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MAKO Sees Broader Loss before Merger

Zacks Equity Research

MAKO Surgical Corp. (MAKO) reported a broader loss of $14.6 million or 31 cents per share (excluding merger transaction expenses of $6.6 million) for the third quarter of 2013 compared with $6.6 million or 15 cents in the same quarter of 2012 as well as the Zacks Consensus Estimate of 12 cents.

MAKO will be acquired by Stryker Corporation (SYK) before the end of this year. The weak third quarter results did not affect the investor sentiment much, as reflected in it stock, which continued to swing between $29 and $30 following the news of its merger with Stryker in September this year.

Revenues in the quarter dipped 22% to $22.8 million, falling short of the Zacks Consensus Estimate of $33 million. The decrease was attributable to fewer RIO systems recognized in the third quarter of 2013, partially offset by a 35% rise in the number of procedures performed in the third quarter of 2012 and an increase in service revenues.

Gross profit fell 5.2% to $16.3 million from $17.2 million in 2012. Gross margin was 72%, consisting of a 74% on procedure revenues, 34% on RIO system revenues and an 86% margin on service revenues. It was down 1,270 basis points from 59% in the prior-year quarter due to fewer RIO systems sold leading to higher indirect costs per system.

Adjusted operating expenses were $31.0 million in the quarter (excluding merger transaction expenses), up 16.6% from $26.6 million in the third quarter of 2012. Adjusted operating loss rose 56.5% to $14.6 million (64.3% of sales) from $9.4 million (32.0%) in the third quarter of 2012.

MAKO Surgical sold four RIO systems during the quarter, of which two were sold to domestic customers, one through MAKO's international distributor in Singapore, and the remaining to its distributor in Taiwan for use in securing regulatory approvals and to demonstrate MAKOplasty. With this, MAKO Surgical’s worldwide commercial installed base of RIO systems stood at 174 systems, including its domestic commercial installed base of 166 systems as of Sep 30, 2013.

As of Sep 30, 2013, MAKO had 167 MAKOplasty sites worldwide. During the quarter, 3,259 MAKOplasty procedures were performed, of which 3,152 were performed at domestic sites, 107 were performed at international sites and the remaining 661 were total hip arthroplasty or THA procedures.

MAKO had cash and cash equivalents of $12.9 million as of Sep 30, 2013 compared with $61.4 million as of Dec 31, 2012. Inventory stood at $24.6 million as of Sep 30 compared with $25.1 million as of Dec 31.

In the first nine months of the year, MAKO’s cash use was $14.0 million from operating activities compared with $27.7 million in the same period of 2012. Capital expenditures decreased to $5.3 million from $7.3 million a year ago.

MAKO Surgical did not provide any guidance for the year due to its pending acquisition with SYK. Currently, MAKO carries a Zacks Rank #2 (Buy). Other medical instruments stocks that are also worth a look include CryoLife, Inc. (CRY) and Natus Medical Inc. (BABY). Both of these carry a Zacks Rank #1 (Strong Buy).

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