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MAKO Surgical Corp.(NASDAQ:MAKO)

Q3 2012 Results Earnings Call

November 7, 2012 4:30 PM ET

Executives

Mark Klausner - Westwicke Partners, IR

Maurice Ferré - Chairman, President and CEO

Fritz LaPorte - SVP, Finance Administration, CFO and Treasurer

Analysts

Matt Miksic - Piper Jaffray

Chris - Goldman Sachs

Kim Gailun - JPMorgan

David Lewis - Morgan Stanley

Mark Landy - Summer Street Research

Matthew O'Brien - William Blair

Larry Biegelsen - Wells Fargo

Operator

Good afternoon ladies and gentlemen, and welcome to the MAKO Surgical Corp's 2012 third quarter results conference call. As a reminder, this conference is being recorded and will be available for replay on the Company's website, www.makosurgical.com under the Investor Relations section after the completion of this 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've 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. Good afternoon and thank you for joining us to discuss MAKO's 2012 third quarter results. I will discuss the highlights of our operating results from the third quarter. Fritz will review the details of our financial results. I will then discuss the progress we're making on our key operating priorities for the remainder of 2012 and provide some additional color on our operating results. In the third quarter, we sold 15 RIO systems. All of which were sold to domestic customers. These 15 RIO systems brings MAKO's commercial installed base of RIO systems as of September 30, 2012 to 141 worldwide of which 138 are domestic. Of note, any of the systems sold in the quarter were sold to hospitals that are part of a national integrated delivery system.

In the third quarter, we sold 14 MAKOplasty Hip application, 11 of which were sold with domestic RIO system sales during the quarter and 3 of which were sold as upgrade to existing knee-only commercial systems including 1, 2 an international customer in Hong Kong. As of September 30, 2011, 85 RIO systems or 60% of the worldwide installed base has purchased MAKOplasty Hip application. Worldwide during the third quarter our customers performed 2,413 MAKOplasty procedures, of which 2,322 were performed at domestic sites.

Of the 2,322 domestic procedures, 302 were Hip MAKOplasty procedures. The 2,413 MAKOplasty procedures performed represent a 7% decrease over the procedures performed in the second quarter of 2012 and a 33% increase over the procedures performed in the third quarter of 2011. The average monthly utilization per system was 6.2 procedures per system per month during the third quarter of 2012, a decrease from 7.2 in the second quarter of 2012 and 6.5 in the third quarter of 2011. Through September 30, 2012, over 20,000 procedures had been performed since the first procedure in June 2006.

During the quarter, we release the RIO 2.5 and the total Hip 2.0 software upgrade and began to rollout of these upgrades to the installed based. We anticipate that all RIO systems in our installed based will upgraded by the end of the year. In October, we also release the RESTORIS PST Cup and Tapered Stem Hip implant system resulting from our collaboration with Pipeline Orthopedics. This is our third release total hip implant system.

During the third quarter, MAKOplasty was discussed in five presentations at the International Society for Technology in Arthroplasty or ISTA 2012 Meeting in Sydney, Australia and in three presentations at the Harvard Advances in Arthroplasty Meeting in Boston, Massachusetts. In particular, a two year survivorship of RESTORIS MCK Hip Cup [high-accuracy] studies presented this quarter continue to build on the strong clinical case for MAKOplasty.

In the third quarter, we completed three BioSkills training session with a good mix of current and perspective surgeons. We currently plan to conduct five additional BioSkills training session in the reminder of 2012.

In conjunction with our customers, we participated in over 80 MAKOplasty patient education seminars in the quarter with approximately 2400 perspective patients denies. In the third quarter, MAKO was featured in 46 local and national media storage which continued to build awareness of robotic orthopedics and the benefits of MAKOplasty. Finally, the launch of the RESTORIS PST Cup and Tapered Stem and in order to further strengthen an already constructive relationship, we now today we have agreed to issue $7.0 million in MAKO common stock to Pipeline Biomedical Holdings, Inc which is the parent company of Pipeline Orthopedics. Pipeline is MAKO's partner in advanced implant development and commercialization.

The $7.0 million consists of a $4.5 million equity investment in Pipeline and $2.5 million which shall be applied as a credit pursuant to the commercial agreement between MAKO and Pipeline. We are pleased with the number of RIO systems sold in the quarter. However, utilization and procedure volumes do not meet our expectations. We believe that the initial actions that we have taken to prove utilization and procedure volumes will began to drive favorable results in the fourth quarter and we are continuing to refocus the organization on the execution of our business plan. I will update you our strategies for doing this after Fritz reviews our financial results for the third quarter, Fritz.

Fritz LaPorte

Thank you, Maurice and good afternoon everyone. In the third quarter of 2012, we recognized total revenue of $29.2 million representing an increase of $9.2 million of 46% from the $20 million generated in the third quarter of 2011. Revenue in the third quarter of 2012 consisted of $12 million in procedure revenue, $14.4 million in system revenue and $2.7 million in service revenue.

Procedure revenue of $12 million represented a $2.9 million increase or 32% over the third quarter of 2011 and was generated from the 2413 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 2,413 procedures performed in the quarter 302 were MAKOplasty hip procedures at an ASP of $4,700 per procedure, which is in line with the first two quarters of 2012.

System revenue of $14.4 million represented a $5.1 million increase or 55% from the third quarter of 2011. Of the $14.4 million of system revenues $14 million was generated from the sale of 15 RIO systems and $400,000 was generated from the sale of three MAKOplasty hip applications to existing customers. The $14.4 million in system revenue for the quarter is net of approximately $2.2 million for the referral 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 ratably over the warranty period as a component of service revenue.

Turning to RIO system ASPs. The 15 RIO systems sold during the quarter was sold to domestic customers at a blended ASP of approximately $1,050,000 per system. 11 of these 15 system sales included the MAKOplasty hip application. The ASP for the three MAKOplasty hip application upgrade sold to existing knee only customers was approximately $185,000 per application.

Total gross profit for the third quarter of 2012 was $17.2 million compared to a gross profit of $13.2 million in the same period in 2012. Total gross margin in the third quarter of 2012 was 59% consisting of a 48% gross margin on procedure revenue, a 62% gross margin on system revenue and an 89% gross margin on service revenue. Gross margin on system revenue was in line with previous quarters.

Gross margin on procedure revenue was reduced by $3.1 million inventory valuation adjustment for excess hip inventory related to our RESTORIS Trinity cup and Metafix femoral stem implant system. Excluding this valuation adjustment gross margin on procedure revenue would have been 74% for the third quarter, which is in line with previous quarters and total gross margin for the third quarter would have been 70%.

The inventory valuation adjustment consisted primarily of the Metafix femoral stem components and was driven by two primary factors. First the percentage of cup only hip procedures have been greater than we originally anticipated at the time we commercially launched our MAKOplasty THA application in September 2011. With the recent commercial launch of our RESTORIS PSP cup and tapered stem implant system, we anticipate that the volume of cup only hip procedures relative to our hip procedures will decline in the future. Second based on the limited certainty of the time of the initial hip launch with respect to the timing of commercialization of future hip implant systems we placed a large initial stocking order to ensure we had adequate supply of hip implant inventory available for our hip launch.

Turning to expenses, total operating expenses for the third quarter of 2012 were $26.6 million, an increase of $3.8 million from the $22.8 million for the third 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 including an increase in stock-based compensation. Selling costs increased due to cost 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 support our ongoing growth. Included in the increase in SG&A was a $1.1 million charge for stock-based compensation as a result of the accelerated vesting of stock options upon the resignation of our senior vice president of sales and marketing.

Net loss for the third quarter was $6.6 million including non-cash stock-based compensation expense of $4.3 million or $0.15 per basic and diluted common share based on average basic and diluted shares outstanding of 42.3 million. Included in net loss for the third quarter was non-cash and non-operating income of $3.1 million associated with the change in fair value of a derivative asset related to our credit facility agreement. Excluding this $3.1 million of non-operating income, the $3.1 million inventory valuation adjustment and the $1.1 million of stock-based compensation for the accelerated vesting of stock options net loss for the third quarter would have been $5.5 million or $0.13 per share.

This compares to a net loss for the same period in 2011 of $9.7 million including non-cash stock-based compensation expense of $2.5 million or $0.24 per basic and diluted share based on average basic and diluted shares outstanding of 41 million. As of September 30, 2012 we had $28.4 million in cash and investments and no debt. Our net cash used in the third quarter of 2012 was $6.9 million and was primarily used in operating and investing activities, including the purchase of inventory and instruments for the commercial launch of our hip implant systems. We continue to believe that we'll finish the year with approximately $23 million of cash and investments.

Turning to guidance, we are reaffirming our 2012 annual guidance for RIO systems of 42 to 48 RIO systems sold. Based primarily on the total procedures performed in the first three quarters of 2012, which were below our expectations and our favorable outlook for procedures in the fourth quarter tampered by the unknown impact of hurricane Sandy, we are reducing our annual procedure guidance to 10,200 to 10,600 MAKOplasty procedures performed from 11,000 to 12,000 procedures. The revised annual guidance implies a range of 2,900 to 3,300 procedures in the fourth quarter, which would represent a sequential increase of 20% to 37% over the third quarter of 2012. The revised annual procedure guidance represents a 47% to 53% annual increase over total procedures performed in 2011.

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 the progress on the key operating priorities for the balance of 2012 and provide some detail on the pipeline investment. Last quarter I detailed for you three key operating priorities, driving RIO system sales, increasing procedure volume and utilizations, and enhancing our products and applications. I'd like to update you on the progress we have made in each of these areas since our last call.

In our RIO sales efforts we have worked hard to increase the number of accounts in our sales funnel and have executed on targeted strategies to bring more accounts to closure. While we're pleased with the 15 RIO systems sold in this quarter, I will remind you that we have consistently said that the capital equipment sales are very lumpy. In any quarter a [few systems] will easily fall in or out of the quarter as our business continues to mature and the number of systems sold in each quarter increases we expect that this variability will continue. During the quarter we focused on RIO sales execution, specifically we strengthened leadership, we upgraded our sales force talent and we approved processing and providing additional training and sales force.

Our second stated priority is to strengthen our organizational focus on driving utilizations as our new - at our new and existing accounts. We made progress in this quarter improving our sales and marketing analytic tools and providing programs to disseminate best practices across our installed base. We also made progress in our programs to increase the numbers of surgeons performing MAKOplastys at each account and we are working closely with our customers to further develop the MAKOplasty Center of Excellence programs. Despite the progress we are making in these areas the benefit of these programs were not reflected in the third quarter utilization of procedure volumes, as we believe that this is a lag between our efforts and realizing the desired results.

Two additional factors that contributed to our third quarter utilization and procedure volume shortfall were our primary focus on RIO system sales and the training preparation and implementation activities required of our MAKOplasty sales force for multiple product launches in the second half of Q3, which I will detail in a movement.

Our revised annual guidance balances our belief that the factors that negatively impacted the third quarter utilization procedure of volumes will have a more limited impact in the fourth quarter. To support our RIO and implant sales efforts we are focused on developing more data to further strengthen the clinical and economic keys for MAKOplasty. In this quarter there were number of important pieces of data released that continues to build this case. At the ISTA 2012 meeting in Sydney, Australia five presentations were made on the MAKO related topics that included unicompartmental and bicompartmental knee, as well as hip cup placement.

The most important paper presented was two-year survivorship our RESTORIS MCK onlay medial unicompartmental implant using the RIO system. This foresight study reported on outcomes of 224 MCK implants at a minimum of three years at an average of 32-months post implantations through follow-ups with each patient. The data indicates a 0.4 revision rate at two years for MCK implants using the RIO versus revision rates for manually placed unicompartmental knees, which are documented at 4.0 in the Swedish and 4.4 in the Australian registries. We are not aware of any other unicompartmental implant system that has shown revision rates this low at two-year follow-up.

The next significant survivorship data point will be a five-year follow-up. Should the five-year data be consistent with the two-year data and showing improvements in unicompartmental revision rates as compared to the registries robotically assisted unicompartmental procedures to be a more broadly viewed at a better clinical alternative not only to manually placed unicompartmental procedures but the total knee arthroplasty as a whole we clinically indicated. We believe MAKO is well positioned to capitalize on such a market opportunity.

The second key presentation was made at Harvard Advances in Arthroplasty 2012 portion in Boston, Massachusetts. In this presentation Dr. Henrik Malchau compared the cup placement in 77 total net patients at four hospitals to the results presented by Callanan et al in the 2011 Clinical Orthopaedics and Related Research or CORR Charnley Award Paper. Based on 2D image evaluation of the post-operative x-rays, 84% of the RIO cases were inside the Mass General Hospital restricted safe zone compared to 47% reported in the CORR paper, while the 3D imaging evaluation data showed 96% of the cases were within this restricted safe zone. Both of these presentations continues to demonstrate our belief that the RIO system fulfills the promise of consistent reproducible precision.

Our third stated priority is to continue to enhance our products and applications with an emphasis on surgeon efficiency. We believe that success in this area will be a significant contributor to our RIO sales and MAKOplasty procedure volume. To this end in the third quarter we accomplished two major milestones. Number one, we commercial launched our RIO 2.5 software. The surgeon feedback indicates that the RIO 2.5 software improves efficiency of our partial knee application, speeds up the registration process and generally improves ease of use.

Number two, we commercially launched the hip 2.0 software, which enables the direct anterior approach for MAKOplasty total hip, as well as the use of the recently released MAKO RESTORIS PST Cup and Tapered Stem implant, resulting from our collaboration with Pipeline Orthopedics. Approximately 75% of our installed base has been upgraded to the RIO 2.5 and THA 2.0 software. We anticipate that the remaining systems will be upgraded by the end of the year. An important component of enhancing our products includes our implant portfolio, we began working with pipeline in October 2010 on the design and manufacturing of the RESTORIS PST Cup and Tapered Stem implant system.

As our relationship has progressed it has been impressed, I have been impressed by the quality of the team at Pipeline and remain enthusiastic about the continued opportunities to work with them in the future implant systems including in advance total knee reconstructive products. The $7 million commitment to Pipeline is a reflection of our desire to work closely with Pipeline in delivering innovative implants as an integral part of MAKOplasty solution. I will note that this commitment does not increase MAKO's anticipated research and development spend.

Before we open up the call for questions I want to update you on our search for a Senior Vice President of global sales. We have retained a national executive search firm and have begun interviewing candidates. I have been impressed with the quality of candidates that we are seeing and I am confident that we'll find a strong addition to the team.

In conclusion we made the third quarter towards reestablishing a growth trajectory in system placements and have begun to put the building blocks in place to drive procedure volume and utilization. I remain confident in my belief 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 capitalize on this opportunity. There is a strong and growing body of evidence to support the clinical and economic benefit of MAKOplasty.

We have refocused our team and our approach to the market and realize the full potential of this unique opportunity. We recognize the benefits that will come from this constructive improvements and we are making will take time to manifest. However, we believe these changes will ultimately optimize our businesses and provide long-term success. We look forward to keeping you up to-date on our progress as we implement these changes.

With that I would like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Matt Miksic with Piper Jaffray. Your line is open.

Matt Miksic - Piper Jaffray

Hi, good evening, can you hear me okay.

Maurice Ferré

Hey Matt.

Matt Miksic - Piper Jaffray

Sorry for the background noise here, but appreciate you taking our questions. So Maurice, very nice progress on the robot side and then I don't want to take away from that at all. I am not sure we'll come back to that in the Q&A, but maybe the biggest question coming out of the quarter is on the utilization side. I appreciate the color you provided on that in your prepared remarks, but I'd appreciate it if you could expand a little bit on exactly what you think is going on in terms of sequentially and on a per site basis, because a number of different elements in motion and you [re-updated] software for your clinical data but and maybe just simply in particular what gives you the confidence, maybe what has changed here that is Q4 will step up as implied in your guidance?

Maurice Ferré

Sure Matt. So I think first and foremost I think that, I don't think that there is anything fundamentally that's not intact here. I think that, I want to just one of the things I tried to state initially was the importance of our clinical data. Look this continues to be an exciting story. I think it's a story that really talks a lot about the future of orthopedics, about the importance of the demand, for precision the demand for a highly placed accuracy and the importance of clinical data, and I think when I put into context the two important clinical studies that came out. I think it just puts into perspective as that data starts to come out and I think it's going to build up a - building confidence in surgeons that are going out and doing procedures.

When we talk about on a quarter-to-quarter basis how procedures are performing and how our hospital sites are performing, we did see a dip in procedures and utilization. I can't point to any macro trends. I don't know if there is anything, any consistency in that. I know we saw the Company showing some decrease because of the summer months. I am not sure if that that is maybe there is some of that kind of going on. Well from my perspective we have visibility of what's happening already in the first month of the fourth quarter and we have kind of stated our guidance the way that has been stated and that represents some significant growth and some uptick.

So we're seeing the upticks on procedures that were remaining flat or low, which I think it's a very positive sign and I think we have very good visibility a couple months out in terms of these volumes. So is it one-off thing, I don't know, summer months potentially. But also we had two major releases that were taking place during the quarter that really used to lot of our time and energy and getting ready for the PST implant system, so that also had an impact. And quite frankly lot of my focus has been really on the system sales, and I think that the results that we have with 15 sales I think kind of demonstrates the execution side of it. And my commitment now is to start focusing more on the procedure sides, during this quarter.

Matt Miksic - Piper Jaffray

So did I if I hear you correctly, I mean if you were it sounds like you would have and I am sure you have gone through and looked at the site they were producing in first half of the year in the last year. And across those sites, across the six months in euro side you're not seeing anything there that shows the retreat in terms of utilization or show some particular and theme across that group that would say, here's what people are using and left.

Maurice Ferré

We went through the data and we look at our high volume accounts or mid volume accounts or low volume it is across the board and I made a lot of personal calls to doctors to ask is there anything fundamentally wrong, and absolutely there was nothing there. And most of them were saying, we're just taking sometime off and this and that, I mean there wasn't anything that I would say that was like overwhelming.

And once again, I mean my visibility is we're now November 7, and I've got visibility what'd happen in the fourth quarter and I think that we have some high predictability of what we think is going to happen. And we think that result is going to result in what we believe year-over-year is going to be 50% growth in procedure volumes.

So I don't think there is anything fundamental here in and one of the things that I have seen that I am very favorable about is, this installed sites. These accounts that we put out at this quarter have been really well that they're really, so really interesting group that's coming out this quarter of these 15 accounts and I am seeing that the right type of activity of engagement from the hospitals from the doctors and really buying in on the volume.

And these strategies that we put in on training in particular surgeon training getting there out there, I think is going to pay off the dividend but these things take time to develop and mature. And from my perspective I wouldn't read too much into what lower procedure at this quarter really represents.

Matt Miksic - Piper Jaffray

Can I just ask one follow-up here on the robot side, it was a very big number and I am going to be the last person that advocates that you want to move guidance up in given what happen in the first half of the year? But this the guidance just kind of shallow increase to the fourth quarter which is uncharacteristic. You have some visibility as you say, do you think you've got some of your fourth quarter robots in the third quarter or how should we think about that?

Maurice Ferré

Look, I am actually, I think for any of those many series there were out there early on about MAKO's inability to sell robots, I think we've addressed it in this quarter, and I think that's very positive. And I just want to emphasize that this business is lumpy, you just don't know how it's kind of comes in, I can tell you fundamentally that there is a real interest in this technology. I can tell you that hospitals are trying to differentiate themselves. I can tell you that the ROI model that we present and how we sell this to hospitals is resonating and hospital administrators are looking for these types of program, and I think that we're on a roll and I think that I see where the hip is going and I think that's going to be a big part of this as well as we continue to build the technology.

Matt Miksic - Piper Jaffray

Okay. Thanks.

Operator

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

Chris - Goldman Sachs

Hey there guys, this is Chris in for David can you hear me okay?

Maurice Ferré

Hey Chris.

Chris - Goldman Sachs

Hi there, thank you for taking the question and congratulations on the system placements. But my first question that I have is just regarding the procedure guidance for the rest of the year. You noted that hurricane Sandy as a potential source of reduced procedure guidance and I was - if we look at the 7,300 that you guys have done year-to-date and versus the original guidance of the 11,000, 12,000 that would put about 35% of those in the fourth quarter. So I was wondering if you could parse out a little bit what the impact would be from the hurricane standpoint or I mean how much of that would be more related to just operational execution?

Maurice Ferré

Yeah, I think from our standpoint, we have a lot of systems in the New York as we have systems at some of these premier hospitals, Bone and Joint and NYU, HSS Colombia, New Jersey and now we just placed a system in [Lenning]. So we've got lot of visibility at some of these high volume accounts for the highly concentrated area.

And from our perspective we just - we did absolutely see systems fall off last week, I am sorry procedures fall off last week. So there is no question that this is an impact and how we wanted to quantify it. Look, I think we took our best estimate based on guidance we knew that we were on the lower end of the guidance going in to this thing, because of the slowdown that we show is in particular in the third quarter.

So we were now kind of falling in to the lower end of the guidance. And I think we've taken the right measures and once again I just want to reiterate that even with those types of reductions in our guidance and we were going to see 50% increase in our procedures for the years what we are estimating. And number of procedures that we performed last year we just hit that number at the end of this quarter.

So from our perspective fourth quarter is looking favorable we feel pretty confident that we're within that range of what we kind of project and I think that's represent some significant growth in procedures.

Chris - Goldman Sachs

Okay, great. My follow up question, I was actually wondering, if you could talk a little bit more about some macro things that you guys are seeing in two respects, one, I was curious about the market share dynamics, some of the competitors on the total knee side I think whether it's J&J or Stryker had a little bit better knee turnout that then say like consumers doing that and I know guys are competing for a portion of that market I am wondering if is there anything that you've seen in terms of competitive wins or doc conversion as far as incremental penetration goes and then actually I'll just let you held on to first?

Maurice Ferré

Look, we're - with this release on a knee we're now on fifth iteration of the system of the Uni side and where our second iteration of the, the hip. The intricacies of developing this technology and the implications of it, I think our real competitive benefit, competitive advantage, do we see anything on the gate coming out that really concerns us, no, we don't.

And I think we are positioning ourselves and we'll continue to position ourselves, with regards to being a leader and Robotic Orthopedics in this field. We've always talked about we have a very strong intellectual property portfolio, we have a lot of trade secrets out there, we hear a lot of things about different types of ways of doing what we're doing.

For example the patient specific instrumentation known as PSI across the industry. And look our view on this thing is our surgeons are telling us the value in the high precision of intra-operative planning and intra-operative training.

And the fact that we're we've got two year study that's out four surgeons and there's a 10-fold improvement and survivorship that's meaningful. And I think that is great trajectory to show some real meaningful impact in our ability to get more surgeons to understand the value of what precision and accuracy means. We don't believe at all and I just wanted to be very clear about that our Q3 results absolutely in terms of procedure side there was we don't view competition is any impact on our Q3 procedure volume.

Chris - Goldman Sachs

Okay, great and then just one last quick one if I could, if I was concerned a little bit about the cash I think we're down about $28 million and going about $7 million a quarter I know you mentioned the additional equity raise but and not drilling down on the deal [further] yet but yeah I was just wondering where you guys were feeling in terms of that is something that starts to look pretty attractive coming here soon or are there other options that might need to be considered?

Fritz LaPorte

Chris, first I just want to clarify something you said incorrectly so with the equity that we are talking about was relative to our commitment to pipeline and we basically provide $7 million of MAKO equity as Maurice outlined in his prepared remarks. So there's no equity raised as you refer to.

So regarding your question, we are - we believe that the capital we have is adequate to for us to execute our plan. The cash that we have on hand and, we've always said we consistently evaluate any opportunities to continue evaluate our business, but at this time we are comfortable with our cash balance.

Chris - Goldman Sachs

Okay. Great, thanks guys.

Fritz LaPorte

You're welcome.

Operator

Thank you. Our next question comes from the line of Kim Gailun with JPMorgan. Your line is open.

Kim Gailun - JPMorgan

First question is a follow-up on the utilization discussion. Just to be clear your comments about the fourth quarter and baking in your comments about the slow down in procedures with the storms, I guess excluding this storm did you see utilization pick up during October?

Maurice Ferré

Yeah. Kim, I mean I think we're seeing just repeat what - what I said earlier, we've got visibility obviously, what happened in October, and as you know because we're - we have a CT based protocol. Patients are booked usually about a month in advance, so we've got a lot of visibility in terms of the number of procedures that are usually performed on a quarterly basis. So that being said, I feel pretty confident right now sitting here, that I think that the utilization is going to bump up north of 7, I terms of what we're saying.

So that implies to me that wherever we saw in the third quarter, we're seeing a bump up. So that's how I view it. With regards to the storm, yes, it has an impact and it think even with the impact we still believe that right now that we'll our utilization bump up - greater - north of 7.

Kim Gailun - JPMorgan

So just a clarification, as we think about the fourth quarter and the systems guidance, are you assuming in that guide that you sell any systems outside the US in the fourth quarter?

Maurice Ferré

Yes.

Kim Gailun - JPMorgan

Okay. You know, actually I'll drop, thank you.

Maurice Ferré

Thank, Kim.

Operator

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

David Lewis - Morgan Stanley

Hello, good afternoon. Maurice, I hate to keep - I'm coming back to utilization but I guess I think you did a nice job explaining why hip utilization made impression, it sounds largely related to where the production iteration was and the higher percentage of cup-only systems but. I guess when we look at your numbers for the third quarter, you still get a uni-volume number that looks below where you were three to four quarters ago.

I'm just trying to understand, what factors could have driven the uni-business that's simply not really growing, that business is - [Mark] shared you've got a significant installed base, data is building, help me understand why that business will be down sequentially and sort of, back to where you were three quarters ago?

Maurice Ferré

David I just - to me, once again, my view on what we're doing and how we're doing it - third quarter, in particular, we had our sales force focused on these two significant upgrades. We have a leadership, where leadership is - was focused on the real systems, that being said is - when I look at the vintages of all the systems that are out there, and I'm actually seeing some very encouraging signs of utilization and procedure volumes going up.

I really think a lot of these things are - are just quarterly blips, when I talk to surgeons about the fundamentals and see where they are going and how they are tracking patients, and the indications for this technology, I see a very bullish story. I don't see this slowing down, I see what we've done is - we take our accounts and we plateau, at a certain level and I think we're just seeing a little fluctuation back and forth quarter to quarter, but I don't think we're seeing, so I think you might be - last two quarters we've seen some drops on these procedures, but remember on the utilization, remember we're adding a lot of systems, and a lot of these systems that we're adding we're getting different flavors of surgeons and different types of communities, that are a), learning about the significance of partial means and where they've been in the past total knee surgeons, and all of a sudden they're starting to realize that there's an opportunity out there to address market with the partial knee.

So we're in the business of educating a lot of these types of surgeons, and that's why I kept on emphasizing the importance of this paper and papers and these 70 different studies that we have out there that when we can show a 10-fold improvement in survivorship, at two years, I think it's going to start having an impact in our procedures, in our volumes in our growth.

David Lewis - Morgan Stanley

Okay, that's very clear. And then actually it's the systems Maurice, the last couple of quarters you've talked about if the system numbers were not what you like but you felt very good about the backlog, given the performance in this quarter, is it safe to assume that backlog you were anticipating as now you'll come into the P&L and as you think about the fourth quarter number does that sort of start to be a new good baseline to think about quarterly box numbers?

Maurice Ferré

Once again David, I think this business is lumpy, but I can tell you one thing, one thing that I have absolutely done this quarter and focusing in on the real sales, is I really, we've upgraded our sales team, we - I think we have a high driven robotic sales team that knows how to sale robots. And I think that we have cracked a lot of the issues that our customers are asking for specifically when it comes to closing deals. And I think that's the key, you've got to bring in the right type of people to help manage this process, and I think that I look at this and see the opportunities, I talk about the IT end, out there these are hospitals and it's not just one idea, we sold to eight different hospital change, that's a good thing, that's exactly what we want to see, because these hospitals chains, they are trying to replicate their success of MAKO programs around the country.

And I spend a lot of time talking to these folks and really getting them to understand what the value proposition and our commitment, and that's why we've made the investment with Pipeline. Because Pipeline for us fundamental and that we're able to go out there and develop advanced applications to expand the platform, to have a meaningful conversation about our addressing that very big need of knee and hip replacement so it is going to have a huge impact in the next 20 to 30 years.

I really am very bullish on the fundamentals that the number of procedures that are going to be required are going to be huge, the number of surgeons, that are out there are going to be decreasing, the amount of efficiencies that have to be created and cost savings have to be created in this environment are going to be very important, and these type of tools that we're developing and developing these relationships with these types of hospitals, in particular that are looking for value-add, is going to be key in the success of real success stories like MAKO.

David Lewis - Morgan Stanley

Just maybe, - thank you Maurice. A quick one for Fritz. The Pipeline agreement it was a modification of your product commercial agreement, can you just help us understand what drove the specific timing to modify it today then, anything interesting about what is modified in the commercial agreement? Thank you?

Fritz LaPorte

So I'll take the second one first, and can't discuss the details if the arrangement we have entered into as a strategic alliance arrangement back in December of 2010. We've been working closely with them to deliver the products under that, the PSTs is the first of that. As we work through things, what we thought back in 2010, there were some items that have changed, as we work through it. So those were some of the modifications, relative to the three lines, to the strategic alliance arrangement. I'm sorry Dave, can you repeat your first - the first part?

David Lewis - Morgan Stanley

What were some of those commercial modifications and why now, is the other question?

Fritz LaPorte

Oh, why now, the why now is because they've come into basically in [delay] where we are confident on what those modifications need to be and those are all related to our co-development. So that's really what drove the why now.

David Lewis - Morgan Stanley

Okay, thank you very much.

Fritz LaPorte

You're welcome.

Operator

Our next question comes from the line of Mark Landy with Summer Street Research. Your line is open.

Mark Landy - Summer Street Research

Good evening, folks, thanks for taking my call, congratulations on the fifteen units. Maurice, I don't if this much input that you can give us, but any thoughts on the possible take outs of (inaudible) and would it have any impact on your business if that does happen?

Maurice Ferré

No, there's not impact there.

Mark Landy - Summer Street Research

And then, I think Maurice, you've kind of gone back into the field and you've not had a quarter extra to reflect that - on the first two quarters of the year, and anything further that you want to share with us as you've learned on how you - you gave us a lot of your thoughts as to why things have slowed down, and anything in particular that you're going to print and that you've change, to rectify that situations going forward?

Maurice Ferré

If I look back at this and kind of say, what once again, I think that there's a lot to be said making sure that you have the right team place throughout the entire organization. And that's a very important piece to this. I think that - these are very complicated sales. And I would say that the key to our success, and unique success is really, number 1 making sure that you have the right type of sales force in place, and with - we can create the price - the type of momentum that's necessary on a quarterly basis to close transaction. Because a lot of times it's - where you're struggling with always with these types of transactions is making sure that you're getting on your agenda and not necessarily the hospitals agenda who's buying the equipment.

In those types of events, that allow us to think about how to do that are critical, and that's why, it's leadership, it's processes that we put I place and it's training, I think that those are three key elements that are required for us to develop and as I look back and reflect I think that's what's companies go through, and I think that we went through a cycle of that in the last couple of quarter and I think is now, we've got to keep focused on that. And I think that's a key part of this.

The second thing if I were to say, reflecting a little on what happened last year, I think we've got to go back and look at the way our sales process in the number of accounts that we put it. I think we've put in some really good measurements and tools in pace, and metrics in place, that I think are allowing us to really understand the customer in our funnel.

Mark Landy - Summer Street Research

And then lastly, you did mentioned total knee, from my understanding, it's seen a little bit of up and down development process, can you share with us some of your thoughts on development process going forward timelines and how you hope to move that need through the regulatory process?

Maurice Ferré

Well, Mark, I don't know where you're getting the up and down because, we haven't really talked at all about a total knee, and in fact this is the first time that we're actually making some commentary about it, with regards to pipeline. And what specifically what are the things that I am excited about is, look and you've got a team like Pipeline, that has success in companies where - they started companies like Osteonics and Implex, and where they have a significant level of expertise on issues that are regulatory, on [force] coated materials and biolgics, I mean it completely changes the dimension in how we think about implants and how we think about releasing products.

So these are all really good things, and I think that from our view we haven't given any color, nor will we on a time frame of when we're going to release a total knee, but the important thing is that it's part of our platform. I just prove for everyone that's out there I just want to make sure that we understand it's not in the near term. This is a long term process, and I think you need to be thinking about it that way. So don't expect us to make any media announcements on the total knee.

Mark Landy - Summer Street Research

Just as to take that one step further, it's as far as we've seen something that from our understanding you had been working on for a while, why mention it then, I mean I also was while you have mentioned that for the first time, so as a first question why mention that now versus keeping it quiet?

Maurice Ferré

Well, I think the most important part about it is, yes, we have been working on something and I think we've just made a significant investment of $7 million commitment an investment in Pipeline and I think it's important for our investors to know why we're making that investment, the rationale behind it and I think that there's a lot of people out there that know what we've been working on. So I think it's - we thought it was the right thing to do to bring it out based on the investment that we're making in Pipelne.

Mark Landy - Summer Street Research

Thanks, guys and good luck on that development.

Operator

Our next question comes from the line of Matthew O'Brien with William Blair. Your line is open.

Matthew O'Brien - William Blair

Good evening, thanks for taking the questions, I wanted to follow up on a couple of things that David had asked a moment ago, but I think I heard this correctly I think you said you sold eight systems to eight separate chains this quarter is that right?

Maurice Ferré

That's correct.

Matthew O'Brien - William Blair

And then so that would leave, seven systems sold to new customers this quarter, can you just give us a sense of how -

Maurice Ferré

No, that's not the way to look at that.

Matthew O'Brien - William Blair

Okay.

Maurice Ferré

Every hospital, even they might be part of a network, but it's an individual hospital, you don't we're not selling a bulk deal to a corporate account. It's just a process that goes through the steps.

Fritz LaPorte

Or the eight systems wasn't saying that there are eight systems that went to existing hospital, so it's not like a second system that existing hospital.

Matthew O'Brien - William Blair

Yeah, I understand that, I think what I was trying to get to and I maybe misinterpreting that's something we can follow-up later, but I think well let's not even talk about that. I mean just thinking about those hospitals that you sold into, were those some of their higher volume centers that are out there because there's always a concern that none of the higher volume centers are adopting your technology?

Maurice Ferré

No, I think that's fair. I think that what we've seen is, we've seen some hospitals that are in their competitive market that are looking for a differentiator, but yeah I would say that, and I'm trying to add a little color to it, when asked about utilization and procedure volume and confidence level that I've had in the fourth quarter and beyond and my commentary is when I look at the hospital, the 15 hospitals that we put into play, and the surgeons and the training that is involved, the pre-training and the steps we've taken to kind of build up on procedures and utilization I think a lot of these are big are sales and big sites. And I think you're going to see some, there's some big hospitals that we've added this quarter.

And by the way I just wanted make a comment on something because someone actually brought this up to us and it went for the record I think people need to worry - people have been tracking us with regards to our website and then sites that - we're installing and also we upload or you know put the slides. That is not a good measurement of whether we sold or not our systems and in fact we've now taken on a policy that we're not going to put any new sites on our website until the quarter until the results are in, but thought this is a good opportunity to bring that up.

Matthew O'Brien - William Blair

I'm glad I could provide that opportunity for you. Just heading over to the hip side of things real quick. You know the number of upgrades this quarter, decelerated a bit compared to Q2 is that just a function of people waiting for the upgrade and getting access to that or have we seen the number of sites that, I think there's still about 58 or so that haven't upgraded and you don't anticipate that they will upgrade?

Fritz LaPorte

No, it's not that we don't anticipate and if you recall at the beginning of the year we said that, probably about -- we expected 50% of sites by the end of the year, were at 60% or went ahead of our expectations. You saw that a lot of new sites are purchasing so 11 out of 15 new sites including the hip application. So we would expect that there will be a smaller number of upgrades around the same amounts and it will bounce around quarter from quarter but it will be relatively around this range going forward.

Matthew O'Brien - William Blair

Okay, then just last one from me and Fritz, I understand you're hesitance to really talk about the Pipeline agreement too much but given how much you just invested there is it fair to say that they're unlikely to be working with anybody any potential competitors you may have on the hip or the knee side in the future?

Fritz LaPorte

I think it's fair to say that when it comes to orthopedic robotics, we have exclusive arrangement between the two of us.

Matthew O'Brien - William Blair

Okay, great. Thank you.

Maurice Ferré

Yeah. You're welcome.

Operator

Our final question comes in line of Larry Biegelsen with Wells Fargo. Your line is open.

Larry Biegelsen - Wells Fargo

Good afternoon. Thanks for taking the question. Let me just follow up on the hip side. Could you talk about the roll out of the Pipeline implants and when do you expect that to have an inflection point on your hip procedure growth, maybe if you can talk directionally about assuming if you do about 1200 or so this year what your expectations are for 2013 and then I have one follow-up.

Maurice Ferré

Sure, sure, Larry. First of all, I think that there has - so the answer I think 2013 you'll start seeing some of the inflection. I'm very encouraged on what I'm seeing. I'm very encouraged with the new release of the software. I'm encouraged about the ability to add to the product line - this has been widely anticipated on our side. But look there's still lot of work to be done.

I'd like the messaging, I was with the Hip and Knee Society Meeting this weekend and the continuation and conversation about the importance of cup placement. I like the fact that we have four independent surgeons that are out there and we had MASS Journal collect data for us independently and joined us with that and the improvement, 96% improvement on the three dimensional data compared to the [MAKO] study on the safety zone and these are the types of things that when we have conversations with surgeons about our technology impact and the implication that I think are going to start helping us build that trajectory and I think that we go forward and continue to focus our energies on this. I think those are going to be the types of drivers that are going to have an impact on our procedures and our utilization and our ability to continue to advance and sell more systems.

Larry Biegelsen - Wells Fargo

Maurice, that's very helpful, just lastly from me. I appreciate the update on the clinical data. Is there anything we should be looking for in let's see the first half of 2013 in terms of important new clinical data? Thanks.

Maurice Ferré

You know I think it's ongoing, early in my background I - coming out of my background is at the end of the day our customers, at the end of the day are our surgeons.. When you're developing this type of technology, the novelty of this technology, investments that are required on clinical research and clinical data are very important. I think we've got a great team in place. We've got the 70 ongoing studies. We've already had 28-peer review manuscripts. We have a 179 abstracts that are out, and just to have eight podium presentations I think that's exactly where we want to be at this place. I think we're going to continue to make that investment.

So, what you're going to start seeing is a continuation of the data and the data collections that are being done. This two-year data study that we have is meaningful. I think, you're going to see three-year data, you're going to see the randomized clinical studies, you're going to see important studies, pivotal studies, in my view on randomized pivotal studies showing our system compared to manual instrumentation.

You're going to see studies about time efficiencies, you are going to start seeing economic analysis and economic studies. I mean, we are making these types of investments that we think are meaningful, that there is a cost savings to using robotics and not making mistakes. I mean that's where we're going with this and that's the importance of our technology.

Larry Biegelsen - Wells Fargo

So the Glasgow study is that still a Q1 2013 event, the final result?

Maurice Ferré

I think you're going to see, the data has been submitted, we can't talk about it, so I think as soon as it gets published, I can't predict when it gets published, but I'm anticipating it's going to get published shortly. And I would expect once that's done I think we can talk. We're very excited about the results that we're seeing in that study.

Larry Biegelsen - Wells Fargo

Thanks guys.

Maurice Ferré

Yeah.

Operator

It does conclude our question-and-answer session. I would like to turn the call back to management for any closing statements.

Maurice Ferré

Yeah. I just want to, first of all thank you everybody for great questions and feedback in terms of where we're going. I feel we're well on our way. This to me has been a really good quarter. I think it demonstrates just to us that when we say we can get something done we can get it done and I had said earlier results speak and - look I focused on three key areas, number one, I said I was going to do something about the RIO sales and I think we have demonstrated that we can do it and it's about [strafing] your sales force, it's about improving the processes, it's investing in training and I think we have positive outcome. So that was a very key part of my focus in Q3.

The second thing that I said that I was going to do was I was going to focus on procedures and get procedures up. Well, we made a lot of progress in putting processes in place, we're addressing issues on leadership, we are addressing issues with regards to bringing more surgeons more training, I talked about our training programs. These are going to be very pivotal.

Now the result didn't show in the third quarter, but I feel confident based on what I'm seeing, a lot of our efforts are going to bear fruit in the fourth quarter, and I think we're going to see an importance of that continued utilization north of seven, as I mentioned in our utilization.

And finally, that whole thing on procedures and I emphasize the importance of our clinical data, the fact that we have these two clinical data points that came out are just absolutely strong testimonies of our technology and this is the type of the stuff that I have been waiting for and being able to give it to our sales force and I am really excited about what that means.

The third thing I said I was going to focus on was products, in terms of getting our products out. There we had two major releases, one on our fifth iteration on our partial knee and two, when our second iteration on our hip implants. So we as a company, we're innovating, and I think that's where we have to be, this type of company needs to be there.

And secondly the other big thing that we did is we're getting prepared for this launch, with regards to PST implants and working with Pipeline. And our commitment to Pipeline and in developing this platform technology is a further testimony of our commitment on our products.

So I think we're getting there. I think you look at where we are, how we've managed our costs, how we've managed our systems and how we're developing it and the commitment that we're making with regards to our cash commitments in terms of being able to get to where we have to get to. We feel good about everything, so I think things are moving in the right direction.

So finally, I'll close by thanking all of you for taking the time for joining us on the call and I sincerely appreciate your interest in MAKO and look forward to updating you on our continued progress.

Operator

Ladies and gentlemen this does conclude your conference for today. You all may disconnect and have a good day.

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