Why You Should Ignore the MAKO Surgical Panic

Despite all the promise and hype, it's been an awful past year or so for MAKO Surgical (UNKNOWN: MAKO.DL  ) shareholders. With a downbeat economy putting pressure on hospital budgets across the nation, Europe's financial crisis slamming the region's spending flexibility, and the U.S. Congress not helping anybody with their excise tax on medical device sales, MAKO's stock has been under the knife for far too long. Investors have watched shares fall and fall and fall -- now down 68% over the past 52 weeks and more than 14% just since the start of 2013 two weeks ago.

While it seems like things can't get any bleaker for this innovative robotic surgical maker, the maddening sell-off of MAKO could be just what the doctor ordered for long-term investors.

Short-term versus long-term
No doubt sales have been a problem for MAKO recently. The company did, after all, slash guidance for sales of RIO systems after its disappointing second-quarter earnings, predicting between 42 and 48 systems sold for the full 2012 year. After sales of 48 systems in 2011, that's not the growth investors wanted.

Yet MAKO managed not to disappoint, revealing 15 sales  of RIO systems in the fourth quarter at the recent JPMorgan conference -- bringing full-year sales to 45, or right in line with what the company predicted. Investors responded to the satisfactory news by selling shares en masse – naturally. Short-term traders looking for the successor to Intuitive Surgical (NASDAQ: ISRG  ) haven't been happy with MAKO's slow growth track.

That shouldn't change your mind about this stock's long-term prognosis, however. With 156 total RIO bases commercially installed around the world, MAKO's making important inroads in gaining experience and trust with medical professionals. As physicians become more accustomed to working with the RIO, hospitals will be more willing to pony up the cash necessary for its expensive price tag.

MAKO really needs to excel with procedural growth. While the early fourth-quarter data showed MAKOplasty procedures up 29% year-over-year -- and up 20% over the third quarter -- investors will need to watch for the official fourth-quarter results to see how that impacts revenue. Through nine months, MAKO's procedural revenue has grown by more than 57%. Any slowing there could trigger even more selling.

Regardless, MAKO's growth track shows that the company is making inroads that will pay off over the long term. Even Intuitive Surgical didn't become the behemoth it is today overnight; MAKO will also need time to gain ground. While international sales don't look good -- the company has installed just five commercial units abroad as of Dec. 31 -- MAKO faces a great opportunity domestically to take advantage of the aging trend.

Aging and obesity on MAKO's side
Everyone knows America is facing an aging population, but this widely known fact could turn out to really pay off for MAKO and its investors.

MAKO currently estimates that it has a 15% market share in partial knee replacements -- but with more and more elderly people needing this sort of surgery, the company may be the recipient of a demographic windfall. In 2010, 244,000 initial knee-replacement surgeries  on Medicare patients were performed, almost double the number in 1991. Per-capita rates also increased during that time, from 3 in 10,000 Medicare patients to 5 in 10,000.

With obesity's rise also putting premature stress on knees across the country, MAKO may not just have to look to elderly people for customers. As many individuals want to remain active, even in old age, the RIO's low failure rate for these operations -- as well as the MAKOplasty's short recovery time -- should have patients looking in MAKO's direction as the company picks up sales.

Those trends may not pay off immediately, particularly with the economy still putting pressure on consumers' wallets. However, over the long term, a higher number of seniors and the obesity epidemic will play right into MAKO's hands. The company faces tough competition in joint replacement, but even here there's opportunity: With Stryker's (NYSE: SYK  ) hip device recall, MAKO faces a great chance now to carve into a rival's market share.

Over time and in the long run, the RIO's precision and lower failure rate will help MAKO even more to knock out its more conventional competitors.

Buying for the long term
Short-term traders may not like the quarter-to-quarter results from MAKO recently, but this maligned company still has plenty going for it. From its sales and procedural growth to demographic trends that will only help MAKO for years to come, long-term investors should ignore the day-to-day fluctuations in this stock -- despite its turbulence over the past year. The medical device tax will still hurt MAKO, and the economic slump abroad will cut into this company's ability to expand quickly internationally. But despite these problems, MAKO's still on track to carve out a significant niche in robotic surgery. With shares falling to shocking lows, now's a good a time as ever to snap up this stock on the cheap.

The recent market sell-off of MAKO Surgical shares has many wondering whether its potential growth prospects make this stock a buy or a stock to stay away from. Fool.com analyst and MAKO expert David Meier has authored a premium research report covering all of the must-know details on the company, including key areas to watch and risks looming in the future. As an added bonus, David will keep you informed with a full year of updates and guidance on MAKO Surgical as news breaks. Click here now to learn more and start reading.

Editor's note: A previous version of this article misstated that MAKO estimated it has a 15% market share in knee replacements, which has been corrected. The Fool regrets the error.


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