Medical device companies have offered up hits and misses so far this earnings season, but as quarterly reports wind down, upstart robotic surgical company MAKO Surgical (Nasdaq: MAKO ) took the spotlight on Wednesday. MAKO has worked under the spotlight of larger, more established robotic surgical companies since its founding in 2004, but many believe this company can soon carve out its own niche in an industry set to rule the future. That being said, how is MAKO performing now -- and what three things should you be watching in the wake of its third quarter?
Financials on the upswing
MAKO's still got a long way to go before it reaches profitability, but the company has been performing better financially as of late. For the third quarter of 2012, MAKO posted a net loss of $6.6 million. It's not a pretty number for investors looking for good, strong financial statements, but it did beat analyst projections on an EPS basis. Furthermore, MAKO's loss is the lowest since Q4 2011 and tops last year's Q3 loss of $9.7 million by 47%.
Revenues rose based heavily on actual system sales, as MAKO sold 15 of its RIO robotic orthopedic surgical units this quarter. That brings the total number of RIO systems installed to 141 -- but with each system costing more than $1 million, the sales brought in a nice chunk of change for MAKO. Eleven of the 15 RIO customers purchased the MAKOplasty hip application with the device for an additional $185,000 each. With 60% of RIO devices worldwide having MAKOplasty applications, this quarter's uptick in purchases is a good sign.
It's slow and steady progress for MAKO on the financial side, but it's not anything bad. You should expect waxing and waning bottom lines for several quarters to come, but based on these results, MAKO is doing the right things to move toward profitability.
While you should keep an eye on the overall financial picture, one particularly troubling area of the company's earnings should raise some eyebrows.
Procedural growth, a key metric for MAKO's future success, didn't . MAKO's procedures dipped by 7% from the second quarter and rose 33% from Q3 2011. MAKO reduced its guidance for procedures for the full year from between 11,000 to 12,000 to a more modest 10,200 to 10,600. In the company's earnings call, MAKO CFO and Treasurer Fritz LaPorte chalked up the reduction to procedures that were "below our expectations" for the first three quarters of 2012. Hurricane Sandy was also cited as potentially dampening fourth-quarter estimates, given that MAKO has numerous systems in New York-area hospitals. President and CEO Maurice Ferre stated in the earnings call that procedures did dip last week, lending credence to those projections.
A 33% year-over-year increase might not seem bad, but by comparison, robotic surgical leader Intuitive Surgical (Nasdaq: ISRG ) posted year-over-year procedural growth of 29% in 2011. Intuitive conducted an estimated 360,000 operations in 2011; MAKO is nowhere near that number. That Intuitive, the big kid on the robotic surgery block, can post similar growth with far more procedures speaks to MAKO's need to improve in this area.
In MAKO's defense, company leadership did outline expanded surgeon training programs and software upgrades to boost procedural growth in its earnings call. Increased efficiency should make customers more willing to buy into MAKO's dream, particularly as surgeons become more versed in using the RIO machine. Additionally, the revised guidance number still keeps the company on track for annualized full-year procedural growth of between 47% and 53%, with projections for the fourth quarter ranging for 20% to 37% growth over the third quarter .
Regardless, the company has some ground to make up. Procedural gross margins came in at 47% for the quarter, albeit heavily affected by one-time costs of excess inventory. That fell below gross margins for service revenue and sales revenue, which were 62% and 89%, respectively. Improving surgeon and machine efficiency sounds like a good plan, and MAKO's leadership is optimistic in procedural growth, but I'd wait to see the results of such efforts before declaring victory.
The fallout of good intentions
Unfortunately for MAKO, it may need to speed up its plans. The Affordable Care Act's impending arrival -- with its 2.3% excise tax on medical device revenues posing a serious threat to MAKO and similar small companies -- could threaten this company's financial well-being.
It's likely that MAKO will experience some speed bumps as it compensates for the ACA. Medical device rival Stryker (NYSE: SYK ) has already announced plans to lay off workers in order to cut costs. Industry insiders have claimed huge losses for the industry from this tax, so you shouldn't expect MAKO to come away unscathed.
It's still questionable what impact the ACA will have on hospital budgets, but the RIO's hefty price tag will make things tough on MAKO should health care institutions need to cut back on spending with millions of newly insured Americans. Together with the tax, this could lay a serious blow in MAKO's plans.
Slow and steady wins the race
It was ultimately a mixed quarter for MAKO, but I believe this company is on the right track for success. The company's commitment to improving efficiency should pay off in procedural growth after this quarter's muted results. If RIO sales continue to stay strong, MAKO should see continued upticks in revenue growth. While the Affordable Care Act could set investors back, MAKO looks ready to compete in the growing robotic surgery arena for the long term.
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