-COVID boom will drive growth over the next 1-5 years, and international markets and machine learning advancements will drive growth over the next 4-7 years.
The Company
Intuitive Surgical (NASDAQ: ISRG) is a developer, manufacturer and distributor of robotic medical implements, accessories, and services. Intuitive Surgical (Intuitive) was founded in 1995 and is headquartered in Sunnyvale, California. Intuitive Surgical primarily engages in the development, production, and sale of two robotic devices, the da Vinci Surgical System and the Ion Endoluminal Platform, as well as accompanying accessories, software, and servicing.
The da Vinci Surgical System is used in robotically assisted surgical procedures. The most common procedures are prostatectomies, cardiac valve repair, and gynecologic procedures. The da Vinci’s precise and minimally invasive approach to these delicate and complex procedures has been shown to improve patient outcomes through shorter hospital stays, lower blood loss, lower risk of infection or complications, and reduced pain. The da Vinci Surgical System was the first robotically-assisted surgical system to receive FDA approval in 2000, and Intuitive has developed three iterations since initial approval: the Xi, X and SP. In addition to developing, manufacturing, and distributing the da Vinci Surgical System, Intuitive also develops, manufactures, and distributes accessories for the surgical system. Intuitive similarly engages in the sale of surgical software, training software, servicing, and maintenance of its da Vinci Surgical System units.
The Ion Endoluminal Platform is Intuitive’s latest product, receiving FDA approval in 2019. The Ion Endoluminal Platform performs minimally invasive robotically-assisted bronchoscopies. This procedure allows for a detailed scan of lung bronchioles, creating rich three dimensional scans used for detecting lung nodules and determining whether they are malignant or benign. Intuitive Surgical has stated they are introducing the Ion Endoluminal Platform to market in a ‘measured fashion’. The Ion Endoluminal Platform’s business model operates similarly to that of the da Vinci system – through the development, production, and sale of the system itself, and accessories, software, and servicing of the units.
The Industry
The robot-assisted surgical systems industry is expected to grow at a CAGR of 17.6% over the next 6 years, valuing the industry at $17.8b by 2027. North America currently holds the dominant market share, both in the production of robot-assisted surgical systems and the number of surgeries performed by robot-assisted surgical systems.
Although other domestic players such as J&J, Stryker, and Medtronic are vying for market share, Intuitive Surgical has been the clearly dominant player for the past three decades. Intuitive Surgical benefits from having a first-to-market advantage, being the first company to receive FDA approval for a robot-assisted surgical system. Since then, other firms have received FDA approval, but none have been able to develop systems as advanced as Intuitive Surgical’s da Vinci System. Additionally, generations of doctors have been trained on the da Vinci system, and hospitals and clinics have made heavy investments in Intuitive’s products. These factors have made Intuitive Surgical’s market share remain dominant.
Revenue Streams
Intuitive Surgical sells the da Vinci Surgical System at anywhere between $1.8 and $2.3 million per unit, depending on the specification and accessories. Intuitive Surgical also leases the da Vinci Surgical System to hospitals and clinics at $80k to $190k a year.
The Ion Endoluminal System has not yet fully entered markets. Intuitive Surgical has stated that revenues and gross margins have not yet been impacted by the Ion Endoluminal Platform.
In addition to the sale of their surgical systems, Intuitive Surgical also engages in the sale of accessories, software, and servicing of the da Vinci Surgical System, as well as the Ion Endoluminal Platform. At present, the Ion Endoluminal Platform’s absence from markets has placed a higher burden on the da Vinci system to drive revenues. Intuitive Surgical creates and sells the software required to operate the da Vinci system, as well as the software used by medical schools to train surgeons to use the da Vinci system. Each da Vinci system costs around $180k/year in maintenance, and is serviced by Intuitive Surgical specialists. Finally, each surgery conducted using the da Vinci system costs around $6,000 in accessories, such as plier attachments, scissor attachments, and the like. Such accessories have a 10-12 surgery life span before requiring replacement. These accessories are solely produced and sold by Intuitive Surgical.
Accessories, software, and servicing have created stable recurring revenue streams for Intuitive Surgical. 77% of Intuitive Surgical’s revenue’s have come from these recurring revenues, and its share of revenue has been growing steadily over the past 4 years.
Financials
Financial fundamentals are listed below.
| Stock Price | $346.14 | EPS (TTM) | $4.64 |
| Shares Outstanding | 357.24M | P/E (TTM) | 75.26 |
| Market Cap | $122.74B | YoY Earnings Growth | 21.20% |
| EBITDA | 2.09B | Operating Cash Flow | 2.15B |
Growth
Intuitive Surgical faces high opportunities for growth in markets outside the US, in advancements in AI and machine learning, new product launches, and post-COVID growth.
The American market accounts for over two-thirds of Intuitive Surgical’s revenue. Expanding health systems in East Asian markets present a substantial growth opportunity for Intuitive Surgical. Although foreign regulators have historically restricted the entry of Intuitive Surgical to their markets to stimulate their domestic market, regulators have recently started to shift their stance. The inability of foregin companies to produce technologies as advanced as Intuitive Surgical’s and the demand for robot-assisted surgical systems have incentivized regulators to allow the sale of the da Vinci Surgical System, as evidenced by recent South Korean approval in 2019. The large addressable market in East Asia presents a large growth opportunity for Intuitive Surgical.
The development of machine learning also allows for expanded applicability of Intuitive Surgical’s systems. A recent innovation, Iris, uses machine learning to create three-dimensional images of kidneys. Iris exemplifies the growth potential for machine-learning in Intuitive Surgical’s systems. Machine learning can create value through improved technologies that open new market opportunities for Intuitive Surgical to enter.
The launch of the Ion Endoluminal System also presents a growth opportunity for Intuitive Surgical. Intuitive Surgical plans to follow the da Vinci’s highly profitable business model for the launch of the Ion Endoluminal System. The future sales of Ion Endoluminal Platform units, as well as the following recurring revenue to come from the sale of the units will drive high growth for the coming 2-3 years. Intuitive Surgical has also created a $100m venture fund to acquire nascent health technology startups, which can aid their product creation process and drive further growth.
Finally, a post-COVID boom in elective procedures will drive revenues by increasing demand for surgical systems in hospitals, as well as higher spending on accessories and servicing. Although this boom will only drive growth in the short-run, it can be expected to show strong returns over the next 12 months.