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Author: LeKitKat Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Feste Award Winner! Old School Fool Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19775  
Subject: Mako Surgical Date: 5/14/2011 1:23 PM
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Mako was an IPO February 2008.

Shares of MAKO Surgical Corp. (MAKO) fell almost 10% on Thursday, their first day of trading, after the company priced its initial public offering of 5.1 million shares at $10 per share. All of the shares were offered by the company.

The company raised about $51 million with the offering.

Mako cut the expected price range of the IPO of 5.1 million shares to between $10 and $11 per share prior the offering. The company originally filed to price between $14 and $16 per share.

J.P. Morgan and Morgan Stanley were the lead managers for the offering, and Cowen & Co and Wachovia Capital were acting as co-lead managers for the offering.

The company makes robotic devices and implants for minimally invasive orthopedic knee procedures.

The shares ended the week at $9.72 a share, down 2.8% from the offering price.

Mako surgical has developed a proprietary robotic arm that guides a surgeon’s hand in knee surgery and the implants that are used in the surgery.

Knee surgery can be a total replacement that is a brutal opening up of the entire joint, removal of the native joint and hammering and screwing into place a total implant. It is a revision of the long thigh bone or femur and the lower leg tibia and replacement of the ends of both bones with the implant device. The recovery is long and painful.

When the entire joint is ruined by arthritis, there is no other choice, but if the knee has localized areas of wear and tear, a partial knee can be done

All of the big ortho companies have minimally invasive surgery [MIS} for partial knees that allows the surgeon to make a smaller incision and work on only the affected portion of the joint.

Mako believes that the MIS currently used does not allow the visualization needed to optimize the outcome. The Mako device offers better visualization and gives the surgeon precise control of the knee surface that is repeatable procedure after procedure and less prone to cutting and shaping error. Surgeons gain better tactile feedback and a margin of safety from the arm, finer control of instruments, and better visualization.

In addition to the robotic arm, they have their own line of implants that can be used. The system does not allow use of other brands of orthopedic implants.

At present Mako only has the capacity to do knee surgery. They expect to launch partial hip implants the back of 2011.

We believe that the tissue sparing and bone conserving techniques enabled with knee MAKOplasty can offer substantial advantages to patients, surgeons and healthcare providers. Because of the minimally invasive nature of the procedure, smaller incisions are possible, which lead to less tissue damage and faster recoveries, thereby reducing the overall costs of rehabilitation, medication and hospitalization.

In addition, because more of the patient’s natural anatomy is preserved and less trauma is inflicted on the knee, we believe that patients who undergo knee MAKOplasty have the potential to experience better functionality and more natural knee movements, thereby achieving an improved post-operative quality of life. Our RESTORIS family of implants for use in single and bicompartmental knee resurfacing procedures provides the ability to address a broad range of the patient population suffering from early to mid-stage knee osteoarthritis.

Finally, because our RIO system is easy to use, we believe that our knee MAKOplasty solution makes knee resurfacing procedures accessible to orthopedic surgeons with varied levels of training and skills and has the potential to lead to greater adoption of knee resurfacing solutions for early to mid-stage osteoarthritis of the knee.


Knee implants have been a slowing segment of joint replacement overall in the last two years. Zimmer, Stryker and DePuy have all had disappointing sales in knees and the latest quarter was no exception. Growth has been especially sluggish in the US

The knee surgery slowdown is concerning because no one seems to be sure if this is a developing trend or whether it’s temporary and due mainly to macro-economic pressures.

One trend that has been notable is that younger patients opt for joint replacement than has been the historic norm. That would auger well for Mako as this patient population is more likely to get a partial knee and demand a faster rehab. This is also the population that has private insurance and may have lost that insurance along with jobs that has added to fewer knees sold in the last few years.

Recent key milestones in the development of the business from the 10K:

• During the year ended December 31, 2010, we sold 33 RIO systems, including two to international distributors, increasing our commercial installed base to 67 RIO systems.

• During the year ended December 31, 2010, a total of 3,485 MAKOplasty procedures were performed, representing a 118% increase over the same period in 2009.

• In February 2010, we received 510(k) marketing clearance from the FDA for our hip MAKOplasty application, which assists a surgeon in performing all components of a total hip arthroplasty using the RIO system. We believe this represents achievement of a necessary milestone towards what we anticipate will be our continuing development and future commercialization of a hip MAKOplasty application.

• The RIO System and our classic RESTORIS onlay unicompartmental knee implant system were approved for European Union CE marking in December 2009 and January 2010, respectively, which is a legal requirement for medical devices intended for sale in Europe. Our RESTORIS MCK onlay unicompartmental implant system was approved for CE marking in April 2010 and our RESTORIS MCK onlay patellofemoral and bicompartmental implant systems were approved for CE marking in January 2011

• During the second quarter of 2010, we launched a clinical research study in partnership with Glasgow Royal Infirmary, Strathclyde University and National Health Services in Glasgow, Scotland. In connection with the clinical research study, we placed a RIO system at the Glasgow Royal Infirmary. The system is being utilized in a three-year randomized prospective clinical trial with the objective of demonstrating the clinical, functional and ultimately, economic benefits of knee MAKOplasty. Glasgow Royal Infirmary reported that 23 procedures were performed at its site during the year ended December 31, 2010.

• In October 2010, the first hip MAKOplasty procedure was completed as part of our surgeon preference evaluation process, designed to solicit user feedback in advance of MAKO’s full commercial release of our hip MAKOplasty application, currently expected in the second half of 2011. As of December 31, 2010, 23 hip MAKOplasty procedures were performed as part of our surgeon preference evaluation process.

Mako has not had a profitable year in its history. In 2006, revenue was $60,000 and that has increased to $44.3 million in 2010. As revenue has climbed so has the stock price.October 2010 Mako was around $10. It would appear that the 2010 revenue increase to $44 million had a beneficial effect and it is now at $25. This is the largest price increase in Mako’s history and I am not quite sure what the catalyst was that took it up so far so fast. That makes it difficult to know what expectations are priced in and what the next event will be taking it up

2010 results

Revenue was $44.3 million in 2010, compared to $34.2 million in 2009. The increase was 29%--far smaller than the 10X increase in revenue 2008-2009. It was due to a $10.2 million, or 69%, increase in RIO system revenue and a $10.1 million, or 133%, increase in procedure revenue

There was $24.9 million in revenue from 33 unit sales of RIO system, including 31 domestic commercial sales and two international demonstration systems compared to $14.7 million of revenue from 19 unit sales in 2009. Unit sales doubled and perhaps that was the catalyst. More units placed ensures that more implants will be sold since the RIO does not work with any other branded product.

The $10.1 million increase in procedure revenue was due to an increase in MAKOplasty procedures---3,485 were done compared to 1,602 in 2009. Again, substantial growth.

They have a little over $1 million in deferred revenue that will be recognized in service revenue over the 2011 twelve-month period

Cost of revenue was down and gross margins increased to 59% from 37% in 2009. The decrease was primarily due to the recognition of $8.8 million during 2009 from 17 previously deferred unit sales. In other words, costs had to match sales even though the revenue was deferred. The bottom line is, the improved gross may not be sustainable, relying on timing of revenue recognition vs recognition of costs.

Mako also benefited from a warranty reserve reversal as inventory was written down.

SG&A expenses have been high as a percentage of revenue since the IPO. The 2010 expense was $47.0 million compared to $32.1 million last year. The 47% increase was primarily due to an increase in sales, marketing and operations costs associated with the production and commercialization, The total number of employees increased from 232 to 291 and of the 59 employee increase, 35 were in Sales and Marketing.

SG&A included $5.4 million in options expense compared to $3.3 million in 2009.

R&D has been another area of high spending. R&D was $15.0 million in 2010 compared to $13.1 million in 2009. The increase of $1.9 million, or 14%, was primarily due to an increase in research and development activities associated with on-going development of the RIO system, MAKO implant systems and potential future products, including the hip MAKOplasty application and associated implant systems.

Mako has no debt and has short-term investments as well as cash. Interest and other income was $317,000

No federal income taxes were recognized for 2010 and 2009, due to net operating losses in each period.

None of these results is unexpected for a medical device company in the initial stages of starting up and introducing new products that do not have a previously installed base. Attempting to penetrate an established market with a preferred way of doing things is difficult. Intuitive Surgical is of course a similar story. For that reason, I looked at ISRG from its first year of profitability and compared that to how Mako is progressing. There are some interesting differences and that is certainly due to the difference between orthopedic and prostate [initially and now many other applications] surgery.

Orthopedic surgeons appear to develop a high level of comfort and preference for particular procedures and brands that is difficult to penetrate. Prostate surgery was simply surgery with no attached implant product required for adoption. Once a surgeon was comfortable with the DaVinci, other applications naturally followed. Some do involve medical devices but surgeons can choose their preferred product line. Mako not only has to sell the robotic device but has to sell their knees too. That may be more difficult and could possibly account for the differences in growth and the time to profitability.

Intuitive Surgical and Mako comparisons

I looked at revenue, revenue growth, margins and operating expenses as a percentage of revenue across the two companies. Intuitive Surgical has been a faster and more resounding success story thus far. Especially notable were the differences in SG&A as a percent of revenue and research and development expenses. ISRG has had much lower expenses during its history allowing faster advancement to profitability.

ISRG

12/10 12/09 12/08 12/07 12/06 12/05 12/04 12/03
===============================================================================
revenue growth 34% 20% 46% 61% 64% 64% 51% na
gross margin 76% 75% 74% 71% 76% 71% 69% 60%
R&D/revenue 8% 9% 9% 8% 8% 8% 13% 18%
SG&A/revenue. 25% 26% 26% 26% 30% 30% 35% 43%


Mako

12/2010 12/2009 12/2008 12/2007 12/2006
=======================================================
revenue growth 29% 1062% 282% 1133% na
gross 59% 37% -13% 24% -22%
R&D/revenue 34% 38% 424% 1072% 8298%
SG&A/revenue 106% 93% 787% 1561% 8027%


ISRG was profitable starting in 2004 and made 70¢ per share. Gross margins have been consistently high and increasing. SG&A and R&D were high initially and by 2005 were definitely moving down.

I would not expect Mako to look like ISRG given the differences in markets and surgeons.

Revenue growth at Mako has been stratospheric, but expenses have been equally so. It is clear why the company has not turned a profit in spite of the revenue growth---expenses are greater than 100% of revenue by a substantial amount. The good news is that they do seem to be decreasing in 2010. SG&A is still coming in at more than 100% of revenue and according to the management discussion, it was largely due to increased headcount in marketing. It would seem their penetration into the market is far more difficult and costly than ISRG’s. As more units are placed I would hope this moderates—word of mouth and multiple units per surgical center/hospital would be a big help. It is a metric that bears close watching.

R&D is critical and you hope to see continued investment. It is coming down to more sustainable levels quickly.

Mako may be picking a bad time to enter the hip/knee implant market. Procedures and implant sales are down. Sales have decreased from norms in the high teen increases yearly to low single-digits the last two years. Knees have been especially bad and growth has stalled across the major orthopedic device makers—Zimmer, Stryker, DePuy and Smith & Nephew. Mako’s rapid share price increase is swimming against the tide in this respect and that makes me wonder what investors are building in to the current high price. I would be looking for better performance from the company if the implant market begins to grow again and would expect if it stays stalled, Mako may see some correction due to macro-forces in the market for implants. Can it defy the trends in pricing other device and implant makers are suffering through with subsequent lowering of share prices over the years? A catalyst will be increased demand for knees, especially from younger patients looking for partial procedures and quicker recoveries. The other catalyst will be their entry into hips.

Capital and dilution and options

Since we are looking at a company that burns cash rather than creates cash flow, it is always good to see where the cash is coming from since it does not come from operations Essentially, Mako issues shares when it needs cash. At current highs this would be a great time to fill up the bank account. The ability to sell shares is the driving force behind many IPOs. Mako became publicly traded in 2008

Here is the statement of financing since the IPO:

Financing activities:
In thousands

2010 2009 2008
=====================================================================
Equity financing 59,708 54,861 40,202
Proceeds from initial public offering 47,430
Initial public offering costs (908)
Proceeds from employee stock purchase 765 455
Exercise stock options and warrants 611 149 46
Net cash financing activities 60,317 54,364 86,301
Net increase (decrease) in cash 9,949 (45,388) 52,932
Cash and cash equivalents at beginning 17,159 62,547 9,615
======================================================================
Weighted average shares outstanding 34,349 27,806 17,096


The share dilution over 3 years is 100%. This is not necessarily bad since the company has to raise capital to stay in business during the development of product. They have not taken on any debt. They say in the 10K that future capital needs will be met by debt or equity or both. Since it appears they are quite a distance from self-sustaining cash flow, I would guess more dilution is in shareholder’s futures.

Options awards have been high to the CEO over three years as has total compensation considering his company has not shown profits and may be a year or two out from being profitable:


Maurice R. Ferré, M.D.
President, Chief_Executive Officer and_Chairman
------------------------------------------------------------------------------
Year salary stock awards options bonus other total
===============================================================================
2010 $391,796 $1,670,500 $1,322,460 $240,149 $3,675 $3,628,580
2009 $322,859 $870,000 $1,356,652 $154,998 $3,675 $2,708,184
2008 $300,000 — $1,053,759 $150,000 $1,010 $1,504,769

Fritz L. LaPorte
Senior Vice President _of Finance and_Administration, Chief_Financial Officer_and Treasurer
-------------------------------------------------------------------------------
Year salary stock awards options bonus other total
================================================================================
2010 $262,724 — $392,868 $103,346 $3,545 $762,483
2009 $243,023 — $358,192 $58,150 $3,542 $662,907
2008 $219,499 — — $56,275 $909 $276,683




I am not sure if the level of compensation for the CEO is warranted, and am inclined to like to see compensation tied to returns to shareholders.It may be that the company cannot run without him—I haven’t done enough research to tell. If he is critical to this company’s success ultimately, then he may deserve this compensation. Would like to hear other opinions.

Not to keep comparing to ISRG but it is the only comp I know:

The CEO of ISRG took 60,000, 70,000 and 65,000 options for 2003-2006 as the company went profitable. His salary was $397,000 in 2006. The salaries are comparable and not out of line. The options trouble me a tad especially in view of the dilution that is necessary from raising capital. Just a small point. Not necessarily a deal breaker. ISRG share dilution since becoming profitable in 2004 is at 15%. They also have no debt.

These are two different markets for robotics. The adoption of DaVinci by surgeons did not require that a surgeon be separated from his favorite implant system. It was also not introduced during a lull in the market for the procedures. Mako has to convince surgeons to abandon a level of comfort with a successful product and not only use a new implant but use it with a new procedure. It will be a more difficult sell. They are also facing a slowing demand for the procedures they are targeting—knees first and foremost and hips.

The market for partial implants through small surgical incisions that allows a very rapid recovery looks good for the future. Mako has some short-term difficulties and unfortunately is selling at a price that reflects unclouded optimism. It is a little inexplicable. It is possible the market is being very forward looking anticipating success that seems likely in the future. I would like to see a recovery of implant business. I closely follow Zimmer, Stryker and JNJ and have not seen any return of growth. Most are in single-digit growth and that does not look like a promising environment for introduction of a relatively pricey new system.

The other big concern I have is the incredible spending on SG&A The need for marketing is a given, but it is consuming any potential profits and I have to wonder if this is such a hard sale now, whether all the spend is returning any value at present.

I think Mako has a reasonably good chance to be a good investment and that the rapid increase in placement of RIO units last year in spite of a difficult macro-environment for implants convinces me there is a market out there. The introduction of hip procedures in the back half of 2011 will provide a catalyst. It may even be enough to tip them into profitability in 2012.


As with all companies I find intriguing for investment there are things I love and things that are less likeable. Probably need to spend a few more quarters with this before deciding on an investment strategy. I have not lived with them quite long enough.
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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6126 of 19775
Subject: Re: Mako Surgical Date: 5/14/2011 2:42 PM
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2010 results

Revenue was $44.3 million in 2010, compared to $34.2 million in 2009. The increase was 29%--far smaller than the 10X increase in revenue 2008-2009. It was due to a $10.2 million, or 69%, increase in RIO system revenue and a $10.1 million, or 133%, increase in procedure revenue

There was $24.9 million in revenue from 33 unit sales of RIO system, including 31 domestic commercial sales and two international demonstration systems compared to $14.7 million of revenue from 19 unit sales in 2009. Unit sales doubled and perhaps that was the catalyst. More units placed ensures that more implants will be sold since the RIO does not work with any other branded product.

LeKitKat


If systems sales increases 69% and procedure revenue increases 133% but total revenue only increases 29%, something else must be happening. That something else was the discontinuation of the original TGS and its replacement by the newer RIO system. It screwed up the accounting. TGS was sold conditionally and when it was discontinued and units sold were replaced by RIO units, the company had to report revenues for TGS that had previously been deferred. This caused the revenue spike in 2009. Of course, once this spike is in place comparison of total revenue for 2010 vs. 2009 won't make sense either, hence the 29% increase while the partials were 69% and 133%.

From the 10-K (page 72):

Subsequent to December 31, 2008, we no longer manufacture our Tactile Guidance System™, or TGS, to which associated TGS sales arrangements required us to provide upgrades and enhancements, through and including the delivery of the RIO system. We commercially released the RIO system in the first quarter of 2009. Sales arrangements for RIO systems do not require us to provide upgrades and enhancements. As a result, revenues related to RIO system sales are generally recognized upon installation of the system and training of at least one surgeon.

For sales of TGS units through December 31, 2008, VSOE of fair value was not established for upgrades and enhancements (through and including delivery of the RIO system), which the TGS sales arrangements required us to provide. Accordingly, prior to delivery of the RIO system, sales of TGS units were recorded as deferred revenue and the direct cost of revenue associated with the sale of TGS units was recorded as deferred cost of revenue. Revenue for all previously deferred TGS sales was recognized in our statement of operations during the year ended December 31, 2009, upon delivery of the RIO system. As of December 31, 2010, the deferred revenue balance of $3.2 million consists primarily of deferred service revenue for warranty and maintenance services on the RIO system hardware.


http://yahoo.brand.edgar-online.com/EFX_dll/EDGARpro.dll?Fet...

Back to reading the LeKitKat report...


Denny Schlesinger

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6127 of 19775
Subject: Re: Mako Surgical Date: 5/14/2011 4:08 PM
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As usual, a very comprehensive report.

MAKO is a pre-profitability and some would say "pre chasm" company. As such, as an investment, it is highly speculative. At the same time, I don't think most accounting metrics can be given the same weight as for an established enterprise. Even comparisons with ISRG are difficult. While I don't have documentary evidence for the following statement I believe MAKO IPOed earlier than ISRG did. The only evidence I have is that it took ISRG five years from founding and MAKO four from incorporation. The anecdotal evidence I think I have is that by IPO time, IRSG had more penetration than MAKO did. This might account for MAKO's faster revenue growth, starting from a smaller base.

What I find an important comparative metric is Price to Sales: ISRG 9.63 vs. MAKO 20.55. This tells me that MAKO might be 30 to 50% overpriced but it is also growing much faster which might be the mitigating factor.

Your growth figures need to be massaged a bit. I moved the deferred revenue for TGS from 2009 back to 2008:

2010 2009 2008

Procedures 17,620 7,550 2,457
Systems 24,928 14,715 11,297
Service and other 1,748 646 487
Revenue 44,296 22,911 14,241
Growth 93.3% 60.9%

2010 is showing Tornado quality growth for 2010. Revenue growth for the first quarter 2011 was 80% but for the first time they are reporting a backlog of nine RIO systems to be delivered during the remainder of the year.

Another important metric, MAKO is already profiting more from procedures than from system sales. It took ISRG longer to get to that stage. The importance is that repeat sales of consumables is usually considered a higher quality business than the less certain sale of expensive systems. Which brings me to some other interesting comparative metrics:


da Vinci RIO

Average selling price $1.35 MM $0.85 MM
Revenue per procedure $2,000 $5,000

Cheaper system but the revenue from procedures is two and a half times higher. This was why I was so worried about their implant strategy for hips. Think about it: For 170 RIO procedures (170*5,000) equal one system (850,000). The ratio for ISRG is 675 procedures equals one system.

Provided MAKO can keep (or get) its expenses in line with revenues, it should become a highly profitable business.

Denny Schlesinger

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Author: LeKitKat Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Feste Award Winner! Old School Fool Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6129 of 19775
Subject: Re: Mako Surgical Date: 5/14/2011 5:17 PM
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thanks a bunch Denny

Are you saying that Mako was an IPO earlier in its history than ISRG? I didn't look at the early years of ISRG electing to see how they had handled things right after profitability so the formative cavity prone childhood years for DaVinci might have revealed spending patterns akin to those of Mako. Do you have any sense of when they might see profits?


I saw the deferred revenue discussion in the 10K but did not stop to think about it enough. Need to go back and reread.

Where did you find the revenue per procedure number? The numbers are further apart than I would have thought. Ortho procedures are high cost--more so than hysterectomies and prostate surgery. The cost of a DaVinci and the revenue it could generate in the OR was one reason I never bought into ISRG. Initially it was taking surgeons quite a bit longer to do the procedures with the robot and they were not making any more money for it. So the DaVinci was tying up a room and not generating more revenue than a good surgeon using standard techniques and probably less since procedures were taking longer. I figured hospitals might try one but decide it was a waste of capital. Apparently that never came true and I missed a huge opportunity. Stupid rookie mistake

The RIO revenue per procedure for the cost of the instrument is good value for the hospital IMO. The technique allowed by the robot looks superior and would not seem to slow the surgeon but make the surgery more efficient.

i definitely would like to see Mako pull back some, but if they continue their current track of insane growth, $25 might prove to be a good place to enter. I passed on ISRG at $35 :(

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6132 of 19775
Subject: Re: Mako Surgical Date: 5/15/2011 1:23 PM
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LeKitKat:

Looking at Intuitive Surgical early years is instructive. They were founded in 1995, IPO in 2000 and profitable in 2004, their tenth year. MAKO's tenth year is 2013. If MAKO grows Gross profit at 80% and Expenses at 50%, profitability starts in 2017

Growth 80% 50%
Year Gross Expenses P/L
Profit

2011 26,123 65,059 -38,936
2012 47,021 97,589 -50,568
2013 84,638 146,384 -61,746
2014 152,348 219,576 -67,228
2015 274,226 329,364 -55,138
2016 493,607 494,046 -439
2017 888,493 741,069 147,424

But this does not take hips into account. A big jump from hips could bring profitability forward to 2014.

Share dilution as ISRG in the early years, until profitability, was rampant!

Year Shares Dilution

2004 33,693 43%
2003 23,626 30%
2002 18,229 2%
2001 17,908 51%
2000 11,898

Currently shares outstanding stand at 39.29M, making dilution since 2004 3% yearly (I think I got the split data right).

ISRG selected financial data 2004
http://secfilings.nasdaq.com/edgar_conv_html/2005/03/16/0001...

MAKO selected financial data 2010
http://secfilings.nasdaq.com/edgar_conv_html/2011/03/10/0000...

Revenue per procedure

In MAKO's case it's a simple division, revenue from procedures divided by number of procedures, and the $5,000 was confirmed by management in the CC. For ISRG I picked the high end of $1,500 to $2,000 I saw in some report or other. ISRG charges for the tools which have a lifetime of ten uses. MAKO's "tool" is a bur that can't cost all the much but patients literally walk away with the implants. ;)

The superiority of da Vinci over manual procedures has never been shown convincingly. It takes longer and outcomes don't seem to be all that much better. With MAKO, alignment is vastly superior to manual and MAKOplasty is enabling a procedure, partial replacement, that did not have good manual outcomes. MAKOplasty enables an average surgeon to perform as well or better than a top manual surgeon. It will be interesting to see if this advantage also exists in hips. My feeling is that it most definitively will exist.


i definitely would like to see Mako pull back some, but if they continue their current track of insane growth, $25 might prove to be a good place to enter. I passed on ISRG at $35 :(

At some point MAKO is likely to see a 50% retrenchment which is quite common in high flying stocks. At that time people will be scared out of buying because the drop will be taken as positive proof that MAKO was overpriced. Catch-22?

I bought a small lot at $10 and change just to keep me interested. I'm playing the stock by selling puts and that has been profitable. One of these days I'll be assigned a bunch of shares but that is OK by me. Another alternative is dollar cost averaging.

Denny Schlesinger

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Author: Garranova Three stars, 500 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6135 of 19775
Subject: Re: Mako Surgical Date: 5/15/2011 9:04 PM
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I figured hospitals might try one but decide it was a waste of capital. Apparently that never came true and I missed a huge opportunity. Stupid rookie mistake

KitKat and Denny,

What do you think is the more important factor for widespread adoption of an expensive investment such as the DaVinci - increased revenue, or some other term that essentially means that it is better for the patient?

Just curious here. My opinion is that these machines (DaVinci and Mako) improve the procedure, making for quicker, more accurate surgeries, and improve the patients' quality of life. Eventually, hospitals and clinics are forced to adopt because patients demand them.

G

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6136 of 19775
Subject: Re: Mako Surgical Date: 5/15/2011 11:23 PM
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The cynical view is that "widespread adoption" is driven by increased revenues for the hospital. But what creates the incentive? In my opinion, the last part of your opinion is correct: "Eventually, hospitals and clinics are forced to adopt because patients demand them."

But again, that begs the question, "Why do patients want the robot procedure?" I don't think that there is conclusive proof that procedures done with da Vinci are superior. But if a male patient is told that there is a higher probability that his sex life won't be impaired if operated on by a robot, he'll go with the robot. One claim (a valid one) is that the robot removes hand tremor and that is what, I think, makes prostatectomies with da Vinci safer. With MAKO RIO, alignment, a key feature of joint replacement, has been proven to be a lot more accurate than hand procedures. MAKO also claims that less healthy tissue is removed. MAKO can also claim that with their more accurate procedure partial knee replacement becomes a viable cure.

Denny Schlesinger

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Author: saunafool Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6137 of 19775
Subject: Re: Mako Surgical Date: 5/16/2011 3:31 AM
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But again, that begs the question, "Why do patients want the robot procedure?" I don't think that there is conclusive proof that procedures done with da Vinci are superior.

Just throwing an idea out there... Could it be that hospitals believe they have lower risk of a malpractice suit with robot procedure?

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Author: eagles22 Two stars, 250 posts Old School Fool CAPS All Star Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6138 of 19775
Subject: Re: Mako Surgical Date: 5/16/2011 10:52 AM
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The simple answer is that patients don't care about robotic surgery. But doctors do. Patients don't make most healthcare decisions - their doctors recommend something, and patients follow that recommendation. Consumer-driven healthcare does not exist (yet).

I've done a lot of work looking at capital equipment purchases for hospitals. I currently work at a large academic medical center, but in the past worked as a financial consultant with hospitals at a company called The Advisory Board based in Washington DC. I interviewed over 100 hospital CFOs on how they kept up with and financed purchases of new medical technology, and the da Vinci robot was one of the key instruments we looked at.

This was four years ago, but at the time, all the evidence pointed to the fact that patients didn't have much of an opinion on robotic surgeries. Yes, everyone prefers less-invasive procedures, but as noted earlier, there was simply no evidence that using a surgical robot improved outcomes. The most obvious factor in improving outcomes was the surgeon - a highly trained specialist that performed hundreds of a single type of procedure (knee replacement, prostate surgery, whatever) had by far the best outcomes, whether they used a robot or not.

I spent a lot of time looking at data on consumer-driven healthcare, the most effective way to for hospitals to advertise, and the best way for hospitals to keep up with the radiply changing technology required in every surgical suite and emergency room.

Here's a quick list of highlights:
- In most cases, doctors split time between multiple hospitals. The hospitals and the doctors split the payments from insurance companies, so hospitals need patient volume to make money. Doctors prefer to use the latest technology, even if it doesn't improve outcomes. Hospitals will therefore purchase the latest technology to make them happy, or to recruit new hot-shot docs.

- Technology then becomes an arms race. If one hospital buys a da Vinci robot, the others in that market will feel the need to do the same. Those that don't feel they will lose out, though data is inconclusive.

- My colleagues and I ran financial analysis on about 30 hospitals that purchased da Vinci robots. Only one actually made a profit - in nearly every case it did not bring in any new volume or improve patient care. But robots are cool.

- We spent a year focusing on consumer-driven healthcare. We put a lot of work into what was thought to be a defining statement on how to market to directly to consumers, etc. The data continued to show that in the majority of cases, medicial decisions were driven by healthcare providers. They controlled referrals to specialists, the type of treatment a patient would recieve, etc. Even patients who spent a great amount of time researching their disease/ailment often went with the advice to their doctor.

Sorry to get off the topic of Mako, but I thought I could throw in a little bit of background. -Tom W.

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Author: Garranova Three stars, 500 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6142 of 19775
Subject: Re: Mako Surgical Date: 5/16/2011 4:09 PM
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The simple answer is that patients don't care about robotic surgery. But doctors do. Patients don't make most healthcare decisions - their doctors recommend something, and patients follow that recommendation. Consumer-driven healthcare does not exist (yet).

Tom,

Thanks for the great post. Very informative.

Perhaps as investors and patients we should be following around the most experienced specialists to see what procedures and equipment they prefer. If these doctors always want the latest technology, and hospitals are in an arms race to provide this technology for the doctors, then it seems fairly obvious that adoption curves for said tech will be steep.

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Author: kelbon Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6143 of 19775
Subject: Re: Mako Surgical Date: 5/16/2011 4:36 PM
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Yes, everyone prefers less-invasive procedures, but as noted earlier, there was simply no evidence that using a surgical robot improved outcomes. The most obvious factor in improving outcomes was the surgeon - a highly trained specialist that performed hundreds of a single type of procedure (knee replacement, prostate surgery, whatever) had by far the best outcomes, whether they used a robot or not.

Yes, using a surgical robot is an aid to the surgeon. It's a tool; it's not a surrogate for the surgeon or for a shortcoming in the surgeon's skills. If you accept that it is a tool, then as with any other tool, it's the skill of the user that gets the best results, not the sophistication, or cost, of the tool.

Which brings me to this snippet from Mako, and the point where I initially stopped reading.

Finally, because our RIO system is easy to use, we believe that our knee MAKOplasty solution makes knee resurfacing procedures accessible to orthopedic surgeons with varied levels of training and skills and has the potential to lead to greater adoption of knee resurfacing solutions for early to mid-stage osteoarthritis of the knee.

Putting a tool in the hands of orthopedic surgeons "with varied levels of training and skills" and expecting them to all to get excellent results, seems to me to be more of a marketing ploy, than common sense. "Yeah, you can use this with a really bad hangover, no problem."

kelbon

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Author: hedgehog444 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6144 of 19775
Subject: Re: Mako Surgical Date: 5/16/2011 5:37 PM
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Yeah, you can use this with a really bad hangover, no problem

Atul Gawande has written a book called "Better", which is mostly taken from articles he wrote for the New Yorker. In it he talks about the distribution of outcomes with doctors and that sometimes procedures are preferred because they are easier to teach, so, for instance, the forceps that was used to help deliver babies is not taught very much, whereas the Caesarian is, because it is easier to teach, despite evidence that a skilled OB with the forceps has better patient outcomes than a standard pt with a Caesarian. There was too much art required to use the forceps properly. Moving the center of the bell-shaped curve is a good thing, and getting so-so surgeons to have better outcomes is not a bad goal.

Rgds,

HH/Sean

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6145 of 19775
Subject: Re: Mako Surgical Date: 5/16/2011 6:57 PM
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I've done a lot of work looking at capital equipment purchases for hospitals. I currently work at a large academic medical center, but in the past worked as a financial consultant with hospitals at a company called The Advisory Board based in Washington DC. I interviewed over 100 hospital CFOs on how they kept up with and financed purchases of new medical technology, and the da Vinci robot was one of the key instruments we looked at.

-Tom W.


I can't argue with your results but I can ask you what year the da Vinci study was done. We talked extensively about the da Vinci robot at the NPI board in its early days. There were strong advocates and strong opponents among doctors.

The Technology Adoption Life Cycle (TALC) maps how a new technology conquers markets:

http://manticoreblog.files.wordpress.com/2010/04/talc.jpg

Your study was done four years ago. I would venture that by then the da Vinci robot TALC had pragmatists, the "Early Majority," climbing on board. MAKO RIO's TALC is probably still in the early visionaries, the "Early Adopters" stage.

Microsoft is at or fast approaching "Laggards." These fast growing technology stocks become value plays after they pass the mid point of the TALC curve. During the "Late Majority" stage they become huge cash cows but the stock does not necessarily reflect it because the "Early Majority" drove the stock to the stratosphere. But I digress...

My opinion is that "Early Majority" is still several years away for MAKO RIO, specially in hips which has not even hit the market yet. MAKO, the stock, is likely to show two "S" curves, one for knees and another for hips. MMM is probably a sequence of 100 or more "S" curves for everything from sand paper, to Scotch tape and Stickies. If you haven't noticed, the common thread is the adhesive!

Denny Schlesinger

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Author: eagles22 Two stars, 250 posts Old School Fool CAPS All Star Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6148 of 19775
Subject: Re: Mako Surgical Date: 5/17/2011 10:40 AM
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Hi Denny,
The study was published in early 2007, meaning data was likely from 2005 and 2006. So it is quite dated. I’ll readily agree that things are likely to have changed in the last few years – I’ve since switched focus to medical research rather than clinical care, so I’m admittedly out of the loop.

I do want to stress that the work we did at The Advisory Board was from the point of view of the hospital itself. Doctors will certainly have different opinions, as they have an entirely different set of incentives and goals (from a personal standpoint – I’m assuming that quality care & patient satisfaction are goals shared by hospital and doctor).

While it is hospital that purchases large pieces of medical technology, physicians have a huge influence on what those purchases are. The most important point I wanted to make was that doctors/surgeons can dictate the success of a technology. If the da Vinci robot is any indication, if MAKO can win support of physicians, it will likely do well. How to gauge or predict that is of course the hard part.

Most hospitals feel extreme pressure to keep up with the arms race I described earlier. Not only does this include actually purchasing the most up-to-date equipment, but it often requires massive renovations to accommodate this new equipment. Operating rooms built only 25 years ago are outdated – their ceilings are too low and are not built to support the weight of instruments that hang down, they’re too small to house all the necessary technology, etc.

The big takeaway for hospitals in a lot of the work that I did was to provide data that showed it was ok to wait a year or two to purchase the next version of a PET Scanner or a da Vinci robot – we could provide multiple case studies that showed long-term volumes would not be compromised. Often just deferring a purchase by a budget year would relieve a lot of pressure on a hospital’s budget, especially if that hospital was a local player and not a regional powerhouse like Duke or Mayo Clinic. We also tried to stress that operational improvement – better scheduling practices, training for users, etc. – provided a much greater and sustainable financial advantage than simply being the first in your market to buy the latest and greatest instrument. But improving operations is difficult – buying the latest technology is comparatively easy.

Bringing this to MAKO and Intuitive Surgical – as the last few years have shown, hospitals did buy a lot of surgical robots, and ISRG has done very well as a company, even if there was not always a stellar financial case to be made for adoption of that technology. Hospitals spend a huge amount of money, and a great deal goes to medical technology. I doubt that will change anytime soon.

Sorry if this is a little too rambling – I hope it helps overall. -Tom

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6149 of 19775
Subject: Re: Mako Surgical Date: 5/17/2011 10:50 AM
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Sorry if this is a little too rambling – I hope it helps overall. -Tom

On the contrary, it is most informative and useful. I was just trying to show that enthusiasm for adoption changes as TALC progresses.

BTW, I hope some of you got the Red Tag bargain the market held on MAKO yesterday. ;)

Denny Schlesinger

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Author: TomFoolNC Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6178 of 19775
Subject: Re: Mako Surgical Date: 5/18/2011 8:27 PM
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Denny,

you said:
Cheaper system but the revenue from procedures is two and a half times higher. This was why I was so worried about their implant strategy for hips

I recently got out of MAKO for this very issue, they were letting a 3rd party make/sell the implants.

I think there was some subsequent discussion that they originally did this with knees also, (but then built or acquired their own??)

Based on other posts you have made it appears you have overcome the hip impact concern. Could you elaborate on why?

Thanks, Tom

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6180 of 19775
Subject: Re: Mako Surgical Date: 5/18/2011 10:01 PM
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Based on other posts you have made it appears you have overcome the hip impact concern. Could you elaborate on why?

Thanks, Tom



I think it was in the conference call where they said that they are doing the same thing with hips as they did with knees. What I understood is that the knee implants were originally made by a third party that had a good fit with MAKO. The knee implants were modified to work even better with the robot using MAKO R&D and at some point the implants were re-branded.

I think part of the problem is cash burn and initially using a third party implant helps solve that problem. The question is what happens if the implant maker gets smart and holds MAKO hostage? It is an issue to watch like a hawk.

I hope that answers your question.

Denny Schlesinger

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Author: RWRocksOn Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6557 of 19775
Subject: Re: Mako Surgical Date: 6/25/2011 8:26 PM
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sorry, very late to the thread....

The key to Intuitive's success is that heavily marketed doctors lobby the hospitals to buy the machine. That is, the person who wants the toy doesn't have to pay. And that person (a doctor) tends to be pretty bad at math. Many a hospital would have been better off never buying a daVinci. Intuitive has done a tremendous job of marketing. The data showing that robotic surgery is "better" is pretty non-existent - and I say this as a surgeon with over a thousand robotic cases under my belt.

I am also just back from the AMA meeting in Chicago. I can tell you the Feds have figured this out - the mantra from Medicare will be shared costs and shared profits between hospitals and doctors. This will mean a whole new look at the real moat and costs and benefits of new technology. I would be quite cautious about applying the ISRG experience to any new technology company.

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Author: RWRocksOn Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6558 of 19775
Subject: Re: Mako Surgical Date: 6/25/2011 8:28 PM
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Could it be that hospitals believe they have lower risk of a malpractice suit with robot procedure?

No, in fact, the very long learning curve with robotic surgery probably puts hospitals at a higher risk (google - Tampa robotic surgery lawsuit)

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Author: Garranova Three stars, 500 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6559 of 19775
Subject: Re: Mako Surgical Date: 6/25/2011 9:51 PM
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I am also just back from the AMA meeting in Chicago. I can tell you the Feds have figured this out - the mantra from Medicare will be shared costs and shared profits between hospitals and doctors.

RW

Could shared costs actually work? How would they even begin to divvy up the pie with so many different staff involved in procedures?

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Author: Garranova Three stars, 500 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6560 of 19775
Subject: Re: Mako Surgical Date: 6/25/2011 9:54 PM
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Could it be that hospitals believe they have lower risk of a malpractice suit with robot procedure?

No, in fact, the very long learning curve with robotic surgery probably puts hospitals at a higher risk (google - Tampa robotic surgery lawsuit)


RW -

I'm asking this from a patient's perpective, not an investors:

Are modern-day surgeries (let's say some sort of knee surgery) improving patients' quality of life? If the robots aren't a reason for this then what is?

Thanks, and sorry for the obtuse questions.

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6561 of 19775
Subject: Re: Mako Surgical Date: 6/25/2011 10:30 PM
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I'm asking this from a patient's perpective, not an investors:

Are modern-day surgeries (let's say some sort of knee surgery) improving patients' quality of life? If the robots aren't a reason for this then what is?

Thanks, and sorry for the obtuse questions.

Garranova


I'm not a doctor, I don't play one on TV nor at TMF. I'm mechanically inclined, I like fixing things. From this totally non-medical perspective, I see a huge difference between soft tissue surgery (ISRG) and bone surgery (MAKO). I don't think that the superiority of daVinci over laparoscopic surgery has been conclusively shown. Set-up times are long and outcomes are not necessarily better. But that is not a good reason to make a straight comparison between daVinci and RIO.

Knee and hip surgery are as much an engineering problem as a medical problem. I can't address the medical part. The engineering part is alignment, alignment, and alignment. Anyone who has done any joinery work knows that a job without the aid of a jig is seldom if ever as accurate as one done with a mechanical jig. Robots using CAD/CAM are even more accurate than jigs. This, I believe, will be THE reason for MAKO's success. MAKO has already released studies about the accuracy of the alignment of MAKO vs. manual. You might want to research that.

Denny Schlesinger

Long MAKO and getting longer ;)

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Subject: Re: Mako Surgical Date: 6/25/2011 11:31 PM
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hey Roger

I know you were looking at ISRG at $35 a few years ago along with me

The comments that it was heavily lobbied for by doctors and their wishes were granted is amazingly crazy

There never seemed to be a clear advantage tying up an OR for hours longer to make this beast do its job in the early years and it could be nothing but a money loser and a huge capex expense for no return on capital

However as we all painfully learned, ISRG made a huge success out of the business. I never could believe it could capture a premier spot in strained hospital budgets.

I imagine the learning curve once mastered improves speed. Any comments on whether it allows either speedier operating times or superior outcomes?

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Subject: Re: Mako Surgical Date: 6/25/2011 11:40 PM
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hi Tom

Did not realize you were into the medical field in such an interesting capacity

Technology then becomes an arms race. If one hospital buys a da Vinci robot, the others in that market will feel the need to do the same. Those that don't feel they will lose out, though data is inconclusive.

- My colleagues and I ran financial analysis on about 30 hospitals that purchased da Vinci robots. Only one actually made a profit - in nearly every case it did not bring in any new volume or improve patient care. But robots are cool.


I actually thought this near ISRG's IPO and did not believe any hospital would be crazy enough to buy a $2 million gadget that offered no clear increasing return on capital--boy howdy was I wrong

Your comments make me shake my head in disbelief at the way they choose to allocate funds. keeping up with the Mayos of the world I guess

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Author: airforcemama20 Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6567 of 19775
Subject: Re: Mako Surgical Date: 6/26/2011 2:14 PM
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Not a doc, but as a OR Nurse/Recovery room nurse I can chime in a bit on the DaVinci. My hospital has been using this for about 5 months now and the surgeons are finally starting to get quicker at them. Still not close to the time it would take if they did it the old way. So despite tying up the OR room for hours my hospital loves the machine. We have a commercial on TV telling patients to come to our hospital for our super duper robot surgery. Any bigwig that comes into our hospital gets to see the robot. Its all pretty silly.

As far as superior outcomes I am not sure. They all seem to recover initially the same, however the robot cases do tend to have a bit more respiratory issues from being inverted on their head for hours during the case, vs flat for a normal procedure. They all stay for <24 hours in the hospital so I cant speak for longterm outcomes.

Hopefully as we continue down the path the docs can get faster/better at it and who knows maybe one day my little hospital will have a MAKO. Goodness knows we do a ton more orthopedic cases than any other. I did 4 total knee replacements just friday.

ali

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Subject: Re: Mako Surgical Date: 6/26/2011 11:23 PM
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afmamma!--thanks. Very informative. Just goes to show hospitals could learn a thing or two about capital allocation

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Author: RWRocksOn Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6647 of 19775
Subject: Re: Mako Surgical Date: 7/3/2011 1:43 PM
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know you were looking at ISRG at $35 a few years ago along with me

The comments that it was heavily lobbied for by doctors and their wishes were granted is amazingly crazy

There never seemed to be a clear advantage tying up an OR for hours longer to make this beast do its job in the early years and it could be nothing but a money loser and a huge capex expense for no return on capital

However as we all painfully learned, ISRG made a huge success out of the business. I never could believe it could capture a premier spot in strained hospital budgets.

I imagine the learning curve once mastered improves speed. Any comments on whether it allows either speedier operating times or superior outcomes?


Well, you could have bought ISRG around $100 a share 2009, I think. When I first saw Tom Ahlering on the robot in 2003, the cost was $7 a share. I had sworn I would never buy a company again that wasn't profitable, so I didn't. I would be retired now...... but the market will give you that again and again. Starbucks at 9 within the last two years, McDonalds 2004 etc etc. (Plus, because of conflict of interest, I probably have a ethical duty to not own Intuitive stock I also do not speak for the company....unlike some of my colleagues. I do engage in some robotic marketing of my practice which is sponsored by Intuitive).

There was no advantage to tying up the OR provided you had better things to do. The key to the success of Henry Ford and City of Hope with robotic surgery in the early 2000's was that they didn't have better things to do - and so could spend time putzing around with the robot while USC and Michigan kept on doing what was profitable at the time.

Hospital administrators make a lot of stupid decisions, just like executive officers of any large company. The vectors of industry, administration and medical staff are very different. Understand that the administration wants new surgical talent that can run the robot but the on staff surgeons do not because the new talent is competition. Throw in capitated contracts, ego, etc etc and the mix is very messy.

Yes, experience still counts for a lot with robotic surgery, just like with any surgery. My operative times are typically about 50% of non fellowship trained urologists. We have docking down to under 5 minutes and radical nephrectomy or partial nephrectomies to under 2 hours, radical cystectomies 3 hours with very low transfusion rate and radical prostate to about 2 hours with high quality surgery. The OR team that the hospital commits to robotics is crucial and I am extremely lucky in this regard at Huntington Hospital in Pasadena to have Ray and Marcy who make me look good every day.

Rog

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Subject: Re: Mako Surgical Date: 7/3/2011 2:44 PM
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MAKO is under $35 and does not make a profit. What are you waiting for to jump in? LOL

Denny Schlesinger

LONG MAKO and getting longer

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