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OFFON

INTUITIVE SURGICAL, INC.

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

07/21/2021 | 05:16pm EDT
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 June 30,
2021, and results of operations for the three and six months ended June 30,
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 still in a measured launch of our da Vinci SP Surgical System, and we have
an installed base of 79 da Vinci SP Surgical Systems as of June 30, 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 70 Ion systems for
commercial use as of June 30, 2021. Ion systems are not included in our da Vinci
Surgical System installed base. We currently have 1 Ion system placed with a
hospital 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 second quarter of 2020, procedures per week in the U.S. continued to
decline in April, reaching approximately 30% of pre-COVID-19 levels, followed by
steady recovery in May and June, as COVID-19 cases dropped and elective
procedures were permitted. However, with the resurgence of COVID-19 cases in the
last two weeks of June, we experienced a corresponding decline in da Vinci
procedures. The impact of COVID-19 in Europe during the second quarter of 2020
varied by country with procedures in Italy, France, and the UK declining more
steeply, while Germany experienced a year-over-year increase in procedures. In
China, procedures per week continued to increase to a level consistent with the
early January 2020 weekly procedure rate. We experienced little impact on the
procedure volume in Korea and Japan in the second 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.
In the second quarter of 2021, as the U.S continued its broad rollout of
vaccinations, COVID-19 cases and hospitalizations decreased, and procedure
volumes recovered, partially attributed to the performance of a number of
procedures that were deferred during the pandemic. In Europe, the rollout of
vaccinations and spread of COVID-19 varied regionally, and procedure growth
rates were mixed with notable recovery in the U.K. We continue to see the
impacts of regional resurgences of COVID-19 cases within the Asia Pacific
markets with growth in India, Taiwan, and Japan lagging behind that of other
markets. China growth continued to be strong year over year, primarily
reflecting the growth in the system installed base.
The depth and extent to which the COVID-19 pandemic will impact individual
markets will vary based on the availability of vaccinations, 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.
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System Demand
In the first and second quarters 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 and second quarters 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 and
second quarters 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
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 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.
As COVID-19 vaccination rates increase and cases decline, we have enhanced our
focus on evaluating and implementing our return-to-office strategy. We intend to
remain flexible, allowing many of our employees to work remotely on at least a
partial basis, while maintaining productivity and our culture. Our top priority
in this process continues to be the health and safety of our employees.
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 and
six months ended June 30, 2021, Ion's contribution to revenue and gross margin
was not significant.
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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 and have launched in most other countries around
the world in the first half of 2021, except China due to regulatory timelines.
They will continue to be introduced at various times throughout the remainder of
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. In the U.S. and Europe, during the first
half 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 cutover 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 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.
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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 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. 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 or, in the
case of usage-based arrangements, 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 years ended December 31, 2020, 2019, and 2018, respectively. As revenue from
operating lease 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.
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 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
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
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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 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 late 2020 and early 2021, we obtained FDA clearance, CE mark clearance, and
regulatory clearances in most of our significant markets to market our Extended
Use Instruments.
•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 70 Ion systems for commercial use as of June 30, 2021.
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•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 June 30, 2021, we have sold 142 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.
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.
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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 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.
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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.
Recent Business Events and Trends
Procedures
Overall. Total da Vinci procedures performed by our customers grew approximately
68% for the three months ended June 30, 2021, as compared with the same period
in the prior year. Total da Vinci procedures declined approximately 19% for the
three months ended June 30, 2020, as compared to the same period in 2019. Total
da Vinci procedures performed by our customers grew approximately 39% for the
six months ended June 30, 2021, as compared with the same period in the prior
year. Total da Vinci procedures declined approximately 5% for the six months
ended June 30, 2020. The second quarter and year-to-date procedure results for
both periods reflect impacts from 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 second quarter of 2021, most notably in
general surgery procedures (particularly bariatrics, hernia repair, 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 77% for the three
months ended June 30, 2021, as compared with the same period in the prior year.
U.S. da Vinci procedures declined approximately 24% for the three months ended
June 30, 2020. U.S. da Vinci procedures grew approximately 41% for the six
months ended June 30, 2021, as compared with the same period in the prior year.
U.S. da Vinci procedures declined approximately 8% for the six months ended
June 30, 2020. As noted in the COVID-19 Pandemic section above, the U.S.
procedure results for the three and six months ended June 30, 2020, reflected
significant disruption caused by the COVID-19 pandemic. During the three and six
months ended June 30, 2021, as COVID-19 infection and hospitalization rates
declined, da Vinci procedure volumes recovered, as a number of procedures
deferred during the pandemic were performed, particularly in the second quarter.
By procedure category, U.S. procedure growth was largely attributable to general
surgery procedures, most notably bariatric, hernia repair, and cholecystectomy
procedures. Additionally, we saw growth in the more mature gynecologic and
urologic procedure categories, albeit at lower rates than the growth in general
surgery procedures.
OUS Procedures. OUS da Vinci procedures grew approximately 51% for the three
months ended June 30, 2021, as compared with the same period in the prior year.
OUS da Vinci procedures declined approximately 7% for the three months ended
June 30, 2020. OUS da Vinci procedures grew approximately 36% for the six months
ended June 30, 2021, compared to approximately 2% for the six months ended
June 30, 2020. As noted in the COVID-19 Pandemic section above, the OUS
procedure results for the three and six months ended June 30, 2020, reflected
significant disruption caused by the COVID-19 pandemic. Similar to U.S.
procedures above, during the three and six months ended June 30, 2021, OUS da
Vinci procedure volumes experienced recovery, as a number of procedures deferred
during the pandemic were performed, particularly in the second quarter. By
procedure category, OUS procedure growth was driven by earlier stage growth in
general surgery (particularly colorectal), gynecology, and thoracic procedures
as well as continued growth in urology procedures, most notably partial
nephrectomy and prostatectomy procedures. The OUS procedure growth rate also
reflects continued da Vinci adoption in European and Asian markets. In China,
the COVID-19 outbreak 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 six months of 2021 compared to the first six months of
2020. We also saw strong procedure growth in the UK and France, while India,
Taiwan, Japan, and other regions saw disruption from the COVID-19 pandemic.
System Demand
We placed 328 da Vinci Surgical Systems in the second quarter of 2021, compared
to 178 systems in the second quarter of 2020. The increase in systems placed
reflects the significant disruption experienced as a result of the COVID-19
pandemic in the second quarter of 2020, as well as 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 second quarter 2021 placements grew 84% 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;
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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.
A few of these companies include, but are not limited to, Asensus Surgical,
Inc.; avateramedical GmbH; CMR Surgical Ltd.; Johnson & Johnson (including their
wholly owned subsidiaries Auris Health, Inc. and Verb Surgical Inc.); Medicaroid
Corporation; 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.
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 70 Ion systems for commercial use as of June 30,
2021.
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Iris. In February 2019, we obtained FDA clearance for our Iris augmented reality
product. Iris is a service that delivers a 3D image of the patient anatomy
(initially targeting kidneys) to aid surgeons in both the pre- and
intra-operative settings. We are now in the early stages of an Iris pilot study
in the field at a small group of U.S. hospitals to gain initial product
experience and insights.
Second Quarter 2021 Operational and Financial Highlights
•Total revenue increased by 72% to $1.46 billion for the three months ended
June 30, 2021, compared to $0.85 billion for the three months ended June 30,
2020. The compound annual growth rate between the second quarter of 2019 and the
second quarter of 2021 was 15%.
•Approximately 408,000 da Vinci procedures were performed during the three
months ended June 30, 2021, an increase of 68% compared to approximately 242,000
for the three months ended June 30, 2020. The compound annual growth rate
between the second quarter of 2019 and the second quarter of 2021 was 16.5%.
•Instruments and accessories revenue increased by 73% to $796 million for the
three months ended June 30, 2021, compared to $461 million for the three months
ended June 30, 2020.
•Systems revenue increased by 68% to $440 million for the three months ended
June 30, 2021, compared to $261 million during the three months ended June 30,
2020.
•A total of 328 da Vinci Surgical Systems were shipped during the three months
ended June 30, 2021, an increase of 84% compared to 178 systems during the three
months ended June 30, 2020.
•As of June 30, 2021, we had a da Vinci Surgical System installed base of
approximately 6,335 systems, an increase of approximately 10% compared to the
installed base of approximately 5,764 systems as of June 30, 2020.
•Utilization of da Vinci systems, measured in terms of procedures per system per
year, increased 55% relative to the second quarter of 2020. The compound annual
growth rate between the second quarter of 2019 and the second quarter of 2021
was 6%.
•During the three months ended June 30, 2021, we placed 20 Ion systems for
commercial use, compared to 3 systems during the three months ended June 30,
2020.
•Gross profit as a percentage of revenue was 69.9% for the three months ended
June 30, 2021, compared to 59.0% for the three months ended June 30, 2020.
•Operating income increased by 534% to $511 million for the three months ended
June 30, 2021, compared to $81 million during the three months ended June 30,
2020. Operating income included charges for share-based compensation of $110
million and $96 million related to employee stock plans and $10.9 million and
$14.6 million of intangible asset-related charges for the three months ended
June 30, 2021, and 2020, respectively.
•As of June 30, 2021, we had $7.73 billion in cash, cash equivalents, and
investments. Cash, cash equivalents, and investments increased by $866 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 June 30,                                                                 Six Months Ended June 30,
                                                                 % of total                               % of total                                        % of total                                 % of total
                                            2021                   revenue               2020               revenue                   2021                    revenue                2020                revenue
Revenue:
Product                               $      1,236.0                      84  %       $ 721.8                      85  %       $    2,310.6                          84  %       $ 1,622.6                      83  %
Service                                        228.0                      16  %         130.3                      15  %              445.5                          16  %           329.0                      17  %
Total revenue                                1,464.0                     100  %         852.1                     100  %            2,756.1                         100  %         1,951.6                     100  %
Cost of revenue:
Product                                        374.0                      25  %         283.8                      33  %              693.3                          25  %           580.5                      30  %
Service                                         66.3                       5  %          65.4                       8  %              136.5                           5  %           130.0                       7  %
Total cost of revenue                          440.3                      30  %         349.2                      41  %              829.8                          30  %           710.5                      37  %
Product gross profit                           862.0                      59  %         438.0                      52  %            1,617.3                          59  %         1,042.1                      53  %
Service gross profit                           161.7                      11  %          64.9                       7  %              309.0                          11  %           199.0                      10  %
Gross profit                                 1,023.7                      70  %         502.9                      59  %            1,926.3                          70  %         1,241.1                      63  %
Operating expenses:
Selling, general and administrative            350.2                      24  %         279.1                      33  %              676.2                          24  %           587.2                      30  %
Research and development                       162.3                      11  %         143.2                      17  %              322.1                          12  %           290.3                      15  %
Total operating expenses                       512.5                      35  %         422.3                      50  %              998.3                          36  %           877.5                      45  %
Income from operations                         511.2                      35  %          80.6                       9  %              928.0                          34  %           363.6                      18  %
Interest and other income, net                  15.0                       1  %          26.6                       3  %               47.0                           1  %            51.7                       3  %
Income before taxes                            526.2                      36  %         107.2                      12  %              975.0                          35  %           415.3                      21  %
Income tax expense (benefit)                     3.2                       -  %          37.0                       4  %               16.8                           -  %            28.9                       1  %
Net income                                     523.0                      36  %          70.2                       8  %              958.2                          35  %           386.4                      20  %
Less: net income attributable to
noncontrolling interest in joint
venture                                          5.8                       1  %           2.2                       -  %               14.7                           1  %             4.9                       -  %
Net income attributable to Intuitive
Surgical, Inc.                        $        517.2                      35  %       $  68.0                       8  %       $      943.5                          34  %       $   381.5                      20  %



Total Revenue
Total revenue increased by 72% to $1.5 billion for the three months ended
June 30, 2021, compared to $0.9 billion for the three months ended June 30,
2020, resulting from 68% higher systems revenue, driven by 84% higher system
placements, 73% higher instruments and accessories revenue, driven by
approximately 68% higher procedure volume, and 75% higher service revenue. Total
revenue increased by 41% to $2.8 billion for the six months ended June 30, 2021,
compared to $2.0 billion for the six months ended June 30, 2020, resulting from
49% higher systems revenue, driven by 51% higher system placements, 39% higher
instruments and accessories revenue, driven by approximately 39% higher
procedure volume, and 35% higher service revenue. In conjunction with our 2020
COVID-19 Customer Relief Program implemented in the second quarter of 2020,
service revenue was reduced by $59 million for the three and six months ended
June 30, 2020 for service fee credits provided to customers.
Revenue denominated in foreign currencies as a percentage of total revenue was
approximately 21% and 22% for the three and six months ended June 30, 2021,
respectively, and 26% and 23% for the three and six months ended 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 and six months
ended June 30, 2021, nor for the three and six months ended and June 30, 2020.
Revenue generated in the U.S. accounted for 69% and 67% of total revenue for the
three and six months ended June 30, 2021, and 63% and 67% for the three and six
months ended June 30, 2020, respectively. We believe that U.S. revenue has
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accounted for the large majority of total revenue due to U.S. patients' ability
to choose their provider and method of treatment, reimbursement structures
supportive of innovation and MIS, and our initial investments focused on U.S.
infrastructure. We have been investing in our business in the OUS markets, and
our OUS procedures have grown faster in proportion to U.S. procedures. We expect
that our OUS procedures and revenue will make up a greater portion of our
business in the long term.
As the COVID-19 pandemic is expected to continue 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 third quarter
of 2021 and beyond.
The following table summarizes our revenue and system unit shipments for the
three and six months ended June 30, 2021, and 2020, respectively (in millions,
except percentages and unit shipments):
                                                 Three Months Ended June 30,                    Six Months Ended June 30,
                                                   2021                  2020                  2021                     2020
Revenue
Instruments and accessories                 $        796.4           $    460.8          $    1,502.3               $ 1,078.3
Systems                                              439.6                261.0                 808.3                   544.3
Total product revenue                              1,236.0                721.8               2,310.6                 1,622.6
Services                                             228.0                130.3                 445.5                   329.0
Total revenue                               $      1,464.0           $    852.1          $    2,756.1               $ 1,951.6
United States                               $      1,005.8           $    535.4          $    1,853.3               $ 1,317.0
OUS                                                  458.2                316.7                 902.8                   634.6
Total revenue                               $      1,464.0           $    852.1          $    2,756.1               $ 1,951.6
% of Revenue - U.S.                                     69   %               63  %                 67   %                  67  %
% of Revenue - OUS                                      31   %               37  %                 33   %                  33  %

Instruments and accessories                 $        796.4           $    460.8          $    1,502.3               $ 1,078.3
Services                                             228.0                130.3                 445.5                   329.0
Operating lease revenue                               67.3                 42.3                 126.3                    81.5
Total recurring revenue                     $      1,091.7           $    633.4          $    2,074.1               $ 1,488.8
% of Total revenue                                      75   %               74  %                 75   %                  76  %

Da Vinci Surgical Systems Shipments by
Region:
U.S. unit shipments                                    213                  106                   403                     288
OUS unit shipments                                     115                   72                   223                     127
Total unit shipments*                                  328                  178                   626                     415
*Systems shipped under operating leases
(included in total unit shipments)                     108                   52                   235                     129

Da Vinci Surgical Systems Shipments
involving System Trade-ins:
Unit shipments involving trade-ins                     125                   72                   257                     208
Unit shipments not involving trade-ins                 203                  106                   369                     207

Ion Systems Shipments                                   20                    3                    34                      11



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Product Revenue
Three Months Ended June 30, 2021
Product revenue increased by 71% to $1.24 billion for the three months ended
June 30, 2021, compared to $0.72 billion for the three months ended June 30,
2020.
Instruments and accessories revenue increased by 73% to $796 million for the
three months ended June 30, 2021, compared to $461 million for the three months
ended June 30, 2020. The increase in instruments and accessories revenue was
driven primarily by procedure growth of approximately 68% as well as higher
sales of our advanced technology instruments, including our stapling and energy
instruments. The second quarter 2021 U.S. procedure growth was approximately
77%, driven by growth in general surgery procedures, most notably bariatric,
hernia repair, and cholecystectomy procedures, as well as moderate growth in the
more mature gynecologic and urologic procedures categories. The second quarter
2021 OUS procedure growth was approximately 51%, driven by earlier stage growth
in general surgery (particularly colorectal), gynecology, and thoracic
procedures and continued growth in urology procedures, most notably partial
nephrectomy and prostatectomy procedures. Both growth rates were positively
impacted by the disruption caused by the COVID-19 pandemic in 2020, as noted in
the COVID-19 Pandemic section above. Geographically, the second quarter 2021 OUS
procedure growth was driven by procedure expansion in China, the UK, and France,
while procedures declined in Taiwan.
Systems revenue increased by 68% to $440 million for the three months ended
June 30, 2021, compared to $261 million for the three months ended June 30,
2020. The higher second quarter 2021 systems revenue was primarily driven by
higher system shipments, higher operating lease revenue, and higher lease
buyouts, partially offset by lower second quarter 2021 ASPs and a higher
proportion of system shipments under operating leases.
During the second quarter of 2021, a total of 328 da Vinci Surgical Systems were
shipped compared to 178 systems during the second quarter of 2020. By geography,
213 systems were shipped into the U.S., 63 into Europe, 41 into Asia, and 11
into other markets during the second quarter of 2021, compared to 106 systems
shipped into the U.S., 18 into Europe, 48 into Asia, and 6 into other markets
during the second quarter of 2020. The increase in systems shipments was
primarily driven by decisions in the second quarter of 2020 by customers to
defer purchases or leases of systems into future quarters as a result of the
COVID-19 pandemic, as well as 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 168 and 61 da Vinci Surgical Systems under lease arrangements, of
which 108 and 52 systems were classified as operating leases for the three
months ended June 30, 2021, and 2020, respectively. Operating lease revenue was
$67.3 million for the three months ended June 30, 2021, compared to $42.3
million for the three months ended June 30, 2020. Systems placed as operating
leases represented 33% of total shipments during the second quarter of 2021,
compared to 29% during the second quarter of 2020. A total of 1,073 da Vinci
Surgical Systems were installed at customers under operating lease or
usage-based arrangements as of June 30, 2021, compared to 758 as of June 30,
2020. Revenue from Lease Buyouts was $26.1 million for the three months ended
June 30, 2021, compared to $9.4 million for the three months ended June 30,
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
$1.55 million for the three months ended June 30, 2021, compared to
approximately $1.65 million for the three months ended June 30, 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.
Six Months Ended June 30, 2021
Product revenue increased by 42% to $2.3 billion for the six months ended
June 30, 2021, compared to $1.6 billion for the six months ended June 30, 2020.
Instruments and accessories revenue increased by 39% to $1.50 billion for the
six months ended June 30, 2021, compared to $1.08 billion for the six months
ended June 30, 2020. The increase in instruments and accessories revenue was
driven primarily by procedure growth of approximately 39%. The year-to-date 2021
U.S. procedure growth was approximately 41%, driven by growth in general surgery
procedures, most notably bariatric, hernia repair, and cholecystectomy,
procedures, as well as moderate growth in the more mature gynecologic and
urologic procedures categories. The year-to-date 2021 OUS procedure growth was
approximately 36%, driven by earlier stage growth in general surgery
(particularly colorectal), gynecology, and thoracic procedures and continued
growth in urology procedures, most notably partial nephrectomy and prostatectomy
procedures. Both growth rates were positively impacted by the disruption caused
by the COVID-19 pandemic in 2020, as noted in the COVID-19 Pandemic section
above. Geographically, the year-to-date 2021 OUS procedure growth was driven by
procedure expansion in China, the UK, France, and South Korea.
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Systems revenue increased by 49% to $808 million for the six months ended
June 30, 2021, compared to $544 million for the six months ended June 30, 2020.
The higher year-to-date 2021 systems revenue was primarily driven by higher
system shipments, higher operating lease revenue, higher year-to-date 2021 ASPs,
and higher lease buyouts, partially offset by a higher proportion of system
shipments under operating leases.
During the six months ended June 30, 2021, a total of 626 da Vinci Surgical
Systems were shipped compared to 415 systems during the six months ended
June 30, 2020. By geography, 403 systems were shipped into the U.S., 122 into
Europe, 85 into Asia, and 16 into other markets during the six months ended
June 30, 2021, compared to 288 systems shipped into the U.S., 43 into Europe, 75
into Asia, and 9 into other markets during the six months ended June 30, 2020.
The increase in systems shipments was primarily driven by decisions in the
second quarter of 2020 by customers to defer purchases or leases of systems into
future quarters as a result of the COVID-19 pandemic, as well as 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 305 and 182 da Vinci Surgical Systems under lease arrangements, of
which 235 and 129 systems were classified as operating leases for the six months
ended June 30, 2021, and 2020, respectively. Operating lease revenue was $126.3
million for the six months ended June 30, 2021, compared to $81.5 million for
the six months ended June 30, 2020. Systems placed as operating leases
represented 38% of total shipments during the six months ended June 30, 2021,
compared to 31% during the six months ended June 30, 2020. Revenue from Lease
Buyouts was $45.2 million for the six months ended June 30, 2021, compared to
$21.6 million for the six months ended June 30, 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
$1.59 million for the six months ended June 30, 2021, compared to approximately
$1.53 million for the six months ended June 30, 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 75% to $228 million for the three months ended
June 30, 2021, compared to $130 million for the three months ended June 30,
2020. The increase in service revenue was primarily driven by the effects of the
Customer Relief Program in the prior year, which resulted in a $59 million
decrease in service revenue in the three months ended June 30, 2020, as well as
a larger installed base of da Vinci Surgical Systems producing service revenue.
Service revenue increased by 35% to $446 million for the six months ended
June 30, 2021, compared to $329 million for the six months ended June 30, 2020.
The increase in service revenue was primarily driven by the effects of the
Customer Relief Program in the prior year as well as a larger installed base of
da Vinci Surgical Systems producing service revenue.
Gross Profit
Product gross profit for the three months ended June 30, 2021, increased 97% to
$862 million, representing 69.7% of product revenue, compared to $438 million,
representing 60.7% of product revenue, for the three months ended June 30, 2020.
The higher product gross profit for the three months ended June 30, 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
June 30, 2021, was primarily driven by lower year-over-year excess and obsolete
inventory costs and lower freight costs, partially offset by lower second
quarter 2021 ASPs. Additionally, we incurred period costs associated with
abnormally low production in the second quarter of 2020, which did not recur in
the second quarter of 2021 as a result of increased production volumes.
Product gross profit for the six months ended June 30, 2021, increased 55% to
$1.6 billion, representing 70.0% of product revenue, compared to $1.0 billion,
representing 64.2% of product revenue, for the six months ended June 30, 2020.
The higher product gross profit for the six months ended June 30, 2021, was
primarily driven by higher product revenue and higher product gross profit
margin. The higher product gross profit margin for the six months ended June 30,
2021, was primarily driven by higher year-to-date 2021 ASPs, lower
year-over-year excess and obsolete inventory costs, lower year-over-year costs
associated with da Vinci Si product transitions, and lower freight costs. In
addition, we incurred period costs in the second quarter of 2020 associated with
abnormally low production.
Product gross profit for the three and six months ended June 30, 2021, included
share-based compensation expense of $16.6 million and $31.9 million,
respectively, compared with $14.2 million and $27.0 million, for the three and
six months ended June 30, 2020, respectively. Product gross profit for the three
and six months ended June 30, 2021, included intangible assets amortization
expense of $4.7 million and $8.9 million, respectively, compared with $8.9
million and $17.7 million, for the three and six months ended June 30, 2020,
respectively.
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Service gross profit for the three months ended June 30, 2021, increased 149% to
$162 million, representing 70.9% of service revenue, compared to $65 million,
representing 49.8% of service revenue, for the three months ended June 30, 2020.
The higher service gross profit for the three months ended June 30, 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 lower
service gross profit margin for the three months ended June 30, 2020, was
primarily driven by the decrease in service revenue as a result of the Customer
Relief Program.
Service gross profit for the six months ended June 30, 2021, increased 55% to
$309 million, representing 69.4% of service revenue, compared to $199 million,
representing 60.5% of service revenue, for the six months ended June 30, 2020.
The higher service gross profit for the six months ended June 30, 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 lower
service gross profit margin for the six months ended June 30, 2020, was
primarily driven by the decrease in service revenue as a result of the Customer
Relief Program.
Service gross profit for the three and six months ended June 30, 2021, included
share-based compensation expense of $5.2 million and $10.9 million,
respectively, compared with $5.2 million and $10.7 million, for the three and
six months ended June 30, 2020, respectively. Service gross profit for the three
and six months ended June 30, 2021, included intangible asset charges of $0.3
million and $1.7 million, respectively, compared with $0.9 million and $1.8
million, for the three and six months ended June 30, 2020, respectively.
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 June 30,
2021, increased by 25% to $350 million, compared to $279 million for the three
months ended June 30, 2020. Selling, general and administrative expenses for the
six months ended June 30, 2021, increased by 15% to $676 million, compared to
$587 million for the six months ended June 30, 2020. The increase in selling,
general and administrative expenses for the three and six months ended June 30,
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. In addition, there were higher marketing,
travel, and training expenses for the three months ended June 30, 2021, as
compared with the prior year.
Selling, general and administrative expenses for the three and six months ended
June 30, 2021, included share-based compensation expense of $55.7 million and
$108.8 million, respectively, compared with $49.6 million and $95.3 million, for
the three and six months ended June 30, 2020, respectively. Selling, general and
administrative expenses for the three and six months ended June 30, 2021,
included intangible assets amortization expense of $1.9 million and $3.6
million, respectively, compared with $1.7 million and $3.4 million, for the
three and six months ended June 30, 2020, respectively.
Selling, general and administrative expenses for the three and six months ended
June 30, 2021, as a percentage of revenue, were 24% and 25%, compared to 33% and
30% for the three and six months ended June 30, 2020, and 25% and 27% for the
three and six months ended June 30, 2019. Our spending in the second quarter of
2021 reflected a continued but less pronounced curtailment of certain costs as a
result of the COVID-19 pandemic, including travel, marketing events, clinical
trials, and other related expenses. We expect that these costs will continue to
increase to the extent that the impact of COVID-19 decreases and decline to the
extent that the impact of COVID-19 increases. In addition, we expect spending to
increase overall and as a percentage of sales as we 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.
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 June 30, 2021,
increased by 13% to $162 million, compared to $143 million for the three months
ended June 30, 2020. Research and development expenses for the six months ended
June 30, 2021, increased by 11% to $322 million, compared to $290 million for
the six months ended June 30, 2020. The increases in research and development
expenses for the three and six months ended June 30, 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.
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Research and development expenses for the three and six months ended June 30,
2021, included share-based compensation expense of $32.6 million and $62.7
million, respectively, compared with $27.4 million and $54.6 million for the
three and six months ended June 30, 2020, respectively. Research and development
expenses for the three and six months ended June 30, 2021, included intangible
asset charges of $4.0 million and $4.7 million, respectively, compared with $3.1
million and $5.0 million for the three and six months ended June 30, 2020,
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 and six months ended June 30,
2021, was $15.0 million, and $47.0 million, respectively, compared with
$26.6 million, and $51.7 million, for the three and six months ended June 30,
2020, respectively. The decrease in interest and other income, net, for the
three and six months ended June 30, 2021, was primarily driven by lower interest
income earned, despite higher cash and investment balances, due to the decline
in average interest rates, and gains on the sale of certain securities in the
second quarter of 2020, partially offset by unrealized gains on investments
resulting from strategic arrangements recognized in the first quarter of 2021.
In addition, we realized higher foreign exchange losses in the second quarter of
2020. During the first quarter of 2021, the Company recorded unrealized gains on
investments resulting from strategic arrangements of approximately $14 million.
Income Tax Expense
Income tax expense for the three months ended June 30, 2021, was $3.2 million,
or 0.6% of income before taxes, compared to $37.0 million, or 34.5% of income
before taxes, for the three months ended June 30, 2020. Income tax expense for
the six months ended June 30, 2021, was $16.8 million, or 1.7% of income before
taxes, compared to $28.9 million, or 7.0% of income before taxes, for the six
months ended June 30, 2020.
Our effective tax rate for the three and six months ended June 30, 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 effective tax rate for the three and six months ended June 30, 2021,
included a one-time benefit of $66.4 million from re-measurement of our Swiss
deferred tax assets resulting from the extension of the economic useful life of
certain intangible assets. Our effective tax rate for the three and six months
ended June 30, 2020, reflected a one-time increase of $36.8 million in
unrecognized tax benefits with a corresponding increase to income tax expense.
This increase was related to intercompany charges for share-based compensation
for relevant periods prior to 2020, triggered by the finalization of a Ninth
Circuit Court of Appeals opinion involving an independent third party.
Our provision for income taxes for the three and six months ended June 30, 2021,
included excess tax benefits associated with employee equity plans of
$43.6 million and $117.0 million, which reduced our effective tax rate by 8.3
and 12.0 percentage points, respectively. Our provision for income taxes for the
three and six months ended June 30, 2020, included excess tax benefits
associated with employee equity plans of $31.6 million and $97.0 million, which
reduced our effective tax rate by 29.4 and 23.3 percentage points, respectively.
The amount of excess tax benefits or deficiencies will fluctuate from period to
period based on the price of our stock, the volume of share-based instruments
settled or vested, and the value assigned to employee equity awards under U.S.
GAAP, which results in increased income tax expense volatility.
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.
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Net Income Attributable to Noncontrolling Interest in Joint Venture
Net income attributable to noncontrolling interest in Joint Venture for the
three and six months ended June 30, 2021, was $5.8 million and $14.7 million,
respectively. Net income attributable to noncontrolling interest in Joint
Venture for the three and six months ended June 30, 2020, was $2.2 million and
$4.9 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 and six months ended June 30, 2021, as well as
re-measurement losses related to contingent consideration during the three and
six months ended June 30, 2020.
Liquidity and Capital Resources
Sources and Uses of Cash
Our principal source of liquidity is cash provided by operations and by the
issuance of common stock through the exercise of stock options and our employee
stock purchase program. Cash and cash equivalents plus short- and long-term
investments increased by $0.86 billion to $7.73 billion as of June 30, 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 six months ended June 30,
2021, and 2020 (in millions):
                                                                             Six Months Ended
                                                                                  June 30,
                                                                         2021                  2020
Net cash provided by (used in)
Operating activities                                                $    1,020.3          $     582.7
Investing activities                                                      (981.7)               419.6
Financing activities                                                       (43.9)              (131.1)

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

                                                                        (2.6)                (1.6)
Net increase (decrease) in cash, cash equivalents, and restricted
cash                                                                $       (7.9)         $     869.6



Operating Activities
For the six months ended June 30, 2021, net cash provided by operating
activities of $1,020 million exceeded our net income of $958 million, primarily
due to the following reasons:
1.Our net income included non-cash charges of $340 million, consisting primarily
of the following significant items: share-based compensation of $211 million;
depreciation expense and losses on the disposal of property, plant, and
equipment of $133 million; changes in deferred income taxes of $(24) million;
amortization of intangible assets of $15 million; and gains on investments,
accretion, and amortization, net, of $4 million.
2.The non-cash charges outlined above were partially offset by changes in
operating assets and liabilities that resulted in $278 million of cash used by
operating activities during the six months ended June 30, 2021. Prepaid expenses
and other assets increased by $177 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 $92 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.
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Accounts receivable increased by $60 million, primarily due to the timing of
collections. Other liabilities decreased by $17 million, primarily due to the
timing of payments. The unfavorable impact of these items on cash provided by
operating activities was partially offset by a $38 million increase in accounts
payable, primarily due to the timing of billings, a $19 million increase in
accrued compensation and employee benefits, primarily due to higher headcount
and variable compensation, and an $11 million increase in deferred revenue,
primarily due to the increased volume of sales contracts.
Investing Activities
Net cash used in investing activities for the six months ended June 30, 2021,
consisted primarily of purchases of investments (net of proceeds from sales and
maturities of investments) of $839 million, the acquisition of property and
equipment of $134 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 six months ended June 30, 2021,
consisted primarily of taxes paid on behalf of employees related to net share
settlements of vested employee stock purchases of $188 million and the payment
of deferred purchase consideration from prior acquisitions of $10 million,
partially offset by proceeds from stock option exercises and employee stock
purchases of $154 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.
                                       41

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