Intuitive leading the shift to Surgical Robotics becoming a service Industry
- Steve Bell
- Feb 13, 2024
- 13 min read
Updated: Jul 30
For the past 25 years the main model for selling a robot has been
Sell the robot as capital
Sell an annual service contract
Sell the consumables and disposables per case
But my guess is... that's all about to change. And read to the bottom of the article to get the full insight of what is about to radically change.
The shift to alternative commercial models in surgical robotics
This is the point where I'm going to claim a small part of history here. Back in 2016 I was brought in to build the commercial model for a small Cambridge Start Up called Cambridge Medical Robotics. It was clear to me at the time that one of the biggest barriers to a wider adoption of robotic surgery was clearly the "Cost".
But what was more clear to me was that the bigger barrier of the struggle to get the $1.5 million up front capital that was needed to purchase the robot. Now to be fair, I had already seen the glimmer of "rental" models and "early lease" models. But I'd understood way back then, that most places outside of the USA could not get together the vast sum of money needed to justify a robot. So that lack of capital was a barrier.
At that point I created a model where you could buy what was effectively a "managed service.". The concept was easy. Commit to a multi year contract, at a set volume and you were provided with hardware, servicing and all the consumables you needed to complete those cases. But in the early model - that also included a grant to allow the hospital to have a full time employee to run the robotics program. Unfortunately few hospitals back then really understood the need to have a dedicated robotics coordinator as part of the service.
Since that time, there has been great success in adopting the "Service" style model - and the market has seen Intuitive react and move to a much higher ratio of long term lease deals (Which grows quarter on quarter according to their quarterly reports.)
We have also seen other companies like Medtronic with their HUGO RAS enter the market, and in most cases "place" the capital for the contractual obligation to use their consumables on the robot, and even more "bundled deals" that use their lap or open products. Parallel type of acquisition / commercial model.
But what we have seen is that as these companies, and many other robot companies start to shift away from capital purchase models (even the US is swinging at great speed) towards alternative commercial models... we will see the "Ecosystem" become a major part of the offering in the future.
What does this first commercial shift mean?
For the customers it means that they no longer have to go through the exercise of ensuring they have over $1 million of cash available for the day of the purchase. So in many places that means a lower burden for getting the capital purchase thought the C-Suite or no longer to have the need to go raise the money through a charity or wealthy donor. (Yet a few of these will still happen.)
This blows the market wide open once this massive barrier is removed. Hospitals have money for cases, but rarely money for capital. And they are from two very different budgets. So by removing this barrier you create an easier (not easy) path to get a robotic service approved in more hospitals. (And come on... everyone wants a robot in 2024.)
The bigger shakeup is for the companies. This is a subtle but important one. When many of the robotic companies were created and backed by investors, the model of "Sell the capital" was still strong in the market. And in financial modelling it would have looked like healthy slugs of cash rolling in as you build the base of installs. With the new models (and I think this is why Intuitive and Medtronic are going this way) the balance sheet of the company carries all of those installs. So if you are a small company with low cash - this is an absolutely crippling new development. Every placement of a system depletes you of capital. And if you don't reach the usage volumes (which are always always always over estimated) then you carry that financial burden even longer . And each install hurts more and more and more. This alone slows your ability to take market share.
If you want to know the biggest moat that the big companies will erect around the robot... it is the financial moat. That is why I repeat time and time again - "You need $1 Billion of capital as a robotic company to have a chance of long term, health survival." And a fearsome amount of this is to fuel the installs, until you get past the break evens of the first installs and they become cash flow positive. But that "valley of death" to get across either limits the rate you can take market share - or risks your company finances to slow R&D. Ultimately it leads to a road to closure.
Intuitive is by far the biggest winner in this shift (Even compared to a Medtronic or a JNJ). Why? Because they are the only company (and will be the only company ever) to have benefitted from the decades of selling the capital and building their formidable war chest of cash up - that cash can easily pay for the "Placement" of the systems in this new model. Plus they already have that massive 8000 plus installed base (this is so so critical even against another big company) that will kick off the continual revenues, and be a positive revenue spiral. They basically have the installed base to fuel the future (that no one else can ever catch up with... ever).
"But Medtronic is a big cash rich company!" I hear you say - Yes they are a big company - but a big chunk of their income (and profit) comes from their laparoscopic products. And Hugo is a purely defensive play to stop the continual erosion of their premium products like Ligasure (advanced energy) and staplers - as Intuitive eats the lunch of the two big lap players. That lunch is a healthy part of their profits. Intuitive had another massive 21% procedure growth in Q4 2023 - "Ouch!"
Medtronic does not have that initial installed base - and they are probably learning - quite painfully - the massive cost of commercialisation and the very thin margins of a robot with reusable instruments - where you aren't yet getting the full number of lives of those instruments. They are probably living that massive start up burden and a diminishing premium product lap range (80% GP let's no forget.) So even a big company will have a huge cash burden of getting a robot going. And they will find it very hard to get any capital sales - which cripples cashflow - even for a big company. It becomes quickly a horrible money pit. (Late to market, inferior specs, market shift - all add to the inability to ask for capital up front - even if you could.)
I can only imagine the quarterly review meetings with the finance department. And remember this shift happened way after they originally planned Hugo and did the financial modelling (over a decade ago). I am sure initial plans did not consider low to no capital sales. (Maybe I'm wrong...)
A smart move by Intuitive?
I'm not going to speculate if this was Intuitive's plan all along. Or if some of my work at CMR sort of accelerated this move in the market. But it doesn't matter. It is clear that one of the big weapons that Intuitive has now, and is using to great effect is this ability to build a financial moat around surgical robotics. (Yet one more moat). I find it very hard to see how any company coming into this space will ever be able to sell a large form factor surgical robot up front ever again (okay a few, a few). The barrier to entry now - even more so - is having vast cash burn until you build your base - so needing to raise huge sums of cash. (Or bleed cash as a parent company.) Either way - that makes this space a very hard place to crack into.
You add onto that the feature set you are competing with, and the more important breadth of indications Intuitive has - and well it is a horrible and hard mountain to climb (as per my other article.)
So, it's very hard for any company to get the foothold in the market, and make enough financial gains to overcome this initial startup barrier. But wait... there's more coming later.
Smaller / Cheaper Robots?
The capital burden of a "main frame" Intuitive style robot is huge. Just the working capital to support the cost of building the systems (and each system unit cost is high) is a problem if you have to place every system. This can be hundreds of thousands of cost, plus all the inventory you need to build, plus the working capital of the complex parts bin. Plus storage, shipping, and spares. It all adds up to a horrendous working capital model. And that is excruciatingly painful when you cannot then sell that expensive machine for immediate cash.
So will some of the smaller form factor robots like Virtual incision and Vicarious surgery help to reduce that outlay burden? Well yes... and no. Yes in the way that the robotic "arm" "Boom" "Bedside" is way smaller and so theoretically should cost less. Have way less parts - and working capital in it. But if you still have a tower, or a console... you still have enough working capital and costs for this to still be a significant problem. It's less of a problem - but still a problem.
But with the reduced size also comes reduced functionality - you will not be able to do everything you do with a da Vinci multiport - with a single port small form factor. No matter how the "hype" comes on these system - they will, by pure physics, be less capable to some degree. So with the smaller cost of the robot also comes smaller price per procedure you can ask - smaller justification of service costs etc. Plus with some, if it is a "ship back to base for refurbishment", there is an added layer of complexity and cost.
On top of that you still have a console - that needs service engineers and parts - and all the cost of building the console, shipping the console and servicing the console. Spares etc are not cheap on consoles. So yes, the overall cost will be less, but in my mind will not be low enough to get out of this trap. And if early on they don't get the traction of volume of procedures they plan for... it will be very painful even for those designs.
The move to full line service models
Okay... so that is the background to say where we are today. But now I want to predict what the future holds.
The moat that Intuitive has been building is large - but there is one critical enabling component that will allow a sudden shift to a whole new model in this industry.
The digital ecosystem around the robot has been utterly misunderstood by so many. The issue (in my mind) is that non digital native companies cannot fully understand this part of the ecosystem. It's just not in their DNA. And that also means that many of the robots on the market, and coming to the market, have not built in enough "smarts" to the system to fully leverage what is about to happen. They are about to get left behind.
Intuitive has been steadily building their capabilities of their digital ecosystem with the Intuitive Hub, My Intuitive and other digital products (some we haven't fully seen yet.)
They are moving into pre-operative planning, peri-operative guidance, and post operative analysis to close the loop. All of this digitally linked to the electronic medical records where outcomes can be measured with immediate feed back into the system - give guidance and improve outcomes .
This comprehensive digital pathway is the nail in the coffin for many of the other robotic companies.
No Hopsital will be buying a robot from Intuitive in the near future (it's happening right now.) Instead they are buying a complete service (program management) of a complete patient journey that throws off insights that help manage all aspects of the patient care pathway, the hospital OR management, Inventory management, efficiencies and work flows.
Intuitive is a service organisation that uses robots such as da Vinci, SP, and Ion as the central enabling technology. But the robots are wrapped in a rich data ecosystem, service (uptime) system, instrument system; a system that will ensure improved patient throughput, better outcomes, and ultimately lower costs.
It's no longer "Robot wars" - it's "Service Provision Competition."
What does that mean for competition?
For many - it's game over. (And the people in many companies will be banging the desk and screaming that my claim is outrageous.) But it's like denying gravity exists.
The game has just moved; and if you have a system that does not have a full digital ecosystem, links to EHRs, full video analysis capability, 99.9% uptime, full range of instruments, full range of procedures, support and help to improve your hospital workflow... you cannot compete.
Too many companies, investors and analysts still believe some archaic "memes"
The Intuitive robot is the most expensive - too expensive - we will come with a cheaper robot and democratise robotic surgery !
Customers hate Intuitive and their practices - they are all willing to jump to any other provider
Most da Vinci systems sit in the corner and don't actually do cases
It's a urology robot
If any of the above ever comes up in any of your internal meetings - you need to go find another sector:
The Intuitive robot will be placed (why they always always use that word not sold, or given) as part of the service offering. You will not be able to compete on "Price". There is no "price of the robot" to compete with in the future.
There is no such thing as a "cheap" robot - and it's irrelevant anyway.
In the past a lot of people "complained" about a "Monopoly" and the practices and pricing that a Monopoly creates. But that is 10 years out of date.
Intuitive are loved by more of their customers than most other med device companies. Don't believe me? Just look at their NPS (net promoter scores) vs the industry below.
They do not sit idle in the corner. In a few corner cases (pun intended) - yes the old systems were bought and the users never got into the swing of it. Or systems were bought "To have a robot" and the service never changed in the hospital. But the vast majority of systems do work all day long, and the average number of procedures per day is going up as acuity goes down. (See ~Note)
Hospitals are buying multiple da Vincis - because a) surgeons can't get flight time b) the demand for robotics is accelerating in all specialties.
It is NOT an urology robot. Yes it does the majority of prostates, but they are low volume compared to say hernia, or hysterectomy - but just go read some figures. It is rocking in general surgery, gynecology, thoracic and all specialties.
If your plan as a company is "Let them have urology we will go after general surgery and thoracic where they don't go..." you are firkin delusional.
Only 5% penetrated.... oh come on! Check out my other article on why that is a totally delusional statement. If you are still spouting that... you are in the wrong industry. (or the wrong decade).
You do not get a 70 NPS if your customer do not like you - Wake up people.
(Note) - There have been just over 8000 daVinci system sold until the end of 2023.With "trade ins" let's say there are about 7000 active systems any day. There were 2.3 Million procedures performed 2023. So some horrible rough maths = an average of 320 plus procedures per robot in 2023. The old "they do one procedure a week" is just madness - self justification of companies that don't want to admit da vincis work all day every day. You don't buy 13 of them to have 13 sitting idle...
Intuitive is NOT a Urology company
So I'm going to say it again - you need $1 Billion of investment to go head to head with Intuitive. Period. And now as we see (as I predict) a major shift to a service industry. That wall just got even higher. If you are not already in the game -- go find a niche like Virtuoso. Or take a lateral approach like Moon Surgical.
If you have a da Vinci Clone. You have a clone of their robot... not their feature set, not their procedure access and not their complex digital ecosystem. The fight is not in the steel and plastic hardware anymore. It's what that hardware is capable of, in which broad procedures, and how it is sold as a service.
That means hardware placed, instrument ranges available with tiered pricing for procedure complexity and the complexity of instruments needed, possibly billed per procedure on consumable usage, service included, training included, robotic service management included, analytics included, VR training included, inventory management included, patient and procedure flow consulting included... etc etc.
So your clone won't help you. It will be a super tough fight unless you can compete on service provision for patient pathways.
If you have a different design... unless you have the capability to provide that full line service and improved care pathway , analytics, video, etc etc - your product "difference" will not be enough to take significant market share.
The move to service based surgical robotics is happening and the moat is getting wider.
Summary
Surgical robotics is no longer just about the robot. The robot will not be "sold" as a capital in the way we saw in the past. All robots will be a service based - be that da Vinci style, Endolumenal style or a host of other robots on their way (Neurovascular, Endo-Vascular, Dental etc). (Watch this space what Intuitive does there.)
Pay per service, such as pay per case (tailored billing per case maybe) with everything included will become the norm. And it may not even surprise me if models evolve into profit / savings / risk shared between the company and the hospital.
"Use our service - and we will share the benefits and risks with you."- and for that you need a large capital war chest.
Any competitor not at critical mass now will probably not make it. The glut of capital cash coming in at the front end of a robotic contract is GONE! If the model of the competitor cannot work out how to build a base of business without that upfront capital cash... if they don't have massive working capital cash... if they don't have the capability to compete as a high level service provider... they are heading for an extinction event in my opinion.
Gary and his team are being super smart in leveraging their vast first mover advantage - to keep changing the game. They know what it takes in terms of time and money and effort to get a surgical robot on the market. They know that it is so hard to pivot mid journey. So they keep building moats, then changing the rules, changing the game and watching as the completion struggles to keep up. They keep pushing as the first mover... and in the shift to being a service company - not a robotics company - they've done it again in my opinion.
These are the musings of the author. They are concluded from analysis of public information and are purely speculative. But if you want more from Steve, follow the blog and sign up for some of the exclusive deep dive content.
