Intuitive Surgical (ISRG) Investment Memo
Meera Equities 11.2.2020
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Investment Thesis
The foundation of human existence is surviving. Medical technology has grown exponentially over the past century through many different activities expanding human life expectancy. The most recent breakthrough is what Intuitive Surgical is producing: machine operated surgeries. Specifically, a highly accurate minimally invasive machine operated surgical tools.
Company Description
Intuitive Surgical designs, manufactures, and markets da Vinci Surgical Systems. The da Vinci Surgical System translates a surgeon's hand movements, which are performed on instrument controls at a console, into corresponding micro-movements of instruments positioned inside the patient through small incisions or ports.
Qualitative
Overview
Sector: Healthcare
Industry: Medical Instruments & Supplies
Competitors: Stryker, Accuray, Smith & Nephew
Strategy: Produce 21st Century Surgical Tools
Produce minimally invasive machine operated surgeries.
Offer win-win scenario with hospitals, their machine produces a lower average recovery time in hospitals, increasing patient turnover, and hospital revenue.
Da Vinci Systems are sold in either a lease arrangement or sold outright upfront. Having a leasing option lowers the barriers to entry into their sticky system.
Business Model: Long Term Revenue
The up-front cost for a da Vinci devise is between $500K-$2.5MM.
After each surgery, they earn between $700-3,500 on instruments and accessories.
Most hospitals enter a contract for a flat fee of $80K-$190K for the instruments and accessories.
Market: Hospitals
As expected, Intuitive Surgical’s sole customers are large hospitals.
Moat: Near Monopoly in Industry
Their flagship da Vinci system accounted for 80% of the global market for robotic-assisted surgery systems in 2019.
Have a total of 5,865 da Vinci systems installed across hospitals.
Their wide exposure base and utilization have produced the system as the industry standard.
X-Factor: Data & Switching Costs
Have 20+ years of clinically proven data analytics on how to provide successful surgeries, both physically and economically.
Incumbents will have to convince hospitals on their product and then the hospitals will have to convince patients on the new comparatively untested products.
With the large upfront cost of their product, switching costs are extremely high.
Depending on the usage of the device, da Vinci will last the hospital 5-8 years, customers would need a large value to add that Intuitive Surgical does not have (price, or newer tech).
Cash Cow: Recurring Revenue & High Margins
Recurring revenue increased to $3.2 billion, which is 72% of its total revenue.
With their subscription model of contracting instruments and accessories, their recurring revenue is not surgically volume-based, producing predictable cash flows.
Pre-Covid, all their margins have rapidly been expanding.
Gross Margins have been over 69% 4 years consecutively, net margins have been above 30% the previous 2 years.
Growth Opportunities: Machine Surgical Growth & New Technology
The industry is expected to grow at a CAGR of 21% for 6 years, Intuitive Surgical’s CAGR for the next 5 years is 12%.
Expanding offering with a new product for a minimally invasive peripheral lung biopsy.
A new offering was released in 2020, the lung biopsy market is $2.7BB and expected to grow at a CAGR of 6% for the next 6 years.
Quantitative
Risks
The pandemic has hit them especially hard as hospitals have overloaded to treat Covid rather than elective surgical procedures.
With the downtown in the economy, orders for their devices decreased by 29% in the most recent quarter
New incumbents could underprice Intuitive Surgical’s high upfront cost product and steal market share
Further widespread adoption of robotics-based surgeries are yet to be well established with only 15% of all surgeries performed this way
Learn Something
Surgical Robots Market Size Analysis: https://www.grandviewresearch.com/industry-analysis/surgical-robot-market#:~:text=North%20America%20dominated%20the%20surgical,robotic%20investments%20in%20the%20region.
The Battle Incumbents Have Against Intuitive Surgical: https://pharmaintelligence.informa.com/~/media/informa-shop-window/pharma/2020/files/article-packs/mti-market-intel-report.pdf
Clinical Value Add of ISRG: https://www.intuitive.com/en-us/-/media/Project/Intuitive-surgical/files/pdf/clinical-value-davinci-surgery-gynecology-1026040.pdf?la=en&hash=DD71F637784BF8E4E47EA5F79177972D
