So what’s going to happen now to the competing soft tissue surgical robotics companies?

Surgical Robots for sale - get 'em while they're cheap

The last few years have seen some major changes in the surgical robotics landscape.

We saw the surge in investments into surgical robots that then whimpered out as the dawning reality of what those companies were up against hit home.

We saw some companies float on the stock market as SPACS to have a surge and then a whimper.

We’ve seen small companies launch with a flurry and then meet the realities of the market and drop off the pace.

We’ve seen some long standing competitors continually struggle to get sustained traction in the space.

We saw Medtronic go big and bold with HUGO and then meet market reality and seemingly pull back.

And we’ve seen the great hope of JNJ and Verb, then 6 arm Ottava, then 4 arm Ottava then delay, then delay.

And just this year we’ve seen Asensus (former Transenterix, Former SOFAR) promise the launch of LUNA to replace the aging Senhance - which has resulted in the first of the “Tower” companies making a move to acquire them, in what many call a “Fire sale.”

We see a possible westward march by several of the da Vinci clones coming from China (there’s a lot) and even Japan with Hinotori.

But the big (and long awaited news) was the play by Intuitive - the undisputed leader of the soft tissue robotics space - and they dropped da Vinci 5 - propelling them further into the lead for the next decade.

So what will happen next in this market?

Surgical Robots are here to stay

I want to start the piece with a simple prediction. Surgical robots are here to stay and the continual march from open to MAS (minimal access surgery) will be powered by robotic surgery. The older laggard surgeons will retire, health systems will consolidate, young surgeons will only accept to use the robot. They want data and the latest systems to assist them.

I foresee a steady move to “what can be done robotically will be done robotically” and that will be the line of sight 21 million procedures that Intuitive has spent a long time calculating. It is a 10X increase over what is done today. But it will take well over a decade to move from the 2 million to the 7million to the 21 million. (It just takes time.)

Collapse of the endo-mechanical market duopoly

This market is the open staplers, trocars, endo-staplers and advanced energy franchises of Medtronic and Ethicon (JNJ). These two companies have dominated this segment of the market in a multibillion dollar fight since the early 90s.

But this is ending - and that demise is actually accelerating. There are some major issues for these companies. The first is the rapid commoditisation of the space by cheaper manufacturers as patents expire and feature sets become vanilla. This has been happening for a while.

The second big attack has been the gradual but steady rise of Intuitive and later the other robots. Most procedures that come across from manual lap to robotic encourage the move from the “toys” such as staplers and advanced energy. And with the added cost of the robot - people will hand sew, or stick with bipolar, and of course use the trocars off the robot supplier. It has been a slow but gradual reduction of the endo-mechanical market through robotic procedures.

The third (and more recent) attack has been that those gadgets have now found their way onto the da Vinci. So even the stalwarts that kept using the hand held staplers, or energy along side the robot have moved over to Sureform (Intuitive’s stapler) and the Intuitive advanced energy devices like Synchroseal (bit slower move but it’s happening.)

This third nail in the Endo-mechanical coffin has seen a very sudden and sharp decline in endo-mechanical sales for the two big companies. Who, by the way, may have locked themselves into a downward spiral of price cuts just recently that is further accelerating a drop in revenues in this segment.

Medtronic has launched HUGO, and Ethicon is scrambling to launch OTTAVA - to “get their staplers on their robot.” They would also like to remain relevant in surgery by the way.

Side note: I guess they have both worked out that to get any type of critical mass to halt the decline they need to get to about 2000 robots each in the market to have any significant impact on the decline in Endo-mech. And have they worked out how long it will take them and how much up front cash it will take them to get to the 2000 placed units (they are not selling capital up front.) If they could drop in a stretch 200 systems a year that’s 10 years….

Intuitive will rule the roost

Unless you’ve been living under a rock… you will know about DV5 and its current and future possibilities. Force feedback, tower integration, data, instruments, wide procedure coverage and advanced instruments just make it untouchable by anyone else. You need to accept that worldwide they will retain over 60% market share (The % not theirs will be driven a lot by local nationalistic support of systems rather than better systems.)

But in the USA - expect Intuitive to retain 80% market share - as it will just be impossible for other companies to have the breadth of procedures - instruments - add ons that Intuitive has. Their lead is way too big - and getting all those approvals just takes time for anyone else.

Even Medtronic HUGO (the next big competitor to get FDA) will only come out of the box with Urology, then they will 510K gynecology and hernia. But that still leaves a mountain to climb to become and all purpose robot that could replace an Xi or a DV5.

Intuitive just have their shit together. Product wise, marketing wise, surgical community wise, ecosystem wise, instrument wise… oh and commercially wise.

The future is some kind of “placement” of systems. Either long term rental. Lease, pay per click, or managed service. It doesn’t matter - they all have one simple impact on the market. They remove the ability of any competitor to sell capital up front (for the main part) and that starves the oxygen from the business plan of any competitor.

There is no doubt in my mind that 10 years from today we will see 60% of the global cases still done with a da Vinci and 80% of the US cases still be done with a da Vinci.

Medtronic and Ethicon

For the big companies - Medtronic and JNJ - it just made the lurch into the robotics market 10X harder. The P&L sheets concocted ten years ago at the start of their “We maybe need to get a robot to defend our business” plan. Will need tearing up and redoing. Why? Because I guarantee that all of those excel sheets had a “% of capital systems sold” in one column and then “$2 Million” in another column. Well those columns are more or less defunct. And that means that incoming cash is reliant upon cases - and cases are reliant on installed base - and installed base is now “place before revenues” and the slopes of cash back in have just changed radically.

You layer on top of that the “cash cow” endo-mech - that was going to bankroll that rapid growth - and it’s a horrible situation where cash is screaming out - profits are reducing - margins are reducing and the P&L sheet of 10 years ago just does not work.

Both companies are now half pregnant in what must be a horrible quarter on quarter financial review and robotic cash hole projection.

Neither can afford to back out unless they want to divest their entire endo-mechanical business (I fear that may come if Ethicon stutters with Ottava or Medtronic cannot convert HUGO into a system that people actually want.)

So that opens up the absolute necessity for both to get a plan B - and get it now.

The da Vinci Clones

There are a number of boom robots that more or less copy the architecture of da Vinci. Toumai, Hinotori, Revo-i to name a few of the many (look for my comparator sheet dropping soon.)

I can absolutely understand that in Japan - the government and local surgeons would patriotically back a local product like Medicaroid Hinotori.

But as someone that has personally launched a UK built robot in the UK - the Government support and local surgeon support (made in Britain) only gets you so far. You still have to go  through tenders, still have to fight competition - it’s not a given. And if the competitor has approvals (such as procedures you don’t have) or instruments the surgeons need - staplers - advanced energy. With the greatest patriotic will in the world - not everyone will buy your product.

In fact in the period that Versius was sold in the UK when I was at CMR, more Intuitive Xis were bought in a ratio of about 5 to 1.

So taking out national pride… why on earth would anyone buy a clone of a da Vinci and not buy a da Vinci?

What do you get with da Vinci? You get reliability, you get a full set of instruments, you get 12 million cases of data back up, you get staplers, you get advanced energy, you get support, you get infrastructure and ecosystem, you get lots of proctors, you get advice, you get quality, you get everything.

So unless your system can offer all of that - what can you offer?

Well five years ago you could offer it “cheap.”

You could place your system at $1 million - because da Vinci Xi was $2.8 million.

If you could see me shaking my head so hard as I write this…

Ten years ago (which the out of date market research is based on) there were some rogue deals via distributors at $2.8 million to buy an Xi. Rare as rocking horse shit.

In Europe deals for Xi were going in at $900K to $1.2 Million max.

But that is all long long long gone. It 90% on placements - so no capital up front.

What counts now is “Cost per case” - that includes a proportion of capital, instruments, drapes, accessories, service, training and support. All in one handy fee. Based on volumes.

And volumes come from approved procedures, and equipment capable to do this procedures. If you don’t have broad approvals for procedures - how do you compete on volumes? And how then do you compete on price per case? Because volume crashes costs.

So if you are a manager still thinking “They will buy my clone because it’s more economical” you are delusional.

Maybe in China that all works where the government can have a stronger say - you can cap imports etc etc.

But for the rest of the world - your clone will cost more per case than a da Vinci Xi - I guarantee it.

And if you rip your price to the floor - you will not be making any profit - and to run a robotics company you need profit - and lots of it.

Microport’s Toumai - is about to test that theory with their recent clearances for CE. I will be watching that unfold. They’ve put some impressive people in management - so it will be down to the market accepting it or not. It will be down to a price war - and I just don’t see anyone making such low numbers of instruments per year being able to win on that front - made in China or not. Volume crashes cost.

The small independents

CMR after raising over $1 billion are the number two player after Intuitive - with less than 200 systems out and active in just coming up to five years post commercial launch.

200 systems have done 22,000 procedures in 5 years - so that’s 110 procedures by each system (average). At da Vinci pricing of $3000 per procedures - $66 Million in 5 years of possible procedure income. Or $13 million per year revenues from procedures. Or $65K per system average over 5 years. Or $16K per system per quarter.

Yes this is not linear - as many systems are coming on later, and learning curves etc.

I just want to give some scale on return on investments - and the challenge that then puts on small companies. It also doesn’t take into consideration the capital that a few systems get sold up front.

But any company generating $16K per system per quarter will have some fearsome expenses that make that happen - it’s revenues here - not profits.

And revenues get so linked to volumes in robotic surgery instruments, servicing, support, training.

Again CMR reported 20,000 procedures on March 21st and then 22,000 procedures on June 3rd.

They also said at Device talks Boston there were 168 active systems.

So that’s 74 days to do 2000 procedures on 168 systems: -

Or 27 procedures per day = 9,855 procedures in 365 days

You can also work out - at 10 lives per instrument - average 3 instruments per robotic case (across all robots) that could be mathematically just 600 instruments needed to do those 2000 cases ((2000 X 3) / 10).

Or mathematically - 9,855 X 3 / 10 = 3000 instruments per year (very very low estimate as it assumes 10 full lives and just 3 instruments average).

But the magnitude for any small start up making sub 10,000 instruments per year means it is hard to get to economies of scale on instruments - one of the key profit centres.

We need to go deeper to see the issues we run in to here for small companies:

Or 0.16 procedures per active system per day.

Or 1.12 procedures per week (7 days) per active system = 5 to 6 procedures per month, per active system.

I’m not putting these figures out to pick on CMR, I used to work there. But they have the largest and most public figures I can find. I’m trying to highlight that the second most successful company after Intuitive is doing about 5 to 6 procedure per month on average (*average is not always the best metric as there are learning curves his users and low users but it is a good metric for CMR as most of the 168 systems are at leats 1 year into usage.)

And that second most successful company raised $1.2 Billion and will probably have the highest burn of any of the smaller companies as they have the most employees - most systems to service etc etc.

So it becomes clear very very quickly that any small independent company - just cannot sustain it as an independent. The maths doesn’t add up.

We have seen it with Asensus. We saw it with Avatera.

In my opinion - no small robotics company can make the economics work to be a self sustained, profitable - go it alone company. The economics are just against them. And you can’t just keep raising investor money forever.

Buy or die

Oh dramatic! Yes. Reality… also yes.

In a parallel market disruption - the DV5 and robots in general have been having a major and insidious impact on tower companies like Olympus, Stryker and Storz. Slowly the robot towers have been replacing the need for a shiny new tower company tower. Not a huge impact - but it always hurts when you can’t sell to your targets and you targets keep going up.

The DV5 is a full on - in every respect tower. I don’t believe it is aimed at hitting tower companies or smart ORs - but they will be collateral damage.

So not only do companies that sell endo-mechanical products need to be in soft tissue surgical robotics - so do the tower companies.

Again, unless you’ve been sleeping under a rock - Storz has stepped in and bought (doing it) Asensus in the first M&A of the modern robotics era. (JNJ bought Auris some years ago). But The Storz acquisition of Asensus is an important signal.

It shows how a failing -  sorry - flailing company like Asensus is an important target for companies like Storz to get onto the robotics ladder. It gives them years of advantage in not having to develop their own system and learn about robotics. It leapfrogs them with the smart ISU (intelligent surgical unit) and gives them LUNA the next gen Senhance as a rapid R&D move. And all at a reasonable purchase price.

(We will see if the cost of the deal with debt, running costs etc will be a good deal in the end.)

But this was a required move to an existential threat to their surgical business.

Stryker are less exposed - as they have the ortho franchise etc - but a massive hit in the coming years to their towers and smart ORS in the USA ASC market would be very painful to them. So they too are now moved into a position where they must (at least think about it) or move to do their own M&A deal.

That then leaves Olympus - that have tinkered (in a very Japanese way) with robotics for some years. And failed to produce anything - Endosamurai where are you now?

They are more exposed than Stryker - as not only are their towers a potential risk, but their EndoAlpha smart ORS - and their range of surgical instruments and advanced energy.

I feel that Olympus has no choice but to at least think about, then contemplate around the board table, a move. And of course they have been - they invested into DistalMotion - so they are not asleep.

But that still leaves Medtronic and Ethicon…

“Steve… they have robots - why on earth would they need other robots?”

Okay - I’m going to be a little controversial here (No !!!).

Medtronic. In my opinion HUGO is turning out to be a BIG flop. I highlight BIG as it is massive and has earned itself the cruel street name “Huge-go”.

I’m a modular fan - but small modular. Not making four units as big and heavy as an Xi boom (I exaggerate) when I talk modular I’m talking about compact and small.

The feedback from the street has been pretty poor about the bedside units. The complexity of set up, the software glitches, not great performance, lack of instruments, lack of advanced imaging and stapling (Okay for a small wild startup - but unforgivable for a Medtronic system from the Medtronic brand.)

I’ve not been surprised by the almost absence of quarterly updates - as my sensation is that not only have sales of the system been tough, but even giving it away as part of a bundled deal have been tough. Buzz is that a lot of systems got sent back (TBC???) And I even heard that their push into Germany has been on hold due to less than stellar feedback. (TBC)

The console is good, nice - well received - but the business end is just not going to cut it against a da Vinci. The IDE seems slow - recruitment feels painfully slow. So I’m just not convinced HUGO is going to cut it for Medtronic. (In its current format)

In my opinion they focused the engineering on “how do we get our staplers and energy on?” Rather than “how do we make a brilliant modular robot?”

My fear is that Ethicon may be making a very similar mistake. You put all the staplers and energy devices (loved by your friendly surgeons) on a robot. But fundamentally the robot must be the star - not the stapler.

I know little about the final configuration of Ottava - but the fact it went to an Auris based 6 arm rendezvous set up to a 4 arm - back to Verb style set up gives me some inklings. The moon shot of Fred Moll was pulled back in to get it on the market faster - refocus on end effectors not robotic capabilities. (My belief.)

This is a huge gamble for Ethicon and ultimately JNJ. I feel the entire Ethicon franchise will ride on Ottava. After so many delays - if the team slips by even 3 to 6 months on their aggressive timeline. It’s over for Ottava and potentially existential for the endo-mechanical franchise. I love JNJ - I was there for 16 years - I am the biggest believer in their endo-mech products - so I am rooting for them 100%. But something deep in my gut thinks they have not really - I mean really - understood what it will take for a brand like JNJ to be accepted in front of the da Vinci 5.

So I think a threat is IDE, then FDA - which carries a lot of risk. Bt that’s not the big threat. The massive threat is commercial acceptance of the system.

Let me explain.

Like every other company (Medtronic included) the commercial bar is that the robot can do nearly every procedure a hospital needs - gyn, thoracic, general surgery, hepatobiliary, trans oral, colorectal, and absolutely urology. That bar is just a regulatory slog to get through.

HUGO and OTTAVA will present at a hospital and say “We can do procedure X”

The administration will say “and A,B,C,D,E,F which makes the robotic program semi viable?”

So Hugo and Ottava will be consigned to interesting research programs until they can 510k their way to critical mass. And that could take another three years post FDA initial clearance.

Outside of the US it will be the same in Europe. Tenders will specify a group of procedures and product features - DV5 will get them all day 1, Xi has them all.

Hugo has some procedures but not all and no ICG, staplers, Ligasure. So that’s not a tender winner - go see how many tenders they’re winning across Europe. It’s public record.

China will be a cost battle.

Japan - a quality battle - if Hugo gets software glitches like the notifications in Europe suggest - that’s a problem for them. No robot works out of the box - no robot works out of the box. Ethicon… no robot works out of the box. Just sayin’.

And Ottava - is the bed. Ethicon sees that as a big plus with “zero arm footprint and integrated table motion.” Having lived and breathed both surgery and robotics for 30 years - to me the challenges of that are obvious.

People have preferred beds - especially in procedures like bariatrics, thoracic.

Many hospitals around the world have anaesthesia work flows and bed systems designed for that. Bed systems with floor columns - like Germany - that means you cannot use your custom bed in that OR. Anaesthesia - in many hospitals there is an anaesthesia room where induction is done - so how will bed management work? I’m sure they’ve got it all worked out outside of the USA usability.

What will they do with the actual OR bed when you have Ottava in the room? Where will it go? Where will it store? Draping etc etc etc.

What I’m saying is that there as many downsides to a bed mounted system as there are upsides. And for me - it will be fascinating how FDA deals with patient access if the system locks up.

That leads me to this…

So M&A is going to happen

So after all of this - what’s the deal?

I think there is a perfect storm coming and that will lead to some winners and losers.

Firstly the influx of money “a go go” to robotics is over for now. So those small companies with funding better make it last.

Small companies cannot go it alone. The infrastructure costs are too high, volumes too low to slowly build to profit over time.

The tower companies must move now - Storz has played the first move - the others must follow.

Stryker and Olympus must make moves that keep their towers the hero. So (unless the Japanese companies match culture and Medicaroid and Olympus team up) - Olympus will go on the back of their distal motion investment and I foresee Olympus acquiring DistalMotion and Dexter soon.

Stryker needs to be king of the ASC and have a strategy that makes sense to keep their tower and smart OR as the centre pieces. So for me Moon Surgical will be a very strong acquisition target. And with last week’s FDA clearance of the commercial system - the time is absolutely now for Stryker to get their M&A team in there.

Let’s not forget that Intuitive has a few other tricks up its sleeve with the Single Port SP.

The offerings out there are Virtual Incision and Vicarious surgical. Neither of which is a massive stand alone business. But  either could be a very interesting tuck in acquisition for JNJ or Medtronic - to get their IP - know how - or in MIRA’s case their FDA clearance.

MIRA (Virtual Incision) gets either big company an ASC play. As Medtronic has lots of IP from Titan - I could see Medtronic the most likely to go after MIRA as - well it’s here and now.

It gives them a portfolio of multiport and single port.

JNJ on the other hand do still have a lot of goodies in the bag they got from Auris - and flexible instrument know how is in there - so they may think they can go it alone with an SP - once they digest Ottava. But some of the IP and decoupled actuator technology in Vicarious may be of interest to them as an IP deal.

That still does leave a couple of left field players - one being BD with their dilemma of what to do with the Bard assets in hernia. As more and more hernia crosses into robotics and Medtronic will have a major blitz on hernia - they have an asset at risk that needs a robot. Primarily this could be for hernia and needs to be ASC capable. So CMR and Versius could be an interesting catch for them - and it could propel them deeper into other areas of surgery. But with so much money invested into CMR the price tag could be too much - especially after the current Edwards deal that they are digesting.

But we do have some assets that are out there and I am not sure Medtronic and JNJ are in comfortable enough positions to not be interested.

So - some fanciful thinking. How about if either company wanted to play a safe move and go after some of the lucrative boom market? And go after the Eastern market?

Could either do a deal on Toumai - or Hinotori? Would it make sense to have a multiport boom - a multiuport modular (or bed) - a single port - and endolumenal? It may not be stupid to have a da Vinci clone to go after hospitals that want that choice. And it would be relatively easy to then build on those platforms and get stapling and advanced energy on there. Cover all bases? Oh and they also get cgeap manufacturing if it's a Chinese robot.

But they may also need to do something with modular systems to ensure they don’t get dragged under by HUGO or Ottava if either falter. I’ve said it before and I’ll say it again - Ronovo Carina for me is everything that a HUGO2 should be. It is the small version of Hugo. It allows Medtronic to say “Hugo is the right architecture - we just now have that in miniature.”

And JNJ - what if Ottava slips again? Can they keep just waiting and waiting as the endo-mech market continues a decline? How long do they have?

Maybe they need a plan B - and that could be a Moon Surgical that doesn’t clash so hard with Ottava. It could be a CMR Versius? So the morning after any acquisition they are the number two player in soft tissue robotics by default. It could be Ronovo Carina to make sure Medtronic doesn’t get that HUGO2. And that would then force Medtronic to pivot and take CMR?

Or the corporate culture and internal spin will win and both companies will be self assured that their offerings they have are, in fact, the da Vinci killers they believe them to be…. Not.

Whoever wants to be in that 40% outside US market, or 20% in US market share that Intuitive will leave vacant, they need to be thinking about buying some of these assets and buying them right now. Every day that passes - more da Vinci 5 get sold. Every da Vinci 5 that gets sold makes it tougher to have an inferior system with no force feedback. Lots of Xis will be coming back for the secondary markets - and that will be an even bigger barrier for those that think “we’ll win with a DV clone on price” … Not.

It’s heating up and I’ll be commentating from the side lines as it happens.

These are opinions of the author for educational purposes only. You should not be making any financial decisions based on these musings.