Author | TheBigPicture
01 Introduction
Shallow knowledge makes people proud, and rich knowledge makes people humble, so the hollow straw haughtily raises its head to the sky, while the full grass spike bows its head to the earth, to his mother. - Da Vinci
In 1999, Intuitive Surgical introduced a robotic-assisted surgical device called Leonardo da Vinci. The advent of this surgical robot has had no less impact on surgery than the iPhone on mobile phones, personal computing, and mobile communications. The four-arm surgical robot was originally trying to break into the market in cardiac surgery at the turn of the century, but at that time another innovative technology: cardiac stents was widely adopted, and robots were not widely adopted in this field.
Da Vinci's breakthrough came in 2001 with FDA approval of it for prostate surgery. Traditional open surgery is invasive in prostatectomy, requires high fine manipulation, and may also result in high blood loss due to the sensitivity of surrounding body tissues. Robotic-assisted minimally invasive surgery has found the best application scenarios: small wounds, low blood loss, reduced hospital residence time, and rapid recovery.
Today, prostatectomy has been almost done by robots in the United States. Since then, da Vinci has entered a wider range of applications in the past 20 years, including hysterectomy, hernia repair surgery, colorectal surgery, gallbladder removal, bariatric surgery, etc. As tools with Leonardo da Vinci, especially advanced tools, become more complete, the system is also being applied to more types of soft tissue surgeries.
Advanced tools such as sutures and electro-knife allow da Vinci systems to increasingly replace traditional open-ended soft tissue surgeries of all types. Of course, there is also competition from many traditional companies that manufacture medical machinery in these tooling fields, such as Johnson & Johnson and Medtronic. In addition, Ion's biopsy robot for the lungs, which was only approved in the United States in 2019, allowed intuition surgery to go out of the surgical field and enter the field of diagnosis for the first time. Adoption growth over the past two years has been staggering.
The company's breakthroughs and applications in the past 20 years have not been smooth, for example, some academic journals have pointed out that the late mortality rate of patients with robotic minimally invasive hysterectomy is higher than that of open surgery patients, so that the application expansion of this type of surgery has been affected to a certain extent. But overall, the application growth of robot minimally invasive is much greater than the local setback, and the long-term prospects are still broad.
A Da Vinci robot costs about $1.5 million, and this robot is the equivalent of a razor's tool holder, which needs to be used with a blade. The tools and accessories on the robotic arm are also expensive and have an average service life of only 10 times, and some tools have only a single service life. In order to ensure safety, the built-in chips of these tools and accessories will automatically stop working after reaching the number of use limits, and must be replaced immediately. On average, a single procedure costs more than $2,000 in tools and accessories.
By the end of 2021, Da Vinci has installed more than 6,700 active systems worldwide, and more than 1.5 million surgeries have been performed through Da Vinci last year. Single year sales of 1300+ Delta Vinci. Simply calculating that selling systems and expendable tools alone will have a single year of revenue of $5 billion, not counting maintenance revenue. The current market value of the company is $100 billion. This is a rough concept. The following is a detailed analysis of this company.
02 The Magical Da Vinci System
Da Vinci's three main components: the doctor's end, the patient's end, and the display end.
Since the DA Vinci Surgical System was approved by the FDA for intraperitoneal surgery in 2000, it has undergone a total of four replacements (i.e. the average life of the system is about 5 years), and the four generations are Da Vinci, Da Vinci S, Da Vinci Si and Da Vinci Xi/X. The Da Vinci system is divided into three components: the surgeon's console, the patient end and the display terminal.
The surgeon's console is a remote control platform that is separated from the robot arm on the patient's end. The surgeon can operate the doctor's end machine in a comfortable compound ergonomic way throughout the whole process, in which the operation is observed through a double lens, while the hands are extended into a finger sleeve, and there are several pedals under the feet, and the operating table is remotely controlled by ten fingers and foot pedals.
The patient end is the robot arm, which receives the operation of the surgeon through the electrical signal to perform delicate surgical operations on the patient. Leonardo da Vinci has four robotic arms, two of which are equivalent to the surgeon's left and right hands, holding tools separately, the third is an endoscope, and the fourth is standard after the second generation of Leonardo da Vinci: the third hand equivalent to the surgeon, or the doctor's assistant, holding an additional tool for backup or simultaneous use.
The display terminal is a unique high-definition display window, real-time to the entire operating room team to play the high-definition picture of the surgical process, key parameter information, its 3DHD technology can provide high-definition full-angle playback without interfering with the endoscopic lens. The full-field-of-view feature eliminates the need for doctors to move the lens without freeing up their hands, reducing potential intervention with tools and endoscopes.
Tools & Accessories
The Da Vinci range of tools and accessories is the soul of the entire system. Tools are divided into three categories: core tool groups (scalpels, scissors, forceps, etc.), suture tools, and electric knives. The function of the tool set is to provide doctors with tools that simulate as much real open surgery as possible, while increasing precision and reliability. For example, the dynamic zoom function can be set at any time by the machine. When operating in a small space, the surgeon can be set in proportion to the dynamics of the tools on the robotic arm, for example, 3 to 1, then the surgeon's action of 3 mm is converted into 1 mm of tool movement on the robotic arm. Greatly improved accuracy.
At the same time, the machine can easily defibrillate, and the surgeon's hands cannot avoid vibrating themselves. Almost all tools have endoWrist three-axis rotation function, so that the dexterity of this set of tools is not inferior to that of human hands, rotating, lifting, traversing, telescopic can be easily completed.
New Ion biopsy system
Ion is the first bold but successful attempt by intuition surgery to break through surgical systems and enter the field of diagnostics for the first time in 20 years. It is also a proof of practicing the company's philosophy and propositions. The 5-year survival rate for prostate cancer is 98% (full-stage), which is home to intuition surgery companies, and the company has also contributed to this extremely high survival rate over the past 20 years. However, as a more prevalent lung cancer, the 5-year survival rate in the United States is only 18% (full-stage). Intuition believes that earlier diagnoses and discoveries are a step forward in improving lung cancer survival.
The Ion system's 3.5mm diameter robotic catheter can penetrate deep into the tiny airways of the lungs to spot tuberculosis at the edge of tiny airways that are smaller and earlier. This catheter is similar to fiber optic technology, processing hundreds of positional information per second during the deep airway process can detect the path shape at high speed in real time, and once it reaches the target nodule, it can stabilize the lock column target for biopsy.
Since its launch in 2019 and after a decline in sales affected by COVID in 2020, 2021 has seen strong Ion system sales and the number of surgeries. By the end of 2021, the company has installed a total of 129 Ion systems, of which 93 were installed in 2021. The cumulative number of surgeries completed has reached 2950. All customers are customers of the company's Da Vinci system. The listing price of the Ion system is $600,000, and the actual price is slightly lower than this price.
According to the PRECIsE Clinical Study in the United States, the diagnosis rate of small (1-2 cm) and large (2-3 cm) TUBERCULO in the Ion system reached 82% and 85%, respectively.
03 Four Goals of Intuition surgery
Intuition Surgery has always adhered to the four major goals (quadruple aim) to lead the company's scientific and technological innovation and product service development direction. The four goals are: better patient outcomes; better patient experience; better healthcare team experience; and lower patient costs.
The company firmly believes that low-invasive surgery fundamentally improves surgical results, and future disease diagnosis will be detected and treated earlier, improving better patient outcomes. The newly launched lung biopsy system Ion reflects the company's ambitions and achievements in the field of diagnosis, in the field of cancer surgery, the ability to diagnose earlier can generally fundamentally improve survival rates and improve patient efficacy.
The company continues to introduce more finely classified surgical tools, so that the Da Vinci system is suitable for more types of minimally invasive surgery, through refined research and development products, so that several characteristics of minimally invasive robotic surgery have been continuously improved: less blood loss, fast rehabilitation, short hospital stay.
The company's support to surgeons and care teams is industry-leading. From continuous training, to cooperation in the academic field, to data analysis sharing, mobile terminal development, etc., the company attaches great importance to medical personnel. The company has enriched distance learning materials during COVID and provided moving support for installed robotic systems to address the surgical isolation requirements of hospitals during COVID. The newly introduced Extended Use Instruments allows the operating table tool, which could have been used 10 times, to extend its life to 12-18 times. These technological advances, along with customer service, are the characteristics and competitive advantages that distinguish intuitive surgery companies.
The fourth generation of Leonardo da Vinci debuted the low-end robot model X, a cheap version of the robot that was launched for non-tumor surgery needs. Since traditional medical insurance covers cancer surgeries in critical condition of life in a high amount, it is generally not difficult to obtain insurance coverage for high-priced surgical expenses. However, the coverage of many non-cancer surgeries is seriously insufficient, and the high cost of surgery will make many patients lose treatment opportunities due to financial affordability. The introduction of low-end models of robots can help reduce surgical costs from the root cause, and in the long run, the company's concept of reducing the cost of patient-side treatment.
04 Recent clinical data
At the 2021 Four Quarters Report conference call, the company's management shared two recent clinical comparison data:
The first analysis was an analysis of 20 studies between 2005 and 2020, in which more than 13,000 surgeries were performed, of which 1,500 were robotic-assisted surgeries and 12,000 laparoscopic surgeries. In these two groups, robotic surgery showed statistical advantages: a 46% lower risk of rectal anastomosis leakage, a 69% lower risk of conversion to open*, a 15% lower overall risk of surgical complications, and a 7-hour reduction in the time to resume a routine diet (shorter hospital stay). Robot-assisted bowel cancer surgery has obvious advantages.
Another analysis was an analysis of lung thoracic surgeries in 8,000 obese patients, including 2,100 robotic-assisted surgeries compared to 5,900 VATS endoscopic imaging surgeries. In comparison, VATS surgery conversion to open 15%, compared to only 3% of robotic surgery, robots also had a shorter hospital stay than VATS 0.7 days, and the risk of respiratory failure was 1%.
*Conversion to open i.e. the chance that a minimally invasive or endoscopic surgery failure requires surgery.
05 Financial situation
The above three figures are the quarterly sales volume of the system by model system, the net shipment of the system, and the installed volume in active service.
The difference between Dual-console and single-console is whether the doctor-side console is double or single. The dual operator station can allow two doctors or an additional assistant to operate the robotic arm. It can be seen that the mainstream hospital adopts a stand-alone system. Xi is the latest generation of Leonardo da Vinci, with the highest absolute sales, followed by the stand-alone version of the economy version of robot X. The previous generation of robots, the Si, has been discontinued for 19 years. The SP is a one-armed robot.
The total number of shipments in the second chart compared with the total number of retirements can be seen that 2021 is a big year to replace the old model. According to the company's management, the replacement demand in 2022 will be significantly reduced, because the replacement of the Si model has been completed. The growth rate of system shipments mainly depends on the sales of new machines and replacement demand. Combined with the third figure, the total installed capacity increased from 4023 units to 6730 units in five years, and the annualized CAGR = 11% in 5 years is the long-term annualized growth rate of net growth. The replacement demand can be offset by the growth rate of total shipments: the annual system shipment volume in 2017 was 684 units, and in 2021 it was 1347 units, and the growth rate in 4 years was CAGR = 18.5%. The two offset the result of a 6.9% growth rate in replacement demand.
It is worth mentioning that the Da Vinci system itself does not have a clear markup trend, that is to say, the growth rate of total shipments is equivalent to the growth rate of the system's sales revenue.
In addition, the Ion system does not count the total number of systems, and the number of completed diagnoses and treatments does not count towards the total number of surgeries.
The above two charts analyze the proportion of the company's three major categories of revenue and the proportion of repetitive revenue. The proportion of the three revenues is basically stable, with maintenance revenue closely related to the total number of system installations (because the larger the installed number, the higher the maintenance demand), while the income from tools and accessories is closely related to the number of surgeries because they are consumables.
The Company counts systems sold in the form of operating leases in the sale of the system as recurring income (equivalent to rent). Therefore, sales of tools and accessories, maintenance revenue, and systems sold on operating leases are counted as recurring income. The share of recurring revenue continued to rise to a medium-high of 70%.
The above two figures compare the comparative relationship between installed capacity and maintenance fee income. It can be seen that the increase in maintenance revenue is faster than the increase in installed capacity. This may not translate into higher profits, because the cost of repaired parts and labor costs will increase. It is also unlikely that the company will increase the gross profit of repair services as a core growth point. Therefore, as long as you maintain a stable and healthy gross margin level. The company does not disclose the gross profit margin of the segment separately, and the gross profit of the segment is not known.
The above three figures show the relationship between the income of tools and equipment and the number of surgeries. Equipment revenue and the number of surgeries maintained a long-term annualized growth rate of about 15%. The unit price of consumables (estimated, divided by the two) is slightly faster than the growth rate of the number of surgeries. This shows that the unit price of equipment ASP has maintained the ability to increase prices for a long time.
The unit price in 2021 has decreased compared to 2020. The company's explanation at the quarterly report in the fourth quarter of 2020 was the launch of Extended Use Instruments in the United States and Europe in the fourth quarter of 2020, which led to an increase in the unit price of initial stockpiling. The company gave revenue from single lot tools at $1,940, compared to $1,900 in the third quarter and $2,060 in the fourth quarter of 2020.
The company emphasizes that with the increase in the proportion of sales of advanced surgical tools, the revenue of this high-growth tool will increase the overall revenue growth rate higher than the growth rate of the number of surgeries.
As shown in the company's latest investor communication in the figure above, the overall sales growth rate of advanced surgical tools is much higher than the growth rate of the system and core tool groups (more than ten percent), and the 5-year CAGR of advanced tools in the US market reached 33%, while in overseas markets reached 43%.
The above three charts are the main financial indicators of the company. Among them, it can be seen that the gross profit margin is basically stable at about 70% in addition to 66% in 2014, 2015 and 2020. In 2014 and 15, it was warned by gynecologists about the risks of robotic hysterectomy that affected sales, and has since recovered lost ground through other types of surgical citations. In 2020, the COVID-19 pandemic has affected sales and surgeries.
Operating margins have also declined, mainly due to the continuous increase in the company's investment in research and development, not only the absolute amount has increased, but also the proportion of revenue is also increasing very aggressively. In 2011, the company's R&D expenditure accounted for only 8% of revenue, and by 2021 it reached 12%.
In line with the recurrent expenditure, the company has also begun to invest heavily in capacity expansion. This requires a lot of capital investment. As a result, WE CAN SEE THE ROIC FALL FROM TRIPLE DIGITS TO 48% IN 2021 (STILL A SUPER HIGH LEVEL THAT HARDWARE COMPANIES DARE NOT IMAGINE).
According to the 2021 Quarterly Report Call, the company plans to invest $700-1 billion in capital in 2022 (referring to $1.32 billion in free cash flow in 2021, Capex capital investment between $300 million and $500 million per capita in the past three years), which is a huge investment, and the same size of investment will be a multi-year cycle. In the coming years, the company will increase production by adding factories to its new market location (currently only California and Germany), replacing rental facilities with self-built factories, and so on.
The combined free cash flow over the past decade has reached 6.523 billion. The company has no debt, does not pay dividends, but does not regularly repurchase. The Company currently has a total cash and bond investment (Treasury bonds, etc.) on its books worth more than US$8.6 billion. Dealing with capital expenditures of 7-1 billion a year plus buying back a large number of shares is more than enough.
06 Revenue Forecast and Valuation
When making revenue forecasts, it can be seen that the revenue growth and ceiling of intuition surgery are very high. Profit margins have always been staggering. If there is a problem, it is that the company's capital investment needs are getting bigger and bigger, that is, the ROIC will be reduced. Not only has the demand for fixed capital investment increased, but the account period is also much longer than the companies I generally look at. That is, working capital and fixed capital investment are very large.
In the future, an increasing proportion of the company's sales will be done in the form of operating leases (my assumption is 50% in the long term), which will actively help sales in increasing the share of the non-U.S. market and providing flexibility for hospitals, as well as smoother revenue figures between quarters.
The projection of 3.8 million Da Vinci surgeries and 17,000 installed capacity by the end of 2028 is not an overly aggressive assumption. It is not even close to the ceiling of the potential market. TAM is an annual volume of 20 million surgeries.
Annual operating profit after tax is expected to be $4.45 billion in 2028. During the forecast period, the upfront capital investment is large (Capex 1 billion US dollars per year in the four years from 2022 to 2025), which directly affects the profit growth rate and THE ROIC to the low to medium and low 30% level.
If the DCF valuation method is used, the fair value is $340, as follows:
If you look at it in multiples, the current market value of the company is 100 billion, minus all cash and long and short bond investments of 8.6 billion, and the net value is 91.4 billion. If the operating profit after tax for 2022, 2023 and 2024 is calculated, it is 63, 63, and 50.5 times, respectively.
Finally, a summary of the target price of the broker is attached:
Note: This article is original by the US stock research agency team, please indicate the source when reprinting, thank you!