Sometimes life just isnt fair. If youve taken good care of yourself, gotten
lots of exercise ( especially if youve gotten lots of exercise) and been
generally lucky, theres still a good chance youll eventually end up with
osteoarthritis. This degeneration of the joints can be brought on by injury,
genetics or metabolism, but it also can result from simple wear and tear over a
lifetime. More than a third of Americans over the age of 65 wind up with chronic
joint pain. When the pain occurs in knees or hips, as it commonly does, the
answer often has been total joint replacement major surgery requiring months of
recovery, and a procedure done more than 800,000 times a year in the U.S. But
MAKO Surgical (NASDAQ: MAKO ) offers an alternative: MAKOplasty, or the
resurfacing of joints using custom implants and a surgical robot called the RIO.
The technology is behind a compelling razor-and-blade business model that is
driving tremendous revenue growth, but not profits yet. Youve probably heard
how the aging population of Western nations is driving a growth in health care
demand like nothing weve seen before. One accompanying trend is that yesterdays
patients are becoming todays health care consumers informed, opinionated and
involved in every step of their care. Intuitive Surgical (NASDAQ: ISRG ) and its
happy investors discovered that when the company launched its da Vinci surgical
robot, which has become widely used in prostatectomy and gynecologic procedures.
Wooed by lower rates of complication, faster recovery times and better outcomes,
it was patients who to a large degree drove the adoption of the da Vinci from
the experimental fringe to the gold standard of care. We see something similar
at work with MAKO Surgical. Patients typically are back on their feet in a day
and doing normal activities within a few weeks. While the early stage of the
business means theres a lot of risk to this investment, weve seen impressive
growth of the installed base and healthy utilization of the robots already out
in the field. At the end of the third quarter, 97 RIO systems were in use. More
than 10,000 MAKOplasties have been performed since the end of 2007, and 1,813 of
them were performed in the third quarter alone a fast acceleration as
orthopedic thought leaders adopt the procedure and patients begin to catch on.
Management estimates they already have captured close to 10% of the market for
single-compartment knee resurfacing procedures, and the RIO now is starting to
be used for more complex two-compartment procedures. Yet the market is
understated, because many people with osteoarthritis dont seek treatment, having
been told their only option is total knee replacement. Orthopedists anecdotally
report that they are seeing their business grow as they use the RIO because
patients who once were on the sidelines finally seek out care. Thats a path for
MAKO to address a sizable number of the estimated 15 million Americans with knee
osteoarthritis. Where it goes is hard to predict. Even 1% of that total would be
150,000 procedures. At current rates of utilization, that would require about
1,875 RIO systems. Combine that revenue with the roughly $5,000 in implants used
with each procedure, and MAKO could be banking huge profits several years down
the road. Its a long way from here to there, but for the speculative portion of
your portfolio, MAKO could richly reward a little patience. David Gardner
co-founded The Motley Fool with his brother, Tom, in 1993. As Chief Rule
Breaker, David wears many hats, including innovator, stock picker, author,
lecturer and media personality.
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