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MAKO Surgical Corp. (NASDAQ:MAKO)

Q2 2012 Selected Financial Results Conference Call

July 09, 2012 17:00 PM ET

Executives

Maurice R. Ferré - Chairman, CEO, President

Fritz L. LaPorte - SVP of Finance and Administration, CFO and Treasurer

Analysts

Matt Miksic - Piper Jaffray & Co

David Roman - Goldman Sachs

Kimberly Gailun - JPMorgan

Matthew O'Brien - William Blair & Company

David Lewis - Morgan Stanley & Co

William Plovanic - Canaccord Genuity

Michael Matson - Mizuho Securities

Steven Lichtman - Oppenheimer & Company

Operator

Good afternoon, ladies and gentlemen, and welcome to the MAKO Surgical Corp’s Conference Call on Selected Financial Results for the Second Quarter 2012. 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 call.

It is now my pleasure to introduce MAKO’s Senior VP and Chief Financial Officer, Fritz LaPorte.

Fritz L. LaPorte

Thank you, operator. Joining me on today’s call is MAKO’s President and CEO, Dr. Maurice Ferré. The Company’s press release of selected financial results has been released via GlobeNewswire.

Dr. Ferré will detail the contents of the release and provide remarks on the selected results. If you’ve not received a copy of the press release, it is available in the Investor Relations section of MAKO’s website at www.makosurgical.com. I’d also like to remind you that this call is being webcast live and recorded. A replay of the event will be available later on our website and will be available for at least 30 days following the call.

Before we begin, I’d like to caution listeners that certain information discussed by management during this conference call, including answers to your questions, will include forward-looking statements covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the Company’s business.

For a discussion of risks and uncertainties associated with MAKO’s business, I encourage you to review the Company’s periodic reports filed from time-to-time with the Securities and Exchange Commission, including the Form 10-K for the fiscal year ended December 31, 2011, the Form 10-Q for the quarter ended March 31, 2012, and the Form 8-K filed with our press 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 R. Ferré

Thank you, Fritz. Good afternoon and thank you for joining us to discuss selected results of MAKO’s 2012 second quarter.

In the second quarter, we sold nine RIO systems, of which eight were sold to domestic customers and one was sold to our distributor in China which in turn was sold for commercial use to a prominent hospital in Hong Kong. The average selling price for all RIO systems was inline with prior quarter. These nine RIO systems brings MAKO’s worldwide commercial installed base of RIO systems to 126 systems and domestic commercial installed base to 123 systems as of June 30, 2012.

Also during the second quarter our surgeons performed 2,590 MAKOplasty procedures, of which 2,494 were performed at domestic sites. Of the 2,494 domestic procedures, 280 were Hip Arthroplasties or THA MAKOplasty procedures. The average selling price for total knee and hip procedures was comparable to the prior quarter. The 2,590 MAKOplasty procedures performed – procedures performed represents a 13% increase over the procedures performed in the first quarter of 2012 and a 66% increase over the procedures performed in the second quarter of 2011.

The average monthly utilization per system was 7.2 procedures during the second quarter of 2012, an increase from 6.6 procedures per system per month in the first quarter of 2012 and an increase from 6.4 procedures per system per month in the second quarter of 2011. Through June 30, 2012 approximately 17,700 procedures has been performed since the first procedure in June of 2006.

In the second quarter we sold nine MAKOplasty THA applications. Seven of which were sold with domestic RIO system sales during the quarter and two of which were sold as upgrades to existing commercial systems. As of June 30, 2012 71 RIO systems or 58% of our domestic installed base have a MAKOplasty THA application. The second quarter continued some of the trends we saw in the first quarter.

Most notably, the result of our RIO sales for Q2 were below our expectations. As we’ve discussed previously in our experience RIO system sales are typically back-end loaded in any given quarter. As the quarter came to a close, some sales were reasonably expected would close in the quarter, did not.

Hospital interest in our technology remains strong as reflected in the healthy number of qualified accounts in our sales funnel. However, our analysis suggests that as we approach the shift from early adopter phase to early majority phase of the technology adoption lifecycle, we’re finding that a growing number of potential purchases require buying from a larger number of surgeons to support the return on investment of a MAKOplasty program. Surgeon’s interest in MAKOplasty also remains high as we believe it will continue to grow.

We see an increasing attendance at our regularly conducted Regional BioSkills Training Labs, which requires a meaningful surgeon time commitment as a leading indicator of the future use of the RIO. Additionally, surgeon interest is more broadly translated into surgeon commitment through visit to existing MAKOplasty sites and education on the compelling and growing body of clinical evidence supporting MAKOplasty, all of which adds time to the RIO sales cycle when involving multiple surgeons per sale.

Having identified this changing profile of our potential hospital and surgeon customer, we’re undertaking steps to meet the sales challenges in order to continue to effectively grow our business. We intend to provide additional commentary on our intended solutions on our regularly scheduled earnings call on August 1st.

During the second quarter we also experienced the following. Continued and stable RIO system utilization across our installed base in partial knee procedures and an increase in the total hip procedures which we expected to continue with the upcoming expansion in our hip offering, specifically, with regards to our MAKOplasty THA 2.0 program.

In Q2 we received a 510k clearance for our 2.0 application, which includes speed improvements to the surgical workflow and software enhancements. Notably, the THA 2.0 will enable the direct anterior MAKOplasty approach, expanding the addressable market of our hip application to a new segment of surgeons that we believe could benefit from the enhanced acetabular implant cup placement in this less invasive surgical approach.

Additionally, we now expect an initial launch in Q3 of both our THA 2.0 application and our THA implant system, the RESTORIS PST Acetabular Cup and the RESTORIS Tapered Femoral Stem.

In summary, from these limited second quarter results, we believe it is fair to conclude two things. First, as indicated by our procedure of volume and utilization MAKO’s existing customer base remains engaged, which would suggest that the fundamentals of our business are intact. Second, MAKO’s prospective customer base has raised the bar with respect to what is required to commit to investing in a MAKOplasty program. We believe we can meet their requirements by demonstrating in the sales cycle both the strong economic case and the compelling clinical value proposition.

We remained steadfast in our core belief, in our significant market opportunity and the transformational value of our technology. Managements near-term focus will be to revisit how best to improve our execution in demonstrating that value in our prospective customers for the remaining of 2012 and beyond.

With respect to guidance, our review of the business after the first quarter led to revised annual real guidance of 52 to 58 systems with no change in annual MAKOplasty procedure guidance, up 11,000 to 13,000.

We continue to scrutinize our business throughout the second quarter and examine the business closely at quarter end. Based on this examination, and our experience with the long RIO sales cycle due to some of the reasons I mentioned, we’re reducing our 2012 annual RIO guidance to 42 to 48 systems and as a result narrowing MAKOplasty procedure guidance to 11,000 to 12,000 procedures.

Before I open the call for questions, I’d like to reiterate that we plan to provide deeper detail and color with respect to our analysis of the business and the outlook for the second half of the year on our August 1st earnings call. In the interim, well that analysis underway we will not be in a position to provide any information beyond what is discussed on this call and we ask that you respect that limitation.

With that, we will now open up the call for questions.

Question-and-Answer Session

Operator

Okay. (Operator Instructions) And we will take our first question coming from Matt Miksic from Piper Jaffray. Please go ahead.

Matt Miksic - Piper Jaffray & Co

Hi, guys.

Fritz L. LaPorte

Hey, Matt.

Maurice R. Ferré

Hi, Matt.

Matt Miksic - Piper Jaffray & Co

So, why don’t we start with – maybe with what and when that sort of dynamic change that you’re describing about doctor buying? Maybe if you could give us a sense of how these deals has been closing, what kind of buying you had to put together in order to close the deal and how that has changed again this last quarter, and when maybe in the quarter it started to change? And then I have a follow-up.

Maurice R. Ferré

Okay. So, I’m just going to – kind of go through a series of how we kind of looked at this, it’s a thought process, in Q1 when we went into it, we talked about that we saw some challenges in our closing – closing our deals at the end of the quarter, on the first quarter. And we spoke about after that call what we adjusted our closing ratios which reflect what we saw in the first quarter.

As we stated in our call, in the second quarter, we came into the second quarter with strong confidence. We saw that the funnel was still strong, we with adjusted ratios and we felt all the way through the end that we were confident that we were going to make that range between 11 and 13 systems, as with the way we described it. Because we once again gave that confidence in our calls about the 1/3, 2/3s, we knew that numbers being very doable all the way till the end. And then at the end, we felt short by two systems.

At that point, right at – and it literally went right till the last day and – this is what’s tough about our business is sometimes trying to call these deals. And I would say that this is not about loosing deals. These are deals just being prolonged and being reviewed in more scrutiny and what we specifically did was as we normally do throughout the quarter and throughout the end of our cycle, we look at the data and we asked ourselves specifically doing looking specifically at the deals that were in play that didn’t come into play or close at the end. And what we saw conclusively was that we saw that these deals were requiring hospitals specifically looking for more data, more data to support their ROI.

Now why is that happening, is that something that – that’s a new trend in capital sales, I don’t know. But I know that specifically in the deals that we were trying to close, we saw a prolonged cycle. And to me the lead that we saw, to be very clear these were very qualified deals and what we see is a trend is that the hospitals are doing more due diligence. And what we’re also seeing is – it’s a trend also with the hospital cycle. It’s not a typical for the hospital CEO to say yes, but then you got to go through another layer of administrators that are asking for new set of question and I think that process is just taking a little longer than anticipated. And that would – that’s our observation.

So taking that – this analytic approach, we see that the hospitals are focused more on ROI than we’ve seen in the past. And I think we’re kind of seeing this as a – as hospitals becoming probably I would say more risk adverse on their purchasing.

Matt Miksic - Piper Jaffray & Co

And I guess, just to make sure I understand – are these answers or these questions that you think you’re going to be able to answer in the near-term or are these going to be qualified accounts that you’re going to have to respond with data or evidence that’s going to take you longer to develop?

Maurice R. Ferré

I think the operative key that we’re seeing is that hospitals want to see more surgeon support that builds on their ROI. I think that’s what we’re seeing, what we have to get more doctors engaged and one leading indicator for us that it’s being addressed. And we think its clear, is that these doctors are going into our BioSkill Labs. So it’s not a matter of us providing opportunities for them to get familiarized with our technology. I think we’re seeing strong support, strong conviction. We’re still – look, we’re still very early in the cycle here. And I think what we just – it’s just a continuation of more support from the doctors that we’re seeing and they want – they in turn want to hospitals are seeing that and that’s something that we’re addressing.

Matt Miksic - Piper Jaffray & Co

So they’re getting trained, they’re interested, they’re engaged, you’re working on convincing these doctors and getting buying from these doctors. I guess, what I’m – just want to make sure I’m crystal clear on is, what exactly are they looking for beyond just more exposure to the robot and is that something – in other words, is this something that you can provide in a month, in two months and three months or is there something that you’re going to have to complete some of them – some of the pre-reviewed studies that you’ve been working on publish them and put them in the hands of these docs before you’re going to get their buying?

Maurice R. Ferré

No, I would describe it this way. To be very, very clear, I think its all about more docs to close with the same information. So period, its not that we need more convincing data, but the hospitals are looking for more doctors to be part of the MAKOplasty program. And what our job is – and this is based on looking at the analysis of the deals that were prolonged this quarter. And I think that’s the reflection of what we believe needs to happen.

Matt Miksic - Piper Jaffray & Co

Okay. And then just a quick follow-up --.

Maurice R. Ferré

I mean, just to be clear – I want to be very …

Matt Miksic - Piper Jaffray & Co

Got it.

Maurice R. Ferré

… clear about this, its not about proving clinical data, I think its more docs that reduce risk to the hospital administrator about building a strong ROI for the system.

Matt Miksic - Piper Jaffray & Co

Okay. And then one quick one, and I’m not sure if I missed it, but does your new implant guidance – did you give us a utilization, an annual utilization rate for that? Just because robots came down, I’m wondering what you’re assuming – have you assumed that you’re going to see a higher productivity than you saw in order to hit that same – roughly same range?

Fritz L. LaPorte

Well Matt, its Fritz. We took down the top end of our range on the guidance and narrowed it. We believe utilization to stay in line with what we’ve seen. We guided the – we expected the range to be in 6.5 and 7.5, and Q2 with a 7.2 which is encouraging for us and based on what we’re seeing we should remain in that range.

Matt Miksic - Piper Jaffray & Co

Okay. But you’ll obviously have to end the -- higher rate to hit that, since you started at six and change you’ll have to end quite a bit higher to be in that 7.5 range, right?

Fritz L. LaPorte

Right, which --.

Matt Miksic - Piper Jaffray & Co

Okay. All right.

Fritz L. LaPorte

Yeah, which we typically --.

Matt Miksic - Piper Jaffray & Co

I’ve listened, I’m sure --.

Fritz L. LaPorte

I will just add one other thing Matt, which is – with the hip program is just getting going as well and so we gave some color around timing of the beginning of our launch and so we believe that will help contribute to that procedure number as well.

Matt Miksic - Piper Jaffray & Co

Yeah. I heard that, and that’s good news. I just want to – I’m sure there are other folks with questions. So, thanks for taking ours, I’ll speak with you a little later.

Maurice R. Ferré

Thanks.

Fritz L. LaPorte

Thank you.

Operator

Okay. Thank you. And we will take our next question from David Roman from Goldman Sachs. Please go ahead.

David Roman - Goldman Sachs

Good evening. I was hoping you could just talk a little bit more about the system placement dynamic and maybe you could put into context for us, does selling cycle in the opportunity at large hospital systems versus your ability to sell individual hospitals because when I look at the numbers for this year and I compare them to what you came out last year, its obvious that HMA had a very significant impact on your system placement numbers? So, can you sell these systems without those type of large contracts in place?

Maurice R. Ferré

David, I would say that – I think that as we look at our profile of hospitals that are looking at the RIO system, there is a large proportion of these hospitals that are part of a hospital chain. And I think that it’s evident that those hospital chains are asking for additional information. So, once again as I stated earlier in the last question, I think there is two types of hospitals, is that hospital that is that’s not affiliated and I think we’re seeing probably a faster cycle on that because I think there is less decision makers in the process. And I think on the hospital chain side, I think it’s a cycle of then familiarizing getting and us going through that process and I would say that if we looked at our funnel we have – we do have a lot of those type of hospitals that required additional line of information to go through the system.

David Roman - Goldman Sachs

Okay and then maybe a follow-up to that. So, I guess I am asking so, are you suggesting that the hospital systems that are asking for more data are the tenants of the world and the HMAs etcetera and there’s a potential that they’re asking for more data to execute a larger order or they were asking for more data to sell every single one-off system?

Maurice R. Ferré

I think that what we’re seeing is, I think the way that this works and that with the most traditional way that this works is there’s really a bottoms analysis. We’re working with multiple hospital chains and building momentum at the local level and supporting that. And I think that’s where we lead to success. I think those are the way that – that’s the way conventionally the business runs and that’s our best success and to me the key or the silver lining here for me is we’re still focused on the MAKOplasty program and also on this utilization, we’re seeing an uptick in procedures, we’re seeing an uptick on utilization and that’s to me the key indicator on how MAKO systems are going to sell in the future. And just to be clear, our core – our current guidance does not account for expectations of a both buy.

David Roman - Goldman Sachs

And did the previous guidance?

Maurice R. Ferré

No.

David Roman - Goldman Sachs

Okay. And then maybe on procedure volumes which we did see a sequential pick up in those, I think in the first quarter Maurice you’ve talked about a few discrete headwinds as it related to procedure volumes, whether it was COBRA being used up in the fourth quarter and not recurring in Q1, certain physicians slowing utilization for whatever the reason might it been, have you seen that reversed in the second quarter and did those headwinds abate to the extend to which you would expect it or are they still there?

Maurice R. Ferré

I think as we communicated and articulated, I think the – we said what was going to happen and it occurred. We said that this – that the – in terms of looking at the procedure growth sequentially and also looking at utilization, based on what we knew were happening and I would say that side of our business is a lot more predictable. And I think as we build our business model and we start looking at the future of how to grow this Company towards profitability, the key part of understanding and increasing those numbers is where the focus is going to be in this Company and that’s why we talk about is developing applications and focusing on developing these MAKOplasty programs and I think we’re showing and I think this quarter it was very positive news about procedure growth in utilization.

David Roman - Goldman Sachs

Okay. Thank you.

Maurice R. Ferré

Thank you.

Operator

Thank you. And we will take our next question from Kim Gailun from JPMorgan. Please go ahead.

Kimberly Gailun - JPMorgan

Great. Hey, everybody. Thanks for taking the question. Couple of questions. I guess, the first is just on the Deerfield financing that you announced last quarter. I’m just curious how the 2Q results here impact your likelihood to draw on the Deerfield funds and/or your ability to exercise any other financing options?

Fritz L. LaPorte

So, we’ve only given at this point for the selected data. We’re still closing out the quarter and we will update everybody on the specific cash balance. It’s fair to say that the cash burn was inline with kind of what we expected in Q2 and so therefore we’re on track for where we expect these at mid-point of the year and we will continue to evaluate that going forward. We did put the Deerfield arrangement in place as we described to be a spare tire in case we do need it. And with that in place, we feel that we have enough cash at this point or access to cash to continue to (indiscernible) our plan here and so I don’t feel at this point we need to raise additional capital at this point.

Kimberly Gailun - JPMorgan

Okay. And then one question getting back to just the sales process, the longer cycle that you’re talking about on the capital sale and really a lot of these hospital systems requiring more docs to kind of support the purchase before, before they’ll get onboard. I guess, it just seems a little counter intuitive given that, here you guys are launching the hip and that should there obviously bring more doctors in anyway, right? It should expand the number of doctors at any given account that will come in and support. So, I guess, I’m wondering what you guys think are the different elements that might bring the hospital closer to the table, the best price come in. You talked last quarter about a couple of systems falling out and I believe one or two was on price. So is price an issue, and a lot of these are, you know maybe back to one of the earlier questions, you think is actually just going to require more clinical data?

Maurice R. Ferré

No requiring clinical data. Pricing, I believe that we didn’t see that same pressure that we had last time. So I don’t think pricing is an issue. And regarding the specifics about more surgeons and hip, I think this is one of the important pieces of our story is that, we’re early in the hip and I believe that hip will help bring in more surgeons and that’s part of our strategy and that’s why we built a platform, and its just a matter of time on getting it right and its looking at the opportunities and saying well how many of these are going to require how many surgeons and I go back and I look at our BioSkills surgeons asking to get trained. We’re booked all the way through November on these BioSkills, and that is a big indicator for me, because these are surgeons that are spending quality time of their weekends to come on, learn how to do MAKOplasty and the fact that we’re booked all the way to November, I think it’s a positive indicator of the interest and part of the strategy that I think we’ll be able to articulate more on August 1.

Kimberly Gailun - JPMorgan

Okay, thank you.

Operator

Thank you. And we’ll take our next question from Matthew O'Brien from William Blair.

Matthew O'Brien - William Blair & Company

Good evening. Thanks for taking the question. Maurice, I was just curious about your commentary on the longer selling cycle, to get to the midpoint of a new range now we’re going to need 30 systems in the back half of the year, but you’re saying that the selling cycle is more challenging than it has been in the past, you don’t have HMA and this year I think you placed quite a few in the back half of last year. How can you have some good visibility or just strong confidence in the ability to get to that 30 number during the second half of the year?

Maurice R. Ferré

So, for starters, I think that -- I think HMA pushed deals more towards the front-end not the back-end, so just to be clear.

Matthew O'Brien - William Blair & Company

Okay, I think you sold were that four systems to HMA in the second half last year?

Maurice R. Ferré

I believe, I …

Fritz L. LaPorte

Total of five in the second half; four in Q3 and one in Q4.

Maurice R. Ferré

Right.

Matthew O'Brien - William Blair & Company

Okay, so in total 29 systems and then 24 HMA. So you’re expecting to go up roughly 20% in a more difficult environment. I am just trying to -- to get a sense for your confident that I understand you have a new application in there to sell the folks but just, where do you get that comfort level that you can get to 30?

Maurice R. Ferré

I think to be fair about it, I mean look, we've got through this now, we continue to go through the information we have at hand and as managers it’s our jobs to kind of understand the data and be able to react to it in a way that’s meaningful and predictable and I mean, that’s our goal, and I think, just consistently we have performed a detailed bottoms up analysis on our funnel and its something that I always do and its not that, this is not something new, but its something that this time around after missing by those two systems at the end of the quarter, I went to every individual sales person in our company and I sat down with my team and we went through with lot of rigor on trying to understand exactly where we are and what the implications are for Q3 and for Q4. And I'll tell you, anybody who’s involved with capital sales knows that there’s a lot of visibility on these deals. These deals take a while to develop, its not overnight, there’s a lot of that goes into these deals. There’s site visits by hospitals, by hospital administrators, there’s personal site visits that me and my team do to make sure that we build up these practices, it’s the BioSkill labs, so there’s a lot of visibility. And we first -- on the first quarter we looked at this and we changed those ratios and I think what we did this time around because it obviously, this doesn’t take -- we just didn’t lower it by two, we basically said, look lets be -- lets make sure with the information that we have what we always do is lets take this information and make sure we’ve got it right. And I think this is the best information that we have and we've taken this approach that we feel confident that these are the right numbers to project. I think it reflects some of the, some of what we've learned about the [bulk buy] from HMA, I think that’s fair to kind of put that in there. But I think it takes more into consideration how we continue to evaluate our opportunities on the bottoms up analysis during this process.

Matthew O'Brien - William Blair & Company

Okay, and then -- and looking back at your original guidance for system placements for the year I think the mid-point was around 60, somewhere in that range. We’re down to about 45 now and you’re saying that that’s about 15 systems difference that none of these hospitals had really walked away in terms of wanting to eventually buy a real system. Is that fair to say that those 15, maybe you get pushed off into 2013 or just any sense on, what you think those demands are?

Maurice R. Ferré

I could tell you right now, when I go through these deals and we go through this cycle that we've not lost any deals. And what we see happening as these deals are just getting pushed off -- they’re getting pushed off for primarily this quarter, the way we identify this is its hospitals looking at their ROI and wanting to get more doctors onboard to support that strong ROI. That’s what we’re seeing. And that to us is the compelling factor, so we know that’s just a longer sales cycle.

Matthew O'Brien - William Blair & Company

Okay, just one more real quick one for me. Just given the short fall of the first half of this year, is it the -- is there going to be any kind of alteration to sales force additions or new application timing in your mind?

Maurice R. Ferré

No. I think we’ve provided the best information if we have to take on evaluating our business and as I said we’re going to provide an update on our business and intended solutions to the challenges we face and you’ll hear more about it on August 1.

Matthew O'Brien - William Blair & Company

Okay, great. Thank you.

Operator

Thank you. And we’ll take our next question from David Lewis from Morgan Stanley. Please go ahead sir.

David Lewis - Morgan Stanley & Co

Good afternoon. Maurice, I know there’s been a lot of question’s this evening on box’s so maybe I'll transition here for a second. The one data point that stuck out thus in the quarter actually was the uni procedural growth number and if I think about the last three quarters, I think uni growth in our model has gone from close to 90% to something closer to 40% in three quarters. So I wonder, if you think about that number, do you think that’s more reflection of recent share competition, if it’s just kind of the life cycle of where comes uni business is right now, or is that perhaps the sales force increasing focus on hip in the last couple of quarters which may have resulted in a disruption?

Maurice R. Ferré

I don’t – I think we have to kind of look at those numbers, because I am not sure those are accurate numbers David and we can do that offline and we can – but I'll say this is, there’s a huge opportunity still out there and when we look at our MAKOplasty accounts and the growth that we experience between the last quarter specifically the sequential growth that we’re seeing. I am seeing a lot of accounts that are kind of moving into the underperformers they start off slow and then all of a sudden they start building some momentum, I am seeing hospitals that are in the middle of that cycle and kind of going through it, so I think what we’re seeing are these hospitals – we go through cycles and in terms of understanding how to build these MAKOplasty programs.

We’re seeing clusters of hospitals that are being very successful in addressing this early to mid-stage osteoarthritis. Okay, but I think it reaches a certain stage or certain plateau over a period of about two years, and we look at our data, we have looked at our historic data, we've looked at it from a vintage perspective to make sure that these aren’t just early adopters, but the types of hospitals now that are growing on speed in the last quarter, we’re seeing these hospitals kind of grow to a certain level and I think that over the next few years, I think it kind of on the uni side its going to be around the six to seven on average and I think that’s what we’re kind of seeing, kind of it starts the plateau and I think the key for us is to build those applications up and I think its also over time, I think people are waiting to see more data that was going to come out and it think that data is, it becomes key in when we see three years of data and five years of data on how these accounts are.

There clearly is an underpin up population, there clearly is a lot of doctors that weren’t doing partial knees and now are doing partial knees, and that – and doing that part of that education. But what we’re not seeing is, we’re not seeing where all of the sudden the competition is coming in with the patient specific instruments and taking our business away or taking our customers away or having success in converting people into the type of growth that we’ve been experienced with the MAKOplasty program. I think once again when the doctors put their hands on the equipment and they understand the value of it and they see these consistent reproducible results, that’s the key.

David Lewis - Morgan Stanley & Co

Okay.

Fritz L. LaPorte

David, its Fritz. Just to add that inherently we would expect some of that growth rate to slow as our installed base grows as well.

David Lewis - Morgan Stanley & Co

Okay, very fair. Maybe one just quick one, I know we’re maybe running a little long here, Maurice, you mentioned an important word I think ROI. I think we heard a lot more about ROI in this call and in last call, and I wonder do you think that ROI is just sort of a natural thing your customer is really thinking about and we just heard less of it, or is it possible that post AOS a lot of the incumbent players in this space have really been pushing customers to think about ROI as a ray of counter detailing against MAKO, do you think that had any role to play here in the second quarter that they’re pushing hospitals to think about ROI or do you just think that ROI has always been relatively important?

Maurice R. Ferré

David my view on that, okay is – is I think that you can't discount the fact of where the discussion be about healthcare has gone over the last couple of years, and the more you talk to hospitals, you know hospitals are buying practices, we know that’s an ongoing trend and hospitals are becoming more savvy on how they invest there, in investment programs. So I think from our perspective that’s what we’re seeing, we’re seeing the hospitals are getting more savvy and more sophisticated about where they make their investments. I don’t see this is a direct competitive debate, I see it more at the macro level because of the types of hospitals that are requiring additional support on their ROI.

David Lewis - Morgan Stanley & Co

Okay. Thank you very much.

Operator

Okay, thank you. And our next question is from Will Plovanic from Canaccord. Please go ahead.

William Plovanic - Canaccord Genuity

Hi, great, thanks, good evening. I just care for two follow-up questions. First Fritz on your commentary on cash needs, when you said that you – I don’t know, but I don’t want to quote you exactly because I don’t remember but, was your comment focused on you have enough cash including cash on the balance sheet and what's available do you feel that’s needed?

Fritz L. LaPorte

Correct.

William Plovanic - Canaccord Genuity

Okay, and then secondly I was just wondering if you could qualify for me the hip launch as we go into Q3 and then how many instruments that do you expect to have out as we hit Q3, Q4; just any qualification of that would be helpful.

Fritz L. LaPorte

Well, I think, I’ll [figure] that I – I think that from your perspective we've talked about the launching of our two systems that we already have which are the, those system that we get from (indiscernible) and from DJO and now the third system which we said that we’re going to launch in the third quarter, and currently we've also talked about a number of hip sites that we've on the call and we've about 71 sites today. And what we’ll do is, we will continue to manage that inventory based on where those – what hospitals are doing with regards to the use of which hip system they’re doing.

William Plovanic - Canaccord Genuity

I understand that Fritz. But as you launch your own internally manufactured, Maurice your own internally manufactured implant like how long will it take it before you have instrument sets available to all (indiscernible) sites?

Maurice R. Ferré

I think – yeah, no I think its fair to say, we’ll have at least 20 sets of kind of in place and ready to deploy during the first couple – I would say in the first two to three months.

William Plovanic - Canaccord Genuity

Okay, so 20 sets in the first quarter and maybe kind of thereafter and – is this the final innovation of the implants and the instrumentation or is this more of an alpha launch with that product set?

Fritz L. LaPorte

I think it’s a – from our perspective we think that’s going to be able to address the initial, the launch okay and as more demand grows we’ll be able to add more instrument sets on to it. Well, let me – Bill, let me be clear, I don’t think that getting instrument sets or the lack of instrument sets is a limiting factor to our opportunity with our new system. I don’t think that’s an issue.

William Plovanic - Canaccord Genuity

Okay, well just – what I am trying to get at Maurice if that go around with the UNI knee as you transition from partners to your own internally developed product, the uptake increased significantly and I am just trying to get a handle on when you’d expect all of the sites to have availability of the internally developed product set versus the external partner sets, because I think that – from your standpoint it’s more profitable, its probably a better solution then kind of the first iteration you have rolled out within the partners.

Maurice R. Ferré

Bill, I mean I would describe that statement as, this we’re excited about this hip system in particular it has very unique features, we’re excited about our partners and that had developed this system for us. It’s going to allow us to do things that we've been working on into our second iteration on our application, and there’s a lot of opportunity to get it right and we’re excited about that. But just once again, this is a process, it’s a matter of going to our existing installed base that has asked specifically for these hip implant systems and it’s about getting them trained, its about showing them what we can do. There is a group of these surgeons that want to do direct anterior, so now we've a solution for direct anterior.

So these are all good positive things and I think it just takes time and we just want to kind of just set the expectation right that this is the process, it’s a launch, excited about it, I think we’re going to have enough installed systems and you will hear a lot more about this in August.

William Plovanic - Canaccord Genuity

Okay.

Fritz L. LaPorte

Bill.

William Plovanic - Canaccord Genuity

Yes?

Maurice R. Ferré

Sorry Fritz, you made the statement that this is more profitable implant system and while it’s – (indiscernible) just to remind you that, its still being manufactured by a third-party. So from a growth profit standpoint it will probably be inline with what we've been seeing on our current [Technical Difficulty] where we believe it will help, it is helping the ASP come up a little bit as we reduce to mitigate the couple only impact on the ASP side.

William Plovanic - Canaccord Genuity

Okay, and then one more question if I may, just – there’s people have kind of danced around it a little and as we look at one of the things you put in place was folks to work on kind of like big contracts, multiunit contracts. And I know it’s a tough question to answer but, its not in this years guidance, is there an – in odds or an opportunity that we could see something close this year, understanding what that funnel looks like or do you think that’s more of a 2013 event in your opinion?

Maurice R. Ferré

Bill, I mean we’re going to continue to drive opportunities. In that strategy we’re looking at and we’ll continue to look at that opportunity of things like bulk buys or dealing with these hospital chains. And I think we’ve got the right type of people behind it helping us to address that, the timing of it and whether it happens or doesn’t happen, now let’s take one step at a time. I think right now what I am more focused on right now is looking at our business and making sure and I feel confident that our fundamentals are place and what we need to do is kind of address the short falls that we’ve been having in the last two quarters of being predictable. And this is where we’re at, it’s kind of best the reality and that’s what we want to do. To me its head down, focus on the opportunity, focus on the fundamentals and get it right.

William Plovanic - Canaccord Genuity

All right, great. Thank you very much for taking my questions.

Operator

Thank you. And we’ll take our next question coming from Michael Matson with Mizuho Securities. Please go ahead.

Michael Matson - Mizuho Securities

Thanks. Most of my questions have been answered I guess, but I just wanted to clarify the RESTORIS hip that you mentioned, what was the timing on that again and I guess and then – you mentioned its going to take some time to roll out the 20 instrument sets so, what quarter – when are you going to start rolling those out and when do you expect to have the full 20 out?

Maurice R. Ferré

Look, sorry for the confusion. We’re releasing it in the third quarter. We’re going to have at least 20 systems out there ready to go.

Michael Matson - Mizuho Securities

Okay. And then just, you know you had the system sale and the Hong Kong and it seems kind of you’ve got these periodic international sales of systems, so I just wondered if you could maybe explain your strategy outside the U.S., are you – what markets are you really targeting. Are you really focusing on that, I mean how does something like that Hong Kong sales kind of come about, we’re you – we’re they kind of coming to you guys are really asking for this or do you have some kind of a strategy to go into certain markets?

Maurice R. Ferré

Yeah, we absolutely do have a strategy in place, for us the international is a ghost story for us in the future and we’ve made the appropriate investments with regards to our regulatory strategy, in terms of our sales strategy. We’ve been working with distributors and lining up distributors. And I think that is just something that you’ll see more and more of it as the end of 2012, 2013 and 2014.

Michael Matson - Mizuho Securities

Okay, but you can't really comment on – I am just curious what specific regions or countries you’re focused on?

Maurice R. Ferré

We’ll talk more about it on our August call.

Michael Matson - Mizuho Securities

All right, fair enough. And I guess I just wanted to go back to the pricing question. Particularly now that you have got the hip system in there, because it is pushing the pricing I guess into the seven digits or just the six digits and I mean I don’t know if that $1 million mark is all that important or really meaningful but, is that becoming an issue here for the hospitals in terms of increasing the hurdles and so forth?

Fritz L. LaPorte

No, the answer is no. We don’t see that as a – the clear. This is all once again based on incremental use of doing procedures at a hospital and there’s a threshold and there’s an absolute payable effect and we've documented that and we understand it and hospitals get that. I think from their perspective it’s all about getting the surgeons support.

Michael Matson - Mizuho Securities

Okay. That’s all I have. Thank you.

Fritz L. LaPorte

Thank you.

Operator

Thank you. And we’ll take our final question from Steven Lichtman from Oppenheimer. Please go ahead sir.

Steven Lichtman - Oppenheimer & Company

Great, thank you. Hi, guys. Really just one follow-up. As you look at the longer sales cycle you’re describing now, is there anything different about the types of hospitals you guys are pushing into now as you’re looking to continue to expand that, you may have changed the bar for purchase whether smaller or whether non-teaching hospitals versus teaching hospitals, anything about the characteristics of the customers that you’re pushing into now that’s changed over the last 12 months versus prior?

Maurice R. Ferré

Well, I think what we’ve seen across our profile of hospitals which most of them are on our website, is that we’re seeing a large percentage of community based hospitals that have or are developing an orthopedic program and a lot of these hospitals fall under the bucket of being part of a hospital chain. And I think we’re seeing less innovators and more early adopters.

Steven Lichtman - Oppenheimer & Company

Okay. And you guys have talked about 1,200 or so potential hospital customer in terms of higher volume, is that still where you guys are targeting so that’s still intact in terms of your potential base?

Maurice R. Ferré

Absolutely. And we've talked about the fact that we’ve penetrated about 10% of that market in a very short period of time. And now we’re seeing that we’re – as we get into – to the early adopters and obviously we're in that phase now looking at those types of hospitals and they’re asking for, we've to react to the information that and the data to support those opportunities. And it -- and from our view and what we’ve done in terms of looking at our analysis, I think it requires hospitals to have build more conviction around supporting the ROI which once again translates into getting doctor support and convincing them.

Steven Lichtman - Oppenheimer & Company

Okay, great. Thanks, Maurice.

Operator

Okay. Thank you. So, I would like to turn it back to Maurice for any closing remarks.

Maurice R. Ferré

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

Operator

Okay. Ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.

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