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MAKO Surgical Corp. (NASDAQ:MAKO)

Q3 2010 Earnings Call

November 2, 2010; 04:30 pm ET

Executives

Maurice Ferré. - President & Chief Executive Officer

Fritz LaPorte - Senior Vice President & Chief Financial Officer

Mark Klausner – Investor Relations

Analysts

Matt Miksic - Piper Jaffray

Kimberly Gailun – JPMorgan

Rick Wise – Leerink Swann

Robert Gold of Brigantine Advisors

Bill Plovanic – Canaccord

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the MAKO Surgical Corp 2010 third quarter results conference call. As a reminder, this conference 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 conference.

It is now my pleasure to introduce your host for today’s conference 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 the financial results has been released via GlobeNewswire. Mr. LaPorte will detail the contents of the 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 September 30, 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 to discuss MAKO’s third 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’m pleased with the progress we have made in the third quarter and particularly by the new system placements, procedure volumes and utilization we are experiencing in the market. Specifically, we sold nine RIO systems in the quarter; eight of these were installed at new domestic commercial sites, increasing our installed base of domestic commercial systems of 54, up from 46 at the end of the second quarter of 2010.

Additionally, we sold a system internationally to our Italian distributor representing our second international sale and further expanding our European presence.

Worldwide, through the end of the third quarter, we have sold a total of 20 RIO systems eclipsing our total 2009 system sales. Worldwide, our customers performed 815 MAKOplasty procedures in the second quarter representing a 3% increase over the prior quarter and a 95% increase over the third quarter of 2009. The average monthly utilization per domestic system was 5.7 in the quarter and is 6.2 year-to-date. We continue to focus on the development of clinical data supporting our RIO system and MAKOplasty procedures and have over 45 clinical studies in progress.

We completed two BioSkill meetings and continue to see strong interest from current and perspective surgeons attending these meetings.

Finally, I am pleased to announce that the first total hip procedures were recently completed using the RIO system. This marks the beginning of our surgical preference evaluation process and I will share some detail with you at the end of the call with regards to our hip MAKOplasty application development progress and expected commercialization timeline.

Overall, the third quarter was another positive one for MAKO. Out team continues to execute on our business plan as demonstrated by the expansion of our domestic installed base, our second international sale, the increase in procedure volumes and the progress with the development of our hip application.

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

Fritz LaPorte

Thank you, Maurice, and good afternoon, everyone. In the third quarter of 2010, we recognized procedure, system and other revenue of $12 million representing an increase of $5.3 million or 79% from the $6.7 million generated in the third quarter of 2009. Revenue in the third quarter of 2010 was primarily comprised of $4.1 million in procedure revenue and $7.6 million in RIO system revenue. Procedure revenue of $4.1 million represented a $2.1 million increase or 105% over the third quarter of 2009, and was generated from 809 domestic MAKOplasty procedures performed in the quarter at an average selling price or ASP of $5100 per procedure, representing a modest increase over last quarter’s ASP.

In addition, our clinical research site at the Glasgow Royal Infirmary reported that six procedures were performed at its site during the quarter. System revenue of $7.6 million represented a $2.9 million increase or 64% over the third quarter of 2009, and was generated from the sale of nine RIO systems in the quarter of which eight systems was sold to domestic customers at an ASP of $861,000 per system.

In addition, one RIO system was sold to an international distributor in Italy, which Maurice will detail shortly. Total gross profit for the third quarter of 2010 was $7.5 million compared to a gross profit of $2.8 million in the same period in 2009. Total gross margin in the third quarter of 2010 was approximately 62%, comprised of a 75% gross margin on procedure revenue and a 56% gross margin on RIO system revenue.

Excluding the inventory write-off for excess inventory in the first quarter, gross margin on procedure revenue has remained consistent throughout 2010, primarily due to the favorable ASP per procedure combined with lower cost of goods as we transitioned from vendor development pricing to more favorable production pricing on our RESTORIS MCK implant system.

Gross margin of 56% on the RIO system revenue declined slightly from 58% in the prior quarter. We continue to believe that until we reach a steady state in production, gross margins on systems revenue will likely fluctuate from quarter-to-quarter.

Turning to expenses, total operating expenses for the third quarter of 2010 were $16.5 million, an increase of $4.2 million from the $12.3 million for the third quarter of 2009. The increase in operating expenses for the quarter was primarily the result of increase in selling, general and administrative costs and an increase in research and development costs.

Selling costs increased due to costs associated with the commercialization of our RESTORIS family of implants and our RIO system. General and administrative costs also increased as we continue to build infrastructure to support our growth.

The increase in research and development costs was primarily associated with the continuous improvement of the RIO system platform and development of potential future products including the RIO-enabled hip MAKOplasty application.

Our net loss for the third quarter was $8.9 million including non-cash stock-based compensation expense of $1.7 million or $0.27 per basic and diluted common share based on average, basic and diluted shares outstanding of 33.5 million. This compares to a net loss for the same period in 2009 of $9.4 million including non-cash stock-based compensation expense of $1.1 million or $0.33 per basic and diluted share based on average basic and diluted shares outstanding of $28.6 million.

As of September 30, 2010, we had $41.1 million in cash and investments and no debt. Our net cash used in the third quarter of 2010 was $8.6 million and was primarily used in operating and investing activities.

With regard to guidance, you will recall that we have historically experienced two thirds of our annual RIO systems sales through the second half of the year. Based on the 20 systems sold through the end of the third quarter and our current RIO sales pipeline, we are reaffirming our current guidance of 31 to 35 RIO systems expected to be sold in 2010. You may also recall that historically one third of our annual procedures have been performed in the fourth quarter. Based on the 2339 procedures that have been performed through the end of the third quarter and our current procedure volume trend, we are also reaffirming our previously issued annual guidance of 3400 to 3700 expected MAKOplasty procedures to be performed in 2010.

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

Maurice Ferré

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

In the third quarter, we sold nine new RIO systems. Eight of these systems were placed at hospitals of United States across multiple geographies, including two states that previously did not have a system.

As of the end of the quarter, we now have RIO systems in 22 states. We are pleased that the RIO sales this quarter included sales to hospitals with leading orthopedic programs, such as New York Presbyterian Hospital and Columbia University Medical Center in New York City, Mayo Clinic in Jacksonville, Florida, and Swedish Medical Center in Seattle, Washington. We are encouraged by the mix in our commercial installed base between academic medical centers and community-based hospitals.

In particular, increasing the number of academic centers like we did this quarter will lead to an increased number of teaching programs and more residents have the opportunity to gain experience with MAKOplasty early in their careers.

In the quarter, we also took additional steps towards developing an international presence in the sale of our RIO system to our exclusive distributor in Italy. As we noted last quarter, both the RIO system and the RESTORIS implant have received CE Mark. While the initial system will primarily be used by our distributor for sale demonstration purposes, it is also anticipated to be used for clinical procedures.

Further, this system along with the system placed at the Glasgow Royal Infirmary in Glasgow, Scotland represents an opportunity for MAKOplasty to gain more visibility in Europe. We continue to be pleased with the overall diverse composition of our domestic MAKOplasty sites and the developing international interest.

Turning to utilization, the average monthly utilization per commercial system was 5.7 producers during the third quarter, a decrease from 6.3 in the second quarter of 2010 and an increase of 5.4 in the third quarter of 2009. As we have stated previously, we expect that utilization will fluctuate on a quarter-to-quarter basis as a function of the number of new systems sold in the prior few quarters, the speed at which these new systems move up the utilization curve, seasonal trends and new product introductions.

In the third quarter, specifically we experienced slower growth in procedure volume, which is consistent with our historic third quarter experience. I was encouraged that the lighter volume was limited to July and August and that we have seen a strong rebound in volume trends in September and October.

As Fritz noted in his remarks, based on the trends that we’re seeing, we remain comfortable with our annual procedure volume guidance, which implies that the average utilization for the year will be in the range of 6.2 to 6.7 procedures per system per month. We continue to see good uptick on our lateral unicompartmental and isolated patellofemoral procedures. In the third quarter, a 107 lateral and isolated patellofemoral MAKOplasty procedures were performed representing approximately 13% of our total MAKOplasty procedures done in the quarter.

Additionally, in the third quarter, 67 bicompartmental procedures were performed consistent with prior quarters, this represents approximately 8% of the total MAKOplasty procedures performed. While early MAKOplasty surgery feedback has been positive on the bicompartmental procedures, we would not expect a material increase in adoption until data is published supporting the clinical benefit of the bicompartmental MAKOplasty procedures.

In conjunction with our searching users and academic collaborators, we continue to build upon our strong base of clinical outcomes with over 45 clinical studies currently in process. These studies include basic clinical outcome studies of all of our implant systems, basic science studies on the progression of the osteoarthritis in the knee and the hip as well as a number of studies comparing the kinematics and functional outcomes of bicompartmental arthroplasty to traditional total knee arthroplasty. Based on these studies, seven abstracts were accepted at the International Society for Technology in Arthroplasty meeting, which was held in Dubai in October 2010.

Turning to our clinical marketing efforts in the quarter, MAKO attended four local conferences, where surgeons engaged in interactive hands-on real system demonstration. We held two bio-school meetings in the third quarter with approximately 21 surgeons in attendance and we tend to hold one additional meeting in the fourth quarter. These meetings are one of our key tools to introduce educated -- to educate and cultivate MAKOplasty surgeon champions who are instrumental in supporting our real system sales process.

On the patient education front, our 43% MAKOplasty implant sales force continues key efforts to educate our customers on the value of MAKOplasty. We supported our hospital customers in conducting 42 seminars, which attracted over 1300 potential knee MAKOplasty patients.

In the quarter, there were also 11 local new stories that featured MAKOplasty. We continue to hear from our surgeons that their patients are actively seeking an alternative to total knee arthroplasty, which continues to -- we continue to believe that increasing the awareness of the the benefit of knee MAKOplasty including a less invasive procedure, reduced [inaudible] recovery time and return to normal functionality will continue to be a key factor in driving adoption.

Before I open up the call for question, I’d like to spend a few minutes discussing the development of our hip application. As we’ve discussed in prior calls, our goal was to complete our first RIO hip by the end of the year. As I mentioned in my initial remarks, we are excited to report that the first hip MAKOplasty procedures were completed recently by Dr. Larry Dorr at Good Samaritan Hospital, Los Angeles and by Dr. Douglas Padgett and Dr. Amar Ranawat at Hospital for Special Surgery in New York. These represent the first total hip cases to be completed where a robotic arm assisted the surgeon in reaming the acetabulum and placing the acetabular cup.

Before I discuss our future development plans, I’d like to take a few minutes to review the clinical value for the robotic-assisted total hip procedure. Some of you may have seen the award-winning study by Dr. Henrik Malchau from the Massachusetts General Hospital that was presented at the recent Hip Society meeting, where they examined acetabular cup placement.

Improper cup positioning has been linked to dislocations and increased bearing surface wear. In this study, diversion and abduction angles were measured radiographically for 1823 patients that had a total hip or hip resurfacing procedure.

Based on the criteria established, only 50% of the cases fall within the optimal placement range. The study also showed a six-time higher risk of malpositioning in MIS cases and that two-fourth increase in risk of malpositioning cases performed by low- volume surgeons. We continue to believe that by introducing to the hip market the precision, accuracy and reproducibility that the RIO system has demonstrated in the knee market we will be able to show significant clinical benefits. To that end, included in our 45 clinical studies currently in progress are hip related studies with near-term endpoints designed to demonstrate this benefit.

The recently performed cases represent the beginning of our surgeon preference evaluation or SPE process, which is one of the final stages of the development prior to commercialization. We anticipate that the SPE will be completed in the first half of 2011 and continue to believe that we remain on track for a commercial release of our hip application in the second half of 2011.

Our implant strategy for the hip MAKOplasty is similar to this two-stage approach that we employed in the development and commercialization of our knee implants.

In the first phase, we will introduce the RIO-enabled hip application with a series of mainstream implants during early commercialization. In the second phase of the development, we intend to introduce the hip implant design to take full advantage of the RIOs capabilities similar to the RESTORIS MCK implants for the knee.

To develop this strategy, this MAKOplasty optimized implant, we have partnered with Pipeline Biomedical, a private company whose management has extensive implant development expertise in an experience in the hip, knees and shoulder devices. This group has a successful track record having founded Osteonics, which is now part of Stryker and Implex, which is now and owned by Zimmer.

As we look forward to the balance of 2010, I remain convinced that pieces are in place to allow us to achieve our goals for this year and continue to significantly grow our business. Both our MAKOplasty sales force and our RIO capital sales force are fully engaged in their territories and we believe that our pipeline remains strong. I’m encouraged by the quality of the accounts that are purchasing RIO systems and continue to believe that our economic value proposition is clear.

Finally, I’m particularly enthusiastic about the progress we are making on our anticipated hip MAKOplasty application and look forward to MAKO being a participant in the large hip arthroplasty market.

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

Question-and-Answer Section

Operator

Thank you. (Operator Instructions) Our first question is from Matt Miksic of Piper Jaffray. Your line is open.

Matt Miksic – Piper Jaffray

Hi, thanks for taking the questions. So, I wanted to ask you, Maurice. First on just the tone of domestic hospital purchasing. We saw sort of decent sequential improvement in Q3 robust domestically. Can you talk about how the tone progressed thought the quarter, is it stable, is it improving and what your expectations are for Q4?

Maurice Ferré

Thanks, Matt for the question. So, specifically asking about, on the capital side of it I mean, I think that it’s -- I mean, I dont know if we are at a good dull weather for that in terms of hospital study, but I con tell you that Ive spent a lot of time with our sales force in closing out a lot of our businesses and our transactions and building these relationships and building up our pipeline.

I’ve the opportunity to talk to a lot of CEOs and CFOs throughout the country and when I see, which I think is a very encouraging sign is that, hospitals want to make investments in businesses that really demonstrate ROI, which demonstrate the increase of procedure volumes. I think that were starting to see a lot of successful sites coming up and case studies being done where other CEOs can call other CEOs within their organizations, were seeing it within specific different types of hospital systems.

What we are encouraged about is that one of the revenue generating businesses for the hospital continues to be in a profit center is orthopedics, and the fact that we can attract that 15 million patients population that we always talk about, I think is a very encouraging sign. And I think, more and more hospitals are starting to see that as we become more successful in the marketplace.

Matt Miksic – Piper Jaffray

As just in terms of, I realize you are not in dull weather but haven’t you had these final stage conversations and you try to get these things into the end zone. Would you consider Q3 was kind of similar to Q2 or that are we continuing to see some improve here? And I guess, are you feeling like there is going to be some continued improvement there or this is sort of the environment it’s kind of back to steady state? And I have one follow-on.

Maurice Ferré

Okay. Once again I think from our view, weve worked very hard in buildings of our pipeline; a lot of our pipeline is back ended. So, a lot of work has been done in getting these systems keyed up by the time it gets to the CEO for signatures. And I think that we are build a more – so I would say that there is more evidence of what were doing, there is more success stories out there. Im encouraged that were able to maintain our guidance for the year that we put out and I think that in itself speak for itself.

Matt Miksic – Piper Jaffray

And then just follow-up on, you mentioned academic centers and a nice mix of the academic centers this quarter, some of the first campaign plans going in an HSS. I’m wonder if you could provide any color on the trends and the interest here and weathethe hip application, the MAKO paper, the fact that thats a much bigger sort of a footprint a big issue, than when you have started with any compartment on the ends to do that. Is that factoring into this, what it sounds like its not talking interest from the academic centers.

Maurice Ferré

Well, Im glad you asked that because, Ive seen it in different companies and in different industries and its just always turns out that when innovation comes a lot of time it comes from the community-based hospitals before it gets through the academic centers and Im really excited to kind of see that now after years of commercialization and still in the beginning of our commercialization phase. But the fact that we are now starting to really get a lot of attention at some of these most prestigious institutions in the country, I think it speaks highly about the success of this program and what we are applying because - usually in those types of hospitals, building consensus and its a good thing.

I think its good to be conservative, our industry is a very conservative industry, but seeing these academic centers in particular starting to step-up and saying we need to understand to be part of this robotic movement thats happening in orthopedics and were excited about that. And clearly on the hip side we have the honor to work with extremely prestigious institutions and prestigious surgeons right out of the gate. I think that in itself speaks very highly about the opportunity.

There’s a lot of things going on in this industry in particular and I think that we know all these recent episodes in the hip and the importance of accuracy and precision are very key. But I just want to remind everybody that we are still early t, here is a lot of work in front of us, similar to what we did in the knee. We want to do it in very systematic way thats sustainable.

Weve got a great thing going on here and its very important that we do it right, we produce right out of the gate real clinical value and I think thats what were focused on and thats why company our size and the amount of money that were spending on 45 different studies and now that were introducing additional new studies on the hip, I think are going to be very pivotal, a very unique opportunity it be very successful with this product in the hip.

Matt Miksic – Piper Jaffray

And then just to clarify that Maurice, I guess what I heard what you say was that youre going to precede with sort of hoarding down, you know smoothing out the procedure, the process and the [inaudible] with the new application using some widely available hip components and then be prepared to launch, some time back half of next year with your component, but the next same nine months is going to be sort of holding that down giving it, shaking out all the rough edges as you did with the knee procedure is that fair.

Maurice Ferré

Thats correct. I couldnt sat it any better.

Matt Miksic – Piper Jaffray

Alight thanks, Ill jump back in the queue here and thanks again for taking my questions.

Maurice Ferré

Thank you.

Operator

Thank you. Our next question is from Kim Gailun of JPMorgan.

Kimberly Gailun – JPMorgan

Hi, guys. Thanks for taking the question. So, the first one is just on utilization. I would love, if you could talk a little bit more about this rebound that you saw in September. I thought that commentary was particularly interesting and probably a little different from what weve been hearing from the broader or therapeutic market, where I dont think the companies have been as quick to say they seen much of a rebound in September and October.

Im curious, if there is anything going on, may be specifically within your user basements driving that? And I have a follow-up.

Maurice Ferré

Sure. So, I thought long and hard on the statement kind of picking how we want it to position this because its a very important point and one of those things that we as a management team tried prior ourselves as we tried to be predictable and I think its our job to do that and we want to continue doing that openly.

So, that being said, I think it would have been easy to kind of pinpoint lower utilization particularly in this quarter, due to certainty of downturns that were seeing across our peers, but, whats unique and whats interesting is that, we saw a slower growth in utilization in the month of July and August, but weve seen a spike in September and in October.

As we looked at it carefully and we started to talk to our surgeons and ask what was the reason in why there was a slower volume for them in July and August. What we noted in talking to them was that, a lot of it was just due to surgeons vacation schedules and which is consisted with what weve seen in volume fluctuations.

I think that what were seeing in the past and what we saw last year is that one-third of our procedures are done in the fourth quarter. So, that led us to kind of seeing early visibility in October and also into November in terms of – usually these cases are both early enough for us to carry again some insight a and I think thats we fell confident with what we stated, what Fritz and I stated with regards to maintaining our guidance.

Kimberly Gailun – JPMorgan

Thats helpful. And I guess another question switching over to the hip side. Ill be curious just on timing of when youll expect that we might here some data from the study that youre doing right now? How many patients, any details that you can give us and then also just curious on the feedback that youre getting from your current user based relevant to the hip opportunity.

Fritz LaPorte

Well, the answer to the first part, I think that the surgeons that have not used the device from across the two different course. Weve been working with them for close to two years in the development of this and so weve done a lot of work and a lot of preparation, cadavers to make sure that we can take it to this next level.

With these first cases being done, Ive got to say that they went much better than anticipated, at least remains where the surgical times where very reasonable and the workflow was very reasonable and there was nothing uneventful which is good to see.

I think those are good early signs, regards to specific studies. I think we are all about is showing that we can accurately place these cups and I think – there is direct correlations and there is enough literature out there that really talks about what improperly place cups need. I think from our perspective, using the robotic arm to have that high precision within a few degrees or a few millimeters, I think has a lot of potential. It has a lot of potential with mainstream implants and has a lot of potential with future advanced implants that were contemplating now with our new partner Pipeline.

But, I think we will be able to start seeing some early endpoints with radiographic study. So, I mean, for us all we need to do is, our first studies are going to focus on the accuracy of how properly, how closely can we looking at postoperative of x-rays as a very defined protocol.

Dr. Henrik Malchau, has proposed one specific type of study, which were going to execute on. And I think its an opportunity for us to see how accurate the system is and I think well know relatively quickly.

Kimberly Gailun – JPMorgan

Okay. Thanks, guys.

Operator

Thank you. Our next question is from Rick Wise of Leerink Swann. Your line is open.

Rick Wise – Leerink Swann

Good afternoon, everybody.

Maurice Ferré

Good afternoon.

Rick Wise – Leerink Swann

Back to my respect to the utilization question, I appreciate when you place a lot of systems in the quarter that it affects those numbers as well seismic et cetera, but maybe can you give us some perspective maybe the highest volume centers. The most what you have said was that there was a decreased utilization there versus some of the newer sides and maybe talk about characterize the utilization kind of be high used sides and the low used sides. Just a little more color on that. Thanks.

Maurice Ferré

We dont really give a lot of -- in the past, we havent really given color of how many our highest volume accounts to, but I could say this is that what were seeing is that, specific to the volumes. Were seeing more and more sites actively doing MAKOplasty and getting our numbers up. I would say that were working with a -- we continue to work with a relatively smaller base and received does always have small base fluctuation.

That being said, if you look at last year versus this year the impact is less. So, we have a couple of surgeon that had a bigger impact last year. And as we continue to add more and more sites, I think that’s going to become less and less of an issue.

Fritz LaPorte

It's Fritz here to illustrate. I would add, two specifics to your question, I think that as we look at the utilization fluctuation it wasnt any one particular, so your question was in the inexperienced sites, new sites. I think we saw both positives and negatives in both categories of more established sites and as well as new sites.

In new sites we had some that come on very quickly and other that would have taken a little more time to ramp-up. So, I think it is a mix and not one kind of consistent trend thats impacting or its not impacting kind of one group of our installed base.

Rick Wise – Leerink Swann

Okay. I Thought I had asked this in a way you can answer. Obviously the hip opportunity is exciting one, its great that its going to happen in the second half of the 11. Can you help us to think about as we adjust models, how should we think about revenue contribution as we get into the second half of 11. Is it incredibly minimal and limited, I mean, when does it going to be in full launch in 12. How would you have us reflect that opportunity in our models of this point of time?

Fritz LaPorte

So, I think at this point in time I think in conservative approach; we have some still goods in the ASP process. Weve just begun that process and as we stated we expect that to take place throughout the first half of 2011 and commercialize in the second half.

So, as we get the feedback and are better able to finalize our exact commercial plans and what that will mean, we will provide updates as we make that progress. So, when we give our annual guidance on our fourth-quarter earnings call, we will be able to provide, by that point for sure wed be able provide more detail on what contribution we anticipate hip will make on the top line both to our RIO system sales and ASP as well as MAKOplasty procedures in ASP.

Rick Wise – Leerink Swann

And maybe -- thanks for Fritz, Maurice. A little more color on just the opportunity, is there a particular type of doc or a hospital, or a patient and again you want to size that for us at all?

Maurice Ferré

Are you referring to the hip up.

Rick Wise – Leerink Swann

Im sorry the hip on the hip side, yes.

Maurice Ferré

Yes, we know that across-the-board, there is a lot; its over 400,000 hips that are being performed. I mean, I think our first initial step and its a baby step is to do it with a very control studying with surgeons that are high volume surgeons in very respected institutions to have a lot of podium presence, so that we can really continue to identify, what the key merits clinically of the technology is and be able to really could make sure that the workflows are very efficient in that process.

I think once we get through that, I think that well start seeing is that –I think it its going to have very broad appeal to a lot of different surgeons in different types of hospitals. I mean, I clearly, I mean you could put it in from the hospitals perspective adding another application with such high volume has a lot of potential for us to justify or continue to justify the cost of the capital.

So, that I think is a very favorable element if done properly, but I just want to make sure everybody understands that were early in the process, but were very excited that weve been able to successfully do these initials hip applications.

Rick Wise – Leerink Swann

Right. One last question on cash. $41 million now, its not exactly, but I think as you burnt 7, 8 million sequentially, but instead of running over 7, 8, 9, 10 a quarter. How long do you see that 41 million lasting just what your thoughts about that? And last just as a reminder, distributor sales is that the same price as a regular sales you could collect the cash in the same time schedules just remind a thing about that again? Thanks guys.

Maurice Ferré

Ill answer that one first one. So on these initial distributor sales those systems were sold at a lower ASP around 550,000 though they are initially going to be used for demonstration purposes you recall last quarter we had a sale to our exclusive Korean distributor and then this quarter to exclusive Italian distributor.

So, as we go forward wed expect those that ASP on their commercial column their commercial system that they purchase which in turn will be full by them to customers, so that ASP had come up still at somewhat of a ABS account to our ASP, but come up more in line Id say with our ASP.

From the cash perspective through the third quarter -- at the end of third-quarter we burned about approximately 34 million as I think you noted, Rick thats come down over by about $2 million over the cash front in the first and second quarters. Primarily associate with our cash received on the RIO, increased RIO system sales.

So, we expect that to see an improvement as well in the fourth quarter, which we stated previously, we expect to burn some more little 40 million this year and we remain on track to do so, which would leave us with a year-end balances somewhere around 30 million, which is as exactly where we expect it to be and where we state at the beginning of the year, we thought it would be by the end of the year.

So, at this point there is lot of variables beyond 2010, unknown variables where it could be positive or negative, so its a little hard to expand on what our cash planning will be beyond 2010 in cash position.

Rick Wise – Leerink Swann

Okay, thanks very much.

Operator

Thank you. Our next question is from Robert Gold of Brigantine Advisors. Your line is open.

Robert Gold – Brigantine Advisors

Thank you, hi guys. Thanks for taking the questions.

Maurice Ferré

Hi, Rob.

Robert Gold – Brigantine Advisors

Just to get on the hip category obviously, were expecting in. I was just wondering as you penetrate that market for the existing customer base is there a great deal of reconfiguration thats required for machine and or the software is there something that you can pretty easily seamlessly integrate into the existing customer base.

Maurice Ferré

Yes, I think by design we wanted the RIO system to be able to do both hips and knees so the system itself is one system. So what changes on the system are the end of factors during the procedure and obviously there is software that goes with it. So, the robotic its actually the end of factors the end piece that changes; there is a configuration change that takes place that we do in our shop that makes to increase the torque of the system because we had –instead of adding a high-speed bur, we now have the capabilities of adding a new type of cutting technology, which is using a low torque or a high torque low speed system, which is necessary for the reaming of the acetabulum.

Robert Gold – Brigantine Advisors

Thanks. Again just touch on utilization, I here someone talk about strength. In September, there has been an unusual dynamic throughout the space further for the probably slower orthopedics. So I was just wondering, are you seeing anything that would relate to maybe some of the folks that were waiting and getting the total may or maybe or now increasingly coming of the fence and getting a partial procedure using the MAKOplasty?

Maurice Ferré

What I know is this. I know that more and more of our sites are using seminars in their local markets to introduce MAKOplasty and I think whats that doing is, is attracting a lot of patients to look at alternative options to total knee replacement.

That I think is then the key pieces that weve been talking about and I think that there is a pent-up demand for patients that are in pain and dont want to have long recovery and long rehabilitation and there is some key pivotal studies that are coming out from renowned places like NYU with we have Peter Walker thats starting to articulate that there is a higher number of patients that are getting total knees that really our candidates for partially replacement, which is our pieces.

So, I think that is the opportunity that were seeing and thats why were seeing just the evolvement of the growth and the evolution of a product being starting to get traction and starting to see some visibility. So, we think its that were very encourage with those sites.

Robert Gold – Brigantine Advisors

Sounds great. Just finally, I know you mentioned there were three academic center replacements in the quarter. I didn’t get it, Fritz, could you just repeat those?

Fritz LaPorte

Well, the site that we sited included a New York Presbyterian hospital at the Colombia campus on the west side, which by the way its great because now just that weve talk in the past about our clusters of sites and New York is a wonderful sight for us because now we have our multiple systems in the pattern. So, were very excited about that. The other one that we mentioned was over in the state of Washington, Swedish.

Robert Gold – Brigantine Advisors

Okay.

Fritz LaPorte

And the third one is, Mayo Clinic in Jacksonville.

Robert Gold – Brigantine Advisors

Okay. Great. Thank you very much.

Operator

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

Bill Plovanic – Canaccord

Great. Thank you. Good evening.

Maurice Ferré

Good evening.

Fritz LaPorte

Good evening, Bill.

Bill Plovanic – Canaccord

Just a couple of questions to you. First, just some clarity as you wanted to step indication. I think the question was asked about reconfiguration of the machine and to increase the torque over the speed. Do you have to bring the box in for that change? Do you send a service rep out? Is there any upgrade charge for that?

Fritz LaPorte

Hi, Bill. So the first thing is, yes we will be selling the hip application as an upgrade to existing RIO platform. Right now, we have the RIO platform has made through two flavors that are among our installed base; one that was the initial knee enabled and then one that is already pre-hip and knee. So it includes what Maurice is referring to as what needs to be made to support the change in the cutting instrument.

So, for those that already hip enabled its really just a software upgrade was the end of factors. And then for any one installed base, the knee only system it will require an upgrade to their system, which would require us to bringing it back cured and back out to the field, but we have a program in place to ensure that, that is done with minimal and hopefully no disruption to their procedure or volume at the existing side.

Bill Plovanic – Canaccord

Okay. It sounds like youve given an owner until you get the one upgraded and then give it back to them.

Fritz LaPorte

Absolutely, yeah.

Bill Plovanic – Canaccord

And how many you are out in the field that have to get swapped out to get knee as it is on.

Fritz LaPorte

I do know that exact number of hand, but I know we made the cut over early in the year.

Bill Plovanic – Canaccord

Okay. And then, as you bring these academic centers into the family here, what is that duty utilization rate? Are they going to be more productive or less predictive and as you look at these centers?

Fritz LaPorte

Hard to tell, I think, its too early to kind of put that one out there, but usually it actually vary, I mean we have a couple of our sites that are very high volume sites and they are very academic. So, it really does depend on who the surgeon champions are and then obviously, as we introduce new application that we get more surgeons involved. So, it really depends, well see.

Bill Plovanic – Canaccord

And then looking at it little clearly on the guidance, you maintained the box guidance for the year at the 31 to 35 systems. And as you look it now, I guess youd have 18, 20 including globally. So I take it that 31 to 35 is global and how many of those do you expect that were going to see 2 or 3 in this fourth quarter OUS or kind of keep going at this may be one a quarter OUS..

Fritz LaPorte

I think more or like not the ladder. Well with the lower numbers.

Maurice Ferré

I think most of our focus is going continue to be here. I think if we were to priorities what is important right now for MAKO, is as we expand the platform back at starting at the second half of 2011. We really want to provide a very stable platform. So well keep or focus and continue to keep our focus and well start building up the international presence, I think most of its going to come in the later years.

Bill Plovanic – Canaccord

Okay. I mean[inaudible] due to the six procedures whole U.S. or is there any procedural revenue, or did that go kind of with original box price that we did, didnt actually capture anything in this quarter or is that in the boxs price?

Maurice Ferré

They purchased a stocking order in Q2. Let me be absolutely clear on this. So, the two international systems that were purchased by our exclusive distributors both of those systems are currently one being used the green systems being utilized initially for regulatory clearance in Korean FDA and then will be used for demonstration system.

The systems sold to Italian distributor is originally being used, they are going to get local clearance even those CE Mark get a local clearance within their country and then the system is going to be used for demonstration and expect to be used for clinical demonstration procedures as well.

Then the sites where we actually reporting procedure that are being performed is at our clinical site at the Glasgow, Royal Infirmary where its done under the clinical research program and that just system is still owned by MAKO and they purchased a stocking order in the second quarter to cover basically the procedures that anticipated under that clinical program.

Fritz LaPorte

And to be clear about that which we talked about it on our last call Bill that this is our randomized clinical study that were doing, and in fact that study is actually just got on its way, so its just starting. And so were glad that well have more to say about that in the next call.

Bill Plovanic – Canaccord

Okay. And just you know since were on the math topic, if I look at it, if your average cost on boxes was 861,000 you placed thats about 6.9 million in box sales thats mean you actually sold the Italian distributors box around $700,000 is my math off there, I thought you said it was about 550ish?

Fritz LaPorte

It was about 550 well, that what you think in up with ?

Fritz LaPorte

861 times 8 is 6.9 million and thats why pricing is off to a --

Fritz LaPorte

Maybe another and according to that math there is another maybe 100,000 of some other real revenue.

Bill Plovanic – Canaccord

Okay. Okay. Great. Thats all I had. Thank you very much.

Fritz LaPorte

Youre welcome.

Operator

Thank you. That concludes the question-and-answer-session. Maurice, would you like to continue with any closing remarks.

Maurice Ferré

I just wanted to say, I think that were excited about our results. And we think the fundamentals are in place to continue to build our business for sustainability. I want to thank everybody for taking the time to join us on the call. We sincerely appreciate your interest in MAKO and look forward to updating you in the continuing months. Thank you.

Operator

Ladies and gentlemen, this concludes the program. You may now disconnect. Good day.

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Source: MAKO Surgical Management Discusses Q3 2010 Results – Earnings Call Transcript
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