MAKO Surgical's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: MAKO Surgical (MAKO)

MAKO Surgical Corp. (NASDAQ:MAKO)

Q4 2012 Earnings Call

February 26, 2013 4:30 pm ET

Executives

Mark R. Klausner – Managing Partner-Westwicke Partners

Maurice R. Ferré – President and Chief Executive Officer

Fritz L. LaPorte – Senior Vice President-Finance Administration, Chief Financial Officer and Treasurer

Analysts

Matt S. Miksic – Piper Jaffray, Inc.

Matthew O'Brien – William Blair

Rich Newitter – Leerink Swann LLC

Kim W. Gailun – JPMorgan Securities LLC

Steve C. Beuchaw – Morgan Stanley & Co. LLC

Lawrence H. Biegelsen – Wells Fargo Advisors LLC

Bill Plovanic – Canaccord Genuity

Mark Landy – Summer Street Research

Operator

Good afternoon, ladies and gentlemen, and welcome to the MAKO Surgical Corporation’s 2012 Fourth Quarter and Year End Results Conference Call. As a reminder, this conference call is being recorded and will be available for replay on the Company’s website, www.makosurgical.com under the Investor Relations section after the completion of this call.

It is now my pleasure to introduce your host, Mr. Mark Klausner of Westwicke Partners. You may begin.

Mark R. Klausner

Thank you, operator. Joining us on today’s call are MAKO’s President and CEO, Dr. Maurice Ferré; and the Company’s Senior VP and Chief Financial Officer, Fritz LaPorte.

The Company’s press release and financial results has been released via Globe Newswire that LaPorte will detail the contents of the release, following remarks by Dr. Ferre. If you've not received a copy of the press release, it is available in the Investor Relations section of MAKO's website www.makosurgical.com.

I would also like to remind you that this call is being webcast live and recorded. A replay of the event will be available later today on our website and will be available for at least 30 days following the call.

Before we begin, I would like to caution listeners that certain information discussed by management during this conference call including answers to your questions will include forward-looking statements covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the Company's business. For a discussion of risks and uncertainties associated with MAKO's business, I encourage you to review the Company's periodic reports filed from time-to-time with the Securities and Exchange Commission, including the Form 10-K for the fiscal year ended December 31, 2011, the Form 8-K filed with our earnings release. And the Form 10-K for the fiscal year ended December 31, 2012, expectedly filed on or before February 28, 2013.

MAKO disclaims any obligation to update any forward-looking statements made during the course of this call. In respect of your time, we intend to limit this call to one hour. With that, it's my pleasure to turn the call over to MAKO's President and CEO, Maurice Ferre.

Maurice R. Ferré

Thank you, Mark. And Good afternoon and thank you for joining us to discuss MAKO’s 2012 fourth quarter and year-end results. On today’s call I will provide you with an update on our business and Fritz will review the details of our financial results.

2012 was a challenging year for MAKO while our results do not meet our initial expectations, we still experience meaningful growth. Over the course of the year, we grew our total number of commercial RIO Systems in the field by 38%, and we grew MAKOplasty procedures by 47%. In addition, I’m confident that the changes we have made internally over the past six months will position us well for success in 2013 and beyond.

The fourth quarter demonstrated progress towards stabilizing the business and re-establishing our growth trajectory. Specifically, we sold 15 RIO systems in the quarter, 13 of these were installed at domestic commercial sites, and two were installed at international commercial sites, increasing our installed base of commercial systems to 156, up from 141 at the end of the third quarter of 2012. For the year, we sold 45 systems worldwide, which was in line with our revised guidance of 42 to 48 systems.

In the fourth quarter, 11 MAKOplasty Hip applications were sold, of which 8 were sold and included with RIO systems sold during the fourth quarter. A total of 47 MAKOplasty Hip applications were sold in 2012, and at the end of the year, 62% of MAKO’s worldwide commercial installed base had the MAKOplasty Hip applications, up from 44% at the end of 2011.

Worldwide, our customers performed 2,904 MAKOplasty procedures in the fourth quarter, representing a 20% increase over the previous quarter, and a 29% increase over the fourth quarter of 2011. Of these procedures 2,507 were partial knee and 395 were total hip.

In 2012, our customers performed 10,204 MAKOplasty procedures, representing a 47% increase over 2011, which was at the low-end of our revised guidance of 10,200 to 10,600.

Average monthly utilization per domestic system was 6.6 in the fourth quarter and was 6.7 for the full year of 2012. On the clinical front, we ended 2012 with approximately 70 clinical studies in progress supporting our RIO systems and MAKOplasty knee and hip procedures.

In the fourth quarter, we completed two national and eight local BioSkills Training sessions. We continue to see strong interest from current and prospective surgeons in attending these meetings. In 2012, we completed a total of 12 national and 12 local BioSkills Training sessions.

Finally, as we’ve recently announced, we appointed Christopher Marrus to the role of Senior Vice President, Sales. Chris joined MAKO in early 2012, and was most recently a Senior Director of sales. Prior to MAKO, Chris worked at a number of medical technology companies including over five years with Intuitive Surgical, the last 2.5 as an area of Vice President of Sales. We are enthusiastic about Chris’s ability to lead the Sales team towards growing the business in 2013 and beyond. As I will discuss later, our team continue to be highly committed and to the execution of our long-term plan, and I remain optimistic about the opportunities in front of us.

Now I would like to turn the call over to Fritz to review our financial results for the fourth quarter and full year. Fritz?

Fritz L. LaPorte

Thank you, Maurice, and good afternoon everyone. In the fourth quarter of 2012, we’ve recognized total revenue of $30.2 million representing a decrease of $2.7 million or 8% from the $32.9 million generated in the fourth quarter of 2011.

Revenue in the fourth quarter of 2012 consisted of $14.3 million in procedure revenue, $12.8 million in RIO system revenue and $3.2 million in service revenue.

Procedure revenue of $14.3 million represented a $2.9 million increase or 26% over the fourth quarter of 2011, and was generated from the 2,904 MAKOplasty procedures performed in the quarter. Of these procedures, 395 were MAKOplasty Hip procedures. All procedures were performed at ASPs consistent with prior quarter.

System revenue of $12.8 million represented a $7 million decrease or 36% over the fourth quarter of 2011. The $12.8 million of system revenue was primarily generated from the recognition of 13 of the 15 RIO systems sold in the quarter, at ASPs consistent with prior quarters. 8 of these 15 total system sales included MAKOplasty Hip applications. The $7 million decrease in system revenue in the fourth quarter of 2012 compared to the fourth quarter of 2011 was attributed to fewer RIO system sales recognized in Q4 of 2012. Additionally, in Q4 of 2011 immediately following the commercial launch of THA application, we had a one-time significant number of MAKOplasty Hip applications sales.

The $12.8 million from system revenue for the quarter is net of approximately $1.4 million for the deferral of the portion of system revenue attributed to the one year warranty. Additionally, the revenue associated with the sale of two RIO systems sold through international distributors to hospitals in Italy and Thailand with deferred. Generally, for RIO sales to international distributors until a favorable collection history has been established, the associated revenue is deferred until receipt of payment.

We anticipate recognizing the revenue associated with these two international RIO sales in 2013. Total gross profit for the fourth quarter of 2012 was $20.3 million compared to a gross profit of $22.4 million in the same period of 2011. Total gross margin in the fourth quarter of 2012 was approximately 67% consisting of a 66% gross margin on procedure revenue, a 64% gross margin on RIO system revenue, and an 83% gross margin on service revenue.

Gross margin on system revenue was in line with previous quarters. Gross margin on procedure revenue was reduced by $1.2 million inventory valuation adjustment primarily for excess procedure inventory. This adjustment was due to anticipated leases of enhancement to certain of our existing implant and disposable products. Excluding this inventory valuation adjustment, gross margin, and procedure revenue would have been 74% for the fourth quarter, which is in line with previous quarters and total gross margin for the fourth quarter would have been 71%.

Turing to expenses, total operating expenses for the fourth quarter of 2012 were $26.2 million, a decrease of $1.9 million from the $28 million for the fourth quarter of 2011. The decrease in operating expenses over the same period in 2011 was primarily the result of a decrease in selling, general, administrative costs and a decrease in research and developmental cost partially offset by an increase in depreciation and amortization.

Selling, general and administrative costs increased primarily due to compensation bonus awards that were incurred in 2011, but not in 2012, and lower sales commission costs. The decrease in research and development costs was primarily due to the timing of expenditures associated with the continuous improvement for the RIO system platforms and MAKOplasty applications, and the development of potential future products as well as compensation bonus awards not incurred in 2012.

Depreciation and amortization increased due to an increase in our consigned implant instrumentation associated with the commercial launches of our Hip implant systems and the increase in our installed base. Net loss for the fourth quarter was $5.7 million including non-cash stock based compensation expense of $2.7 million or $0.13 for basic and diluted common share based on average basic and diluted shares outstanding of $44.5 million. This compares to a net loss for the same period in 2011 of $5.6 million including non-cash stock based compensation expense of $2.5 million or $0.14 per basic and diluted share, based on average basic and diluted shares outstanding of $41.3 million.

Let me quickly summarize our operating results for the year ended December 31, 2012. Total revenue for the full year of 2012 was $102.7 million representing an increase of 22% over the $84.5 million generated in 2011. 2012 revenue consisted of $50.9 million of procedure revenue associated with the sales implant used in the 10,204 MAKOplasty procedures performed during the year. $41.2 million of system revenue associated with the recognition of revenue from 42 of the 45 RIO systems sold, and 17 MAKOplasty Total Hip applications sold to existing customers and $10.6 million of service revenue associated with warranty and maintenance services.

Total operating expenses for the full year of 2012 were $104.4 million compared to $93.9 million in the same period in 2011. Net loss for the full year of 2012 was $32.6 million with $0.76 per basic and diluted share based on average shares outstanding of $42.7 million, compared to $36.1 million or $0.89 per basic and diluted share based on average shares outstanding of $40.8 million in the same period in 2011.

As of December 31, 2012, we had $73.3 million in cash and investments and no debt. Our cash position was enhanced in November through our closing of a follow-on public offering of our common stock with net proceeds of $42.9 million after expenses. Excluding the net proceeds of the equity offering, our net cash increased in the fourth quarter of 2012 by $1.9 million and for the full year of 2012, our net cash used was $28.3 million, and was primarily used in operating and investing activities including the purchase of inventory and instruments for the commercial launch of our Hip implant system.

Turning to guidance, we are continuing to provide annual guidance on RIO system sales and total annual MAKOplasty procedures. We anticipate that in 2013, we will sell 45 to 48 RIO Systems worldwide, and that our customers will perform 13,500 to 14,500 MAKOplasty procedures. With regard to cash burn, we anticipate that we will burn $22 million to $27 million in cash during 2013. Based on this, we will anticipate ending the year with approximately $46 million in cash.

Now I’d like to turn the call back over to Maurice.

Maurice R. Ferré

Thank you, Fritz. Before we open the call for question, I’d like to spend a few minutes providing you with some additional details on our operating accomplishments during the fourth quarter and full year, and then discuss our operating priorities for 2013. In the fourth quarter, we sold 15 RIO systems, 13 of these systems replace at hospitals in the U.S. across multiple geographies. At the end of the quarter, we now have RIO systems in 36 states. In addition, we sold two systems to international distributors that were sold to hospitals for commercial use in Italy and Thailand.

Turning to utilization, the average monthly utilization per commercial system was 6.6 procedures during the fourth quarter, an increase from 6.2 in the third quarter of 2012. This sequential increase in utilization during the fourth quarter was driven primarily by a general improvement in MAKOplasty utilization at new RIO accounts and the typical fourth quarter seasonality associated with patients taking advantage of insurance deductibles at year-end.

Compared to the fourth quarter of 2011, utilization decreased from 7.2 primarily due to the large number of systems sales in the third quarter of 2012 as compared to 2011. For the year, average monthly utilization per commercial system was 6.7 procedures. In 2013, we are modestly changing the way we will report utilization. we will now be including the international commercial systems in our installed base, and we will be reporting utilization on a per-site rather than on a per-system basis, to reflect the leverage we gain from sites with multiple systems. We believe that both of these changes better reflect the underlying trends in our business.

Based on these changes at the end of 2012, there were 156 systems at 149 worldwide sites that will be included in utilization beginning in the first quarter. Calculated in this manner, utilization would have been 7.1 in the fourth quarter of 2012, and 7.2 for the year. On our website in the Investor Relations tab, we have provided a table showing historical utilization recalculated for total commercial procedures using this per-site methodology.

In conjunction with our surgeon users and academic collaborators, we continue to build upon a strong phase of clinical evidence in support of MAKOplasty with approximately 70 clinical studies currently in process, covering both our knee and hip applications.

During the fourth quarter, three papers were published related to accuracy of knee and hip MAKOplasty. Bringing the total number of published peer reviewed papers up to 31. Of note, the hip accuracy study published in the Journal of Engineering in Medicine, compared MAKOplasty THA with manual THA on six paired cadavers and showed that the MAKOplasty THA cups were 100% in the safe zone compared to 30% in the manually placed cups.

In addition, MAKOplasty accuracy was shown to be four to six times greater than manual accuracy in both inclination and anteversion. We held two national and eight local BioSkills meetings in the fourth quarter, with approximately 70 surgeons in attendance. These meetings are one of our key tools to introduce, educating and cultivate MAKOplasty surgeon champions, who are instrumental in supporting both our RIO systems sales process as well as our programs to drive utilization.

On the patient education front, our MAKOplasty implant salesforce continues to partner with hospitals and surgeons in educating patients on the value of MAKOplasty. In the fourth quarter, we supported our hospital customers in conducting a 135 consumer seminars, which attracting nearly 3,000 potential MAKOplasty patients.

I would like to comment briefly on competition, we have started to hear increasing discussion about potential competitive systems in the market. We believe attempts to develop and commercialize competing robotics systems validate our foundational thesis on the benefit of robotics in orthopedics, and we are not surprised that thesis terms to replicate our success. We believe that we have clear technological advantages over any known alternative systems including Optics Fitness, which is essential for accurate and efficient bone resections, soft tissue balancing, which is critical for intraoperative optimization of knee kinematics, and a fact that the RIO is a platform technology, that has proven applications in uni and bicompartmental partial knee arthroplasty, and total hip arthroplasty.

In addition, we have accumulated significant operating history with over 23,000 MAKOplasty procedures performed and over 30 peer reviewed papers published on MAKOplasty. We have also enhanced and refined our RIO platform and MAKOplasty applications on an ongoing basis. We are on the third generation of the RIO system, and the fifth iteration of our knee application software, and the second iteration on our hip application software. We also have established robust sales, customer support, and trading infrastructure. We believe these factors in the aggregate have established MAKO as the industry leader in robotic assisted orthopedic surgery, a position we intend on maintaining.

Lastly, I’d like to share our perspective on the business, and our key operative priorities for 2013. We analyze the challenges that we experienced last year, and have developed the following key operating priorities to drive utilization, support system sales, continued to build the clinical economic evidence necessary for significant growth, and long-term success, and remain the industry technology leader. Specifically we are executing on the following.

Focus on the launch of new RIO accounts. Based on our experience to-date, we know that sites early success is typically indicative of long-term performance. Thus we’ve implemented a systematic approach to launch new RIO accounts and restructure our MAKOplasty sales force to include a launch team of product specialists. We’ve also changed the compensation plan for our sales team to incentivize them to ensure that the launch of the new sites will be successful after the initial sale.

Both these initiatives are designed to assist new account and coming up the curve quickly ands maintaining a high utilization rate. Number two, recover low volume accounts, we have developed specific action plans that are working with accounts that are underperforming to help them execute plans to increase their utilization.

Number three; drive hip volume. We’re focusing on MAKOplasty Hip accounts with a potential to generate meaningful near and long-term procedure growth. We have developed training programs and materials specifically focused on hip to assist our sales force in this effort.

Number four; continue to build clinical and economic evidence. We’re seeing long term data released on knee MAKOplasty patients namely the favorable two year survivorship data on our MCK partial knee system, which demonstrates a 0.4 revision rate after two years, representing a 10 fold improvement over data published in multiple international registries as well as the early data on hip MAKOplasty patients as presented by Dr. Dr. Henrik Malchau of Massachusetts General Hospital, which showed the cup placement with the RIO resulted in 84% of the cases being within the restricted safe zone compared to 47% in the manual procedures. We know that continuing to build on the strong base of clinical and economic evidence around MAKOplasty will be important on our near and long-term success.

And finally number five; innovate existing and new applications. We know that it is important that we remain a technology leader and continue to innovate. In 2013, we plan to continue to collect and analyze user feedback, and use this information to further enhance our product offering.

As we look forward to 2013, I’m confident that the elements and programs are in place that will enable us to achieve our goals for this year and support the long-term thesis upon which our business was built, we look forward to keeping you updated on the progress.

With that, I’d like to open the call to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Matt Miksic from Piper Jaffray. Your question, please?

Matt S. Miksic – Piper Jaffray, Inc.

Hi, can you hear me okay?

Maurice R. Ferré

Hey, Matt.

Matt S. Miksic – Piper Jaffray, Inc.

Hey, good evening. Thanks for taking my questions. So looking at your guidance for this year, it equates to, it looks like about 28% to 30% expansion in your installed base of robots over the last year, and I guess around 35% to 40% growth in implant, if I’m doing my math right in the middle of the range. So I guess it would be helpful if you could given your experience last four or five quarters, expand a little bit on some of the key assumptions, and drivers that go into that outlook, in particular, how it incorporates some of the things that you’ve experienced last year, maybe this year is different to account for some of the selling cycles, buying patterns, large idea and experience that you have last year, and then I have one follow-up?

Maurice R. Ferré

Sure, Matt. I think from our perspective, when we looked at 2012 on how we’ve been growing our business, I think the biggest theme for us has been, I think it was a reflective year in terms of how we built our business, and I think one of the things that we’ve learned, and we built our entire operating plan around is the importance of procedures and utilizations in growing that business. And that’s where we planned to really keep focused this year. This year to us, I think we have great opportunities to do, we’ve identified where our high volume accounts are, our mid volume and our low volume accounts. And we know that we can make a lot of progress on getting those low-to-mid accounts up the utilization curve with our specific applications. And we have opportunities to do that, we have it in the launching of our hip. We’re one-year into it, and we’re already seeing even in the first year of our hip, we’ve done over 1,200 procedures. I think we see it in the opportunity of reinvigorating accounts that were slow to get started. For multiple reasons, that I think that we’ve been able to identify why those accounts are slow, and what we can do to improve their utilization.

And finally, we know that on our launch accounts, when we kick off these launch accounts, there’s a lot more that we could do to get them up and running right out of the gate. We know that the more successful accounts that are always on the high-end of our growth opportunity are accounts that come out of the gate running, so in 2012, we learned a lot of those lessons, and I think that we put the plans in place, I think we’ve put our leadership in place, and I think that all of this is kind of reflective on how we look at guidance, in terms of how we want to grow our business. And I think we’ve set the stage right at the beginning of this year in terms of what we want to deliver, and I think it’s right now from our view, and I think we’re focused on our business, these things take time, but we know we have to do, because we think the fundamentals are clearly still in place.

Matt S. Miksic – Piper Jaffray, Inc.

Okay, that’s helpful. So there’ll be a fair amount of follow-up on that, but I’ll just go to my kind of segues into my follow-up on utilization. You mentioned I think in your remarks that some of these new sites even though you’re going back to some of low utilization sites to sort of help them get pick up the pace. Some of the new sites sound like they’re coming up the curve faster, but maybe you’ve seen some unusual phenomena here in the fourth quarter, due to the large number of implant, put into the third quarter, you could maybe step back, and given those sort of conflicting trend, can you walk through maybe what do you think, in addition to your efforts that you just mentioned, what are some of the major drivers utilization now, and how does this new implants for site methodology, maybe that better represents the trends you’re trying to communicate on your utilization?

Maurice R. Ferré

I go back to some of the prepared remarks Matt, and I think that one thing for example that we identified was we’ve talked about our sales force, we now have over 100 people up there in the sales force, and broke it down into two different categories, right, a guy to install the RIO Systems and a guy to do the procedures, we know that up front, we can do there is a lot more that we are doing now including looking at the way we compensate our sales force in terms of rewarding them for increased utilization upfront. So a lot of it is just preparing the market, preparing the hospital working with them as partners, creating these programs, and I think that by successfully doing that right out of the gate, our chances of improving utilization become very important.

Matt S. Miksic – Piper Jaffray, Inc.

And last if I just squeeze in one on, just the trends from Q4 to Q1, anything that we should be thinking about, in terms of seasonal trends in utilization, I think you’ve given us some helpful color before in terms of what we should expect maybe as we enter the year?

Maurice R. Ferré

I think the only thing I would add is we know that always our fourth quarter across the board in the industry, there is always a lot of deductibles that are used in, a lot of patients that usually, they usually sign up, so that’s not, it’s not atypical in this industry, but to kind of see those type of trends occur, and I think that’s pretty consistent across the entire industry. And clearly in the lot of our mature accounts I think we would anticipate that to occur as well.

Matt S. Miksic – Piper Jaffray, Inc.

Thank you so much.

Operator

Thank you. Our next question comes from Matthew O'Brien from William Blair. Your question please.

Matthew O'Brien – William Blair

Good afternoon, can you guys hear me okay.

Maurice R. Ferré

Yes.

Matthew O'Brien – William Blair

Okay just one quick clarification question, I wanted to make sure those two systems that you didn’t recognize in 2012, that’s part of the 45 to 48 that’s you provided for 2013.

Fritz L. LaPorte

Correct. Sorry, in 2013 no, they were part of the 45 in 2012, and they are not included in the system counts in our guidance.

Matthew O'Brien – William Blair

Okay (indiscernible), and then as far as the system number goes for 2013, Maurice I think you’d mentioned last quarter, you felt like you would figure it out, some of the issues you are having in closing, and it’s not really, I know it’s going to expand as far as your installed base pretty meaningfully here, but on a year-over-year basis, you are not seeing significant amounts of growth, and based on the commentary you provided before, I thought we might see a little bit more in 2013, is there something else there, maybe a bit of conservatism that’s you’re factoring in here, anything in terms of competition, where it kind of a little bit conservative.

Maurice R. Ferré

No, not at all, I mean I think from our view, we have already we feel that we’ve got about the based on 1,200 sites that we think are in the U.S. I think we see that we now executed and have captured 13% of that market and I think we are seeing very positive signs. We are very strong convictions that why robotics in orthopedics are going to play out in a meaningful way. When I look at some of the data, the accuracy data that’s coming off the fact that we’re starting to see for the first time, survivorship data that has a 10 fold increase of what we’ve seen in different registries.

I mean, this is meaningful stuff and then about educating a lot of doctors of the importance of partial knees and educating customers and consumers in terms of having them understand, what the value proposition that differentiates our technology of doing it robotically. So a lot of these things are playing out. And at the end of the day, similar to what I said to Matt, and in our prepared remarks, we look at our systems, I mean to us, it’s really about seeing that utilization going up, where we have that focus on our existing accounts, and have our focus on getting the right type of accounts up and running.

And it’s important that we not only improve utilization of existing accounts. But just as important to add new accounts that will contribute in a meaningful way in the utilization. I mean, we’d rather have accounts at the end of the day that are contributing in a meaningful way versus not contributing. And that’s our focus and I think that’s reflective of how we see system growth occurring in 2013.

Matthew O'Brien – William Blair

Okay, it sounds like it’s a little bit more of a go deep strategy now within existing accounts. That’s being reasonable. But just on the guidance for 2013, on the volume side. Is it reasonable to assume a doubling of the number of hip placements during 2013 and then how should we think about progression in terms of utilization throughout the air. Should we similar type of kind of back-end loaded, number of procedures to form given the hip software rollout so on?

Maurice R. Ferré

So I guess the first thing Matt; we’re not going to break out the specifics on the product category volumes relative to hip and knee.

With that being said, we would expect to see the hip volume increased materially in 2013. And the last part of your question give you more specific on I think you are referring the seasonality of growth towards the end of the year in procedures.

Matthew O'Brien – William Blair

But I think historically, (inaudible) serves around 60% of cases that’s performed during the back half of the year, should we expect around that number or something higher given the hip half throughout the course of the year.

Fritz L. LaPorte

We wouldn’t expect it to be higher, we would expect that we would continue to see more of a level ramp, and I think with the exception, Maurice commented on a previous comment about Q1, and how that after the deductibles reset and as well as the impact on utilization, with higher sytem sale at the end of the year, you would expect maybe procedures to be a lower ramping Q1. But beyond that we would expect it to be relatively consistent throughout the remaining three quarters.

Matthew O'Brien – William Blair

Okay, thank you.

Fritz L. LaPorte

You are welcome.

Operator

Thank you. Our next question comes from the line of Rich Newitter from Leerink Swann. Your question please.

Rich Newitter – Leerink Swann LLC

Hi, guys, thanks for taking the questions. I was just wondering Maurice, can you explain just again the rationale behind the reason for the new utilization reporting?

Maurice R. Ferré

I will let Fritz to answer that.

Fritz L. LaPorte

Sure, Rich two things; one, is when we first started out, we had some non commercial sales on systems on international basis. We currently have five international sales that are relatively productive. Last year, for example, about 100 procedures per quarter. So they’re contributing this meaningfully to overall procedure number, and as we go forward, we continue to expect systems placements to represent on an international basis to represent about 10% of our systems sales. And so we felt that it was important to include the utilization in there. That’s one change.

The other change in on a per-site basis versus a per-system basis. We currently have seven sites that have more than one system. We gain leverage when a site has more than one system, our costs are essentially fixed to the site, whether it’s the rep even the instrumentation so forth that’s supplied to that site. So we gained leverage with multiple systems there.

So as we think about how we look at our business from the utilization metric standpoint. As our business has matured and changed over time, it’s more meaningful to count for the international systems, and then also look for evaluating on a per-site basis. And per-site basis has really become meaningful over the last two years, and as Maurice said, we’ll put up the historical recalc, we gave the comparison for the fourth quarter, and you’ll see as you go back a couple of years as less disparity between the two numbers.

Rich Newitter – Leerink Swann LLC

And just on that note, I mean you usually have pretty good visibility into your funnel, is there any color, you can give on the number of sites that, are you anticipating greater number of sites potentially purchasing their additional systems or a greater proportion of that dynamic playing out in ‘13 versus prior years?

Maurice R. Ferré

Rich, I think when we gave, when we’re changing these guidance, if you look at the numbers, right, that reflects about 5% of our existing installed base now has more than one system, which to me is a very positive sign, because it just shows you what the power of a robotic program that’s being established where hospitals are making multiple investments, and to me is key. And I think that if we continue to do what are the fundamentals in this business, and believe in our convictions about increasing procedure growth utilization, efficiencies, all the things are robotics, and with these robotic programs are all about, training programs, proving out these clinical data.

I think we will see more and more of our sites, kind of moving into that buying multiple systems. And that’s exactly where we’re positioning ourselves, and that’s why we’ve created this platform, that’s why we’re expanding the platform. We’ve expanded it and we’ll continue to see that and I think that is our focus, that needs to be our focus and I think that will drive everything.

Rich Newitter – Leerink Swann LLC

That’s helpful. And then just lastly, you mentioned some continued innovation, just wondering if you could potentially highlight anything, anticipated this year, and if we can expect any launches at AOS? Thanks a lot.

Fritz L. LaPorte

Rich, the only thing I would there, it’s very important, I mean we’ve positioned ourselves and we’ve been able to grow this technology where we now have over 100 engineers that have been working on technology, and that’s where we’re going to differentiate ourselves at the end of the day is establishing technology that really makes a difference in outcomes, and makes a difference from a clinical perspective, and from an economic perspective, and I think that there is a lot of interesting technology that plays into where we are, and how we’ve developed, and we worked in all different angels in terms of where we need to be. I think we have a pretty comprehensive five-year roadmap and vision of where we want to be with robotics and I think this is based on what’s happening in the healthcare systems, I think there’s a lot of interesting dynamics of how over time you’re going to see MAKO incorporate new different types of technologies, within its programs, that I think are going to create these efficiencies, these outcomes, there are a lot of the surgeons in hospitals are looking for.

Operator

Did that answer your question?

Rich Newitter – Leerink Swann LLC

Yes, thank you.

Operator

Thank you. Our next question comes from the line of Kim Gailun from JPMorgan. Your question please.

Kim W. Gailun – JPMorgan Securities LLC

Questions, so a couple here, I guess first on the competitive technologies which you had mentioned in your prepared remarks, how are those, I guess the recent approvals in the U.S., how are those coming and factoring into the capital discussions that you’re having with U.S. customers if at all?

Maurice R. Ferré

Well, Kim really not all, I mean we have been really seeing a lot of that. We’re not surprised, I think based on our success, when you take 13% of the market in a very positive way and grow company to $100 million in sales, and show the type of growth that we’ve experienced, it’s not surprising where we are, but at the end of the day, we’ve seen this, we’ve seen it long and hard. We’ve seen the importance of our superior technology, the importance of optics business, is a key element of our technology that really enables these surgeons to do the cutting, the soft tissue balancing aspects of our technology, and the fact that we have a platform in place, I think are the key features that allow us, and I think that this has allowed to head start, where we have a 156 systems, 23,000 procedures over 30 peer reviewed articles, and we have created a very robust infrastructure in place to kind of help and support and work out, what we think are the most important pieces of our technology. And finally, I would say Kim, we think that increased competition from our perspective, what it really does is, it expands the visibility of the importance of robotics in orthopedics.

Kim W. Gailun – JPMorgan Securities LLC

Yeah, okay. And that’s helpful, as we just sort of think about comparing the different offerings, I guess as we go forward. The part of the question is just, I’m curious are your customers aware of these new systems that have been approved, and is that coming into the conversation at all?

Maurice R. Ferré

What I see is we’re talking to our customers; we’re talking about the value proposition. And the full value of creating a platform in a program and developing a set of excellence with these hospitals.

Kim W. Gailun – JPMorgan Securities LLC

Okay. And then the other question separately is just on some of your initiatives here with the utilization, and one of them were it was an improving utilization at the lower volume accounts. Can you just talk about what types of initiatives you have in place in particular for those lower volume accounts to kind of get them back up the curve?

Maurice R. Ferré

Kim, from our perspective a lot of our, early on and we’ve talked about this before specifically, with our family of systems that came out in 2011 and where a lot of the selling of the 2011 accounts were very much top down approaches. I mean, what we really learned through that process was really identifying surgeon champions early into the process, and now that we have the hospitals have made these investments on these technologies and their utilizations are ramping up as quickly, what we’re focused on is working with the hospitals as partners and identifying surgeon champions, bring them into our BioSkills Training courses, and then helping them to drive the value proposition, and helping to create these programs. And I think that we’ve set up our sales force in a way, I think from a competition standpoint that incentivizes them to move some of these systems into the middle end and to the top end of the bucket. And for us, those are the types of programs that we’re just kicking off, and I think the early stages that look like they’re on track. So we’ll continue to do that throughout the year.

Kim W. Gailun – JPMorgan Securities LLC

Okay, great. Thank you.

Fritz L. LaPorte

You’re welcome.

Operator

Thank you. Our next question comes from the line of David Lewis from Morgan Stanley. Your question please.

Steve C. Beuchaw – Morgan Stanley & Co. LLC

Hi, it’s Steve Beuchaw here for David. Thanks for taking the questions everyone. One on the hip application, you’re at 62% penetration right now, and as you think about the plans for 2013, do you see that penetration rate kicking up meaningfully, you said another way. Can you place more hip applications in systems to start to close that gap and get higher penetration?

Maurice R. Ferré

Yeah. I think probably, I think we’re pleased where we are. it’s a lot easier to sell these hip applications at when the capital budget request comes in with the RIO System and more challenging down the road. I think when I look at it, we have that over 100 systems in place where we can be working and developing hip programs. And that to me, I think it’s a good playing field. and I think that on a forward-looking basis, I think we will see consistently the same kind of ratios that we’ve seen.

And I think more and more, we’re seeing more hospitals, taking, understanding and appreciating the value of the platform. I think as we said, I mean hip is going to have a major contribution to our growth. And it’s a very important piece of it, it’s still early on. We lost what we’re seeing with our partners, pipeline and the type of feedback that we’re getting on the PST Cup in particular. This is a very unique technology in terms of combining this poor structured technology and allows for rapid bone absorption.

So we’re using a very novel and unique implants that I think in their own rights are best-in-class. And I think we’re just getting this started, and I think that we’ll see in our second generation of software. We anticipate this year that we’ll have another iteration of our software. We’ve identified where there’s some real opportunities to improve efficiencies on our third iteration. And I think that there’s pieces of the family of implants that we’ll add. And I think we’ll continue to help us to grow this business. we’re very excited about how we’ve delivered on the hip last year and what the implications are the next two years of what hip, and I think we’re really set for it, because those invested don’t have to be made. This is now a lot about just educating surgeons, showing them the value proposition, showing them the efficiencies of putting in these perfect cups. And really being up in the podium and continue to present that in a meaningful way. And you’ll hear a lot more about that over time.

Steve C. Beuchaw – Morgan Stanley & Co. LLC

All right. Actually, it’s a great segue to my next question. I wonder Maurice, if you could give us a bit of a preview of AAOS on the clinical front. I guess, one of the ways you could have answered Kim’s question about competing against in non-capital systems as to, look ultimately, we’re going to have data that proved to people that you get a better result with our system. I mean is AAOS a catalyst on that front.

Maurice R. Ferré

I think the academy is always a meaningful time of the year, when it comes to opportunities to get important papers out and presentations. And to me, I think there’s three key papers that have been presented, and I think the one in particular that’s going to come out at the academy. It’s going to be the initial work on our randomized clinical study. I think it’s meaningful when you look at a randomized study and you compare manual versus robotics. And the end points, I think you’re going to be very interesting in how they’re presented, and I can’t really talk a lot about it. But I could tell you that I think that’s going to be a meaningful paper. I think I mentioned it in my stated remarks. I’m very excited about where we are with our two-year data, on looking at a study that was presented where we had a 0.4 failure rate, two years out and compare it to the data that’s out there from a lot of these different registries, which is a 10-fold improvement. I think that is really creating a certain amount of peak and awareness from a lot of our customers that they’re looking at that data and they’re saying, well, that’s pretty interesting.

and it makes sense, because you’re putting in these implants so precisely, and I think that’s going to be really key as we progress into the next few years in terms of getting a lot of surgeons that have been on the sidelines where patients have been asking for these MAKOplasty procedures, but they’re a little cautious, because they haven’t seen the clinical data come out. So I think seeing that, I think it’s going to be very meaningful, and also the third piece of data that I think it’s very meaningful, which is all these level I type studies is what we’re seeing and to continue to see on this hip data. and just showing anecdotal data, cadaver data and also high profile data like what we’re seeing with MAKO study.

Now it’s been replicated at multiple academic institutions. and I would say that when we have surgeons that in the short period of time do 10 to 15 MAKO procedures, it’s amazing how all of a sudden, they really become converts in the use of this technology. But it’s not for everybody, and I think the data that comes out of the academy, I think the fact that we’ll have a big presence there, the fact that we really have a lot of invitations and except invitations, there are people wanting to see our technology. The fact that we’ll have a technology pavilion, I think, it’s going to be a very strong academy for MAKO.

Steve C. Beuchaw – Morgan Stanley & Co. LLC

Thanks, that’s great detail. And one last one, basically two months end of the year here, I wonder if you could give us any sort of anecdotal updates about what you’re hearing from your hospital customers in terms of the way that they’re thinking about the capital spend in 2013 and should we be thinking at all about sequestration, is that a potential hiccup during the early part of the year until we get that sorted out? Thanks so much everyone.

Maurice R. Ferré

I mean I always say with I’m asked that question, I always kind of say, I don’t know, we’re really reflective of a data point that’s not really meaningful, but I could tell you from the hospital administrators that we talk to on an ongoing basis, I mean I wouldn’t say it’s changed, I’d say it’s the same, and I would say what they’re really focused on always is looking at their ROIs and what the clinical evidence and support for this for what we’re doing and the support of surgeon champions. So I think from that perspective, I haven’t seen much change.

Steve C. Beuchaw – Morgan Stanley & Co. LLC

Great color, thank guys.

Operator

Thank you. Our next question comes from the line of Larry Biegelsen from Wells Fargo. Your question please.

Lawrence H. Biegelsen – Wells Fargo Advisors LLC

Good afternoon, and thanks for taking my question. Hope you can hear me okay. so I wanted to start off with the knee side. so you came in at the low-end of the guidance and the growth decelerated again, and I just wanted to know if you’re seeing any changes from a market, yearly market standpoint or competitive standpoint. for example, in the second quarter, new environment started offering patient specific instruments for UVs and Biomet started offering the guarantee. have you seen any impact from that, Maurice?

Maurice R. Ferré

Larry, the short answer of that is no, i.e., bits and pieces of it, but from our perspective, most of our surgeons that are across the board and surgeons that are creating volume. I don’t really see a lot of delays there. I think our story, a large part of our story is I mean I think we’ve already captured close to 15% of the market, we’re doing a lot of times as we’re taking midrange volume surgeons and they’re becoming high volume surgeons, that’s what we’re doing is like, all of a sudden, they’ve built up this level of confidence of being able to do these procedures, because they’re so consistently reproducible and they’re seeing how these programs work. and that takes time, and I think that we need to keep on focusing on these programs, and building up, because the demand is out there. The patients are asking for these types of procedures and a lot of them are asking for MAKOplasty procedures, because they’re seeing the value of a robotic system. And I don’t think that anything that we’ve seen out there from a competitive standpoint is really kind of coming out there and threatening that value proposition.

Lawrence H. Biegelsen – Wells Fargo Advisors LLC

Have you guys considered offering a guarantee like the one Biomet that is offered?

Maurice R. Ferré

I don’t know what that means. and I don’t think that, from our perspective, I don’t think that’s an important thing, in terms of how we say it. I don’t know what that means.

Lawrence H. Biegelsen – Wells Fargo Advisors LLC

Okay, fair enough.

Maurice R. Ferré

There’s always fine lines in that, there’s always redefined print, all right. so I’m not sure what that means.

Lawrence H. Biegelsen – Wells Fargo Advisors LLC

Okay. On the hip side, so you mentioned a minute ago about a new software version, a third version coming out in 2013. can you talk a little bit about the timing of that and what we hear is that your current hip application is great on the cup side, but it’s not a cell phone and the terminal side, it doesn’t help with leg length and offset, if it’s new third generation software going to address leg length and offset and do you think that, how important do you think that iteration will be for the hip application? Thanks.

Maurice R. Ferré

Yeah. Larry, actually the second integration does address leg length and offset. and we’re just like any software that we’ve developed; it’s just a continuous iteration of it. And I just want to be clear, we have nobody waiting toward the next iteration to kind of decide that they want to use this technology or buy this technology that’s not where this is about. This is just about the cycle of products that we’ll continuously develop and make better. and just like we hear with the knee; we’re now in our fifth iteration of it. And I think that when you do 1,000 of these cases, you learn something, right and when you’re sitting around with a lot of very smart people with very good ideas and you want to incorporate that as quickly as possible, and I think that’s where we are with this technology.

Lawrence H. Biegelsen – Wells Fargo Advisors LLC

Thanks for taking the questions.

Operator

Thank you. Our next question comes from the line of Bill Plovanic from Canaccord. Your question please.

Bill Plovanic – Canaccord Genuity

Great, thanks, good evening. A couple of questions here guys. Fritz, you talked about the international and pushing that off until you’re ready to recognize, when would you expect to recognize the revenues from that?

Fritz L. LaPorte

We said in 2013, hopefully the first half for 2013 for sure.

Bill Plovanic – Canaccord Genuity

Okay. And then given, you’re talking about utilization, obviously, (inaudible) (00:01:27) Q4 is typical for the industry. In Q1, it starts to pull back, but I would suspect or expect it to kind of boxes you placed in Q3 would have become productive and offset that. That’s not the case, which you still expect to kind of utilization flat to down from Q4?

Fritz L. LaPorte

So the sites that we’ve placed in Q3, a couple points, generally, systems are placed towards the end of the quarter. and as we said before, it takes about six months for a site to ramp up the curve. So in the first quarter, those systems that were placed in Q3 are in their back half of that ramp, typically months through four to six. So they still will be ramping. It’s more so, we’re reflecting on the procedural growth as well as just as the nominator on the systems we placed thirty systems in the second half and the year, they’re still coming up the curve. So we would expect that to have impact on overall utilization.

Bill Plovanic – Canaccord Genuity

Okay. and then just from housekeeping stuff, the number of reps and MAKO specialists at the end of the year, I’m sure that will be in the K?

Fritz L. LaPorte

Yeah. the number of reps, so there’s about 24 sales reps on the RIO side, and there are 94 reps on the MAKOplasty procedures side at year-end.

Bill Plovanic – Canaccord Genuity

And then just on the hip, as you ramp it up, I think it’s a little over a 100 are currently roughly active or capable. How many of those are active at this point?

Fritz L. LaPorte

So there is about half of 2012 basis is active.

Bill Plovanic – Canaccord Genuity

And how do you define active?

Fritz L. LaPorte

Doing procedures.

Bill Plovanic – Canaccord Genuity

Okay. And then my last question just as you look at your operating expenses obviously, Q4 was down significantly probably a nice sales price for a lot of us in terms of the spend being down. How much of that is the spread between your typical like stock comp and year-end bonuses and stuffs like that and kind of is this a new baselines or should we expect this to jump up, again, as we move forward and kind of just because it was a tough year in ‘12, it’s not going to be that low in ‘13, I mean how should we think about those OpEx X lines going into ‘13?

Fritz L. LaPorte

Sure. So we would expect OpEx to increase with the growth in our business annually. However, we have seen leverage in our operating expenses, for example, our revenue grew by about 22% this year versus our OpEx grew by 11%, and we are focused on continuing to drive that leverage as we get towards profitability. So answer is that that will increase, but it should increase to lower percentage than what we’re seeing on the top line.

Steve C. Beuchaw – Morgan Stanley & Co. LLC

Okay, that’s all I had. Thank you.

Fritz L. LaPorte

You’re welcome.

Operator

Thank you. Due to time constraints, our final question comes from the line of Mark Landy from Summer Street Research. Your question please.

Mark Landy – Summer Street Research

Thanks guys for squeezing me in and good evening.

Fritz L. LaPorte

Good morning, Mark.

Mark Landy – Summer Street Research

Fritz, first part of question for you, how do we think of the revenue delta between, revenue that’s going to fall into 2013, from the international (inaudible) in 2012 versus the revenues that are going to fall into 2014 from international sales in 2013, not supposed coupled with that is, what is your expectation for the number of international sales of 2013, how the guidance that’s given?

Fritz L. LaPorte

Sure. So I’d start with the last part of that question first, as I stated earlier, we continue to expect about 10% of our systems sales to the international, and I would say without knowing exact timing of those systems sales that it could be a wash on that revenue, meaning the revenue that falls in the ‘13 from ‘12 would wash with revenue from ‘13 that could possibly push to ’14, but again it depends on timing, maybe it’s one system difference, but I’d say washed to one system difference.

Mark Landy – Summer Street Research

And then timing on procedure revenues, is that kind of more inline with what you currently see internationally?

Maurice R. Ferré

I am not sure your questions are kind –

Mark Landy – Summer Street Research

Planting on implants procedure revenues . . .

Maurice R. Ferré

So our implant revenue for both domestic and international recognized essentially on the same basis, which is as procedures are performed, that revenue is recognized so all of the 10,204 procedures are performed in 2012 that revenue was recognized.

Mark Landy – Summer Street Research

Maybe I’ll touch to sticky question seems much at the end, you’ve spoken about for anything some of your existing sales, you’ve talking about programs that you’re putting in place to restore growth of a tough 2012. One of the things that we constantly picked up in talking to the people who have bought into the value of MAKOplasty, and to a lesser extend knees, it’s pricing of the implant, can you (inaudible) through the ROI calculation base sometimes it’s spread up between profit for procedure versus what ultimately they get from the capital equipment? At what point you have to trace that, what point do you think that becomes sticky relative to the growth that you are trying to achieving hits, it’s a constant threat that we are hearing from some of our biggest supporters.

Maurice R. Ferré

I don’t think Mark, I don’t think this is unique to make up. I think if I look across the Board, and I see what’s happening from price pressures within the hospital systems, I think it’s across the Board. There are four hospitals that are going back to all of the vendors in evaluating what pricing plans look like, and I think that we are in that. So I don’t think it’s unique to us.

Mark Landy – Summer Street Research

Maurice, just to know it little bit further, I’m not asking what prices are set on a percentage basis, as from what we have been able to pickup that there is a meaningful step up in price. Obviously part of that is the disposable costs that you are willing to accept and absorb. Certainly there is a technology value that you are trying to get a premium for that. I just seems that your premiums stands out a little bit more than some of the others, and that some must be willing to pay for. So maybe on an apples-to-apples basis, it’s also question that versus everybody is facing price pressure, which I have set that statement which you made.

Maurice R. Ferré

Mark, I would say this way, is that I think overtime, we anticipate that pricing pressure will continue, and from our perspective in terms of any barriers of doing deals, and doing cases I don’t think it has an impact. We are competitive in the market with our pricing.

Mark Landy – Summer Street Research

Okay. Now last up, how is the traction being from the launch of the new stand? Obviously there were a little bit of hold in the product pipeline. Have you seen good acceptance of that given that now the way you price the customer and the spend et cetera, how is that roll out of the new products going, and then thanks for taking my question?

Maurice R. Ferré

Mark, I think we are very pleased on how the rollout is taking place, and the adoption and the interest. And we’re actually, we think we have a great time and great opportunity to even expose more of it at the academy coming up next month. But I think we’re starting to see there is a lot of people that are asking about it and that’s a good sign.

Mark Landy – Summer Street Research

Thanks guys.

Fritz L. LaPorte

You’re welcome.

Maurice R. Ferré

So let me close by thanking all of you for taking the time to join us on the call today. We sincerely appreciate your interest in MAKO and look forward to updating you on continuing progress. Thank you.

Operator

Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.

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