A Mako Surgical Pitch
Board: Mako Surgical
This is one in a series of ongoing posts detailing why I invest in various companies. I focus primarily on non-financial intangibles that point toward the possibility of multi-bagger potential.
What they do: MAKO Surgical Corp (NASDAQ: MAKO) is revolutionizing both knee replacement and hip replacement surgery. Mako has created a system that makes surgery less invasive and easier to recover from. Currently, they have no direct competition. Makoplasty allows surgeons to resurface parts of the knee joint damaged by injury or arthritis before an entire knee replacement is necessary. The knee has three compartments, and people with osteoarthritis often suffer damage to only one or two. Yet the most common surgical procedure for osteoarthritis is total knee replacement.
Intuitive Surgical (NASDAQ: ISRG) has been the poster child for robotic surgery and has kicked down the door that Mako is walking through. Intuitive Surgical has branched out into a wide variety of surgical procedures and has become the de facto standard for robotic surgery. They are a multi-bagger many times over and many investors feel they missed the boat not investing in Intuitive in their early growth years. Many comparisons have been made between Intuitive and Mako. While they are companies with different prospects, they do have similarities. The biggest is that both are replacing their more invasive predecessors, resulting in shorter hospital stays and fewer complications.
Why invest in Mako? I see one of the main reasons to invest in Mako as the same reason I invest in SXC Health Solutions (NASDAQ: SXCI) - The Silver Tsunami – SXC Health Solutions is a pharmacy benefit manager that is poised to reap the rewards of the same societal trends that stand to benefit Mako. The external environment cannot be ignored in the case of these companies. The United States is at the forefront of what has been popularly characterized as the Silver Tsunami – Baby Boomers are just beginning to retire. This snippet from an article in The Economist:
But few have grasped either the size of the tsunami or the extent of its consequences….Nearly one in three American workers will be over 50 by 2012.
From another article:
The start of the new year marks yet another milestone for America's Baby Boom generation, one they are not likely to welcome. The first of the baby boomers turn 65 in 2011. The boomers are getting old.
And the rest of the 76 million Americans are charging hard after this first batch. It has been dubbed the Silver Tsunami. The number of people age 65 and older will double between 2010 and 2050, with the number of those 85 and older increasing fourfold
Baby Boomers, as a group, are more active than any generation that has gone before them and they want to continue to be active into retirement.
Doctors say boomers who have been active most of their lives and are reaching their late 50s or early 60s can continue to do so
We know that Mako currently accounts for only a small percentage of the knee replacement surgeries in the US. According to AARP, estimates indicate that there will 3.2 million knee replacements per year within 10 years, and they are occurring in much younger patients then they were historically.
From another article:
The number of joint replacements has soared in the last decade. During that time, knee replacements have doubled and more than tripled in the 45-64 age group. Hip replacements are way up too. You may be surprised to learn what experts are saying accounts for the increase -- baby boomers. That's right. Baby boomers, who are willing to do anything to stave off aging and be able to maintain an active lifestyle.
Part of the driver of knee replacements in younger patients is likely obesity. According to the CDC, more than 1/3 of Americans is obese:
Recent studies indicate that obesity results in earlier onset of osteoarthritis, which is a major contributing factor in the necessity of joint replacement. This study, published in Nature provides just one example:
In our study, we found BMI to independently predict an earlier age at hip and knee replacement surgery.
Results? Mako has a huge potential market. The aging baby boomers that have historically lead more active lifestyles and want to continue to do so. Obesity is an epidemic that shows no signs of abating. MAKO is the in the right place at the right time to address these needs. Potential patients are doing research and see ISRG as the poster child for robotic assisted surgery. Minimally invasive surgery vs. the full replacement option is being demanded by more and more patients as well as their physicians. Mako stands to benefit from the precedent set by Intuitive Surgical.
Recurring Revenue: There are other drivers for Mako. One key to Mako’s success is turning those system sales into recurring revenue streams. In the second quarter, 49% of Mako’s $19 million in revenue came from recurring sources — implants, disposables, and service.
Recent Events: In the most recent quarter, which is historically slow due to seasonality, Mako missed analyst’s estimates by what amounts to 2 systems. This is an early stage growth story and investors were spooked. As a result, the stock tanked 36% the following day, and they are currently 49% off their all-time high set on March 6th. For those with a multi-year perspective, this presents a buying opportunity in a growing company, as part of a diversified portfolio.
Final thoughts: For those that feel they missed out on ISRG, this is your chance. This is not an apples to apples comparison, I know. I do not see the potential for MAKO to grow as much as ISRG, as they are limited by the types of procedures they can currently perform. Surgeons are driving adoption of ISRG’s daVinci by continually finding additional uses for the robot. At this point, MAKO is limited to knees and hips. This may change in the future, in which case my previous statement may be moot. That said, MAKO has market opportunities to become a multi-bagger. In fact, I suspect that MAKO has the potential to be one of those rare breed of companies whose stock will become a ten-bagger going forward. If you do not own any, I suggest that now is the time. The robotic arm is the "wave" of the future.