(By R.Chandrasekaran) The announcement of medical appliances and equipment maker MAKO Surgical (Nasdaq: MAKO) that it sees lower than expected sales in the second quarter will likely to push the company's path to profitability by a year. Though the company has not announced anything about it, the latest indications point out to this.
Following the company's move to cut down its sales outlook for the second quarter on RIO system and narrowing of its MAKO plastery system, shares of the company are hammered thereby dragging the stock approximately 40 percent. This is the second consecutive quarter that the company has indulged in cutting down its sales estimate. This suggests that the growth rate is lower than predicted earlier.
Street is extremely disappointed with the company's latest disclosure that could potentially push MAKO's path to profitability by a year to 2014 from previous predictions of 2013 by analyst David Roman. This apart, doubts are raised about the long-term viability of the company's core technology and the extent to which it can grow outside the purview of its initial indication.
Investors seemed to have taken a bullish view about MAKO's ramp in total hips and its capability to market the systems outside the big contract orders. This was quite evident by the stock witnessing 4.7 percent upside after analysts added it in Buy list on May 16 but before the company reducing its forecast. This was in contrast to S&P 500's 1.7 percent gain and the Russell 2000's 2.2 percent loss during the same period.
In 2011, the partial knee franchise witnessed 92 percent upside; however, the latest reduction in their second quarter outlook, the company is poised to record less than 58 percent growth expected earlier. Similarly, total hips are ramping less rapidly than predicted. Given the cost of system replacements of $800K range, MAKO will be more dependent on big hospital system orders. This apart, the company will face a significant change in the selling cycle with hospitals that require further physician buy-in to support a system sale. This will have the potential to extend replacement cycles hurting the company's top line.
The unimpressive macro environment for hospital capex also looks to hurt the company's businesses. At this juncture, it is not clear to what extent the headwinds will prove transient or when they will subside. "We lower our 2012-2015 system and procedure forecasts (our 2012 numbers are in-line with revised guidance), which in turn pushes out profitability to 2014 from 2013," wrote Goldman Sachs analyst David Roman in an equity research note.
Meanwhile, the brokerage has drastically cut down its one-year price target on MAKO to $17 from $36 on lower revenues, and a longer way to profitability, apart from a reduced EV/sales multiple.