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Intuitive Surgical's Business Model as Explained by It's VP Strategy

(Check Continued Updates to this article in comment section below aritcle!) I was doing my daily look at the financial and daily news of Medical and Biotech companies.  Anyone in the medical industry or even those outside the industry who viewed their direct to patient advertising know a little something about the company; even if it is "Oh, they make those cool big robots that do surgery!"  On the other hand, many stock investors and those working in the industry know they have faced a number of hurdles this past year.  In attempt to understand their business model and state of affairs I found this interesting September 11th, 2013 interview by Morgan Stanley of Intuitive's Vice President of Strategy, Aleks Cukic, and their Vice President of Investor Relations.  If you would like to see the complete article;

Intuitive Surgical's Management Presents at Morgan Stanley Healthcare Conference Call (Transcript)

To do my full disclosure, I recently penned a new contract with Intuitive to place for the sales and sales management side of the business and after a brief 2 weeks of recruiting for them, I felt compelled to dig deeper into their business currently and where they are headed.  So to that end, I would like to share a few key points and would like to share with you Aleks Cukic's description of their business model and where they stand currently as an extract from the above referenced Morgan Stanley Healthcare Conference Call:

Aleks Cukic - Vice President of Strategy

Thank you, David. Yes, briefly before we get started, I’d just like to remind everyone that some of the things we say may be deemed forward-looking, and a list of our risks and uncertainties can be accessed on our website at intuitivesurgical.com in our public disclosures. A brief overview of Intuitive Surgical, I think for the most part, people understand the history of the Company.

So I’ll jump in and give some of the background statistics that are as current as I can provide that the Company has a basic razor/razorblade model where the da Vinci System, which comes in a few different form factors in configurations sells for anywhere between $1.1 million and about $2.2 million with an average sales price of about a $1.5 million per unit, and each system generates instrument and accessory revenue on a tune of about $2,000 per procedure.

Each system carries a service component which ranges from between $100,000 and $170,000 per year per system depending on the configuration of the system. As of Q2 of this year, we have approximately 2,800 systems placed throughout the world. We have about 2,000 in the United States and about 800 outside the United States with Europe having, I believe, 443 and rest of world having the remainder.

We have approximately 450 or just over 450 hospitals that own more than one da Vinci with hospitals owning as many as eight individual systems, and you’ll see that in typically large programs, large hospitals, where there are committed systems to the various specialties we serve.

The focus of the Company is really a procedure-focused business. The success of our procedures determines the strength of system sales, and so within the procedure categories that we focus on, you’ll find us very well resourced in Urology, gynecology, general surgery, thoracic surgery, cardiovascular surgery, and ENT, and pediatrics to a lesser extent, but the real prime drivers of the business which really started to grow through the urology franchise and then moved into gynecology and most recently general surgery.

So in closing, I think people think of Intuitive Surgical as a single product company, but what we -- I think when you peel back one layer, you’ll see pretty quickly that the company is a composition of multiple technologies that go on to a single platform, so for example we are now involved in vessel sealing.

We’re involved in stapling, we are involved in fluorescence, we are involved in surgical simulation. We have an enormous suite of instruments and accessories. We are in the drape business, and so there is this consolidation if you will of hospital spending, not raising prices, but actually consolidating a lot of wallet share into a single manufacturer, and we’ve been able to do that through our own organic development as well as I think some pretty strategic licenses and acquisitions along the way. So, it is a very unique company in sort of today’s healthcare paradigm, and thus far over the past dozen or so years, I think our growth supports that. So, without going into any greater detail, I’ll let David sort of lead us through this discussion.

 

As most of my followers know, I am from the medical industry and most of my career was happily spent selling medical devices into the hospital and eventually managing teams of sales people, sales managers and clinical support teams.  It is important to me that I have an array of contracts in the various sectors of our medical market to offer opportunities that would appeal to a wide range of medical sales professionals and clinical nurse support positions.  I have always said, "A job is not right for everyone, but there will be a person this would be perfect for and I have been hired to find that person."  That said, one does not want to get on a sinking ship either!  Companies I select to recruit for have to bring a solid value proposition to my candidate clients and my recruitment firm!

That said, Intuitive has had their challenges last year and the beginning of this year.  I would encourage those that are entertaining a career with Intuitive Surgical to read further in the above referenced article, because Morgan Stanley's interviewer, David Stanley, asked some tough questions of Mr. Cukic and that part of the interview was on the second page of the article beginning HERE.  

I believe the companies value proposition is solid, it is the matter of future growth and being able to maintain the high double digit growth numbers that Wall Street is questioning.  Wall street likes to see a continued high growth in a stock and one they have become accustomed to seeing with Intuitive Surgical since their beginnings.  That growth has stalled as of the time of this writing and of course, they there have had some FDA legal challenges. Almost all companies have setbacks with the FDA and their legal challenges (that I know personally when in the business!), and that is usually just a matter of making the right changes. Ultimately the basic question you have to ask yourself as a career seeker is if their technology is here to stay and are there still new surgical procedures left to conquer and grow with their da Vinci product line, as well as a continued flow of new products we have not yet seen?

I think the answer is "yes" if one looks at the innovation and talent the company has gathered since it's beginnings, it is just a matter of them now understanding how to manage through growing market penetration and yes, some bad headlines.  It won't be the first company to face these type of growing pains and remember, they are a company that was and is a game changer to the surgical industry; people who have done that won't stand still for long!

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Comment by Linda Hertz on August 22, 2014 at 7:57am

OK, understanding some of you pharma people are interviewing with Intuitive Surgical as a vehicle to get out of pharma sales.  I stopped my follow on them since April 2014 due to the apparent slide in earnings and etc.  thinking my original premise that they could turn the ship around would have arrived by now.  I will go back to adding news content as it comes.  First some positive news reported recently here on product additions or enhancement (usually not one to move the earnings meter unless significantly different to gain new customers or have old customers want to pay up for the enhancements):

http://finance.yahoo.com/news/intuitive-surgical-receives-firefly-t...

I will take another look at their most recent earnings report too, as you may know by now, that is THE MOST important meter we have on assessing a company's go forward strength while also looking at newer competitive companies (said as a general statement for any company you may be evaluating).

Comment by Linda Hertz on April 26, 2014 at 2:07pm

Well, I might need to re-write the original article from Sept. of 2013 or at least revise it.  Here is another Bow Wow report out on Intuitive Surgical's earnings:

Intuitive Surgical's CEO Discusses Q1 2014 Results - Earnings Call Transcript

http://seekingalpha.com/article/2155923-intuitive-surgicals-ceo-dis...

Here are some random articles evaluation the earnings results.  Enjoy if you don't work for them at this time, and hope for better days if you do!  

  1. The Real Reason Intuitive Surgical is tanking, yet again
  2. Intuitive Surgical Earnings Lag on Q1 (good summary)
  3. Weakness Seen in Intuitive Surgical Stock Tumbles 11.5%

Again, we are doing this as an exercise that you should be doing as you target the companies you would like to work for.  Also remember, that some companies may be having a tough time now, but may be setting the cards up for a better day down the road.  That said, if a company remains with continued earnings reports that are terrible, typically a top line shake up is needed at the top of the organization to get new leadership and direction.  As far as Intuitive, well, you make the decision!

Comment by Linda Hertz on April 11, 2014 at 6:03am
Comment by Linda Hertz on April 3, 2014 at 10:55am
Comment by Linda Hertz on April 2, 2014 at 6:51pm

FDA Clears Intuitive Surgical's New da Vinci System

http://finance.yahoo.com/news/fda-clears-intuitive-surgicals-da-181...

Comment by Linda Hertz on March 16, 2014 at 1:30pm
Comment by Linda Hertz on March 4, 2014 at 1:04pm
Comment by Linda Hertz on February 11, 2014 at 12:14pm
Comment by Linda Hertz on January 24, 2014 at 9:44am

OK, this is not looking pretty and perhaps changes my tune from the original Blog.  That said, this just came over the wire:

Intuitive Surgical falls after guidance disappoints
Shares of Intuitive Surgical (ISRG), which makes and markets the da Vinci Surgical System, are falling after the company announced it would sell fewer systems in 2014 compared to the prior year. It also declined to provide revenue guidance for 2014. WHAT'S NEW: Last night, Intuitive Surgical reported Q4 EPS of $4.28 and revenue of $576.2M, both of which exceeded expectations of $3.83 and $558.46M, respectively. WHAT’S NOTABLE: On the company’s Q4 earnings conference call, management said the company would likely sell fewer da Vinci systems in 2014 compared to 2013. It forecast 2014 procedures increasing 9%-12%, compared to a 16% increase in procedures for 2013. The company declined to provide revenue guidance for 2014, citing a lack of visibility. ANALYST REACTION: This morning, research firm Jefferies said the company’s outlook was conservative. Jefferies said that while Intuitive Surgical's lack of revenue and earnings guidance was indicative of near-term headwinds and uncertainties, its procedure guidance met expectations and was likely conservative. The firm said Intuitive's long-term growth prospects remained compelling, and it kept a Buy rating on the stock with a $480 price target. PRICE ACTION: In late morning trading, Intuitive Surgical fell $23.81, or about 5.4%, to $415.19 on heavy trading volume. The shares are down approximately 28% over the past twelve months. OTHERS TO WATCH: Intuitive Surgical’s competitors include Stryker (SYK), Bovie Medical (BVX), and Harvard Apparatus (HART).

Comment by Linda Hertz on January 18, 2014 at 10:22am

As part of my Blog series, looking at companies from a Job Seekers perspective, I continue my analysis of Intuitive Surgical.  The stock has popped the past week.  So what is going on?  Here is one article that I think is interesting and yes, they did lay off a number of people in their Clinical Sales arm of the business a few weeks ago to re-tool and re-direct the companies resources.  They are attempting to re-center their sales force and sales support to new surgical procedures to support and drive sales GROWTH.  Let's face it, stock investors like to see a growth oriented company to support and keep growing the stock share price.

That said, as a Job Seeker, you like to see a company growing, but you also have to look for the company's ability and willingness to maintain current employee headcount (or re-deploy them if possible if they must change directions) vs. just laying off to re-hire similar but lower cost employee's (think of a full Account Manager Position with a company who usually make and cost more to a company vs. an Associate Sales Person who can cost 35% less, or more, than a higher level position doing the same basic function).  

Always remember that usually a layoff in a company (if their business model is not broken) will increase the price of the stock; this is considered increased efficiency of a company and assumed to raise the earnings of the company and their investors.  As an employee of that company?  Well, you are left behind to become part of that increased efficiency and living with the fear of perhaps the next layoff!   

So back to the original intent of this blog, ALWAYS follow the health and frankly, the culture of the company that you are not only looking to work for, but certainly the one you are currently in!

Let's get back to Intuitive Surgical as we continue this quest of using them as a case study.  Here is an interesting article that is written from a financial perspective, but you can certainly fill in the pieces if you are considering them as a future employer.  

Intuitive Surgical Surges, but Are There More Roadblocks Ahead? http://www.fool.com/investing/general/2014/01/14/intuitive-surgical...

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