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Surgical robots are a new investment frontier

As the healthcare sector expands its use of robots and AI, it is creating new investment opportunties.

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

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

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

Canada has few heavyweights in the healthcare sector and no large players in surgical and medical devices. The S&P/TSX Capped Health Care Index has 10 stocks of which five are cannabis companies. Another three are involved in assisted living and nursing homes. Titan Medical, a TSX-listed startup, (TSX: TMD) is developing a surgical robot. It has interesting prospects, but as yet no revenues.

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

Mr. Henry says the U.S. is the biggest market for installations of medical robots, followed by western Europe, Japan and China. In terms of the number of procedures each year, the one-two is U.S. and China.

jim drake robots sick kids
Dr. Jim Drake, Surgeon-in-chief at Toronto’s Hospital for Sick Children, says surgical robots enhance the ability of doctors to do their job. Credit: Supplied photo

The machines are expensive and Canadian surgeons would like more of them. But they are hard to come by, says Dr. Jim Drake, Surgeon-in-Chief at the Hospital for Sick Children in Toronto.

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

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

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

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

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

“It started there because they are procedures with a narrow channel, where you can use a robot for visualization. They allow surgeons to see things that would otherwise be difficult to see.”

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

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

Intuitive SurgicalIntuitive Surgical robot AI surgery
A robotic arm cluster used in surgery manufactured by Intuitive Surgical Inc. Credit: Intuitive Surgical

The leader in general surgical robots is California-based Intuitive Surgical Inc. (NDQ: ISRG) with a recent market capitalization of US $62 billion. “It is one of the most profitable companies in our coverage universe,” Mr.  Henry says.

Medtronic Corp., (NYSE: MDT) the world’s largest medical device company, is number two.  Medtronic had a recent market cap of US $140 billion and operates in 140 countries, but generates most of its sales and profits in the U.S. Third, he says, is Johnson & Johnson, which  has teamed up with Google (NDQ:GOOG) to create Verb Surgical. Verb combines J&J’s tools with  Google’s data analytics, but as yet has no revenues. Other players  include Stryker Corp., (NYSE: SYK) a leader in hip and knee surgery and Zimmer Biomet (NYSE: ZBH).

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

“That’s the hope in the next five years,” he says.

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

“It’s a long way off if it ever comes at all,” he says.

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(This article appeared in the Globe Advisor section of the Globe & Mail Report on Business on Oct. 3, 2019)

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