Originally Published MX March/April
2002
COVER STORY
The Rising Tide of Telesurgery
For Computer Motion chairman and CEO Robert W. Duggan, surgical robotics is the wave of the future whose time has come.
Interview by Steve Halasey
For
more than a decade, Computer Motion Inc. (Goleta, CA) has pursued a single-minded
vision: to apply computer-controlled robotics to the challenges of medical surgery.
The company is devoted to the development, manufacture, and marketing of proprietary
computer and robotic surgical systems that are designed to enhance surgeons'
capabilities, improve patient outcomes, and reduce healthcare costs.
Computer Motion
was founded in 1989 by Yulun Wang, PhD, an electrical engineering graduate of
the University of California, Santa Barbara. But after serving as president
of the company throughout its early years, in 1996 Wang stepped aside to take
on new roles for the company as chief technical officer and executive vice president.
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The company didn't
have to look far to find a candidate to take on daily leadership responsibilities.
In 1997, the role of CEO was handed over to Robert W. Duggan, one of the company's
earliest investors and chairman of its board of directors since 1990. Duggan
brought with him a wealth of experience as a private-venture investor and business
adviser, having already served as a director of many other businesses.
Today, Duggan is the point person for Computer Motion's pioneering efforts to
develop the operating room of the future—the intelligent OR—which
the company envisions as a suite populated with a sophisticated network of medical
computers and robotic devices. "It's a star-high goal," Duggan admits,
"but it's a goal worth working toward because it touches everybody."
In this interview with MX editor in chief Steve Halasey, Duggan discusses
the challenges of investing in an early-stage technology, what it has taken
to bring robotic surgery devices to market, and what will be required next to
build a profitable industry sector based on those devices.
The complete text of the interview is also available.
MX: Since
Computer Motion was launched some 13 years ago, what has been the evolution
of the company?
Duggan: The company began as the idea of Yulun Wang, who received his
PhD in engineering from the University of California, Santa Barbara (UCSB).
At that time, the UCSB school of engineering had a major multimillion-dollar
robotics grant, and he played a leading role in that grant.
Early on, he recognized that consumer robotics was an underdeveloped industry.
Although industrial robots had come into full play, intelligent, interactive
consumer robots had not yet done so. So he decided to advance that industry,
and to do so under the umbrella of medicine.
His purpose was to add productivity to the medical health environment. The marketing
assessment at the time was that medicine in general was underautomated, and
this was especially true of operating rooms, which can be viewed as the factory
floor of hospitals. Intelligent, interactive equipment to support surgeons and
their staff was virtually nonexistent.
Where did the early financing for Computer Motion come from, and how did
that transition to later rounds of financing and, eventually, to the company's
initial public offering (IPO)?
I put in the first couple of hundred thousand dollars. Then Yulun went out
and raised some additional money from NASA. And then I put in additional monies
and went out and raised venture capital.
Over the years, we've raised about $85 million. By the time this goes to print,
it will be up to around $100 million. So significant capital has been brought
to the fore.
Tommy Weisel is a personal friend of mine. Over the years, we have had a common
interest in a number of venture and public investments. His former firm, Montgomery
Securities, took Computer Motion public a number of years ago at about $14 a
share. The IPO raised a little over $40 million—about half of our total
to date—and was the major round of funds that was brought to the company.
What was it
that attracted the venture capital (VC) groups that you brought in? Did they
share the company's vision, or did they see it as merely an opportunity for
a good return on investment?
I think it was our sheer persistence—covering all the bases and calling
as many VCs as humanly possible. And we probably did a lot of arm twisting to
bring their monies to the table.
Many of the institutional investors have done very well to hold on to their
shares in Computer Motion. I would assume that for some of them it has been
hard to hold on, because success has been a long time coming. But the momentum
is certainly here now to establish some very significant returns.
Curiously, the stock market hasn't yet begun to reflect that momentum. Right
now, the company has a lower market capitalization than the total amount of
money already invested in the business. So even though we're on the brink of
going profitable, investors don't have the view of this business that we on
the inside have, having been with it for 10 years.
Planning Regulatory Strategy
In planning your regulatory strategy, how did you balance a high level of
FDA requirements against the company's desire to get a product on the market?
Did you take it stage by stage, or did you wait to file a more complex device
and then move forward?
Our first FDA submission was for clearance of the Aesop system. Yulun and I
agreed that since surgical robotics was a new technology we needed to define
each new term as it occurred in the submission. We wanted to ensure that the
reviewers would be capable of understanding what we were saying, because we
knew the terms would be new to 95% of the people who would be reading the document.
Since then, we've received numerous 510(k) clearances. In the beginning, some
of the clearances may have come a little too easily. Over time, we weren't doing
quite the same job as we did with our early submissions, and that hurt us when
we came up to much more difficult submissions with even more esoteric terminology.
We thought the clearances would be easy to come by. But frankly, they weren't,
and we've been very challenged by that.
What kinds of
issues was FDA primarily concerned about?
In order to understand how our products operate, the agency wanted to review
data from a quantity of surgical procedures. And one of the challenges with
that requirement has been that patients are rarely interested in participating
in a study designed to provide FDA with the data it needs—especially if
the protocol calls for anything out of the ordinary.
Consequently, if there's nothing in it for the patient, a company can wind up
having a difficult time registering patients. That was the challenge that we
faced, and that any company whose submission requires clinical data is likely
to face.
Have any of
the company's FDA submissions, such as those for the Aesop and Zeus systems,
been premarket approval applications (PMAs)?
No. We've had more than 17 FDA submissions, but we've not had to go through
any PMAs. All of our submissions have been either full or abbreviated 510(k)s.
The Socrates
system is the first device—and so far the only device—in FDA's new
category of robotic telemedicine products. It must be pretty exhilarating to
be setting the pace in a whole new field.
No question about it. Leadership and innovation go hand in hand; and leadership
can also change hands as a result of innovation.
What we've done with intelligent interactive robotics is to provide a brand-new
tool. But right now, most surgical and nursing staffs aren't really knowledgeable
about this equipment. They may understand the theoretical benefits of the technology,
but they don't yet know how it works or how to make the best use of it. And
that knowledge will be essential to institutions that intend to participate
in this new era of patient-friendly surgery.
That's why we feel the Socrates product will help to fast-forward the development
of this entire movement. It will save surgeons and institutions money as they
confront the challenges of retraining their staff to work with new procedural
paradigms. It's going to be a wonderful product for us, for surgeons, for institutions,
and ultimately for patients.
Connecting with Surgeons
What has been your experience in communicating with surgeons? Have surgeons
had input into the development of your systems, and how do they relate to those
products?
This field represents a convergence of complex high technology and medical science.
And in any science, there are those that are compelled to do something new,
to innovate, to find new ways, and it's on the backs of those few that progress
is made.
Within the world of surgeons, there are perhaps 6% or so that are very interested
in innovating, reducing the risks of innovation, and taking strides that are
beneficial to patients. Such visionaries tend to want to hang out together,
so we've not had a hard time finding them. In fact, they find us as quickly
as we find them, because they're already interested in the application of computers
and robotics to medicine.
Do you find
surgeons in teaching hospitals and at universities generally more receptive,
more eager to participate?
I would say you never know where you're going to find supporters. One new surgical
procedure is endoscopic atraumatic coronary artery bypass graft (CABG) surgery,
and the physician who has performed more of these procedures than anyone else
in the world is Dr. Tom Vassiliades, a community surgeon at Sacred Heart Hospital
(Pensacola, FL). The surgeon who has performed the second greatest number of
those procedures is Dr. Andres Bochenek, of Katowice, Poland. Neither of these
surgeons is really at a teaching center, but both are innovators in their own
right.
Getting to
Adoption
In terms of
adoption rates, where do private and community hospitals stand? Considering
the significant cost pressures on such institutions, will they be able to adopt
robotic technologies, and what is their rationale for doing so?
Adoption rates are really a function of a lot of things—the patient's knowledge
and understanding of what's available, the surgeon's knowledge and skill in
performing the procedure, and the willingness of an institution to support the
education of surgeons and their patients.
At the beginning, these procedures take a little longer to do. But they ultimately
become the best and most cost-effective techniques, and the fastest means of
moving patients into and out of operating rooms, and in and out of the hospital.
When hospitals
are deciding to purchase equipment like this, where would you rank cost-effectiveness
as a factor in their decision? What kind of studies have you undertaken to provide
the kind of cost-effectiveness data that hospitals might want?
Cost-effectiveness is huge. It's not everything, but it's definitely a major
something.
As an example of how the economics work, take one of the hospitals that have
adopted the endoscopic atraumatic CABG procedure. Using traditional CABG procedures,
that surgery typically generates $25,000 in net revenue and has a normal profit
of $10,000 associated with it. That institution paid $120,000 for an Aesop system
and the kit necessary to perform this procedure and, over the several hundred
procedures performed there, it has saved an average of $3600 per procedure.
Those are absolute, definable cost savings. So that hospital has taken a $10,000
profit and been able to move it up to $13,600.
In addition, the hospital's procedure count has jumped significantly. The institution
has probably been able to quadruple the number of these procedures it performs,
each generating net revenue of $25,000. So this institution has had a phenomenal
return, and it has recently invested in a Zeus three-armed robotic system.
How quickly
can institutions expect to attain such cost-effectiveness?
It's not an overnight achievement. When an institution is bringing about major
paradigm shifts, it has to look beyond the first 12 months. It has to look to
its leadership responsibilities, and determine what will be needed to rise to
the next level. It may take a while to hit that zone—to be able to fulfill
patient needs and wants, and do so cost-effectively—but when that level
is finally reached, there's a significant amount of money available to all.
Building Alliances
Computer Motion has entered into a number of strategic alliances with various
companies, including a recently announced alliance with Smith & Nephew (Andover,
MA). How do you see those alliances fitting into your long-term business plan?
Do you view any of those companies as potential buyers for Computer Motion,
or do you intend to continue growing as an independent company with many strategic
partners?
In the past 18 months, the major companies have switched their view of the surgical
robotics business. Many such companies previously viewed this field as a novelty,
but they are now beginning to acknowledge that intelligent interactive robotics
will be essential to the development of patient-friendly surgery.
Surgical robotics has the potential to become a multi-deca-billion-dollar business
over next 20 years, and many companies will have an interest in participating
in that business. So I think you're going to see an increased interest in alliances.
And because Computer Motion's intellectual properties, capabilities, and knowledge
will be highly valued and greatly sought after, alliances are also a great way
for us to go.
Do all these
achievements make Computer Motion ripe for acquisition by a larger company?
Whether Computer Motion is an independent company 50 years from now will be
in the hands of others much more than in mine. But for now, it's been my judgment
that developing this business still requires us to pour our energies into meeting
our long-term goals. And I believe that the best people to be operating this
business are those who are already part of the Computer Motion team—whether
they are located in China, France, South America, or the Middle East.
It wouldn't surprise me if major companies wanted to own more of this business
and viewed our intellectual property as something of great value. But how that
interest will manifest itself, only time will tell.
Dealing with Shareholders
You've just come off a record fourth quarter of $8.6 million in revenues—$0.4
million above your projections—and yet your stock is trading at around
$5 a share, less than when you went public. With the new products that you released
last year, however, it seems likely that your revenues will grow. What's your
vision of the next 12 to 18 months with regard to providing your shareholders
with a return on their investment?
Well, the good news is that we finished the year at $8.6 million in quarterly
revenues. That equates to a $34.4 million run rate, which is significant. But
because we're highly leveraged, we didn't make money at $8.6 million.
We have run our numbers, and we're very pleased to know that when we achieve
revenues of about $12.5 million per quarter, we will turn the corner into profitability.
And one reason we're pleased with that number is because our bookings in the
fourth quarter of 2001 approached $13 million—which equates to a run rate
of $52 million. So if you just took the bookings piece and attached the appropriate
gross margin, cost of goods, and SG&A to it, in that fourth-quarter round
of money we were profitable.
I think we have a shot at achieving profitability during this year. And once
we do, we won't be looking back.
What will you
have to do to increase shareholder value, and what do you think is the company's
potential value?
I think this company is ultimately worth 10 times sales, so as we grow our revenue
to the $50 million range, it becomes a half-billion-dollar property. Just as
we lose money when our revenues are below $50 million, revenues above that level
become incrementally very profitable to us. I think that number is achievable
in today's environment, so I believe the company's prospects are sound and solid.
It has taken a while for us to deliver what we thought we could, but we're an
order of magnitude more valuable than when we first went public. So now we've
promised that we're going to achieve profitability as soon as possible. It's
our major goal, and everyone in the company has their attention on it.
I believe we'll do it. And once we do, I think we'll be viewed quite differently
from the way we have been viewed in the past. Instead of asking whether we can
survive in this field, investors will begin asking how big this business can
get.
I think we've demonstrated this past year that we can survive. Now, when we
show that we can become profitable, it will be time to wonder just how prosperous
we can become.
Copyright ©2002 MX
