Expectations Have A Lunar Trajectory Intuitive Surgical ... · Vinci. More recently, the...

Initiating Coverage03/04/2013

UnderperformPrice: $541.32Price Target: $400.00Risk: Moderate

IndustryMedical Technology

Suraj Kalia, CFA(212) [email protected]

Stock Data52-Week Range $467.26/

$594.89Avg. Daily Volume (MM) 0.30Market Cap. (MM) $21,707Shares Out. (MM) 40.1Float 98.9%Cash Per Share $33.01Debt-to-Capital 0.0%Book Value Per Share $89.06Dividend Yield 0.00%Shares Short (MM) 2.25Insider Ownership 1.1%Institutional Ownership 95.8%FY End DecSource: Factset

Revenue Estimates ($M)2012 2013 2014

1Q 495.0A 586.0E 675.0E2Q 537.0A 635.0E 736.0E3Q 538.0A 634.0E 727.0E4Q 609.0A 726.0E 838.0EFY 2,179.0A 2,581.0E 2,976.0EP/S 10.0x 8.4x 7.3x

GAAP EPS Estimates ($)2012 2013 2014

1Q 3.48A 4.01E 4.04E2Q 3.73A 4.13E 4.40E3Q 4.44A 4.04E 4.34E4Q 4.23A 4.62E 5.00EFY 15.89A 16.79E 17.77EP/E 34.1x 32.2x 30.5x

Intuitive Surgical, Inc. (ISRG)Expectations Have A Lunar Trajectory...SummaryWe are initiating coverage of Intuitive Surgical with an Underperform ratingand a 12-month PT of $400. While we love the engineering aspects of theda Vinci, our due diligence reveals a story that has a heavy "marketing"component to it, the sustainability of which is a cause for concern.

Key PointsIntuitive Surgical, a pioneer in robotic-assisted surgeryIntuitive Surgical's da Vinci today boasts usage in over 450,000 annual surgeriesworldwide, a 32% CAGR over the last 12 years. Sales have grown from $26 millionto $2.1 billion over the same period. The clinical arguments favoring use of da Vincicenter around lower blood loss during surgery, lower post-op hospital stays, abilityto do complex procedures, lesser muscle dissection, and hence better clinical /functional outcomes. Whether it is radical prostatectomies, hysterectomies or partialnephrectomies, the da Vinci's ubiquitous presence is unmistakable.

Our Due Diligence / Field ChecksOur extensive field checks highlighted a story where aggressive marketing drivesthe message, and true clinical utility seems secondary in nature. Clinical comparisonrelative to laparoscopy or open surgery is difficult to prove given lack of true Level Ievidence. da Vinci surgeries it seems add incremental costs of 20% per procedureand these are absorbed by the hospitals. The lack of training and credentialingstandards is problematic for lower-volume centers who end up assuming liabilityrisk. Our field checks highlighted a physician base frustrated with the changing focusof ISRG reps towards meeting sales targets, rather than optimizing training andoutcomes. This is manifesting itself in poor outcomes (some of which are beingevidenced by recent lawsuits) and greater number of instruments being used percase, especially in low-volume centers. While there are no separate reimbursementcodes for robotic-assisted surgery; our calls highlighted an increased usage ofModifier 22 for reimbursement upcoding, although the extent of usage was not veryclear. Finally, there is growing perception that the "macroenvironment" will curtailuse of da Vinci's in prostatectomies and hysterectomies, therefore increasing thepressure on Intuitive to make up for volume in other segments.

Valuation / SummaryOur PT of $400 is derived using a 2-stage DCF. For Intuitive to ‘grow” into currentvaluation, the company would have to grow at a 7% rate into perpetuity. That Ismathematically absurd. We think the da Vinci has a role in high-volume centersdoing high-risk, complex cases. The proliferation in benign, low-risk cases with noadditional benefit in outcomes though, does not make any sense to us...

IMPORTANT DISCLOSURES AND ANALYST CERTIFICATION ON PAGE 63

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Investment Thesis

Intuitive Surgical…laying the ground work for strong da Vinci uptake

Robotic-assisted surgery using Intuitive Surgical‘s da Vinci machine has become one of the storybook examples used

by new entrants into the medtech space of how to use a combination of savvy technological ingenuity and aggressive

marketing to carve a nice niche for a product. We confess, from a purely engineering perspective, the da Vinci is a

very cool device. Unseen to the casual observer are the intricate electronics, process-control algorithms, noise

control / filtering mechanisms, and visualization embedded in the da Vinci and key to its success so far. While various

claims are made about the clinical utility and cost-effectiveness of the machine, the ability to perform procedures

remotely while seated on a console, especially for longer-duration surgeries makes the da Vinci an attractive tool to

be used by physicians. Intuitive Surgical has, in our opinion, done a great job of collaborating with clinicians in the

early years to generate a perception of the da Vinci as a ―must-have‖ for the hospital. Subsequently, the initial studies

conducted showed a reduction in blood loss, ability to do more complex procedures, and potentially reduce post-op

hospital stays when robotic-assisted surgery is used. The need to have a da Vinci combined with preliminary

evidence pointing to some intra-operative and perioperative benefits created a strong wave of demand that has

sustained itself for almost 10 years now.

Intuitive Surgical is by far the ―Apple‖ of the medtech sector

Intuitive Surgical, let‘s face it, is the darling of medtech investors. The company deserves full credit for recognizing,

creating and then capitalizing on an opportunity. Sales have grown from $26 million in the year 2000 to an estimated

$2.5 billion in fiscal 2013, a CAGR of 42% over this period. EPS has gone from roughly ($0.78) to an estimated

$17.80 in fiscal 2013. Gross margins have gone from 33% in fiscal 2000 to an estimated 71% in fiscal 2013.

Operating margins have gone from (100%) in fiscal 2000 to an estimated 38% in fiscal 2013. By all mathematical

metrics, the company has done a spectacular job of growing sales, creating demand, and becoming an unrivaled

force in medtech land. Total procedures have gone from about 15,000 or so in the year 2000 to roughly 450,000 in

2012, a CAGR of approximately 32%. Growth of robotic-assisted radical prostatectomies has increased from almost

2% of all prostatectomies in the year 2000, to a peak of 86% of all U.S. prostatectomies in 2010. Growth in

hysterectomies/ urogynecologic procedures has been relatively more constrained, growing to about 20% of overall

hysterectomies in the U.S. In 2012, we estimate that approximately 96% of the urology practices in the U.S. had a da

Vinci on site. Approximately 90% of the urology fellowships have a robotic-surgery training course. On the

gynecology side, we estimate that roughly 50% of the practices have a robot on site. In essence, the strong

penetration point to a focused company with a clear message. The stock has responded in tandem. Since the year

2000, Intuitive Surgical stock has gone from roughly $26 to a current price of approximately $575, a 2600% increase.

Intuitive Surgical has rewarded investors for betting on the company and its growth trajectory. Management deserves

full credit for making Intuitive Surgical what it is today.

The Prevailing Wall Street Argument for Clinical Utility Argument of the da Vinci

The argument for incorporating robotic-assisted surgeries in hospital practices was fostered originally through the

concept that the da Vinci robot effectively reduces blood loss intra-operatively, reduces post-op hospital stay and pain

levels due to reduced muscle dissection. Another clinical argument that has developed over the years has to do with

the ability of the robot to offer 7 degrees of freedom, reducing tremor in physicians‘ hands, do complex suturing and

help maneuver in tight spaces with increased visualization capabilities using the Insite 3D Vision camera. For

example, in urology, there has gradually been indication creep for robotic-assisted surgeries wherein robots are being

used for surgical removal of otherwise benign or early stage tumors. In hysterectomy, the ability to suture using the

da Vinci is noted as being very valuable, especially in women with large uteruses. In partial nephrectomy, the ability

to identify surgical margins while minimizing incisions at the entry site is said to be an appealing feature of the da

Vinci. More recently, the introduction of the da Vinci Si, with its 2 consoles is thought to be useful where an assistant

surgeon is needed to simultaneously handle a different geographic area during a patient surgery.

03/04/2013

Intuitive Surgical (ISRG) of 64

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The Prevailing Wall Street Argument for Cost-Effectiveness of the da Vinci

Embedded in the argument for widespread use of the da Vinci is one of higher upfront costs and lower downstream

costs, therefore making the surgical approach net neutral to the hospital. Again, most of the studies in this area are

poor quality in nature, therefore making wild conclusions one way or the other problematic. To summarize, the

studies that have examined cost-effectiveness of robotic-assisted surgery indicate to higher instrument costs per

procedure, but lower post-op hospital stays (for example in radical prostatectomy of about 1 – 2 days depending on

the study you choose), lower blood loss and therefore transfusion units (EBL differences between open and robotic-

assisted surgery of about 100 – 250ml; transfusion units of 1 – 3), and quicker return to normal functioning (1 – 10

days depending on which study you choose). The argument that robotic-assisted surgery simply shifts costs has

allowed a derivative argument to be built, specifically that other surgical disciplines would also find rapid and cost-

effective use of this approach.

Our due diligence from the field

During our due diligence phase, we talked to numerous urologists, gynecologists, and general surgeons all from high-

volume centers and highly experienced in the use of the da Vinci. Our due diligence uncovered some interesting

collective feedback from these clinicians. When taken in aggregate, it paints a picture that seems somewhat

asynchronous from prevailing wisdom on Wall Street. Here are some specific concerns / issues highlighted by the

clinicians / our own due diligence:

- Ergonomic Benefits of the da Vinci

There are several advantages that robot-assisted surgery offers when compared to conventional

laparoscopic techniques. The new technique offers increased maneuverability. The wrist component of the

robot-assisted surgical tool allows the operator to achieve 7 degrees-of-freedom. This is a considerable

increase from the four degrees-of-freedom offered to the surgeon during minimally invasive laparoscopic

procedures. In the context of ergonomics, conventional laparoscopic procedures require the surgeon to

execute awkward and counterintuitive movements as the instrument is pivoted about a fulcrum inverting and

constraining tool motion. The master-slave robot-assisted technique allows the operator to intuitively control

surgical tool motion. Furthermore, robot-assisted surgery unarguably enhances procedure visualization and

allows tight maneuvers when space is constrained as compared to conventional laparoscopic techniques.

The master- console allows the surgeon to see the operating field in three dimensions, restoring the critical

element of depth perception found in open surgical techniques

- Clinical Utility of da Vinci

We reviewed over 100 clinical papers / systematic reviews / meta-analysis / policy papers for use of robotic-

assisted surgery with the da Vinci in urology, gynecology, cardiac surgery, and general surgery. What we

found interesting is that the results, taken in aggregate, present a mixed picture for robotic-assisted surgery.

For example, urinary continence rates @ 12-months (assuming a standard definition of urinary continence is

assumed) with robotic-assisted prostatectomy range from anywhere between 65% - 92% (depending on

type of patient, type of study, specific surgical technique, etc). However, literature also points to similar rates

for laparoscopic prostatectomy and retropubic prostatectomy. Potency rates for robotic-assisted

prostatectomy are noted in the 60% - 90% range at 12-months, and at 40% - 90% for laparoscopic

prostatectomies. Complication rates between the two procedures are also noted to be similar and

conclusions usually seem to boil down to a set of trade-offs. In essence, the current body of evidence in

prostatectomy is mixed, at best. In gynecology, robotic-assisted surgery is used in about 20% of the cases.

Current evidence indicates most of the studies are of poor quality, suffer from significant heterogeneity, and

control bias, among others. Uncontrolled, nonrandomized, retrospective studies have shown a lower hospital

stay with robotic-assisted radical hysterectomy of about 2 – 3 days as compared to an open hysterectomy,

However, the lower post-op stay delta disappears when robotic-assisted surgery is compared to

laparoscopic or vaginal hysterectomy. Operative time using a robotic-assisted surgery is noted to be about

192 – 242 minutes compared to 60 - 70 minutes for a vaginal hysterectomy, 85 – 108 minutes for a

laparoscopic hysterectomy, and 75 – 90 minutes for an abdominal hysterectomy. Some reports indicate that

room to incision time for a robot is about 45 minutes, and incision to docking time for a robot is another 25

minutes, therefore adding to the overall cost of anesthesia and OR time. Incidence of complication rates is

03/04/2013



also decidedly mixed. Within cholecystectomy, the same trend follows. Reduced length of surgery favors the

laparoscopic group, while reduced post-op stay favors the robotic-assisted group. Some meta-analysis have

shown an increased risk of complications with the robotic-assisted cholecystectomy group. The conclusions

are pretty much the same across different surgical disciplines – urology, gynecology, cardiac surgery,

general surgery, etc. In other words, making definitive claims about the clinical utility of robotic-assisted

surgery one way or the other is problematic. Reason being…it isn‘t about the robot (good or bad), it has to

do with the lack of a concerted effort industry-wide to get a substantive picture of how clinical outcomes are

affected due to choice of surgical approach.

- Economics of Robotic-assisted Surgery

As is well known, the price of a da Vinci robot ranges from $1.5 - $2.3 million, depending on all the bells and

whistles added. The da Vinci Si is the higher end model, with a dual console that allows for a second

surgeon to participate in the robotic-assisted surgery. Service contracts run from $150,000 - $170,000 per

year, and require a 5-year service contract from the hospital. Disposable instruments range from $600 -

$1,000 and can each procedure can use from 3 – 8 instruments (depending on the procedure). Everything

else remaining the same, introducing a da Vinci into a hospital program is estimated to add fixed costs to the

tune of 15%- 20% per procedure when amortized over the life of the robot (again, bear in mind, these are

estimates from medical literature and not based on a scientific sampling of hospital administrators and how

true costs are amortized). While the impact on clinical outcomes is not exactly clear (at least from existing

evidence), the only remaining logical approach for hospitals is to increase volume of surgeries done and to

spread out usage over different disciplines. When a robotic surgery program is initiated, the overall costs not

only include the upfront capital outlays, but there are costs related to training, facility renovation, marketing,

patient education, down-time while training, prolonged operative times, among others. As highlighted on

Intuitive Surgical‘s website, a document that lays out an economic argument for making a robotic surgery

program successful includes creation of a multi-disciplinary robotic surgery task force. For community

hospitals that becomes especially interesting because they have to hire experienced robotic surgeons to

spearhead the program. The added costs therefore need to be factored in. In the textbook, ―Robotic Urologic

Surgery‖, authors Patel et. al note that the learning curve of radical prostatectomy ranges anywhere

between 12 – 200 cases, leading to an operative time improvement of anywhere from 1 – 21 minutes. They

also note that cost of the operating time + anesthesia during the learning curve of radical prostatectomy

ranges from $95,000 - $1.365 million. These essentially are costs that need to be factored into the whole

picture. Lastly, what is not entirely clear to us is the redistribution of procedures between university and

community hospitals. If multiple hospitals in the same geographic area are competing for the title of being

―technologically advanced‖ and increasing patient volume, we don‘t understand how mathematically you can

justify an ever-increasing procedure volume using the robot (after adjusting for age and immigration).

- Emphasis more on ―selling‖ equipment rather than ―ensuring proper outcomes through proper training‖

Pretty uniformly, clinicians complained that Intuitive Surgical‘s sales reps are more interested in selling the

capital equipment and service contracts, rather than ensuring that proper training is delivered to surgeons.

The reps, we were told, ―disappear‖ a few days after the sale of equipment, essentially hunting for the next

sale. The clinicians feared sales rep compensation was driving this behavior. Clinicians also complained that

the quality of training has gone down over the years, simultaneously while product costs have gone through

the roof. While most of the clinicians agreed that poor training is having an effect on utilization and

outcomes, it wasn‘t clear as to how this could be corrected.

- Training and Credentialing

One of the most interesting topics during our due diligence (apart from the marketing aspects of the robot)

included that of training and credentialing the surgeons. While Intuitive Surgical has a da Vinci simulator,

and a 2-day training program for using the da Vinci, the aggregate feedback we received during our due

diligence calls points to frustrated surgeons who point to Intuitive reps more interested in selling units rather

than holding a surgeons‘ hands and making sure training is optimized. Once the initial training by Intuitive is

complete, it is up to the surgeons and the hospitals to create customized guidelines for training, certification

and credentialing. A significant amount of literature points to a direct correlation between level of training

and expertise in robotic-assisted surgery and surgical outcomes. However, the ―liability risk‖ for the surgery

03/04/2013



resides entirely with the hospital. In essence, Intuitive Surgical has virtually no liability risk (apart from

product liability risk). The lack of universal guidelines also creates an interesting situation where outcomes

from different hospitals / surgeons may or may not be directly comparable. Lastly, as we point out in the

previous sub-section, the ―training costs‖ for the da Vinci run far higher than the initial 2-day session that

Intuitive Surgical provides. In urology, current evidence points to 20 – 200 cases needed to gain proficiency

in the da Vinci, in hysterectomy the number of cases cited for the same are in the 12 – 100 range. Not only

are there indirect costs upfront that are incurred by the various hospitals, the liability downstream is also

borne by the hospital.

- High Pressure Marketing

To us, this was by far the most interesting aspect of our discussions during our due diligence calls. Bear in

mind, almost all our calls were to high-volume da Vinci centers in the U.S. The word ―marketing‖ was

probably most frequently used in most of our conversations. The clinicians we talked to indicated that a

―significant‖ component of the use of robotic-assisted surgery has to do more with high-pressure marketing

from Intuitive Surgical, as well as a desire to present an image of the hospital being ―technologically-

advanced‖ than its peers. The goal for the latter portion being to attract and retain more patients, therefore

allowing greater diffusion of costs and greater negotiating leverage with payors. The discussions with the

various clinicians almost reminded us of the U.S. Surgical days and the aggressive marketing techniques

employed then. The aspect of clinical claims being embedded with marketing language pervades

throughout, from hospital websites to hospital literature to field presentations. In an interesting study

published in the American College of Obstetrics & Gynecology, Sept 2012, authors Schiavone et. al

conducted an analysis of 432 hospitals performing robotic-assisted gynecologic surgery out of a database of

6000 hospitals. The key criteria for hospital selection was the cutoff of >200 beds in the hospital. Among

these hospitals, the authors state that, ―the web sites of 192 (44.4%) contained marketing for robotic

gynecologic surgery. Stock images (64.1%) and text (24.0%) derived from Intuitive Surgical were frequent.

Although most sites reported improved perioperative outcomes, limitations of robotics including cost,

complications, and operative time were discussed only 3.7%, 1.6%, and 3.7% of the time, respectively. Only

47.9% of the web sites described a comparison group.‖ In the study, less than 5% of hospitals included

information about the robotic surgery‘s costs, complications or operative time. Nearly half of the hospitals

that discussed robotic surgery advantages such as ―less pain‖ did not specify whether that was in

comparison with open surgery or traditional laparoscopic surgery. One in seven of the examined websites

touted the robots on a home page, and an additional 18% had information one click away from the home

page. Fewer than 15% cited evidence to support claims, and nearly half used marketing terms such as

―cutting edge‖ to describe the devices. Eleven percent described the robot-assisted procedure as ―the ideal

treatment‖ for certain surgical conditions. Many used emotion-laden language such as ―you owe it to

yourself‖ and ―you or your loved one.‖ This study buttressed the findings of a broader study of all robot-

assisted procedures in the November 2011 Journal for Healthcare Quality. That examination of a different

group of 400 randomly selected U.S. hospitals found that 37% touted robot-assisted surgery on their home

pages and none mentioned risks of the procedure.

- Issues with daVinci

Apart from the high cost of purchase, maintenance, set-up and training for the da Vinci, we learned of some

interesting nuances with use of the da Vinci. Specifically, the lack of haptic feedback was one that was cited

as resulting in a longer learning curve. Haptics is the science of ―tactile and kinesthetic feedback.‖ Haptic

cues are an important component of surgery and can enable a surgeon to differentiate tissue, perceive the

amount of force applied to tissue, and generally determine the contour and compliance of tissue. Because

the human hand contains 22 joints, it allows movement with 22 degrees of freedom. The skin covering the

hand is also rich with receptors and nerves, components of the nervous system that communicate touch

sensations to the brain and spinal cord. Given that surgeons are not using their dominant hand to carry out a

procedure using tactile feel, there is a learning curve associated with the da Vinci. The second key feedback

on this related to collision between the robotic arms. If the surgeon was not careful, or for that matter early in

the learning curve, there is a chance the da Vinci‘s arms can collide therefore creating a problem. Multiple

ports need to be connected to power at all times of the operation. Finally, there was subliminal frustration

that the surgical instruments are programmed to be used for only 10 times, which in reality could be used

03/04/2013



(based on our engineering assessment) probably hundreds of times. The clinicians also recognize Intuitive

Surgical‘s rationale for limiting use of the instruments, but feel they don‘t have a choice currently. The ratio

of system weight to payload for the da Vinci also presents some interesting stats. Our understanding is that

the da Vinci weighs roughly 1,000 lbs and each arm weighs about 30 – 40 lbs. The master-slave cable

mechanism essentially creates a scenario wherein a significant amount of compensatory mechanisms need

to kick in, in order to mimic surgeons‘ hand movements. As we understand it, there are three settings for

motion transfer – standard, medium and fine. These have to do with the compensatory mechanisms in the

system to dampen unnecessary tremor in surgeon hand movements. The more precise the movement

needed, the slower is the motion transfer to the da Vinci instrument arm. Our understanding from the field is

that a number of surgeons chose the ―standard‖ motion option, essentially to speed up the procedure.

Whether this really has any effect on outcomes is impossible to determine.

- Procedure Utilization is at Risk

To us this was by far the most interesting feedback. Specifically in prostatectomies, the clinicians indicated

that radical prostatectomies, especially after the USPTF recommendations in 2012 are headed on a

downward trajectory. Given that over 70% of the prostatectomies are for low-risk, localized cancer and for

patients that are asymptomatic, there was a pervading sense that prostatectomies, and robotic-assisted by

association, are overused quite a bit. In aggregate, we were told that radical prostatectomies over the next 5

years could be down by about 40 – 60%. Similarly, hysterectomies have been the fastest growth segment

for Intuitive Surgical over the last 3 – 5 years. Gynecologic surgeons we talked to expressed frustration at

the ―push‖ to use robotic-assisted surgery, especially in benign conditions. The recent drumbeats in the

press about probably unnecessary and over-aggressive use of the da Vinci in hysterectomies is probably a

reflection of the field sentiment. In essence, prostatectomies constituted about 22% or so of overall da Vinci

procedures in fiscal 2012; hysterectomies constituted 40%; and the remaining was a mix of urologic,

gynecologic and general surgeries. The procedure mix becomes very interesting especially if we start seeing

a rapid drop-off in prostatectomies & hysterectomies. Utilization in other areas will have to pick up at such a

rapid pace, probably much faster than market growth rates and cannibalizing open and laparoscopic

procedures. In essence, while we don‘t know when a change in trajectory will occur; we certainly believe that

there will be a correction at a certain point. The current trajectory is unsustainable. You cannot have

hospitals keep eating 20% extra costs per procedure and Uncle Sam lowering reimbursement via

Obamacare and thrive at the same time.

Competition Far Behind

While there are a few competitors in the marketplace, our due diligence suggests that they are a few years behind

Intuitive Surgical‘s da Vinci machine. There is something to be said about the feedback gained from years of

experience with running production quality machines and interfacing with clinicians who provide a valuable feedback

component in product development. The weak-link in this whole chain seems to be product pricing. The current

macro-environment could present an interesting opening for more cost-effective robots.

Valuation We are initiating coverage of Intuitive Surgical with an Underperform rating and a $400 PT. Our PT is derived using a

traditional 2-stage DCF using a 12% discount rate in the high-growth phase, and a 10% discount rate into perpetuity.

On a relative valuation basis, a $400 PT represents about 5.6x forward P/S and 23x forward P/E. We are acutely

aware of the perils of our rating, especially given all the cadavers lying around who have tried to present a counter-

argument. However, when presented with a choice between being intellectually honest and presenting our due

diligence checks honestly; fearing pushback from clients, we choose the former. There is no question about the

―marketing‖ angle to the Intuitive story. Our rating is not based on any proprietary knowledge of Intuitive ―missing‖ a

quarter. Our rating is really based on: 1) This trendline is unsustainable, especially in today‘s environment; 2) The

broad clinical claims made about the da Vinci cannot be backed up with true Level I evidence; 3) It is unclear to us

how hospitals can keep ―eating‖ 15 – 20% higher costs per procedure ad infinitum; and finally 4) From a purely

mathematical basis, the company would need to grow at 7% into perpetuity in order to justify this valuation. Anyone

who understands DCF and macroeconomics knows this is not possible.

03/04/2013



Corporate Overview

Intuitive Surgical, Inc. designs, manufactures, and markets da Vinci surgical systems for various surgical procedures,

including urologic, gynecologic, cardiothoracic, general, and head and neck surgeries. Its da Vinci surgical system

consists of a surgeon‘s console or consoles, a patient-side cart, a 3-D vision system, da Vinci skills simulator, and

proprietary ‗wristed‘ instruments. The robotic-assisted surgery system translates a surgeon‘s natural hand

movements on instrument controls at the console into corresponding micro-movements of instruments positioned

inside the patient through small puncture incisions, or ports. The company has done an excellent job of marketing the

da Vinci to university and community hospitals with the appeal of lower procedure times, lower blood loss, and lower

post-op hospital stay. Intuitive, with over $2 billion in annualized revenues, markets its products through sales

representatives in the United States, and through sales representatives and distributors in international markets. The

company was founded in 1995 and is headquartered in Sunnyvale, California.

Key Market Opportunities

Prostatectomy

Prostatectomies have by far been the bread and butter for Intuitive Surgical‘s da Vinci. The market growth in

prostatectomies has been driven in part by the early and aggressive use of PSA testing in the U.S. and the

concomitant push for radical prostatectomies. The incidence of prostate cancer in the U.S. is roughly 240,000 per

year. We estimate roughly 100,000 or so radical prostatectomies are being performed in the U.S. every year. We do

not account for more focal therapy, whether it be cryotherapy, external beam radiation therapy, and also we don‘t

account for active surveillance. Annually, we estimate that roughly 110,000 or so patients opt for watchful waiting.

Figure 1. In order: Prostate Cancer Treatment for Gleason score <7; For Gleason Score ≥7

Source: Northland Capital Markets estimates

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Focal Therapy Laparoscopic radical

prostatectomy

Robotic-assisted radical

prostatectomy

Open radical prostatectomy

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Focal Therapy Laparoscopic radical

prostatectomy

Robotic-assisted radical

prostatectomy

Open radical prostatectomy

03/04/2013



The majority of urological surgeons performing radical prostatectomies in the US have extremely low annual

caseloads. Given that caseload and overall experience are associated with improved outcomes, this is likely to lead

to suboptimal outcomes. As high volume surgeons, by definition, treat many patients each year, a small shift in the

distribution of high volume surgeons can have a large effect on patient care. The slightly greater proportion of very

high volume surgeons in the U.S. are estimated to be around 2%, and about 20% - 40% of patients are receiving care

from these surgeons. Based on various reported studies, it is estimated that most urological surgeons will not reach

250 radical prostatectomy cases in their surgical careers, which is considered a plateau of the learning curve.

However, the majority of surgeons have such low annual volumes that our conclusions would not change even if we,

say, halved the minimum number of surgeries considered to be adequate.

Hysterectomy

In the U.S. we estimate roughly 620,000 hysterectomies performed annually, with roughly 80% of these

hysterectomies being for benign conditions such as uterine fibroids, endometriosis, abnormal bleeding, etc. Within

hysterectomies for conditions which are defined as benign, we estimate that robotic-assisted radical prostatectomies

are being performed to the tune of roughly 140,000 or so procedures per year and within malignant cases, the use of

robotic-assisted procedures is roughly to the tune of 40,000 or so. Our overall breakup of vaginal vs. open vs.

laparoscopic vs. robotic-assisted remains roughly at 15%: 40%:20%: 25%. The proliferation of robotic-assisted

hysterectomies has been interesting to watch especially given the use in predominantly benign conditions and the

lack of Level I data. Overall, we estimate hysterectomies in the U.S. have grown at an annual rate of roughly 3% per

year. The future growth, however, is intricately going to be linked to ongoing structural changes in the macro-

environment, and this will be a key metric to follow long-term.

Figure 2. In order: Hysterectomies performed annually in U.S. stratified as Malignant; Benign (as of 2012)

Source: Northland estimates

0

10,000

20,000

30,000

40,000

50,000

60,000

Vaginal Hysterectomy

Abdominal Hysterectomy

Laparoscopic hysterectomy

Robotic-assisted hysterectomy

0

50,000

100,000

150,000

200,000

250,000

Vaginal Hysterectomy

Abdominal Hysterectomy

Laparoscopic hysterectomy

Robotic-assisted hysterectomy

03/04/2013



Partial Nephrectomy

In the United States, renal cell carcinoma (RCC) accounted for an estimated 65,000 new cases and over 20,000

deaths in 2012.1 RCC is the most lethal of the urologic malignancies, with approximately 20% to 30% of patients with

RCC presenting with metastatic disease and more than 40% of patients eventually dying from it. Surgical resection

for clinically localized disease remains the mainstay for curative intervention. However, the aggressive and often

insidious nature of RCC is reflected by recurrence rates of 20% to 40% after nephrectomy for clinically localized

disease. This high rate of recurrence for clinically localized disease after nephrectomy underscores the importance of

post-surgical surveillance. With the availability of treatment modalities offering improved survival in recurrent cases,

the physician is challenged to identify treatable recurrences, while minimizing low yield studies and without sacrificing

patient outcomes. The greatest risk of recurrence for RCC occurs within the first 5 years after nephrectomy, with the

majority of recurrences occurring within 3 years. Although recurrences have been reported as late as 30 years

following nephrectomy, rates of 43% in the first year, 70% within the second year, 80% within 3 years, and 93%

within 5 years have been reported. Tumor stage plays an important role in timing of recurrence, with T1 tumors

generally recurring between 38 and 45 months, whereas T3 tumors generally recur between 17 and 28 months

following initial nephrectomy. After nephrectomy, the incidence of RCC recurrence has been reported to be 7% with a

median time of 38 months for T1 tumors, 26% with a median time of 32 months for T2 disease, and 39% with a

median time to recurrence at 17 months for T3 tumors.

We estimate that almost 60,000 nephrectomies are performed in the U.S. every year, and about 75% - 80% of these

are total nephrectomies. The remaining are partial nephrectomies. Within the definition of total vs. partial, there is

also sub-classification by usage of surgical technique, whether it be open vs. laparoscopic vs. robotic-assisted vs.

cryoablation.

Figure 3. In order: Partial Nephrectomies in the U.S. stratified by surgical technique; Total Nephrectomies stratified by technique


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Open Laparoscopic Robotic-Assisted Cryoablation

0

5,000

10,000

15,000

20,000

25,000

Open Laparoscopic Robotic-Assisted Cryoablation

03/04/2013



Sacrocolpopexy

Vaginal prolapse is a common condition causing symptoms such as a sensation of dragging or fullness in the vagina,

and difficulty emptying the bowel or bladder and back ache. About 1 in 10 women need surgery for prolapse of the

uterus or vagina. Sacrocolpopexy is a procedure to correct prolapse of the vaginal vault (top of the vagina) in women

who have had a previous hysterectomy. The operation is designed to restore the vagina to its normal position and

function. A variation of this surgery called sacrohysteropexy corrects prolapse of the uterus. This operation is

performed in a similar way to sacrocolpopexy. Sacrocolpopexy is performed either through an abdominal incision or

‗keyholes‘ (using a laparoscope or with a surgical robot), under general anesthesia. The vagina is first freed from the

bladder at the front and the rectum at the back. A graft made of permanent synthetic mesh is used to cover the front

and the back surfaces of the vagina. The mesh is then attached to the sacrum (tail bone) as shown in the illustration.

The mesh is then covered by a layer of tissue called the peritoneum that lines the abdominal cavity; this prevents the

bowel from getting stuck to the mesh. Sacrocolpopexy can be performed at the same time as surgery for

incontinence or vaginal repair for bladder or bowel prolapsed.

The lifetime risk of undergoing surgery for prolapse and incontinence up to the age of 80 is 11%, and approximately

200,000 surgeries are performed annually for prolapse in the U.S. every year. Surgery is an effective treatment for

prolapse, and the sacrocolpopexy is an optimal procedure for advanced uterine or apical prolapse. A sacrocolpopexy

can be performed abdominally, laparoscopically, or robotically. Within sacrocolpopexy, we estimate that robotic-

assisted sacrocolpopexies constitute roughly 40,000 or so procedures annually.

Figure 4. Annual Sacrocolpopexies performed in the U.S. stratified by surgical technique


Other Applications

Intuitive Surgical is pushing use of the da Vinci in various other applications, some of them being mitral valve repair,

colorectal surgery and cardiac surgery. For the purposes of our initiation report, we specifically do no delve into these

segments as they are not material at the current stage.

0

20,000

40,000

60,000

80,000

100,000

120,000

Open Laparoscopic Robotic-Assisted

03/04/2013



Product Portfolio Intuitive Surgical‘s flagship product is the da Vinci, a robot assisted surgery system that has been designed to reduce

size and extent of incisions, reduce post-op hospital stays, and also potentially improve outcomes. It consists of an

ergonomically designed surgeon's console, a patient cart with four interactive robotic arms, a high-performance vision

System and patented EndoWrist instruments. At the da Vinci console, a surgeon operates while viewing a highly

magnified 3D image of the body‘s interior. To operate, the surgeon uses master controls that work like forceps. As

your surgeon manipulates the controls, the da Vinci responds to your surgeon‘s input in real time, translating his or

her hand, wrist and finger movements into precise movements of miniaturized instruments at the patient-side cart.

The da Vinci's patient cart holds up to three EndoWrist instruments and one 3D camera. To access the target

anatomy, the surgeon introduces the precisely controlled EndoWrist instruments into the body through a series of

small 1 – 2 cm incisions.

Figure 5. daVinci robotic surgery system; Endowrist arm

Source: Medical Literature; Company Reports

03/04/2013



In the conventional layout, the surgeon is seated at a console several feet away from the patient operating table. The

surgeon has his head tilted forward and his hands inside the system‘s master interface. To start the procedure, the

surgeon‘s head must be placed in the viewer. Otherwise, the system locks up and remains motionless until it detects

the presence of the surgeon‘s head once again. The surgeon sits viewing a magnified 3D image of the surgical field

with a real-time progression of the instruments as he operates. The instrument controls enable the surgeon to move

within a one cubic foot area of workspace. This component of the system contains the robotic arms that directly

contact the patient. It consists of two or three instrument arms and one endoscope arm. The feedback as of today is

limited to sensing tool-on-tool collision, so the surgeon needs to rely almost solely on the visual field when suturing or

contacting soft tissue. During the procedure, a zero-point movement system prevents the robotic arms from pivoting

above or at the one-inch entry incision, which could otherwise be unintentionally torn. Included in the power source is

a backup battery that allows the system to run for twenty minutes, giving the hospital enough time to reestablish

power. Each instrument contains a chip that prevents the use of any instrument other than those made by Intuitive

Surgical. These chips also store information about each instrument for more precise control and keep track of

instrument usage to determine when it must be replaced.

Figure 6. daVinci robot in a general surgery setting

Source: http://www.uchospitals.edu/specialties/minisurgery/benefits/davinci.html

03/04/2013



The robotic cart is over 500 kgs in weight and maneuverable on a wheel base. The 3 arms attach to specially

designed 8-mm metal ports supplied with both blunt and sharp trocars. The 4th

arm has a surgical endoscope. Each

arm has a series of multiple positioning joints and a terminal pivot joint at the attachment with the port allowing easy

positioning.

The computer controller comprises of a closed-loop feedback servo system. Mostly velocity controllers (some position

controllers) are used with velocity control algorithms. The primary module performs control tasks and secondary

module has 2- 3 filters. There are redundant sensors in the system, hardware watchdogs and real-time error

detection ensures fail-safe operation of the controller in all its states. There is a filter in its forward path to attenuate

master input commands that may cause instrument tip vibrations. The computer capable of fully interconnected

control of 48 degrees of freedom at update rates exceeding one thousand cycles per second, with 48 encoders and

96 analog input channels. The system features processors configured as master-slave controllers, with the switching

interface receives inputs from mechanical input device, and then selects a surgical apparatus. Conflicts are settled

based on a priority scheme, with the processor coupling the input device to manipulator assembly. The manipulator

has a plurality of joints, providing sufficient degrees of freedom to allow a range of joint states for an end effector

position. When input receives a command, to effect a desired movement of the end effector; processor couples the

input to the manipulator arm and determines the movements of joints accordingly. Processors have configurable joint

controller programming instructions which allows them to derive generally suitable joint commands to move end

effectors as desired. The head of each manipulator is a DC servo-motor provide the inputs and outputs to the da

Vinci System. Motors and encoders receive inputs via series of feedback controls from the surgeon and translate in

real-time through the console electronics. Manipulators exert forces back through the console electronics to the

surgeon‘s hands.

The daVinci system also has foot pedals to allow control of the system. The 1st is the clutch pedal (disengages the

instruments from the controllers). The 2nd

pedal disengages the instrument from the masters and engages the

camera. The 3rd

is used to focus the telescope lens prior to surgery, while the 4th

is used in bipolar coagulation. The

5th

is used in electrocautery (bi-polar tip, carries a current that heats and denatures tissue). The device is typically

coupled to an on-off switch to actuate the device and heat the tissue. The electrocautery device may also receive

control signals to vary its power output).

The daVinci 3D Vision System (Insite Vision and Navigator Camera Control) consists of a 3D endoscope and image

processing equipment, with two 3-chip cameras and 2 separate optical channels which generate 2 images delivered

separately to each human eye viewing the binocular viewer. Two light sources optimize the intensity of light and

image magnification is controlled by adjusting the depth of camera insertion in the operative field. Approximately 1000

frames of the instrument position per second are captured and each image is filtered through a video processor that

eliminates background noise. Image synchronizers, high-intensity illuminators and camera control units optimize

images. The endoscope is programmed to regulate the temperature of the endoscope tip automatically to prevent

fogging during the operation.

The Endowrist detachable instruments allow the robotic arms to maneuver in ways that simulate human movements.

These instruments have a proximal end, a distal end effector suitable for insertion into a patient. Each instrument has

its own function from suturing to clamping, and is switched from one to the other using quick-release levers on each

robotic arm. The device memorizes the position of the robotic arm before the instrument is replaced so that the

second one can be reset to the exact same position as the first. The instruments‘ abilities to rotate in full circles

provide an advantage over non-robotic arms. The seven degrees of freedom (3 orientation, 3 translation, 1 grip)

offers considerable choice in rotation and pivoting. Moreover, the surgeon is also able to control the amount of force

applied, which varies from a fraction of an ounce to several pounds. The Intuitive Masters technology also has the

ability to filter out hand tremors and scale movements. As a result, the surgeon‘s large hand movements can be

translated into smaller ones by the robotic device. Carbon dioxide is usually pumped into the body cavity to make

more room for the robotic arms to maneuver. In 2003 Intuitive launched a fourth arm, costing roughly $175,000, as a

part of a new system installation or as an upgrade to an existing unit. The sales pitch for the fourth arm essentially

relied on the perceived advantages to manipulate another instrument for complex procedures and removes the need

for one operating room nurse. Position sensing occurs approximately 1500 times/sec and the system counts the

number of times an instrument is used in order to limit maximum usage.

03/04/2013



Figure 7. List of 510k clearances for Intuitive Surgical

Source: accessdata.fda.gov

PRODUCT APPROVAL DATE 510(K) #

DA VINCI SINGLE-SITE INSTRUMENTS AND ACCESSORIES 2/19/2013 K122532

CONNECT FOR DA VINCI SURGICAL SYSTEM(S) 2/14/2013 K123840

INTUITIVE SURGICAL DA VINCI SI SURGICAL SYSTEM SMARTPEDALS 12/3/2012 K123463

INTUITIVE SURGICAL ONSITE FOR DA VINCI SURGICAL SYSTEMS 10/25/2012 K121921

ENDOWRIST STAPLER SYSTEM 10/17/2012 K113706

SINGLE-SITE MEDIUM-LARGE CLIP APPLIER SINGLE-SITE CADIERE GRASPER SINGLE-SITE FUNDUS GRASPER SINGLE-SITE CROCODILE 4/30/2012 K120215

ENDOWRIST ONE VESSEL SEALER 12/28/2011 K110639

INTUTIVE SURGICAL DA VINCI SINGLE SITE INSTRUMENTS AND ACCESSORIES 12/8/2011 K112208

MONOPOLAR CURVED SCISSORS TIP COVER ACCESSORY 10/7/2011 K112263

5MM/8MM HARMONIC ACE(TM) CURVED SHEARS DISPOSABLE HARMONIC ACE(TM) INSERT DISPOSABLE HARMONIC(TM) CURVED SHEARS INSERT 9/29/2011 K112584

ENDOWRIST ONE SUCTION/IRRIGATOR 8/26/2011 K110451

INTUITIVE SURGICAL DA VINCI S SURGICAL SYSTEM WITH DA VINCI CONNECT & DA VINCI ONSITE MODEL IS2000 4/8/2011 K101581

5MM FLARED CANNULA MODEL 420262 8MM FLARED CANNULA MODEL 420319 2/4/2011 K101743

DA VINCI FLUORESCENCE IMAGING VISION SYSTEM MODEL FF 100 2/4/2011 K101077

5 MM HARMONIC ACE INSTRUMENT (USED WITH DA VINCI IS1200 & IS2000/IS3000 SYSTEM) 1/21/2010 K093217

INTUITIVE SURGICAL ENDOSCOPIC INSTRUMENT CONTROL SYSTEMS MODELS IS1200 IS2000 AND IS3000 12/16/2009 K090993

INTUITIVE SURGICAL ENDOWRIST ONE HOT SHEARS INSTRUMENT 5/7/2009 K082497

INTUITIVE SURGICAL DA VINCI SI SURGICAL SYSTEM: MODEL IS3000 2/18/2009 K081137

INTUITIVE SURGICAL DA VINCI S SURGICAL SYSTEM MODEL IS2000 WITH DA VINCI CONNECT AND ONSITE 12/19/2008 K081207

DA VINCI SONICPRO CLEANING SYSTEM MODEL 400253 8/1/2008 K073112

INTUITIVE SURGICAL DA VINCI ENDOSCOPIC INSTRUMENTS AND CONTROL SYSTEM AND ENDOWRIST STABILIZER 3/19/2008 K080291

MODIFICATION TO:INTUITIVE SURGICAL STEREO VIEW ENDOSCOPIC SYSTEM 3/6/2008 K080155

INTUITIVE SURGICAL INSTRUMENT AND ACCESSORIES STERILIZATION TRAYS 2/28/2008 K072211

INTUITIVE SURGICAL DA VINCI SURGICAL SYSTEM AND ENDOSCOPIC INSTRUMENTS AND ENDOWRIST CARDIAC PROBE GRASPER 2/14/2008 K070947

INTUITIVE SURGICAL DA VINCI AND DA VINCI S SURGICAL SYSTEM AND ENDOSCOPIC INSTRUMENTS AND ENDOWRIST INTRODUCER 2/7/2008 K072627

PROBE HOLDER SYSTEM 10/9/2007 K071405

DA VINCI S SURGICAL SYSTEM-V1.1 MODEL IS2000 12/1/2006 K063220

INTUITIVE SURGICAL ENDOWRIST PK DISSECTING FORCEPS MODELS 400214 & 420214 5/18/2006 K061260

INTUITIVE SURGICAL ENDOWRIST STABILIZER MODEL 420182 4/10/2006 K060391

MODIFICATION TO INTUITIVE SURGICAL DA VINCI SURGICAL SYSTEM AND ENDOSCOPIC INSTRUMENTS 6/29/2005 K050802

INTUITIVE SURGICAL DA VINCI SURGICAL SYSTEM MODEL IS2000 4/29/2005 K050369

INTUITIVE SURGICAL DA VINCI SURGICAL SYSTEM AND ENDOSCOPIC INSTRUMENTS 4/21/2005 K050404

MODIFICATION TO INTUITIVE SURGICAL DA VINCI SURGICAL SYSTEM AND ENDOSCOPIC INSTRUMENTS 3/3/2005 K043288

INTUITIVE SURGICAL MONOPOLAR CURVED SCISSORS MODEL 400179; TIP COVER ACCESSORY MODEL 400180 1/25/2005 K050005

INTUITIVE SURGICAL DA VINCI SURGICAL SYSTEM AND ENDOSCOPIC INSTRUMENTS MODELS IS1200 & IS1000 12/15/2004 K043153

INTUITIVE SURGICAL HARMONIC CURVED SHEARS INSTRUMENT 11/12/2004 K042855

INTUITIVE SURGICAL DA VINCI ENDOSCOPIC INSTRUMENT CONTROL SYSTEM AND ENDOSCOPIC INSTRUMENTS 7/7/2004 K040237

INTUITIVE SURGICAL ENDOPASS ENDOSCOPIC DELIVERY INSTRUMENT MODEL P/N 400170 5/5/2004 K040948

INTUITIVE SURGICAL ENDOSCOPIC INSTRUMENT CONTROL SYSTEM & ENDOSCOPIC INSTRUMENTS MODEL DA VINCI ISI 1000/1200 11/12/2002 K022574

INTUITIVE SURGICAL DA VINCI SURGICAL SYSTEM MODEL IS1000 6/26/2002 K021036

INTUITIVE SURGICAL STERO VIEW ENDOSCOPIC SYSTEM 2/28/2002 K013952

INTUITIVE SURGICAL ENDOWRIST ENDOSCOPIC INSTRUMENT FAMILY 1/10/2002 K013416

INTUITIVE SURGICAL BIPOLAR FORCEPS 11/16/2001 K012833

INTUITIVE SURGICAL ULTRASONIC SHEARS 7/24/2001 K011281

INTUITIVE SURGICAL DA VINCI SURGICAL SYSTEM MODEL ISI 1000 5/30/2001 K011002

INTUITIVE SURGICAL DA VINCI ENDOSCOPIC CONTROL SYSTEM 3/2/2001 K002489

MODIFICATION TO INTUITIVE SURGICAL STEREO VIEW ENDOSCOPIC SYSTEM 8/24/2000 K001666

INTUITIVE SURGICAL ENDOSCOPIC INSTRUMENTS INTUITIVE SURGICAL ENDOSCOPIC INSTRUMENT CONTROL SYSTEM 7/11/2000 K990144

INTUITIVE SURGICAL STEREO VIEW ENDOSCOPIC SYSTEM MODEL SVS-1 4/1/1999 K990188

INTUITIVE SURGICAL MONARCH LAPAROSCOPIC MANIPULATOR 7/31/1997 K965001

03/04/2013



da Vinci Si

Intuitive‘s most current system is the da Vinci Si, wherein a second surgical console may be installed to provide

assistance to the primary surgeon during surgery or as an active aid during surgeon-proctor training sessions. With a

da Vinci Si, a surgeon sitting at a second console can view the same surgery as the primary surgeon and can be

passed control or some or all of the instruments during a case. The fourth instrument is a standard feature on the da

Vinci Si.

Figure 8. da Vinci Si

Source: http://integrisok.com/upload/images/Baptist/Surgical%20Services/da-Vinci-Si-Dual-Console-OR.jpg

In Q1-11, Intuitive also launched the FireFly Fluorescence Imaging product licensed from Novadaq (NVDQ –

Underperform) for use with the da Vinci Si Surgical system in the U.S. and Europe. The new imaging modality is

based on fluorescence of indocyananine green dye in vasculature under UV light. Currently, we estimate over 200 da

Vinci‘s have a Firefly module installed in them. Based on our last channel checks, the recurring revenue from Intuitive

Surgical procedures for Novadaq is around 5 – 10% of total quarterly recurring revenues.

da Vinci Single Site

The da Vinci single site system is a set of instruments and accessories that allow da Vinci Si surgical systems to work

through a single incision rather than multiple incisions. The single site system currently is cleared for laparoscopic

cholecystectomy.

03/04/2013



da Vinci Training Despite some of the noise regarding insulation issues with the instruments using monopolar current (cited in some of

the lawsuits), the da Vinci is an engineering marvel. In our opinion, the da Vinci is a complex machine and despite

some neat features, the success in outcomes using the device resides in the end-user training and experience level

of the user. Part of the issue with outcomes using the da Vinci is in the lack of adequate training. As stated on

Intuitive‘s website, ―The ability to extend these benefits to patients depends on surgical teams achieving proficiency in

preparing for and performing da Vinci Surgery…We believe rigorous training standards and support of our System

users are essential to establishing and maintaining a successful da Vinci Surgery program…Surgery Training

Pathway to help OR teams meet surgical demand, while achieving clinical proficiency in the safest, most efficient

manner possible. The Training Pathway incorporates product training, clinical training, and clinical education for

integrated teams of both surgeons and OR staff. The primary purpose of our training programs is to develop and

increase a surgical team’s confidence and competence in the use of da Vinci. The ultimate goal is to develop a self-

sufficient OR team fully capable of performing surgical procedures with minimal product support and instruction.‖

The company website indicates that Intuitive Surgical works with experienced, independent faculty who has extensive

knowledge of da Vinci surgery. These faculty members conduct didactic and laboratory sessions that teach

specialized pre-, intra- and post-operative techniques that are unique to the da Vinci System. In-depth, hands-on

segments enable participants to practice learned surgical techniques. Intuitive also sells a simulator as part of the

original package. This simulator tests skills on lifelike video tissues and provides a good touch & feel for the clinician.

Figure 9. Training Modules for da Vinci

Source: Company Reports

One of the key issues uncovered in our field checks is the lack of adequate training though, apart from the super-high

costs of the device. There seems to be lack of uniform training and credentialing of surgeons. Intuitive seems to run

an intensive three-to-four-day course at its Sunnyvale, Calif., home, including cadaver work, and dispatches mentors

to monitor trainees for several cases before certification. However, as far as we know, there are no ―national‖

guidelines for robotic surgery. It is usually up to the hospitals to set rules — and they're all over the map. It is unclear

how many ―cases‖ need to be performed by clinicians before they become proficient in use of the da Vinci. Some

hospitals require surgeons to perform a minimum number of cases/year in order to maintain robotic-surgery

credentials. Some anecdotal information cites that urologists needed 250 to 500 cases to get "consistently good," and

laparoscopy-savvy gynecologists took 50 to 100 cases to gain proficiency.

Overall, training seemed like a red flag in our field checks. In summary,

Sales reps seem to be more interested in initial sale, both on the capital equipment side and the procedure

instruments.

The lack of adequate training seemed to be a prevalent theme in our checks. Clinicians cited the lack of

adequate training as one of the reasons for potential complications or less-than-optimal outcomes.

Combine the lack of guidelines with the lack of adequate training, there was concern in the field as to who

shoulders liability risk. Our understanding during our due diligence calls with Intuitive is that after the initial

training, Intuitive hands over the reins to the hospital and the each hospital then develops their own

standards of accreditation. The lack of uniform guidelines, pressure to ―recoup‖ costs, and a relatively

inexperienced surgeon potentially creates a scenario where surgical outcomes could be seriously sub-

optimal and the hospital ends up bearing liability risk.

Content Description TrainerProduct Training I: Introduction to da Vinci Surgery Intuitive Surgical

Product Training II: Preparation and System Training

Clinical Training III: Post System Training Peer-to-Peer

Clinical Training IV: Advanced Training Societies/Academic Institutions

Continuing Clinical

Education

Beyond the Pathway Societies/Academic Institutions

03/04/2013



Clinical Evidence The U.S. Food and Drug Administration (FDA) has cleared the da Vinci Surgical System for use in urological surgical

procedures, general laparoscopic surgical procedures, gynecologic laparoscopic surgical procedures, transoral

otolaryngology surgical procedures restricted to benign and malignant tumors classified as T1 and T2, general

thoracoscopic surgical procedures, and thoracoscopically assisted cardiotomy procedures. The system can also be

employed with adjunctive mediastinotomy to perform coronary anastomosis during cardiac revascularization. The

system is indicated for adult and pediatric use (with the exception of transoral otolaryngology surgical procedures in

pediatric patients). Radical prostatectomy and hysterectomies have been the two primary growth drivers for use of

the da Vinci robot over the last 7 years. Other indications where there has been some use, or where the company is

actively looking to get a foothold are: pyeloplasty, cystectomy, nephrectomy, ureteral reimplantation,

cholecystectomy, Nissen fundoplication, Heller myotomy, gastric bypass, donor nephrectomy, adrenalectomy, among

others. We primarily discuss clinical evidence in radical prostatectomies, hysterectomies, colorectal surgeries,

nephrectomies, and cholecystectomies given that these are the current major contributors to Intuitive Surgical.

Radical Prostatectomy

The prostate gland lies just under the bladder, in front of the rectum. Radical prostatectomy is an operation to remove

the prostate gland and tissues surrounding it, which includes the seminal vesicles and some nearby lymph nodes. It

is done to remove cancerous tissue, which is localized. Usually men under the age of 75 years with limited prostate

cancer who are expected to live at least 10 more years tend to get the most benefit from radical prostatectomy.

Figure 10. Anatomy of the prostate

Source: www.webmd.com

Surgeons choose from four different approaches to reach and remove the prostate during a radical prostatectomy.

These are:

Radical retropubic prostatectomy: The surgeon makes a cut just below the belly button and reaching to the

pubic bone. This is considered an ―open‖ surgery.

Laparoscopic radical prostatectomy: The surgeon makes several small cuts instead of one big cut.

Laparoscopes (thin tubes with a video camera) are put inside one of the cuts. This helps the surgeon see

inside the belly during the procedure.

Robotic-assisted laparoscopic prostatectomy: This type of procedure involves use of robot-assisted surgery,

mostly with Intuitive‘s da Vinci system.

Radical perineal prostatectomy: The surgeon makes a cut in the skin between the anus and base of the

scrotum (the perineum). The cut is smaller than with the retropubic technique. This makes it harder for the

surgeon to spare the nerves around the prostate, or to remove nearby lymph nodes. Perineal surgery

usually takes less time than the retropubic way. There is also less blood loss.

03/04/2013



Figure 11. Types of radical prostatectomies. In order: Retropubic; retroperineal; Laparoscopic

Source: Medical Literature

03/04/2013



Figure12 below highlights the rise on robotic radical prostatectomies in the U.S. In 2003, only 9.2% of radical

prostatectomies were done using a minimally invasive procedure, of which we estimate roughly 6% were robotic. By

2007, that number had jumped to 43.2%, of which robotic radical prostatectomies constituted 40%. By 2011, industry

experts guesstimate that roughly 79% of overall radical prostatectomies in the U.S. were performed using the da

Vinci.

Figure 12. Trend in open vs. robotic radical prostatectomies in the U.S.

Source: sciencedirect.com; Northland estimates; wsj.com; nytimes.com; Journal of Cancer Oncology

The proliferation of robotic-assisted prostatectomies has coincided with an aggressive marketing push to hospitals by

Intuitive Surgical, as well as favorable policies by private payors, Medicare and Medicaid. As seen from figure 13

below, the proportion of hospitals with at least one da Vinci being used for urology procedures has risen from <5% in

the year 2000, to an estimated 80% in the year 2012. As can be seen in the same figure, access to this kind of

surgery, primarily through favorable coverage policies by payors has increased from <10% to an estimated 80% in

the year 2012. In other words, an aggressive marketing push combined with favorable policies in general have

resulted in a super-rapid uptake in robotic-assisted surgery in radical prostatectomies in the U.S.

0%

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40%

60%

80%

100%

120%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Robotic Radical Prostatectomy

Non-Robotic Radical Prostatectomy

03/04/2013



Figure 13. Proportion of physicians who performed at least 1 robotic RP by certification year and type.

Source: sciencedirect.com; Northland Capital Markets estimates;

The question about outcomes is also interesting within the context of low-risk radical prostatectomies. We discuss

this more in the next section.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2002 2004 2006 2008 2010 2012

Hospitals without Robotic Surgery Hospitals with Robotic Surgery

0%

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30%

40%

50%

60%

70%

80%

90%

2000 2002 2004 2006 2008 2010 2012

Private Medicare Medicaid

03/04/2013



The Role of PSA (Prostate-specific Antigen) Tests

One of the major drivers of growth in prostate cancer treatments in the U.S. had been the increased use of PSA

testing, which was rolled out as a cancer screening method over two decades ago and has driven an uptick in the

number of prostate cancer cases diagnosed each year. One in six American men will be diagnosed with prostate

cancer in their lifetime. In most cases, the disease grows so slowly it doesn't cause problems. Yet some prostate

cancers are fast-moving and lethal; about 28,000 U.S. men die every year because it wasn't detected and treated in

time. A test for prostate-specific antigen, or PSA, a protein made in the prostate, can give an early warning sign of

cancer. But PSA tests have also recently come under criticism for its rate of false-positives and for creating a fear of

imminent danger, especially in asymptomatic cases. PSA is not cancer-specific; a rising PSA level can be due to an

infection or benign prostate enlargement as well as cancer. There's no PSA level that definitely indicates that prostate

cancer is present. Some patients have a PSA of 0.5 and have cancer and some have a PSA of 11 and do not. And

two patients with a similar Gleason score and clinical history may have very different outcomes. And prostate cancer

is an age-related disease. Between 40% and 80% of men aged 50 to 75 possess asymptomatic cancer, so cancer

may well be found. However, the PSA test can't distinguish an indolent cancer from an aggressive one. Some

industry sources estimate that more than 1 million unnecessary biopsies are performed every year in the U.S. alone

due to the over-diagnosis of PSA tests. And when prostate cancer is found, more than 85% of men opt for surgery,

radiation or hormone therapy that sometimes leaves them incontinent or impotent, even though their cancer probably

wasn't life-threatening.

In a 2008 report published by the AHRQ (http://effectivehealthcare.ahrq.gov/ehc/products/9/99/ProstateCancerClinician.pdf,

citing a Level of Evidence of ―High‖, it was stated that ―men whose tumors have high Gleason scores have higher

rates of cancer recurrence and death than men who have tumors with low Gleason scores. This is true no matter

what treatments are used.‖ The U.S. governmental Task Force assigned to give recommendations on prostate

cancer screenings made its recommendations in late 2012, ―The harms of PSA-based screening for prostate cancer

include a high rate of false-positive results and accompanying negative psychological effects, high rate of

complications associated with diagnostic biopsy, and—most important—a risk for over-diagnosis coupled with

overtreatment. Depending on the method used, treatments for prostate cancer carry the risk for death, cardiovascular

events, urinary incontinence, erectile dysfunction, and bowel dysfunction. Many of these harms are common and

persistent.‖

The interesting thing about the PSA guidelines is that on one hand the tests have a certain rate of false positives. A

recent article in the journal Cancer estimated that without PSA testing, the number of men initially diagnosed with

metastatic (incurable) cancer would be nearly three times higher. That's an additional 17,000 men annually. So the

argument made is that more men would be cured if detected earlier, but PSA testing dramatically improves the odds

that prostate cancer will be found before it becomes incurable. On the other hand, to save the 20,000 or so deaths

due to prostate cancer, the prevailing wisdom in industry is that there have been over 1 million unnecessary surgeries

done on patients, who would have done fine with no intervention. At the same time, many of these patients have

suffered infections or other complications, including incontinence and impotence. There is a growing body of

evidence that suggests that combining Gleason scores with clinical assessments of a patient with a prostate exam,

and using PSA levels can be effectively used to stratify patients into low, intermediate and high-risk groups.

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Figure 14. Mortality due to prostate cancer stratified by age and Gleason scores; Incidence and death rates due to prostate cancer

in the U.S (per 100,000).; Mortality rates stratified by age for men with prostate cancer in U.S.; Treatment modalities stratified by

Gleason score in PSA tests; Split in type of surgery done in patients with low Gleason scores

Source: AHRQ 2008 Report on Prostate Cancer; wsj.com; Northland estimates

0%

10%

20%

30%

40%

50%

60%

70%

80%

2 - 4 5 6 7 8-10

55 - 59 yrs 60 - 64 yrs

65 - 69 yrs 70 - 74 yrs

0

50

100

150

200

250

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Incidence Deaths

0%

2%

4%

6%

8%

10%

12%

14%

0 - 30 yrs 40 - 59 yrs 60 - 69 yrs >70 yrs

0%

20%

40%

60%

80%

100%

120%

Gleason Score ≥ 7 Gleason Score < 7

Active Surveillance Surgery

85%

15%

Robotic-assisted Non-Robotic

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Current Evidence in Clinical & Functional Outcomes in Prostatectomies

Urinary Incontinence

Urinary incontinence along with erectile function are probably two of the key metrics used in determining success of

radical prostatectomies. While much has been said of robotic assisted radical prostatectomy being superior to

laparoscopic radical prostatectomy or retropubic / retroperineal radical prostatectomy, the evidence is really far from

conclusive given lack of real Level I evidence. The prevalence of urinary incontinence after robotic-assisted surgery is

influenced to a large extent by patient characteristics, surgeon experience, surgical techniques, and methodological

aspects such as continence definitions, tools used for data collection, and different follow-up intervals. The existing

evidence though highlights the following:

Figure 15. In order: Comparative analysis of open radical prostatectomy to robotic-assisted radical prostatectomy;

Comparative analysis of laparoscopic radical prostatectomy to robotic-assisted radical prostatectomy

Source: europeanurology.com

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- Definition of ―urinary incontinence‖

Different studies use different definitions of urinary incontinence. Some studies for example, use a ―no-pad‖ definition

whereas others include a ―safety-pad‖ definition for determining urinary incontinence. Specifically, 12-month urinary

incontinence rates after robotic-assisted prostatectomies using a no-pad definition have ranged from 4% - 31%, and

from 8% - 12% for patients using a ―safety-pad‖ definition. Longer-term follow-up data for urinary incontinence post-

robot assisted surgery is relatively sparse. Moreover, while there have been good data reported from single-center

studies on incontinence rates after robotic-assisted surgery, these cannot be directly compared to historical series, or

for that matter construed as being representative of the larger population undergoing robotic-assisted surgery simply

given the differences in patient characteristics, study designs, data collection methods, and finally, surgeon

experience and techniques.

Figure 16. Urinary continence rates reported using robotic-assisted radical prostatectomy between 2008 - 2011


- Surgical Technique

Over the years, various surgical techniques have been reported to have yielded low urinary incontinence rates after a

radical prostatectomy. Few of these include the puboprostatic-sparing technique, bladder neck preservation, nerve-

sparing techniques, posterior muscolofascial reconstruction as well as anterior restoration of the pelvic space.

Interestingly enough, only a few studies have really compared the effects of these techniques on urinary

incontinence, and on continence recovery. Some studies have reported using cold irrigation and endorectal cooling

balloons being used in improving urinary continence rates. However, as noted in most papers, the data coming from

these studies has not been properly adjudicated or for that matter evaluated via a peer-reviewed journal. The

posterior / anterior reconstruction methods during radical prostatectomies have probably been the most studied. As

stated in one of the papers, ―in posterior reconstruction, vinyl sutures were used to approximate the cut end of the

Denonvilliers fascia to the rhabdosphincter fibrous raphe on either side of the midline. The aim of the technique was

to restore the length of the urethrosphincteric complex, to prevent its caudal retraction, to avoid undue tension on the

subsequent anastomosis, and to provide a posterior buttress to the urethrosphincter complex to facilitate its effective

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contraction.‖ In a meta-analysis published in the journal European Urology (Vol 62: 2012), a small statistical

advantage was noted in favor of posterior reconstruction after 1-month of surgery. However, a 95% CI of the

cumulative analysis raised questions about the real clinical benefit of this difference. The authors did note that even

between studies, the method of reconstruction was vastly different, therefore leading to limitations in making broad

conclusions about a particular reconstruction technique.

Figure 17. Urinary continence rates reported using robotic-assisted radical prostatectomy comparing techniques


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- Surgeon Experience in using robots

The most critical issue remains the impossibility of controlling for surgical skill and individual surgeon factors in

determining outcomes after radical prostatectomy surgery. Similar to open and laparoscopic surgeons, robotic

surgeons do not have the same level of surgical ability, regardless of experience. Hence, time required to complete

the learning curve is a highly individualized factor and is difficult to generalize. The most-commonly cited number for

being proficient in performing robotic-assisted radical prostatectomies is around 250 - 500 cases. Moreover, our field

checks suggest that the best outcomes are strongly correlated to higher-volume centers, especially those that do 100

– 200 robotic-assisted radical prostatectomies/year. The level of training provided at a particular center, combined

with the ―stage‖ on the learning curve have been shown to strongly influence outcomes for robotic-assisted

prostatectomies.

- Differences in patient baseline functional assessments

A last but not least important aspect that continues to confound proper statistical analysis is the difference in

validated functional assessments of patients at baseline.

Figure 18. Urinary continence rates reported using robotic-assisted radical prostatectomy for difficult cases


Oncologic Outcomes

Margin status is an important predictor of disease recurrence after radical prostatectomy and, therefore, a measure of

treatment efficacy. Oncologic outcomes in published studies seem to be mainly limited to overall and stage-stratified

positive surgical margin rates. True Level I studies comparing positive surgical margin rates between open,

laparoscopic and robotic-assisted radical prostatectomies are sparse. The only study with highest level of evidence

demonstrated positive surgical margin rates in retropubic and laparoscopic prostatectomies were overlapping. Even

after stratifying data by pathologic states, no differences were found between two procedures. Cumulative analysis

highlighting positive surgical margin rates between open and laparoscopic approaches suggests margin rates as (RR:

1.08; 95% CI of RR: 0.97 – 1.19; p = 0.17). Even considering only positive surgical margin rates in patients with

pathologically localized cancer, only non-statistically significant trends in favor of open surgery over laparoscopic

surgery have been shown in literature.

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The tables on the next page highlight the prevalence of positive surgical margins ranging from 7% - 32% for robotic-

assisted prostatectomies. Positive margins were 9% mean (range 4% - 23%) for pT2 cancers, 37% (Range 29% -

50%) in pT3 cancers, and 50% (range 40% - 75%) in pT4 cancers. In an extensive analysis, Vincenzo Ficarra et.al

evaluated the clinical and pathologic predictors of any positive surgical margins, posterolateral margins, multiple

positive surgical margins, and also margins in pT2 cancers. Prostate volume, and cT stage were the only clinical

variables predictive of any PSM when using robotic-assisted prostatectomy. pT stage was the only unique pathologic

predictor though. The cT stage and biopsy Gleason score were the only preop predictors of posterolateral positive

surgical margins. In a larger study involving a multicenter collaboration involving >8000 cases with >1200 positive

surgical margins, the authors found that a patients BMI, prostate-specific antigen levels, pT stage, and prostate

volume (all p-values <0.001) were independent predictors of positive surgical margins, whereas Gleason score

wasn‘t.

Figure19. In order: Positive surgical margin rates in comparative studies evaluating laparoscopic radical prostatectomy and robotic-

assisted radical prostatectomy; Comparison between open and robotic-assisted radical prostatectomy


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Erectile Dysfunction

Erectile dysfunction and return to full sexual activity remains by far one of the most important psychological and

functional outcomes that concerns prostate cancer patients, especially those diagnosed with early stage prostate

cancer. Walsh originally described an anatomic nerve sparing technique in 1982 that was based on the concept that

neurovascular bundles (NVBs) are situated posterolaterally and symmetrically to the prostate in the space among the

levator fascia, prostatic fascia, and Denonvilliers‘ fascia. A comprehensive review of the literature including radical

retropubic prostatectomy (RRP) series published between 1990 and 2005 showed a wide range of estimates after a

minimum follow-up of 12 months, with patients who received bilateral nerve-sparing RRP showing potency rates

ranging from 31% to 86%. Similar ranges of outcomes from 42% to 76% were reported after nerve-sparing

laparoscopic radical prostatectomy (LRP). In the last decade, deeper insight into the distribution and course of the

cavernous nerves showed that, especially in men with a small prostate, NVBs may have either an anterolateral

position or, rarely, an asymmetric posterolateral position on one side while lateral on the other. These new anatomic

concepts supported the incision of the periprostatic fascia anteriorly and parallel to the NVBs to preserve cavernous

nerves located at both the posterolateral and anterolateral surfaces of the prostate. The multiple compartments that

could be developed from the levator fascia to the prostate capsule by entering fascial planes during surgery explain

the possibility of realizing a different extension of the nerve-sparing procedure according to cancer risk stratification

and patient preoperative characteristics. Although some surgeons demonstrated the feasibility of the anterior incision

of the periprostatic fascia and the possibility of realizing an interfascial or intrafascial surgical plane in open surgery, it

was hypothesized that the tri-dimensional magnification, scaling of movements, and 7 degrees of freedom associated

with the robotic technology could significantly simplify and improve the results of nerve-sparing procedures.

The figure below summarizes the incidence of potency recovery reported in robotic-assisted surgical series published

between 2008 and 2011. The mean values of the 3-, 6-, 12-, and 24-mo potency recovery rates are 50% (32–68%),

65% (50–86%), 70% (54–90%), and 79% (63–94%), respectively. Interestingly, selecting the series that fulfilled six or

more Mulhall criteria, the mean 3-, 6-, 12-, and 24-mo potency rates were 48% (32–68%), 68% (50–86%), 76% (62–

90%), and 82% (69–94%), respectively. Conversely, studies that reached fewer than six Mulhall criteria showed a

mean value of 3-, 6-, 12-, and 24-mo potency rates of 56%, 62% (53–70%), 66% (62–83%), and 63%, respectively.

The observed wide variability can be due to different case mixes among studies such as patient age, preoperative

potency status, comorbidity index, extension of the nerve-sparing procedure, and countertraction.

Figure 20. Potency rates in robotic-assisted radical prostatectomies for series involving >100 cases between 2008 - 2011


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In conclusion, the various studies on nerve-sparing robotic-assisted radical prostatectomies was associated with an

incidence of 12- and 24-mo erectile dysfunction ranging from 10% to 46% and from 6% to 37%, respectively. These

widely different rates of erectile dysfunction are attributable to several factors: (1) Different definitions and measures

of erectile dysfunction have been used from study to study, (2) characteristics of the surgery and patient selection

have varied across studies, (3) postsurgical rehabilitation varies greatly from center to center, and (4) surgeon skill.

The systematic reviews also confirmed that for patients who underwent robotic-assisted surgery, relevant predictors

of outcome are age at surgery, baseline erectile function, and presence of comorbidities. These data confirmed the

classic suggestion that nerve-sparing procedures were better reserved for young, preoperatively potent patients

without significant comorbidities.

Figure 21. Potency rates in robotic-assisted radical prostatectomies for series involving >100 cases between 2008 - 2011


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Figure 22. Studies comparing recovery of potency rates between robotic-assisted and laparoscopic radical prostatectomy


In recent years, deeper insights concerning the multilayer structure of the periprostatic fascia and the distribution and

course of the cavernous nerves have supported the high incision of the levator and fascia and the following

development of intra- or interfascial surgical planes. Data from some studies have shown wide variability in the choice

between the interfascial or intrafascial dissection within the same surgical series. Therefore, no conclusion is possible

between the robotic-assisted and laparoscopic approaches. The only available comparative studies took into

consideration the comparison between interfascial nerve sparing with the so-called extrafascial nerve-sparing

technique. This last approach is considered a minimally nerve-sparing procedure, considering that dissection with this

technique is conducted laterally to the prostatic fascia and anteriorly to the extension of Denonvilliers‘ fascia into the

thickness of the NVBs. Until 2008, the promising potency outcomes of robotic-assist surgery were supported by only

one prospective study comparing the robot-assisted approach with open prostatectomy. This study showed a

statistically significant advantage in favor of robotic-assisted surgery to reach potency recovery. Similarly, only one

study comparing robotic-assisted and laparoscopic prostatectomy in terms of 3-mo potency rates showed better

results for robotic-assisted surgery (46% vs. 36%). Authors Vincenzo Ficarra et.al showed, for the first time,

significant advantages in terms of 12-mo potency recovery in favor of robotic-assisted surgery as compared with

open prostatectomy. Interestingly, 12-mo potency rates reported in the robotic arms of these comparative studies

ranged from 55% to 81%, similar to those values reported in the non-comparative studies (ranging from 54% to 90%).

The only comparative study reporting potency outcomes at a longer follow-up confirmed a statistically significant

advantage in favor of robotic-assisted surgery. Concerning the comparison between robotic and laparoscopic, the

systematic review included one RCT (level 2) and three studies using historical control groups (level 4). The result of

the RCT showed a significant advantage in favor of robotic-assisted surgery in comparison with laparoscopic surgery.

However, the cumulative analysis was strongly influenced by the results of level 4 studies and showed only a non-

statistical trend in favor of robotic-assisted radical prostatectomy.

Perioperative Outcomes

Using a rule of thumb, the less invasive the surgery, the better the post-op outcomes. While a plethora of research

has pointed to ―trends‖ in reduced hospital stay, use of pain meds, catheterization times, and blood transfusion rates,

we note that making definitive claims is complicated due to studies not being properly adjudicated, properly

randomized, or for that matter having appropriate duration of follow-up and being able to normalize for differences in

surgeon experiences. For example, authors Patel et.al studied 374 patients who underwent open prostatectomy and

629 patients who underwent robotic-assisted prostatectomies. They reported mean length of stay in the open

prostatectomy case to be 1.23 days, and 94.3% of these patients were discharged on or before postoperative day 1.

On the other hand, the mean length of stay was 1.17 days in the robotic-assisted prostatectomy patients, and 97.5%

of these patients were discharged on or before postoperative day 1. Other studies have shown post-op hospital stay

to range from 1 – 4 days depending on the type of surgery. In essence, no conclusions currently can be drawn about

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the statistical difference between post-op hospital stay between robotic-assisted and laparoscopic surgery. In the

hands of experienced robotic surgeons, single-center studies have shown direct correlation between high volume of

procedures and lower post-op stays.

One of the lesser studied perioperative outcomes is the conversion from one procedure to another. A number of

studies have reported conversion of laparoscopic procedures to open procedures in 2 – 8% of the times. Similarly,

conversion of robotic-assisted surgery to open surgery has been reported in 0 – 2% of the times in literature.

However, bear in mind, there have been no controlled studies performed to monitor the cross-overs, hence the

numbers above should be taken with a grain of salt.

The figures on the next page summarize current body of evidence on operative times using different surgical

techniques for radical prostatectomies. According to the only published randomized trial, operative times were

significantly longer in patients undergoing laparoscopic procedures vs. open procedures (Level of Evidence 1b).

Cumulative analysis of published studies indicates that the weighted mean difference between the two approaches is

about 71 minutes (p<0.00001). The same trial demonstrated lower blood loss and transfusion rates in patients

randomized to laparoscopy. Catheterization times between open and laparoscopic approaches ranged from 5.8 days

– 14 days after laparoscopy and 5 days – 22 days after open approaches. Laparoscopy also demonstrated shorter in-

hospital stays (Level of Evidence 2b). Complications rates between open and laparoscopic approaches, at least

based on current evidence seems to suggest similar rates.

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Figure 23. Operative Outcomes of Open Radical Prostatectomy, Laparoscopic RP, and robotic-assisted RP from single-center

studies

Source: Reviews in Urology; Vol 12; No.1; 2010

Figure 24. Perioperative Outcomes of Robotic-Assisted Radical Prostatectomy (Level of Evidence = 4)


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With regards to perioperative data between robotic-assisted and laparoscopic procedures, available studies suggest

that robotic-assisted surgery was more time consuming than open procedures in the earlier phase of the learning

curve (Level of Evidence 2b), but these differences disappeared with a larger robotic cohort of cases. Similar to

laparoscopic approaches, robotic-assisted surgery warranted significantly lower blood loss and transfusion rates.

Interestingly enough, there are other papers which present a more nuanced comparison between different

approaches, specifically related to the specific surgical technique (reconstruction, suturing, etc) and how the patient is

managed subsequently. As far as we know, there aren‘t true, randomized, controlled studies been done to compare

perioperative outcomes between robotic-assisted and laparoscopic surgeries. Some studies have highlighted

transfusion rates in the robotic approach were significantly lower transfusion rates (RR: 4.51: 95%; CI = 1.35 – 15.03;

P = 0.01). Sensitivity analysis for prospective studies, however, showed a non-statistically significant trend in favor of

the robotic approach.

In comparative studies excluding the learning curve, operative time based on current studies seems to indicate that

operative times in robotic-assisted and laparoscopic surgery, especially in centers with considerable laparoscopic

experience is similar (Level of evidence 3b – weighted mean difference = -19.39 minutes; 95% CI = -49.34 – 88.13

minutes; p = 0.58)). Blood transfusion rates (RR = 6.46; 95% CI = 0.76 – 55.07; p = 0.09) and blood loss have also

been reported to be similar between the two approaches (Level of evidence 3b; weighted mean difference = 19.45

minutes; 95% CI = -112.53 – 106.73 minutes; p = 0.96).

In a nutshell, while there are trends towards lower blood loss, shorter post-op hospital stays with robotic-assisted

prostatectomies, there isn‘t really a true Level study that one could hang their hat on. Similarly, while it is accepted

that robotic-assisted prostatectomies take longer intra-operatively, there remain issues with erectile dysfunction,

potency, and conversion to laparoscopic procedures. Hence, care needs to be exercised in drawing major causative

analyses either way.

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Hysterectomy

Hysterectomy is the surgical removal of a woman‘s uterus. It may be total (removing the body, fundus, and cervix of

the uterus) or partial (removal of the uterine body while leaving the cervix intact; also called "supracervical"). It is the

most commonly performed gynecological surgical procedure. Roughly 620,000 hysterectomies are performed

annually in the United States alone, of which over 90% were performed for benign conditions including fibroids,

abnormal uterine bleeding, endometriosis, and chronic pelvic pain. The most common indications for hysterectomy

are symptomatic uterine leiomyomas (40.7%), endometriosis (17.7%), and prolapse (14.5%). Of this 90%, robotic-

assisted hysterectomies are used in <20% of the cases. There are different approaches to performing a

hysterectomy, specifically related to the tools used for surgery. The different approaches are open or abdominal

hysterectomy, vaginal hysterectomy, laparoscopic hysterectomy, and finally, robotic-assisted hysterectomy. The

choice of surgical approach as well as the tool used is influenced by many factors such as size of the uterus, patient

baseline characteristics, ability to get pregnant, stage of cancer or other comorbidity, patient choice, etc. Figure 25

underneath highlights currently known stats about use of various approaches in surgery and the underlying

fundamentals driving usage.

Figure 25. Geographical zones of hysterectomy

Source: Wikipedia.com

Removal of the uterus renders the patient unable to bear children (as does removal of ovaries and fallopian tubes)

and has surgical risks as well as long-term effects, so the surgery is normally recommended when other treatment

options are not available. Oophorectomy (removal of ovaries) is frequently done together with hysterectomy to

decrease the risk of ovarian cancer. However, recent studies have shown that prophylactic oophorectomy without an

urgent medical indication decreases a woman's long-term survival rates substantially and has other serious adverse

effects. This effect is not limited to pre-menopausal women; even women who have already entered menopause

were shown to have experienced a decrease in long-term survivability post-oophorectomy.

Factors that may influence the route of hysterectomy for benign causes include the size and shape of the vagina and

uterus; accessibility to the uterus; extent of extrauterine disease; the need for concurrent procedures; surgeon

training and experience; available hospital technology, devices, and support; emergency or scheduled cases; and

preference of the informed patient. A narrow pubic arch (less than 90 degrees), a narrow vagina, an undescended

immobile uterus, nulliparity, prior cesarean delivery, and enlarged uterus have been proposed by some authors as

contraindications for vaginal hysterectomy. However, many nulliparous women and women who have not given birth

vaginally have adequate vaginal caliber to allow successful completion of the vaginal hysterectomy. If the vagina

allows access to divide the uterosacral and cardinal ligaments, uterine mobility usually is improved enough to allow

vaginal hysterectomy, even in cases where there is minimal uterine descent. When the uterus is enlarged, vaginal

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hysterectomy often can be accomplished safely by using uterine size reduction techniques such as wedge

morcellation, uterine bisection, and intramyometrial coring. Guidelines incorporating uterine size, mobility,

accessibility, and pathology confined to the uterus (no adnexal pathology or known or suspected adhesions) have

been proposed as selection criteria for vaginal hysterectomy. Uterine morcellation and other uterine size reduction

techniques were only necessary in 11% of cases.

Extrauterine disease such as adnexal pathology, severe endometriosis, or adhesions may preclude vaginal

hysterectomy. However, in these cases, it may be prudent to visualize the pelvis with a laparoscope before deciding

on the route of hysterectomy. The decision to electively perform a salpingoophorectomy should not be influenced by

the chosen route of hysterectomy and is not a contraindication to performing a vaginal hysterectomy. The success of

removing the ovaries vaginally varies greatly and is reported to range from 65–97.5%. In a randomized trial that

compared vaginal hysterectomy with bilateral salpingoophorectomy to laparoscopically assisted vaginal hysterectomy

with bilateral salpingoophorectomy, there were more complications and increased operating time with the

laparoscopic approach. Evidence demonstrates that, in general, vaginal hysterectomy is associated with better

outcomes and fewer complications. A Cochrane review of 34 randomized trials of abdominal hysterectomy,

laparoscopic hysterectomy, and vaginal hysterectomy, including 4,495 patients, concluded that vaginal hysterectomy

has the best outcomes of these three routes. The review also found that when a vaginal hysterectomy is not possible,

laparoscopic hysterectomy has advantages (including faster return to normal activity, shorter duration of hospital

stays, lower intraoperative blood loss, and fewer wound infections) over abdominal hysterectomy; however,

laparoscopic surgery also is associated with longer operating time and higher rates of urinary tract injury. When it is

not feasible to perform a vaginal hysterectomy, the surgeon must choose between laparoscopic hysterectomy, robot-

assisted hysterectomy, or abdominal hysterectomy. Experience with robot-assisted hysterectomy for benign

conditions is currently limited. Abdominal hysterectomy is also an important surgical procedure, especially when the

vaginal or laparoscopic approach is not appropriate to manage the patient's clinical situation or when facilities cannot

support a specific procedure.

Cost analysis has consistently demonstrated that vaginal hysterectomy is the most cost-effective route. Patient

preference may influence the route by which the hysterectomy is performed. For example, despite the evidence that

there is no significant difference in outcome between a supracervical hysterectomy and a total hysterectomy, some

patients may choose a supracervical hysterectomy. In these cases, a laparoscopic or open abdominal approach is

most appropriate. Sometimes, a robotic-assisted hysterectomy could be the preferred route depending on a variety of

factors. However, whether robotic-assisted hysterectomy is being done due to superior clinical outcomes, or other

incentives is many a times unclear. Recently, robotic-assisted surgery has come under withering criticism for being

indicative of a more aggressive-marketing driven procedure rather than superior outcomes-based. Interestingly

enough, Intuitive Surgical has done a great job at penetrating fellowship programs at various gynecologic oncology

programs nationwide, and our due diligence suggests that the daVinci is present in over 95% of these institutions.

Abdominal hysterectomy is still the standard of care, and in the hands of experienced surgeon‘s yields good peri-

procedural and long-term outcomes. Vaginal hysterectomy is usually preferred for uteruses which are smaller in size,

whereas laparoscopic and robotic-assisted hysterectomies are preferred modalities in cases which are more

complex.

Our due diligence revealed a severe lack of systematic, updated, and statistically rigorous data that could shed some

comparative light between the different surgical approaches. While a large amount of literature does tend to insinuate

a steep learning curve with laparoscopy, it does not necessarily suggest that robotic-assisted hysterectomy is any

easier to learn technique. The rapid rise in robotic-assisted gynecologic surgery is attributed to surgeons being able

to complete tasks such as intracorporeal suturing and knot tying, ureterolysis, lymphadenectomies, and lysis of dense

adhesions. There is some evidence that also suggests the ability to provide suctioning, retraction, vessel coaptation,

passage of suture or laparotomy sponges, and thrombogenic agents as needed. Despite the wide use of robotic-

assisted surgery in gynecology, there are no randomized trials comparing its safety and efficacy to other traditional

surgical approaches. The vast majority of published literature on use of robotic-assisted surgery in gynecology

consists of case reports, descriptions of techniques, retrospective case series, and several review articles.

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Figure 26. In order; Split of hysterectomy procedures in the U.S. (Annual = 620,000) by malignancy; By size of uterus; By

type of surgical Approach; Split in Benign Hysterectomies by type of surgical approach

Source: Northland Capital Markets estimates; Medical Literature

Benign Conditions

92%

Malignant

cases8%

Uterus - too

big32%

Small -

Medium uterus

68%

Robotic assisted

15%

Abdominal

45%

Laparoscopic

20%

Vaginal20%

Robotic assisted

18%

Other82%

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In an article published by authors Maeso et.al. (Source: The British Journal of Surgery, vol. 97, no. 12, pp. 1772–

1783, 2010) conducted a systematic review comparing robotic-assisted hysterectomy to laparoscopic hysterectomy

and abdominal hysterectomy. Twenty-two studies were included in the review. All were controlled but none was

randomized. The majority were retrospective with historical controls. The settings in which robotic surgery was used

included hysterectomy for malignant and benign disease, myomectomy, sacrocolpopexy, fallopian tube

reanastomosis and adnexectomy. Robotic surgery achieved a shorter hospital stay and less blood loss than open

surgery. Compared with conventional laparoscopic surgery, robotic surgery achieved reduced blood loss and fewer

conversions during the staging of endometrial cancer. No clinically significant differences were recorded for the other

indications tested. The authors concluded that the available evidence showed that robotic surgery offered limited

advantages with respect to short-term outcomes. However, they also cautioned that clinical outcomes should be

interpreted with caution owing to the methodological quality of the studies.

While there are many studies as mentioned above which are reporting outcomes of robotic-assisted hysterectomy in

benign disease, there are only 4 studies to date reporting comparative observational data of robotic versus

laparoscopic hysterectomy. No studies have compared robotic-assisted to abdominal hysterectomy. Payne and

Dauterive reported the first study in 2008. They retrospectively reviewed 200 cases of consecutive hysterectomies

completed before and after the implementation of a robotics program at their institution with the first 100 cases

intended to be performed by laparoscopy and the second 100 cases intended to be performed by the daVinci. All the

hysterectomies were done for benign conditions, and the mean uterine weights and body mass index (BMI) did not

differ between the two groups. The overall operative time was longer in the laparoscopy group (120 versus 92 min.),

but, when comparing the operative times of the last 25 robotic cases to the laparoscopic cases, the robotic cases

were significantly shorter (79 versus 92 min.). Also, the average blood loss of the robotic cases were half that of the

laparoscopic cases (61 versus 113 mL) and the patients had shorter hospital stays (1 versus 1.6 days). Twenty-

percent of the intended laparoscopic cases were done as an exploratory laparotomy or converted to open (eleven for

large uterine size, 8 due to adhesions, and one case due to a tubo-ovarian abscess) while only 4% of the robotic-

assisted cases were converted to open (one due to a cystotomy, and 3 due to large uterine size). There was one

enterotomy and one vaginal tear in the laparoscopy group and one cystotomy and one cuff infection in the DRS

group. Thus, the robotic group had improved outcomes with no difference in complication rates. Although not a

comparative study, Payne et al. reported on a multicenter retrospective case series of robot-assisted hysterectomies

performed on uteri of at least 250g. They reported only 4 conversions to open among 256 cases (1.6%) with a minor

complication rate of 1.6% and a major complication rate of 2.0%. Interestingly, three of the four patients with

conversion to open had uterine weights above 1000 g. Uterine weight above 500 g was independently associated with

increased blood loss and operative times in multivariable linear regression models with approximately 40 additional

minutes of operative time and 60 mL increased blood loss. Shashoua et al. in 2009 compared 24 patients that

underwent robotic-assisted hysterectomy versus 44 patients that underwent laparoscopic hysterectomy. Of note, one

patient in each group underwent a simple hysterectomy due to a malignant process. They found that robotic-assisted

surgery was associated with a significantly shorter hospital stay, a decrease in narcotic use postoperatively, but a

longer operative time compared to laparoscopy. However, there was no difference in blood loss or drop in

hemoglobin. Although robotic-assisted surgery had an increased operative time, patients in the robotic-assisted group

tended to have larger uteri, and a significantly larger proportion underwent morcellation (23% versus 2%). Also, there

were no conversions to open surgery in either group and the rates of complications were comparable. Another study

by Pasic et al. utilized the Premier hospital database, which contains complete patient billing, hospital costs, and

coding histories of more than 600 health care centers in the U.S. They identified 36,188 patients that had minimally

invasive hysterectomies, with slightly less than 5% of these patients undergoing robotic-assisted hysterectomies and

only 13% of the 358 hospitals identified had access to robot-assisted surgery. While they did obtain information on

patients‘ comorbid conditions, there was no mention of the patients‘ uterine weights, BMI, or history of prior surgeries.

Also, there were a large variety of procedures performed including radical hysterectomies for malignancies,

lymphadenectomies, supracervical hysterectomies, and the vast majority of the procedures were laparoscopic

hysterectomy. They did control for surgery types, indications for surgery, region, hospital type, comorbid illnesses,

and age in multivariate regression analysis to assess the effects of robotic or no robotic assistance on hospital costs,

and surgery time, and length of stay. However, due to the heterogeneity of their patients, procedures, and surgeons,

and because identification of complications could only be completed through reported ICD-9 codes, this study was

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excluded. Nonetheless, they found similar adverse events across robot-assisted and laparoscopic hysterectomies,

but significantly longer surgical times with robotic-assisted surgery and shorter lengths of stay. However, due to

higher costs of robotic-assisted surgery, they cautioned against its routine use in hysterectomies.

In a technology review published by Washington State Health Care Authority in March 2012, the following

assessment is presented about robotic-assisted surgery in gynecology:

Robot-assisted radical hysterectomy–robot-assisted total hysterectomy (RARH-RATH) compared with open

radical hysterectomy–open total hysterectomy (ORH-OTH):

The meta-analysis results of the studies pertinent to this comparison favored ORH-OTH and are

summarized below (WMD = weighted mean difference):

Shorter operative duration (WMD 63.57 minutes, 95% CI 40.91 to 86.22);

Shorter length of hospital stay (WMD −2.60 days, 95% CI −2.99 to −2.21);

Reduction in the extent of blood loss (−222.03 mL, 95% CI −270.84 to −173.22, NS); and

Reduced risk of transfusion (RR 0.25, 95% CI 0.15 to 0.41, NS).

Results of the analysis based on study design and study quality found:

Operative time was significantly longer in the robotic surgery group as shown by four of the five meta-

analyses (MA in the text, retrospective studies, and high to good quality studies, moderate to low quality).

Three of those meta-analyses reported significant heterogeneity between studies.

Lower complication rates (RR 0.38, 95% CI 0.27 to 0.52, NS); and

The most commonly reported complications were ileus, wound infection, lymphedema, vaginal cuff hernia,

port site hernia, re-operation for bleeding, delayed voiding, deep vein thrombosis, and vaginal cuff

dehiscence.

Figure 27. Comparison of robotic-assisted hysterectomy to abdominal hysterectomy

Source: hta.hca.wa.gov

Robot-assisted radical hysterectomy–robot-assisted total hysterectomy (RARH-RATH) compared with

laparoscopic radical hysterectomy–laparoscopic total hysterectomy (LRH-LTH):

A meta-analysis was not performed for the ―operative duration‖ outcome due to the high degree of

heterogeneity among study findings, which were inconclusive;

Shorter length of hospital stay (WMD −0.22 days, 95% CI −0.38 to −0.06);

Reduction in the extent of blood loss (−60.96 mL, 95% CI −78.37 to −43.54); and

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The risk of transfusion exposure was found to be inconclusive (RR 0.62; 95% CI 0.26 to 1.49) with mixed

results reported among the studies.

Four of the five meta-analyses (MA in the text, prospective studies, and high to good quality studies,

moderate to low quality) did not show a significant difference for operative time. Three of those meta-

analyses reported significant heterogeneity between studies. Three meta-analyses (MA in the text,

retrospective studies, moderate to low quality studies) showed a consistent significant reduction for hospital

stay favoring the robotic surgery group with the exception of the high or good quality meta-analysis (2

studies) which did not show a difference.

Inconsistent results were reported for incidence of complications across all meta-analyses.

Blood loss: Five meta-analyses consistently showed a significant reduction for blood loss in favor of the

robotic surgery group.

Five meta-analyses did not show a statistically significant difference for incidence of transfusion.

Operative time, incidence of transfusion and blood loss outcomes did not change between the pooled meta-

analysis results and the high or good quality and moderate or low quality studies.

Lower complication rates (RR 0.54, 95% CI 0.31 to 0.95, NS); and

The most commonly reported complications were wound infection, ileus, lymphedema, vaginal cuff

hematoma, bleeding, delayed voiding, deep vein thrombosis, and injury of vena cava.

Figure 28. Comparison of robotic-assisted hysterectomy to laparoscopic hysterectomy


In a 2011 (originally indicated in 2009) Technology Assessment by the American College of Obstetric Gyneocology

(ACOG), the recommendations listed for use of various surgical approaches for gynecologic surgery are as follows:

Vaginal hysterectomy is the approach of choice whenever feasible, based on its well-documented

advantages and lower complication rates.

The choice of whether to perform prophylactic oophorectomy at the time of hysterectomy is based on the

patient’s age, risk factors, and informed wishes , but not on the route of hysterectomy.

Laparoscopic hysterectomy is an alternative to abdominal hysterectomy for those patients in whom a vaginal

hysterectomy is not indicated or feasible.

Experience with robot-assisted hysterectomy is limited at this time; more data are necessary to determine its

role in hysterectomy.

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Nephrectomy

In a systematic review conducted for the Center for Evidence-based Policy at the Washington State Healthcare

Authority published in 2012, there were 10 nephrectomy studies identified which compared robotic surgery with either

laparoscopic or open surgery. The study sample sizes ranged from 22 to 247 with the length of follow-up reported

varying from 4 months to 4 years. Study quality was assessed as being good in one study, fair to good in eight

studies, and poor to fair in one study. The majority of these studies were observational and retrospective in design,

and were rated as lower quality on this basis. The studies focused on patients with renal cell carcinoma. The ―TNM‖

system was used to describe the disease stage. Among the stages, ―T‖ = the size of the primary tumor and local

extent of the disease, ―N‖ = the degree of spread to regional lymph nodes, and ―M‖ = the presence of metastasis.

Many of the meta-analyses performed in this section were associated with high (>50%) I2 and chi2 values indicating

statistically significant heterogeneity between studies. Relevant potential sources of heterogeneity were investigated

for correlation with study outcomes. Subgroup and sensitivity analyses based on study design, study quality, were

explored to identify systematic variations. The meta-analysis results of the studies pertinent to this comparison

favored RAPN, except as indicated, and are summarized below (WMD = weighted mean difference):

For operative duration, there was a high degree of heterogeneity and mixed results among studies, and a meta-

analysis was not performed;

Shorter length of hospital stay (WMD −0.25 days, 95% CI −0.47 days to −0.03 days);

The extent of blood loss in this comparison was not statistically significant (−17.44 mL, 95% CI −53.63 to 18.75 mL);

Risk of transfusion was found to be inconclusive in this comparison (RR 0.85, 95% CI 0.24 to 3.09, NS); and

Reduced warm ischemic time (WMD −4.18 minutes, 95% CI −8.17 to −0.18 minutes).

Results of the analysis based on study design and study quality found inconsistent results were reported for operative

time across all meta-analyses. Four meta-analyses reported significant heterogeneity between studies. Four of the

five meta-analyses showed a significant reduction in hospital stay in favor of the robotic surgery group. Three of those

meta-analyses reported significant heterogeneity between studies. Five meta-analyses did not show a significant

difference for incidence of complications. Four of the five meta-analyses did not show a significant difference for

blood loss with the exception of the one high to good quality study. Five meta-analyses did not show a significant

difference for incidence of transfusion.

Figure 29. Robotic-assisted partial nephrectomy compared to laparoscopic partial nephrectomy


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Two studies compared robot-assisted radical nephrectomy compared with laparoscopic radical nephrectomy and

open radical nephrectomy. Longer operative times were statistically significant in both studies; and LOS, blood loss,

and risk of transfusion were inconclusive between the 2 studies. A small, good quality retrospective study (Hillyer

2011) compared outcomes of bilateral, sequential robotic nephrectomy (RPN) and laparoscopic partial nephrectomy

(LPN). These procedures were proposed to be minimally invasive, nephron-sparing techniques for excising bilateral

renal tumors. This report included 9 and 17 patients with bilateral synchronous renal cell carcinoma in the two

intervention groups, respectively. There were no statistically significant differences between the 2 groups at baseline

in terms of age, gender, BMI, American Society of Anesthesiologists (ASA) score, and preoperative renal function (p

values ranged from 0.2 to 0.72). The interval between sequential partial nephrectomy was similar (4.78 and 4.9

months) for the robotic and laparoscopic groups, respectively (p < 0 .43). Surgical outcomes favoring the robotic

group noted a tendency toward shorter warm ischemia time (19 vs. 37 minutes; p=0.056); and significant lessening in

the negative clinical renal functional effect, as measured by the percentage of decrease (-14.6% vs. -37.4%; p=0.03)

in glomerular filtration rate (GFR) at 1 month post-operative. In conclusion the same report from the Wash U Center

for Evidence-based Policy stated that robotic partial nephrectomy, compared to laparoscopic approaches, reported

shorter hospital stays; reduced warm ischemic time; and one small, subsequent study noted a reduction in the

negative effect on GFR at one month. Robotic partial nephrectomy, compared with a laparoscopic approach, reported

no difference or inconclusive results for operative duration; extent of blood loss; and risk of transfusion. Complication

rates did not show a difference between treatments (RR 1.24, 95% CI 0.79 to 1.93); and the most commonly reported

complications were urinary leaks, bleeding, hematoma, and pulmonary emboli. Complication rates were no different

when the robotic approach was compared to laparoscopic, for partial nephrectomy. Complication rates were found to

be inconclusive when comparing robotic, laparoscopic, and open radical nephrectomy.

Cholecystectomy

A systematic review by Maeso et. al included 1 RCT and 3 cohort studies comparing robotic and laparoscopic

cholecystectomy (N=511). A meta-analysis was performed with the following results:

Reduced surgery time favored the laparoscopic group (16.96 mins; 95% CI 7.95, 25.96)

Reduced LOS favored the robotic group (-0.73 days; 95% CI -1.43, -0.03)

Subsequently two studies, both quality rated as poor, were included that compared robotic and laparoscopic (N=56).

One study (Jayaraman 2009) was retrospective, with baseline characteristics noted as dissimilar; statistical

information not reported. Longer mean operating time favored the robotic group (91 mins vs. 48 mins; P<0.001). No

other clinically significant outcomes were reported. Another study (Wren 2011) compared robotic to laparoscopic

(historical) cholecystectomy groups. Baseline characteristics showed no statistically significant differences in age,

predominance of females, nor BMI. Presence of pre-operative inflammatory disease was Center for Evidence-based

between different groups without statistical significance reported. Operative times between groups reported no

statistically significant differences.

The preponderance of evidence from the SR and subsequent studies indicated that operative times were significantly

longer with robotic than laparoscopic cholecystectomy. The quality ratings of the studies, which were observational in

design, varied. The choice of patient participation in the treatment arms was subject to selection bias. The overall

strength of evidence for operative times was noted to be low. The findings from the systematic review on adverse

events were:

Increased odds of complications were found in the robotic group (OR 2.15; 95% CI 0.64, 7.25). The complications,

though, were not specified. The authors for Center for Evidence-Based Policy of the Washington-State Health Care

Authority concluded that there was a low overall strength of evidence for increased complication rates for robotic

surgery for cholecystectomy.

In terms of studies reporting correlation between learning curve and results, two of the four studies reported on

learning curve findings with mixed results. One study showed shorter operative times in the second half of their series

whereas another study showed no such effect of the chronologic case number. One of the studies (Jayaraman 2009)

discussed staffing requirements for robotic surgery. Noting a limitation with this modality in that the presence of a

second experienced surgeon at the bedside is needed to exchange the robotic instruments, retract for exposure, and

assist with the procedure.

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Colorectal Surgery (Colorectal Resection, Colectomy, Mesorectal Excision)

In the same systematic review performed for the Washington State Health Care Authority, the authors noted that

seven controlled, nonrandomized studies compared robotic-assisted and laparoscopic approaches for colorectal

resection in the treatment of benign and malignant disease (N=532). All of the studies were rated as good quality.

Sample sizes ranged from 12 to 211, with follow-up times not specified for individual studies. Interventions varied as

to what portions of the colon were removed, from the right colon to mesorectal resections for treatment of rectal

cancer. The underlying diseases also differed and ranged from diverticular disease and polyps, to adenocarcinoma.

A meta-analysis was performed with the following results (pooled mean difference) favoring the robotic-assisted

surgery groups (all reported as statistically significant without p values):

Longer surgery time (39.42 mins; 95% CI 14.99, 63.84);

Reduced blood loss (7.04mL; 95% CI -22.73, 8.66);

Reduced LOS (0.26 days; 95% CI -1.55, -1.02);

Earlier bowel function recovery (0.11 days; 95% CI -0.46, 0.23)

Reduced time to resume oral diet (0.26 days; 95% CI -0.74, 0.22)

Seven studies were subsequently identified which addressed this topic. One study was a RCT and the remainders

were retrospective and observational in design. All of these studies were quality rated as poor. The RCT study

(Patriti 2009) of mesorectal dissection for rectal adenocarcinoma was abandoned after the advantage of robotic

surgery was noted, introducing selection bias. Statistically significant differences at baseline were noted as the

robotic group had more prior surgery (18/29 vs. 11/37; p<0.01) and less distance of tumor from the anal verge (5.9+-

4.2 cm vs. 11+-4.5 cm; p<0.01). Outcomes were both statistically different between groups in operating time, blood

loss, or LOS. Another study (Park 2010a) compared robotic, laparoscopic and open total mesorectal excision for

rectal cancer (N=263). Baseline characteristics were similar among groups, except that the robotic group tended to

have tumors that were extraperitoneal vs. intraperitoneal in location (p=0.077). Tumors were all of similar stage and

proximity to the anal verge. No follow-up period was reported. Surgical outcomes (robotic vs. laparoscopic vs. open

groups) were reported as follows:

Operating time: (232.6±52.4 mins; 158.1±49.2 mins; 233.8±59.2 mins ; P<0.001); and

LOS (10.4±4.7 days; 9.8±3.8 days; 12.8±7.1 days; P<0.001).

No cases converted to open surgery.

Another study (Park 2010b) compared robotic to laparoscopic mesorectal excision for rectal cancer (N=123) with no

follow-up period reported. Baseline matching between groups showed no significant differences in age, BMI, previous

chemo/radiation therapy, previous abdominal surgery, or tumor stage. Surgical outcomes noted shorter operative

times in the laparoscopic group (231.9±61.4 mins vs. 168.6±49.3 mins; P<0.001), but no statistically significant

differences between groups in LOS, or conversions to open procedures. Another study (de Souza 2010) compared

robotic and laparoscopic hemicolectomy for treatment of cancer or Crohn‘s disease (N=175). Significant differences

favoring the robotic groups were noted in baseline disease status. No follow-up period was reported. Significant

differences favoring the robotic group were noted in operative times (mins) (158.9±36.7 vs. 118.1±381; P<0.001) and

reduced range of blood loss (50mL, range 10-240; 50mL, range 10-600; P=0.5). No significant differences between

treatment groups were noted in LOS, nor in conversions to open procedures. The odds of robotic group complications

(OR .99; 95% CI 0.59, 1.65) (NS). The current body of literature shows a low strength of evidence that surgeon

experience influences operative outcomes.

Sacrocolpopexy

Authors Reza (2010) et.al identified one prospective cohort study (n=178) that used historical controls to compare

robotic sacrocolpopexy to open sacrocolpopexy (Geller 2008). Since evidence findings were limited to one study, a

meta-analysis was not performed. The review assessed the quality of the Geller study, noting that the study was not

randomized, or blinded, but had a clear objective. No other quality indicators were called out by the Reza review.

Reza reports that, according to the sole Geller study, robotic sacrocolpopexy was associated with significantly less

blood less, shorter LOS, and longer surgical duration. Subsequently, the Center for Evidence-based Policy at the

Washington State Healthcare Authority identified three comparative studies addressing robotic sacrocolpopexy for

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treatment of vaginal or uterine prolapse (Patel 2009, White 2009, Paraiso 2011). One study (Paraiso 2011) was a

fair-quality RCT (n=78) that was limited by its small sample size. The other two studies were small (n=15 and n=30),

poor-quality retrospective cohort studies (White 2009, Patel 2009). The findings favored open procedure (Patel 2009)

or laparoscopic procedure (Patel 2009, White 2009, Paraiso 2011). Less pain and less use of NSAIDS at 3-5 weeks

post-op was reported. Other findings reported included shorter operating time reported for laparoscopic group

(Paraiso 2011, Reza 2010), o Statistically non-significant difference in operating time (Patel 2009, White 2009) LOS,

shorter LOS in robotic group (Reza 2010), non-significant differences in LOS (Patel 2009, White 2009, Paraiso 2011)

less blood loss in robotic group (Reza 2010), and Non-significant differences (Patel 2009, White 2009). The strength

of the evidence on complications arising from robotic, laparoscopic and open sacrocolpopexy was noted to be

moderate.

A summary of the guidelines from various professional societies is shown in Figure 30 on the next page.

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Figure 30. Summary of guidelines from various societies


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Competition

Titan Medical

A Canadian company called Titan Medical has developed the Amadeus Composer, a surgical system with an

external robot and flexible instruments designed for procedures in small or medium surgical spaces. The Amadeus

Maestro is a four-armed system designed for procedures in large surgical spaces. Titan plans to enter the market

initially by targeting general, thoracic and ENT surgeries, with additional applications in urology and gynecology,

company documents state. The company has signed nonbinding memos of understanding with three U.S. medical

institutions, as well as institutions in Switzerland and India, under which the facilities will test the Amadeus surgical

technologies and provide feedback. Titan aims to have its Amadeus Composer ready for tissue and animal feasibility

studies this year, initiate human clinical trials in 2013, and apply for 510k clearance in 2014.

Figure 31. In order: Amadeus robotic surgery system; Snake-like arms of Amadeus


The single-site platform is being developed with the goal of providing interactive instruments and a 3D vision system

capable of being inserted into the patient‘s body cavity through a single incision. The design contemplates a

collapsible device that, when collapsed, would be capable of being inserted into the body cavity through a 15mm skin

incision. Once inserted, the single-site platform would be deployable into a working configuration whereby the 3D

vision system and interactive instruments would be capable of control by the surgeon at the workstation. The platform

design includes unique mechanisms for reach and triangulation of the instruments needed to perform various MIS

procedures including cholecystectomy procedures. The 3D vision system is being designed to provide the surgeon a

real-time in-vivo viewing and control for the surgeon. In addition to the single-site platform, the Company has under

development, for inclusion in the Amadeus system, the multi-port platform intended to allow for surgeries where

multiple incisions are required for instrument and 3D vision system deployment inside the patient. The Company has

completed prototypes of a surgeon workstation, vision tower and multi-port platform patient-cart which incorporate

innovations toward the targeted capability of robotic surgery, including an input controller with force feedback,

providing real-time force information for control of the system and instruments with multiple degrees of freedom.

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University of California – Santa Cruz

The Raven II was developed at the University of California at Santa Cruz and the University of Washington and

modeled on a system originally designed for military use. Five newly completed systems are being shipped to test

centers throughout the U.S. The Raven II is expected to be priced around $250,000 and its Linux-based operating

system lets users modify code. Seven Raven II‘s at centers including Harvard University and Johns Hopkins

University are expected to be linked together for collaborative experiments. The system consists of two robot arms, a

camera, and an interface for the surgeon. It can be used for online telesurgery. Some of the more intriguing plans for

the Raven II apparently include operating on a beating heart by moving in sync with its motion, and getting the robot

to perform autonomously by imitating surgeons. Further details about the Raven – II are not known at this stage.

Figure 32. Raven II prototype developed by UC – Santa Cruz

Source: news.cnet.com

Surgica Robotica s.p.A

Surgica Robotica s.p.A is developing its Surgenius BETA minimally invasive robotic surgery system. CE Mark is

expected sometime in March 2012. We do not have more details beyond that at this point.

Figure 33. Image rendering of the Surgica s.p.A. robot


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SOFAR s.p.A

SOFAR is another Italian company that has developed the Telelap Alf-X robotic surgery system. Not many details are

currently known.

Figure 34. The Alf-X robotic surgery system


Micro Hand A

Micro Hand A has been developed jointly by Tianjin University, Nankai University and Tianjin Medical University

General Hospital. The first animal trials were conducted July 2010 in the university hospital, and since then, it is said

to be deployed in some local hospitals. Further partners are the Southern Medical University, Computer Research

Institute of Surgery by the Southern Medical University, South China University of Technology, Shanghai Jiaotong

University, National Defense University and Waseda University in Japan. The first phase of research was realized

with 10 million yuan investment. The device is said to be ready for being commercially launched in China. The Micro

Hand A's main features include: 3D vision system, 360 deg articulated instruments, 0.1 mm accuracy claimed, 4

patents (6 pending). It is our understanding from the field that some of the larger U.S. medtech companies have been

in active dialog with Tianjin University and are exploring strategic partnerships.

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Figure 35. The Micro Hand A robotic-assisted surgery system .

Source: surgrob.blogspot.com

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Reimbursement There are no dedicated reimbursement codes for robotic-assistance surgery using the da Vinci. In 2007, the AMA

determined that there was no need for a new CPT or unique modifier for surgical procedures completed with robotic

assistance. Even when a da Vinci is used, the primary surgical procedure remains a laparoscopic procedure. Most

commonly used reimbursement codes are shown in the figure below.

Figure 36. In order: Physician Reimbursement Codes applicable to robot-assistance surgery; Procedure codes


The interesting thing about using various reimbursement codes for using robotic-assistance surgery is ―when the

work required to provide a service is substantially greater than typically required, it may be identified by adding

modifier 22 to the usual procedure code. Documentation is required to support the additional work and the reason for

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the additional work.‖ The guidelines state that this modifier should be used only when additional work factors

requiring the physician’s technical skill involve significantly increased physician work, time, and complexity than when

the procedure is normally performed. Modifier 22 is appropriate in reporting increased procedural cases, such as

trauma extensive enough to complicate the particular procedure and that cannot be billed with additional procedure

codes, significant scarring requiring extra time and work, extra work resulting from morbid obesity or other unusual

anatomic anomalies, increased time resulting from extra work by the physician, additional work and time involved in

managing a patient’s co-morbid conditions throughout the procedure, and when work associated with bundled

procedures is more extensive than normal. Documentation required for using Modifier 22, per the guidelines, should

reflect the extra problems, effort, extent or additional not-separately-codeable services that were required to treat the

patient. It is not sufficient to simply state that the procedure is a reoperation or a revision of a previous procedure. It is

not sufficient to simply document the extent of the patient’s illness or comorbid conditions that might cause additional

work. The documentation must describe additional work performed. Modifier 22 is not appropriate unless the work

involved substantially exceeds the work described by the CPT code for the service. Interestingly enough, the

guidelines also state that it is not sufficient to identify a new operative technique or new operative tool without also

identifying the additional work and time involved in its use. CPT now specifies that ―pertinent information should

include an adequate definition or description of the nature, extent, and need for the procedure, and the time, effort,

and equipment necessary to provide the service.‖ (CPT Code Changes 2010). The only limiting factor of note is that

payors have not allowed an additional payment for the robotic technique. When certain payors accept HCPCS Level

II codes, a hospital is allowed to submit an S2900 surgical technique code in addition to the code for the primary

procedure. However, Medicare does not accept S codes for additional payment unique to robotic-assisted

procedures, and national private payers generally follow Medicare policy.‖

In our field checks, the use of Modifier 22 in billing for robotic-assisted surgery seemed to be higher than normal.

During our physician due diligence calls, it was brought to our attention that Modifier 22 is being misused in robotic-

assisted surgeries. The extent of this, however, was not readily obvious to us. Moreover, the use of Modifier 22 was

also purported to be more prevalent in gynecology procedures than urology procedures where hybrid procedures was

more prevalent.

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Economics An exact comparison of the economics of robotic-assisted surgery with either open surgery or laparoscopic surgery is

complicated by the following:

- One of the most confounding aspects in cost comparison between the robotic-assisted and laparoscopic

approaches to surgery remain in the learning curves and the associated disciplines where they are used.

Literature highlights some surgical indications requiring 200+ cases before robotic surgeons become

proficient. Others cite a case load of 20 or so. Laparoscopy on the other hand, has been reported to have a

less steep learning curve (in general). How does one capture the costs of ―becoming proficient‖? Don’t

know.

- Incomplete costing basis for procedures. Some studies simply include the cost of instruments for doing a

head-to-head comparison. Most studies that we have looked at ―do not‖ include capitalization costs of the

machine, as well as ongoing service contracts. The heterogeneity in cost analysis makes a comparison

problematic.

- Most of the literature points to an inverse correlation between volume of procedures and intra-operative time

per procedure. In other words, the more experienced surgeons at high-volume centers tend to complete

procedures in a shorter time than their counterparts at lower-medium volume centers.

- The proper comparison is also complicated by presence of additional technicians, nurses and even

surgeons for various procedures, sometime intermittently. An exact capture of these costs is sometimes not

recorded.

- In our due diligence checks, the number one issue that was cited as a problem was ―need of proper

training.‖ The lack of proper training and credentialing has resulted in a situation, especially in lower-volume

hospitals where more number of instruments are being used per procedure therefore potentially inflating the

costs relative to laparoscopic or open surgery.

- Since most studies are either observational, or single-center, or for that matter retrospective in nature, there

is difference in follow-up times and correlating outcomes in dollar terms. Some studies cite shorter post-op

hospital stay for robotic-assisted surgery along with lower blood loss and potentially quicker return to normal

functionality. Other studies do not accurately capture complication rates with robotic-assisted or for that

matter laparoscopic / open surgeries.

- A number of studies indicate that costs are roughly comparable between robotic-assisted, laparoscopic and

open surgeries. The trade-offs are primarily in higher instrument costs and higher intra-operative times vs.

lower post-op hospital stays and complications. What is unclear through all these studies is how much of the

capital costs spent on a da Vinci upfront are really being captured on a per-procedure basis. A number of

hospitals we talked to essentially acknowledged ―burying‖ the upfront capital and ongoing service contract

costs into the hospital marketing budgets. This is, to a certain extent, providing an unrealistic comparison

between different surgical approaches.

- The university hospitals, based on our due diligence calls, seem to be doing ok with robotic-assisted surgery

being used as a primary tool from their armamentarium. The community hospitals though, did not seem to

be doing well. The cost differential was being felt in total procedure time, and in ability to ―absorb‖ costs. For

example, our due diligence in the NY area community hospitals highlighted ―concerned‖ hospital

administrators trying to get a handle on costs for robotic-assisted surgery.

- There is definitely a ―marketing‖ component to the da Vinci story. Almost all the hospitals / clinicians we

talked to (high-volume + community-based centers) highlighted the need to ―capture‖ a patient by presenting

an image of a center being technologically advanced vis-à-vis its peers. The da Vinci is one of the tools

being used. Almost all the centers / clinicians we talked to did not endorse the specific claims about

outcomes using robotic-assisted surgery; they nonetheless are using the tool either to recoup costs or to

maintain the image of the hospital.

- There are interesting similarities between the marketing methodology adopted by U.S.Surgical in the

yesteryears and Intuitive Surgical. It will be interesting to see if and when a true competitor arises for

Intuitive Surgical, and how competition is engendered.

- Ultimately, the costs of such technology show up when hospitals negotiate with insurers. To what extent the

costs are actually warranted is unknown.

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Depending on which study is used and the frame of reference one is utilizing to review a surgical approach, there are

pros and cons that can be derived from the various studies. Level I evidence on cost analysis is virtually non-existent

for robotic-assisted surgery. Figure 37 below highlights some high level cost analysis between various approaches

and in different surgeries.

Figure 37. Comparison of total hospital costs for different surgical techniques in different disciplines

Source: Wash State Center for Evidence-based Policy Report; Medical Literature

We note in the above figure the following:

- Almost all literature uniformly notes the increased costs associated with robotic-assisted surgery. While the

studies cite incremental costs of anywhere from $2,000 - $20,000 per procedure, what is unclear from all

these studies is whether the cost analysis is based on actual costs or ―estimated‖ costs based on a certain

caseload or depreciation schedule.

- Most of the studies are poor quality, and most of them do not include the capital outlays for the da Vinci.

There is no set amortization schedule for the device, especially given the differences in case volumes

amongst different centers, different experience levels of surgeons, and different disciplines where the robot

is used.

- Most studies do not have representative sampling of university and community hospitals. Neither do these

studies account for comparative outcomes between the teaching and non-teaching centers.

- Most studies do not account for indirect costs related to hiring experienced robotic surgeons, the costs of

upfront training, any potential negative outcomes in the earlier stages of the learning curve, liability costs to

the hospital, etc. Neither do these studies accurately capture any potential indirect benefits of using robots in

particular surgeries whether it be in clinical outcomes such as pain scores, level of anesthesia required,

intra-operative time, etc. Neither do these studies capture any potential benefit on functional outcomes such

as return to work time, return to pre-op functionality, etc.

- In essence, the only thing that all these studies agree on seems to be the requirement for increasing

caseload using the da Vinci in order to bring effective costs per case in a range comparable to laparoscopic

or open surgeries. These studies, in our opinion, seem to be based on an ad-hoc analysis. Reason being,

the decision to buy a robot has already been done and now the roadmap is being sought in order to make

robotic-assisted surgery more cost-effective.

The more interesting question that will arise next year will be the impact on capital equipment purchases when

Obamacare starts getting implemented. There are 2 sides to the coin here. The bulls will argue that robotic-assisted

surgery reduced post-op hospital stay (hence costs) and hence in an environment of bundled payments will be

beneficial. The bears will argue that robotic-assisted surgery is inherently increasing the cost trajectory curve, and

there is no real evidence that points to any statistically significant improvements using this tool. Hence, as hospitals

merge and the focus on costs starts taking shape, the robot will increasingly become a tool for more complex

surgeries in high-volume academic centers. Time will tell.

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

Radical Prostatectomy

Sacrocolpopexy Radical Nephrectomy

Mesorectal resection Hysterectomy

Robotic Laparoscopic Open

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Financials

Intuitive Surgical, by an metric, has shown a phenomenal growth trajectory over the last 12 years. Sales have gone

from $26 million in fiscal 2000, to almost $2.2 billion in fiscal 2012. Procedure growth has gone from 15,000 or so to

450,000 during the same period. As of Q4-12, there were roughly 2,637 system installs worldwide. A state by state by

state penetration rate is shown in Figure 39 on the next page. Based on our calculations, the da Vinci seems to

have an 80% penetration rate in the U.S., about 12% or so in Europe and a 2% rate in Asia / Far East. The

differences in reimbursement structures, ability for out-of-pocket pay and patient preferences play an important role in

unit sales geographically. As can be seen from the Figure 38below, system installs at end of Q4-12 have more than

doubled since 2007. North America installs as of Q3-12 were 1,789, with Europe at 400. U.S. System installs have

grown at a CAGR of roughly 24%, with OUS installs have grown at a CAGR of 25%. Average pricing of the da Vinci

in the U.S. currently is estimated to be in the $1.5 - $1.7 million range, with mandatory 5-year service contracts

ranging from $100,000 - $170,000/year. Disposable instruments are priced from $600 - $1,000 and each procedure

usually consumes about 3 – 4 instruments, depending on the type of surgery, experience of surgeon level, etc.

Figure 38. In order: Cumulative da Vinci System installs for the da Vinci; Quarterly installs; Procedure growth

Source: Company reports

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Figure 39. North America geographic placements of the da Vinci


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Figure 40. Worldwide placements of the da Vinci


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A quarterly trend line in new system installs and trade-ins to upgrade to the da Vinci Si are shown in figure below. As

of Q4-12, Intuitive Surgical seems to be averaging a run rate of about 50 trade-ins/quarter. An uptick in the trade-in

metric would not bode well for the story per se, especially since it would be a lagging indicator of demand for de novo

units in new accounts. Instrument revenues per system per quarter have gone up from roughly $68,000 in Q1-07 to a

current run rate of $85,000, a jump of almost 25%. Considering the worldwide installed base stood at approximately

2600 units at the end of fiscal 2012, the instrument utilization should be viewed, in our opinion, as a true measure of

the interest in the field, whether due to pure marketing or due to clinical effectiveness.

Figure 41. Quarterly System installs and trade-ins; Quarterly trend in instrument sales/system and service revenues/system

Source: Company Reports; Northland Capital Markets estimates

Intuitive Surgical exited fiscal 2012 with revenues of roughly $2.2 billion and EPS of $16. The strong growth trajectory

in unit installs and procedure growth are what has fueled the revenue line. Systems and instrument sales comprise

roughly 42% of total sales, respectively. In fiscal 2007, system sales contributed roughly 52% of overall revenues,

with instruments another 32%. The increase in procedures has allowed the company to therefore reduce reliance on

the capital equipment selling cycle, while increasing margins. As we understand it, over the last 6 years, the

contribution from instruments has grown by approximately 10 – 12% as a percent of sales.

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Figure 42. In order: Pie chart for sales by product type; Quarterly revenue trends; Growth rates on an annual basis

Source: Company reports; Northland Capital Markets estimates

Annual growth rates for the various business segments are being influenced by two factors – first, the base of

procedures has grown leading to a denominator effect; the second – radical prostatectomies are down over 15% -

20% in the U.S. therefore causing a relative slowdown in procedure growth. U.S. prostatectomy decline is being

driven in part by the recommendations from the U.S. Preventive Service Task Force against PSA testing, and a

Instruments42%

Systems42%

Services16%

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FY07A FY08A FY09A FY10A FY11A FY12A FY13E FY14E FY15E FY16E

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change in treatment recommendations for low-risk prostate cancer away from definitive treatment. Our field checks

continue to suggest that the decline in radical prostatectomies will continue for the foreseeable future, and some

clinicians have indicated to us that use of the da Vinci in radical prostatectomies might be obsolete in 10 years.

Another reason why annual growth rates overall are coming down has to do with barriers to entry for surgeries such

as cardiac surgery, nephrectomies, etc are very different than that for prostatectomies. International growth has been

cited to be key contributor to growth moving forward, both in the hysterectomy and prostatectomy side. What is

unclear to us is the likely effect of austerity measures and greater price elasticity of demand on capital equipment and

instrument sales outside the U.S.

Figure 43. In order: Trend in da Vinci prostatectomies; Trend in da Vinci hysterectomies


The operating expense and margin profile for the company are highlighted in figure on the next page. Product gross

margins for Intuitive have remained relatively stable for Intuitive at 72 – 73%. However, as the installed base has

increased and Intuitive has been able to increase pricing for service contracts, gross margins on services have

decreased over the last 6 years, from a level of 41% to a current margin of roughly 33%. While contribution from

services has remained relatively stable over this time period, the rising contribution of disposable instruments has

fueled overall gross margins from the 68% level in fiscal 2007, to an estimated 71% for fiscal 2013.

SG&A as a percent of sales has been relatively stable in 26% range, with R&D in the 8% range. We note that of all

the medical device companies in the revenue range of Intuitive Surgical, Intuitive‘s SG&A and R&D are by far the

lowest, again pointing to a finely tuned engine. Operating margins of 38 – 39% have resulted in strong cash flows

from operations, to the tune of $700 million/year currently. Combine that with no real competitors for the last 10 years,

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Intuitive continues to command premium pricing and very high switching costs given existing capital outlays by

existing clients. Finally, 41% of system installs in fiscal 2012 were to existing customers, which makes a very

interesting scenario with the selling cycle.

Figure 44. In order: Quarterly margin and Expense Profile for Intuitive Surgical


Intuitive‘s guidance for fiscal 2013 calls out for procedure growth in the range of 20 – 23%, primarily with growth in

international prostatectomies. Overall annual revenue growth rates are expected to be in the range of 16 – 19%, with

operating income in the 38 – 39%. Effective medtech excise tax is expected to be around 1.1%. We have accordingly

shaped our numbers. We confess we have no confidence in our numbers in the out years, especially given what‘s

going on in the macro-environment. However, we have tried to be fair to Intuitive simply to determine what growth

rates are needed to justify current valuation. As we point out in the next section, even assuming revenues of $4.1

billion in fiscal 2017, and no change in the business trajectory, Intuitive would essentially have to grow at 7% into

perpetuity to justify the current valuation.

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Valuation We are initiating coverage of Intuitive Surgical with an Underperform rating, and a 12-month PT of $400. From an

engineering perspective, Intuitive‘s da Vinci is a thing of beauty. We are acutely aware of the perils of our rating,

especially given all the cadavers lying around who have tried to present a counter-argument. However, when

presented with a choice between being intellectually honest and fearing pushback from clients, we choose the former.

Our due diligence highlighted a company that has in many ways transformed how surgery is being performed.

However, when we peel the layers of the onion, there seems to be an unmistakable element of aggressive marketing

in this story, both from the company side and hospital side. Combine this with lack of clear clinical benefits due to lack

of Level I studies, and a super-high cost structure that essentially makes robotic-assisted surgical procedures much

more expensive than traditional laparoscopic or open surgeries, one has to wonder how long this trend will last.

Finally, in the age of Obamacare, the ability for hospitals to fork out millions of dollars in upfront capital expenditures

in order to maintain an image of being technologically-advanced could be severely constrained. We present our 2-

stage DCF below.

Figure 45. 2-stage DCF model for ISRG

Source: Northland Capital Markets Estimates

Intuitive Surgical Suraj KaliaFree Cash Flow to Firm Model 27-Feb-13

Fiscal Year Ends Dec 31

Numbers in $ MM

PROJECTED

2014E 2015E 2016E 2017E 2018E

Operating Income $1,035 $1,167 $1,214 $1,225 $1,300

Taxes $311 $350 $364 $367 $390

After Tax Operating Income $725 $817 $850 $857 $910

Less: Net Capital Expenditures $0 $0 $0 $0 $0

Less: Change in Working Capital $0 $0 $0 $0 $0

.

Free Cash Flow $725 $817 $850 $857 $910

Terminal Value $0 $0 $0 $0 $19,110

Total Free Cash Flow $725 $817 $850 $857 $20,020

Assumptions

Long term debt cost 4.00%

Tax Rate 30.00% Sensitivity Analysis - Equity Value

High growth WACC 12.00%

Beta 1.50 WACC

MaRKET Risk Premium 6.00% $409.94 13.00% 11.50% 10.00%

Risk Free Premium 3.00% Diluted Shares 41,000 $396.63 $416.87 $438.75

Long term growth rate 5.00% 42,500 $382.63 $402.15 $423.26

Steady state WACC 10.00% 45,000 $361.37 $379.81 $399.75

Net Present Value at December 31, 2013

Sensitivity Analysis - Equity Value

Present Value of Cash Flow $2,964

Present Value of Terminal Value $10,844 High Growth Phase WACC

409.94 10.00% 11.00% 12.00%

Company Value $13,808 Long-Term 3.00% $352.12 $341.18 $330.78

Growth 5.00% $438.75 $423.97 $409.94

Plus: Cash $3,000 7.00% $640.88 $617.15 $594.66

Less: Debt $0

Equity Value $16,808

Shares Outstanding 41,000

Intrinsic Value / Sh $409.94

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Some additional notes about our DCF analysis and what we glean from it:

- Intuitive Surgical has had a great run. No question about it. We absolutely do not fault the company for using

aggressive marketing for creating awareness and pushing robotic-assisted surgery using the da Vinci.

Would you prefer a company who is asleep at the wheel or who is aggressively competing for share?

- The question we ask is…how long will this last, especially given the current macro-environment and the fact

that Level I clinical evidence in favor of robotic-assisted surgery is virtually non-existent?

- Our checks with high-volume hospitals indicated that robotic-assisted surgeries using the da Vinci are not

money-makers for the hospitals, and many community hospitals are re-looking at their business strategy of

robotic-assisted surgery, especially at the current price point.

- Given no other legitimate competition currently, the sole-player status of Intuitive Surgical has created a

scenario wherein it has dictated pricing mechanisms that seem unusually high and unsustainable. It is

unclear today is there is any legitimate competitor out there, however, the trend line on hospital expenditures

on capital equipment such as the da Vinci cannot continue on a straight trajectory.

- While it is commonly known that radical prostatectomies are on a downward trajectory, our field checks on

hysterectomies or nephrectomies and cholecystectomies did not uncover any major clinical benefits of using

the da Vinci. That is not to say utilization will not continue to increase for the near future. All we are saying is

that when there is a macro-level shock to either reimbursement, or payment patters (bundling, etc), or

comparative-effectiveness kicks in, the utilization trajectory across the board could see a major swing in the

opposite direction.

- Intuitive Surgical, to their credit, has beat expectations since the beginning of time. As we show in our

financial models, we have been as generous to the top line and bottom line as can be. In fiscal 2017, we

given Intuitive the benefit of the doubt and estimate revenues slightly over $4 billion. That is over a 60%

jump from fiscal 2012. In other words, Obamacare, Medicare going bankrupt, macro-level changes in

purchasing patterns or reimbursement for hospitals all have NO EFFECT on Intuitive‘s sales. In essence, we

consider a Teflon-like scenario.

- Even using these super-generous assumptions and sustainability of these margins ad-infinitum, the models

suggest that Intuitive would have to grow at a 7% rate into perpetuity to justify the current valuation. Not to

be too pedantic here, mathematically that is an impossibility. Anyone who has done even a little bit of

economics knows that any single company cannot continue to grow faster than the macro-level economy

into perpetuity. Mathematically that is an absurdity. The reason we highlight this is that at some point,

investors have to take a step back and ask themselves…Is this worth the current price?

- We are not suggesting by any means that this game of expectations relative to consensus estimates will

change anytime soon. Intuitive, in our opinion, has finely honed the art of beating expectations and creating

positive surprises. However, on a purely fundamental basis, at some point reality has to set in…

- Hence our rating and PT.

Risks Key risks to this story are reimbursement risk, competitive risk and market risk.

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Intuitive Surgical Suraj Kalia, CFAStatement of Operations

Fiscal Year Ends Dec

Numbers in $MM, rounded off

PROJECTED

FY10A FY11A Q1-12A Q2-12A Q3-12A Q4-12A FY12A Q1-13E Q2-13E Q3-13E Q4-13E FY13E Q1-14E Q2-14E Q3-14E Q4-14E FY14E

Instrument & Accessories $529 $701 $208 $224 $218 $254 $903 $251 $271 $262 $310 $1,093 $292 $314 $301 $356 $1,263

Systems $660 $778 $207 $229 $232 $265 $933 $238 $264 $267 $307 $1,075 $268 $303 $301 $353 $1,227

Services $224 $278 $81 $83 $88 $91 $343 $97 $100 $105 $109 $411 $114 $118 $124 $128 $485

Total Revevnue $1,413 $1,757 $495 $537 $538 $609 $2,179 $586 $635 $634 $726 $2,581 $675 $736 $727 $838 $2,976

Cost of products $297 $382 $112 $123 $119 $141 $495 $137 $150 $148 $173 $607 $168 $185 $181 $213 $747

% Gross Margin - Products 75% 74% 73% 73% 73% 73% 73% 72% 72% 72% 72% 72% 70% 70% 70% 70% 70%

Cost of Services $86 $101 $28 $27 $28 $30 $113 $30 $31 $33 $34 $128 $34 $36 $38 $39 $146

% Gross Margin - Services 38% 36% 34% 33% 32% 33% 33% 32% 32% 32% 32% 31% 31% 31% 31% 31% 30%

Cost of Goods Sold $386 $486 $140 $151 $148 $172 $611 $168 $181 $181 $207 $736 $203 $222 $219 $252 $894

Gross Profit $1,027 $1,271 $355 $386 $389 $437 $1,567 $419 $454 $453 $519 $1,846 $472 $514 $508 $586 $2,082

Operating Expenses:

SG&A $359 $439 $124 $121 $129 $148 $522 $150 $162 $165 $189 $665 $175 $191 $189 $218 $774

R&D $116 $140 $38 $40 $50 $42 $170 $45 $49 $51 $58 $203 $54 $59 $58 $67 $238

Excise Tax $0 $0 $0 $0 $0 $0 $6 $7 $7 $8 $28 $7 $8 $8 $9 $33

Op. Expenses $475 $579 $163 $161 $179 $190 $692 $201 $218 $223 $255 $897 $237 $258 $255 $294 $1,044

Operating Income $552 $692 $193 $225 $211 $247 $875 $217 $235 $230 $264 $947 $235 $256 $253 $292 $1,035

Net Interest Income $17 $15 $4 $4 $4 $4 $16 $4 $4 $4 $4 $16 $4 $4 $4 $4 $16

Other $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Total Other Income $17 $15 $4 $4 $4 $4 $16 $4 $4 $4 $4 $16 $4 $4 $4 $4 $16

Pretax Income $570 $707 $196 $229 $215 $251 $891 $221 $239 $234 $268 $963 $239 $260 $257 $296 $1,051

Taxes $191 $215 $54 $74 $32 $77 $237 $56 $69 $68 $78 $271 $69 $75 $74 $86 $305

Net Income $379 $492 $143 $154 $183 $174 $654 $165 $170 $166 $190 $692 $170 $185 $182 $210 $746

Fully Diluted Shares 40 40 41 41 41 41 41 41 41 41 41 41 42 42 42 42 42

Fully diluted EPS $9.40 $12.24 $3.48 $3.73 $4.44 $4.23 $15.89 $4.01 $4.13 $4.04 $4.62 $16.79 $4.04 $4.40 $4.34 $5.00 $17.77

Margins FY10A FY11A Q1-12A Q2-12A Q3-12A Q4-12A FY12A Q1-13E Q2-13E Q3-13E Q4-13E FY13E Q1-14E Q2-14E Q3-14E Q4-14E FY14E

Gross Margin 72.69% 72.32% 71.72% 71.89% 72.40% 71.75% 71.94% 71.40% 71.43% 71.39% 71.45% 71.51% 69.89% 69.89% 69.88% 69.89% 69.96%

Operating Margin 39.09% 39.37% 38.89% 41.86% 39.17% 40.60% 40.17% 37.05% 37.08% 36.29% 36.35% 36.68% 34.79% 34.79% 34.78% 34.79% 34.79%

Pretax Margins 40.32% 40.23% 39.65% 42.60% 39.97% 41.21% 40.89% 37.74% 37.71% 36.93% 36.91% 37.30% 35.38% 35.34% 35.33% 35.27% 35.33%

Net Margin 26.84% 28.02% 28.83% 28.74% 33.95% 28.59% 30.00% 28.16% 26.77% 26.22% 26.20% 26.79% 25.12% 25.09% 25.09% 25.04% 25.08%

Growth FY10A FY11A Q1-12A Q2-12A Q3-12A Q4-12A FY12A Q1-13E Q2-13E Q3-13E Q4-13E FY13E Q1-14E Q2-14E Q3-14E Q4-14E FY14E

Revenue Growth 34.30% 24.37% 27.60% 26.03% 20.39% 22.64% 23.99% 18.41% 18.35% 17.91% 19.16% 18.48% 15.09% 15.88% 14.64% 15.43% 15.27%

SG&A as % of Rev 25.39% 24.97% 25.08% 22.53% 23.99% 24.31% 23.97% 25.50% 25.50% 26.00% 26.00% 25.76% 26.00% 26.00% 26.00% 26.00% 26.00%

R&D as % of Rev 8.21% 7.98% 7.75% 7.49% 9.24% 6.84% 7.80% 7.75% 7.75% 8.00% 8.00% 7.88% 8.00% 8.00% 8.00% 8.00% 8.00%

Tax Rate 33.44% 30.35% 27.30% 32.55% 15.07% 20.00% 26.63% 29.00% 29.00% 29.00% 29.00% 28.17% 29.00% 29.00% 29.00% 29.00% 29.00%

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Analyst CertificationI, Suraj Kalia, certify that (1) the views expressed in this report accurately reflect my personal views aboutall of the subject companies and securities and (2) no part of my compensation was, is or will be directly orindirectly related to the specific recommendations or views expressed in this report.

Suraj Kalia, CFA is an advisor to AVRA Surgical.

Suraj Kalia, CFA was an advisory board member of Levitronix, LLC from 2009 until its acquisition by ThoratecCorp in 2011.

Important disclosures

Explanation of Ratings:Outperform (BUY) – Outperform the S&P 500 by at least 10%.Market Perform (HOLD) – Perform within 10% above or below the S&P 500.Underperform (SELL) – Underperform the S&P 500 by at least 10%.Under Review – Estimates, ratings and/or price target are subject to possible changes in the near term.

Risk Profile:Conservative – Lower risk and volatility.Moderate – Average risk and volatility.Aggressive – Above average risk and volatility.

Rating Distribution Breakdown as of March 4, 2013IB Serv./ Past 12Mos.

Rating Category Count Percent Count Percent

Buy [OP] 109 66.87% 9 8.26%Hold [MP] 44 26.99% 1 2.27%Sell [UP] 10 6.13% 0 0.00%

Important Disclosure:The analyst responsible for preparing this research report receives compensation that is based upon variousfactors including Northland's institutional trading commissions and total revenues which may be generatedby Northland's investment banking activities.

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Other Disclosures:Northland Capital Markets reports will provide short-term commentary, but our ratings are forward lookingby at least 12 months, unless otherwise noted, to reflect our financial model expectations. Northland’sinvestment thesis, valuations and ratings are subject to change without notice and the primary analyst shouldbe contacted to ensure that our opinions have not changed since the date of this report.

Information contained herein is based on data obtained from recognized statistical services, issuer reports orcommunications, or other sources, believed to be reliable. However, we have not verified such information,and we do not make any representations as to its accuracy or completeness. Any statements nonfactual innature constitute only current opinions, which are subject to change.

Individual investors are advised to carefully consider the risks associated with investments in equityinvestments, particularly in small cap and micro cap securities. Northland’s research universe includes alarge proportion of this type of investment. This research report does not take into account the investmentobjectives, financial needs and risk parameters of individual investors. Individual investors are advised byNorthland Securities to discuss their particular financial situation with their investment representative andother professional advisors, prior to acting upon any recommendations in this report.

Past performance is not necessarily an indication of future performance. This report reflects our currentopinion. We do not assure future performance. Security prices fluctuate.

Unless otherwise noted, the price of a security mentioned in this report is the market closing price as ofthe end of the prior business day.

‘Northland Capital Markets’ is the trade name for certain capital markets and investment banking servicesof Northland Securities, Inc., member FINRA/SIPC.

Further information is available upon request.

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Expectations Have A Lunar Trajectory Intuitive Surgical ... · Vinci. More recently, the...

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