MAKO Surgical Corporation (NASDAQ:MAKO)
The 31st Annual J.P. Morgan Healthcare Conference Call
January 9, 2013 10:30 AM ET
Maurice Ferre – Chairman, President and CEO
Fritz LaPorte – SVP and CFO
Kim Gailun – JP Morgan
Okay. Good morning and welcome to day three of the JP Morgan Conference. I’m Kim Gailun with the MedTech team and it’s my pleasure to introduce MAKO Surgical and presenting today is Maurice Ferré. After the presentation, we’ll have our breakout in the Georgian Room.
Thank you, Kim, and good morning, everybody. So, first of all, we’re going to start with – MAKO Surgical is a robotic surgery company focused in orthopedics. And we see this market is still larger opportunity and growing, and we see that one of the demands that we’re seeing in the industry is the need for consistent and reproducible precision.
We believe we have a solution using MAKOplasty. MAKOplasty is made up of two elements. It’s made up of a robotic technology and our proprietary implants, which allows us to create a razor/razorblade model.
One of the things that we continue to be focused on is the proposition of adding and creating value to the three constituents; to the patients, the physicians, and the hospitals, and I’ll go through this in our presentation.
We also believe one of the key drivers for success as we started seeing changes in the healthcare system is the continual proving of and developing positive clinical outcomes. And we’ve been working diligently on a lot of work to demonstrate the importance of precision in placements in robotics as it relates to joint replacements both in hips and knees.
We also believe that we had developed a razor/razorblade model with – and a direct sales force in our growing installed base and driving towards higher utilizations, which is a story that over time we still strongly believe is playing out. And we believe also in the strong financial performance and seeing this as a real growth opportunity and continue to be a growth opportunity.
So just to start off with, we’ve just recently announced our Q4 results and we’re happy to say that one of the important things that we’ve been saying consistently has been this one-third, two-thirds element into our business and in the first half in terms of the real placements.
Between Q3 and Q4, we delivered two-thirds of our systems in the second half of the year, which brings us to a total of now 45 systems and more importantly it takes us to what we think is a – it was an important number we’ve always been talking about kind of exceeding and getting to this 150 RIO system threshold. It’s an important piece to our story as we start moving towards profitability.
We continue to put focus on our surgeons and surgeon trainings. We now have about 900 surgeons being trained. We talk about the efforts that we’re putting in on our training programs. We’re training about once a month now where we’re bringing in close to 30 doctors.
On the procedure side, we reported out the first quarter where we actually have seen an increase this year where there’s a 20% increase on 2,904 procedures. One of the key highlights for us is that we saw some real uptick in our hip systems and the release of the system in October was important for us.
Our utilization, we reported out at 6.6. Large part, as you may recall, utilization is driven by the number of systems that we put in on the systems the prior quarter get out into the utilization number. Today we’ve done 23,000 procedures.
And as I’ll talk briefly, we’ve also released and developed our RIO 2.5 Hip application that was released in September. And also our release of our new PST – RESTORIS PST Cup and Tapered Stem implant system, which we’re very encouraged how that’s developing.
Just an overview on the orthopedic market. We know this is a large market. It still continues to be a growing market. The total hip and total knee part of the business represents about a third of this. It’s about a $10 billion business. We know that there’s an aging population. We know that some of the parameters in terms of obesity, things that we’ve always talked about.
I think one of the interesting things that we’re also seeing is also – these orthopedic surgeons across the board are – as the population are getting older and as the increase in demand on orthopedics and procedures become more evident, there’s going to be a real emphasis in our belief of efficiencies in the operating room. And I think this is one of the key pieces that the MAKO story over time will play out. And it’s something that we continue to focus on in terms of bringing automation and efficiency into the operating room.
When it comes to what – what’s going to drive this opportunity, it continues to be the same story. I mean, I think that it’s about patients and real adding value to them. We have patients, live testimonials out there where we have patients talking about partial knees and the success that they’ve had.
We have – it’s all about surgeons in terms of what are you doing for surgeons, what’s the – what is it, is it efficiency piece, is it – where is the data that supports it, what is it that you’re doing for our practice. And we’ve been able to demonstrate to surgeons one of the key pivotal studies that we talked about is we have a two-year data now that shows a 10-fold improvement in survivorship in our partial knees done robotically. And I think that’s very significant and that’s what surgeons are looking for.
And hospitals continue to look for their competitive advantage of being able to develop orthopedic programs and we believe in a lot of the hospitals that we’re working with we’re working towards developing those types of programs.
Here’s the technology and here’s what we do. It’s a robotic arm made up with software that is specific to hips and knees and we have our own proprietary implant systems that go with it. We offer solutions on partial knees. We offer solutions in our total hip applications. Specifically, we’ve been able to target different types of applications. The novelty of the technology allows us to think differently about implant systems and implant technology.
Here is a simple way animation. It shows how the system works. As you can see, this is a robotic arm and on it is a high speed burr. And what we do is we have our own proprietary implants that we’ve talked about in the past. We generate a C team. With that we create a three dimensional model preoperatively. We’re able to plan very specifically of where these implants are supposed to be placed with very high precision.
Once the planning takes place, we wheel the system into the operating room, surgeon brings in the arm and he’s able to cut and where he has capabilities of sculpting specific area with boundaries allowing them to put these custom fit implants.
A lot of what we do is done in the operating room where there’s manipulation that takes place intraoperatively to get the optimal position, specifically what we’re finding a lot of it with in terms of soft tissue balancing. And these are key pieces of where this technology is starting to become pretty evident and important in terms of how we’ve been able to drive procedures.
The knee opportunity, we know that there’s 700,000 procedures that are performed and we know that there’s a growth rate of about 3.5%, but we know that there’s 15 million people suffer with some form of osteoarthritis. So this only represents 4% of the market that’s being treated. We believe that we have a solution to address these markets with our technology and expand the market.
And currently, we have now, with the 20,000 procedures that we – the over 20,000 procedures that we performed this year we will have developed and we represent about 15% of this market. And, I think that’s where things start becoming critical mass as you start looking at our opportunity.
And I think that our ability to kind of penetrate in this market and the demand for that is something that what we’re doing is not – I think it’s incremental. I don’t think we are taking business away from other companies. I think that we’re actually growing this market and a lot of this is just starting to come on. And I think when we put out data that continues to support the thesis of treating patients earlier and treating them with partial knees, I think that there’s a real demand for this technology.
Quickly on the progression of the disease, we know that one of the key pieces that we’re focused on our minimalistic approaches and solutions robotically is to look at compartments and preserve soft tissues and that’s what we do. So a large part of our patient population is the early and mid-stage osteoarthritis.
And clearly when brought to our surgeons and to our patients when they see the difference between a total knee and a partial knee, they start realizing in seeing the value of partial knee replacement.
And for surgeons who have attempted to do partial knees, and this is part of our education process that we spend a lot of time with our surgeons, is educating them that the way that partial knees were done in the past where they were a lot of failures, we have a solution that solves those problems.
And I think the clinic data that I mentioned about the 0.4% failure rate at two years, I think is kind of a key in that conversation. And it starts luring surgeons into this – into looking as partial knees as being a larger part of their solutions.
Here’s our technology in terms of what we provide. We can address the medial side, the lateral side, the patellofemoral, and our bicompartmental. So we have a modular solution that allows us to robotically sculpt the bone and put in very specifically these implants.
The other thing that we’ve done is we’re now on our fifth generation of our technology in the knees and a lot of our work has been going in on the soft tissue kinematics. We recently in Q3 launched our 2.5 software, and we think this is a very smart software system that allows surgeons to better plan and get information intraoperatively, which is unique to our technology.
We decided to jump into a platform. We think that’s a key step in creating this whole concept of the quantification of surgery. And one of the key things that we did was we – areas that we focus was on the hip. And unlike what we did in the partial knees, we went after the total – the total hip and this is a large market.
Also, there’s – it’s larger in the partial knee business; it’s about 460,000 procedures that are being performed. And one of the key things that’s driving, we believe, this opportunity is in the osteoarthritis of the knee where you’re putting in these types of implants where you have a liner or a cup heading to stem. What we’re seeing in this market is the need to address issues like hip impingement dislocations, leg lengths.
And I think that the longevity in the data that’s starting to come out in terms of the importance of cup placement has kind of been out there where it’s addressing these types of issues where if you don’t put these cups in properly, what you start seeing, not immediately, but over time and I think we’ve seen a lot of data that’s showing this and more and more data is coming out where you’re starting to see the back wear, the ions that start to jump, the metal ions that start to showing up in the body or the back wears that are happening on these implants and the loosening of these implants over time, which results in costly revisions.
We use our same robot with the same technology where what we do is we change the end effecter and use the haptics of our system to allow them to ream and to place implants in a very precise manner.
And what was compelling to us about getting into this is the work that’s been going on at Mass General, and in particular what we identified was that in looking at the data where there was a pretty conclusive dataset of over 1,800 patients that really said that if you looked at the positioning of these cups that 50% of these cups were improperly placed. And they got very interesting when you looked at it from low volume surgeons and from MIS approaches where it was 34% and 19% respectively.
And I think that this data is also now being similar data is coming out of other academic institutions that it’s kind of starting to bring this conversation to ahead about the importance of cup placements. And I think with our hip technology and what we can do, we’re very unique in the market. And what I’m really excited about is that I see this technology as a tool that allows the surgeons to properly place these alignments and cups.
And we just recently released our third implant system, and I think that’s a very important part of this and also we’ve been able to release our software that allows us to do multiple approaches now. So it’s not limited to one of the – what we had done in the past – posterior. I think there’s real interest in what we do for the multiple approaches that are being done.
And one of the things that we’ve done is recently, and we talk about it, we made a – an investment in our partner pipeline, and pipelines had a very successful track record of developing multiple implant systems in the field that are very unique and have real features. So what we’ve been able to do is we’ve been able to combine the best robotic technology and the progression of what that implies with a implant system that’s being developed and designed specifically for uses with the robot. And I think that combination has a lot of interesting elements to it that I think is going to drive the continued interest and success at MAKO.
Our growth strategy is made up of and continues to be made up of I think four pillars that we think are very important that I want to share with you. The first one and I mentioned earlier is our clinical data. We have to continue to be in the front cutting edge of developing clinical data. And we’ve been very rigorous with this.
And for a company of our size, we’ve been able to accumulate enormous amount of data where we already have 179 abstracts, 28 publications and most importantly 70 ongoing studies, including a randomized clinical study which is very unique in our industry being able to kind of bring out a specific study and that will be reported out at the upcoming academy in March, one of the first pieces of the study and I think this is very important.
In today’s world, you not only have to look at the clinical data, but you also have to look at the economic data of being able to improve efficiencies in the operating room and what the implications of that efficiency results in is also very critical.
I mentioned earlier, talked about this study where we are seeing two-year data follow-up of over 200 patients where we saw failure rate of 0.4. And if you look specifically at the Swedish, Australian, Norwegian, New Zealand, and the British registries, two-year data is around 4%. So this is the beginning of I think the importance of why robotic placements and this is the conversations that we’re starting to have with a lot of surgeons and is being presented up in the podium a lot of these courses and conferences. And I think this is where this industry is going, and I think we are – we will continue to be very well positioned to address this with this type of data and supporting this type of data as we go forward.
We also talked about earlier the Malchau study about hip and we did initial study of 77 patients and what we saw was, as we said on teaching hospitals, outside the box was 47%, and what we saw in the same type of study 84% was within our range and with our study of looking at it. And when we looked at the 3D data, it was actually 96% inside the box. So I think this type of data is validating the importance of precision in placements robotically that I think is going to continue to be pivotal as we go forward and develop our technology.
On the commercialization side, we continue to build our sales forces. We have two sales forces. We have a sales force – sales capital. We have a sales force that sells implant systems. We’ve developed marketing programs. We’ll continue to do this with our partners in the hospital to help them develop their specific programs.
And we continue to build our intellectual property portfolio. This I think is as this becomes more validated in terms of where we are in the market and we start seeing the importance of robotics, we will – we’ve been working in cultivating our intellectual property and we think we have a very strong intellectual property portfolio that will protect us. And it really covers the whole spectrum of what we do. It’s on the instrumentation, on the navigation and the robotics, and we’ll be diligent on our process of making sure that we continue to build our and protect our intellectual property.
With that I’d like to turn it to Fritz.
MAKO was an attractive razor/razorblade business model. It consists of a capital sale of our RIO system, recurring revenues from the sale of our RESTORIS implant systems as well as ongoing service revenue. Our RIO system has a blended ASP depending on whether it – as the knee application or knee and hip application of about $1 million per system.
On our recurring revenue side, our implant systems have an average ASP of about $5,000 per procedure. By a way of comparison, hospitals have reimbursed about $12,000 on the national average. That could vary depending on payer mix and geographical location.
On the service revenue side, the RIO system comes with a one-year standard warranty. Beyond that we sell an annual service contract with our customer, which approximates 10% of our RIO ASP on an annual basis.
MAKO’s experienced significant procedure ramp on an annual basis; however, in 2012, in the first three quarters, we did see a slowdown in our procedure ramp. We saw a recovery of that begin in the fourth quarter of 2012 with 2,904 procedures performed bringing our total procedures performed in 2012 to 10,204. Our procedures translate to a average monthly utilization per system of between 6.2 and 7.2 procedures. Utilization will continue to be a focus for MAKO going into 2013.
We haven’t released our full operating results as of today. We’ll be doing that on our February 26 conference call for the fourth quarter. What you’ll see here are historical financial results, as well as results through the third – the end of the third quarter of 2012. From a total revenue standpoint, in 2010-2011, we experienced over 90% annual revenue growth. As of September – through September 30, 2012, we experienced 40% revenue growth over the same period in the prior year.
We believe that we’ll continue to have meaningful revenue growth going forward as well. From a balance sheet perspective, as of September 30, we had just over $28 million of cash and equivalents. In November of 2012, we completed an equity financing with $43 million of net proceeds, and we continue to believe that our cash balance on hand as of now will be adequate for us to get to profitability and cash flow positive. Thank you.
[No Q&A session for this event]
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