Intuitive Surgical (NASDAQ:ISRG) CEO Greg Guthart used a baseball analogy in his presentation Thursday at the J.P. Morgan Healthcare Conference. Guthart said people sometimes ask him, "What inning are you in?" His response: "We're in the early innings."
Guthart's reference, of course, wasn't really about baseball. Instead, he highlighted just how early Intuitive Surgical is in the growth of the robotic surgical systems market even though the company has been in business for more than 20 years.
But his baseball analogy is a good one. Guthart's discussion at the J.P. Morgan conference made me realize that Intuitive Surgical is playing a game of Moneyball -- and investors will be the big winners.
The "Moneyball" approach
Michael Lewis' best-selling book Moneyball and the movie based on the book told the story of how the Oakland A's used a data-driven approach to become more competitive against rival baseball teams. Statistical analysis found that high on-base percentages and slugging percentages -- a measure of the weighted number of bases gained divided by total at-bats -- were great predictors of offensive success for players.
The Oakland A's revamped their draft strategy to target players who scored higher on the success predictors identified by the analysis of data. This approach went against the conventional wisdom in baseball circles at the time. But it appeared to work for the A's, especially considering the team's small budget compared with its rivals. Over time, other professional baseball teams also adopted the Moneyball approach.
So how is Intuitive Surgical taking a similar approach to its business? For one thing, Guthart is a self-proclaimed "data guy." He earned a B.S. in Engineering from the University of California, Berkley and an M.S. and Ph.D. in Engineering Science from Cal Tech. Even as CEO, Guthart thinks like an engineer.
Instead of on-base percentage and slugging percentage, Intuitive Surgical's focus is on procedure volumes. One of the first slides in Guthart's presentation at the J.P. Morgan conference highlighted the numbers of procedures performed using Intuitive's da Vinci robotic surgical system.
Guthart stated that "procedure growth is the best indicator of product acceptance" for robotic surgery. He noted that Intuitive saw 18% procedure growth in 2018, with an especially strong increase in the use of da Vinci for general surgery.
You might think Intuitive Surgical would place a lot of emphasis on selling more robotic surgical systems. Guthart said, though, that putting more systems in the field isn't the primary focus of the company. He would rather get customers "to use the system a lot."
That's one reason Intuitive isn't concerned about higher numbers of customers who are leasing da Vinci systems. Guthart acknowledged that there is a risk that lease customers could return their systems but that the company was prepared to take that risk.
Intuitive Surgical applies a Moneyball-like approach in its development, too. The company focuses like a laser on the data associated with surgical outcomes. Guthart mentioned that the lowest quartile of surgeons in terms of surgical skill are three times more likely to have complications resulting from the surgical procedures they perform than the highest quartile of surgeons does.
So what is Intuitive doing about the problem? The company developed a simulated environment to measure the capability of surgical teams before they go into the operating room. This approach enables the teams to practice. It also gives Intuitive lots of data to analyze and use in developing new technology.
New players on the team
To continue with the baseball analogy a bit, Intuitive Surgical also has some very promising new "players" on its team. Guthart talked about the company's da Vinci SP surgical system launched in 2018 and the ION system that awaits FDA clearance.
Da Vinci SP (the SP stands for "single port") makes minimally invasive surgery even more minimally invasive. Its robotic surgical instruments enter the body through one small incision. Da Vinci SP is on the market already for some urology procedures. Guthart said the response by the market has been "remarkable." Intuitive plans to expand the use of da Vinci SP for other complex procedures.
Even less invasive is a type of surgery that doesn't require cutting at all. That's where Intuitive's new ION system comes into play. The new robotic platform enables minimally invasive lung biopsy even in airways that are difficult to reach with current transbrochial biopsy methods.
Who wins from Intuitive Surgical's Moneyball approach? Nearly everyone.
Patients benefit from better surgical outcomes made possible by precisely controlled procedures performed using robotic-assisted systems. Payers are able to reduce overall costs over the long run, with fewer complications leading to longer hospitalizations and readmissions. Surgical teams improve their skills using Intuitive's simulated environments.
Investors should win big over the long run, too. Procedure volume growth leads to more revenue for Intuitive Surgical, as instruments must be replaced. It's not by accident that recurring revenue now generates more than 70% of the company's total revenue.
Intuitive's data-driven approach to development also should add to investors' long-term gains. The company is in an enviable position to innovate thanks to the data available from its large install base of customers who now perform over 1 million procedures each year. Innovation leads to new and improved technology, which in turn fuels more sales growth for Intuitive Surgical.
As Guthart said, Intuitive Surgical is in its early innings. And the company is playing the kind of game that arguably puts it in a league of its own.