Is There Growth Left for Surgical Robots?

No matter how good artificial intelligence becomes, no airline company will ever fly without a human on board who gives the appearance of being in charge. eVTOLs might be the exception here, but a plane carrying 250 passengers will have someone in a suit with a dapper-looking cap making sure everything is kosher. The same holds true for surgeries. Even if a robot can do a surgery on its own, you can be sure a human will always be looking over its metallic shoulder to make sure nothing goes pear shaped. “Click yes to snip,” or “are you sure you want to cut that artery?” are the prompts tomorrow’s surgeons will become accustomed to. And the robots asking those questions will likely be produced by the leading robotic surgery company by a mile – Intuitive Surgical (ISRG).

Analysts estimate ISRG owns about 80% of the market share, with medical device manufacturer Stryker (SYK) reportedly a distant second at about 10% after acquiring Mako Robotics about a decade ago.

Credit: Nanalyze

Revisiting Intuitive Surgical Stock

While the ISRG IPO filing might be several decades old, it provides a simple explanation of how surgery has evolved. Modern open surgical techniques emerged in the second half of the 19th century because of the combination of two medical breakthroughs: anesthesia and sterile technique. Then came minimally invasive surgical (MIS) techniques which have evolved over the past few decades, beginning with the development of the endoscope. A certain percentage of common surgery types can be performed using MIS, and that percentage is increasing notably over time. Laparoscopy was one of the first types of minimally invasive surgery (a laparoscope is an endoscope designed especially to examine the abdomen). “Due to its cost-saving nature, laparoscopy is expected to become a gold standard across different specialties,” says iData Research which puts the number of procedures annually at around 13 million and growing. The below graphic show how laparoscopic surgeries are increasing as a percentage of the total over time for a variety of popular procedures.

There are a number of problems with traditional MIS techniques such as laparoscopy which is where Intuitive Surgical comes into the picture. Current MIS tools require “backwards” movements while ISRG accommodates a surgeon’s normal hand movement with natural dexterity and range of motions. More precise movements and reduced tremor translate to better outcomes, while an immersive 3-D visualization helps surgeons see what they’re doing. The tools are easy to learn and extensible with the number of possible procedures rising from 20 when the tool was introduced to over 70 today.

Intuitive Surgical’s platform was used for 1.8 million procedures in 2022. Compare that to the 13 million laparoscopic procedures performed globally every year and they seem to have captured about 14% of the total opportunity. But when we consider the total number of surgical operations performed every year across the globe, and the poorest third of the world’s population only receives 3.5% of those, there’s a lot of opportunity for future growth.

The Total Addressable Market

Statista found some lads in Bangladesh who claim the surgical procedures market worldwide is worth (checks notes again) $3 trillion, but that seems shady. A dozen other “research firms” out there put the value of surgical devices globally at $15 to $50 billion, so that’s probably closer to the total addressable market. Or we could look at the total number of procedures completed each year as a benchmark for penetration. Globally, 310 million major surgeries are performed each year; around 40 to 50 million in USA and 20 million in Europe. ISRG’s instruments performed 1.8 million procedures last year, so that implies a lower penetration – about 5%. JNJ’s CFO recently stated that about 5% of surgeries globally were performed with a robotic platform, so the numbers seem to check out. At the least, we can conclude one obvious takeaway – as the leader in robotic surgery, there’s a lot of potential upside for Intuitive Surgical.

When presented with complex topics, we do what every MBA is trained to do. We leverage the hard work of others and act as if we’re doing the heavy lifting. The bright minds over at Bain expect the surgical robotics market to “balloon over the next decade, with 78% of US surgeons interested in embracing the new technologies.” There are nearly 70 representative clinical uses for da Vinci systems, but there are obstacles to adoption standing in the way. Longer surgery times are the largest hurdle along with limited clinical evidence and high ongoing and up-front costs. That’s something ISRG has tried to address through platform leasing.

Bain talks about how technology can still be used where robotics aren’t as compelling an option yet in vascular surgery and cardiology procedures. “New digital solutions that incorporate intra-operative device guidance, AI-based planning, and other cutting-edge features will fill the gaps in the interim.” It’s a topic we covered in a past piece on The Future of Medical Imaging Technology for Surgery. ISRG spends nearly a billion dollars in research and development to maintain their competitive position, and expanding into adjacent opportunities makes sense wherever their 7,700 systems are deployed. Advances in AI, 5G, and augmented reality technologies will likely be places ISRG will look for complementary opportunities.

Investing in ISRG Stock

Large medical device companies like Medtronic (MDT) and Stryker (SYK) both dabble in surgical robotics and see plenty of future opportunities. Earlier this year, Medtronic merged their robotic and legacy surgery businesses into a single unit and described this space as “one of the most attractive markets in all of healthcare — a market that is forecasted to nearly double over the next 10 years.” Analysts at William Blair believe that “competitors may take years to establish the basic ecosystem of products and services that they will need to win meaningful market share.” It’s a good segue into several reasons why we haven’t invested in ISRG thus far.

The first concern surrounds our existing medical device exposure which includes Johnson & Johnson, Medtronic, Stryker, and the 34% of Abbott’s revenues that come from their medical device segment. If we add to that additional medical device exposure in our tech stock portfolio – names like Illumina (ILMN), Oxford Nanopore (ONT L), and Quanterix (QTRX) – then about 7.5% of our total assets under management are exposed to medical devices. Adding an additional position would bring this exposure to 8%, so not moving the needle much. The bigger concern surrounds size and valuation.

With a $91 billion market cap, ISRG is larger than our usual target size, but we can afford to have more “mega cap” exposure.

While we’re overweight life sciences in our tech stock portfolio, we’re underweight robotics, and we’ve talked before how we’d like to increase the exposure. We currently classify ISRG as a robotics company, so that’s sorted, and an investment might make sense if we’re able to add shares at a reasonable valuation. Here’s a look at how ISRG’s valuation has been tracking over time using our simple valuation ratio (SVR).

At today’s prices, we’d be purchasing shares of ISRG below their average SVR of around 14. Should we decide to go long this leader in surgical robots, Nanalyze Premium subscribers will be the first to know.

Conclusion

Any company which produces a medical device that results in 80% recurring revenues has mastered the lucrative razor-blade model. Financing the machines for customers and then soaking them for lots of high-margin consumables makes for healthy gross margins. Intuitive Surgical has epitomized the ideal business model and managed to create a moat around their business that has kept other competitors at bay so far. They’re like Illumina, just without all the dirty laundry. Opportunities to expand include blue ocean TAM along with possible complementary technology applications for the hundreds of millions of surgeries conducted every year.