Why MAKO Will Remain in My 2013 Portfolio

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

On Monday, Fool contributor Brian Stoffel skewered MAKO Surgical (NASDAQ: MAKO), explaining why the company's stock is unlikely to occupy a spot in his portfolio next year.

To Brian's credit, he acknowledged the risk in stepping away from the beaten-down company, writing "now could be just the right time to be buying into MAKO Surgical."  Given the company's less-than-stellar track record of accurately predicting sales, he's certainly not the only investor worried about the orthopedic robotics specialist.

That said, here's why I'm happy to take the other side of the trade.

Signs of life

Despite starting 2012 with two consecutive horrifying quarters, MAKO finally showed signs of life early last month with its third quarter earnings report.  At the time, I mused investors could finally breath a sigh of relief and wrote: "Third quarter revenue rose 46% from the same year-ago period to $29.2 million, with a net loss of $6.6 million, or 15 cents per share.  Perhaps most importantly, the company showed a marked improvement in its ability to move RIO systems, selling 15 robots in the quarter -- the same number sold during the entire first half of 2012."  

While the numbers undoubtedly improved, skittish investors remain unconvinced MAKO can continue to outperform.  As Brian rightly pointed out, MAKO has so far failed to live up to the nearly-impossible expectations of becoming the next Intuitive Surgical (NASDAQ: ISRG).  Looking back, this shouldn't be much of a surprise given the wide range of soft-tissue procedures surgeons could perform from the very beginning using Intuitive's da Vinci robotic systems.  In contrast, the initial focus of MAKO's RIO systems was solely on the niche orthopedics segment in partial knee replacements.

Even still, comparing MAKO to Hansen Medical (NASDAQ: HNSN) seems premature considering MAKO's quarterly procedure count showed a 33% year-over-year increase in the third quarter.  This stands in contrast to Hansen, whose early falloff in procedures for its Sensei X Robotic Catheter system served as an ominous omen for its future system sales.  Despite MAKO's prior sluggish RIO system sales to new customers, surgeons continue to enthusiastically use RIO Systems that are already in place.

New applications

To increase its value proposition and encourage wider adoption, MAKO is also working hard to increase the variety of procedures its RIO systems can perform.  In September, 2011, the company announced the commercial availability of its RIO system for use in compete hip replacement procedures.  

As I wrote in early October, however: "At $100,000 each, selling a new THA (Total Hip Arthroplasty) application to a hospital that already spent $850,000 on the RIO system can't be easy."  Still, as of its most recent quarter, a full 60% of the installed RIO system base has opted for the THA application, but only 13% of the year-to-date MAKOplasty procedures were hip replacements.  It's important to note, then, the number of hip MAKOPlasty procedures increased 7.4% from the previous quarter, despite a 7% decrease in the overall number of procedures over the same period.  This indicates many hospitals are finally beginning to ramp up their hip applications, which should bode well in proving the viability of MAKO's THA solution.

In the past, MAKO championed its partial knee solution as a way to avoid forcing patients to wait until a more intrusive total knee replacement was necessary.  During last quarter's earnings conference call, however, MAKO management finally made the company's first official statement confirming its plans for a new Total Knee Arthoplasty (TKA) application.  While management was careful to say investors shouldn't expect the TKA application in the near future, it will eventually serve to broaden MAKO's reach and improve its value proposition for prospective new customers down the road.

Insider buys and the secondary offering

Several MAKO executives purchased shares in November, including a $13.95 per share buy from MAKO's founding President and CEO Maurice Ferre and two significant purchases made by members of MAKO's Board of Directors at $13.45 and $13.15.  Given today's closing price of $12.78, retail investors have the rare chance to open long positions at a lower cost basis than MAKO's insiders.

In addition, today's price per share is lower than the $13.15 price from MAKO's secondary offering just last month.  While some investors expressed concern, the offering was performed at such low levels, it's no secret MAKO continues to burn cash and will likely need additional funds before it turns a profit.  While cash burn is slowing as new RIO systems are brought online, management has repeatedly stated they were pleased with the outcome of the secondary offering and simply wanted to get the cash worry out of the way so they could continue to focus on execution.  Furthermore, while MAKO still has access to a separate line of credit with Deerfield Management, pulling from that line would have invoked significant dilution to existing shareholders in the form of warrants issued to Deerfield.  It's understandable, then, why MAKO would want to avoid using the Deerfield credit line unless it's absolutely necessary.

Foolish bottom line

While I understand Brian's reluctance to stick with MAKO, I'm convinced now's the wrong time to jump off this nausea-inducing roller coaster.  For the reasons above, I'm looking forward to the rest of the ride and will cling tightly to my shares in 2013.

Steve Symington owns shares of MAKO Surgical.  The Motley Fool owns shares of Intuitive Surgical and MAKO Surgical. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus