Opinion

Investing in disruption: part two

By Andy Gardner
Investment Manager, Global Equities Sydney, Australia

Intuitive Surgical is a pioneering force in robot-assisted surgery

Surgery is one of the most widely used practices in medicine, but it is far from perfect. While it is an essential service to treat disease or injury, complications can arise that result in readmission and the variability in skill sets between surgeons can lead to inconsistent patient outcomes.

Spending on healthcare as a percentage of GDP continues to rise, and the amounts are becoming unsustainable. According to Statista, US national health expenditure as a percentage of GDP was 13.3% in 2000 and will increase to 18.2% in 2018 (1).

This is where the publicly-listed Intuitive Surgical is making its mark. The US-based med-tech is on a mission to disrupt surgery using a robotic-assisted platform that offers a compelling value proposition for patients, hospitals and surgeons.

The key word in its offering is “assisted”. The robotic-assisted platform – known as the “da Vinci surgical system” – is designed to act as an extension of the surgeon’s hands.

The platform consists of a console that controls four interactive robotic arms with tools on the end to hold objects such as a scalpel. The tools are controlled by the surgeon, who is seated at the console near the patient.

Intuitive Surgical’s business model consists of three revenue streams:

  • robotic surgical systems
  • surgical instruments and accessories for use with the robot and
  • service plans.

Considerations for investors
There are two key considerations for investors.

The first is that robotic-assisted surgery, of which Intuitive Surgical is the only company in this space, has many advantages over open and laparoscopic techniques. These include:

  • Reduced blood loss, faster recovery and faster discharge for patients.
  • Hospitals benefit from shorter patient stays, lower readmissions and better overall outcomes.
  • Surgeons experience increased reach, stability and flexibility during surgery and hence increased reproducibility, improved quality of work and quality of life due to less physical and mental strain.

The second consideration concerns new entrants. While competition will no doubt enter this market at some stage, AMP Capital believes Intuitive Surgical will remain the dominant player.

This is because Intuitive Surgical has built considerable early-adopter advantages and substantial competitive barriers over the past 20 years. It has already installed more than 4000 robotic systems, which have performed more than five million surgeries. There are also more than 12,000 peer-reviewed clinical papers on the technology, and the company has been investing in research and development for over two decades. The data and analytics expertise it has accumulated is far ahead of its competitors and this points to a significant sustainable advantage for the company.

Future outlook

The use of robotics in surgery remains in its infancy, but a major acceleration is poised to occur. Less than 2% of potentially addressable surgical procedures worldwide are performed using robotic assistance (2). Based on our analysis AMP Capital believes, as a conservative estimate, this could double to just under 4% over a five-year time frame and could possibly reach 10% in 10 years. The majority of the incremental growth would be driven by general surgery such as hernia repair, higher margin colorectal, and international growth.

Additionally, international sales form less than 30% of Intuitive Surgical's total sales, which compares with a figure of 60% for other global medical device manufacturers (3), indicating substantial room to catch up.

As Intuitive Surgical has built a significant lead in the number of installed systems, and as the number of procedures per machine each week increases, it can sell more instruments and accessories and sign more service contracts. Currently 70% of its sales come from recurring revenue, but according to our research, AMP Capital believes this may reach 90% within the next 10 years.

Intuitive Surgical is a highly cash-generative business. It has substantial net cash on its balance sheet and last year used excess cash to buy back nearly 4% of its shares. Its investment in R&D is one of the main redeployments of cash and technological leadership will be key in defining the winners from the losers over the long term.

As the clear leader in its space with a successful track record of innovation, Intuitive Surgical fits well within AMP Capital’s wealth creation framework as a business that offers a long-term mindset, high rates of growth and strong economic moats that extend well beyond the next five years.

(1) Statista, US national health expenditure as percent of GDP from 1960 to 2018
(2) HCUP Databases. Healthcare Cost and Utilization Project (HCUP)
(3) Intuitive Surgical Annual Report & Bloomberg

Want to read more of the series?

In part one of this series we introduced the concept of disruption. In part three we discuss the investment implications of this trend and provide a framework for evaluating opportunities and risks.

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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