A Member of Pat McKeough’s Inner Circle recently requested his advice on an Israeli company in a rapidly-growing area of medicine.
Mazor Robotics develops systems for computer-assisted surgery, specifically spinal and brain surgeries. The company has produced two robotic systems; it receives 57% of its revenue from the sale of new systems and 43% from disposables (sutures, etc.) and services. The company benefits from an agreement with a much larger firm, notes Pat, and its outlook is generally positive. But surgical robotics continues to be at risk from lawsuits, as well as from uncertainty over hospital budgets and health care funding in the U.S.
Q: Pat: Thanks for all the great advice over the years. Could you please give me your opinion on Mazor Robotics? Thank you very much.
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A: MAZOR ROBOTICS (ADR) (symbol MZOR on Nasdaq; www.mazorrobotics.com) is an Israeli company that develops and markets computerized and imaging systems for spine and brain surgeries.
Computer-assisted surgery enables the use of surgical instruments with high precision and minimal invasiveness. Those tools replace freehand procedures with robot-guided procedures. The system has been used to perform over 33,000 procedures worldwide across the full range of spinal surgery. However, surgeons continue to perform the vast majority of spinal operations “freehand;” that leaves a considerable growth opportunity for guided surgical robotics.
To complement its flagship Renaissance robotic system, launched in 2011, Mazor then launched Mazor X—its second robotic system—in 2016.
The company’s sales are in three areas: It sells the surgical robots themselves for about $1.1 million each; the disposables that the robots consume; and the support services.
Mazor currently receives 57% of its income from the sale of new systems and 43% from disposables and services. Income from disposables and services depends on the number of installed systems and the number of procedures performed per installed system. The number of installed bases has multiplied from 27 systems in 2012 to 180 by the end of 2017. About 60 of them are installed in markets outside of the U.S.
Growth stocks: Company sells more systems, but receives less revenue
The company has experienced strong growth over the past five years: sales have risen from $20.0 million in 2013 to $64.9 million in 2017.
Like most medical device makers, Mazor spends heavily on research—around 13% of its annual revenue. Also, it spends the equivalent of 61% or more of its annual revenue on sales and marketing to expand its global client base and gain market share. As a result, Mazor reported a loss for each of the last five years. In 2017, it lost $5.7 million, or $0.12 a share.
In the three months ended June 30, 2018, the company lost, excluding one-time items, $1.4 million, or $0.03 a share. A year earlier, it lost $2.4 million, or $0.05 a share. Sales fell 14.3%, to $13.2 million from $15.5 million. Mazor sold more systems, but received less revenue under its agreement with Medtronic (see below).
Mazor is debt free and holds cash of $104.3 million, or $3.95 a share. The company has a distribution and development agreement with the much larger medical equipment developer and distributor Medtronic (symbol MDT on New York). As part of that agreement, Medtronic invested $31.9 million in Mazor and now owns 11.4% of the outstanding shares. Medtronic operates in 160 countries and has extensive technical and distribution capabilities.
All medical device makers face ever-tightening U.S. hospital budgets, and U.S. President Donald Trump’s plan to replace the Affordable Care Act adds uncertainty. Moreover, surgical robot makers are always at risk of lawsuits that arise due to complications from surgeries. Still, the overall outlook for the company is positive.
Inner Circle recommendation: Mazor Robotics is okay to hold for aggressive investors.
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