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XMFHelical (< 20)

Reconsidering MAKO in the Helical Portfolio



July 17, 2012 – Comments (3) | RELATED TICKERS: MAKO.DL , GHDX

As I continue to carefully consider (i.e. can't make up my mind) on how I feel about health insurers currently, another item has come to the forefront of consideration for the Helical Portfolio.  MAKO Surgical (groan) ... again.  

The Helical Portfolio has a couple of guidelines that automaticly trigger ... consideration (not action necessarily, but review and comment).  I find it helps me immensely to have to act, even if just intellectually, to certain movements in my holdings.  For review, the loss in any one month of 6% of the portfolio, or 2% of the port due to any one holding, trigger this review.

Last quarter, MAKO Surgical failed to meet estimates on instrument sales (which are few per quarter), as the company noted a prolonged sales cycle, yet they continued to see interest and did not decrease their own guidance for the year.  And the stock was summarily punished (May), causing the Helical Portfolio to lose > 2% of its value.

The 'reaction' here was as follows:

If I am unwilling to lose 2% of my portfolio to any one holding, and these high risk speculative positions are considered as having the potential to drop 50% at any time, then perhaps it makes sense to not allow any one of these to be over 4% of the portfolio.  But does it??  This is the investors dilemma, the Friedman-Savage puzzle that makes risk personal and not inherent.  It defines the balance between taking on risk for the promise of gains and preserving wealth, and forms the basis of Prospect and Behavioral Portfolio theories.  It is why I consider myself first and foremost a behavioral investor (and not style-boxed as growth, value, etc.).

I want the Helical portfolio to be relatively high risk. ...  Still, the 6%-2% is a good guideline, though based more on a trader mindset than investors.  Bottom line, I’m going to accept a speculative position of more than 4% of the portfolio, specifically, up to 8%.  I’ll let a position run, but once it sees 10% of the port, I’ll consider trimming (these are all guidelines after all, not algorithms).  Loss of more than 6% of the port and 2% to any one holding will always trigger review (blogs are great for that), but not necessarily activity. 

So, what I did when MAKO fell, was to actually trim my Genomic Health (which is back over 8%, and on watch).  And so, in not reacting, and again not establishing a protective position, I again got spanked as MAKO yet again fell 50% when it announced that it again fell short on instrument sales and this time would indeed cut the forecast (ahead of the earnings call).  This was clearly a strong possibility, so I should indeed have reduced or perhaps bought insurance via cheap puts (far off the price at the time). [I don't have options enabled on this port, and being a Roth they would likely be quite limited].

Where to go from here?  While MAKO was once 12% of my portfolio (not smart), it is now just over 4%, and I am now 'twice bitten'. The company says that sales are not 'dead' but that there is still interest only the cycle is prolonged.  Hospitals and groups want more information and trained pysicians before making the commitment to purchase this large $$ robot.  They need more assurance of a return on their investment.  As some have noted (RB boards are great for MAKO - subscription required), the installed base continues to grow in usage and procedures performed.  So this isn't a 'bad product' but one that requires a lot of consideration to buy.

I've heard the company say they need to do a better job of arranging for reimbursement for these procedures and in making the economic case to purchasers.  Health care is becoming more and more about care (vs. churn) as pay for outcomes are slowly taking precedence over pay for procedure.  My father was in sales and used to note 'sales is easy, you just need to be either cheaper or better'.  MAKO isn't cheaper per procedure, and has yet to make the case they are better (longer term cheaper) in terms of hosptial stay times, readmission rates, long term recurrance, etc.

But they should sometime soon.  The company provides an update on their ongoing studies"Annual Summary of Clinical and Economic Research MAKO Surgical Corp. – 2011".

Two studies are of particular interest to me.

The first is, 

• RCT comparing robotic arm UKA (MCK) vs. manual UKA (Oxford), (Strathclyde)
– 150 patients

– Endpoints include overall alignment, pain relief, functional return, activity level, satisfaction, QALY, cost of care

– Final patient recruitment by end of 2012 

This shouldn't report until 2013, but QALY measurements (quality adjusted life years) are key considerations for reimbursers. Earlier than this we should see the results of:

• Multicenter cost analysis of knee arthroplasty (Lavernia, Bosco, Slover, Coon)
– Comparison of cost of episode of care, including post discharge costs (rehab, DME, etc.)

– Comparison between robotic arm guided UKA, manually instrumented UKA,and manually instrumented TKA in private and academic institutions

– Data collected and manuscript written by Q3 2012 

These could go a long way to establishibng reimbursibility for MAKOplasty, which should greatly increase patient volume (it is now just ~8 per month per machine).  So, MAKO has 'reached the chasm' (kudos to Denny for this nice linked piece). Will they get through it?  I am of the opinion that they will IF they can demonstrate that the use of their system has cost benefits (long over short term) and desrves to be reimbursed.

But ... I've decided I don't need to hold until after this is demonstrated.  So I'll be selling my stake in MAKO (can't for a few days now). When I see the results of one or more of these cost studies, or see news that some major insurers will reimburse, I will likely re-buy, but not until then.  Sure -- I will almost certainly miss a bottom acting in this fashion, but the growth ramp should be a long one if the company can establish its value to hospitals and physican groups, so I feel no need to 'call the bottom'.  I may miss entirely if MAKO is acquired, which is certainly quite possible.  

I will however save myself if MAKO continues to struggle with sales, cuts prices significantly to drive sales,  or fails in these studies to demonstrate adequate long term value to patients and thus can't convince insurers to reimburse.  Right now, even despite the drop (OK, drops!), this is not a value play and still a high risk consideration.  And the risk is outweighing the short term reward right now.

So, bye (not buy) MAKO.  And I honestly look forward to rebuying this, even at a price higher than it is today.


Helical Investor 

3 Comments – Post Your Own

#1) On July 17, 2012 at 4:23 PM, TMFWysocki (< 20) wrote:

Great post, Ralph. It provides me with confirmation bias for my sale of MAKO last week. ;->

 David aka TMFWysocki

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#2) On July 17, 2012 at 9:41 PM, XMFHelical (< 20) wrote:


Thanks.  Back at you with the confirmation bias.  Hard one to let go, but I expect plenty of time to get back should this story be fruitful.


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#3) On July 20, 2012 at 9:16 AM, captainccs (33.88) wrote:

Ralph, thank you for mentioning and linking my MAKO article.

Denny Schlesinger


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