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When Will MAKO Finally Make it Big?

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

Last Friday, Piper Jaffray analysts speculated MAKO Surgical (NASDAQ: MAKO) would pre-announce selected earnings on January 7, 2013, urging investors at the time to buy shares of the robotic surgery specialist ahead of the news. 

After all, they reasoned, if MAKO were to report in-line results of 3100 procedures and 16 RIO systems sold, it would "ease investor concerns and drive the stock significantly higher."

Horseshoes and hand grenades

Sure enough, on Monday morning MAKO did almost exactly what Piper Jaffray predicted by reporting selected operating results for the fourth quarter and full year 2012. Unfortunately, traders who bought on their advice were treated to a nearly 14% drop that morning when the numbers fell slightly short of expectations. 

Unsurprisingly, Piper Jaffray analysts wasted no time weighing in Monday to say shares of MAKO should be bought on weakness and, though the stock recouped most of its losses by the afternoon to close down 5.5%, investors' frustrations were evident as the announcement added insult to injury after an already-difficult year.

The numbers

According to the announcement, fifteen RIO systems were sold during the fourth quarter bringing the 2012 total to 45, or smack-dab in the middle of MAKO's current guidance which called for sales between 42 and 48 systems.  While many investors remain disappointed, it's important to note the company still managed to increase its installed base of RIO systems by more than 40% in 2012. 

Even more impressive were the 10,204 procedures performed in 2012, representing a 47% increase from 2011.  The problem?  This just barely met the lower end of the company's already-reduced guidance of between 10,200 and 10,600 procedures. Still, monthly per-system utilization improved from 6.2 procedures last quarter to 6.6 in the most recent period.

To investors' credit, some of the disappointment may have resulted from hopeful comments during the company's third quarter conference call made by MAKO's President and CEO Maurice Ferre, who professed confidence utilization rates would "bump up north of seven" in the fourth quarter.  Unfortunately, the miscalculation only lends credence to the concerns of Fool contributor Brian Stoffel, who recently described MAKO as "a company with management that's having a tough time understanding where it is on the adoption curve." 

Even so, however slight, the improvement helped dash investor concerns of a prolonged decline in system utilization -- a problem which served as an ominous omen for the failure of other robotic devices like Hansen Medical's (NASDAQ: HNSN) Sensei X Robotic Catheter System.

Total(ly) hip arthroplasty

Apart from slower-than-expected system sales, how does MAKO Surgical plan to increase its bread-and-butter procedure counts?  Looking back, robotic surgery pioneer Intuitive Surgical (NASDAQ: ISRG) became the cool kid on the block by showcasing the wide array of soft-tissue procedures surgeons could perform using its da Vinci robots, allowing them to treat literally dozens of life-threatening conditions. 

In contrast, Hansen's Sensei X system failed to gain traction largely because of its limited scope of operation, sticking instead to the solitary realm of catheter insertion.  Similarly, MAKO's RIO system could only perform partial knee replacements until September, 2011, when the company announced the commercial availability of its total hip arthoplasty (THA) solution, the excitement from which helped drive the stock to its current 52-week-high of more than $45 per share.  Unfortunately, with few trained surgeons and little clinical evidence supporting the viability of the procedure, investors grew impatient as hospitals were slow to adopt the $150,000 add-on.

Now, more than a year later and as MAKO armed itself with new clinical research and expanded training facilities, a full 62% of the RIO system base has the THA application installed.  Thankfully for MAKO shareholders, MAKOPlasty hip surgeries have continued to accelerate, rising 20% from the third quarter with 395 procedures performed during the most recent three month period.

Slicing into international markets

Considering nearly a third of Intuitive Surgical's more than 2500 da Vinci robots reside outside the United States, it's also easy to see MAKO Surgical's massive opportunity for international growth. 
 
With only five of MAKO's 156 RIO systems overseas, its selected fourth quarter results become much more interesting when we note the company just sold its first RIO systems to hospitals in Thailand and Italy.  Similar to its growth in hip procedures, then, MAKO's international expansion remains in its infancy.

Foolish bottom line
 
To be sure, 2012 was brutal for shareholders of MAKO Surgical.  With the stock trading down 64% in over past year and 76% below its 52-week-high, however, I'm convinced the punishment doesn't fit the crime.
 
In the end, while the analysts at Piper Jaffray were wrong to encourage the short-term mentality of trading around earnings, the fact remains MAKO Surgical is still well-funded and determined as ever in its stubborn long-term march toward profitability.


Steve Symington owns shares of MAKO Surgical . The Motley Fool recommends Intuitive Surgical and MAKO Surgical . The Motley Fool owns shares of 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!

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