2023-08-07 09:00:00 ET
Summary
- Intuitive Surgical, the established leader in robotic surgery has lead recent advancements in AI that are incorporated into its existing robotic surgery offerings.
- Integration of AI technology in the company's robotic surgery systems could enhance precision, planning, monitoring, and training, leading to a potential growth surge of 20%.
- This could aid the company in defending its position against challengers, which we believe would lead to Intuitive gaining even more market share in the lucrative robotic surgical market.
In our previous analysis of Intuitive Surgical, Inc. ( ISRG ), we forecasted Intuitive Surgical, a leader in robotic surgery, to experience continued top-line growth at an average rate of 12.2% over the next five years supported by the rising adoption rates of robotic surgery in the past decade. We also believed that Intuitive could continue to expand its economies of scale which could lead to lower R&D as well as SG&A costs in the future. While we expected Intuitive Surgical to maintain its dominant market leader position in the foreseeable future, we anticipate a decrease in its market share from 84.23% to 80.22% by 2026 attributed to the entry of larger healthcare equipment manufacturers into the market.
In this assessment, we delved into the potential for Intuitive Surgical to enhance its leadership in the field of robotic surgery systems through advancements in AI technology. Our analysis began by investigating the integration of AI within the Healthcare Equipment & Services Industry Group, shedding light on the advantages AI offers within the realm of surgical robots. Additionally, we examined how Intuitive Surgical could harness AI, specifically by evaluating its implementation in the company's existing products such as Da Vinci and Ion Systems, as well as other offerings within its Instruments segment. Our analysis extended to the potential impact of AI on the company's revenue growth trajectory and its standing within the broader surgical robotics market. We did this by forecasting the growth of AI robotic surgery revenue and market share for Intuitive Surgical. Ultimately, our findings were incorporated into an updated valuation, utilizing a DCF approach, reflecting the newfound insights gleaned from our projections.
AI in Healthcare Equipment
Intuitive Surgical is categorized as a company in the Health Care Equipment & Supplies Industry which is part of the Healthcare Equipment & Services Industry Group. We compiled examples of how AI is incorporated across the industry:
- Medical Imaging : Uses deep learning techniques to help healthcare practitioners in the detection of diseases and abnormalities which enhances the diagnosis and treatment accuracy, efficiency and personalization. Its applications include cardiovascular conditions, neurological abnormalities, cancer screening and fractures.
- Predictive Analytics : Applied in healthcare for analyzing datasets for more accurate detection and predictions of complex conditions or disorders such as “rare hereditary and neurodegenerative diseases”.
- Virtual Assistants : Enables a more personalized experience for patients by assisting in identifying illnesses based on symptoms, monitoring health status and scheduling doctor appointments
- AI-Based Robotic Surgery : Incorporates AI in robotic surgery systems to improve patient outcomes, standardize practices, reduce stress, enhance efficiency and bridge the gap in access to surgical treatment.
Focusing on robotic surgeries, according to PwC , robots have been utilized in medicine for over 3 decades, assisting in surgeries, automating tasks, aiding rehabilitation, and supporting those with chronic conditions. Based on market research reports such as Verified Market Research , Research and Markets, Global Market Insights and Markets and Markets, the average total market size of the surgical robot market was $6.72 bln in 2022, highlighting a significant market. We believe AI could benefit surgical robots, compiling several key benefits below including:
- Precision and Accuracy : AI pattern recognition can swiftly detect diseases like atrial defects, while surgical robots' precise control minimizes harm, complications and recovery time. These robots handle repetitive tasks, even performing autonomous surgeries like gallbladder removal, allowing assistants to automate tasks like suturing, enhancing focus on intricate procedures. Even in cases where surgery is only robot-assisted, and AI aids real-time monitoring for informed decisions during robot-assisted surgeries.
- Improved Planning and Simulation : AI can leverage vast data to enhance surgical approaches, suggesting efficient techniques and reducing complications by analyzing patient data, tailoring treatment plans, and minimizing risks for better safety and outcomes. Furthermore, AI can assist surgeons with real-time augmented reality guidance and feedback to refine skills and enhance surgical results progressively.
- Real-time Monitoring : As mentioned previously, AI integration in surgery allows real-time monitoring of procedures, patient health, and resource use, boosting efficiency and safety in hospitals. The AI system processes data like video feeds and patient vitals to generate reports and informed decisions, improving management practices.
Overall, we identified the benefits of AI integration in healthcare equipment including improving accuracy, efficiency, and patient outcomes in areas such as medical imaging, predictive analytics, virtual assistants, and robotic surgery. In surgical robots specifically, we believe that Intuitive Surgical could benefit by integrating AI as it enables precision, enhanced planning, simulation, real-time monitoring and training. In the following section, we examine how Intuitive Surgical has integrated AI across its surgical robots.
How The Company’s Products Integrate AI
In this section, we examine the AI developments of Intuitive Surgical and highlight the incorporation of AI in the company’s surgical robots including its Ion Endoluminal Systems and Da Vinci products.
Ion Endoluminal Systems
The company's FDA-cleared Ion Endoluminal system employs AI and computer vision for minimally invasive lung biopsies, using flexible robotic catheters to navigate the body's curves and collect biopsies with miniature forceps.
Previously, Intuitive Surgical's CEO, Gary Guthart, anticipated strong growth for Ion particularly in regions experiencing a rise in lung cancer and lung disease cases, such as China which has the highest lung cancer burden in the world. Based on the company’s annual report , China represented over $350 mln in revenue which was 5.6% of its total revenue.
Furthermore, the also submitted its “regulatory dossiers for CE mark in Europe, for clearance in Korea, and in China via its Green Channel”. As seen in the chart below, the company’s Ion installed base had increased by an impressive 1,683% from Q1 2020 to 321 by Q4 2022.
Intuitive Surgical
Da Vinci Systems
For the company’s Da Vinci product family, the company highlighted that it applies AI and machine learning technologies to its Da Vinci product line, drawing from over two decades of experience and 10 mln procedures to offer insights that aid surgeons in using robotics, aiming to reduce surgical variability and improve patient care.
In relation, Intuitive developed its SureForm product to improve stapling in surgery. The company’s SureForm stapler family introduces intelligent features for precise and consistent staple formation, enhancing surgical outcomes and minimizing tissue damage, and it is integrated into the company’s da Vinci X and Da Vinci Xi surgical systems.
IRIS Platform
Besides the Ion and Da Vinci systems, the company’s other instruments products that incorporate AI include IRIS which is its augmented reality imaging platform that utilizes machine learning algorithms. It assists surgeons in surgical planning , providing essential image details and serving as a teaching tool. This system enables physicians to visualize anatomy and implement surgical plans in the operating room. We believe this could benefit the company as it is complementary to its Da Vinci systems.
Intuitive Ventures
Furthermore, we also highlighted the company’s AI developments such as its Intuitive Ventures and KelaHealth investments. Intuitive Ventures serves as an internal funding program to nurture innovative technologies, while the collaboration with K?laHealth focuses on leveraging AI to predict surgical complications. K?laHealth's algorithms assess and update patient risk across various complication categories, enabling personalized interventions based on individual risk profiles and considering hospital-specific standards.
Summary
Overall, we believe the company’s incorporation of AI in its surgical robots spans across various products such as with its Ion systems and we expect the company to continue benefiting from its strong growth since its launch in 2020. Additionally, we believe the company’s IRIS platform could benefit its Da Vinci family as well as its SureForm technology which is integrated with the Da Vinci Xi systems. Thus, we believe the company’s AI developments could allow the company to capitalize on the AI robotic surgery market and we expect it to grow in line with the market, leveraging the company’s existing dominant market leadership in surgical robotics.
AI Could Help the Company Maintain its Market Leadership
In our previous analysis , we highlighted the company’s market share leadership in the surgical robotics market. We updated the market share of the company (excluding service revenue) for 2021 and 2022 at 77.4% in 2022. Our projections indicate its share to decline to 69.2% by 2026 due to increased competition from new entrants in surgical robotics which we determined in our previous analysis.
Source: Company Data, Verified Market Research, Research and Markets, Global Market Insights, Markets and Markets, Khaveen Investments
To determine whether the company’s AI developments could help it to maintain its market dominance in the robotic surgery market, we compiled and estimated data on the adoption of AI robotic surgeries.
For the TAM, we based the figure on the total surgical equipment market size of $14.3 bln in 2021 and estimated the 2022 market value based on the projected CAGR of 9.3% by Straits Research .
Whereas for SAM, we derived an average market size of $6.72 bln based on market research reports by Verified Market Research, Research and Markets, Global Market Insights and Markets and Markets as well as an average market forecast growth rate at a CAGR of 17.42%.
For the SOM, we first estimated Intuitive Surgical’s AI robotic surgery revenue based on its latest earnings briefing of $890 mln from its Da Vinci X systems which includes the SureForm AI technology and also estimated the contribution of its Ion systems based on its % of procedures at 1.2%. In total, we estimated the company’s AI revenue to be $953 mln of 18.3% of its total robotic surgery revenue. We assumed the 18.3% figure as the adoption rate of AI robotic systems as the company is the dominating market leader. We multiplied the SAM with our assumption of 18.3% to derive the SAM of $1.7 bln. We derived an average CAGR of the AI in Healthcare market research reports by Fortune Business Insights , Precedence Research and Grand View Research .
AI Robotic Surgery Market Projections ($ bln) | 2022 | 2027F | CAGR |
TAM (Global Surgical Market Size) | 15.6 | 24.3 | 9.3% |
SAM (Robotic Surgery Market) | 6.72 | 15.00 | 17.4% |
SOM (AI Robotic Surgery Market) | 1.23 | 6.38 | 39.0% |
AI Robotic Surgery Market % of Total Robotic Surgery | 18.3% | 42.6% |
Source: Company Data, Verified Market Research, Research and Markets, Global Market Insights, Markets and Markets, Fortune Business Insights, Precedence Research, Grand View Research, Khaveen Investments
Company Data, Verified Market Research, Research and Markets, Global Market Insights, Markets and Markets, Fortune Business Insights, Precedence Research, Grand View Research, Khaveen Investments
Based on the table above, we estimated the share of AI robotic surgery systems to increase from 18.3% to 42.6% by 2027 due to the higher CAGR for the SOM at 39% compared to 17.4% for the total robotic surgery system market.
Intuitive Surgical Robotic Surgery Revenue Projections ($ mln) | 2022 | 2023F | 2024F | 2025F | 2026F |
AI Robotic Surgery Revenue | 953 | 1,324 | 1,840 | 2,558 | 3,554 |
Growth % | 39.0% | 39.0% | 39.0% | 39.0% | |
AI Robotic Surgery Revenue % of Total Robotic Surgery Revenue | 18.3% | 21.2% | 24.9% | 28.7% | 33.0% |
Non-AI Robotic Surgery Revenue | 4,247 | 4,923 | 5,557 | 6,347 | 7,218 |
Growth % | 15.9% | 12.9% | 14.2% | 13.7% | |
Total Robotic Surgery Revenue | 5,200 | 6,247 | 7,398 | 8,905 | 10,772 |
Growth % | 20.1% | 18.4% | 20.4% | 21.0% |
Source: Company Data, Khaveen Investments
Company Data, Verified Market Research, Research and Markets, Global Market Insights, Markets and Markets, Fortune Business Insights, Precedence Research, Grand View Research, Khaveen Investments
Based on our estimates of the company’s AI robotic surgery revenues of $953 mln in 2022, we applied the market CAGR for AI in Healthcare of 39% through 2026. Moreover, for its non-AI revenues, we applied our derived growth projections for its robotic surgery systems from our projections in our previous analysis. In total, we forecasted the company’s AI robotic surgery revenues share of total robotic surgery revenues to rise to 33% by 2026 from 18.3% in 2023.
Intuitive Surgical Robotic Surgery Market Share | 2021 | 2022 | 2023F | 2024F | 2025F | 2026F |
Without AI | 76.9% | 77.4% | 76.4% | 73.4% | 71.4% | 69.2% |
With AI | 76.9% | 77.4% | 79.1% | 79.8% | 81.8% | 84.3% |
Thus, we believe the company’s AI developments could boost its growth outlook at a forward average of 20% compared to 14.2% without AI due to the higher growth for AI surgery systems at a 33% CAGR compared to the total surgical robotics CAGR of 17.4% and overall surgical equipment CAGR of 9.3%. As a result, our revised market share projections show that we expect the company’s market share in the surgical robotics market to increase to 84.3% by 2026 with support from AI growth in comparison to our initial forecast of a decline to 69.2%, translating to a 15% benefit to its market share.
Risk: Competitors Advancing AI Development
We believe one of the risks of the company is competition in the AI robotic surgery system market as several competitors incorporate AI into their systems. The same companies that threatened the company's leadership in robotic surgery are also the same companies adopting AI to continue challenging Intuitive. Some of the companies which we highlight are Stryker ( SYK ) and Medtronic ( MDT ) which are two notable competitors in the surgical robotics market. Stryker is also pursuing AI developments for surgical robotics such as intelligent surgical planning systems following its acquisition of patent technologies as well as acquiring AI company Gauss Surgical in 2021, creating its AI team. The company’s management also indicated a greater focus on AI in 2023. Similarly, Medtronic has also been expanding into AI with its acquisition of Digital Surgery with AI video platforms for surgeries. However, we believe Intuitive Surgical has an advantage over these companies due to its market dominance with a 77% market share which the company could capitalize on its massive installed base, and as we highlighted its AI products are complementary and integrated with its surgical robots.
Verdict
Intuitive Surgical Total Revenue Projections ($ mln) | 2022 | 2023F | 2024F | 2025F | 2026F |
Total Robotic Systems (With AI) | 5,200 | 6,247 | 7,398 | 8,905 | 10,772 |
Growth % | 8.5% | 20.1% | 18.4% | 20.4% | 21.0% |
Services | 1,020 | 1,134 | 1,251 | 1,371 | 1,495 |
Growth % | 11.33% | 11.13% | 10.33% | 9.64% | 9.05% |
Total Revenue | 6,220 | 7,381 | 8,648 | 10,276 | 12,267 |
Growth % | 8.93% | 18.66% | 17.18% | 18.83% | 19.37% |
Source: Company Data, Khaveen Investments
We updated our revenue projections from our previous analysis based on its segment breakdown with its full-year 2022 results. For its robotic systems revenues, we forecasted it factoring in potential AI growth. Also, we added our previous forecast for its Services segment and updated its 2022 figures. In total, we forecasted its 5-year forward average growth of 18% which is higher than our previous forecast of 12%.
Seeking Alpha, Khaveen Investments
Khaveen Investments
Based on a discount rate of 10.1% (company’s WACC) and terminal value based on the average EV/EBITDA of selected surgical robotics companies of 25.22x, our model indicates an upside of 17.9%.
To sum it up, we believe that the integration of AI holds significant potential for enhancing the Healthcare Equipment industry, particularly within the realm of robotic surgeries. In the context of surgical robots, our conviction lies in the substantial benefits that Intuitive Surgical could derive from AI integration. AI technology facilitates precise surgical procedures, aids in planning, enables real-time monitoring, and enhances training through simulation. This is notably observed in the company's Ion systems and the potential extension to its Da Vinci family and SureForm technology integrated with Da Vinci Xi systems.
Anticipating the trajectory of the AI robotic surgery market, we project that the company's AI advancements could capitalize on its existing dominant market leadership in surgical robotics. This alignment could potentially lead to a growth surge of 20%, surpassing our previous 14.2% forecasted growth rate without AI integration. Notably, AI surgery systems are expected to exhibit a robust 33% CAGR compared to the broader surgical robotics CAGR of 17.4% and overall surgical equipment CAGR of 9.3%. Our recalculated market share projections indicate a potential increase to 84.3% by 2026, a notable rise from our initial projection of 69.2%, all attributed to the bolstering effect of AI growth. This stands as a substantial 15% advantage to the company's market share.
Considering our revised valuation, we upgrade the company's status to a Buy , setting a target price of $404.61 , a significant increase from the previous target of $299.48. We base this decision on our belief that the company's AI endeavors could be a key driver behind its heightened growth prospects.
For further details see:
Intuitive Surgical: AI Boosts Robotic Surgery Leadership