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,
2021, and results of operations for the three months ended March 31, 2021, and
2020, 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, 2020.
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 the expected impacts of the COVID-19
pandemic on our business, financial condition, and results of operations, the
potential impact on our procedure volume, our acquisitions, our expected
business, our expected new product introductions, the impacts of Extended Use
Instruments, 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
be considered in light of various important factors, including, but not limited
to, the following: our ability to obtain accurate procedure volume and mix 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, including increased difficulties in obtaining a sufficient
amount of materials in the semiconductor and other markets; closures of our
facilities; delays in surgeon training; delays in gathering clinical evidence;
delays in obtaining new product approvals or clearances from the U.S. Food and
Drug Administration due to the effects of the COVID-19 pandemic; the evaluation
of the risks of robotic-assisted surgery in the presence of infectious diseases;
diversion of management and other resources to respond to COVID-19 outbreaks;
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, 2020, 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. Our mission reflects that 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
continues to stress critical resources, including the professionals who staff
care teams: surgeons, anesthesiologists, nurses, and other staff. At the same
time, governments strain to cover the healthcare needs of their populations and
demand 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 new methods to solve
continued 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
hardware, software, and digital solutions 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. The da
Vinci SP Surgical System accesses the body through a single incision while the
other da Vinci Surgical Systems access the body through multiple incisions. We
are early in the launch of our da Vinci SP Surgical System, and we have an
installed base of 75 da Vinci SP Surgical Systems as of March 31, 2021. 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 approximately 70 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 da Vinci Energy 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
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Vinci Xi Surgical Systems share the same instruments whereas the da Vinci Si
Surgical System uses instruments that are not compatible with da Vinci X or da
Vinci 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 50 Ion systems for
commercial use as of March 31, 2021. Ion systems are not included in our da
Vinci Surgical System installed base. We currently have 2 Ion systems placed
with hospitals for gathering clinical data in addition to the systems placed for
commercial use.
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
Procedures
In the first quarter of 2020, 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. 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 to
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. 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 to
approximately 65% of the weekly procedure rate experienced earlier in the first
quarter of 2020.
In the first quarter of 2021, in the U.S., the COVID-19 resurgence that affected
procedures later in the fourth quarter of 2020 continued well into January 2021.
Then, as COVID-19 cases subsided beginning in February 2021, da Vinci procedures
experienced a steady improvement throughout February and March. In Europe, the
spread of COVID-19 varied regionally, and procedure growth rates were mixed with
strength in France and a year-over-year decline in the U.K. While there have
been COVID-19 hot spots within some of our Asia Pacific markets, they tended to
be isolated and, in general, procedures performed well. China growth was
significantly higher than other regions, reflecting the severity of the COVID-19
impact on China during the first quarter of the prior year and the additional
system installations during 2020.
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. The impact of COVID-19 on our
procedure volumes varies widely by country, region, and type. When COVID-19
infection rates spike in a particular region, procedure volumes have been
negatively impacted and the diagnoses of new conditions and their related
treatments have been deferred. While there is a backlog of patients, it is
unpredictable when those patients will ultimately seek diagnosis and treatment
and whether they will be treated through surgery. Based on our experience during
2020, we do not expect all markets, regions, and procedure types to recover at
the same time or at the same pace.
System Demand
In the first quarter of 2020, customers in regions impacted by COVID-19 deferred
decisions to purchase or lease systems into future quarters and, in some cases,
indefinitely. However, in the first quarter of 2021, we experienced strong
system demand. In general, we believe that the COVID-19 pandemic had less of an
impact on hospital spending capacity and that customers recognize that da Vinci
surgery meets their quadruple aim objectives better than other surgical
approaches. More specifically, during the first quarter of 2021, system demand
reflected procedure growth, hospitals purchasing systems in preparation for a
post-COVID-19 pandemic environment, and hospitals upgrading their system
portfolio to access and/or standardize on fourth generation capabilities.
General Increase in Risks
Capital markets and worldwide economies have been significantly impacted by the
COVID-19 pandemic, and it is possible that factors related to the COVID-19
pandemic could cause a prolonged recession in local and/or global economies.
Such an economic recession could have a material adverse effect on our long-term
business as hospitals curtail and reduce capital and
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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, including our training
and manufacturing operations, or the facilities of our suppliers and their
contract manufacturers, could further significantly impact our sales and our
ability to produce and 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.
Our Response
Our priorities and actions during the COVID-19 pandemic have been and remain as
follows. First, we are focused on the health and safety of all those we serve -
patients, customers, our communities, and our employees - implementing
continuous updates to our health and safety policies and processes. Second, we
are supporting our customers according to their priorities - clinical,
operational, and economic - and ensuring continuity of supply by working with
our suppliers and our distributors. Third, we are securing our workforce
economically. We have built a valuable team over the years, and we believe they
will be important in a recovery that follows the pandemic. Finally, we will
continue to invest in our priority development programs while eliminating
avoidable spend.
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 $600 and $3,500 of instruments and accessories revenue
per surgical procedure performed, depending on the type and complexity of the
specific procedures performed and the number and type of instruments used.
Further, in late 2020, we launched our Extended Use Program (refer to further
discussion immediately below) in the U.S. and Europe, with the intention to
reduce the cost for customers to treat patients, which in turn will reduce the
overall instruments and accessories revenue per procedure. 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.
Consistent with the da Vinci Surgical System model described above, we generate
revenue from the placements of the Ion endoluminal system at the time of sale in
or sales-type lease arrangements or over time in operating lease transactions
and usage-based models. 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, 2021, Ion's contribution to revenue and gross margin was
not significant.
Extended Use Program
In July 2020, we announced our "Extended Use Program," which consists of select
da Vinci Xi and da Vinci X instruments possessing 12 to 18 uses ("Extended Use
Instruments") compared to the current 10 use instruments. These Extended Use
Instruments represent some of our higher volume instruments but exclude
stapling, monopolar, and advanced energy instruments. Instruments included in
the program are used across a number of da Vinci surgeries. Their increased uses
are the result of continuous, significant investments in the design and
production capabilities of our instruments, resulting in improved quality and
durability. Extended Use Instruments have been introduced in the U.S. and Europe
in the fourth quarter of 2020. They are being introduced at various times
throughout 2021 and 2022 in other geographies, depending on regulatory
processes. In addition, simultaneous with the regional launches of Extended Use
Instruments, we will lower the price of certain instruments that are most
commonly used in lower acuity procedures and/or lower reimbursed procedures
within the region. These actions will reduce the cost for customers to treat
patients, which in turn will reduce our revenue per procedure. Based on 2019
volume and mix of procedures, our Extended Use Program and the reduced pricing
on certain other instruments would have reduced 2019 annual instruments and
accessories revenue by approximately $150 to $170 million. During the first
quarter of 2021, we saw customers begin to adjust their instrument buying
patterns to reduce their inventory levels to reflect the additional uses per
instrument. In addition, we saw increased usage of Extended Use Instruments;
however, we anticipate that full adoption will occur over the next few quarters
as customers utilize their remaining 10 use instruments. We expect increased
usage of Extended Use Instruments and customer buying patterns to continue to
reduce instruments and accessories revenue per
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procedure over the next few quarters. The precise impact of these actions on
future revenue will be dependent on the future volume and mix of procedures and
whether cost elasticity will enable greater penetration into available markets.
Recurring Revenue
Recurring revenue consists of instruments and accessories revenue, service
revenue, and operating lease revenue. Recurring revenue increased to $3.4
billion, or 77% of total revenue in 2020, compared to $3.2 billion, or 72% of
total revenue in 2019, and $2.6 billion, or 71% of total revenue in 2018.
Instruments and accessories revenue has grown at a faster rate than systems
revenue over time. Instruments and accessories revenue increased to
$2.46 billion in 2020, compared to $2.41 billion in 2019 and $1.96 billion in
2018. The growth of instruments and accessories revenue largely reflects
continued procedure adoption.
Service revenue was $724 million in 2020, compared to $724 million in 2019 and
$635 million in 2018. Service revenue remained unchanged, driven by the growth
of the installed base of da Vinci Surgical Systems, offset by the effects of the
Customer Relief Program that was implemented as a result of the COVID-19
pandemic in the second quarter of 2020. The installed base of da Vinci Surgical
Systems grew 7% to approximately 5,989 at December 31, 2020; 12% to
approximately 5,582 at December 31, 2019; and 13% to approximately 4,986 at
December 31, 2018.
We use the installed base, number of shipments, and utilization 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, number of shipments, and utilization of da Vinci Surgical
Systems provide meaningful supplemental information regarding our performance,
as management believes that the installed base, number of shipments, and
utilization 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, number of shipments, and
utilization of da Vinci Surgical Systems in assessing our performance and when
planning, forecasting, and analyzing future periods. The installed base, number
of shipments, and utilization of da Vinci Surgical Systems also facilitate
management's internal comparisons of our historical performance. We believe that
the installed base, number of shipments, and utilization 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 judgments, which are, by their nature, subject to substantial
uncertainties and assumptions. Estimates and judgments for determining the
installed base, number of shipments, and utilization 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, number of shipments, and utilization of da Vinci Surgical
Systems and our revenues may fluctuate from period to period, and growth in the
installed base, number of shipments, and utilization of da Vinci Surgical
Systems may not correspond to an increase in revenue. The installed base, number
of shipments, and utilization 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.
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 to other third-party entities that
offer equipment leasing. We have also entered into usage-based arrangements with
qualified 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, 2020, 2019, and 2018, we shipped 432, 425, and
272 da Vinci Surgical Systems, respectively, under lease and usage-based
arrangements, of which 317, 384, and 229 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. More
recently, we have entered into usage-based arrangements with certain qualified
customers whereby systems revenue and service revenue are recognized as the
systems are used. We generally 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 has been included in our
operating lease metrics herein. Operating lease revenue has grown at a faster
rate than overall systems revenue and was $177 million, $107 million, and
$51 million for the
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years ended December 31, 2020, 2019, and 2018, respectively. Generally, lease
transactions generate similar gross margins as our sale transactions. As of
December 31, 2020, a total of 901 da Vinci Surgical Systems were installed at
customers under operating lease or usage-based arrangements.
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 or other
customer-specific factors. In addition, as customers continue to divert
significant resources to the treatment of or the preparation to treat patients
with COVID-19, 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 $52.2 million, $92.8 million, and
$48.8 million for the years ended December 31, 2020, 2019, and 2018,
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.
Systems Revenue
System placements are driven by procedure growth in most markets. In some
markets, systems placements are constrained by regulation. 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. 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. Systems
revenue declined 12% to $1.18 billion in 2020. Systems revenue grew 19% to
$1.35 billion in 2019 and 21% to $1.13 billion in 2018. Based on the factors
outlined in the COVID-19 Pandemic section above, we believe that historical
system shipment trends may not be a good indicator of future system shipments.
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 da
Vinci Energy and EndoWrist and SureForm 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 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 factors outlined in the COVID-19
Pandemic section above, including past and potentially future recommendations of
authorities to defer elective procedures, historical procedure patterns may be
disrupted.
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
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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. For example, we have seen elongated regulatory approval
timelines in the U.S. and the EU.
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 2019, we
obtained regulatory clearances for the following products:
•In November 2019, we obtained FDA clearance for our SynchroSeal instrument and
E-100 generator. Following the FDA clearance, in February 2020, we received CE
mark clearance for both products. In March 2020, we received regulatory
clearance in Japan to market both our SynchroSeal instrument and E-100
generator. In August 2020, we received regulatory clearance in South Korea to
market our 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. We have
also received CE mark clearance for our SureForm 45 Curved-Tip stapler and
SureForm 45 Gray reload.
•In June 2019, we received CE mark clearance for our da Vinci Endoscope Plus for
the da Vinci Xi and da Vinci X Surgical Systems in Europe. Following the CE
mark, in July 2019, we obtained FDA clearance for our da Vinci Endoscope Plus.
We have also received regulatory clearances in South Korea and Japan to market
our da Vinci Endoscope Plus in December 2019 and May 2020, respectively.
•In June 2019, we obtained FDA clearance for our da Vinci Handheld Camera and,
in February 2020, we received CE mark clearance.
•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 50 Ion systems for commercial use as of March 31, 2021.
•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 currently conducting a pilot study of our Iris product and
service in the field at a small group of U.S. hospitals to gain initial product
experience and insights.
•In December 2018, we received product registration for our da Vinci Xi Surgical
System in China. The registration approval does not include advanced energy or
stapling products that attach to the da Vinci Xi system. Separate product
registrations are required for each of these products with the 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. After an adjustment notice was published in the third quarter of
2020, the government will now allow for the total sale of 225 new surgical
robots into China, which could include da Vinci Surgical Systems as well as
surgical systems introduced by others. As of March 31, 2021, we have sold 129 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.
Refer to the descriptions of our products that received regulatory clearances in
2021, 2020, and 2019 in the New Product Introductions section below.
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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 robotic-assisted prostatectomy and partial nephrectomy,
respectively. Most prostatectomies and partial nephrectomies were open
procedures prior to da Vinci reimbursement. Da Vinci procedure reimbursement for
robotic-assisted prostatectomy and partial nephrectomy procedures are higher
than open and conventional laparoscopic 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 the adoption pace for these procedures will be
similar to robotic-assisted prostatectomy or partial nephrectomy, given their
higher reimbursement, or any other da Vinci procedure.
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 the number and type of da Vinci procedures
and our
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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.
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
for 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 than
to non-da Vinci alternatives and 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. We focus our organization and investments on developing, marketing, and
training products and services for procedures in which da Vinci can bring
patient value relative to alternative treatment options and/or economic benefit
to healthcare providers. Target procedures in general surgery include hernia
repair (both ventral and inguinal), colorectal procedures, bariatrics, and
cholecystostomies. Target procedures in gynecology include hysterectomy for both
cancer and benign conditions. Target procedures in urology include prostatectomy
and partial nephrectomy. In cardiothoracic surgery, target procedures include
lobectomy. 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 2020, approximately 1,243,000 surgical procedures were performed with da
Vinci Surgical Systems, compared to approximately 1,229,000 and 1,038,000
surgical procedures performed with da Vinci Surgical Systems in 2019 and 2018,
respectively. The reduced growth in our overall procedure volume in 2020
reflects significant disruption caused by the COVID-19 pandemic, as noted in the
COVID-19 Pandemic section above, and 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 declined to
approximately 876,000 in 2020, compared to approximately 883,000 in 2019 and
approximately 753,000 in 2018. General surgery was our largest and fastest
growing U.S. specialty in 2020 with procedure volume that grew to approximately
434,000 in 2020, compared to approximately 421,000 in 2019 and approximately
325,000 in 2018. Gynecology was our second largest U.S. surgical specialty in
2020 with procedure volume that declined to approximately 267,000 in 2020,
compared to approximately 282,000 in 2019 and approximately 265,000 in 2018.
Urology was our third largest U.S. surgical specialty in 2020 with procedure
volume that declined to approximately 134,000 in 2020, compared to approximately
138,000 in 2019 and approximately 128,000 in 2018.
Procedures Outside of the U.S.
Overall OUS procedure volume with da Vinci Surgical Systems grew to
approximately 367,000 in 2020, compared to approximately 346,000 in 2019 and
approximately 285,000 in 2018. Procedure growth in most OUS markets was driven
largely by urology procedure volume, which grew to approximately 214,000 in
2020, compared to approximately 206,000 in 2019 and approximately 175,000 in
2018. General surgery and thoracic procedures also contributed to OUS procedure
growth with higher growth rates than urology procedures.
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Recent Business Events and Trends
Procedures
Overall. Total da Vinci procedures performed by our customers grew approximately
16% for the three months ended March 31, 2021, compared to approximately 10% for
the three months ended March 31, 2020. The first quarter procedure results for
both periods reflect significant disruption caused by the COVID-19 pandemic, as
noted in the COVID-19 Pandemic section above. We saw continued recovery and
growth in most of the major procedure categories in the latter part of the first
quarter of 2021, most notably in general surgery procedures (particularly
bariatrics and cholecystectomies) and, to a lesser extent, gynecology and
urology procedures. The rates of recovery in urology procedures continue to be
impacted by the COVID-19 pandemic due to delays in both the diagnosis of and
procedures in patient populations that are considered to be at higher risk from
COVID-19 infections as well as for conditions that may progress more slowly.
U.S. Procedures. U.S. da Vinci procedures grew approximately 14% for the three
months ended March 31, 2021, compared to approximately 9% for the three months
ended March 31, 2020. The first quarter procedure results for both periods
reflect significant disruption caused by the COVID-19 pandemic, as noted in the
COVID-19 Pandemic section above. The U.S. procedure growth was largely
attributable to general surgery procedures, most notably bariatric,
cholecystectomy, and hernia procedures. Growth in the more mature gynecologic
and urologic procedure categories was more moderate. During the COVID-19
pandemic, we believe patients have delayed non-urgent procedures to a greater
extent than urgent procedures, particularly when patients are at higher risk of
COVID-19.
OUS Procedures. OUS da Vinci procedures grew approximately 23% for the three
months ended March 31, 2021, compared to approximately 12% for the three months
ended March 31, 2020. The first quarter procedure results for both periods
reflect significant procedure disruption caused by the COVID-19 pandemic, as
noted in the COVID-19 Pandemic section above. The OUS procedure growth was
driven by continued growth in urology procedures, most notably partial
nephrectomy and prostatectomy procedures, and earlier stage growth in general
surgery (particularly colorectal), gynecology, and thoracic procedures. The OUS
procedure growth rate reflects continued da Vinci adoption in European and Asian
markets. The COVID-19 outbreak in China during the first quarter of 2020,
coupled with low COVID-19 rates in 2021, resulted in China's procedure volume
significantly increasing in the first quarter of 2021 compared to the first
quarter of 2020. We also saw strong procedure growth in France and South Korea,
while the UK, India, and other regions saw significant disruption from the
COVID-19 pandemic.
System Demand
We placed 298 da Vinci Surgical Systems in the first quarter of 2021, compared
to 237 systems in the first quarter of 2020. The increase in systems placed
reflects procedure growth, more customers trading in da Vinci Si Surgical
Systems for fourth generation da Vinci systems in order to access fourth
generation instruments and capabilities as well as to standardize their system
portfolio, and further customer validation that da Vinci surgery addresses their
quadruple aim objectives.
While first quarter 2021 placements grew more than 25% compared with 2020,
future demand for da Vinci Surgical Systems will be impacted by a number of
factors: economic and geopolitical factors; the impact of the current COVID-19
pandemic, as noted in the COVID-19 Pandemic section above; hospital response to
the evolving healthcare environment; 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, the following companies: Asensus Surgical, Inc.;
avateramedical GmbH; CMR Surgical Ltd.; Johnson & Johnson (including their
wholly owned subsidiaries Auris Health, Inc. and Verb Surgical Inc.);
Medicaroid, Inc.; Medrobotics Corporation; Medtronic plc; meerecompany Inc.;
MicroPort Scientific Corporation; Olympus Corporation; Samsung Group; Shandong
Weigao Group Medical Polymer Company Ltd.; Smart Robot Technology Group Co.
Ltd.; and Titan Medical Inc.
Many of the above factors will also impact future demand for our 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.
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New Product Introductions
SynchroSeal and E-100 Generator. In November 2019, we obtained FDA clearance for
our SynchroSeal instrument and E-100 generator. Following the FDA clearance, in
February 2020, we received CE mark clearance for both products. In March 2020,
we received regulatory clearance in Japan to market both our SynchroSeal
instrument and E-100 generator. In August 2020, we received regulatory clearance
in South Korea to market our 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 da Vinci 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. We have also
received CE mark clearance for our 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 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. We have also received regulatory
clearances in South Korea and Japan to market our da Vinci Endoscope Plus in
December 2019 and May 2020, respectively. 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. In February 2020, we
received CE mark clearance for our da Vinci Handheld Camera. We broadly launched
the da Vinci Handheld Camera in our European direct markets as well as in the
U.S. in May 2020 and June 2020, respectively.
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 50 Ion systems for commercial use as of March 31,
2021.
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.
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First Quarter 2021 Operational and Financial Highlights
•Total revenue increased by 18% to $1.29 billion for the three months ended
March 31, 2021, compared to $1.10 billion for the three months ended March 31,
2020.
•Approximately 360,000 da Vinci procedures were performed during the three
months ended March 31, 2021, an increase of 16% compared to approximately
310,000 for the three months ended March 31, 2020.
•Instruments and accessories revenue increased by 14% to $706 million for the
three months ended March 31, 2021, compared to $618 million for the three months
ended March 31, 2020.
•Systems revenue increased by 30% to $369 million for the three months ended
March 31, 2021, compared to $283 million during the three months ended March 31,
2020.
•A total of 298 da Vinci Surgical Systems were shipped during the three months
ended March 31, 2021, an increase of 26% compared to 237 systems during the
three months ended March 31, 2020.
•As of March 31, 2021, we had a da Vinci Surgical System installed base of
approximately 6,142 systems, an increase of approximately 8% compared to the
installed base of approximately 5,669 systems as of March 31, 2020.
•Utilization of da Vinci systems, measured in terms of procedures per system per
year, increased 8% relative to the first quarter of 2020.
•During the three months ended March 31, 2021, we placed 14 Ion systems for
commercial use, an increase of 75% compared to 8 systems during the three months
ended March 31, 2020.
•Gross profit as a percentage of revenue was 69.9% for the three months ended
March 31, 2021, compared to 67.1% for the three months ended March 31, 2020.
•Operating income increased by 47% to $417 million for the three months ended
March 31, 2021, compared to $283 million during the three months ended March 31,
2020. Operating income included $104 million and $91 million of share-based
compensation expense related to employee stock plans and $6.9 million and $13.3
million of intangible asset-related charges for the three months ended March 31,
2021, and 2020, respectively.
•As of March 31, 2021, we had $7.23 billion in cash, cash equivalents, and
investments. Cash, cash equivalents, and investments increased by $361 million,
compared to December 31, 2020, primarily as a result of cash provided by our
operations and proceeds from stock option exercises and employee stock
purchases, partially offset by capital expenditures and taxes paid related to
net share settlements of equity awards.
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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
                                              2021                      Revenue                     2020                     Revenue
Revenue:
Product                                $       1,074.6                            83  %       $       900.8                            82  %
Service                                          217.5                            17  %               198.7                            18  %
Total revenue                                  1,292.1                           100  %             1,099.5                           100  %
Cost of revenue:
Product                                          319.3                            25  %               296.7                            27  %
Service                                           70.2                             5  %                64.6                             6  %
Total cost of revenue                            389.5                            30  %               361.3                            33  %
Product gross profit                             755.3                            58  %               604.1                            55  %
Service gross profit                             147.3                            12  %               134.1                            12  %
Gross profit                                     902.6                            70  %               738.2                            67  %
Operating expenses:
Selling, general and administrative              326.0                            25  %               308.1                            28  %
Research and development                         159.8                            12  %               147.1                            13  %
Total operating expenses                         485.8                            37  %               455.2                            41  %
Income from operations                           416.8                            33  %               283.0                            26  %
Interest and other income, net                    32.0                             2  %                25.1                             2  %
Income before taxes                              448.8                            35  %               308.1                            28  %
Income tax expense (benefit)                      13.6                             1  %                (8.1)                           (1) %
Net income                                       435.2                            34  %               316.2                            29  %
Less: net income attributable to
noncontrolling interest in joint
venture                                            8.9                             1  %                 2.7                             -  %
Net income attributable to Intuitive
Surgical, Inc.                         $         426.3                            33  %       $       313.5                            29  %



Total Revenue
Total revenue increased by 18% to $1.3 billion for the three months ended
March 31, 2021, compared to $1.1 billion for the three months ended March 31,
2020, resulting from 30% higher systems revenue, driven by 26% higher system
placements, 14% higher instruments and accessories revenue, driven by
approximately 16% higher procedure volume partially offset by the impact of
extended use instruments, and 9% higher service revenue.
Revenue denominated in foreign currencies as a percentage of total revenue was
approximately 23% and 21% for the three months ended March 31, 2021, and 2020,
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, 2021, nor for the three months ended and March 31, 2020.
Revenue generated in the U.S. accounted for 66% and 71% of total revenue for the
three months ended March 31, 2021, and the three months ended March 31, 2020,
respectively. 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.
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As the COVID-19 pandemic is expected to continue to cause a strain on hospital
resources, as outlined in the COVID-19 Pandemic section above, we cannot
reliably estimate the extent total revenue will be impacted in the second
quarter of 2021 and beyond.
The following table summarizes our revenue and system unit shipments for the
three months ended March 31, 2021, and 2020, respectively (in millions, except
percentages and unit shipments):
                                                                        

Three Months Ended March 31,

                                                                          2021                   2020

Revenue

Instruments and accessories                                        $        705.9           $     617.5
Systems                                                                     368.7                 283.3
Total product revenue                                                     1,074.6                 900.8
Services                                                                    217.5                 198.7
Total revenue                                                      $      1,292.1           $   1,099.5
United States                                                      $        847.5           $     781.6
OUS                                                                         444.6                 317.9
Total revenue                                                      $      1,292.1           $   1,099.5
% of Revenue - U.S.                                                            66   %                71  %
% of Revenue - OUS                                                             34   %                29  %

Instruments and accessories                                        $        705.9           $     617.5
Services                                                                    217.5                 198.7
Operating lease revenue                                                      59.0                  39.1
Total recurring revenue                                            $        982.4           $     855.3
% of Total revenue                                                             76   %                78  %

Da Vinci Surgical Systems Shipments by Region:
U.S. unit shipments                                                           190                   182
OUS unit shipments                                                            108                    55
Total unit shipments*                                                         298                   237

*Systems shipped under operating leases (included in total unit shipments)

                                                                    127                    77

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

                                            132                   136
Unit shipments not involving trade-ins                                        166                   101

Ion Systems Shipments                                                          14                     8



Product Revenue
Product revenue increased by 19% to $1.07 billion for the three months ended
March 31, 2021, compared to $0.90 billion for the three months ended March 31,
2020.
Instruments and accessories revenue increased by 14% to $706 million for the
three months ended March 31, 2021, compared to $618 million for the three months
ended March 31, 2020. The increase in instruments and accessories revenue was
driven primarily by procedure growth of approximately 16%, partially offset by
customer buying patterns. The first quarter 2021 U.S. procedure growth was
approximately 14%, driven by growth in general surgery procedures, most notably
bariatric, cholecystectomy, and hernia repair procedures, as well as moderate
growth in the more mature gynecologic and urologic procedures categories. The
first quarter 2021 OUS procedure growth was approximately 23%, driven by
continued growth in urology procedures, most notably partial nephrectomy and
prostatectomy procedures, and earlier stage growth in general surgery
(particularly colorectal), gynecology, and thoracic procedures. Both growth
rates were impacted by the disruption
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caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section
above. Geographically, the first quarter 2021 OUS procedure growth was driven by
procedure expansion in China, France, South Korea, Japan, and Germany, while
procedures declined in the UK.
Systems revenue increased by 30% to $369 million for the three months ended
March 31, 2021, compared to $283 million for the three months ended March 31,
2020. The higher first quarter 2021 systems revenue was primarily driven by
higher system shipments, higher operating lease revenue, higher first quarter
2021 ASPs, and higher lease buyouts, partially offset by a higher proportion of
system shipments under operating leases.
During the first quarter of 2021, a total of 298 da Vinci Surgical Systems were
shipped compared to 237 systems during the first quarter of 2020. By geography,
190 systems were shipped into the U.S., 59 into Europe, 44 into Asia, and 5 into
other markets during the first quarter of 2021, compared to 182 systems shipped
into the U.S., 25 into Europe, 27 into Asia, and 3 into other markets during the
first quarter of 2020. The increase in systems shipments was primarily driven by
procedure growth, more customers trading in da Vinci Si Surgical Systems for
fourth generation da Vinci Xi and da Vinci X systems in order to access fourth
generation instruments and capabilities as well as to standardize their system
portfolio, and further customer validation that da Vinci surgery addresses their
quadruple aim objectives.
We shipped 137 and 121 da Vinci Surgical Systems under lease arrangements, of
which 127 and 77 systems were classified as operating leases for the three
months ended March 31, 2021, and 2020, respectively. Operating lease revenue was
$59.0 million for the three months ended March 31, 2021, compared to $39.1
million for the three months ended March 31, 2020. Systems placed as operating
leases represented 43% of total shipments during the first quarter of 2021,
compared to 32% during the first quarter of 2020. A total of 1,006 da Vinci
Surgical Systems were installed at customers under operating lease or
usage-based arrangements as of March 31, 2021, compared to 721 as of March 31,
2020. Revenue from Lease Buyouts was $19.1 million for the three months ended
March 31, 2021, compared to $12.2 million for the three months ended March 31,
2020. 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
$1.65 million for the three months ended March 31, 2021, compared to
approximately $1.44 million for the three months ended March 31, 2020. 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 9% to $218 million for the three months ended
March 31, 2021, compared to $199 million for the three months ended March 31,
2020. The increase in service revenue 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, 2021, increased 25% to
$755 million, representing 70.3% of product revenue, compared to $604 million,
representing 67.1% of product revenue, for the three months ended March 31,
2020. The higher product gross profit for the three months ended March 31, 2021,
was primarily driven by higher product revenue and higher product gross profit
margin. The higher product gross profit margin for the three months ended
March 31, 2021, was primarily driven by higher system first quarter 2021 ASPs,
lower year-over-year costs associated with da Vinci Si product transitions,
lower freight costs, and lower intangible assets amortization expense.
Product gross profit for the three months ended March 31, 2021, and 2020,
included share-based compensation expense of $15.3 million and $12.8 million,
respectively, and intangible assets amortization expense of $4.2 million and
$8.8 million, respectively.
Service gross profit for the three months ended March 31, 2021, increased 10% to
$147 million, representing 67.7% of service revenue, compared to $134 million,
representing 67.5% of service revenue, for the three months ended March 31,
2020. The higher service gross profit for the three months ended March 31, 2021,
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, 2021,
was primarily driven by lower intangible assets amortization expense.
Service gross profit for the three months ended March 31, 2021, and 2020,
included share-based compensation expense of $5.7 million and $5.5 million,
respectively, and intangible assets amortization expense of $0.3 million and
$0.9 million, respectively.
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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, 2021, increased by 6% to $326 million, compared to $308 million for
the three months ended March 31, 2020. The increase in selling, general and
administrative expenses for the three months ended March 31, 2021, was primarily
driven by higher headcount, resulting in increased fixed and share-based
compensation expense, higher variable compensation, and increased infrastructure
to support our growth, partially offset by lower marketing, travel, and training
expenses.
Selling, general and administrative expenses for the three months ended
March 31, 2021, and 2020, included share-based compensation expense of $53.1
million and $45.7 million, respectively, and intangible assets amortization
expense of $1.7 million and $1.7 million, respectively.
Our spending in the first quarter of 2021 reflected a continued curtailment of
certain costs as a result of the COVID-19 pandemic, including travel, marketing
events, surgeon training, clinical trials, and other related expenses. We expect
that these costs will increase to the extent that the impact of COVID-19
decreases and decline to the extent that the impact of COVID-19 increases.
However, 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. We will manage the hiring of volume-related roles,
such as sales representatives and manufacturing employees, to meet the needs of
the business.
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, 2021,
increased by 9% to $160 million, compared to $147 million for the three months
ended March 31, 2020. The increases in research and development expenses for the
three months ended March 31, 2021, were 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, 2021, and
2020, included share-based compensation expense of $30.1 million and
$27.2 million, respectively, and intangible asset charges of $0.7 million and
$1.9 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, 2021, and
2020, was $32.0 million, and $25.1 million, respectively. The increase in
interest and other income, net, for the three months ended March 31, 2021, was
primarily driven by unrealized gains on investments resulting from strategic
arrangements, partially offset by lower interest income earned, despite higher
cash and investment balances, due to the decline in average interest rates.
During the first quarter of 2021, the Company recorded unrealized gains on
strategic investments of approximately $14 million.
Income Tax Expense (Benefit)
Income tax expense (benefit) for the three months ended March 31, 2021, was
$13.6 million, or 3.0% of income before taxes, compared to $(8.1) million, or
(2.6)% of income before taxes, for the three months ended March 31, 2020. The
higher income tax expense for the three months ended March 31, 2021, was
primarily due to higher pre-tax income.
Our effective tax rate for the three months ended March 31, 2021, and 2020,
differs from the U.S. federal statutory rate of 21% primarily due to excess tax
benefits associated with employee equity plans, the effect of income earned by
certain overseas entities being taxed at rates lower than the federal statutory
rate, and federal R&D credit benefit, partially offset by U.S. tax on foreign
earnings and state income taxes (net of federal benefit).
Our provision for income taxes for the three months ended March 31, 2021, and
2020, included excess tax benefits associated with employee equity plans of
$73.4 million and $65.4 million, which reduced our effective tax rate by 16.4
and 21.2 percentage points, respectively. The amount of excess tax benefits or
deficiencies will fluctuate from period to period based on
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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.
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 IRS 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.
Net Income Attributable to Noncontrolling Interest in Joint Venture
Net income attributable to noncontrolling interest in Joint Venture for the
three months ended March 31, 2021, and 2020, was $8.9 million and $2.7 million,
respectively. The increase in net income attributable to noncontrolling interest
in Joint Venture was primarily due to increased sales in China during the three
months ended March 31, 2021.
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 $0.36 billion to $7.23 billion as of March 31, 2021,
from $6.87 billion as of December 31, 2020, primarily from cash provided by our
operations and proceeds from stock option exercises and employee stock
purchases, partially offset by capital expenditures and taxes paid related to
net share settlements of equity awards.
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.
See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in our
Form 10-K for the fiscal year ended December 31, 2020, 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, 2021, and 2020 (in millions):
                                                                              Three Months Ended
                                                                                   March 31,
                                                                           2021                   2020
Net cash provided by (used in)
Operating activities                                                $      477.6             $     352.8
Investing activities                                                      (597.0)                 (117.1)
Financing activities                                                      (102.2)                 (178.7)

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

                                                                         0.8                    (0.8)
Net increase (decrease) in cash, cash equivalents, and restricted
cash                                                                $     (220.8)            $      56.2



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Operating Activities
For the three months ended March 31, 2021, net cash provided by operating
activities of $478 million exceeded our net income of $435 million, primarily
due to the following reasons:
1.Our net income included non-cash charges of $212 million, consisting primarily
of the following significant items: share-based compensation of $103 million;
depreciation expense and losses on the disposal of property, plant, and
equipment of $65 million; deferred income taxes of $45 million; gain on
investments, accretion, and amortization, net, of $13 million; and amortization
of intangible assets of $7 million.
2.The non-cash charges outlined above were partially offset by changes in
operating assets and liabilities that resulted in $169 million of cash used by
operating activities during the three months ended March 31, 2021. Prepaid
expenses and other assets increased by $73 million, primarily due to an increase
in prepaid taxes, driven by the timing of tax payments, and an increase in
leasing. Inventory, including the effect of systems inventory built and
transferred to property, plant, and equipment as a result of systems placed
under operating lease and usage-based arrangements, increased by $41 million,
primarily due to 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. Refer to further details in the supplemental cash flow information in
Note 4 to the Condensed Consolidated Financial Statements (Unaudited) included
in Item 1, Part I. Accrued compensation and employee benefits decreased by $40
million, primarily due to the payments of 2020 incentive compensation. Other
liabilities decreased by $31 million, primarily due to the timing of payments.
Accounts receivable increased by $14 million, primarily due to the timing of
collections. The unfavorable impact of these items on cash provided by operating
activities was partially offset by a $24 million increase in accounts payable,
primarily due to the timing of billings.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2021,
consisted primarily of purchases of investments (net of proceeds from sales and
maturities of investments) of $530 million, the acquisition of property and
equipment of $59 million, and the acquisition of a business, net of cash
acquired, of $9 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.
Financing Activities
Net cash used in financing activities during the three months ended March 31,
2021, consisted primarily of taxes paid on behalf of employees related to net
share settlements of vested employee stock purchases of $178 million and the
payment of deferred purchase consideration from prior acquisitions of $8
million, partially offset by proceeds from stock option exercises and employee
stock purchases of $84 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 $300 million in both 2021 and 2022. 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, 2020, that are of significance, or potential
significance, to the Company.
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