MAKO Surgical's Proven Model Signals Profits Ahead

by: Roger Newman

I have long been a fan of so-called "razor/razorblade" companies. These companies produce products that involve the sale of a hard piece of merchandise and the follow-on sale of "soft" consumables that are necessary in order to continue use of the "hard" product. Several examples come to mind, namely Green Mountain Coffee Roasters (NASDAQ:GMCR), Intuitive Surgical (NASDAQ:ISRG), Sodastream (NASDAQ:SODA) and even Hewlett-Packard (NYSE:HP), with its model of selling low-cost printers to capture the market for high-margin ink cartridges.

GMCR did not suffer terribly during the market crash of 2008, and has risen from $10 per share to $100 per share in the past 27 months. ISRG has risen from a split-adjusted $10 per share at the beginning of 2008 to over $100 per share now. SODA rose from an IPO price under $25 per share in November 2010 to a high of nearly $80 per share before its recent earnings-induced implosion. HPQ rose from $5 per share in 1991 to $75 per share in 2000, an increase of 1,400%! Clearly there is something to this razor/razorblade model.

MAKO Surgical (NASDAQ:MAKO) designs and makes robotic systems (similar general idea as ISRG) that can avoid total knee replacements by use of a procedure called MAKOplasty. MAKOplasty is an alternative that resurfaces the damaged portions of the knee. MAKO sells the robotic system, called the Robotic Arm Interactive Orthopedic System, and then sells consumables which must be replaced for every procedure. Recovery times for MAKOplasty patients are drastically reduced over total knee replacement, leading to lower healthcare and rehabilitation costs, and improved quality of life.

About 581,000 knee replacements are performed each year in the US. Although there are no hard numbers for the percentage of these that would benefit from MAKOplasty, that does provide some scale to the potential market. The company has not yet had a profitable quarter, but revenues keep increasing at a high rate (up 80% and 81% in the past two quarters) and procedures performed are also increasing quickly (up 88% in the first half of 2011 to over 2,800).

MAKO trades on the Nasdaq, has a market cap of $1.3 billion (a fraction of ISRG) and currently has nearly 6 million shares sold short, or 8.5 days' volume to cover. If you believe in the razor/razorblade model as I do, MAKO is definitely worth a look.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here