da Vinci: Robotic Surgery

09/24/2004 12:00 am EST

Focus:

Alexander Green

Chief Investment Strategist, The Oxford Club

"Imagine going to the hospital for a heart bypass and having your operation performed by a robot," says Alexander Green, editor of The Oxford Club Communiqué. "It’s not science fiction, however, it’s science." Here, he looks at a play on robotic surgery.

"Robotic surgery is now being performed at hundreds of hospitals in the US and around the world. The benefits are numerous: reduced trauma to the body, less anesthesia, less blood loss, less post-operative pain, less risk of infection, shorter hospital stays, less scarring, and faster recovery. But surgical robots don’t come cheap. Fully equipped, they cost nearly $1.3 million each. Yet, hospitals are lining up to buy them. That’s particularly good news for Intuitive Surgical (ISRG NASDAQ), the world leader in operative surgical robotics. Its leading product is the da Vinci Surgical System. We all know that medicine has embraced minimally invasive surgery. Open surgery involves more pain, longer hospital stays and the aesthetic drawback of a scar. The da Vinci Surgical System takes minimally invasive surgery to the next level.

"With only a keyhole incision and a skilled surgeon at the controls, it can perform intricate operations that traditionally are done by opening up the patient. This leads to benefits on both sides of the knife. Major surgery can last for hours. That’s rough on doctors. It can make them tired and mistake-prone. Da Vinci reduces this risk. When using the system, a doctor sits several feet away from the patient and remotely manipulates robotic arms to do the work. Essentially, the surgeon sits at a console, looking at three-dimensional images in a magnified viewfinder. And he performs the surgery by looping his fingers around controls on the console. These movements are translated to the robot ‘hands’ inserted into the ports. The robot hands follow every move of the surgeon, cutting, clamping, and sewing just as the surgeon would. The da Vinci system makes more precise cuts and causes less bleeding. In a recent study comparing robot-assisted surgery to traditional surgery, University of Michigan surgeons found that patients who had robot-assisted surgery recovered more quickly and had fewer scars, while only an extra half-hour of surgery time was needed.

"Already, da Vinci can perform more than 100 different types of procedures, from repairing hernias to removal of the prostate to coronary bypass grafts. It is the one and only proven surgical robot in the world. And this is no pipedream. The da Vinci Surgical System received FDA approval four years ago. And was approved in Europe in the late 1990s. In short, robotic surgery is a phenomenon that has finally come of age. And it’s only going to become more pervasive. For instance, there are 230,000 new cases of prostate cancer discovered every year in the US, but only 80,000 undergo surgery. That’s because open surgery carries more risk. But now 5% of radical prostatectomies in the US are done using robotics. And a much larger percentage will be done this way in the future, because da Vinci lessens the risk of impotence or incontinence. That means more patients are likely to opt for the surgery.

"Already Intuitive Surgical has sold more than 250 systemsand has been reporting record sales and earnings. A few weeks ago, Intuitive announced that second quarter revenues shot up 45%, to $21.5 million. Earnings soared 180%, to $4.8 million. And we’re still early in the game. Hospitals are largely fixed-cost institutions. The more patients they can put through, the better. Da Vinci does just that, enabling doctors to send patients home quicker. The system also allows smaller hospitals to perform operations they would ordinarily pass off to larger institutions. And it’s important to realize that the da Vinci is not just a one-shot sale for the company. Intuitive’s greatest growth potential actually comes from its ‘razor blades’replacement instruments that fit on the end of the robotic arms. They can be sterilized and reused a few times, but ultimately they must be replaced. That’s why recurring revenues at Intuitive are nearly half of total sales and grew 102% in the second quarter alone.

"It’s worth noting, too, that Intuitive is financially strong. The company has very little debt and more than $115 million in cash on hand. Currently, the da Vinci System is sold in the US and Canada, as well as most of Europe and Asia. But interest is growing rapidly. Intuitive now trains surgeons at 12 sites in the US and three in Europe. And the equipment is not difficult to use. The company claims a surgeon can learn the necessary skills in just two or three sessions. In short, robotic surgeryonce just an imaginary concept will soon become commonplace. Until then, there appears to be plenty of momentum ahead for Intuitive Surgery. Clearly, this is a stock with a great deal of upside potential."

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