Mazor Robotics' (MZOR) CEO Ori Hadomi on Q2 2016 Results - Earnings Call Transcript

| About: Mazor Robotics (MZOR)

Mazor Robotics Ltd. (NASDAQ:MZOR)

Q2 2016 Earnings Conference Call

August 02, 2016 08:30 AM ET

Executives

Michael Polyviou - Investor Relations

Ori Hadomi - Chief Executive Officer

Sharon Levita - Chief Financial Officer

Doron Dinstein - Chief Medical Officer

Analysts

Jeffrey Cohen - Ladenburg Thalmann & Co. Inc.

Craig Bijou - Wells Fargo Securities

David Turkaly - JMP Securities, LLC

Young Xuyang Li - Barclays Capital, Inc.

Tracy Marshbanks - First Analysis

Matt Miksic - UBS

Operator

Greetings and welcome to the Mazor Robotics’ Second Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I’d now like to turn the conference over to your host Michael Polyviou. Thank you. You may now begin.

Michael Polyviou

Thank you, Rob. We also want to thank everyone for joining us today for Mazor Robotics’ conference call and webcast to review the financial results for the second quarter ended June 30, 2016. On the call today are Ori Hadomi, Chief Executive Officer, and Sharon Levita, Chief Financial Officer.

Before I turn the call over to Ori, I would like to make the following remarks concerning forward-looking statements. All statements in this conference call, other than historical facts, are forward-looking statements. These forward-looking statements are not guarantees of future performance and they involve and are subject to risks and uncertainties and other factors that may affect Mazor’s business, financial condition, and other operating results, which include but are not limited to the risk factors and other qualifications contained in the Form 20-F and other reports filed by Mazor with the SEC to which your attention is directed. Therefore, actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. Mazor expressly disclaims any intent or obligation to update these forward-looking statements.

During this call, we will present certain non-GAAP financial measures, such as non-GAAP net loss and net loss per share. In Mazor’s press release and in the financial tables issued earlier today, which is located on the Company’s website at www.mazorrobotics.com, you will find definitions of these non-GAAP financial measures.

A reconciliation of these non-GAAP financial measures with the closest GAAP financial measures, as well as a discussion about why these non-GAAP financial measures are relevant to the Company’s results.

With that, I’d like to turn the call over to Ori Hadomi Chief Executive Officer. Ori, please go ahead.

Ori Hadomi

Thank you, Michael, and welcome to Mazor’s second quarter 2016 conference call to discuss our operating performance and financial results. I will begin by discussing the results and then I will review the significant development that have occurred since our Q1 conference call that have transformed our growth prospect and would allow us to maintain our leadership position in the market for guided spine and brain surgery system.

On July 5, we announced that we received order for 11 Renaissance Systems in the second quarter of 2016 which represents the second highest amount in any quarter and easily outperform the year-ago second quarter when we received orders for seven systems.

On a global basis, we ended the second quarter with 122 systems globally, of which 74 are in the U.S. market. This compares with 93 globally and 53 systems in the U.S. at the end of 2015 second quarter. At the end of the quarter we had a backlog of two orders that will be delivered to our distribution partners in China during the second half of 2016 and one system whose revenue was deferred to the second half of 2016.

We reported revenue of $8.3 million in the second quarter, a 6% increase compared to the $7.8 million in the year-ago second quarter. Recurring revenue increased 31% over the year-ago second quarter to $4.2 million. This year-over-year performance continues to demonstrate the adoption and utilization of the Renaissance Systems.

To provide some more detail on our second quarter performance, we installed six systems including two with brain modules in the U.S. one in New Jersey, one in North Carolina, one in Idaho which is the first system in that state and three were installed in Florida. The three Florida hospitals are HCA-affiliated hospitals and have increased to eight the number of Renaissance Systems through the all the network.

Internationally we received purchase orders for five Renaissance Systems, one each in Italy and Australia and three from our distribution partner in China. Only one of the systems in China were delivered in Q2 the two remaining systems will be delivered in the 2016 second half through my earlier comment about the backlog.

Year-to-date China has five Renaissance Systems and Australia has four which together with other systems in Asia-Pacific including our presence to 18 systems in the region. Our 2016 first half performance a total of 16 systems is the best six month period in our Company’s history and more than anything reflects the faith of our growth or our strategies.

Our sales team is pursuing additional opportunities and to date in Q3 we received first purchase order for Renaissance Systems which was installed in hospital in South Carolina. As you can see we have a strong second quarter and first half of 2016.

For the next few minutes I want to review the significant achievement that occurred in Q2 and earlier this quarter as the developments change our course, accelerating our growth prospect and reshaping our business.

First on May 18, we announced the signing of Strategic Commercial and Investment Agreements with Medtronic. Medtronic is viewed as a global spine leader and Mazor is widely recognized as a pioneer in robotic technology and global leader in surgical guidance system for spine. For the partnership of our two companies is a mutual fit. The agreement has generated a great deal of excitement for many stakeholders including employees, investors, industry and the surgeon community.

Medtronic is also excited and is dedicating hundreds of sales representative to this joint effort. Comparatively when we launched Renaissance in the U.S. a few years ago, we have four capital sales reps and today we have 17 capital sales representatives, while we have been successful with our independent sales effort Medtronic’s committed involvement, allocation of resources to medical education and awareness and market access is expected to transform our ability to drive our commercial trajectory.

Getting there requires a great deal of planning. Latter this month, we will begin educating the Medtronic sales reps at our training centers to teach them more about the Mazor X, our recently introduced transformative platform for spine surgeries. I will share more on this shortly, but between now and the end of 2017 [Audio Gap], the Medtronic sales team is working closely with result team to drive sales.

The Medtronic sales team will be focused on generating demand and raising surgeons awareness and interest of the Mazor X and to bringing the hospital [indiscernible] into the sales cycle. The Mazor capital sales rep will build on this list and be responsible for closing system sales. And with the training of our own sales reps there is going to be a learning curve for the Medtronic sales reps and likely a ramp up period.

Success is defined by sales target. We have not disclosed these metrics, but it is fair to assume that the figures are not much greater than those we would have expected without the agreement. While using the first-year of the agreement in order to synchronize and align the organization to work together modestly and to be redeemed for the significant growth at a second year and the second stage of the agreement. Upon hitting certain milestones and subject to certain conditions being met by both parties, the parties are expected to enter the second phase of the agreement.

During this second phase which is expected to begin in 2018, Medtronic will assume exclusive global sales and distribution rights for the Mazor X specifically for the spine market. This second phase also includes annual quotas with a cumulative potential of hundreds of Mazor X systems throughout the end of 2021 contingent on satisfaction of specified milestones.

In combination with the agreement and unavailing of the Mazor X, Medtronic has taken an equity position of up to 10% of Mazor’s fully diluted outstanding shares. The third potential equity investments of up to 5% may cure upon entering the distribution phase of the agreement and is thoroughly at Mazor decision.

At Mazor, our innovative and pioneer experience and robotics expertise created something special in Renaissance which has been used in more than 18,000 procedures globally with positive surgeon feedback hospital satisfaction and many published spacers and presentation highlighting the accuracy, lower duration exposure and improved clinical outcomes. The agreement with Medtronic demonstrates that we are on the right side and as we see other robotic technologies emerge and other spine players get into robotic, it clearly validates the market opportunity.

In July, we unveiled the Mazor X, a transformative Surgical Assurance Platform for spine surgeries that we have been developing for several years under the radar. Mazor X was developed with the goal of enhancing predictability and patient benefit. Through the combination of analytical tools, multiple tools that are precision guidance, optical tracking, intra-op verification, and connectivity technologies.

The Mazor X was developed with the aim of expanding the role of robotics in the operating room far beyond its traditional role in guiding tools and implantable devices. We are commercially launching Mazor X this October at the Annual Meeting of the North American Spine Society.

Medtronic, our first customer of Mazor X has already placed a purchase order for 15 systems and we will deliver this during the second half of this year. Medtronic will place five of these in its [indiscernible] facilities and the remaining 10 systems will be deployed at least at leading clinical centers which we believe will greatly enhance the awareness of Mazor system, value proposition and synergy with Medtronic product line.

Today, the Mazor X has been used clinically in over 130 cases to safely place approximately 1040 implants by a half dozen surgeon. Since we introduced Mazor X last month, we have received inquiries from quite a few surgeons who are planning to visit one of our training centers for the product demonstration.

Some of the futures that makes Mazor X three special include Pre-operative analytics into operative guidance and real-time 3D verification. Given the success and performance of the Renaissance systems I believe the market world anticipating a game changing technology from Mazor and I do believe we didn’t disappoint.

As our momentum in Q2 demonstrate, the market upgrade into our technology. The addressable market for Renaissance including surgery center is estimated at over 2,000 facilities which perform over 400,000, a record number fusions annually. However, given our relative side, we have only penetrated a fraction of the hospital that could use our system.

We have made progress. If you look at the map of the U.S. two years ago, Mazor mainly have installation in Florida, Texas, and Southern California. Today, the picture is dramatically different and include systems in the Mid-Atlantic, Northeast, Midwest, and Northwest. It is quite an achievement and the Medtronic agreement give us the ability to popular the map even further in the coming years.

As I mentioned earlier, we increased the number of HCA-affiliated hospitals using the Renaissance and our goal is to penetrate further hospitals in the network and to increase our presence in other hospital networks. To date, we have 18 systems at three major hospital networks. There is no reason given the performance of the system and ROI that we can increase the number of systems at these networks.

As we demonstrated in the second quarter, Asia continues to be a growth opportunity. As I said in the Q1 conference call, a recent trip I met China reassure me that it’s a market driver for the Renaissance System where we believe there is a sizable market opportunity. We continue to work with other distribution partners throughout Asia and Europe to penetrate deeper into the market and this have shown success.

On the regulatory front, we continue to make progress and move closer to approvals in key markets like Japan. Before I hand the call over to Sharon to review the financial results for the second quarter, I want to provide an update on our growth strategies. We ended the second quarter with 16 capital sales reps and we are still aiming for 20 by the end the year. Our sales team remains focused on pursuing Renaissance sales and they have active sales pipeline.

As the partnership with Medtronic builds momentum, they will also be responsible for translating interest generated by Medtronic in two fields. Second, we remain focused on increasing the utilization of the systems which we know list a new system sales. This remains a significant revenue stream, but also the most direct demonstration of customers affection and the main validation of our clinical value proposition.

Several list of priorities, is to deliver products enhancement and product innovation regularly to maintain a high-level of surgeon satisfaction. In addition to the Mazor X, we continue to experience interest in the product since introducing it at last year. Finally, we continue to engage in clinical studies and data collection. During last months IMS Conference in Washington DC comprehensive data from two studies demonstrated the significant clinical benefit of our surgical guidance technology was presented.

In the first study titled, Surgical Outcome of Robotic-Guidance versus Freehand Instrumentation and retrospective review of 705 Adult Degenerative Spine Patients operated in Minimally Invasive and Open Approaches. The data showed that in the hands of experienced MIS surgeons, the use of robotic guidance in MIS approach can significantly reduce surgical complications and revision surgeries when compared to fluoro-guided MIS and to fluoro-guided open spine surgery.

The study revealed a three-fold higher rate of complications in both the freehand MIS and freehand open cases, compared to the Renaissance-guided cases. The revision rate was 3.8 times higher in the freehand MIS cases than in the Renaissance MIS cases. All the results were statistically significant. This is a dramatic finding and to give precisely the type of patient benefit contribution that we had hoped that our Surgical Guidance System would yield when we set out on our mission to heal through innovation.

The second study, titled first report from MIS ReFRESH, a prospective, comparative study of Robotic-Guidance vs. Freehand Pedicle Screw Placement in Minimally Invasive Lumbar Surgery provided data which we initially reported in May. While study is on going the preliminary data showed that the use of our surgical guidance in MIS significantly reduced the complications and revision rates compared to freehand MIS cases, corroborating the findings in the retrospective study.

We invested in prospective study to assess our contribution to reducing complication and bettering patient care. We were very pleased with the clinical based evidence and value then the result suggest. Our performance in the second quarter reaffirms our view the 2016 is clearly shaping up to be another year of growth for Mazor.

Moreover, the agreement with Medtronic, the unveiling of Mazor X, and the recent data that I must dramatically change our growth trajectory and reaffirm our position as the market leader.

Now to review the financial highlights of the second quarter. I will turn the call over to Sharon. Sharon?

Sharon Levita

Thank you, Ori, and hello everyone. I will review our financial results for the second quarter of 2016. Revenue for the three months ended June 30, 2016 was $8.3 million, an increase of 6% compared to $7.8 million in the year-ago second quarter. Geographically, revenue in the U.S. was $6.7 million or 81% of total revenue, with $1.6 million or 19% of revenue from the international markets.

Capital sales revenue was $4.1 million in the second quarter of 2016 compared to $4.6 million in the second quarter of 2016. This includes revenue from eight systems this quarter compared to seven systems and one upgrades in the year-ago second quarter. Although we received orders for 11 systems in Q2 revenue from one system in the U.S. was the first to future periods due to revenue recognition delays with respect to an upgrade option and two systems orders from our distributor in China would be recognized once delivered in the second half of 2016.

Revenue from disposable kit sales grew to $2.6 million, a 37% increase, compared to $1.9 million in the last year’s second quarter, reflecting the increasing utilization primarily in the U.S. market, as well as increase in the installed base. Revenues generated from service and others were $1.6 million compared to $1.3 million in the year-ago quarter.

Gross margin for the three months ended June 30, 2016 was 76.9% compared to 79.6% in the year-ago second quarter of 2015. Operating expenses were $10.3 million compared to $8.4 million in the year-ago second quarter. The increase in expense is mainly due to our continued investment in sales and marketing as we recruit more sales and clinical reps and invest in activities to raise our brand awareness, broaden our sales footprint. We also continue to invest in R&D to support the Mazor X development increasing our product offering as well as in clinical studies to validate the clinical and economic benefits of this system.

The research and development expenses were net of $1 million in development costs related to the Mazor X, therefore capitalized retangible assets during the second quarter. This as well as other development project will allow us to build upon our leadership position.

On a GAAP basis, the net loss for the second quarter of 2016 was $4.1 million or $0.09 per share compared to $2.1 million or $0.05 per share in the year-ago quarter. On a non-GAAP basis, the net loss for the period was $3.9 million or $0.09 per share compared to $1.9 million or $0.04 per share in the second quarter of 2015.

During the quarter, cash used in operating activities was $0.6 million compared to $0.5 million in the last year’s second quarter. As of June 30, 2016, our cash and cash equivalents and investments totaled approximately $47.5 million, which includes the $11.9 million from the initial equity investment by Medtronic’s.

Subsequent to the end of the quarter and due to achievement of a pre-determined operating milestone as second equity investment is expected during August. We believe this resource provide us with the metrics to execute our business plans and drive the continued adoption of our technology.

That concludes my remark and I will now pass the call back to Ori for closing comments and take questions.

Ori Hadomi

In summary, we achieved a number of goals to reaffirm our leadership status in guided spine and bring surgery systems and position us for accelerated growth. The first is a significant increase in our access to the market through a key strategic agreement with Medtronic. We believe the agreement will often our growth and lead to profitability. The second is a game changing value proposition which we believe is delivered by the Mazor X, the Surgical Assurance Platform.

Based on the positive feedback, we have already received I believe it will transform and redefine the standard of care for spine surgeries and once again demonstrate our vision of savings reservation. We intend on remaining the market leader and other will be measured by our success. I remain confident about the remainder 2016 being a record year in system sales and utilization and our profits well beyond simply put Mazor is in the right place at the right time with the right technology and the right partner to be the global leader of spine robotics.

Thank you again for joining the call. Operator, we are now open for questions

Question-and-Answer Session

Operator

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from the line of Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question.

Jeffrey Cohen

Good morning. Can you hear me okay.

Ori Hadomi

Yes, we would. Jeff, good morning.

Sharon Levita

Good morning.

Jeffrey Cohen

Just a few quick questions for you if I may, could you give us a general ideas as far as number of procedures from the second quarter I know the – I try to know it was $2.6 million or can we know that average price procedure volume?

Ori Hadomi

Jeff as you know we don't disclose on a quarterly based number of procedures for quarter, what I can say that we’ve had a very nice growth and which continue to grow than we had in previous quarter. We publish the utilization for 12 systems once a year at the first quarter and we will continue to do it in the future.

Jeffrey Cohen

Okay. And as far as the one upgrade from the second quarter was that two and x or what was the upgrade that you are referencing earlier in the call?

Sharon Levita

The upgrade related to the Q2 of 2016 which was an upgrade in Germany.

Jeffrey Cohen

Okay, got it. Can you give us any clarity on the 15 units for Medtronic as far as the second half; do you expect those in the third quarter or the fourth quarter or both?

Ori Hadomi

I believe it will be both. We got the purchase order and we are waiting to get from them the exact location where they want, the system to be placed, some of it would be as we said – part of this will be in training centers and I believe that all this five will be placed during the third quarter even though I remind that the price for the training centers is lower than for the commercial systems and the clinical systems will be installed some of it probably in the third, but I believe the majority will be in the fourth quarter.

Jeffrey Cohen

Okay, got it. So are there any extra set that have in place the date?

Ori Hadomi

Not out of the five that, we developed the systems, we have right now three systems in the U.S. in three different sites.

Sharon Levita

Is this enough.

Jeffrey Cohen

Got it. Okay. And lastly, could you give us some idea as far as the numbers of enroll MIS in ReFRESH to date?

Doron Dinstein

Hi, Jeff. This is Doron. We are currently outlook 300 patients where the control as almost tripled itself, but we will be looking at the data later this year or beginning of next year, we don't continuously monitor patients by patients, obviously we also need a long enough period of time for follow-up for complications that revision, it’s not immediately both surgery.

Jeffrey Cohen

Okay. And we should expect to see some follow-up data at NASS some time in the fall?

Doron Dinstein

I don't expect it to be at NASS, but NASS the data is original data that we've disclosed will be presented by Dr. Wang of Miami that’s a podium presentation at NASS. But I assume that’s probably going in 2017 when we are going to new data.

Jeffrey Cohen

Perfect. Okay, thanks very much for taking the questions.

Ori Hadomi

Thank you.

Operator

Our next question is from the line of Craig Bijou with Wells Fargo. Please proceed with your question.

Craig Bijou

Good morning, guys. Thanks for taking the question.

Ori Hadomi

Good morning, Craig.

Sharon Levita

Hi.

Craig Bijou

I know it’s early that's only been a few weeks since you unveiled Mazor X. But I wanted to see if you have gotten any feedback or reaction from the hospitals. And I guess more specifically anything that you’ve heard from hospitals that were in your pipeline to decline and waiting for Mazor X for the commercial launch. If they do, does that delay their buying process? Do they have to go, get a new approval? And then also just any impact from the lower ASP of Renaissance. Have you heard anything about that to date?

Ori Hadomi

Craig I will try to relate to the few questions that you asked. First, about feedback from surgeons. As you said it’s early, the feedback that we have with us now is very encouraging I attended several of these meetings. I can tell you that even got a course from the surgeons pending us for being so structural in with the system. Still as you know and as we know that to translate this excitement and this appreciation to a business and to person efficient making takes time, awareness and a lot of effort.

So as much as you know if you ask me about the feedback from the surgeon I think there is a great deal of excitement support from the concept and the integrations all these technologies into one platform. It is perceived as a great through platform. The market was expecting to get a better guidance, I think the market was overwhelmed by the concept of surgical assurance and the Pre-Op Analytics with all the capabilities of being able to plan and stimulate alignment and then execute it something the market didn’t expect to that we will introduce in such a sophisticated way.

The impact of the pipeline again right now the feedback great from the markets and actually even helped us to move deal forward with the Renaissance in some others, we are still waiting to face. I don’t expect it to have significant a negative impact on the Renaissance sales primarily because in these areas where there maybe concern we will consider a closure will allow surgeons subject to paying the guest to upgraded actually wanted certain time.

And this will actually address the confirm and also aim to answer the potential tendency of surgeons to an administration to wait and experience the Mazor X. So while it may have some accounting implication but from the business and from the fundamentals I don’t expect this to have any significant impact. Did I answer your question?

Craig Bijou

No, no that’s helpful. And just as a follow-up Ori when you're halfway through the year you've typically been pretty confident in the number of systems sales for the second half. So I guess my question is how does Mazor X impact that visibility and I mean I think it's related to the answer that you gave previously. But when we think about expectations for system sales I know you said you're confident in a record number of sales. So if you take the 16 in the first half, the 15 from Medtronic, you're at 31 which is well ahead of 2015, the 25 systems you sold then. How should we think about systems on top of that? And I guess what's your visibility into the rest of the year sales beyond the Medtronic system?

Ori Hadomi

Yes. I think that you answered most of the question by just over viewing the results today. And this is the result already granted because of the agreement and when I made my comments earlier during this year, I knew we’re heading in a new – what were the terms that we agreed with Medtronic’s. I think – and you knew me Craig, I'm not giving number for making promises unless I really feel confident about it.

I think that with the numbers we have now, as you said, we've already exceeded significantly the 2015, and with the numbers that we expect for the third and the fourth quarter I believe it will be even much better. The combination between Renaissance and [indiscernible] it's still too early for me to say. I don't know yet and it probably will be affected by the [indiscernible]will be able to mature the Mazor X to meet the prime time expectations of surgeons and then it will have a – by the time we will release it.

But all-in-all, I don't have visibility on the pipeline in the fourth quarter because these are all early stage process. I feel that with the support of Medtronic with the people in the field will experience – as of today I feel it will be a record year for us in all the different parameters, number of units, the procedures, the utilization and all different parameters are expected to be a very good year.

Craig Bijou

Great, thanks. And if I could just squeeze one more in. On the milestones to get the Phase II of the agreement, I know they're going to happen from – when Medtronic has the systems through 2017, but I wanted to know is there any – are you going to provide any progress updates, so that we would know where you stand in relation to those milestones? Or is it just going to be an announcement that you hit the milestones and you're going to move into Phase II?

Ori Hadomi

Right now I think that I believe that the final information will be known when we get to the end of the period. And I don't expect too much of report before we get to the milestone.

Craig Bijou

Okay. Thanks for taking the question.

Ori Hadomi

You are very welcome. Thank you.

Operator

Thank you. [Operator Instructions] Our next question is from the line of Dave Turkaly with JMP Securities. Please proceed with your question.

David Turkaly

Thanks. And I think the Medtronic agreement is primarily a domestic one, but is there any chance or does it cover international for them as well and looking at sort of the narrow brain upgrades. Will they be involved in promoting that as well?

Ori Hadomi

Okay. Good morning, Dave. So the agreement at its first stage is focused domestically in the U.S. market. At the second stage which is expected subject to milestone at the first half, first quarter of 2018 will extend their distribution agreement to the international market. We may consider some partnerships and collaboration also during the period in other specific market, but generally speaking till through to 2018, it’s U.S. only, and in the beginning of 2018 it is expected to include also the international markets.

And to the brain, right now the agreement is focused on spine only. Again, we may expand it in the future to include some collaboration also in brain. But right now, the agreement as we signed and as we open and execute is focused on spine only.

David Turkaly

And these are the quick follow-up. At your Analyst Day you talked about the types of cases that the robots been used and degenerative was a more than a half. I guess as you look at Medtronic rolling this out, would you expect that to kind of still remain their primary focus or revision and deformities as well? Or should we be thinking kind of even bigger focus on degenerative moving forward with them?

Ori Hadomi

So I think that you should expect to see – this is the Mazor X used both in the degenerative, in MIS and in complex cases. These are the three main areas that we focus, represent the market we believe that we can maximize the clinical value proposition, and our clinical experience is focused on these three anthologist.

David Turkaly

Thank you.

Ori Hadomi

You’re welcome.

Operator

Your next question comes from the line of Young Xuyang Li with Barclays. Please proceed with your question.

Young Xuyang Li

Hi. Thanks for taking my questions. I guess the first one on just the question about the three purchases from the hospital network, are those top down decisions or surgeon driven and it is surgeon driven can you talk about how many surgeons will be using that at each hospital?

Ori Hadomi

It is a great question and thank you for asking it. All sort of decision always initiated by the surgeons in all case and we have a sales strategy, we also always has to change to target those strategic markets, but then we go to the hospitals and we try to get the surgeons interest so that they will push within their administration – and purchase decision change about the better the system.

The reason we do it this way because we know that this assure of the fault of the engagement of the surgeons later at the implementation and stimulation of the technology in the hospital. So in this [indiscernible] of the system the decisions was highly supported by the executives of the network, but was initiated and led by the local hospitals teams, surgeons and administrator.

Young Xuyang Li

Okay. Thanks for that. Just a quick follow-up on that, how many surgeons for each of the hospital or is it like handful or just one surgeon leading the charge?

Ori Hadomi

More than one.

Young Xuyang Li

Okay. Got it. Thanks. And just on the follow-up just on the Medtronic deal, can you maybe talk about how you change the centers for your owned capital and clinical sales reps and maybe if you can talk about if there is any changes from Medtronic side as well regarding sales rep and centers?

Ori Hadomi

Obviously, we don’t disclose our compensation policy and incentive plan that as you can imagine were differently together and synchronized with Medtronic adjusted and offered incentive plan to support our mission and objectives and we also as part of the agreement assured that Medtronic will put in place incentive plan that support the joint effort and the shared objectives. I feel very comfortable and also very proud that two organizations were able to work so closely on many sensitive issues to make sure that we are aligned and focused on the same objectives. Aligning the compensation strategy was an important building block in the building our execution strategy.

Young Xuyang Li

Great. Thank you very much.

Ori Hadomi

Thank you.

Operator

Our next question comes from the line of Tracy Marshbanks with First Analysis. Please proceed with your questions.

Tracy Marshbanks

Hi. Couple questions, first just a little bit on your commercialization and rollout strategy, number of times companies with the new technology will roll it out to a limited number of sites. And then pass if you will just to do a shakedown period to make sure there are no issues. Are you thinking of a process like that or are you sort of ready to supply demand sort of commercial demand fully at a specific date?

Ori Hadomi

I think that we need to be very sophisticated and put a lot of balance in control methodology in order to make sure that we release the system and are able to implement all the feedback that we will get from the market. I expect we right now have three systems, we will soon have 13 systems and it will continue to increase.

And based on the feedback we will get and our systems how long it will take us to implement improvement and changes and how critical of these improvements – we will make decisions about the release of the supply of additional systems. I don't expect this to have an impact on our ability to collect pears and get surgeons interest and all the sales process, but again we need first of all to release the system that will take place only at late October and following the release of the system. And based on the feedback we will decide should we need to put any delays or process until we improve. Right now, we are what we plan is to continue with new stuff.

Tracy Marshbanks

Okay. Maybe a little bit on the accounting side for Sharon. The simple one has the price of the - the 6% equity investment been determined already and expecting its an average and if so could you just share that the price and number of shares, so we could roll that in. And second could you discuss considerations on revenue recognition that may come into play if you have, you know upgrade options and the like. So that we could least be aware if those things start to roll in. Thank you.

Sharon Levita

Okay. Thank you for the question. So with respect to the Medtronic second tranche investment of up to 6% of the fully-diluted number of shares, the price is not been determined yet and is right now in the process of forming because it’s based on 20 days moving average from the time we announced on the unveiling of the Mazor X. So we expect to have the price around August 7, in few days. Medtronic’s make cap the investment to $20 million. So the full amount that they may invest is much higher with the 6% is probably approximately $37 million a little bit more at the moment with the pricing until now and they may cap it to $20 million. So is that clear.

Tracy Marshbanks

Yes, I appreciate that. And on revenue recognition?

Sharon Levita

With respect to revenue recognition in this quarter we delayed revenue from one system placed in the U.S. markets due to the upgrade opportunity this account has. We have put in place upgrade throughout for hospitals that would want to buy a Renaissance now with an option to upgrade to the Mazor X, we are putting plans that are limited in time and those kind of plans may during Q3 and maybe some in Q4 required delay of revenue recognition. But the aim is to continue to place systems during the period and allow an upgrade until we fully commercially launched Mazor X.

Tracy Marshbanks

Okay. If I get one more and it's related to that maybe a bit more in Ori’s domain. But if I haven't aware with a Renaissance system set up and working how simple or complex is it to take out the Renaissance and install in X and not miss a beat if you will?

Ori Hadomi

I am not sure. From the operational point of view it's a new system to different systems. To take out the Renaissance something that can be done immediate and to bring in the Mazor X also very fast. If you ask if we could take the hardware of a Renaissance and upgrade to be a Mazor X the answer is no, these are two very different platforms with different technologies with different components and completely two different systems. So it does mean to have a new system in the operating room.

Tracy Marshbanks

Yes. Right. I have seen on the - it was just more the logistics of the hospital do I have to have a different configuration, a different bed, a different attachment. How much headache might there be and do I buy one and then switch or is there enough headache that I just wait?

Ori Hadomi

There's no real logistics around it and we have no real, any material implications on the set up in the operating room. It’s a really straightforward and we developed Mazor X attachment to the bed to be generic so that we can attach it to the very most of the bed that exist today in our main markets.

Tracy Marshbanks

Yes, excellent thank you.

Ori Hadomi

Thank you.

Sharon Levita

Thank you.

Operator

The next question is from the line of Mike Matson with Needham & Company. Please proceed with your question.

Unidentified Analyst

Hi, this is actually [indiscernible] for Mike. Just want to get your thought on Zimmer’s acquisition of Medtech?

Ori Hadomi

My thoughts, I congratulate them for the move. I believe I read all of your reports and of course it was very thoughtful. I think that Medtech have a great application for brain and I believe that one thing will be developed for other applications, it will probably be a good product there as well.

So I’m far from being to know how to analyze Zimmer needs in this market, but the distributors had heard about the Medtech product for the brain is very encouraging mainly for the epilepsy procedure. I think that there is a lack of validation, clinical data experiencing spine.

And I believe it will take time to make it work for spine, but I trust Zimmer and its team that they will know how to develop, how to work closely with the team at Medtech until they will have a product that will be in spine or in joints. And by the way, I am not sure their first market will be spine, but that’s probably Zimmer would be the right people – the Zimmer team will be the right people to ask about it.

Unidentified Analyst

Okay, great. And I apologize if this was mentioned already, but you’ve sold a number of systems to distributors in China. Could you maybe tell us how many are actually being used clinically at this point?

Ori Hadomi

You know that in the international market has been different from the U.S., we don't have reps in the room, so we don't have in online an ongoing track about the exact utilization in case of per system. So unfortunately I can’t give you a real validated data. I can tell you that when I was in China just about two months ago I met with probably with several, more than 10 surgeons uses URL systems in cases. How many of these are used today in every day, every quarter, it’s hard to say for us.

Unidentified Analyst

Okay, great. And finally can you remind us what your plans are for entering Japan?

Ori Hadomi

Yes. We are in the regulatory process which takes always longer, not always, but for us longer to what I expected. We are making progress there, but it still hasn’t been finalized. And I’m really afraid from certain expectation whether it will happen this quarter or next quarter or the third quarter, but we are very close to the final line, but still it’s yet to be done.

Unidentified Analyst

Okay, great. Thank you.

Ori Hadomi

You are very welcome.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Matt Miksic with UBS. Please proceed with your question.

Matt Miksic

Hi, Ori. Thanks for taking the question. Just maybe a couple of questions on – at higher level or maybe into directionally the kinds of things you're seeing with the system and the customers that you're talking to. Obviously, a lot of benefits associated with the platform that you talked about in the journalist meeting and before reproducibility or reduced risk of complication enabling MIS adoption or exposure which is really almost like a work place safety issue for the surgeon or the surgical team.

And then of course there is commercial opportunity per hospital from a marketing perspective. And I'd love to get your thoughts on the new accounts that you're seeing maybe what you’re seeing over the past few years in terms of driving traction with hospitals, surgeons and maybe some examples of how different types of hospitals or surgeons are looking at this system down if that's changing at all. And then I have just one quick follow-up.

Ori Hadomi

Hi, Matt. Thank you for the question. If the question is focused on the impact of the unveiling of the Mazor X from the perception of the hospital mutation, I think it’ll be too early for me to comment on that just because I don't think we have really a thorough feedback and information for the market. If you are asking about our experience with the Renaissance, I can share a lot of information there. I think that it is different. The whole process is different between the different types of hospitals.

If you go from surgery centers to community hospitals, to academic centers, you should expect a very different set of consideration in the adoption of technology and also in the way they actually execute and realize the opportunity. The hospitals are very hesitant or they are not easily sharing the commercial information about to what extent they were able to incrementally increase their patients and different kinds of business information – they are not very easily and happy to share.

These being said, we can indirectly learn about it from the feedback of the surgeon, from the level of engagement, from the feedback and a lot of our surgeons used to say, when they see their hospital CEO’s smile to me in the corner I know I’m doing something right for him and it's probably not only the clinical benefits, but it is also something about the business. And what we hear from many of the surgeon is that they never had such a level of engagement and support from the administration to their activity as they had recently.

So I think that we were able with the Renaissance and with the great support of our clinical sales team to develop programs in the hospitals not only intimidation of placement of technologies. And this problems, the spine and on the Renaissance programs in the hospital is what makes a difference. It definitely differentiates hospital, it definitely makes the team more active and I believe that the results that I can’t share numbers because I don't have a validity numbers tells the story of excitement by the patients and the ability to attract more patients to these hospitals.

I think that these together with the recently published clinical data is a very strong and I believe – I think it’s the first time there is a real evidenced based support to the benefit of surgical guidance technologies like the Renaissance. And if the hospitals will use these to promote and to explain the clinical benefits I feel confident that it will support the trend and perfection that we evidenced in the last 18, 24 months.

Matt Miksic

That’s helpful. And then one follow-up on that just and it maybe too earlier, we hear this not all that often, but occasionally with the kind of flurry of activity at CMS around bundle payment you know [indiscernible] ortho and more recently in cardio, spine comes up and there is a debate I think is to whether that something that will be on the tables especially given at relatively small expenditure of CMS related to these other indications.

But curious if that comes up, certainly some of the major academic centers have been. You are looking at their patient handling process efficient and how they prep patients and looking to reduce their total cost of care across the wide variety of surgical procedures. And I'm just wondering if that’s factoring into any of the interest that you're seeing reproducibility and production of higher cost adverse events and that kind of things?

Ori Hadomi

Absolutely, yes. That I think it’s an important considerations and by the way I think it's not only consideration by the hospitals, but also by the medical industry and I believe that all the spine [England] companies consider it an important factor, whether it’s a recent opportunities depend where you ask, but I think one of the great benefit that our – the Mazor X brings is the ability to process data, to collect the data and to assess the risk that associated in each and every account and to be able to manage the inventory and to support that business efficiency that’s taken both by the hospitals and by the industry.

And this one seems that’s really so unique and in many ways I can tell as when we developed the Mazor X, the whole interest of the business stakeholders whether it’s the industry, the hospitals or others been seriously considered and implemented in a development plan.

Matt Miksic

That’s great. Thanks for the color.

Ori Hadomi

You are very welcome. Thank you, Matt.

End of Q&A

Operator

Thank you. At this time, I would like to turn the call back to Ori Hadomi for closing remarks.

Ori Hadomi

Thank you very much, everyone. I’m looking forward to meeting you at NASS and the result of the third quarter. Thank you very much. Have a good day.

Operator

This concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

About this article:

Expand
Tagged: , Israel,
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.