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MAKO Surgical (NAS: MAKO) sits at a crossroads. One path will lead the company straight into obscurity with so many other promising tech companies. The other path is the start of its second phase of growth.

The 10-Baggers team believes that MAKO Surgical is making progress toward the latter, which is why we are buying more shares. (Click here for the original write-up.)


These trends are our friends
There's no denying that the recent trend for the stock has been down. The company warned (twice!) that systems sales growth was slowing due to difficulty closing sales opportunities. The slowdown in sales growth from 52% to 38% was unwelcome. However, there are still a number of trends working in the company's favor over the long term.

Researchers predict that doctors will perform more than 4 million knee and hip replacement surgeries annually by 2030. That's a big increase from the 2.5 million procedures in 2009 -- and a big tailwind behind MAKO Surgical, whose RIO robots have performed 17,688 procedures since their inception in 2006.

The other trend we see is the increasing usage of MAKO's RIO surgical robots. Procedures increased 66% last quarter. And the chart below shows that once a hospital or clinic buys a system, it makes full use of it:

Source: MAKO Surgical conference calls.

According to Dr. Kevin Stone of the San Francisco Surgery Center, usage increases over time as doctors and staff become comfortable with the system. "We were able to spend successively less operating time per case as the surgical team become [sic] more in the OR setup and use of the robot," said Stone.

The combination of procedure efficiency and effectiveness (Dr. Stone also talked about better alignment and faster recovery times) is a powerful combination that can help propel MAKO Surgical into its next phase of growth.

Growth, Act II
As we said, MAKO has a nice tailwind behind it. But it's going to take more than just good demographics and a disruptive technology to start the company's next phase of growth.

In the more recent conference call, management said that MAKO has about 15% market share. From the chart below, that puts the company on the cusp of the early majority group of customers in the technology adoption life cycle:

Source: Technology Adoption Life-Cycle by Infrae.

To kick-start its next phase of growth, tech marketing strategist Geoffrey Moore says MAKO has to cross the chasm between the early adopters and the early majority. That's not an easy task. Management has to recognize that the larger hospital chains in the early majority "want technology to enhance, not overthrow, the established ways of doing business." Winning them over won't be easy, but MAKO has started to make progress. And the payoff at the end can be big.

The table below shows the progress MAKO has made to date.

Health-Care Provider

Sales

Hospitals

Period

New Purchase?

Health Management Associates (NYS: HMA) 11 70 Q1 2011 No
Tenet 2 50 Q2 2012 No
Adventist 2 41 Q2 2012 No
Community Health 1 135 Q2 2012 Yes

Source: MAKO Surgical conference calls, hospital websites.

These larger chains of hospitals are starting to come around to the idea that robotic surgery is not a revolution, but the natural evolution of orthopedic surgery. Still, they are being pragmatic about their buying decisions, preferring to start small and learn. In addition, hospitals are looking for more doctor buy-in up front before making a purchase. After all, the last thing a hospital administrator wants is for doctors not to use a machine. Idle machines cost money.

MAKO Surgical hired an experienced professional from Intuitive Surgical (NAS: ISRG) , the surgical-robot maker that has already crossed the chasm with great success, to manage its corporate accounts -- those early-majority customers.

To us, this is a critical role. Doctors and hospital administrators aren't risk takers like the earlier customers. They want to see both the clinical and financial benefits of MAKO's robots. If the person in charge of those corporate accounts can clearly communicate the benefits other chains are experiencing, additional hospital systems will be more likely to join the party. That's how MAKO will bridge the gap and take market share from traditional competitors like Stryker (NYS: SYK) and Johnson & Johnson's (NYS: JNJ) implant segment, Depuy.

Risks
According to Moore, the chasm between the early adopter and early-majority customers is filled with technology companies that could not change their marketing message and win over the more pragmatic customers. That is the risk MAKO Surgical faces today.

Let's not sugarcoat it, either: It is make or break. If MAKO Surgical cannot win over the larger hospital chains over time, growth will slow down considerably, and the company will not be able to achieve the scale its needs to generate profit and cash flow.

The 10-Baggers team understands this risk and is willing to take it with a reasonable amount of investment capital. We're not betting the farm on MAKO and would not recommend anyone else do so.

The bottom line
MAKO Surgical is pushing orthopedic surgery forward with its RIO robots and customer implants for knee and hip replacement surgery. The company sits at a critical juncture, but we believe MAKO is making all of the right moves to drive its next phase of growth.

Many investors do not see it that way and have sold their shares. The sell-off looks overdone, making MAKO attractive from a risk-reward standpoint. And we're not the only ones who think so. Insiders have been buying shares recently, too. Insiders may sell for many reasons, but they buy shares for one: to make money.

The article Why We're Buying (More) MAKO Surgical originally appeared on Fool.com.

Neither John nor David owns shares in the companies mentioned. The Motley Fool owns shares of Intuitive Surgical, Johnson & Johnson, and MAKO Surgical.  Motley Fool newsletter services  have recommended buying shares of Intuitive Surgical, MAKO Surgical, and Johnson & Johnson.  Motley Fool newsletter services  have recommended creating a diagonal call position in Johnson & Johnson. The Motley Fool has a  disclosure policy . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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