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MAKO Surgical Corp. (NASDAQ:MAKO)

Q1 2010 Earnings Call Transcript

May 6, 2010 4:30 pm ET

Executives

Mark Klausner – IR, Westwicke Partners

Maurice Ferré – President, CEO and Chairman

Fritz LaPorte – SVP of Finance and Administration, CFO and Treasurer

Analysts

Matt Miksic – Piper Jaffray

Kim Gillan – JPMorgan

Patrick Clingan – Lazard

Rich Newton [ph] – Leerink Swann

Michael Matson – Wells Fargo Securities

Operator

Good afternoon, ladies and gentlemen and welcome to the MAKO Surgical Corp.'s 2010 first quarter results conference call. As a reminder, this conference is being recorded and will be available for replay on the company's website at 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.

Mark 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 of financial results has been released via Globe Newswire. Mr. LaPorte will detail the contents of this release following remarks by Dr. Ferré. If you have 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, 2009, Form 10-Q for the quarter ended March 31, 2010, and the Form 8-K filed with our earnings release. MAKO disclaims any obligation to update any forward-looking statements made during the course of this call.

With that, it's my pleasure to turn the call over to MAKO's President and CEO, Maurice Ferré.

Maurice Ferré

Thank you, Mark and good afternoon and thank you for joining us today to discuss MAKO's first quarter results. On today's call, I will provide you with an update on our business and Fritz will provide you with the details of our financial results.

I am pleased with the progress we've made in the first quarter and in particular, by the continued increase in utilization trends we are experiencing in the market. Specifically, we installed the RIO system at four new commercial sites in the quarter, bringing the total number of commercial systems in the field to 40 from 36 at the end of the fourth quarter of 2009.

Our customers performed 731 MAKOplasty procedures in the first quarter, representing a 30% increase over the prior quarter and a 176% increase over the first quarter of 2009. Our average monthly utilization per commercial site system increased from 6.6, up from 6.0 in the previous quarter. We attended four medical meetings this quarter including one of the most important meetings, the 77th Annual Meeting of the American Academy of Orthopedic Surgeons or AAOS. We had four peer reviewed posters and one presentation at AAOS and one presentation at the Specialty Day, expanding on our base of the clinical evidence.

We completed two BioSkill meetings and experienced strong interest from existing and prospective surgeons in these meetings. And we received a third 510(k) marketing clearance for the FDA for our anticipated future application that assists a surgeon in performing all components of the total hip arthroplasty using the RIO system.

Overall, the first quarter was another positive one for MAKO. Our team continues to do a great job executing against our business plan as demonstrated by continued system placement and importantly, the increase in procedure volume and utilization trends.

Now, I'd like to turn the call over to Fritz to review our financial results for the first quarter. Fritz?

Fritz LaPorte

Thank you, Maurice, and good afternoon everyone. On today's call, I will provide an overview of our financial results for the first quarter of 2010, highlighting the charge that we took during the quarter, and explain certain items that have been reclassified in our financial statements.

In the first quarter of 2010, we recognized procedure, system, and other revenue of $7.2 million compared to $3.7 million in the first quarter of 2009. Revenue in the quarter was primarily comprised of $3.6 million in procedure revenue as a result of the 731 MAKOplasty procedures performed in the quarter and $3.4 million in RIO system revenue generated from the four RIO systems sold in the quarter.

Total gross profit for the first quarter of 2010 was $3.3 million compared to a gross profit of $697,000 in the same period in 2009. Total gross margin for the period was approximately 45%, comprised of a 46% gross margin on procedure revenue and a 49% gross margin on RIO system revenue, partially offset by a negative margin on service and other revenue.

The gross margins on procedure revenue and service and other revenue were lower than in recent periods as a result of a $1.1 million charge that we took in the quarter for the write-off of excess inventory related to our RESTORIS Classic implant system, which I will detail in a moment. Excluding this charge, the gross margin on procedure revenue would have been 73% and the total gross margin would have been 60%.

The higher gross margin on procedure revenue net of the charge was primarily driven by higher average selling price or ASP of approximately $4,960 per procedure, combined with lower cost of goods as we transition from vendor development pricing to more favorable production pricing. The higher gross margin on the RIO system revenue was primarily driven by a higher ASP of $847,500 per system.

Now, I'd like to highlight the charge that we took during the quarter for the write-off of excess inventory related to our RESTORIS Classic implant system. As you know, our MAKOplasty procedures are accomplished using a proprietary MAKO implant. Our RESTORIS unicompartmental knee implant system or RESTORIS Classic, which was leased in the third quarter of 2008, was modeled after existing well-known unicompartmental designs.

In connection with the launch of the RIO system in the second quarter of 2009, we released our next-generation RESTORIS MCK multicompartmental knee system. RESTORIS MCK was designed as a premium implant to the RESTORIS product family with the goal of delivering a more natural feeling knee by preserving bone and providing anatomical features such as high flexion.

As we have discussed over the last couple of quarters, since its launch, RESTORIS MCK has been rapidly adopted by our customers. This has resulted in a corresponding decline in the usage of RESTORIS Classic. As a result, for the three months ended March 31, 2010, we wrote off approximately $1.9 million of excess RESTORIS Classic implant and related instrumentation.

Of the $1.9 million charge, approximately $1 million was charged to cost of revenue, procedures for excess implant inventory; approximately $100,000 was charged to cost of revenue, service and other for vendor cancellation charges; and approximately $800,000 was charged to selling, general, and administrative costs for excess instrumentation. While we do our best to manage new product introductions and minimize these types of charges, they are generally a part of the life cycle of emerging technology.

Turning to the reclassification of certain items in our financial statements, within the last quarter, our team conducted an evaluation to ensure that our classification of certain expenses and assets best reflect the true economic nature of the expenses and assets. Based on that evaluation, we determined that certain expenses and assets should be reclassified in our financial statements. There is no impact to net loss or earnings per share, but certain expenses have shifted between classifications in the statement of operations and balance sheet.

First, depreciation expense on loaned implant instruments that historically have been included in cost of revenue procedures are now going to be classified in selling, general, and administrative expense. Second, the undeployed implant instruments that historically have been included in inventory are now going to be classified in property and equipment in the balance sheet.

We believe that the reclassifications not only best reflect the true economic nature of the expenses and assets, but will also enhance comparability with other companies in our industry. Note that these reclassifications have been reflected in our financial – in our financial results for the first quarter of 2010 presented today and are soon to be filed Form 10-Q, as well as in the historical financial results presented.

Depreciation expense for loaned implant instruments of $90,000 and $42,000 have been included in selling, general, and administrative expenses for the three months ended March 31, 2010 and 2009, respectively. As for the reclassification of undeployed implant instruments, $1.3 million and $1.8 million of undeployed implant instruments have been included as property and equipment as of March 31, 2010 and December 31, 2009, respectively.

Turning to expenses, total operating expenses for the first quarter of 2010 were $14.7 million, an increase of $4.9 million from the $9.8 million for the first quarter of 2009. The increase in operating expenses for the quarter was primarily the result of an increase in selling, general, and administrative costs, and an increase in research and development costs.

Selling, general, and administrative costs were $10.8 million in the first quarter of 2010 compared to $6.8 million in the first quarter of 2009. The increase of $4 million is primarily due to an increase in sales, marketing, and operations costs associated with the production and commercialization of our RESTORIS family of implants and our RIO system, as well as a charge for the write-off of excess instruments associated with the RESTORIS Classic implant system discussed earlier. General and administrative costs also increased as we continue to build infrastructure to support our growth.

Research and development costs were $3.3 million in the first quarter of 2010, representing an increase of $800,000 from the same period a year ago. The increase was primarily associated with the ongoing development of the RIO system and potential future products, including the RIO-enabled hip application.

Our net loss for the first quarter was $11.4 million, including non-cash stock-based compensation expense of $1.3 million or $0.34 per basic and diluted common share, based on average basic and diluted shares outstanding of 33.2 million. Excluding the write-off of excess RESTORIS Classic implants and instruments, net loss for the quarter would have been $9.5 million or $0.29 per basic and diluted share. This compares to a net loss for the same period in 2009 of $8.9 million, including non-cash stock-based compensation expense of $830,000 or $0.36 per basic and diluted share, based on average basic and diluted shares outstanding of 24.7 million.

As of March 31, 2010, we had $60.6 million in cash and investments and no debt. Our net cash used in the first quarter of 2009 was $10.6 million and was primarily used in operating and investing activities.

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

Maurice Ferré

Thank you, Fritz. Before we open the call up for questions, I'd like to spend a few minutes providing you with some additional details on our operational accomplishments during the first quarter.

In the first quarter, we installed four new RIO systems at community-based hospitals across multiple geographies. We continue to be pleased with the overall diverse composition of our MAKOplasty site, as well as the economic and clinical value proof statements coming from established MAKOplasty centers of excellence.

As further evidence of this value, a MAKOplasty surgeon published an economic white paper this quarter, detailing his experience in the first year utilizing of RIO system. During his first year, he performed 144 MAKOplasty procedures, representing 55% of his knee procedures performed and his total volume of knee arthroplasty procedures increased 98%.

Since introduction of our system, we have published four economic white papers demonstrating success by our MAKOplasty surgeons in academic, as well as specialty and community hospitals in both large and small markets. The average monthly utilization per commercial system was 6.6 procedures during the first quarter, an increase from 6.0 in the fourth quarter and 4.9 in the first quarter of 2009.

We continue to be focused on driving utilization at both existing and new facilities through our 33-person MAKOplasty implant sales force. One of the strategies that our MAKOplasty sales force has been employing successfully is partnering with our hospital customers to increase volume through local co-marketing outreach center of excellence programs.

During the quarter, our customers conducted 49 seminars that attracted over 2,300 potential patients. Of note, Physicians Regional Healthcare System in Naples, Florida held 20 seminars that attracted over 500 potential patients. St. Helena in Napa Valley, California reached out to customers in outlying markets with two seminars that brought in over 600 potential patients. We are encouraged by the attendance at these – at these events and the strong interest on the part of the potential patient to learn about MAKOplasty.

As Fritz indicated, we have continued to see rapid adoption of the RESTORIS MCK implant system since its introduction in the first quarter of 2009. In the first quarter of 2010, 97% of the procedures that were completed utilized a RESTORIS MCK implant system, up from 91% in the fourth quarter. While RESTORIS MCK provides surgeons with the ability to treat osteoarthritis in each of the three compartments of the knee, its rapid adoption has been led by medial unicompartmental MAKOplasty procedures.

As we have mentioned previously, we continue to take a measured approach to the market introduction of the RESTORIS MCK bicompartmental procedure. However, we are encouraged by the adoption and clinical results to date. In the first quarter, 50 bicompartmental procedures were performed. Consistent with prior quarters, this represents approximately 7% of the total MAKOplasty procedures performed. While early MAKOplasty surgeon feedback has been positive on the bicompartmental procedures, we would not expect a material increase in adoption until data is published supporting the clinical benefits of the MAKOplasty bicompartmental procedure.

In addition to the bicompartmental procedures, the RESTORIS MCK system allows surgeons to perform lateral unicompartmentals and isolated patellofemoral procedures. In the quarter, 85 lateral and isolated patellofemoral MAKOplasty procedures were performed, representing approximately 12% of the total MAKOplasty procedures volumes in the quarter, consistent with prior quarters. In total, approximately 18% of all procedures performed in the quarter were comprised of bicompartmental, lateral, and isolated patellofemoral procedures.

As we've stated before, we believe that the RESTORIS MCK implant system provides the opportunity for our MAKOplasty surgeons to treat up to 50% of the existing 2.5 billion U.S. knee market. In addition, we believe that MAKOplasty has the potential to expand the current market by providing an attractive surgical alternative to the approximately 15 million people in the U.S. that suffer from some form of osteoarthritis to the knee, yet may currently forgo surgical treatment.

Turning to our clinical marketing efforts, MAKO was very active in medical – at medical meetings in the first quarter. We participated in the International Congress for Joint Replacement meetings and two society meetings in the quarter and exhibited at AAOS, one of the most important meetings of the year. MAKO had a significant scientific presence at both AAOS and the Orthopaedic Research Society meeting, directly proceeding it; the – a presentation was given on the learning curve of the robotic unicompartmental procedure, an additional presentation described the morphology study that supported the use of unlinked components for bicompartmental arthroplasty.

In addition, four posters related to MAKOplasty were presented on the following topics. The cementing technique for an inlay uni bone preservation with a robotic inlay uni, component placement accuracy with a robotic uni, and evidence showing that the total knee arthroplasty is an overused procedure and that often those TKA patients could have been treated with a medial uni instead. A video presentation of the MAKOplasty technique was also available for viewing at the multimedia educational – education center throughout the entire meeting. Finally, a podium presentation was given at the Knee Society's Specialty Day, a robotic unicompartmental arthroplasty in a symposium entitled Cutting Edge Techniques in Knee Arthroplasty.

One notable change on the floor from last year was the interest shown by surgeons at our booth. Last year, most surgeons that stopped by our booth were merely curious about MAKO. This year, most surgeons who came to the booth specifically wanting to learn more about our products, the clinical outcomes, and economic value proposition. Our booth was consistently busy and our 14-booth presentations by nine MAKOplasty surgeons were well-attended.

Also, as we have highlighted previously, we continue to conduct BioSkill courses that are designed to allow new and current MAKOplasty surgeons to obtain advanced training on the real system and the RESTORIS MCK implant system and for prospective surgeons, to obtain a hands-on experience with the RIO and MAKOplasty procedures. We held two BioSkills meetings in the first quarter with approximately 40 surgeons in attendance and intend to hold approximately six additional meetings in geographically diverse locations in the remainder of 2010.

Finally, in February of 2010, we received a 510(k) marketing clearance from the FDA for our anticipated future hip MAKOplasty application. As you recall, our prior clearance was limited to utilizing the RIO to place an acetabular cup. The recent clearance is expanded to increase the placement of the femoral stem, which means that our RIO system is cleared to address all components of the total hip arthroplasty. We believe this clearance enables us to remain on plan to begin clinical procedures through our surgeon-preference evaluation process by the end of 2010 as part of our ongoing development process.

As we look forward to the balance of 2010, I remain encouraged with the trends I am seeing in our business. Both our MAKOplasty sales force and our MAKO Capital sales force are fully trained and engaged in their territories and we believe that our pipeline is strong. I continue to believe that our utilization trends demonstrate economic value proposition and the increased body of significant clinical evidence along with our anticipated hip application will continue to support our sales process as we go – as we grow our business.

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from Matt Miksic of Piper Jaffray.

Matt Miksic – Piper Jaffray

Hey, good evening, guys.

Fritz LaPorte

Hey, Matt.

Maurice Ferré

Hey, Matt.

Matt Miksic – Piper Jaffray

Thanks for taking the questions. So Maurice, first question just on sort of the tone of the market, what you saw in the quarter. The robot number came in a unit or two maybe lower than we were thinking. Any thoughts on changes in the momentum of the interest, changes in the market that you saw in the quarter versus the prior quarter and maybe anything that would change this kind of backend-loaded one-third, two-thirds pacing of the market that you talked about before or pacing your business?

Maurice Ferré

Sure, Matt. So I mean I think to start of with – based on our limited commercial history, we have always said usually and we've seen it in the past that our first quarter is usually slower or slowish. And that – that's pretty consistent with what we last year. It's consistent also what I saw in my prior companies. But our quarterly system placements can vary widely and that's why we've chosen to provide annual guidance instead of this quarterly guidance.

So that being said, we still see this one-third, two-third in the first – kind of taking place one-third in the first half, two-third in the second half and I think that's pretty consistent. And I've said – and the other thing is that I've said in my prepared remarks, I remain confident in the strength and the depth of our sales pipeline, which is being driven by kind of three things that we emphasize and it's very important to understand.

Number one is, look at our utilization trends and I – we think they are favorable, currently at 6.6 and the procedure volume is up 30% from our prior quarter and 176% year-over-year. Number two, we continue to build a strong clinical case for the treatment of early to mid-stage osteoarthritis, we have 15 manuscripts that are out, we've got 40 abstracts, five book chapters, and 39 ongoing studies.

And thirdly, the economic case studies and we have four hospital studies that demonstrate our ROI model. And I think that just builds to the maturity and the talent of our sales force. And I think those are the kind of the drivers that helps us feel confident, helps me feel confident in terms of maintaining our guidance for the year.

Matt Miksic – Piper Jaffray

Okay, that's helpful. It sounds like though no material change in terms of behavior in the channel or the way hospitals are buying or think about the robot. Is that – am I hearing that right?

Maurice Ferré

I think what we are seeing is – I think we are seeing a consistent – we haven't seen any dramatic change in the economic side of the hospitals in terms of the capital side. I don't think it was – it's as bad as it was a year ago. I think that now that we've kind of settled down with the health care reform bill that took place and that had, I think, some impact, but I think people are back to doing – going back to business and I'm encouraging and I think our job is continue to build our case and build our story.

And the fact that we've now built up a strong sales force and now a mature sales force that's starting to build up that pipeline I still feel very confident on how we are landing and where we are going. So I don't see any major changes since our last call.

Matt Miksic – Piper Jaffray

Okay. And then one on just the utilization rate, which was, on the other side, better than expected. Any comments on what's driving this sort of sequential step-up there? I guess – is it – I guess, maybe just what are you seeing that's driving this acceleration in utilization?

Maurice Ferré

Well, I think what we are starting to do is – the fact that we are focused on our clinical outcome. I think we are attracting the types of surgeons that really want to see this as an alternative to total knee replacement and they are tacking on and they are buying into the value proposition to their patients and their patients are going through it and I think patients refer other patients and the fact that now we can not only address the medial side, but now the patellofemoral and the lateral – and that's why I emphasized it on the prepared statement, where we've got 18% of our procedures are being patellofemoral and lateral.

So I think the fact that we can now address one of the three compartments, I think, is a big deal. The fact that we are getting good commercial – or good clinical data out there is a big deal and the fact that patients are doing well is a good deal. Finally, I think that we've built a sales force of 33 people that are out there that are bringing more surgeons into the MAKO story – we are not seeing this – at one time one surgeon at a site. We are building up more and more surgeons, getting more and more surgeons interested, and I think those are the key things that we are driving towards that increases utilization.

Matt Miksic – Piper Jaffray

Last – that's helpful. And then last thing, you are just looking forward to sort of the next step on the hip side, the robot approval. It seems coming out of the AAOS, there was an awful lot of talk and interest around sort of improving acetabular cup alignment and attention to alignment around hip. Can you tell – or remind us what's sort of the next step that we are going to see on the hip side in terms of news flow [ph], will it be a filing or it would be an approval and remind us again when you expect that to be something that we will start to see in some of your centers.

Maurice Ferré

Matt, we are – obviously, we are very pleased on how we are progressing with hip. And I think the – this last 510(k) clearance of allowing us to do both the acetabular cup and the femoral component kind of is the one that we need to kind of get us to our surgical preference evaluation, which is, in part, a limited release.

What we are going to do is over this year, we are going to be doing clinicals in humans now that we've got the clearance on the RIO system and what we are going to be able to do is through these selected sites, we are going to make sure that we've got a product that really is going to be, from the get-go, the right type of product that addresses those issues that came up at the academy on a lot of papers regarding acetabular cup placements, dislocations, leg length, and femoral fractures.

I think that that's the focus of what we are going to accomplish, I think we are set, as we've said in the past, to do it this year since we've got the clinical piece behind us and being commercialization in 2011.

Matt Miksic – Piper Jaffray

Great, thanks. I'll pass it back for the next folks to start asking some questions. So thanks again.

Maurice Ferré

Thank you.

Operator

Thank you. Our next question comes from Kim Gillan of JPMorgan.

Kim Gillan – JPMorgan

The first question, I guess, is just back on the system side and understanding your commentary around the kind of the one-thirds, two-thirds, but if you look at – I guess the question is really as we look at guidance in terms of system placements being at 30 to 37 for the year, do you think the 1Q performance, is that skewed more towards the lower end of that range just in terms of looking at perhaps six to seven systems next quarter and the bulk in the back half?

Maurice Ferré

I think we remain still very confident with our guidance and I don't think it's a matter of where we sway to one side or the other. I think that we are a – we are in a business of building a new value proposition and doing that right, it’s very important for us to pick selected sites. We want to pick the right type of sites out of the gate and I think that what we are doing is we are doing it in a very systematic way.

We are very focused on our clinical data, getting our support out there. We want to make sure we do this right, because we think that robotics is going to become the key in a lot of orthopedic applications and we are excited about that and we want to get it – we want to get right and we think that we are still confident of landing within that guidance.

Kim Gillan – JPMorgan

Okay, that's helpful. Is there anything you can tell us just about your backlog or were there any systems that you might have thought would have fallen into the quarter that might go into the second quarter, anything of that nature?

Maurice Ferré

We really don't talk about our backlog. But I can tell you, sitting here today, we are very confident of where we are going and how we are going to get to those numbers. We are looking at – when we see utilization rates as high and growing as fast they are, 30% quarter-over-quarter, 176% year-over-year, we got clinical case studies where we got 15 manuscripts, 40 abstracts, five book chapters, and 39 ongoing studies and we've got economic case studies that shows 98% growth in one year and we have a sales force that's doubled in the last six months.

We feel confident about our pipeline, we feel confident about our utilization rates, we feel confident about our numbers in terms of boxes or robots that we have to put in for the year.

Kim Gillan – JPMorgan

Okay, yes. That's helpful. The utilization number did look great, so congratulations on that. Just one follow-up on the hip side just to make sure that I'm clear. So I know that you've the extended 510(k) in February. Is that all you need from a regulatory standpoint now in terms of the hip?

Fritz LaPorte

From MAKO's perspective on our system, that is the 510(k) clearance that we need to do hips.

Kim Gillan – JPMorgan

Okay, great. Thanks, guys.

Maurice Ferré

Thank you.

Fritz LaPorte

Thank you.

Operator

Thank you. Our next question comes from Patrick Clingan of Lazard.

Patrick Clingan – Lazard

Hey guys, how are you today?

Maurice Ferré

Hey, Patrick.

Fritz LaPorte

Good. How are you, Patrick?

Patrick Clingan – Lazard

Doing good. Just want to ask a quick question. You seem to sound relatively optimistic on the following [ph] guidance for the year. So I was just wondering, how are you leveraging the recent hip approval in your sales message?

Maurice Ferré

We are not. We are not. The reason we've disclosed the hip is because it's public information at the – with the FDA and we are just trying to be very clear because we won't want people to have any misunderstanding of what it is. I mean, this is work – ongoing work on what we are doing and we are committed to the process and we are excited at where we are. And we've done a lot of clinical research, we've done it very systemically, we've done a lot of announced studies on cadavers and we are going to continue to do that.

And – but we are instructing our sales force to stay focused on what we have on the market, which is the treatment early to mid-stage osteoarthritis of the knee, addressing those markets and that's our key. When we feel comfortable that it's a real product and then it's going to be more visible out to the rest of the world. And obviously – I mean, look, when you have a – all of a sudden, you are introducing a hip application where there is over 500,000 procedures that are performed and you can address those – that's a very interesting proposition. But we are not ready to do that at this point. We are – we really want to be very cautious about this.

Patrick Clingan – Lazard

Sure, I understand. You guys have done a nice job in a challenging pricing environment maintaining your ASPs, actually appreciating them since your every quarter as you report. I just wanted to ask if you are growing ASP on the system is potentially causing any challenges at some of the more cost-conscious hospitals you maybe having dialogues with.

Maurice Ferré

I think – I'm glad you brought that up, Patrick, because I think that's – we are – I didn’t want to overemphasize this, but we are absolutely excited at the fact that the way we want to drive our business is towards profitability and I think a key part of that is addressing things like our gross margin and the fact – now, we did have this write-off, but the fact that ended with ended up with 60% gross margin if we didn’t count the write-off and I think that’s partially attributed to the ability for us to command and get these ASPs both on our systems and on our implants.

And I don't think it's having an impact in that we would get one more system if we lowered it. I don't think those are the compelling arguments. What we are doing and how we work with our hospitals is we work very closely in educating the on how to build their economic story and it works with the types of ASPs that we are currently – that we experience.

Patrick Clingan – Lazard

And then I wanted to touch on utilization. I wanted to just get a better understanding. Of the 40 systems that you guys have out there, could you perhaps stratify it a bit by high-volume users, mid-tier guys, and low-volume users and perhaps a little bit of a range around it?

Fritz LaPorte

Sure. If – I think when you look at the 40 installed base, we typically – when we look at our utilization calculation, we don't include the ones that were placed during the quarter, because those are still getting up and running and typically placed in the latter part of the quarter. So when you look at the 36 sites that are up and running, what our trend at the 6.6 range is somewhere – it’s spread fairly evenly where we see about a third of it down at the lower end of the range, let's say, in the four procedures or less; and then in the midpoint of the range, about the four to about a little over eight and then – about a third there; and then over eight, we see about another third of our site.

Patrick Clingan – Lazard

That's great. And then last question for me is just maybe help us understand how you guys have impacted the knee market more broadly. Are the patients that you are treating today primarily they would have otherwise gotten a unicompartmental knee or are you pulling patients from the total knee based on the kind of docs that you have in the locations where you place systems? Thanks for taking the question.

Maurice Ferré

Thank you, Patrick. I think that that's – that’s one of – I think one of the really interesting things about how we are running our business and what we are seeing – and the trends that we are seeing. I think that a large percentage of our patients that have gone to multiple surgeons and just haven't decided that they didn’t want a total knee replacement and they – and some doctors would tell them to wait and some doctors would tell them that they would get a total knee. And what we are seeing is that we are drawing on those what we call are watchful waiters.

And the other interesting thing that we are seeing is that we are not cannibalizing the total knee markets in these different markets. In fact, in most of our sites, we are seeing that there – there is an increase in the total number of joint procedures, similar to what we articulated with our fourth economic study that we put together, and that is that we are drawing more patients to these sites and doctors – to us, there is a big part about being efficient and developing and addressing a patient population that is – says no to Synvisc, they've already gone through multiple stages of steroid shots and palliative types of procedures and they are saying no on the other side of the spectrum of having a full bone total knee.

And I think we are addressing that side in the market. And I think that the key for us is seeing our surgeons – what we are seeing is our surgeons are building up that practice and seeing that their practice and the total knee joint business is growing in parallel. I don't think we are cannibalizing.

Okay?

Operator

Thank you. Our next question comes from Rick Wise of Leerink Swann.

Rich Newton – Leerink Swann

Hey, guys. This is Rich Newton [ph] in for Rick. How are you?

Fritz LaPorte

Good. How are you, Rich?

Maurice Ferré

Hey, Rich.

Rich Newton – Leerink Swann

Good. I have just a couple of quick questions. One is on the sales force ramp. You guys have invested pretty significantly in last two quarters in building out your sales force. I was just wondering what – where are we in terms of how productive they are and how much more room do we have, where do we have to go, and are they perhaps – is your strategy there to have them direct more attention on kind of penetrating the accounts there anymore deeply? Is it perhaps that a reason why we might see more of a gradual ramp in the back half of the year as these reps get more productive? How should we think about that and when we see start to see the payoff?

Maurice Ferré

I think these are – all I could say is I just got out of a coast-to-coast meeting where we went – I went and met the East Coast sales force here and met the West Coast sales force out in L.A. last week and I am excited with what our guys are doing out there and what – and how they are addressing the business and especially these new guys. I think that we've got some really good hires and I think that – we think that it takes about six months for them to start ramping up and I think that we are now into that phase and I think that's going to show.

And that's – that I think is the key to this thing is getting the right type of guys and asking and building up the right types of stories. You have to understand that a lot of what we do and how we do it is first, we have to find the surgeon champions. We really try to identify the right type of doctors within any community, doctors that really want to expand their practices, doctors that really understand early to mid-stage osteoarthritis and they want to be part of it, they want to be the robotic champions in their communities.

And then once we get those surgeons, then we got to go in and we have to present that – present the case to the hospital. And that takes on different types of elements, there is different pieces to that in terms of getting the hospitals to understand their value and what it means to their community, what it means to the patient care, and types of the treatments and what it means from an ROI perspective. And I think the guys that we are bringing on really understand those two pieces and I think that then leads to us finally doing the close of the transaction.

And the other important thing on all of this we talked about and – we have 33 other guys out in the street that are out there on a day-to-day basis attracting more doctors at MAKOplasty sites. And what that's resulting in is them talking to other doctors and those doctors are then coming on board and then they start saying, "You know what, maybe we should be looking at another hospital in the area," and that's exactly what you are seeing in these clusters of sites where for example in Wisconsin we now have multiples sites in a very small geographic area and that was a result of a lot of doctors getting engaged and wanting to do procedures across the area.

Rich Newton – Leerink Swann

Thanks. That's helpful. And then just on your implant ASPs, I think you touched on it a little bit earlier. But you are getting nice increases there on a quarterly basis and I was just wondering if there are any underlying dynamics in the contracts you guys have, when they come up for renewal, are there built-in increases over a number of period at have long-term contracts that are kind of enabling you to get that in a pretty challenging pricing environment? Thanks.

Fritz LaPorte

Sure. So the answer is no. We don't have built-in escalation or increases in our arrangements with our MAKOplasty sites. A big part of what has driven that is MCK, which we talked about, is a premium implant. It's not only premium as we feel from a clinical perspective, but we've been able to price it that way as well. So that has become – the significant majority of our procedures has helped to drive that ASP up. But while we are pleased with that ASP pricing, we know that we are not immune to what's going on in the industry with pricing pressure. So we are cautious and would expect that increase would not continue in that ASP and possibly go down in the future.

Rich Newton – Leerink Swann

Thanks. That's all I have.

Fritz LaPorte

Thanks.

Maurice Ferré

Thank you.

Operator

Thank you. Our next question comes from Michael Matson of Wells Fargo Securities.

Michael Matson – Wells Fargo Securities

First of all, I think you gave a number of salespeople of 33, but I was just wondering if you could – I was – it was unclear to me whether that was system or implant or a combination of the two. Can you just give us the breakdown between your system, how many system salespeople you have and then how many procedures/implant salespeople you have?

Fritz LaPorte

Yes, that's easy. We have 16 guys that sell the MAKO RIO system, the capital side of the sale. And we have 33 what we call MAKOplasty specialists that sell our implant or our procedures.

Michael Matson – Wells Fargo Securities

Okay. And then the hip system, is that going to be an open system that will compatible with other companies' implants or is this something like on the knee side where you are going to develop your own specific hip system to use with it?

Maurice Ferré

Yes, we are going to be similar to our knee system where it's going to be a closed system and it's going to be an implant system. That's going to be from a third-party vendor that we are working with a clear implant.

Michael Matson – Wells Fargo Securities

Okay. And then I knew there was already a question about the system ASPs, but just I guess for Fritz, going forward – I mean, can we – this is the second quarter where we've seen $800,000 plus ASPs. Can we expect them to kind of remain in the 8 – 28, 40 range or?

Fritz LaPorte

Mike, I think at this point we'd say we are comfortable with about $800,000 ASP for modeling purposes with just the first quarter behind us and three quarters ahead of us still. I think we feel comfortable on how we see it trend over the next couple of quarters. We feel we can keep it at least $800,000 range.

Michael Matson – Wells Fargo Securities

Okay. And then for cash burn, $10.6 million for the first quarter, you can kind of expect it to stay at that level for the next – for the remainder of the year on a quarter basis – quarterly basis?

Fritz LaPorte

Approximately. And I think we expect it will trend down over the year as our top line growth contributes more to that cash balance. I think for the year, we are probably looking in the $35 million to $40 million at the high end.

Michael Matson – Wells Fargo Securities

Okay. And then I guess, just curious, Biomet has been out there, I saw a big ad in KVJ [ph] as kind of being the drum [ph] on their Oxford uni and clinical data they've got behind that and I don't know what percent of the U.S. market that is, but I got to imagine it's a pretty big portion of the U.S. uni market. So how are you positioning MAKOplasty against that product and have you had any success in converting people?

Maurice Ferré

I think that what we are seeing is the – comparing us to Oxford, we are not seeing a lot of, what I would say, direct competition in that.

One of the things that our technology is doing is it's removing a minimal amount of bone, a lot less bone resection and we have found in people that have converted over from the Oxford to our system, what we are seeing is on – or kind of more a mobile-bearing versus the fixed-bearing is the way I should describe it, is the – one of the reasons that they move to the mobile-bearing is because of how accurately they are placing these components and the fact that we are getting such high precision and we have clinical studies that demonstrate that, our surgeons are feeling very comfortable about being more conservative and removing less bone.

So if you – we have a couple of clinical papers that are out there that discuss the difference between a MAKOplasty and a mobile-bearing Oxford and the key thing is that we resect less bone, we preserve more soft tissue, and that results in – and also, we find that – our surgeons find that they are a lot easier to do when they use our technology. So with those types of things is we are getting good traction.

Michael Matson – Wells Fargo Securities

Okay. That's all I have. Thank you.

Operator

Thank you. Our next question comes from Matt Miksic of Piper Jaffray. Your line is open, sir. Again, Mr. Miksic, your line is open. Please make sure you are not muted.

Maurice Ferré

Okay. 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 our continued progress.

Operator

Thank you, sir. And thank you, ladies and gentlemen, for your participation. This does conclude your program; you may disconnect your lines at this time.

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Source: MAKO Surgical Corp. Q1 2010 Earnings Call Transcript
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