I remember exactly when I became aware of robotic surgery: I was four years old, watching Luke Skywalker have his hand rebuilt after a rather contentious family reunion. That level of science fiction has not yet become reality, but we're not as far away as we once were.
Intuitive Surgical (ISRG 2.21%) has been moving humanity closer to fulfilling that futuristic vision since introducing its robot-assisted surgical system, the da Vinci robot, in 2000. With any medical breakthrough, regulatory hurdles can often slow progress to market. But 20 years on, the company is leveraging its global footprint to move at light speed.
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Surgery comes to the machine age
Intuitive Surgical has been in a perpetual cycle of innovation and regulatory review since the original da Vinci system was released. The da Vinci Si was released in 2009, and in 2014, the da Vinci Xi was approved. Enhancements like thinner arms and longer instrument shafts facilitated a broader range of procedures. 2017 saw the introduction of the da Vinci X, a more budget-conscious version of the Xi.
The company's latest offering, the da Vinci SP -- or "single port" -- requires just one small incision, which provides deeper and narrower access to body tissue. The system, which consists of three joint instruments and a high-definition 3D camera, has received uneven regulatory acceptance in the U.S. and other countries.
Speed up! No, slow down!
The U.S. Food and Drug Administration (FDA) can be an easy target for criticism on all sides. As the novel coronavirus has introduced many of us to the drug approval process, a common question is, "Why does it take so long?" On the other hand, when an approved drug gets pulled from the market after side effects are discovered, people tend to ask, "Why didn't they wait longer to approve it?"
The FDA has a well-defined process for devices like the da Vinci, but approval can take much longer than the documented 90-day period, especially when additional information and data is requested.
A simple word search suggests that Intuitive Surgical has become increasingly focused on navigating the regulatory environment in recent years. Mentions of the word "regulatory" in the annual 10-K filing have steadily increased since 2015.
Source: Author's calculations.
This concern is understandable for a company that has struggled in the past with questions about the benefits provided by its solutions. The medical community judges the benefit of a treatment using standard criteria such as recovery time, length of hospital stay, complications, and cost. Over the past decade, various studies have concluded that the use of expensive da Vinci devices was worth it -- or not worth it -- for specific procedures. This debate may be influencing the FDA's review process. Furthermore, as coronavirus continues to spread in the U.S., management has been unable to provide a date for when clinical studies that might satisfy the regulatory agency's needs might start.
Globalization in a new form
Similar to the U.S., China and South Korea have their own regulatory bodies to evaluate medical advances. South Korea, in particular, has served as a useful proving ground for the latest da Vinci device, the da Vinci SP. The country's version of the FDA, the Ministry of Food and Drug Safety (MFDS), created the Innovative Convergence Products Support Department in March 2019. This department is explicitly tasked with managing technologies such as robotics, biological advances, and artificial intelligence.
For Intuitive Surgical, this is a welcome development; the company is pushing the envelope of robotics in medicine, and the new department could help it speed up the process of bringing new innovations to market. Perhaps this is why the company hired Austin Kim as its general manager in South Korea -- Kim had previously overseen regulatory affairs in the country for scientific instrument maker Agilent, among other functions.
Playing the hand you're dealt
South Korea has a track record of being at the leading edge of global robotic surgery, and the peninsula has been on Intuitive Surgical's radar for years. The company opened a Center for Surgical Innovation there in November 2017 to expand training on its devices. Not coincidentally, a local competitor named Meere Company developed the first Korean surgical robot in 2018; while Meere was popular with investors at first, its share price has plunged in the past year. That's largely because of the contraction in the Chinese robotics market that's thanks in no small part to that country's trade war with the U.S.
In closing the Q4 2018 earnings call, CEO Gary Guthart reiterated the uncertainty surrounding FDA approval for additional procedures using the SP. It's already approved for prostate surgery and surgery for mouth or throat cancers, but U.S. surgeons wanting to perform additional procedures are stuck in neutral for now. .
South Korea, on the other hand, had already approved the device for additional procedures, including pancreatic surgery and kidney removal, two years prior. And the number of procedures performed with the SP has been growing; in recent earnings calls, management noted that the system boasts utilization rates higher than the Da Vinci Xi. Will waiting to satisfy the FDA upend Intuitive Surgical in the U.S.?
Regulators giveth, and regulators taketh away
Government bureaucracy is no match for the pace of technological advancement, but South Korea is doing its part to assist companies bringing innovation to the medical arena. And there is an upside to the arduous U.S. FDA approval process -- an upside that specifically benefits Intuitive Surgical. A lengthy approval process creates an expensive barrier for any potential competitor with a new device, requiring an impressive combination of capital and expertise to navigate. For this reason, the lower regulatory hurdles likely mean any eventual disruptor of the da Vinci system won't come from Intuitive Surgical's home market -- it will come from South Korea.
But with more than 1,700 of Intuitive Surgical's systems already installed and 5 million procedures performed worldwide, that day is likely to remain distant. Despite near-term headwinds, healthcare investors hoping to profit from the growing field of robotic surgery should buy shares in this leader and watch South Korea for clues about future growth.
