Mazor Robotics: The Next Intuitive Surgical

Conventional wisdom in choppy markets is to avoid high valuation stocks. The volatility will give you nightmares. If properly prepared, volatility can also give you opportunity.

In a correction good young companies often see the price of their equity fall more than average. This is what successful investors look for in the overall strategy.  Let me give you an example.

Start with a long time favorite in the healthcare field: Intuitive Surgical (ISRG:NASDAQ).  I ran across ISRG in April 2008.  Wow that was right in the middle of the financial crisis when Bear Stearns was going out: volatile times back then.  

Intuitive Surgical  are the guys that pioneered robotic surgery.  Their Di Vinci surgical suite specializes in procedures like prostatectomies and hysterectomies.  

From a patient perspective, Di Vinci offered faster, less invasive and quicker recovery times than conventional surgery.  For physicians it meant being able to offer a better service and a happier customer.  For Intuitive Surgical it meant big upfront revenues on the sale of the equipment and even more continuous income from sale of disposable products consumed during the surgery.  A true win win situation.

Back in 2008 when I discovered ISRG it was selling at nearly 100 times a token level of earnings.  The total market cap was somewhere around $500 million.  To rich for my blood at the time.  After all, it was the middle of the financial crisis.  Not a time to take chances.

Today Intuitive Surgical is worth just over $45 billion.  They are far and away the leader in robotic surgery.  The lesson: if there is a long term investment thesis, even a major financial crisis is a short term hurdle.

Along Comes Mazor Robotics For Spinal Surgery

Mazor Robotics (MZOR:NASDAQ) created the Renaissance Robotic Surgical System.   This dramatically simplifies the very nature of spinal surgery.  The system is 98%-99% accurate, reduces complications by more than two-thirds and reduces exposure to harmful radiation by 35%-50%.  Finally, it reduces recovery time and that makes for happy patients.  When it comes to alleviating back pain a satisfied customer is a walking endorsement for the Renaissance System.

Promising Agreement with Medtronic

The fun got started back in 2016 when Mazor signed a marketing and distribution agreement with Medtronic (MDT:NYSE) that represented a breakthrough for the Renaissance System.  Mazor is an Israeli company strong on technology but weak in global distribution.

The selling and distribution of surgical suites like Renaissance is long and involves entire project teams of medical experts and IT professionals to train hospital physicians and their surgical teams.  Once trained, it practically takes an Act of Congress to force doctors to change their habits.  So the long selling cycle tends to lead to long-term customer relationships.

How Mazor Makes Money

The company makes money from three sources.  The Renaissance Surgical suite sells for about $850,000.  With the sale, Mazor offers maintenance and service under contracts.  This is like annuity income that is highly profitable.  Disposables at a cost of $1,500 per operation are the second most important revenue stream.  The gross profit on these items is over $1,350.

Blade & Razor Business Model

The interesting thing about Mazor’s business model is the disposables business. One only needs to consider the potential 100,000 US procedures and 500,000 worldwide might do for the company. Of course there is a lot of blue sky thinking here.  For example, not every surgical procedure will be appropriate.  Sometime, patient characteristics like obesity etc. preclude the use of various surgical techniques. Also cost and reimbursement issues have to be taken into consideration. Having stated all these caveats the opportunities for Mazor are interesting, so say the least.

Constant Comparisons

Along the way Mazor’s potential will constantly be compared with Intuitive Surgical.

The most recent data shows Da Vinci was used in over 650,000 procedures last year employing 3597 machines.  That works out to one surgery suite for every 180 procedures.  If we use this as a proxy, Mazor will need to sell roundly 2800 Renaissance Systems to service 500,000, and that is just half the global market.

Will Mazor succeed or will something trip them up along the way. On the positive side, it has regulatory approval for use in the United States and most everywhere else in the world. However, the healthcare business is littered with promising companies that flamed out so the risks are there. For all their success, Intuitive Surgical’s path encountered a few bumps.

There are already over 200 systems in place worldwide.  Mazor is starting to catch on. The company expects to report full year 2017 revenues of about $65 million in mid February.  We think near term order backlogs could be a little soft.  If so the stock could be impacted and that is an opportunity to watch for.

Something to remember, Mazor’s current value at about $1.7 billion may sound sizable but Intuitive Surgical is a far more lofty $45+ billion. We are neither doctors nor investment advisors so we won’t give you advice on your aching back or you financial portfolio.  However, we will keep you informed as more information on Mazor becomes available about this technology.

Featured image courtesy of Shutterstock. 

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