Advertisement
Canada markets closed
  • S&P/TSX

    22,167.03
    +59.95 (+0.27%)
     
  • S&P 500

    5,254.35
    +5.86 (+0.11%)
     
  • DOW

    39,807.37
    +47.29 (+0.12%)
     
  • CAD/USD

    0.7380
    -0.0006 (-0.09%)
     
  • CRUDE OIL

    83.11
    -0.06 (-0.07%)
     
  • Bitcoin CAD

    95,148.98
    -754.59 (-0.79%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • GOLD FUTURES

    2,254.80
    +16.40 (+0.73%)
     
  • RUSSELL 2000

    2,124.55
    +10.20 (+0.48%)
     
  • 10-Yr Bond

    4.2060
    +0.0100 (+0.24%)
     
  • NASDAQ

    16,379.46
    -20.06 (-0.12%)
     
  • VOLATILITY

    13.01
    0.00 (0.00%)
     
  • FTSE

    7,952.62
    +20.64 (+0.26%)
     
  • NIKKEI 225

    40,369.44
    +201.37 (+0.50%)
     
  • CAD/EUR

    0.6838
    -0.0005 (-0.07%)
     

A Tiny Upstart Takes Aim at Robotic Surgery

Intuitive Surgical's (NASDAQ: ISRG) robots enjoy a near monopoly in hospitals, but that could change following last week's FDA approval of TransEnterix's (NYSEMKT: TRX) Senhance. Senhance is a robotic system that assists surgeons performing laparoscopic surgeries. It offers advantages, including haptic feedback, that could differentiate it from Intuitive Surgical's da Vinci system. Will TransEnterix carve out a meaningful slice of this fast-growing market?

A robotic revolution

Intuitive Surgical's ground-breaking da Vinci systems are reshaping laparoscopic surgery.

A multiport Senhance robotic surgery system in a hospital room.
A multiport Senhance robotic surgery system in a hospital room.

When the company launched in 2000, most surgeons shunned the concept of robotic surgery, preferring instead to rely upon the freehand surgical techniques they were taught. However, many of these surgeons have been won over by early adopters who have experienced success with the system and hospital administrators who are eager to boost procedure volume, reduce complications, and offer the latest in surgical technology.

ADVERTISEMENT

Today, there are more than 4,100 Intuitive Surgical da Vinci systems installed at hospitals globally, and those systems were used to perform 750,000 surgeries in 2016, up 15% from 2015. Since inception, da Vinci systems have been used by surgeons to perform more than 4 million procedures.

The pace of adoption for robotic surgery isn't slowing, either.

Surgeons frequently use da Vinci in gynecological and prostate surgeries, and Intuitive Surgical is offering new instruments that allow da Vinci's use in colorectal and hernia procedures, too. Expanding da Vinci's addressable market has propelled procedure growth this year. In the third quarter, year-over-year procedures grew 16%, prompting Intuitive Surgical to boost its outlook for full-year procedure volume growth to between 14% to 15%.

Carving away at a multibillion market

Intuitive Surgical's dominance in robotic surgery has been very profitable. In 2016, system sales were $792 million. Sales of da Vinci instruments and accessories and service revenue were $1.4 billion and $517 million last year, respectively. Overall, Intuitive Surgical reported $735 million in net income last year.

ISRG Revenue (Annual) Chart
ISRG Revenue (Annual) Chart

ISRG Revenue (Annual) data by YCharts

TransEnterix hopes Intuitive Surgical's success has paved the way for a market that can support more than one player. In 2015, TransEnterix bought the ALF-X system from SOFAR S.P.A. for $99.8 million, including $43.7 million in TransEnterix stock, and rebranded it as Senhance.

TransEnterix will try to win away market share by talking up Senhance features that are designed to mimic doctors' traditional surgical experience. Senhance's haptic feedback provides a similar feeling to what surgeons experience in freehand surgery, and Senhance's camera can be controlled by eye and head movements.

These features may help TransEnterix avoid pushback by surgeons who might otherwise object to using surgical robots, but to win over hospital administrators, TransEnterix will need to demonstrate that Senhance can save them money. Hospitals spend tens of thousands of dollars on da Vinci instruments and accessories, and since some Senhance instruments are reusable, the cost savings associated with them could give the company a valuable advantage.

A big hill to climb

Investors might want to temper some of their enthusiasm, because Senhance's success overseas has been limited. Through the first six months of 2017, TransEnterix only recorded two Senhance system sales and $3.5 million in revenue. For perspective, Intuitive Surgical placed 119 da Vinci systems outside the U.S. during the first six months of 2017, up 37% year over year. There are 698 da Vincis installed in Europe, plus another 538 systems installed in Asia.

Senhance performance overseas may indicate a similarly anemic adoption of it in America. Most of the hospitals that haven't bought a da Vinci system yet are cash-strapped, and those with more financial flexibility might not want to take a leap and buy a relatively unproven newcomer.

Making matters more difficult for TransEnterix is that Intuitive Surgical isn't likely to sit back and let TransEnterix win away business without a fight. In response to TransEnterix's increased marketing in Europe last year, Intuitive Surgical began offering discounts on refurbished systems to maintain market share. So far, that strategy appears to be keeping Senhance at bay. Intuitive Surgical spending on R&D could lead to new advances that make it more difficult for Senhance to win a toehold, too.

Furthermore, TransEnterix may find that its status as one of only two players in this market doesn't last long. Verb Surgical, a health technology company bankrolled by Alphabet and Johnson & Johnson, is working on surgical robots. Med-tech Goliath Medtronic (NYSE: MDT) is already making a big push into spine surgery via a partnership with Mazor Robotics (NASDAQ: MZOR), and it hopes to have a competing laparoscopic surgical system developed by the end of next year also.

TransEnterix's financial situation isn't overly encouraging, either. In its second-quarter filing with the SEC, management said "existing cash and cash equivalents, together with cash received from sales of our products, will not be sufficient to meet our anticipated cash needs through at least the next 12 months." That suggests management could have to tap equity investors for more money if sales don't ramp up quickly. Senhance approval triggers the expiration of warrants that add $25 million in cash to the coffers, but nonetheless, management only expects cash to last until late next year.

Given TransEnterix's challenges, the risk associated with buying its shares is high. Instead, investors might be better off waiting a couple of quarters to see if Senhance wins traction with buyers.

More From The Motley Fool

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Intuitive Surgical, and Johnson & Johnson. The Motley Fool owns shares of Medtronic. The Motley Fool has a disclosure policy.