Should investors take a bet on surgical robotics? – The Globe and Mail

The biggest companies in the medical technology space are well-capitalized global players with a wide array of other businesses that support the expensive research and development costs of this new frontier.

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As the health-care sector further embraces robotic tools to make surgeries less invasive and painful, opportunities abound for investors. This growing technology is leading to faster healing times and shorter hospital stays, which makes patients happier and gives health-care providers a way to contain rising costs.

Theres a multi-billion dollar potential for surgical robotics over the next 10 years, says Brandon Henry, a medical supplies and devices analyst with RBC Capital Markets in New York. Its going to be a growth market for a very long time and we are [only] in the early stages.

The notion of robots might conjure up images of the walking, talking machines found in science fiction movies. But medical robots are far simpler. Think of a Canadarm-like device performing repetitive tasks guided by a doctor. The tasks are relatively simple but are done safely, efficiently and accurately.

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Canada has few heavyweights in the health-care sector and no large players in surgical and medical devices. Of the 10 companies included in the S&P/TSX Capped Health Care Index, half are cannabis companies while three are involved in assisted living and nursing homes.

Toronto-based Titan Medical Inc. (TDM-T) is a startup thats listed on the Toronto Stock Exchange and is developing a surgical robot. It has interesting prospects, but no revenue yet.

So, investors have to look elsewhere. The United States dominates with the biggest public companies in the medical technology space. These are well-capitalized global players with a wide array of other businesses that support the expensive research and development costs of this new frontier. They pay dividends and their share prices offer conservative growth.

Mr. Henry says the U.S. is the biggest market for installations of medical robots, followed by Western Europe, Japan and China. In terms of the number of procedures performed each year, the U.S. and China rank first and second, respectively.

The machines are expensive and Canadian surgeons would like more of them. But theyre hard to come by in this country, says Dr. James Drake, surgeon-in-chief at the Hospital for Sick Children in Toronto.

Funding them in a not-for-profit system is challenging, he says, even though theres plenty of interest in robots because of their potential to improve lives.

These machines will enhance what surgeons can do, Dr. Drake says. They allow surgeons to concentrate on the important stuff and not be concerned about the things that machines do so much better.

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As an example, Dr. Drake, who is a neurosurgeon, cites the surgical procedure for placing electrodes in an epilepsy patients brain. The electrodes must be placed precisely and the most common way to do it is by fitting a metal frame over the skull an apparatus developed 60 years ago. The frame has 15 electrodes, with each electrode having five adjustments for a total of 75 combinations.

They have to be absolutely correct; every adjustment has to be absolutely right, Dr. Drake says. As you can imagine, thats very challenging. The robot avoids all that. It goes in sequence exactly where you tell it to. It sounds very simple, but [this technology] solves a very important problem.

Mr. Henry says the use of robots in general surgery is growing by 15 to 20 per cent annually. They were introduced about a decade ago and the first procedures involved heart surgery, kidney ailments and prostate surgeries.

It started [with those surgeries] because theyre procedures with a narrow channel, [for which] you can use a robot for visualization. They allow surgeons to see things that would otherwise be difficult to see, he says.

Mr. Henry says robots have spread from general surgeries to hips and knees, with spinal surgery also growing. Each area has its own needs and the robots are developed specifically for each task.

But nothing is really automated at this point, he says. Surgeons are controlling the robotic arms at a console. The arms may have instruments attached, which can make incisions. If the surgeon strays from the optimal position, the robot will sense it and issue a warning.

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The leader in general surgical robots is Sunnyvale, Calif.-based Intuitive Surgical Inc. (ISRG-Q), which has a market capitalization of US$62.6-billion. Its one of the most profitable companies in our coverage universe, Mr. Henry says.

Medtronic PLC (MDT-N), the worlds largest medical device company, is second in this space. Medtronic has a market cap of US$144.1-billion and operates in 140 countries, but generates most of its sales and profits in the U.S. (The company is based in Dublin for tax purposes but its operational headquarters are in Minneapolis.)

In third, he says, is New Brunswick, N.J.-based Johnson & Johnson Services Inc. (JNJ-N), which has teamed up with Alphabet Inc. (GOOGL-Q) to create Verb Surgical Inc. Verb Surgical combines Johnson & Johnsons tools with Alphabets data analytics, but has no revenue yet. Other players include Stryker Corp. (SYK-N), a leader in hip and knee surgery, and Zimmer Biomet Holdings Inc. (ZBH-N) of Warsaw, Ind.

The next frontier is the early detection and treatment of lung cancers, avoiding the painful surgery now required to treat them, Mr. Henry says. Probes with cameras are commonly used and take biopsies. Whats coming is the ability to remove cancerous tissue and cauterize the wound.

Thats the hope in the next five years, he says.

As for Dr. Drake, hes not worried about being replaced by a machine any time soon.

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Its a long way off if it ever comes at all, he says.

Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.

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Should investors take a bet on surgical robotics? - The Globe and Mail