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What the Heck Is Robotic Surgery?

Erik Kobayashi-Solomon

Erik Kobayashi-Solomon: Hi, I'm Erik Kobayashi-Solomon, co-editor or Morningstar's Option Investor. Today it's my great pleasure to have Julie Stralow, who is a senior analyst on our health-care team, to talk about Intuitive Surgical, a stock that I recommended to our investors a few weeks ago. Hi, Julie. Thanks for coming.

Julie Stralow: Hi, Erik. Nice to be here. Thank you.

Kobayashi-Solomon: When I first started reading up on Intuitive Surgical, it sounded like science fiction to me. What the heck is this robotic surgery? And is it actually plausible right now?

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Stralow: Well, it does sound a little bit like science fiction, doesn't it? Like it's straight out of a movie. So I would ask you to banish the thoughts of R2D2 or some other robot just coming into the O.R. and performing surgery with no human input. That's not viable. What is viable and what is being performed in over a thousand operating rooms worldwide is something that I'd call robotic-assisted surgery. And that's the niche that Intuitive Surgical plays in. They operate there with no direct competitor with their da Vinci System.

That basically has two major components to it. First, a surgeon console, which sits away from the patient. And then there are these robotic arms that actually interact with the patient.

Kobayashi-Solomon: I see. So the patient is actually separate from the doctor. The doctor is manipulating things, and that's actually manipulating the arms.

Stralow: Exactly. Exactly. And the surgeon console, there's visualization software and hardware. They can see in real time what's going on at the patient site, and also maneuver a set of joysticks, if you will, to maneuver the arms, which are actually doing the physical work.

Kobayashi-Solomon: So this is like the Wii approach to surgery.

Stralow: [laughs] A little bit, a little bit. Definitely.

Kobayashi-Solomon: So you say that is in use already. What are the kind of procedures that it's used mainly for?

Stralow: The major goal is to perform minimally invasive techniques, where only open procedures had been available in the past. So there's actually many different areas where Intuitive Surgical can be utilized. Right now it is most utilized in prostatectomy, which is the removal of the prostate gland. And they're also moving into hysterectomy pretty aggressively. And also a variety of other areas, too. There's many, many different procedures that could utilize this system.

So mitral valve repair in the heart, gastric bypass. Many other different areas are becoming a place for growth for Intuitive Surgical.

Kobayashi-Solomon: OK, so it's got room to grow, except you've got a doctor's console, you've got these robotic arms--this must cost a pretty penny, right?

Stralow: It does. Actually last quarter, the average selling price was $1.3 million. So it's definitely very pricey, it's not something that's a band-aid or a basic gauze material. It's something that the hospital administrators would spend a lot of time scrutinizing, the sale of these systems.

Kobayashi-Solomon: And then in addition to the base costs, you've also got a couple thousand bucks a piece for the attachments. The doctors buy those after each procedure, right?

Stralow: It's ongoing, yes. So in order to perform a multitude of procedures, you have to continue to purchase these instruments.

Kobayashi-Solomon: So they get some ongoing revenues as well.

Stralow: Absolutely. Actually last quarter, about 63% of Intuitive's sales were recurring in nature.

Kobayashi-Solomon: Ah, I see.

Stralow: So these instruments and also services. Intuitive contracts with hospitals, basically in an insurance policy. The hospital pays Intuitive to insure that if the system breaks down, Intuitive can come out and fix it in the future.

Kobayashi-Solomon: Check. It's not so much a bet just on new sales of these $1.3 million things, there's also this recurring sort of income stream.

Stralow: Exactly. And that provides a really nice backstop in uncertain times.

Kobayashi-Solomon: Now something that you said earlier struck a chord with me. That is, they compete completely uncontested in this market, right?

Stralow: They don't have a direct competitor, no.

Kobayashi-Solomon: All I can imagine is a GE or Siemens or something, that they would take some interest in this field and just crush these guys. GE is big; Siemens is big.

Stralow: That's definitely my chief long-term concern for the company. I don't think it's going to happen next quarter; it could be many, many years down the road. But eventually there will be someone that comes about and provides a similar tool. It may not be exactly like Intuitive's system, but I think eventually there will be some sort of technology that provides some sort of competition.

Kobayashi-Solomon: But on the flipside, if they've got such a nice deal here, it could be that a GE or Siemens might want to buy these guys?

Stralow: I agree with you. Right now Intuitive Surgical is the only game in town. Do you build or buy? So it could be an easier path just to buy. So Intuitive would definitely be the key acquisition target.

Kobayashi-Solomon: Thanks a lot for this idea. It's working out great. I hope that some of our investors took advantage of our put rights before too.

Stralow: I hope so too.

Kobayashi-Solomon: Gosh, they've made so much money lately.

Stralow: Good deal. Good deal.

Kobayashi-Solomon: Julie, thanks a lot for joining us.

Stralow: Nice to be here. Thank you, Erik.

Kobayashi-Solomon: And thank you for joining us. Please stop by the Option Investor's site, where we publish regular option investment strategies based on Morningstar's fundamental research.