The Fundamental Equity team at MacKay Shields seeks to invest in competitively advantaged companies likely to experience above average earnings growth backed by secular trends.

One trend which has caught our attention is the rising penetration of Minimally Invasive Surgery (MIS). While the spread of COVID-19 has caused most elective surgeries to be postponed in the first half of 2020, we believe that it will ultimately increase adoption of surgeries which can be performed in outpatient settings, have fewer complications, and require shorter hospital stays.

Goldman Sachs estimates that Minimally Invasive Surgeries will grow at 21% annually from 2018 to 2030 and will account for 22% of all surgeries in 2030 vs. just 8% in 2018.1 Patient preference for smaller incisions, payer demand for shorter hospital stays and advances in technology are driving strong growth in minimally invasive surgical procedures. We believe that healthcare companies facilitating and driving this trend present compelling long term investment opportunities.

Smaller Incision, Better Outcome

Surgical care continues to play an indispensable role in healthcare. A third of disease treatments globally require surgical intervention, including treatments for many of the most prevalent and rapidly growing chronic conditions such as cardiovascular disease, stroke, cancer, diabetes, and pulmonary disease2. The high cost of surgery places a major burden on patients, with 25% of worldwide patients who undergo surgical procedures facing “financial catastrophe”, defined as out-of-pocket healthcare spend exceeding 40% of non-subsistence household income3.

In response to rising demand for better patient outcomes and financial affordability, minimally invasive surgery is gaining acceptance and replacing open surgery across diverse medical applications. Minimally invasive surgery utilizes only a few key-hole sized incisions to access the organ with small surgical instruments. When compared to traditional open surgery, which requires large sections of tissue to be opened in order to allow surgeons’ hands enough space to operate, the advanced MIS technique offers numerous proven benefits including:

- less blood loss during operations,

- less scarring,

- lower post-operative complication rates, and a

- faster, less painful recovery.

Minimally invasive surgeries also result in shorter hospital stays, fewer missed days of work, and a reduction in facility and service fees, thus achieving greater cost effectiveness for patients, service providers, and payers (Figures 1 and 2). Research by the Johns Hopkins University School of Medicine suggests that if all U.S. hospitals increased the volume of minimally invasive surgeries by 50%, they would avert 3,600 complications, reduce hospital stays by 144,800 days and save $288 million a year4.

Smarter Operating Rooms

A steep learning curve for surgeons has been the biggest barrier to more rapid adoption of minimally invasive surgery. Compared to conventional open surgery, the smaller incisions prevent surgeons from seeing the whole structure and applying surgical instruments to the treatment area directly. Instead, surgeons must rely on monitor images to insert small and slender medical devices through incisions. These tools are then controlled at distance to navigate through blood vessels and operate the diseased area inside the body. Given the limitations on visualization and control, first generation technology in MIS has gravitated around image-guided endoscopy and laparoscopy and robotic-arm assisted surgery, which all require significant time to master. This limitation explains why most robotic procedures are still in lower risk surgical applications.

However, advances in technology are rapidly improving the effectiveness and number of applications for minimally invasive treatments. One of the fastest areas of improvement is within imaging and visualization. Real-time tracking of high-resolution 3D color visuals allows surgeons to focus their attention on surgery without having to interpret the unnatural and non-intuitive 2D images generated by ultrasound or fluoroscopy.

Further, quality enhanced images in different dimensions from diagnostic devices, surgical machines and robotic consoles are now being integrated into a single digital platform to provide streamlined and comprehensive live data. In addition, 3D holographic computing platforms in augmented reality (AR) have begun to provide more visibility and cognitive awareness to surgeons. With these advancements as a key driver, the global installed base of robotic surgical platforms has grown at 11.3% annually to 5,800 over the last five years (Figure 3).

Big data and machine learning are also supporting a technological leap forward. Surgical workflow management systems based on data analytics help to optimize workflows and provide insights on likely outcomes of procedures. Predictive modeling combined with an artificial intelligence (AI) system provides a higher degree of accuracy and precision in the operating room. Such innovations enable surgeons to focus their efforts by removing unnecessary burdens and improving intuitive capabilities. As technological advancement continues, minimally invasive surgery is now becoming the industry standard.

Finding Opportunity

We have identified a number of leading international medical technology firms that are benefitting from rising adoption of minimally invasive surgical techniques. These include providers of medical imaging technology, developers of software used to integrate healthcare equipment, and companies that develop interventional medical products and devices. Our investment team sees several attractions of investing in the Healthcare sector including the relatively inelastic nature of demand, the barriers to entry provided by patents and regulatory approvals, and the volume growth likely to be provided by aging populations.

We find the medical technology space to be a particularly attractive area within Healthcare given the tight relationships that Medtech companies have with hospitals and physicians in their field and the ability of many products to sustain their revenues following patent expirations. We believe that Medtech companies benefitting from rising adoption of minimally invasive surgery are likely to enjoy even higher rates of sales and earnings growth than the sector as a whole and the leading companies are likely to enjoy even higher customer switching costs given the complexity of their products and their integration with other systems in the operating room.

1. Goldman Sachs Global Investment Research.

2. Meara, John G., et al. “Global Surgery 2030: evidence and solutions for achieving health, welfare, and economic development.” The Lancet Global Health (2015), Shrime Mark G., et al. “Global burden of surgical disease: an estimation from the provider perspective.” The Lancet Global Health (2015).

3. Shrime, Mark G., et al. “Catastrophic expenditure to pay for surgery: a global estimate.” The Lancet (2015).

4. Martin A. Makary, MD, MPH et al. “Hospital cost implication of increased use of minimally invasive surgery”. JAMA Surgery (2015).