Intuitive Surgical, Inc.

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Intuitive Surgical, Inc.

950 Kifer Road
Sunnyvale, California 94086
U.S.A.
Telephone: (408) 523-2100
Toll Free: (888) 868-4647
Fax: (408) 523-1390
Web site: http://www.intuitivesurgical.com

Public Company
Incorporated:
1995 as Intuitive Surgical Devices, Inc.
Employees: 321
Sales: $227.3 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: ISRG
NAIC: 339113 Surgical Appliance and Supplies Manufacturing

Intuitive Surgical, Inc. is a surgical robotics company that has developed and markets the revolutionary da Vinci Surgical System, which is installed in more than 350 academic and community hospitals in the United States as well as in Saudi Arabia, Australia, and throughout Europe. The $1.5 million system has received U.S. Food and Drug Administration (FDA) approval for use in procedures such as heart valve repair, prostatectomy, and hysterectomy. Da Vinci combines elements of virtual reality and video games to create a precise robotic surgical system. The surgeon performs work at a console across the room from the patient on an operating table, over which are suspended articulated robot arms that can be fitted with microsurgical instruments (sold under the EndoWrist label), such as scalpels, scissors, and clamps. The instruments are inserted into the patient through "ports," one-centimeter incisions. One of the arms includes a stereo endoscope, which sends visual information to the console where it is rendered into three dimensions and magnified. In this way, an artery can be made to appear the size of a hose. The surgeon positions the endoscope with foot controls and performs the surgical procedure using master controls beneath the console display. The system's software then translates the surgeon's motions into real-time manipulation of the surgical instruments inside the patient. The controls also provide some resistance to improve dexterity. The minimally invasive surgery performed by da Vinci lowers the risk of infection, leads to faster patient recovery, and shortens hospital stays. Based in Sunnyvale, California, Intuitive Surgical is a public company listed on the NASDAQ.

COMPANY ORIGINS: LATE 20TH-CENTURY RESEARCH

The original research that led to the development of da Vinci was performed in the late 1980s at the Stanford Research Institute, later known as SRI International. The goal was to improve the surgical tools available in the rising field of minimally invasive surgery (MIS). The concept of MIS dated to the ancient Greeks when Hippocrates made mention of a rectal speculum. The Romans also developed ways to inspect internal organs. The principles of endoscopyusing light, mirrors, and lenses to examine internal organswere established in the 1800s. In the early 1900s the concept of laparoscopy was laid out, in which an incision was made, primarily in the navel, to allow for the inspection of abdominal and pelvic organs and the treatment of some conditions. In 1973 laparoscopy was first used on cancer patients for observation and biopsy of the liver. The introduction of video cameras in the early 1980s was a major advance in MIS, leading to surgeons using laparoscopy for the removal of gallbladders and ovarian cysts. However, the long instruments inserted in a patient were difficult to maneuver, moving in the opposite direction of the surgeon's hands, and the slightest movement was amplified on the other end. One surgeon compared the task to tying shoelaces with golf clubs.

SRI's efforts to improve microsurgery were aided in 1990 by funding from the National Institutes of Health. Researchers developed a prototype for a robotic surgical system that included major elements of da Vinci, including stereoscopic imaging, ergonomic design, and force feedback. The SRI System, as it was then known, came to the attention of the Defense Advanced Research Projects Administration (DARPA), which was no stranger to technological innovation, having played a key role in the development of the Internet (originally known as the DARPA-net). DARPA saw the SRI System as a way to perform "telesurgery" on the battlefield. The idea was that by using satellite transmission military surgeons hundreds of miles away could use a robotic surgery system to perform life-saving procedures on the wounded in remote locations and then evacuate the patients to a critical-care hospital.

In order to drum up interest in nonmilitary applications, SRI demonstrated the prototype to numerous venture capitalists and others in the early 1990s, but no one expressed serious interest until Dr. Frederick Moll in 1994. Moll received his medical degree from the University of Washington in 1981 and became fascinated by the rise of laparoscopy. He left his residency and developed the safety trocar, a tool that permitted surgeons to create a hole in the abdominal wall without risk of damaging organs. But Moll was as much an entrepreneur as a doctor, if not more so. He also held a bachelor of arts degree in economics from the University of California at Berkeley and a master of science degree in management from Stanford University. He cofounded a company called Endotherapeutics to market the trocar; the business ultimately was acquired by U.S. Surgical in 1992. Moll also cofounded Origin Medsystems, Inc. to develop laparoscopic tools, a company that would be bought by Eli Lilly for $100 million in 1992 and turned into an operating company of cardiac instruments subsidiary Guidant Corporation. Moll stayed on as chief medical officer of the unit.

According to Forbes, Moll initially did not think that the SRI System had much commercial value, just a lot of "wow factor." The more he thought about it, however, the more interested he became and he returned for a second demonstration. He knew that the telesurgery elements of the system could be applied to laparoscopic surgery. He told Technology Review in a 2000 article, "What got me excited wasn't the remote-surgery aspect, but the way the system eliminated the need for a hand to be directly connected to a surgeon's instruments. It offered new ways of solving the challenges in minimally invasive techniques." After failing to interest Guidant in licensing the technology, he approached Mayfield Fund, a venture capital firm that had backed him in the past. Mayfield then teamed up Moll with John Freund, who held both a Harvard medical degree and a Harvard M.B.A., to further examine the potential of Moll's idea. Freund was duly convinced and brought in an electrical engineer, Robert Younge, to provide the necessary technical expertise. Younge was also a Stanford graduate and in 1979 cofounded Acuson Corporation, a major ultrasound developer and manufacturer where Freund had been an executive since 1988. According to U.S. News & World Report, Younge "immediately realized that the technology existed to make a surgical robot feasible. 'It was like getting the stars in the skies to line up at the same time.'"

In 1995 Freund successfully negotiated a technology license from SRI, followed by other licenses for technology from IBM and MIT, and in November he, Moll, and Freund incorporated Intuitive Surgical Devices, Inc. Two years later the company adopted its current name. Mayfield and another venture capital firm, Sierra Ventures, supplied $5 million in seed money. Morgan Stanley Ventures joined in the next round of financing, followed by a number of private investors in subsequent rounds. All told, Intuitive raised $127 million by the end of the 1990s.

COMPANY PERSPECTIVES

Intuitive Surgical is proud to be fulfilling its mission to extend the benefits of minimally invasive surgery to the broadest possible range of patients, while providing extraordinary value for its customers, investors and employees.

PROTOTYPE READY BY 1997

Younge went to work refining the SRI System into a viable piece of medical equipment, which was tested on cadavers, and by March 1997 he had a prototype ready. It was called Mona, named after Leonardo da Vinci's painting Mona Lisa. Da Vinci also had invented the world's first robot and his name was ultimately applied to the commercial version of the system. In the meantime, Mona was taken to Belgium for tests on humans, performing such relatively simple procedures as peripheral vascular surgery. It was soon apparent that the imaging was not sufficient, which led to further investment in this area and the development of an endoscope that could provide a 3-D image. What was now known as da Vinci was again sent to Europe in 1998 for testing. In both Paris and Germany the system was used to perform abdominal surgery and several open heart operations.

While Intuitive began the process of seeking FDA approval, which would have to be done on a procedure-by-procedure basis, it began marketing da Vinci in Europe, selling ten systems there in 1999. Intuitive also began preparing to make an initial public offering (IPO) of stock. With Lehman Brothers serving as the lead underwriter, Intuitive completed its IPO in June 2000, netting the company $46 million, despite having been sued for patent infringement by a competitor, Computer Motion, Inc., just a month before the offering.

Intuitive was not the only company interested in robot surgery and was in fact a latecomer to the party. Computer Motion was founded in 1989 specifically to develop surgical robots, relying on NASA technology used to assemble equipment remotely in space. The company went public in 1997 and was the early leader in surgical robots. Its signature product was the ZEUS Robotic Surgical System, which also was approved for use in Europe and awaiting approval from the FDA. It, too, combined robotic arms (called Aesop), computer control, and a video console (called Hermes), as well as voice-recognition software to allow the surgeon to call out specific comments to the arms. A third player in the field, Integrated Surgical Systems Inc., had introduced RoboDoc to perform total hip arthroplasty and other orthopedic surgeries. It was Computer Motion that became Intuitive's chief rival, and in the early 2000s the two companies traded expensive lawsuits.

A short time after going public, Intuitive received FDA clearance to use da Vinci on gallbladder disease and gastroesophageal disease. The company's prospective cited gallbladder removals as a major use for da Vinci, but that promise did not pan out due to the far-less-expensive laparoscopic tools that were available to perform the relatively simple operation. The system was in need of an application and found it in prostate surgery, for which the FDA granted approval in June 2001. While the company enjoyed some U.S. sales in 2000, business picked up in 2001 as doctors began to realize the benefits of performing prostate surgery with da Vinci, achieving greater control and precision with less loss of blood and quicker patient recovery. The system also was being used in thoracic operations and mitral-valve heart repair.

In 2002 Moll and Younge left Intuitive to found another medical start-up, Hansen Medical, which developed a robotic system to move diagnostic catheters within a patient in order to perform procedures. Moll remained on Intuitive's board of directors until the beginning of 2003.

MERGER WITH CHIEF RIVAL IN 2003

Although da Vinci was receiving good review from doctors and a great deal of press coverage, sales were slow. The system was expensive and the microsurgery tools and microchips it employed could only be used several times before they had to be discarded. On average an operation consumed about $1,500 worth of these tools. Moreover, the litigation between Intuitive and Computer Motion was making potential customers nervous about a financial commitment to a company that might be the losing party in the patent disputes. The matter was resolved in June 2003 when Intuitive and Computer Motion agreed to merge. The merger proved to be a tremendous success on a number of levels. The Zeus system was phased out in favor of da Vinci, eliminating the difficulty customers experienced in choosing between the two, and the combined company was able to realize efficiencies of operations by now relying on a single sales force, a consolidated financial department, and other support areas. Sales picked up, aided in no small measure by the increasing number of procedures the FDA approved da Vinci to perform. While Intuitive was nearing profitability, however, the other major player in the field, Integrated Surgical Systems, was struggling to survive and in 2005 shut down.

KEY DATES

1995:
The company is founded.
1999:
Da Vinci Surgical System is introduced.
2000:
The company is taken public.
2003:
The company merges with Computer Motion, Inc.

In 2004 revenues increased 51 percent to $138.8 million and Intuitive recorded net income of $23.5 mil-lion, the company's first profitable year. Sales improved to $227.3 million in 2005 and net income soared to $94.1 million. Da Vinci was clearly establishing itself in the medical community, but it remained an expensive device and in the opinion of some was too large. Nevertheless, its potential remained enormous. In the spring of 2005 da Vinci received FDA approval to perform hysterectomies, a procedure performed five times more often than prostate surgery. Perhaps in the future da Vinci could be used to perform tele-surgery, as its original developers envisioned. Ideally, a specialist could perform several surgeries a day in scattered operating rooms far from his office, and perhaps military surgeons could indeed operate on soldiers hundreds of miles away. For the time being, however, such uses for da Vinci remained a future possibility, primarily due to the lag times caused by transmission delays over long distances, limiting the effective range to 30 miles by wireless communication and 200 miles by cable connection, as well as the unreliability of network communications. Intuitive's researchers continued to pursue the concept of telesurgery, but for the time being at least saw it as a way to speed up the training of surgeons learning to use robotic-assisted surgery by letting them work under the guidance of seasoned users. Regardless, Intuitive estimated that its market, in terms of selling da Vinci systems, consumable tools, and service contracts, could easily top $2 billion a year.

PRINCIPAL SUBSIDIARIES

Computer Motion, Inc.

PRINCIPAL COMPETITORS

Boston Scientific Corporation; Johnson & Johnson; Medtronic, Inc.

FURTHER READING

Alpert, Bill, "Cold Hands," Barron's, June 8, 1998, p. H26.

Barrett, Jennifer, "Cutting Edge," Newsweek, December 12, 2005.

Comarow, Avery, and Thomas Hayden, "Rob Younge & Frederic Moll: A Robot That Fixes Hearts," U.S. News & World Report, December 25, 2000, p. 50.

Ditlea, Steve, "Robo Surgeons," Technology Review, November 2000, p. 74.

Kichen, Steve, "Medical Renaissance," Forbes.com, July 27, 2005.

Moukheiber, Zina, "Dr. Robot," Forbes, March 6, 2000, p. 159.

Popolow, Gerry, "Robotic Systems Transform the Operating Room," Robotics World, November/December 1999, p. 32.

Salisbury, J. Kenneth, Jr., "The Heart of Microsurgery," Mechanical Engineering, December 1998, p. 46.

Wysocki, Bernard, Jr., "Robots in the OR," Wall Street Journal, February 26, 2004, p. B1.

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Intuitive Surgical, Inc.

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