A quick look at the numbers of surgeries performed annually in the US, especially who the patients are?most notably their age?is enough to hint at why investors are more than a little overjoyed with their new-found wonder stocks: Intuitive Surgical (ISRG) and MAKO Surgical (MAKO), both with skyrocketing share values with seemingly no end in sight.
Ageing population, more procedures, more opportunity
The Centers for Disease Control and Prevention cite over 600,000 hysterectomies and 158,000 prostatectomy procedures annually in the U.S. (Intuitive Surgical?s specialty areas) and 300,000 total knee replacement surgeries annually (MAKO Surgical?s speciality area), with knee replacements expected to increase 525% by the year 2030. Typical costs: $20,000 hysterectomy; $12,500 prostatectomy; and $45,000 per total knee replacement. Investors are quick to note that all of the above are surgeries typically performed on older patients, and with the U.S. population ageing, the numbers for these procedures will only go one way, up?very up!
Faster recovery means shorter hospital stays
Additionally, both Intuitive and MAKO, as well as surgeons who have used the surgical robots, claim that post-operative recovery times are drastically reduced, which of course, means shorter hospital stays, which more than pleases everyone?s wallet: patient, hospital, insurance company, and government alike. The net-net on briefer hospitalizations is that hospitals that do not now have one of these $1 to $3 million robots will so very soon. And as the proliferation of surgical robots increases, so too do their share of surgical procedures performed, and so too the value of their respective shares.
If there is an apparent stronger surgical product between the two, Seeking Alpha leans toward Intuitive?s da Vinci robots: ?For all practical purposes, Intuitive Surgical has captured the bulk of this robotic surgery market: its net income has almost doubled in the last two years (it was close to $500 million in 2011), it has five-year sales growth average of 35%, and the company has practically no debt.?
Not as flush on the income side of things as Intuitive, MAKO Surgical is also upwardly mobile. Seeking Alpha reports that MAKO sold 18 robotic systems in Q4 2011 vs. 33 for all of 2010. ?The company’s revenue rose approximately 120% for the fourth quarter. MAKO Surgical is known for robotic knee procedures, but is also driving on the partial knee replacement market with a less invasive technique as well as hip replacement with its MAKOplasty product line. Both procedures also claim shortened recovery times.
For Dr. J. Frederick Doucette, a gynecologist at Mount Nittany Medical Center, PA the benefits of Intuitive?s daVinci over traditional surgery are numerous and very welcome. ?Because of its precision ? the machine gets rid of any tremors in the performing surgeon?s hands ? the robot has been shown to lower blood loss and the risk of infection resulting from surgery, as well as resulting in less pain, faster recoveries and shorter hospital stays. The robot?s pinpoint accuracy also means smaller scars than traditional surgery.?
Another Mount Nittany physician, urologist Dr. Howard Miller, notes that the da Vinci can also be used for cardiac and general surgery, and has become especially popular for prostatectomies. ?Ten years ago, this technology was experimental,? he noted, ?and only a few prostate removals were done with the robot. Now, eighty-five percent of prostatectomies are done robotically.?
Changing patient preference and recruiting new doctors
Interesting and significant consequences for both Doucette and Miller are that many patients now request da Vinci surgeries over traditional procedures and that hospitals with surgical robots find it easier to retain and recruit doctors. Surely both are signs of the times and bode well for market growth.
Unimpressed with MAKO is Motley Fool?s Rich Smith. ?It’s unprofitable for one thing, and while growing quickly, it still works off a tiny revenue base?so small that MAKO’s $1.8 billion market cap equates to a very optimistic valuation of 21 times annual sales. MAKO’s also burning cash like mad: $39 million in trailing negative free cash flow…[while] in contrast, Intuitive generated close to $595 million in positive free cash flow last year.?
Smith?s advice is to avoid MAKO. Investors do not share his pessimism: despite MAKO?s trail of underperformance, investors have bid up its shares by 65% over the past 12 months. Seeking Alpha agrees with Smith, noting ?the metrics of valuation simply do not make any sense to us and we question why investors are willing to pay 17X book value and 21X sales.? The recommendation for buying MAKO is that ?many stock traders are so used to the bubbles that they buy overvalued stocks and simply set stop orders in case the bubble pops.? Likewise, say the experts, exercise advance caution with MAKO.
Nascent overseas opportunity
Then too, maybe the investors are on the right track and MAKO will prove to be an analyst buster. There?s a world of growth in robot-assisted surgery ahead and investors are taking it for a ride. Overlooked by many is the fact that Intuitive has penetrated overseas sales very little while MAKO has zero penetration, which is all about to change in a hurry if robot-assisted surgery even loosely follows the U.S. model. Savvy investors see Europe as a huge market; moreover, the ageing populations of Asia may well be robot-assisted surgery?s biggest play. Intuitive, for example, sold 134 of 534 da Vinci systems overseas last year. That’s a dramatic improvement from 2009, when the company’s overseas sales total sat at just 86 systems. Although Intuitive?s U.S. sales represent over seventy percent of its total, for MAKO it?s one-hundred percent. The upside in overseas sales potential for both is enormous.
Room for ?little bots? as well
Unfazed by analyst opinion, other robot-assisted surgery manufacturers, nicknamed the ?little bots,? are moving into the medical device space. Canadian “little bot” maker Titan Medical (TMD) is developing its Amadeus Composer, to operate in space-constrained ORs and clinics, and Amadeus Maestro, which is a four-armed robot. “Snakelike arms enable obstacle avoidance in the body, give multiple approach paths to a surgical target, and free the arms from fulcrum constraints at the body port site. As a result, more surgical procedures can be addressed safely and less invasively.”
Scheduled for a 2015 release, Titan’s products will avoid confrontation with Intuitive or MAKO’s specialty areas, hoping to target instead ENT, thoracic, and general surgeries.
Overall, the stage seems well set for the permanent place of robot-assisted surgery in hospitals both here and abroad. With U.S. healthcare costs topping $1 trillion annually, there is great need for machines that can put a dent in the overhead. Intuitive appears to be solidly placed; MAKO seems scary but making strong inroads, and there?s even room?and plenty of it?for the ?little bots? to grow into big bots. Through it all, Wall Street, in all likelihood, may well remain agog with robot surgicals? profitably agog!?for some time to come.
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