UPDATED: What could be the impact of daVinci 5 on the market and competitors

In another special report I've delved deep into the possible features coming on the daVinci 5 by Intuitive. It is my best guess on what changes will come in hardware, software and instruments. (Updated with new information)

I've been asked to dive deeper on what does that mean for users (surgeons), the user base, the procedure numbers and, importantly, the competition. In this exclusive content post - I'm going to give my opinion on what this means for the market in the coming years.

da Vinci 5

Introduction

The generational span and spin cycle of a mainframe surgical robot is looking like 10 years. Well that is the time that has passed since the Intuitive daVinci Xi was launched. And as discussed in my special report - that means that hardware must become capable of continual upgrade through the new life cycles.

In another report I mentioned that Intuitive seem to be moving the industry to a service model - and that will be critical when I discuss later how this launch will impact the entire market. And "what will happen to all those (old) Xi models?" I see a plan coming together here.

The market has moved on from the initial launch of the Xi. Surgical robotics is well accepted and growing - competition is on the horizon more than ever (some horizons are just longer than expected) - economics have changed, and how robots are sold has changed. Importantly too is how the regulatory bodies have changed with MDR in Europe creating a. massive barrier, and FDA having moved away from 510K to de Novo clearances. In all that means longer approval cycles, BUT more importantly, is that broad coverage of new products across all procedures is a thing of the past. I'll dive into the possible impact that will have.

Impact on Intuitive of the daVinci 5

I am not even going to start to speculate on the impact of a launch of this magnitude on the stock price of the company. I will leave that to the market experts.

What I will do is speculate on what this means from an operational impact of the company - as no matter how big you are - how good you are - a flagship product launch has positives and negatives.

The first major impact on the company will be huge supply chain and build mountain they will need to climb. I have speculated that smart companies try and keep as much off the parts bin as possible across platforms - but 10 years is a pretty long time in electronics, screens, motors, sensors and everything that goes into a robot. So depending on the % of "newness" in the system - this will have a stretching effect on manufacturing and supply chain. Keep in mind since the Xi they have launched SP and Ion. So they will now have their work spread across X, Xi, SP, Ion and now the DV5. More complexity - more stretch.

I have seen that they are well geared up for this - but it does take a degree of management time and focus, so carries some operational risks.

The new, and maybe biggest impact, this year will be "So who will buy an Xi when the DV5 is around the corner?"

I think this is why Intuitive have lowered procedure growth guidance... in part. Because what I expect is that (US for sure) people will now hold on and wait before they layout / commit for a new piece of hardware. That will impact the amount of "new systems" they place in the US market - which in turn will have a knock on impact on procedure growth.

Much of that "pent up" desire will go away as soon as a few pieces of critical information are known. When they get FDA clearance (NOW CLEARED), pricing vs Xi, specs and what procedure clearance they get for the DV5 (BROAD CLEARANCE). All of this will allow buyers to make sensible decisions of wait or go with an Xi.

Robotics in surgery is very complex. And each of these factors will change dramatically the landscape.

When some people see the dv5 spec - they will say "Nah not for me we don't need that..." and return to getting their Xi.

Others will see it and say - "Yes I will wait for that."

A tactic by Intuitive is to (as we see the market is moving) create agreements - lease agreements - with hardware upgrade clauses in them. This will allow an Xi placed in now - and when dv5 is available (and maybe when it gets enough feature sets and procedures approved) the trade in can happen, and they upgrade to the dv5.

"So what about all those Xis that they will need to take back if they do that????". Okay let me get to that. It's not a problem - especially as the entire world moves to a lease model. Let me explain.

DV5 appears to be FDA first - so Europe and LatAm and China and the rest of Asia will still be on the Xi for the next few years.

In the old paradigm: If you sell an Xi and then do a trade in - that Xi has inherently less value after it has been used. And if you resold to a new customer as pre-owned, the customer either won't accept it - or would expect heavy heavy discounts. Massively hurting the average selling price, as well as having people buy a cheaper used Xi than a new Xi. (You left cash on the table).

But the world has changed - and we are now in a 48% lease world; which I predict will move to 100% in 5 years. Now that means that the liability of old Xi used systems now becomes an actual boon for the company.

It goes like this:

I sell you an Xi lease with upgrade clause (maybe even for a lease bump if and when you get the dv5.)

I take back your old Xi and drop in the new dv5 - and probably get more per lease and more per instruments. (So more revenues for the same procedures)

I take your old Xi, and now I do another lease to a new customer of an Xi. And as it's a lease deal - it doesn't matter if the Xi I deliver is brand new or used. That has no bearing on that contract. The customer gets what I deliver.

So I get a full value lease deal, but by using refurbed hardware that already generated cash in the past - (sweet).

RINSE & REPEAT !

Much of the USA will not want a dv5 - so great - Xi on a lease as above.

Much of the outside of US can't have the dv5 because of clearances (or lack of) - and they beg for leases. So the disposal of all those US, used Xis is easy, as there will be customers queuing up for an Xi lease. And on top, Intuitive is not having to build new hardware at a high COGS for those Xi leases - they just recondition the "nearly new" stock from the USA at a way lower cost. It's beautiful.

The cherry on the cake is that it massively drives customers to the service model - and so crushes the hopes and dreams of competitors that built their business models on selling hardware. Boom! (Pun intended for this that know robot architecture.)

The dv5 - I believe will accelerate the entire market to a fiercely competitive lease / service model (as stated in my article) and the winner of that will be Intuitive. This is what a 20 years plus of installed base buys you. It is the revenues from that massive installed base that others can't mimic now; and will never be able to mimic in the future.

The rate at which all this happens will be 100% dependent on if they get cleared by FDA for a few target procedures or a broad clearance (so they can perform in the same specialties that an Xi does today.)

Note They got Broad clearances I'm leaving this text in for context

Narrow clearance means a lot of hospitals really "cannot" but a robot that only caters to a few specialties. So as dv5 gets 510K after 510k to expand procedures - each hospital will decide if there is enough meat on the bones to go for the dv5 upgrade. But it will take time.

Some places will get it, even with few procedures "just to be the first."

So a narrow clearance drops the slope of DV5 adoption - but I reckon many customers will just take an Xi on lease and wait for clearances to catch up. Then upgrade later.

In a broad procedure clearance - it's a 1:1 switch out of dv5 for Xi - so will come down to the economics and what extra goodies dv5 gets the user; and is it worth the premium. (It will be for a lot of users - it will be.)

In a broad clearance I believe supply constraint (not just building them) will be the biggest factor in dv5 adoption. How many can they build, how many can they train on, how many preceptors would be needed (if any), how fast can they ship, implement and get them going? There are just limit constraints for any company with such a complex product.

Clearance happened in MARCH

The timing of the clearance will also have a major impact. If they get cleared in say April* *- you get 8 months to run the play this year - 8 months for customers to decide if they are buying or not and the "holding off" issue will be less dramatic as people will know.

But roll that to November, and you have most of this year in anticipated uncertainty. So earlier clearance should mean higher than guided 14% procedures - later clearance close to the 14% procedure growth. (Would be my guess.)

Either way procedures will grow and it will be just about timing until we see a return to 20% growth rates (in my humble opinion). It's timing - not some other issue.

There will be other impacts on intuitive such as "focus" and their sales teams getting giddy about the new tech - the SP won't be the new darling anymore etc etc. But this par for the course in any business introducing a new flagship - so I won't dwell on it.

**I'm betting closer to April due to the announcement timing from Intuitive. But I am wrong more than right... (Let's see it at SAGES ;) NOTE - I was close

Impact on users (Surgeons)

So what does a shiny new dv5 loaded with tech mean to the users and the user base?

For the Intuitive fans it will mean that they "need" an upgrade to have the latest and greatest. But I'm not sure it changes their practice from lap to robotic a lot - because they are probably already in the high 75% of their practice done on a robot (over at the main block). It may enable them to do another 10% of the most complex of the complex??

But if the dv5 allows the ASC and OPDs to gain sensible meaning in robotic surgery - this could mean that procedures could be done there - so some surgeons may (if the economics works) start doing more in the ASCs. That could give a significant bump in procedure penetration. I feel ASCs are the future battle ground.

Update note: They stuck with a big boom architecture - but the addition of the "Lap tower" and smaller console could be enough to shift some ASCs. I think by having a fully functioning lap tower - they can replace Olympus & Storz style towers and have an effective 30% reduction in the DV footprint. As the tower has to be in there anyway.

I've speculated for a long time that there is a huge chunk of the straight stick laparoscopic community that has dug their heals in and decided "Robotics is stupid" or "Robotics is for those that can't do straight stick." They've painted themselves into a rather embarrassing corner, as it is clear robots are for all and make less gifted surgeons more gifted. And brings oodles of data that is exciting and useful. They know they really should be on the robot - but now they've been too vocal for too long.

If the dv5 has the toys on it that I suspect - this will be the get out of jail card for a host of surgeons that have hung on for a decade. The dv5 with better vision, assistance, instruments and haptics (force feedback) could well be the "Okay well now it has that - that - that - and that as standard... it just makes sense. I always said robotics would have its time when the technology catches up. That time in now."

So I imagine that the dv5 will be the catalyst for a lot of pent up lap surgeons to cross the divide and bring all of their straight stick lap procedures to the robot. I predict dv5 could see another significant jump (short term) in robotic penetration as the laggards / protestors finally cave in. (And let's face it... they have to... to stay relevant.)

The final group of surgeons are the middle of the road - not so gifted surgeons that know their limits. If dv5 brings all the support tools I speculate - I can imagine that a lot of surgeons that ration themselves to certain procedures on the robot - may be encouraged and supported (by the system) to do way way more procedures on the dv5. A much higher % of their weekly caseload. So again - not new users - but users that may now do a higher % of their case load.

Impact on procedures and site of care

Because of all of the above - and the surgeons coming across - I'm predicting that we will see healthy quarter on quarter procedure penetration and conversion from lap to robotic for a few years to come. Intuitive talk of their "line of site procedures." I think lap surgeons coming into the fold and a possible opening up of some volume from ASCs and clinics - will see a continued healthy procedural growth into that line of site procedure number.

I can't be the only one... I mean some pretty big lap companies like Medtronic and JNJ have seen the writing on the wall and are scrambling to get into the party.

But for me - the train has not only left the station - the train is accelerating and dv5 is possibly a new engine for that train. It may take longer with narrow clearances - but as they come - that conversion from straight stick lap to robotic procedures is inevitable. (in my mind.)

And if the dv5 has all the features I imagine (well not all... I do imagine too much) - but enough of them - then it will get harder and harder on safety grounds, technical grounds, cost grounds, to justify the continued use of lap straight stick.

Economics and work flow will determine if that acceleration and reach can work for lower and lower acuity procedures: and if it then makes sense for the masses.

But if the dv5 can crack the economics, workflow and footprint. The ASCs open up, low acuity fast turn over procedures become game, and procedure penetration accelerates. Then a huge chunk of the currently untapped market opens up.

And... every ASC wants to offer robotic surgery - of course they do ! They just need the $$ and flow to work for them to allow it.

Update note: Workflow has been a major focus of DV5 and the addition of the insufflator makes it ideal for any site of care - and to be perfect for robotic or lap as a tower. I think they will get a significant % efficiency of workflow with the smarts - set up - tear down automation and data assistance.

And if the ASC code can be cracked - hospital management will be very happy to send many procedures back to the ASC that have drifted across to the main block "because of the robot." In fact, they may well now encourage robotics in the ASC instead of proclaiming it "the Devil's work!"

So I think a well planned dv5 - with the right pricing drop of Xi, and the introduction of a tiered instrument strategy (go read my other report if you want to understand all that better) - will allow not only a greater penetration of robotic procedures - but also a shift in site of care to less acute settings for less acute procedures.

I calculate that any robot with no constraints - working full time could handle 600 - 700 procedures per year. The reality is with scheduling, vacations, sick leave, cancelations, OR management problems and a host of stuff - robots will be running at 350 - 400 procedures per annum. If all the surgeons I expect come across - and all the procedures I see come across (even super complex procedures) then that also means we will see more systems max out. So I'm going to predict that not only will more sites of care get robots - but with a lease model - if you are doing the volume... you will get as many robots as you need (as capital upfront is no longer the barrier!) so more and more Ors will get their own robot as standard. That is why I am so convinced that if you are the market leader - push that accelerator - and unlock the last reasons to "not have a robot in every OR."

That will also free up bottlenecks as you won't have people stalled by waiting for the robotic OR to be available, being forced to do straight stick lap. I predict something about the dv5 that makes a "robotic OR" a thing of the past. It is the direction of travel. And it is critical to opening up more procedures to be done robotically.

Impact on competition and robot "sales" / placements globally

So what does this all mean for the competitors playing catch up? And what does this mean for the overall robotics market?

I'm not going to lie... dv5 is going to be a massive barrier to entry for competition for many direct and indirect reasons I've eluded to above.

If you are a competitor that is on the brink of getting your clearance this year for FDA. You get the FDA clearance and you can do... Urology & gynecology. You are not in any way shape or form able to commercially compete with a daVinci Xi. You will be a curiosity that will need to be placed into your "friendly" hospitals. (My thoughts: No competitor is ever selling a lot of robots again in the USA. Period. It's leases and service agreements all the way. That's my prediction.)

And why would anyone that is an Intuitive user going to put themselves through the hassle of training and installing a new system - and taking up an OR? When for the same "cost per case" they could take the dv5? And they don't know what it is yet? But it must be hellish exciting? Right? Why would anyone do that? Unless it is just a tyre kicking exercise to fill some time before the dv5 comes out. But that is not a sustainable business for the competitor!

Intuitive have basically just frozen the entire market, even for placements until everyone knows what the dv5 holds. It's a genius strategy.

Now if Intuitive can leverage their millions of prior procedures, data and knowhow to convince FDA to get a broad clearance as "it's just an upgrade of the Xi!" If they get broad clearance and every other "new system" with limited data gets a narrow clearance. It is over for the competition. Over.

Update: They did get broad coverage - it's over

What it means world-wide is what I explained in my other article. The move to a service industry starves every other company of upfront capital. And even if they can find 3rd party finance companies - it starves them of critical margin that they give to the finance company. For Intuitive instead, the vast installed base throwing off cash (plus a huge war chest of cash) makes placing leases easier and logical. They will put all that income and reserves to work for future growth and barriers for other companies. Now is the time to drive home leases.

Add to that their unique ability to have leases outside US fuelled by reconditioned, lower COGS cost US used Xis... and wow. How the hell do you compete with that?

The final whammy - if dv5 has anything like the capability that I think it's getting - then every other system is also going to be old news. The shiny new toy will be dv5. The most capable system will be dv5. Companies are getting systems cleared now that are at least two steps backwards to what dv5 could be. (They are already behind an Xi). That means you will need to compete on things like price. And how do you do that when it's a cost per case model? The capital is irrelevant in many respects.

The cost per case would need to be 40% lower to gain attention... and when you get to those prices with instruments with a low number of lives - with no upfront capital - with no war chest - with potentially a 3rd party factoring house. It all paints a grim picture for the P&L.

And that doesn't matter if you are a small startup or a massive juggernaut... cash is king.

Update: With the adjunct of a high flow - low pressure insufflator - they basically just made Conmed and Airseal irrelevant for DV cases - this is material for Conmed

They also just made it pointless to buy any other lap tower if you get a DV5 - so it will eat massive market share from Olympus - Storz and others. And it will move the goalpost again for JNJ and Medtronic. Allowing Intutive to get into lap territory if they want.

The tower changes everything.

Also if you are an Xi clone - you are in a world of hurt for a decade. No haptics? No deal.

Of course... I'm being over the top. I think overall the competitors will find some places - will do some bundled deals - will find some loyal home markets, and fans that want something different. So I see the entire ocean of robots increasing everywhere. But I see that dv5 will help Intuitive retain its crown for a decade to come as a far front runner market leader.

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All of the above is speculation by the author based off market conditions, public information and experience. You should definitely not be making any investment decisions based of this report.