Analysis of MAKO Surgical’s robot and implant business

Surgical Robot Wars (Motley Fool)

The stakes are getting higher. During the most recent MAKO Surgical (NASDAQ: MAKO) conference call, CEO Maurice Ferré noted that they have “gained increasing attention from competitors.” So the heat is officially on … and this at a time when MAKO’s sales have stumbled.

Who will come out on top of the struggle for robotic supremacy? That is the $64 question facing investors, and we have a lot more than $64 resting on the answer.

Traditional Surgical Providers

Most of MAKO’s competitors provide only implants and tools for traditional orthopedic surgery. They are large, well established companies supporting a variety of surgical disciplines; but none of them builds surgical robots — not yet at least. Top on the list are privately held BiometDePuy Orthopedics – a subsidiary of Johnson & JohnsonSmith & Nephew(NYSE: SNN), Stryker (NYSE: SYK), and Zimmer Holdings (NYSE: ZMH). Three of the five (Biomet, DePuy Ortho, and Zimmer) are neighbors in Warsaw, Ind., a little-known mecca of biomedical device technology; Stryker is nearby in Kalamazoo, Mich.; while Smith & Nephew hales from London.

All five of them design, fabricate, and distribute medical implants and surgical devices for a wide variety of traditional medical procedures that partially overlap in an intriguing patchwork. For example, Biomet fabricates products for joint orthopedics (think bone implants for knees, hips, and shoulders), spine, bone repair, skull and jaw, and arthroscopy. DePuy Orthopedics focuses only on joint orthopedic products, leaving the spine, sports medicine, neurology, and trauma to its cousin DePuy divisions in Raynham, Mass. Smith & Nephew mixes the two with products for joints, spine, bone repair, as well as wound, trauma, and endoscopy. Lastly, Stryker’s Reconstruction division specializes in products for joints and athroscopy, leaving neurology, endoscopy, and surgical navigation systems to cousin divisions.

As you can see, these are highly diversified manufacturers for whom MAKO poses a threat to only one portion of a larger business; but that threat has finally reached a crescendo they can no longer ignore, and they are taking direct counter action. Collectively they are attempting to dissuade MAKO’s customers with “counter marketing efforts,” as Ferré tactfully described it. Their objective is to convince the customers that the traditional methods are just as good as the robots and cost a heck of a lot less. Let’s call this what it is: a deliberate smear campaign to defend their turf.

I say this because early results from MAKO’s 70+ ongoing studies, most recently from the San Francisco Surgery Center, are revealing that the quality of robotic surgery is significantly superior to traditional methods. Perhaps even more important to the paying customers (hospitals, surgical centers, and insurance), the total medical costs per surgery, including rehabilitation, are coming in substantially lower. The customers aren’t yet buying it, however, because there simply aren’t enough surgeons today using MAKO’s expensive robots to provide the required return on investment.

The New Robotic Upstarts

Coming up from behind MAKO are nascent competitors introducing their own robotic surgery systems. Chief among these is privately owned OmniLife Sciences. They acquired Praxim’s APEX surgical robot for total knee replacement, which is in contrast to MAKO’s focus on thepartial knee replacement market. This is a critical distinction. MAKO believes there is a vast unserved market for partial knee replacement. These are potential patients who forgo the highly invasive total knee replacement surgery and choose to live with the pain and mobility impairement. So MAKO is pursuing what they believe will ultimately be the biggest slice of the knee-replacement pie.

MAKO is still clearly concerned, and well they should be. OmniLife, as well as several private medical practices, are offering what Ferré described in the conference call as “early stage development of potentially competitive technologies.” While OmniLife has a lot of catching up to do in this struggle for robotic dominance, with only 1,000 surgeries performed vs MAKO’s 17,000 (2,600 in the latest quarter alone, as shown by the red line and right y-axis in the graph below), they do have the advantage of capitalizing on MAKO’s expensive marketing and proof-of-value studies.





MAKO has so far prevailed over these competitors by being the firstest with the mostest: They are the first mover in robotic orthopedic surgery, and they hit the ground running in 2006 and rapidly accelerated over the next six years. Their sales, however (as shown by the blue columns and left y-axis in the chart above), have recently taken a breather, which is causing much concern amongst investors. Is the door opening to these new upstarts?

Where’s the Gorilla?

Clearly missing from this list of competitors is the big gorilla in robotic surgery: Intuitive Surgical (NASDAQ: ISRG). They have elected to pursue surgery of organs and have so far avoided orthopedics. Though competitors in organ surgery have been thoroughly shut out, the door into orthopedic surgery remains wide open. MAKO is currently the … well, not exactly the 800-pound gorilla; but perhaps an 80-pound gorilla striving very hard to grow up into the next robotic dominator.

Who Will be the Next Big Gorilla?

MAKO continues to leverage its first-mover advantage into a commanding lead over its competitors, but the jury is still out over whether it will grow up to be the orthopedic counterpart to Intuitive Surgical. In retaliation to its sagging sales, Wall Street has savaged its stock price, down 67% since May. MAKO must successfully make the perilous transition from selling to the few technophilic surgeons and clinics to selling to the many pragmatic customers of the mainstream market.

If they succeed in crossing this “market chasm,” I believe they will triumph and become the second 800-pound gorilla in robotic surgery, standing shoulder to shoulder with Intuitive Surgical.

If they fail, however, I see two possible outcomes. The less likely is that OmniLife Sciences or a successor makes the very same attempt across the market chasm in a couple of years. With MAKO’s lessons in mind, perhaps they will succeed where MAKO failed. More likely, however, is that a company with vast resources and extensive market penetration, such as Johnson & Johnson, will decide robotics is finally mature enough and simply buy either MAKO or OmniLife.

MAKO is still early in its transition into mainstream markets, however, and is still showing plenty of fight and spunk. It also has alot of valuable data coming hot off the presses from its 70+ ongoing studies on efficacy and economics. I believe it will be a rough and tumble fight to the top. But I still believe MAKO is the horse, or rather the gorilla, to bet on in this race.