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MAKO Surgical Corp. (NASDAQ:MAKO)

Q2 2012 Earnings Call

August 01, 2012 04:30 pm ET

Executives

Mark Klausner - Westwicke Partners

Maurice Ferré - Chairman, President & CEO

Fritz LaPorte - SVP, Finance Administration, CFO & Treasurer

Analysts

Kim Gailun - JPMorgan

Matt Miksic - Piper Jaffray

Matthew O'Brien - William Blair

David Lewis - Morgan Stanley

Bill Plovanic - Canaccord

Michael Matson - Mizuho Securities

Operator

Good afternoon ladies and gentlemen, and welcome to the MAKO Surgical Corporation 2012 second 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 call.

It is now my pleasure to introduce your host Mr. Mark Klausner of Westwicke Partners.

Mark Klausner

Thank you, operator. Joining us on today’s call are MAKO’s President and CEO, Dr. Maurice Ferré; and the company’s Senior VP and Chief Financial Officer, Fritz LaPorte. The company’s press release of 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 on 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 7 days following the call.

Before we begin, I would like to caution listeners that certain information discussed by management during this conference call including answers to your questions will include forward-looking statements covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company’s business.

For a discussion of risks and uncertainties associated with MAKO’s business, I encourage you to review the company’s periodic reports filed from time to time with the Securities and Exchange Commission including the Form 10-K for the fiscal year ended December 31, 2011 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.

In respect of your time, we tend to limit today’s call to one hour. 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 2012 second quarter results. As a follow up to our selected Q2 operating results call on July 09, on today’s call, I'll provide you with some additional details on the operating results for the second quarter and Fritz will review the details of our financial results.

I'd like to devote the balance of the call to discuss the current perspective on the business and operating priorities for the remainder of 2012. In the second quarter, we sold nine RIO systems of which eight were sold to domestic customers and one was sold for a customer to use to a prominent hospital in Hong Kong by our distributor in China.

These nine RIO systems brings MAKO’s commercial installed base of RIO systems as of June 30, 2012, to 126 worldwide of which 123 systems are domestic. Of note, two of the systems sold in this quarter were sold to hospitals that are part of the Tenet Healthcare corporation, two are part of the Adventist Health Systems and one is part of the Community Health Systems.

In the second quarter, we sold nine MAKOplasty hip 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 purchased the MAKOplasty hip application. Worldwide, through the second quarter, our customers performed 2,590 MAKOplasty procedures, of which 2,494 were performed at domestic sites. Of the 2,494 domestic procedures, 281 were hip MAKOplasty procedures.

The 2,590 MAKOplasty 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 per system, per month during the second quarter of 2012, an increase from 6.6 in the first quarter of 2012 and 6.4 in the second quarter of 2011. Through June 30, 2012, approximately 17,700 procedures have been performed since the first procedure in June of 2006.

We had five abstracts accepted to upcoming conferences and attended four conferences in the quarter. At the annual CAOS UK meeting Dr. [Mark Blight] presented data on the first 50 patients in the MAKO sponsored randomized control trial being conducted at the Royal Glasgow Infirmary in conjunction with the University of Strathclyde.

The study compared unique compartmental knee implant alignment error between two groups of patients. Those receiving the makeover stores MCK unicompartmental implant delivered by the RIO system and those received the Oxford Partial Knee mobile bearing unicompartmental implant using manual non-robotic instrumentations.

The results are statistically significant and indicate more accurate alignment using RIO system. Specifically the tibial internal and external rotation, 70% of the MAKOplasty procedures showed less than a two degree of error against their target value, while only 20% of the Oxford cases were less than two degrees of error.

In comparison all MAKOplasty procedures showed six degrees or less of error while approximately 50% of the Oxford showed six degrees or less of error. In the tibial slope, 70% of the MAKOplasty procedures showed less than a two degree of error against their targeted value, while only 15% of Oxford cases showed less than two degrees of error.

In comparison, all MAKOplasty procedures were four degrees or less of error yet approximately 35% of Oxford cases showed four degrees or less of error.

In the second quarter we completed four national and two regional bioscope training session with a good mix of current and perspective surgeons. We currently plan to conduct five additional national and three regional BioSkills last for the reminder of 2012.

In conjunction with our customers, we participated in 92 MAKOplasty patient education seminars in the quarter with nearly 4500 perspective patients in attendance and finally MAKO was featured in 46 local and national media storage which continued to build awareness of robotic orthopedics and the benefits of MAKOplasty. As we stated on our earlier call, the first half of 2012 has not met our expectations and we are refocusing the organization on the execution of our business plan. I will discuss our strategies for doing this after Fritz reviews our financial results for the second quarter.

Fritz LaPorte

Thank you, Maurice and good afternoon everyone. In the second quarter of 2012, we recognized total revenue of $23.7 million representing an increase of $5.1 million with 27% from the $18.6 million generated in the second quarter of 2011. Revenue in the second quarter of 2012 consisted of $13 million in procedure revenue, $8.2 million in system revenue and $2.5 million in service revenue.

Procedure revenue of $13 million represented a $5.3 million increase or 70% over the second quarter of 2011 and was generated from the 2590 MAKOplasty procedures performed in the quarter at an average selling price or ASP of approximately $5000 per procedure which is in line with the previous quarters. Of the 2,590 procedures performed in the quarter 280 were MAKOplasty hip procedures at an ASP of 4,700 per procedure which is in line with the first quarter.

System revenue of $8.2 million represented a $1.3 million decrease or 14% from the second quarter of 2011. Of the $8.2 million of system revenue $7.9 million was generated from the sale of the nine RIO systems and $200,000 was generated from the sale of two MAKOplasty hip applications to existing customers.

The $8.2 million in system revenue for the quarter is net of approximately $1.1 million for the deferral of the portion of system revenue attributed to the warranty provided to our customers under the terms of the RIO system sales. This deferred revenue will be recognized readily over the warranty period as a component of service revenue.

Total system revenue of $8.2 million was also net of approximately $220,000 for the deferral of revenue attributed to the hip 2.0 application upgrade associated with a nine MAKOplasty hip applications sold during the quarter. The hip 2.0 application upgrade is anticipated to occur during the third and fourth quarters of this year at which time the associated revenue will be recognized.

Turning to RIO system ASP, of the nine RIO systems sold, eight were sold to domestic customers at a blended ASP of approximately $1,050,000 per system. Seven of these eight domestic sales included the MAKOplasty hip application. The ASP for the two MAKOplasty hip application upgrade sold to existing customers was approximately $145,000 per application.

Total gross profit for the second quarter of 2012 was $17.3 million compared to a gross profit of $13.1 million in the same period in 2011. Total gross margin in the first quarter of 2012 was approximately 73% consisting of a 76% gross margin on procedure revenue, a 66% gross margin on system revenue and 82% gross margin on service revenue.

Gross margins were in line with previous quarters. Turning to expenses, total operating expenses for the second quarter of 2012 were $25.8 million, an increase of $2.7 million from the $23.1 million for the second quarter of 2011.

The increase in operating expenses over the same period in 2011 was primarily the result of an increase in selling, general and administrative costs and an increase in research and development costs.

Selling costs increased due to costs associated with the selling and marketing activities related to driving the ongoing adoption of our RIO system, MAKOplasty applications and our implant systems. General and administrative costs also increased as we continue to build infrastructure to support our ongoing growth.

The increase in research and development costs was primarily associated with the continuous improvement of the RIO system platform and MAKOplasty applications including the recently launched MAKOplasty Total Hip Application and the development of potential future products. Net loss for the second quarter was $8.5 million including non-cash stock based compensation expense of $3.4 million or $0.20 per basic and diluted common share based on average basic and diluted shares outstanding of $42.2 million. This compares to a net loss for the same period in 2011 of $9.9 million, including non-cash stock based compensation expense of $2.6 million or $0.24 per basic and diluted share based on average basic and diluted shares outstanding of $40.6 million.

As of June 30, 2012, we had $35.3 million in cash and investments and no debt. Our net cash used in the second quarter of 2012 was $11.5 million, was primarily used in operating and investing activities including the purchase of inventory and instruments for the commercial launch of our hip implant system.

Turning to guidance, we're reaffirming our 2012 annual guidance provided in our release of select operating results on May 7, 2012 of 42 to 48 RIO systems sold and 11,000 to 12,000 MAKOplasty procedures performed.

Now, I would 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 discuss our current perspective on the business and the operating priorities for the balance of 2012. MAKO was founded on the belief that there is a significant opportunity in delivering clinical value in orthopedics through consistently reproducible precision. We're encouraged to have seen this premise validated in a number of ways. We also continue to see strong interest in the MAKOplasty from hospital, surgeons and patients.

Hospital interest is increasing as a result of the growing number of hospitals that have built successful and profitable MAKOplasty center of excellence. Surgeons’ interest is evident by the increasing hands on participation with our products at our booth and key meetings and the continued stronger hearing attendance in our (inaudible).

Patient interest is driven by the many successful patient testimonials and evidence in the large and growing attendance at patient educational seminars. In the last five years, MAKOplasty has grown from zero to nearly 15% of the partial knee market utilizing robotics to achieve consistently reproducible precision.

Additionally, the impact of MAKOplasty in the marketplace has gained increasing attention from competitors who are beginning to respond to MAKOplasty through counter marketing efforts and in some cases early stage development of potentially competitive technologies.

Despite the large market opportunity, the early signs of MAKO’s success and MAKO’s unique advantages, our growth over the past two quarters has slowed as we have not executed as effectively as we hope for. For RIO system sales we were slow to recognize that the hospital administrators are performing more extensive business case analysis and are getting support for more surgeons prior to purchasing a system. Therefore, while we have been successful in gaining surgeon support in hindsight, we underestimated the time and effort necessary to close system sales.

On the procedure front, MAKOplasty procedure growth slowed in the first half of the year and we must further develop and execute strategies to increase utilization in the existing accounts as well as help new accounts ramp up more effectively.

This is important as the continuing demonstration of hospital level success will drive demand for RIO systems. In addition, higher utilization allows us to leverage our fixed expenses and investments in support of our installed base. I characterize MAKOS' journey to be as an evolution.

Initially, we were very much a technology driven organization. As we develop and introduced the RIO system and the initial implant systems, our culture transitioned to being a product driven. Now that we have broadened our platform, we introduced multiple applications and made a recognized impact in our market, we must now build on our technology and product based foundation to become a customer driven organization focused on sales execution.

In this process, we need to better execute on three key operating priorities. First, in our RIO sales effort we need to continue to broaden the base of accounts in our sales funnel and develop targeted strategies to bring these accounts to closure. We are further investing in sales force training to deepen the knowledge of this compelling existing data that supports the clinical and economic value of MAKOplasty to enhance the tools necessary for teams to close deals.

Second, we are stressing our organizational focus on driving utilization at our new and existing accounts. This is being accomplished through strengthening our surgeon relationships. To accomplish this, we plan to deepen the orthopedic expertise resonance throughout our organization, improve our sales and marketing analytic tools and develop programs to disseminate best practice across our account base.

Third, we are continuing to enhance our product and application with an emphasis on surgeon efficiency. To this end, in the third quarter, we plan to begin the commercial rollout of both our RIO 2.5 software and our HIP 2.0 software. The RIO 2.5 enhances the base RIO system platform, improves efficiency of a partial knee application, speeds up the registration process and generally improves ease of use. The HIP 2.0 software enables the direct anterior approach for MAKOplasty hip arthroplasty as well as the use of the soon to be released MAKO pipeline restores implant.

The refocus of these three key operating priorities has resulted in changes in our management team and sales organization. As announced in early July, we restructured the management team. Following the departure of our Senior Vice President of Sales & Marketing, we have initiated a nationwide search for a Senior Vice President of Sales. In the meantime, I have assumed responsibility for managing all sales efforts on a day-to-day basis.

We have expanded the role of Ivan Delevic, our Senior Vice President of Marketing beyond Strategic Marketing and Business Development to include all marketing functions. We believe that having marketing consolidated under one leader will allow us to align our marketing efforts with a more commercial focus and execute more effectively for the remainder of 2012 and beyond. We also restructured our sales compensation plan to better align with our key operating priorities.

In conclusion, despite a slower than anticipated start to 2012, I remain confident that there is a big market opportunity for robotics in orthopedics and that MAKO has and will continue to develop the best technologies and products to take advantage of this opportunity. There is a strong and growing body of evidence to support the clinical and economic benefit of MAKOplasty. We're refocusing our team and our approach to the market to realize the full potential of this unique opportunity.

We recognize that the benefits that will come from this constructive improvements we are making will take time to manifest. However, we believe these changes will ultimately optimize our business and allow for long-term success. We look forward to keeping you up-to-date on the progress we're implementing as we implement these changes. Having said that, we intend to devote a significant majority of management’s time to our day-to-day business and intend to limit our investor relation activities during this period of intensively focus on execution.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Kim Gailun with JPMorgan. Kim Gailun your line is open.

Kim Gailun - JPMorgan

I guess the first one for Maurice. Maurice, you talked about restructuring some of the sales compensation to better align key priorities. Could you just give a little bit more color on what these key priorities are, what the changes will be around the sales force restructuring? And then the follow up would be, curious if you have lost any sales people or let any of the lower performers go since you know, over the last call it, four to six weeks?

Maurice Ferré

Sure, Kim. Let me answer the second part first and then I'll answer the first part. So in terms of, we go through a process of evaluating our sales force and as normal course of business and so the underperformers we have as we normally do like (inaudible) what we think are non-performers. So we’ve done that.

And secondly, I think that’s a practice that we will continue to be doing, I think one of the keys to the success of our business is going to have the right people in place to close these transactions. So I think that’s one of the keys to our success. So regarding compensation, you know, we want to make sure that our teams are fully aligned, especially on the MAKOplasty side; I think it's very important that these teams are aligned and we are able to put best practices in place, and that’s what we're currently doing.

Kim Gailun - JPMorgan

Okay; and Maurice just as a follow-up there, maybe on timing of the naming of a new Head of Sales and how you think about that transition?

Maurice Ferré

You know, so right now what we have Kim, we have a nationwide search on its way and we’ll see what that does. I mean I think that what's exciting from the early signs of this is that we’re a fast growing company. We have a great reputation in the orthopedic industry as being innovators and there is a lot of people that are following us and it’s a great opportunity for somebody of the right caliber to step in to take us to the next level and we are excited about that process and right out of the gate we are excited about the type of people that are starting to pop-up.

Kim Gailun - JPMorgan

Okay. And then last one, in terms of the comp change to my earlier question, so is it fair to think that the rest compensation will be far more bonus oriented versus the base?

Maurice Ferré

Yeah, absolutely; I think that one of the best ways to incentivize sales people is on variable comp and I think that’s the right type of motivation. From our perspective that’s how we have been driving our business and we are continuing to do it that way.

Operator

Our next question is from Matt Miksic with Piper Jaffray. Your line is open.

Matt Miksic - Piper Jaffray

I wanted to ask you a follow-up on a couple of things you mentioned. So one was, one on this announcement you made or the disclosure you made around the two robots, (inaudible) repeat customers I guess that makes them now and you know maybe talk a little about if you could what does that tell us about the way those relationships are sort of coming along; is that it, we can expect them to kind of continue to nimble that investments like this or customers like that and maybe why hospital groups might be moving along that line as there maybe time suite of time instead of a big large announcement, just some color around the hospital group relationships that you have and then I have a follow-up?

Maurice Ferré

Sure Matt. So first of all, I think that a big part of our business at this stage has been working with these IDNs or these corporate accounts and obviously with the success that we had last year with HMA I think it really got a lot of attention from a lot of other hospital IDNs. And you know what we did is we actually brought a corporate person who is actually an intuitive person, came out of intuitive surgical that is running our corporate accounts and we have had the opportunity to meet a lot of these hospital IDNs and throughout the last couple of quarters and I think what we are focused on is to try to deliver value to them. We have seen the success of MAKOplasty program. They have seen the success on various programs. So all these hospitals that we mentioned have had systems in place, except for community, community is that just joined us for the first time.

So they are starting to see the success and what we saw happen with our HMA account was we had one or two successful accounts and then that led to more confidence from these hospital chains to go forward with additional programs. Whether this comes in the form of a bulk order or bulk deal like the HMA deal, those are the things that we don’t really plan for it. The way we are looking at our business is very much a bottoms up analysis.

We want to build a strong business plan upfront to get surgeon adoption upfront because we know that by doing that we are going to have the best shot of seeing the utilization at those accounts to be successful and by doing those successful utilizations and seeing utilization right out of the gate it’s going to do two things. Number one, it’s going show significant improvements in terms of our ability to leverage our financials and our balance sheet because we have these fixed assets in these accounts and they are effective by having large procedures right out of the gate.

And we know statistically that they maintain themselves on a faster clip and a faster run rate. And secondly by being successful. All of a sudden we know that that's going to result in more RIO systems. And you know its not by – the fact that in the last five years we've been able to create that 15% or close to 15% of market is I think one of the positive signs on how we are growing our business and we are going to continue to grow this business.

Operator

Thank you. Our next question comes from Matthew O'Brien with William Blair.

Matthew O'Brien - William Blair

Just wanted a little bit more color on the new software upgrades that you are going to be rolling out in the coming quarters. Just can you talk a little bit about the part of the organization that's going to focus on that? I would assume it's your technical group and then just kind of any kind of accounting impact that that may have for the second half of the year?

Maurice Ferré

Sure Matt, on the product side of it, we talked about the release specifically of our software, our version 2.5 and our hip 2.0 and we said that we were going to release that by the end of the third quarter and we are well on track of rolling it out. And you know so it will be released, will be rolled out. It will take about two quarters to kind of rollout to our installed base.

We've been working on this software, first with the 2.5. The key thing as I mentioned in the call what I think is really key is that it really improves efficiency and it speeds up the times. We already have it at 10 sites. So we've been testing it and we've got very good positive responses and reviews from that.

We think this is one of the key steps that we are going to do and focused on as one of the three steps that I mentioned. That we are going to have focus on improving our utilization at our existing accounts and our lodged accounts as well.

So that's the importance of that 2.5 software. On the hip 2.0 we've talked about this and there's two key things that it brings that are very important is a lot of our users have been asking to do direct anterior and I think we have an opportunity with this software released to do direct anterior approaches.

And as you know the direct anterior approach is more of a minimally invasive approach on hip procedures and there's a growing demand for those types of applications and I think we see our surgeons that had looked at this, see real value of using the robotic system for specifically placing the cup on these direct anterior approaches.

And secondly it also includes the ability for us to really launch what we think is going to be a very successful implant system with our partners that we've been working with which is the pipeline.

Matthew O'Brien - William Blair

Just a bit more on that if you wouldn’t mind, when you say it improves efficiency, are you just simply talking about set up time being a little bit faster or would the cases be a bit faster and then I'm assuming you are not going to be charging your customers anything for these upgrades?

Maurice Ferré

Yes, we are not charging for the software upgrade and what I mean improving efficiency, it's pretty much the speed. So the software, the upload pages are faster, the registration process which is if we look at what most people complain about on our system, it's -- the time it takes to do registration. So we've increased the -- improved the algorithms and the techniques on how they do a registration and net-net what we see is it improves the user experience.

So I think what we are going to be able to do is once again it's our opportunity is – we've talked about to the low to mid users, we have about 200 surgeons that are out there that are trained to use MAKO. And what we think this has a real opportunity to do is to get them to get more excited about using the RIO system and its ability. So we think that have potentially have an impact and we're focused on that -- on improving utilizations at our sites.

Matthew O'Brien - William Blair

Okay, just one quick follow up. The installed base is contracted by one. I know it's only one, from 127 down to 126. I know there is a system that was out there that I think you bought back. Can you just talk a little bit about that situation specifically and then any accounting that maybe associated with that in terms of the sale of it initially and then are there any other situations that may be similar to that, that can be up at this point.

Fritz LaPorte

So, Matt, just to close out your question on 2.5 and 2.0 revenue recognition implications. At this point we don’t believe 2.5 will have revenue recognition implication as it will be -- the rollout will occur and be included in our Q3 system sale. So that shouldn’t be an issue. Hip 2.0, we did as I mentioned in my prepared remarks, we did ascribe a portion of the revenue to the hip 2.0 feature, a small portion in total for the 9 hip application that amounted to about $220,000 in the quarter.

So that’s being deferred, that revenue will be recognized during Q3 and Q4 as those particular systems get upgraded. Regarding the system, you mentioned which happened during Q2, it was a unique situation. So we're not aware of any similar situations, but it was a system that we sold pretty early on probably 2007.

And that system surely almost immediately after we sold it, the hospital was acquired and for essentially political reasons, that system never really got placed into use. And because they were selling on the open market, we thought it was best to acquire that back. So that it’s in our hands and not other people’s hands since we do want to control our installed base to be productive and so forth. And it did not have an accounting implication as that was not purchased back under a commitment or on obligation. It was more like just a open market transaction.

Operator

Our next question comes from David Lewis with Morgan Stanley. Your line is open.

David Lewis - Morgan Stanley

Fritz or Maurice, one of the comment or point you made earlier, it sounds like you've talked a lot about execution on this call and you talked about bringing in more talent and it sounds like some of that talent obviously is going from either robotic surgical existing people or as well as large recon sales force people, general managers things of that nature.

I guess when I hear all that and investments in training, I think it’s expensive. I wonder if you could sort of talk about that. And then may be Maurice and Fritz, how you are going to go about and what kind of visibility can you give us in terms of the investment in the business versus controlling your cash burn?

Maurice Ferré

Well David I will take the first stab at it. It’s really interesting because if you look at our business, it's very unique and I was just talking to somebody just recently and they were just commenting to me somebody in the industry in the orthopedic industry kind of commenting to me in a favorable way saying that in their career they have never seen a company like MAKO and the opportunity and the potential that MAKO has in a large market like orthopedics.

So I think we really are in the business of really transforming orthopedics. So when I talk about the how the company has transformed or how its shift in terms of its focus. You know we talked about technology, then we moved to product and now we're kind of moving into kind of a sales execution mode.

And I know what I think what it lends itself is – it's a unique combination. There aren't very many successful companies out there in our space, in the medical device space. That's growing or grown the way that we have the potential to grow over the next five to 10 years and what we need is a combination of somebody who or a team or a mindset that understands what real growth means and builds into the growth mode.

And we also have the uniqueness of dealing with specifically in orthopedics in terms of our implants and our relationships with our doctors. So it's a combination of what needs to be blended into this organization and that’s what we are focused on. We know the pieces that need to kind of fit in and as we go forward and looking for that type of person, I think that we will be able to kind of attract that type of talent.

And it just doesn’t start off with our sales person. It's also within our organization and how we kind of look at it. With regards to training and the cost associated with training, I think we are going to take a very disciplined approach in looking at our operating expense and making sure that it's in line with what we are actually -- how we are growing the business.

So I think those two things do seem to fall into line and then I think we will be able to do it effectively.

Fritz LaPorte

If I can just expand on that. So the short answer is we do not expect a significant increase based on these initiatives, we are talking about. As Maurice mentioned, we have already invested and start to build these resources. So it really is a refocus of existing resources that we've invested in the business and redeploying so its shuffling with what we already have as opposed to going out and acquiring something we don't have, we've been focused on expanding our training, its been a big initiative for us over the last year.

We actually have a facility here that we are expanding into; it will be completed in the fourth quarter which will allow us to have a greater training program for our internal folks which is one of the things that Maurice mentioned as initiative.

The second thing is which Maurice just alluded to as well, is we are taking a hard look at both reducing our working capital and operating expense needs to be in line with our top line expectations for the remainder of the year as we look forward beyond that.

David Lewis - Morgan Stanley

And then just one quick follow-up. In terms of utilization there's been a lot of focus on hip and the new applications coming this quarter and next quarter but if you think about the [UNI] business which I think is supporting the majority of the valuation now, if you go to the second half of last year and the first half of this year, utilization is flattish maybe a little bit down, I guess have you been able to kind of identify with a little more time in the quarter, why utilization or growth procedure growth decelerated utilization take down, would you expect utilization specifically in the [UNI] business to be up in the second half of the year over the first half?

Fritz LaPorte

The answer is yes, Q3 is some times a little more challenging but Q4 strong based on the visibility we have now we think our [UNI] business will remain relatively consistent in Q2 and Q3. We have an opportunity to pick that up in Q4. But we have you've heard I think a lot in our prepared remarks around focusing around utilization and the importance of utilization being a significant contributor not only to our financials but successive MAKOplasty programs as well as which turns into new opportunities for us. So we're focused on employing best practices around center of excellence programs that we've identified from our high volume site.

Maurice mentioned enhancing the user experience with the version 2.5 and hip 2.0 software as well as expanding for MAKOplasty sales trends. So we think those elements will help drive procedure growth as we go forward. Obviously, it doesn’t all happen in one quarter. So it will take sometime but that we believe the refocus will ultimately result in a much stronger financial position outlook as well as better results on the sale side.

Operator

Our next question comes from Bill Plovanic with Canaccord. Your line is open.

Bill Plovanic - Canaccord

So, just, you know, Maurice, you talked a lot about making changes. When do you start implementing this focus or changes that you’re talking about and when do we see that start impacting the numbers?

Maurice Ferré

Well, the answer is its already taking place. So we've already, I talked about our three key priorities and alignment [implying] the organization about driving RIO sales, increasing utilization, enhancing product offering, and in a prepared remarks, I went into details about what we specifically doing on those three fronts. And so that the answer is now and I think the impact of it I think, we are right now looking at our guidance and we think that we are confident in our guidance in terms of what we have stated publicly in terms of the number of system placements and the procedures at this point. And I think these are going to be key drivers going into 2013 we get the story back on to the type of the growth trajectory that we have experienced in the past.

Bill Plovanic - Canaccord

Okay and then as we talk about the new hip implant just I think we talked on the last call that this would be something that would happen overtime kind of (inaudible) site as we go into Q3 more in Q4. When we do expect all the sites to have the hip implant available?

Maurice Ferré

In terms of our products right as of June 30, we have 58% of our sites or 71 accounts have hip applications, so we are going to as we roll out this product and that’s why we are [lead] to it right I think we moved the focus over to kind of a more on the sales side understanding that what we call the downstream marketing putting the information out there and letting our surgeons know what the value is of these implants and kind of roll it out on a needs basis and I think that we think that there is a real opportunity there.

But I just want to emphasize I think it’s important to everybody just to appreciate this is, what this is, the fundamentals of our business are very much intact, I think that we are seeing the demand and the interest of developing of robotic program in orthopedics as a real thing, it is palpable, it’s real, there is a lot of interest on a lot of fronts and I think that, where we are today is we have demonstrated this perfect execution for 16 straight quarters and all of sudden we started falling flat on our face and our growth story started decrease over the last two quarters.

I look back that and I think about business what went wrong and what do we have to do? And at the end of the day, I truly believe this is more than anything in execution failure. And what we need to do is understand and I think we have a clear understanding of what we need to do, and these things fall under those three premises that we described.

So how the launching of the hip comes with PST? I want to be cautious about it because I know in the long run the story is sound. I know that there is a real demand for surgeons that are looking, there is a whole issue about cost placement is the real issue in our industry and there is no real solution to fix it. And I know that the doctors that buy into this stuff and understand why it is important, they get it. And I think that those are to me the sign that says this is going to be successful. Its matter of timing and putting these things in place and to me it comes down to really execution. How do we get back on track to demonstrate this growth?

Bill Plovanic - Canaccord

And then if I could just one follow-up, one of your objectives, goals, focus on driving utilization you are already doing the docs are already doing the cattle calls they are bringing the people in. I don’t understand how you fell down on that and what else you can do to help drive that. I am sorry if you could give me some clarity on your understanding on that?

Maurice Ferré

We want to spread it across all accounts. So we have great pockets of successful stories that are remarkable. And we have hospitals that are looking at that and say how do I do that, how do I become successful like that and that's why we have this initiative of looking at utilization and taking best practice. We want to be able to take best practice and we have product enhancements that are coming in and we want to be able to kind of spread that across. We know that these programs can work. We've seen them work. We have case studies that make them work and we just need to execute on this.

Operator

Our next question comes from Michael Matson with Mizuho Securities.

Michael Matson - Mizuho Securities

I guess my first question and forgive me if you mentioned this earlier on the call, but I just wanted to know if you had updated your guidance around cash burn for the year. I think I asked about that on the last call and you indicated that you would provide an update on this call and then I guess secondarily just wanted to ask about the need to raise additional capital because as I understand that the Deerfield credit facility is really not intended to be sort of a longer term financing vehicle?

Fritz LaPorte

Sure Mike. So through the first half of the year we've earned just over $23 million. As I mentioned earlier, we are focused on reducing our working capital on OpEx needs to be more in line with our top line expectations. Same here today, we would estimate that in 2012 in total we've earned approximately $35 million in cash which would leave us with a year end balance of somewhere around $23 million and how that translates to ultimately financing we've talked about having the Deerfield credit facility available to us and at this point its too early to tell. We will end the year with $23 million and we might cross that bridge when we get there, but at this point we are comfortable with our cash balance looking out here over the short term.

Michael Matson - Mizuho Securities

Okay. And then I guess just wanted to ask about your commentary around surgeon training, it sounds like there is a pretty significant interest in getting trained, but what kind of conversion rates are you seeing there for the doctors that take your earlier training in terms of ending up buying ultimately buying a robot at their hospital and is this something that they are sort of paying their own way for or you are covering the cost of, the travel cost and so forth for the doctor getting trained?

Maurice Ferré

So Matt just to be very clear and this is a very important point, when we are talking about training we are talking about our sales training, our internal training of our folks, of our team on the sales process. Okay, so I just want to make sure, I want to make that very clear.

Michael Matson - Mizuho Securities

Yeah, I understand now, in this call, I guess I am referring to kind of your commentary on the last call that you had after the pre-announcement?

Maurice Ferré

Yeah, specifically with regards to the last call when we were talking, you know I want to make sure I can answer the question, could you be specific?

Michael Matson - Mizuho Securities

Yeah, so I think you said on the last call that you indicated that there was a strong demand for surgeons to be trained and there was a backlog of surgeons wanting to come to the training courses you were holding for MAKOplasty?

Maurice Ferré

Right, so we talked about that as being a key indicator. So we talked about, we actually have cases, we have sites already booked out till November, we talked about how many national BioSkill labs at last we’re going to do. So yes what we do is we do pay for the surgeons expenses to come to the BioSkill labs, their airfare and their arrangements and that’s it. So it's usually on their free time, they spare time coming out to learn how to do MAKOplasty.

Fritz LaPorte

You know, that’s a conversion. I’ll just remind you that it does, the attendees consist to have of a couple different categories. Our perspective customers, there might be surgeons from existing RIO sites that with an additional surgeons getting trained or there could be surgeons getting additional advance training whether it be advanced training on partial knee or a knee surgeon who has been active in knee and now is being trained in hip. So a it’s little hard to look at that total group and say what's ultimately converts. We trained over 800 surgeons to-date and we say probably about 50% of those are active MAKOplasty users.

Michael Matson - Mizuho Securities

And then just you cited this randomized control trial that you are running in Scotland in the press release and you mentioned that the alignment was better with the RIO system versus just manual instruments. But is that trial also going to look at any kind of clinical endpoints in addition to just the overall alignment of the implant?

Maurice Ferré

Yes, this is actually, a lot of people always have asked us about this study in a particular kind of key data. You know, we have over 70 studies that are going on and this is one of the most promising and the fact that this data come out to us it’s meaningful because what it’s really saying is in terms of accuracy and alignment there is statistically significant manual instrumented knees and this is on a randomized study and I think that what it entails is about a 150 patients.

So this is the beginning of it and this is the first 50 patients and we have currently about a 100 people that are enrolled in and I think what we are going to see beyond the alignment is you are going to see an accuracy, you are going to see studies that are going to start showing things about early pain release, functional return, cost of care, post operative complications.

And I think that a lot of this data should be available and peer reviewed we believe by the first quarter of 2013. So we are excited about the additional data that’s going to come out of this randomized clinical study and this is just the beginning.

Michael Matson - Mizuho Securities

Okay, so it’s not just looking at the alignment, it’s looking a lot of other clinical measures as well.

Maurice Ferré

Absolutely.

Operator

Our next question comes from Matt Miksic with Piper Jaffray. Your line is open.

Matt Miksic - Piper Jaffray

Hi, thanks for the follow up. So I did have one thing, a couple of things to follow up here on that you mentioned Maurice about; one on the technology and I wasn’t clear whether it was the software or enhancements to the technology on speeding up the registration process. What is that exactly and maybe if you have anything in the hopper under development, priority maybe in your R&D in sort of future releases to sort of speed up that part of the procedure, I love to hear whatever you are willing to share?

And then the other just sort of follow up on one of your questions is this comment about trying to bring utilization up quicker and since we have seen the shift as you thought about would get more docs involved, more of a team approach around the robot for some of the new accounts. Have you seen anything you can tell us from some of the accounts that have gone in like that so far or when would you expect to see some of the benefit perhaps of utilization on the back of putting the robot with three or four docs around it instead of one or two; I would appreciate that color as well?

Maurice Ferré

So Matt, so first of all, I would say on the software, as I said earlier specifically to the new release, I mean this is a release that we have been working out for close to a year and we have taken a lot of input from our surgeons of what they want and this is our iteration of the software. And I think what’s unique about this in particular is that it really speeds up certain pieces of the process and in particular one of them happens to be that registration piece where they go in with a probe and they touch possible points to correlate the patient’s anatomy to the real anatomy. And you know I think this is one of those steps that have been always been very cumbersome, and I think that we have made some improvements on that and I think that’s going to have an impact.

The feedback that we’ve gotten from the ten sites that already have the software and have been using it now for a few months has been very, very positive and I think that may absolutely see the difference and be more efficient. And we have proven that; we have actually done studies showing that they are more efficient with this software and it’s a more delightful experience or user experience.

And we think that’s going to have an impact on the guys that aren't the super users or the high volume users, but the kind of the guys that are in the kind of the low to mid range that we talk about, a lot of these guys that we bring into our labs, our BioSkill labs where we now have well over 300 surgeons that are actively using our systems.

And what we want to see from that opportunities is there is an opportunity for our sales force to go in there and explain to them, look here is an opportunity to see what's new on MAKO and that’s in MAKO; and I think that user experience I think is going to be beneficial to see that population, that specific population of surgeons increase their procedure of volumes and I think that's going to have an impact on our utilization.

And I think we should start experiencing that I think in the fourth quarter as we kind of move into it and I think our refocus of our sales force in terms of training them on how to present the clinical data, the clinical support, the marketing information that is best practice and we are successful as these accounts have been so successful, we know that we could replicate that and that's where we are going with it.

Matt Miksic - Piper Jaffray

And can I squeeze in just one, I know you have a follow-up that you are not in the past talking about what may or may not have closed as you got through the initial close of the quarter and into the next quarter. Could you, are you willing to possibility reconsider that policy or maybe talk a little bit about the progress on some of the delayed or pushed out deals out of Q2?

Maurice Ferré

No we can't do that. Thanks for asking. I think we want to stick with our --

Operator

Our next question comes from David Roman with Goldman Sachs. Your line is open.

Unidentified Analyst

Hey guys this is [Chris] in for David. My questions are more of a high-level strategy approach and coming out of the last call, I felt like there was a whole lot of emphasis around the fact that longer selling cycles were really, it wasn’t a result of an ROI or a pricing issue or it wasn’t an issue of clinical data.

The conversation was very geared toward (inaudible). Now I feel that you know, while it's still an issue of executing on these deals, I feel like the conversation has really pulled back to more of an ROI type conversation and more of a focus on executing by equipping the sales force with data.

I am curious one on, why the change in tone or change in direction and is this a result of any more clarity from particular accounts for them saying, this is something that would help you bring us to the table closer. You know, why the change in tone versus the last call?

Maurice Ferré

So, Chris I am glad you brought that up because I think it was something that when we had brought up in the last call, there was some confusion about what we're talking about. You know, and I will be very specific about it and that is -- what we talked about that the hospitals, the hospital administrators were trying to reduce their risk in some very specific accounts that didn’t close that quarter.

And what they had requested after we had gotten approvals from the first layer of CEOs, and these were IDN accounts and what they were asking for is, hey look to reduce my risk, can you bring on a couple of more surgeons. So this was a second layer. It was an administrative decision. It was based on the hospital, not saying that this doctor can't do these number procedures, but they want to see more doctors spread across it just in case something happens to that specific surgeon.

And when we talked about in the earlier call, I think from our perspective as we dug into the issue we, it was early in our assessment and I think that what we concluded was and where we emphasize now and what we think is important is more on the execution side on our side of making sure that we have strong enough funnels that we know how to close the deals that we have to understand where we are in the process. And I think it’s just the maturity of our company in terms of where we are growing.

Unidentified Analyst

Okay, wonderful thank you. If I could [segway] off that just a little bit, fundamentally I was just curious about what the changes have been and how you guys are qualifying these accounts? I get that there is a little bit of or not so much of science involved in it but when you look at these accounts and you say this is something that it’s my pipeline, it’s in the funnel and I think that this encloses, do you guys, have you evaluated what the timeframes for closing are that you think these are realistic as far as setting your guidance is it six months, is it 12 months, is it just going to take the hospital CEO's word for it, how are you guys looking at these things differently now?

Fritz LaPorte

Chris listen, I have been involved in every detail of this point. I am right now involved looking at every deal and what’s in our funnel and qualifying these funnels and talking to CEOs and talking to the different administrators, talking to the doctors and assessing the situation. And I will tell you that we are being much more thorough on the product or in this process in terms of what we are calling and what we are not and I think it’s (inaudible) process. I think once again it’s the more I look at this and has an opportunity to look it now over two quarters and I have come to the conclusion that this is very much an execution story.

Operator

Thank you. I am not showing any further questions. I would now like to turn the call back to Mr. Fritz for any further remarks.

Maurice Ferré

So let me close by thanking all of you for taking the time to join us on our call. We sincerely appreciate your interest in MAKO and we look forward to updating you on the upcoming progress. And finally, I just wanted to add my last piece on this thing is, I want reiterate I think a, the market opportunity is very large and I think everything is intact. The like more we look into this, the more I look in this, I have very strong convictions about that. But you know I am just going to say one thing, action speaks louder than words, so we are focused on results; we are going to get it done. So thank you very much for your time and patience.

Operator

Ladies and gentlemen thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.

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