Intuitive Surgical Pricing Spineometer: 3 of 5 Vertebrae

Intuitive Surgical, a medical technology firm known for the da Vinci robotic surgical system, had a positive Q3 2023. Revenue rose 12% to $1.7 billion and earnings before interest and taxes rose 17% to $466 million over the same period last year.

A review of Intuitive Surgical’s October 19^th earnings call and financial report provided insight regarding the importance of pricing on performance.

Gary Guthart, CEO of Intuitive Surgical, and Jamie Samanth, CFO of Intuitive Surgical, both expressed acute awareness of the challenges in pricing.

Gary Guthart directly addressed the importance of pricing in responding to a question regarding inflation.  He said, “Certainly, price to us, cost to us, but also price elasticity, what the customer can do and achieve, and that varies by market. And I think we’ve become increasingly sensitive to, and sophisticated at, understanding pricing. So, raw material pricing and core inflation to us is an input to our pricing, that’s why we took price up this last year. But it’s not the only thing, and you shouldn’t expect us to be purely algorithmic tracking inflation on its own.”

Jamie Samath noted the importance of a modest recent price increase on consumables.  He stated, “Da Vinci instrument and accessory revenue per procedure at approximately $1,830, compared with approximately $1,840 last quarter and $1,800 last year. On a sequential basis, lower I&A per procedure reflected the impact of customer ordering patterns, partially offset by a full-quarter impact from the I&A price increase that went into effect halfway through last quarter.”

Jamie Samath also discussed two challenges in average selling prices.  (1) Repeat customers are getting lower prices than they paid in the past. He stated, “As we expand our existing customers who are looking for third, fourth, fifth system, those tend to be slightly lower ASPs than you’ve seen previously when they were greenfield accounts.”  And (2), the da Vinci systems are leased on a usage basis, leased on a regular time basis, and sold outright as a direct capital purchase.  Jamie Samath clarified, “As leasing has grown significantly in the U.S., that, in and of itself, has an adverse effect for calculated system ASP.”

On top of these challenges, Intuitive Surgical is investing in artificial intelligence with Case Insights offering but has little to show for it.  Gary Guthart shared, “specific guidance to learning surgeons and care teams about where they might improve their technique and skills to giving suggestions to programmatics about efficiency and total cost management, to giving other insights for the company about how to improve procedures in the OR (operating room).  So, we think it’s — it’s a long-term set of investments around really the science of surgery. We remain extremely excited about it. While we do have some revenue for it, we don’t expect it to be a serious revenue driver.”

Intuitive Surgical is not alone in making these investments.  Other peer medical technology firms are exploring doing the same thing albeit with different machines and procedures.  Tech firms like Alphabet and Amazon have long expressed an interest in using AI to improve patient outcomes and lower costs.  Unfortunately, like tractor manufacturers in the farm market, there is no simple and clear route to monetize the relationships nor should investors expect a “winner take all” outcome.  Farmers in agriculture and surgeons in health care both express hesitancy in providing their data to the company that ultimately enables that company to process that data and then sell results back to them.  It is hard to get the “flywheel” moving in these markets.

Challenges pricing should be addressing at Intuitive Surgical include:

1. Price variance management within a single geographic market and transactional pricing on both capital and consumables sales.
2. New product development and pricing decisions, both early stage before deciding to invest in a new offering or feature and late stage when preparing to go to market.
3. Price variance by geographic market resulting from variances in economic value to the customer and willingness / ability to pay.
4. Price variance by customer type in the US between hospitals, integrated delivery networks (IDN), and other settings.
5. Geographic market specific macroeconomic challenges and their interactions with procedural volumes, costs, and foreign exchange rates as more systems are sold outside of the States.
6. Variance in business models between usage, leased, and capital sales and the impact of higher interest rates on financial arrangements.
7. Mix management and price captured per customer.
8. Volume-based discounts and rebates as it relates to both systems and consumables sales.
9. Sales compensation relationship to price captured and mix sold.
10. Changing business models related to software sales and artificial intelligence sales on top of other consumable and durable sales.

Industry benchmarks suggest Intuitive Surgical would benefit from having 13 to 60 professionals dedicated to pricing.  Based on the complexity of business challenges facing Intuitive Surgical, and the rapidly changing nature of its industry, we would expect to find the count at the upper end of this range.   

Research into the investment by Intuitive Surgical in pricing yielded acceptable results.  The team size was slightly lower than expected. Titles ranged from the rotational analyst, analyst, and manager to the director level.  No vice president of pricing was identified.  Responsibilities varied between operations (presumably transactional pricing), strategy (unsure of its focus), and global.

It appears that most of pricing at Intuitive Surgical is largely managed by product managers and sales managers at Intuitive with a modicum of financial oversight and occasional input from the pricing department.  If so, it implies there is an opportunity for improvement given the unique expertise and insights a pricing expert can bring to a firm.

Given the importance and capability of pricing at Intuitive Surgical as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of November 2023.

Intuitive Surgical Pricing Spineometer: 3 out of 5 Vertebrae. Intuitive Surgical has made some investments in pricing capability but has an opportunity for significant improvement.

ISRG (Intuitive Surgical, Inc.) fell slightly from 275 the day prior to their earnings call to 259 one week later. FY 2022 revenue of $6.2 billion with a 25% operating margin and P/E ratio near 63.

For FY 2022, a 1% improvement in price would yield 3.9% improvement in operating profits holding all else constant at Intuitive Surgical.