Mazor Robotics Ltd.'s (NASDAQ: MZOR) surgical-assist robots are revolutionizing how surgeons perform spine surgery and demand for these systems could accelerate following study results showing that they reduce complications and thus the need for additional surgeries.
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The data suggests that commercialization partner Medtronic plc (NYSE: MDT) -- one of the world's biggest medtech companies -- may have even greater success convincing hospitals to purchase and use Mazor X systems.
Game-changing approach to surgery
Robotics are increasingly helping surgeons plan and perform surgery and Mazor Robotics systems are already installed at over 170 sites worldwide.
The company's latest robotic system is the Mazor X, which allows surgeons to create a presurgery plan that can be executed once its hardware has been attached to the patient. Because robotic-assisted surgery removes the need for surgeons to perform freehand surgery, it can reduce the risk and costs associated with surgical complications.
The Mazor X also reduces patients' and surgeons' exposure to radiation by lowering the need for intraoperative X-rays. In one study, robotic-assisted spine surgery lowered radiation doses by 56% when compared to traditional spine surgery.
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Furthermore, using the Mazor X in spine procedures can generally result in shorter recovery times and less postoperative pain caused by scarring and tissue damage.
The Mazor X's advantages were recently backed up by a study involving 379 patients at 10 investigator sites. In that study, 287 underwent robotic-guided arm surgery and the rest received traditional freehand surgery. The relative risk of an adverse event or complication was 5.3 times higher in the freehand arm of the study compared to the robotic arm of the study, with a p-value of p<0.001. The relative risk for a revision surgery was 7.1 times higher for freehand surgery compared to the robotic-assisted cases, with a value of p=0.012.
Intriguing business model
Mazor Robotics makes its money from Mazor X in three ways. First, it sells the systems for about $850,000 apiece. Second, it sells an average of $1,500 in disposables for every surgery performed using the system. Third, it sells service contracts to buyers.
In Q3 2017, systems, consumables, and service contracts combined to produce a preliminary $17.2 million in companywide revenue. For comparison, in Q2, sales jumped 87% year over year to $15.5 million. Official third-quarter financials are expected to be reported on Nov. 7.
The rapid sales growth is largely thanks to Medtronic taking over responsibility for marketing the Mazor X. In 2016, the two companies inked a marketing deal that initially had them working together. However, Medtronic has been so successful that it took over marketing entirely this summer.
Medtronic will receive a commission on Mazor X sales, while Mazor Robotics will pocket consumable and services revenue.
The companies are also continuing to work together on the development of new products that can be used in spine surgery, and Medtronic has invested millions to acquire a stake in Mazor Robotics. In August, Medtronic paid $40 million to Mazor Robotics to bring its equity ownership up to 10.6%, based on diluted shares outstanding. Medtronic has warrants that eventually could increase its ownership to 14.2%.
What's next for these companies?
Medtronic is a global powerhouse, and already sells products worldwide that are used in spine surgery. As a result, it's perfectly positioned to introduce the Mazor X to its customers. The relationship with Medtronic could significantly increase Mazor Robotics' installed base of systems, and since more systems allow more procedures, that could translate into a nice tailwind for disposables revenue.
Mazor Robotics isn't profitable yet -- the company lost $15.4 million last year -- but I wouldn't bet on that continuing forever. There are roughly 500,000 spine surgeries with implants done in the U.S. alone every year, and following the study results showing Mazor X's advantages, I think Medtronic's job of selling has become even easier than it was earlier this year. If I'm right, then stepping up and adding Mazor Robotics shares to growth portfolios now would be wise.
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Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool owns shares of Medtronic. The Motley Fool recommends Mazor Robotics. The Motley Fool has a disclosure policy.