By: James Waggoner
Mazor Robotics Ltd. (MZOR $37)
How does a small Israeli based company with little, or no US business and virtually no Wall Street following get the attention it needs. Here is the story of Mazor Robotics. They have come a long way but still have managed to attract the following of just four small Wall Street firms. After you read their story, you will be amazed.
Robotic Surgery Is Here: The Spine And The Brain Are Next
Minimally invasive surgery has been around for a while. Intuitive Surgical (NASD:ISRG $931) pioneered the wave with its Da Vince robotic suite designed for urological procedures like prostatectomies and hysterectomies.
New innovations in medical technology can be tricky. It took 10 years before the Da Vince system became the standard surgical platform. Mazor Robotics is a company that would like to be the next Intuitive Surgical. This company, founded in Caesarea Israel in 2001 is focused on minimally invasive robotic surgery for the spine and the brain.
The Mazor Renaissance Surgical System has regulatory approval for use in the United States and most everywhere else in the world. There are already 140 systems in place worldwide with 90 in the United States. The order backlog as of June 2017 increased 138% year over year to 62 systems. Mazor is starting to catch on.
Disrupting Surgery One Back At A Time
The Renaissance System marks a revolution in spinal surgery. The system is 98%-99% accurate, reduces complications by more than two-thirds and lowers exposure to harmful radiation by 35%-50%.
Perhaps best of all, 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
Not long ago, Mazor signed a marketing and distribution agreement with the big US company Medtronic that represents a breakthrough for the Renaissance System. Mazor is a 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 $850,000. With the sale, Mazor offers contract maintenance and service. This is like annuity income that is highly profitable. Disposables are another source of recurring income. At a cost of $1,500 per operation they are the second most important stream of revenues. The gross profit is over $1350.
One only needs to consider the potential 100,000 US procedures and 500,000 worldwide might do for the company. This is the number of spinal surgeries that are conducted each year.
Constant Comparisons With Intuitive
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.
This translates into equipment revenues of $2.4 billion. Add to that $750 million in disposables and another $300 million in service contracts and the revenue potential hits $3.4 billion.
If Mazor matches Intuitive Surgical’s scale and efficiencies, their after tax earnings could reach over $650 million. Valuing these earnings at a market multiple of 20 times works out to $13 billion. (Just so you don’t think we are crazy, Intuitive Surgical’s market value today is $35 billion). Mazor is presently valued at $880 million.
Lets assume it takes 15 years to produce a $13 billion value. That is how long it has taken for Intuitive Surgical to reach its dominant market position. After all the calculations, what is $13 billion worth today?
Will Mazor succeed or will something trip them up along the way. The healthcare business is littered with promising companies that flamed out so the risks are high. For all their success, even Intuitive Surgical’s path encountered a few bumps.
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 fascinating new technology.
About the James Waggoner:
James Waggoner comes from a New York Wall Street career that covered more than 30 years. During that time he served as CEO of Sands Brothers Asset Management and Sands Brothers Ltd.
He was the founder of The Kensington Group in 1988, an arbitrage hedge fund that produced IRR’s of 24.2% over a 10-year period. For the prior decade, James was an analyst and investment banker with Bear Stearns Cos. Inc. Institutional Investor Magazine recognized him on multiple occasions as one of the top analysts in his field. His international financial background includes VP of SoGen-Swiss International Corp. in Paris France where he advised major US financial institutions on corporate and global economic issues.
James earned a degree in Finance and Economics from The Ohio State University.