By Timothly Lutts, Cabot Stock of the Month

It was almost exactly seven years ago that we first discovered Intuitive Surgical (ISRG), which was just getting started with its da Vinci surgical robot, which offered less invasive surgeries.

Now along comes Mako Surgical (MAKO), which is loosely replicating Intuitive's success by offering its own robotic surgical solution. In fact, Intuitive's founder sits on Mako's board of directors.

Mako's target market, however, is different -- the firm's RIO robotic system is currently used in partial knee replacements, about a $400 million market in the U.S. that is growing 10% or so a year. 

The big advantage of the system is that, instead of removing and replacing the entire knee (as with a full replacement), the RIO system can accurately and precisely resurface one or two diseased segments of the joint, thus preserving much more soft tissue and healthy bone. 

It does this through the firm's tactile assistance technology, which lets surgeons achieve a higher level of precision than they otherwise could. 

This minimalist surgical approach has many benefits -- such as smaller incisions, quicker recovery times and highly reproducible results.

About 10% to 20% of all knee replacements are partial, so that’s Mako's target market.  Of that target, it has already garnered about 10% of the market (in terms of procedure volume).

This has led to great interest in the RIO system, as well as growing sales of the firm’s proprietary implants (Mako's implants must be used with the RIO) and other disposable equipment. 

And we're talking about big money!  Each RIO system sells for about $800,000, while each procedure brings in another $5,000 or so of recurring income. 

So you can only imagine how much potential there is should the number of procedures and systems double or triple in the years ahead.

By itself, the knee segment should propel Mako on a sustainable growth path. But even more exciting will be the firm’s entry into the hip replacement market later this year, an opportunity many times larger than knees. 

It’s expected to ramp slowly, but it could be a significant growth driver in 2012 and beyond, especially as current RIO operators have to upgrade their equipment and software for $200,000 or more.

In terms of numbers, Mako is just scratching the surface of its potential. At the end of June, it had 86 RIO systems placed, and they performed 1,557 procedures in the second quarter, up 96% from a year ago.

It placed 19 systems during the first half of this year, and management says that the weak economy isn’t slowing demand, despite the high price tag. 

Though the company is still losing money as it builds out its business, revenue was up a strong 81% to $18.6 million last quarter (still a very small company), the fourth straight quarter of very strong growth.

As for the stock, we loved its gigantic-volume rally off its 200-day moving average after the market’s crash in early-August, followed by a push to new highs in recent weeks. 

You could buy a little around here if you want, but keep in mind that until the market enters into a sustained uptrend, a high-flying stock like Mako is subject to sharp pops and drops.

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