Q3 2020 Intuitive Surgical Inc Earnings Call
Currently two factors are at play at hospitals as hospitals treat both COVID-19 first. There are some deferred cases that were scheduled in the spring and summer that have now come back to the hospital for treatment second diagnostic procedures such as colonoscopies and PSA tests have been delayed and may not be back to pre COVID-19. Now the delay and diagnostic visits will delay disease detection and like prostate screening changes in 2012 create a reservoir of patience with more advanced disease this push-pull of those patients who delay to schedule surgery coming back to Hospitals now and the delay of disease identification due to diagnostic visit postponement makes Hospital patient volumes hard to model for coming quarters.
That said full diagnostic recovery is in everyone's interest and we expect surgery to return to prepay endemic levels over the mid-term will take you through procedure translator in a call.
Given the slow down and procedures due to the pandemic. We expected weaker Capital demand in the third quarter or the quarter. We installed a hundred ninety-five new systems. This compares to 275 installs in Q3, 2019 and 178 installs in Q2 20/20. Year-over-year installed base growth was 8% at the end of Q3 after accounting for trade-ins. We know the relation between system utilization in the form of procedure demand and the need for New Capital capacity at hospitals is strong many hospitals will seek to absorb existing capacity before installing new capital in regions in which DaVinci systems are more common hospitals May delay adding new systems until utilization recovers average globally. We continue to expect a challenging near to mid-term environment for Capital placements has COVID-19 wears on and Hospital finances remain strained.
because I
Bingo Cal's differently we see significant variability in procedure growth and new system placement pipeline by region. Marshall will take you through Capital placement Trends and risks later in the call.
And intuitive we're focused on those activities and priorities within our control our team in the field in our labs in our factories and working in homes and offices is performing. Well, we adapted our properties for 20 20 to meet the challenge of the pandemic and the needs of those we serve first. We are focused on the health and well-being of patients customers our employees and our communities second thoughts focused on inventory and Supply Chain management. So far product availability has been very strong. Thanks to the Relentless work of our supply chain teams and our partners.
Third we implemented our customer Financial relief program and our extended use instruments program the timeliness and the design of these programs has been well received by our customers.
Fourth we continue to invest in our high priority development programs recognizing that high-quality m is is more important in the coming years not less. So
Yes, we're accelerating activities that help us adapt to the current environment and for which demand is likely to be durable Post. Finally we have constrain spend where we believe it is inefficient in the correct.
With these priorities as our guide our operational and financial performance serve both our customers and our company well in the quarter intuitive commercial and learning teams adjusted their work methods to meet customers where they both figuratively and literally over the years our time. Our teams have built a strong network of capable field trainers sales reps surgeon Proctors and cloud-enabled DaVinci Cisco are professional education and Commercial teams engaged this network implementing on-site digital and Regional programs. Such that customer engagement and training programs are approaching endemic levels off a remarkable achievement.
Across the company our teams have prioritized their efforts and practice physical fiscal discipline based on quality and automation improvements and continued detention our manufacturing teams or managing. Our product costs. Well leaving too strong gross margin performance while we implemented our customer relief program and our extended use program for generation for instruments.
While the pandemic is created near and mid-term uncertainty in the form of competing Health Care priorities and economic stresses. I have high confidence in the need for high-quality minimally, invasive surgery and Thursdays and long-term to deal with the current and future stresses on the Healthcare System payers hospitals and surgeons are looking for solutions that improve outcomes decrease in hospital resource consumption off and lower total costs to treat in other words the core pillars of the quadruple name. We had set as our goal many years ago.
We have a team that has demonstrated fiscal discipline particularly in light of the pandemic over time. We plan to increase investment in our Innovation engines to improve the quadruple aim at our customers and to expand a good opportunity and we will continue to invest in our virtuous cycle of quality and efficiency gains in production that fuel quality improvement manufacturing cost reductions and pricing flexibility for our customers that can lead to increase volume.
Looking at product operations in the quarter are Advanced instruments and endoscopy programs are producing strong clinical and financial results customer adoption of our stapler product line our vessels healers and re 100 generator Home, encouraging utilization of these products and they're targeted clinical procedures and their reorder rates have been strong despite disruptions caused by COVID-19 20/20 uptake of newly launched products as well as our newest endoscope and just go plus there's also been strong as we've said in the past a great clinical procedure takes the customer the right system the right instruments the right Imaging the right training in the right support as our generation for ecosystem has matured customers achieve High utilization rates for our Target procedures in Ghent for accounts.
Our ion program continues to advance with eleven systems placed in the quarter many of which are in large teaching institutions ion diagnostic procedures are also returning to significant growth early clinical studies comparing iron to existing Alternatives in the market both handheld and robotic are beginning to be published and are encouraging supporting the architectural architectural decisions be made early by our design team.
While our progress in our precise trial for Ian has been slowed. We are seeing a returned two cases as our clinical trial Partners comfrey lastly our team continues to incorporate learnings from customers and improving our system for manufacturing and our supply chain as we work diligently to support high on a greater scale.
Turning to our s p system. It's clinical evidence continues to mount and advocacy for the system by surgeons who use it as increasing procedures on SP rebounded nicely in the third quarter. I'm quite encouraged by the commentary from surgeons on the performance of the system and the potential for it to impact a wider variety of procedures over time in the United States were pursuing expanded clinical indications and a number of areas with our colorectal IDE trials readying initiation our system and first clinical case sites are standing by to start the study pending feedback from FDA and borrowing additional headwinds from COVID-19. If these go to plan we expect First cases in Q4 of this year or q1 of 2021.
For cloud simulation intelligence and analytics programs are also performing. Well, we've accelerated our cloud and remote technology efforts this year with use of our remote case observations and our Network simulators Ram quickly and the quarter our Network surgical simulators were used over eighty seven thousand times roughly doubling year-over-year are Iris augmented reality program entered limited launching took last year and has recovered. Well in Q3 lastly, our customer analytics efforts have been well utilized by hospitals in twenty-twenty and are scaling nicely.
As we finalize our 20 21 planning it's worth reflecting for a moment the opportunity for improvement and acute interventions including surgery is a substantial and decades-long journey, the fourth quarter of 2020 will Mark the 25th anniversary of the founding of intuitive and the 21st year of clinical use looking bad back at what has been achieved and forwards the important work that remains to be done are committed both to our organic Innovation and to expanding the universe of bright Minds who can improve medicine with the types of Science and Technology pioneered to that end. We launched our own Adventures group a part of our future is initiatives whose mission is to accelerate opportunities at the frontiers of medicine intuitive Ventures group's first fund is a hundred million dollars in our team is engaging with entrepreneurs having funded some in the quarter.
we look forward to seeing what's
Solutions they bring to complex problems and closing our priorities for the next few quarters remain as follows first continued strong performance on customer employee and Community safety while ensuring superb changed ability. Second continued support of our customers adapted to their specific conditions will support them according to their needs third advancing. Our priority programs instruments palm trees endoscopy systems and intelligence programs and finally discipline spend management during this period of change now turn the call over to Marshall will take you through financial matters in Greater wage.
Good afternoon. I would describe the highlights of our performance on the non-gaap or pro forma basis. I will also summarize our Gap performance later in my prepared remarks a Reconciliation between a pro forma. And GAP results is posted on our website key business metrics for the third quarter where as follows third-quarter 2020 procedures increased approximately 7% compared with the third quarter of 2019 and increased approximately 36% compared with last quarter third-quarter placements have 195 systems decreased 29% compared with 275 systems last month and increase 10% compared with 178 systems last quarter. We expanded our install base of DaVinci systems over the last year by 8% to approximately 5860 Jack system this growth rate Compares with nine percent in the last quarter and 13% last year.
Utilization of clinical systems in the field measured by procedures persistent declined approximately 2% compared with last year and increased 33% compared with last quarter. Let me walk you through the impact of COVID-19 pandemic on procedures and system placements and how it impacts our business.
Overall procedures recovered gradually during the quarter to around 90% of Levels by the end of the quarter. However, the extent and pace of recover varied by market in the office reflect. We reflected several underlying themes. We experienced broader adoption across multiple procedures led by general surgery. For example, we saw significant year-over-year took a trip procedure growth.
Partially offsetting broader adoption is the impact of reduced diagnosis and treatment of conditions given patients concern over Covetous posure and regional COVID-19 office in Regional that disrupt elective procedures.
The reduction of diagnosis and treatment was the was most pronounced in prostate cancer.
Dynamics that affected the also affected our markets in summary. We saw higher procedure growth in markets recovered spread is lower like China and Japan compared with markets where COVID-19 packed is great wage like the UK in India.
Well, total worldwide procedure rates have improved. It is possible that Resurgence is of COVID-19. Like those currently being experienced in parts of Europe and the us could negatively impact DaVinci procedures in addition delays and diagnosis and treatment of underlying conditions could also negatively impact DaVinci procedures. Philip will provide additional procedure commentary later in life call.
Although Capital placements were higher in the second quarter third-quarter placements reflected headwinds. We discussed last quarter including hospitals filling existing system capacity before purchasing additional capital and delayed Capital spending while hospitals revisit their Capital budgets given the impacts of COVID-19 utilization in the third quarter was 2% lower than the third quarter of 2019 while the second quarter 2020 utilization was 27% lower than the second quarter of 2019.
Going forward we expect these same same headwinds to impact Capital placements in addition macroeconomic conditions created by could also impact Hospital spending and as we Face competition in various markets, we may experience longer selling cycles and price pressures.
Additional Revenue statistics and Trends are as follows. Total third-quarter revenue was 1078000000 representing a 4.5% decrease from last year and a 26% increase from last quarter third quarter 2020 Revenue reflects twenty-three million of service credits issued in relation to the previously announced customer relief program where we provided Home Service credits to customers as their use of DaVinci systems were lower than covet volumes.
Total Service credits issued under the customer relief program which has now ended where eighty two million.
Leasing represented 35% of current quarter placements compared with 29% last quarter second quarter placements included a higher proportion of China placements. We're leasing is prohibited.
Excluding China we saw increased demand for leasing structures in an environment of COVID-19. And as economic pressures increase we anticipate more customers will seek leasing or alternative financing Arrangements been reflected in historical run rates.
40% of systems placed in the third quarter involved trade-ins consistent with last quarter trading activity can fluctuate and be difficult to predict.
We recognize 17 million of lease buyout Revenue in the third quarter compared with nine million last quarter in twenty Million last year lease buyout revenue is very significantly quarter-to-quarter and will likely continue to do so.
Is there a accessory Revenue per procedure increased slightly to approximately $1,910 per procedure compared with one thousand nine hundred dollars per procedure in a second quarter of 2028 and decrease compared with one thousand nine hundred eighty dollars realized in the third quarter of last year.
The decrease compared to last year reflects customer buying patterns partially offset by increased Advanced instrument usage.
In the third quarter of 2020 we did not experience reduced purchases of instruments that we anticipated in in advance of the launch of extended use instruments.
In early October we launched our extended use instruments in the extended use instruments have twelve to eighteen uses compared with our previous ten use instruments. In addition. We are rejecting the price of certain instruments used commonly and lower Acuity procedures and or lower reimbursed procedures.
We plan to.
sure extended use instruments later in the fourth quarter in Europe and in 2021 and 2022 in other markets depending on regulatory requirements
overall extended use instruments and lower instrument pricing will result in lower Revenue per procedure to intuitive for example had the extended use instruments been available in the lower instrument pricing been in place for all of 2019 revenue for 2019 would have been 150 million to 170 million less than reported in in a procedure would have been 7% off the impact of these actions on future Revenue will depend on procedure volumes instrument usage and mix and whether cost elasticity will enable greater penetration into a job markets
Beginning in the fourth quarter with the introduction of extended use instruments. We expect that Ina revenue and revenue per procedure will be lower than it otherwise would have been
six of the system's placed in the third quarter. We're SP systems reflecting both are measured roll out of s p and the continued impact of COVID-19. Our install base of SP systems is now fifty a month in Korea in 50 in the US are roll out of the SP surgical system will continue to be measured putting systems in the hands of experienced DaVinci users while we pursue additional indications and off training Pathways in our supply chain is Gary outlined we expect to initiate First cases associated with colorectal clinical trial by the first quarter of 2021.
Replaced 11:00 Scion systems in the quarter bringing the install base 232 systems iron system placements. Also continue to be impacted by COVID-19. I insist in place procedures and related information is excluded from our overall systems and procedure counts.
A rule out of iron will continue to be measured while we optimize training Pathways in our supply chain procedures under the precise study are being completed at a slower Pace than anticipated due to COVID-19 based on the current pace of procedures. We expect the precise study to complete in the second quarter of 2021.
Outside the US replace 79 systems in the third quarter compared with ninety in the third quarter of 2019 in 72 systems last quarter current quarter system placements included Thursday night into Europe fifteen into Japan and 12 into China compared with thirty six in to Europe 27 into Japan intended to China in the third quarter of 2019.
During the third quarter, moh in China expanded the previous 154 system quota for the period 2016 through 2022 225 systems the time line for purchasing the 125 systems remaining under the expanded quota is the same as the original quota, which is that hospitals allocated quoted by December 31st, 2020 took two years to complete their tenders. We expect more of the remaining systems to be completed towards the end of the two year period and only approximately a dozen systems to be placed in the fourth quarter of 2020. We also anticipate other companies to achieve regulatory approval over the next year or so, if approved those competitors will share in a remaining quota.
Moving on to gross margin and operating expenses pro. Forma Marge gross margin for the third quarter of 2020 was 70.2% compared with 72% for the third quarter of 2019. It's 62.4% last quarter. The second quarter of 2020 included higher. Costs associated with abnormally low production higher impact of the customer relief program it higher excess and obsolete inventory charges the decreased relative to the third quarter of 2019 reflects higher. Costs associated with abnormally low production the customer program partially offset by product mix
Has revenues are pressured by COVID-19 production levels May operate at below normal levels, which may result in higher labor costs and under absorbed overhead in reduced product margins dead Edition product and customer mix fluctuate quarter-to-quarter and could cause fluctuation and gross margins.
Pro forma operating expenses increased 1% compared with the third quarter of 2019 and increased around 5% compared with last quarter the increase in third-quarter operating expenses compared with the third quarter of 2019 is driven by higher investments in product development activities, including informatics Advanced Imaging in our INSP platforms and investment in headcounts and capabilities and no choice markets. This was partially offset by reduced spending on activities directly impacted by COVID-19, including marketing events travel and training and reduced spending reflecting continued discipline throughout the organization.
Relative to last quarter spending reflects increase increases in training and travels increased spending on product development areas outlined in partially offset by reduced spending.
Continue to believe that we have a unique opportunity to expand the benefits of computer-aided surgery and acute interventions around the world and will continue to invest in the business for the long-term.
Are pro forma effective tax rate for the third quarter was 19.8% compared with our expectations of 20% to 21% Our actual tax rate will fluctuate with changes in geographical of income changes in taxation made by local authorities in with the impact of one-time item our third quarter 2020 pro forma. Net income was 334 million or $2.77 per share compared with 409 million or $3.43 per share for the third quarter of 2019 in 132 million or $1.11 per share for last month.
I will now summarize our Gap results capita income was $340 or $2.60 per share for the third quarter of 2020 compared with gaap. Net income of $3,000 million or $3.33 per share for the third quarter of 2019 and gaap net income of 68 million or 57 cents per share for last quarter the adjustment between pro forma and gaap net income or outline and Quantified on our website and include access tax benefits associated with employee stock awards Employee Stock based compensation and IP charges off immunization of intangibles and acquisition-related items in legal settlements.
2020 gaap net income also included pre-tax gains of sixty-two million on our investments and private entities resulting for purchases of certain Technologies. The EPS impact of these gains tax is 39 cents per share.
We ended the quarter with cash and Investments of six point four million compared with 6.1. Sorry, 6.4 billion compared with 6.1 billion at June thirtieth two thousand twenty thousand cash generated from operations in stock exercises was partially offset by investments in working capital and our infrastructure. We did not repurchase any shares in the quarter a current thoughts on Capital deployment are dead following order. We recognize the hardship that COVID-19 places on our customers and will work with customers to ease the burden of lower DaVinci utilization including providing customers with more flexible financing.
We will ensure a secure supply chain and build appropriate levels of inventory to ensure customer Supply. We will invest in securing our employees. We will continue to reinvest in the business phone not on expanding our Market opportunity or accelerating adoption of our products. We will continue to open market repurchase program consistent with our prior practice in with that box to turn it over to Philip will go over procedure performance. Thank you Marshal. Our overall third-quarter procedure growth was 7% compared to 20% growth during the third quarter of 2019 and a 19% decline wage order R23 procedure growth was driven by 7% growth in the US and 9% growth o u s u s general surgery in China were key drivers of procedure growth in Q3 in the two or three packs a growth was largely driven by strength in general surgery. Hernia, Kohli and bariatric were the largest drivers of growth within general surgery in the quarter bariatric procedures have been an increased area of focus off.
Twenty-twenty and may also have benefited from certain patients prioritizing weight loss. As obesity is a significant COVID-19 factor in China procedure growth accelerated meaningfully as new systems under the quota began to provide additional capacity for incremental growth Q3. China procedure growth was strong with broad-based growth in urology thoracic General Surgery & Gynecology.
With respect to are more mature procedure categories in the Q3 Gynecology procedure growth was up low-single digits year-over-year with hysterectomy for cancer and volumes growing mid single-digits. He would 3-9 procedures were up modestly over here in the US TV procedures in the third quarter declined High single digits in the quarter compared to a year ago. We believe a constricted diagnostic line may be impacting the VP volumes as patients maybe postponing cancer screening procedures during the pandemic on a worldwide basis CVP procedures in the third quarter declined mid-single digits compared to a year ago month. We do not have visibility as to when the diagnostic pipeline returns.
certain states that saw increased Covetous has had lower growth rates at the end of
You to procedural volumes in these states load and gradually recovered later in third-quarter. We would caution investors that our visibility of coconut brakes is limited and that procedure volumes May fluctuate when certain geography home taking care of its third-quarter procedure volume grew 9% compared to 23% growth for the third quarter of 2019 third-quarter growth was driven by continued growth in Europe the Rasik General Surgery & Gynecology in Japan procedure growth moderated versus Q2 due to a Slowdown in D. DP overall European procedures grew modestly in Q3 as countries would covet and 2/3 Germany France and Italy contributed to year-over-year growth while the UK declined. However, we would caution that as Covetous occur in different countries procedures can be impacted at Birth
It is important to note that we do not have guidance in Q3 Trends may not be indicative of future results due to potential kovats has patience willingness to have procedures done in a constricted diagnostic pipeline. Now turning to the clinical side of our business each quarter on these calls, we highlight certain recently published studies that we deem to be notable. However to gain a more complete understanding of the body of evidence. We encourage office holders thoroughly review the extensive detail of scientific studies that have been published over the years earlier this year in article led by dr. Melissa lapinska from the University of Tennessee Knoxville in the journal a surgical endoscopy provided results from one of the largest smashed case series analysis for non complex ventral hernia repair based on real-world evidence, utilizing the abdominal core Health Quality collab of the study compared 1230 subjects undergoing either robotic-assisted or laparoscopic non-complex ventral hernia repair in a propensity score matched analysis with 650 home.
Texting each cohort the robotic-assisted approach had a shorter mean like the stay by two days a lower rate of conversion by over 1% a lower rate of clinically encounters through 30 Days by 6% and a lower rate of surgical site occurrences or infections requiring treatment by 2.4% in article with doctors Ravi rajaraman, David Rice and Eduardo Pereira from the University of Texas MD Anderson Cancer Center in the fiber optic and cardiovascular surgery provided results from a real world evidence analysis using the premier Hospital database for the back to me. This study included patients who underwent an elective lobectomy for primary lung cancer between January 1st, 2013 and September 13th, 2015 with the objective to compare post-operative inpatient opioid Administration after robotic-assisted lobectomy compared to open and video assisted thoughts topic surgery approaches.
You know propensity score matched analysis with over 2000 subjects in each cohort robotic-assisted lobectomy patients used it lower total opioid dose and lower average daily dose assess through the median wage being the equivalent daily dosage compared to patients undergoing either an open or Vats approach from post-operative day 1 until discharge in both comparisons over the same. Open the back to me and vast page one more likely to be administered opioids compared to those undergoing robotic-assisted procedure, 7.6% fewer robotic-assisted patience, when compared to open and 2.6% fewer robotic-assisted patience, when compared to that song the authors concluded in this study of patients with lung cancer undergoing lipectomy use of a robotics assisted approach was associated with less opioid Administration in the inflation post-operative. Compared with either best or the back to me that includes our prepared remarks. We will now open the call to your questions.
Thank you.
If you'd like to ask a question today, you may press one and then zero using your telephone keypad. We do recommend picking up your handset if using the speaker phone, once you've placed, press the 105. Mm, and you should hear an acknowledgement tone. Let me just one moment for our first question.
Our first question today comes from Tycho Peterson with JPMorgan, please go ahead.
Hey, good afternoon. I'll start with the procedures here. You know, you were growing 8% exiting June and obviously there's a lot of give and takes on the second wave and some of the diagnostic headwinds as you flag. But can you maybe just talk already during the quarter? You know, how is uh, you know, July August and September and any color on the first half of October. And when do you think the diagnostic headwinds could could reverse how do you think that potentially could could play off?
Or partial one that you jump in and speak a little bit to the lady already question and we'll talk a little bit. I'll pick up the diagnostic pipelines then sure consistent with their last call at the beginning of the quarter wage depressed relative to let's say middle of June. It's slowly gradually came back during the quarter there's choppiness, of course because it varied region-by-region off but slowly came back in the quarter and probably reached its peak near the end of the third quarter.
On the on the diagnostic side. I think there's a broad recognition by health care providers that it's not in anybody's interest for these pipelines to remain called. I think there were efforts to drive them that said in terms of how fast they refill and patient Comfort to come in and get these things done. I think all of us are going to have to wait and see. So, we'll keep watching and tracking it Channel checks show that that people are working on it how fast it converges. I don't I don't think anybody has a great predictor.
And then Gary on the some of the developments from last quarter of the extended use instruments and and the price of adjustment any anecdotal color. You can provide on on you know, your customer conversations on how they're thinking about incremental usage and then you kind of mention the regulatory hurdle for the extended use instrumentation. That's pretty straightforward. But can you just comment on that as well?
Sure on the on the customer feedback side. We've seen positive response. There are different market segments both in terms of the types of procedures that people are interested in using our our device for DaVinci 4 and also different regions and those reimbursement Dynamics and payment Dynamics differ in places where that issue has been greater stress. We've seen really positive engagement in response. We will see as as it plays out in time. I think COVID-19 days off extended use will be a confounding factor that there early drivers may be as simple as how folks are are treating non-coding complications concurrently what we think as it lays out in time. This is going to be really healthy for us and was not not a hard.
analysis
To do to understand the potential value of it in terms of regulatory Pathways. We don't see real hurdles on the regulatory side. I think there's work to be done in terms of validations in otherwise, I think that's all off so I don't see stresses around regulatory clearances as it relates to Extended use instruments.
Okay, and this last one outside you mentioned in your comments, you know with regards to the quota that you may see approval from competitive systems next year. Can you just talk on the competitive environment there? Are you seeing more more platforms of you know for several folks there there are.
Handful of commercial groups in China that are working on systems of one variety or another whether they seek to compete with a multi-port DaVinci type system or a single port system or am I on type system we see interest in all those things ultimately, they'll make it through the regulatory process and get into the market. We see great demand in China and the month the increase in the quota I think is a reflection of customer interest working its way through the national processes to to get additional approval. So we feel like we're in a strong position competitively. We think that there's a real Market there that's really gated and limited by the quota system and and we expect others will enter the mom could seeing the the value it has and we've oriented our our teams to make sure we're meeting customer needs better than others do wage.
Okay. Thank you.
Next we have a question from David Lewis with Morgan Stanley line is open.
Good afternoon. Just a few here for me Gary. So it's pretty clear procedure Trends normalized across the quarter and you've seen that and change a solid as well. You know, you talked about these various choices exhausting backlog Hospital capacity improving diagnosis, you know, is it reasonable to expect you know slow and steady Improvement going forward but at a more modest rate that's sort of the message we got from from Jeff. I'm just wondering if you could comment on that so we get Improvement, but that Improvement is going to be more measured going forward.
I hesitate to characterize it just because I don't know what the future holds for Co. Brakes and stream. What I can say is that life is are are handling the the concurrent needs that they have a little bit better. I think they have protocols that they feel good about. I think they have access to resources and things like that early on they didn't that that gives us some comfort that barring a massive influx that they can manage both sides need what that plays out like in the future. So I pass the is better. It's also clear that that they want to do minimally invasive surgery and high-quality minimally invasive surgery and they have faith in using our products gives me Comfort. What what the weather does what the pandemic does I think is harder for intuitive to have direct Club.
Okay, but it sounds like on an an apples-to-apples based.
All things being normal the the system continues to improve obviously, you're not in control of a doggedness factors. I think that's fair. Okay, very fair just an extended use two questions for me Marshall. I thought I heard I apologize if I misheard the customers did not change buying patterns in the third quarter. I'm sort of curious. Why do you think that was and are you more confident? Obviously that will change in the fourth quarter. And then Gary if I said you extended use is going to do one or two things. It's going to bring more general surgeons and more types of procedures into the mix or it's going to stimulate a significant amount of sort of Gen 4 platform demand. What do you think is the bigger the bigger trigger bigger Factor here near term
So we announced you know in July the the program for the very intent that maybe hospitals might want to take advantage of of managing their inventory levels them. What they do. I I I can't answer the question as to as to why they're buying patterns were what they were I think that as far as going forward, there will be a hard cut over you're not going to see hospitals by a a combination of the two and we're not offering a combination of who basically cutting it over to to the extended use instruments. So that will like I said my script that'll have an impact on on Q4, but I think it'll be positive from a hospital economics perspective, which is the whole intent of the program, right?
Turning to the the issue of what do we think? It's going to catalyze first. We think that
surgeons have an interest in using our products broadly. And in fact in procedures that have been traditionally done laparoscopically early days of the company. It was predominantly black institutions of open surgery. It was a way to allow minimally invasive surgery. We're open surgery was the norm and Mis by Manuel means was really difficult and yet in in general surgery. We're seeing a draw a poll by our customer base to do with DaVinci procedures that are often done with laparoscopy. And there's a reason for that wage system is orgonomic Lee sound it allows more complex cases to be done comfortably and repeatedly and and so we see real demand there and as a result we feel like as we've gotten scale as our instrument quality and processes have improved over the years that we've made design changes. We can make it easier for those who want to use it more broadly.
To do so economically. So we think it's going to stimulate over the long term more Demand on that side and better way to say it. Perhaps is it's going to reduce barriers. I think customers want to go there and took us as barriers to them getting there with regard to upgrades. I think there are a whole host of good reasons to to move for a customer to move into a generation for our system XII or X if they're in a Gentry or Gentoo system and ask for an SI and extended use instruments or just one of the of the wage is there so I think it helps that problem but I I think that if I had to wait it to the former is a strong pole and and this is going to do Thursday Next Gen Imaging next-gen Advanced instruments next-gen stapling vessels feeling those things are great reasons to to upgrade from an SI into a gym.
Okay. Thanks so much.
Our next question will come from the line of Larry biegelsen with Wells Fargo, please go ahead.
Good afternoon. Thanks for taking the question guys, you know similar question on the recovery, but on the system side Gary, how do you see that playing out over the next few Quarters off a anecdotes? You can share, you know about conversations with with hospitals, you know, utilization was was down less this quarter than it was last quarter and had one follow-up.
I've been relatively pleased with the nature of conversations with hospitals around systems and how they view their robotic programs. I I think they're being highly rational. I think they've you a high-quality invasive surgery is important going forward. They have a lot more data at their fingertips took a lot of it supplied by us to understand and measure the performance of their programs and and they can look out and say okay as they if they get more comfortable with recovery this help them and largely speaking. Yes, they view it as a help. So I think that's good having said that I think they're trying to plan what their Finance is going to look like in 20 21 off. Some of them have reasonable visibility others have low visibility. And and so I think they may pace and we're seeing that pacing I am not discouraged over the long-term. I I look out. I think that dead
Combination of analytical prowess and recognizing the value of lower variability high quality interventions is is quite strong. So often hard to predict in the near-term we expect pressure as Marshall said I think Marshalls write on it having said that in the long-term as procedures come back Capital would be important and we keep innovating on our products suck at that catalyzes upgrade Cycles paying in Gary intuitive has historically been almost exclusively in an organic grower, you know investing in early early in IP and developing projects around that rather than buying companies with commercial products or were folding in distribution the expect that to change over the next few years. And is that partly why you were announced intuitive Ventures? Thanks for taking the questions.
Yeah, I think we have an interest in in Pride in our organic Innovation capabilities and I expect that to be remain a pillar in in part of our DNA as as we've grown. And as I think the market is started to really appreciate here. I mean the medical Market really appreciate what robotic-assisted surgery and computer-aided surgery can do. I think that a lot of new avenues open and that provides opportunity for us we have been off we're we're not not invented here culture. We we are open minded to the very by people outside. We do a lot of activities walk-ins overtime. Those make it bigger in time. We may continue to do it in general. I I prefer to to bring things in earlier rather than later on the authors.
and if something's interesting, we're
We are open minded to it the Venture fund and our futures initiatives. I think are really recognizing as a interesting ecosystem out there developing. There's a lot of Technology lines that can make a big difference in medicine and we'd like to facilitate that growth.
Thank you.
Next we have a question from Ahmad azzam with Goldman Sachs, please. Go ahead.
Oh, thanks. Hey, good afternoon. Everyone wanted to kind of try the angle of talking about new technology and pipeline. Maybe try again kind of from an R&D perspective. I think that's where you've been down most comfortable answering it in the past. So I asked it in that context. Obviously R&D spending is kind of growing right through these last couple of quarters despite the the pressures. Can you just talk to the biggest buck of R&D spend and and your focus or most focus on these days and how you allocate those those buckets with in R&D spend all all all all starred in the last morsel to do a little bit more of the comparator, you know for us we we kind of think about it in three categories. One of them is what kinds of things we can invest in that makes a substance of change in outcomes. Not not a 3% change but a bigger one and those things get our attention in and drive.
Set up Investments. That's one. We look out at new ways to get in to the body with less damage to healthy tissue and and less variability long. As you know, we we look a lot in ways we can bring more information to the surgeon and to make that information more understandable whether it's Advanced Imaging or higher quality Imaging or machine learning all those things are ways to help the decision-making and and share the load with surgeons. In fact, we're making substantial progress in that domain and we've been talking for several quarters now, perhaps several years about a catalyzing a a virtuous cycle of long driving volume driving quality decreasing the cost to make our products and sharing those savings with our customers which allows them to take our products into places. They've like to go home.
See that happen as well. So those are categorically where we are thinking Marshall. I'll let you take the the kind of rough mix question sure from a from a year-over-year perspective. As I said my script the biggest area of investment really is digital capabilities AI machine learning and informatics. Um, then after that would be Advanced Imaging and hostilities there and you've seen this introduce new scope Technologies, but also making investments in other other ways to image image the anatomy and then uh, the other two areas I call out would be I on an s p of course as we bring those products to Market.
So maybe just they're related.
Follow up on on Iris just given you mentioned. I think that it recovered well in the quarter, um, would love to a better understanding of where you're deploying it and you know implementation. I mean obviously some very big players in in the space that you have to contend with practically speaking and and and work with and partner with it how you're seeing that develop now and and what we should be thinking about the next year or two for that evolution.
It just it kind of anchor everybody on what iris is this is augmented reality program that takes preoperative 3D models MRI and CT scans things like that that are typically all done in the in the workflow of a workup for a patient and making it really easy for the surgeon to have access to that data real-time first before the case to help them visualise the case and planning a second to have it in in real time in the console. So it's kind of a really simple idea and as you say and rightly say doing it well executing it. Well as the hard part we have some really good natural collaboration Partners in the space to do that with you. Think about we we don't go out and acquire those images ourselves. They're required on other people's devices off of those companies are incented and and open-minded about how to help those things progress and we've had good relationships with them. We have done some really cool proprietary thing dead.
Have a brilliant team of scientists and computer scientists who have thought hard about how to make that augmented reality work really well and it's easy to to do a quick prototype. It's hard to do it, you know in such a way that it's additive to the procedure and doesn't get in the way of the surgeon that's a lot of what has been going on in our has since then and then if you think about what we're can that take you inside the body, it's really neat. You you think about you're interested in what the vasculature is up to your interested in what solid organs are doing you're interested in where two more boundaries are Thursday and surgeons getting access to that. I thinking through what approach might be getting getting advice from the Computing system is how that might work and Consulting with patients about it. Those things are really good facilitated discussions. I think we are
Quite strong relative to what I see out in the market from others and the where people are kind of in the universities. So our our team is is really really good God how that grows over time. What parts of the body we we approach next? We have a roadmap. We're working through it. We think that surgeons and hospitals will evaluate of developing the evidence in our wrists one point of this first launched to really build the value and and sole that roadmap so far. We have really passionate Advocates both inside and outside the company so so far so good.
He's very much. Thanks a lot.
Thank you. Our next question comes from Larry cash with Raymond James, please. Go ahead great. Thanks. Good afternoon. Everyone. Just you mentioned some of this in the prepare, but just sort of curious sort of how you're thinking about as you look across your procedures. Where do we stand with backlog and those that have actually been completed and and Thursday at this point. Are we are we starting to work through that backlog and really into new cases or just just some trying to get some sense of how you think of that backlog that's working its way through Thursday. I think we're we're coming at it from three different ways and we have no great insight to share with you. I wish I had better Insight. I don't know that if somebody gave you a great in fact that I would believe it having said that with that is a lovely set up Philips anything you would like to add please jump in.
Oh, no, I mean it's clear in our prepared comments. We we talked about how there are patients that are being deferred and you know that are different treatment right now and and that's clearly a detriment to the patient wage. And and so we we do see we have worked through some of the backlog of alluded to in the script but they're still our patients that are that are clearly different treatment and supposed to be worked on.
We we're we're in close contact with our customers to the extent that that we can help them.
Provide Assurance to patients to to make sure that they stay attending to their health care if we can partner with others to make that easier we do and we've had some of those opportunities what largely I think this is the main owners of this process are the health providers themselves and we stand in support of them. What makes it so hard to model. Is that a number of regional hospital no country if it's a single pattern and so you're you're integrating across a wide spot. Okay, great. And then just a second question is, you know, again, you talked a lot about sort of the benefits of the extended use of the instruments and the lower pricing of the less complex instruments and certainly all that makes sense. I think one part of the equation that people are looking to get some color on is you know, so how do you look at that price elasticity? And what does that do potentially to The Tam
Presumably, you know in part the analysis was done to to kind of figure out what the right price for the instruments are. So just wondering if there's anything incremental to add on how you are thinking about the Tam expansion with with sort of a changes that you've made to the the pricing.
Yeah, perfectly fair question. I clearly we think that that there's greater demand at different price points given both the types of procedures that people want to them and give them the Region's what that Tim looks like over what period of time I don't think we're ready to update with you on this call. We do think over time and money move into next year will have a greater visibility in terms of what's actually happening versus what our models are and we'll start to share with you a little bit more of what our models look like. Okay terrific. Thank you.
so Operator just
One more caller, please. Thank you. That question will come from Bob Hopkins with Bank of America your line is open.
Oh great and good afternoon. And thanks for taking the question. I'll just ask one given the lateness of the hour. I thought I heard you comment that you expect procedures to return to normal time in the mid-term. And first did I hear you correctly and and I'm just curious how you kind of Define midterm and then lastly and maybe most importantly I'm just curious what what gives you that confidence, you know, cuz there are some people that are beginning to think that maybe some of these Covetous issues could have sort of a lasting impact on procedures in terms of you know, patients or Logistics within hospitals. I'm curious if you get out of the color to your midterm comment.
Yeah fair. I have an anchored it on a particular time Verizon. I think frankly. It's exactly as you've you've really outlined in your question. It's implied in your question is dead.
I think as as Covetous either Tamp down or concurrently managed. Well, it's in the healthcare system and patience interest to make sure that people aren't sitting with undiagnosed conditions or suffering with diagnose conditions that are being untreated. I think Health Systems globally help policymakers and leaders of these institutions are trying to make sure they serve their constituencies as well. And to me the definition of midterm is is when they come over the hump of being able to manage that set of backlogs in the flow of patients that may mean managing it within a COVID-19 or it may be that that impression start to 5. And they have more room so you can imagine it plays out in a couple of different ways. So long is Hospital systems are fully in reactive mode with regard to Cove it. I think we're in the near
Terms, so I Define midterm as when folks are not in pure reaction that when they can manage things concurrently and we see that executing well in some countries where this month it's not growing out of out of sight and they can manage that pretty well and we're that happens. We see a return to to managing the surgical patients pretty well. So it's one that starts happening more and more countries. How long does that take? I don't really know and what exactly the Catalyst are. Well it depends on COVID-19 policy. Very helpful. I'll leave it at that. Thank you. Okay. Thanks Bob. Well, that was our last question and closing we continue to believe there is a substantial endurable opportunity to fundamentally improve surgery and acute interventions our teams continue to work closely with hospitals Physicians and Care teens and pursuit of what our customers have termed the quadruple aim.
That are more predictable patient outcomes better experiences for patients that are experiences for their care teams and ultimately a lower total cost of care. We believe value creation and surgery and Acute Care Foundation a human it flows from respect for and understanding of patience and Care teams their needs and their environment. Thank you for your support on this extraordinary Journey. We look forward to talking with you again in three months. This concludes today's call.
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