MAKO – A Case of Mistaken Identity

MAKO Surgical Corp. is a medical device company that markets a robotic solution for orthopedic implants and procedures called Rio MAKOplasty.  This was an investment in an aging population (requiring repairing knees and hips) and robotic surgery.  However, with this past week’s earnings announcement, I’ve been debating what to do with the company.

At a Glance:
Symbol: US-MAKO
Price: $11.47
Market Cap: $538M
Yield: 0%
Me Wife Mom
Stock
Option

My investment in MAKO was based on an investment I made in another maker of robotic-assisted surgery I made back when it was also around the same stages – Intuitive Surgical (ISRG):

ISRG MAKO
Robot

Da Vinici

000334_si_male_seated_with_nurse_at_cart_no_vc_400x235

Rio MAKOplastyrio-makoplasty
Procedures Prostatectomy – removal or all or part of the prostate gland Restorative Knee Surgery – for early to mid-stage knee osteoarthritis
Addressable Market
  • 90K prostatectomies performed in the US / year
  • worldwide numbers unavailable
  • 15M suffer from knee osteoarthritis
  • 400K worldwide, 270K in the US require total knee replacement
  • ~20% of those requiring total knee replacement are candidates for MAKOplasty (54K in US)
Future Applications
  • Hysterectomy (FDA approved)
  • Thoracic (Chest) Surgery
  • Cardiac Surgery
  • Colorectal Surgery
  • Any surgery in which laparoscopic surgery methods are used
  • Restorative Hip Surgery

At the time, Intuitive Surgical was just starting out and had just started making headway in the prostatectomy surgeries (<~10%).   Today, 80% of prostatectomies in the US are robot-assisted.  That explosive adoption (including other surgeries as well now) in ISRG have driven revenues and it’s shares [I’ve always regretted selling shares a little too early and have been waiting forever to  find a good entry point back in]:

ISRG Revenue

ISRG Price Chart

What attracted me to MAKO was all the similarities to ISRG:

  1. FDA approved procedure, no competitors (at least in the near future)
  2. Razor/razor-blade model – sell a machine for a high price and accessories/instruments that require replacing for each surgery
  3. Aging population would feed procedure growth and adoption

The key to both these companies is adoption – which can be witnessed in ISRG’s revenue chart.  As time progresses, all revenue streams are increasing – systems, accessories, and training.  That means more hospitals buying more systems (some hospitals even have 4 Da Vinci’s!), and more procedures per system (accessories and training).

Unfortunately, MAKO so far hasn’t shown that adoption – getting investors excited in late 2011 on predicted sales and then falling well short – causing the stock to drop.

Mako Revenue

MAKO Price Chart

Sadly, I got caught up in stock run up through 2010 and 2011.  When MAKO first dropped in 2012, I thought the drop (from quarter of decreased sales) was just temporary and that sales would pick up and continue on their merry way.  To capitalize on the drop, and potential run back up, I decided to sell my shares (making a profit) and convert them to the equivalent number of long term call options.   As it turns out, management had a little too rosy-eyed view of the future and over the next 4 quarters continued to disappoint.  Even today, it’s last quarterly earnings release indicates the company sold 5 systems (in 3 months!).    This also means that my options have become pretty much worthless – ending in a small loss overall on my MAKO investment (although I have 6 months for a miracle to happen).

So, today, I wonder what to do with the company.  My excitement over it being the next ISRG got the best of me – and I failed to really look at what the adoption numbers were really saying (and augmented that by making an even worse decision on the conversion of stock to options).  I’ve also realized it’s  not fair to really compare MAKO to ISRG.  ISRG is an investment in minimally invasive robotic surgery – which is constantly finding newer applications.  Typically, surgeries performed using a Da Vinci have no, or undesirable alternatives (i.e. chemotherapy, open surgery, etc.).  The alternative to surgery for knee osteoarthritis is pain killers so it isn’t a must-have surgery.

That’s not to say MAKO won’t be a winner in the future – just that where it is on the adoption curve is much earlier than when I invested in ISRG (sales are always lumpy at the beginning); and the potential isn’t as great as ISRG.  For now, it’s a lesson in mistaken identity – and I prefer to sit on the sidelines until MAKO shows some signs of sustainable adoption.

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3 thoughts on “MAKO – A Case of Mistaken Identity

  1. Pingback: Sometimes you just need a little luck | Fearless Cal's Investment Journal

  2. Pingback: Welcoming Back an Old Friend (ISRG) | Fearless Cal's Investment Journal

  3. Pingback: Intuitive back on top (and how they might be getting their groove back)! | Fearless Cal's Investment Journal

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