The Great Surgical Robotics Roundup

Has it already started?

Has the great surgical robotics roundup started

What is it?

The future is extremely clear to me. Soft tissue surgical robotics has one super dominant player - Intuitive surgical. Coming a long long way behind them, to defend their laparoscopic business, which is diminishing as procedures move from open and straight stick lap to robotic, are Medtronic with their Hugo RAS, and Johnson & Johnson with the soon to be IDE submission for Ottava.

Then beyond that are a host of stand alone smaller companies with varying formats. This rag tag bunch of startups and small companies are bidding for an independent run at the soft tissue robotics market. But - in my opinion (and I’ve been there) they cannot go alone. The capital required, the mass of support infrastructure is just too much to take on the might of Intuitive.

Why not?

It’s hard for me to summarise why it is almost impossible for a small stand alone to survive - but let me try and help here.

Firstly, Intuitive has had 20 years of time to build a massive entrenched fortress of an installed base of some 9000 robots. This is way bigger than the number suggests because of commercial reasons.

Firstly - most of those 9000 were sold - which has built up a formidable war chest for Intuitive. But on top of that the model is split into 3 key revenue streams: Capital - Service - Consumables.

Service and consumables are driven by installed base. And with their 9000 installed base they have an unmatchable and forever untouchable core that is throwing off procedures = service and consumable income. (At a different sale to any second place company.)

The landscape has shifted dramatically and no one is selling capital equipment anymore - it is all on a place per use for the future basis. So the ONLY company to ever have really taken advantage of the gold-rush of capital sales is and will be forever Intuitive.

All other companies that come along will not get the advantage of selling the capital - in fact - it will actually cost them to place the capital to try and get to a meaningful installed base. And that has become very expensive now. And without the installed base throwing off vast revenues (that Intuitive has) all other companies need to fuel that cash from somewhere - and it’s a lot of cash.

Medtronic and JNJ will need to fuel this from their balance sheet - and that is going to be very painful quarter on quarter. Especially as quarter on quarter procedures move from manual lap to robotic - especially in the lucrative markets. Every loss of an end-cutter is loss of profit to fuel their robots. Time is against them. But they do have big balance sheets - granted.

But the problem for the small players is that they need to fund all of that from raising money - a lot of money. Because they don’t need to just place the capital up front - they need to hire vast support teams up front. Sales - marketing - clinical trainers - clinical implementation.

One advantage of a JNJ and a Medtronic is that they can leverage much of the their existing medical device infrastructure too absorb some costs.

Let me give you some scale of the lift and the cash consumption:

Let’s imagine a system costs $150K just to build it. (This is if you only ever sold one system):

It needs parts and service of $30K per year

It needs a service engineer at $80K per year

It needs a couple of sales people at $150K per year (costs)

It needs a training $25K

It needs shipping $10K

It needs congresses and marketing $10K (one systems share)

It needs all the back office staff $10K (customers care)

So just deploying that one system (forget training systems, demo systems, demos etc etc)

At a base line could cost a company - let’s round it up to $500k of cost in the first year.

(I’m making these up just to give a sense of scale and give round numbers.)

Now let’s look at a revenue stream that pulls in:

In all the finance models I’ve seen, everyone will have 300 procedures a year - but reality is to get going it will be more like 80 to 100 (it just is).

So we have a plan in place to charge $2500 per case to come in at 20% under Intuitive and make it attractive. (Sound familiar?)

$2500 X 100 cases = $250K year 1

$2500 X 200 cases = $500k year  2

But the sales reps and service engineers will still cost what they cost , and of course you can spread their cost over more systems —-

Call it $250K - (just for this example).

So over the first 2 years - it’s $750K income and about $750K outgoings - so you get to break even on year 2 for each system and then year 3 onwards can start to make some money… But…

The pipe keeps filling so each first year you net loss $250K for every new system.

(Note: This is if your system is perfect out of the box and you don’t need loaners, you don’t need replacements, you don’t have staff turn over etc etc - it’s perfect scenario modelling.)

So where am I going…

If you wanted to get to 5% market share of active robots (installed base) - you need to sell about 500 robots in the next 3 years. That is a whopping $250 Million of investment (forget R&D, electric bills, rent and all that).

It’s $250 million costs just to get to 5% share and still be haemorrhaging money.

Medtronic and JNJ can afford that and fuel it from their other products - but a small stand alone will have to raise all of that money. And that is why I repeat and repeat - if you don’t have a $billion to spend on this, you cannot in any way to get any form of critical mass that is meaningful and supports the weight of the business. All the small companies can get out and demonstrate their technology - but as a stand alone cannot survive to get to the critical mass of installs to generate the profits needed to be a viable business. The growth engine crushes you under your own weight.

The next great barriers

So if the financial barrier is not enough - the technological barrier, and reach barriers are even bigger.

20 years ago when robots were new - basic 3D vision and basic instruments were enough to get a prostate done. But roll forwards 20 years and the world has moved on. Robots are now general surgery robots - and that requires ICG (advanced imaging), stapling and advanced energy right on the robot. These are very big ticket items and not that available.

(Don’t listen that a main frame robot can survive with the co use of supplementary stalkers and energy manually. It can’t.)

You need something of the three - at least next gen white light  ICG, 4K 3D imaging - with auto flip etc etc. Something like a Storz Rubina.

You need massive global reach - for regulatory - quality - approvals - clinical - and that is very hard as a small stand alone. Distribution will go so far in some countries - but this is a product that needs dedication and expert direct sales reach. How much money does that need of the $1 Billion to just set up the infrastructure?

The filings of the robots technical files are huge - and the constant - never ending updates to hardware and software requires an army of quality and regulatory people.

JNJ and Medtronic have much of the machine of regulatory - marketing - logistics - finance - company structures to employ teams etc. But they will still need to invest in dedicated teams and that costs money. But it is a fraction of a stand alone small company.

Then there is the ecosystem barrier to all of this. The digital data barrier and the training barrier.

The digital ecosystem needs lots of cases to become meaningful - and Intuitive has about 12 million cases to lean on and 2.2 million new cases per year fuelling their algorithms. The next closets competitor has 20,000 — that is a gulf of data difference.New entrants may have 500 to 3000 cases - and that is meaningless in data analytics. So they need reach - installs and usage fast to keep up. It’s about speed to critical mass.

Training and preceptors is another massive barrier - the cost alone is prohibitive - but getting enough training sites, systems, proctors etc etc is a big weight. A Medtronic and JNJ have that reach and resource - but even they will still struggle on proctors. But good surgeons will be willing to sign up with a big brand name with cash behind it.

The small companies need to face that hill - and it is huge.

So when you combine all of this:

The massive lead of Intuitive

The cash needed (and the cost of that cash)

The resources needed

The reach needed

And the infrastructure…

It becomes clear that only a few of the big companies can every actually - really do this by leveraging their already established infrastructure and playing from their balance sheets.

Bottom line - small companies need to be bought or eventually die.

Why would strategics want a robot if it’s so costly and hard?

There are three profiles of strategic that need a robot and need one now:

The big lap players:

JNJ and Medtronic have owned the laparoscopic endomechanical space for a long time. But there has been a slow creep of market share erosion by cheaper commodity companies for trocars, end-cutters, open staplers etc.

In any manual lap case the surgeon can choose what stapler they use. In a robotic case - they can only use what stapler the robot is designed for. It kills cheap staplers as a threat.

Besides the commodity staplers, JNJ and Medtronic have seen the creep of robotic surgery into laparoscopy, and there is a tidal wave of cases moving to Intuitive from them. They lose trocars, staplers and advanced energy for every big case they lose to Intuitive. And intuitive is seeing 20% plus procedure growth quarter on quarter.

So it has been known for a long time that JNJ and Medtronic have moved to the robotic space as a defence strategy. Of course they need a robot top compete in a robotic space. Through acquisition, licensing and internal development they both have significant internal programs.

They have to be in robotics to defend their laparoscopic business.

The imaging companies:

A small collateral damage over the past years has been imaging companies. Stryker, Olympus, Karl Storz. Because every use of a robot is one less use of their tower. For some imaging companies it is even less use of their instruments and advanced instruments.

With the launch of DV5 and its advanced imaging tower, and now most robots having some form of tower - the use of lap towers ultimately decreases. And this trend will accelerate - and especially if the tower could actually be used for manual lap - then it begins to obviate the need for a lap tower all together.

As the train moves ever forwards to robotics and their integrated towers, then the imaging companies are at a growing risk.

The robot companies will not be targeting (well maybe Medtronic) manual lap - but if their system is capable - if it scoops up image data into their ecosystem and apps - then the robot companies start to have a very good landscape map of the hand help market as well as the robotic market. And that starts to get powerful in strategic planning - proving comparative outcomes data etc etc. You now have direct comparative data in your apps between lap and robotic. Hmmmmm.

But it’s potentially worse than that for the tower companies. As all of these three companies make expensive smart operating rooms like EndoAlpha and OR1.

Robots with integrated smart OR controls have potentially just obviated the need to build smart ORs. Roll in a robot - plug it in to any modern OR and it will make that OR smart. Control smart, data smart, imaging smart and screen smart. Integrated towers can control all elements of the tower - plus will start to talk to OR lights etc. I feel a massive damage to the smart OR companies will be the elimination of the need for high end smart ORs. That is a big revenue stream.For the hospitals it is a strong value proposition to get all Ors smart by just using the robot. That’s a good economic story.

So tower company yes must have a robotic strategy or see continual and accelerated decline.

The peripheral gen surgery players:

There are vast numbers of players that through one product or another touch the general surgery space. Budget staplers - specific energy devices - and specific insufflation devices.

One of the best use cases of high flow, low pressure, self smoke clearing insufflation is in Robotic surgery. Often companies like Conmed would provide Airseal systems for robotic cases.

Well if that is now integrated int a smart tower - I foresee that 3rd party insufflation for robotics just got wiped out. The systems and the trocar revenues.But it’s worse… if in the OR you have a perfectly good energy device - insufflator - imaging system - that all talks to one another - and you have a manual lap case between robotic cases - there is no need for bringing in the insufflator from Conmed. Simply use some Intuitive ports and their insufflator - video tower (oh and all that data goes to their app) and there is no need for your box anymore.

Somehow companies that touch general surgery - Conmed, Applied Surgical, Chex, Panther, etc etc - must work out how to roll up with a robot if they are to survive. How do they work out strategic partnerships?

Big iron:

I’m going to throw this one in from left field. But if GE Healthcare or Siemens Healthineers, or Philips ever wanted to get into surgery in a meaningful way. Then the time is right now. This is the only window for a generation for a big iron company to drop into the general surgery space.

One big thing they have is knowing how to sell big capital and make financial models around it work. They are less suited to understand the day to day OR side (but can learn) but big capital - they know it better than most. And that is a huge part of the sales process - where even JNJ and Medtronic have a big knowledge gap.

If - and it’s a big if - they wanted to break into the MAS market - then this it the time - this is the only window they will ever get.

They know data - ecosystems - service - implementation - managed services and leasing - so many aspects of soft tissue surgical robotics is actually right in their stride pattern. And Siemens have already put their toe in the water with robotics with Corindus. Left filled but not impossible.

Build vs Buy

Soft tissue surgical robotics is utterly unique in oh so many ways. It is (in my mind) the pinnacle of hard things to do and get right.

Some strategics set off on a course to build a robot - or acquire in the components - but this was over a decade ago.

Medtronic (from what I see) is struggling with Hugo - because it is not easy at all.

JNJ have still to even get to clinical trials with Ottava - and that is after billions and billions sunk in.

This is because it is so hard. And the issue is you can end up with a system that doesn't’ work.

Having just one system as a JNJ and a Medtronic - for me - is a huge huge risk with all the eggs in one basket.

If any strategic wanted to start - today - to build a soft tissue surgical robot - it would be another decade before it got on the market. And by then Intuitive will have the DaVinci 6 out and utter dominance of the global market (not that they don’t have now) but vast swathes of manual lap will have come across - and an entire new generation of surgeons will have grown up with Intuitive and be very unwilling to switch.

In my mind the most logical thing to do now for all of these companies is to “Buy” a surgical robot that is already 10 years into development. Let me adjust that - maybe “buy” means also close partner with someone.

As an example - Olympus may be in no position to buy Medicaroid - but for me there is an utterly and obvious partnership right there. So through an agreement - they could “buy” their way in to immediate access too robots in Japan - robots a long way along MDR and FDA. A perfect architecture to hand their imaging systems on and advanced energy.

I think Storz has already worked that out - and the announcement of Asensus as an acquisition is the next big step in the robotics round up. It makes sense as it breathes new life into their towers - imaging - retains control of smart ORs. It gives Asensus immediate access to world class 4K white light ICG (maybe one of the best on the market).

At the same time it hobbles Medicaroid - Medtronic and any other company using their older imaging. Because it means (if they are smart) they just killed the future vision chains of multiple robots.

(Did you never ask why they didn’t give them access to Rubina from day one? Protection of their lap towers and future proofing if they got a robot.)

So some of the robotic chairs in this game of musical chairs are rapidly disappearing. That potentially leaves some of the strategics with a dilemma.

Medtronic - is Hugo the answer? Or do they need a Ronovo? Or other small form factor modular robot to do what Hugo should have done. But they are “half pregnant” with advanced energy and stapling about to get loaded on to Hugo. Are they smart enough to admit a second path would be a smart insurance.

JNJ - they have Ottava that is approaching IDE submission - but there is so much risk between now and getting a fully functioning and cleared system. It could theoretically be another 3 to 4 years before they are throwing off revenues. And will the system even still be relevant vs the DV5?

Do they need a suite of robots - Low end - middle end - high end - single port etc etc.

Stryker must defend their ASC dominance in towers and ORs - so they absolutely need a solution. Moon Surgical and Distalmotion - both could be ideal targets - but a lot of other companies are circling - so time will be the essence here. This cannot be the normal M&A eons of diligence.

No one can wait until any company gets to $100MM of sales - that is no longer the game. It is about clearances and IP. That is the new currency.

If Stryker misses this round of robots - there is a 10 year gap until they build something or new systems hit the market. By then the ASCs opportunity will be a distant dream.

GE, Siemens, Philips - if one of them wants to get in - then they need to move now - and take a system that has imaging and the end to end of instruments. They need to buy a system with the whole deal - because they don’t have that competency - or kit in house. (Unlike an Olympus, Stryker, Storz.)

There is absolutely no chance that they will build internally. It’s too long of a path - too expensive - and too difficult.

The China Option

If you look at the map of either da Vinci Clones - or new interesting systems; China has a disproportionate amount of systems in development - on market - on their way.

The big challenge for any of the Chinese systems is that data - and plugging them in (plus stigma.) USA and Europe for any strategic are critical markets but China is also a massive opportunity.

A smart strategic may take one for the emerging Chinese robots and “buy” the rights to the design for outside of China - or buy the whole company - build Chinese versions in China - and build Western versions in the US or Europe.

Take Ronovo - they have an awesome design. Like a mini Hugo.

If Medtronic were to be smart and buy them - they will get Hugo V2 ready to go. Gain access to China - way quicker - and have an alternative if HUGO can’t make it.

They could take the design - and build Western versions on western serves and cloud infrastructure in the USA (or Ireland). That would make it acceptable.

Any strategic could take a clone - that is proven already to work in thousands of cases - and take the design and transport that to manufacture state side. They get a 10 year jump on the development path - and are in business. They are immediately in China - and immediately have a working design for the rest of the world - that they can Americanify and get clearances with ready to go technical files and testing.

China is also full of decent stapling technology, trocars and advanced energy - so again this can be a super rapid way to start to get a formidable offering on the system.

Strategics should be looking carefully about how they adopt a China option and then make it palatable for countries outside of China.

What’s next?

The trigger has been pulled with Storz going after Asensus. As more systems get CE mark and FDA - there could be a feeding frenzy that starts - because there are not enough assets to go around for all of the strategics. And if some companies decide to take two or more of the systems - for IP - or to build a layered segmented offering - then things will dry up fast.

Not only that - all of the current systems are at different stages of development - and clinical proof. The ones with over 10,000 cases are few and far between - the systems with both CE and FDA are even more rare.

Systems that are full “robots” verses Lap assist robotics will have different appeal to different strategics.

I know for a fact that diligence teams are off and running across several of the robotics systems already. M&A teams are working out what they want, why and how.

Some companies are realising that their internal programs may not be the right answer (or only answer) - and they need a plan B or a “next gen” or segmentation.,

I foresee that in the next 18 months - offer after offer for systems will go out.

And here’s the odd thing I predict:

Normally it would be in the interest of a strategic to “wait it out” and see the smaller companies struggle and value decrease as they struggle with sales, or raising money. That would be a big error in this market of scarcity.

I believe the opposite will happen - as each asset gets picked off - the remaining assets become more and more scare - and disproportionately more valuable - even if they have a lower offering than what has been taken so far. (The best will go first.)

The choice for suiters gets less - and they have to get what they can - and the few remaining robots will become the only option - and that means the price will go up in a weird Dutch auction style.

The bargains are the next one or two deals.

The strategics that move today - like Storz - will be the ones to get the best deals at the best price.

If someone takes Moon or Distal - they will get one of the only assets that supports a tower company - and fills that ASC niche. There’s only two assets that can do that - and have any chance of finding a space where Intuitive finds it hard to play today. But when the first one goes - Moon or Distal - the second will have a disproportionate value as it will be the last chance for a decade to access the ASC.

And in that ten years… that opportunity is gone! It’s now or never.

I believe the robotic roundup has started and I’m sitting with popcorn watching how this is now going to rapidly play out. Your move…

These asre opinions of the author based on public knowledge and for educational purposes only