(INVESTORS.COM)–With artificial intelligence now firmly entrenched in many hospital operating rooms, the field of robotic surgery is starting to get competitive.Giant companies like Alphabet (GOOGL), Johnson & Johnson (JNJ) and Medtronic(MDT) are training their sights on Intuitive Surgical (ISRG), the king of robotic surgery companies. But analysts say the booming medical technology segment has lots of room to run.
Robotic surgery is an area that could grow by billions of dollars as more machines are used to treat patients. Intuitive commands the space with $3.3 billion in annual sales. Its signature da Vinci robotic surgeons, however, are limited in the types of procedures they handle. The multi-limbed da Vinci can be used in a variety of procedures — including cardiac, colorectal, gynecological, head and neck, thoracic and urologic surgeries — but only as long as they’re minimally invasive.
How big the market could be is still unclear, yet analysts agree the potential has yet to be tapped. So more players are moving in, and quickly.
“I think investors need to understand that the robotics and AI (artificial intelligence) revolution is happening, and it’s touching every sector of the economy,” said Jeremie Capron, the director of research and managing partner for Robo Global, an index and advisory firm specializing in robotic industry investments. “This is a technological revolution that investors can’t afford to miss.”
Medical Technology Applications
Analysts say that in March, Auris Health became the first company to pose a formidable threat to Intuitive when its catheter-based Monarch Platform gained U.S. approval. Intuitive will counterpunch by seeking approval for a flexible catheter similar to the Auris device, likely this year, RBC analyst Brandon Henry said in a recent report.
Meanwhile, others are working in areas where Intuitive Surgical doesn’t have a foothold. Smith & Nephew (SNN) has a robotic assistant for knee replacements. Stryker (SYK) has a robotic joint replacement system. Mazor Robotics (MZOR) and Zimmer Biomet (ZBH) have robotic offerings in brain and spinal surgery. Mazor alone could see around $3 billion in sales just from its systems.
But these players have a long way to go to take Intuitive Surgical’s throne.
In 2005, Intuitive had a market cap of $1.3 billion. Today, it’s worth nearly $52 billion. Capron calls Intuitive “an amazing stock.”
“I think the investment community has been scratching their heads trying to figure out the impact of those new entrants for Intuitive Surgical,” he told Investor’s Business Daily. “We feel pretty relaxed about it. The size is big enough for small players to come in.”
Intuitive Surgical: A ‘Blowout’ Quarter
Shares of medical tech companies have been relatively insulated from the woes frustrating biotech and pharmaceutical stocks of late. The stocks of medical equipment makers such as Intuitive and Mazor have collectively spiked 15% year to date.
Intuitive’s “blowout quarter” in April helped to spur excitement, Evercore analyst Vijay Kumar said in a recent note to clients. Recent investor days from J&J and Medtronic are helping to drive that frenzy.
“Robotic surgery is the topic currently in medtech with a blowout quarter from Intuitive Surgical hinting that the pace of manual-to-robotic transition might be picking up,” Kumar said. “The topic of competition elicits various responses from investors.”
Intuitive Surgical stock is up 33% this year, after climbing 78% in 2017. Kumar expects Intuitive Surgical’s competition to become more apparent over the next 12 to 18 months. Intuitive’s da Vinci Surgical Systemnow boasts “five million patients and counting.”
The da Vinci systems are also moving deeper into hernias and are seeing early-stage adoption in bariatrics surgery performed to induce weight loss.
Intuitive Surgical Opportunities
Myriam Curet, executive vice president and chief medical officer for Intuitive, noted in an email to IBD that an estimated 82% of prostatectomies in the U.S. are performed via robotic-assisted surgery. The same is true for about 80% of malignant hysterectomies.
“General surgery is our fastest-growing specialty, and one where we are still in early stages of adoption for procedures such as ventral and inguinal hernia repair, colorectal and bariatric surgery,” she said. “We believe there is substantial opportunity to expand robotic usage in these categories, and we are developing additional tools and technologies to do so.”
For the year, Intuitive guided on its first-quarter earnings conference call to 12%-15% growth in the number of procedures performed with its systems this year. That followed what many considered a strong fourth quarter in which recurring revenue — including instruments and accessories for its da Vinci systems — grew 11%. Recurring revenue represents 73% of the sales pie.
Still, even Intuitive Surgical sees itself in the early innings and expects robotic surgery to present a huge total addressable market. The number of da Vinci procedures performed each year grew nearly 68% from 2013 to 2017.
Among other robotic surgery companies, Intuitive’s closest competitor, Auris, doesn’t trade publicly. Until recently it was in “stealth mode,” Kumar said. But in May the medical technology company signed a commercialization agreement with a division of J&J. The agreement came two months after Auris’ Monarch system grabbed approval in the U.S.
Competition In Medical Technology
Monarch is a flexible catheter. Surgeons thread it through a patient’s mouth and into the lungs by remote control. Before its approval, investors believed “credible competitors” to Intuitive would be years away, Kumar says. But Monarch got approval months ahead of views. Intuitive Surgical plans to seek approval of its own flexible catheter later this year.
On its website, Auris says Monarch’s first target is lung cancer. Some experts estimate half a million lung biopsies are performed in the U.S. each year. Surgeons could also use flexible catheters in urinary tract procedures, which number roughly 400,000 procedures a year.
Intuitive isn’t sweating the competition. Auris’ chief executive, interestingly, is Frederic Moll, who founded Intuitive Surgical in 1995. Intuitive’s current CEO, Gary Guthart, joined the medical technology firm in 1996 and took over as CEO in 2010.
“We have built technologies and made decisions about our architecture based on first principles, not by looking over our shoulder at what other people are doing, but by really engaging customers deeply and understanding their clinical needs,” Guthart said on a recent earnings call.
RBC’s Henry notes Auris’ Monarch has a 25% larger catheter than Intuitive’s to allow for its camera. Intuitive sees a benefit in a smaller catheter that can move deeper into the lungs, Henry wrote in a recent report. That would allow surgeons to potentially use it to remove diseased tissue.
Robotic Surgery Grows
Meanwhile, J&J has teamed up with Google on a company called Verb Surgical. Analysts are unsure what system the team is creating. They do expect it to enter the robotic surgery market in 2020, though.
At the same time, Medtronic is partnered with Mazor. Medtronic also expects its own robotic surgery system to launch in 2020.
It’s not unreasonable to suggest Intuitive could keep 80% of the market, Evercore’s Kumar told IBD. New robotic surgery companies will have to differentiate themselves.
“They can’t have a straightforward, ‘me too’ product,” he said. “Investors have put a pretty punchy marketable valuation on Intuitive Surgical because we’re still in the early stages of this robotic conversation.”
But, he added, “This market is big enough to sustain multiple players.”
That’s where companies like Mazor and Zimmer Biomet, which makes systems called ROSA, come in. Both have systems that surgeons use in brain and spinal procedures.
Robotic Surgery Companies: Target Market
Like others, Mazor CEO Ori Hadomi says sizing the opportunity for robotic surgery companies is difficult. Surgeons use the $1.1 million Mazor X system in spinal surgeries. The company’s Renaissance system can perform spinal and brain surgeries and costs $500,000.
Disposable instruments and materials comprised 40% to 60% of Mazor’s revenue, Hadomi told IBD. For each surgery performed with the Mazor X, the list price is $1,500 in terms of disposable items. An estimated half a million procedures would generate $750 million.
Stakeholders expect spine procedures to grow rapidly.
“People are being more and more active,” he said, meaning they will suffer more injuries and require surgery more often. “The procedures will become less invasive. The safer the procedures will become, the more patients will be willing and interested to be treated, to be operated on.”
The benefits of robotic surgery are plentiful, Hadomi says. Revision surgery — surgery to correct mistakes or tweak prior surgeries — are significantly lower with a robot assisting. The precision of the robot helps to curb potential errors, he says.
Research By Robotic Surgery Companies
Last October, Mazor unveiled the results of a 379-patient study. It found a fivefold reduction of complications for surgeries performed with its Mazor robotic surgery technology. Notably, there was also a sevenfold reduction in revision surgery compared with freehand lumbar fusion surgeries.
“There’s no doubt from the patient’s perspective, I would not consider going to surgery without the robot there knowing the chance of going through revision (surgery) is seven times higher,” he said. Revision surgery is also costly for the hospital, which can face reimbursement hurdles.
All agree that robotic surgery won’t replace human surgeons. Hadomi likens his system and others like it to “the toolbox of the surgeon”. These are simply medical technology tools that make operating easier on the surgeon and safer for the patient, he says.
The benefits are also growing for investors, says Robo Global’s Capron.
“What’s really exciting is the fact that we are at an inflection point where the technologies that enable robotic surgeries and the price point are attractive,” he said. “Now there’s a lot of action around J&J and Medtronic. I see that as confirmation that this is a substantial, addressable market.”
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