Intuitive Put Surgery In Hands Of Robots

Investor's Business Daily

During much of the 20th century, if you asked people what the most exciting technologies of the future would be, robots would probably have been right up there with flying cars. For decades, they've appeared in movies and TV shows, essentially as slaves, often with superhuman abilities but without offensive moral implications. What wasn't to like

The way robots have actually developed has been less cinematic yet more innovative. Take Intuitive Surgical's (ISRG) da Vinci system.

Da Vinci doesn't look like C3PO, Robby the Robot or anything remotely humanoid. But it does have superhuman powers. A surgeon using the system can see tiny details inside a patient's body, and his hand movements are replicated by robot arms at a much smaller scale and without human tremors. And he can do it from another room if he wants.

Intuitive Surgical sold its first da Vinci robotic surgery system in 1999, four years after the company was founded. In 2004, sales surpassed $100 million and the company posted its first annual profit. Intuitive shares shot higher, climbing 2,954% from the July 2004 breakout to their April 2012 peak. That placed Intuitive among the great stocks of the past three decades.

"What initially attracted me to Intuitive was that it really was a paradigm shift — I know that's a very hackneyed phrase, but (it was) a paradigm shift in the way medicine was practiced," said Les Funtleyder, who formerly covered Intuitive as an analyst at Miller Tabak.

Intuitive sales topped $2.2 billion last year, and the global installed base of da Vinci systems now numbers around 3,000. The systems were used in more than half a million surgical procedures last year. Every procedure uses instruments that Intuitive also sells, supported by its services staff. That gives the company a lucrative 'razor / razor blade' business model.

While robot surgery is still new and its larger impact has yet to be seen, it has already changed the hospital landscape.

It all started back in the 1980s, when the Defense Advanced Research Projects Agency — or DARPA, the same federal body that brought you the Internet — started funding development of robotic systems that could do surgery remotely, thinking it would protect surgeons in battlefield situations.

The Stanford Research Institute was one academic center that took up the challenge. In 1994 it received a visit from Frederic Moll, a surgeon and entrepreneur who was then chief medical officer at Guidant (now owned in two pieces by Boston Scientific (BSX) and Abbott Laboratories (ABT).

"The thought was it would be used by surgeons in a safe zone operating on soldiers in the battlefield," Lonnie Smith, Intuitive's CEO from 1997 to 2010, said in a lecture at Stanford in 2005. Moll "thought that was a pretty lousy idea, but he was intrigued with the idea that you could separate the surgeon's hand from the tip of the instrument.

Moll and a friend, John Freund, licensed the technology and co-founded Intuitive in Sunnyvale, Calif. The whole thing might have stayed just a cool sci-fi idea, however, if not for an important trend in the medical business.

"The real precedent is minimally invasive surgery," said Jose Haresco, analyst at JMP Securities. "The whole concept that if you can avoid splitting the patient open with a 12-inch gash, they recover faster (and) it's better for everybody.

In the last few decades surgeons have mainly done this laparoscopically, by feeding tiny instruments into patients with catheters and sticks. The da Vinci system could make that more sophisticated.

It took a bit of trial and error to get there. The first surgeries performed with the system, in 1998, were heart surgeries. When the company went public in June 2000 — as da Vinci was on sale in Europe but a month before its U.S. approval — heart surgery was still expected to be the main market. But in 2001 the company gained approval for prostatectomy, which was what really took off.

"That was our first killer app," Smith said in his 2005 lecture. "In the (Silicon) Valley people talk about a technology looking for an application, and it's not always a compliment. But every really breakthrough technology's exactly that.

Haresco credited not only the da Vinci system itself, but management's shrewd marketing. Having a da Vinci became a point of prestige for a hospital, and with that came more patients.

"A lot of hospitals in the 2000s were buying it so they could put up these billboards by the side of the freeway saying, 'Come to Hospital XYZ, we've got the robot!'" said Haresco. "It was smart of management to either recognize that or deliberately go out and market it that way, because it worked.

Back in the boom years of the 2000s, the investment in a da Vinci system, which could run over $2 million, could pay off as it helped hospitals poach surgeons and patients from each other. The 2007-09 recession and changes in the reimbursement environment have made life difficult for Intuitive Surgical and anyone else who might be interested in building an expensive futuristic machine.

Questions about da Vinci's cost-benefit ratio, which always haunted the system, have grown acute.

Funtleyder told IBD that was partly due to the new world that da Vinci helped create.

"If minimally invasive surgery is cutting back the lengths of hospital stays, hospitals have less money to spend on big-ticket items," he said. "In the new environment ... you have to be involved in reimbursement discussions in addition to just saying, 'Look at how much better our machine is.'

As a result, innovation in the field is now more value-focused. Haresco points to the example of TransEnterix, a North Carolina-based startup awaiting FDA approval for a smaller system called SurgiBot at a lower price point.

But TransEnterix CEO Todd Pope says he's an Intuitive fan. "We see it as a market expansion, not a head-on competition," he told WRAL Tech Wire last fall.

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