This Innovative Joint Replacement Stock Will Thrive in 2012

Sometimes life just isn’t fair. If you’ve taken good care of yourself, gotten lots of exercise (especially if you’ve gotten lots of exercise) and been generally lucky, there’s still a good chance you’ll eventually end up with osteoarthritis. This degeneration of the joints can be brought on by injury, genetics or metabolism, but it also can result from simple wear and tear over a lifetime. More than a third of Americans over the age of 65 wind up with chronic joint pain.

When the pain occurs in knees or hips, as it commonly does, the answer often has been total joint replacement — major surgery requiring months of recovery, and a procedure done more than 800,000 times a year in the U.S. But MAKO Surgical (NASDAQ:MAKO) offers an alternative: MAKOplasty, or the resurfacing of joints using custom implants and a surgical robot called the RIO. The technology is behind a compelling razor-and-blade business model that is driving tremendous revenue growth, but not profits … yet.

You’ve probably heard how the aging population of Western nations is driving a growth in health care demand like nothing we’ve seen before. One accompanying trend is that yesterday’s patients are becoming today’s health care consumers — informed, opinionated and involved in every step of their care. Intuitive Surgical (NASDAQ:ISRG) and its happy investors discovered that when the company launched its da Vinci surgical robot, which has become widely used in prostatectomy and gynecologic procedures. Wooed by lower rates of complication, faster recovery times and better outcomes, it was patients who to a large degree drove the adoption of the da Vinci from the experimental fringe to the gold standard of care.

We see something similar at work with MAKO Surgical. Patients typically are back on their feet in a day and doing normal activities within a few weeks. While the early stage of the business means there’s a lot of risk to this investment, we’ve seen impressive growth of the installed base and healthy utilization of the robots already out in the field. At the end of the third quarter, 97 RIO systems were in use. More than 10,000 MAKOplasties have been performed since the end of 2007, and 1,813 of them were performed in the third quarter alone — a fast acceleration as orthopedic thought leaders adopt the procedure and patients begin to catch on.

Management estimates they already have captured close to 10% of the market for single-compartment knee resurfacing procedures, and the RIO now is starting to be used for more complex two-compartment procedures. Yet the market is understated, because many people with osteoarthritis don’t seek treatment, having been told their only option is total knee replacement. Orthopedists anecdotally report that they are seeing their business grow as they use the RIO because patients who once were on the sidelines finally seek out care. That’s a path for MAKO to address a sizable number of the estimated 15 million Americans with knee osteoarthritis.

Where it goes is hard to predict. Even 1% of that total would be 150,000 procedures. At current rates of utilization, that would require about 1,875 RIO systems. Combine that revenue with the roughly $5,000 in implants used with each procedure, and MAKO could be banking huge profits several years down the road.

It’s a long way from here to there, but for the speculative portion of your portfolio, MAKO could richly reward a little patience.

David Gardner co-founded The Motley Fool with his brother, Tom, in 1993. As Chief Rule Breaker, David wears many hats, including innovator, stock picker, author, lecturer and media personality.

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