Are these five big problems for Intuitive?

I think maybe once or twice a week I get asked these questions in one form or another about Intuitive and the impact they will have on their business. For 25 years they have had an almost clear run (not quite true) at the market. They had the entire laparoscopic market to convert... thousands of hospitals to go after for installs. So it was easy to build out their business and just have meteoric growth... (No. Do not believe that. It has been a tortuous slog.)

But today they stand as the pinnacle of surgical robotics (health robotics) and everyone wants to know what is about to knock them from the number one spot. Well let me be clear - nothing - no one - no how. They are not leaving that number one spot for a very long time.

However, that doesn't mean they don't have challenges, headwinds and possible bumps in the road. But do not believe the hype, do not beleive the claims from all angles. I will give you my thoughts on these five questions I'm asked on a regular basis. And let me be totally clear - I have ZERO relationship with Intutive - these are purely my opinions as an industry observer (people keep saying I must be paid by them... I am not.) I just have to say it as I see it about the leader of this space. And this is how I see it.

So let's get into five common questions (no order) I get asked.

1. Drop in Market share

I'm going to start with a rather odd one. I often get people saying "Look!!! Intuitive are losing market share... I think it's a major issue!!!"

Well Duh! I mean if you start with 100% market share - how the hell do you keep that at 100%? How the hell do you go up in market share?! Of course you can only lose market share. Every single new install of another robot is a loss of market share. But that does not mean they are going backwards in real terms. The market is not a fixed number of robotic systems.

Remember the overall market is growing... and at a good clip.

Many of those "competitive installs" Intuitive might never have got... in places they don't normally go. It doesn't mean they actually lost that install in a stand up fight.

And often those robots are at price points they may not be willing to "give the business away" at. (anyone can give away a few robots...)

Of course every system they go for and don't get is a technical "loss." But name me one industry where that doesn't happen to the market leader? The key is to look at their win / loss ratio on deals they go after. Not market share. You need to realise that for every bid out there, Intuitive is winning (across the globe) and my guess - at over 10:1 vs competiton. In the USA it is not even close in the win loss ratio with competitors.. My estimates of Intuitive vs the entire rest of providers is that they are winng 30:1 if not more. Let me make sure I say that right. They are winning 30 systems for every system put in by ALL the competitors put together.

The key metric for me is that competition came, and came at the market aggressively. But Intuitive didn't suddenly start losing the majority of bids. This is not like we saw the collapse of dominant players like Cordis when new stents came. Intuitive is still winning nearly all the systems that are up for grabs. (75%-80% in the last 12 months across Europe. 90% in major cancer institutions and multi specialty teaching hospitals across Europe.) They are public numbers.

So expect Intuitive to remain the dominant market share company - but they cannot retain 100% share !!! Market share is not their issue for now. For me it is a poor metric. Especially in the early stages of competition when many customers are willing to give other systems a chance. But is that the real macro picture? No. Is that how we will get to steady state "real business?" NO!

2. The loss to Chinese surgical robots

We have seen a massive surge in the number of Chinese systems and Chinese backed systems over the past few years. But honestly there are only a few of the Chinese robots that have relevance and (I think) will make it outside of China. I see Microport Medbot (now 300 installs) and Edge Medical as the front runners for today. But Cornerstone Robotics will come out strong soon. You have small pockets with Surgerii in single port - and Kangduo via deals across places like India with Meril. And of course you have Ronovo that signed up with JNJ. So there are some of the 30+ contenders that are venturing outside of China. And doing "okay."

Of course they got a rapid rise to success in China. Home grown - home pricing - quotas - import duties - etc etc. I would have been shocked if they didn't get to rapid mass adoption inside their own country. But - winning in China and "winning" OUS (excluding USA) is a very different game. And if you step out of the home market - again I look at the win/loss ratios... and there is still a massive - and I mean massive dominance of Intuitive across SEA, Europe and LatAm. I don't want to say there is no impact. But it is nothing like we saw the success in China. And I do not think it will be replicated. The Chinese robots are good - they have some great feature sets and the telesurgery has caught Intuitive on the back foot more than they probably would admit. But if you really dig into the install numbers, and look at Xi and DV5 placements outside of China (Ex USA) - Intutive is still absolutely dominating. And I believe they haven't even started to power up on the Xi (Refurbished). And when they drop in as Pay Per case deals... that will be pretty irresistible for many customers.

Also there was a big promise of "crashing prices" from many eastern suppliers. (no let me be factual - customers thought that!) And many thought that that would be the real impact on Intuitive, destroying their margins as they raced to the bottom. Nah! I'm sorry but I'm just not seeing it. You see when you ship your product out of China - there are lots of on costs - import duties - staff costs - infrastructure costs - distribution commisions. You can't make bargain basement deals ad infinitum, and survive as a company. And to be fair - Chinese robots are "not cheap things" - they are high quality, well built, well featured and well supported. It's the customers that fantasised about the "low cost robotics." But once you ship out of China - have an EU importation entity - and then add in a distribution layer and possibly agent fees - sorry the price is not the lever as people once predicted.

In fact, to be honest, in the last few deals that a few of the Chinese robots won - it was NOT on price... but for the telesurgery capability, quality - and for the "it's different to Intuitive." So I think that is not the threat that everyone initially thought.

And come on... I've said it before - there is no such thing as a cheap robotic system. In fact data shows Intuitive in Europe won 75%-80% of all public tenders in the last 12 Months. They were not always the highest price but were never the lowest price. In the majority of (MEAT) tenders they won at one of the highest prices. If not the highest price. Buyers chose Intuitive. Speaking with a lot of buyers that took Chinese robots - one of the main things they bought into was "speed of evolution and innovation" of the systems and instruments. Not because "it was a cheap deal."

But again - in Europe in high level cancer institutions Intuitive won 90% of all tenders that went out !!!!! 90%!

USA... hmm I just don't see it if they go in as "Chinese robots." But if they do a collab with a major strategic like JNJ did with Ronovo - that's potentially a different story. But still... the pricing is not going to be the lever. It is just not real - they are not crashing the price of the capital - and the cost per case is almost exactly the same. And as Intuitive extends lives on instruments - that price per case lever falls away. So cost parity - you can have an Xi or a Chinese robot in the USA (with less functionality - less procedures cleared).... hmmm not happening. Those that chose them could maybe look for involvement in innovation. But I honestly see an uphill struggle for Chinese robots in the USA.

Chinese robots are good - but not better than an Xi.

Chinese robots are not 30% cheaper (cost of ownership) than an Xi.

They do have telesurgery - and that gap is about to be closed. They do show rapid innovation and for many that is a key thing. In fact - they could take a leap but... it's a big if.

The initial surge in Chinese installs - I think will slow, and we will see the real impact and real win /loss ratio settle out over the next two years. My guess is that overall market growth will be bigger and faster than the missed sales to Chinese robots.

3. Remanufacturing of instruments

I've talked about this a lot. But for some reason people still think that Restore Robotics etc will have some "massive impact" on Intuitive's instruments and accessories business. I don't! I still think it's a rounding error that will eventually go away.

Let me be clear - I love the idea of a company taking back metal - plastic - etc and remanufacturing the parts they can salvage back into new instruments. For the planet I think it has merit (see my other post.) It also, in some cases, will have cost savings - as of course manufacturing from new means more cost of goods for Intuitive vs salvaging parts. If someone is remanufacturing - there is "competition" and so price pressure - and number of lives pressure. But let's be clear - where - how and what. So let me explain.

If I own (outright) my Xi - and I am no longer under any usage contract with Intuitive - then I'm free to buy my instruments from the lowest cost provider. I've paid the robot - and now I want the most cost effective "razor blades" I can get.

If I look at a new grasper from Intuitive that has 10 lives and I pay (making this number up) $1300 - I get each life at $130 when I use it.

If I get a remanufactured grasper from a third party - and it costs me $900 for 10 lives - I get each life use at $90... so a saving. And that then makes sense as a user of the instruments that outright owns my own robotic system.

So for those customers that have an old (paid off) Xi, or for someone that bought a refurbished Xi (cash) say in a countryu outside USA. And especially if they got it from an unauthorised dealer - then it makes sense to get the instruments cheaper as remanufactured. And it is possibly the only way to get the instruments in some markets. It works. But I don't believe Intuitive was ever selling that type of customer instruments in the first place. That is often why people go to the refurbished in certain places. But, for me, that has near zero impact on Intuitive instruments and accessories. That opportunity never existed for Intuitive to lose.

Even in the USA, where an older - paid off Xi - where they use a couple of remanufactured instruments (because they can't get them all from a remanufactured source) - then this makes sense. But it probably not a prime - high volume centre. Possibly not the main target of Intuitive . And remember, available refurbished instruments can be limited. But that $30 -$40 saving per instrument could be an incentive enough for a certain customer to use them. And why not? But is this profile to majority of Intuitive's current I&A volume?

Now - read the room. In the USA the majority of current deals going in are forms of hardware lease systems or Pay Per Click - where the customer must use the Intuitive instruments to get access to the robot (or hardwired into the deal.). Beyond that in a PPC model - the instruments are already paid in the price - so there is ZERO reason to go and buy a remanufactured instrument. In my mind, this is now the vast majority of new customers - and especially high volume customers. None of this new Xi business, and DV5 business will be remotely touched by remanufactured instruments. I don't think you'll even see a blip on the I&A side of the business. DV5 instruments with force feedback. Not being remanufactured for a long long time. (if ever.)

I know many of you think this will be a big hit for Intuitive. Let's speak at year end when the numbers are in. I think I know what it will look like. But... I have been wrong before.

Final point - as Intuitive get more and more extended lives across instruments - the price per use per case drops dramatically. On a $1300 instrument - 10 lives is $130 per use. But when extended to 20 lives that is now $65 per use. Which is probably less than a remanufactured 10 life instrument - theoretically. And to get to 20 lives for the remanufactured product - I think it needs a new 510K - so it all just gets harder. So, as I believe, everything is against (specifically in the USA) the business case of remanufactured instruments. But let's see. let's look at the numbers at year end.

4. Johnson & Johnson Ottava

Many of you keep telling me that Ottava will be the ultimate da Vinci killer. Even though you haven't seen more than the images I put out, and the mock AI video I made. Much of your reasoning has been on "It's JNJ" "They've been cooking it for 10 years so it must be good." Now I have been one of the biggest sceptics of Ottava - just because I have pre conceptions about bed mounted systems. And I know as well as anyone that getting a robot out - working - working repeatedly and scaled has been done by very few. All robots have struggled, and all commercialisation efforts have been way slower than people think. Way more costly than people thought, and a lot more issues than anyone imagined when they did their powerpoint a decade earlier.

Now - I have said that Ottava can be interesting - and I expect nothing less than excellence from JNJ. But... I need to be real with you.

First - even if it's brilliant out of the box... you need to be able to build en-mass - and that is way harder than people think. I reckon you could get to anywhere between 20 and 50 of those systems out in year 1. That alone will not impact DV sales. Because I doubt they will be installed in hospitals that were about to buy a DV5 and suddenly switched to Ottava. In all likelihood, these will be supplemental sales for the curious, and the friends of JNJ. (Well I do suggest they go there first.) And sales numbers will be 10 to 15 year 1. As a guess. Then you need to build the machine to sell the machine - implement the machine - get the clinical machine working. That is harder than many think, and a three year initiative to get going at any scale.

Next - procedure constraints. In the first few years the system will not be broad based commercially viable (careful what I mean there) - it isn't a direct replacement for a DV5 or Xi - as it still needs to get clearances for more procedures - specialties and features. That automatically disqualifies it from many working hospitals that "need a robot for all departments that can do all procedures now."

My prediction is that JNJ will (sensibly) be cautious on the first 2 years about roll out. making sure the thing works - making sure they support it well; and ensuring a good experience. That leads me to a 100 install figure in the first 3 years - and that is not material to Intuitive. Let's talk a decade from now before we could see any meaningful traction against da Vinci. So YES Ottava will be a competitor - but I think for the next years it will be pretty immaterial and also be (if targeted right) getting into say a small OR where a DV was never going anyway. Well that is the theory from their intial clinical data. Yet to be seen if that "theory" can be translated into "Reality." But it is a super sensible approach if they go that way.

In summary: long term could affect some sales. Short term - rounding errors.

5. Running out of procedures

I get asked this a lot. "Have we converted all the procedures that can be converted?"

So in the USA many specialities now have super high penetrations of robotics - such as prostate.

We are seeing higher % of thoracic, hernia, and some Gyn procedures. Colorectal has good uptake. Current estimates have that robotic is now used more n the USA, than manual lap. (be careful how you measure that.)

We must always consider procedures that should, or can be done robotically. For clinical reasons, technical reasons, availability of robots, site of care, economically, work flow etc etc.

Let's assume that 50% is robotic and 50% is lap of all those procedure that could (if you line up the stars) be done robotically. Well that is still a 2X of today's procedures if they all got converted: so simple answer - NO we have not run out of lap procedures that could be converted. But "should" they be converted? Different thesis. I think that as prices come down on instruments - ease of use / set up of the DV, better work flow (data showing significant savings) - as older lap hold out surgeons retire - new generations come in - autonomy kicks in etc etc etc we see a continued procedure conversion from lap to robotic.

Site of care and reimbursement will make some of those procedures increasingly hader to access. But I think that is all gonna get worked out as we go forwards. Either through better commercial models - technology improvements or other dynamics. I do think even Intuitive will drop an ASC friendly system sooner or later.

But we still have not talked about the open procedures - which still are significant. And no... not all of those can come across to minimally invasive. BUT many can. And I bet it is the robot that is the catalyst because 30 years of manual lap wasn't enough. And as I said, the open surgery hold outs will retire... and the new generation will be robotic first. So I feel there is still a large number of procedures in the USA that can come across to robotic. And will come across to robotic.

Now go beyond the USA and we get into China, India, South East Asia, LatAm and Europe. Massive population areas where lap and open are still the predominant modes of surgery. I feel that as capital becomes less of a barrier through commercial models such as pay per case. As lives on instruments increase, and as comparator costs between manual lap and robotic cases close - we see more and more robotic uptake. As we see global initiatives on upgrading access to health and huge funds (like we have seen in Eastern Europe) get released and deployed. Robotics will be a key focus. If you combine population dynamics - new surgoens coming through - government funding - commercial models changing - cost per case gaps closing... etc. We could see a way way way bigger increase in procedures outside the USA: and Intuitive is absolutely poised to take advantage of that as they are already so well inserted into the global markets. And through their clever political change from distribution to direct - they become even more poised to be the ones to take on those cases. This will be through upping utilisation of their OUS installed base (which often lags USA) and new installations utilising their different tiers from DV5 to Xi to XiR to match all budgets and pockets. I feel we will see faster cross over from lap to robotic OUS over the next decade.

Summary

I've only scratched the surface on my thoughts on Intuitive and the da Vinci multi arm. I'm not even speculating on the growth they will see with endoluminal systems - and the new platforms they are going to probably launch in the next few years. But my sentiment is that you're all worrying too much about Intuitive running out of steam and having problems. I do not see it. Latest numbers from them seem to back me up. I believe future numbers are going to keep looking good. No one is taking away their crown for decades in my mind. And watch the next three years; and how many competing companies "run out of steam" or move away from lap style robotics. Why? Because doing a few robots is easy - do lots is hard.... but making profit at large scale is near impossible.

The trend will continue that older legacy surgeons will retire and new surgeons will be robotic and digitally native. And unless there is some radical change in someone's competing robotic system - I would doubt that Intuitive will not be the ones to profit most from this uptick in procedures.

These are just my guesses and perosnal opinions and should only be used for educational purposes only. I can get the future as wrong as the next person.