Intuitive Surgical (ISRG +2.81%) has delivered market-crushing returns over the past two decades, thanks to its leadership in the robotic-assisted surgery (RAS) market. Part of the company's appeal is that its crown jewel has had little competition.
However, that may change soon. Recent developments suggest that Intuitive's famous RAS device, the da Vinci system, will finally go head-to-head in the U.S. with another robot device. This might suggest that Intuitive Surgical can no longer produce outsize returns, but there's more to the story.
Here's what investors need to know.
Image source: Getty Images.
Meet the Hugo system
Other RAS gadgets are cleared for use in the U.S., but for the most part, they're approved for procedures that have no overlap with those the da Vinci system helps perform. Stryker markets a robot surgeon called Mako, which is approved for partial and total knee operations and hip surgeries. Zimmer Biomet's Rosa Knee system competes with the Mako. The list of approved procedures for the da Vinci system does not include total knee replacement.
It does include urologic and cardiac surgeries, bariatric surgeries, and more. Intuitive Surgical helps perform minimally invasive surgeries with its devices, yet it still has to compete with other devices that aid more invasive types of operations. But there's been little direct competition from robot systems across the range of its approved procedures.
NASDAQ: ISRG
Key Data Points
That might be changing soon. Medtronic (MDT +3.06%), a leading medical-device maker, recently announced it had submitted an application to the U.S. Food and Drug Administration (FDA) for its Hugo system for use in urologic procedures. That's after the device performed well in a clinical trial on 137 patients.
The Hugo system has been in use for years in many other countries, but its grand entrance in the U.S. -- if it does earn clearance from the FDA -- could be a big deal for Medtronic. It will also mean stiffer competition for the da Vinci system, at least in urologic procedures. Could that spell the end of Intuitive Surgical's dominance and market-beating days?
Still a great stock to buy
There are several things to note about Intuitive's da Vinci system and the challenges coming from the Hugo system.
First, the da Vinci is approved both for urologic procedures and many others. It's spent years being tested and earning regulatory clearances across a range of therapeutic areas. It will take time for any single robot system, or even several of them, to challenge the da Vinci system in most of these markets.
Consider that the rise of weight loss drugs disrupted the company's volume in bariatric surgeries, but since these made up only 4% to 5% of its total procedures, its financial results were barely affected.
Second, even with mounting competition, there's substantial white space in the RAS market. Medtronic saw this opportunity and decided to jump in; it pointed out two years ago that only 5% of procedures that could be performed robotically actually were. This number is unlikely to have increased substantially in the meantime. So even with Medtronic's entrance, Intuitive has a significant growth runway.
Third, Intuitive Surgical benefits from a strong moat. Its devices cost between $700,000 and $2.5 million, a substantial investment for healthcare facilities. The company does make it easier by offering flexible payment options, making its products more affordable. But after spending that kind of money, its customers won't want to switch to competing devices -- a classic example of switching costs.
Finally, there's far more clinical evidence for the better-established da Vinci system than there is for the newcomer Hugo, meaning physicians are still more likely to opt for the former when all other factors are equal. The Hugo should become successful in the long run, but that takes little away from Intuitive now.
Intuitive Surgical should still deliver excellent financial results and stock-market performance, just as in the past. That's why I think it's a good idea to purchase the company's shares and hold on to them for a long time.
