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Shares of the medical device company Mako Surgical Corp. (NASDAQ: MAKO) have seen a steady recovery after the company released quarterly results (for Q2 2012) in early August. Although recent gains have been significant, they are still nothing compared to the drop we saw on July 10th where the company initially hinted that the second quarter was not going to produce the results that investors were hoping for.

This all follows a disappointing first quarter where we saw MAKO miss its top-line estimates. This generally implies that the business is simply not growing fast enough to justify the company's price.

From its 52-week high of $45.15/share where expectations were highest, MAKO has dropped a whopping 65% and has clearly lost its trading momentum. Now the question that remains for prospective investors is whether or not MAKO's business is worth more than its current market cap of approximately $676 million.

The company markets robotic equipment for orthopedic surgery, which operates through its RIO (Robotic-Arm Interactive Orthopedic) system. MAKOplasty is the name they give to the procedure that they've developed that incorporated RIO. Recent releases suggest that it is being used for knee or hip surgery about six or seven days per month (on average) which does imply that robotic surgery is making progress.

Mako is not alone though. Anyone watching Mako should also be watching Intuitive Surgical (NASDAQ: ISRG), which has beat investor expectations quite nicely in the last few years, and has moved up an amazing 55% in the last twelve months.

It seems that many MAKO bulls will argue that the huge, growing hip and knee surgery market leaves plenty of room for the company to stumble a few times before their system really takes off to the sales figures that the analysts are looking for. I would agree to some extent, since there are about 2.5 million knee and hip operations performed each year in the United States (by 2009 data). Mako is involved in roughly 10,000 of them now, so when crunching the numbers you can see that there's always a chance for considerable expansion under the right conditions.

Things get much more complicated when you factor in competition like Intuitive Surgical and upcoming names like well-established medical device company Stryker Corporation (NYSE: SYK) which is developing a surgical robot of its own. Mako, which seems to be lagging behind Intuitive Surgical, suddenly doesn't look as appealing, does it?

According to transcripts of the Q2 2012 press release, there are 126 RIO systems installed worldwide which performed 2,494 procedures last quarter. This is a 66% year-on-year increase in procedures relative to Q2 2011, although only fifteen new RIO systems were sold since the start of the year. This helps explain why revenue increased by only 27%, and why the market is concerned that Mako is prematurely stagnating. Intuitive, on the other hand, continues to beat analyst expectations.

It boils down to whether or not you believe that Mako's products can match the competition. Even a small penetration of the orthopedic surgery market would mean huge returns for investors, and at this point the only thing MAKO shareholders should be concerned about is the revenue growth. Markets are forward looking, and we may see the stock turn around if the company can display more confidence about the future. Until we see that, shares will likely stay rangebound or worse.

Source: Mako Surgical's Market Penetration Is Key