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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

David Roman – Goldman Sachs

Michael Matson - Mizuho Securities

Matt Miksic - Piper Jaffray

Kaila Krum - William Blair

Kimberly Gailun - JPMorgan

Richard Newitter - Leerink Swann

Bill Plovanic - Canaccord Genuity

Mark Landi - Summer Street Research

MAKO Surgical Corp. (MAKO) Q1 2013 Earnings Call May 7, 2013 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to the MAKO Surgical Corp's 2013 First Quarter 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. Please 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. Mr. 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-Q for the fiscal year ended March 31, 2012, expected to be filed on May 8, 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 Ferré.

Maurice R. Ferré

Thank you Mark and good afternoon and thank you for joining us to discuss Mako's 2013 first quarter 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. The first quarter of 2013 was in line with our expectations. We continue to focus on executing against our operating plans and are demonstrating progress towards stabilizing the business and reestablishing our revenue growth trajectory.

Specifically we sold five RIO systems in the quarter. All these were installed at domestic commercial sites, increasing our installed base of commercial systems to a 161, up from 156 at the end of the fourth quarter of 2012. At the end of the quarter we had a 154 MAKOplasty sites worldwide. In the first quarter six MAKOplasty Total Hip Arthroplasty or THA applications were sold, of which five were sold and included with the five RIO systems sold during the first quarter.

Worldwide our customers performed 2,988 MAKOplasty procedures in the first quarter, representing a 3% sequential quarterly increase and a 30% increase over the first quarter of 2012. While the first quarter is usually slower for us this quarter procedural volume was slightly impacted by two fewer surgical days. Of the total procedures 2,521 were partial knees and 467 were total hip. Average monthly utilization per commercial site was 6.6 in the first quarter.

On the clinical front we have 70 clinical studies in progress supporting our RIO systems and MAKOplasty knee and hip procedures. Notably we had positive early results reported at the AAOS from our Strathclyde randomized study.

In the first quarter we completed three national and three local BioSkill Training sessions with over 90 surgeons in attendance. We continue to see strong interest from current and prospective surgeons that attended these meetings.

Finally as we recently announced we shelved our patent infringement actions against Stanmore Implants Worldwide Limited. Under the terms of the settlement Stanmore agreed to exit robotics and we acquired the robotic assets at minimal cost. We are pleased to have put this matter quickly behind us and believe that this settlement demonstrates the strength and depth of our intellectual property portfolio.

As I will discuss later our team continues to be highly committed to the execution of our long term plan and I continue to be 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 first quarter, Fritz?

Fritz L. LaPorte

Thank you, Maurice and good afternoon everyone. In the first quarter of 2013 we recognized total revenue of $24.8 million, representing an increase of $5.2 million or 26% from the $19.6 million generated in the first quarter of 2012. Revenue in the first quarter of 2013 consisted of $14.8 million in procedure revenue, $6.5 million in RIO system revenue and $3.5 million in service revenue. Procedure revenue of $14.8 million represented a $3.3 million increase or 28% over the first quarter of 2012, was generated from the 2,988 MAKOplasty procedures performed in the quarter. Of these procedures 467 were MAKOplasty hip procedures. The ASP for procedures were consistent with prior quarters.

Average monthly utilization per site of 6.6 procedures in the first quarter was a decrease from the monthly utilization of 7.1 in the fourth quarter of 2012. As we mentioned in our fourth quarter call, we anticipated that utilization would decrease in the first quarter due to the impact of the large number of sites added in the second half of 2012 as they came up the utilization curve and typical seasonality in Q1. We anticipate that utilization will increase in the second quarter.

System revenue of $6.5 million represented a $600,000 or 11% increase over the first quarter of 2012. The $6.5 million of system revenue was primarily generated from the recognition of five domestic commercial unit sales of our RIO system all of which included MAKOplasty Hip applications. In addition during the quarter we recognized the revenue associated with two deferred international commercial sales that were sold in the fourth quarter of 2012 and the sale of one MAKOplasty THA application to existing customers. The $6.5 million in system revenue for the quarter is net of approximately $600,000 for the deferral of system revenue attributed to the warranties provided to our customers under the terms of the RIO system sales. This deferred revenue will be recognized ratebly over the warranty period as a component of service revenue. The ASPs for the RIO systems and the MAKOplasty hip application were consistent with prior quarters.

Gross profit for the first quarter of 2013 was 18.3 million compared to a gross profit of 14.2 million in the same period in 2012. Total gross margin in the first quarter of 2013 was approximately 74% consisting of a 75% gross margin on procedure revenue, a 63% gross margin on RIO system revenue, and an 87% gross margin on service revenue. Gross margins were in line with previous quarters.

Turing to expenses, total operating expenses for the first quarter of 2013 were $27.2 million, representing an increase of $1.3 million or 5% from the $25.9 million for the first quarter of 2012. The $1.3 million increase was primarily due to the new medical device excise tax which became effective January 1, 2013, the legal cost associated with asserting our intellectual property and depreciation and amortization due to an increase in our consigned implant instrumentation associated with the increase in our installed base.

Net loss for the first quarter was $9.6 million including non-cash stock based compensation expense of $2.9 million or $0.21 per basic and diluted common share based on average basic and diluted shares outstanding of $46.8 million. Also included net loss for the first quarter was non-cash and non-operating expense of $660,000 associated with the change in fair value of the derivative asset related to our credit facility agreement.

Upon the expiration of the draw period on May 15, 2013, the derivative asset will have no value and this will result in a $6.9 million non-cash charge to non-operating expense in the second quarter of 2013. Excluding this $660,000 of non-operating expense net loss for the quarter would have been $9 million or $0.19 per share. This compares to a net loss for the same period in 2012 of $11.7 million including non-cash stock base compensation expense of $2.7 million or $0.28 per basic and diluted share based on average, basic and diluted shares outstanding of 41.7 million.

As on March 31, 2013 we had $71 million in cash and investments and no debt. Our net cash used in the first quarter of 2013 was $2.2 million and was primarily used in operating and investing activities including the purchase of inventory and instruments for hip implant system.

We anticipate our net cash burn will increase in the second quarter of 2013 due to the timing of working capital, collections and expenditures, the approximately $1 million payment made to Stanmore for the purchase of assets and an anticipated $1 million no draw fee to be paid to Deerfield Management Company upon expiration of the credit facility on May 15, 2013.

Turning to guidance, we remain confident in our previously issues annual guidance on RIO system sales of 45 to 48 RIO systems worldwide and total annual MAKOplasty procedures of

13,500 to 14,500.

With regard to cash burn we continue to anticipate that we will burn $22 million, $22 million to $27 million in cash during 2013. Based on this we wound 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 questions, I'd like to spend a few minutes providing you with additional detail out of some recent events. It was nice to see many of you at the recent American Academy of Orthopedic Surgeons Meeting in Chicago. The traffic in our booth was strong and notably we saw that more leading surgeons were engaged than in the past years.

One of the important highlights of the academy for MAKO was the presentation of early data from our prospective single center randomized control trail at Glasgow Royal Infirmary with University of Strathclyde. This study compares MAKOplasty unicomparmental knee arthroplasty or UKA versus manual placed Biomet Oxford UKA. The initial results of the first 100 patients focused on accuracy and pain scores and were positive for MAKO. Most notably MAKOplasty UKA patients reported statistically significant lower post-operative pain levels compared to the Oxford patients from day one through week eight despite no difference in pain medication. It took (Inaudible) patients eight weeks to reach the lower pain levels that MAKO patients were already reporting after six days.

In addition 57% of MAKOplasty patients had an American Knee Society score of excellent at three months post-operative compared to only 32% of Oxford patients which is also statistically significant. This study also showed that MAKOplasty UKA components were placed more accurately in all six measured parameters. For example over 70% of the MAKOplasty components were placed within two degrees of error in tibia slope compared to only 15% of Oxford components. In fact 60% of the Oxford cases has tibia slope errors between four and eight degrees. Errors in achieving proper tibia slope have been shown in the literature to be a predictor of implant failure.

Recruitment in this trial is now complete with a total of 139 patients. We expect three months outcomes for the entire cohort to be presented in the second quarter of 2013. This trial will continue to track these patients for a total of 10 years.

A few of our potential competitors had non robotic products on display at the AAOS focused on improving accuracy and precision in orthopedics we've seen to further increase the confusion around our competitive position in the market. It remains our belief that the only way to achieve consistent reproducible precisions in orthopedics which translates to better clinical outcomes is with robotics. We believe that patient specific instruments and other smart instruments don't provide a complete solution and fall short of achieving this goal.

We also believe that in order to be effective as an orthopedic robotic platform a company's product must do the following. Number one, allow surgeons to create a precise preoperative plan based on patients specific anatomy. Number two allow for intra-operative adjustments so that soft tissue structures can be proper balanced. Number three execute the patient specific preoperative plan perfectly through effortless and accurate bone resection.

Number four add applications in multiple joints and finally number five have a portfolio of clinically differentiated implants that are enabled by the precision of robotic implantation.

As we stated previously MAKO is the only company that has the ability to achieve all these objectives, specifically the RIO system utilizes pre-operative planning software and a highly accurate 3D model based on the patient specific CT scan to allow surgeons to precisely plan the surgery they want to execute. The design of our robotic arm in combination with our proprietary haptic stiffness creates effortless constraints which allow for accurate and efficient bone resection. Surgeons can effectively perform intraoperative soft tissue balancing which is critical for the optimization of knee kinematics and the RIO is a proven platform technology that has applications in uni and bicompartmental partial knee arthroplasty and total hip arthroplasty.

Finally our family of knee and hip implants is specifically designed to work in conjunction with our RIO system and takes advantage of the precision and accuracy offered. All these so called robotic solutions currently fall short of achieving all of these adjectives.

In addition, our clinical advantages we have accumulated significantly operating history with approximately 26,000 MAKOplasty procedures performed and over 30 peer review 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 of our hip application software. We have also established robust sales, customer support and training infrastructure.

As noted in July 2012 edition of Orthopedic Network News MAKO has captured 17% of the American UK market. We believe these factors in the aggregate have established MAKO as the clear industry leader in robotic assisted orthopedic surgery, a position we tend to maintain and defend. To that point in the first quarter following the announcement by Stanmore Implants Worldwide that they have received FDA 510(k) clearance for a UK application for their haptic robotic sculpture system, we filed patent infringement actions with the U.S. International Trade Commission in the US district courts in Massachusetts and Northern California seeking adjunctive relief against the importation of sculpture into the United States.

Within a month of filing Stanmore announced its complete exit from robotics. MAKO agreed to withdraw all pending legal actions to acquire Stanmore robotic assets including patents for less than a million dollars. We are enthusiastic about the settlement because it removes a potential competitor from the market adds incrementally to our intellectual property portfolio and avoids both distractions of management times and millions of dollars in potential litigation cost. We believe that a quick settlement is a testament to the strength and breath of our intellectual property position.

In closing as I mentioned in my opening remarks the first quarter was in line with our expectations. As I have mentioned on our last call during the first quarter we appointed Chris Marrus, Senior Vice President Sales and initiated key operating programs to drive utilization, support system sales continue to build on the clinical and economic evidence necessary for significant growth and long term success to remain the industry's technology leader. Based on these enhancements and the first quarter results I remain confident in our outlook for 2013.

With that I would like to open the call to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from David Roman of Goldman Sachs. Your line is open.

David Roman – Goldman Sachs

Thank you and good afternoon everyone. I wondered Maurice maybe if you can help us put the quarter into a little bit of perspective and I guess what I am asking is there's been quite a bit of evolution in the model over the past several quarters where we are seeing a slowing in procedure volume growth, a change in the trajectory with respect to systems placed and you made some changes at the sales force level, where do you think we are in sort of this turnaround for the business following some of the shortfall last year and how do you feel about getting the pieces back on track here.

Maurice R. Ferré

Sure, David. I think to start off with one of the things that we believe is the most important piece in our business model in our sustained business model is to continue to focus our business around procedure growth and utilization. Now to that end we have made and we've talked about it over the last two quarter are changes to our management team and systems in place to address these issues. We initiated three key programs around focusing on hip launches, focus on -- I am sorry to focus on hip as an initiative and looking at new installations and recovery accounts.

And I think that, that's a very important part of our story is to see those procedures going up and I think we are seeing based on what we saw in the first quarter and what we are seeing, we are feeling confident about how that translates into procedure growth which is reflective of the growth that we are anticipating in our guidance.

David Roman – Goldman Sachs

And then I think this is the first quarter where 100% of your units were sold with hip applications or close to it. Are you finding any difference in the selling cycle or your ability to market to hospitals having both applications now out there for some time, having gained some traction on hip. This change is it making easier to go to hospitals who might have said to you we don't want to buy a system that's just knee. Hip looks like it's starting to pick up so now there is more incentive to adopt this technology if there are multiple modalities.

Maurice R. Ferré

David the way I would answer that is we are pleased with the progress of what we are seeing in our hip adoption. Clearly this quarter represented where 100% of our systems sold were hip. We are starting to see the conversation at the hospital level and at the doctor's level starting to gravitate towards a platform technology, both focusing on our partial knee business and on our hip business and just to point out I think some of the important things that we know is last year we did 1,200 procedures which represented 12% of our total procedure business. This quarter we did 467 procedures which represent 16%. And the value proposition still remains very strongly intact.

And as we go through these multiple iterations of our software development and maturity as we include and incorporate the story of the implants the value proposition educating our sales force on how to sell the systems, building confidence with surgeons, all these things start building up on the value proposition that we have subscribed to, in terms of importance of cup placements, the importance -- offsets the importance of leg length.

And that right now is reflective of right now we have 63% of our installed base with these applications and that adoption we are seeing it very similar to what we saw on partial knees and it's going to be -- it's one of our key initiatives that we have been talking about over the last few quarters that focuses on my key first question that I was answering in terms of utilization. And that leads us to believe that our hip procedure volume in 2013 we believe will almost double from our 2012 number.

David Roman – Goldman Sachs

And then just maybe one for Fritz, and Fritz as you think about the guidance on procedural volumes, understandably there are some factors that influence the first quarter like seasonality and selling days. But to get to the midpoint of the range we are providing is a pretty big step up sequentially in growth that's required, maybe just talk us through how you derived some of those numbers and your level of confidence in seeing that uptick particularly in knees throughout the year.

Fritz L. LaPorte

So the procedure guidance as we have from prior years, our actual procedure volume tends to weighted towards the back half of the year. So we would expect that we continue to see procedure growth throughout the year. And historically we've seen it range around 40% in the front half, 60% in the back half. Last year was a little more evenly spread. I think that last year was somewhat of anomaly. So I think what we have seen historically we expect this year to fall more in-line with the 40%, 60% in the back half. So based on procedures in the first quarter and what we see going into second quarter and the growth Maurice just alluded to on hip we would expect that we will end up within our guidance range that we set of 13,500 to 14,500.

David Roman – Goldman Sachs

Okay. Thank you very much.

Fritz L. LaPorte

Welcome.

Operator

Thank you. Our next question is from Michael Matson of Mizuho Securities. Your line is open.

Michael Matson - Mizuho Securities

Thanks for taking my question. I guess my first question which is given the clinical data that you talked about that was presented at AAOS. I was just wondering if you've seen any kind of impact from that if your sales people have been able to use that to get to generate more interest from the surgeon community.

Maurice R. Ferré

Sure right. That's a great question one of our -- we've been talking over the last few years of the importance of clinical data and supporting clinical data and the short answer to your question is yes, we're starting to see an impact. Specifically when you have a level one study, like the study that we presented at Strathclyde which is randomized clinical study. What surgeons are really gravitating towards is the pain source in particular and saying that you could have such fast recovery for the patients. And a lot of the surgeons that are in our program, that are convinced that the MAKOplasty procedures and how the accuracy consistently producible results are impacting their patients are really starting to acknowledge that.

And I had multiple conversations with many of these surgeons. And I think that's what this (charge plays out) and that's where I feel very confident that if we stay focused and stay on the charge of clinical data in supporting this thesis of treating early to mid-stage osteoarthritis with accuracy and precision and a lot of our surgeons say that at the end of the day what they are most pleased about is that they have boring x-rays that show consistent reproducibility through and throughout. And that's building up our story and this specific study to us is with a broader set study it's critical because it either really starts to put it into the perspectives of a legitimate study that is described as a level one study.

Michael Matson - Mizuho Securities

Okay. And on the end results from that study what do you are really (pivoting) theories as to what caused the pain difference its related to the fact that Oxford removes more bone or do you think it is in the greater authority implant alignment provided by the RIO systems?

Maurice R. Ferré

I think when we spoke with the surgeons involved I think that a lot of it was (inaudible) with the amount of bone resection that's removed has a big part to do with the amount of pain that they are experiencing and also in terms of access. These are the few ones that they described to us.

Michael Matson - Mizuho Securities

All right and then speaking of Oxford Biomet has sort of the direct to consumer campaign going now for Oxford, so I was just wondering if you have any thoughts on that. And they seem to be trying a lot of different things here to try to reignite growth in Oxford but just for direct to consumer campaign wonder if you had any comments on that or anything else you are doing in terms of its life time warranty and those signature et cetera.

Maurice R. Ferré

I think our first asset is -- look we've taken 17% for the market and I don't know any other company that's been able to grow in that sector so quickly. So I think we're clearly having an impact in this growth cycle. Clearly last year we experienced a slowdown in our growth. We understand why and we believe we've addressed it and we believe that the growth trajectory will be there in 2013. But the importance of what Oxford what Biomet's doing from our perspective is that it's educating a large population of the importance of partial knee replacement.

From our view you know we have seen different types of technologies come into play like patient specific instrumentations, like navigation in its (inaudible), like sensors to address Kinematics and they all demonstrate the importance of what their messaging is and this is similar to what Biomet is saying specifically with Oxford and (inaudible) is the importance of consistency and precision and reproducibility in orthopedics and all these products including Oxford are attempting to achieve accurate placement results with better clinical outcomes which is favorable.

From our perspective meaning faster recoveries, more natural feeling joints, greater functionality and improved survivorship but each of these products address a component of these objectives but none of them provides a complete solution to address these objectives across a wide range of surgeons and that's where we believe that these non-robotic alternative solutions and partial knees fall short of providing full solution. And we believe at the end of the day where this goes is to robotic surgery because of its ability and our demonstration of high precision based on clinical data that is supporting our thesis.

Michael Matson - Mizuho Securities

Okay and my final question is just on the hip product. I think you gave a number in the press release and I (presume) it was wrong. I think it was 63% of installed base has hip now but so let me know if that's wrong but I guess what I am asking is what portion of those installed base have the hip application are actually doing decent number of hips. Is that procedure number that you gave concentrated among a handful of customers or is spread out pretty evenly across the portion that actually have hip application?

Maurice R. Ferré

About two-thirds of our accounts are now actively (inaudible) and that to us encouraging and I think that's why we feel that we will double our number of hip procedures by the end of the year. We are starting to see it roll down in different ways and I think that it's a different sales, it's a different conversation with surgeons. A lot of surgeons that we talk to initially described their hip applications as well. I understand in partial knees you are working with a very difficult technically challenging procedure.

In hip I don't have that problem so why do I need to go robotically and I think that overtime what's compelling is the accuracy of our placement and the workflow. So we as improve on the implants which we have done. We improve on the efficiency and workflows which we continue to improve and we start bringing conversations that we have been talking about that's being talked a lot about at the Hip Society about the importance of the cup placement, the importance our addressing offset, the importance of leg length and being able to come into a program, I think we are starting to get more traction on the hip so we feel we are on track and moving in the right directions on our hip procedure.

Michael Matson - Mizuho Securities

All right thanks a lot.

Operator

The next question is from Larry Biegelsen of Wells Fargo. Your line is open.

Unidentified Analyst

Hi guys, it's (Craig) on for Larry. First question, just wanted to ask about the hip software updated so if you guys can provide an update or any other details about the progress of when the new launch may be out and any detail into the improvements that new software will have?

Maurice R. Ferré

We are on schedule with our plan. We talked in our last, of the five things that we talked about in terms from the management perspective, number four was our products, in terms of focus on our products and making sure that they get out there on a timely manner. And we have baked that into our guidance, where we believe the importance of it is. And we are on plan and we believe that we will -- that it will, similar to how went through multiple iterations on the knee that this is just one other step towards that iteration that improves efficiency that improves work flow, addresses what we have learned from the surgeons that we have touched, which is now close to 400 surgeons.

So we have got a lot of really good feedback, where we have kind of over 1,000 cases under our belt and we know the nuances of what works and what doesn't and I think we have been able -- we will continue to address these issues because at the end of the day it's all about adding efficiency, and it's about adding value and a big part of the robotics story for us is about surgeons and giving surgeon's tools that allows them to think of orthopedics in different ways.

Similar and I use this analogy all the time, it's similar to, in the past we used to have maps in the field, cars used to be made manually. So our floors, our manufacturing have brought in automation, our vision our view is that in today's world we are moving, we need to move that into the orthopedic space. And that's the value proposition, that we are contemplating and we are always working towards improving efficiency.

Unidentified Analyst

Okay and the software update, do you think it would be, do you think it would accelerate the procedures, the hip procedures, or do you think it is just kind of an iteration and part of the evolution process of the application?

Maurice R. Ferré

It's a continual, these things take time and when you are transforming an industry and giving them these tools we are working with different types of surgeons, that's why from an academic perspective, we are focused on academic accounts because we know that the young surgeons that are coming out are the ones that are starting to understand and value where this is going and the importance of this technology.

So this is just one of the iterations now and there will be more as we continue to gain more experience and knowhow and knowledge and advance the technology, these are why we have made these large investments, this is why we have developed an engineering team that is focused on multi-facets of creating of value whether it be on the implants, whether it be on the software, whether it be on the haptics in creating these new types of stiffness and constrains in steel and whether it be on our clinical data and how we support.

Unidentified Analyst

Okay, one last quick one, on system placement there were all five of them domestic and I know in the past you have said you expect 10% of the placements to be international, just wanted to know if it was just a quarter timing difference or if there is anything that we should, or that should be noted about international system sales.

Maurice R. Ferré

No, change on that Craig.

Unidentified Analyst

Okay, thanks guys.

Operator

Thank you. The next question is from Matt Miksic of Piper Jaffray. Your line is open.

Matt Miksic - Piper Jaffray

Hi, good evening. Thanks for taking the questions. So can you hear me okay.

Maurice R. Ferré

Yes.

Matt Miksic - Piper Jaffray

On -- a couple of questions on this so far, but I just want to make sure I understand it was a bit better in terms of utilization that we were looking for this quarter. You've talked about sort of picking up momentum throughout the year. Can you give us a sense, just to the software iterations in addressing surgeon needs, what is changing there, by the contracting, where are you sort of breaking into these accounts?

Maurice R. Ferré

So yeah, I think that just brings kind of -- Matt it's a great question, because it really kind of addresses the types of things that we have to break through as we continue to build momentum on our hip. So contracting is one of that, there are hospitals that have negotiated the implant pricing and spent a lot of time getting those pricing in line and one of our challenges has been going to these hospitals that have our application and renegotiating or negotiating our pricing.

So that is clearly something that we have worked on and will continue to work and I am happy to report that in most cases we have kind of overcome that obstacle. But it did take some time. And I think that we have got better processes in place on how to identify and how to move that needle forward.

Matt Miksic - Piper Jaffray

Okay, and then on the utilization side, can you give us, I know there is this sort of vintage of robots if you will of science that came through some of them the larger (IDNs) you have talked about before. Can you give us a sense of what the new placements look like relative to say that placements of last year and the year before, maybe not the new placements this quarter but if you look at sites that are now coming up to speed maybe six months in, can you give a sense of what the trajectory of utilization looks like there and is this remediation and sort of going back and working on utilization still really addressing a segment of sites that were say a 1.5 year or 2 years old or you are still having challenges with some of these new sites as well?

Maurice R. Ferré

The way, I think last year, we have talked about this before, we know that it usually takes about six months before a system really starts to perform and generate growth. And I think one of the things that we saw from our vintage of 2011, we saw really out of the four quarters, where we had underperforming quarters on the vintages.

And now what we have been able to do is we have been very careful and very meticulous to understand how the performance of the 2012 accounts are performing and really asking the very specific question, about are they performing like the 2011 accounts or they are performing what we have experienced from the early days from 2008 to 2010. And I think what we are pleased, it's still early but we are very pleased with what these systems and how they are performing in the accounts.

We have put an enormous amount of effort into making sure that when we launch a system that it's not just a top down sale but that it has real clinical value, it has clinical support and that out of the gate we have put programs in place to create incentives and for all constituents to make sure that we are seeing the types of utilizations that we need to be seeing from these accounts.

It's been a big focus of ours. We have seen improvements in the 2012 vintages, compared to the 2011 and we are very encouraged and I think it supports the thesis of our guidance and looking into the quarters to come, we believe that, that is very key to our success.

Matt Miksic - Piper Jaffray

Great and finally if you could there's been a fair amount of talk I mean (inaudible) some of the either technology solutions in the large players or smaller sort of startup provider players, any change in the sort of capital execution side in terms of folks slowing down to look at some of these other things as potential alternatives, or give us maybe some color if you would as to what the evaluations programs and process looks like and has that changed at all?

Maurice R. Ferré

I think that from the competitive perspective in what's out there and what we are seeing on robotic and non-robotic, we are not surprised I mean I think that imitation leveraging our success, there is the idea of low cost imitators like have and appeal to the market and some of these stories have started to kind of deflate the maker story and put it into question of why should we be supporting a system and I think if you look at our prepared remarks very closely we described the importance of what a robotic program needs to be and what we have worked through our experience, but in the short term we have not seen a material impact in closing of our closed deals that we saw in Q1 or our pending deals.

And we have finalized a lot of those as I said earlier in our prepared remarks of what the essence of a robotic solution has to be and I think from our perspective we have five years worth of history we have done 26,000 procedures and in the interaction that we have had is with our a 1,000 surgeons in terms of developing what we have developed. And I think we are only company that really has this complete solution.

And at the end it's one of the most important compliance stories that we are selling to the hospital is an ROI mark that makes sense and it's based on a platform. And that's a very important part of this conversation as we expand and try to develop these programs and drive our growth.

Matt Miksic - Piper Jaffray

That's very helpful. Thanks Maurice.

Operator

Thank you. Our next question is from Matt O'Brien of William Blair. Your line is open.

Kaila Krum - William Blair

Hi, guys this is Kaila in for Matt. Thanks for taking our questions. So it seems like pricing improved a bit on the implant side compared to our estimates, is that a function of potentially physicians using less competitive stents, or can you give us a better idea of what's going on there?

Maurice R. Ferré

With the launch of the PST implant system, the utilization of cup only has decreased over time. And that has had a slightly favorable impact on our procedure ASP, but overall it's in line with what we saw in prior quarters. It is slightly above but not significant, we do see that kind of fluctuate from quarter to quarter depending on exact product mix and so on. But with the PS on the hip side PST has become the majority of the procedure volume and it has driven more usage of the total implant system

Kaila Krum - William Blair

Okay, and then just excluding the impact of the two fewer selling days what do you think that procedure volume would have come in for the quarter?

Maurice R. Ferré

We estimate that the two days could have had about an 80 to 100 procedure impacts, based on our average procedures that we saw there per day in the first quarter.

Kaila Krum - William Blair

Perfect thank you so much.

Operator

Thank you. Our next call is from Kim Gailun of JPMorgan. Your line is open.

Kimberly Gailun - JPMorgan

Great, good afternoon guys. So I guess the first question is just on the systems that were sold here in the first quarter. Can you just tell us a little bit about the type of hospitals or centers that you sold to here in the first quarter maybe more rural, more academic, et cetera.

Maurice R. Ferré

Yeah, Kim, I would say that most of these were community based hospitals this quarter. And I think that they were kind of spread across both the east and the west. And I think one of the things that we saw happening this quarter interestingly is we have a couple of these accounts that came out of residency trained surgeons that had experience with the RIO. And they were moving into their hospitals and building up programs. We also saw from what we see in terms of our success of our clusters of accounts where we had success with MAKOplasty programs and the hospital across the street was realizing the impact of the business of having a successful robotic program. And they also required to buy into this technology and we have been very successful in that specific market.

Kimberly Gailun - JPMorgan

Got you, okay. That's interesting. And then I guess the follow-up is just reiterating the system guidance for the year, just curious as we have seen these capital sales cycles lengthen a bit for you guys how good do you feel that your visibility is into the system sales on say like go forward six to nine months basis.

Maurice R. Ferré

Our view Kim on this is we have gone through a -- we have a new VP of Sales in place, that happened this quarter and I think if you look at where we sat in the last two quarters we were (inaudible) We've been very successful in calling that RIO number. I'm very confident looking at our positioning on what our guidance is and where we are, I'm calling it the way we're calling it and we've looked at this many different ways. One of the things that with these changes that we've made have resulted in improvement and sales process and the depth and quality of our funnel.

I think we're starting to see it. Some of these things are not predictable in terms of the process we have relationships that we've established with a lot of these hospital chains. And we're so focused on making sure that these systems are running efficiently based on the numbers that we put out in the first quarter, and based on the breakdown, we've seen we're seeing the types of improvements and utilizations that are going to drive the behavior for systems. And that's why I think we've got things in place.

I think we've got the processes in place and I think that we've been very, very cautious in knowing what the changes when we put out our guidance on systems of what we're going to anticipate in terms of pushback, in terms of other competitive products. I think we have put all that into the equation after what we had experienced in 2012 in particular. We just took a -- as we continue to grow as a company and mature the company and trying to become more predictable and move towards profitability, we become a lot more methodical in our processes of being able to call this.

And this is I think what's really required at this stage. This is a -- this has been a transitional last year we described a kind of the growth phase of the company in making sure that you as a management team are maturing. And you as the management team by making appropriate changes at the right time. And I think that is reflective of our confidence of where we feel we are going to land both the systems and on the procedures.

Kimberly Gailun - JPMorgan

Okay, great. Thank you.

Operator

Thank you. Your next question is from Richard Newitter of Leerink Swann. Your line is open.

Richard Newitter - Leerink Swann

Hi. Thanks for taking the questions guys. Just two follow-ups one can you talk a little bit about the 2011 vintage, I know that you've mentioned you have initiatives and programs in place both to address kind of a recovery sites so to speak I think to use your languages and also the 24 sites which are new ones coming on to make sure they don't fall into that 2011 camp. Well firstly can you just talk about what you are seeing at those underperforming utilization accounts have the initiatives taken hold or is still too early? And I have a follow-up.

Maurice R. Ferré

Yeah I think that as I said earlier it is still early but we're encouraged in what we saw in 2011 what we're seeing in Q1 and what we're seeing in Q2. But I just want to, I want to make sure that we phrase it properly and say that we're encouraged with what we see. It's working on two fronts, it's working on the 2012 vintages are coming in stronger than the 2011 and that for a lot of the systems that we've identified that are, that we were able to fix in 2011 those programs are starting to kick in.

We've really put a lot of emphasis on training surgeons, helping hospitals in terms of putting their programs together that's going at a grass roots level. And focusing on those outcomes we're starting to see those benefits starting to play in.

Richard Newitter - Leerink Swann

And Maurice if I could just ask how much -- sticking with the 2011 batch how much of that is kind of going and working with "dusting off the systems" and working with the hospital institutions to market the technology versus just kind of (emerging) adopter so to speak. And reminding them of the purchase and benefits of the system.

Maurice R. Ferré

The key is really surgeon engagement and identifying surgeons and the opportunity where or some of these is our advantage on these accounts is looking we have two products that we can have conversations with surgeons both on the hip and on the knees. So I think we've armed our teams, we've trained our teams we've taken the right steps that I think are starting to show. Now not all of them are going to be in perfect shape. But our goal is and continues to be that we get half of that group really going to where we are, where we need them to go. It's going to have an impact on our ability to compete and grow our business.

Richard Newitter - Leerink Swann

And just one last one. On the 2012 programs or the programs aimed for 2012 accounts are you -- you mentioned incentives for all parties involved and that should help or are beginning to gain traction. What specifically you are trying to there?

Maurice R. Ferré

So the first quarter is the first quarter that we really that these incentives are in place. One of the things that we've done with our sales force specifically is how we compensate. And I think what we've been able to do is build a stronger and more united sales force that has incentives and (keep) both the capital side and on the procedure side. And putting these teams on a regional basis working together and being incentivized to get their programs up and running is really what we've spent a lot of time and a very methodical way of building out this program. And this was in the first quarter and it took us two quarters to put these programs in place. We've put the people in place. And now we feel that we're on track to seeing this being executed and we're starting to see the beginnings of it. And it is still too early to tell but we're encouraged with the signs that we're seeing.

Richard Newitter - Leerink Swann

Thanks a lot.

Operator

Thank you. Our next question is from Bill Plovanic of Canaccord. Your line is open.

Bill Plovanic - Canaccord Genuity

Hi. Thanks. Good evening. Couple of questions first Fritz did you tell us what the OUS system revenues which you recognized in the Q1 were?

Fritz L. LaPorte

I did not but it's about $1.5 million, 1.5.

Bill Plovanic - Canaccord Genuity

Okay. And then as you look at a system today and it's both knee and hip, what is the max potential utilization? And then on top of that what's the max utilization for a system you have in the field?

Fritz L. LaPorte

Bill, just to be clear on your question that the max you want the max utilization or kind of what the midpoint average is. The max utilization as you can imagine as we talked about on our knee business there is a wide range. And we haven't really seen a limitation per se on the top and a super user gets pretty high up there. But I would say on a blended basis for those that I would say would fall into a successful account they are at the 10 procedures per month for a combined system.

Bill Plovanic - Canaccord Genuity

And then okay, so success is 10 procedures per month per system. Roughly what percent of your existing systems are performing at that level today?

Fritz L. LaPorte

So we have about 100 systems I would say that are on a combined basis I would say probably this is a rough guess which I'm a little cautious to do but I would say approximately 20%.

Bill Plovanic - Canaccord Genuity

Okay. And then so in -- of the hip just so I understand you have 102 that are hip capable about two-thirds of those are active today with hip, is that the answer to the previous question?

Fritz L. LaPorte

Yeah so that's correct. And you'll recall I think you specifically asked the question last quarter and we were about 50%. So we have seen an increase in the number of active sites among the hip installed base.

Bill Plovanic - Canaccord Genuity

Okay. And then so you have those active sites in the hip base do you have enough instrumentation set to support them at this point, are you still building that inventory of those instrument sets so that they can, they can have the instruments and implants to do the procedures.

Fritz L. LaPorte

So the answer is yes we have not been constrained by inventory. And I'll also say that we would expect our inventory to increase I alluded to it in cash spend we'd expect that to increase throughout the year as our installed base increases as well.

Bill Plovanic - Canaccord Genuity

Okay and then how many -- as you look at -- you had one hip upgrade this quarter, how many more hip upgrades do you think you think you'll see or we total pretty much done with that.

Fritz L. LaPorte

That I think we'll see them occurring but not the same levels that we saw. You'll recall we had a pretty large amount come through in the first couple of quarters after initial launch and that's been tapering off so we might see a hand full here and there and in the quarter but not any large amount expected.

Bill Plovanic - Canaccord Genuity

Okay last question just a simple one. The med device tax what was the dollar amount hit to you in the quarter?

Fritz L. LaPorte

It was just under about 500,000.

Bill Plovanic - Canaccord Genuity

Great. Thank you, very much.

Fritz L. LaPorte

You're welcome.

Operator

Thank you. Our last question comes from Mark Landi of Summer Street Research. Your line is open.

Mark Landi - Summer Street Research

Good evening guys. Thanks guys for squeezing me in. Has PST been rolled out your entire installed base yet?

Maurice R. Ferré

The question you are asking about is the PST?

Mark Landi - Summer Street Research

Yeah the hip ones yes.

Maurice R. Ferré

Yeah I think that we've got a pretty rapid adoption across our installed base it's in the 90% now.

Fritz L. LaPorte

It's available for the entire installed base.

Maurice R. Ferré

It is available and I think the story and part of this is just getting the story out of about it's the combination of -- it's not just looking at it from a robotic solution but it's also the importance of the implants and the importance of us having an important story with PST and one of the things that I am really, that I am seeing that surgeons are gravitating towards is as they see this implant and they are educated on this implant is the science behind this core structure technology.

Mark Landi - Summer Street Research

As far as the question that follow from that is given that now you have a much more complete line that can address a larger number of procedures how much of the momentum that you are seeing going -- that has been attributed to that filling up the pipeline or product lines versus perhaps the excitement or rejuvenated excited in the robotic hip procedure?

Maurice R. Ferré

It's the combination of everything. I don't think it's the one or the other I think that I think there's a surgeon intrigueness about what we do its not made out -- it's not cut out for everybody but as we have these conversations with our surgeons one of the biggest the first line of defense that we saw was well tell me what implants you have. And very similar to what we saw in our knee business we went through -- it took us reiterations of implants before we got it. And I think we are seeing a very similar cycle on the implants on the hip.

And what I'm really encouraged about and what I really see the marriage of implants and robotics is what the future holds and what you can do with the staff that has a lot of ideas of transforming the way we look at this disease. We're just in the beginning of this and there is so much more to do and we're -- the interesting thing that we're seeing is that we're capturing it, we're going through the process of learning and positioning ourselves to be the leader with this technology.

Mark Landi - Summer Street Research

Have your engineers and marketing guys been able to get their hands or have they got their hands on robots yet and is there anything that you have gotten through you are getting your hands on device that you might transfer across to RIO?

Maurice R. Ferré

Well the answer is yes of course we have we've obviously looked at it we see the technology and the value and I have a lot of respect for the team that developed that out of the UK, Professor (inaudible) a very worldwide recognized thought leader in this industry and he's been a strong proponent of partial knees and the importance of precision in placement. He's put a lot of work into this and I think that we've been able to re-understand a lot of those concepts and there is value in understanding that. And we are happy to have that asset now under our belt.

Mark Landi - Summer Street Research

You have bought that asset from (inaudible). Has he now become the major advocate or have been I know that's a choice…

Maurice R. Ferré

Can't comment on that but I thank you for asking the question.

Mark Landi - Summer Street Research

And my next question I hope you can call me it's almost my final question, any update on the partial knee you have spoken a lot about this being a platform technology for many different things. I know you keep that thoughts (inaudible) but is there anything that you can share with us in the progress there.

Maurice R. Ferré

We did mention in our earlier call, when I think was maybe three or four cycles or quarters ago that we did say that, as we talked about the importance of our platform and I just -- I have my convictions are as strong then if not more about what the value proposition is across multi platforms. And where robotics plays in to the operating room and how it plays in and how it improves workflow, how it reduces inventory, how it creates precision in placements of implants, how it creates new types of ideas of what implants need to look like, and how they should be shaped, and it falls under a lot of gamut we put a lot of efforts continue to put lot of efforts into what we currently have at hand.

We have our hands full with demonstrating our growth, how we are focused on there now being procedure growth that leads to a lot of other things, And I think that as MAKO evolves into a growth story and it evolves into its success it's going to be attributed to adding these types of procedures like the total knee. But right now with regards to the progress and where we are I really am not in a position to comment on it, but thanks.

Mark Landi - Summer Street Research

No, fair enough Maurice, I just tried. Thanks guys, appreciate the time.

Operator

Thank you. This ends the Q&A portion of today's conference, I would like to turn the call over to management for any closing remarks.

Maurice R. Ferré

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

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.

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