Before earnings, MAKO Surgical (MAKO) investors were just hoping for the company to meet expectations. As described so very well in this recent Seeking Alpha article, MAKO had an eye-opening, heart-rendering and back-breaking 2012. Shareholders on the ride with MAKO saw their investments drop 77% from a high of $44.98 to a low of $10.00 just last month. The question was whether 2013 first quarter reporting would mark a turn-around. As it turned out, MAKO reported a revenue beat and an earnings miss. It might have been a turn-around but it wasn't quite yet a step forward.
MAKO Surgical markets its Robotic-Arm Interactive Orthopedic (RIO) systems for knee and hip implant procedures. This surgical platform enables precise insertion and alignment through surgeon-interactive technology. Revenues are derived from three sources: 1) sales of the RIO system and MAKOplasty applications, 2) MAKOplasty procedure supplies and 3) system servicing.
For MAKO to achieve profitability, the business model relies on a steady performance level of MAKOplasty procedures. Selling RIO systems that are then under-utilized is not productive. Likewise, the only way for procedures to occur is through the sale of a RIO system and surgeon training. Through first quarter reporting, with the sale of 5 systems, MAKO has 161 installed systems worldwide in 154 sites and 900 trained surgeons. Average monthly utilization has never surpassed 7.2 procedures and has averaged 6.6 procedures for the past 27 months.
Annual losses have ranged from $38.7 million in 2010 to $32.6 million in 2012. Obviously, system sales and service revenue contribute to the bottom line. But, MAKO wants to rely on procedure revenue to cover expenses. The average sales price per procedure is $5,000. In context, the number of 2012 procedures was 10,204. The projection for 2013 is 13,500 to 14,500 procedures which would get MAKO about halfway to the target.
So, there are basically three ways for MAKO to be profitable: 1) sell more RIO systems and applications so more procedures can be performed, 2) increase utilization of existing RIO systems or 3) do both. Obviously, MAKO has elected the third option - do both.
For 2013, MAKO projects an additional 40 to 43 systems will be sold. Historically, the second half of a given year equates to 60% of MAKO's business. The additional systems and historic implementation trend equates to a growth of approximately 1,000 procedures for 2013.
That leaves 2,000 to 3,000 procedures in the projection related to organic growth. The opportunity is real. The population is aging. Obesity is creating increased health problems. In the United States, there are 15 million sufferers with osteoarthritis knee problems. Through 2010, only 700,000 have had knee implants. MAKO's Total Hip Arthroplasty application has been installed on 63% of RIO systems. The expected annual growth rate for hip replacement in the United Sates is 3.8%. The annual direct and indirect costs of bone and joint health problems are $950 billion. Again, the opportunity is real.
To further educate, persuade and convince surgeons of the superiority of the MAKO technology, MAKO is participating in over 70 studies. For example, in the second quarter of 2013, results from the Glasgow Royal Infirmary control trial will be released. Early data shows impressive results such as:
"Most notably MAKOplasty UKA (unicompartmental knee arthroplasty) patients reported statistically significant lower post-operative pain levels compared to the Oxford patients (manually placed Biomet) from day one through week eight despite no difference in pain medication."
"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."
"Over 70% of the MAKOplasty components were placed within two degrees of error in tibia slope compared to only 15% of Oxford components (errors in achieving proper tibia slope have been shown in the literature to be a predictor of implant failure)."
To date, there are over 30 peer-reviewed papers published on the MAKOplasty procedure.
There are well over 5,800 registered hospitals in the United States. There are over 27,700 orthopedic surgeons listed with the American Academy of Orthopaedic Surgeons in 2012. With 154 installed sites and 900 trained surgeons, MAKO's penetration rate is only around 3%.
The following table summarizes scenarios with increases that would cover 2012 expenses.
Average Monthly Procedures per site Increase
Average Procedure Revenue
Annual Procedures Revenue
1% of total to 232
40% over 7.2 to 10
1.5% of total to 261
25% over 7.2 to 9
2% of total to 290
10% over 7.2 to 8
By year-end 2013, MAKO expects to have an install base right around 200. Projections for 2013 total procedures are 13,500 to 14,500. Average monthly procedures per site should tally closer to the prior high of 7.2 rather than the running average of 6.6.
Based on the table above, it is difficult to project breakeven or profitability based solely on procedure revenue even in 2014. The historic trend that 60% of the business occurs in the last half of a year must be considered. As well, time (usually 6 months) must be allowed for implementation and ramp-up after sales are completed.
While it does certainly seem breakeven and profitability are within MAKO's reach, it doesn't look like it will happen before 2015. And trusting that means trusting another year like 2012 is not in MAKO's near-term future. In the first quarter earnings call, CEO and president, Maurice Ferre assured:
"Clearly last year we experienced a slowdown in our growth. We understand why and we believe we've addressed it."
"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 (guidance)."
With each quarter of proof, profitability gets closer.
Additional disclosure: I belong to an investment club that owns shares in MAKO.