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The Intuitive Future of Medicine

By Rich Smith - Updated Nov 15, 2016 at 5:16PM

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Surgical robots' CEO takes us inside this innovative company.

The Fool's Rich Smith recently talked with Lonnie Smith, CEO of Intuitive Surgical (NASDAQ:ISRG). The maker of the da Vinci robotic surgical system is a three-time Rule Breakers recommendation, and the stock has more than doubled since it was first picked. Here, Lonnie Smith talks about attracting new users (hospitals, doctors, and patients), as well as about market expansion, competition, and more.

Question: Lonnie, for those of us who aren't familiar with Intuitive Surgical yet, can you give us a thumbnail sketch of what the company does?

Lonnie Smith: We develop and manufacture systems that provide surgeons with superior surgical vision, dexterity, and precision through unparalleled state-of-the-art robotics, 3-D vision, and instrument technology. These systems improve surgical outcomes and reduce trauma. Our products allow surgeons to perform complex surgery through tiny keyhole incisions in the same manner as they perform surgery through large open incisions -- intuitively.

The da Vinci surgical system effectively places the surgeon's fingers at the very tips of their instruments, so they move in the same direction as their hands and fingers. The instruments precisely replicate the surgeon's natural wrist, hand, and finger movements outside the body, combined with "tremor elimination" and "motion scaling," which translates large movements outside the body into very small and precise movements inside the body -- significantly improving surgical dexterity and precision.

We believe that some prostate cancer patients who would have historically selected a non-surgical option are now selecting a da Vinci prostatectomy, because of its value in terms of efficacy and invasiveness. We are also encouraged by the early growth we have seen in the da Vinci hysterectomy procedure.

Question: In your 10-K, you list several companies as current or potential competitors in robotic-assisted surgery, including giants like Toshiba and Hitachi (NYSE:HIT) as well as smaller players like Integrated Surgical Systems, MicroDexterity, Armstrong Healthcare, and Sinters. When you look over your shoulder, do you see any of these companies breaking away from the pack and gaining on you?

Lonnie Smith: Several of the companies you mention are focused in areas outside our business interest, such as orthopedic drilling or general laparoscopic positioning; others, we believe, are in a pre-clinical status within undisclosed surgical specialties. We are building a very attractive surgical category that will certainly invite competition and believe that competition may eventually come from some of the Japanese companies you've mentioned. We can't control who may try to enter this space, but we can and will continue to build higher barriers to entry, such as superior product offerings, intellectual-property protection, multiple regulatory clearances, a large installation base, worldwide training centers, strong customer relationships, and an excellent balance sheet. We are committed to continuing to build our leadership position.

Question: "Getting 'em while they're young" is a key objective of many businesses -- Altria (NYSE:MO) and cigarettes, Toyota (NYSE:TM) and its Scion brand, and more. Even more relevant, Microsoft (NASDAQ:MSFT) likes to give students access to its development tools and accustom them to its programming tools and methodologies, and Reed Elsevier (NYSE:ENL) and Thomson (NYSE:TOC) try to hook law students on their legal databases by giving them free access while they're still in school. Is Intuitive Surgical doing anything along these lines -- say, partnering with medical schools to provide students with hands-on experience in da Vinci use?

Lonnie Smith: If you ask a 60-year-old surgeon if robotics will play an important role in the future of his practice, you'll probably get mixed results. However, if you ask a 30-year-old resident, he will most probably answer yes.

Robotic surgical training and experience has proved to significantly enhance the career opportunities for young surgeons. We are told that it has become one of the primary decision criteria for many medical-school graduates in selecting where they will go as a resident for their surgical training. Progressive surgical training centers have and are making robotic surgery a key part of their training program.

Question: I recently watched a program on the Discovery Channel discussing robots on the battlefield. One of the robots profiled was a little medical unit that would be sent out to recover wounded soldiers, pick them up, stabilize them, and shuttle them to safety. Do you see a role for Intuitive Surgical here down the road? Could da Vinci technology be used to let a surgeon to operate on a patient truly remotely?

Lonnie Smith: This was actually the original application envisioned when the technology was being developed at SRI International in the early 1990s. Our founders licensed the technology from SRI, and we further developed it for mainstream minimally invasive surgery.

While truly remote surgery is technically possible, the economic, legal, and regulatory environments remain undeveloped for such surgeries. Therefore this is not a focus for us at this time. Nevertheless, research continues in this area, and we are continuing to work with organizations like SRI and a number of academic centers to advance the capabilities of surgical robotics.

Question: How many hospitals or clinics in the United States do you think could economically put the da Vinci system to use, how much of this potential U.S. market has da Vinci penetrated so far?

Want to see where Intuitive Surgical is and where it's going, plus much more about this innovative company? Rule Breakers subscribers can read the complete interview with Intuitive Surgical CEO Lonnie Smith byclicking here. Not a subscriber yet? Take a free 30-day trial for full access to the service, including interviews, updates, discussion boards, and two new stock recommendations a month. Click here to get started.

Fool contributor Rich Smith does not own shares of any companies named above -- but if he did, he'd have to tell you. Microsoft is an Inside Value recommendation. The Fool'sdisclosure rulesare intuitively simple.

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Stocks Mentioned

Intuitive Surgical, Inc. Stock Quote
Intuitive Surgical, Inc.
ISRG
$240.32 (-0.88%) $-2.14
Altria Group, Inc. Stock Quote
Altria Group, Inc.
MO
$44.10 (-0.34%) $0.15
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$282.91 (-0.26%) $0.74
Toyota Motor Corporation Stock Quote
Toyota Motor Corporation
TM
$157.31 (0.41%) $0.65
Hitachi, Ltd. Stock Quote
Hitachi, Ltd.
HTHIY
$98.88 (-0.32%) $0.32

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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