Intuitive Surgical, Inc. (ISRG) Earnings Call Transcript & Summary

Okay. Good afternoon, everyone, and welcome back from the lunch period. I'm Larry Keusch, the hospital supply analyst. We're extremely pleased to have with us Intuitive Surgical. Obviously, Intuitive is one of those companies that, anytime you can get an update, it's great to hear what they're doing because the momentum is so strong there. With us is Calvin Darling, who is Senior Director of Finance or IR or both...

Finance, investor relations.

You got them all. Okay. And then a new addition, I'm really happy to have the pleasure to have Phil Kim here as well, who's the Head of Investor Relations, who recently joined Intuitive. I had the pleasure of working with Philip when he was on the dark side and now he is at Intuitive. So I'll turn it over to Calvin to provide the disclosures, and then we'll just kick it into -- for Q&A.

Well, thank you, Larry, and thanks, everyone, for joining us this afternoon. Before we get started, I'd like to inform you that comments mentioned this afternoon may be deemed to contain forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, which are described in detail in our SEC filings. Investors are cautioned not to place undue reliance on such forward-looking statements.

Impressive. You have that fully memorized. So I guess we should probably just kick it off. And I don't want to take away from all the great things that Intuitive is doing but sort of address the elephant in the room, which is the dynamic situation around coronavirus. You guys have a small but rapidly growing business in China. I think it's about 3% of revenues or so. But maybe remind us again about how you size that business and the exposure right now from both a revenue and a supply chain perspective.

No, a good place to start, Larry. We've been meeting with folks all this morning, and that's literally been the first question that everyone has asked us. And I think the keyword you put out there was "dynamic," right? It was in your question, and that's absolutely what it is. But you look at China specifically. On the procedure side of our business, roughly 3% of our worldwide procedures are performed in China. And yes, they've been growing very well as of late as new systems have been installed. There's no doubt that the coronavirus has been affecting procedure volumes in China and likely have some impact on other countries around the region as well. We've seen incidences of outbreaks in Korea as well as Japan and lately, more lately in Italy and even here in Washington state. So it's really we're unable to predict what the ultimate impact will be, but clearly there has been some. And we'll keep you informed as things go.

So the message is, again, dynamic. There has been some impact, as you would expect, that nonemergent surgeries are going to see some delays here. Is it fair to say that it's been most acute in China? Or is Korea sort of a close second behind it? Because that's a pretty decent region for you guys as well.

Yes, I think China is really where you have the most affected population. And again, it's 3% of our worldwide procedures. Folks have asked us also about the supply side of things as it relates to China. And so our manufacturing production is 100% in North America. Our systems are mostly produced in Sunnyvale, California, our headquarters. And most of our instrumentation is produced in Mexicali, Mexico. So if we look at our top-tier, Tier 1 and Tier 2 components, we don't see direct exposure into China or from affected areas. There's no obvious impact to us right now on the supply chain.

Great. Okay. Perfect. Last one on this one, and then we can move on. Just curious. It's still earlier days here in the United States. Just curious if you -- since you are connected to all your systems on a real-time basis, if you can detect any changes in procedure volumes from the coronavirus.

Yes. I mean we can see differences in trends, and we track them on a regular basis. We're not going to report here to this group exactly what we see at this point in time because, again, it is very dynamic, and we can look for an update on -- after our Q1 earnings.

Okay, that's fair. So let's switch to procedures and really talk about the procedures that propelled the growth in 2019 and how you see that, again, shaking out as we look into 2020.

So as we think about last year and procedure growth drivers. General surgery was a key driver of growth for us. So if you think about the big procedure categories there, hernia; colorectal; and chole, which is gallbladder. Those were some big procedure categories for us last year. This year, we lay out our key categories within general surgery that we're targeted on, we're targeting. Those same categories are there, hernia; colorectal; and then bariatrics, which is a new category for us, roughly 200,000 procedures, not a new category for us, but the sales force is really focusing on the category in a new way in 2020. And so yes, as we think about what also outperformed in last year, dVP was a bit stronger than we expected just as we think about the incidence of the category, standard of care in the U.S., and it was a bit stronger than we expected. And so our guidance reflects a moderation in that growth.

Okay. On bariatrics because, again, as you point out, Philip, it's not a new procedure per se for you, but the toolkit seems to be complete. And so I know you didn't want to disrupt the sales force based on our conversations last year, Calvin, relative to hernia and other general surgical procedures. But it sounds like now it's a more opportune time to get that sales force focus on it. What do you think will be the drivers of da Vinci surgery within bariatrics? What's going to move docs to use it?

So when you think about our offering there, we have SureForm 60 and then we have Synchroseal. And...

So for everybody here. That's the stapler and the sealing device...

And the new vessel sealing device that we just got approval for. As we think about just improved ergonomics within bariatrics, you have really heavy patients, and it's performing surgery takes a toll. And when you think about robotics, there's a real ergonomic benefit we hear from bariatric surgeons to using da Vinci, and so that's a key driver for growth.

Okay, perfect. One more question on general surgery and then we can move on to some of the geographic mix. You have been at hernia now for several years. Maybe talk a little bit about how you're seeing both the inguinal and ventral shake out. And where is the opportunity to continue to drive that growth between those [ procedures this year ]?

Yes, with hernia, we still characterize opportunity there. That's a 1 million procedure category. We still -- to use a baseball analogy, still view it as early to mid innings. We'll see attractive opportunity there. And so yes, we would still -- we don't break it out per se, the exact growth, but we would characterize it using that baseball analogy in that early to mid innings.

Are you finding more usage in ventral, though, or inguinal? Is there one side of the procedure going that's gained more traction?

Yes. So actually, Philip mentioned 1 million total hernia procedures. The market is roughly 300,000 ventral hernias, [ 7,000 ] inguinal hernias. Ventral is in the chest and inguinal is in the groin. We look at our value proposition there -- and ventral hernia is in the chest. We're taking -- a lot of times, it will be a complex open procedure enabling a minimally invasive approach able to do a repair of that primary defect with robotic technology from the inside and so hence a pretty significant value proposition from the clinical and the economic standpoint. So ventral looks a lot more like things that have been really successful in the past and -- to your point, and we've had a lot more confidence. And you look at the inguinal side. And over the last couple of years, we've seen the performance on inguinal. A lot of things I just described apply just as well to those procedures as well. So I guess I'd say on an absolute basis we are doing more inguinal hernias than ventral. Ventral is a higher proportion of the market capture for us, but they're both growing at about the same rate. And we've become incrementally more confident on the inguinal side as we've gone along.

Great. I guess one thing I want to touch on is clearly we've seen -- if you sort of think about the procedures that -- and the physician specialties that the da Vinci platform touches, it's -- clearly touches urology, urologists, gynecology and gynecologists and then obviously general surgeons who are sort of these jack-of-all-trades types of folks that do a lot of procedures. You've seen -- you sort of describe gynecology and urology as sort of mature markets in the U.S. I'm sure there are pockets of growth in all of those. But general surgery has really been a driver for the last couple years, and it's really, I think, in many ways opened up by Xi and X, right? But if you look at the complexion of Europe, it's different, and it's been much more so urology-driven. So I know you've been working on clinical aspects and education and really trying to try to show the value proposition. What is it going to take to really start to drive general surgery into Europe?

Yes. So as we look to pivot from urology in other countries, often it requires building in-country data. And so you can't just come and bring U.S. data. You have to build country-specific data, work with KOLs, work with the surgeon societies. It's a real heavy lift in some countries, and so it's just a process of over time building the evidence to really build certain categories. And it's just a process that we're focused on. If we look, if you look at our slide deck, we talk about within specific countries how we've invested, for example, in Germany, how we've invested for quite some time. And the country is performing quite well, but it took a level -- a long time to invest, as well same thing with Japan. So we're in the process of developing it in Europe.

Yes. Is Germany starting to see more adoption of general? Are they there yet or is it still early on that side?

Still early, yes.

Yes. Okay. So again, this is going to be, it sounds like, a multiyear process, and it's just -- but is there anything structural that you think from -- I know you have a lot of single-player countries there. But is there anything structural that you think that boxes out the use of robotic surgery?

Yes.

No, I don't think so. There is one trend that we didn't talk about in the U.S. side that we've started to talk about a little bit more this year. It's that the number of U.S. hospitals with 5 or more da Vinci systems is up 400% over the last 3 years. And part of that trend is because hospitals are now sharing their data with us, and they're able to analyze their data because it's integrated with electronic health records. And they're able to look at their procedure data, whether it's open, lap and robotic. They're looking at outcomes, length of stay, opioid usage, contribution margin; and they're coming to the conclusion that they should be doing more procedures robotically. And so we're seeing this standardization where large hospitals are getting bigger on da Vinci, buying more da Vincis because they see not only the clinical benefit but the economic benefit. And so that's a trend that we've been highlighting and that's been quite compelling.

Yes. No, that's fascinating. Let's just switch gears here on da Vinci SP. So the single-port system, really a brand-new architecture early in its evolution in indications. But again for the audience here, maybe just provide us with an update on where we are in the indication front and where that's headed.

Sure. So we have 44 SPs out there. And yes. So within the U.S., we have approval for urology and TORS. And the -- it's important for us to really get new clinical indications to help grow the market, to help grow SP. So on the last conference call, we talked about colorectal and how it's going to take a little bit longer than we first expected. So you should not expect approval for colorectal in 2020, but that -- we're working towards that. And the rollout is going as we expected in the sense that we're going to experienced da Vinci users, and we're working through the pathways and building the supply chain and training of them appropriately. And so the rollout is going as we hope. It's just we really need to focus on building clinical data in colorectal. We really need that third indication to help extend the market.

So I hope I don't catch you by surprise on this question. But as you were just speaking, Philip, it made me think about this. So you do colorectal procedures, obviously, with the da Vinci platform under the general surgical umbrella. Is there a specific colorectal indication that was received for X or Xi? Or is there a very different pathway with SP to get colorectal?

No, it's a similar process, right? So it's just we're in the process of working through what's going to take in what we presume as an IDE trial for the SP version of colorectal procedures. But we'll involve the use of that system in colorectal procedures for that indication.

Okay, perfect. You touched, Philip, on analytics and data in your comments around hospitals increasing their robotics presence. Maybe just starting, talk a little bit about Ion. It's -- no. I'm sorry. The augmented reality, IRIS. Sorry. Maybe just talk a little bit about I think that's kind of started out in a kidney application...

Yes. So it's early days. And don't think of it as we'll make a lot of revenue selling IRIS. Think of it more as an ecosystem enabler that really is getting good feedback from our surgeons preoperatively taking a scan and helping them with planning the procedure and actually during the procedure. And as we think about kidney as a category, it's just opening up that category. Just a good analogy would be Firefly, right? So when you think about the technology that Firefly provides when you're doing chole procedures, it really helps the surgeon view things in a different way and it's really an ecosystem enabler. It's helping drive that chole growth that we're seeing. And so as we think about the ecosystem and just building upon the ecosystem, IRIS is just another way of how we're building and spending in informatics and building that moat.

Right. Can you talk a little bit, again, as you develop a non-hardware, non-instrument side of the platform, broadly speaking? You have IRIS. That's an augmented reality platform that will, I assume again, expand over time. Where else do you want to take the analytics, the imaging? Where does that take you?

So as you think about Endoscope Plus, so on the imaging side. It's much clearer image, real efficiencies there. If you look at some of our competitors, they're outsourcing that. We have that internally. If you think about instruments and accessories, we have Synchroseal coming out. We've had very high returns on the I&A piece, just the investments there. Yes, Synchroseal and E-100. If you think about SP and Ion just as platforms, we're continuing to invest there. We're also investing on automation just as we scale. We have 1.2 million procedures, so -- and then we have [ scaling advantages ]. So those are just some high-level places in terms of where we're investing in building the ecosystem.

And maybe, Calvin, for you. Again if you sort of think about what the goal is on the side of, again, whether it be imaging, software, data analytics, augmented reality, where are we taking the system is really the question.

Yes. And the goal starts with the mission of the company. And I've been with Intuitive for 20 years. And our mission when we started was let's improve the patient outcomes to the maximum extent. Let's expand the population of patients that can benefit from minimally invasive surgery. If you ask surgeons now, "What would you most like to see in future innovations?" it's things like this, like imaging; additional information, analytics before procedure, during the procedure, in the console, whether it's augmented reality, to see those tissue planes more clearly to make more informed decisions during the procedure. Those things are right at the core. You saw us acquire our long-time manufacturing partner with endoscope Schölly Fiberoptic last year. We took it in-house. When we started out, we just purchased endoscopes from third parties. Over time, we developed our own design, and now it's completely our design, and now we've acquired and gone -- done a vertical integration of Schölly because this is now core. We look at imaging as a core part of our offering. We think this will accelerate our innovation cycle here, and this is where a lot of the things aligned with what surgeons would like to see in our mission alignment.

Great. Perfect. Maybe before we talk a little bit about the balance sheet and some of the other maybe competitive dynamics, please spend a moment on leasing. And I think one thing that is -- we've seen leases over the last several years increase pretty consistently. I think that one thing I've become to appreciate is that the leasing is not necessary to any hospital out there that is just looking for a deal. I think it's a little bit more controlled and targeted, if you will. So is it fair to say that the leasing is really going after hospitals that have a real vested committed interest in a robotic surgery program? And then I know Marshall always talks about leasing will go as high as it goes. And if it goes higher, that's great. But talk about where you stand with it in the international markets to maybe open up some of that market as well.

Yes, you should think leasing is going to continue to go up. So as we think about last quarter, it was 38% of new placements. They're -- in the U.S., if you're a publicly traded hospital, you might prefer to buy the capital outright because you're evaluated on EBITDA. But other people, other hospitals in the U.S. prefer to lease. It's just easier. You don't have to raise the capital [ to ] $1.5 million. And yes, it's true that we have leasing agreements with experienced robotics players. And we're trying to meet our customers' needs. We're trying to drive robotic penetration to meet our customers' needs, whether that's offering leasing, whether that's offering X lower capital cost. We really just want to drive robotic penetration and drive the market. With respect to OUS, Japan is a market that we'd call out as having opportunity on the leasing side. With respect to China, actually, leasing is illegal, so leasing will never go to 100%. Some of the benefits with leasing that we see in other industries is that typically customers who lease upgrade faster. And so when we have upgrade cycles, when we come out with a new-generation system, that they -- customers who are leasing will switch faster and that's ultimately better for procedure utilization.

Right. Perfect. Ion, so that is a clearly a new platform for Intuitive. Just can you give us an update on the key initiatives before that kind of enters a full launch mode? You're still in this controlled...

All right. So Ion is a completely new platform for us. You look at SP, and that's a single-port version of our robotic surgery system. It's an extension of our fourth generation that goes alongside Xi and X and SP. Now Ion is something completely different. It's a robotically controlled flexible catheter system where our first application for the platform is not surgery. It's early-stage lung cancer diagnosis, which is a pretty significant unmet need, I would say, around the world, where lung cancer is the #1 killer. And we think with our technology we have a real chance to change the paradigm here, where there will be an opportunity to diagnose the existence or nonexistence of cancer at earlier stages. So we're working on that. We got clearance for Ion about a year ago, and we're in the midst of a phased rollout, a measured introduction of the product. We're in about 16 sites now with Ion. There's a high level of awareness for what we're doing in this space and, I'd say, even optimism on the part of clinicians in the space. But at the same time, there's a skepticism or really a scientific skepticism and they want to be shown that it works. [ What ] does it work? It means it's able to hit smaller lesions. What size of the lesions? How far extended in the lung? And how accurately and consistently and, of course, safely for the patient? So these are the types of data end points that we're working towards. There is a study, a PRECISE study, that we're involved with. It's several centers, hundreds of patients that's scheduled to complete sometime around September. I think that so far, so good, as far as the outcomes go. We'll see how it turns out. But not one study is going to change everything, but the data is going to be a catalyst, I think, for further expansion of Ion.

And this is da Vinci has been a multigenerational platform and has even led to a departure with SP. I assume you guys think about Ion as in the same way in that it could become a therapeutic. If you can get a skinny, robotically-controlled wire to -- into the lungs, perhaps you can get it into the vasculature around the brain. So the question really is, is this a -- ultimately a platform for you as well?

Yes. And so we look at it as a platform. And that's really how we think at Intuitive. Hopefully, you gauge from my comments that we're squarely focused on the lung cancer diagnosis opportunity here, to start. But downstream, we believe there will be other applications for the device, both diagnostic and therapeutic.

Okay. We have just a couple minutes left here. Let me just ask one question. So if you look at J&J and Medtronic and their robotic surgical platforms, they have moved into or will at some point move into soft tissue. They clearly have an interest in hard tissue. They both have a robotically controlled wire platform as well. You guys have 2 of the 3, I guess. So is -- what's the right way to think about hard tissue or spine or orthopedics? Is that -- is because some of that is a closed system with the implants that it would be difficult for the company to go in that direction or is it something you even kick around?

Yes, kick around, for sure, right. I think there's real value for the types of technologies that we're talking about here, robotic computer-assisted technology, sophisticated imaging navigation. There's a role to play in these procedures. But if we look at our -- the core technology we have in soft tissue and fine tissue interaction, it's a little bit different than the hard tissue. You would take a robot with quite a bit different design. You mentioned -- in case of orthopedics, it's more of an implant model. And again, we're a lot about focus. There's a tremendous opportunity that we're facing in our core space right now. So things that we think about, but we're focused on what we're doing.

Okay. Last question for you, and it's just one that I get a lot from people, which is how do we think about penetration of robotics in terms of the available market. How should we think about that?

Yes.

So we still think there's a lot of room to go with respect to robotic penetration. We did 1.2 million procedures this last year. Historically, we set clear line of sight to 5 million procedures. And so that's a number that over time we will revisit. Some of our competitors: Medtronic will say 2%. J&J will say 5% penetration. So we're still early days. Our number is clear line of sight. The number of procedures that we're doing right now doesn't include anything for SP and Ion, so...

Okay. Terrific. Well, thank you, gentlemen, appreciate it. And management will be available for a breakout session in Amarante 1, which is right downstairs. Thanks.

Thank you.