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Urbem's 'Wonderful Business' Series: Intuitive Surgical

California-based Intuitive Surgical (ISRG) is the pioneer and a global technology leader in robotic-assisted, minimally invasive surgery, which improves clinical outcomes and experience of patients, reduces medical risks, and lowers healthcare costs. The company develops, manufactures, and markets the da Vinci surgical system and related products.


For a long time, Intuitive Surgical has been dominating the lucrative Robotic MedTech space, which is expected to grow at a 7.7% compound annual growth rate between 2018 and 2028, according to MedTech Intelligence. While competitors like Medtronic (MDT) are trying to catch up, for the time being, we are positive regarding Intuitive Surgical's sustainable dominance.

The company's first-mover advantage is evolving into a last-mover power in our view, as more residents have been trained via the systems. We appreciate the company's move to introduce the da Vinci VR simulators into academic institutions to cultivate future buying decisions influenced by fresh surgeons. The growing install base at hospitals (more than 5,000 at the moment worldwide) is building a high barrier of entry for latecomers, through the high switching cost.

New entrants will likely enter a price war with Intuitive Surgical. Nonetheless, Intuitive Surgical should be able to defend the business through an additional layer of the moat - its reputation earned with over 6 million procedures performed and more than 18,000 peer-reviewed scientific articles published about the da Vinci system.

Lastly, a strong balance sheet and strategic focus provide the company with a sustainable competitive advantage to acquire new customers through operating leasing, which accounts for one-third of the newly installed base as of 2018.

The vast economic moat at Intuitive Surgical explains the consistently high returns on invested capital over the years. As you can see below, the company outperformed its peers in the medical device industry, including Medtronic, Boston Scientific (BSX), and Stryker (SYK), most of the time for the last decade.

At the same time, Intuitive Surgical demonstrates a robust business model to generate cash for its owners. The business has been typically able to convert one dollar of net income into more than one dollar of free cash flow.

At Urbem, we particularly value recurring revenue thanks to its high margin, predictability, and reliability. Around 70% of the company's sales are recurring, consisting of instrument & accessory revenue and service revenue out of the install base. Hospitals with the da Vinci system set up should have the financial incentive to maximize the use of the system, leading to long-term visibility of growth in procedures, revenue, cash flow, and shareholder value.

We expect to see continuous penetrations of the da Vinci system and related products in both current and new surgical applications. The R&D capability at Intuitive Surgical is the key supportive factor. Additionally, overseas markets, with just under 1,900 installed bases (as of June 2019), appear underpenetrated for the company in light of the over 3,300 installed bases in the US. Also, the aging population and downward pressure on rising healthcare costs should further fuel the secular growth at Intuitive Surgical.

Disclosure: The mention of any stock in this article does not constitute an investment recommendation; investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market; we own shares of Intuitive Surgical.

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This article first appeared on GuruFocus.