Intuitive Surgical: Robotic Precision - [Business Breakdowns, EP.155]

26:39These benefits and relative costs, obviously vary from one procedure to another. And that's another important consideration when you think about that matrix of the growth runway across different procedure types and geographies. The other trade -off I'd mentioned, it's worth being transparent on it, is procedure time. So several procedures actually take longer on a robot than they do laparoscopically. And this is because a significant amount of time when using a robot is the docking and undocking process. So that needs to be taken account into the cost measure as well, the cost of the OR time and staff.

27:14But perhaps the surgeon isn't needed for the whole time. The surgeon can join for the procedure once the instrumentation is in place and the robot is docked. But it's a consideration as well. And this goes to another question you asked in terms of areas where robotics is less likely to be used. The extra undocking time also carries another risk. if something goes wrong it's slow to get the robot undocked and out of the way and for surgeons to get to work on whatever life -saving intervention they need to do like stopping bleeding and this is part of the reason why robotics is not widely used in most cardiothoracic surgery it's too dangerous to have this undocking slowing you down if something goes wrong with the lungs or the heart mid -operation whereas if you puncture a hole in the bladder the patient isn't going to die right away, they can undock the robot and then set about fixing the mistake.

28:07So this academic work and documenting the value add across different surgical types and the cost and benefit is what hospitals look for and surgeons look for when they're thinking about adopting robotics. It's not just the allure of the brand and the latest, greatest technology. Very interesting to hear about some of those trade -offs and not even things that I would consider just in terms of the docking and the undocking and the time to set up. I did want to touch on a point about market size and whether there's any evidence that it actually expands the market for procedures. I could potentially make the case that I might be more willing to do a procedure if there was a surgical robot doing the work rather than just certainly being cut fully open and potentially relative to laparoscopic.

28:53But is there any data or evidence that it's actually expanding the market of procedures done because of the interest in using it? I don't think it's fair to assume that's the central case because many of the procedures where this is being done in urology and gynecology, for example, are not benign procedures. And so these are not something where the patient has the luxury of waiting and choosing between surgery or not. Normally, these are more serious requirements and therefore there's going to be a surgical procedure undertaken and there's a greater comfort involved in what you get with the robot and the narrower range of outcomes and the steadier greater control over the procedure which the surgeon gets.

29:34I don't think it's quite fair to say it's expanding the market from that perspective. I appreciate when a guest will push back on something that might otherwise be a bullish or positive thesis. So I appreciate the pushback on that point. We can transition a bit into the DaVinci system and how that's evolved. I think you referenced there just in terms of the upfront cost and the useful life, which mentioned six years. But maybe we just start with the DaVinci system and the evolution over the timeframe since being introduced. Is this something where we have DaVinci 1, DaVinci 2? How do updates come into play?

30:12What do those look like? Maybe just a little bit about the da Vinci system itself? Sure. So since the 1999, 2000 time, Intuitive have introduced four generations. So exactly as you say, you've got da Vinci 1, da Vinci 2. And actually earlier this year, they announced their fifth generation has been submitted to the FDA. And the new versions, the new systems, they bring new features, they bring improvements on all the things we've already discussed. The vision systems get better, the degrees of motion get improved, they integrated operating table motion, and so on. There were also some feature sets were introduced, which I think are quite important junctures in the story of da Vinci and its competitive landscape, I suppose.

30:57Now, if you were to think the emerging competitive threat to the incumbent surgical tools market, that Intuitive grew. Intuitive was growing robotic surgery, and it was taking share from laparoscopic, taking share from open procedures. If you were to think all of that growth was unknown or unknowable to the incumbents that were being somewhat disrupted, then you might be surprised to hear this. Up until 2014, there was no stapling instrumentation from Intuitive. So surgical staplings are a common method for closing up work that's been done in the operation, in the procedure. And prior to the launch of stapling tools by Intuitive, surgeons had been standing up from their DaVinci console, scrubbing into the procedure, and then carry out the stapling using a tool from another provider.

31:47There was a similar story for energy systems. So you have tools such as vessel sealers, and Intuitive first introduced those just over 10 years ago. Prior to that, like with stapling, surgeons were getting up from the console, scrubbing in, and using a third -party electrosurgical tool to coagulate and cut or seal tissue. So Intuitive didn't have the whole procedure covered in the early days. Its systems were being used in hybrid with other surgical tool providers. And in my mind, that was a bit of a missed opportunity by the competitors. They should have seen this growth in robotic surgery, seen that surgeons were embracing it as the future, and of course seized on the fact that Intuitive at the time did not have all of the bases covered.

32:30They only provided the simpler tools and were being supplemented by third -party staplers and vessel sealers and energy systems. But intuitive work left as the sole player of robotics through most of the 2010s. And during that time, they developed, launched stapling and energy systems. Plus, they demonstrated the effectiveness and the reliability of those tools. If you're a surgeon, you don't use a stapler unless you trust it 100%. You don't want to be having a readmission, opening a patient back up to fix a burst staple or a failed staple. And an unproven intuitive stapling system took a few years to be accepted.

33:10Today, those stapling and energy tools, which were new introductions 10 years ago, are now classed as advanced instruments. And these contributed more than a billion dollars of revenue in 2023. So a meaningful contributor from these later developments, the advanced instruments. And then if you think about upgrades through the generations of the DaVinci system, replacement and upgrade cycles, these were actually arguably of greater importance to the fundamentals of the business trajectory a few years ago. So previously, a new robot would be announced. They'd go from generation three to four. This would spur an upgrade cycle, supporting capital placements, as in robotic placements.

33:53But Intuitive have de -risked the product cycle nature of their business model in two important ways. One is they've started to offer leasing. And two, they've offered upgrade clauses in the agreements they've got with hospitals. And this de -risks the potential for volatility in their own business, as hospital placements should now be smoother and it de -risks for the hospital, the decision of having to worry about buying a robot just before a new generation gets announced and your new purchase becomes obsolete. So that's the story of introductions over the last two decades. The only other thing I would mention on new offerings is in addition to the DaVinci ecosystem, more recently, Intuitive have developed and unveiled a second product group called ION.

34:43And this is what's called an endoluminal system, which at the moment is used for minimally invasive biopsies in the lung or bronchoscopies. Most people are probably familiar with this, but why do we carry out bronchoscopies? Well, lung cancer is the leading cause of cancer death, unfortunately, and 25 % of all cancer deaths are represented by lung cancer. so it's a big problem and the survival rate on lung cancer is low partly because of late stage diagnosis and survival rates can improve a lot with early diagnosis and treatment so every year millions of people have chest radiographs and ct scans sometimes nodules are detected in the lungs in those scans the problem is most of the time those nodules are in hard to reach peripheral parts of the lungs and traditional bronchoscopy techniques give you pretty limited access to those areas.

35:36And that's often where lung cancers first develop. So pulmonologists who work in this field have a dilemma on their hands. They want to detect the cancer as early as possible. And that means taking biopsies of smaller, earlier nodules, but there's a greater probability of a small nodule being benign. So you need to balance the probabilistic safety. They're hesitant of checking every single nodule with a traditional trans -thoracic needle biopsy if that risks collapsing a lung, especially when early nodules are more likely to be benign. So there's a huge unmet need for an easy, safe, less invasive bronchoscopy that can navigate, you could call it, torturous anatomy of the lung and accurately biopsy these small lesions.

36:22And that's what the ion system does. It's a super thin, three and a half millimeter diameter, flexible robotic bronchoscope. And that can be used to navigate the lungs and find these areas in question for biopsy. Interestingly, intuitive share this market for flexible bronchoscopies with J &J with their Monarch offering. So the competitive position is a little less dominant than in the main business, but these flexible bronchoscopy tools are growing very, very quickly from next to nothing in 2019. Intuitive's ION Systems did 54 ,000 procedures last year, and the install base has grown 10x in three years.

37:02So that's an example of another product group, another innovation, which is still minimally invasive, still robotic surgery, answering a significant unmet need and talks to the innovation going on at Intuitive. Yeah, the possibilities are just fascinating in terms of non -invasive surgeries and what it can potentially do when you mix that with advanced innovation and monitoring and detection as well. You hit on a very interesting point on the revenue model. I was very curious to get into this. When you presumably have a system that you're updating to your point once every six years or so, that can create some type of volatility, cyclicality, not much visibility.

37:45When you mentioned transitioning a bit towards leasing the equipment and offering those upgrades I imagine there's some type of maintenance slash service line here. But can you break down just the revenue buckets, however you or the company would break them down? Sure. So maybe just to remind people of the scope in terms of robots and then how that flows through to revenue. So last year, Intuitive Place just shy of 1 ,400 of these systems, the DaVinci systems. And that generated $1 .6 billion of revenue. Once you strip out some of the moving parts, the system ASP is $1 .4 to $1 .5 million. And there's currently an installed base of 8 ,500 of these robots globally.

38:32But the larger part of the business from a revenue perspective is the sale of instruments, accessories, and these sales are the ones tied to procedure volumes. I've mentioned this in 2023, there were 2 .3 million procedures performed on DaVinci. and the instruments shipped to enable these procedures generated over $4 billion of revenue. So the simple math tells you that Intuitive are earning about $1 ,900 of instrument revenue per procedure. And then exactly to your point, there's additionally some servicing revenue attached to the systems and the install base, which generated around a billion dollars last year.

39:10So the revenue breakdown is $7 billion total last year, 60 % of which is instruments, 25 % of which is system revenue, and the remainder is servicing. One thing to say, which you hit on exactly correctly about the systems revenue, the robots, is on leasing, which we've touched on. Intuitive offer the ability for the hospitals to de -risk that capital budgeting decision by offering the robotic system on a lease. And what that means from a financial model perspective is the robots ship to the hospital, but it sits on intuitive balance sheet at cost as a line of PP &E, and then it's depreciated over its useful life.

39:53Meanwhile, the lease payments, operating lease payments get booked as revenue into the accounts. Now those lease payments might be fixed on a per month per quarter basis, or they might be usage -based. And then with the latter, the payments are really tied to procedure volumes, but then the hospital would be contractually locked into some minimal usage level. And so the risk of idle robots isn't entirely borne by intuitive. When you think about the drivers and maybe the mix shifts, is it getting more of these systems into the market? Do you expect that percentage to shift in terms of what that service line represents as a percentage of total revenue?

40:33How do you think about the drivers there? You can make the case that it's either more procedures done, which would drive that service revenue to the extent that it's usage -based, or that it's simply more penetration, more selling into the market. I think the way to think about how the revenue model unfolds over time is that it's all led by procedures. And so as intuitive demonstrate the efficacy of robotic surgery, and they bring incremental innovation and bring new features and tools and so on, then you're going to see more and more procedures done on DaVinci systems. And that flows through to an install base over time, which has grown relatively monotonically as well, albeit the install base has grown slower than the procedure number.

41:16The balancing part of that equation is utilization has grown. So the number of procedures per year has gone up. Suppose you could say that the service revenue per procedure has gone down, but Intuitive would be very happy with that. They know that it's all about unlocking the maximum amount of value from a given robotic system and the associated service, and that means driving procedure penetration. So it waterfalls down from procedure volume, install -based volume, the associated revenue of systems and services. You referenced a bit about depreciation schedule, useful life. In reality, are these systems used beyond six years?

42:00Is there a secondary market for them? If you were to have some type of downturn in the economy, could you see some of the customers maybe sweating the assets a bit more, extending the life of those systems? How much does that play a role? It plays a role to some degree, although once a hospital or a customer starts really getting decent utilization out of a robot, then there are so many other costs associated with a given procedure that the depreciation of a single procedure of that robotic system starts to be smaller. And this is again a point about the brilliant disclosure that Intuitive give you.

42:35You do get given the number of trade -in systems. So while they ship new systems, they also take trade -ins from the market. So they might be older robots, the previous generation, they might be retired, or if they've still got some useful life and they need some upgrades and maintenance, they might actually be shipped out at lower ASP to other parts of the world, which maybe can't support the latest, greatest, most expensive model, but maybe have an appetite for still the benefits that you get at a lower ASP. So you get some trade in, and maybe in an era of economic weakness, you get some delayed purchase of the new system.

43:11But certainly in certain parts of the world, the US being the biggest market for intuitive, surgery and these procedures tends to be margin accretive. And you don't need to necessarily think about over -squeezing your asset or running it longer than you ideally should, because there's revenue attached to the procedure. And as we've said, a big portion of the costs are the other parts, the labor, the building, and the instruments and accessories as well. And for intuitive themselves, thinking about the cost line, the investment, R &D, capex whatever it might be how much variance is there from year to year in the margin profile of that business and then the ultimate free cash flow of the business as well so the headline is that the business earns around about 70 gross margin which is actually quite similar across product revenue and service revenue the product side sometimes dips down a little bit when they're scaling up a new offering.

44:11So ION at the moment, that endoluminal system I talked through, that's currently not running at a large manufacturing capacity or at scale, but it's growing quickly. So that can pull down the gross margin a little in the short term as that scales into its manufacturing footprint. But generally high 60s is where the gap gross margin sits and a bit higher for adjusted gross margin. I should also point out that the leasing setup that we've mentioned, the associated revenue and depreciation expense of the robot that's on a lease drops through at the same gross margin as an outright sale. If you move down the P &L to operating expenses, intuitive spends in the region of 14 % of sales on R &D and then 26, 27 % of sales on SG &A.

45:01That's on a gap basis. So you're looking at a high 20s, low 30s gap operating margin. And depending on how you like accounting for stock -based comp, the adjusted operating margin is seven, eight, nine percentage points higher. But yeah, exactly to your point, what does that mean for cash? Well, historically, this was simply a simple sales business. Sell the robots to the hospitals, then sell instruments and accessories, and you get a pretty predictable attach rate on services. And the market used to actually focus on capital spending, to your point earlier, as this drove incremental installs.

45:37Now, the introduction of leasing breaks that link somewhat between hospital capex cycles and sales momentum of DaVinci. And that gives greater forecastability. But there is a trade -off, which is cash conversion of leasing. So the accounting treatment I mentioned, the system being capitalized up front and sitting on the balance sheet while you don't get the revenue until it flows in over time, that acts as a drag on cash conversion, but not a detrimental one. And in my view, it improves the relationship and the stickiness with the hospitals and the overall business health. So even once you've taken that into account, a fairly limited amount of capex, albeit it's slightly higher at the moment as they build out manufacturing facilities, this business still produces a ton of cash, even with that marginal drag from leasing.

46:26Very interesting. And when you think about the R &D expense, as well as CapEx, how much of that is going into new systems like ION versus maintaining the existing business? Is a lot of cash being spent on more innovation? I know it's hard to separate maintenance a little bit when DaVinci is consistently being updated, but I am curious about that. Yeah, it's definitely hard to pass out because you don't get given that broken out. But the company have told the market that not only have they been working on the fifth generation for many years, which they've now announced this year has been submitted to the FDA, but they've also had the sixth generation in development, as well as the Ion system.

47:09there's also a single port version of da vinci which i didn't go into detail on but that involves all the instrumentation through a single incision in the abdominal wall so they've been developing new systems like that relatively regularly and updating things but maybe somewhere i would touch on where their r &d engine has really been put to work especially in recent years and that's digital capabilities so that's been much more of a focus of their development efforts and they've shipped and are shipping a more comprehensive set of digital tools, if you like, in the last few years. And the premise is that they've been capturing a ton of high quality data relating to all the procedures done on their systems, which are all high tech cloud connected systems, by the way.

47:56And you can, I suppose, bucket these tools into three camps. So these tools are aiding pre -op planning, interoperative guidance, and then post -op analytics. So if you think about the pre -op side, surgeons, consultants, they can use 3D models of a patient's anatomy taken from a diagnostics tool, and then they can use that to plan the operation. So you end up with a kind of augmented reality for the procedure. You also have a simulation software. So surgeons can work on their robotic surgery skills in a simulated environment. So you've got these different digital tools pre -op. In terms of intraoperative guidance, as well as the 3D model, the augmented reality being there from that planning stage, there's also something called intuitive telepresent, which is, they describe it as a HIPAA compliant FaceTime.

48:50So you can have proctoring of the procedure live, but digitally. And then finally, post -op tools. Some of these are actually still in prototype. But these tools would let the surgeon or the hospital or the head of the surgical department maybe do analysis on a procedure after it's been concluded. So there's a tool called Case Insights, which compares your procedure to a huge sample of similar procedures and shows the surgeon where they did really well, where they could have done better. There's also a portal for the hospital to monitor their usage of instruments, usage of the robotic systems, resource planning, and so on.

49:26So it all makes their robotics department within the hospital more efficient. So that's somewhere where they've been focusing their efforts in recent years. Those digital tools have been taking an increasing share of R &D spend. When you start to think about competition, I think you alluded to with ION, there's more of a natural competitor with J &J in that market. Maybe we focus on the DaVinci system itself, competition in that market. It It seems like what you referenced, they have about 10 % of the share in that market today. Is that something that you expect to continue to grow in terms of them continuing to gain market share?

50:04And are there any major competitive threats in terms of companies putting major investments for a competitive product that exists today? They've got essentially 100 % market share in robotic surgery, but the market is maybe only 10 % penetrated. and at this point intuitive have grown quite a big profitable business and so it is attracting some competition for context there was a legitimate competitor in the early days called computer motion back in the 1990s it was founded specifically to develop surgical robots borrowing nasa technology and they did a really good job with their zeus surgical robotic system and in fact, they sued Intuitive in 1998 for patent infringement.

50:50After five years of litigation, the two companies merged under the name Intuitive Surgical. And for much of the time since then, Intuitive have been pushing forward this market alone. The competitors that are entering the market today can be broadly grouped into two buckets. On one hand, you've got large legacy surgical tools businesses looking to defend their business as the world moves increasingly towards robotics. And then on the other hand, you've got smaller startups seeking the promised land occupied by Intuitive, a big business, high margins, high returns on capital, and so forth. On the first group, there's almost something of a syllogism where one of the big diversified medical device businesses like Medtronic, for example, says, we're in surgical tools.

51:36Robotic surgery is a bright spot in surgical tools. We should do robotic surgery. And I'm not sure that's the right mindset as a starting point to really make something innovative that surgeons really want to use. Medtronic are not particularly focused on robotic surgery. It's one product line of many within one of their four divisions. Now they have a product in the market and I'm sure they will get some traction, but by definition it doesn't get the same level of focus up and down the organization as what Intuitive give to their robotic surgery business. So maybe it's worth asking how robust is Intuitive's competitive position?

52:13Well, they're technology leaders. They have learnings from 25 years of research and billions of dollars of cumulative R &D spend. They've now announced their fifth generation robot, and the latest versions encapsulate a ton of electromechanical engineering know -how, software development, and so on. Meanwhile, their would -be competitors are only coming to the market now or in the last couple of years, so you could argue they've got some catching up to do. The second thing I'd point to is FDA approvals. To go to market with a level of scale that's attractive enough to be considered by hospitals and healthcare systems, your robotic system, it needs to have sufficient regulatory clearances.

52:54Intuitive have done the hard yards of getting clearances for different procedure types in different countries. It's a slow process to go through and build that up. Finally, I'd point to Intuitive having nurtured their ecosystem quite deliberately over the last 20 years. They've got highly engaged in store base at this point of surgeons, of hospitals, heads of surgical departments, academic groups. Each part of the value chain is bought into DaVinci and hospitals are very hesitant to change their surgical robotics provider. Surgeons don't want to learn a new system. Administrators have built resourcing workflows and budgeting processes around the DaVinci.

53:34Also, Intuitive have offered leasing, which lowers the financial burden of making the decision on buying robots. The length of time they've been in the market means there exists a vast amount of data on the 14 million da Vinci procedures that have been done to date. And that data feeds into developing digital tools, it feeds into R &D, and it feeds into clinical evidence. I mean, there have been 38 ,000 peer -reviewed academic articles published to date relevant to robotic surgery. There have been 3 ,000 in the last year alone. And the vast majority of these are done independent of intuitive. Surgeons don't adopt these robots purely on the basis of better ergonomics and a compelling sales pitch from the salesperson.

54:18They want to know that the benefits that we've talked about play out in reality, and they want to see clinical evidence of that. Surgeons can look at the independent studies. They can look at meta -analyses. They can gauge the pros and cons of adopting robotics into their scenarios and the body of evidence is a huge barrier to entry. So a new system comes to market there's no way a doctor simply assumes what happened in a da Vinci system happens in the new one and you get this quite virtuous cycle. R &D investments get a workable system that gets approved by the FDA you ship that to a wide enough install base that are engaged using the system the procedures being done generate a ton of data that feeds the academic work, it proves out the efficacy of your system, and it feeds back into R &D.

55:03I think Intuitive have been quite careful about improving their relationship with all of these aspects. They've been there for a long time, they're focused on robotic surgery, and they live and die by the success of that business alone. So I feel quite comfortable with the competitive position, but it's fair to say there are people entering the market and I'm sure they'll gain some traction. This is a large, fast -growing market, there's lots of space to innovate, and more than one player can succeed here. On the geographical opportunity, what does their market exposure look like in the US relative to the international opportunity?

55:40And is that a key area for growth, expanding abroad versus further expanding in the US? It definitely is an area for growth. It's a challenging thing to analyze. The data that comes from the United States, health systems and the academic literature is really great at painting a picture of the potential growth runway there. And it's obviously more challenging to do it across a couple of hundred other countries where the disclosure is more patchy. But there's definitely a growth runway there. And some of the things that Intuitive has done in recent years have obviously lowered the barriers to adoption.

56:18So extending the life of the instrument so it reduces the per procedure costs, offering leasing, the potential for traded in systems to be then shipped out at a lower ASP. So there are a number of things that Intuitive are doing to broaden out that international market. Obviously, the international market is not a monolith, and some countries spend a lot on healthcare and recognize the benefits of total cost budgeting, thinking about the value versus just the headline cost. And then in other countries, the healthcare systems are more stretched financially and therefore adoption of something that's perceived to be expensive is more challenging.

56:55So there's definitely a long runway there. And the fact that intuitive business is still two thirds US, one third ex -US, while obviously the population and the number of procedures that are being done ex -US, even in the richer countries in the world with well -developed healthcare systems, if you just look at the penetration in OECD countries, there's clearly a long runway there. And I think Intuitive do a terrific job of carefully liaising with local regulators, local surgical associations, local healthcare groups in different countries around the world, extolling the virtues of what they do, and then working with those different systems to see what they can bring to the market in terms of clearances and demonstrable efficacy and so on and so forth.

57:41They're very, very disciplined that going through those different cells from a procedure country perspective. I think we've done a very good job laying out the continued opportunity for growth here. As you think about the risks for this business, we touched a little bit just on competitive threats or how much we want to view competition as a threat. What else would you point to in terms of risks for this business? If you characterize robotic surgery as disrupting other forms of surgery, it's fair to say the flow of disruption is not one way. And in fact, Intuitive have been actually on the receiving end of some disruption in one small corner of their business.

58:18And this has been actually quite a focus for people who follow Intuitive over the last few quarters. And that's GLPs being the weight loss disruptor in bariatric surgery. So last year, 2023, we heard a lot about GLP -1s and numerous studies read out. As a result, lots of companies felt the impact of the market anticipating disruption to their business model. Some of this was obviously very direct. The direct diabetes businesses felt it probably the most severely, but even snacks businesses, obviously people anticipating disruption there. Also some more indirect impacts felt from the advent of GLP -1s being more widely adopted.

59:03Intuitive's impact is actually quite direct, albeit it's small in the overall mix of their business. And robotic systems are used for bariatrics procedures, which you use to treat morbid obesity and therefore the secondary effects such as diabetes. GLP -1 type drugs obviously offer a substitution here. If you're morbidly obese, if you're at risk of diabetes or suffering from diabetes, there's a substitution. And understandably, patients are deferring surgery while they assess the options of GLPs. Surgery is seen as a more drastic option. And so people are taking pause while they assess the new options have been brought to the table more recently.

59:45There's two things I'd probably call out to consider here. One, the deferral might occur for a year or two while the patient tries GLP -1s. But we know that longer term levels of adherence to these drugs are not widely known. We don't have super high confidence bars as to the level of adherence across different patient populations yet. So there is at least some likelihood that bariatric surgery might, down the line, supplement GLP -1s as an aid to longer -term weight loss and diabetic health. Two, maybe something that's not immediately obvious, but some morbidly obese patients are considered too high risk to operate on for other non -bariatric procedures.

1:00:30So if GLP -1s actually allow weight loss, they potentially expand the addressable market for surgery, people that were previously not eligible and their doctors deemed them too high risk for surgery, and that potentially expands the market again for robotic surgery. So while intuitive and fairly sanguine about the impact of GLP -1s on their business. One could argue that this is the canary in the coal mine for surgery, or maybe that's too extreme a metaphor, but one generally could get more worried if you thought that pharmacological healthcare improvements over time reduced the need for surgery.

1:01:08As we improve biologic drugs, personalised medicine, improve diagnostics, bring down the cost of gene sequencing, all these things where there's been tons of innovation, do those developments erode the need for surgery? If broadly surgery is typically a more drastic solution than pharma -based healthcare, then advances in all of those things are certainly something to monitor. But overall, I think the way Intuitive managed this business very carefully, very deliberately, no rash decisions means they're pretty well set to navigate whatever it is that other healthcare innovations throw up. But it's an interesting who want to monitor.

1:01:46If you weren't mentioning Ozempic as one of the risks, I was going to ask you about it. So I'm glad that you jumped on that for me. As we finish out these conversations, we always try to pull out lessons that we can look out from a broader level and maybe apply them across your investing framework. What lesson stands out to you from Intuitive Surgical? I think the biggest lesson for me is the benefit of focus. And it goes back to that competition points as well. I think a preconceived notion that in healthcare, M &A often makes sense because, of course, if you can broaden out your product offering, which you sell into an existing customer set, then you get huge cost synergies.

1:02:27This has led to quite large, quite diversified businesses and the incremental products you acquire don't require any additional sales force. So they accrete to incremental margins. And if you're thinking, if you look at the landscape of public companies, there are some successful operators obviously using that playbook, but there are also some cases where innovation is maybe lacking in lots of parts of the portfolio, not to the detriment of the whole business, but you get pockets where innovation is lacking. And a lack of focus is something to do with it, in my view. There are huge returns to focus.

1:03:02And this, I think, especially is true when you're selling to clinicians. They're professionals who value genuine innovation. They value reliability, they value improved clinical outcomes, much more so than the benefit of dealing with less providers. So maybe in some pockets of, I don't know, live sciences or other medical supplies where the procurement decision is being made by someone closer to the budgeting process, the diversifying model makes sense. But for intuitive, they just do surgical robots, driven by they've got this vision that minimally invasive surgery can deliver better outcomes for their stakeholders.

1:03:38And by focusing singularly on this aim, they've developed the robotic surgery market basically out of scratch. They've made a huge success of it over time. Yeah, it's an excellent point. I was going to remark something about them competing with giants in this world, but at $140 billion market cap, I think it's fair to consider them to be one of those giants. So a very excellent point in terms of the value of focus. And when you can truly create a market, the opportunity is endless. This has been an excellent conversation, Joe. I appreciate you not only introducing us to Intuitive Surgical, but also into the broader world of robotics in the surgical market.

1:04:19So thank you very much for joining us. Thanks for having me on, Matt. To find more episodes of Breakdowns ranging from Costco to Visa to Moderna, or to sign up for our weekly summary, check out JoinColossus .com. That's J -O -I -N -C -O -L -O -S -S -U -S .com. Thank you.