Ladies and gentlemen, thank you for standing by, and welcome to the Intuitive Surgical Q2 2012 earnings release call. At this time, all phone participants are in a listen only mode. Later, there will be an opportunity for your questions Instructions will be given at that pad. And as a reminder, this call is being recorded. I'd now like to turn the conference over to Kelvin Darling, Senior Director, Investor Relations for Surgical.
Please go ahead.
Thank you, and good afternoon. Welcome to Intuitive Surgical Second Quarter Conference Call. With me today, we have Gary Guthart, our President and CEO Marshall Moore, our Chief Financial Officer and Alex Soukich, our Vice President of Strategic Planning. Before we begin, I would expressed or implied as a result of certain risks and uncertainties. Exchange Commission filings.
Prospective investors are cautioned not to place undue reliance on such forward looking statements. Please note that this conference call will be available for audio replay on our website at intuitivesurgical.com on the audio archive section under our Investor Relations page. In addition, today's press release has been posted to our website. Today's format will consist of providing with highlights of our second quarter's results as described in our press release announced earlier today, followed by a question and answer session. Gary will present the quarter's business and operational highlights.
Marshall will provide a review of our 2nd quarter financial results, Alex will discuss marketing and clinical highlights, then I will provide an update to our financial forecast for 2012. And finally, we will host a question and answer session. With that, I will turn it over to Gary.
Thank you for joining us today. In the second quarter, our team has delivered a solid performance, driven by robust growth in both our S. Gynecology business and our emerging general surgery business. As a reminder, for 2012, intuitive is focused on the following: 1st, continuing our growth in gynecology and urology worldwide through outstanding execution in the field second, disciplined execution of our single site and vessel link launches focused on outstanding early customer experiences 3rd, building robust clinical programs with leading customers in emerging seizures in general surgery, thoracic surgery and trans oral surgery. And finally, strengthening our capabilities in international markets, particularly Europe, Japan, and Korea.
In the second quarter, we continued to experience strong growth in gynecology and general surgery. Growth in gynecology came from a broad base of procedures, including benign and cancer hysterectomies, cyclical pepsi, myomectomy and endometriosis resection. Growth in general surgery was also multifaceted, including growth in colon and rectal surgery, as well as cold cystectomy. The latter following the introduction of single site earlier in the year. This strength was tempered somewhat by weakness in Europe and has declined in our US Dementia Processech needs.
In total, procedures for the second quarter of 2012 grew by approximately 26% over the second quarter of 2011. Alex will provide additional procedure commentary later in the call. Globally, our business in Asia has continued to build as a result of fine execution by our team. Japan system sales and procedure performance have responded well to MHLW's reimbursement of DaVinci prostatectomy at the start of the second quarter, and we continue to invest in building our capabilities in Japan. Conditions in Europe are challenging with both broad austerity issues as well specific structural issues impacting our business.
In response to these conditions, we have brought in an experienced executive from our key accounts group the United States to lead our European commercial organization. We also continue to invest in our international regulatory and reimbursement teams. Given the depth of environmental issues in Europe, we expect challenging conditions to persist into the second half of the year. Turning to operating highlights for quarter of 2011. We sold 150 Dementia Surgical Systems, up from 129 during the second quarter of last year.
Total revenue was $537,000,000, up 26% over last year. Instrument and accessory revenue increased to $224,000,000, up 30% over Q2 11. Total recurring revenue grew to $307,000,000, up 28% from prior year and comprising 57% of total revenue. Net income was $155,000,000, up 32 percent over last year. We generated an operating profit of 259 dollars before noncash stock option expense, up 27% from the second quarter of last year.
We generated $223,000,000 in gross cash flow from operations and ended the quarter with $2,631,000,000 in cash and investments. Turning to recently launched products and those in development, the second quarter, we focused on launches me in the U. S. In response to growing early customer demand. Certain and patient response to single site has been positive with over 200 of our U.
S. Hospital customers having our instrument offering in single surgeons while firming up our manufacturing and supply chain. Clocal response to the vessel sealer has been encouraging, with positive commentary on precision, articulation, vessel ceiling quality, and thermal spread. We expect applications for the da Vinci vessel the optimization. As we enter new surgical markets and drive into new product arenas, we continue to invest in building our team and expanding partnerships and in acquiring that can make a difference to robotic surgery.
This quarter, we added 82 people to our team predominantly in sales, manufacturing and R and D bringing our total team to 2100 employees. I'll now pass the time over to Marshall, our Chief Financial Officer. Thank you, Gary. Our 2nd quarter revenue was $537,000,000, up 26% compared with $426,000,000 for the second quarter of 2011. And dollars compared with $495,000,000 reported for the first quarter of 2012.
2nd quarter revenues by product category were as follows. 2nd quarter revenue was $224,000,000, up 30% compared with $172,000,000 for the second quarter of 20 1, up 8% compared with $208,000,000 in the first quarter of 2012. The increase is an instrument and accessories were driven by procedure Instrument and accessory revenue realized per procedure, including initial stocking orders, was approximately $20.15 per procedure, which is higher than the $1940 realized in the second quarter of 2011 and the $19.85 realized in the first quarter of 20 12. The increase in I and A per procedure was driven primarily by new product sales in advance of their use in cases. 2nd quarter 2012 systems revenue of $229,000,000 increased 23% compared with 100 $7,000,000 for the second quarter of 2011, an increased 11% compared with $207,000,000 for the first quarter of 2012.
We sold 150 systems in the second quarter of 2012 compared with 129 systems in the second quarter of 2011 and 140 systems in the first quarter of 2012. Our second quarter average sales price per system was $1,000,000 $1,530,000, an increase from the $1,440,000 realized in the second quarter of 2011 and 1.4 $7,000,000 realized in the first quarter. ASPs include all da Vinci models, all simulators, and Fireflies when configured with the system. And exclude upgrades. The increase in ASPs compared with the first quarter of 2012 was driven by favorable channel, product and trade in mix.
From a channel standpoint, we sold proportionally less systems to distributors, which are which are sold at lower prices than prices charged for direct customers. There were 14 systems sold to distributors in the 2nd quarter compared with 26 the first quarter. On the product side, we sold 121 simulators, mostly in conjunction with new system sales compared with 108 or 102 last quarter. We also sold 28 dual console systems compared to 25 in first quarter. 35 of our second quarter 2012 systems involved trade ins comprised of 23 da Vinci assets and 12 standard models, while 46 of our first quarter 2012 system sales, involved trade ins comprised of 27 da Vinci assets in 9 standard models.
ASPs will fluctuate quarter to quarter based on product, customer and trade in mix as well as foreign exchange rates on direct sales to foreign customers. We would expect systems ASPs to decline in future quarters, driven by a return to a more historic rates. Service revenue increased to $83,000,000, up 23% compared with $68,000,000 last year and 3% compared with $81,000,000 last quarter. The growth in service revenue was primarily driven by a larger system in Saltbase. Total 2nd quarter recurring revenue comprised of instrument, accessory and service revenue in increased to $307,000,000, up 28% compared with the second quarter of 2011 and up 6% compared with first quarter of 2012.
Recurring revenue represented 57% of total 2nd quarter revenue compared with 56% in the 2nd quarter last year and 58% last quarter. International results were as follows 2nd quarter revenue outside the U. S. Was 101,000,000 up 16% compared with revenue of $87,000,000 in the second quarter of 2011 and down 3% compared with revenue of 105,000,000 in the first quarter of 2012. 3% sequentially, reflecting procedure growth rate.
Procedures outside of the U. S. Grew 20 1% on a year to year DVP growth in Europe. The decline in procedures compared with the first quarter reflects the macroeconomic environment in Europe, coupled with a few with fewer operating days due to holidays. DVPs in Japan grew at a high rate, albeit of small base as national reimbursement was approved at the beginning of the quarter.
Quarter of 2011 to 35 last quarter. We sold 13 systems in Europe this quarter with 6 in quarter of last year. The decline in European system sales reflects the difficult macroeconomic environment. Alex will provide additional details of international system sales. Roughly equal to the second quarter of 2011 in the first quarter of 2012.
Our gross margin has remained unchanged as the positive in of our higher second quarter system ASPs were offset by lower margins earned on new products and higher inventory reserves. Margins on newly launch products will typically be lower than nodes for our mature products, reflecting vendor pricing on low volumes, temporary tooling costs, and other startup costs. Over time, as volumes increase, we refined the manufacturing processes and products we should see improvement in the margins of these newer products. 2nd quarter2012 operating expenses of $61,100,000 were up 16% compared with the second quarter of 20 11 and down 1% compared with the first quarter of 2012. We changed our stock option granting pattern this year so that employees are granted options at both February 15th August 15th compared with only at February 15 annually, the amount of expense taken in the 1st quarter 2nd quarter was approximately $3,000,000 $5,000,000 lower and the amount of expense in the 3rd quarter will be approximately 8 including 38 employees in our commercial operations and 39 employees in product operations.
2nd quarter operating income was $225,000,000 or 42 percent of sales compared with $168,000,000 or 39 percent of sales for the second quarter of 20.11 $193,000,000 or 39 percent of sales for the first quarter of 2012. 2nd quarter 2012 operating income reflected $33,000,000 of non cash stock compensation expense compared with $35,000,000 for the second quarter of 20 $1,000,000 last quarter. Percent for the second quarter of 2011 27 percent last quarter. Our 32% second quarter rate higher than our previous guidance of 31%, primarily due to a higher proportion of pretax income coming from our U. S.
Business. Our net income was $155,000,000 or $3.75 per share compared with $117,000,000 or $2.91 per share for second quarter of $211,144,000,000 or $3.50 per share for the first quarter of 2012. Let me quick summarize our results for the 1st 6 months of 2012. Proceeds grew by 27%. Total revenue for the 1st 6 months 2012 was $1,032,000,000, up 27% compared with $814,000,000 last year.
The revenue increase included recurring revenue months of 2012 was $419,000,000, up 32% compared with $316,000,000 last year. Operating income included $68,000,000 of stock based compensation charges in the 1st 6 months of 2012 compared with $67,000,000 in 20.11. Net income for the 1st 6 months of 2012 or $7.26 per share compared with $222,000,000 or $5.51 per for the 1st 6 months of 2012 was $383,000,000 compared with $306,000,000 last year. Now moving to the balance sheet. We ended the 2nd quarter with cash and investments of $2,600,000,000, up $260,000,000 compared with March 31, 20 12.
The increase was driven by $217,000,000 of cash in stock options, partially offset by $15,000,000 in stock buybacks and $14,000,000 of capital and IP purchases. We had 553,000,000 board authorized buybacks remaining. Our accounts receivable balance increased to 323,000,000 at March 31st, primarily reflecting our dollars at June 30th is equal to the March 31st balance. And with that, I'd like to turn it over to Alex to go over
our sales, marketing and clinical Thank you, Marshall. During the second quarter, we sold 150 da Vinci systems, 124 in the United States, 13 into Europe and 13 into rest of world markets. As part of the 150 system sales, 12 standard da Vinci systems and 23 da Vinci We had a net 115 system additions to the installed base during the quarter, which brings to 23 and 41, the cumulative number of da Vinci systems worldwide, 1707 in the U S, 389 in Europe, 245 in Rest of World Markets. 79 of the 150 systems installed during the quarter represented repeat system sales to existing customers. In total, 142 of the 150 systems sold represented da Vinci Si Systems, which included 28 dual console systems.
The 26 system sales internationally included 7 into Japan, 4 into France and 3 into the U. K. Clinically, we had a solid quarter achieving year over year procedure growth of approx 26%. Gynecology, general surgery, along with the emerging categories of thoracic and head nexor III accounted for a large part of this growth. Da Vinci hysterectomy, cholecystectomy, colon and rectal resections, lopectomy, endometriosis resections, myomectomy and partial nephrectomy exhibited strong quarter over quarter growth, which was partially offset by DBP softness in the United States.
The recent pressure from non surgical disease management, namely active surveillance, as well as an apparent decline in PSA screening, has caused some pullback in to site. Early customer feedback has been positive and our initial sales U. S. Customers, while demand for training remains strong. We initiated our phased rollout of the vessel sealer product in February and its use within the segments of general colorectal and GYN surgery has begun.
The product is performing well the feature set, specifically the articulated risk design, appears to be satisfying a strong market need. Operationally, we continue to make progress toward optimizing the manufacturing process, while reducing product costs. Regarding system attachments, namely the VINCI simulator and da Vinci Firefly. Both attachment rates remained high in the second quarter. Strong market acceptance for these products has helped buoy our da Vinci system ASP to an all time high.
During the quarter, over 350 robotic abstracts and papers representing a variety of surgical specialties were published within various peer reviewed journals graduate robotic courses and podium presentations and clinical poster has lagged behind the United States for both malignant and benign conditions, not surprising. We believe that DVH for the treat of malignant conditions will likely pace the international GYN business and a recent addition of the International Journal of Gynecologic Cancer Doctor. Mach and Yang from of their open hysterectomy Open Surgery is the standard of care for endometrial cancer staging in Singapore as it is in many other countries. This study compared the results of open hysterectomy to DVH 124 consecutive endometrial cancer patients. The patients in each cohort were of similar age BMI and pre existing health condition.
The authors reported that their that their operating time was longer during their initial 20 DDA procedures, but had dropped significantly thereafter and was subsequently on par with the comparator. Limp note harvests were also slightly lower within the initial 20 cases, but were similar thereafter. However, DVH was associated with 56% less blood loss than open surgery, had a lower rate of postoperative complications, 8.8% versus 26.8% and a lower wound complication rate. 0 versus 9.9%. In addition, the requirement for postoperative, parenteral, analgesia was for the open laparotomy patients.
And hospitalization was reduced to 2 days for open laparotomy group. They concluded their paper by stating, and I quote, our series shows that outcome traditionally associated with laparoscopic endometrial cancer staging are achievable by laparoscopically naive gynecologic cancer surgeons moving from laparotomy to robotic assisted endometrial cancer staging after a relatively small number of cases. Early data for da Vinci single site COLIS is being collected at various sites within the U. S. And abroad.
While the initial EU publications begin to appear in the literature. In a recent addition of the archives of surgery, a consortium made up of 5 leading Italian robotic centers published initial results of their first 100 single site cola cystectomy procedures, the paper entitled overcoming the challenges of single incision cholecystectomy with robotic single site technology, describe the contribution of traditional single in Cision laparoscopy as an important development step in moving from multiple site laparoscopy to single incision interventions. However, single incision laparoscopic cholecystectomies has not gained widespread use due in large part to the physical limitations of economics of the procedure and quality of view. This according to the authors, they also reported that the combination of these factors provide challenges for optimal tissue exposure and that traditional instruments platforms have significant limitation when used for sills. They went on to say and I quote da Vinci single site cholecystectomy was regarded as a safe procedure by all surgeons involved in the study and as safe as standard for port laparoscopic operation.
They also reported that 4 out of the 5 surgeons participating in this trial claimed to be considering the extension of da Vinci's single site technology toward treating other conditions. In their conclusion, they wrote and I quote, the robotic technology is a compensatory technique that can overcome the constraints single access approach. We show that it allows for the quick overcoming of the learning curve that is typical most new procedures, particularly a laparoscopic single incision approach. This is likely to increase the safety of single incision surgery and in turn expand adoption to a wider number of general surgeons and surgical procedures. After Shindong Chung and others from National University Hospital in Taiwan studied the readmission rates for patients who had undergone open prostatectomy, lab prostatectomy, and robotic prostatectomy.
The nationwide Taiwanese study included 2741 patients, studied over a 5 year period with the objective of determining the sub-ninety day readmission rate associated with each of cost can be quite significant for payers and patients. In total, 257 or 9.4 to a hospital within 90 days post surgery. The diagnosis for readmission included intestinal infection UTIs, hernias, pneumonia, prosthetic hypertrophy, retention of urine, and postoperative infection. The authors reported that the readmission rate for is common than for patients undergoing a DBP, 8.2% for LAP versus 3.6% for DBP. When comparing the readmission rate for open prostatectomy to DBP, the frequency of readmission was nearly three times as great, 10.7% versus 3.6%.
In the written discussion, the author stated and I quote, In the present study, we clearly showed that patients undergoing robotic assisted laparoscopic prostatectomy had a lower risk of 90 day readmission then the patients undergoing open prostatectomy. We think that the present study is an important step in helping to define and open prostatectomy as a treatment option for localized prostate cancer. Moreover, the present findings may prove valuable to patients trying to make based datasets, its robust findings can be generalized to a population as a whole. I'll now turn the time over to Calvin.
Thank you, Alex. I will be providing you with an update to our financial forecast for 2012, including procedures, revenues and other elements of the income statement on a GAAP basis. I will also provide estimates of significant non cash expenses to provide you with visibility into our expected future cash flows. Starting with procedures. On our last call, we forecast procedures to grow approximately procedures performed in 2011.
Halfway through 2012, our procedure growth stands at 27%. During the second quarter, we saw key volume and challenges in our European procedure business. Based upon the net of these factors, we continue to forecast full year 2012 da Vinci procedure volume to grow approximately 25% to 27% above our 2011 total. Moving on to revenues. We are increasing our 2012 revenue guidance.
Based primarily upon capital sales trends and revenue contributions from new products, we now expect 2012 revenue to grow between 2020 3% above total 2011 revenue of $1,760,000,000. This is up from the 19% to 21% revenue growth forecast on our previous call. Specifically related to system ASP, as Marshall mentioned, our Q2 ASP came in at 1,530,000 This metric largely resulted from favorable channel, trade in and product mix. Going forward, we would expect to see a system sales mix more in line as patterns. In addition, Euro based system ASPs will be lower in U.
S. Dollar terms due to the weaker euro. As a result, we would expect system ASP to return to more historic levels realized in previous quarters. Overall, we would consistent with our $152,000,000 $156,000,000 for the year. The timing of these expenses, however, be considerably different in 2012 as compared to prior years.
As Marshall mentioned, in 2012, we began issuing employee option grants in 2 installments, 1 in February and 1 in August rather than a single February grant. As a result, in 2012, Q1 and higher proportion. Specifically, 2012 actual stock compensation was 34,400,000 Q11 $33,300,000 in Q2. We would expect Q3 stock compensation to be between $13,000,000 $14,000,000 higher $40,000,000 we anticipate station and R and D expenses and continuing business growth, we would expect Q3 operating expenses to come in over $20,000,000 higher than Q2. Now turning to operating income.
Consistent with our previous forecast, we continue to expect operating income to fall within a range of between 39% 40% of net revenue. Again, while 2nd quarter operating income came at 42% of sale, and we stand at expect full year operating expense to come in within our 39% to 40% guidance range. We expect other income, which is mainly comprised of interest income to total between $16,000,000 $17,000,000 for the year. With regard to income tax, our Q2 reported tax rate of 32.4 percent was above the 31% projection on our last call. While our Q2 tax rate.
We estimate that our nearly 41,700,000 shares. That concludes our prepared remarks and we will now open the call for your questions.
You've been placed in queue. And our first question will come from Ben Andrew with William Blair. Please go ahead.
Good afternoon, guys.
Hi, Ben. Hi.
Gary, maybe give us some insights into DDP trends here. And, how far you think that may go down. If you can give us some sense of what happened in the quarter, you know, where does this stabilize in your view based on the trends?
And it does sound like it's
a broader, kind of an industry shift in terms of the way patients are being managed. And, obviously, it's becoming less important with the growth of the other pieces, but just wanted to understand nicely that bit if we can.
Yes. The way we look at it is really being driven by 2 different effects. Of them has been, the scrutiny and discussion around PSA testing and what that impact is. It's hard for us to exactly handicap what the impact on PSA test and discussion is, but clearly as one of the major treatment modalities for prostate cancer care, if there are change is to PSA testing and the number of people going into the pipeline that will flow through to us. And then second part that you've described has been, if there's a look at non surgical treatment modalities and other alternatives like active surveillance, that also will have an impact hard for us to, to, to predict, predict where that will play out over the long haul.
We know for with high confidence that surgery is the best treatment for men with high risk prostate there's really no question. Another question is going to be okay, well, as surgical societies and surgeons look at this over the long term, how do they vector patients in through, through their treatment pathways. What we've seen in the past, just one more comment is that over time, men are moved into, active surveillance, and those kind of come in waves having to do with, the amount of publicity it gets. Over time, people will will start come back out of active surveillance, either because cancer is progressing, or because over time, the active surveillance in, in itself, a burden. So hard to predict with a quantitative sense, exactly where that will head, but clearly those two factors are having an impact on us in the months.
But maybe try another way, Gary. I mean, was it down single digit percentage, double digit, and what's baked into guidance for the balance of the year?
On our side, it was a significant push. I don't we don't usually break out the numbers for you quarterly. And and so, we have gone through and done our best, to, to project. It's an estimate if I had a perfect crystal ball, I'd share it with you, but we don't.
Okay. And then you talked about some of the timing of research projects. Maybe give us some insights to what those are and are we gonna see a structural shift in R and D spending perhaps higher and also on operating expense side, can you talk a little bit about, opportunities for investment in in the Salesforce? Are you looking to accelerate that to move things along quicker or maybe offset some of the prostatectomy weakness in other applications, or are you happy with kind of where the trends are set there?
Fair question. And a lot of questions. The, the first the first side on the R and D and project side, as you know, we have a few things that we've been working on pretty hard. Stapler, you should think of Stapler, not as a single product. Stapler will ultimately be a family of products kind of a platform.
And that will come out in sequential releases. So, there a set of, releases and products that make sense for colorectal surgery, a different set that makes sense for thoracic surgery, a different set that might make sense bariatric surgery in the future. And so those things will move in sequence. Likewise, vessel ceiling, strong instrument for us. Right now, it's pointed at general surgery applications and complex gonic logic cancers, but we can see that as being a platform technology as well.
So there are investments here that are as you know, we also work on, single site expansion and other sets of instruments and then other things, longer term in terms of platform improvements. It's I guess what I'd say is the signal from Q2 to Q3 has more to do with lumpiness and timing, then it does kind of a seismic shift in the kind of work we're doing. There is some, some gradual sequential growth in R and D spend, but mostly what you're seeing is lumpiness. Turning to the the our capability. We're we're, happy with our, our team there and they're growing, and that will be, to allow us to have a greater presence over time.
We're also making investments in Europe. The investments there are around, the sales and commercial team, mostly around bringing in experience in selling and support skills, as well as investments in our ability to respond to, needs and reimbursement, and economic analysis needs. So we're making those investments there. They're kind of investments that are ahead of what you would think of as the U. S.
Norms. In the U. S, we continue to invest in the U. S. Sales force, although about on pace to what you've seen in past quarters.
We don't feel like we're ahead or behind there, but really moving in sync.
Yeah. Specifically, we added about 20 to our clinical team in the quarter, bringing us up to about 600 on the clinical side and we stayed roughly flat about 90 capital side.
If I can sneak in
one more quick one, it looks like
you had a strong de novo placement effort in the quarter. Talk a little bit about how SIE affected that. And and I I heard the number 200 customers. Are you starting to see a lot of activity from that in terms of initial cases and are people actually doing cases beyond COLI already?
So, I'll just start Alex can, can add, jump in. On the single side versus SIE, SIE something a little bit different. But with regard to single side, the initial purchases, we did say, over 200 hospitals in the U. S. Have taken their initial kits.
We're seeing good utilization so far, although it's early, The response, the commentary in terms of safety and efficacy and reputability, the ability to learn Cedar quickly is strong. So we're feeling good about that. But we caution that we're still in the early quarters there. With regards to people having an interest to doing things OUS and discussed interest inside the US to do some other things. And so we're seeing, interest in certain gynecologic procedures, perhaps some upper GI years over time.
And that's where our R and D teams are spending their time.
I'll turn it to Alex. Yes. I would just reiterate under the, the comments pertaining to the 200 customers that have purchased initial sites. What we can tell thus far really from that is that there is a lot of general interest to try the system. We can't it's too early to make any large clinical claims otherwise other than people are looking at reduced cosmetic, improved cosmetics, I should say.
And then whether or not there's pain difference between one technique versus the other. But at this stage, it's very difficult to say. But the interest is try it. The training queue is strong and, we'll look at it for a few more quarters, I think, before we can assess much more.
Of the SIE impact on the quarter 6 of the 150 systems sold or SIE systems enter my SIEs are 3 And they're primarily targeted towards the more price sensitive customers who are engaged in the, single site or engaged in, maybe a lesser complex hysterectomy. I think we are seeing more interest in this particular segment of our product offering.
Our next question will come from Lennox Ketner with Bank of America. Please go ahead.
Oh, hi
guys. Thanks for taking the question. I guess if we could maybe just shift gears and focus on Europe for a minute. I guess I just want to understand, in your view, kind of what's driving the lower procedure growth. I know you talked about some structural issues.
But in terms of the austerity measures impacting it, I I guess what I'm struggling with a little bit is because it's a obviously, we've seen electric procedures, impacted there because it's a cancer surgery, I would have thought we would see less. Are you essentially seeing the government just lower their quotas for these surgeries, even though they're cancer surgeries?
We, we definitely see. It depends on which country you're in. And I guess I'd start by saying different countries are are behaving a little bit differently. So one answer won't cover them all. But taking a couple as an example, we seen pressure on quotas.
For sure you see total budgets, getting pressured and people are making decisions about how they want to spend that We think some of it has to do a little bit with how we've grown our organization and their training and skill. If I I just stand back, from the point of view of bringing clinical and economic value to a procedure that would have been open and taking its a minimally invasive dementia procedure. We think there's value there and we think we can do well in the presence of even tight budgets. And that's really the internal part that we're that we're working on.
Okay. So I guess just as a follow-up, you you had mentioned, that you're you're investing in in regulatory and and reimbursement issues. Is is that, are you focused on on changing kind of reimbursement teams in Europe, or was the reimbursement, question or the reimbursement coming more directed towards Japan?
Well, the answer is a little bit of both. In Japan, it tends to be a more direct conversation with, surgical societies and the government. Europe, it tends to be a little bit more, working with Surgical Societies And Health Technology Assessment Groups to really and the clinical benefits and the long term, the downstream economic downstream economic benefits of Medici surgery. And it's really as a way for hospitals and customers to understand what the total economics are.
Okay. And then just last question on the single site, the attachment for that, is it possible just to give us some sense as, you know, when a hospital does buy the single site attachment, how much you're, charging for that? And is that revenue recorded in, as part of, upgrade revenue, or is that in instruments and accessories?
Just to let everyone know that the single site is a set of instruments and accessories instruments that attached to the da Vinci SI system. And so there's no system upgrade required to do single site procedures. Usually initial customers, you need to have the 8.5 millimeter endoscopes as well as the specific instruments for the case and so on. So it's an investment I think on average out of the gate, it might be something like a 40 and dollar investment to kind of get going. It's recorded on the instrument and accessory line.
Okay. Got it. Thanks so much. I'll let someone else jump in.
And we'll go to the line of Tycho Peterson with JP Morgan. Please go ahead.
Hey, thanks for taking the question. I want to go back to kind of the discussion on DBP from and understand obviously with the change in screening intervals, that's one aspect. But as we think about watchful waiting, any color on what the conversion factor is in terms of patients going into watchful waiting and then coming back and hitting surgery? And obviously with pivot back in the
news, is there anything you need
to do differently in terms of data generation or marketing, given that it's back in kind of the public press, if you will?
I'll speak to the first one. I'll let Alex speak to the second one. With regard to what the kind of behavior has been historically with regard to people in very, very rough outlines. It's been about a third start in active surveillance and stay in active surveillance throughout about a third will, convert to aggressive disease. And, and, in essence, be kicked out by progression.
And about a third will choose to leave, because of the the repeated going back into, to being tested at some point, they decide they'd rather, they'd rather have a definitive treatment And that's been historical and it's rough. We'll see if it holds going forward.
The Pivot trial being back in the news. I don't know that there was anything that was new that was reported today. I think this is something that we've discussed think over the past year, since it had been presented at the AUA, I think the editorial that a company the actual report in the New England Journal of Medicine, really says I think has a pretty consistent tone, I think the way we think about it as well.
And then just to clarify your comments on Europe, I'm just not understanding why the volumes are really declining here when you normalized healthcare in a lot of these markets? I mean, is it really that variable in these geographies?
Short answer is, yes, it's variable. You have a few different things again, I think you have to think, well, what's happening in Italy, what's happening in Spain, what's happening in Germany, what's happening in France, what's happening in U. K, what's happening in the Scandinavian countries, and they vary. In many of the countries, you have a combination of private health systems and public ones. Their behaviors vis a vis, da Vinci are are quite different.
And so depending on what the mix of private and public is and and what the government, run hospitals are wanting to see different kind of dynamics and behavior.
And then last one, as we think about some of the gives and takes around procedures, I understand, obviously, you didn't change guidance on procedures this year, but do see a path north of 30% in the kind of medium to intermediate term the next couple of years given everything you've got in terms of new procedures or I don't want to box you in giving longer term guidance, but how do you think about where procedures could go?
Our best thoughts are in the guidance we provide you.
I I was talking beyond this year, though.
And we'll talk to you about that in, in January.
Okay. Thank you. We'll go to the line of David Lewis with Morgan Stanley. Please go ahead.
Good afternoon. Gary, these comments about the DBP in the U. S, most of the comments so far are really focused on utilization or sort of patient demand creation. I wonder have you seen anything in the U. S.
That would suggest that maybe it's push and pull where it's a hospital specific issue, so I'm really into ACOs demonstration projects where the hospitals are sort of targeting prostatectomy for its declining profitability or something like that or this is very acutely the patients just aren't proceeding to surgery and aren't showing up?
I without having to talk to every high in the US, I have not heard, the concern that you just voiced that hospital is is trying to direct patients one way or another due to their perceived profitability. Generally speaking, most hospitals will offer both, or all three alternatives. They'll to all of them. And in that setting where all the alternatives are discussed and a patient has been diagnosed, Davinci does well. And we we've and we've seen a lot of stability there.
So, short answer is it tends to be more, diagnosis and non surgical approach than it is, I think, directed intervention.
Okay. Very helpful. And then the clear positive, this quarter, sort of in the capital side in the U. S. I assume multiple capital peers have reported sort of softness in the 2nd quarter, either in a period of a dividend, any of that softness.
Is it safe to assume that you feel at least as far as the quarter's concern relatively insulated from some of the factors that may have been out there or some of the push outs that some of your peers have seen in the 2nd quarter?
Well, again, I think it's the term insulated has got a few meanings, but I would say that if you look at and again, back away from from just that number for a second and look at the overall procedure business. We've reported a 26% gain in procedures year over year. And for the first half of the year, it's up 27%. That's still a pretty large number. And so that does necessitate the demand for systems.
And so we do believe that. We do believe that very strongly. I don't think there was a particular event or an episode in Q3 2 that separated us from our peer group or other capital companies any more than just strong procedure demand. Now there are, as you said earlier, puts takes on the procedures, while one has gone down, several have gone up and some have gone up pretty significantly. And on balance, it's a very strong procedure business.
And I think that's really what separates us from some of the other companies that are up there when you look at the actual numbers and percentage of growth. So, short of that, I don't think there's anything else we can really point to.
And just Gary, maybe just one quick one, if I could. The comments about Europe, I wonder if you seen anything in Europe over the last couple of quarters or several quarters that would suggest that perhaps the market development in Europe is going to be different than the U. S. In one particular way, which would be in the U S, you never engaged in a directed significant study to prove a specific but you had a wealth of single center experience data and multicenter experience data that was generated by users. Is there a sense sort of based on what you're seeing in Europe that a more direct or active approach to clinical data is going to be required in Europe?
Or is that not the case?
I think a more active conversation is acquired. And that's a little bit of what we've been talking about with regard to the health technology assessments and other things. We have, now we've been in the market long enough in some procedures over a decade that there's actually large population based studies that are well done, multicenter, tens of 1000 of patients in them that show clear benefits for da Vinci over other surgical alternatives. There's data being generated, around comparisons to other kinds of treatment modalities between da Vinci surgery and non surgical outcomes. And I think that data is going to be helpful worldwide and in Europe.
Other may be cases and, and certainly we're in conversation and have, thoughts and plans around specific trials that may help us in different locales, and Europe is one of them.
Great. Thank you very much.
And we'll go to the line of Larry Cute with Raymond James. Please go ahead.
Oh, hi. Good afternoon. Just to pick up on Europe, Gary, I think I heard you correctly. When what it sound like there's a change in the, excuse me, the leadership there. And then if I caught that accurately, if you could kind of just walk us through kind of what's changing and kind of what's the strategic direction?
Yeah. So we have changed leadership in terms of leadership of commercial organization and the direct, the direct side of Europe, and as well as overall leadership over the as well. This is somebody who's been with us for many years in the U. S, and that had run the national account side of the business here in the United States. Knows our business very well has had prior experiences in Europe.
And and so he'll be, he'll be taking over there.
But but I guess, part of the question is, is that, a result of of, you know, the the current environment or needing to change your strategic tactics within Europe, you know, coming back to needing more discussions around the market of the device and the procedures. Just trying to understand perhaps it, you know, what there may be the change in strategy in in the year 18 region?
Yes, I think it's probably less of capital less strategy change and more focus on execution. And organizational growth and capability. There are some things that we can do a little bit differently and perhaps a little bit in terms of, some of the conversations on the, on the economic side. So I'd say sort of smallest strategy. I don't think it's worth shattering me different, but I do think it's business change.
And, we're working on those things.
Okay. Great. And and then, you know, the the, obviously, it's terrific to here that, the single site procedures are are starting to, gain some traction. And I fully understand that it's gonna take a couple of quarters to to fully fill that out I guess the conversations that we've had with with folks would suggest that, you know, where there is a da Vinci in place, you know, the general surgeons are eager to jump in and and and get some time on on the system to to try out these procedures. And generally, we've we've heard very good things once they get to do it.
But I guess the question that that that I sort of wrestle with is, you know, there's an awful lot of, general surgical procedures, prostatectomy, in particular, are probably done in institutions that today don't have a, a da Vinci Sis them. So can you can you make a convincing ROI argument that, you know, this system can be used, for general surgery sort of as a standalone device, even with the SIE option, or, you know, at some point, does that have be a segmentation strategy?
107 total systems. And I believe the number of U. S. Customers, Kelvin will give us, I believe, is somewhere of $1200,000,000 to $1300,000,000, I believe. But if you $1275,000,000.
$1275,000,000. It the way what we have seen in prostatectomy, for example, is that the system has, to this point, become somewhat of a consolidator for procedure rather than having to put procedures in all or I should say put systems in all 4 1800 or 5000 hospitals that are out there. You've seen a strong consolidation of let's say the urologic oncology business happen around the same base of systems. That prior to the minimally invasive introduction was being done at significantly more hospitals. Fewer were being done at more pillows.
So I don't think we look at it and say, can we, can we necessarily build this self standing platform with general surgery as a paramount question today. Now what we what we do believe is that with the the increased interest both from the colorectal surgeon, from other complex general surgery procedures, as well as the individual cholus cystectomy procedures that there is enough capacity out there for people to actually try use it and then build into, the flow of the robotics coordinators in the hospital to make sure that there's enough access, whether it becomes or third systems, etcetera. But the cholecystectomies by themselves is probably not the way we think about it. I think general surgery as a whole, and then leveraging the installed base that we have.
Okay. Understood. And then just last one and, and, not not to continue to come back me procedures, I assume they were, down sequentially. And, you know, would you characterize it as sort of a a a sharp fall off relative to where we've been over the last couple of quarters or, you know, it's sort of been a gradual decline. And, you know, now we've hit a point where we're down year over year.
I think the way we think about it and really what the numbers will tell us that it's been a gradual decline over the past few quarters. We've called it out in the past and now we're calling it out with a little more emphasis. And there appears to be more evidence in the sort of macro environment for prostate cancer that we can refer to with a little more clarity.
Okay, great. Thanks very much.
We'll go to Jose Haresco with JMP Securities. Please go ahead.
Hi, guys. Good afternoon.
Hi, Jose.
Good. Couple of questions on a single site COLI, you guys haven't broken this out in the past. Are you at a point where you can kind of give us a sense of how many procedures you think you've done in in single site COLIORE? Just in general, how many single site procedures have been done since these 200, devices have been placed. I'm sorry.
Stats have been placed out there.
Yeah. We're not we're not ready to start breaking that out just just because we're still on the early days of, of, seeing new sites come up and, and, and really work through their initial orders and what we like to see is what happens on a sustained basis. How much of their future they start to convert to a single site and so on. And that's just too early to tell. So, we're happy to tell you to talk a little bit qualitatively about how that how the initial installs are going, but we'll wait a little bit on on sequential use.
Okay. I'll be
probably on that for one more question.
Sure. Just on Europe turning a little bit more.
Could you give us a little bit
more granularity between say regions of Europe, you know, Southern Europe versus Western Europe as an example? And then procedures were hardware when you guys raised the the system guidance, revenue guidance for the year. And so I just kinda get if I wanna get a better sense for where that that's coming from beyond just the slight increase in ASP that we saw in the quarter?
On the kind of the breakouts country by country, it's it's a little bit mixed, probably not real surprising that that some of the countries in the south that are always in the news, have been most strained in terms of both system sales and procedures. Although I'd I'd say that Italy has been a bright spot. We have seen some pressure in in, both capital and procedures in, some of the core countries of Europe as well. And, and that's kind of where we are and what we're we're working through.
Great. Thank you very much.
Thank you. That was our last question. These conference calls, our organizational focus remains on increasing patient value by improving surgical outcomes and reducing surgical trauma. I hope the following experience from Rebecca and Maryland gives you some sense of what this means in the lives of our patients. Went to Doctor.
Kathleen Cratz, upon discovering that I had a uterine fibroids and endometrial cysts, which had been causing painful menstrual as well as severe lower is minimally invasive, so the recovery time would be much quicker. At the time, I was trying to finish up my dissertation and apply for academic jobs, so it was important to me to have a quick recovery. My surgeon also explained that this procedure allows for greater visualization in performing the surgery and in doing the stitches. Because of this, Doctor. Crafts was able to save my left ovary, which would not have been possible otherwise.
After my surgery, not only was I able to return to working on my dissertation within a few days, but I was also able to attend conference a few weeks later. Even with all that I have been told, I was shocked by at how quickly I had recovered from surgery. Every day, I was able to move more easily and with far less pain allowing me to stop taking pain medication after a day or 2. And I am free of back pain and have nearly no menstrual cramps. I'm extremely grateful for the da Vinci surgery and excellent carer received from Doctor.
Kratz and our entire surgical team because the surgery has significantly improved my quality of life. When I look back at my time at time with my life, I have only positive memories of my surgical experience. My surgeon provided me with comprehensive information about my options and about the surgery, allowed me to make the decision very foundation of our operating performance. We have built our company to take surgery beyond the limits of the human about a few things that truly make a difference. This concludes today's call.
We thank you for participating for your participation and support on this extraordinary journey to improve surgery, and we look forward to talking with you
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