INTUITIVE SURGICAL : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

In this report, "Intuitive Surgical," "Intuitive," the "Company," "we," "us,"
and "our" refer to Intuitive Surgical, Inc. and its wholly and majority-owned
subsidiaries.
This management's discussion and analysis of financial condition as of March 31,
2020, and results of operations for the three months ended March 31, 2020, and
2019, should be read in conjunction with management's discussion and analysis of
financial condition and results of operations included in our Annual Report on
Form 10-K for the year ended December 31, 2019.
This report contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking
statements relate to expectations concerning matters that are not historical
facts. Words such as "estimates," "projects," "believes," "anticipates,"
"plans," "expects," "intends," "may," "will," "could," "should," "would,"
"targeted," and similar words and expressions are intended to identify
forward-looking statements. These forward-looking statements include, but are
not limited to, statements related to our expectations regarding the potential
impacts of the COVID-19 pandemic on our business, financial condition, and
results of operations, the strength of our long-term fundamentals, the potential
decline of procedure volume, our acquisitions, expected new product
introductions, procedures and procedure adoption, future results of operations,
future financial position, our ability to increase our revenues, the anticipated
mix of our revenues between product and service revenues, our financing plans
and future capital requirements, anticipated costs of revenue, anticipated
expenses, our potential tax assets or liabilities, the effect of recent
accounting pronouncements, our investments, anticipated cash flows, our ability
to finance operations from cash flows and similar matters, and statements based
on current expectations, estimates, forecasts, and projections about the
economies and markets in which we operate and our beliefs and assumptions
regarding these economies and markets. These forward-looking statements should,
therefore, be considered in light of various important factors, including, but
not limited to, the following: our ability to obtain accurate procedure volume
in the midst of the COVID-19 pandemic; the risk that the COVID-19 pandemic could
lead to further material delays and cancellations of, or reduced demand for,
procedures; curtailed or delayed capital spending by hospitals; disruption to
our supply chain; closures of our facilities; delays in surgeon training; delays
in gathering clinical evidence; the evaluation of the risks of robotic-assisted
surgery in the presence of infectious diseases; diversion of management and
other resources to respond to the COVID-19 outbreak; the impact of global and
regional economic and credit market conditions on healthcare spending; the risk
that the COVID-19 virus disrupts local economies and causes economies in our key
markets to enter prolonged recessions; healthcare reform legislation in the U.S.
and its impact on hospital spending, reimbursement, and fees levied on certain
medical device revenues; changes in hospital admissions and actions by payers to
limit or manage surgical procedures; the timing and success of product
development and market acceptance of developed products; the results of any
collaborations, in-licensing arrangements, joint ventures, strategic alliances,
or partnerships, including the joint venture with Shanghai Fosun Pharmaceutical
(Group) Co., Ltd.; our completion of and ability to successfully integrate
acquisitions, including Schölly Fiberoptic's robotic endoscope business and
Orpheus Medical; procedure counts; regulatory approvals, clearances, and
restrictions or any dispute that may occur with any regulatory body; guidelines
and recommendations in the healthcare and patient communities; intellectual
property positions and litigation; competition in the medical device industry
and in the specific markets of surgery in which we operate; risks associated
with our operations outside of the United States; unanticipated manufacturing
disruptions or the inability to meet demand for products; our reliance on sole
and single source suppliers; the results of legal proceedings to which we are or
may become a party; product liability and other litigation claims; adverse
publicity regarding us and the safety of our products and adequacy of training;
our ability to expand into foreign markets; the impact of changes to tax
legislation, guidance, and interpretations; changes in tariffs, trade barriers,
and regulatory requirements; and other risk factors. Readers are cautioned not
to place undue reliance on these forward-looking statements, which are based on
current expectations and are subject to risks, uncertainties, and assumptions
that are difficult to predict, including those risk factors described throughout
this filing and in the Annual Report on Form 10-K for the fiscal year ended
December 31, 2019, and other periodic filings with the Securities and Exchange
Commission. Our actual results may differ materially and adversely from those
expressed in any forward-looking statement. We undertake no obligation to
publicly update or release any revisions to these forward-looking statements,
except as required by law.
Intuitive®, Intuitive Surgical®, da Vinci®, da Vinci S®, da Vinci S HD Surgical
System®, da Vinci Si®, da Vinci Si HD Surgical System®, da Vinci Xi®, da Vinci
SP®, EndoWrist®, Firefly®, InSite®, da Vinci Connect®, Intuitive Surgical
EcoSystem®, da Vinci X®, SureFormTM, IonTM, IRISTM, and SynchroSealTM are
trademarks or registered trademarks of the Company.
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Overview
Intuitive is committed to advancing patient care in surgery and other acute
medical interventions. We are focused on innovating to enable physicians and
healthcare providers to improve the quality of and access to minimally invasive
care. We believe that minimally invasive care is life-enhancing care. Intuitive
brings more than two decades of leadership in robotic-assisted surgical
technology and solutions to its offerings. While surgery and acute interventions
have improved significantly in the past decades, there remains a significant
need for better outcomes and decreased variability of these outcomes across care
teams. The current healthcare environment is exerting a large and increasing
burden on critical resources, including the professionals who staff care teams:
surgeons, anesthesiologists, nurses, and other staff. At the same time,
governments are straining to cover the healthcare needs of their populations and
are demanding lower total cost per patient to treat disease. In the face of
these challenges, we believe scientific, process, and technological advances in
biology, computing, imaging, algorithms, and robotics offer the promise of new
methods to solve old and difficult problems.
We address these needs by focusing on the quadruple aim. First, we focus on
products and services that can improve outcomes and decrease variability in the
hands of care teams. Second, we seek to improve the patient experience by
minimizing disruption to lives and creating greater predictability for the
treatment experience. Third, we seek to improve care team satisfaction by
creating products and services that are dependable, smart, and optimized for the
care environment in which they are used. Finally, we seek to lower the total
cost to treat per patient episode when compared with existing treatment
alternatives, providing a return on investment for hospitals and healthcare
systems and value for payers.
Open surgery remains the predominant form of surgery and is used in almost every
area of the body. However, the large incisions required for open surgery create
trauma to patients, typically resulting in longer hospitalization and recovery
times, increased hospitalization costs, and additional pain and suffering
relative to minimally invasive surgery ("MIS"), where MIS is available. For over
three decades, MIS has reduced trauma to patients by allowing selected surgeries
to be performed through small ports rather than large incisions. MIS has been
widely adopted for certain surgical procedures.
Da Vinci Surgical Systems enable surgeons to extend the benefits of MIS to many
patients who would otherwise undergo a more invasive surgery by using
computational, robotic, and imaging technologies to overcome many of the
limitations of traditional open surgery or conventional MIS. Surgeons using a da
Vinci Surgical System operate while seated comfortably at a console viewing a
3D, high-definition image of the surgical field. This immersive console connects
surgeons to the surgical field and their instruments. While seated at the
console, the surgeon manipulates instrument controls in a natural manner,
similar to open surgical technique. Our technology is designed to provide
surgeons with a range of articulation of the surgical instruments used in the
surgical field analogous to the motions of a human wrist, while filtering out
the tremor inherent in a surgeon's hand. In designing our products, we focus on
making our technology easy and safe to use.
Our da Vinci products fall into five broad categories: da Vinci Surgical
Systems, da Vinci instruments and accessories, da Vinci Stapling, da Vinci
Energy, and da Vinci Vision, including Firefly Fluorescence imaging systems
("Firefly") and da Vinci Endoscopes. We also provide a comprehensive suite of
services, training, and education programs. Within our integrated ecosystem, our
products are designed to decrease variability in surgery by offering dependable,
consistent functionality and user experiences for surgeons seeking better
outcomes. We take a holistic approach, offering intelligent technology and
systems designed to work together to make MIS intervention more available and
applicable.
We have commercialized the following da Vinci Surgical Systems: the da Vinci
standard Surgical System in 1999, the da Vinci S Surgical System in 2006, the da
Vinci Si Surgical System in 2009, and the fourth generation da Vinci Xi Surgical
System in 2014. We have extended our fourth generation platform by adding the da
Vinci X Surgical System, commercialized in the second quarter of 2017, and the
da Vinci SP Surgical System, commercialized in the third quarter of 2018. We are
early in the launch of our da Vinci SP Surgical System, and we have an installed
base of 47 da Vinci SP Surgical Systems as of March 31, 2020. Our plans for the
rollout of the da Vinci SP Surgical System include putting systems in the hands
of experienced da Vinci users first while we optimize training pathways and our
supply chain. We received U.S. Food and Drug Administration ("FDA") clearances
for the da Vinci SP Surgical System for urological and certain transoral
procedures. We also received clearance in South Korea where the da Vinci SP
Surgical System may be used for a broad set of procedures. We plan to seek FDA
clearances for additional indications for da Vinci SP over time. The success of
the da Vinci SP Surgical System is dependent on positive experiences and
improved clinical outcomes for the procedures for which it has been cleared as
well as securing additional clinical clearances. All da Vinci systems include a
surgeon's console (or consoles), imaging electronics, a patient-side cart, and
computational hardware and software.
We offer over 80 different multi-port da Vinci instruments to provide surgeons
with flexibility in choosing the types of tools needed to perform a particular
surgery. These multi-port instruments are generally robotically controlled and
provide end effectors (tips) that are similar to those used in either open or
laparoscopic surgery. We offer advanced instrumentation for the da Vinci Xi and
da Vinci X platforms, including the da Vinci Vessel Sealer Extend and da Vinci
Stapler products, to provide surgeons with sophisticated, computer-aided tools
to precisely and efficiently interact with tissue. Da Vinci X and da Vinci Xi
Surgical Systems share the same instruments whereas the da Vinci Si Surgical
System uses instruments that are not compatible
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with X or Xi systems. We currently offer nine core instruments on our da Vinci
SP Surgical System. We plan to expand the SP instrument offering over time.
Training technologies include our Intuitive Simulation products, our Intuitive
Telepresence remote case observation and telementoring tools, and our dual
console for use in surgeon proctoring and collaborative surgery.
During the first quarter of 2019, the FDA cleared our Ion endoluminal system to
enable minimally invasive biopsies in the lung. Our Ion system extends our
commercial offering beyond surgery into diagnostic procedures with this first
application. We are introducing the Ion system in the U.S. in a measured fashion
while we optimize training pathways and our supply chain and collect additional
clinical data. We are early in the launch and have placed 18 Ion systems for
commercial use as of March 31, 2020. Ion systems are not included in our da
Vinci Surgical System installed base. We also have 4 Ion systems placed with
hospitals for gathering clinical data.
The success of new product introductions depends on a number of factors
including, but not limited to, pricing, competition, market and consumer
acceptance, the effective forecasting and management of product demand,
inventory levels, the management of manufacturing and supply costs, and the risk
that new products may have quality or other defects in the early stages of
introduction.
COVID-19 Pandemic
Prior to the spread of COVID-19, we experienced procedure growth trends
consistent with those experienced in the fourth quarter of 2019, including
strength in general surgery, growth in mature procedures in the U.S., and growth
in OUS urology. We also saw early strength in capital placements, particularly
in the U.S., with over half the systems placed in the first quarter of 2020
related to arrangements where the sales cycle was mostly completed in the fourth
quarter of 2019. Beginning in January 2020, we saw a substantial reduction in da
Vinci procedures in China and, by early February 2020, procedures per week in
China had declined by approximately 90% compared with the weekly procedure rates
experienced in early January 2020. As the COVID-19 pandemic subsided in China in
March 2020, da Vinci procedure volume began to recover and, by the end of the
first quarter of 2020, China procedures per week were approximately 70% of the
early January 2020 weekly procedure rate. We saw varied impacts on da Vinci
procedures in some of the other early countries affected by COVID-19. COVID-19
had little impact on the procedure volume in Korea and Japan in the first
quarter of 2020, while it had a severe impact on the procedure volume in Italy.
Overall, the disruption to worldwide da Vinci procedures was not significant
through the middle of March 2020. As the COVID-19 pandemic spread to Western
Europe and the U.S., we experienced a significant decline in da Vinci procedures
in the last half of March 2020. Procedures per week in the U.S., which
represented approximately 72% of our procedure volume in 2019, declined
approximately 65% compared with the weekly procedure rate experienced earlier in
the first quarter of 2020. Procedures in France, Germany, and the UK also
declined compared with the weekly procedure rate experienced earlier in the
first quarter of 2020 but to a lesser extent than in the U.S.
Most of the sales cycle for approximately half of the system placements in the
first quarter of 2020 were completed in the fourth quarter of 2019. As we
progressed through the first quarter of 2020 and the impact of the COVID-19
pandemic progressed, customers began to defer decisions to purchase or lease
systems into future quarters and, in some cases, indefinitely. The depth and
extent to which the COVID-19 pandemic will impact individual markets will vary
based on the availability of testing capabilities, personal protective
equipment, intensive care units and operating rooms, and medical staff as well
as government interventions. As COVID-19 continues to spread, it is likely that
da Vinci procedures will decline from those rates experienced in the first
quarter of 2020. In addition, we would expect that system placements will follow
the decline in procedures. While some markets, e.g., China, appear to be
recovering, it is possible that a recurrence of COVID-19 will negatively impact
da Vinci procedures. Moreover, we do not expect all markets to recover at the
same pace. While we cannot reliably estimate the extent or length of the impact,
we expect procedure volume and system placements to significantly decline or be
delayed in the second quarter of 2020 and beyond as COVID-19 infections spread,
causing additional strain on hospital resources, coupled with the recommended
deferrals of elective procedures by governments and other authorities.
Capital markets and worldwide economies have also been significantly impacted by
the COVID-19 pandemic, and it is possible that it could cause a local and/or
global economic recession. Such economic recession could have a material adverse
effect on our long-term business as hospitals curtail and reduce capital and
overall spending. The COVID-19 pandemic and local actions, such as
"shelter-in-place" orders and restrictions on our ability to travel and access
our customers or temporary closures of our facilities or the facilities of our
suppliers and their contract manufacturers, could further significantly impact
our sales and our ability to ship our products and supply our customers. Any of
these events could negatively impact the number of da Vinci procedures performed
or the number of system placements and have a material adverse effect on our
business, financial condition, results of operations, or cash flows.
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We set our priorities and actions during the COVID-19 pandemic within the
context of the phased framework described in the American Enterprise Institute's
paper entitled "National coronavirus response - a road map to reopening." In
Phase 1, which is the 'Slow the Spread' phase of coronavirus response, our
priorities are as follows. First, we are focused on the health and safety of all
those we serve - our customers, our communities, our employees, and our
suppliers - implementing early and continuous updates to our health and safety
policies and processes. Second, we are supporting our customers according to
their priorities - clinical, operational, and economic. Third, we are focused on
continuity of supply by working with our suppliers and our distributors. Fourth,
we are securing our workforce economically. We have built a valuable team over
the years, and we believe they will be important in the recovery that follows
the pandemic. Fifth, in partnership with our Intuitive Foundation, we are
contributing material, product, and volunteers to the front lines of COVID-19
support - we have designed, produced, and delivered personal protective
equipment to local hospitals, and our employees have volunteered in several
communities. Finally, we are eliminating avoidable spend during the 'slow the
spread' phase of the COVID-19 pandemic.
Business Model
Overview
We generate revenue from the placements of da Vinci Surgical Systems, in sales
or sales-type lease arrangements where revenue is recognized up-front or in
operating lease transactions and usage-based models where revenue is recognized
over time. We earn recurring revenue from the sales of instruments, accessories,
and services, as well as the revenue from operating leases. The da Vinci
Surgical System generally sells for between $0.5 million and $2.5 million,
depending upon the model, configuration, and geography, and represents a
significant capital equipment investment for our customers when purchased. Our
instruments and accessories have limited lives and will either expire or wear
out as they are used in surgery, at which point they need to be replaced. We
generally earn between $700 and $3,500 of instrument and accessory revenue per
surgical procedure performed, depending on the type and complexity of the
specific procedures performed and the number and type of instruments used. We
typically enter into service contracts at the time systems are sold or leased at
an annual fee between $80,000 and $190,000, depending upon the configuration of
the underlying system and composition of the services offered under the
contract. These service contracts have generally been renewed at the end of the
initial contractual service periods.
We generate revenue from the placements of the Ion endoluminal system in a
business model consistent with the da Vinci Surgical System model described
above. We generate revenue from the placements of the Ion system, and we earn
recurring revenue from the sales of instruments and accessories used in biopsies
and ongoing system service. Ion systems are presented separately from our da
Vinci Surgical Systems installed base. We are introducing the Ion system in the
U.S. in a measured fashion. For the three months ended March 31, 2020, the
associated impact to revenue and gross margin was not significant.
Recurring Revenue
Recurring revenue consists of instruments and accessories revenue, service
revenue, and operating lease revenue. Recurring revenue increased to
$3.2 billion, or 72% of total revenue in 2019, compared with $2.6 billion, or
71% of total revenue in 2018, and $2.2 billion, or 71% of total revenue in 2017.
Instruments and accessories revenue has grown at a faster rate than systems
revenue over time. Instruments and accessories revenue increased to $2.4 billion
in 2019, compared with $2.0 billion in 2018 and $1.6 billion in 2017. The growth
of instruments and accessories revenue largely reflects continued procedure
adoption.
Service revenue increased to $724 million in 2019, compared with $635 million in
2018 and $573 million in 2017. Service revenue growth has been driven by the
growth of the installed base of da Vinci Surgical Systems. The installed base of
da Vinci Surgical Systems grew 12% to approximately 5,582 at December 31, 2019;
13% to approximately 4,986 at December 31, 2018; and 13% to approximately 4,409
at December 31, 2017.
We use the installed base and number of shipments of da Vinci Surgical Systems
as metrics for financial and operational decision-making and as a means to
evaluate period-to-period comparisons. Management believes that the installed
base and number of shipments of da Vinci Surgical Systems provide meaningful
supplemental information regarding our performance, as management believes that
the installed base and number of shipments of da Vinci Surgical Systems are an
indicator of the rate of adoption of robotic-assisted surgery as well as an
indicator of future recurring revenue (particularly service revenue). Management
believes that both it and investors benefit from referring to the installed base
and number of shipments of da Vinci Surgical Systems in assessing our
performance and when planning, forecasting, and analyzing future periods. The
installed base and number of shipments of da Vinci Surgical Systems also
facilitate management's internal comparisons of our historical performance. We
believe that the installed base and number of shipments of da Vinci Surgical
Systems are useful to investors as metrics, because (1) they allow for greater
transparency with respect to key metrics used by management in its financial and
operational decision-making, and (2) they are used by institutional investors
and the analyst community to help them analyze the performance of our business.
The vast majority of da Vinci Surgical Systems installed are connected via the
internet. System logs can also be accessed by field engineers for systems that
are not connected to the internet. We utilize this information as well as other
information from agreements and discussions with our customers that involve
estimates and
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judgments, which are, by their nature, subject to substantial uncertainties and
assumptions. Estimates and judgments for determining the installed base and
number of shipments of da Vinci Surgical Systems may be impacted over time by
various factors, including system internet connectivity, hospital and
distributor reporting behavior, and inherent complexities in new agreements.
Such estimates and judgments are also susceptible to technical errors. In
addition, the relationship between the installed base and number of shipments of
da Vinci Surgical Systems and our revenues may fluctuate from period to period,
and growth in the installed base and in the number of shipments of da Vinci
Surgical Systems may not correspond to an increase in revenue. The installed
base and number of shipments of da Vinci Surgical Systems are not intended to be
considered in isolation or as a substitute for, or superior to, revenue or other
financial information prepared and presented in accordance with GAAP.
The recent COVID-19 pandemic reduced our expected number of shipments of da
Vinci Surgical Systems in the first quarter of 2020. As the pandemic spreads to
other geographies, such as Europe and the U.S., which represent a larger portion
of our business, it will have a more significant impact on the number of
shipments of da Vinci Surgical Systems. The COVID-19 pandemic has also
significantly disrupted the capital markets as well as worldwide economies,
which could lead to prolonged local and/or global economic recessions. This
could pressure hospital spending, impacting system shipments. As a result of all
of these factors, the ability to forecast future system shipments has been
disrupted. Therefore, we believe that historical system shipment trends may not
be a good indicator of future system shipments.
Intuitive System Leasing
Since 2013, we have entered into sales-type and operating lease arrangements
directly with certain qualified customers as a way to offer customers
flexibility in how they acquire systems and expand their robotic-assisted
surgery programs while leveraging our balance sheet. These leases generally have
commercially competitive terms as compared with other third-party entities that
offer equipment leasing. We have also entered into usage-based arrangements with
larger customers that have committed da Vinci programs where we charge for the
system and service as the systems are utilized. We include operating and
sales-type leases, and systems placed under usage-based arrangements, in our
system shipment and installed base disclosures. We exclude operating
lease-related revenue, usage-based revenue, and Ion system revenue from our da
Vinci Surgical System average selling price ("ASP") computations.
In the years ended December 31, 2019, 2018, and 2017, we shipped 425, 272, and
139 systems, respectively, under lease and usage-based arrangements, of which
384, 229, and 108 systems, respectively, were operating lease and usage-based
arrangements. Revenue from operating lease arrangements is generally recognized
on a straight-line basis over the lease term. For usage-based arrangements,
systems revenue and service revenue are recognized as the systems are used. We
set operating lease and usage-based pricing at a modest premium relative to
purchased systems reflecting the time value of money and, in the case of
usage-based arrangements, the risk that system utilization may fall short of
anticipated levels. The proportion of revenue recognized from usage-based
arrangements has not been significant and is included in our operating lease
metrics herein. Operating lease revenue has grown at a faster rate than overall
systems revenue and was $106.9 million, $51.4 million, $25.9 million for the
years ended December 31, 2019, 2018, and 2017, respectively. Generally, lease
transactions generate similar gross margins as our sale transactions.
Our system leasing and usage-based models provide customers with flexibility
regarding how they acquire or obtain access to our systems. We believe that
these alternative financing structures have been effective and well-received,
and we are willing to expand the proportion of these structures based on
customer demand. As revenue for operating leases and usage-based arrangements is
recognized over time, total systems revenue growth is reduced in a period when
the number of operating lease and usage-based placements increases as a
proportion of total system placements.
Our exposure to the credit risks relating to our lease financing arrangements
may increase if our customers are adversely affected by changes in healthcare
laws, coverage, and reimbursement, economic pressures or uncertainty, including
disruption associated with the current COVID-19 pandemic, or other
customer-specific factors. In addition, as customers divert significant
resources to the treatment of or the preparation to treat patients with the
COVID-19 virus, we may be exposed to defaults under our lease financing
arrangements. Moreover, usage-based arrangements generally contain no minimum
payments; therefore, customers may exit such arrangements without paying a
financial penalty to us. As a result of the COVID-19 pandemic, we anticipate
that some customers will exit such arrangements or seek to amend the terms of
our operating lease and usage-based arrangements with them.
For some operating lease arrangements, our customers are provided with the right
to purchase the leased system at certain points during and/or at the end of the
lease term. Revenue generated from customer purchases of systems under operating
lease arrangements ("Lease Buyouts") was $92.8 million, $48.8 million, and
$39.5 million for the years ended December 31, 2019, 2018, and 2017,
respectively. We expect that revenue recognized from customer exercises of the
buyout options will fluctuate based on the timing of when, and if, customers
choose to exercise their buyout options.
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Systems Revenue
System placements are driven by procedure growth in most markets. In geographies
where da Vinci procedure adoption is in an early stage, system sales will
precede procedure growth. System placements also vary due to seasonality largely
aligned with hospital budgeting cycles. We typically place a higher proportion
of annual system placements in the fourth quarter and a lower proportion in the
first quarter as customer budgets are reset. System revenue grew 19% to
$1,346 million in 2019; 21% to $1,127 million in 2018; and 16% to $928 million
in 2017. Systems revenue is also affected by the proportion of system placements
under operating lease and usage-based arrangements, recurring operating lease
and usage-based revenue, operating lease buyouts, product mix, ASPs, trade-in
activities, and customer mix.
Procedure Mix / Products
Our da Vinci Surgical Systems are generally used for soft tissue surgery for
areas of the body between the pelvis and the neck, primarily in general surgery,
gynecologic surgery, urologic surgery, cardiothoracic surgery, and head and neck
surgery. Within these categories, procedures range in complexity from cancer and
other highly complex procedures to less complex procedures for benign
conditions. Cancer and other highly complex procedures tend to be reimbursed at
higher rates than less complex procedures for benign conditions. Thus, hospitals
are more sensitive to the costs associated with treating less complex, benign
conditions. Our strategy is to provide hospitals with attractive clinical and
economic solutions across the spectrum of procedure complexity. Our fully
featured da Vinci Xi Surgical System with advanced instruments, including the
EndoWrist Vessel Sealer and EndoWrist Stapler products, and our Integrated Table
Motion product targets the more complex procedure segment. Our da Vinci X
Surgical System is targeted towards price sensitive markets and procedures. Our
da Vinci SP Surgical System complements the da Vinci Xi and X Surgical Systems
by enabling surgeons to access narrow workspaces.
Procedure Seasonality
More than half of da Vinci procedures performed are for benign conditions, most
notably hernia repairs, hysterectomies, and cholecystectomies. These benign
procedures and other short-term elective procedures tend to be more seasonal
than cancer operations and surgeries for other life threatening conditions.
Seasonality in the U.S. for these procedures for benign conditions typically
results in higher fourth quarter procedure volume when more patients have met
annual deductibles and lower first quarter procedure volume when deductibles are
reset. Seasonality outside the U.S. varies and is more pronounced around local
holidays and vacation periods. As a result of the COVID-19 pandemic and the
recommendations of the Surgeon General and American College of Surgeons to defer
elective procedures, we expect a significant portion of da Vinci procedures to
be deferred.
Distribution Channels
We provide our products through direct sales organizations in the U.S., Europe
(excluding Spain, Portugal, Italy, Greece, and most Eastern European countries),
China, Japan, South Korea, India, and Taiwan. In 2018, we began direct
operations in India and Taiwan. In January 2019, our Intuitive-Fosun joint
venture began direct sales for da Vinci products and services in China. In the
remainder of our OUS markets, we provide our products through distributors.
Regulatory Activities
Overview
Our products must meet the requirements of a large and growing body of
international standards that govern the product safety, efficacy, advertising,
labeling, safety reporting design, manufacture, materials content and sourcing,
testing, certification, packaging, installation, use, and disposal of our
products. Examples of such standards include electrical safety standards, such
as those of the International Electrotechnical Commission, and composition
standards, such as the Reduction of Hazardous Substances and the Waste
Electrical and Electronic Equipment Directives. Failure to meet these standards
could limit our ability to market our products in those regions that require
compliance to such standards.
Our products and operations are also subject to increasingly stringent medical
device, privacy, and other regulations by regional, federal, state, and local
authorities. We anticipate that timelines for the introduction of new products
and/or indications may be extended relative to past experience as a result of
these regulations.
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Clearances and Approvals
We have generally obtained the clearances required to market our products
associated with our da Vinci Surgical Multiport Systems (Standard, S, Si, Xi,
and X systems) for our targeted surgical specialties within the U.S., South
Korea, Japan, and the European markets in which we operate. Since 2018, we
obtained regulatory clearances for the following products:
•In November 2019, we obtained FDA clearance for our SynchroSeal instrument and
E-100 generator.
•In July 2019, we obtained FDA clearance for our SureForm 45 Curved-Tip stapler
and SureForm 45 Gray reload, which round out our SureForm 45 portfolio.
•In June 2019, we received CE mark clearance for our da Vinci Endoscope Plus for
the da Vinci X/Xi Surgical Systems in Europe. Following the CE mark, in July
2019, we obtained FDA clearance for our da Vinci Endoscope Plus.
•In June 2019, we obtained FDA clearance for our da Vinci Handheld Camera.
•In February 2019, we obtained FDA clearance for our Ion endoluminal system, our
new flexible, robotic-assisted, catheter-based platform, designed to navigate
through very small lung airways to reach peripheral nodules for biopsies. We are
introducing the Ion endoluminal system in a measured fashion while we optimize
training pathways and our supply chain and collect additional clinical data. We
have placed 18 Ion systems for commercial use as of March 31, 2020.
•In February 2019, we obtained FDA clearance for our IRIS augmented reality
product. IRIS is a service that delivers a 3D image of the patient anatomy
(initially targeting kidneys) to aid surgeons in both pre- and intra-operative
settings. We are in the early stages of an IRIS pilot study in the field at a
small group of U.S. hospitals to gain initial product experience and insights.
•In December 2018, we received regulatory clearance for our da Vinci Xi Surgical
System in China. The Xi clearance does not include advanced energy or stapling
products that attach to the Xi system. Separate clearances are required for each
of these products by China National Medical Products Administration ("NMPA").
•In October 2018, the China National Health Commission published on its official
website the quota for major medical equipment to be imported and sold in China
through 2020. The government will allow the sale of 154 new surgical robots into
China, which could include da Vinci Surgical Systems as well as surgical systems
introduced by others. As of March 31, 2020, we have sold 65 da Vinci Surgical
Systems under this quota. Future sales of da Vinci Surgical Systems under the
quota are uncertain, as they are dependent on hospitals completing a tender
process and receiving associated approvals.
•In July 2018, we obtained FDA clearance to market SureForm 60, our da Vinci
EndoWrist 60mm Stapler. In January 2019, we obtained FDA clearance to market
SureForm 45. We have also received regulatory clearance in Taiwan, South Korea,
and Japan to market both SureForm 60 and SureForm 45.
•In May 2018, we obtained FDA clearance for the da Vinci SP Surgical System for
urologic surgical procedures that are appropriate for a single port approach. In
March 2019, we obtained FDA clearance for the da Vinci SP Surgical System for
certain transoral procedures. We also received regulatory clearance for the da
Vinci SP Surgical System in South Korea in May 2018. We continue to introduce
the da Vinci SP Surgical System in a measured fashion while we optimize training
pathways and our supply chain. We have an installed base of 47 da Vinci SP
Surgical Systems as of March 31, 2020.
•In April 2018, we obtained FDA clearance for our da Vinci Vessel Sealer Extend.
Refer to the descriptions of our products that received regulatory clearances in
2020, 2019, and 2018 in the New Product Introductions section below.
The Japanese Ministry of Health, Labor, and Welfare ("MHLW") considers
reimbursement for procedures in April of even-numbered years. The process for
obtaining reimbursement requires Japanese university hospitals and surgical
societies, with our support, to seek reimbursement. There are multiple pathways
to obtain reimbursement for procedures, including those that require in-country
clinical data/economic data. In April 2012 and April 2016, the MHLW granted
reimbursement status for da Vinci Prostatectomy ("dVP") and partial nephrectomy,
respectively. Most prostatectomies and partial nephrectomies were open
procedures prior to da Vinci reimbursement. Da Vinci procedure reimbursement for
dVP and partial nephrectomy procedures are higher than open procedure
reimbursements. An additional 12 da Vinci procedures were granted reimbursement
effective April 1, 2018, including gastrectomy, low anterior resection,
lobectomy, and hysterectomy, for both malignant and benign conditions. An
additional 7 da Vinci procedures were granted reimbursement effective April 1,
2020. These additional 19 reimbursed procedures have varying levels of
conventional, laparoscopic penetration and will be reimbursed at rates equal to
the conventional, laparoscopic procedures. Given the reimbursement level and
laparoscopic penetration for these 19 procedures, there can be no assurance that
adoption will occur or that the adoption pace for these procedures will be
similar to any other da Vinci procedures. If these procedures are not adopted
and we are not successful in obtaining adequate procedure reimbursements for
additional procedures, then the demand for our products in Japan could be
limited.
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Recalls and Corrections
Medical device companies have regulatory obligations to correct or remove
medical devices in the field that could pose a risk to health. The definition of
"recalls and corrections" is expansive and includes repair, replacement,
inspections, relabeling, and issuance of new or additional instructions for use
or reinforcement of existing instructions for use and training when such actions
are taken for specific reasons of safety or compliance. These field actions
require stringent documentation, reporting, and monitoring worldwide. There are
other actions that a medical device manufacturer may take in the field without
reporting including, but not limited to, routine servicing and stock rotations.
As we determine whether a field action is reportable in any regulatory
jurisdiction, we prepare and submit notifications to the appropriate regulatory
agency for the particular jurisdiction. Regulators can require the expansion,
reclassification, or change in scope and language of the field action. In
general, upon submitting required notifications to regulators regarding a field
action that is a recall or correction, we will notify customers regarding the
field action, provide any additional documentation required in their national
language, and arrange, as required, return or replacement of the affected
product or a field service visit to perform the correction.
Field actions as well as certain outcomes from regulatory activities can result
in adverse effects on our business, including damage to our reputation, delays
by customers of purchase decisions, reduction or stoppage of the use of
installed systems, and reduced revenue as well as increased expenses.
Procedures
We model patient value as equal to procedure efficacy / invasiveness. In this
equation, procedure efficacy is defined as a measure of the success of the
surgery in resolving the underlying disease, and invasiveness is defined as a
measure of patient pain and disruption of regular activities. When the patient
value of a da Vinci procedure is greater than that of alternative treatment
options, patients may benefit from seeking out surgeons and hospitals that offer
da Vinci Surgery, which could potentially result in a local market share shift.
Adoption of da Vinci procedures occurs procedure by procedure and market by
market and is driven by the relative patient value and total treatment costs of
da Vinci procedures as compared to alternative treatment options for the same
disease state or condition.
We use the number and type of da Vinci procedures as metrics for financial and
operational decision-making and as a means to evaluate period-to-period
comparisons. Management believes that the number and type of da Vinci procedures
provide meaningful supplemental information regarding our performance, as
management believes procedure volume is an indicator of the rate of adoption of
robotic-assisted surgery as well as an indicator of future revenue (including
revenue from usage-based arrangements). Management believes that both it and
investors benefit from referring to the number and type of da Vinci procedures
in assessing our performance and when planning, forecasting, and analyzing
future periods. The number and type of da Vinci procedures also facilitate
management's internal comparisons of our historical performance. We believe that
the number and type of da Vinci procedures are useful to investors as metrics,
because (1) they allow for greater transparency with respect to key metrics used
by management in its financial and operational decision-making, and (2) they are
used by institutional investors and the analyst community to help them analyze
the performance of our business. The vast majority of da Vinci Surgical Systems
installed are connected via the internet. System logs can also be accessed by
field engineers for systems that are not connected to the internet. We utilize
certain methods that rely on information collected from the systems installed
for determining the number and type of da Vinci procedures performed that
involve estimates and judgments, which are, by their nature, subject to
substantial uncertainties and assumptions. Estimates and judgments for
determining the number and type of da Vinci procedures may be impacted over time
by various factors, including changes in treatment modalities, hospital and
distributor reporting behavior, and system internet connectivity. Such estimates
and judgments are also susceptible to algorithmic or other technical errors. In
addition, the relationship between number and type of da Vinci procedures and
our revenues may fluctuate from period to period, and da Vinci procedure volume
growth may not correspond to an increase in revenue. The number and type of da
Vinci procedures are not intended to be considered in isolation or as a
substitute for, or superior to, revenue or other financial information prepared
and presented in accordance with GAAP.
The recent COVID-19 pandemic reduced our expected number of da Vinci procedures
performed in the first quarter of 2020. As the pandemic intensified globally, we
experienced a significant decline in procedure volume in the U.S. and Western
Europe, as healthcare systems in those areas diverted resources to meet the
increasing demands of managing COVID-19. The COVID-19 pandemic has also
significantly disrupted the capital markets as well as worldwide economies,
which could lead to prolonged local and/or global economic recessions. This
could pressure hospital spending, impacting procedures, procedure growth, and
system placements. As a result of all of these factors, the ability to forecast
future procedures based on historical procedure patterns has been disrupted.
Therefore, we believe that historical procedure trends may not be a good
indicator of future procedure volumes. In geographies such as the U.S. and
certain countries in Europe, where COVID-19 cases continue to increase, da Vinci
procedure volume could decline below the levels experienced at the end of the
first quarter of 2020.
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Worldwide Procedures
Our da Vinci systems and instruments are regulated independently in various
countries and regions of the world. The discussion of indications for use and
representative or target procedures is intended solely to provide an
understanding of the market for da Vinci products and is not intended to promote
the sale or use of any Intuitive product outside of its licensed or cleared
labeling and indications for use.
The adoption of robotic-assisted surgery using the da Vinci Surgical System has
the potential to grow for those procedures that offer greater patient value as
compared to non-da Vinci alternatives and to provide competitive total economics
for healthcare providers. Our da Vinci Surgical Systems are used primarily in
general surgery, gynecologic surgery, urologic surgery, cardiothoracic surgery,
and head and neck surgery. Target procedures in general surgery include hernia
repair (both ventral and inguinal) and colorectal procedures. Target procedures
in gynecology include da Vinci hysterectomy ("dVH"), for both cancer and benign
conditions, and sacrocolpopexy. Target procedures in urology include dVP and
partial nephrectomy. In cardiothoracic surgery, target procedures include da
Vinci lobectomy and da Vinci mitral valve repair. In head and neck surgery,
target procedures include certain procedures resecting benign and malignant
tumors classified as T1 and T2. Not all of the indications, procedures, or
products described may be available in a given country or region or on all
generations of da Vinci Surgical Systems. Surgeons and their patients need to
consult the product labeling in their specific country and for each product in
order to determine the cleared uses, as well as important limitations,
restrictions, or contraindications.
In 2019, approximately 1,229,000 surgical procedures were performed with da
Vinci Surgical Systems, compared with approximately 1,038,000 and 877,000
surgical procedures performed with da Vinci Surgical Systems in 2018 and 2017,
respectively. The growth in our overall procedure volume in 2018 was driven by
growth in U.S. general surgery procedures and worldwide urology procedures.
U.S. Procedures
Overall U.S. procedure volume with da Vinci Surgical Systems grew to
approximately 883,000 in 2019, compared with approximately 753,000 in 2018 and
approximately 644,000 in 2017. General surgery was our largest and fastest
growing U.S. specialty in 2019 with procedure volume that grew to approximately
421,000 in 2019, compared with approximately 325,000 in 2018 and approximately
246,000 in 2017. Gynecology was our second largest U.S. surgical specialty in
2019 with procedure volume that grew to approximately 282,000 in 2019, compared
with approximately 265,000 in 2018 and approximately 252,000 in 2017. Urology
was our third largest U.S. surgical specialty in 2019 with procedure volume that
grew to approximately 138,000 in 2019, compared with approximately 128,000 in
2018 and approximately 118,000 in 2017.
Procedures Outside of the U.S.
Overall OUS procedure volume with da Vinci Surgical Systems grew to
approximately 346,000 in 2019, compared with approximately 285,000 in 2018 and
approximately 233,000 in 2017. Procedure growth in most OUS markets was driven
largely by urology procedure volume, which grew to approximately 206,000 in
2019, compared with approximately 175,000 in 2018 and approximately 149,000 in
2017. General surgery and gynecology procedures also contributed to OUS
procedure growth.
Recent Business Events and Trends
Procedures
Overall. Total da Vinci procedures grew approximately 10% for the three months
ended March 31, 2020, compared with approximately 18% for the three months ended
March 31, 2019. U.S. procedure growth was approximately 9% for the three months
ended March 31, 2020, compared with approximately 17% for the three months ended
March 31, 2019. The first quarter 2020 U.S. procedure growth reflects
significant disruption caused by the COVID-19 pandemic, as noted in the COVID-19
Pandemic section above. The first quarter 2020 U.S. procedure growth was largely
attributable to growth in general surgery procedures, most notably hernia
repair, cholecystectomy, colorectal, and bariatric procedures. U.S. procedure
growth was also driven by growth in thoracic procedures, as well as lower growth
in the more mature urologic procedure category.
Procedure volume OUS grew approximately 11% for the three months ended March 31,
2020, compared with approximately 21% for the three months ended March 31, 2019.
The first quarter 2020 OUS procedure growth reflects significant procedure
disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic
section above. The disruption was most pronounced in China, Italy, France,
Germany, and the rest of Europe. The first quarter 2020 OUS procedure growth was
driven by continued growth in dVP procedures and earlier stage growth in general
surgery (particularly colorectal), gynecology, kidney cancer, and thoracic
procedures.
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U.S. General Surgery. Growth in U.S. general surgery procedures continued to
drive the majority of incremental procedures during the three months ended
March 31, 2020. Inguinal and ventral hernia repairs contributed the most
incremental procedures during the three months ended March 31, 2020, as they did
in 2019 and 2018. We believe that growth in da Vinci hernia repair reflects
improved clinical outcomes within certain patient populations, as well as
potential cost benefits relative to certain alternative treatments. We believe
hernia repair procedures represent a significant opportunity with the potential
to drive growth in future periods. However, given the differences in surgical
complexity associated with treatment of various hernia patient populations and
varying surgeon opinion regarding optimal surgical technique, it is difficult to
estimate the timing of and to what extent da Vinci hernia repair procedure
volume will grow in the future. We expect a large portion of hernia repairs will
continue to be performed via different modalities of surgery.
Adoption of da Vinci for colorectal procedures, which includes several
underlying procedures including low anterior resections for rectal cancers and
certain colon procedures for benign and cancerous conditions, has been ongoing
for several years and is supported by our recently launched technologies, such
as the EndoWrist Staplers, energy devices, and Integrated Table Motion.
In recent quarters, we have seen increasing contributions to growth from other
U.S. general surgery procedures, including cholecystectomy and bariatric
procedures. Our introduction of the SureForm 60mm stapler product in the third
quarter of 2018 has provided surgeons a better optimized robotic tool for
bariatric procedures.
U.S. Gynecology. U.S. gynecology procedures declined modestly during the three
months ended March 31, 2020, compared to 2019. The decline reflects significant
procedure disruption caused by the COVID-19 pandemic, as noted in the COVID-19
Pandemic section above. Combining robotic, laparoscopic, and vaginal approaches,
MIS represents about 80% of the U.S. hysterectomy market for benign conditions.
Global Urology. Global urology procedures have also been a strong contributor to
our overall procedure growth. In the U.S., dVP is the standard of care for the
surgical treatment of prostate cancer, and we believe growth is largely aligned
with surgical volumes of prostate cancer. For OUS, dVP is at various stages of
adoption in different areas of the world but is the largest overall da Vinci
procedure. The first quarter 2020 growth in OUS dVP was approximately two thirds
of the growth in 2019, which is primarily due to the significant procedure
disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic
section above.
Kidney cancer procedures have also been a strong contributor to our recent
global urology growth. Clinical publications have demonstrated that the use of a
da Vinci system increases the likelihood that a patient will receive
nephron-sparing surgery through a partial nephrectomy, which is typically the
surgical society guideline-recommended therapy.
OUS Procedures. The first quarter 2020 OUS procedure growth rate reflects
continued da Vinci adoption in European and Asian markets. In 2018 and through
the first quarter of 2019, procedure growth in China moderated, as the previous
systems quota expired at the end of 2015 and systems installed in China were
highly utilized. In October 2018, the China National Health Commission announced
a new quota to allow the sale of 154 new surgical robots into China through
2020, which could include da Vinci Surgical Systems. This quota applies to the
da Vinci Si and recently approved Xi Surgical Systems (refer to the previous
discussion in the "Clearances and Approvals" section), as well as competitors'
products when and if cleared by NMPA. Sales of da Vinci Surgical Systems under
the quota are uncertain, as they are dependent on provincial allocation
processes and hospitals completing a tender process and receiving associated
approvals. In the last three quarters of 2019, procedure growth in China
accelerated, as initial systems placed during these quarters provided additional
capacity in the field. However, due to the COVID-19 outbreak in China during the
first quarter of 2020, as noted in the COVID-19 Pandemic section above, the
procedure volume decreased by 23% as compared to the first quarter of 2019. In
Japan, we experienced strong procedure growth after receiving the national
reimbursements for dVP and partial nephrectomy in 2012 and 2016, respectively.
However, as adoption for these procedures has progressed towards higher levels
of penetration, growth in these two urologic procedures has moderated. A total
of 12 additional da Vinci procedures were granted national reimbursement status
effective April 1, 2018, including gastrectomy, anterior resection, lobectomy,
and hysterectomy, for both malignant and benign conditions. Procedure growth in
Japan has accelerated since the new procedures were granted reimbursement
status. However, these additional 12 reimbursed procedures have varying levels
of conventional laparoscopic penetration and are reimbursed at rates equal to
the conventional laparoscopic procedures. Given the reimbursement level and
laparoscopic penetration for these procedures, there can be no assurance that
adoption will occur or that the adoption pace for these procedures will be
similar to any other da Vinci procedure. If these procedures are not adopted and
we are not successful in obtaining adequate procedure reimbursement for
additional procedures, then the demand for our products in Japan could be
limited. During the first quarter of 2020, the impact of the COVID-19 pandemic
on procedure volume in Japan was limited. In Italy, France, Germany, and Western
Europe, while procedure volume continued to grow during the first quarter of
2020 as compared to the first quarter of 2019, the growth was negatively
impacted by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section
above.
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System Demand
Future demand for da Vinci Surgical Systems will be impacted by a number of
factors, including economic and geopolitical factors, including the impact of
the current COVID-19 pandemic, as noted in the COVID-19 Pandemic section above,
hospital response to the evolving healthcare environment under the current U.S.
administration, procedure growth rates, hospital consolidation trends, evolving
system utilization and point of care dynamics, capital replacement trends,
additional reimbursements in various global markets, including Japan, the timing
around governmental tenders and authorizations, including China, the timing of
when we receive regulatory clearance in our other OUS markets for our da Vinci
Xi Surgical System, da Vinci X Surgical System, and da Vinci SP Surgical System,
and related instruments, and market response.
Market acceptance of our recently launched da Vinci SP Surgical System and the
nature and timing of additional da Vinci SP regulatory indications may also
impact future system placements.
Demand may also be impacted by robotic-assisted surgery competition, including
from companies that have introduced products in the field of robotic-assisted
surgery or have made explicit statements about their efforts to enter the field
including, but not limited to, Avatera Medical GmbH; CMR Surgical Limited;
Johnson & Johnson (including their wholly owned subsidiaries Auris Health, Inc.
and Verb Surgical Inc.); Medicaroid Inc.; MedRobotics Corp.; Medtronic plc;
meerecompany Inc.; Olympus Corp.; Samsung Corporation; Smart Robot Technology
Group Co. Ltd.; Titan Medical, Inc.; TransEnterix, Inc.; and Wego Holding Co.,
Ltd.
Many of the above factors will also impact future demand for our recently
cleared Ion system, as we extend our commercial offering into diagnostics, along
with additional factors associated with a new product introduction, including,
but not limited to, our ability to optimize manufacturing and our supply chain,
competition, clinical data to demonstrate value, and market acceptance.
New Product Introductions
SynchroSeal and E100 Generator. In November 2019, we obtained FDA clearance for
our SynchroSeal instrument and E-100 generator. SynchroSeal is a single-use,
bipolar, electrosurgical instrument intended for grasping, dissection, sealing,
and transection of tissue. With its wristed articulation, rapid sealing cycle,
and refined curved jaw, SynchroSeal offers enhanced versatility to the da Vinci
Energy portfolio. The E-100 generator is an electrosurgical generator developed
to power two key instruments - Vessel Sealer Extend and SynchroSeal - on the da
Vinci X and Xi Surgical Systems. The generator delivers high frequency energy
for cutting, coagulation, and vessel sealing of tissues.
SureForm 45 Curved-Tip and Gray Reload. In July 2019, we obtained FDA clearance
for the SureForm 45 Curved-Tip stapler and SureForm 45 Gray reload. SureForm 45
Curved-Tip is a single-use, fully wristed stapling instrument with a curved tip
intended for resection, transection, and/or creation of anastomoses. SureForm 45
Gray reload is a new, single-use cartridge that contains multiple staggered rows
of implantable staples and a stainless steel knife. The SureForm 45 Curved-Tip
stapler and Gray reload have particular utility in thoracic procedures and round
out our SureForm 45 portfolio. Not all reloads or staplers are available for use
on all systems or in all countries.
Da Vinci Endoscope Plus. In June 2019, we received CE mark clearance in Europe
for our da Vinci Endoscope Plus, an enhanced 3D endoscope for use with our da
Vinci X and Xi Surgical Systems. Following the CE mark, in July 2019, we
obtained FDA clearance for our da Vinci Endoscope Plus. The da Vinci Endoscope
Plus leverages new sensor technology to allow for increased sharpness and color
accuracy.
Da Vinci Handheld Camera. In June 2019, we obtained FDA clearance for our da
Vinci Handheld Camera, a lightweight, 2D camera head, which can be connected to
third-party laparoscopes. This allows the laparoscopic image to be displayed on
the da Vinci X/Xi vision cart to address aspects of da Vinci procedures that may
require use of a laparoscope, thus eliminating the need for redundant equipment
in the operating room and increasing procedure efficiency. We are introducing
the da Vinci Handheld Camera in a measured fashion with a broad launch expected
in mid-2020.
Ion endoluminal system. In February 2019, we obtained FDA clearance for the Ion
endoluminal system, our new flexible, robotic-assisted, catheter-based platform
designed to navigate through very small lung airways to reach peripheral nodules
for biopsies. The Ion system uses an ultra-thin articulating robotic catheter
that can articulate 180 degrees in all directions. The outer diameter of the
catheter is 3.5mm, which allows physicians to navigate through small and
tortuous airways to reach nodules in most airway segments within the lung. The
Ion system's flexible biopsy needle can also pass through very tight bends via
Ion's catheter to collect tissue in the peripheral lung. The catheter's 2mm
working channel can also accommodate other biopsy tools, such as biopsy forceps
or cytology brushes, if necessary. We are introducing Ion in a measured fashion
while we optimize training pathways and our supply chain and collect additional
clinical data. We have placed 18 Ion systems for commercial use as of March 31,
2020.
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IRIS. In February 2019, we obtained FDA clearance for our IRIS augmented reality
product. IRIS is a service that delivers a 3D image of the patient anatomy
(initially targeting kidneys) to aid surgeons in both the pre- and
intra-operative settings. We are now in the early stages of an IRIS pilot study
in the field at a small group of U.S. hospitals to gain initial product
experience and insights.
SureForm 60 and SureForm 45 Staplers. In July 2018, we obtained FDA clearance
for the SureForm 60 instrument with White, Blue, Green, and Black 60mm reloads.
In January 2019, we obtained FDA clearance for the SureForm 45 instrument with
White, Blue, Green, and Black 45mm reloads. Additionally, we received regulatory
clearance in South Korea for the SureForm 60 instrument and 60mm reloads in June
2018 and July 2018, respectively, and for the SureForm 45 instrument and 45mm
reloads in June 2019 and September 2019, respectively. Also, we received
regulatory clearance in Japan for the SureForm 60 instrument and 60mm reloads in
June 2018 and November 2018, respectively, and for the SureForm 45 instrument
and 45mm reloads in September 2019. The SureForm 60 and SureForm 45 Staplers are
single-use, fully wristed stapling instruments intended for resection,
transection, and/or creation of anastomoses. The SureForm 60 instrument has
particular utility in bariatric procedures, while the SureForm 45 instrument has
particular utility in colorectal procedures. The SureForm 60 and SureForm 45
Staplers broaden our existing stapler product line, which also includes
EndoWrist Stapler 45 with White, Blue, and Green, 45mm reloads and EndoWrist
Stapler 30 with White, Blue, Green, and Gray 30mm reloads. Not all reloads or
staplers are available for use on all systems or in all countries.
Da Vinci SP Surgical System. In May 2018, we obtained FDA clearance for the da
Vinci SP Surgical System for urologic surgical procedures that are appropriate
for a single port approach. In March 2019, we obtained FDA clearance for the da
Vinci SP Surgical System for certain transoral procedures. The da Vinci SP
Surgical System includes three, multi-jointed, wristed instruments and the first
da Vinci fully wristed, 3DHD camera. The instruments and the camera all emerge
through a single cannula and are triangulated around the target anatomy to avoid
external instrument collisions that can occur in narrow surgical workspaces. The
system enables flexible port placement and broad internal and external range of
motion (e.g., 360 degrees of anatomical access) through the single SP arm.
Surgeons control the fully articulating instruments and the camera on the da
Vinci SP system, which uses the same fourth generation surgeon console as the da
Vinci X and Xi systems. The da Vinci SP Surgical System provides surgeons with
robotic-assisted technology designed for deep and narrow access to tissue in the
body. We anticipate pursuing further regulatory clearances for the da Vinci SP
Surgical System, including colorectal applications, broadening the applicability
of the SP platform over time. We continue to introduce the da Vinci SP Surgical
System in a measured fashion while we optimize training pathways and our supply
chain. We have an installed base of 47 da Vinci SP Surgical Systems as of
March 31, 2020.
Da Vinci Vessel Sealer Extend. In April 2018, we obtained FDA clearance for da
Vinci Vessel Sealer Extend, our newest instrument in the Vessel Sealing family
of products. Da Vinci Vessel Sealer Extend is a single-use, fully wristed
bipolar electrosurgical instrument compatible with our fourth generation
multiport systems. It is intended for grasping and blunt dissection of tissue
and for bipolar coagulation and mechanical transection of vessels up to 7mm in
diameter and tissue bundles that fit in the jaws of the instrument.
Acquisition of Orpheus Medical
In February 2020, we acquired Orpheus Medical Ltd. and its wholly owned
subsidiaries ("Orpheus Medical") to deepen and expand our integrated informatics
platform (the "Orpheus Medical Acquisition"). Orpheus Medical provides hospitals
with information technology connectivity, as well as expertise in processing and
archiving surgical videos. Orpheus Medical will be a wholly owned subsidiary of
Intuitive.
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First Quarter 2020 Operational and Financial Highlights
•Total revenue increased by 13% to $1,100 million for the three months ended
March 31, 2020, compared with $974 million for the three months ended March 31,
2019.
•Approximately 309,000 da Vinci procedures were performed during the three
months ended March 31, 2020, an increase of 10% compared with approximately
282,000 for the three months ended March 31, 2019.
•In early February 2020, procedures per week in China declined by approximately
90% compared with the weekly procedure rates experienced in early January 2020.
As the COVID-19 pandemic subsided in China in March 2020, da Vinci procedure
volume began to recover and, by the end of the first quarter of 2020, China
procedures per week were approximately 70% of the early January 2020 weekly
procedure rate.
•We experienced a significant decline in da Vinci procedures in the last half of
March 2020. Procedures per week in the U.S. declined approximately 65% compared
with the weekly procedure rate experienced earlier in the first quarter of 2020.
Procedures in France, Germany, and the UK also declined compared with the weekly
procedure rate experienced earlier in the first quarter of 2020 but to a lesser
extent than in the U.S.
•Instruments and accessories revenue increased by 12% to $618 million for the
three months ended March 31, 2020, compared with $552 million for the three
months ended March 31, 2019.
•Systems revenue increased by 14% to $283 million for the three months ended
March 31, 2020, compared with $248 million during the three months ended
March 31, 2019.
•A total of 237 da Vinci Surgical Systems were shipped during the three months
ended March 31, 2020, an increase of 1% compared with 235 systems during the
three months ended March 31, 2019.
•As of March 31, 2020, we had a da Vinci Surgical System installed base of
approximately 5,669 systems, an increase of approximately 11% compared with the
installed base of approximately 5,114 systems as of March 31, 2019.
•During the three months ended March 31, 2020, we placed 8 Ion systems for
commercial use.
•Gross profit as a percentage of revenue was 67.1% for the three months ended
March 31, 2020, compared with 68.8% for the three months ended March 31, 2019.
•Operating income increased by 12% to $283 million for the three months ended
March 31, 2020, compared with $252 million during the three months ended
March 31, 2019. Operating income included $91.2 million and $76.9 million of
share-based compensation expense related to employee stock plans and $13.3
million and $30.2 million of intangible asset-related charges for the three
months ended March 31, 2020, and 2019, respectively.
•As of March 31, 2020, we had $5.9 billion in cash, cash equivalents, and
investments. Cash, cash equivalents, and investments increased by $0.1 billion,
compared with December 31, 2019, primarily as a result of cash generated from
operating activities, partially offset by share repurchases and capital
expenditures.
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Results of Operations
The following table sets forth, for the periods indicated, certain unaudited
Condensed Consolidated Statements of Income information (in millions, except
percentages):
                                                                                     Three Months Ended March 31,
                                                                                     % of total                               % of total
                                                                 2020                  revenue               2019               revenue
Revenue:
Product                                                    $      900.8                       82  %       $ 799.8                      82  %
Service                                                           198.7                       18  %         173.9                      18  %
Total revenue                                                   1,099.5                      100  %         973.7                     100  %
Cost of revenue:
Product                                                           296.7                       27  %         246.4                      25  %
Service                                                            64.6                        6  %          57.7                       6  %
Total cost of revenue                                             361.3                       33  %         304.1                      31  %
Product gross profit                                              604.1                       55  %         553.4                      57  %
Service gross profit                                              134.1                       12  %         116.2                      12  %
Gross profit                                                      738.2                       67  %         669.6                      69  %
Operating expenses:
Selling, general and administrative                               308.1                       28  %         273.4                      28  %
Research and development                                          147.1                       13  %         144.0                      15  %
Total operating expenses                                          455.2                       41  %         417.4                      43  %
Income from operations                                            283.0                       26  %         252.2                      26  %
Interest and other income, net                                     25.1                        2  %          27.5                       3  %
Income before taxes                                               308.1                       28  %         279.7                      29  %
Income tax expense                                                 (8.1)                      (1) %         (24.3)                     (2) %
Net income                                                        316.2                       29  %         304.0                      31  %

Less: net income (loss) attributable to noncontrolling interest in joint venture

                                           2.7                        -  %          (2.5)                      -  %

Net income attributable to Intuitive Surgical, Inc. $ 313.5

                  29  %       $ 306.5                      31  %



Total Revenue
Total revenue increased by 13% to $1,100 million for the three months ended
March 31, 2020, compared with $974 million for the three months ended March 31,
2019, resulting from 12% higher instruments and accessories revenue, driven by
10% higher procedure volume, 14% higher systems revenue, and 14% higher service
revenue.
Revenue denominated in foreign currencies as a percentage of total revenue was
approximately 21% and 19% for the three months ended March 31, 2020, and 2019,
respectively. We generally sell our products and services in local currencies
where we have direct distribution channels. Foreign currency rate fluctuations
did not have a material impact on total revenue for the three months ended
March 31, 2020, as compared with the three months ended March 31, 2019.
Revenue generated in the U.S. accounted for 71% of total revenue for both three
months ended March 31, 2020, and 2019. We believe that U.S. revenue has
accounted for the large majority of total revenue due to U.S. patients' ability
to choose their provider and method of treatment, reimbursement structures
supportive of innovation and MIS, and our initial investments focused on U.S.
infrastructure. We have been investing in our business in the OUS markets, and
our OUS procedures have grown faster in proportion to U.S. procedures. We expect
that our OUS procedures and revenue will make up a greater portion of our
business in the long term.
As the COVID-19 pandemic is expected to continue and causes strain on hospital
resources, coupled with recommended deferrals of elective procedures, we expect
procedures and system placements to decline significantly in the second quarter
of 2020. We cannot reliably estimate the extent to which the COVID-19 pandemic
will impact procedures and system placements in the second quarter and beyond.
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The following table summarizes our revenue and system unit shipments for the
three months ended March 31, 2020, and 2019, respectively (in millions, except
percentages and unit shipments):
                                                                         

Three Months Ended March 31,

                                                                          2020                    2019

Revenue

Instruments and accessories                                        $         617.5           $     552.3
Systems                                                                      283.3                 247.5
Total product revenue                                                        900.8                 799.8
Services                                                                     198.7                 173.9
Total revenue                                                      $       1,099.5           $     973.7
United States                                                      $         781.6           $     691.6
OUS                                                                          317.9                 282.1
Total revenue                                                      $       1,099.5           $     973.7
% of Revenue - U.S.                                                             71   %                71  %
% of Revenue - OUS                                                              29   %                29  %

Instruments and accessories                                        $         617.5           $     552.3
Services                                                                     198.7                 173.9
Operating lease revenue                                                       39.1                  20.4
Total recurring revenue                                            $         855.3           $     746.6
% of Total revenue                                                              78   %                77  %

Da Vinci Surgical Systems Shipments by Region:
U.S. unit shipments                                                            182                   154
OUS unit shipments                                                              55                    81
Total unit shipments*                                                          237                   235
*Systems shipped under operating leases (included in total unit
shipments)                                                                      77                    78

Ion Systems Shipments                                                            8                     -

Da Vinci Surgical Systems Shipments involving System Trade-ins: Unit shipments involving trade-ins

                                             136                    85
Unit shipments not involving trade-ins                                         101                   150



Product Revenue
Product revenue increased by 13% to $901 million for the three months ended
March 31, 2020, compared with $800 million for the three months ended March 31,
2019.
Instruments and accessories revenue increased by 12% to $618 million for the
three months ended March 31, 2020, compared with $552 million for the three
months ended March 31, 2019. The increase in instruments and accessories revenue
was driven primarily by procedure growth of 10%, incremental sales of our
advanced instruments, and customer buying patterns. First quarter 2020 U.S.
procedure growth of 9% was driven by strong growth in general surgery
procedures, most notably hernia repair, cholecystectomy, colorectal, and
bariatric procedures, and thoracic procedures as well as slower growth in the
more mature urologic procedure category. OUS procedure growth in the first
quarter of 2020 was 11% and was driven by continued growth in urologic
procedures and earlier stage growth in general surgery and gynecology
procedures. Geographically, first quarter 2020 OUS procedure growth was driven
by procedure expansion in Japan, Korea, and Germany with varying results in
other countries, including a 23% decline in procedures in China as a result of
the COVID-19 pandemic.
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Systems revenue increased by 14% to $283 million for the three months ended
March 31, 2020, compared with $248 million for the three months ended March 31,
2019. Higher first quarter 2020 systems revenue was primarily driven by higher
system shipments, higher first quarter 2020 ASPs, and higher operating lease
revenue, partially offset by lower lease buyouts.
During the first quarter of 2020, a total of 237 da Vinci Surgical Systems were
shipped compared with 235 systems during the first quarter of 2019. By
geography, 182 systems were shipped into the U.S., 25 into Europe, 27 into Asia,
and 3 into other markets during the first quarter of 2020, compared with 154
systems shipped into the U.S., 49 into Europe, 21 into Asia, and 11 into other
markets during the first quarter of 2019. The increase in systems shipments was
primarily driven by procedure growth, the need for hospitals to expand or
establish capacity, and more customers trading in older da Vinci models for
fourth generation da Vinci Xi and da Vinci X systems.
We shipped 121 and 81 da Vinci Surgical Systems under lease arrangements, of
which 77 and 78 systems were classified as operating leases for the three months
ended March 31, 2020, and 2019, respectively. Operating lease revenue was $39.1
million for the three months ended March 31, 2020, compared with $20.4 million
for the three months ended March 31, 2019. Systems placed as operating leases
represented 32% of total shipments during the first quarter of 2020, compared
with 33% during the first quarter of 2019. A total 721 of da Vinci Surgical
Systems were installed at customers under operating lease or usage-based
arrangements as of March 31, 2020, compared with 423 as of March 31, 2019.
Revenue from Lease Buyouts was $12.2 million for the three months ended
March 31, 2020, compared with $12.0 million for the three months ended March 31,
2019. We expect revenue from Lease Buyouts to fluctuate period to period
depending on the timing of when, and if, customers choose to exercise the buyout
options embedded in their leases.
The da Vinci Surgical System ASP, excluding the impact of systems shipped under
operating lease or usage-based arrangements and Ion systems, was approximately
$1.44 million for the three months ended March 31, 2020, compared with
approximately $1.31 million for the three months ended March 31, 2019. The
higher first quarter 2020 ASP was largely driven by favorable product and
geographic mix, partially offset by higher trade-in volume. ASP fluctuates from
period to period based on geographic and product mix, product pricing, systems
shipped involving trade-ins, and changes in foreign exchange rates.
Service Revenue
Service revenue increased by 14% to $199 million for the three months ended
March 31, 2020, compared with $174 million for the three months ended March 31,
2019. Higher service revenue for the three months ended March 31, 2020, was
primarily driven by a larger installed base of da Vinci Surgical Systems
producing service revenue.
Gross Profit
Product gross profit for the three months ended March 31, 2020, increased 9% to
$604 million, representing 67.1% of product revenue, compared with $553 million,
representing 69.2% of product revenue, for the three months ended March 31,
2019. The higher product gross profit for the three months ended March 31, 2020,
was primarily driven by higher product revenue, partially offset by lower
product gross profit margin. The lower product gross profit margin for the three
months ended March 31, 2020, was primarily driven by increased costs associated
with da Vinci Si product transitions and higher freight costs as well as higher
intangible assets amortization expense and share-based compensation expense.
Product gross profit for the three months ended March 31, 2020, and 2019,
included share-based compensation expense of $12.8 million and $11.0 million,
respectively, and intangible assets amortization expense of $8.8 million and
$7.3 million, respectively.
Service gross profit for the three months ended March 31, 2020, was $134
million, representing 67.5% of service revenue, compared with $116 million,
representing 66.8% of service revenue, for the three months ended March 31,
2019. The higher service gross profit for the three months ended March 31, 2020,
was primarily driven by higher service revenue, reflecting a larger installed
base of da Vinci Surgical Systems and higher service gross profit margin. The
higher service gross profit margin for the three months ended March 31, 2020,
was primarily driven by lower repair costs.
Service gross profit for the three months ended March 31, 2020, and 2019,
included share-based compensation expense of $5.5 million and $4.5 million,
respectively, and intangible assets amortization expense of $0.9 million and
$0.9 million, respectively.
As a result of an expected decrease in overall demand in the second quarter of
2020, we expect that our production facilities will run at less than normal
capacity. Accordingly, certain labor and fixed production overhead costs will be
expensed as incurred, significantly reducing our gross profit margin. We cannot
reliably estimate the extent to which the COVID-19 pandemic will impact our
overall demand in the second quarter and beyond.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses include costs for sales, marketing,
and administrative personnel, sales and marketing activities, tradeshow
expenses, legal expenses, regulatory fees, and general corporate expenses.
Selling, general and administrative expenses for the three months ended
March 31, 2020, increased by 13% to $308 million, compared with $273 million for
the three months ended March 31, 2019. The increase was primarily driven by
higher headcount, including expansion of our Asian and European teams, and
increased infrastructure to support our growth.
Selling, general and administrative expenses for the three months ended
March 31, 2020, and 2019, included share-based compensation expense of $45.7
million and $38.6 million, respectively, and intangible assets amortization
expense of $1.7 million and $1.2 million, respectively.
Our spending in the first quarter of 2020 reflected normal business activities
into March and then a curtailment of certain costs associated with the impact of
the COVID-19 pandemic. While certain spending will decrease in the second
quarter of 2020 as a result of a reduction in revenue and activities limited by
the COVID-19 pandemic, much of our spending will continue. We will continue to
support our customers, invest in innovation focused on the quadruple aim, and
invest in manufacturing and our supply chain to ensure supply for our customers.
Certain costs will decline as the underlying activities are restricted by the
COVID-19 pandemic, including travel and related expenses, clinical trials,
surgeon training, and customer data collection. We will eliminate spending that
is ineffective due to the COVID-19 pandemic, such as surgeon and hospital
events, and we are pausing the hiring of volume-related roles, such as sales
representatives and manufacturing employees.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and
development expenses include costs associated with the design, development,
testing, and significant enhancement of our products.
Research and development expenses for the three months ended March 31, 2020,
increased by 2% to $147 million, compared with $144 million for the three months
ended March 31, 2019. The increase was primarily driven by higher
personnel-related expenses and other project costs incurred to support a broader
set of product development initiatives, including Ion and SP platform
investments, informatics, advanced instrumentation, advanced imaging, and future
generations of robotics, partially offset by lower intangible asset-related
charges.
Research and development expenses for the three months ended March 31, 2020, and
2019, included share-based compensation expense of $27.2 million and $22.8
million, respectively, and intangible asset-related charges of $1.9 million and
$20.8 million, respectively.
Research and development expenses fluctuate with project timing. Based upon our
broader set of product development initiatives and the stage of the underlying
projects, we expect to continue to make substantial investments in research and
development and anticipate that research and development expenses will continue
to increase in the future.
Interest and Other Income, Net
Interest and other income, net, for the three months ended March 31, 2020, was
$25.1 million, compared with $27.5 million for the three months ended March 31,
2019. The decrease was primarily driven by realized foreign exchange losses,
partially offset by higher interest income earned due to higher cash and
investment balances. However, average interest rates declined from the beginning
of the first quarter to the end of the first quarter.
Income Tax Benefit
Income tax benefit for the three months ended March 31, 2020, was $8.1 million,
or 2.6% of income before taxes, compared with $24.3 million, or 8.7% of income
before taxes, for the three months ended March 31, 2019. The higher effective
tax rate for the three months ended March 31, 2020, was mainly due to lower
excess tax benefits recognized for employee share-based compensation.
Our provision for income taxes for the three months ended March 31, 2020, and
2019, included excess tax benefits associated with employee equity plans of
$65.4 million and $72.7 million, which reduced our effective tax rate by 21.2
and 26.0 percentage points, respectively. The amount of excess tax benefits or
deficiencies will fluctuate from period to period based on the price of our
stock, the volume of share-based instruments settled or vested, and the value
assigned to employee equity awards under U.S. GAAP, which results in increased
income tax expense volatility.
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We file federal, state, and foreign income tax returns in many U.S. and OUS
jurisdictions. Years before 2016 are closed for the significant jurisdictions.
Certain of our unrecognized tax benefits could change due to activities of
various tax authorities, including evolving interpretations of existing tax laws
in the jurisdictions we operate, potential assessment of additional tax,
possible settlement of audits, or through normal expiration of various statutes
of limitations, which could affect our effective tax rate in the period in which
they change. Due to the uncertainty related to the timing and potential outcome
of audits, we cannot estimate the range of reasonably possible change in
unrecognized tax benefits that may occur in the next 12 months.
We are subject to the examination of our income tax returns by the Internal
Revenue Service and other tax authorities. The outcome of these audits cannot be
predicted with certainty. Management regularly assesses the likelihood of
adverse outcomes resulting from these examinations to determine the adequacy of
our provision for income taxes. If any issues addressed in our tax audits are
resolved in a manner not consistent with management's expectations, we could be
required to adjust our provision for income taxes in the period such resolution
occurs.
In July 2015, a U.S. Tax Court opinion (the "2015 Opinion") was issued involving
an independent third party related to intercompany charges for share-based
compensation. Based on the findings of the U.S. Tax Court, we were required to,
and did, refund to our foreign subsidiaries the share-based compensation element
of certain intercompany charges made in prior periods. Starting in 2015, direct
share-based compensation has been excluded from intercompany charges. In June
2019, the Ninth Circuit Court of Appeals (the "Ninth Circuit") reversed the 2015
Opinion (the "Ninth Circuit Opinion"). Subsequently, a re-hearing of the case
was requested but was denied in November 2019. In February 2020, a petition was
filed to appeal the Ninth Circuit Opinion to the Supreme Court of the United
States. Since the Ninth Circuit Opinion potentially is subject to further
judicial review, we continue to treat our share-based compensation expense in
accordance with the 2015 Opinion and continue to recognize the related tax
benefits in our financial statements based upon our evaluation of the position
in light of the present facts. In the event of a final opinion which reverses
the 2015 Opinion, there may be an adverse impact to our income tax expense and
effective tax rate.
Net Income (Loss) Attributable to Noncontrolling Interest in Joint Venture
The Company's majority-owned joint venture (the "Joint Venture") with Shanghai
Fosun Pharmaceutical (Group) Co., Ltd. ("Fosun Pharma"), a subsidiary of Fosun
International Limited, was established to research, develop, manufacture, and
sell robotic-assisted, catheter-based medical devices. The Joint Venture is
owned 60% by us and 40% by Fosun Pharma and is located in China. The
catheter-based technology will initially target early diagnosis and
cost-effective treatment of lung cancer, one of the most commonly diagnosed
forms of cancer in the world. Distribution of catheter-based medical devices in
China will be conducted by the joint venture, while distribution outside of
China will be conducted by us.
In January 2019, the Joint Venture acquired certain assets, including
distribution rights, customer relationships, and certain personnel, from Chindex
and its affiliates, a subsidiary of Fosun Pharma, and began direct operations
for da Vinci products and services in China. As of March 31, 2020, the companies
have contributed $55 million of up to $100 million required by the joint venture
agreement.
We do not expect the Joint Venture to generate revenue in 2020 related to the
sale of robotic-assisted, catheter-based medical devices. There can be no
assurance that we and the Joint Venture can successfully commercialize such
products. There can also be no assurance that the joint venture will not require
additional contributions to fund its business, that the Joint Venture will
continue to be profitable, or that the acquired Chindex assets will be
successfully integrated and the expected benefits will be realized.
Net income (loss) attributable to noncontrolling interest in Joint Venture for
the three months ended March 31, 2020, was $2.7 million, compared with $(2.5)
million for the three months ended March 31, 2019. The increase in net income
attributable to noncontrolling interest in Joint Venture was primarily due to
increased revenue and a re-measurement gain related to the contingent
consideration during the three months ended March 31, 2020.
Liquidity and Capital Resources
Sources and Uses of Cash
Our principal source of liquidity is cash provided by operations and by the
issuance of common stock through the exercise of stock options and our employee
stock purchase program. Cash and cash equivalents plus short- and long-term
investments increased by $0.1 billion to $5.9 billion as of March 31, 2020, from
$5.8 billion as of December 31, 2019, primarily from cash provided by our
operations and proceeds from stock option exercises and employee stock
purchases, partially offset by taxes paid related to net share settlements of
equity awards, common stock repurchases, and capital expenditures.
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Our cash requirements depend on numerous factors, including market acceptance of
our products, the resources we devote to developing and supporting our products,
and other factors. We expect to continue to devote substantial resources to
expand procedure adoption and acceptance of our products. We have made
substantial investments in our commercial operations, product development
activities, facilities, and intellectual property. Based upon our business
model, we anticipate that we will continue to be able to fund future growth
through cash provided by our operations. We believe that our current cash, cash
equivalents, and investment balances, together with income to be derived from
the sale of our products, will be sufficient to meet our liquidity requirements
for the foreseeable future.
However, as a result of the COVID-19 pandemic, we expect to experience reduced
cash flow from operations as a result of decreased revenues and extending
payment terms on sales and operating lease and usage-based arrangements.
Moreover, we are focused on ensuring that we have adequate supplies on hand
given the potential disruption of the COVID-19 pandemic to our suppliers and
their supply chain and, accordingly, we expect to continue to increase inventory
during the second quarter of 2020 and beyond.
See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in our
Form 10-K for the fiscal year ended December 31, 2019, for discussion on the
impact of interest rate risk and market risk on our investment portfolio.
Condensed Consolidated Cash Flow Data
The following table summarizes our cash flows for the three months ended
March 31, 2020, and 2019 (in millions):
                                                                            Three Months Ended
                                                                                 March 31,
                                                                         2020                  2019
Net cash provided by (used in)
Operating activities                                                $      352.8          $     333.2
Investing activities                                                      (117.1)              (308.9)
Financing activities                                                      (178.7)               (41.8)

Effect of exchange rates on cash, cash equivalents, and restricted cash

                                                                        (0.8)                (1.2)
Net increase (decrease) in cash, cash equivalents, and restricted
cash                                                                $       56.2          $     (18.7)



Operating Activities
For the three months ended March 31, 2020, net cash provided by operating
activities of $353 million exceeded our net income of $316 million, primarily
due to the following reasons:
1.Our net income included non-cash charges of $223 million, consisting primarily
of the following significant items: share-based compensation of $91 million;
deferred income taxes of $65 million; depreciation expense and losses on the
disposal of property, plant, and equipment of $51 million; and amortization of
intangible assets of $12 million.
2.The non-cash charges outlined above were partially offset by changes in
operating assets and liabilities that resulted in $186 million of cash used by
operating activities during the three months ended March 31, 2020. Prepaid
expenses and other assets increased by $132 million, primarily due to an
increase in leasing and an increase in prepaid taxes, driven by the timing of
tax payments. Accrued compensation and employee benefits decreased by $95
million, primarily due to the payments of 2019 incentive compensation.
Inventory, including the transfer of equipment from inventory to property,
plant, and equipment, increased by $65 million, primarily due to the increased
number of systems under operating lease and usage-based arrangements and
build-up to address the growth in the business as well as to mitigate risks of
disruption that could arise from trade, supply, or other matters, such as the
COVID-19 pandemic. The unfavorable impact of these items on cash provided by
operating activities was partially offset by a $118 million decrease in accounts
receivable, primarily due to the timing of collections.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2020,
consisted primarily of the acquisition of property and equipment of $105
million, the Orpheus Medical Acquisition, net of cash acquired, of $38 million,
and purchases of investments (net of proceeds from sales and maturities of
investments) of $26 million. We invest predominantly in high quality, fixed
income securities. Our investment portfolio may, at any time, contain
investments in U.S. treasury and U.S. government agency securities, taxable and
tax-exempt municipal notes, corporate notes and bonds, commercial paper,
non-U.S. government agency securities, cash deposits, and money market funds.
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Financing Activities
Net cash used in financing activities during the three months ended March 31,
2020, consisted primarily of taxes paid on behalf of employees related to net
share settlements of vested employee stock purchases of $149 million and cash
used in the repurchase of approximately 0.2 million shares of our common stock
in the open market for $100 million, partially offset by proceeds from stock
option exercises and employee stock purchases of $91 million.
Capital Expenditures
Our business is not capital equipment intensive. However, with the growth of our
business and our investments in property and facilities and in manufacturing
automation, capital investments in these areas have increased. We expect these
capital investments to exceed $400 million in both 2020 and 2021. We intend to
fund these needs with cash generated from operations.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our Financial Statements, which have been prepared in accordance
with U.S. GAAP. The preparation of these Financial Statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses. On an ongoing basis, we evaluate our
critical accounting estimates. We base our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. There have been no new or material changes to the
critical accounting estimates discussed in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2019, that are of significance, or potential
significance, to the Company.
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