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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO _____________
COMMISSION FILE NUMBER 000-30713
INTUITIVE SURGICAL, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 77-0416458
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(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification Number)
950 KIFER RD
SUNNYVALE, CA 94086
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(Address of Principal Executive Offices including Zip Code)
(408) 523-2100
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ X ] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant on June 28, 2002, based upon the closing price of Common Stock on
such date as reported by Nasdaq, was approximately $289,351,649. Shares of
voting stock held by each officer and director have been excluded in that such
persons may be deemed to be affiliates. This assumption regarding affiliate
status is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant's common stock on
February 28, 2003 was 36,920,459.
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INTUITIVE SURGICAL, INC.
2002 ANNUAL REPORT ON FORM 10-K
INDEX
PART I. PAGE
Item 1. Business 4
Item 2. Properties 26
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 30
PART II.
Item 5. Market for the Registrant's Common Equity and Related 30
Stockholder Matters
Item 6. Selected Consolidated Financial Data 31
Item 7. Management's Discussion and Analysis of Financial Condition 32
and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 57
Item 8. Financial Statements and Supplementary Data 58
Item 9. Changes in and Disagreements with Accountants on Accounting 58
and Financial Disclosures
PART III.
Item 10. Directors and Executive Officers of the Registrant 59
Item 11. Executive Compensation 62
Item 12. Security Ownership of Certain Beneficial Owners and 66
Management
Item 13. Certain Relationships and Related Transactions 69
Item 14. Disclosure Controls and Procedures 69
PART IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 70
8-K
SIGNATURES 72
CERTIFICATIONS 73
EXHIBIT INDEX 104
PART I
ITEM 1: BUSINESS
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements based on our
current expectations about our company and our industry. You can identify these
forward-looking statements when you see us using words such as "expect,"
"anticipate," "estimate" and other similar expressions. These forward-looking
statements involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of the factors described in the "Factors Affecting Operating Results"
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this report. We undertake no obligation
to publicly update any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.
COMPANY BACKGROUND
Intuitive Surgical, Inc. was founded in 1995. We are a Delaware corporation with
our principal executive offices located at 950 Kifer Road, Sunnyvale, California
94086, our telephone number is (408) 523-2100 and our website address is
www.intuitivesurgical.com. In this report, "Intuitive Surgical," "we," "us," and
"our" refer to Intuitive Surgical, Inc. Intuitive(TM)(R), da Vinci(TM),
EndoWrist(TM), InSite(TM) and Navigator(TM) are trademarks of Intuitive
Surgical, Inc.
We design, manufacture and market the da Vinci Surgical System, an advanced
surgical system that we believe represents a new generation of surgery -- the
third generation. We believe that this new generation of surgery, which we call
Intuitive surgery, is a revolutionary advance similar in scope to the previous
two generations of surgery -- open surgery and minimally invasive surgery, or
MIS. Our da Vinci Surgical System consists of a surgeon's console, a
patient-side cart, a high performance vision system and proprietary "wristed"
instruments. By placing computer-enhanced technology between the surgeon and
patient, we believe that our system enables surgeons to perform better surgery
in a manner never before experienced. The da Vinci Surgical System seamlessly
translates the surgeon's natural hand movements on instrument controls at a
console into corresponding micro-movements of instruments positioned inside the
patient through small puncture incisions, or ports. Our da Vinci Surgical System
provides the surgeon with the intuitive control, range of motion, fine tissue
manipulation capability and 3-D visualization characteristic of open surgery,
while simultaneously allowing the surgeon to work through the small ports of
MIS.
In March 1997, surgeons using an early prototype of our technology successfully
performed Intuitive surgery on humans. Beginning in May 1998, surgeons using our
technology successfully performed what we believe were the world's first
computer-enhanced closed chest heart surgeries, including mitral valve repair,
dissection of an internal mammary artery and grafting of a coronary artery. In
early 2000, surgeons using our technology successfully completed what we believe
was the world's first beating heart bypass procedure using only small ports. The
da Vinci Surgical System can be used to control Intuitive Surgical endoscopic
instruments including, rigid endoscopes, blunt and sharp endoscopic dissectors,
scissors, scalpels, forceps/pickups, needle holders, endoscopic retractors,
stabilizers, electrocautery, and
accessories during a wide range of surgical procedures. In July 2000, we
received marketing clearance from the U.S. Food and Drug Administration, or FDA
for general surgery procedures. We received clearance for a non-cardiac
thoracoscopic surgery indication for the product in March 2001. Additionally, in
May 2001 we received clearance for use of our products in laparoscopic
prostatectomy procedures, and in November 2002 we received clearance for use of
our products in thoracoscopically-assisted cardiotomy procedures. As of December
31, 2002, we had sold 149 of our da Vinci Surgical Systems and surgeons using
our technology had successfully completed several thousand surgery procedures of
various types.
The first generation of surgery, open surgery, remains the predominant form of
surgery and is still used in almost every area of the body. However, the large
incisions required for open surgery create significant trauma to the patient,
resulting in long hospitalization and recovery times, increased hospitalization
costs, and significant pain and suffering. Over the past two decades, the second
generation of surgery, MIS, has reduced trauma to the patient by allowing some
surgeries to be performed through small ports rather than large incisions,
resulting in shorter recovery times, fewer complications and reduced
hospitalization costs. MIS has been widely adopted for certain surgical
procedures, but it has not been widely adopted for complex procedures. We
believe surgeons have been slow to adopt MIS for complex procedures because they
generally find that fine tissue manipulations, such as dissecting and suturing,
using these techniques are more difficult to learn and perform, and are less
precise, than in open surgery.
The da Vinci System enables surgeons to overcome many of the shortcomings of
both open surgery and MIS. Surgeons operate while seated comfortably at a
console viewing a bright and sharp 3-D image of the surgical field. This
immersive visualization results in surgeons no longer feeling disconnected from
the surgical field and the instruments, as they do when using an endoscope in
MIS. While seated at the console, the surgeon manipulates instrument controls in
a natural manner, just as he or she has been trained to do in open surgery. Our
technology is designed to provide surgeons with a range of motion in the
surgical field analogous to the motions of a human wrist, while filtering out
the tremor inherent in every surgeon's hand. In designing our products, we have
focused on making our technology as simple as possible to use. In our
experience, based on over a thousand procedures, surgeons can learn to
manipulate our instruments with only a short amount of training and can learn to
perform Intuitive surgery with less training than is required for MIS.
Our products are designed to make a broad range of open surgical and MIS
procedures suitable for Intuitive surgery. The da Vinci Surgical System is
designed to allow surgeons to perform better surgery while providing patients
with the benefits of MIS. We believe that these advantages will enable us to
drive a fundamental change in surgery.
THIRD GENERATION SURGERY: THE INTUITIVE SURGICAL SOLUTION
The da Vinci System is designed to provide the surgeon the range of motion, fine
tissue control and 3-D vision characteristic of open surgery while
simultaneously allowing the surgeon to work through the small ports used in MIS.
All this is accomplished in an intuitive manner, in the same way that the
movements of a surgeon's hands in open surgery are entirely intuitive.
We believe that our technology overcomes many of the limitations of existing MIS
in the following ways:
- Natural Instrument Movements. Our technology is designed to directly
transform the surgeon's natural hand movements outside the body into
corresponding micromovements inside the patient's body. For example,
a hand movement to the right outside the body causes the instrument
inside the patient to be moved to the right, eliminating the
backward nature of existing MIS.
- EndoWrist Instruments Provide Natural Dexterity and Range of Motion.
Our technology is designed to provide surgeons with a range of
motion in the surgical field analogous to the motions of a human
hand and wrist. Our proprietary instruments, which we call EndoWrist
instruments, incorporate "wrist" joints that enable surgeons to
reach behind tissues and suture with precision, just as they can in
open surgery. The surgeon controls the joint's movements from the
surgeon's console using natural hand and wrist movements. EndoWrist
joints are located near the tips of all of our instruments.
- More Precise Movements and Reduced Tremor. With our technology, the
surgeon can also use "motion scaling," a feature that translates,
for example, a three millimeter hand movement outside the patient's
body into a one millimeter instrument movement in the surgical field
inside the patient's body. Motion scaling is designed to allow
greater precision than is normally achievable in both open surgery
and MIS. In addition, our technology is designed to filter out the
tremor inherent in every surgeon's hands.
- Immersive 3-D Visualization. Our vision system, which we call the
InSite vision system, is designed to give surgeons the perception
that their hands are immersed in the surgical field even though they
are outside the patient's body. As a result, we believe that
surgeons no longer feel disconnected from the surgical field and the
instruments, as they currently do with MIS. In addition, we believe
that the InSite system provides a much brighter and sharper image
than any other 3-D endoscope vision system. The InSite system also
incorporates our proprietary Navigator camera control technology
that allows the surgeon to easily change, move, zoom and rotate his
or her field of vision. The combination of these features offers
what we believe is the most advanced surgical vision system
available today.
- Easy to Learn, Easy to Master. In designing our products, we have
focused on making our technology as simple as possible to use, even
though it is inherently complex. We believe that tissue
manipulations using our products are as natural as hand movements in
open surgery. In our experience, based on feedback from surgeons who
have performed hundreds of procedures, surgeons can learn to
manipulate our instruments with only a short amount of training.
Learning to perform surgical procedures using the da Vinci Surgical
System will vary depending on the complexity of the procedure and
the surgical team's experience with MIS techniques.
- Multi-Specialty Surgical Platform. The da Vinci Surgical System is
designed to enable surgeons to perform surgery in virtually any part
of the body. To date, surgeons have used the da Vinci Surgical
System to perform over 100 different types of surgical procedures.
We believe that these advantages give the patient the benefits of less traumatic
MIS while restoring to the surgeon the range of motion and fine tissue control
possible with open surgery,
along with further enhancements such as tremor reduction, motion scaling and
superior visualization.
We believe that our technology has the potential to change surgical procedures
in two basic ways:
- - Convert procedures which are currently performed through large
traditional incisions to Intuitive surgery.
- - Facilitate Difficult MIS Operations. We believe surgical procedures
that today are performed only rarely using MIS techniques will be
performed routinely and with confidence using Intuitive surgery. Some
procedures have been adapted for port-based techniques but are
extremely difficult and are currently performed by a limited number of
highly skilled surgeons. We believe our da Vinci Surgical System will
enable more surgeons at more institutions to perform these procedures.
AGREEMENT AND PLAN OF MERGER
On March 7, 2003, we entered into an Agreement and Plan of Merger with Computer
Motion, Inc. Pursuant to the merger agreement, a wholly owned subsidiary of our
company will merge with Computer Motion, with Computer Motion surviving the
merger and continuing as a wholly owned subsidiary of our company.
Upon completion of the merger, each share of Computer Motion common stock will
be converted into the right to receive a fraction of a share of our common
stock. The fraction of a share of our common stock to be issued with respect to
each share of Computer Motion common stock will be determined by a formula
described in the merger agreement. Based on the expected capitalization of
Intuitive Surgical and Computer Motion on an assumed closing date of June 20,
2003, we estimate that the exchange ratio will range from approximately 0.48 to
0.52 depending on the average Computer Motion common stock price during a
defined period prior to closing. Based on these assumptions and on Computer
Motion's common stock price as of the date of this Annual Report on Form 10-K,
we estimate that we will issue approximately 14.7 million shares of our common
stock in the merger and will reserve approximately 5.7 million additional shares
of our common stock for future issuance in connection with our assumption of
Computer Motion's outstanding options and warrants (including out-of-the-money
options and warrants). Further, we estimate that, upon completion of the merger,
our current stockholders will own approximately 72% of the then outstanding
shares of our common stock and former Computer Motion stockholders will own
approximately 28% of the then outstanding shares of our common stock. These
estimates are subject to change depending on such factors as the number of
fully-diluted shares we and Computer Motion have outstanding at closing,
Computer Motion's stock price, and whether outstanding options and warrants of
Computer Motion are exercised prior to closing.
Completion of the merger is subject to the approval of the stockholders of our
company and Computer Motion. Certain stockholders of Computer Motion and our
company have agreed to vote their respective shares in favor of the transaction.
In connection with the proposed merger, we have entered into a Loan and Security
Agreement with Computer Motion pursuant to which we have agreed to provide a
short-term secured bridge loan facility of up to $7.3 million. Computer Motion
may use the facility to pay off existing indebtedness and to fund operations
prior to completion of the merger. This facility terminates and all outstanding
amounts become due and payable 120 days following termination of the merger
agreement, subject to acceleration upon the
occurrence of specified events. Interest on the facility will accrue at a rate
of 8% per annum and will be payable on the maturity date.
Our company and Computer Motion have obtained an immediate stay through
August 31, 2003 of all proceedings in the pending litigation proceedings between
the companies. As part of the stays the courts have ceased all further activity
in the cases during the period of stays, and will not issue any opinions or
orders on issues already submitted for decision. The stays may be terminated
before, or extended beyond, August 31, 2003 under specified circumstances. In
the event the merger is completed, our company and Computer Motion will request
dismissal with prejudice of the pending litigations.
In reaching its decision to approve the merger agreement, the Intuitive Surgical
board of directors considered a variety of factors, including the following:
- Complementary Nature of Technologies. Our board of directors
believes there is a strategic fit between the technologies of our
company and Computer Motion, including the core competencies,
intellectual property rights and focus areas of the companies. Our
board of directors believes that the merger will permit all major
products and technologies currently provided by both companies to
survive to the benefit of the surgical community for the foreseeable
future. Our board of directors further believes that the merger will
permit the companies to focus the talent and energy of the combined
organization on developing and growing the application of robotics
to minimally invasive surgery, bringing significant benefits to
patients, surgeons and medical centers throughout the world. Our
board of directors believes that the combined company has the
opportunity to enhance its future prospects through the development
of products utilizing the technologies and expertise of Intuitive
Surgical and Computer Motion.
- Dismissal of Patent Litigation. Our board of directors weighed the
benefits of the dismissal of the pending patent litigations with
Computer Motion upon completion of the merger. Our board of
directors considered the diversion of management's attention and
significant expense associated with ongoing patent litigation. Our
board of directors also weighed the possibility that any the
litigation could result in Intuitive Surgical being found to
infringe the intellectual property rights of Computer Motion, which
could be ruled to be valid and enforceable and could result in
Intuitive Surgical being required to obtain a license from, and pay
damages and/or royalties to, Computer Motion or, in the event the
parties were unable to agree on the terms of a license to redesign
or withdraw from the market one or more of Intuitive Surgical's
products or product configurations.
- Synergies. Our board of directors evaluated the potential synergies
of a combination of Intuitive Surgical with Computer Motion,
including the complementary nature of the business of Intuitive
Surgical and Computer Motion and the opportunity for significant
cost savings. Our board of directors noted that, although no
assurances can be given that any particular level of synergies can
be achieved, our management anticipates annual pre-tax cost savings
of approximately $18 million commencing in late 2003 as a result of
the merger. A significant portion of the cost savings will result
from a substantial reduction in headcount. Our ability to achieve
these goals is subject to economic conditions, and therefore there
can be no assurance that these results will be achieved.
INTUITIVE SURGICAL'S PRODUCTS
Our principal products include the da Vinci Surgical System and a variety of
"smart disposable" EndoWrist instruments.
DA VINCI SURGICAL SYSTEM
Surgeon's Console. The da Vinci Surgical System allows the surgeon to operate
while comfortably seated at an ergonomic console viewing a 3-D image of the
surgical field. The surgeon's fingers grasp the instrument controls below the
display with wrists naturally positioned relative to his or her eyes. Using
hardware, software, algorithms, mechanics and optics, our technology is designed
to seamlessly translate the surgeon's hand movements into precise and
corresponding real-time microsurgical movements of the EndoWrist instruments
inside the patient.
Patient-Side Cart. The patient-side cart, which can be easily moved next to the
operating table, holds electromechanical arms that manipulate the instruments
inside the patient. Three arms attached to the cart can be easily positioned as
appropriate, and then locked into place. The first two arms, one representing
the left hand and one the right hand of the surgeon, hold our EndoWrist
instruments. The third arm positions the endoscope, allowing the surgeon to
easily change, move, zoom and rotate his or her field of vision.
3-D Vision System. The vision system includes our InSite high resolution 3-D
endoscope with two separate vision channels linked to two high resolution,
progressive scan color monitors. The vision system also incorporates our InSite
image processing equipment comprised of high performance video cameras,
specialized edge enhancement and noise reduction equipment. The resulting 3-D
image has high resolution and contrast and no flicker or cross-fading, which
occurs in single monitor systems, and minimizes eye fatigue. Our vision system
allows the surgeon to move his or her head in the viewer without affecting image
quality.
ENDOWRIST INSTRUMENTS
We manufacture a variety of EndoWrist instruments, each of which incorporates a
wrist joint for natural dexterity, with tips customized for various surgical
procedures. These EndoWrist instruments are currently approximately seven
millimeters in diameter. The instruments mount onto the electromechanical arms
that represent the surgeon's left and right hands and provide the mechanical
capability necessary for performing complex tissue manipulations through ports.
At their tips, the various EndoWrist instruments include forceps, scissors,
electrocautery, scalpels and other surgical tools that are readily familiar to
the surgeon from open surgery and MIS. Generally, a variety of EndoWrist
instruments are selected and used interchangeably during the surgery. Where
instrument tips need to incorporate a disposable component, for example, scalpel
blades, we sell disposable inserts. We plan to continue to add new types of
EndoWrist instruments for additional types of surgical procedures.
The EndoWrist instruments are "smart disposables" because they are
resterilizable and reusable for a defined number of procedures. A custom
computer chip inside each instrument performs several functions that help
determine how the system and instruments work together. When an EndoWrist
instrument is attached to an arm of the patient-side cart, the chip performs an
"electronic handshake" that ensures the instrument was manufactured by us and
recognizes the type and function of the instrument and number of past uses. For
example, the chip distinguishes between scissors and a scalpel and controls the
unique functions of different instruments as appropriate. In addition, the chip
will not allow the instrument to be used for more than the prescribed number of
procedures so that its performance meets specifications during each
procedure.
USING THE DA VINCI SURGICAL SYSTEM
During a procedure, the patient-side cart is positioned next to the operating
table with the electromechanical arms arranged to provide access to the initial
ports selected by the surgeon. Metal tubes attached to the arms are inserted
through the ports, and the EndoWrist instruments are introduced through the
tubes into the patient's body. The surgeon then performs the procedure while
sitting comfortably at the surgeon's console, manipulating the instrument
controls and viewing the operation through our InSite vision system. When a
surgeon needs to change an instrument, as is done many times during an
operation, the instrument is withdrawn from the surgical field using the
controls at the console, in similar fashion to the way a surgeon withdraws
instruments from the patient in MIS. A scrub nurse standing near the patient
removes the unwanted instrument from the electromechanical arm and replaces it
with the new instrument, in a process designed to be rapid enough not to disturb
the natural flow of the procedure. As a result, the scrub nurse plays a role
similar to that played in open surgery and MIS. At the conclusion of the
operation, the metal tubes are removed from the patient's body and the small
incisions are sutured or stapled.
OUR STRATEGY
Our goal is to establish Intuitive surgery as the standard for complex surgical
procedures and many other procedures currently performed using either open
surgery or MIS. We intend to accomplish this objective both by pioneering new
types of endoscopic surgery and by making existing MIS procedures easier, safer
and more cost effective. Over time, our strategy is to broaden the number of
procedures performed using the da Vinci Surgical System and to educate surgeons
and hospitals as to the benefits of Intuitive surgery. Key elements of this
strategy include:
Focus on Key Institutions. Our marketing efforts are focused on both academic
and community hospitals. Following the initial placement at a given hospital, we
endeavor to expand the number of physicians who use the da Vinci Surgical System
and work with the hospitals and their surgeons to promote patient education as
to the benefits of Intuitive surgery. We believe that these efforts will result
in increased usage per system, leading to high volume sales of instruments and
sales of additional systems at each hospital. In addition, we believe such
efforts will benefit early-adopting hospitals by increasing their market share
in the procedures and specialties that benefit from Intuitive surgery. We expect
these efforts to increase demand for our products among competitive hospitals,
surgeons and referring physicians.
Focus on Leading Surgeons to Drive Rapid and Broad Adoption. We place
significant emphasis on marketing the da Vinci Surgical System to leading
surgeons who are considered to be the "thought leaders" in their institutions
and fields. These surgeons typically perform complex surgical procedures that
are currently not adaptable to MIS techniques. For example, cardiac procedures,
of which over one million are currently performed annually worldwide, are among
the most difficult to perform using MIS techniques. This strategy puts surgeons
at the forefront of procedure development and provides them an opportunity to
maintain a competitive edge in their specialty. We believe that early adoption
of our products by surgical thought leaders will give many other surgeons the
confidence that the da Vinci Surgical System can be used for all types of
surgical procedures. In addition to working with academic-based thought leaders,
we
will work with busy community-based surgeons who are focused on differentiating
themselves within their community. We will help them expand their busy clinical
practice by offering their patients an increased number of MIS procedures.
Develop Protocols for New Surgical Procedures. We intend to leverage our
relationships with key institutions and surgical thought leaders to develop
protocols for new surgical procedures. These protocols would include guidance on
patient screening, port placement, interaction of the surgical team and advice
on the sequence and selection of tools and maneuvers. We believe that
establishing protocols for a given procedure will facilitate the broader
adoption of Intuitive surgery for that procedure.
Maintain Market Leadership. We intend to maintain our leadership advantage by
continuing to develop and enhance our technology and to communicate the benefits
of our da Vinci Surgical System to surgeons, hospitals and patients. We will
continue to improve our da Vinci Surgical System through software and hardware
enhancements and by developing new surgical instruments. We will also continue
to develop our surgical platform to facilitate and support future surgical
innovations.
CLINICAL APPLICATIONS
We believe our technology is capable of enhancing or enabling a wide variety of
procedures in many surgical specialties. To date, surgeons using our da Vinci
Surgical System have performed several thousand surgical procedures of various
types, including general, cardiothoracic, and urologic surgery. These surgical
applications which, are currently cleared by the FDA, are further described
below.
GENERAL SURGERY
Cholecystectomy. Removal of the gallbladder, or cholecystectomy, is the most
common procedure performed by general surgeons. The procedure is used to treat
cholecystitis, which is an inflammation of the gall bladder. Although a
minimally invasive approach, called a laparoscopic cholecystectomy, is now well
accepted for routine cases, there is great variability in the level of skill
required to accomplish the procedure. The skill level necessary to complete a
laparoscopic cholecystectomy is dependent on the disease status the surgeon
discovers after the abdomen is entered. For example, acute cholecystitis can
result in inflammation and the abnormal union of tissues resulting from the
formation of new fibrous tissue in the inflammatory process. As a result, very
meticulous surgery to access gallbladder anatomy can be required. Similarly,
during the operation, the surgeon may find a condition known as
choledocolithiasis, or stones in the common bile duct. The surgeon may choose to
incise or cut the common duct to extract stones that are caught between the
liver and intestine. Exploration of the common bile duct is an extremely
delicate procedure that requires micro-sutures to be placed in the common duct.
Most surgeons will not do this procedure laparoscopically because of its
difficulty. This usually results in a conversion to open technique or another
surgical or delicate gastrointestinal endoscopic procedure to extract the
stones. With our technology, we believe that the surgeon will have expanded
capability to deal with complicated cholecystectomies and can avoid subjecting
the patient to a second procedure.
Nissen Fundoplication. Nissen fundoplication is a general surgical procedure
that is performed to
correct esophageal reflux. Esophageal reflux disease is a digestive disorder
that affects the muscle connecting the esophagus with the stomach. As an
elective procedure, Nissen fundoplication is currently performed on only a small
fraction of candidates who suffer from this condition because the open surgical
procedure is quite invasive. An MIS alternative exists, but there are only a
limited number of surgeons skilled in the procedure. We believe that our
technology will significantly improve the ease of performing the Nissen
procedure through ports. Specifically, our technology will address the two most
difficult steps in this procedure, which are made more difficult by existing MIS
techniques, esophageal dissection and suturing of the fundus of the stomach. If
adoption of our technology becomes widespread for Nissen procedures, we believe
that the number of surgeons able to perform a Nissen procedure using port-based
techniques will increase. Further, we expect that the widespread availability of
a port-based approach may significantly expand the number of surgeries
performed.
CARDIOTHORACIC SURGERY
Internal Mammary Artery Dissection. In a coronary artery bypass graft procedure
used in cardiac surgery, a blocked coronary artery is bypassed with a graft.
When available, an artery from the chest called the internal mammary artery is
dissected from its natural position and grafted into place to perform the
bypass. Because the internal mammary artery is located on the underside of the
anterior surface of the chest, dissection of the vessel is challenging using
existing surgical instruments through the three- to five-inch incision currently
used in a coronary artery bypass graft procedure. The da Vinci instruments have
multiple joints that emulate the surgeon's shoulders and elbows, allowing exact
positioning of the instruments inside the patient's chest. In addition, the
EndoWrist joints permit the surgeon to reach behind the tissues for easier
dissection of the internal mammary artery. Thus, we believe that the internal
mammary artery can be dissected with greater ease and precision using our
technology.
Thoracoscopy. A number of procedures performed in the thorax, or chest cavity,
can be accomplished by minimally invasive methods. These methods are generally
referred to as thoracoscopic procedures. They include various types of lung
resection, biopsy procedures, node dissections, nerve resections and esophageal
surgery. Conventional thoracoscopic tools have all the limitations of
conventional laparoscopic tools, such as "backward" movement and limited range
of motion. We believe that the capability of our technology to operate
dexterously in the often very small and restrictive space of the chest cavity
will offer significant clinical value in the performance of advanced
thoracoscopic procedures.
Mitral Valve Repair/Replacement. Valve repair and replacement surgeries are
challenging even when using open surgical techniques. Significant exposure of
the surgical field is essential to the identification and precise manipulation
of valves and other structures inside the heart, and is key to successful
surgical outcomes with minimal complications. Motion scaling allows a surgeon
using our da Vinci Surgical System to maneuver instruments inside the patient
even more precisely than is possible in open surgery. Our system has already
enabled heart valve repairs to be performed through small ports in a manner that
could not have been accomplished with open surgery. Replacement of valves
currently requires a small incision, even if the majority of the procedure is
eventually performed through ports using our technology, because the replacement
valve itself is too large to be inserted into the chest through a port. However,
new valve designs that can be delivered through ports are being developed, and
the small incisions necessary today to deliver a replacement valve to the heart
may eventually not be required, allowing a surgeon
using the da Vinci Surgical System to replace a valve entirely using ports.
UROLOGIC SURGERY
Radical prostatectomy is the removal of the prostate gland in patients diagnosed
with clinically localized prostatic cancer. The current approach to removal of
the prostate is via an open surgical procedure or a laparoscopic approach. The
laparoscopic approach while not prevalent, is difficult and poses challenges to
even the skilled urologist. Patient demand for a minimally invasive approach to
the radical prostatectomy is increasing. The da Vinci Surgical system allows for
improved visualization of the gross anatomy (dorsal veins, endopelvic fascia,
bladder muscle, puboprostatic ligaments), microanatomy (bladder muscosa, nerve
bundles) and tissue planes which are critical for an anatomic dissection. Da
Vinci radical prostatectomy allows for good oncologic results, better
anastomoses, reduced operative blood loss, less postoperative pain, improved
cosmesis and potentially a better nerve-sparing technique. The technology has
enabled surgeons to convert from an open technique to a minimally invasive
technique with great ease.
ADDITIONAL CLINICAL APPLICATIONS
The da Vinci Surgical System has full regulatory clearance in Europe and has
been used for other applications which have not yet been cleared by the FDA. In
addition, we believe there are numerous additional applications that can be
addressed with the da Vinci Surgical System. Some of these applications include
totally endoscopic coronary artery bypass surgery, vascular surgery such as
aorto-femoral bypass and aortic aneurysm repair, gynecologic and orthopedic
surgery.
Totally Endoscopic Coronary Artery Bypass (TECAB). Coronary artery bypass graft
surgery demands that the surgeon delicately dissect and precisely suture very
small structures, which are less than two millimeters in diameter, under
significant magnification. These procedures are difficult when performed in open
surgery. They are even more difficult when performed using an endoscopic or
limited incision approach, and extraordinarily difficult to perform when the
heart is beating. As a result, this procedure is typically done as open surgery
by stopping the heart and using a heart/lung bypass machine. Our technology is
designed to allow surgeons to perform scaled instrument movements that can be
even more precise than the movements used in open surgery, thus enabling precise
suturing of single and multiple coronary vessels on a stopped or beating heart.
VASCULAR SURGERY
Aortic Aneurysms. A common vascular procedure is the repair of aortic aneurysms,
which are sacs formed by the dilation of the wall of the main artery in the
body. Aneurysms are caused primarily by atherosclerosis, which is characterized
by the deposition of fatty substances in large and medium-sized arteries, such
as the arteries that lead to the heart and brain. Surgical treatment involves
clamping the aorta and making long incisions at multiple sites to resect and
replace the aneurysm with a synthetic graft. Once the aorta is clamped, time is
of the essence, since procedures are typically done without heart/lung bypass
machines. Thus, only a narrow window of time for completion is available.
Currently, some aneurysms are treated by intravascular stent-grafts. These
stent-grafts can be inserted through the main artery in the thigh, called the
femoral artery, and do not require an incision. However, the necessity of
traversing the femoral artery to gain access to the aorta limits the usage of
this technique. We believe that the capability of our
technology to deliver to the surgeon enhanced dexterity and the ability to
suture grafts, alone or in conjunction with stent-grafts, will help convert this
procedure from open surgery to Intuitive surgery.
Aorto-Femoral Bypass. The lower portion of the abdominal aorta is often a
location of atherosclerosis. Atherosclerotic blockage of this portion of the
aorta restricts blood flow to the lower body. To treat this condition using open
surgery, a synthetic graft is attached above and below the blockage. This
procedure currently requires open surgery because of the need to suture the
grafts in place. We believe that with our technology, surgeons will be able to
perform the required suturing of arteries, called an anastomosis, through ports
and avoid the large incision currently required.
GYNECOLOGIC SURGERY
General Gynecology. Laparoscopy has been used for several decades in a large
number of diagnostic infertility procedures. Although there are a variety of
therapeutic infertility procedures that can currently be performed by some
gynecologists using existing MIS techniques, these procedures are relatively
difficult to perform using existing MIS tools because of the lack of tissue
control, inability to perform fine dissection, and limited suturing capability.
We believe that our technology will provide gynecologists with the ability to do
sophisticated procedures such as tubal re-anastomosis and dissection of ovarian
cysts, as well as common procedures such as surgical removal of an ovary or
fallopian tube.
Hysterectomy. Removal of the uterus is one of the most commonly performed
surgeries in gynecology and it can be done by using open surgery or MIS
techniques. Like colon resection, it demands a significant degree of tissue
manipulation in the dissection and ligation, or tying, of blood vessels,
ligaments and other pelvic structures. Further, laparoscopic techniques used in
this procedure increase the risk of injury to the ureters, which are vital
structures that provide the conduit for urine between the kidney and bladder. It
is often difficult to ensure the identification and prevention of injury to the
ureters and bladder with conventional MIS instruments because of the limited
angles at which these instruments can be positioned. We believe that our
products will increase the surgeon's dexterity in this procedure and, as a
result, will have a significant impact on safety, operating time, and rate of
adoption of port-based techniques in hysterectomy.
Bladder Neck Suspension. Bladder incontinence is a widespread condition
affecting middle aged women, which can be treated surgically with a procedure
known as bladder neck suspension. This procedure involves elevation of the
bladder neck by suspension with sutures, surgically recreating the normal angle
of the urethra and re-establishing bladder sphincter control. The procedure
works well in open surgery and is the "gold standard" for correction of bladder
incontinence. However, because of its long recovery time, most candidates are
discouraged from undergoing the procedure using open surgical technique.
Instead, they use adult diapers for their incontinence, which is an
embarrassment and inconvenience. Bladder neck suspension can currently be done
laparoscopically but is difficult to perform because of the need to suture at
awkward angles using existing MIS instruments. We believe our technology may
provide a better solution for suturing the bladder neck and would represent an
advance in the ease of performing incontinence surgery.
ORTHOPEDIC SURGERY
Spinal Surgery. Disc removal and spinal fusion are common procedures performed
in open spinal surgery. Disc replacement, via prosthetic discs, holds great
promise for hundreds of thousands of back pain sufferers. MIS techniques where
surgeons approach the spine through the abdomen and use laparoscopic methods to
expose the anterior portion of the spine and lumbar disc space are rapidly
emerging. This procedure requires both delicate and precise dissection and
retraction of tissue, and would benefit from the enhanced capabilities offered
by the da Vinci Surgical System. We believe that our technology may make this
procedure safer, easier, more precise, and allow more surgeons to perform it
with confidence.
MARKETING AND DISTRIBUTION
We market our products through a direct sales force in the United States and
most of Europe. We have also entered into agreements with distributors in Italy,
Canada, India, Singapore and Japan. Our marketing and sales strategy in the
United States and Europe involves the use of a combination of area sales
managers, technical sales representatives and clinical training specialists. As
of December 31, 2002, we had 94 employees in sales and marketing. We expect to
increase our sales and marketing force as we expand our business.
The role of our technical sales representatives is to educate physicians and
surgeons on the advantages of Intuitive surgery and the clinical applications
that our technology makes possible. We also train our technical sales
representatives to educate hospital management on the potential benefits of
early adoption of our technology and the potential for increased local market
share that may result from Intuitive surgery. Once a hospital has installed a da
Vinci Surgical System, our sales force helps introduce the technology to other
surgical specialties within the hospital.
Clinical training specialists provide training and support to physicians and
other hospital staff. We employ service technicians to install our da Vinci
Surgical Systems and to provide non-clinical technical expertise, service and
maintenance. We believe that this combination of technical sales
representatives, clinical training specialists and service technicians provides
an appropriate balance of professional selling skills while maintaining an
adequate level of technical expertise in the field.
Our da Vinci Surgical System has a lengthy sales and purchase order cycle
because it is a major capital item and normally requires the approval of senior
management at purchasing institutions. Particularly during periods in which our
sales volume is low, this may contribute to fluctuations in our quarterly
operating results.
TECHNOLOGY
Using key technologies, we have designed the da Vinci Surgical System to ensure
intuitive control and fail-safe operation of the system. The system updates arm
and instrument positions over 1,000 times per second, thereby ensuring real-time
connectivity between the surgeon's hand movements and the movements of the
instrument tips. A backup battery is included in the system that can power the
system for more than 20 minutes in case of power loss or fluctuation. We believe
this 20-minute period is sufficient either to reestablish the power supply or
for the hospital back-up power system to become effective.
Monitoring the operation of the system at all times is a network of
approximately 20 micro-controllers that checks for proper system performance.
System misuse or system fault can be
detected and the system can be transitioned to a safe state in micro-seconds.
The system also includes a sensor that detects the presence of the surgeon's
head in the viewer. If the surgeon removes his or her head from the viewer, the
system automatically disengages and locks the instruments in place to prevent
inadvertent movement.
The instrument controls at the surgeon's console have eight degrees of freedom
of motion that allow the surgeon to move each hand through a workspace
approximately one cubic foot in volume. These degrees of freedom allow the
surgeon to orient his or her hands without limitation. The instrument controls
are constructed with very low friction cables and gear transmissions to ensure
smooth operation. Furthermore, critical components are constructed of magnesium
and titanium to provide high mechanical stiffness and low inertia, ensuring a
light and responsive feel to the surgeon.
The electromechanical arms of the patient-side cart are gravitationally
counterbalanced to allow for smooth, easy and safe positioning of the
instruments in the patient. The arms have seven degrees of freedom, allowing for
control of position, orientation, translation and grip of the instrument, all
inside the body. Redundant sensors are designed to ensure fail-safe operation of
the instrument tips.
Unlike other 3-D systems, our InSite vision system relies on two entirely
separate vision channels. Two eyepieces are linked by a precisely designed
optical assembly to two high resolution, high contrast medical grade monitors,
which have been specially designed to have a refresh update rate that eliminates
flicker and reduces eye fatigue. Our stereo endoscope uses two separate
high-resolution optical channels to improve image clarity. The stereo images
pass through video processing electronics that provide specialized edge
enhancement and noise reduction. A foot switch at the surgeon's console operates
a focus controller on the endoscope. The endoscope self-regulates the
temperature of its tip to eliminate fogging during procedures.
Our EndoWrist instruments use a wrist joint architecture driven by tiny but very
high strength, flexible tungsten cables. Each tungsten cable is a "metal rope"
constructed from over 200 fibers that are each less than one thousandth of an
inch in diameter. These cables are similar in function to the tendons of a human
wrist and are used to drive fluid motions of the wrist joint. The instruments
each contain a custom memory chip that records and stores data each time the
instrument is placed on the system. The chip contains encrypted security codes
to protect against use of non-Intuitive Surgical instruments so that only our
instruments will work with the da Vinci Surgical System. The chip identifies the
type of tool being inserted so that different instrument types can be controlled
uniquely by the system. The chip also records usage of the instrument and
expires the instrument after its prescribed life.
INTELLECTUAL PROPERTY
Since our inception in late 1995, we have encountered and solved a number of
technical hurdles. We have patented and continue to pursue patent and other
intellectual property protection for the technology that we have developed to
overcome these hurdles. In addition to developing our own patent portfolio, we
have spent significant resources in acquiring exclusive license rights to
necessary and desirable patents and other intellectual property from SRI
International and IBM, which were early leaders in applying robotics to surgery.
One of the strengths of our portfolio is that the licensed SRI International and
IBM patents have original filing dates as early as January
1992 and June 1991, respectively. We have also exclusively licensed a patent
application from MIT concerning robotic surgery. In April 2000, we exclusively
licensed an extensive minimally invasive heart surgery patent portfolio from
Heartport, Inc. in the field of robotic surgery. These patents cover many
different forms of minimally invasive robotic surgery, including single- and
multi-vessel coronary artery bypass grafts, heart valve repair and replacement
and beating heart stabilization. In June 2001, we entered into a non-exclusive
patent license with Olympus Optical Co., Ltd. of Japan for several robotic
surgery patents. As of March 14, 2003, we hold exclusive field-of-use licenses
for over 80 United States patents and approximately 40 foreign patents, and own
outright 28 U.S. patents that expire no earlier than 2016. We also own or have
licensed numerous pending United States and foreign patent applications, several
of which were recently allowed. Our patents and patent applications relate to a
number of important aspects of our technology, including our surgeon's console,
electromechanical arms, vision system and our EndoWrist instruments. We intend
to continue to file additional patent applications to seek protection for other
proprietary aspects of our technology.
Our success will depend in part on our ability to obtain patent and copyright
protection for our products and processes, to preserve our trade secrets, to
operate without infringing or violating valid and enforceable proprietary rights
of third parties, and to prevent others from infringing our proprietary rights.
We intend to take action to protect our intellectual property rights when we
believe doing so is necessary and appropriate. In addition, our strategy is to
actively pursue patent protection in the United States and in foreign
jurisdictions for technology that we believe is proprietary and that offers a
potential competitive advantage, and to license appropriate technologies when
necessary or desirable. We cannot be certain that we will be able to obtain
adequate protection for our technology or licenses on acceptable terms.
Furthermore, if any protection we obtain is reduced or eliminated, others could
use our intellectual property without compensating us, resulting in harm to our
business. In addition, the laws of certain foreign countries do not protect
intellectual property rights to the same extent as do the laws of the United
States. See "Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Factors Affecting Operating Results." Others may
assert that our products infringe their intellectual property rights, which may
cause us to engage in costly disputes and, if we are not successful in defending
ourselves, could also cause us to pay substantial damages and prohibit us from
selling our products. In this regard, see "Item 3: Legal Proceedings" for a
description of pending cases and interferences before the U.S. Patent and
Trademark Office regarding our da Vinci Surgical System.
SRI INTERNATIONAL LICENSE AGREEMENT
After receiving funding in 1990 from the U.S. Advanced Research Projects Agency,
SRI International conducted research to develop a "telesurgery" system to allow
surgeons to perform surgery on the battlefield from a remote location. SRI
International developed the precise electromechanics, force-feedback systems,
vision systems and surgical instruments needed to build and demonstrate a
prototype system that could accurately reproduce a surgeon's hand motions with
remote surgical instruments. In 1995, John G. Freund, M.D., one of our founders,
acquired an option to license SRI International's telesurgery technology, which
resulted in SRI International granting us a license.
Under the terms of our license agreement with SRI International, we have an
exclusive, worldwide, royalty-free license to use the SRI International
technology developed before
September 12, 1997, including all patents and patent applications resulting from
that work, in the field of manipulating tissues and medical devices in animal
and human medicine, including surgery, laparoscopic surgery and microsurgery. We
also have the right of first negotiation with respect to any SRI International
technology developed in these areas before September 12, 1999 but after
September 12, 1997.
Our license with SRI International will terminate upon the last expiration of
the patents licensed from SRI International or December 20, 2012, whichever is
later. Currently, the last patent expiration date is in 2016, although this
could change. SRI International may terminate the license in the event of a
material, uncured breach of our obligations. In the event SRI International
terminates the license, we do not know whether the necessary licenses could be
reacquired from SRI International on satisfactory terms, if at all.
IBM LICENSE AGREEMENT
IBM conducted research on the application of computers and robotics to surgery
during the late 1980s and early 1990s. IBM performed some of this work in
conjunction with the Johns Hopkins Medical Center. Our license agreement with
IBM covers a number of technologies related to the application of computers and
robotics to surgery. Under the terms of this agreement, we have an exclusive,
worldwide, royalty-free license to a number of IBM patents and patent
applications in the field of surgery performed on animals and humans. We also
have a non-exclusive license from IBM to practice in the areas of neurology,
ophthalmology, orthopedics and biopsies. Under the license, we were obligated to
make two payments to IBM, which were tied to revenue milestones. The final
payment became payable in December 2001 and was paid in March 2002. The IBM
license agreement will terminate upon the last expiration of the licensed
patents. Currently, the last patent expiration date is in 2016, although this
could change. In the event IBM terminates the license agreement, we do not know
whether necessary licenses could be reacquired from IBM on satisfactory terms,
if at all.
In March 2001, consistent with the terms of our license agreement with IBM,
Intuitive and IBM jointly sued Computer Motion in the U.S. District Court for
the District of Delaware alleging infringement of U.S. Patent No. 6,201,984. See
"Item 3: Legal Proceedings" for a more detailed description of this litigation.
MIT LICENSE AGREEMENT
After receiving funding from the U.S. Department of the Army, several
researchers at MIT conducted research on various aspects of robotic surgical
systems. As a result of that work, several patent applications were filed. Both
MIT and the Army waived their rights to all but one of these applications, which
the inventors ultimately assigned to us. MIT owns the other application. Under
the terms of our license agreement with MIT, we have an exclusive, worldwide,
royalty-free license to this patent application in the field of medical devices.
The MIT license will terminate upon the last expiration of any patents issuing
from the licensed patent application. MIT also has the right to terminate the
MIT license in the event of a material, uncured breach of our obligations under
the license. In the event MIT terminates the license, we do not know whether we
would be able to reacquire a license from MIT on satisfactory terms, if at all.
HEARTPORT, INC. LICENSE AGREEMENT
Since its inception in the early 1990s, Heartport, Inc. has developed an
extensive patent portfolio covering systems and methods for performing many
different aspects of minimally invasive heart surgery, including single- and
multi-vessel coronary artery bypass grafts, heart valve repair and replacement,
and beating heart stabilization. In April 2000, we acquired an exclusive,
worldwide license in the field of robotic surgery to much of Heartport's
portfolio, including issued U.S. patents and pending U.S. and foreign
applications. The license is royalty-free unless we sell instruments for robotic
surgery procedures that are not operated by the robotic surgery system, in which
case we pay a small royalty.
Our license will terminate upon the last expiration of the patents licensed from
Heartport. Currently, the last patent expiration date is in 2015, although this
could change. Heartport may terminate the license in the event of a material,
uncured breach of our obligations. In the event Heartport terminates the
license, we do not know whether the necessary or desirable licenses could be
reacquired from Heartport on satisfactory terms, if at all.
In April 2001, Heartport became part of the Cardiovations Division of Ethicon,
Inc., a Johnson & Johnson Company. Intuitive's exclusive license survives
Johnson & Johnson's acquisition of Heartport. Ethicon, Inc. therefore is
Intuitive's licensor under the Heartport license.
RESEARCH AND DEVELOPMENT
Substantially all of our research and development activity is performed
internally. Our research and development team is divided into four groups:
software engineering, systems analysis, electrical engineering and mechanical
engineering. In addition, various members of the research and development team
support the design and development of the manufacturing processes used in
fabricating our products.
MANUFACTURING
Prior to February 2002, we leased a 13,000 square foot manufacturing facility in
Mountain View, California. We used this facility and our manufacturing personnel
to produce the systems and instruments that were sold and used in clinical
trials through December 2001. The manufacture of our products is a complex
operation involving a number of separate processes and components.
In February 2002, we moved our manufacturing facility to Sunnyvale, California.
We now lease approximately 18,000 square feet of manufacturing space.
We purchase both custom and off-the-shelf components from a large number of
certified suppliers and subject them to stringent quality specifications. We
periodically conduct quality audits of suppliers and have established a supplier
certification program. Some of the components necessary for the assembly of our
products are currently provided to us by sole source suppliers or single source
suppliers. We purchase components through purchase orders rather than long-term
supply agreements and generally do not maintain large volumes of inventory. The
disruption or termination of the supply of components could cause a significant
increase in the costs of these components, which could affect our operating
results. A disruption or termination in the supply of components could also
result in our inability to meet demand for
our products, which could harm our ability to generate revenues, lead to
customer dissatisfaction and damage our reputation.
COMPETITION
We consider our primary competition to be existing open or MIS surgical
techniques. Our success depends in part on convincing hospitals, surgeons and
patients to convert procedures to Intuitive surgery from open or existing MIS.
We also face competition from several companies that are developing new
approaches and products for the minimally invasive surgery market, however, as
many of these developments are aimed at MIS, it is our belief that the da Vinci
platform may actually prove complimentary to these new technologies.
In addition, a limited number of companies are using robots and computers in
surgery, including endoVia Medical, Inc., Computer Motion, Integrated Surgical
Systems, Inc., Johns Hopkins University Engineering Research Consortium, Maquet
AG, MicroDexterity Systems, Inc., Armstrong Healthcare Ltd., Sinters SA, and
Ross-Hime Designs, Inc. Our revenues may be reduced or eliminated if our
competitors develop and market products that are more effective or less
expensive than our products.
We believe that the primary competitive factors in the market we address are
capability, safety, efficacy, ease of use, price, quality, reliability, and
effective sales, support, training and service. The length of time required for
products to be developed and to receive regulatory and reimbursement approval is
also an important competitive factor.
GOVERNMENT REGULATION
UNITED STATES
Our products and operations are subject to extensive and rigorous regulation by
the FDA. The FDA regulates the research, testing, manufacturing, safety,
labeling, storage, recordkeeping, promotion, distribution, and production of
medical devices in the United States to ensure that medical products distributed
domestically are safe and effective for their intended uses. In addition, the
FDA regulates the export of medical devices manufactured in the United States to
international markets.
Under the Federal Food, Drug, and Cosmetic Act, or FFDCA, medical devices are
classified into one of three classes -- Class I, Class II or Class III --
depending on the degree of risk associated with each medical device and the
extent of control needed to ensure safety and effectiveness. Our current
products are Class II medical devices.
Class I devices are those for which safety and effectiveness can be assured by
adherence to a set of guidelines, which include compliance with the applicable
portions of the FDA's Quality System Regulation, or QSR, facility registration
and product listing, reporting of adverse medical events, and appropriate,
truthful and non-misleading labeling, advertising, and promotional materials, or
General Controls. Some Class I devices also require premarket clearance by the
FDA through the 510(k) premarket notification process described below.
Class II devices are those which are subject to the General Controls and most
require premarket demonstration of adherence to certain performance standards or
other special controls, as specified by the FDA, and clearance by the FDA.
Premarket review and clearance by the FDA for these devices is accomplished
through the 510(k) premarket notification procedure. For most Class II devices,
the manufacturer must submit to the FDA a premarket notification submission,
demonstrating that the device is "substantially equivalent" to either:
(1) a device that was legally marketed prior to May 28, 1976, the date
upon which the Medical Device Amendments of 1976 were enacted, or
(2) to another commercially available, similar device which was
subsequently cleared through the 510(k) process.
If the FDA agrees that the device is substantially equivalent, it will grant
clearance to commercially market the device. By regulation, the FDA is required
to clear a 510(k) within 90 days of submission of the application. As a
practical matter, clearance often takes longer. The FDA may require further
information, including clinical data, to make a determination regarding
substantial equivalence. If the FDA determines that the device, or its intended
use, is not "substantially equivalent", the FDA will place the device, or the
particular use of the device, into Class III, and the device sponsor must then
fulfill much more rigorous premarketing requirements.
A Class III product is a product which has a new intended use or uses advanced
technology that is not substantially equivalent to a use or technology with
respect to a legally marketed device. The safety and effectiveness of Class III
devices cannot be assured solely by the General Controls and the other
requirements described above. These devices almost always require formal
clinical studies to demonstrate safety and effectiveness.
Approval of a premarket approval application, or PMA, from the FDA is required
before marketing of a Class III product can proceed. The PMA process is much
more demanding than the 510(k) premarket notification process. A PMA
application, which is intended to demonstrate that the device is safe and
effective, must be supported by extensive data, including data from preclinical
studies and human clinical trials and existing research material, and must
contain a full description of the device and its components, a full description
of the methods, facilities, and controls used for manufacturing, and proposed
labeling. Once the FDA determines that an application is sufficiently complete
to permit a substantive review, the FDA will accept the application for review.
The FDA, by statute and by regulation, has 180 days to review a filed PMA
application, although the review of an application frequently occurs over a
significantly longer period of time, sometimes up to several years. In approving
a PMA application or clearing a 510(k) application, the FDA may also require
some form of post-market surveillance, whereby the manufacturer follows certain
patient groups for a number of years and makes periodic reports to the FDA on
the clinical status of those patients when necessary to protect the public
health or to provide additional safety and effectiveness data for the device.
When FDA approval of a Class I, Class II or Class III device requires human
clinical trials, and if the device presents a "significant risk" (as defined by
the FDA) to human health, the device sponsor is required to file an
investigational device exemption, or IDE, application with the FDA and obtain
IDE approval prior to commencing the human clinical trial. If the device is
considered
a "non-significant" risk, IDE submission to the FDA is not required. Instead,
only approval from the Institutional Review Board overseeing the clinical trial
is required. Human clinical studies are generally required in connection with
approval of Class III devices and to a much lesser extent for Class I and II
devices.
Our manufacturing processes are required to comply with the FDA's Good
Manufacturing Practice, or GMP, requirements contained in its Quality System
Regulation, or QSR. The QSR covers, among other things, the methods and
documentation of the design, testing, production, processes, controls, quality
assurance, labeling, packaging, and shipping of a company's products. The QSR
also requires maintenance of a device master record, device history record, and
complaint files. A company's domestic facility, records, and manufacturing
processes are subject to periodic unscheduled inspections by the FDA.
In July 1997, we received 510(k) clearance from the FDA for the surgeon's
console and patient cart to be used with only rigid endoscopes, blunt
dissectors, retractors and stabilizer instruments. In November 1997, we withdrew
a subsequent 510(k) submission covering additional instruments necessary for
performing most surgical procedures, including scissors, scalpels,
forceps/pickups, needle holders, clip appliers and electrocautery, after the FDA
indicated that substantial clinical data would be required to support clearance.
In January 1999, we filed a 510(k) submission with clinical data, seeking
clearance for the da Vinci Surgical System and EndoWrist instruments for
laparoscopic surgical procedures. In May 1999, the FDA determined that our
products were not eligible for 510(k) clearance but would instead be required to
undergo the PMA approval process. On June 16, 1999, after review of the clinical
data on the use of our products in laparoscopic surgical procedures, the FDA's
General Surgery Advisory Panel recommended approval. In November 1999, we filed
a PMA application to commercialize our products for laparoscopic surgery, which
was accepted for review by the FDA in December 1999. In March 2000, the FDA
inspected our Mountain View facility and determined, after conducting an
extensive audit, that our facility and manufacturing practices were consistent
with Good Manufacturing Processes. In June 2000, the FDA determined that the PMA
approval process was inappropriate for the da Vinci Surgical System and
re-classified the device as Class II. The Premarket Approval Application
submitted in November 1999 was closed and the original 510(k) application
reactivated. In July 2000, we received a letter from the FDA informing us of
their decision to clear the da Vinci Surgical System for use in laparoscopic
surgery. The decision to reclassify the device to Class II also means that
future submissions for the da Vinci Surgical System may be reviewed under the
premarket notification process unless changes to the intended use significantly
change the safety and effectiveness of the device, in which case a PMA may be
required.
Subsequent to the July 2000 clearance of the da Vinci Surgical System, we have
obtained additional 510(k) clearances from the FDA to include non-cardiac
thoracoscopic surgical procedures (March 2001), laparoscopic radical
prostatectomy (May 2001). and thoracoscopically-assisted cardiotomy procedures
(November 2002). In January 2001, we submitted an investigational device
exemption application to the FDA requesting permission to conduct a multi-center
evaluation of the da Vinci Surgical System for totally endoscopic coronary
artery bypass grafting. In April 2001, we received a letter from the FDA
approving trials for totally endoscopic coronary artery bypass grafting. We have
commenced this clinical trial and, if completed, we expect to submit a 510(k) to
the FDA requesting permission to expand
the intended use for the da Vinci Surgical System to include totally endoscopic
coronary artery bypass grafting. While trials are in progress, we cannot assure
that such trials will produce clinical data adequate to support a 510(k)
application.
We are subject to inspection and market surveillance by the FDA to determine
compliance with regulatory requirements. If the FDA finds that we have failed to
comply, the agency can institute a wide variety of enforcement actions, ranging
from a public warning letter to more severe sanctions. The FDA also has the
authority to request repair, replacement or refund of the cost of any medical
device manufactured or distributed by us. Our failure to comply with applicable
requirements could lead to an enforcement action that may have an adverse effect
on our financial condition and results of operations.
CALIFORNIA REGULATION
The state of California requires that we obtain a license to manufacture medical
devices and subjects us to periodic inspection. Our facilities and manufacturing
processes were inspected in February 1998. We passed the inspection and received
our device manufacturing license from the Food and Drug Branch, or FDB, of the
California Department of Health Service in March 1998. In March 2002, our
facilities and manufacturing processes in our Sunnyvale facility were
re-inspected by the FDB and we have received an updated device manufacturing
license for our Sunnyvale facility.
FOREIGN REGULATION
In order for us to market our products in other countries, we must obtain
regulatory approvals and comply with extensive safety and quality regulations in
other countries. These regulations, including the requirements for approvals or
clearance and the time required for regulatory review, vary from country to
country. Failure to obtain regulatory approval in any foreign country in which
we plan to market our products may harm our ability to generate revenue and harm
our business.
Commercialization of medical devices in Europe is regulated by the European
Union. The European Union presently requires that all medical products bear the
CE mark, an international symbol of adherence to quality assurance standards and
demonstrated clinical effectiveness. Compliance with the Medical Device
Directive, as certified by a recognized European Notified Body, permits the
manufacturer to affix the CE mark on its products. In January 1999, following an
audit of our quality system and Mountain View facility, we received permission
from DGM, our Notified Body and agent of the Danish Government, to affix the CE
mark to our da Vinci Surgical System and EndoWrist instruments.
If we modify existing products or develop new products in the future, we may
need to apply for permission to affix the CE mark to such products. In addition,
we are subject to annual regulatory audits in order to maintain the CE mark
permissions already obtained. We do not know whether we will be able to obtain
permission to affix the CE mark for new or modified products or whether we will
continue to meet the quality and safety standards required to maintain the
permissions we have already received. If we are unable to maintain permission to
affix the CE mark to our products, we will no longer be able to sell our
products in member countries of the European Union.
The Ministry of Health and Welfare regulates commercialization and reimbursement
of medical devices in Japan. We have developed a clinical trial strategy for
laparoscopic surgical use of the da Vinci Surgical System and EndoWrist
instruments with our commercial partner in Japan. In May 2001, the proposed
clinical trial strategy was approved by the Ministry of Health and Welfare. We
commenced this clinical trial in June 2001 and, if completed, we expect to
submit appropriate documentation to the Ministry of Health and Welfare
requesting permission to commercialize the da Vinci Surgical System for conduct
of laparoscopic surgical procedures in Japan. We are currently in the process of
developing a cardiothoracic surgical clinical strategy with our commercial
partner to facilitate conduct of an evaluation ultimately permitting expansion
of the intended use for da Vinci Surgical System to include various
cardiothoracic surgical procedures. However, we do not know whether we will
succeed in procuring the required approvals to market our products in Japan or
elsewhere, even if we develop a strategy and ultimately apply for these
approvals.
THIRD-PARTY REIMBURSEMENT
In the United States and international markets where we intend to sell our
products, the government and health insurance companies together are responsible
for hospital and surgeon reimbursement for virtually all surgical procedures.
Governments and insurance companies generally reimburse hospitals and physicians
for surgery when the procedures are considered non-experimental and
non-cosmetic. In the United States, reimbursement for medical procedures under
the Medicare and Medicaid programs is administered by Centers for Medicare &
Medicaid Services. Generally, procedure codes are assigned by the American
Medical Association using the copyrighted Current Procedural Terminology codes,
which are in turn incorporated in the Medicare and Medicaid programs coding
system. Applications for new procedure codes may be submitted to the American
Medical Association.
Governments and insurance companies carefully review and increasingly challenge
the prices charged for medical products and services. Reimbursement rates from
private companies vary depending on the procedure performed, the third-party
involved, the insurance plan involved, and other factors. Medicare reimburses
hospitals a prospectively determined fixed amount for the costs associated with
an in-patient hospitalization based on the patient's discharge diagnosis, and
reimburses physicians a prospectively determined fixed amount based on the
procedure performed. This fixed amount is paid regardless of the actual costs
incurred by the hospital or physician in furnishing the care and is unrelated to
the specific devices used in that procedure. Thus, any reimbursements that
hospitals obtain for performing surgery with our products will generally have to
cover any additional costs that hospitals incur in purchasing our products.
Domestic institutions typically bill the services performed with our products to
various third-party payors, such as Medicare, Medicaid and other government
programs and private insurance plans. Because the da Vinci Surgical System has
been cleared for commercial distribution in the United States by the FDA,
Medicare reimbursement is available for use of the device in laparoscopic and
thoracoscopic procedures and procedures conducted under an approved
investigational device exemption application. We believe that the additional
procedures we intend to target are generally already reimbursable by government
agencies and insurance companies. If hospitals do not obtain sufficient
reimbursement from third-party payors for procedures performed with our
products, or if governmental and private payors' policies do not permit
reimbursement for surgical procedures performed using our products, we may not
be able
to generate the revenues necessary to support our business. In such
circumstances, we may have to apply to the American Medical Association for a
unique Current Procedural Terminology code covering computer-enhanced surgery.
If an application for a unique code is required, reimbursement for any use of
our products may be unavailable until an appropriate code is granted. The
application process, from filing until adoption of a new code, can take two or
more years.
In countries outside the United States, reimbursement is obtained from various
sources, including governmental authorities, private health insurance plans, and
labor unions. In most foreign countries, private insurance systems may also
offer payments for some therapies. Additionally, health maintenance
organizations are emerging in certain European countries. To effectively conduct
our business, we may need to seek international reimbursement approvals, and we
do not know if these required approvals will be obtained in a timely manner or
at all.
Any regulatory or legislative developments in domestic or foreign markets that
eliminate or reduce reimbursement rates for procedures performed with our
products could harm our ability to sell our products or cause downward pressure
on the prices of our products, either of which would affect our ability to
generate the revenues necessary to support our business.
EMPLOYEES
As of December 31, 2002, we had 290 employees, 54 of whom were engaged directly
in research and development, 93 in manufacturing and service and 143 in
marketing, sales, and administrative activities. None of our employees are
covered by a collective bargaining agreement, and we consider our relationship
with our employees to be good.
RECENT DEVELOPMENTS
In November 2002, Frederic Moll, M.D. the Company's co-founder and Medical
Director, and a member of the Board of Directors, became the Chief Executive
Officer at a newly formed company called Hansen Medical. The Company does not
believe that Hansen Medical will directly compete with the Company. Hansen
Medical intends to develop and sell products that will use catheter-based
medical device technology for interventional procedures. The Board of Directors
and management of the Company have agreed with Dr. Moll that he will continue
with his responsibilities as Medical Director at a salary commensurate with his
time spent at the Company and that he will continue to serve as a member of the
Board of Directors. The Company may decide to license certain portions of its
technology to Hansen Medical as well as take an equity position in this new
venture. Initial funding for Hansen Medical has been provided by Prospect
Venture Partners. Dr. Russell C. Hirsch, a member of our board of directors,
serves as one of the managing partners for Prospect Venture Partners.
WEBSITE ACCESS TO REPORTS
We make our periodic and current reports available, free of charge, on our
website as soon as practicable after such material is electronically filed with
the Securities and Exchange Commission. Our website address is
www.intuitivesurgical.com and the reports are filed under "SEC Filings."
ITEM 2: PROPERTIES
Prior to February 2002, we leased approximately 50,000 square feet in Mountain
View, California. The lease expired in February 2002 and was not renewed.
Effective January 2002, we lease approximately 83,000 square feet in Sunnyvale,
California. Our lease agreement requires us to lease an additional 22,000 square
feet starting in January 2004. The facility is leased through April 2007, and we
have an option to extend the lease for an additional five-year term.
ITEM 3: LEGAL PROCEEDINGS
COMPUTER MOTION
We are involved in intellectual property litigation with Computer Motion as
described below. While the recently announced merger agreement has resulted in a
stay of all such litigation and other administrative legal proceedings between
Intuitive and Computer Motion, these proceedings may continue if the merger is
not completed for any reason. If the merger closes, then all litigation and
other disputes between Intuitive and Computer Motion will be dismissed with
prejudice or similarly finally terminated.
On May 10, 2000, Computer Motion filed a lawsuit in United States District Court
for the Central District of California (Case No. CV00-4988 CBM) alleging that by
making, using, selling or offering for sale our da Vinci Surgical System, we are
infringing United States Patent Numbers 5,524,180, 5,762,458, 5,815,640,
5,855,583, 5,878,193, 5,907,664, and 6,001,108, in willful disregard of Computer
Motion's patent rights. On June 1, 2000, Computer Motion amended its lawsuit to
allege that we also infringe U.S. Patent Number 6,063,095. In late 2000,
Computer Motion alleged our infringement of a ninth patent, and added U.S.
Patent Number 6,102,850 to the litigation. Computer Motion subsequently added
U.S. Patent No. 6,244,809 to the litigation, alleging that we also infringe that
tenth patent. These ten patents concern various methods and devices for
conducting various aspects of robotic surgery. Of those ten patents, three are
no longer part of the suit. After Computer Motion lost all of its rights to its
5,855,583 and 5,878,193 patents as a result of our successful Patent Office
interference proceedings, Computer Motion voluntarily dismissed those patents
from suit. However, Computer Motion has sought to challenge the interference
proceedings by separate district court appeal. In addition, in November 2002,
the Court granted our motion for summary judgment of noninfringement of the
6,102,850 patent. In February 2003, the Court denied our motion for summary
judgment of noninfringement of the 6,244,809 patent and granted Computer
Motion's cross-motion for partial summary judgment of literal infringement of
one claim of that patent. We subsequently requested that the Court reconsider
that decision because of perceived flaws in the Court's approach to the issue of
infringement on summary judgment. Regardless of what happens on reconsideration,
we will continue to defend the 809 patent on invalidity, based on the earlier
robotic surgery work of SRI and others. We still have pending motions for
summary judgment of noninfringement on two more of Computer Motion's seven
remaining patents-in-suit, numbers 5,907,664 and 6,001,108. At the Court's
request, we will not file further motions for summary judgment until the
remaining pending motions are decided. In late January 2003, after close of fact
discovery, Computer Motion asserted between 26 and 35 new claims of its seven
remaining patents-in-suit and new theories of infringement. We have moved to
strike those new assertions as inappropriate at this late stage. Trial had been
calendared for April 29, 2003.
\
In connection with our proposed merger with Computer Motion, our company and
Computer Motion have obtained an immediate stay through August 31, 2003 of all
proceedings in the pending litigations between the companies. As part of the
stays, the courts have ceased all further activity in the cases during the
period of stays, and will not issue any opinions or orders on issues already
submitted for decision. In addition, the California court postponed the trial
date and was asked to reset trial for a date no earlier than November 30, 2003.
The stays may be terminated before, or extended beyond, August 31, 2003 under
specified circumstances. In the event the merger is completed, our company and
Computer Motion will request dismissal with prejudice of all pending
litigations.
The Computer Motion action seeks damages based upon the making, using, selling
and offering for sale of our products and processes, and seeks to enjoin our
continued activities relating to these products. In the event the stay is
lifted, this action will subject us to potential liability for damages,
including treble damages, and could require us to cease making, using or selling
the affected products, or to obtain a license in order to continue to
manufacture, use or sell the affected products. While we continue to believe we
have multiple meritorious defenses to each patent asserted in this action, in
the event that the stay is lifted, we cannot assure you that we ultimately will
prevail on any issue in the litigation or that we will be able to successfully
defend Computer Motion's charges, nor can we provide assurance that any license
required would be made available on commercially acceptable terms, if at all.
Failure to successfully defend against the Computer Motion action could harm our
business, financial condition and operating results. Due to the inherent
uncertainties of litigation, we cannot accurately predict the ultimate outcome
of this matter at this time and, therefore, cannot estimate the range of
possible loss.
On March 7, 2003, Intuitive and Computer Motion announced their intent to merge
into a single surviving company. As part of their merger agreement, on March 10,
2003, both companies jointly requested that the California litigation be stayed
through August 31, 2003, and that a trial date be reserved no sooner than three
months after August 31, 2003, in case the merger cannot be completed. Currently,
there is no further activity in the California litigation while closing of the
merger is pursued.
On December 7 and 8, 2000, the PTO declared three interferences between a single
SRI patent application exclusively licensed to our company and three of Computer
Motion's patents, Numbers 5,855,583, 5,878,193 and 5,907,664. An interference is
a proceeding within the U.S. Patent Office to resolve questions regarding the
patentability of inventions and who first invented subject matter claimed by two
or more patents or patent applications. The Patent Office entered final judgment
in each interference proceeding. In the interference involving the 5,878,193
patent, the PTO entered final judgment in our favor. Subject to review by or
appeal to a federal court, which could reverse or modify any or all of the
following, this judgment establishes that the disputed invention of, generally
speaking, image-based control of robotic surgical instruments is prior art to
all of Computer Motion's remaining patents, that we are entitled to patent that
invention, and that Computer Motion is no longer entitled to any of the three
claims of the 5,878,193 patent. In the interference involving the 5,855,583
patent, the PTO again entered final judgment in our favor. Subject to review by
or appeal to a federal court, which could reverse or modify any or all of the
following, this judgment establishes that the disputed invention of, generally
speaking, proportional movement of articulating robotic surgical instruments is
prior art to all of Computer Motion's remaining patents, that we are entitled to
patent that invention, and that Computer Motion is no longer entitled to any of
the 15 claims of
the 5,855,583 patent. In the interference involving the 5,907,664
patent, the PTO entered final judgment against us, deciding that our patent
claim is unpatentable for noncompliance with the "written description"
requirement of Title 35 of the U.S. Code. The PTO declined to decide our motion
challenging the validity of certain claims of the `664 patent, leaving that
issue in question. This 5,907,664 patent was the subject of our first motion for
summary judgment of noninfringement mentioned in the previous paragraph, which
motion still has not been decided. In July 2002, Computer Motion filed suit
against us in the U.S. District Court for the Central District of California to
challenge the PTO's two interference judgments in our favor. That suit has also
been stayed through August 31, 2003 as a result of the merger agreement between
Computer Motion and Intuitive.
In September 2000, we filed a Notice of Opposition in the European Patent
Office, or EPO, challenging European Patent No. 653,922, which was issued to
Computer Motion in 1999 and is related to several of the patents now involved in
the U.S. litigation and the interference proceedings. An opposition proceeding
allows the EPO to determine whether the challenged patent should be revoked in
its entirety, should be amended, or should remain unaltered. In our Notice of
Opposition, we cited numerous prior art references not cited to the EPO during
the '922 patent's original prosecution. An initial ruling in March 2002
indicated that the EPO was not then inclined to alter the `922 patent in any
way. However, during a hearing held in Germany on July 2, 2002, the EPO
sanctioned Computer Motion for its "abuse" of the opposition process. As a
result of Computer Motion's actions, the preliminary EPO decision is mooted,
both sides will now provide further written briefing and evidence on the
substantive issues, and another hearing is anticipated for sometime later in
2003. Intuitive and Computer Motion anticipate taking steps to seek a stay or
other similar relief from the EPO as a result of their recent merger agreement.
On March 30, 2001, Intuitive and International Business Machines Corporation
("IBM") jointly filed suit against Computer Motion in the U.S. District Court
for the District of Delaware. The complaint alleges that by continuing to make,
use, sell, and offer for sale its AESOP and ZEUS voice-controlled products,
Computer Motion willfully infringes U.S. Patent No. 6,201,984. The complaint
also impacted the HERMES product to the extent it interfaced with either the
AESOP or ZEUS. The `984 patent concerns various aspects of voice control of
surgical instruments issued to IBM in early March 2001 and is exclusively
licensed to us. The `984 patent predates by several years Computer Motion's
development of voice-controlled surgical robots. Trial was held in August 2002.
After evidence and argument was presented, the seven-member Delaware jury
returned a unanimous verdict in our favor, finding that Computer Motion had
failed to prove any claim of the `984 patent invalid and awarding us $4.4
million for damage caused by Computer Motion's sales of its infringing AESOP and
ZEUS products. In December 2002, the Court rejected Computer Motion's final
"prosecution laches" defense as inapplicable to the circumstances presented by
our patent. Subject to the stay, the suit is in the post-trial briefing phase.
Computer Motion has filed three motions seeking to set aside the jury's verdict,
to reduce the damages awarded, and for a new trial on one or more issues. We
have filed our request for a permanent injunction against further infringing
sales of Computer Motion's AESOP and ZEUS products. In February 2003, the Court
indicated that it would first address Computer Motion's post-trial requests
before deciding our request for a permanent injunction against Computer Motion.
All proceedings in this suit have also now been stayed through August 31, 2003
as a result of the merger agreement between Computer Motion and Intuitive.
BROOKHILL-WILK 1, LLC
On September 1, 2000, Brookhill-Wilk 1, LLC, or Wilk, filed a lawsuit in the
United States District Court for the Southern District of New York (Case No. 00
Civ. 6599 (NRB) alleging that by making, using, selling or offering for sale our
da Vinci Surgical System, we are infringing U.S. Patent Nos. 5,217,003 and
5,368,015 in willful disregard of Wilk's patent rights. These patents concern
methods and devices for "remote" surgery. In March 2001, Wilk withdrew its
assertion of infringement of the '015 patent against our company, leaving only
the '003 patent at issue in the suit. On November 8, 2001, the District Court
granted summary judgment of noninfringement of the `003 patent in our favor and
dismissed Wilk's complaint in its entirety. Wilk appealed the summary judgment
ruling to the U.S. Court of Appeals for the Federal Circuit. A decision on the
substantive issue on appeal is expected sometime in 2003. We believe the
appellate court will uphold the summary judgment of noninfringement. If we lose
the appeal, however, the case will return for further proceedings in the
District Court. We remain confident that we will prevail in Wilk's suit against
us and that we have multiple meritorious defenses to Wilk's assertion of its
`003 patent. However, litigation is unpredictable and we may not prevail with
any of our defenses or on appeal. If we ultimately lose Wilk's suit against us,
however, it will hurt our competitive position, may be costly to us and may
prevent us from selling our products. In addition, if we lose the patent suit,
we may need to obtain from Wilk a license to this technology if we are to
continue to market our products that have been found to infringe Wilk's patents.
This license could be expensive, which could seriously harm our business. If
Wilk is successful in its suit against us and is unwilling to grant us a
license, we may be required to stop selling our products that are found to
infringe Wilk's patents unless we can redesign them so they do not infringe
Wilk's patents, which we may be unable to do. In addition, if we lose the patent
suit, we could be required to pay Wilk damages, including treble damages, which
could be substantial and harm our financial position.
OTHER LEGAL MATTERS
In September 2002, we discovered that one of our employees had purchased
approximately $900,000 in administrative supplies without the authorization or
knowledge of the company's management. This matter was investigated by law
enforcement authorities and company advisors. We have since terminated this
employee and have taken actions intended to insure that no similar incidents can
occur in the future, including by implementing additional controls relating to
our cash disbursement process. In addition, we are seeking to recover our loss.
We have filed a claim with our insurance carrier, from which we expect to
receive proceeds of approximately $500,000, and have filed suit against the
sellers of the administrative supplies in December 2002. Our complaint alleged
that each of the defendants has (i) violated various sections of the Racketeer
Influenced and Corrupt Organizations ("RICO") Act through their extortion,
coercion, intimidation, fraud, bribery and racketeering activity in connection
with the Unauthorized Purchase of Office Supplies, and (ii) committed unlawful
business acts and practices in violation of Cal. Bus. & Prof. Code Section 17200
et seq. Our suit seeks to recover actual and treble damages, costs and attorney
fees for the damage caused by each of defendants through their illegal conduct.
In January 2003, we amended our complaint to allege that each defendant further
unlawfully offered prizes and gifts in violation of Cal. Bus. & Prof. Code
Section 17537 and unlawfully failed to advertise limitations on the quantity of
its sales in violation of Cal. Bus. & Prof. Code Section 17500.5. The amended
complaint reiterates our claim to recover actual and treble damages, costs and
attorney fees. This suit is in its early stages and, as of March 21, 2003, none
of the defendants have yet answered either complaint.
We are subject to legal proceedings and claims that arise in the normal course
of our business. We do not know whether we will prevail in these matters nor can
we assure you that any remedy
could be reached on commercially viable terms, if at all. Due to the inherent
uncertainties of litigation, we cannot accurately predict the ultimate outcome
of these matters at this time and, therefore, cannot estimate the range of
possible loss.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fiscal
quarter ended December 31, 2002.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on The Nasdaq Stock Market under the symbol
"ISRG" since June 13, 2000. The following table sets forth the high and low
sales prices of our common stock for the periods indicated and are as reported
by Nasdaq.
QUARTER HIGH LOW
------ ------
Year Ended December 31, 2002:
First Quarter $10.15 $ 8.39
Second Quarter 10.90 7.92
Third Quarter 8.31 5.77
Fourth Quarter 8.13 6.08
Year Ended December 31, 2001:
First Quarter $ 9.13 $ 4.88
Second Quarter 14.78 3.00
Third Quarter 14.15 4.99
Fourth Quarter 10.75 6.01
As of December 31, 2002, there were approximately 253 stockholders of record of
our common stock, although we believe that there is a significantly larger
number of beneficial owners of our common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends. We currently expect to retain
earnings for use in the operation and expansion of our business, and therefore
do not anticipate paying any cash dividends for the next several years.
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with the Consolidated Financial Statements and the accompanying Notes to such
consolidated statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this report. The
selected data in this section is not intended to replace the consolidated
financial statements.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- --------- ---------
(In Thousands, Except Per Share Data)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Sales ............................... $ 72,022 $ 51,673 $ 26,624 $ 10,192 $ --
Cost of sales ....................... 34,584 28,218 18,031 9,273 --
-------- -------- -------- -------- --------
Gross profit ........................ 37,438 23,455 8,593 919 --
-------- -------- -------- -------- --------
Operating costs and expenses:
Selling, general and administrative 40,864 29,987 19,136 9,338 7,565
Research and development ........... 16,793 13,851 11,734 11,130 23,208
-------- -------- -------- -------- --------
Total operating costs
and expenses .................... 57,657 43,838 30,870 20,468 30,773
-------- -------- -------- -------- --------
Loss from operations ................ (20,219) (20,383) (22,277) (19,549) (30,773)
Interest income, net ................ 1,798 3,683 3,754 1,134 1,330
-------- -------- -------- -------- --------
Net loss ............................ $(18,421) $(16,700) $(18,523) $(18,415) $(29,443)
======== ======== ======== ======== ========
Basic and diluted net loss per share $ (0.51) $ (0.47) $ (0.78) $ (3.81) $ (8.14)
======== ======== ======== ======== ========
Shares used in computing basic and
diluted net loss per share ......... 36,458 35,815 23,796 4,837 3,619
======== ======== ======== ======== ========
DECEMBER 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(In Thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments ......................... $ 50,839 $ 66,661 $ 89,441 $ 26,260 $ 23,220
Working capital ...................... $ 52,562 $ 67,922 $ 83,836 $ 22,023 $ 19,817
Total assets ......................... $ 91,581 $ 100,361 $ 112,421 $ 34,455 $ 28,167
Notes payable, less current portion .. $ 1,838 $ 771 $ 1,861 $ 2,521 $ 2,438
Deferred compensation ................ $ (223) $ (886) $ (2,483) $ (943) $ (1,128)
Accumulated deficit .................. $(128,791) $(110,370) $ (93,670) $ (75,147) $ (56,732)
Total stockholders' equity ........... $ 63,680 $ 78,293 $ 90,730 $ 22,211 $ 20,596
The consolidated statements of operations data for the years ended December 31,
2002, 2001,
and 2000, and the consolidated balance sheet data at December 31, 2002 and 2001
are derived from our consolidated financial statements which have been audited
by Ernst & Young LLP and included elsewhere in this report. The consolidated
statement of operations data for the years ended December 31, 1999 and 1998 and
the consolidated balance sheet data at December 31, 2000, 1999, and 1998 are
derived from our audited consolidated financial statements that are not included
in this report. Historical results are not indicative of the results to be
expected in the future.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and our consolidated financial statements
and the related notes.
Except for historical information, the discussion in this report contains
forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. The cautionary
statements made in this report should be read as applying to all related
forward-looking statements wherever they appear in this report. Our actual
results could differ materially from those discussed here. Factors that could
cause or contribute to these differences include those discussed in "-- Factors
Affecting Operating Results" below as well as those discussed elsewhere.
OVERVIEW
We design, manufacture, and market the da Vinci Surgical System, an advanced
surgical system that we believe represents a new generation of surgery. The da
Vinci Surgical System consists of a surgeon's console, a patient-side cart, a
high performance vision system and proprietary instruments. The da Vinci
Surgical System seamlessly translates the surgeon's natural hand movements on
instrument controls at a console into corresponding micro-movements of
instruments positioned inside the patient through small puncture incisions, or
ports. We believe that the da Vinci Surgical System is the only commercially
available technology that can provide the surgeon with the intuitive control,
range of motion, fine tissue manipulation capability and 3-D visualization
characteristic of open surgery, while simultaneously allowing the surgeon to
work through the small ports of minimally invasive surgery, or MIS. By placing
computer-enhanced technology between the surgeon and the patient, we believe
that the da Vinci Surgical System enables surgeons to perform better surgery
while giving patients the benefits of MIS, including decreased trauma and
postoperative pain, reduced surgical complications, shorter hospital stays and
lower total treatment costs.
In 1999, we obtained permission from the European Union to affix the CE Mark to
the da Vinci Surgical System and EndoWrist instruments for general surgical and
cardiac surgical use. Based on this approval, we recognized revenue for the
first time in the second quarter of 1999 for the sale of our products. In July
2000, we received clearance from the U.S. Food and Drug Administration, or FDA,
to begin commercialization of our da Vinci Surgical System in the United States
for use in laparoscopic surgical procedures. In March 2001, we received
clearance from the FDA for use of our da Vinci Surgical System in non-cardiac
thoracoscopic surgical procedures. In May 2001, we received market clearance
from the FDA to promote use of the da Vinci Surgical System for performance of
laparoscopic radical prostatectomy procedures. In
November 2002, we received clearance from the FDA for use of the da Vinci
Surgical System in thoracoscopically-assisted cardiotomy procedures. In January
2003, we began promoting atrial septal defect closure surgery under the November
2002 cardiotomy clearance.
To date, the majority of our revenues have come from the sales of the da Vinci
Surgical System, which are high revenue dollar items. A smaller percentage of
revenues have come from sales of EndoWrist instruments and accessories, which
are lower revenue dollar items. A small percentage of revenue also comes from
ongoing service of installed da Vinci Surgical Systems. Although we expect the
majority of our revenues to continue to come from the sale of da Vinci Surgical
Systems over the next few years, we believe that the percentage of revenue from
our EndoWrist instruments and service will continue to increase. Due to the high
dollar revenue per system sold, small variations in system unit sales may cause
revenue to vary significantly from quarter to quarter. During the useful life of
each installed da Vinci Surgical System, we expect to generate recurring revenue
through sales of the EndoWrist instruments and accessories and ongoing service.
The percentage of revenue derived from recurring instrument, accessory, and
service revenue has grown from 12% in 2000 to 14% in 2001 and to 21% in 2002.
PROPOSED MERGER
On March 7, 2003, we entered into an Agreement and Plan of Merger with Computer
Motion, Inc. Pursuant to the merger agreement, a wholly owned subsidiary of our
company will merger with Computer Motion, with Computer Motion surviving the
merger and continuing as a wholly owned subsidiary of our company.
In connection with the proposed merger, we have entered into a Loan and Security
Agreement with Computer Motion pursuant to which we have agreed to provide a
short-term secured bridge loan facility of up to $7.3 million. Computer Motion
may use the facility to pay off existing indebtedness and to fund operations
prior to completion of the merger. This facility terminates and all outstanding
amounts become due, subject to acceleration upon the occurrence of specified
events. Interest on the facility will accrue at a rate of 8% per annum and will
be payable on the maturity date.
We expect that we and Computer Motion will hold our respective stockholders
meetings at which matters related to the merger will be submitted for approval
in June 2003.
Management anticipates that the combined companies will be able to achieve
annual pre-tax cost savings of approximately $18 million commencing in late
2003. A significant portion of those savings will result from a substantial
reduction in headcount. Intuitive Surgical's ability to achieve these goals is
subject to economic conditions and unanticipated changes in business conditions,
and therefore there can be no assurance that these results will be achieved.
RESULTS OF OPERATIONS
Sales. Sales for the year ended December 31, 2002 were $72.0 million, up 39%
from $51.7 million for the year ended December 31, 2001. The increase was
primarily the result of the sale of 60 systems during 2002, compared to 49
systems during 2001. Total system revenue for the year ended December 31, 2002
was $56.9 million, compared to $44.7 million in the year ended December 31,
2001. The average system selling price, or ASP, was $948,000 in 2002, compared
to $912,000 in 2001, reflecting the impact of a 2002 U.S. list price increase
and a higher concentration of sales in the higher ASP U.S. market. System unit
sales by region in 2002 were 50 in the U.S., 6 in Europe, and 4 in the rest of
the world, compared to 2001 system unit sales of 31 in the U.S., 16 in Europe,
and 2 in the rest of the world.
Also contributing to the revenue increase was continued growth in recurring
instrument, accessory, and service revenue. The 2002 recurring revenue increased
by $8.1 million, or 116%, to $15.1 million, compared to $7.0 million in 2001 as
cumulative placements of systems grew from 89 at December 31, 2001 to 149 at
December 31, 2002.
Sales for the year ended December 31, 2001 of $51.7 million were up 94% from
$26.6 million for the year ended December 31, 2000. The sales increase was
primarily due to an increase in the number of da Vinci Surgical Systems sold to
49 in 2001 from 28 in 2000.
Gross Profit. Gross profit for the year ended December 31, 2002 was $37.4
million, or 52% of sales, compared to $23.5 million, or 45% of sales, in 2001
and $8.6 million, or 32% of sales, in 2000. The year-to-year improvements in
gross profit resulted from higher system ASP increased manufacturing
efficiencies and improved contribution from customer service operations.
In addition, 2001 and 2000 gross profit were both negatively impacted by a $1.0
million non-routine royalty charge that became due to IBM when we exceeded $50.0
million in annual revenue in 2001 and $25.0 million in 2000. Excluding the
impact of this charge, 2001 gross profit would have been $24.5 million, or 47%
of sales, and 2000 gross profit would have been $9.6 million, or 36% of sales.
The 2001 royalty payment represented the final royalty obligation
under our agreement with IBM.
Research and Development Expenses. The 2002 research and development costs were
$16.8 million, up 21% from $13.9 million in 2001. The increase was primarily due
to headcount-related increases of $1.5 million, more clinical trial costs of
$900,000, higher prototype material and project costs of $400,000, and higher
facilities costs of $400,000, offset by lower deferred compensation amortization
of $600,000. The 2001 research and development expenses of $13.9 million were up
18% from $11.7 million in 2000. The increase was due to higher prototype
material and project costs of $1.4 million and headcount-related increases of
$1.0 million.
Research and development expenses include costs associated with the design,
development, testing and enhancement of our products. These enhancements
represent significant improvements to our products. Research and development
expenses also include expenditures for clinical trials and purchases of
laboratory supplies. Research and development costs are expensed as incurred. We
expect to continue to make substantial investments in research and development
and anticipate that research and development expenses will continue to increase
in the future.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 2002 were $40.9 million, up 36% from $30.0 million
for 2001. The year-over-year increase was due in large part to support increased
revenue and a larger installed base of da Vinci Surgical Systems. Specifically,
salaries and fringe benefits increased $5.6 million, travel and entertainment
increased $1.6 million, and customer training and lab costs increased $1.7
million. Selling, general and administrative expenses were also higher in 2002
due to increased legal expenses of $1.5 million, unauthorized purchases of
administrative supplies of $900,000, and facilities charges of $300,000, offset
by lower depreciation of $400,000 and deferred compensation expense of $300,000.
Selling, general and administrative expenses for 2001 of $30.0 million were
$10.9 million higher than the 2000 expenses of $19.1 million. This increase was
primarily due to headcount increases resulting from growing sales and marketing
activities as the da Vinci Surgical System received FDA clearance in 2000.
Selling, general and administrative expenses include personnel costs for sales,
marketing and administrative personnel, tradeshow expenses, legal expenses,
regulatory fees and general corporate expenses. Selling, general and
administrative expenses are expected to increase in the future to support our
expanding business.
Deferred Compensation. We record deferred compensation as the difference between
the exercise price of options granted and the fair value of our common stock at
the time of grant for financial reporting purposes. Deferred compensation is
amortized to research and development expenses and selling, general and
administrative expenses. For the years ended December 31, 2002, 2001 and 2000,
we recorded amortization of deferred stock compensation of $700,000, $1.6
million, and $2.6 million, respectively. For 2002, 2001 and 2000, non-cash
deferred compensation expense included in research and development expenses was
$400,000, $1.0 million, and $1.9 million, respectively. For 2002, 2001 and 2000
non-cash deferred compensation expense included in selling, general and
administrative expenses was $300,000, $600,000, and $700,000, respectively.
Deferred compensation recorded through December 31, 2002 was $8.9 million with
accumulated amortization of $8.7 million. The remaining $200,000 is scheduled to
be amortized during the first half of 2003.
Interest Income. Interest income was $2.0 million, $3.9 million, and $4.3
million for 2002, 2001, and 2000, respectively. The decreases resulted primarily
from decreasing cash and short-term