Do Not Trust Humans, Trust Machines

Ankit is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

MAKO Surgical (NASDAQ: MAKO) is a medical device company that provides a robotic technology platform (RIO) and orthopedic implants that enable minimally invasive MAKOplasty procedures for partial knee replacements and total hip replacements. This stock has seen a huge downfall of ~54% in the span of 4 months. Two events attributed to this giant fall (Click here to know about these events). The following graph shows the stock price movement over the last 6 months:

<img height="380" src="https://lh3.googleusercontent.com/IxA7f5K_TU8Qviilrr6QLYTG6tgERJ3i4kQ4XgihoaOD-mlgDNQLkWjuutnofg6AAKHGIxqJRgMmxCFlwPEMUdZY-PvyHaU2PhD8NHDh_nNrN1MpAeU" width="680" />
Now, the question arises about where the stock will go from here. Will the stock be able to recover its position? or Will it continue to decline?  According to me, the damage has been overdone and I expect the stock to move sustainably higher from current levels given:

  • Management’s now lower 2012 outlook at the pertinent level.
  • MAKO‘s hip application is on track.
  • MAKO is expanding into new orthopedic segments like total knee replacements, shoulders, extremities.

I believe the expansion into new segments will enhance MAKO‘s value proposition to hospitals as a true-platform technology.


Robots to Replace Humans
A major part of MAKO’s success attributes to thee RIO system as it has been driving volume to centers because patients perceive robotic surgery to be more advanced than manual surgery. I believe the RIO system will continue to be enticing due to its ability to make the procedure more reproducible and accurate for surgeons. Going forward, I expect increasing patient awareness/demand for robotics technologies and physicians desire to attract these patients to their institutions to continue to support MAKO‘s ability to place systems for the foreseeable future.

 

Uptake of Hip Application to be Increased
MAKO’s initial hip implants only cover a minor portion of the market (~30%) on top of unfavorable technical and software issues. That’s why the uptake of hip application has been slower than expected. Looking forward, MAKO is launching two new hip implants which will allow it to address a major portion of total hip procedures. Thus, I am optimistic that the uptake of hip applications will be in-line with, if not above, the Street's expectations after the launch.

Market Share Gain in Partial Knee Replacement
MAKO has been captured ~12% of the partial knee replacement market since the introduction of the RIO system. Partial knee replacement procedures are more challenging procedures for a surgeon compared to total knee replacement procedures, and MAKO’s system allows more surgeons to perform these more difficult operations. Therefore, I believe that MAKO will continue to gain share in the partial knee market.

Unique Position with Advanced  Technology
The company has several competitors include Biomet and Zimmer (NYSE: ZMH). Biomet specializes in reconstructive products for hips, knees and shoulders and fixation devices and Zimmer is also highly concentrated in Hip and Knee market (~70% of sales). Both these companies have recently launched new products, and many would say there is a risk that these established ortho giants could recapture share with relatively simpler and cheaper tools.  I just suggest to pick up the phone and call any of the doctors who have even once used RIO. I promise you will not hear one say they would go back to doing it the old fashion way. I believe that patient investors will be extremely rewarded in the long run especially at the current levels. The following table summarizes the expected EPS growth of MAKO and Intuitive Surgical (NASDAQ: ISRG):

<table> <tbody> <tr> <td> <p><span>Company</span></p> </td> <td> <p><span>Expected EPS growth (next year)</span></p> </td> <td> <p><span>Expected EPS growth (next 5 years)</span></p> </td> </tr> <tr> <td> <p><span>MAKO Surgical</span></p> </td> <td> <p><span>39.7%</span></p> </td> <td> <p><span>25%</span></p> </td> </tr> <tr> <td> <p><span>Intuitive Surgical</span></p> </td> <td> <p><span>20.49%</span></p> </td> <td> <p><span>17.2</span></p> </td> </tr> </tbody> </table>

Intuitive Surgical designs and builds the da Vinci Surgical System, the breakthrough platform for robotically assisted minimally invasive surgery. It could be easily interpreted from the table that both these robotics based medical companies have impressive expected EPS growth on an absolute basis. Therefore,  I am optimistic about the strong long term growth prospects of both the companies.

I believe MAKO has created a unique platform that will see enhanced utilization in the coming years after bypassing the hurdles that always affect new technologies. For example; new potential hospital purchasers are looking for additional data points to support the investment, realizable short-term economic benefit, including additional surgeon buy-in, and compelling clinical value. I am optimistic that these hurdles will be tackled in a smooth manner. Therefore, I suggest investors to use the current weakness in share price to build a position.


ankitagrawal has no positions in the stocks mentioned above. The Motley Fool owns shares of Intuitive Surgical, MAKO Surgical , and Zimmer Holdings. Motley Fool newsletter services recommend Intuitive Surgical and MAKO Surgical . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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