Johnson & Johnson Is Eyeing Intuitive Surgical's Market, But Can It Win?

Johnson & Johnson (JNJ -0.46%) won't be breathing down Intuitive Surgical's (ISRG 0.59%) neck anytime soon. But for the first time ever, the robotic surgery company has a serious competitor planning to encroach on its territory. With J&J's plans to produce a robotic surgical unit in full swing, a competitive showdown is now inevitable, and it'll play out over the rest of the decade.

But which business will prevail, and how much does it matter to investors? The stakes are quite high for Intuitive, so let's evaluate what's going on.

The surgical robotics market is about to heat up in a big way

On Nov. 7, Johnson & Johnson announced that it would petition the Food and Drug Administration (FDA) in the second half of 2024 to get permission to start clinical trials for its surgical robotics system called Ottava. The four-armed robot will have a small footprint in the operating room, with the aim of cleanly integrating into a variety of surgical work routines. It isn't the company's first foray into the surgical robotics space, as it also makes another system intended for bronchoscopies, but the new entrant appears to be somewhat closer to a generalist tool rather than a highly specialized one.

Much as with other minimally invasive surgery platforms, using the Ottava will require surgeons to get training. That will create a form of customer lock-in. After all, busy surgeons probably don't have the time to get trained on a bunch of procedures for surgical robots from more than one manufacturer. Plus, hospitals will likely prefer to buy the most capable systems they can afford and work with manufacturers to upgrade their systems as necessary, rather than buying and installing wholly new robots. So if the company can place enough Ottavas (once they're on the market), it'll gain years of opportunity to realize follow-on revenue in the form of maintenance, spare parts, training programs, and perhaps upgrades.

Intuitive Surgical investors may want to take a deep breath

The Ottava seems like it'll be a serious competitor to the da Vinci robotic surgical suite produced by Intuitive Surgical. The da Vinci has been on the market for more than two decades. While it isn't approved for every possible surgery, it has a swath of approvals that make it right at home in a general surgery operating room. At the same time, it's nowhere close to finishing the penetration of its markets. That means Johnson & Johnson is very likely to tread on Intuitive's turf when it gets FDA approval.

For Intuitive Surgical investors, the entry of J&J on the horizon marks a paradigm shift that's hard to overstate. Until recently, Intuitive had nothing to write home about in the way of actual competition, and it faced few constraints in penetrating its markets. While companies like Stryker and Medtronic do produce surgical robotics, their systems are for specialized purposes. Stryker's Mako unit is only for orthopedic surgery and Medtronic's Hugo robot is not approved in the U.S., so they aren't considered significant competitive threats. Now one of the biggest companies in healthcare is gearing up for a big push, and it's unclear how the da Vinci will compare in the long term.

Don't bet on the challenger winning right away

In the short term, there are a few things investors can expect will remain true.

The first is that Intuitive Surgical will continue to deploy more da Vinci units, each of which will yield a long tail of recurring revenue in the form of consumable sales and maintenance contracts, not to mention training fees and accessories. In fact, 79% of Intuitive's sales are from those recurring sources. And given that there are more than 8,200 such units installed worldwide, and that the number of procedures performed with those robots grew at a compound annual growth rate (CAGR) of 15% from 2019 to 2022, Intuitive will continue to expand its sales and earnings for at least the next few years regardless of what J&J manages to do in the same time frame. Due to the costs of installing and training, it's highly improbable that Intuitive's market share will be eroded quickly even if the Ottava proves to be a superior product.

Then there's the impact of the medical community having had more than 20 years to characterize the da Vinci's capabilities and utility through the frame of scientific investigations. You can find a myriad of scholarly publications analyzing where the da Vinci shines, where it struggles, and how economical it is to use for different purposes, not to mention a body of documented best practices and technical notes.

No new surgical robotics system will have anywhere near the same degree of documentation and medical context, nor will there be a cadre of evangelists who have used it for years and trust it to help them create the intended outcomes for patients. That suggests Johnson & Johnson could struggle to capture market share quickly, as it could take years to earn the same level of proof (developed through studies and scientific literature) that its system works.

So it's fully possible that Intuitive Surgical will eventually lose its market mastery to J&J, but don't count on it happening anytime soon. If you're looking for one robotic surgical stock to invest in today, it's still Intuitive, and that won't change for years (if it ever does).