直覺手術 (ISRG) 2009 Q2 法說會逐字稿

Welcome, and thank you for standing by.

(Operator Instructions) I would now like to turn the call over to Mr.

Ben Gong.

Thank you.

Sir, you may begin.

Good afternoon, and welcome to Intuitive Surgical second quarter conference call.

With me today we have Lonnie Smith, our Chairman and CEO, Gary Guthart, our President and Chief Operating Officer, Marshall Mohr, our Chief Financial Officer, Aleks Cukic, our Vice President of Strategic Planning and Jerry McNamara our Senior Vice President of Sales and Marketing.

Before we begin, I would like to inform you that comments mentioned on today's call may be deemed to contain forward-looking statements.

Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties.

These risks and uncertainties are described in detail in the company's Securities and Exchange Commission filings.

Prospective investors are cautioned not to place undue reliance on such forward-looking statements.

Please note that this conference call will be available for audio-replay on our web site at intuitivesurgical.com on the audio archive section under our Investor Relations page.

In addition today's press release has been posted to our web site.

Today's format will consist of providing you with highlights of our second quarter results as described in our press release announced earlier today, followed by a question and answer session.

First Lonnie will present the quarter's business highlights.

Gary will follow with operational highlights.

Marshall will provide a review of our second quarter financial results.

Aleks will discuss marketing and clinical highlights.

I will provide an update on our financial forecast for 2009 and finally we will host a question and answer session.

With that I would like to introduce Lonnie Smith, our Chairman and CEO.

Thank you for joining us today.

It has been an interesting six months; despite the challenging economic environment, patients, surgeons and hospitals continue to recognize the value our products bring to surgery and surgical outcomes.

During the first six months procedures grew by 56% which compares well with the 59% in the first half of last year.

Revenue grew by 12% excluding the revenue deferrals and reversals that will wash out by year end.

While this is not the 60% growth we enjoyed in the first half of last year, I consider our ability to remain in positive growth territory, during the worse worldwide economic downturn since the Great Depression, a significant accomplishment.

And our teams operational execution exceptional.

Pro forma operating income year to date, before revenue deferrals and non-cash stock option expense grew by 12%.

We repurchased $150 million in stock at an average price just under $107 per share; invested $40 million in capital and intellectual property, reduced working capital by $21 million, and ended the first half with $902 million in cash and investments, equal with year end 2008 and $162 million higher than this time last year.

As most of you know we took a $20 million revenue deferral in the first quarter associated with our offer to customers who purchase da Vinci S systems in the first quarter to upgrade to the new SI system; we recognized $14 million of that deferral in the second quarter.

I excluded the impact of the revenue deferral in my summary of our first quarter financial performance and will exclude the reversal of deferred revenues in my summary of the second quarter.

With that background, highlights, operating highlights for the second quarter excluding the $14 million in deferred revenue recognized during the quarter were as follows.

Procedures grew approximately 52% over the second quarter of 2008.

We sold 56 -- sold 76 da Vinci surgical systems down from 85 in the second quarter of last year.

Our international team contributed 20 of the 76 systems sold.

We ended the second quarter with 1,242 da Vinci systems installed worldwide.

Total revenue was $247 million, up 13% from last year.

Instrument and accessory revenue increased to $94 million, up 28%, and total recurring revenue grew to $136 million, up 32% from prior year comprising 55% of total revenue.

We generated an operating profit of $110 million before revenue deferral and non-cash 123 R stock option expense, up 13% from the second quarter of last year.

We ended the quarter with $902 million in cash and investments, up $80 million from last quarter.

Significant cash outlays during the quarter include $13 million invested in intellectual property and property plant and equipment excluding impact of this outlay, $6 million in cash versus stock receipts and $7 million change in working capital we generated $80 million in gross cash from operations, $2.07 per fully diluted share and 128% of our GAAP reported net income in the second quarter.

With that I'll pass the time over to Gary Guthart our President and Chief Operating Officer.

Thank you.

Lonnie.

On our last earnings call we announced the introduction of our new da Vinci Si surgical system and during the Q2 we had the opportunity to showcase the SI system at several major conferences which included the American Urology Association, the American College of Obstetrics and Gynecology, the World Robotic Gynecologic Symposium, The American Association of Thoracic Surgery and The American Society of Colon and Rectal Surgery, to name a few, with an excellent customer response.

Evidence of this response can be seen in the proportion of the Si system sales within our Q2 results achieving 62% of system sales in the quarter.

The improved vision system, enhanced user interface and dual console capability which expands the surgical training paradigm have been well-received in both academic and community medical centers.

We will continued to extend the Si product offering to other international markets during subsequent quarters.

Speaking of the new Si, Dr.

J.

Michael Smith, a leading cardiac surgeon at Good Samaritan Hospital in Cincinnati remarked the Si dual console will bring a huge opportunity for robotic surgery in complex procedures.

Both in the ability to train surgeons in advanced technique and in the ability to work collaboratively during a case.

It takes the fourth arm from a static retractor to a dynamic instrument that exceeds the capability of a bedside assistant by giving them articulation and 3D vision.

Of the new vision system, Dr.

Tim Wilson, an experienced laproscopic and robotic urologic surgeon at City of Hope Medical Center in Los Angeles reported, "I think this is the best image I've ever seen in any laproscopic surgery."

For the systems installed to date the Si has been used in approximately 1,000 cases.

The Si's clinical performance and dependability have exceeded our expectations.

As always we remain committed to developing significant products that deliver clinical value to patients, are easy to use and facilitate repeatable and teachable procedures.

We continue to invest in developing novel instruments for our da Vinci platform and improving and expanding our imaging capabilities and developing new patient side mechanisms, and in creating surgical networking and training technologies.

Our development teams are focused on bringing high clinical value products to the market quickly while our manufacturing organization is relentless in the pursuit of quality, efficiency, cost reduction and inventory management.

With that I will turn the call over to Marshall for a review of financial highlights.

Thank you, Gary.

As reported last quarter we offered certain first quarter customers the opportunity up to grade their da Vinci S systems to da Vinci Si systems at a discount to the otherwise list price for such an upgrade.

We also offered those customers the opportunity to return da Vinci S accessories in exchange for da Vinci Si accessories.

As a result we deferred a total of $20.1 million of revenue in the first quarter comprised of $18 million of system revenue associated with the system upgrade offers and $2.1 million of accessory revenue.

These customers were given until June 30 to accept our offers.

In our second quarter of 2009 we recognized $13.8 million of the total $20.1 million originally deferred.

19 of the 45 system upgrade offers were accepted.

$12.4 million of the $13.8 million related to 26 declined system upgrade offers and six completed system upgrades.

$1.4 million of the $13.8 million related to accessory exchange offers declined or completed.

We expect the remaining first quarter deferred revenue of $6.3 million associated with 13 accepted upgrade offers to be recognized by the end of 2009.

To provide listeners with comparable information I will now walk you through our revenue results excluding the first quarter deferral of $20.1 million and the second quarter recognition of $13.8 million.

Our second quarter revenue was $247 million, up 13% compared with $219 million for the second quarter of 2008 and up 18% compared with $208 million for the first quarter of 2009.

Second quarter revenues by product category are as follows.

Second quarter instrument and accessory revenue was $94 million, up 28% compared with $74 million for the second quarter of 2008, and up 16% compared with $82 million in the first quarter of 2009.

The change compared with the second quarter of last year was driven by procedure growth of 52%.

The change compared with the first quarter reflects increased procedure volume and customer buying patterns.

The amount of instrument and accessory revenue we realized per procedure including initial stocking orders was approximately $1,880 per procedure, down approximately $360 per procedure compared to last year and up $90 per procedure compared to the first quarter.

The decline in revenue per procedure compared to the second quarter of 2008 reflects lower stocking orders, procedure efficiency as certain customers are using less instruments per procedure, and customer buying patterns.

The increase from last quarter primarily reflects customer buying patterns.

Second quarter 2009 systems revenue of $111 million was $5 million lower than the $116 million of systems revenue for the second quarter of 2008, and $24 million higher than the $87 million of systems revenue for the first quarter.

We sold 76 systems in the second quarter of 2009 compared with 85 systems last year and 66 systems last quarter.

We continue to feel the impact of curtailed hospital spending for capital equipment in the ongoing economic recession particularly in the U.S.

56 systems were sold in the U.S.

during the quarter, compared with 66 systems last year, and 44 systems last quarter.

Twenty systems were sold outside of the U.S.

compared with 19 last year and 22 last quarter.

47 of the 76 or 62% of the units sold in the quarter were da Vinci Si systems.

Our first quarter average sales price per system including all da Vinci models but excluding upgrades and the revenue deferral was $1.43 million, an increase from the $1.33 million realized in the first quarter reflecting the 62% mix of da Vinci Si systems of which five were sold with set in consoles.

Service revenue increased to $41 million, up 40% compared with $29 million last year and up 5% compared with $39 million last quarter.

The growth in service revenue is primarily driven by a larger system install base.

Total second quarter recurring revenue comprised of instrument, accessory and service revenue increased to $136 million, up 32% compared with the second quarter of 2008 and up 12% compared with the first quarter of 2009.

Recurring revenue represented 55% of total second quarter revenue compared with 47% in the second quarter last year and 58% compared -- in the last quarter.

Moving on to gross margins.

There were no costs deferred in conjunction with the $20.1 million revenue deferral and therefore all of the $20.1 million first quarter deferral and the $13.8 million second quarter recognition had an equal impact on revenue, gross profit, operating income and pretax income.

Excluding the impact of the deferral activities gross margins were approximately equal in the first and second quarters of 2009 at about 71.5%, and slightly better than the 71.2% realized in the second quarter of 2008.

Second quarter 2009 operating expenses of $91 million were up 16% compared with the second quarter of 2008 and up 8% compared with the first quarter.

The quarter over quarter increase reflects commissions associated with higher revenue, costs associated with 34 employees added during the quarter, higher non-cash 123 R compensation, and increased R&D development costs.

In addition patent amortization expense increased to $3.8 million for the quarter compared with $2.2 million during the second quarter of 2008 and $3.5 million last quarter.

Second quarter 2009 operating income was $100 million or 38% of sales compared with $78 million or 36% of sales for the second quarter of 2008 and $45 million or 24% of sales for the first quarter of 2009.

Excluding the first quarter deferral and the second quarter recognition, second quarter 2009 operating income was $86 million or 35% of sales, compared with $78 million or 36% of sales for the second quarter of 2008 and $65 million or 31% of sales for the first quarter of 2009.

Second quarter 2009 operating income reflected $25 million of non-cash stock compensation expense compared with $20 million for the second quarter of 2008, and $23 million last quarter.

The increase in 123 R.

expense primarily reflects the impact of our annual option grant made on February 17.

Our second quarter 2009 other nonoperating income of $5.2 million was approximately the same as the first quarter of 2009 and approximately $500,000 less than the second quarter of 2008.

Our effective tax rate for the second quarter of 40.4% was slightly higher than our anticipated rate of 40% due primarily to higher state taxes.

Our net income was $62 million or $1.62 per share compared with $51 million or $1.28 per share for the second quarter of 2008 and $28 million or $0.72 per share for the first quarter of 2009.

Excluding the first quarter deferral and second quarter recognition, our net income was $54 million or $1.40 per share compared with $51 million or $1.28 per share for the second quarter of 2008, and $40 million or $1.02 per share last quarter.

Now moving to the balance sheet.

We ended the second quarter of 2009 with cash and investments of $902 million, up $80 million from March 31, 2009, and approximately the same as December 31, 2008.

The increase in the current quarter reflects cash flow from operations and $7 million from the exercise of stock options partially offset by $13 million of CapEx.

Since December 31, cash flow from operations of $173 million, and stock option exercises of $12 million net of CapEx of $40 million were entirely offset by $150 million used to buy back and retire 1.4 million shares of common stock.

Our accounts receivable balance increased to $175 million at June 30 from $139 million at March 31.

The increase in receivables reflects increased revenue.

Our net inventory decreased to $59 million at June 30 from $64 million at March 31.

Our inventory declined during the second quarter primarily due to the utilization of material built up to support the da Vinci Si product launch.

With that I'd like to turn it over to Aleks who will go over our sales, marketing and clinical highlights.

Thank you, Marshall.

During the second quarter we sold 76 da Vinci systems.

56 in the United States, 12 in Europe and eight into rest of world markets, a total of five systems were part of trade in transactions.

The net 71 additions to the install base brings to 1,242, the cumulative number of da Vinci systems worldwide.

916 in the United States, 221 in Europe, and 105 in rest of world markets.

16 of the 76 systems installed represented repeat system sales to existing customers which included a fifth system to Good Samaritan Hospital in Cincinnati and third systems to Florida Hospital in Celebration, Florida, and Florida Hospital in Orlando, Florida, and Strong Memorial in Rochester, New York.

This brings to 152 the total number of customers who own two or more da Vinci systems.

Internationally we placed four da Vinci systems into Germany, three into the U.K.

and two into both France and Qatar.

Clinically we had an excellent quarter.

For the third quarter in a row we had double-digit sequential procedure growth both domestic and internationally.

Demand for da Vinci hysterectomy both malignant and benign conditions [sacral] colpopexy, myomectomy, partial nephrectomy, cystectomy and da Vinci prostatectomy were most notable.

We also experienced early international demand for a number of our general surgery procedures, specifically da Vinci colon and rectal procedures and da Vinci thyroidectomy, most of which is emanating from Asia.

In Q2, well over 200 da Vinci related clinical publications and abstracts were published within peer review journals and as Gary mentioned our participation within the various medical conferences corresponding with the da Vinci Si launch was very strong.

Over the past several quarters the management of endometrial and cervical cancer has been one of our largest and fastest growing areas of focus.

The clinical value of converting these predominately open, highly invasive operations to a minimally invasive da Vinci procedure has become widely accepted.

The surgeons at Northwestern University Medical Center in Chicago reported the impact this shift was having on fellowship training at their university.

Dr.

Anna Hoekstra and team authored a paper entitled, "Robotic Surgery in GYN Oncology, the Impact on Fellowship Training", which was published in the May edition of the Journal of Gynecologic Oncology.

Prior to the adoption of da Vinci hysterectomy for both endometrial and cervical cancer Northwestern's fellows predominantly participated in open surgery which represented 94.4% of their surgical oncologic training.

This percentage corresponded with the level of open cancer surgery within their practice.

But three months post de Vinci implementation the fellows participated in robotic procedures was up to 45%.

After six months, 72%.

And after 12 months, it was up to 92%.

The authors summary was as follows, and I quote, "fellow surgical training underwent a dramatic change with the introduction of the robotic surgery program.

The management of endometrial and surgical cancer was impacted the most by robotics.

Robotic surgery broadened fellowship surgical training but balanced surgical training and standardized fellow training modules remain challenges for fellowship programs." Close quote.

The transition from open surgical oncologic management toward da Vinci is not limited to U.S.

borders.

In the May edition of the Journal of Minimally Invasive Gynecology, Dr.

Maggioni and [Peretti] from the European Institute of Oncology, a teaching hospital in Milan, Italy, published a paper which outlined their significant shift toward the robotic approach to endometrial and cervical cancer surgery.

The authors reviewed patient data from 80 consecutive da Vinci, hysterectomies for endometrial carcinoma.

Data collected included BMI, operating time, histology, blood loss, convergence and postoperative pain management.

Rather than run through all the numbers and statistics associated with their findings I will sum it up with their conclusion which I believe says enough and I quote, "over a relatively short time using the da Vinci surgical system, we observed a substantial change in our surgical activity.

For endometrial cancer open surgical procedures decreased from 78% to 35%.

Moreover, our preliminary data confirm that surgical robotic staging for early stage endometrial cancer is feasible and safe.

Age, obesity, previous surgery do not seem to be contraindications." Close quote.

The incorporation of da Vinci into residency and fellowship programs has become increasingly popular which we believe represents a meaningful and potentially powerful shift in the training pathway of future attending surgeons in both the United States and abroad.

We've not commented much on our cardiac business during the past few calls but we did see a nice increase in both da Vinci mitral valve repair and da Vinci revascularization procedures during the quarter.

We've always believed that patients evaluate their surgical treatment options using an equation that balances efficacy and invasiveness.

There's perhaps no clearer example of a more favorable score than that associated with a da Vinci cardiac procedure.

Even though the growth of the cardiac category has not mirrored urology or gynecology the relief from postoperative pain and suffering probably exceeds them both.

In the April edition of the journal, Cardiology, Dr.

[Bonoti, Boronos] and teams from Innsbruck Medical University in Innsbruck, Austria, and the University of Maryland in Baltimore set out to evaluate post surgical quality of life at three, six, and 12 months, comparing open revascularization to da Vinci revascularization.

The study included 120 patients split pretty evenly between open sternotomy and da Vinci's endoscopic approach.

Nine patients were converted from an endoscopic approach to a sternotomy which were also assessed postoperatively.

The comprehensive analysis evaluated several factors including but not limited to hospitalization, operating time, postsurgical pain and discomfort, time to resuming normal activity such as taking a shower, gardening, riding a bicycle, driving a car and shopping.

The results of the comparisons were pretty dramatic.

Hospitalizations for the da Vinci patients was approximately half as long when compared to the open patients.

The time to take a shower was reduced from 9.8 days for an open approach to 3.7 days for the da Vinci approach.

Gardening was reduced from 54.2 days to 22.2 days.

Driving a car, 35.5 days to 16.4 days.

Walking outdoors, 15.5 days to 6.2 days, and riding a bicycle was shortened from 67.2 days to 28.2 days.

I think you get the picture.

Virtually all quality of life metrics improve significantly incorporating the da Vinci approach.

In their conclusion, the authors remarked and I quote, TCAB using robotic technology leads to improved physical health, shorter hospital stay and more rapid restoration of daily activity.

Conversion from TCAP to sternotomy does not lead to a quality of life impairment as compared with primary sternotomy Close quote.

Regarding our urology business, we continue to see a tremendous adoption of da Vinci prostotectomy, nephrectomy and partial nephrectomy, pyeloplasty and da Vinci cystectomy taking place on a worldwide basis.

The agenda at this year's A U A conference held in Chicago was a da Vinci testimonial in and of itself.

Presentations, clinical abstracts, live surgeries, postgraduate robotic courses and booth presentations dominated this year's conference.

The mass global appeal of da Vinci based procedures within the specialty of urology is truly material.

During the four-day conference we registered over 1,000 urologists at our booth, representing nearly 40 countries.

The most popular area of inquiry remained d VP.

However, da Vinci partial nephrectomy, cystectomy, and pyeloplasty are all procedures that are being rapidly adopted.

Among the more interesting abstracts at this year's AUA pertained to prostate cancer mortality rates following radical proctectomy, external beam radiation and primary androgen deprivation therapy, a large multicenter series was derived from the capture registry which accrues patients from 31 practice sites prospectively and follows them under a uniform protocol regardless of treatment and follows them through death or withdrawal from the study.

8,321 men with localized disease at the time of the diagnosis with at least six-months follow up after radical prostectomy, EBRT or PA DT- were analyzed.

The study was authored by Dr.

Matthew Cooperberg and the urologic, oncology group from the University of California at San Francisco.

The study used CAPRA scoring which is cancer of the prostate risk assessment which is a well validated instrument incorporating PSA, Gleason score, age, percentage of biopsy cores positive and cancer stage.

A parametric survival model was constructed to compare outcomes among different treatments adjusting for CAPRA score and age.

It was a very comprehensive and statistically relevant approach toward assessing the various treatment methods.

The results.

261 men died of prostate cancer at a median of 6.4 years follow up.

Adjusting for age and risk, the hazard ratio for cancer specific mortality was twice as high for external beam radiation therapy than for radical prostectomy and 2.3 times as high for primary androgen deprivation therapy versus radical prostetectomy.

The authors' conclusion and I quote, "surgery for localized prostate cancer was associated with a significant and substantial reduction in cancer specific mortality relative to EBRT and PA DT.

Although not a randomized study, the analysis was adjusted for clinical risk and age and it is unlikely that the unmeasured cofounders would account for the large observed difference in survival." Close quote.

Our strong believe has always been that the removal of the cancerous prostate through surgery is the most effective treatment for patients with localized prostate cancer especially so when taking into account long-term survival.

As patients are diagnosed earlier in life and become better informed on the treatment options we would expect our dVP opportunity to further expand.

This concludes my summary and I will now turn the time over to Ben.

Thank you, Aleks I will be providing an update on our forecast for 2009 based on our results in Q2.

First and foremost procedure growth which is the primary driver of our total revenues, continues to be strong.

Procedures grew approximately 52% in the second quarter.

In our last earning call we forecasted procedures to grow more than 40% for the year.

We are increasing our forecasts on procedures to grow more than 45% for the year.

This will continue to drive significant growth in our instrument and accessory revenues.

However, as we have mentioned previously, variations in initial stocking orders and customer ordering patterns can cause our instrument and accessory revenues to fluctuate and difficult to forecast on a quarterly basis.

Therefore we will not be re-instating guidance for instrument accessory revenues at this time.

Likewise, while strong procedure growth continues to drive high demand for systems sales, the general slow down in hospital capital spending makes it difficult for us to accurately forecast how many systems we will be selling in the near term.

Therefore, we also will not be re-instating guidance on systems revenues at this time.

Our service revenue model has been very consistent and we expect it to remain as it has in the past.

We are generating an average of about $140,000 in service revenue per system per year.

Since our service revenue is driven largely by the installed base we continue to expect service revenue to grow approximately 35% this year.

With regard to gross margin, excluding the one time impact of the $20 million revenue deferral in Q1, and the release of a portion of that revenue deferral in Q2, our gross margins have been very consistent with that of previous quarters.

Since the balance of Q1 revenue deferral will be recognized by the end of the year, the deferral should have no net impact on gross margins in 2009.

In our last earnings call we forecasted our gross margin for the year to come in between 70% and 71%.

Based on our gross margins to date we estimate that gross margin for the year will be approximately 71%.

With regard to operating expense, last quarter we provided a forecast of growing our GAAP operating expense by approximately 17% in 2009.

We are increasing our estimate to 18% to 20% growth in operating expense based on two factors.

First we estimate our stock compensation charge for the year to be approximately $98 million compared with our previous estimate of $95 million.

Secondly we are hiring more field personnel to drive continued procedure growth and we are increasing our investments in new and existing R&D projects to drive growth in our long-term business.

With regard to income tax we continue to expect to report a GAAP tax rate of approximately 40% for the balance of the year.

For calculating EPS we ended the quarter with approximately 37.9 million shares outstanding and approximately 700,000 shares were added to the diluted share count for calculating EPS in Q2.

For the balance of the year, assuming we do not repurchase any additional stock, we expect our share count for calculating EPS to be between 38.6 million and 39 million shares.

Finally regarding our cash flows we continue to generate significantly more cash than our reported net income.

For the first six months of 2009 we generated $173 million in cash flow from operations, compared with our reported net income of $90 million over the same period.

The largest contributor of this difference was our recording of approximately $47 million of FAS 123 R.

stock compensation expense year to date.

And we expect to record an additional $51 million in stock compensation expense in the seconds half of this year.

As a result our cash flow should continue to be significantly higher than our reported net income.

That concludes our prepared remarks.

Before we open the call to questions, we ask that you limit your inquiry to a couple of questions and for any follow up questions please get back on to the queue.

We will now open the call to your questions.

(Operator Instructions) Our first question is from Tao Levy.

Good afternoon.

Congratulations on a very impressive quarter.

I stopped saying that because no one has really put up great quarters but this is definitely very impressive.

A couple of questions on my end.

One on the gross margin side, given the number of Sis that you sold and also your procedure growth I would have thought maybe would you have seen some sequential improvement excluding the deferrals instead of just saying at the 71.5%.

Then you is there any sort of scrap material related to the S.

or anything going on there?

No, really, there's not.

Even though you have a higher ASP due to higher price of the Si, the cost of producing an Si system is actually higher than it is for an S.

and that's why the gross margin was very similar even though you have a mix of the Sis in the sales mix.

Okay.

Great.

And on Aleks, you talked about the paper on the prostate cancer and long-term survival.

Have they also done an analysis, have you guys looked at an analysis on the cost difference between the different therapies?

And the question that kind of ties into that for Lonnie because I'm sure he has a perspective on it, any thoughts on what's going on with healthcare reform, the thoughts of comparative effectiveness, maybe having robotics part of that?

Thanks.

Tao, clearly we have.

It's interesting to me.

There's, first of all (inaudible) reimburses about $72,000 because of if you assume 40 treatments which is about the average.

IMRT reimburses it, these are CMS reimbursements around just under 40,000.

Brachytherapy about 29,000, and surgery, assuming co morbidities complications is about 10,000, all those include both the facility fee, as well as the surgeon or the physician.

And Aleks pointed the out those numbers actually -- Astuari did a study, a longitudinal study of 3,000 patients, a little over 3,000 at Henry Ford and found that life expectancy over what he called conservative treatment which would be hormonal treatment or watchful waiting was 4.6 more years of life and this is age adjusted, disease state adjusted for radiation therapy and 8.6 more years of life for surgery.

Now if you do a simple calculation, I'm a simple minded guy, I divide cost by number of years of expected life-- additional expected life and for a proton being assuming it's the same as other radiation therapies which I think is a reasonable assumption is about 16,000 per year of additional year of life, 9,000 for IMRT, about 6,000 for seeds and less than a thousand for surgery.

So in terms of comparative effectiveness and thing like that we are big proponents of it especially if it's a level playing field and people go into it without a preset agenda.

So we have some entry days ahead but I do think that comparative effectiveness can lead to us a better place with healthcare both in terms of cost and outcomes.

Thanks.

Our next question is from Ben Andrew with William Blair.

Good afternoon, I just wanted to follow up a little bit on the placements in the quarter and then maybe turn to procedures.

You talked about I think it was a relatively high percentage of de novo systems coming in in this quarter in particular.

Can you speak a little bit more about what you were hearing from customers and what you think was driving that mix shift?

It's hard to say exactly in a single answer was drove each of them but I think what I would like to say is if you think about the customers that do not have a da Vinci system and the pressures that they face.

For example, radical prostatectomy has moved to what is widely accepted now as standard of care through da Vinci.

If you are not participating in that you felt that impact on your radical prostatectomy program.

If you look at the hysterectomy consolidation that is going on both for benign and malignant conditions, if you again have not participated in a robotics program you have missed that and potentially will miss quite a few going forward.

So if you put yourself in a position of a customer that, A., has a system, you are participating in it and now you're looking at your capacity and what you can do with that system or that second system or third system.

If you do not have a system you are viewing it a little bit differently.

And so I believe that customers are looking at that a little bit closer with really some pain that they are feeling on loss procedures.

Aleks, did you see anything relative to not as many people adding capacity?

Are they just working harder to take advantage of capacity on an existing system before buying a new one?

Was there something unusual there.

I mean, I can't answer that but perhaps Jerry can give you some color on that.

Yes, over the last three quarters as we've gone into this change in the economic environment we've seen customers try to extend the available slots per surgery per day and so they are really looking at their efficiencies and maximizing the number of surgeries before they buy a second system.

So we have seen a shift in the buying pattern.

One last question, as you look at the international roll-out opportunity, Si, what percentage of your available market, if you will, is currently, has access to that product and when would you get to kind of broader roll-out.

I guess the areas that say don't have regulatory approval right now include Asian countries like Korea, China, and, of course, Japan where we don't have any approvals for any type of system.

And then in other parts of the world, Canada we are still waiting for approval there.

And registration in some parts of South America.

By and large we have Europe pretty well covered and we did sell Si systems in Europe this quarter.

Great.

Thank you.

Our next question is from David Lewis with Morgan Stanley.

Go ahead.

Good afternoon.

Just thinking about revenue per procedure I know you are not giving obviously significant new guidance but obviously procedure numbers were up, but your reversal in revenue per procedure was interesting.

Does this basically signal to us that the relative level of destocking pressures have ceded or the relative mix between hysterectomy and prostatectomy has seeded.

Should we expect flat revenue per procedure going forward.

You're right, we are not providing guidance.

I mean the amount of revenue, instrument and accessory revenue per procedure is going to vary from quarter to quarter based on the number of stocking orders, our new systems sales and stocking orders associated with it and customer buying patterns will also have a big influence over it and we are not ready to predict what those customer buying patterns are going to be for the next few quarters.

But, Marshall, is there a reason that this quarter would have seen a reversal in that trend and why that may not be repeatable in a forward quarter?

Well, we believe we've seen in the end -- in the first quarter particularly and at the end of even Q4 we saw hospitals managing their inventories and their costs very closely.

And so we believe they managed them down more so in the first quarter where it's just not possible for to us predict how much more they need to manage them or will manage them going forward.

Very helpful.

In terms of new system placements, the de novo placements in the U.S.

marketplace can you give us a sense of those?

It sounds like 40 new system placements or version placements; what was the average size of the hospital in terms of beds that those systems were placed into?

I don't know that we have that break out at this stage.

I mean perhaps later we can give that you information but I don't have that available.

I can say that we sold to large academic medical centers and am aware of even small hospitals, in fact even some fairly small hospitals that purchased dual console systems.

So I don't think there's anything remarkable about this quarter versus historical past in terms of size of hospitals.

I don't know that there's a big differentiation on the size of the hospital and the correlation between that and the de novo system purchases.

If you want some statistics there's three statistics that people typically want, the large hospitals, there's 457 sites with 614 systems.

The medium-size hospitals, 176 sites with 190 systems.

And the small hospitals, 100 sites with 112 systems; totaling 733 sites in the U.S.

with 916 systems.

That's helpful.

One last question and I'll jump back in queue.

You're obviously expanding R&D.

It sounds like here in the back half of the year, but if you think about a series of deals the company did some externally and some internally as it relates to attacking single port procedures or better utilization or better (inaudible) when can we seeing some of the significant product launchings associated with what seemed to be a pretty substantial internal focus on this area starting middle of last year?

Hi, David, it's Gary.

As we've said before we don't announce time lines for them before they are ready to be launched.

In general our investments are really focused on long-term.

So a lot of these things are looking out into the future both in IP acquisitions and in technology developments that will give us growth into the future.

Maybe ask you just one different way, one of your quasi-competitors in instrument space is thinking of rolling out better articulating instruments in sort of the back half of 2010.

Do you think the marketplace as you see is it is ready for single port procedures and articulate instruments in the back half of 2010.

I think we've seen in the marketplace already several companies who are looking at single port, and articulation.

We think that robotics will have a roll to play in single port surgery.

We will have to see how they roll-out and we will see how we enter the market.

Thank you very much.

Our next question is from Rick Wise with Leerink Swann, go ahead, your line is open.

It's actually Mira Suava for Rick.

Congratulations on the quarter from us as well.

And I'm curious to hear how you guys view the mix of the Si versus the S., the standard model system going forward?

Obviously a pretty impressive performance for the Si in the first quarter postlaunch.

I'm wondering does it have to do with teaching institutions purchasing more systems early on or would you expect this kind of a mix to continue based on the benefits of the system?

This is Ben, I will take a cut at that and maybe Jerry can even add but historically we've seen that a lot of our customers like to have the most capable system that we offer and that's happened when we launched da Vinci S.

in 2006 and we see it happening again with launched da Vinci Si.

We think the majority of the systems that we saw going forward will probably be da Vinci Si although we are continuing to sell da Vinci S.

systems.

Can you hear us okay because we are getting a back lash here.

I can hear you great.

Can you hear me?

Yes.

Okay.

That's awesome.

And in terms of up grades of your current install base, did you see any up grades in the quarter and how should we -- can you help us handicap that opportunity?

Yes, we made those offers to those Q1 customers which as Marshall mentioned 19 of those 45 offers were taken and we were capable of installing six of those in the quarter and we will install the other 13 in the latter part.

So that's probably, think of that as a concentrated number of upgrades.

Other than that we will probably see some upgrades from the existing customer base that purchased prior to Q1.

But it's probably not going to be a large number each quarter.

Right.

Okay.

And just a final question, obviously you're increasing your investments in R&D and in clinical investments again.

Just curious as to your thought about the environment.

Do you feel a little bit more comfortable with the environment in terms of hospital capital spending, the economic environment, at this point that you're taking these actions or has anything changed?

Obviously you are not updating guidance.

Has anything changed in your mind now as of the end of the second quarter versus where you stood in the first quarter of '09 when you withdrew the guidance?

I will take that.

And the answer is, we don't manage the business or our R&D on a quarter to quarter basis.

We really believe that robotics will play a significant role in healthcare and surgery for decades.

And we are investing with that kind of mind set.

So we aren't going to pull back because, oh gee, this quarter might be a little bit weaker or something else.

We are investing for the long-term.

We've been building this business from the beginning that way.

We will continue to so and we have high confidence in the long-term and that's what we are investing for.

Okay.

Thanks, congratulations on the quarter again.

Thank you.

Operator, do we have another question?

I'm sorry, I was on mute.

We have Sameer Harish with Needham and Company.

Hi, guys, can you hear me okay?

We can.

Perfect.

I want to verify, did I hear correctly that you sold five second consoles in the quarter.

That's correct.

Just to drill down a little bit on some of the expansion as far as investing in the business, do you have an idea or can you talk a little bit about what you are expecting as far as sales force expansion in numbers?

We don't provide the specifics on that.

We did add 20 people to the field organization this past quarter and that was on top of 25 people that we added in the first quarter.

And that continues to comprise a large portion of the total headcount we add.

That 20 in Q2 was out of a total of 34 people in the company.

So we definitely are continuing to hire in the field.

Okay.

And if we sort of look at that international versus U.S., what do you think is kind of the level of investment that you feel will be necessary for international growth in 2009?

Part of the people that we are hiring are for the direct business in Europe.

And we are again continuing to look at various ways of expanding through our distribution channels as well.

So we are investing not just through hiring in our direct business but hopefully investing with our distribution partners as well.

Well, I guess if we look at it as a change from what your expectations were last quarter is most of that increase directed towards international or is it split pretty evenly?

It's consistent with the metrics by which we measure the business in the past.

So we add heads, clinical heads to as a current number of systems that are placed.

So we are sticking to the same metrics that we managed the business last year, the same metrics this year.

Okay.

Fair enough.

Just to switch over to R&D.

Again, as we look at it incremental versus last quarter are you looking to investment more on chronic development or clinical work to expand indications?

We really invest in all of those things; we invest in the clinical side, we invest in research and in development as well as some IT acquisition.

So you see in all of those buckets, there's not a radical change in which bucket these things go into.

Our next question is from Tycho Peterson with JPMorgan.

Go ahead, your line is open.

Hi, good afternoon and my congratulations as well as on a great quarter.

On the utilization of the Si, is there any change in kind of mix?

In other words, are you seeing adoption for procedures beyond what you saw with the traditional S.

system and can you also comment on whether you are seeing any interest, I know it's early for the dual console outside the teaching hospitals?

As far as the first question I don't think there's enough data at this stage for us to make any, or really expect that there's going to be much of a difference in terms of the uptake I think there are a lot of variables that go into the success and the early success of a program depending on the commitment from the hospital and other factors.

The system is certainly designed to improve ease of use in some of those factors but it's early for us to say that it's had a material impact on the rate of adoption yet.

As far as your second question on the dual console, there were hospitals that were outside of the call it traditional larger academic medical centers that did purchase second systems.

I should say they purchased dual console systems.

And again these took place during the quarter and we will be able to comment on it more as they become more familiar with a quarter's worth of usage and so in the future, but there is definitely interest both within academic medical centers as well as outside within community based nonacademic medical centers.

It's too early to the give you what percent of sales are going to be dual consoles.

That's helpful.

A follow up on kind of the prostate market.

Obviously with the New England Journal article this spring there's been some noise that the number of prostectomies could be impacted with potential declines in PSA testing overall as well.

Could you comment on whether that's something that you are picking up on still or are you still expecting the prostate market to grow significantly in the near term.

It's interesting.

During the quarter there was an AUA.

and a gathering of 15,000 urologists from around the world and I can say that as long as I've been associated with this business this debate has been going on, it's certainly even longer a than that and it will continue for some time in the future.

The general feel and there were some really spirited discussions on it is in our view as we look at it, we don't look at it as something that is going to materially impact our business one direction or the other at this point.

And the European portion of that study showed that there was improved survival rate, significant survival rates with PSA testing and the other part of the study was inconsistent in terms of the consistency of the testing.

So, at least for me I'll be tested.

I appreciate the color, thanks again.

And our last question is from Vincent Ricci with Wells Fargo Securities.

Gentlemen, how are you?

Aleks, you guys mentioned an increased adoption in surgical particularly lower anterior rectal surgery in Asia, I'm curious, has some of your ability to increase adoption there been around any kind of instrumentation you've been working on?

You called out some instrumentation that seems to be linked to that?

No, there isn't anything that the Asian community is getting that is not available in the U.S.

market or anywhere else for that matter.

In terms of you might be referring to something like a surgical stapler which we've talked about developing.

There's nothing that's driving it there.

I would say that the growth in the Asian business is certainly large but there's also solid growth in the U.S.

business in colorectal surgery.

Thyroidectomy, on the other hand is largely driven out of Asia.

But in terms of the colon and rectal surgery, sort of equal set of instruments globally and good growth going on globally more so outside of the United States and Asia.

And is there any specific dynamics that makes that thyroidectomy a good procedure in Asia or is that more of a cultural thing?

You know, it's something that they are certainly more sensitive about.

They are more sensitive about the scarring that goes on with the operation and a traditional operation which is an incision in the neck.

And, again, it is early for us to really draw a lot of conclusions other than the fact that it is growing very rapidly and it is growing very rapidly in the Asian countries.

Okay, great.

And then Marshall, in terms of-- there's been a lot of talk about tax reform you guys clearly don't have a lot of the problems that some companies that might be impacted would have but you guys have also been talking about longer term tax planning initiatives.

Can you walk us through what we should be thinking about not only in the near term but also two, three years out.

I'll caveat it all with I don't think the administration is done in their attempts to modify the tax codes so I can only speak to what we've seen so far and based on what we've seen so far our previous plans that were laid out are still okay, I guess is the way to put it.

And that means that sometime probably next year you will start to see some improvement in our tax rate and we are hopeful that we can get it down to the mid 30s%.

Overtime.

Overtime, right.

Okay, great, and then lastly on the systems side, I mean you guys have largely been on a run rate in the mid-teens for repeat placements.

And I am just curious is there a certain dynamic that helps drive that consistency there?

You know, the dynamics that drives the second system placement is really hospital adoption and running out of capacity with their first, second or third or whatever it might be.

I don't think there's anything that sort of stops it from being more than in the mid-teens or less than.

So I think that's probably coincidental.

Okay.

Great.

Thanks for taking my questions.

That was our last question?

As I've said previously while we focus on the financial metrics such as revenues, profits, cash flow, during these conference calls, our organizational focus remains on increasing patient value, by improving surgical outcomes and reducing surgical trauma.

I hope the following patients personal stories in their own words give you some sense of what that means in the lives of our patients.

The first is Christy's story.

She says, on December 15, 2009.

I had the devastating news I had cancer.

In a whirlwind I was referred to an oncologist to determine I needed surgery which I had on January 22, 2009 , I should have said 2008, December, 2008.

In January, 2009, at 2:00 pm.

My gynecologic oncologist and I had decide to use the da Vinci surgical system because we felt it was the safest and most likely to the provide satisfactory results.

I went to sleep and when I work off my worse post operating issue was nausea from anesthetic.

Around 830 am, my doctor happily discharged with me simple but important instructions.

Phase I through three post operation was spent most until bed except for a few important walks.

By day seven I was no longer taking even the mild pain pills I was prescribed and on day nine with my doctors permission I was back on my treadmill Starting slowly of course.

My surgery was an amazing success in several front first because my surgeon had the freedom of movement and visibility he was able to be sure that he removed all the cancer.

I went from having stage one B, grade three endometrial cancer to no evidence of disease.

By mid-February I formed a cancer advocacy and research company.

We provide research grants to medical students in our area.

I now speak to about 2,000 people each month, less than four months after surgery, about cancer prevention, screening awareness and about the da Vinci robotic system.

You have not only saved my life, it saved my quality of life.

The second is Beth's story.

I'm 30 years old.

I was diagnosed with mitral valve prolapse at the age of 14.

I went through my teenage years and a portion of my adult life before it needed to be repaired.

When I began seeing my current cardiologist, Dr.

Michael Ball, years ago he made me aware that surgery would more than likely be in my future.

My regoverntation was moderate to sphere.

I was as much prepared as I could be.

My hub and I were married October, 2008.

And the news came less than two months after our nuptials.

The timing was difficult but I kept my eye on the big picture.

My health was most important.

We also want children and my condition at the time would not have allowed it.

Dr.

Ball referred me to Dr.

Douglas Murphy and I'm forever grateful that he did.

The procedure amazed me and overall experience was a positive one.

There is pain and discomfort with any surgery but overall it could have been much, much worse.

Had it not been for the miracle hands of Dr.

Murphy and the da Vinci surgery.

Three and a half weeks later I'm already feeling better than ever.

My scarring is minimal.

Which was something that was important to me personally.

I can't say enough about this procedure and the experience I had.

I feel so blessed in so many ways.

Patients like these are the strongest advocates for surgery with the da Vinci system and are the foundation of our operating performance.

In closing, I assure you that we remain committed to do focusing on the vital things that truly make a difference as we strive to take surgery beyond the human hand.

That concludes today's call.

We thank you for your participation and support on this extraordinary journey.

We look forward to talking to you again in

That does conclude today's conference.

Thank you for participating.

You may disconnect at this time