The potential to revolutionize healthcare is being driven by significant advances in technology that may improve patient procedures and usher in an era of personalized medicine. At the forefront of this innovation are Intuitive Surgical's (NASDAQ:ISRG) robotic surgery systems and Illumina Corp's (NASDAQ:ILMN) DNA sequencing machines. How are these products changing healthcare today and how might they change healthcare in the future? Find out in this episode of The Motley Fool's Industry Focus: Healthcare podcast.
A full transcript follows the video.
This podcast was recorded on April 13, 2016.
Kristine Harjes: Peering into the crystal ball, on this Healthcare edition of Industry Focus.
Greetings from Fool HQ in sunny Alexandria, Virginia, as my fellow Industry Focus host Sean O'Reilly Might say. Kristine Harjes here with healthcare investor extraordinaire, Todd Campbell on the phone. How's it going, Todd?
Todd Campbell: I'm excited about this show. It's going to be a lot of fun.
Harjes: Yeah. The premise behind today's episode, sometimes on this show, we talk about the future of healthcare, and I kind of get the sense that there are some really shocking things we think should already be here that aren't. For example, inter-operable electronic health records, or something like that. Healthcare seems like it's lagging a bit behind some of these other Industries that have adopted the newest, latest, greatest technology. But, today's show is just the opposite. We are talking about some crazy, futuristic-seeming things that are already here and already on the market. The first one we wanted to start with is robotic surgery, which seems like a really crazy concept, but it's here, it's happening.
Campbell: It's amazing! You know we do a lot of prep work, obviously, whenever we're getting ready for our shows. And the one I was doing the prep work for today's show, I couldn't help but think about some of the favorite science fiction movies. Kristine, do you like Matt Damon?
Harjes: I am so bad at pop culture, I don't even know who that is. That's embarrassing to admit, I'm sorry. (laughs)
Campbell: Well, he had this movie, and it was called Elysium. In Elysium, there was this healthcare pod, and you could just lay down in it, it would diagnose you and cure you. And I started thinking, how do we get to that point from where we are today? And what's fascinating is, I think your one core building block of getting to those healthcare pods is going to be advances in robotic surgery.
Harjes: You know, I almost wanted to make a reference to ... (laughs) there are so many people who are about to judge me for not knowing the difference, but it's either Star Wars or Star Trek, where there's some sort of magical diagnosis machine. Do you know what I'm getting at?
Campbell: Your judging is going to begin immediately.
Harjes: I know, (laughs) we'll to get some listener emails about this, my apologies. But, I'm sure most of you listening know what I'm talking about. Fingers crossed, anyways.
Campbell: Yeah, Star Trek and the hologram, and the whole concept that you could have virtual caregivers.
Harjes: There you go.
Campbell: That reality is getting closer than many people may realize.
Harjes: Exactly. To your point, it sounds like science fiction. But this is something that's out here, particularly with a company called Intuitive Surgical that makes this device called the da Vinci robot.
Campbell: Yeah. They are the granddaddy of robotic surgery, no question. They pioneered the space. It's a company that's been around since the mid-90s, and they licensed technology for robotic surgery that was developed in the 80s by a company named SRI International that had government contracts to build a system, if you will, that would allow them to conduct surgery on the battlefield more efficiently. Da Vinci has been slowly but steadily growing and becoming a big part of various surgical procedures ever since. I think the first da Vinci came onto the market about '99 or 2000. And now, it's one of the most commonly used ways to do things like hysterectomy and prostate surgery.
Harjes: So, the question that comes to mind for me thinking about robotic surgery would be, is it worth it? I guess there are plenty of elements to that question. Is it worth it from a cost standpoint, or efficacy? What do you think there? Is this something that makes sense to adopt?
Campbell: You look at these machines, and they're kind of scary-looking. They've got all sorts of arms that look like tentacles, and instruments that can go inside your body, and move things around and stuff. So, yeah, these are futuristic systems, and you have to wonder, is this system really any better than Mr. XYZ who has been conducting open surgeries for 30 years, and does four or five of them a day. The argument for robotic surgery, however, is that you're talking about the ability to conduct certain surgeries with very small incision points, rather than large incision points.
Theoretically, that could reduce the amount of time in recovery, reduce costs to the system by keeping people out of intensive care units, and getting them back into their homes more quickly. These machines are also fairly easy to control, and they're steady. You don't have to worry as much, if you will, about a human hand and potential tremors or anything like that while conducting surgery. So, there are arguments you can make that say, "This robotic surgery offers advantages to the traditional person peering into a person's abdomen to conduct these." I would say that, overall, one of the biggest advantages is the ability to magnify the workspace, if you will, for the doctor. These machines have cameras, and these cameras magnify what the doctor is seeing. And now, it's like zooming in on a PowerPoint presentation and being able to see every single little detail, rather than staring at it in 2D.
Harjes: Yeah, that's pretty cool. It's almost like, you're not completely removing the human element, you're just making the doctors superhuman. When you're talking about the doctor's hand shaking or something like that, it reminded me, earlier today, I was talking to one of my co-workers about going to the dentist, and she mentioned that her dentist, last time she was there, mentioned that he had just bought a Fitbit. And my immediate thought there was, "Oh my gosh, what if he's doing something to my tooth and happens to make his steps and it starts vibrating? And he's working on my mouth?" That's just one example of the human error that can be involved here.
Campbell: (laughs) Right. And it might be helpful, too, to paint a virtual picture, if you will, for our listeners. Essentially, what we're talking about here, these da Vinci systems, they're systems that sit near the bed where the surgery would be performed, and the surgeon actually will sit behind in a control console that's operated by levers that are operated by the hands and by foot pedals. They're staring into almost goggles, attached to a camera with these instruments, and that allows them that 3D experience as they're conducting the surgery. So, their hands and their feet are moving the instruments as they're doing it, so they're not fully removed. But, again, you could argue there are some advantages.
Harjes: So, who else is in the space? Does Intuitive have it to itself?
Campbell: They are absolutely the market share leader, they're the Goliath out there. There's some upstarts, we'll talk about them in a second, who want to hone in on their territory. But they've been groundbreaking and controlling this market for the last 16 years. They've got 3,600 of their da Vinci systems installed throughout the globe. 2,400 here in the U.S. alone. If you're going to get robotic surgery at this point in time, it's going to be done using a da Vinci system. Of course, that's very good for investors, because first you've got these systems being sold, and they're not cheap, but they also have recurring revenue streams that they receive from installing those systems, because every time a procedure is done, some instruments need to be discarded and thrown in the garbage and replaced with new instruments. As it stands now, we're talking about a market that's about $2.3-2.4 billion, and it could grow fairly exponentially over the course of the next decade or two.
Harjes: Right, you've got that razor-and-blade model that we know is extremely effective. 70% of their sales right now come from that recurring blade-type model, which seems really promising. But you mentioned that there are some upstarts that could threaten them.
Campbell: Yeah, there are a couple different companies. One is really an upstart, and the other is just a deep pocket of a company. The upstart is a company called TransEnterix (NYSEMKT:TRXC). They are developing something called the SurgiBot. The SurgiBot is a much lower entry-point cost, about a third the value, roughly, of the average da Vinci system. It has not been FDA approved yet. They were supposed to get approval last month, it got pushed back to potentially getting approval this month. If it does get approval, then they're going to go out and start pitching to smaller hospitals that haven't been able to pony up the million dollars-plus to buy the da Vinci.
There's some advantages -- they claim they've got a system that provides with better feedback to the doctor, haptic feedback, an articulating camera that could be something that doctors would favor. And, you don't have to sit behind a console and be that far-removed from the patient. This is a mobile system that theoretically can be moved from operating room to operating room. But again, TransEnterix is a very, very small firm. They don't have a lot of cash on their balance sheet. They are going to launch this thing and basically hope demand is big enough to be able to eventually carve a way, a little bit at a time, at Intuitive Surgical's dominance.
Then, the other company is much bigger. We're talking about a combination between Johnson & Johnson and Google Life Sciences. They created this company called Verb Surgical. They're going to take Johnson & Johnson's fast experience and surgical instruments and medtech, put that together with Google's experience in analytics, and try to come up with a better mouse trap than Intuitive Surgical. But they just got started last year. Who knows when they might even have a product that could compete in this place?
Harjes: So, one final question on this topic. Looking forward, say, three to five years, do you think this is a winner-take-all market? If so, which of these three ventures would you put money behind.
Campbell: No, I don't think it's winner-take-all at all. Last year, there was 652,000 procedures done via robot. That was about 20% of all the procedures that have been done since the first da Vinci rolled out 15-16 years ago. Procedure volume is growing exponentially. 12-14% a year. And as it stands right now, Intuitive Surgical thinks that, without any further innovation, their target market is more than four times as big as it is today. There's 50 million surgeries that are done in the U.S. every year. 200 million done worldwide. I think this is a market opportunity that has a lot of long legs. The way to play it, if you're interested, in my opinion, would be Intuitive Surgical. Then, of course, keep your eye on these other players.
Harjes: Okay. Before we move on to the second half of our show, I have a question for our listeners -- are you always looking for high-quality stock ideas and research to back it up? If the answer is yes and you haven't checked out The Motley Fool's Stock Advisor, then that could be exactly what you're looking for. Check out Focus.Fool.com to learn some more, and also get access to a special pricing discount just for our podcast listeners. Again, that is Focus.Fool.com.
Alright, we've covered robots and how they're removing humans and all their flaws from surgery, it's totally sci-fi, it's awesome. Our next topic is kind of the opposite of this concept. It is taking the most fundamental part of our human selves to improve health outcomes. I'm talking about DNA and DNA sequencing. Todd, broad view, what is going on in this space?
Campbell: We've got science fiction all over the place that's reality. The whole concept of being able to rewrite the parts of our genetic code that are malfunctioning, and cure disease at the very base cause, is absolutely fascinating. And what we're dealing with here are technologies that are known as gene sequencers. They're made by a company called Illumina. There are some others that do it as well. These sequencing machines allow you to basically dive deep into the DNA of living things. Maybe plants, maybe people, maybe food, whatever. You're able to dive into this, find problems within those genes, and theoretically come up with solutions to those problems.
Harjes: This is so, so cool! I mean, I just absolutely loved doing research about this this morning. Just thinking about the beginning of the Human Genome Project which was completed 13 years ago, and how far we've come to today, is incredible. This is something that -- sequencing the first human genome took 10 years, and now it takes a couple of hours. It cost $3 billion to do the first one, depending on who you ask; now it's about $1,000.
Campbell: Yeah! It's amazing! And, what's happening is, technology in this space is growing so quickly that they're able to build smaller and faster and better machines, and come up with machines that are either targeting the high-end, where you need a lot of throughput and a lot of deep-dive, deep sequencing; and then, they're also targeting smaller markets, small labs, that would be able to explore maybe one particular aspect that they wanted to do research on. That's the new mini-version that Illumina just rolled out in January that only costs $50,000.
Harjes: And this totally makes sense with the direction you see healthcare taking now, where medicine is increasingly personalized.
Campbell: Yeah. There's a huge push toward personalized medicine, and rightfully so, because we're finding that so many diseases are tied to some mutation of a gene, or an absence of a gene, or a problem with a protein, or something like that. Being able to go through and actually find them is step one of being able to then go back and say, "Okay, now that we have found the problem, how do we create a medicine," whether it's an RNA-type medicine, a gene-editing, immunotherapy, whatever, "and how do we now go without repairing that DNA, the genetic code?" So, the future of gene sequencing is quickly and rapidly evolving toward pairing up gene sequencing with the clinical research that's being done to develop drugs.
Harjes: Indeed. So, right now, Illumina controls about 90% of this gene sequencing market. What do potential investors need to know about this company?
Campbell: You pretty much just summed it up. 90% of the market! They're the dominant player. There are other companies out there that make sequencing machines. You've got Life Technologies, which is owned by Thermo Fisher, that participate. You've also got Pacific Biosciences (NASDAQ:PACB), that just rolled out their latest model at the end of the fourth quarter. But they're small bit players. Illumina has 7,500+ machines installed throughout the world. For comparison, Pacific Biosciences has about 160 machines. Illumina does $2.2 billion a year in sales. For comparison, Pacific Biosciences does less than $100 million. So, they are the Goliath in the space. And being the Goliath in the space means they've got the resources and the financial firepower to really move this whole DNA sequencing thing into new realms.
Harjes: Yeah. I think what you're leading into right now is their new GRAIL initiative, which could be by far the most important thing they've done yet.
Campbell: It's fascinating. You think about cancer, cancer is always evolving, it mutates, and that's what makes it so hard to treat. Well, if you are able to detect cancer early on, then you know you're going to be able to treat it more effectively. Most cancers, unfortunately half of them, are discovered in stage 3 or stage 4 levels. That makes it extremely difficult to treat them. You have to use more and more toxic chemicals and medicines to try and treat them. What Illumina's doing with GRAIL is taking all of its experience in analyzing the genome and leveraging that to be able to identify biomarkers that are kicked off by cancer cells. So, theoretically, GRAIL would allow you to detect cancer far sooner than you would be able to detect it otherwise.
Harjes: Yeah, maybe before you even have symptoms, is the ideal. What it's doing is, instead of scanning for the effects of cancer, it's actually a direct measurement of cancer DNA. So, your chances of finding something early are much greater. And that means that your chances of survival are much greater.
Campbell: Yeah, and this is a big market. If you look at Illumina's presentation, it's available on their website, I encourage everybody to go to their website and check it out, they talk about a base case where this could be a $20 billion a year opportunity. And that's just if you're detecting stage 2 or higher cancers in patients who are at high risk. If they evolve this technology to a point where they're able to detect stage one, and be able to evaluate most patients and tell doctors where that tumor actually is located, then they think ... the sky's the limit, basically.
Harjes: Yeah, this bull case has a $200 billion market opportunity, in theory.
Campbell: Yeah, in theory. We won't get the cart too far in front of any of the horses. Let's just assume this is going to be a diagnostic tool that we should see over the course of the next few years start to get rolled out in high-risk patients. And know that this, eventually, could be more of a meaningful revenue contributor for investors than the sequencing machines themselves.
Harjes: Yeah, Illumina has a greater-than 50% ownership in this venture. It also has investors like Bill Gates, Jeff Bezos from Amazon. Really interesting part of this company to take a look at and follow as they make progress.
One housekeeping note before we sign off -- we now have a Facebook group for all of The Motley Fool's podcasts. Search on Facebook for "Motley Fool Podcasts." It's a private group, but spoiler alert -- if you request to join, we will probably let you join. We can continue the conversation there. Todd, thank you so much for your time today. Folks, thanks for listening!
As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against these stocks, so don't buy or sell based solely on what you hear. That's a wrap for today's show. Until next time, Fool on!