Meet Bob Smith. Bob is a banking executive, occupying one of the upper middle rungs of a bank that very well may have made you a loan at some point over the last ten years. He is 56 years old, has two teenage kids who will soon be going to college, an expansive if not luxurious home in one of the tonier suburbs or a large metropolitan zone on the East Coast, and wife who is 10 years younger. She works part time as a school teacher at a local kindergarten. Despite a rising cholesterol level and a gradually expanding waste line, Bob has always been in fairly good health; he credits his cushy spot on the corporate ladder to the fact that he has often taken work assignments that other colleagues couldn’t find the time for, and the fact that Bob has rarely if ever missed an important client meeting or networking conference. We are about to meet Bob on a very bad day in his life.
The trouble started gradually about a year ago. Constantly getting up at night to go to the bathroom, with very little urine actually coming out, very little sense of relief. Getting tired of being constantly woken up by Bob’s midnight wanderings to the bathroom, his wife Beverley finally succeeded in pushing him to get the annual physical that he hadn’t found the time for over the last few years. The primary care doctor ran a few blood tests, and Bob will never forget how his eyebrows raised just so subtly when the physician reviewed the results of his PSA test. From there it was a flurry of visits to the urologist, blood tests and finger exams in uncomfortable places, culminating in a prostate biopsy that was about as comfortable as spending extended time in a Turkish prison.
But nothing could prepare Bob for today. It was a fifteen minute conversation between his doctor, himself, and his wife. A lot was said, but only a few words stuck out, clanging around his head like an untuned piano that can only play a few notes…
.prostate cancer…..aggressive….surgery….erectile disfunction….erectile disfunction…erectile….
Bob was so upset that Beverly had to drive home. She was trying to cheer him up, relentlessly focusing on what the urologist had called the “good news” – most cases like his had a very high cure rate….Bob probably wouldn’t even have to miss much work and there was very high chance that, after the surgery, he would soon be hiking and biking again as always. Beverly just kept repeating what the doctor said, again and again, without daring to confront the “not so good news” that the doctor had dropped on them in a hushed tone, as if he was trying to whisper a rumor about someone other than Bob, the truth is, there is a fairly high rate of complications with this procedure….nothing life threatening, but somewhere between 30% and 70% of men experience partial or total erectile disfunction after the procedure. Sometimes it’s temporary, but sometimes…..its permanent. There also is a smaller risk of incontinence….
Beverly had peppered the urologist with questions, but he seemed to evade giving firm answers about much of anything….despite him discussing a range of “new, better” options and “advances in treatment” it was as if he just didn’t want to be caught guaranteeing anything.
“How could this happen to me?” Bob thought in a daze as Beverly drove the couple home. “What does it mean, “might?” “maybe?” “reduce risk?” He tried not to look at his wife, whom he had often noted, approvingly, still drew the occasional lusty gaze at the country club pool or tennis court. “Jesus Christ, she’s not even 50 and she’s never going to get laid again? What the hell is going to happen to us?” the thoughts wafted through his mind like a poison fog….
It was then that he looked up at a giant sign on the highway. Man and machine, together. A youngish surgeon, beaming with confidence, leaning against a machine with four gleaming mechanical arms, the whole futuristic scene twenty feet tall by the side of the road. “Saint Joseph’s Hospital: #1 in robotic prostatectomy,”
the sign read, “Experience counts.”
A rush of emotions flooded through Bob’s addled brain. He could feel it coming, like a wave that he could catch just long enough to surf; that old fighting spirit that had gotten him out of so many jams. “Well, I’m not going quietly. That’s for damn sure. If I am going to do this, I want the latest technology on my side. I need the best doctor on my side. That old foggy that we just saw probably doesn’t really know about the newest robots out there….I’m sure that with this robot, my chances of having a normal life are better…..” And then he turned his head just so slightly, enough to catch the outline of Beverly’s comely face as she focused squarely on the road ahead of her, “I hope so, anyhow,” he thought.
Bob grabbed his phone and created a memo, jotting down the phone number on the billboard.
Welcome to the Jungle
As a human being, I am sad to report to you that Bob’s situation is quite typical. These kinds of conversations happen thousands of times per month across the United States. Not just for prostate cancer, but for a long list of cancers and maladies. But as an investor, I have to tell you; cancer and other kinds of slow motion, doubt inducing, fear creating diseases are a gold mine. Just ask long time investors in Intuitive Surgical, the maker of that robot that Bob saw on the highway billboard (the DaVinci surgical system). Patients like Bob have given Intuitive shareholders an astonishing 4,854% return on investment over the last twenty years. Yes, you read that correctly. $10,000 invested in Intuitive Surgical in 1997 would be worth $495,429 today.
Benefiting from such outrageous financial returns over the last two decades, it must be clear to all that the Da Vinci Robot has saved millions of men like Bob from the humiliating side effects of prostate cancer, right? Here is what the American Cancer Society has to say on the subject:
Most doctors believe that surgery, external radiation, and brachytherapy all have
about the same cure rates for the earliest stage prostate cancers. However, the pros and cons to each type of treatment that should be considered….choosing among treatment options is complicated even further by the development of newer types of surgery such as robotic assisted prostatectomy and proton beam radiation in recent years. Many of these seem very promising, but there is very little long term data, which means comparing their effectiveness and possible side effects is difficult, if not impossible….you might also want to consider getting more than one medical opinion. For early stage cancers, it is natural for surgical specialists, such as urologists, to favor surgery and for radiation oncologists to lean more towards radiation therapy. Doctors specializing in newer types of treatment may be more likely to recommend their therapies……(1)
So, according to the American Cancer Society, the good news is that there are now a lot of different ways to fight cancer effectively. The bad news is, men like Bob are on their own in determining which methods are least likely to destroy their quality of life. Putting on our investor hat, which is the purpose of this handbook, we recognize the following truism: where scientific facts become blurry, marketers and salespeople will step in to offer clarity and comfort to patients. With even the American Cancer Society reluctant to declare a “winner” in the cancer wars, the door is left wide open for salesmanship to take hold. As any long time Intuitive shareholder will tell you, the potential investment returns can be explosive.
My task in this chapter is not to poke holes in Intuitive’s marketing campaigns, or to expose the many absurdities and abuses inherent in American cancer care. My role is to help you find the next Intuitive, so that you can invest and turn your $10,000 into $450,000.
Keeping that in mind, the educated investor must ask himself, “was Intuitive a fluke? Was it just somebody’s score of a lifetime? Right place, right time, etc?”
If I thought investing was luck based, I would just tell you to go to the casino instead of wasting time reading my book. The founders of Intuitive were some very smart cookies (and some very brave cookies), and they capitalized on a mix of societal trends, medical trends, and technological trends to create one of the most fruitful business plans in the history of the modern publicly traded company. If we were to make the analogy to food, it wasn’t just a soup with the right ingredients. It was more like a salad, with many discrete ingredients combined in just the right proportions, the careful investor able to identify each ingredient to the recipe. I am going to help you pick apart that recipe for success, so that you can repeat it while analyzing your investment choices.
The very simple formula could be broken down to the following
Legitimate scientific ambiguity+good payor mix+competitive medical business environment+MOAT+ cultural attitudes = GOLD MINE.
Let’s go over each element. When we are done, I am confident that you will be better equipped to pick out the next Intuitive and ride the wave to your own 4,000% return.
Legitimate Scientific Ambiguity
If the devil himself could create just one disease to terrify humanity, cancer might be his choice. The dread disease has been with us since the dawn of recorded human knowledge. The word “cancer” comes from the greek word “Karkinos,” or crab, because certain tumors looked like malicious crabs to the ancient greek physician Hippocrates. Even the mighty Egyptian Pharaohs were victims of cancer; we know because archaeologists have unearthed mummies riddled with tumors.
Although I am not a physician, and I don’t even have a simple undergraduate degree in biology, your author knows quite a bit about cancer because he won several national sales championships selling pathology services. A pathologist is a kind of physician who, either alone or in a team environment, uses visual, chemical, and genetic analysis to determine whether a tissue is cancerous, and if cancerous, just how dangerous. I routinely sat in on meetings with practitioners with collectively more than 100 years of education and watched them debate diagnosis, correct each other, and sometimes ultimately just take a guess at whether X,Y, Z cancer was going to kill a patient. In the best case situations, all they could give was a probability based on their vast clinical experience and a review of the latest studies and academic literature. “Such and such a malignancy of the breast has an 80% chance of spreading. Such and such malignancy of the prostate has a 50% chance of spreading.” Billions of dollars in research, decades of rigorous study, and the smartest people in America can only tell you, “This tumor growing inside of you might kill you. Or maybe not.” Not very satisfying, is it?
After receiving a diagnosis from a pathologist, which will usually include a score indicating your rough likelihood of dying painfully, a patient will typically receive either single modality, or multimodality treatment. Once again, the best trained, most confident, most compassionate oncologist can only tell you, “70% of patients are still alive in 3 years with treatment X.”
Another notorious, fear inducing aspect of cancer treatment is that the side effects of treatment may be worse than the disease itself. Most people, somewhere in the dark corners of their mind, have an image of the ravaged chemotherapy patient; alive, if you call that living. Slow death can also come to a patient through the blade; although treatment modalities and outcomes have made leaps and bounds over the last 25 years, you could still Google “Roger Ebert, Cancer” if you want to see photos that will keep you awake at night. (not recommended!)
Each different kind of cancer has its own traumas and tragedies. One example is the story of Bob at the beginning of this chapter. The good news is that 99% of men diagnosed with prostate cancer will survive more than 5 years. (2) The terrible news is that life saving removal of a cancerous prostate leaves many, many men with some degree of impotence. If you were facing that prospect, you would want some hard numbers, wouldn’t you? Reliable facts to help you make a decision about your treatment. Well, that may be a tall order. A quote from the Prostate Cancer Foundation:
Within one year of treatment, nearly all men with intact nerves will see a substantial improvement….about 40-50% of men who undergo nerve sparing Prostatectomy will have returned to their pretreatment function; after about two years 30-60% will have returned to pretreatment function. These rates vary widely depending on the surgeon and level of experience, and how outcomes are reported…..(3)
For a leading scientific organization, there sure is a lot of wiggle room in those statistics. A lot of legitimate doubt that would gnaw at a terrified patient’s mind. If someone could create a better method of doing the surgery, something that just seemed more advanced, more precise, they sure could make a fortune, couldn’t they?
Intuitive could, and they did.
Remember those 10,000 people per year who turn 65? Well, it turns out they have some of the best insurance in the world – Medicare. Medicare will pay for almost anything, without realistic regard to outcomes. In other words, Medicare will pay for cancer treatment for a 90 year old demented patient just the same way it would pay for cancer treatment for an active 65 year old executive. As long as a treatment is somewhat clinically reasonable, our Uncle Sam pays. And, generally, Uncle Sam will pay providers more than the cost of providing care, making most treatments profitable.
Despite the eternal hysteria over cancer causing agents in our environment, the sad truth is that the number one predictor of cancer is age. For reasons that are poorly understood at the moment, our cells just don’t replicate as accurately as we age. The older we get, the more cancer prone we are. As we grey as a nation, we will have more cancer, and more people will have “no questions asked” government insurance that will pay for even the most aggressive treatments. As an added financial incentive, sadly, many cancer patients are “repeat customers.” In other words, physicians make every good faith effort to cure their patients, but realistically, many patients will endure surgery after surgery, treatment after treatment, until they eventually succumb. As nasty as it is to consider, prolonging a patient’s life through continuous interventions is a very lucrative affair if Uncle Sam is paying.
Of course we all know people under 65 who has faced cancer. Even in these cases, cancer patients function in what is the most like a free market of any American medical scenario (the American medical system is certainly far from being a free market in general). The reason why cancer patients are the most likely to act like market participants is because they are dying, but dying slowly. So they can actively shop, and consciously choose providers and facilities. Sadly, this phenomena also favors wealthier patients with better insurance plans. Think about it. A diagnosis of breast cancer is grim for anyone. But who realistically has the best ability to “shop” for the best treatment options? A suburban housewife with a busy tennis schedule and two college educated children to help? Or a struggling single Mom working overtime just to pay the groceries? Typically, the wealthier individual in this scenario will have more time and money to seek out specialized treatment in the best facilities with the newest technologies, while the poorer patient may be forced to seek whatever treatment she can manage while still trying to pull a double shift at her employer to pay for it all. This means that facilities that invest in the latest cancer care can expect a payoff in the form of patients with better paying insurance plans.
Competitive Business Environment
In the Unites States today, it is illegal for a hospital to refuse basic medical care to anyone in emergency need. This means that whoever walks, crawls, or wheels into an emergency room must at least be stabilized, no matter how expensive the trauma is. If a BMW and a used Honda get into a car accident, all of the occupants will receive exactly the same care, at least for the first 72 hours. According to the American Hospital Association, this translated to 35 Billion dollars in uncompensated care during 2015 alone!! (4) The advent of broader insurance coverage under Obamacare has helped reduce the burden, but each hospital must still write off tens of millions of dollars in expenses every year.
Even though many hospitals throughout the United States are considered “non-profit,” they still must balance revenue against expenses in order to pay their employees and offer services to the public (more on this in another chapter. Calling these entities “Non-Profit” can be debateable….). This means that for every dollar they must write off for uninsured patients who are carried into their emergency room, they must earn extra revenue somewhere. If you were a hospital CEO, and you had at your disposal some of the information discussed earlier in this chapter, which kinds of patients would you be looking to attract? How might you make sure that well insured patients actively choose your hospital, as opposed to some other one?
You might seek to purchase the very latest technologies. You might seek to recruit the foremost medical experts in these technologies. And you would not be shy about letting the public know that your hospital is in the vanguard. Think about Bob looking up to that billboard, like a beacon of hope in his darkest hour. Bob and Beverly are good patients that any hospital would strive to attract.
Try this as an exercise over the next few weeks. Driving down the highway, how many medical ads do you see? If you are lucky enough to be healthy with a healthy family, you probably never noticed. But if you live in any major urban area, your eyes will be opened up to a whole world of hospitals competing vigorously to be your “go to choice” for a new hip, a prostate removal, or even a new heart.
Now imagine that you are a medical provider at one of the facilities that has just invested millions of dollars in a robotic suite. You are a well paid employee, but you just practice medicine. Your employer handles everything else. Every day you now pass an ad on the highway for the robot on your way to work. Even though the scientist in you has doubts about how much improvement the Intuitive robot really offers, are you going to resist when your boss asks you to be trained on this new technology? Are you really the one who wants to resist “progress,” and the multi million dollar investment that was required to feature this “progress??
Once a hospital has committed the millions of dollars in machines, training and marketing to mount a robot program, they have every incentive to make sure the new techniques are adopted throughout the hospital, and adopted by as many physicians as possible. It’s not unheard of for individual surgeons to opt out or passively resist, but it’s unlikely that such physician employees would come up for promotion, or even retention if staffing cuts are ever made. Think about “Man and Machine together” on the billboard that Bob passed. As an early adopter of the “breakthrough” cancer fighting robot, the future does look bright indeed for that smiling, 20 foot high surgeon…..
If you are a medieval nerd like myself, or even just a devotee of “Game of Thrones,” you may be well aware of what a moat is. A moat was a ditch dug around ancient castles, often filled with water, alligators, etc, to form a physical barrier against invading hoards. If the mere presence of the moat didn’t ward off enemies, most of them would die trying to cross the barrier into the castle.
In investing, the idea of the moat was popularized by Warren Buffett, whom I have reverentially referred to as the greatest investor of all time. The definition of “Economic Moat” from Investopedia:
The term “economic moat” coined and popularized by Warren Buffett, refers to a business’ ability to maintain competitive advantages over its competitors in order to protect its long term profits and market share. Remember that a competitive advantage is essentially any factor that allows a company to provide a good or service that is similar to those offered by its competitors and, at the same time, outperform those competitors in profits….Very successful investors such as Buffet have been very adept at finding companies with solid economic moats……
With a stupendous compounded profit that would make even Warren Buffet proud, Intuitive must have found one world class economic moat. But what exactly has been that “X Factor,” that world beating competitive advantage?
Is the technology so special, so unique, that it can never be copied? After all, the four armed mechanical surgeon is a marvel of the twenty first century technology. All you have to to is a quick google search to see its mechanical fingers sewing grapes together with shocking precision, a precision that never gets tired, never gets distracted, and never feels stressed. Human surgeons have even operated the wondrous machine cybernetically all the way across continents. (the human surgeon was in America, the machine was in France, and a surgery was orchestrated successfully just as if both man and machine were in the same room…..).
But other high tech breakthroughs have been copied before. Think about how hard Elon Musk worked to promote the concept of an electric car from a glorified golf cart to the number one selling luxury sedan in the United States. It took a decade of sweat, investment, and risk to create a viable, saleable electric car. But now all of the major car companies are launching rival electric cars with similar technologies. Even Elon Musk’s rocket company, Space X, again a leader in the development of groundbreaking technology, now faces numerous ferocious competitors in our new twenty first century “space race.” So technological advances alone aren’t enough to keep business barbarians from crawling up the walls of your corporate castle.
So what could be the Moat that has ensured Intuitive’s dominance, year after year, decade after decade? Remember that smiling youngish surgeon on Bob’s billboard, twenty feet high? The “Man” from “Man and machine?” Surprisingly enough, Intuitive’s killer advantage comes not from gears, or circuits, or microchips, but from a carefully arranged trap set for human beings.
Although the phrase “DaVinci Surgical Robot” sound alluring, truth be told, the DaVinci is not a robot. At least not in the traditional, science fiction sense. Not like robots from Star Wars that move around, complete tasks independently, and have their own sense of judgement and logical thinking. Rather, the DaVinci is most realistically thought of as the world’s most advanced scalpel. It is a machine, but it is a tool to be wielded by a skilled surgeon, not a surgical A.I. where we just push a button that says, “Do Surgery” and come back after an hour to find a cured patient.
In other words, as the prostate cancer association reminded us a few pages ago, the skill and experience of the surgeon is still vitally important to ensure good outcomes.
Training surgeons on the effective use of this new technology is critical for Intuitive, not only to create outcomes that the shareholders can be proud of, but also to create a moat so wide and deep that the top technical and business minds have yet failed to cross into Inutuitive’s lucrative castle. Training surgeons on the DaVinci requires at least 4 distinct educational phases, and can cost many thousands of dollars. Most surgeons who devote precious time to this rigorous training are not young, carefree med students, but rather mature surgeons with full patient loads, full family schedules, and large mortgages that need to be paid every month. Additionally, even after completing successful training on the DaVinci, how long does it truly take the surgeon to feel 100% comfortable on the machine? How many nights does he spend tossing and turning in bed, secretly wondering if someone will now be impotent due to a nicked nerve, or a severed tissue?
It’s a huge mountain to climb to become proficient at the newest technology….once that mastery is achieved, there is almost no chance that any surgeon would go through training all over again to adopt a different system.
If surgeons are “invested” in the DaVinci system in an emotional and professional sense, then hospitals are invested in the DaVinci in the literal sense. One machine can cost 2 million dollars or more, with ongoing yearly fees in the six figure range for maintenance, updates in technology, and disposable attachments. Committed surgery programs can have several machines in one hospital. Its also very likely that the hospital has invested heavily in training of personnel. Lastly, it’s also very likely that the hospital has spent many thousands of dollars vigorously marketing the benefits of DaVinci surgery to the general public.
Intuitive has done a masterful job of leveraging their FIRST MOVER ADVANTAGE to build an economic moat for the ages. It would literally cost a hospital and its surgical personnel millions upon millions of dollars to switch away from the DaVinci robot. Some competitor would have to present a quantum leap in technology for a health system to even consider switching.
The first mover advantage is one of the critical aspects of twenty first century big business. The way that companies such as Google, Facebook and Amazon exploded on the tech scene with new business models is impressive; but what really made these businesses legends was the way that they somehow wove themselves into the fabric of everyday American life. Just as these consumer names evolved seemingly unassailable moats that have in turn yielded astronomical profits, Intuitive Surgical has done the same. The roving corporate barbarians can only eye Intuitive’s stronghold with envy, wishing in vain for the golden hoard within.
Those readers old enough to remember the 80’s and 90’s might remember the infamous boxing promoter Don King. Promoting fighters such as Mike Tyson, Don King was a colorful character to say the least, and he exuded a certain audacious brashness that excited many and irritated some. His catchphrase was “Only in America!” which he would exclaim with pride at the end of every interview. He even named his company, “Only in America Enterprises.” It’s really a shame that a questionable operator like King trademarked that name, because in a lot of ways Intuitive Surgical is the real “Only in America.”
Now you might logically say, “over 3 billion men worldwide have prostates, Intuitive could have launched its robot anywhere.” I would argue with you. This is not a text on anthropology, sociology, or communications. But I believe that cultural factors can be the special spark that lights a roaring investment fire.
Consider for example, American ideas about cancer. As early as the 1970’s Richard Nixon was declaring “War on Cancer.” If a celebrity dies of cancer, you will often hear a phrase such as “so and so lost her brave battle with cancer…” As of the writing of this chapter, Senator John McCain, a famously pugnacious lawmaker and former presidential candidate has been diagnosed with an aggressive form of brain cancer. A headline from the Washington Examiner read, “John McCain Will Beat Cancer Because He is a Fighter.”
Senator McCain was 80 years old at the time of his diagnosis, already had lived a legendary life, a longer life than the average American male. But no one seems to suggest that McCain should simply put his affairs in order and make sure that his life ends in a peaceful and natural way. He he has made it to age 80, he should try for 85; if he makes it to 85, he should try for 90. Americans tend not to believe that they should “go quietly” and “let nature take its course.” For cultural reasons that are beyond the scope of this work, most Americans think that a sick person should dig in deep and fight every moment until the war is inevitably lost.
If you were “going into battle” against such a fearsome adversary as Cancer, wouldn’t you seek the latest weapons, the most advanced defenses, the one magic cure that could somehow ward off a disease that has hunted our race since the time of the Pharaohs? Now imagine that steely resolve, and imagine that you don’t even have to pay for it; your insurer will. If a doctor tells you something could work, you’ll try it.
And generally, as Americans, we believe that technology will work. We were crazy enough to believe that four Americans could safely visit the moon in a vessel that today looks like little more than a flying tin can. Our children now begin playing with computer generated media just weeks after exiting the womb. We learned how to split the atom. Of course a robot can cure cancer…..evidence be damned. It just…..makes sense. It just seems Intuitive.
Maybe Intuitive is the right name for the company.
Become the Salad Master
So there you have it. Our simple recipe for the tastiest investment salad of all time:
Legitimate scientific ambiguity+good payor mix+competitive medical business environment+MOAT+ cultural attitudes = GOLD MINE.
I could lie to you, and tell you that companies like Intuitive come along all the time, and you can easily transform $10,000 into $450,000 by investing in those common occurrences. But I promised at the beginning of this book to be honest. And the honest truth is, these kind of investing bonanzas don’t come around often. How many Google’s are there in the world? However, if you follow the formula above, you will be ready to spot the next world beating opportunity when it comes along.
Where might be some good places to look for that elusive four leaf clover of a company? Here are some ideas.
-Cancer. As we only began to discuss in this chapter, cancer is a fiendishly complicated disease which our scientists are only beginning to understand. Current treatments, while big advances over prior decades, still leave a lot to be desired. Due to demographics, there are going to be a lot of cancerous old folks with good insurance who are willing to take a chance on newer technology.
-Anything with the brain. Neurology and Neurosurgery today are moving from their infancy to a toddler like stage. Existing modalities of treatment for common and devastating ailments such as stroke are weak at best. Horrific, slow killing diseases such as Parkinson’s leave patients desperate for new technology.
-Fertility/Obstetrics. Without going into detail in this short description, there is a day on the horizon where human children will be grown in laboratory like settings. Anyone who has endured the excruciating pain of miscarriage or stillbirth might understand science’s interest in this field. If this trend is carried to its logical conclusion, artificial wombs could mirror phenomenas like the DaVinci machine.
Be curious. Be a nerd. Pour over science magazines, poke around your local university, ask your doctor what interests him. Remember that so called “luck” may boil down to the formula I gave you, and you will make some luck of your own.