SSII: Amid Aggressive MedTech M&A, Could the Robotic Surgery Company Find Itself in Someone's Crosshairs?

The Federal Trade Commission (FTC) recently cleared Amgen’s (AMGN) $28.7 billion buyout of Horizon Therapeutics after initially raising drug-bundling concerns. This clears the path for Amgen to close on its acquisition, one of the latest in a string of mergers and acquisitions in the pharmaceutical and “MedTech” space. That warrants exploring the future of SS Innovations International (SSII) and whether it could wind up in someone’s crosshairs, writes John McCamant, special to MoneyShow.

We are resending this piece on SSII in case you missed it from last week.

AMGN clearly and convincingly proved that the FTC's claims about the alleged risk of rebate bundling were entirely speculative and unsubstantiated. AMGN’s purchase of Horizon – which makes Tepezza and Krystexxa, the only treatments for thyroid eye disease and chronic gout on the market – will now finally move forward. In our view, this is a major positive for biopharma/MedTech and should help accelerate M&A as we head into the fall.

The rapid technical advances of robotic surgery lead us to believe the sector is ripe for M&A. Robotic surgery is poised for tremendous growth worldwide as the sector explodes beyond the US, Japan, and Europe, which currently comprise 87% of the market for installed robotic surgery systems.

Meanwhile, COVID-19 resulted in pent-up demand from patients eligible for robotic surgery who had been kept waiting for some period of time. The rapidly growing population of Baby Boomers (10,000 turn 65 every day) is also a very powerful demographic. The bottom line is that a combination of expansion into new markets, powerful demographics, and an additional bump from the COVID-19 hangover will fuel dramatic robotic surgery growth going forward. 

In our view, SSII could be at the top of MedTech’s shopping list as the firm represents a potential leap-frog, game-changing robotic surgery platform. The US-based medical robotics company with significant assets in India uses advanced technology, leading surgeons, and cutting-edge training to manufacture and commercialize the world's only surgical robotic system that is cost-effective and offers broad surgical applications. It also addresses the practitioner learning curve issue because it’s designed from the ground up by users and utilizes the latest technology.

Furthermore, SSII’s robotic surgery technology is very attractive to less-developed countries given the much lower price tag for both an installed system and cost per procedure. Intuitive Surgical’s (ISRG) systems cost up to $2.5 million compared to $600,000 for SSII.

Johnson & Johnson (JNJ) Describes M&A Appetite as Voracious on Q2 Call

On potential M&A activity, JNJ reiterated on its second-quarter earnings call that it remains highly active and agnostic to deals by business segment. M&A areas of interest that management specifically highlighted during recent investor presentations across MedTech include vision, cardiovascular, surgery, and high-growth segments of orthopedics.

We find it interesting that robotic surgery could add or augment growth to any of those areas of MedTech. JNJ management highlighted the company's history of success with tuck-ins, in-licensings, and collaborations, noting that external innovation represents approximately 50% of the company's current pipeline. In terms of capacity, we note that JNJ ended the quarter with a huge war chest of $28 billion in cash and marketable securities.

We also find it interesting that officials from current robotic surgery leader ISRG made comments on their recent call that they are not actively pursuing M&A. The company recently stated that their highest priority is the improvement of core surgical capability targeting improved patient outcomes, often through innovation in robot and instrument precision, imaging, and sensing, while focusing on dependability and product quality. 

This sounds like an older company protecting a border-line monopoly. Their DaVinci technology platform is more than 20 years old and is clearly vulnerable to new technology/platforms. In our view, ISRG may be resting on their laurels as they are the dominant player in the rapidly expanding field of robotic surgery. They have watched their competitors basically flail as JNJ, Siemens (SIEGY), Stryker (SYK), and Medtronic (MDT) have made acquisitions in the robotic surgery space that have failed to close the gap on Intuitive’s market dominance.

A History of MedTech Deals...with More to Come?

In 2019, JNJ paid handsomely to acquire robotic surgery startup Auris Health for $3.4 billion in cash, plus additional milestone payments of up to $2.35 billion. Auris Health was cofounded in 2007 by Hari Sundram, Christopher J.P. Velis, and Frederic Moll. Moll is often referred to as the Godfather of robotic surgery because he cofounded the $110 billion market cap Intuitive Surgical.

Auris Health’s product, called the Monarch platform, received FDA clearance in March 2018 for diagnostic and therapeutic bronchoscopy, which can be used to perform lung biopsies. Specifically, the Monarch platform features a controller interface for navigating the integrated, flexible robotic endoscope into the periphery of the lung. It combines traditional endoscopic views with computer-assisted navigation based on 3D patient models.

J&J has been making strides to get into robotics since at least 2015, when it invested in robotic surgery startup Verb Surgical, a joint venture with Google-parent Alphabet (GOOGL). In 2018, J&J also paid an undisclosed amount to acquire French robot-assisted surgery company Orthotaxy. 

That was is a big price tag given that Auris only had one product and it makes us wonder if Auris has any other pipeline products that justify the huge investment. It also begs the question: “How will JNJ catch up and compete with ISRG?”

In our view, JNJ may be ready to add another robotic surgery platform to their vast armamentarium of advanced surgical tools. In Q223, trends within the surgical business were incrementally encouraging for JNJ, with operational growth accelerating to 3.9% from just 1.8% in Q123. That was also slightly above the 1%-3% range of the last six quarters.

Growth was broad-based, deriving from both general and advanced surgery segments, in the US and International regions. While there are some transient tailwinds (biosurgery), we believe these positive trends reflect the ongoing recovery in surgical procedure volumes. They are also encouraging in terms of the outlook for the balance of 2024 and going forward.

Siemens has not been as successful as JNJ after spending $1.1 billion in cash to acquire Corindus Vascular Robotics, a maker of a minimally invasive platform for coronary, peripheral, and neurovascular procedures, in 2019. The merger’s goal was to couple Siemens’ established surgery tools in digital imaging and artificial intelligence with a precision robotics platform for cardiovascular disease.

Based in Waltham, Massachusetts, Corindus received FDA approval in March 2018 for new automated surgery software for its CorPath platform. It’s designed to speed up the placement of catheters and guide wires during more complex, percutaneous coronary intervention procedures.

On the company’s second-quarter earnings call, Siemens said that the use of Corindus robots for cardiology operations did not fulfill its expectations and the company is dropping the program. On a more positive note, Corindus recently received regulatory approval for a new indication expanding its platform’s use in neurovascular interventions in Australia and New Zealand.

Currently, the company counts an installed base of at least 68 systems. The neurovascular approval is an incremental positive for Siemens, but the timeline for robots for neurological operations to reach the market constitutes several years and hardly makes up for the failure of the cardiology platform. 

In 2018, Medtronic pulled the M&A trigger and acquired Israel-based Mazor Robotics for $1.7 billion. The world’s largest medical device maker had held a position in Mazor since May 2016 and obviously liked what it saw.

The company makes the Mazor X guidance system and the Renaissance robot-assisted spine surgery device. Medtronic said it plans to develop a fully integrated surgical planning, execution, and confirmation system by uniting its existing spine technologies with the Mazor robotic system. Mazor X Stealth integrates Medtronic’s StealthStation software into the Mazor X device. 

Medtronic officials recently said on their Q2 call that they are decisively allocating capital to programs and fast-secular-growth markets, as well as focusing R&D investments on technology megatrends like robotics and artificial intelligence that will drive growth in the MedTech industry over the next decade. 

The company said it has double-digit growth in Mazor robotics and high-single-digit growth in StealthStation navigation. Spine and Biologics grew 7% globally and 9% in the US.

These results demonstrate Medtronic’s successful strategy of offering surgeons a differentiated and innovative ecosystem, including an AI-enabled surgical planning platform and patient-specific customized implants, along with imaging, navigation, and robotic technologies. 

In Robotic Surgical Technologies, Medtronics increased its installed base with a strong international rollout of Hugo robotic systems in six regions around the globe: Greater China, Asia, Western Europe, LatAm, North America, and Canada. We expect Hugo to be a meaningful growth driver in the years ahead for minimally invasive surgery given the low penetration of robotic surgery around most of the world. Overall, Hugo contributed to growth in the Surgical business across the last couple of quarters, and it will become a more important part of Medtronic’s business going forward.

As for Stryker, it made the first big acquisition in robotic surgery in 2013 when it bought Mako Surgical Corp for $1.7 billion to gain access to Mako's robot-assisted orthopedic surgery technology. Mako, founded in 2004, makes orthopedic surgical systems and knee and hip implants for treating early-to-mid-stage osteoarthritis. Its Rio surgical system includes a robotic arm that helps surgeons with precise insertion of implants. 

The deal has helped Stryker to use its own implants with Mako’s surgical system, boosting the system’s adoption against newer orthopedic products made by competitors. The company remains aggressive in M&A and continues to believe its M&A strategy creates tremendous financial returns for the firm.

Recent Mako sales were robust, with strong US and international performances, which is helping drive continued growth in hips and knees. Orthopedics and Spine had both constant currency and organic sales growth of 10.6%, which included organic growth of 10% in the US and 12.1% internationally. 

The US Knee business grew 10.6%, which reflects the firm’s market-leading position in robotic-assisted knee procedures. The US hip business grew 8.8%, reflecting strong primary hip growth fueled by Insignia hip stem and continued procedural growth. 

Mako is really starting to pick up steam in Japan, India, and China, countries that will fuel future growth. The company is currently focused on hard tissue robotic surgeries, hips, and knees, and would love to become a leader in soft tissue robotic surgery, particularly cardiac – SSII’s sweet spot.

JNJ, Siemens, Stryker, and Medtronic Likely Remain on the Hunt!

The bottom line is that Stryker, and most other MedTech companies, believe that innovation wins the day. They see significant robotic surgery growth with a continuation in increased utilization.

JNJ, Siemens, Stryker, and Medtronic have made acquisitions in the robotic surgery space that have failed to close the gap on Intuitive’s market dominance in the last decade. A review of Q2 calls and recent investor presentations confirms that four of the monster MedTech companies are openly shopping for new assets with an emphasis on proprietary technology. 

JNJ has made a significant commitment to robotic surgery and tops our list of potential acquirers of SSII. The company has historically been a major player in M&A across all heath care sectors. It has also made the largest and most recent acquisition in the robotic surgery space, buying Auris Health for $3.4 billion in cash, plus additional milestone payments of up to $2.35 billion, in 2019. JNJ has a huge war chest of cash at $28 billion and proudly states that 50% of its pipeline was in-licensed or acquired. 

Stryker is clearly number two on the list, as it already showed interest in SSII’s robotic surgery platform at a recent robotic surgery conference. The company has had some success with its Mako acquisition, which could help Stryker pull the M&A trigger again. 

SSII’s soft tissue, cardiac robotic surgery expertise would dovetail perfectly with Stryker’s growing hard tissue business. SSII’s strong and growing regional presence in India/Southeast Asia is another major attraction for Stryker as the firm is seeing up to 12% growth in international markets. 

In sum, SSII offers a compelling, leap-frog, second-generation robotic surgery platform. The system can be sold at a lower price point given India’s more favorable cost and expense structure. It is already successfully being used to perform surgeries, minimizing R&D risk relative to other systems an acquirer might be interested in. Plus, early indications from the field seem to indicate that the Mantra is as good, if not better, than DaVinci. Given the strong underlying fundamentals of SSII and the serial acquisitions (discussed above) in the robotic surgery space, it could be a matter of when, not if, we see a premium SSII takeover.

Disclosure: SSII is a paid advertiser of MoneyShow.