Intuitive Surgical Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 19, 2023

There are 13 speakers on the call.

Operator

I will now turn the conference over to your host, Head of Investor Relations, Intuitive Surgical, Brian King. Please go ahead.

Speaker 1

Good afternoon, and welcome to Intuitive's 3rd quarter earnings conference call. With me today, we have Gary Guthard, our CEO Jamie Samath, our CFO and Doctor. Miriam Caret, our Chief Medical Officer. Before we begin, I would like to inform you that comments mentioned on today's as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in our Securities and Exchange Commission filings, including our most recent Form 10 ks filed on February 10, 2023 and Form 10 Q filed on July 24, Our SEC filings can be found through our website or at the SEC's website.

Speaker 1

Investors are cautioned not to place undue reliance on such forward looking statements. Please note that this conference call will be available for audio replay on our website at intuitive.com on the Events section under our Investor Relations page. Today's press release and supplementary financial data tables have been posted to our website. Today's format will consist Providing you with highlights of our Q3 results as described in our press release announced earlier today, followed by a question and answer session. Gary will present the quarter's business and operational highlights.

Speaker 1

Jamie will provide a review of our financial results. Miriam will present clinical highlights and I will discuss procedure details and provide our updated financial outlook for 2023. And finally, we will host a question and answer session. With that, I will turn it over to Gary.

Speaker 2

Thank you for joining us today. In 3rd quarter, we saw strong growth in procedures performed by our customers, solid new system placements and healthy growth in utilization Amid market conditions that remain largely consistent with Q2. Our new platforms continue to gain ground with growth continuing, SP installs and procedure growth modestly accelerating and healthy growth in customer use of our digital tools. Turning first to procedures. Da Vinci procedure growth in the quarter was 19%.

Speaker 2

Areas of strength included general surgery for benign conditions, Particularly in the United States and broad regional growth with Germany, Japan, the U. K. And India as standouts, China procedure growth was in line with our global average in the quarter. U. S.

Speaker 2

General surgery procedure growth was led by cholestectomy and colon resection. Ion procedures showed continued strength with 125% growth in the quarter. SP procedure growth accelerated with 54% global growth in the quarter driven by strength in the United States. On the capital front, we placed 312 systems in Q3 compared with 305 systems in Q3 of last year. Our clinical installed base now stands at 8,127 multi port da Vinci systems, 4 90 Ion systems and 158 single port Diminci systems.

Speaker 2

Overall, our capital placement trends reflect Demand for additional capacity in multi port, continued greenfield interest in our ION system and a modest acceleration for placements of SP. The proportion of leases for new capital placements accelerated in the quarter with the U. S. Using the highest leasing rates. We think the acceleration in leasing The convenience of our leasing program and the maturity of our generation 4 multi port systems.

Speaker 2

While leasing reduces in quarter revenue relative to capital purchase, Total economics are healthy for our customer and for us. Leasing allows our customers to build clinical capacity when and where they need it and provides predefined pathways for our new technology as it enters the market. The growth rate in system utilization defined as procedures per install system Per quarter was 6%, down from 9% last quarter, while still above historical growth rates. Strong procedure growth and an increased proportion of use in benign indications shortens average procedure times and ease the scheduling. Higher utilization increases our customers' return on invested capital and is economically healthy for us.

Speaker 2

Turning to our finances. Our revenue grew 12% in the quarter and our operating expenses were within our spend guidance. Our spending reflects continued investments in research and development to support the growth of our platforms and digital tools, expansion of our manufacturing and commercial footprints and capital amortization. Looking at the broader picture, our 4th generation da Vinci platform is operating at global scale and embedded in a robust ecosystem of instruments, accessories, training and services. Customer and our digital tools are building momentum through their early stages.

Speaker 2

We welcome Doctor. Miriam Purette, Intuitive's Chief Medical Officer to this call and she will take us through our clinical perspective and some of the work we're doing to expand indications. Our operations teams did a fantastic job Our customers through the supply chain shocks of the past several years. This unavoidable effort diverted resources away from product cost And as supply chain stresses ease, we're now pivoting our attention to once again lowering our product costs. Areas of opportunity include our ION program, our SP accessories portfolio and our multi port accessories and advanced instrument lines.

Speaker 2

Given the timing of facilities completion, manufacturing efficiency improvements for new products and other complex projects, We expect variability in gross margin over the coming quarters as we work through these programs. Turning to our digital offerings, customer use Digital tools and channels is growing nicely. Our SimNow surgical simulators are installed at the majority of our customer sites and subscription renewal rates are outstanding. Routine use of Myintuitive app by over 10,000 da Vinci Surgeons grew by 140% year over year and is receiving strong net promoter scores that continue improving over time. Our Intuitive Hub Media Management and TelePresence System installations grew 58% in the quarter and hub captured surgical cases grew 61%.

Speaker 2

In closing, core demand is healthy. We're focused on extending our ecosystem internationally and driving our product costs down, particularly for our newer platforms. We are dogged in pursuit of significant long term opportunity to improve the quadruple aim using our integrated ecosystem powered by analytics and we are pacing our investments to catalyze that opportunity. I'll now turn the time over to Jamie, who will take you through our finances in greater detail.

Speaker 3

Good afternoon. I will describe the highlights of our performance on a non GAAP or pro form a basis. I will also summarize our GAAP performance later in my prepared remarks. A reconciliation between our pro form a and GAAP results is posted on our website. Core metrics continue to be healthy in Q3 with global procedure growth of 19% An increase in the installed base of da Vinci systems of 13% and an increase in average system utilization of 6%.

Speaker 3

Our key financial indicators were also healthy. 3rd quarter recurring revenue grew 21%, Pro form a operating margin was 36% and pro form a earnings per share increased 23% over last year. Seizures in the U. S. Grew 17%, reflecting a lower benefit from patient backlogs as compared to the first half of twenty twenty three.

Speaker 3

Last quarter, we highlighted that our growth rate in bariatrics procedures in the U. S. Had slowed given patient interest in weight loss drugs. In Q3, we continue to see double digit growth, albeit a modestly lower growth rate as compared to Q2. Bariatrics procedures represent between 4% 5% of total global procedures.

Speaker 3

Based on third party data, we believe we continue to gain market share in the bariatric surgical segment. OUS procedures grew 24% with relative strength in India, Germany, the UK and Japan. Procedure growth in China was consistent with our expectations, lower than last quarter due to a strong base period given the recovery from COVID related lockdowns in the year ago quarter. Consistent with recent trends, growth in non neurology outside of the United States was accretive, growing approximately 31%. Within the larger cancer categories, Our fastest growing OUS procedure is colon resection, a high value procedure led by adoption in Japan, Germany and the UK.

Speaker 3

With respect to capital performance, we placed 312 systems in the 3rd quarter as compared to 305 systems last year. As a reminder, system placements in Q3 of last year benefited from a delay in the shipment of approximately 15 systems from June into July as a result of supply chain challenges we encountered in June of last Late in Q3, we started to see delays in tender processes in China, primarily as a Result of anticorruption efforts by the central government, resulting in lower system placements in China in Q3. We expect tender delays to continue to impact system placements in China in Q4. Q3 revenue was 1 point $7,000,000,000 an increase of 12% year over year. Q3 revenue growth was driven by procedure growth, offset by an 11% decline in systems revenue due to the significant increase in the mix of operating lease arrangements.

Speaker 3

On a constant currency basis, 3rd quarter revenue growth was also 12%. Given recent movements in exchange rates, At current rates, the U. S. Dollar is approximately 3% stronger on a revenue weighted basis as compared to the average rates realized in Q3. Revenue denominated in non USD currencies represent approximately 24% of total Revenue.

Speaker 3

Additional revenue statistics and trends are as follows. In the Q3 compared to 175 systems placed last year. Outside

Speaker 1

the U.

Speaker 3

S, we placed 150 3 systems in Q3 compared with 130 systems last year. Current quarter Placements included 60 into Europe, 32 into Japan and 10 into China, compared with 54 into Europe, 32 into Japan and 15 into China in Q3 of last year. 62 of the 3 12 systems placed in Q3 were trading transactions compared to 71 trading transactions in the Q3 of last year. As of the end of Q3, there are approximately 440 SIs remaining in the installed base, of which 85 are in the U. S.

Speaker 3

Operating leases represented 52% of 3rd quarter placements compared with 37% last year. In the U. S, 70% of system placements in Q3 were under operating lease arrangements compared to 48% last year. Of the 163 operating lease placements in the quarter, 93 were usage based arrangements, An increase compared to 54 last year, reflecting customer preferences, particularly in the U. S.

Speaker 3

While leasing may fluctuate from quarter to quarter, we continue to expect that the proportion of placements Under operating leases will increase over time. Q3 system average selling prices were $1,400,000 as compared to $1,390,000 last quarter and $1,500,000 last year. The year over year decrease in system ASPs da Vinci instrument and accessory revenue per procedure is approximately $18.30 compared with approximately $18.40 last quarter and $1800 last year. On a sequential basis, lower INA per procedure reflected the impact of customer ordering patterns, partially offset by a full quarter impact from the I and A price increase that went into effect halfway through last quarter. Turning to our ION platform.

Speaker 3

In Q3, we placed 55 ION systems as compared to 50 in Q3 of 2022. 3rd quarter ION procedures of approximately 14,500 increased 125% as compared to last year. 16 of the systems placed in the 3rd quarter were SP systems, 12 into the U. S. And 4 into Korea.

Speaker 3

SP procedures grew by 54% and average system utilization growth Pro form a gross margin for the 3rd quarter was 68.8% compared with 68.5% last quarter and As a reminder, pro form a gross margin in Q3 of last included a one time benefit of approximately 50 basis points relating to the favorable conclusion of certain indirect tax matters. The remaining year over year difference in pro form a gross margin is primarily due to a higher mix of ION revenue, which currently carries Significantly lower margins as compared to the da Vinci business and lower system ASP, partially offset by the INA price increase. Inventory increased to approximately 180 days in Q3, higher than historical We are building bridge inventory to facilitate an elevated number of line transfers to new locations. As a result, we expect higher levels of inventory relative to historical norms into 2025. 3rd quarter pro form a operating expenses increased 8% year over year, driven primarily by higher headcount related costs.

Speaker 3

During the quarter, our headcount increased by 489 employees, of which approximately 275 were for our manufacturing operations in support of revenue growth. SG and A expenses as a percentage planned leverage in our enabling functions. Pro form a other income in Q3 was $58,000,000 compared to $42,000,000 last quarter $7,000,000 last year. Other income primarily consists of interest income and the increase as compared to last quarter was driven by higher interest And higher average cash and investment balances, pro form a other income in Q3 of Last year also reflected higher than typical foreign exchange losses resulting from remeasurement of the balance sheet as as a result of the strengthening U. S.

Speaker 3

Dollar. Capital expenditures in Q3 were $256,000,000 primarily comprised of infrastructure investments to expand our facilities footprint and increase manufacturing Our pro form a effective tax rate for the 3rd quarter was 22.5% consistent with our 3rd quarter pro form a net income was $524,000,000 or $1.46 per share compared with $429,000,000 or $1.19 per share for Q3 of last year. I will now summarize our GAAP results. GAAP net income was $416,000,000 or $1.16 per The adjustments between pro form a and GAAP net income are outlined and quantified on our website and include excess tax benefits associated with employee stock awards, employee stock based compensation, And with that, I would like to turn it over to Miriam, who will discuss clinical highlights.

Speaker 4

Thank you. Now turning to the clinical side for our business. Each quarter on these calls, we highlight certain studies that we deem to be notable. However, to gain a more complete understanding of the body of evidence, We encourage all stakeholders to thoroughly review the extensive detail of scientific studies that have been published over the years. In addition to relaying the results of one of these studies, I'd like to start by describing the status of some important intuitive research projects underway that support our company's belief in the potential value of da Vinci Systems, specifically our single port system for procedures requiring refined access to tight or difficult to reach anatomical areas.

Speaker 4

In June 2021, Intuitive launched an FDA approved clinical study focused on complex Colorectal procedures such as low anterior resection or right colectomy performed using the SP platform. Currently, enrollment is complete with 60 patients across 9 sites in the U. S. And Korea. Another FDA approved clinical trial of thoracic procedures, including pulmonary lobectomy and thymectomy performed using SP Completed enrollment in June of this year with 32 subjects enrolled across 6 centers in the U.

Speaker 4

S. We believe that Intuitive's Singapore technology will enable thoracic surgeons to perform uniportal lobectomy, something that may be difficult using a BAPS approach. Intuitive intent to submit data from these two studies to the FDA after the patient follow-up outlined in the study plan and the data analysis has been completed. Now I'll turn to a notable study published in the Annals of Surgery this past August. This study was not sponsored by Intuitive.

Speaker 4

Doctor. Yogita Patel of McMaster University in Canada published early results from the REVAL trial in a manuscript titled Robotic lobectomy is cost effective and provides comparable health utility scores to video assisted lobectomy. This study describes results from a multicenter, multinational blinded, Randomized controlled study comparing the da Vinci and VAPS approach to pulmonary lumpectomy. It analyzed 164 subjects, 81 in the robotic assisted group and 82 in the BAST group, and all robotic assisted lobectomies were performed with a da Vinci multiport platform. Notably, the health utility Score was significantly higher in the da Vinci arm at 7 weeks 12 weeks post procedure, which suggests the quality of life for patients who underwent a da Vinci lobectomy was better than for patients undergoing the BAPS Interestingly and related to quality of life outcomes, the authors analyzed The incremental cost effective ratio or ICER for the robotic group relative to BAT and reported the robotic group was associated with a gain of approximately $11,000 per quality adjusted life year.

Speaker 4

In addition, the median number of lymph nodes examined and sampled were significantly higher in the da Vinci Group. To summarize, the authors conclude that early results from the RAVAL trial suggest that robotic pulmonary It's a cost effective intervention, which is associated with comparable patient reported health utility scores when compared to that lobectomy. And with that, I would like to turn it over to Brian, who will discuss additional procedure highlights and provide our updated outlook for 2020.

Speaker 1

Thank you, Maria. Our overall 3rd quarter procedure growth 19% year over year compared to 20% for the Q3 of 2022 22% last quarter. In the U. S, Q3 2023 procedure growth was 17% year over year compared to 18% for the Q3 of 2022 and 19% last quarter. Q3 growth was led by procedure strength within general surgery, with particular strength in cholecystectomy and colon resection.

Speaker 1

Outside of the U. S, 3rd quarter procedure volume grew 24% compared with 24% for the Q3 of 2022 and 28% last quarter. OUS growth was led by procedures beyond urology, which now make up 50% of total OUS procedures. General surgery growth was strong, primarily in colorectal procedures, followed by growth in gynecology procedures. Growth in urology continued to be healthy, led by kidney procedures along with continued double digit growth in prostatectomy.

Speaker 1

In Europe, we experienced strong growth in Germany, the UK and Spain. In each of the regions noted, procedure growth was led by general surgery, primarily from colorectal And specifically in Germany and the UK, hysterectomy procedures also contributed to strong growth. In Asia, growth was led by Japan. More than half of the incremental procedure growth in the country was led by strong growth in general surgery Consisting largely of colorectal and gastrectomy procedures. In China, procedure growth was consistent with our expectations for the quarter.

Speaker 1

Growth was driven primarily in neurology, notably by prostatectomy and kidney procedures. In India, while in the early stage of adoption, saw strong growth in general surgery procedures, namely I will now turn to our financial outlook for 2023. Starting with procedures. On our last call, we forecasted full year 2023 and expect full year 2023 procedure growth of 21% to 22%. The low end of the range reflects uncertainty around the duration of elevated procedure volumes with patients returning to healthcare, a continued slowing of bariatric growth rates in the U.

Speaker 1

S. And macroeconomic challenges that could impact hospitals and patient spending. At the high end of the range, We assume macroeconomic challenges do not have a significant impact on hospital procedure volumes and bariatric growth rates in the U. S. Continue at the rate we experienced in Q3.

Speaker 1

The range does not reflect significant material supply chain disruptions or hospital capacity constraints. Turning to gross profit. On our last call, we forecast our 2023 full year pro form a Gross profit margin to be within 68% 69%. We are now refining our Profit margin will vary quarter to quarter depending largely on product, regional and trade in mix and the impact of new product introductions. With respect to operating expenses, on our last call, we forecast pro form a operating expense growth to be between 12% 15 We are adjusting our estimate and now expect our full year pro form a operating expense growth to be between 12 We are also refining our estimate for non cash stock compensation expense to range between $600,000,000 to $610,000,000 in 2023, lowering the range from our previous Other income, which is comprised mostly of interest income to total between $190,000,000 $200,000,000 in 2023, an increase from our previous estimate of $160,000,000 $180,000,000 The increase primarily reflects the rise in interest rates.

Speaker 1

With regard to capital expenditures, we are narrowing our estimate to range between $900,000,000 to $1,000,000,000 primarily for planned facility construction activities. With regard to income tax, we are also refining our estimate for the 2023 pro form a tax rate to be between 22% 23% of pre tax income, reducing the previous estimate of the upper end of the range from 24% to 23%. That concludes our prepared comments. We will now open the call to your questions.

Operator

Thank you. JPMorgan, please go ahead.

Speaker 5

Great. Congrats on a good quarter. Thanks for taking the question. Maybe to start, it's hard to escape it. GLP-one is becoming a very big topic in med And your it's impacting bariatric surgery here.

Speaker 5

It doesn't seem to be impacting anything else, particularly in the pipe But just wondering your thoughts overall, could GLP-1s ultimately be a positive as more people try weight loss surgery and come in the funnel? And any other impacts, good or bad, that you foresee on the business?

Speaker 2

Thanks, Robbie. I'm going to ask Doctor. Carette as a bariatric Surgeon to go ahead and weigh in on that first part of your question and we'll talk about the broader implications after that.

Speaker 4

Yes, I think you are correct. I think in the short term, we will see patients who are considering or are in the pipeline for bariatric surgery Going to try the drug. However, given compliance issues, costs, side effects, We expect that many of them will not stay on the drugs for longer than a year or 2. And at that time, we'll consider bariatric So I think overall, we'll see an increased interest in bariatric surgery, but that will get delayed, in the short term.

Speaker 2

Robbie, any follow-up you wanted on GLP-1s?

Speaker 5

No. I had a financial question for Jamie, if that's okay

Speaker 3

Okay. Please.

Speaker 5

Jamie, it looks like the 4th quarter gross margin is ticking down a bit and you're talking about the increased depreciation costs and some of these new investments here. I was wondering if you could size the amount and I'm really looking for how to think about into next year with depreciation, so we could get our gross margin set based on whatever expansion or traction we're all forecasting. Thanks a lot.

Speaker 3

Yes. For Q4, You're not really seeing significant depreciation expense reflected in the range that we provided. That's really more next year, as some of the manufacturing capacity Facilities come online, what you're seeing in Q4 really is, a little bit of FX Given how the rates have moved, a little bit of slower progress in, some of the line transfers and product cost reduction plans that That's not a large delay. It's just slightly slower than we have planned. And then there's some mix dynamics reflected in Q4.

Speaker 3

They now to be relatively small, but those are the dynamics as to why that gross margin range for the year is at the midpoint Slightly lower than what we had previously. With respect to how 2024 is shaping up, What I would just say is, as Gary said in his prepared remarks, we'll see some variability in gross margin over the next Several quarters is the depreciation expense and the ongoing efforts to improve our product costs, They built up over COVID and because of the supply chain issues that we encountered that we're addressing. And a number of those will So, I'd say, let us give you 24 guidance for gross margin when we get to January, because

Speaker 5

Great. Thanks a lot.

Operator

We'll go to the next line, Travis Steed, Bank of America. Please go ahead.

Speaker 6

Yes. Thanks for taking the question. I guess Follow-up on that. I know on those prepared remarks, it sounded like Gary said manufacturing improvements for new products and other complex projects. So Just curious if you could elaborate on some of those new products and complex projects and what those are that's impacting the gross margin?

Speaker 2

Yes. On the product side, we have real work to do on ION. ION is well accepted by the customer base, growing quickly. We need to iterate and drive manufacturability and manufacturing costs on Ion. So that was mainly what I was referring to.

Speaker 2

Some of The accessories in the SP line are real opportunities. We want to be assertive there. So on the product side, That's most of what the reference is.

Speaker 3

Just one other element, we are in sourcing a high volume accessory on the multiport side. And as part of in sourcing that, there's some differential automation in the line there. And so ramping that, there's We'll work together to be at our targets.

Speaker 6

Great. Helpful. And coming into this year, On the procedures, some of the swing factors were China staffing pressures and COVID. And I imagine like going into 2024, there's bariatrics in China, some of the swing factors. Maybe just talk about some of the swing factors on 2024 procedures, pluses and minuses.

Speaker 6

And do you think China and bariatrics are still going to be growing and

Speaker 1

Share at this point. Clearly, I think when we get into January, we'll be able to give you a bit more insight. But I guess I'll just leave it at that for now.

Speaker 2

Let me just pick up 2 topics you hit. On China side, I think the procedure demand side remains robust. I think there's some government policy Activity that's putting a little bit of a chill in the market. Some of that is economic, so price caps and value based pricing and some of it is And anti corruption probe that is giving hospitals some pause at moving forward with other new programs. We'll see.

Speaker 2

I think the China side is likely to some pressure on the China side is likely to persist for several quarters. On the bariatric side, I think we'll find a new normal in the next few quarters. It's hard to predict exactly When that will happen, we'll see that play out in the marketplace.

Speaker 6

Great. Thanks a lot.

Operator

And we'll go to next line, Larry Biegelsen, Wells Fargo. Please go ahead.

Speaker 7

Good afternoon. Thanks for taking the question. Gary, your usage based leasing program has gotten some scale. Can you talk about the utilization rates on those systems relative to the average and any other themes you could share?

Speaker 2

Sure. I will turn to Jamie here on kind of utilization rates. So why don't you kick that off?

Speaker 3

Yes. There's 2 ways to look at it, Larry, what is the absolute utilization rate compared to a regular leasing compared to a purchase arrangement? They are very Actually, the tightness on the mean between those three structures is very tight. Within those arrangements, You generally have a target procedure level that reflects success of the program for the And the economic objectives that we have and if you accumulate again the portfolio, they run at slightly above the targeted levels that we have embedded in the contracts. So, they have run very well so far and it's one of the reasons why we and the

Speaker 7

That's helpful. And leasing in the Where you see that going? I mean, it was almost it was over 70 this quarter and last quarter. Have we plateaued? Or does that continue to Go higher.

Speaker 7

Thanks for taking the questions.

Speaker 3

On a global basis, we expect the proportion of placements that are leased to continue to climb. U. S. It's pretty high as you pointed out, Larry, 70% this quarter, 78% last quarter. There will be some Larger IDNs that just routinely prefer to purchase just because of how that affects the metrics that are important to But even in the U.

Speaker 3

S, I think there's some room for that to continue to creep up a little bit, obviously running out of room. We found a number of I really appreciate that as a way to manage through what are tightly managed capital budgets.

Operator

Thank you. And next we have Brandon Vazquez, William Blair, please go ahead.

Speaker 8

Hi, everyone. Thanks for taking the question. Maybe my first one, Wanted to talk a little bit about general surgery that's obviously been a nice growth path for you here in the U. S. My understanding is it's a little less Penetrated international, what do you think needs to happen in the international markets to kind of get on that steep part of the adoption curve for general surgery as well Are they kind of seeing timelines and catalysts as the U.

Speaker 8

S?

Speaker 2

Sure. Thank you for the question. On one way to think about it is that general surgery comprises both Procedures that are done where cancer is the underlying cause and others that are benign indication. On the cancer as an underlying cause, we're seeing nice early growth in several OUS markets. So there, I I think that's healthy and we're enthused.

Speaker 2

I think reimbursements are generally in place in many of the places That we are operating. I think that's looked good and clinical data coming out has been supportive. I think that as you think about benign indications, we're seeing some of the beginnings of benign indications in some markets. There may be reimbursement work or education of insurers that has to be done for those to progress further. So in that We'll have additional work to do as it plays out.

Speaker 8

Great. And then maybe last one for me as a follow-up. I think last quarter you guys were talking a little bit about launching, I believe it was called Case Insights, Kind of the software AI platform, any kind of updates on that end? How are things going so far? And maybe, what's in the future for that program?

Speaker 8

Thanks.

Speaker 2

Yes. Thank you for the reference. So Case Insights is our machine learning AI program that looks at surgical science. We have our first And first cases going, we had talked about it with you last quarter. So far early feedback and it's super early.

Speaker 2

We're really in the early innings here It's very good. Case Insights builds on some prior research that we had done with academic centers on That we had described as a computational observer. So we have some pretty good scientific underpinnings for it. We expect Over time that program will feed insights into different parts of the hospital's Analytics system from giving specific guidance to learning surgeons and care teams about where they might Improve their technique and skills to giving suggestions to programmatic about efficiency and total cost management, to giving other insights for the company about how to improve procedures in the OR. So we think it's a long term Set of investments around really the science of surgery.

Speaker 2

We remain extremely excited about it. While we do have some revenue for it, we don't expect it to be a serious revenue driver. We think it is ecosystem complementer and we look forward to

Operator

to Matt Miksic, Barclays. Please go ahead.

Speaker 9

Hi. Thanks so much for taking the question. So I had one question on a follow-up on kind of the bariatric trends and one And sort of the system leasing effect on pricing. So, Bariatric, If you could maybe talk about, you mentioned the global percentage of procedures that Variancik represents, maybe Just the growth trajectory of that business in the second quarter and the third quarter and Whether that's something you expect to grow at a similar trajectory or bottom out given Your comments on folks getting on the drug for getting off say in a year or 2 kind of suggest maybe a longer path to Stabilization in that business line within MN? And then I'll just follow-up briefly with a question on ASPs Thank you.

Speaker 2

Yes. JB, you might speak to kind of what the size or percentage of that business is for us, A little bit of the acceleration or deceleration trend?

Speaker 3

Yes. And I want to make sure I got it right, Matt. So come back to me if I have the wrong questions. But Our total bariatric business represents about 4% to 5% of global procedures. What you saw in Q2 Was in the U.

Speaker 3

S, which is where the majority of our bariatric procedure volumes are in the U. S. The growth rate Declined to about the U. S. Average and then what we saw in Q3 was it modestly declined a little further in Q3.

Speaker 3

Were those your questions?

Speaker 9

Yes. No, that's very helpful. And then I guess just your expectation you framed out in I mentioned it just because one of the other competitors actually saw a Decline, I guess, in laparoscopic bariatric or some combination of LapinOpen in the 3rd quarter, Single digit decline, but it doesn't seem like you're in that zone, right? You're still at or slightly below your average Growth rate in the U. S, is that am I hearing your answer correctly?

Speaker 3

Well, if you take our procedure growth in bariatrics relative to market. We're taking share and have been for some time. So the fact that we had double digit growth In Q3, relative to another company that had a decline, that's just a reflection in part of the fact that we are taking Share in bariatrics and continue to do so even though there's an impact to overall bariatric surgery because of GLP-1s.

Speaker 9

Got it. That's very helpful. And then the other just ASP, I understand the system ASP you give is not It does not as your U. S. Leasing goes up, as I understand it, Those leased systems in the U.

Speaker 9

S. Are not included in that ASP calculation. So if you could maybe just speak to, I don't know the way in which the increased leases have affected ASP or whether this is Straight up year over year, the decline that suggested in sort of the overall numbers that you provide, if that's Clear question.

Speaker 3

Yes. So everything you described is correct. Generally, although there can be exceptions to mix effect, Generally, U. S. System ASPs when purchased are accretive to the global average.

Speaker 3

So in effect, as leasing has grown significantly in the U. S, that in and of itself has The other thing that you see then with now a greater proportion of Systems used to calculate that system ASP being international FX can have an effect if Look on a 2 year horizon. So for example, the exchange rate in Japan based on how the U. S. Dollar There's a 30% to 40% impact over a 2 year basis on system ASP in Japan as Translated.

Speaker 3

So there is a geographical effect. And if you look at a long enough horizon, there's an FX effect in there. What we And that's really just as we expand our existing customers who are looking for a 3rd, 4th, 5th system, those tend to be Slightly lower ASPs than you've seen previously when they were greenfield accounts. I would say that in China, we do see some dynamics with respect to pricing, just given the number of lower local players. And so there's been some competitive effect on system ASPs in China We don't really see that in other markets to this point.

Speaker 9

Thanks so much for the color.

Operator

And we'll go to the next slide. Jason Bedford, Raymond James. Please go ahead.

Speaker 10

Hi, good afternoon. Gary, I think you've expressed your views on the role of bariatric surgery in a GLP world. I'm just wondering if these views Have changed in any way over the last quarter or 2? I know it's not a lot of time, but the adoption of this class of drugs is obviously ramping quickly. And then just as kind of a related follow-up, getting back to Robbie's question on the potential impact of GLPs beyond bariatrics, Do you expect an impact on some of your other procedure categories as GLPs get adopted?

Speaker 2

Okay. On the first one, I think Miriam described it well, our position on GLP-1s, as it relates to bariatric surgery, I think, I think she hit it well at the start of the call. No reason to reiterate it here. On the issue of potential impact beyond bariatrics, There may be some, although I think as you think through the analysis, I think it will be modest. And Here's how we think about it.

Speaker 2

If you look at obesity and diabetes as risk factors in other domains In other diseases for which surgery is performed, they are sometimes positive correlated risk factors for that disease. In some weird cases, they're negative, in cases, that it's actually protective against disease. So it's not entirely obvious. In most of the diseases that we treat as we look at it, it is not the dominant risk factor. So So as we look out and think about what could it be like in our TAM, we can kind of do a back of the envelope analysis.

Speaker 2

It is really early. I don't think anybody knows the exact number. What I can say is that it's not the dominant risk factor in most things that we look at. And we have a very large unpenetrated TAM. I think We're still in the early innings of what we're trying to work on.

Speaker 2

So if these drugs are highly effective at avoiding other types of diseases, we will cheer. I still think we have a lot of upside opportunity to pursue.

Speaker 10

Fair enough. Thank you.

Operator

And we'll go to the next line.

Speaker 1

Ryan Zimmerman,

Operator

BTIG. Please go ahead.

Speaker 7

Thanks for taking the questions. I think you spoke about some of the new indications in SP. And if I'm not mistaken, I think there's a 30 day follow-up on the thoracic trial, but I'm curious if you could expand maybe when complex colorectal and thoracic cases Potentially could become growth drivers for SP adoption, and when you expect those not just those trials to wrap up, but potentially clearances in the U. S. With that?

Speaker 2

Sure. Miriam, I think you're best to answer.

Speaker 4

Yes. So we are hoping to submit everything in the foreseeable future. After that, as you know, there's at least a 90 day turnaround for the IDE and then excuse me, for the clearances. And then after that, we will have to put training together and launches together. So I can't really give you a timeline for when that would be, but we know what the work is that needs to be done and we are starting and moving forward on that.

Speaker 2

Our biggest steps are get the data arranged, get it into FDA and work with them to get the clearances. And then As Miriam says, we'll go through a staged commercialization. So you can expect submissions in the first half of twenty twenty four and

Speaker 7

Thank you, Gary. One of the other things and I don't know if this is directed at you, Gary or Jamie, but You did talk about an opportunity to lower product costs as supply chain stresses ease. And I know there was some comments earlier about 24 gross margins, but stepping aside from that, can you quantify the opportunity potentially for what That looks like have you gotten your arms around, I know Marshall has been kind of shepherding these processes, but At what point can you give The Street more color on what that opportunity looks like to drive gross margin gains?

Speaker 3

We have Very well detailed plans for each of the areas that we're focused on. The teams have the capability and skill. It's going to take some time. I think the best way I would answer the question is, we see a path over time, probably in the

Speaker 7

Thank you, Jamie.

Operator

We'll go to the next line, Anthony Petrone, Mizuho Group. Please go ahead.

Speaker 11

Maybe one on China and one on pricing on instruments. When we think about the quota size that National Health Commission in China put out, it's The new quote is 559 systems. Just wondering on anti corruption, could that Shift that number over time, whether it be that just there's fewer capital dollars going to projects or Just from a timing element because things are getting elongated. And then the pricing question would be on instruments and accessories. The company put a 5% Price increase in their first one in 14 years.

Speaker 11

Chairman Powell came out and said, look, inflation is going to be persistent And elevated for quite some time, if inflation stays high, could another 5% price increase be on the table for 2024. Thanks.

Speaker 2

With regard to the capital side in China, I'll jump into that. I think Demand for our systems and for the procedures they support in China, raw demand is really high. So it's really being Limited or titrated by policy. I don't see I haven't heard anything that says People want to go back and revisit or lower the quota. I think that would be resisted by customers who are looking For purchases, so I think it's more around delay and kind of a timing thing.

Speaker 2

How long that is hard to predict, but months not weeks. On the pricing side, I'll speak to a general principle rather And projecting 24. What we try to do is a couple of things. One is be an outstanding manufacturer, really get high quality at low cost and make sure that we can invest in manufacturing prowess to do that. I think that's really powerful for us.

Speaker 2

It gives us enormous flexibility to meet the customers' needs Kind of where they are. With regard to pricing, we look at a couple of things, certainly price to us, cost to us, but also price elasticity, what the customer can do and achieve and that varies by market. And I think we've become increasingly sensitive to and sophisticated at So raw material pricing and core inflation to us is an input to our pricing. That's why we took price up this last year, but it's not the only thing and you shouldn't expect us to be purely algorithmic tracking inflation on

Speaker 7

Thank you.

Operator

And we'll go to the line of Michael Pollard of Wolfe Research. Please go ahead.

Speaker 12

Good afternoon. Thank you for taking the questions. I have a big picture one modeling long term. There's an investor presentation out earlier this year, and in it, Intuitive identified 6,000,000 Procedures globally for multi and single port for which you currently have line of sight. And on that same slide, identified that there's 20,000,000 soft tissue

Speaker 1

surgery procedures overall.

Speaker 12

And if I look at where you are today, you're approaching 40% of that $6,000,000 And so my question is that the delta between the $20,000,000 the $6,000,000 the $14,000,000 kind of How do you expand the 6 towards the 20? And what are the major unlocks that you expect over the next 3 to 5 years that will move the 6 towards the 20 and kind of your feel for the pace of addressing more of the global procedure pie.

Speaker 2

Yes, it's a good question. I think the general tools that we use to get from 6 to 20 are kind of 3 buckets. Some of them are clearances in new markets. So making sure that a market we can address has access to the So you think about something like Ion, for example, Ion is not yet available in all the markets in which we operate. As it operates, it starts to open what we can That's kind of one bucket.

Speaker 2

New indications are another one that some of the work that Miriam described earlier that starts to open new We broaden the applicability of our platforms to new types of surgery and intervention. The 3rd bucket or another bucket is reimbursement. There are places where we think additional data is required Get insurers to engage a little bit differently and open the market. And then lastly, there are new products and technologies that we're working on that we are Not yet described that we think allow us to provide new solutions that are competitive in the marketplace. Each of those operates on a little bit different timeline.

Speaker 2

So it's not I can't give you a simple synopsis of how fast each one runs. Some of them take a lot of years, some reimbursement things are a long lead, product development can be long lead. Other types of access Can happen more quickly. But that's a set of plans that we lay out. We're pretty disciplined about laying out what we want to do over time over a multi year time horizon and that's That was our last question.

Speaker 2

In closing, we continue to believe there's a substantial and durable To fundamentally improve surgery and acute interventions, our teams continue to work closely with hospitals, physicians and care teams in pursuit of what our customers have termed the quadruple aim: better, more predictable patient outcomes, better experiences for patients, Our experiences for their care teams and ultimately a lower total cost of care. We believe value creation in surgery and acute care is Foundationally human. It flows from respect for and understanding of patients and care teams, their needs and their environment. At

Operator

Thank you, everyone. And that does conclude your conference. We do thank you for joining. You may now disconnect. Have a good day.

Powered by Quartr
Earnings Conference Call
Intuitive Surgical Q3 2023
00:00 / 00:00