in re: mako surgical corporation securities litigation 12...

Case 0:12-cv-60875-JIC Document 33 Entered on FLSD Docket 09/12/2012 of 141

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA

CASE NO. 12-60875-CIV-COHN/SELTZER

IN RE MAKO SURGICAL CORPORATION CLASS ACTION SECURITIES LITIGATION

CONSOLIDATED AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS

JURY TRIAL DEMANDED


TABLE OF CONTENTS

I. NATURE OF THE ACTION.............................................................................................2

II. JURISDICTION AND VENUE ....................................................................................... 11

III. PARTIES ..........................................................................................................................11

A. Lead Plaintiffs....................................................................................................... 11

B. Defendants ............................................................................................................ 12

1. The Company............................................................................................ 12

2. Individual Defendants............................................................................... 12

IV. FACTUAL BACKGROUND AND SUBSTANTIVE ALLEGATIONS........................15

A. MAKO Business Overview..................................................................................15

B. Publicly, MAKO’s Sales Appear to Be Booming in 2011, but Internally Red Flags of Slowed Growth Are Raised, Ignored and Concealed from the Public....................................................................................................................21

1. The HMA Contract—“Good on Paper” but in Reality a “Dead Account” ................................................................................................... 21

2. MAKO’s Recognition of 2010 RIO System Sales in 2011 Artificially Inflates 2011 Results—the Baseline for 2012 Guidance .......28

3. In 2011, MAKO Employees Warn Internally that MAKO’s Goals for RIO System Sales and Procedures Are Inflated and Unattainable.............................................................................................. 33

(a) MAKO’s Top-Down Approach to Sales Goals and the Guidance Set for 2012 .................................................................. 33

(b) CW’s Report Alarm Bells During 1Q11 and 2Q11 Reflecting Slowing RIO Sales and MAKOplasty ProceduresTrends......................................................................... 36

(c) August 2011 Upstream Marketing Meeting ................................. 52

C. MAKO’s RIO Systems Pipeline Dries Up at the End of 2011 Heading into 2012....................................................................................................................... 62

D. Defendants, Aware of Adverse RIO Sales and Procedures Trends in February 2012, Nevertheless Continue to Publicly Reiterate Their False and Misleading 2012 Guidance in March and May 2012..................................... 66


V. ADDITIONAL ALLEGATIONS SUPPORTING THE INDIVIDUAL DEFENDANTS’ SCIENTER........................................................................................... 68

A. RIO Systems Sales and MAKOplasty Procedures Were MAKO’s Core Business During the Class Period......................................................................... 68

B. Individual Defendants Closely Monitored RIO Systems Sales and Volume of MAKOplasty Procedures and Related Guidance ............................................. 70

VI. DEFENDANTS’ MATERIALLY FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD .....................................................................................73

A. January 9, 2012 Press Release..............................................................................73

B. March 6, 2012 Press Release................................................................................78

C. March 6, 2012 Earnings Conference Call............................................................. 79

D. March 14, 2012 Barclays Capital Global Healthcare Conference........................82

VII. INVESTORS SUFFERED DAMAGES AS THE TRUTH BEGINS TO EMERGE BUT DEFENDANTS PERPETUATE THEIR FALSE AND MISLEADING STATEMENTS, BLUNTING THE FULL IMPACT OF THE FIRST CORRECTIVE DISCLOSURES.......................................................................... 85

A. May 7, 2012 Press Release ...................................................................................87

B. May 7, 2012 Earnings Conference Call................................................................ 89

C. June 13, 2012 William Blair and Co. LLC Growth Stock Conference ..............107

VIII. INVESTORS SUFFERED DAMAGES WHEN MAKO’S STOCK PRICE DROPPED AS THE TRUTH IS FULLY REVEALED ................................................108

A. July 9, 2012 Press Release.................................................................................. 108

B. July 9, 2012 Conference Call.............................................................................. 110

IX. POST-CLASS PERIOD EVENTS.................................................................................119

X. CLASS ACTION ALLEGATIONS ...............................................................................123

XI. INAPPLICABILITY OF STATUTORY SAFE HARBOR...........................................125

XII. PRESUMPTION OF RELIANCE UNDER THE AFFILIATED UTE DOCTRINE AND/OR, IN THE ALTERNATIVE, THE FRAUD ON THE MARKET DOCTRINE....................................................................................................................131

XIII. CAUSES OF ACTION................................................................................................... 132

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COUNT I VIOLATION OF SECTION 10(b) OF THE EXCHANGE ACT AND SEC RULE 10b-5 (Asserted Against All Defendants) ...................................................132

COUNT II VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE ACT (Asserted Against All Individual Defendants)................................................................ 134

XIV. PRAYER FOR RELIEF .................................................................................................135

JURY TRIAL DEMANDED...................................................................................................... 135

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Court-appointed Lead Plaintiffs Oklahoma Firefighters Pension and Retirement System

(“Oklahoma Firefighters”) and Baltimore County Employees’ Retirement System (“Baltimore

County”) (collectively, “Lead Plaintiffs”), individually and on behalf of a class of similarly

situated persons and entities, by their undersigned counsel, for their Consolidated Amended

Class Action Complaint for Violations of the Federal Securities Laws (the “Complaint”)

asserting claims pursuant to the Securities Exchange Act of 1934 against Defendants MAKO

Surgical Corporation (“MAKO” and/or “the Company”), Maurice R. Ferré, and Fritz L. LaPorte,

(collectively, “Individual Defendants”), allege the following upon personal knowledge as to

themselves and their own acts, and upon information and belief as to all other matters.

Lead Plaintiffs’ information and belief as to allegations concerning matters other than

themselves and their own acts are based upon, among other things, (i) review and analysis of

press releases, news articles, transcripts, and other public statements issued by or concerning

MAKO and the Individual Defendants; (ii) review and analysis of research reports issued by

financial analysts concerning MAKO’s securities and business; (iii) review and analysis of

reports filed publicly by MAKO with the Securities and Exchange Commission (the “SEC”); (iv)

an investigation conducted by and through Lead Plaintiffs’ attorneys, which included interviews

of numerous former MAKO employees, as well as review of MAKO internal documents

provided by those former employees, and other persons with knowledge of the matters alleged

herein, on a confidential basis; (v) review and analysis of news articles, media reports and other

publications concerning the orthopedic medical device industries and markets; (vi) review and

analysis of certain pleadings filed in other pending litigations naming MAKO as a nominal

defendant; (vii) and other publicly available information and data concerning MAKO, its

securities, and the markets therefor. Lead Plaintiffs believe that substantial additional


evidentiary support for the allegations herein exists and will continue to be revealed after Lead

Plaintiffs have a reasonable opportunity for discovery.

I. NATURE OF THE ACTION

Lead Plaintiffs bring this federal securities class action on behalf of themselves

and all similarly situated persons and entities that, between January 9, 2012 and July 9, 2012,

inclusive (the “Class Period”), purchased or otherwise acquired the publicly traded common

stock of MAKO on the open market and were damaged thereby (the “Class”).

2. MAKO is a medical device company founded in November 2004 that develops

and markets a surgical robot technology, known as the RIO Robotic Arm Interactive Orthopedic

System (the “RIO system”), and associated implants and other disposable products for use in its

robotically-assisted orthopedic procedures, known as MAKOplasty, to treat early to mid-range

osteoarthritic knee and hip disease. The RIO system provides both pre-operative planning and

intra-operative guidance to orthopedic surgeons, purportedly assisting surgeons with alignment

and insertion of implants and achieving more consistently reproducible precision in knee and hip

joint replacements compared to conventional procedures performed manually.

From its inception and until recently, MAKO’s RIO system was commercially

available only for partial knee MAKOplasty procedures. In September 2011, MAKO released a

new total hip application for the RIO system, expanding its MAKOplasty offerings beyond

partial knee to total hip procedures. Defendants touted this total hip product launch as a key step

in MAKO’s growth strategy, one that would drive the widespread adoption of MAKOplasty

across the orthopedic surgeon community, and that would produce increased RIO systems sales

and MAKOplasty procedures, which generate over 90% of the Company’s revenue.

4. Security analysts and investors focus primarily on two key metrics provided by

MAKO—the number of RIO system sales and MAKOplasty procedures expected to be

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performed in a given year, as set forth in the Company’s annual guidance. That annual guidance

is substantially based on the number of its RIO system sales and procedures attained in the prior

year. Although MAKO has not yet reached profitability, it had, until recently, demonstrated

consistent growth in both RIO system sales and procedures, and thus revenue, both on a

quarterly and annual basis, from its inception.

5. On January 9, 2012, MAKO publicly pre-announced its selected operating results

for the fourth quarter and year ended 2011, including strong performance (compared to prior

years) in the number of RIO systems sold and MAKOplasty procedures performed. MAKO also

issued aggressive 2012 annual guidance of 56 to 62 RIO systems placements and 11,000 to

13,000 MAKOplasty procedures (for both partial knees and total hips). The guidance of 56 to 62

RIO system units represented a substantial increase from the 48 units MAKO had sold in 2011.

Similarly, the procedures guidance range was also much higher than the approximately 7,000

procedures performed in 2011. Both investors and analysts reacted positively to the high 2012

annual guidance, driving up the price of MAKO common stock almost 8% to $31.07 per share

on January 9, 2012. Subsequently, Defendants, including Ferré and LaPorte, reaffirmed this

2012 annual guidance on multiple occasions in early and mid March 2012, at the same time

touting MAKO’s increased sales and procedures figures in 2011 as indicators of additional high

growth expected in 2012. As a result, MAKO’s stock price continued to rise substantially,

reaching its Class Period closing high of $44.98 on March 26, 2012.

6. However, Defendants’ 2012 annual guidance announced in January 2012 and

reiterated in March 2012 was materially false and misleading when made because Defendants

were aware of many undisclosed, adverse facts, all of which, individually and when taken

together, seriously undermined the validity of the issued guidance and showed that Defendants

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lacked a reasonable basis for announcing it. Specifically, MAKO’s 2012 annual guidance was

premised substantially on its strong 2011 results. However, these 2011 results (particularly

MAKO’s 48 RIO systems sales) was an improper baseline for use in forecasting 2012 results.

Specifically, they were artificially inflated by three material circumstances that were unusual or,

in any event, for which there is no evidence of a reasonable belief that they would likely recur in

2012, and which were known to Defendants prior to their issuing 2012 guidance but not

disclosed to investors.

7. First, MAKO had deferred recognition in 2011 of approximately 4-6 RIO system

sales that were attained in 2010, under highly unusual circumstances, the absence of which

would have meant that the sales would have been counted toward 2010 results. In particular,

MAKO had closed these 4-6 RIO sales in the fourth quarter 2010 and even delivered the actual

units to the hospitals in the last week of December 2010. However, MAKO then did not install

these 4-6 units for approximately 1 to 2 weeks, an atypically long wait time in light of MAKO’s

usual installation practices. MAKO’s purported reason for the delay was that there were

unspecified contract issues related to these sales, even though the hospitals on the other side of

each of these 4-6 system contracts were wholly unrelated to each other and were located in

different regions of the country. These contract issues were then “magically fixed” and the units

installed in the first week of January 2011. Compounding these unusual circumstances was the

fact that MAKO did not need these 4-6 sales to meet its 2010 guidance and, therefore, they were

spare units that could be used to boost 2011 sales results, particularly the generally slower first

quarter.

8. Second, MAKO’s 2011 results were inflated, for the purpose of using them as a

baseline, by the sales of 11 RIO system, which were achieved through a bulk-order contract,

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announced in March 2011, with a large hospital chain, Health Management Associates, Inc.

(“HMA”). However, unknown to investors, the HMA bulk-order deal for 11 RIO sales, which

accounted for almost a fourth of MAKO’s 2011 RIO sales, was more a marketing tool by HMA

to attract surgeons than a harbinger of substantial increased interest in and sales of the RIO

systems and increased MAKOplasty procedures in the future. Many of the HMA hospitals

where the RIO systems were to be installed were essentially “dead accounts” that had zero or

minimal utilization of the RIO systems by surgeons in terms of procedures. Thus, the 11 HMA

sales were an anomaly unlikely to be replicated in 2012 and were unlikely to contribute any

material increase in 2012 procedures. Indeed, it was only on July 9, 2012, the end of the Class

Period, when Defendants acknowledged that their 2012 guidance (which on that date had been

revised downward) did not include “expectations of a bulk buy.”

9. Third, MAKO’s 2011 results were further boosted and rendered improper as a

basis to project 2012 results by its total hip application launch in September 2011. Specifically,

MAKO had received a significant number of orders for the RIO systems with the new THA

application well before its release, resulting in an influx of sales at the end of the year after the

launch to “early adopters,” surgeons who had been initial supporters of MAKO’s technology and

represented only a small portion of the orthopedic community. Once this small pool of MAKO’s

early adopters, who did not require much of a selling effort by MAKO to place their orders, was

exhausted in 2011, there would be few additional surgeons interested in the total hip RIO system,

as MAKO’s own marketing personnel warned the Company internally in August 2011.

Accordingly, there was no indication that there was an equal or greater number of hospitals and

orthopedic facilities with an equal interest in as quickly acquiring the combined application

system.

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10. Indeed, MAKO’s own marketing personnel’s internal analysis demonstrated as

early as August 2011 that, in fact, the Company’s high RIO sales and procedure goals for 2012,

based substantially on the new hip application driving increased sales and procedures, were

unreasonable, given the low surgeon interest in MAKO’s new hip application, other than among

early adopters, due to, among other reasons, a lack of clinical benefit, the significantly longer

surgery time, and the Company’s limited and unpopular hip implant offerings.

11. Moreover, MAKO’s 2012 annual guidance also lacked a reasonable basis

because, without the above three anomalous factors artificially boosting 2011 results, MAKO

was already struggling to attain its RIO sales and procedures goals as early as first quarter 2011.

By that time, the Company was experiencing declining structural trends in RIO system sales and

utilization rate (the monthly number of procedures performed per RIO system in the field,

another key metric tracked by investors and analysts), which were evident internally and

discussed as a matter of substantial concern at a first quarter business review meeting, attended

by the Individual Defendants, in May 2011. As discussed in that meeting, MAKO’s sales

personnel were experiencing much greater difficulty in closing RIO system sales and thus

underperforming internal sales goals. Similarly, the meeting participants learned that MAKO’s

utilization rates, which were low to begin with, began to decline further between 2010 and 2011.

Further, there was discussion of the reasons for this sales and procedures slowdown, centering

around low surgeon “buy-in” for the return-on-investment value of the RIO system (particularly

in light of its hefty $1 million price tag ) due to the lack of proven long-term clinical benefits of

MAKOplasty over conventional, manual knee procedures. Among other things mentioned, there

were numerous customer complaints and other internal evidence of “buggyness” problems with

the RIO, which led to increasing frustration and conclusions by surgeons that the system was not

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sufficiently reliable to be used in orthopedic surgeries by surgeons, leading to the declining

interest in, and thus sales of, RIO systems, as well as dropping utilization rates.

12. Further, during the Class Period, MAKO concealed these declining utilization

trends from investors by use of certain manipulative tactics. MAKO helped establish

MAKOplasty “super centers,” or orthopedic facilities at hospitals, where only MAKOplasty

procedures were performed. These MAKOplasty super centers were comprised of surgeons who

were MAKO’s “strategic business partners” and were well-compensated by the Company for

their efforts. These super centers were used by MAKO to ramp up their procedure numbers and

thereby to compensate for the low utilization at a majority of its sites, resulting in a significantly

higher average utilization rate across its total installed RIO systems sites, which is the utilization

metric that is disclosed to the public. Significantly, approximately 25% of RIO system sites

account for 95% ofMAKO’s utilization , a statistic that Defendants failed to publicly disclose to

investors.

13. Moreover, these materially declining RIO sales and utilization rates were

unlikely to turn around in 2012. As a MAKO marketing manager’s internal analyses

demonstrated as early as August 2011, the pool of surgeons who sufficiently believed in

MAKO’s technology to act as early adopters was exhausted, leaving mostly others who were

skeptical and preferred to wait for clinical long-term evidence of net benefits. This market

saturation problem was exacerbated by territorial exclusivity agreements MAKO signed with

many hospitals that had previously agreed to purchase the RIO system, which typically

prevented MAKO from selling systems to other hospitals within a certain radius and for a certain

time period, as well as by the very high price for the system.

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14. All of these problems were known internally and rendered MAKO’s 2012 RIO

sales and procedures goals highly unrealistic, as MAKO’s own sales and marketing employees

repeatedly warned as early as 2011 (when MAKO’s internal goals and public guidance are set).

Such problems became materialized at the end of 2011 and heading into 2012 as MAKO’s RIO

system sales pipeline of interested, prospective customers was depleted. According to RIO sales

representatives responsible for selling the systems to hospitals and surgeons, a big year-end push

at the end of 2011, needed to generate sufficient sales to meet 2011 guidance, left MAKO’s

existing pipeline dry.

15. This declining RIO sales trend was further demonstrated by the cancellation of

RIO system orders by several accounts in December 2011 and beginning of 2012. At least two

internal memoranda sent by MAKO’s senior management, one in December 2011 and one in

January 2012, revealed that several hospitals, for example in the Columbus, Ohio area, had

cancelled their RIO system orders and that RIO sales would be down as a result.

16. Further, Defendants also were aware of a materially slowed 2012 sales trend for

RIO systems and procedures (in particular, a substantial drop in the utilization rate) at the

beginning of 2012, which was atypical even by first quarter standards, already evident internally

by the end of February 2012. This adverse trend was troubling enough for Defendants,

particularly LaPorte, to task a marketing manager to investigate the decrease with respect to

procedures.

17. Individual Defendants knew or, with respect to representations they made as to

current or historical facts, recklessly disregarded the above, material undisclosed facts. The

Individual Defendants closely monitored MAKO’s core business of RIO system sales and

MAKOplasty procedures, by, among other things, participating in weekly status meetings held

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by Ferré with the “FINS” team, which consisting of the Company’s Senior Vice Presidents

(including LaPorte) who reported directly to Ferré, and in quarterly business review meetings,

including the first quarter 2011 meeting discussed above, where quarterly sales and procedures

results, future goals, sales trends, and other material information were discussed. In addition,

internal documents tracking procedures, utilization rates, RIO system sales, among other metrics,

were regularly circulated across the Company, and directly available to the Individual

Defendants.

18. On May 7, 2012, the concealed facts, circumstances and risks that rendered

MAKO’s guidance wholly unreasonable began to manifest themselves in results that were

unexpected by the investment community. On that date, MAKO announced its first quarter 2012

operating results, reporting weak RIO system sales (only 6 quarterly RIO systems sales,

compared to analysts’ average estimates of 9), procedures numbers, and a decreased utilization

rate, which missed many analysts’ estimates. Further, “[b]ased on the slower than expected start

to the year,” Defendants decreased their 2012 annual guidance of RIO system sales by 4 units

from 56-62 to 52-58. However, MAKO’s guidance as to the range of total number of

procedures remained unchanged at 11,000 to 13,000.

19. During the earnings call that day, Defendants reiterated their revised 2012 annual

guidance, falsely expressing their confidence in these revised “conservative” guidance numbers,

and reassuring investors that the disappointing RIO sales results and reduced guidance were the

results of isolated, happenstance issues in closing some of the expected deals, rather than more

serious “fundamental” problems. Defendants’ false assurances were belied by the undisclosed

facts described above, but served to blunt the full impact of the unexpectedly adverse news, as

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they also continued to tout the new guidance which, because of those undisclosed facts, was still

inflated.

20. Nonetheless, the stock plummeted $15.13 per share to close at $26.27,

representing an approximately 37% drop from the prior day and a market capitalization loss of

more than $644 million.

21. The truth regarding MAKO’s continued poor RIO system sales and procedures

volume and inability to meet its guidance was fully revealed on July 9, 2012. On that day, soon

after the market closed, MAKO issued a press release pre-announcing its selected second quarter

2012 operating results, shocking the market with even more pronounced disappointing RIO

systems sales and decreased 2012 annual guidance, for the second quarter in a row, this time

lowering the guidance range by a full ten units, or approximately 20%, to 42-48 units, compared

to the prior guidance of 52-58, and the original guidance of 56-62 in January. Because MAKO

had sold 48 RIO systems in 2011, this reduced guidance range was below, or at most in line

with, the Company’s 2011 results, meaning that 2012 would be the first year since MAKO’s

inception that its RIO system sales would not grow, and likely decrease, from year to year. This

time, MAKO also lowered its 2012 procedures volume guidance from 11,000-13,000 to 11,000-

12,000.

22. Investors were shocked by these disclosures and sent MAKO’s stock plummeting.

MAKO’s stock plunged by $10.60 per share or approximately 43% to close at $14.01, wiping

out more than $451 million in shareholder value. According to a July 10, 2012 Bloomberg

article this drop was “the biggest one-day decline since the shares began trading in February

2008.” As one analyst stated, there was now an issue of “management credibility.”

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II. JURISDICTION AND VENUE

23. The claims asserted herein arise under Sections 10(b) and 20(a) of the Securities

Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5

promulgated thereunder by the SEC, 17 C.F.R. § 240.10b-5.

24. This Court has jurisdiction over the subject matter of this action pursuant to

Section 27 of the Exchange Act, 15 U.S.C. § 78aa, and 28 U.S.C. §§ 1331 and 1337(a).

25. Venue is proper in this District pursuant to Section 27 of the Exchange Act, and

28 U.S.C. § 1391(b). Many of the acts and omissions charged herein, including the

dissemination of materially false and misleading information to the investing public, occurred in

this District. MAKO’s principal executive offices are located within this District, at 2555 Davie

Road, Fort Lauderdale, Florida 33317.

26. In connection with the acts alleged in this Complaint, Defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including but not limited

to the United States mails, interstate telephone communications, and the facilities of national

securities exchanges and markets.

III. PARTIES

A. Lead Plaintiffs

27. On August 8, 2012, this Court appointed Oklahoma Firefighters and Baltimore

County to serve as Lead Plaintiffs in this action pursuant to the Private Securities Litigation

Reform Act of 1995 (the “PSLRA”).

28. Oklahoma Firefighters, headquartered in Oklahoma City, Oklahoma, is a defined

benefit plan that managed more than $1.7 billion in assets on behalf of more than 23,000

beneficiaries as of June 30, 2011. In 1981, the Oklahoma legislature created Oklahoma

Firefighters as a state agency. As set forth in its PSLRA certification attached hereto as Exhibit

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A, Oklahoma Firefighters purchased publicly traded shares of MAKO common stock on the

open market during the Class Period at artificially inflated prices and suffered damages as a

result of the federal securities law violations alleged herein.

29. Baltimore County, headquartered in Towson, Maryland, is a defined benefit

pension plan that managed approximately $2.4 billion in assets on behalf of more than 15,000

beneficiaries as of June 1, 2011. As set forth in its PSLRA certification attached hereto as

Exhibit B, Baltimore County purchased publicly traded shares of MAKO stock on the open

market at artificially inflated prices during the Class Period and suffered losses as a result of the

federal securities law violations alleged herein.

B. Defendants

1. The Company

30. Defendant MAKO was incorporated under the laws of Delaware in November

2004 and has its principal executive offices at 2555 Davie Road, Fort Lauderdale, Florida 33317.

MAKO describes itself as a medical device company that provides a surgical robotic arm

solution and orthopedic implants for orthopedic procedures. During the Class Period, MAKO’s

common stock traded on the NASDAQ Global Select Market under the ticker symbol “MAKO.”

2. Individual Defendants

31. Defendant Maurice R. Ferré (“Ferré”) was at all relevant times MAKO’s

President, Chief Executive Officer (“CEO”) and Chairman of the Board of Directors

(“Chairman”). In particular, Ferré is the Company’s founding President and CEO. During the

Class Period, as more fully alleged below, Ferré made materially false and misleading statements

in MAKO press releases, quarterly earnings conference calls, and SEC filings.

32. Defendant Fritz L. LaPorte (“LaPorte”) was at all relevant times MAKO’s Senior

Vice President of Finance and Administration, Chief Financial Officer and Treasurer. LaPorte

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has been with the Company since its inception in November 2004. During the Class Period, as

more fully alleged below, LaPorte made materially false and misleading statements in MAKO

press releases, quarterly earnings conference calls, SEC filings, and analyst conferences.

33. Each of the Individual Defendants, by virtue of their high-level positions with

MAKO, directly participated in the management of the Company, was directly involved in the

day-to-day operations of the Company at the highest levels and was privy to confidential,

proprietary information concerning the Company and its business (including MAKO’s sales of

the RIO system and products and services associated with the system and with MAKOplasty

procedures), operations, growth, financial statements, and financial condition during their tenure

with the Company, as alleged herein. The Individual Defendants, because of their positions at

MAKO, also had access to material, adverse, non-public information about the Company, as

discussed in detail below, through internal corporate documents, conversations with other

corporate officers and employees, attendance at management and Board of Directors meetings

and committees thereof and via reports and other information provided to them in connection

therewith, and knew or, with respect to representations of current or historical facts, recklessly

disregarded that these adverse undisclosed facts rendered the positive representations made by or

about MAKO materially false and misleading. As set forth below, the materially misstated

information conveyed to the public was the result of collective actions of these individuals. Each

of these individuals, during his or her tenure with the Company, was involved in drafting,

producing, reviewing and/or disseminating the statements at issue in this case, approved or

ratified these statements, or, with respect to representations of current or historical facts, was

aware or recklessly disregarded that these statements were being issued regarding the Company.

Accordingly, it is appropriate to treat the Individual Defendants as a group for pleading purposes.

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34. The Individual Defendants are liable as direct participants in the wrongs

complained of herein. In addition, by reason of their status as senior executive officers, they

were “controlling persons” within the meaning of Section 20(a) of the Exchange Act, and had the

power and influence to cause the Company to engage in the unlawful conduct complained of

herein. Because of their positions of control, Individual Defendants were able to and did,

directly or indirectly, control the conduct of MAKO’s business.

35. The Individual Defendants, because of their positions with the Company,

controlled and possessed the authority to control the contents of MAKO’s reports, press releases,

and presentations to securities analysts and, through them, to the investing public. The Individual

Defendants were provided with copies of the Company’s reports and press releases alleged

herein to be misleading, prior to or shortly after their issuance, and had the ability and

opportunity to prevent their issuance or cause them to be corrected. Thus, the Individual

Defendants had the opportunity to commit the fraudulent acts alleged herein.

36. As senior executive officers and as controlling persons of a publicly-traded

company whose common stock is registered with the SEC, traded on the NASDAQ, and

governed by the federal securities laws, the Individual Defendants had a duty to promptly

disseminate accurate and truthful information with respect to MAKO’s financial condition and

performance, growth, operations, financial statements, business, products, markets, management,

earnings, and present and future business prospects, and to correct any previously issued

statements that had become materially misleading or untrue so that the market price of MAKO’s

securities would be based upon truthful and accurate information. The Individual Defendants’

misrepresentations and omissions during the Class Period violated these specific requirements

and obligations.

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37. In making the statements complained of herein, the Individual Defendants, who

were all senior officers and controlling persons of MAKO, were acting on behalf of the

Company in the regular course of business. Therefore, each of the statements made by the

Individual Defendants is attributable to the Company.

IV. FACTUAL BACKGROUND AND SUBSTANTIVE ALLEGATIONS

A. MAKO Business Overview

38. MAKO is a medical device company founded in November 2004 that develops

and markets a robotic arm solution and implants for orthopedic procedures both in the United

States and internationally. It was the first company to offer a surgical robot to be used in

orthopedic procedures. As of June 30, 2012, MAKO had 469 employees.

39. Specifically, MAKO manufactures and markets a RIO Robotic Arm Interactive

Orthopedic System (the “RIO system”), which is a technological platform used by surgeons in

performing minimally invasive orthopedic procedures, known as MAKOplasty, to treat early to

mid-range osteoarthritic knee and hip disease. The RIO system consists of two main elements—

1) a tactile robotic arm that uses an integrated bone cutting instrument and 2) a patient-specific

visualization system. The RIO system provides both pre-operative planning and intra-operative

guidance to orthopedic surgeons, purportedly enabling tissue sparing bone removal and accurate

implant insertion and alignment. According to MAKO, the RIO system assists orthopedic

surgeons in achieving more consistently reproducible precision in knee and hip joint

replacements compared to conventional procedures performed manually.

40. The first generation RIO system, known as the Tactile Guidance System (“TGS”),

was approved by the FDA in November 2005. In June 2006, the first MAKOplasty procedure

using the TGS was performed. MAKO obtained FDA clearance of the current, second-

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generation RIO system in December 2008, and commercially launched the RIO system in the

first quarter of 2009.

41. MAKO also develops and sells its own line of RESTORIS implants that are used

along with the RIO system in MAKOplasty procedures. The RIO system is a closed platform,

meaning that only the RESTORIS family of implant systems may be effectively used with the

RIO system and MAKOplasty applications. Moreover, purchasers of the RIO system are

contractually required to use the RESTORIS implants, as well as MAKO’s disposable products,

for MAKOplasty procedures.

42. MAKO currently offers two types of MAKOplasty procedures—Partial Knee

Arthroplasty (“PKA”) and MAKOplasty Total Hip Arthroplasty (“THA”). From its inception up

until 2011, the RIO system was commercially used only for PKA procedures. According to

MAKO, its PKA procedures, unlike conventional total knee replacement surgeries that require

extraction and replacement of the entire knee joint, enable resurfacing of one or two specific

diseased compartments of the knee joint, which purportedly preserves more soft tissue and

healthy bone of the knee.

43. In September 2011, MAKO launched its MAKOplasty THA application for the

RIO system, thereby expanding its MAKOplasty offerings beyond partial knee resurfacing to

total hip replacement procedures. The RIO system with the added THA application may be sold

to both new customers and to existing customers, as an upgrade to their prior PKA RIO system

(which requires a return of the old PKA RIO system to MAKO).

44. MAKO’s September 19, 2011 press release announcing the THA application

launch asserted that the THA application for the RIO system “builds upon five years of MAKO’s

existing MAKOplasty” PKA procedures. According to the press release, the THA application

- 16 -


was designed to support the surgeon’s ability to more accurately align and position the hip

implants, which may reduce potential complications associated with conventional hip

replacement surgery.

45. In MAKO’s November 9, 2011 press release reporting its third quarter 2011

operating results, Defendant Ferré, in touting the introduction of the THA application, asserted

“that the expansion of our product offering through the launch of the hip application will allow

us to continue to drive the adoption of MAKOplasty to help enable surgeons to deliver

consistent, reproducible precision to orthopedic procedures.”

46. MAKO generates all of its revenue from three sources: 1) unit sales of the RIO

system, including the MAKOplasty PKA and THA applications, as well as associated

instrumentation, installation services and training of surgeons; 2) sales of associated implants

and disposable products required for each MAKOplasty procedure; and 3) sales of warranty and

maintenance services for the RIO system. RIO system sales and procedures represent the bulk of

MAKO’s revenue. The Company has been operating at a net loss since its inception and has not

yet reached profitability.

47. Analysts and investors focus on several key metrics provided by the Company,

but give particular emphasis to MAKO’s annual guidance for the number of RIO system sales

and MAKOplasty procedures (reflecting the number of implants to be sold for each procedure).

Indeed, a May 8, 2012 analyst report by Summer Street Research Partners stated that “RIO

placement is the single metric investors focus on.” A William Blair analyst report from the same

day described MAKO’s procedures guidance as another “key metric” in its analysis of MAKO’s

operating results. Moreover, Defendants themselves have emphasized the significance of these

metrics to investors and analysts. As Defendant LaPorte stated at the Barclays Capital Global

- 17 -


Healthcare Conference on March 14, 2012: “[MAKO’s] guidance has been focused on two key

metrics -- system placements and procedures.” MAKO does not provide such guidance on a

quarterly basis. The Company’s annual guidance for these two key metrics is substantially based

on results achieved in the prior year, as confirmed by several Confidential Witnesses (“CW’s”)

who were former MAKO employees interviewed as part of Lead Counsel’s investigation, and

who are identified, infra, as CW2, CW3, and CW4.

48. For each reporting period, including its quarterly one, the Company also discloses

the number of RIO systems sold (and since its launch, as a separate disaggregated item, the

number of THA applications sold) and MAKOplasty procedures performed (now including the

breakdown for knee and hip procedures). In addition to these metrics, MAKO provides a

utilization rate, or the average monthly number of procedures performed per installed RIO

system in the market, for each reporting period. Analysts and investors also view the utilization

rate as an important barometer of the growth of MAKOplasty procedures and of the orthopedic

market’s adoption of MAKO’s RIO system, and, thus, a key driver of RIO system sales. For

example, an August 2, 2012 JP Morgan analyst report stated that a key priority for MAKO was

showing “improved utilization, which if successful will in our view be a crucial piece of the

capital [RIO system] sale” and that “better utilization rates will be key to driving system sales

going forward.”

49. Thus far, MAKO has no direct competitors that offer such a robotic technology

in combination with a computer assisted system for orthopedic surgeries. MAKO, however, lists

as its competitors various medical device companies that manufacture and sell orthopedic

products, including Biomet, Inc., DePuy Orthopedics, Inc., a Johnson & Johnson company,

Stryker Corporation, Zimmer Holdings, Inc., and Smith & Nephew, Inc. Such companies

- 18 -


provide orthopedic instruments and implants for use in conventional total and partial knee

replacement surgeries and total hip replacement surgeries.

50. Each RIO system is an expensive piece of capital equipment that typically

requires inclusion in a hospital’s budget as a capital expenditure and approval of the hospital’s

senior management. According to Defendants’ various public disclosures, including a May 7,

2012 presentation to investors used in its first quarter 2012 earnings call (the “May 7

Presentation”), the average selling price of the RIO system, including both the knee and hip

applications, is approximately $1,000,000. The average selling price of the RIO system with the

knee PKA application alone is approximately $850,000, and the new hip THA application (or

upgrade for existing customers) costs, on average, an additional $100,000 to $200,000.

According to MAKO, the RIO system has an extended sales cycle that ranges between seven and

eighteen months from the point of initial identification and contact with a qualified surgeon until

closing of the purchase with the hospital. Moreover, the RIO system is a fairly new robotic

technology whose clinical benefits over conventional knee and hip procedures have not been

fully established in the orthopedic surgeon community. As a result, MAKO sells a relatively

small number of units of the RIO system each quarter.

51. As of June 30, 2012, the company had sold 126 RIO systems worldwide, of which

3 were sold internationally. Of the systems sold domestically, 71 (or 58%) contain the

MAKOplasty THA application.

52. MAKO’s sales of RIO systems, MAKOplasty products such as implants and

disposables, and service plans are driven by its sales and marketing group, which is primarily

comprised of a direct sales force. According to MAKO’s 2011 Form 10-K, as of February 29,

2012, the sales and marketing group had a total of 184 employees, including 119 direct sales

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representatives. This direct sales force is separated into two divisions, one dedicated to RIO

system sales (the “RIO Sales Force”) and the other to MAKOplasty procedures and implants

sales (the “MAKOplasty Sales Force”). According to the May 7 Presentation, the RIO Sales

Force consisted of 32 sales representatives as of that time. As part of their sales efforts, these

RIO sales representatives, who are also referred to by MAKO as RIO Account Executives,

purportedly profile high-volume orthopedic surgeons and target leading hospitals with high-

volume orthopedic facilities. The MAKOplasty Sales Force had 90 sales representatives as of

May 2012. These MAKOplasty sales representatives, also known as MAKOplasty Specialists,

support orthopedic surgeons performing the MAKOplasty procedures, attending the surgeries

and providing training and technical and clinical assistance with MAKO’s procedures and

associated products. MAKO’s sales force is also supported by a Marketing Support Team,

which had 15 employees as of May 2012.

53. During the Class Period, MAKO’s Sales and Marketing group was headed by

Steven J. Nunes (“Nunes”), the Senior Vice President of Sales and Marketing, who reported

directly to Defendant Ferré, and was responsible for sales and marketing of MAKO’s RIO

systems and MAKOplasty procedures (sales of implants and associated products). As discussed

in greater detail in Section IX, infra, on July 17, 2012, after the end of the Class Period, Nunes

resigned from MAKO following MAKO’s dismal sales performance and slashed annual

guidance for two quarters in a row in 2012. After Nunes’ resignation, Ferré assumed his sales

responsibilities on an interim basis while the Company searched for a new Senior Vice President

of Sales.

54. Another key executive at MAKO during the Class Period was Ivan Delevic

(“Delevic”), who joined the Company in April 2009 as MAKO’s Senior Vice President of

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Strategic Marketing and Business Development, a department distinct from though related to the

Sales and Marketing group. In this role, Delevic also reported directly to Defendant Ferré and

was responsible for MAKO’s strategic marketing and business development initiatives, including

clinical and economic market research, clinical education and training, and product management.

After Nunes resigned in July 2012, Delevic transitioned into a newly created role of Senior Vice

President of Marketing, assuming commercial marketing responsibilities, in addition to his prior

strategic marketing responsibilities.

B. Publicly, MAKO’s Sales Appear to Be Booming in 2011, but Internally Red Flags of Slowed Growth Are Raised, Ignored and Concealed from the Public

1. The HMA Contract—“Good on Paper” but in Reality a “Dead Account”

55. From the launch of the RIO system (and its predecessor TGS system) and through

2011, MAKO enjoyed strong growth on an annual and quarterly basis in both the number of RIO

systems reported sold and MAKOplasty procedures performed. Thus, notwithstanding that it is a

young company that has operated at a loss from its inception, MAKO’s consistent reported

growth through 2011 in terms of its RIO sales and procedures volume, which account for the

bulk of its revenues, indicated to investors that it was on a steady track to the widespread

adoption of its RIO system and MAKOplasty solution across the orthopedic surgeon community

and, thus, profitability.

56. In March 2011, MAKO appeared to be further building on that growth by

obtaining a substantial bulk order for its RIO systems from a large hospital chain. Specifically,

on March 30, 2011, after the markets closed, MAKO announced that it had secured a binding

commitment for eleven new MAKOplasty sites, i.e. a multi-system order for eleven new RIO

systems to be purchased in 2011, from Health Management Associates, Inc. (“HMA”), an

operator of acute-care hospitals in the southeast and southwest regions of the United States. See

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MAKO Press Release, “CORRECTING AND REPLACING -- MAKO Surgical Corp.

Announces Multi-System Order From Health Management Associates,” Mar. 30, 2011. In the

press release, Defendant Ferré touted this HMA contract as expanding the adoption of

MAKOplasty and enabling MAKO to “confidently reaffirm” its previously issued 2011 annual

guidance of 40 to 46 RIO system sales:

We are encouraged by the strengthening of our partnership with HMA and their increased commitment to establish MAKOplasty as an integral part of their hospitals’ orthopedic programs. . . . This multi-system order represents the binding commitment to purchase RIO systems that were anticipated in our 2011 plan, allowing us to confidently reaffirm our previously announced annual guidance of 40 to 46 systems.

57. The market and analysts responded favorably to the news. As a March 30, 2011

Bloomberg BusinessWeek article titled “Mako Surgical Gets Order for 11 RIO Systems”

reported, MAKO’s stock price surged after the announcement, rising $2.31 per share or nearly

11% in after-hours trading on March 30, 2011. For example, a March 31, 2011 analyst report by

Piper Jaffray commented: “HMA’s agreement to purchase 11 Rio robotic arm surgical systems

boosts our confidence in 2011 and 2012 projections for MAKO. The HMA robots were

contemplated in the company's 2011 outlook, however, having the binding commitment in place

early in the year significantly improves visibility for the stock.” Indeed, the HMA contract

enabled MAKO not only to meet but to exceed its original 2011 guidance of 40-46 RIO systems,

and thereby revise upward that guidance to 44-48 systems later in 2011.

58. However, as was known internally at MAKO but not disclosed to the public, the

HMA contract did not actually result in the RIO systems being broadly used across these new

eleven HMA hospitals, thereby expanding the adoption of MAKOplasty procedures in the

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orthopedic community, as this bulk-order deal implied. According to CW1, 1 who had worked

for MAKO from December 2006 to June 2011, most recently as a regional MAKOplasty sales

manager reporting directly to Nunes, the HMA contract was a marketing tool for HMA hospitals

to recruit orthopedic surgeons. In this position, CW1 stated that s/he managed MAKOplasty

procedures and related implant sales in 24 states and had over 50 MAKOplasty Specialists

reporting to him or her. CW1 stated that while the HMA deal “looked good on paper” for both

HMA and MAKO, in reality, most of these HMA hospitals were essentially “dead accounts” for

MAKO after the purchase of the systems in terms of MAKOplasty procedures volume (and

associated implant sales). CW1 explained that by “dead accounts” s/he meant that a majority of

the 11 HMA hospitals did not have orthopedic surgeons on staff to perform MAKOplasty

procedures using the purchased RIO systems; thus, the MAKOplasty Specialists, who reported to

CW1, could not sell implants to these accounts because no procedures were being done.

According to CW1, s/he and another regional sales manager learned these facts after conducting

their own research on the HMA hospitals that were part of the HMA contract. CW1 elaborated

that, after the HMA deal occurred, s/he and the other regional sales manager participated in an

internal MAKO conference call where they were told by MAKO’s senior management that they

were responsible for achieving a certain number of procedures and associated implant sales

revenue volume from these HMA hospital accounts after the RIO systems were installed.

However, according to CW1, these procedures goals were unrealistic and unattainable for the

HMA hospitals because, based on CW1’s and the other regional sales manager’s research, a

majority of these HMA accounts did not have any orthopedic surgeons on staff to perform the

1 Former MAKO employees and other knowledgeable witnesses interviewed by Lead Counsel on a confidential basis will be referred to throughout the Complaint as “CW1,” “CW2,” etc. to maintain their anonymity.

- 23 -


MAKOplasty procedures. CW1 stated that this “dead accounts” problem with the HMA deal

was widely known within MAKO at that time in 2011.

59. Another former MAKO employee, CW2, a MAKOplasty Specialist 2 from August

2011 to December 2011, reporting to a regional MAKOplasty sales manager, corroborated

CW1’s statements with respect to the HMA contract. Specifically, CW2 stated that when HMA

purchased the 11 RIO systems in 2011, many of its hospitals did not have the orthopedic

surgeons on staff to use the RIO systems and perform MAKOplasty procedures, as was widely

known internally at MAKO at the time. Like CW1, CW2 reported that the HMA contract was a

marketing ploy used by HMA to draw surgeons to their hospitals to perform these MAKOplasty

procedures and generate revenue associated with those surgeries. CW2 elaborated that HMA’s

hospitals are considered second or third-tier in terms of reputation within the healthcare

community (what s/he described as “B to C” level compared to the highest “A” level hospitals).

Thus, according to CW2, HMA planned to use the RIO systems, which were marketed as an

advanced robotic technology, to attract more orthopedic surgeons and enhance HMA hospitals’

reputation in the medical community.

60. In particular, CW2 stated that when MAKO shipped these RIO systems to the

HMA hospitals in 2011, many of them did not have any orthopedic surgeons available to use the

RIO systems, and the machines sat idle, resulting in a zero utilization rate for those hospitals.

For example, CW2 recalled that during his or her time at MAKO in 2011, one RIO system was

specifically moved from one HMA hospital to another, Walton Regional Medical Hospital in

Monroe, GA, because the prior HMA hospital was not using the RIO system at all. Thus, this

HMA bulk RIO systems order, though appearing significant to MAKO’s bottom line for RIO

2 As a MAKOplasty Specialist, CW2 was responsible for growing the utilization rate, i.e. increasing the number of MAKOplasty procedures performed, for the RIO systems at particular hospitals, including training and supporting the orthopedic surgeons performing the procedures.

- 24 -


placements in 2011, could not possibly, and did not, translate into high procedures volumes in

2012 as investors would have expected, based on facts known to the Defendants but undisclosed

to the public.

61. Moreover, rather than representing a harbinger of substantial increased interest in

and sales of the RIO system in 2012, HMA’s unique, publicly undisclosed reasons for its bulk

purchase—which substantially increased RIO sales in 2011, making it, according to CW2, the

biggest “player” in MAKO’s RIO system pipeline of hospital accounts—made it an anomaly,

one unlikely to be reproduced going forward, thereby casting doubt on 2012 guidance that

showed a substantial increase in sales over that of 2011. Indeed, it was only on July 9, 2012, the

end of the Class Period, when Defendants acknowledged that their 2012 guidance (which on that

date had been revised downward) did not include “expectations of a bulk buy.”

62. Indeed, CW2 stated that MAKO “put all of their eggs in one basket with HMA,”

meaning that Defendants relied heavily on HMA buying and utilizing a large number of these

RIO systems, which took away the Company’s focus from selling RIO systems to other hospitals

and decreasing the expansion of MAKOplasty into other territories. If Defendants had disclosed

to the investing public the facts relating to HMA’s bulk purchase, investors would have been

able to put MAKO’s 2011 sales results into perspective and have been far more skeptical of 2012

guidance.

63. Further, another former MAKO employee, CW3, similarly stated that one of the

primary reasons that MAKO was able to substantially increase its RIO sales in 2011 and thus

meet its original 2011 public guidance (and actually revise it upward later in 2011) was this

HMA bulk-order contract, as was widely known in the Company at the time. CW3 worked as a

mechanical engineering manager in MAKO’s Engineering group from September 2005 to June

- 25 -


2011, responsible for both sustaining engineering of the RIO system and its applications and new

product mechanical design and development. CW3 explained that his or her sustaining

engineering duties included reviewing and investigating customer complaints and other field

failures with the RIO system and developing preventative/corrective actions. Accordingly, CW3

stated that s/he received every customer complaint with the RIO system “in real time” as part of

MAKO’s “Continuous Improvement Program,” and worked on fixing related engineering issues.

Further, CW3 stated that s/he had worked for MAKO almost from its inception when it was still

a very small company, and was therefore one of its earliest employees; indeed, CW3 described

him or herself as MAKO’s “30 th employee” – compared to MAKO’s 469 total employees as of

June 30, 2012. According to CW3, s/he had built the very first RIO system “with [his or her]

own bare hands.”

64. CW3 was also knowledgeable about MAKO’s sales information concerning RIO

systems and MAKOplasty procedures because s/he had full access to “Sales Logix,” in

connection with his or her responsibilities in reviewing and addressing customer complaints with

respect to RIO systems. CW3 stated that Sales Logix was an internal client relationship

management program, used by MAKO sales and marketing personnel to document all of the

Company’s interactions with its customers ( i.e. surgeons and other hospital personnel), for

example, sales representatives’ notes from sales meetings or calls describing the strength of those

leads and viability going forward, and operating room case notes from MAKOplasty procedures,

including any incidents. According to CW3, during his/her tenure at MAKO, the Individual

Defendants also had access to Sales Logix.

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65. As part of CW3’s position, s/he attended MAKO’s “JAWS” 3 Quarterly Business

Review (“QBR”) meetings, which were full-day offsite meetings held approximately a month

after the end of every quarter. CW3 stated that these were attended by MAKO’s entire JAWS

management team from all of its functional groups ( e.g. , Sales and Marketing, Strategic

Marketing and Business Development, Engineering, etc.) to discuss the prior quarter’s

performance and strategy for the future. CW3 elaborated that each group’s head and other

managers typically presented their data from the last quarter, any challenges faced, and plans for

the next quarter and beyond. For example, CW3 stated that Nunes (along with other managers in

his group) typically presented on behalf of Sales and Marketing, and Richard Leparmentier, the

Senior Vice President of Engineering (“Leparmentier”) and his team did so for the Engineering

group. CW3 stated that MAKO’s senior management, including Defendants Ferré and LaPorte,

also attended these meetings. According to CW3, Ferré led each meeting, typically giving a

speech on the Company’s strategy, new development and performance. CW3 stated that LaPorte

also spoke at these meetings, providing a presentation on the Company’s quarterly financial

results and projections for future periods.

66. CW3 stated that the last such QBR meeting that s/he attended was a first quarter

2011 meeting on May 16, 2011 (the “1Q11 QBR Meeting”), held approximately a month and a

half after 1Q11 closed at the end of March. According to CW3, at this meeting the HMA

contract was discussed, and although it was not explicitly stated, it was readily apparent to all

participants in the meeting that the HMA bulk order of 11 RIO units was one of the primary

reasons enabling MAKO to be on track to meet (and eventually exceed) its 2011 RIO sales

3 CW3 explained that MAKO, in keeping with its name, referred to various levels of its employees using shark-related terminology. For example, the management team members who were invited to these QBR meetings were referred to as “JAWS” group, while the Senior Vice Presidents (including LaPorte), who headed MAKO’s various functional groups and reported directly to Defendant Ferré, were known as the “FINS” team.

- 27 -


guidance, in light of its relative size compared to the total number of units sold as of that time

and targeted for the year.

67. Further, CW3 confirmed CW1’s and CW2’s statements that buying the RIO

systems as part of the HMA contract was a marketing tool used by its hospitals to attract

surgeons and thus patients because the RIO system is considered an advanced robotic technology

that may enhance the hospital’s reputation. According to CW3, these HMA and other hospitals

bought the RIO systems so that they could claim they had this advanced capability, regardless of

whether they used it or not. CW3 stated this marketing purpose by HMA was discussed by

MAKO’s Sales and Marketing personnel at the 1Q11 QBR Meeting as part of their presentation.

CW3 explained that, in keeping with the bulk-order deal, HMA was considered MAKO’s

strategic partner, meaning that HMA expected MAKO sales representatives to help recruit and

train new orthopedic surgeons as part of this partnership. According to discussion at this 1Q11

QBR Meeting, CW3 stated that one of the challenges with the HMA bulk-order contract was that

most of these HMA accounts did not have any or had very few active orthopedic surgeons,

resulting in very low procedure numbers and utilization rates at these sites. CW3 added that

other hospitals also bought RIO systems as part of the same marketing ploy to draw new

surgeons, and accordingly had similar low utilization rates, so that this issue was not limited to

HMA.

2. MAKO’s Recognition of 2010 RIO System Sales in 2011 Artificially Inflates 2011 Results—the Baseline for 2012 Guidance

68. While discovery is necessary to determine whether Defendants’ conduct alleged

below constituted a violation of Generally Accepted Accounting Principles (“GAAP”),

Defendants’ recognition of 4-6 RIO system sales in 2011 under highly unusual circumstances,

the absence of which would have meant that the sales would be counted toward 2010 results,

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artificially distorted and inflated the baseline for 2012 guidance, which was premised

substantially on 2011 sales figures. These circumstances constitute undisclosed, material facts

that rendered MAKO’s subsequent 2012 guidance false and misleading.

69. CW3 explained that MAKO’s internal RIO sales and procedures goals and public

guidance of these metrics were based substantially on results achieved in the prior year. CW3

noted that MAKO’s management, in presenting their internal sales goals and public guidance, at

for example, the QBR meetings, specifically told their employees that these goal numbers were

based on the Company’s prior performance. CW3 stated that, besides the HMA bulk-order

contract, another primary reason that MAKO was able to achieve better RIO sales than it

otherwise would have and eventually meet its 2011 guidance was because there were a

substantial number of RIO units sales counted in 2011 results that were actually placed and

delivered in 2010. In particular, CW3 explained that that there were approximately 4 to 6 RIO

systems that MAKO had actually sold in the fourth quarter of 2010 and delivered to the hospitals

in the last week of December 2010, which were counted as RIO placements in 2011 rather than

2010. According to CW3, MAKO was able to defer recognition of these 4-6 RIO sales and

associated revenues until 2011 because, even though the deals had been closed and the units

delivered to the hospitals in 2010, the systems were not actually “installed” until the first week of

2011, and were instead sitting idle at the hospitals in the meantime until MAKO sent invoices to

the hospitals in early 2011.

70. CW3 learned these preceding facts at that time from personal discussions with

MAKO’s field service employees responsible for installing the RIO systems after delivery to the

hospitals. CW3 had a close working relationship with these field service employees, who also

provided RIO maintenance services in addition to installation and thus were dispatched to the

- 29 -


relevant hospital whenever an issue with the systems occurred, because of his or her

responsibilities for providing related engineering support in response to such customer

complaints. CW3 explained that these field service employees had been on “stand-by” mode

after the 4-6 RIO systems were delivered in the last week of December 2010, waiting and “kept

at the ready” near the hospitals to install the systems for approximately 1 to 2 weeks until the

first week of January 2011. CW3 stated that this wait time was highly unusual because typically

RIO systems are installed on the same day as they are delivered or the next day, in part because

MAKO did not want hospital personnel to uncrate the systems themselves, which included

sensitive pieces of equipment requiring special care by knowledgeable staff. Further, CW3

stated these 4-6 hospitals were located throughout the country, which MAKO split into four

regions for purposes of installations, so that there were several such field service teams

suspended in this holding pattern until told by MAKO to install.

71. According to CW3, again as reported to him or her by the field service

employees, the reason given by MAKO for the delay in installing these 4-6 RIO systems was the

same in each instance, unidentified contract issues related to the sales, even though the hospitals

on the other side of each of these 4-6 system contracts were wholly unrelated to each other and

were located in different regions of the country. CW3 stated that these purported contract

issues––as to each of the separate, independent hospitals––were then “magically fixed” at the

same exact time after the New Years holiday in the first week of January 2011.

72. Further, CW3 stated that the delay in installation was not a result of waiting for

surgeons to complete training on the RIO systems. CW3 explained that MAKO always trains

new surgeons on the RIO systems (in MAKO’s training labs that have mock operating rooms)

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before the systems are delivered to the hospitals, and usually well before the systems are even

sold because MAKO uses the training as a marketing tool to recruit new surgeon customers.

73. Moreover, as was apparent to CW3, and should have been apparent to all

members of management, particularly senior management, it was otherwise “strange” that

MAKO was apparently able to sell 4-6 units in the first week of 2011 when the Company could

barely sell 4 systems in the first quarter of the prior year, particularly given that the first quarter

has historically been MAKO’s slowest sales quarter. CW3 added that this deferred recognition

of sales from the end of one year to the next was an anomaly, explaining that s/he did not recall

this happening in his or her prior years at MAKO. Indeed, because CW3 found this situation

strange, s/he had specifically asked Ferré and Nunes at the 1Q11 QBR Meeting in May 2011

why the first quarter 2011 results were better than in prior first quarters. However, according to

CW3 both Ferré and Nunes had shrugged off the question. According to CW3, their responses

simply consisted of stating that MAKO gives guidance only on an annual and not quarterly basis.

Thus, Ferré and Nunes sidestepped addressing the clear anomaly of significant increases in sales

in the first month of 2011, a result solely of bringing into 2011 transactions that actually

occurred in 2010.

74. Further, CW3 stated that, based on his or her knowledge of MAKO’s business

operations from almost the inception of the Company, Ferré and LaPorte, as MAKO’s CEO and

CFO, respectively, must have known about and approved the deferred recognition of these 4-6

RIO sales from 2010 to 2011. CW3 explained that this was the kind of “big decision” that

required more senior authorization than that of Nunes, the head of Sales and Marketing, who

“would not have made that call on his own.”

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75. According to MAKO’s fourth quarter and year ended 2010 earnings conference

call on March 1, 2011, MAKO sold 33 RIO systems worldwide in 2010, meeting both its

original public 2010 guidance of 30-37 systems, and its narrowed guidance of 31-35 systems,

even without these deferred 4-6 RIO sales. Accordingly, Defendants did not need these 4-6 RIO

units sold and delivered in December 2010 to meet its 2010 public guidance—they were excess

units that could be used to help 2011 sales results, particularly the first quarter, which, as

Defendants have publicly stated, is a traditionally slower quarter for MAKO’s sales than later

quarters.

76. Defendants’ recognition of these 2010 sales in 2011, even if eventually found to

be consistent with proper accounting standards, a determination that cannot be made based on

the current public and other information available to Lead Plaintiffs, nonetheless artificially

increased their 2011 RIO sales results to the extent they were being used as a baseline for 2012

guidance, and thus further distorted that guidance. Without these 2010 4-6 RIO unit sales,

MAKO’s 2011 results would have been only 42-44 units rather than 48, which rendered their

January 2012 guidance of 58-62 units even more unrealistic. Regardless of whether Defendants’

deferred recognition of these sales until 2011 was consistent with their sales and revenue

recognition policy, they failed to disclose this fact to investors, making their representations as to

their ability to achieve 2012 RIO sales guidance, based substantially on the sales achieved in

2011, false and misleading.

- 32 -


3. In 2011, MAKO Employees Warn Internally that MAKO’s Goals for RIO System Sales and Procedures Are Inflated and Unattainable

(a) MAKO’s Top-Down Approach to Sales Goals and the Guidance Set for 2012

77. According to CW4, a trained orthopedic surgeon who had worked as a senior

product manager, 4 responsible primarily for partial knee procedures, in MAKO’s Upstream

Marketing Team, 5 which was part of the Strategic Marketing and Business Development group

headed by Delevic, from March 2011 to June 2012, MAKO “had it backwards” with respect to

its model for formulating internal goals and public guidance of RIO sales and procedures –

meaning that MAKO’s leadership told their employees in the field the numbers of RIO sales and

procedures that they were expected to achieve, rather than obtaining their input on the numbers

that were realistic based on these employees’ experience in the field. CW4 stated that this was

an “upside down” system compared to other companies—one that remained hidden from

investors, along with the numerous objections by various members of the sales staff to the

resulting unrealistic guidance.

78. CW3 echoed CW4’s description of MAKO management’s top-down approach to

setting its internal goals and public guidance for RIO system sales and procedures. Like CW4,

CW3 stated that MAKO’s senior management determined its internal goals and public guidance

without input from the employees in the field who were knowledgeable about the market realities

of selling MAKO’s products and thus the sales numbers that were reasonably achievable.

4 CW4’s responsibilities included refining surgical techniques and providing related descriptions for MAKO’s sales brochures and other materials; conducting research on market trends, particularly, in partial knee replacement surgeries; and addressing customer complaints with respect to the performance and instrumentation of the RIO system. CW4 explained that because the partial knee application was already mature within the Company, his responsibilities expanded beyond partial knee procedures to other MAKOplasty-related subjects, including the new THA application, and review of all of MAKO’s risk assessments and large documentations from a clinical perspective.

5 “Upstream marketing” refers to the marketing efforts undertaken in the early stage of product development (e.g., segmentation, market and pricing research, etc.), as compared to “downstream marketing,” which refers to traditional marketing activities for an existing product, such as advertising, trade shows, and promotions.

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Instead, as CW3 reported, MAKO’s senior management announced their sales goals to their

employees and to the public, and subsequently expected that the threat of losing their jobs would

sufficiently motivate MAKO’s employees to achieve these numbers. Given the lack of any

procedure to involve the field sales staff in the process, CW3 stated that it was likely that

MAKO’s senior management, including the Individual Defendants, which presented their

potential sales goals for the year at MAKO’s Board of Director (“Board”) meetings, based those

in part on information concerning MAKO’s RIO sales and procedures collected at the QBR

meetings that CW3 attended. According to CW3, it was at these Board meetings that ultimate

decisions as to the figures for these goals were made. CW3 stated that these goals were inflated

and did not reflect the troubling information concerning RIO sales and MAKOplasty market

trends that were provided to them at the QBR meetings, as described more fully below.

79. According to CW3, many MAKO employees besides him/herself believed that

MAKO’s internal goals and public guidance were too high and unattainable, and failed to reflect

all of the facts, described below, articulated at the QBR meetings that made achieving that

guidance at best difficult, if not impossible. CW3 stated that one of the main reasons s/he quit in

2011 was because s/he felt that s/he and other MAKO employees had no influence over

MAKO’s unrealistic goals. CW3 reported that other MAKO employees similarly shared these

concerns, and also quit in 2011 in substantial part because they believed that MAKO’s sales

goals and guidance were unachievable, explaining that these employees’ bonus compensation

was tied to meeting these goals. CW3 also noted that MAKO’s internal sales goals were metrics

affecting the bonuses of all MAKO employees, not just Sales and Marketing personnel. Thus,

according to CW3, even non-Sales and Marketing personnel who had no control over these sales

metrics, were penalized when MAKO underperformed its internal goals, and were therefore

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highly motivated to keep track of developing sales trends, leading to widespread knowledge

within the Company of much of the data alleged below.

80. CW4 learned of MAKO management’s goals for 2012 RIO system sales and

procedures to its employees in the summer of 2011, some time before August. CW4 stated at

that time in 2011, MAKO’s 2012 goals were approximately 60 or more RIO systems sales,

which was consistent with MAKO’s publicly announced 2012 guidance of 56-62 units in

January 2012, as well as approximately 14,500-15,500 total procedures, which were substantially

higher than the guidance range of 11,000-13,000 that was ultimately issued. According to CW4,

the 14,500-15,500 figure for procedures included approximately 10,000 or 11,000 partial knee

procedures and 4,500 total hip procedures using the new THA application that MAKO was

planning to launch in September 2011. CW4 learned of these 2012 goals at a weekly Upstream

Marketing Team meeting, held by his or her supervisor, Vance Clement, Senior Director of

Upstream Marketing (“Clement”), with his direct reports at some point before August 2011.

According to CW4, Clement had received these 2012 goals from MAKO’s senior management.

As set forth in greater detail below, CW4 specifically warned MAKO’s senior management in

August 2011 that these 2012 goals were too high and unrealistic.

81. Further, CW3 stated that at a national sales meeting in approximately May 2011,

held in Dallas, TX, Nunes and his team had presented MAKO’s 2012 annual RIO sales goals,

which were widely considered unattainable by many MAKO employees. Although CW3 did not

attend this national sales meeting because s/he was an employee in MAKO’s Engineering group,

CW3 knew about it based on his or her discussions with other MAKO employees. Specifically,

CW3 learned that at this meeting Nunes had presented MAKO’s goals of a total 80 RIO systems

for the fourth quarter 2011 and the four quarters of 2012, with 65 of those systems projected for

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2012. CW3 stated that after this meeting, many MAKO employees disagreed with those goals as

highly unrealistic and expressed concerns about MAKO’s ability to achieve them. In particular,

according to CW3, several senior MAKO employees responsible for manufacturing, Joe Regan,

Director of Manufacturing, and Duncan Moffat, the Senior Vice President of Operations, directly

told CW3 after this meeting that they disagreed with these excessive goals and were upset that

these numbers were set without any input from their groups.

(b) CW’s Report Alarm Bells During 1Q11 and 2Q11 Reflecting Slowing RIO Sales and MAKOplasty Procedures Trends

82. According to CW3, 2011 was the first time in MAKO’s history that the

Company’s internal tracking systems showed that RIO sales and MAKOplasty procedures had

begun to materially decline. CW3 explained that MAKO’s internal sales goals were typically

even higher than the public guidance issued to investors; thus, even though MAKO appeared to

be on track with respect to sales according to the metrics disclosed to the public, the Company

was in reality experiencing a significant slowdown in RIO sales in the first quarter and second

quarter of 2011.

83. As alleged above, during CW3’s near 6-year tenure at MAKO, s/he regularly

attended QBR meetings where management from each of the Company’s groups made

presentations as to their group’s performance and challenges from the last quarter and plans

going forward. According to CW3, senior management, including the Individual Defendants,

attended and actively participated in these meetings, as described previously. For example, CW3

explained that the Sales and Marketing group, led by Nunes, provided presentations concerning

discussion of sales leads, particularly for RIO systems, including the number of prospective

customers that the sales team had met with, the strength of these leads in the sales funnel ( e.g. ,

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by assigning ratings 6 on a scale and the number of such prospective clients for each rating), how

close the sales team were to closing the deals, and the leads’ viability in the future. Similarly,

MAKOplasty sales managers presented data on the number of procedures performed, utilization

rates, and related trends.

84. CW3 explained that at the 1Q11 QBR Meeting in May 2011, his or her last before

leaving MAKO, the Company’s 1Q11 sales results of 7 RIO sales compared to an internal target

of 6, did not adequately reflect the slowing RIO sales trend that was widely known to MAKO

employees internally. CW3 stated that this 1Q11 result was skewed by the 4-6 RIO sales from

2010 that were improperly recognized in 1Q11, as alleged in Section IV.B.2., supra. Moreover,

as CW3 described above, id. , the 2011 sales were also distorted by the HMA bulk order deal.

CW3 stated that, aside from HMA, other customers were increasingly reluctant to purchase RIO

systems at that time. S/he explained that RIO Account Executives were experiencing significant

difficulties in closing deals, compared to their past sales experience. According to CW3, without

these two anomalous factors that artificially boosted MAKO’s 2011 RIO sales numbers, MAKO

would not have been on track to meet its 2011 goals by the end of 1Q11. S/he explained that

putting aside these factors, the overall structural sales trend among the majority of MAKO’s

accounts in its pipeline was materially negative at that time in 2011 before s/he left MAKO.

85. CW3 stated that in 1Q11 and 2Q11, it was the “general consensus” throughout the

Company, as reported by MAKO’s RIO sales force, that it was becoming much harder and

taking longer to close RIO sales deals than in the past. CW3 explained that s/he knew of this

increasing difficulty based on his or her day-to-day communications with field services

6 For example, CW3 explained that the “A” rated leads (ranked further as A1 through A3) were the top tier of prospective customers, with “A-1” being the strongest and likely to result in sales within the quarter, while “B” rated leads were ones who had expressed some interest but “were on the fence.” CW3 added that there was a vastly smaller number of A-rated leads in the funnel compared to B-rated leads.

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employees, who were told by RIO sales representatives that they were “not selling” systems like

they used to and told them to take vacations because their installation services would not be

needed. CW3 also viewed the Sales and Marketing department’s sales metrics scorecards, which

were physically posted on the wall outside of the department and updated weekly According to

CW3, these scorecards enabled him or her to see the trending information of declining RIO

system sales. CW3 added that s/he also observed such negative sales trends based on the sales

information entered by the sales representatives in Sales Logix, which showed essentially “real

time data.” CW3 stated that although first and second quarters were typically slower than the

last two quarters, the trend s/he saw at that time was abnormal.

86. Additionally, CW3 stated that there was evidence of this declining RIO sales

trend as demonstrated by a decrease in the sales funnel of the top-tier A-rated leads from the

1Q11 actual number of such leads to the 2Q11 target number, which was included in a Sales and

Marketing presentation used in the 1Q11 QBR Meeting. CW3 noted that the number of these

strongest A-rated prospective customers in the sales funnel targeted for 2Q11 had dropped

sharply, approximately in half, compared to the number of such leads in Q1.

87. Moreover, CW3 stated that many sales managers were upset at this time in Q2

2011 because they knew that their sales figures were in jeopardy and that they would be

penalized accordingly with respect to their bonus compensation at the end of the year. CW3

added that this concern was not limited to sales personnel, as sales goals were tied to all MAKO

employees’ compensation. CW3 stated that although MAKO appeared to be on track in terms of

1Q11 sales results, it was widely known that these figures did not accurately portray the marked

slowdown experienced by sales personnel in the first half of 2011.

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88. CW3 stated that at the 1Q11 meeting, attended by Ferré and LaPorte, there was

discussion of MAKO’s declining RIO system sales and MAKOplasty utilization rate trends in

2011. CW3 stated that at this meeting management discussed these disappointing sales trends

and the factors behind them. CW3 commented that at this 1Q11 QBR Meeting the RIO and

MAKOplasty sales employees “took a real beating” from management, including Ferré, as a

result of this sales declining trend. S/he explained that MAKO’s management pushed MAKO’s

sales personnel to increase sales or they would fail to meet internal sales goals and thus their

bonuses. Indeed, CW3 stated that at the 1Q11 QBR Meeting a senior director, who was

responsible for RIO sales and reported to Nunes, was “under fire” directly from Ferré after

reporting on the sales slowdown. CW3 noted that right after the meeting the sales director was

fired.

89. CW3 stated that Ferré and LaPorte, as revealed in the 1Q11 QBR Meeting, knew

of these declining sales trends experienced by MAKO RIO sales representatives because they

were “very involved” in overseeing MAKO’s sales and procedures. CW3 explained that RIO

sales and MAKOplasty procedures information was reported to Ferré on a weekly basis through

weekly staff meetings that he held with the FINS team, i.e. the Senior Vice Presidents, including

LaPorte, Nunes and Delevic. According to CW3, all sales information, including the strength of

sales leads, the number of customers in the sales pipeline, and similar information was discussed

at these FINS meetings. Thus, according to CW3, this was the source of Ferré’s knowledge

about the declining sales trends from these meetings, notwithstanding any rosier picture

presented by the actual 1Q11 sales results in the 1Q11 QBR Meeting. CW3 stated that, based on

this information communicated to him at the FINS meetings, Ferré had his finger on the pulse of

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the structural declining sales trend and accordingly told MAKO’s sales personnel that they

needed to improve their sales results in the rest of the year.

90. In particular, according to CW3, as discussed at the 1Q11 meeting, one of the

principal reasons behind the declining RIO sales trend was that hospitals were increasingly

resistant to purchasing the RIO system, particularly given its hefty $1 million price tag, because

MAKO was unable to persuade new surgeons that the RIO’s MAKOplasty was better than

conventional, manual procedures for knees— i.e. to buy into the benefits of MAKOplasty over

these established procedures. CW3 explained that additional problems identified by many

surgeons with MAKO’s RIO system was that it could take longer than manual surgeries and was

generally “buggy.” CW3 added that many hospitals wanted to gain greater familiarity with

MAKO’s RIO system and related products, and were waiting to see evidence of its longer-term

benefits over the traditional, manual surgeries, before committing to such an expensive capital

investment. According to CW3, another factor discussed at the meeting was the high cost of

MAKO’s implants, which surgeons were contractually required to use with the RIO system, on

top of the already expensive price of the RIO system.

91. Further, CW3 stated that, as discussed at this meeting, MAKO assumed that it

could increase RIO system sales if it could show stronger utilization rates ( i.e. the average

monthly number of MAKOplasty procedures performed per installed RIO system) in the field by

existing customers in the next 6 to 12 months. CW3 explained that the orthopedic community is

fairly small and tight-knit so that existing RIO system customers performing MAKOplasty

would likely communicate their experience and assessments of the benefits of using the system

over manual surgeries. Thus, if existing users communicated positive results, that process would

drive increased interest in MAKOplasty, and thus purchase of RIO systems, by new surgeons

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and hospitals. However, CW3 stated that, as expressly reported in this 1Q11 QBR Meeting,

MAKO’s utilization rates were low to begin with and instead of improving, they began to

decline further between 2010 and 2011 according to MAKO’s internal analyses . Thus,

MAKO’s increased RIO sales goals based on driving increased utilization rates were

contradicted by the actual experience in the field of low and continually dropping utilization.

According to CW3, despite their knowledge of this fact, MAKO failed to correspondingly lower

their RIO system sales goals based on these declining utilization rates.

92. CW3 stated that one of the primary reasons that MAKO’s utilization rate had

been dropping was the high number of problems reported by surgeons in using the RIO system

while performing MAKOplasty procedures. CW3 explained that there were numerous

MAKOplasty cases where, after experiencing certain problems, the surgeons would be forced to

finish the surgery manually. According to CW3, such problems did not risk patients’ health

because the surgeon had the option to abort the MAKOplasty surgery and finish manually, but

the problems nonetheless resulted in significant time wasted by, and dissatisfaction on the part of

the surgeons, leading them to view the system as more of a hassle than it was worth. CW3 knew

of these issues directly from his or her observations in MAKO’s training labs where s/he and

other Engineering personnel tested the RIO system and where MAKO trained surgeons to

familiarize them with the platform. According to CW3, s/he personally witnessed many

“mishaps” by surgeons using the RIO systems in the training labs. CW3 was also privy to such

information through his or her access to MAKO’s Sales Logix program, which tracked surgeons’

case-by-case experience with the RIO system in the operating room through MAKOplasty

representatives’ surgery notes and similar documentation.

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93. For example, CW3 stated that one of the problems experienced by surgeons in the

field and in training labs was a software “registration” issue with the RIO system. CW3

explained that “registration” was the process of calibrating the RIO hardware ( i.e. the robotic

arm), software and patient positions in a three-dimensional space so that any movements of the

patient or the robot are communicated correctly to the system’s software to ensure accuracy of

the system during the procedure. According to CW3, this software registration process slowed

down the surgery compared to manual procedures, taking approximately 15-20 minutes to do.

More significantly, sometimes there would be issues with this software registration so that it

would have to be repeated several times, significantly extending the time it took to complete the

surgery further.

94. CW3 stated that there were numerous other issues. For instance, the actual

“cutting system,” meaning the cutting instrument attached to the robotic arm, in the PKA

application had a significant failure rate of 1 out of 11 cases. CW3 explained that although the

surgeon had a back-up cutting system during the surgery, this failure, when it occurred, also

increased the procedure time and caused frustration to the surgeon because he or she then had to

switch the cutting system and re-do the whole registration process.

95. Another RIO problem described by CW3 was a problem in the fiberoptics, which

is used as a communication system in the RIO to connect its main components – the robotic arm

and computer control module and the camera. CW3 stated a problem in the fiberoptics caused

the communication system of the RIO to fail during surgery, which was a significant issue that

occurred in late 2010 across every system in the field and almost resulted in a product recall.

CW3 explained that although this issue was fixed in 2011, it nevertheless left a bad impression

with many surgeons with respect to the significant “buggyness” of the product.

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96. CW3 stated that these, and numerous other, incidents caused many surgeons to

regard the RIO system as a “buggy” platform and to be concerned about its reliability in

performing partial knee procedures. Because of this “buggyness,” CW3 stated that surgeons

using MAKO’s RIO system, both in the field or in the training labs, began to grow increasingly

frustrated with the RIO system. CW3 added that even “early adopters,” the initial supporters of

MAKOplasty, used the RIO system sporadically, still performing many knee procedures

manually. CW3 explained that these problems provided a significant negative user experience

for the surgeons, which led them to conclude that the system was “not ready for primetime” and

not worth the significant capital investment, given the system’s high price. Moreover, as CW3

explained, MAKO’s surgeon customers, who were part of a small and close-knit orthopedic

community, shared their negative experience and frustration with the RIO system to other

surgeons, creating a “bad word of mouth” regarding the system, which spread across the

orthopedic community. According to CW3, this decreased the likelihood that these new

surgeons, many of whom were purposely waiting to see the results achieved by other surgeons

using the RIO, would adopt MAKOplasty. Thus, CW3 stated that this declining utilization rate

based on the existing customers’ negative experience with the “buggy” RIO system led to other

prospective customers of the RIO, surgeons who had been trained on the RIO in MAKO’s

training labs, refusing to buy new systems. CW3 stated that, based on his or her direct

responsibility and experience of investigating and addressing customer complaints with the RIO

during his or her near 6 years at MAKO, the customer satisfaction with the RIO had declined in

2010 and 2011.

97. CW3 stated that all of these utilization problems were communicated and

discussed at the QBR meetings, including the 1Q11 one in May 2011. For example, CW3 noted

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that at the 1Q11 QBR Meeting, and prior ones, CW3’s Engineering group, led by Leparmentier,

highlighted these reported bugs with the RIO system, their occurrence rates, and the time it

would take to address them. Further, CW3 explained that Nunes’ Sales and Marketing group

reported the Clinical group’s findings 7 with respect to surgeons’ increasing frustration with the

RIO system’s “bugginess” and conclusions that it was not sufficiently reliable to be used in

orthopedic surgeries. CW3 elaborated that MAKO has a representative in every MAKOplasty

operating room to assist the surgeon in the procedure. According to CW3, these MAKOplasty

representatives, per FDA requirements, documented everything that occurred in the operating

room and communicated any such incidents and issues to MAKO, including CW3’s Engineering

group, who were responsible for fixing technical issues with the RIO systems.

98. CW3 emphasized that from 2010 to 2011, there was a significant noticeable trend,

as discussed at each QBR meeting, including the last one attended by CW3 in May 2011,

revealing an increasing difficulty in the ability of MAKO to sell additional RIO systems to new

and existing customers and improve utilization trends for the reasons discussed above.

According to CW3, at this time MAKO was “always missing” its internal utilization rate targets.

99. However, MAKO concealed these declining utilization trends from investors at

that time by employing certain manipulative tactics, which were similarly not disclosed to the

public. CW3 stated that many hospitals that had purchased the RIO system had a “zero”

utilization rate, for the reasons described above. CW3 explained that, as a result, to compensate

for such zero and other low utilization rates at these hospitals, MAKO had helped establish

certain MAKOplasty “super centers,” or orthopedic facilities at hospitals where only

MAKOplasty procedures were performed. For example, CW3 stated one such super center was

7 CW3 explained that the Sales and Marketing group presented the Clinical group’s findings because the latter personnel were in the field assisting surgeons with MAKOplasty cases.

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located in Naples, FL, which was an HMA hospital. According to CW3, these MAKOplasty

super centers were comprised of surgeons who were MAKO’s “strategic business partners.”

CW3 explained that these surgeons were well-compensated by the Company and had a vested

interest in it, meaning that they received shares of MAKO’s stock. CW3 stated s/he was told this

information regarding the compensation of these strategic business partners by MAKO in a

private conversation by Rony Abovitz, who was MAKO’s co-founder, former Chief Technology

Officer, and, most recently, Chief Visionary Officer, responsible for driving MAKO’s vision for

global strategy and technology. CW3 stated that such super centers would “ramp up” their

number of procedures performed to compensate for the low utilization rate, which is calculated

on an average basis, by other non-MAKO sponsored sites. Significantly, CW3 stated that

approximately 25% of RIO system sites account for 95% ofMAKO’s utilization , a statistic that

Defendants failed to publicly disclose to investors. CW3 explained that s/he determined this

statistic based on his or her review of the procedures data in Sales Logix. According to CW3, it

was easy to see from this data that only 5 or 6 main MAKOplasty sites were accounting for the

vast majority of the procedures, often doing approximately 10 procedures per day, compared to

much lower numbers by the bulk of other hospitals.

100. According to CW3, although Defendants, including specifically Ferré and

LaPorte, were made aware of all of these facts revealing MAKO’s declining RIO sales and

MAKOplasty utilization rates at these QBR and FIN meetings, including 1Q11 QBR Meeting,

and the specific reasons for these trends—none of which appeared to be reversible in the short

run—they failed to factor in the impact of such adverse facts on MAKO’s 2012 RIO system sales

internal goals and public guidance, or to disclose them to the public.

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101. CW3 stated that another reason that MAKO’s 2012 RIO sales goals were

unrealistic was that they were in part premised—in contradiction to the plain evidence that

appeared before them—on MAKO’s new total hip application, planned to be released in

September 2011, being able to generate increased RIO sales and drive the expanded adoption of

MAKOplasty beyond 2011, 2012 and after. CW3 explained that MAKO had been trying to

commercially release its total hips product for his or her last two and a half years at the

Company. CW3 stated that at that time in 2011 prior to his or her departure, the THA product

was the focus of MAKO’s strategy going forward and taking up significant time of the

Company’s groups in anticipation of the upcoming launch. For example, Ferré devoted a

substantial amount of his presentation discussing the THA product launch and its significance to

MAKO’s growth strategy going forward at the 1Q11 QBR Meeting. CW3 explained that the

reason that the Company was so focused on the new THA product was that total hips

replacement is considered a much more “mainstream” surgery than knee procedures,

representing a much larger market and thus source of revenue for hospitals compared to knees.

According to CW3, MAKO sought to tap into that larger hips market with its THA application in

order to sell many more RIO systems with it.

102. Further, CW3 explained that MAKO had received a substantial number of orders

for the RIO system with its new THA application at the end of 2010 and early 2011—well before

the product launched in September 2011. CW3 stated that most of the orders for the RIO system

with the THA application, either as new RIO systems with both applications or as “upgrades” to

existing PKA RIO system customers, were slated to be included in 2011 sales results at the end

of the year after THA launched. However, CW3 emphasized that these initial THA application

orders were all from MAKO’s “early adopters” surgeons who had been initial supporters of

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MAKO’s technology and represented only a small portion of the orthopedic community, as

described in greater detail above. CW3 noted that once this small pool of MAKO’s early

adopters, who did not require much of a selling effort by MAKO to place their orders, was

exhausted in 2011, that there would be few such additional surgeons interested in the RIO with

the added THA application. Thus, according to CW3, these THA-driven sales slated for the end

of 2011 were another reason, besides the HMA bulk-order contract and the 4-6 2010 RIO sales

recognized in 2011, that MAKO’s RIO sales were artificially inflated in 2011, enabling MAKO

to meet its 2011 guidance, and did not represent a reasonable baseline for 2012 guidance.

According to CW3, MAKO’s failures to meet 2012 RIO sales guidance resulted from a failure to

convince non-early adopters, who represented the bulk of the orthopedic community, that the

RIO system, both the old PKA-only version and the new one with both PKA and THA

applications, that it was a finished product, based on repeated “buggyness” problems and other

issues worth the very high price MAKO was charging for it.

103. With respect to the THA application issues, CW3 stated that in preparation for

MAKO’s THA product launch, MAKO set up many labs to train surgeons on its THA

application, with surgeons flying in from all over the world in the first half of 2011. However,

according to CW3, most of these THA training labs were “failures,” meaning that the surgeons

could not successfully perform the THA procedures because of various problems with the RIO

systems or related implants. For example, CW3 stated that one such problem was in placing the

hip implant according to the surgery plan, resulting in an improper alignment. CW3 believed

that MAKO eventually fixed these problems before launch, although s/he could not be certain

because s/he left in June 2011. Nonetheless, CW3 stated that the numerous failed training labs

with the THA application left a “bad taste in the mouths” of many surgeons, resulting in

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decreased interest from both adopters and non-early adopters in buying the technology. CW3

noted that the surgeon attendance level in subsequent THA training labs declined after the earlier

attendees shared their negative experiences with other surgeons, showing the waning surgeon

interest. Further, CW3 stated that Ferré and LaPorte knew about the THA training lab failures

because the THA training labs were seen as an important marketing tool for MAKO’s new THA

product, which MAKO was relying on substantially boosting RIO sales and the wider adoption

of MAKOplasty. Thus, CW3 explained that the THA training labs were documented in great

detail, and that reports, including with respect to any problems, were sent to senior management,

including Individual Defendants.

104. According to CW3, another issue with MAKO’s THA application was that it did

not provide any time-saving benefit compared to conventional, manual THA procedures. CW3

explained that this inability by MAKO to show any time-saving benefit using its RIO system for

THA procedures compared to manual surgeries was another factor that militated against

surgeons’ interest in the THA application, and thus RIO systems.

105. Other CW’s corroborate CW3’s account of these negative RIO sales trends and

utilization rates known to MAKO at this time in 2011. For instance, CW1, who had firsthand

knowledge of the procedures volume and utilization rates of RIO systems by surgeons as a result

of CW1’s responsibilities for managing procedures and related implant sales across an entire

region of the country, stated that MAKO’s internal goals for the number of procedures across its

existing customer base were inflated and unachievable. Specifically, echoing CW3’s account,

CW1 reported that one of the primary reasons that s/he quit in June 2011 was because of the

unrealistically high number of MAKOplasty procedures that MAKO management set as its goals

and publicly projected for both 2011 and 2012. CW1 explained that his or her compensation

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plan was tied to the number of MAKOplasty procedures, and thus implant sales, that his or her

region was expected to achieve according to MAKO’s goals set by senior management. CW1

stated that by June 2011 s/he saw “the writing on the wall” with respect to the procedure goals,

meaning that these numbers handed down from MAKO’s senior management were

unachievable. According to CW1, another regional MAKOplasty sales manager at the time

agreed with CW1 and quit around the same time for this and other reasons.

106. CW1 explained that one of the reasons that the procedures projections were

unachievable was because “the robots [RIO systems] were not being sold.” CW1 elaborated that

the number of procedures (and, accordingly, the number of implants sold) were “linked” with the

sales of RIO systems – the more RIO systems that MAKO had installed in the field, the more

procedures that could be performed. Conversely, according to CW1, if MAKO was not selling

enough new RIO systems, it would become exceedingly difficult to generate more procedures.

CW1 stated that in 2011, despite the HMA bulk-order, MAKO was not selling enough new RIO

systems to continue to increase its procedures numbers at the volume that MAKO projected.

CW1 added that MAKO’s RIO Sale Force, referred to as the “capital side,” was running into

significant “road blocks” in 2011 with selling RIO systems, including that many hospitals did not

have sufficient capital budgets to spend on an expensive piece of capital equipment such as the

RIO system. CW1 explained that, “across the board,” the high price of the RIO system was a

major roadblock for hospitals, preventing them from purchasing the RIO system. CW1 stated

that s/he was personally told this by personnel at numerous hospitals, who “always” described

the RIO system as a “huge expense,” as well as by RIO Account Executives responsible for

selling the RIO systems to hospitals. According to CW1, MAKO’s 2012 annual guidance,

publicly announced on January 9, 2012, of 11,000 to 13,000 procedures was reasonable only if

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MAKO sold 56 to 62 RIO systems as the Company set forth in its guidance, but would

necessarily be lower with fewer unit sales.

107. CW1 stated that in the spring of 2011 and leading up to CW1’s departure, s/he

grew increasingly concerned about CW1’s region’s inability to meet MAKO’s procedures goals.

CW1 expressed those concerns repeatedly in both emails and personal discussions to Nunes,

CW1’s supervisor and the Senior Vice President of Sales and Marketing, who reported directly

to Defendant Ferré. According to CW1, another regional MAKOplasty sales manager agreed

with CW1’s concerns and similarly shared them with Nunes on several occasions around that

same time. In particular, CW1 stated that both of them had heated conversations with Nunes

regarding their compensation plans and MAKO’s unrealistic number of procedures that they

were expected to achieve notwithstanding the insufficient number of RIO systems’ sales. Nunes

failed to address the continued red flags raised by regional sales managers, and according to

CW1, both quit shortly afterward in June 2011.

108. CW2 corroborated CW1’s and CW3’s statements regarding the low procedures

volume and utilization rates at existing MAKOplasty sites, supporting CW1’s account of the

inflated and unrealistic procedures goals. CW2 stated that as a MAKOplasty Specialist s/he was

tasked with training all of the surgeons within an orthopedic practice or hospital on using the

RIO system and driving the increased utilization of the systems and thus procedures volume.

However, according to CW2, it was very difficult for CW2 and other MAKOplasty Specialists to

achieve these goals given the low interest by surgeons in using the RIO systems at the hospitals

that had purchased them. CW2 stated that the problem that MAKO faced was that its RIO

technology was not getting sufficient “buy-in” from orthopedic surgeons, even at the hospitals

who purchased the RIO systems. CW2 elaborated that only a small percentage of orthopedic

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surgeons, referred to by MAKO as “surgeon champions,” had “bought into” and adopted

MAKO’s RIO technology, while the majority did not embrace the technology and instead were

“waiting to see” MAKOplasty’s long-term benefits over conventional, manual procedures.

109. Specifically, CW2 stated that there were many instances where RIO systems were

sold to a hospital where only one surgeon was interested in using the system. CW2 explained

that it was never the case that all or even a majority of surgeons in the particular hospital buying

the RIO system intended or actually did use the system. In CW2’s experience, s/he generally

found that only one or two surgeons at a given hospital or practice in CW2’s territory were

actually using the RIO system to perform MAKOplasty procedures. Moreover, CW2 stated that

based on CW2’s experience of seeing many RIO system accounts across the southeast U.S.

region (where MAKO is headquartered), there were typically less than 40% of surgeons at a

particular hospital that had the RIO system that were actually using it. As a result, CW2

described MAKO’s utilization rate for MAKOplasty procedures as “really low,” particularly

given the significant investment made by the hospital in acquiring the expensive RIO system.

CW2 also knew, based on personal discussions with RIO Account Executives responsible for

selling the RIO systems, that certain hospitals had decided not to purchase the system because of

the low surgeon interest.

110. CW2 explained that there were several reasons behind the low surgeon interest in

MAKO’s RIO system and MAKOplasty solution. According to CW2, many surgeons had told

him or her that they can perform partial knee procedures better without the assistance of the RIO

system. Additionally, these surgeons reported to CW2 that the MAKOplasty procedure, which

requires additional set-up time using the RIO system ( e.g. , incorporating the patient’s CT scan in

order to design the steps that the robot will perform), takes longer than manual procedures. As a

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result, this additional time required by MAKOplasty procedures reduces the number of cases that

the surgeon can do per day.

111. CW2’s statements regarding the low utilization of the RIO system at existing

MAKO hospital accounts are corroborated by a third-party account of the experience at JFK

Memorial Hospital (“JFK”) in Indio, CA, which owns a RIO system that had been used only by

one surgeon and has sat idle since his departure. According to CW5, a materials director in

purchasing at JFK from 2010 to the present, the hospital had acquired the RIO system for partial

knee procedures in approximately 2009 at the request of one surgeon. CW5 stated that only this

surgeon had used the RIO system at JFK, and after he or she retired, none of the other orthopedic

surgeons at JFK have used it, such that the machine has not been used in a while. CW5

explained that these surgeons do not use the RIO system because they do not derive sufficient

benefits in using it over traditional procedures and that it is, therefore, not “cost effective.” In

particular, CW5 stated that the additional time it takes to perform procedures with the RIO

system reduces the number of procedures they can do per day.

112. Despite the above warnings by MAKO’s employees of slowing MAKOplasty

adoption in 2011, Defendants persisted in their unrealistically high forecasts for RIO system

sales and procedures, which were publicly announced through the Company’s 2012 annual

guidance on January 9, 2012.

(c) August 2011 Upstream Marketing Meeting

113. After learning of MAKO’s 2012 goals (approximately 60 or more RIO sales units

and 14,500-15,500 procedures, with 4,500 THA and 10,000-11,000 PKA), CW4 stated that s/he

immediately questioned them, in particular the 4,500 THA procedures target, as overly

aggressive and unrealistic. CW4 primarily questioned these numbers based on his or her

conclusion after conducting market research into the new THA application that the RIO system

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did not offer any advantage over traditional, manually performed total hip replacements for

surgeons. After learning of MAKO’s goals, CW4 subsequently performed his or her own

analysis of these figures and prepared a presentation reflecting that analysis for a biennial

Upstream Marketing Team 8 meeting in August 2011. CW4 stated that s/he emailed a copy of

this presentation to CW4’s supervisor, Clement, and Ivan Delevic, the Senior Vice President of

Strategic Marketing and Business Development, who reported directly to Defendant Ferré. Both

Clement and Delevic also attended the August 2011 meeting, with Delevic being the most senior

MAKO executive present. According to CW4, approximately 12-16 employees, primarily

product managers within the Upstream Marketing Team, attended this August 2011 meeting.

CW4 stated that the purpose of the meeting was for each group manager within the Upstream

Marketing Team to present their group’s plans for the upcoming year. As Senior Product

Manager for the Partial Knees group, CW4 was responsible for delivering the support and

training materials to MAKO’s sales force in order to help achieve the requisite number of partial

knee procedures set by the goals. As such, CW4 stated that s/he presented CW4’s analysis of the

MAKO’s 2012 forecasts of its goals for partial knees, as well as the new THA procedures and

RIO system sales on behalf of the other groups. No one else besides CW4 presented on

MAKO’s RIO system sales and procedures at this August 2011 marketing meeting.

114. In this August 2011 presentation, CW4 stated that s/he informed MAKO’s senior

management, including Clement and Delevic, who had specifically received the presentation and

attended the August meeting, that MAKO’s 2012 goals for both RIO system sales and

MAKOplasty procedures were too ambitious and unrealistic. Although CW4 does not have first-

8 According to CW4, MAKO’s Upstream Marketing Team was segmented into several subgroups: Partial Knees, which CW4 was part of; Platform, which was responsible for the marketing of the RIO system; Hips, which included the new THA application; and Future Applications, which was responsible for new product development, including a total knees application and applications for other joints, such as the shoulder.

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hand knowledge as to whether either Clement or Delevic forwarded or related CW4’s

presentation to the Individual Defendants, CW4 stated that Ferré holds regular meetings with the

Senior Vice Presidents who directly report to him, including Delevic, regarding the Company’s

business, including MAKO’s RIO sales and procedures oversight and planning. Given that

Delevic reported directly to Defendant Ferré and participated in such regular meetings with

Ferré, and given the significance of MAKO’s procedures and RIO sales as key metrics of

MAKO’s business, and the very purpose of the August meeting was to assess those goals, it is

inconceivable that the Individual Defendants would not have been made aware of the contents of

the presentation.

115. Indeed, CW4, who alone was tasked at the August meeting with discussing the

relevant goals, explained that CW4’s presentation provided his or her own projections for

procedures and RIO systems sales for 2012, based on CW4’s market research and analysis,

which were significantly lower than MAKO’s internal goals of approximately 60 RIO system

sales and 14,500-15,500 procedures. With respect to RIO system sales, CW4 stated that, based

on the Company’s sales pace and market conditions at the time, CW4 projected what s/he

described as a more realistic number in the lower 50’s or perhaps even high 40’s. In terms of

procedures, CW4 forecast at most only 1,200 THA procedures in contrast to the 4,500

anticipated by MAKO, which s/he described as completely unrealistic. Although CW4 projected

the same number of partial knee procedures as Defendants’ goals of 10,000 to 11,000, s/he

described their 4,500 hips goal as extremely overstated and unreasonable. Thus, according to

CW4’s analysis, s/he projected a total procedures number much lower than MAKO’s 14,500-

15,500 figure, approximately 11,000 to 12,000 as a result of his or her much lower 1,200 THA

procedures forecast. CW4 added that the 1,200 hip procedures number was the best case

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scenario and made the unlikely assumption that every new RIO system sold would include both

the PKA and THA applications. As described in greater detail below, MAKO eventually

adopted CW4’s 1,200 hip procedures projection in the public procedures guidance that it

provided to analysts and investors in 2012, lending credence to CW4’s entire analysis.

Defendants, however, did not heed CW4’s similar warnings with respect to their overstated RIO

systems sales guidance, though that guidance was significantly based on the same faulty

assumptions related to the THA application launch underlying their original procedures goals,

which CW4 warned against.

116. CW4 explained that, as CW4 reported in the August 2011 presentation and

meeting, one the main reasons that MAKO’s 2012 goal of 60 RIO systems sales was inflated was

because of its erroneous assumption—which CW4 dispelled, in detail, with undisputed facts, in

the presentation—that it could sell more RIO units with the added hip THA application that it

was planning to launch in September 2011. According to CW4, MAKO’s goal was premised on

the factually baseless assumption that its THA application would be adopted at the same pace as

its PKA application had been and that it could therefore “copy and paste” the same model used

to calculate sales and procedures volumes for partial knees to MAKO’s new total hip procedures.

117. However, CW4’s market research had revealed that the general consensus within

the orthopedic surgeon community performing total hip replacement surgery was that MAKO’s

robotically assisted THA procedure offered no benefit over conventional, manually performed

hip replacements. According to CW4, while some orthopedic surgeons recognized the clinical

benefit of RIO system robotic guidance in alignment and improving results in partial knee

procedures, there was no such equivalent support of incremental value for total hip procedures.

CW4 explained that orthopedic surgeons are traditionally reluctant to adopt new technology, and

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were even more so with respect to MAKO’s THA application because they have achieved good

clinical results with conventional, manual hip replacement therapies for more than 40 years.

CW4 stated that another reason that surgeons were resistant to MAKO’s THA procedure was

that it takes between 45 minutes to 1 hour longer than a manual total hip replacement surgery,

reducing the number of such surgeries that the surgeon can perform in a day by at least one

procedure. Accordingly, CW4 reported that surgeons, because of this extended operating time

and lack of real benefit in total hip replacement surgeries, generally regarded MAKO’s RIO

system as a “hassle,” rather than a useful aide, for THA procedures. According to CW4, this

lack of surgeon interest in MAKO’s RIO THA application was exacerbated by a hefty price tag

for the RIO system and THA application, particularly given the tight hospital budgets for

expensive capital equipment.

118. Moreover, CW4 stated that another significant challenge with MAKO’s THA

application is that the Company offers only one or two different styles of hip implants with its

RIO system while its competitors who market implants for conventional total hip replacements

provide greater variety—for example, approximately six to eight different styles of total hip

implant systems offered by DePuy Orthopaedics and Wright Medical. 9 CW4 explained that

MAKO’s hip implants were not the most current or “state-of-the art” style of implants on which

a majority of total hip replacement are trained and, thus, used. Accordingly, CW4 stated that

9 As MAKO itself has acknowledged, “[t]he hip implant market, unlike the partial knee implant market, is based on multiple, differing implant philosophies, which results in most orthopedic companies offering a variety of hip implants options in order to satisfy the requirements of a majority of surgeons.” 2011 Form 10-K at 21. Recognizing this market issue, MAKO claimed that it “intend[ed] to offer a variety of such hip implant options for use with the RIO system and our MAKOplasty THA application.” Id. However, upon its THA application launch in September 2011, MAKO offered only one option of hip implant system, an off-the-shelf one manufactured by a third-party supplier, Corin PLC (“Corin”), which was marketed under the brand names RESTORIS Metafix for the femoral stem and the RESTORIS Trinity for the acetabular cup. Id. In or around May 2012, MAKO released a second implant system, the RESTORIS Z implant, manufactured by Total Joint Orthopedics, for use in THA MAKOplasty procedures. Although MAKO stated that it planned to release an additional, proprietary hip implant system, designed and manufactured for MAKO by Pipeline Biomedical, in 2012, to date it has not been launched, such that MAKO’s hip implants offerings remain limited.

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many surgeons did not want to be forced to use MAKO’s hip implants. CW4 elaborated that

upon launch and throughout most of the Class Period, MAKO offered only one hip implant

system, supplied by a UK company called Corin, which is used by only a limited number of

surgeons. Moreover, CW4 explained that MAKO’s RIO system was a “closed” platform,

meaning that only MAKO’s own RESTORIS implants were approved by the FDA and

contractually required to be used with its RIO platform. Thus, according to CW4’s research,

MAKO’s limited line of hip implants, which were disfavored by a majority of hip surgeons, was

another substantial factor militating against surgeons’ broad adoption of MAKO’s RIO system

for THA procedures. CW4 discussed this analysis during his or her August presentation.

119. CW4 further explained that his or her August presentation provided a “reality

check” on how much the RIO system was being used in partial knees and could be expected to

be used in THA procedures. According to CW4’s research, the RIO system has a “ramp-up”

period of 90 days, meaning the initial time a surgeon gets a new RIO system and starts using it,

during which the rate of surgeries is low. CW4 reported that MAKO’s internal analyses had

overestimated the amount of surgeries performed during this ramp-up period. CW4’s own

analysis factored in the more realistic number of procedures performed during this ramp-up

period to present the more realistic goal of 1,200 hip procedures.

120. CW4 provided this analysis of the market for MAKO’s THA application as part

of his or her presentation at the August 2011 meeting. Based on all of these reasons, CW4

concluded that MAKO’s 4,500 hip procedures projections, and as a result the total procedures

number and the 60 or more RIO systems sales number, were “completely unrealistic,” as CW4

reported in the August presentation. Moreover, according to CW4, many MAKO employees,

particularly sales representatives in the field who regularly interacted with the surgeons and

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hospital personnel, knew and agreed with him or her that MAKO’s THA application would be a

“hard sell” to surgeons and hospitals.

121. In the August presentation, CW4 also proposed a more expansive public relations

and advertising campaign to surgeons and patients to increase the number of RIO system sales

and MAKOplasty procedures for both partial knees and total hips. CW4 explained that one of

main drivers of MAKOplasty adoption is patients’ awareness that there are alternatives to

traditional, manual procedures for orthopedic procedures, in particular for partial knee surgeries,

which were less invasive than conventional total knee replacements. CW4 stated that MAKO

was aware of this need for such direct-to-patient advertising, having been repeatedly told by

surgeons that it was necessary to expand the growth of MAKOplasty and RIO sales. According

to CW4, in the August 2011 presentation, s/he warned that without such expanded marketing

efforts, particularly directly to patients, whose demand drives RIO system usage, MAKO would

not be able to meet its 2012 RIO system sales and procedures goals.

122. With respect to RIO system sales in general, CW4 stated that another reason that

CW4 believed that MAKO’s 2012 goal of 60 or more RIO units was unrealistic and which CW4

discussed at the August 2011 meeting was that the market for RIO systems was already

saturated, so that it would be increasingly difficult to sell new RIO units. CW4 stated that

MAKO had sold as many RIO systems as it could to the “early adopters,” surgeons who believed

in MAKO’s technology and represented a small portion of the orthopedic community, and once

that pool was exhausted, it was becoming much harder to sell any new systems, as was evident to

MAKO employees in 2011. CW4 stated that the vast majority of the orthopedic community

remained “skeptical” and were in a “waiting mode” to see if there was any clinical long-term

evidence showing the benefits of the RIO system and MAKOplasty to patients for both partial

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knee and total hip procedures over conventional, manual procedures without robotic assistance.

CW4 stressed that even for MAKO’s original partial knee MAKOplasty, not to mention the

brand new total hips MAKOplasty, there was still no long-term clinical results data supporting it.

S/he explained that at that time in August 2011, MAKO’s RIO system and PKA MAKOplasty

had only been available for approximately 5 years, which was not a sufficiently long period to

establish long-term clinical results. In contrast, CW4 stated that BioMet, which provides a

partial knee replacement system for manual procedures and is the current market leader in partial

knee surgeries, had approximately a 25-year track record establishing long-term clinical results.

CW4 explained that this lack of long-term clinical data was the chief objection to PKA

MAKOplasty procedures using the RIO system that surgeons expressed to MAKO, and that this

issue was well known within MAKO.

123. Additionally, CW4 explained that another reason that CW4 determined that

MAKO’s 2012 RIO system sales goal for 2012 was overstated was that the RIO system

represented an expensive capital investment by a hospital. CW4 explained that, as a result of the

slowed economy and other macroeconomic issues, most hospitals had tightened their budgets

and did not want to invest in a significant capital expenditure such as the RIO system. By itself,

this may not have been a serious problem if the community of relevant surgeons were generally

convinced of the utility of the system over traditional manual methods. However, for all of the

reasons alleged above, the opposite was true. Thus, this undisclosed factor, known to

Defendants, rendered the high cost factor far more of a significant barrier to achieving MAKO’s

sales guidance.

124. Further, according to CW4, the market saturation problem was exacerbated by the

fact that as part of the RIO systems sales, many hospitals forced MAKO to sign a territorial

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“exclusivity” provision, meaning that MAKO could not sell RIO systems to other hospitals

within a certain mile radius of the hospital for a certain period of time, typically two to three

years. Thus, CW4 stated that MAKO was effectively “shooting itself in the foot” in terms of its

ability to sell more RIO systems, meaning that such exclusivity provisions would decrease the

number of RIO systems that MAKO could sell in the future, at least for a few years. CW4

explained that although s/he did not specifically address these capital expense and exclusivity

provision factors at the August meeting, including when combined with other issues that were

discussed, it was because these concerns were widely known internally at MAKO in 2011.

These combined and interacting issues were never disclosed to the investing public as material

risk factors in MAKO’s ability to meet its guidance.

125. CW4 stated that at the August 2011 meeting, Delevic rejected CW4’s lower

projections for RIO system sales and procedures without much discussion, and, significantly,

without disputing the specific facts or reasons behind CW4’s analysis. According to CW4,

Delevic simply proclaimed that CW4’s projections were “wrong,” stating only that MAKO had

its own “sophisticated” mathematical models for calculating how many RIO systems placements

and procedures it could achieve in the future. CW4 elaborated that no one else spoke up at the

meeting, not wanting to disagree with Delevic, who was the most senior executive in attendance.

CW4 noted that after this meeting, CW4’s relationship with Delevic soured and that CW4 was

treated as a “black sheep” by the rest of the marketing group for raising these concerns.

126. Nevertheless, CW4 continued to raise these concerns about MAKO’s overstated

RIO sales and procedures goals, in particular with regard to the THA MAKOplasty launch, after

the August 2011 meeting to Clement at the weekly Upstream Marketing Team meetings.

However, according to CW4, Clement “never really responded” to CW4’s concerns. After a

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period of continually raising this issue and not getting any response from Clement or others at

the meetings, CW4 gave up, finding that these efforts were unproductive.

127. Nevertheless, other sales and marketing personnel at MAKO, including high-level

managers who were directly involved with RIO system sales, shared CW4’s concerns, further

demonstrating the merit of CW4’s analysis that s/he had repeatedly shared with senior

management. In addition to certain product managers who had orthopedic backgrounds and

were thus particularly knowledgeable about this market, CW4 stated that two RIO system Sales

and Marketing employees, who were thus directly involved with and knowledgeable about the

sales of this platform, also agreed with CW4’s lower projections for both system sales and

procedures, and in particular CW4’s THA launch analysis. According to CW4, one such

employee was Saul Najera, Product Manager for RIO system sales, who also reported to Clement

and was responsible for the training materials to the RIO Sales Force on how to sell the RIO and

instructions for the operating room staff. CW4 stated that around August 2011, CW4 had several

conversations with Najera, who concurred with CW4 based in part on the latter’s own prior

personal experience at MAKO in a similar scenario, when he had been expected to sell an

unrealistic number of certain type of implants developed by MAKO, and similarly raised such

concerns to MAKO’s management without success. According to CW4, Najera’s agreement was

also based on his understanding and analysis of the overall orthopedic landscape relating to

usage of robotic assisted surgeries, about which Najera was knowledgeable given his extensive

experience in this area and responsibilities for RIO system sales.

128. CW4 explained that another such MAKO employee was Craig Lippincott,

Director of International Sales and Marketing – Europe and Latin America, who was in charge of

international sales of the RIO system and who reported directly to Nunes. According to CW4,

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CW4 had several private discussions with Lippincott regarding this topic around that time in

2011. CW4 stated that Lippincott also agreed with CW4 that Defendants’ 2012 goals for both

RIO system sales and procedures were “way too optimistic”, based on Lippincott’s experience

with RIO system sales and knowledge of the orthopedic marketplace, including that surgeons in

the U.S. were hesitant and skeptical of MAKO’s technology, waiting to see long-term benefit

results before adopting it.

C. MAKO’s RIO Systems Pipeline Dries Up at the End of 2011 Heading into 2012

129. CW2 stated that there was a big push within MAKO’s sales division at the end of

2011 to sell as many RIO systems as possible by year-end. According to CW2, things “fell

apart” with respect to MAKO’s RIO system sales in December 2011, after the year-end push,

because MAKO’s sales pipeline, meaning MAKO’s sources of prospective RIO customers, was

left depleted going into the first quarter of 2012. CW2 knew this based on his or her discussions

with numerous RIO Account Executives with whom CW2 worked. According to CW2, based on

these discussions, most RIO Account Executives, had sold their pipelines empty by fourth

quarter 2011 as part of MAKO’s year-end push. By way of example, CW2 stated that one

particular RIO Account Executive, who is currently employed at MAKO, had told CW2 during a

recent conversation in August 2012 that he has not been able to sell a single RIO system in 2012.

CW2’s statements regarding this depleted sales pipeline heading into 2012, based on the sales

experience of RIO Account Executives in the field as reported to CW2, contradict Defendant

Ferré’s subsequent false and misleading statements on May 7, 2012, as alleged in Section VII.B.

infra, that MAKO’s sales “funnel” was still strong with a large number of prospective customers

and that the RIO sales shortfalls in the first quarter 2012 were merely due to an extended sales

cycle.

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130. Nonetheless, on January 9, 2012, in pre-announcing MAKO’s selected operating

results for the fourth quarter and fiscal year 2011, Defendants publicly issued an aggressive 2012

guidance of 56-62 RIO system sales, which was substantially higher than the 48 units MAKO

had sold in 2011 (a figure that included the one-time HMA bulk order of 11 systems, the 4-6

units that were delivered in 2010, and the influx of early adopters of the hip application upon its

launch). Defendants also announced a 2012 guidance of 11,000 to 13,000 total procedures for

partial knees and total hips, which also represented a significant increase over the approximately

7,000 procedures performed in 2011.

131. Defendants’ announced procedures guidance of 11,000 to 13,000 was more in

line with CW4’s lower procedures projection presented by CW4 at the August 2011 marketing

meeting, in contrast to MAKO’s initial, internal goal of approximately 14,500 total procedures

(as reported by CW4), which included the anticipated 4,500 THA hip procedures, though the top

of the range was still approximately 1,000 procedures more than the maximum number CW4

calculated was reasonably possible, based on a best case assumption that CW4 thought unlikely.

As alleged in detail below, MAKO also ultimately adopted CW4’s lower projection of 1,200 hip

procedures in early 2012, premised on CW4’s conclusion that THA applications were being

adopted at a slower rate and not receiving the widespread market support from orthopedic

surgeons as MAKO had assumed in its inflated earlier goal.

132. While Defendants’ January guidance of 11,000 to 13,000 procedures did not

provide a breakdown for the number of procedures to be generated by partial knees versus total

hips surgeries on March 6, 2012, when reaffirming this guidance (along with the RIO system

sales guidance), Defendants also gave 2012 guidance for the utilization rate in the range of 6.5 to

7.5 total procedures per month across the guided installed base of RIO systems. Defendants also

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stated on this date that MAKO expected the hip application to account for approximately 0.75

procedures per month within that range. Based on this additional guidance, a March 7, 2012 JP

Morgan analyst report calculated that these figures resulted in 1,200 hip procedures ( i.e.

implants) expected for 2012.

133. During the May 7, 2012 earnings call discussing first quarter 2012 results after a

JP Morgan analyst explained its mathematical calculation of the 1,200 hip procedures figure

based on MAKO’s previously issued guidance, Defendant LaPorte confirmed that the analyst’s

“math” and, thus, the 1,200 figure were accurate. Thus, Defendants adopted CW4’s August

2011 estimate of approximately 1,200 hip procedures, in contrast to their original 4,500 hip

procedures goal for 2012, again confirming their confidence in CW4’s analysis, which equally

supported a much lower projection for 2012 sales of RIO systems.

134. Nonetheless, with respect to 2012 RIO sales guidance, Defendants persisted in

maintaining their original inflated goal of approximately 60 or more units, as reflected in the

publicly announced guidance range of 56-62, which CW4 had similarly warned in August 2011,

for substantially the same reasons s/he had demonstrated with respect to his or her conclusions

concerning the forecasted THA procedures, was both unrealistic and unattainable.

135. Additionally, CW2 and CW4 both stated that MAKO’s 2012 RIO sales guidance

announced in January was based on the Company’s sales in the past and failed to take into

account the warning signals of slowed growth that was evident to virtually all MAKO employees

by the end of 2011. According to CW4, this 2012 guidance did not properly factor in the fact

that the market for RIO sales was already saturated and that the majority of orthopedic surgeons

remained skeptical of MAKO’s technology, such that it was going to be increasingly difficult to

grow RIO systems sales going forward to meet these overstated guidance numbers – as was

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widely known within MAKO before the guidance was issued. Further, CW2 stated, based on

CW2’s discussions with RIO Account Executives, that after depleting its RIO system sales

pipeline at the end of 2011, MAKO “started running into problems immediately in 2012” with

respect to selling new systems.

136. CW6, another former MAKO employee who worked as a Senior Software Quality

Assurance Tester/Analyst 10 in Fort Lauderdale, FL from November 2011 to March 2012,

similarly stated that Defendants’ 2012 RIO sales guidance issued in January 2012 was overly

aggressive because, as Defendants were aware at the time they issued the public guidance,

several hospitals had cancelled their orders for new RIO system orders in December 2011 and

January 2012. Specifically, CW6 recalled reviewing at least two internal memoranda sent by

senior management, one in December 2011 and one in January 2012, that revealed that several

hospitals had cancelled their RIO system orders and that RIO sales would be down as a result.

According to CW6, these memoranda were stamped “Confidential” and circulated Company-

wide to all MAKO employees, including Individual Defendants. CW6 explained that these

memoranda did not disclose the exact names of the hospitals that had cancelled their orders, but

instead described them by geographical region. For example, CW6 recalled that these

memoranda had stated that two hospitals in the Columbus, Ohio area had decided not to purchase

the RIO systems. According to CW6, the primary reason that these hospitals elected to cancel

the anticipated orders was the high price of the RIO systems.

10 In that position, CW6 was responsible for creating and executing test protocols on the software used in MAKO’s RIO system.

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D. Defendants, Aware of Adverse RIO Sales and Procedures Trends in February 2012, Nevertheless Continue to Publicly Reiterate Their False and Misleading 2012 Guidance in March and May 2012

137. CW4 stated that in the first quarter 2012, it became apparent internally that

MAKO’s public 2012 guidance of 56 to 62 RIO sales and 11,000 to 13,000 procedures were

unrealistic after the year started off particularly slowly, in terms of both RIO system sales and

procedures. CW4 explained that although the first quarter was generally slower than later

quarters for MAKO’s RIO sales and procedures, the slow start in 2012 was “atypical.” CW4

added that MAKO maintained and circulated by email, across various departments, internal

documents tracking procedures, utilization rates, RIO system sales and other metrics, which

would have alerted senior management to a decrease in these metrics. According to CW4, this

data was compared to the trending history in previous years. Thus, CW4 stated, MAKO’s

internal tracking had revealed by the end of February at the latest that in the beginning of 2012,

its RIO sales and procedures numbers had slowed significantly, more so than in prior first

quarters.

138. CW4 explained that MAKO’s senior management, for example Defendant

LaPorte, as described further below, grew “very concerned” in February 2012 because the

number of procedures done by existing customers, or the utilization rate, had decreased

significantly in January and February 2012. In addition, CW4 stated that sales of the RIO

systems were very slow in this same time frame, as was widely known within MAKO at the

time. Nonetheless, Defendants kept this information of slowed sales trends hidden from

investors for months, while reiterating the overstated January guidance on several occasions in

March 2012, failing to revise the RIO sales guidance until May 7, 2012 and the procedures

guidance until July 9, 2012.

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139. Defendants, and in particular Defendant LaPorte, were aware of MAKO’s sales

and procedures slowdown in the beginning of 2012 as early as February. According to CW4,

Defendant LaPorte approached CW4, asking CW4 to investigate why partial knee procedure

numbers were down in the beginning of 2012, lower than in prior years at the same time period.

According to CW4, LaPorte was concerned about these decreased procedures numbers, i.e. the

utilization rate, and requested that CW4 look into this problem because of the latter’s

responsibilities for partial knee MAKOplasty market research. CW4 stated that CW4 used the

“Surgeons Summit” in March 2012, a marketing event sponsored by MAKO for orthopedic

surgeons performing MAKOplasty procedures, to survey surgeons as to the reasons for the

decreased PKA procedures and utilization trend in the beginning of the year. CW4 stated that

CW4 surveyed the attending surgeons, who were a small pool of early adopters and supporters of

MAKO’s RIO technology, and therefore not representative of the majority of the orthopedic

community that did not buy into the MAKOplasty solution. CW4 found various, general

explanations for the procedures slowdown, such as February being a short month (particularly,

given a week-long orthopedic surgeons’ meeting in February when the surgeons were not

performing surgeries) and a historically slow month for orthopedic procedures; and the general

slow-down in the economy. However, according to CW4, one of the primary reasons

emphasized by the surgeons for the procedures slow-down was that patients were not asking for

MAKOplasty procedures. This lack of patient demand was a significant factor that could

contribute to procedures volume shortfall that CW4 had previously warned about in his or her

August 2011 presentation. CW4 summarized these findings in a report that CW4 emailed to

Defendant LaPorte and Delevic. CW4 did not receive a response from either.

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140. Thus, despite this specific knowledge of these materially slowed sales trends for

RIO systems and procedures evident as early as February 2012, Defendants, nevertheless

persisted in reaffirming their false and misleading 2012 annual guidance for both RIO sales and

procedures in March 2012 and May 2012, as alleged in greater detail in Sections VI. and VII.

infra .

V. ADDITIONAL ALLEGATIONS SUPPORTING THE INDIVIDUAL DEFENDANTS’ SCIENTER

141. At all relevant times, the Individual Defendants acted with scienter in making

materially false and misleading statements during the Class Period. Each of the Individual

Defendants had actual knowledge that the statements made by him were false and misleading, or

acted with deliberately reckless disregard for the truth or falsity of those statements. Each of the

Individual Defendants’ intent to deceive, or deliberately reckless disregard for the truth, is

demonstrated by substantial direct and circumstantial evidence supporting a strong inference of

scienter. As alleged herein, Defendants, by virtue of their receipt of information reflecting the

true facts regarding MAKO, their control over, and/or receipt and/or modification of MAKO’s

allegedly materially misleading misstatements participated in the wrongful scheme alleged

herein.

A. RIO Systems Sales and MAKOplasty Procedures Were MAKO’s Core Business During the Class Period

142. During the Class Period, the Company’s MAKOplasty solution, meaning its RIO

system technology and MAKOplasty procedures (including sales of related implants and

products used in these procedures, as well as RIO maintenance services), was the core of

MAKO’s business. MAKO does not market any other products or services that are unrelated to

its RIO system and MAKOplasty procedures. Indeed, MAKO’s description of itself in the

“Corporate Profile” section of the Company’s website clearly demonstrates that the RIO system

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sales and MAKOplasty procedures, with their related implant sales, were its core and only

business: MAKO is “an innovative medical device company that markets both its RIO® Robotic

Arm Interactive Orthopedic System and proprietary RESTORIS® family of implants to surgeons

for a procedure called MAKOplasty® that provides a less invasive method for knee resurfacing

and a new procedure for Total Hip Arthroplasty.”

143. In fact, all of MAKO’s revenue is generated from three sources, which all involve

the RIO system and the MAKOplasty procedures it is used to perform: 1) unit sales of the RIO

system, including the MAKOplasty PKA and THA applications; 2) sales of associated implants

and disposable products required for each MAKOplasty procedure; and 3) sales of warranty and

maintenance services for the RIO system. RIO system sales and procedures ( i.e. associated

implant and product sales) account for the vast majority of MAKO’s revenue. For example, RIO

system sales generated $43.9 million or approximately 52% of MAKO’s total revenue of $84.5

million in 2011, while procedures accounted for $34.6 million or approximately 41% (with

service plans generating only $5.9 million or about 7%). See 2011 Form 10-K at 76.

Additionally, the Company’s direct sales force was completely devoted to either RIO system

sales or MAKOplasty procedures and implant sales.

144. The Individual Defendants also publicly described its MAKOplasty procedures,

which are enabled by the RIO system, as its core business. For example, on March 14, 2012,

during the Barclays Capital Global Healthcare Conference, Defendant LaPorte, in discussing the

Company’s business, characterized the partial knee MAKOplasty procedures, which were its

only type of procedures until the total hips application launch in September 2011, as its “core

business:” “We have a lot on our plate right now with the hip launch and focusing on continuing

to drive that adoption and our core business with the partial knee.”

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145. Moreover, during the March 6, 2012 Q411 conference call, LaPorte emphasized

that MAKO was “highly focused on our current business of partial knees and total hip” and Ferré

echoed LaPorte’s remarks by saying “we are highly focused on partial knee and total hip in

2012.”

146. Defendants Ferré and LaPorte, in their capacities as senior executive officers of

the Company, were directly responsible for these core operations, including the volume of RIO

system sales and MAKOplasty procedures and related guidance provided to investors.

B. Individual Defendants Closely Monitored RIO Systems Sales and Volume of MAKOplasty Procedures and Related Guidance

147. Consistent with the centrality of the RIO system technology and MAKOplasty

solution to its revenues and operations, the Individual Defendants closely monitored the

Company’s volume of RIO system sales and MAKOplasty procedures, and associated implant

sales, as well as related guidance issued to investors.

148. Defendant Ferré publicly held himself out as a hands-on CEO who regularly and

personally scrutinized information concerning MAKO’s RIO system sales trends and guidance.

For example, during the May 7, 2012 earning conference call, in discussing the RIO sales

shortfall during the first quarter 2012, Defendant Ferré asserted: “I have personally spent a great

deal of time looking and understanding what happened in the quarter, just like I do every

quarter.” During the call, Ferré further emphasized his personal involvement in and careful

analysis of the RIO system deals that he claimed were still in MAKO’s sales “funnel” in

explaining his confidence in meeting MAKO’s revised guidance: “I personally have gone

through a lot of these deals and look at it and drilled down and see where they are. And I feel that

the fundamentals are in place.”

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149. Moreover, on the May 7 call, Ferré explained that in calculating MAKO’s RIO

sales guidance, Defendants carefully analyze its RIO sales funnel using metrics such as closing

ratios, which he received and reviewed regularly: “[T]o give you some perspective, how we set

guidance, we always -- we have always analyzed our sales funnel and assigned certain, what we

call closing ratios, based on the prospects and the status of our sales funnel.” Therefore,

Defendant Ferré received and closely monitored data regarding such RIO system sales available

to him on a regular basis, further demonstrating that he had knowledge of, or recklessly

disregarded the true, adverse trends of RIO system sales, as alleged supra in Section IV.D.,

which rendered his and the other Defendants’ public statements regarding MAKO’s positive

sales trends and guidance false and misleading.

150. Moreover, MAKO’s former employees confirm Ferré’s public statements that he

was significantly involved in overseeing MAKO’s RIO systems sales and procedures.

According to CW4, Ferré held regular meetings with the Company’s Senior Vice Presidents,

including Nunes and Delevic, both of whom reported directly to him, to discuss MAKO’s sales

and procedures status and planning as well as other operations. Similarly, CW3 stated that the

FINS team, comprised of the Company’s Senior Vice Presidents, including LaPorte, Delevic,

and Nunes, met with Ferré on a weekly basis to discuss key company sales and marketing

information (among other business matters), including RIO sales, procedure and utilization rate

metrics, the strength of sales leads, the number of customers in the sales pipeline, and similar

information.

151. Additionally, CW4 stated that MAKO maintained and circulated by email, across

various departments, internal documents tracking procedures, utilization rates, RIO system sales

and other metrics, which were compared to the trending history in previous years and showed

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when abnormal sales and procedures trends occurred, as for example in early 2012. Therefore,

according to CW4, these tracking documents that were circulated would have alerted senior

management, including Individual Defendants, to a material decrease in RIO sales and

procedures volume.

152. Defendant LaPorte was also described by former employees as a hands-on CFO

who carefully monitored MAKO’s core operations of RIO system sales and procedures. For

instance, CW4 explained that in LaPorte’s position as CFO he acts as “the guy who raises red

flags” because he keeps his finger on the “pulse of the dollars coming in and out.” According to

CW4, it was in this hands-on capacity of monitoring potential problems that would impact

MAKO’s financial results, that LaPorte tasked CW4 with investigating the decrease in

MAKOplasty procedures in early 2012 after becoming concerned by the atypically low numbers

that were reported internally at the time, a significant trend that wholly undermined the

Defendants’ rosy guidance.

153. Further, according to CW3, both Ferré and LaPorte attended QBR meetings.

Ferré chaired and led these QBR meetings, while LaPorte presented the prior quarter’s financial

results and the Company’s financial projections for upcoming periods. During these QBR

meetings, management from each of the Company’s groups also presented the data from the

prior quarter, challenges, and their strategies going forward for their respective groups. These

quarterly meetings allowed Ferré and LaPorte to closely monitor the state of RIO sales and

procedures and challenges the Company faced in meeting its annual guidance.

154. Further, in December 2011 and January 2012, CW6 reviewed at least two internal

memoranda that were circulated Company-wide to all MAKO employees by senior management

stating that several hospitals had cancelled their RIO system orders and that RIO system sales

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would be down as a result. Individual Defendants, who were MAKO’s senior executives,

therefore had knowledge of, or consciously disregarded, the Company’s weakened pipeline for

RIO system sales in late 2011 and early 2012, which showed that the Company would not be

able to meet RIO system sales goals.

155. Taken together, the central importance of MAKO’s RIO system sales and

MAKOplasty implants and procedures as the Company’s core business, as the Individual

Defendants repeatedly affirmed to the public, these Defendants’ active and close monitoring of

such RIO sales and procedures, and their corporate positions, duties, and access to detailed

corporate information, raise the requisite strong inference of scienter. These allegations, alone or

together with others herein, raise an inference that is cogent and at least as compelling as any

plausible competing inference, that the Individual Defendants, at the time they made the material

misstatements or omissions alleged herein, knew the true, undisclosed facts with respect to RIO

system and MAKOplasty procedures sales trends and guidance or, with respect to allegations of

representations of current or historical facts, recklessly disregarded those facts.

VI. DEFENDANTS’ MATERIALLY FALSE AND MISLEADING STATEMENTS DURING THE CLASS PERIOD

A. January 9, 2012 Press Release

156. The Class Period begins on January 9, 2012, just over a week into the first quarter

of 2012. Prior to the market opening that day, MAKO issued a press release titled “MAKO

Surgical Corp. Reports Selected Operating Results for the Fourth Quarter and Full Year 2011

and Announces 2012 Annual Guidance,” pre-announcing its selected operating results, including

the number of RIO systems sold and MAKOplasty procedures performed, for the fourth quarter

and full year ended December 31, 2011 (“4Q11 and FY11”). The press release touted strong

sales of the Company’s RIO Systems and purported strong interest in MAKO’s new hip

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application. It also provided optimistic 2012 annual guidance of 56 to 62 RIO Systems sales

(compared to 48 sold in 2011) and 11,000 to 13,000 MAKOplasty procedures (compared to

6,932 performed in 2011), which represented substantial increases from the 2011 figures and

beat some analysts’ estimates:

“We are pleased with our strong RIO system sales and the interest in our hip application during the fourth quarter. In addition, we believe the increased MAKOplasty procedure volume and utilization trends continue to demonstrate the clinical value of our technology” said Maurice R. Ferré, M.D., President and Chief Executive Officer of MAKO. “2011 was a positive year for MAKO and we look forward to continuing to drive the adoption of MAKOplasty in 2012.”

2012 Annual Guidance

MAKO anticipates that it will sell 56 to 62 RIO systems and that its customers will perform 11,000 to 13,000 MAKOplasty procedures in 2012. 11

157. The significant increase in projected sales in 2012 over the strong results achieved

in 2011 was impressive by itself, and even more so when considering that the 2011 total unit

sales included a bulk order for eleven RIO systems from HMA, announced by MAKO in March

2011. See Section IV.B.1, supra. This HMA bulk order represented almost a fourth of MAKO’s

48 RIO systems sales in 2011. MAKO provided no reason for any expectation that it would

enter into any similar bulk sales contract with any large hospital system in 2012.

158. As some analysts noted, MAKO had pre-announced its aggressive 2012 annual

guidance well ahead of its complete 4Q 2011 results earnings call, scheduled for March 2012,

contrary to its practice in prior years. For example, a January 10, 2012 Summer Street Research

Partners analyst report pointed out: “Unlike prior years, MAKO did not wait for its 4Q11

earnings call to provide annual guidance.” Defendants were apparently eager to release

11 Throughout this Complaint, emphasis in quotations is added, unless otherwise noted.

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MAKO’s inflated annual guidance, knowing that it would boost the market’s confidence in the

Company and accordingly its stock price, notwithstanding undisclosed facts that should have led

them to be more cautious, not less so, and should have counseled awaiting how events were

playing out before publicly projecting significant advances in its RIO sales.

159. Indeed, Defendants’ 2012 annual guidance in their January 9, 2012 press release,

see ¶ 156, was materially false and misleading when made because Defendants lacked a

reasonable basis for making it and were aware of undisclosed, adverse facts tending to seriously

undermine the validity of the issued guidance, including:

(a) MAKO’s recognition of 4-6 RIO system sales in 2011 under highly

unusual circumstances, the absence of which would have meant that the sales would be counted

toward 2010 results, thereby artificially distorting and inflating the baseline for 2012 guidance,

which was premised substantially on 2011 sales figures;

(b) HMA’s 2011 bulk-order contract for 11 RIO sales, which accounted for

almost a fourth of MAKO’s 2011 RIO sales, was a marketing tool by HMA and an anomaly

unlikely to be replicated in 2012, with many of the hospitals essentially “dead accounts” that had

zero or minimal utilization of the RIO by surgeons, rather than a harbinger of substantial

increased interest in and sales of the RIO systems and increased MAKOplasty procedures,

further distorting the 2011 baselines for 2012 guidance;

(c) The launch of the THA application in 2011 resulting in an influx of sales

to early adopters, who long ago had expressed interest in purchasing the application, without any

indication that there was an equal or greater number of hospitals and medical facilities with an

equal interest in as quickly acquiring the system, providing another distortion to the baseline for

2012 guidance;

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(d) MAKO marketing personnel’s internal analysis demonstrating as early as

August 2011 that, in fact, the Company’s high RIO sales and procedure goals for 2012, based in

substantial part on the new THA application driving increased sales and procedures, were

unreasonable, given the low surgeon interest in MAKO’s new THA application, other than

among early adopters, due to, among other reasons, a lack of clinical benefit, the significantly

longer surgery time, and the Company’s limited and unpopular hip implant offerings;

(e) MAKO’s declining RIO sales and utilization rate trends, evident as early

as the first quarter of 2011, due to low surgeon “buy-in” for the benefits of MAKO’s RIO system

and PKA MAKOplasty over conventional, manual knee procedures, particularly, given the

RIO’s “buggyness” and longer surgery time;

(f) MAKO’s manipulative use of MAKOplasty “super centers” to ramp up

procedures numbers and thus conceal the low and continually declining utilization rate across its

installed base;

(g) MAKO marketing personnel’s internal analyses demonstrating as early as

August 2011 that the pool of surgeons who sufficiently believed in MAKO’s technology to act as

early adopters was exhausted, leaving mostly others who were skeptical and preferred to wait for

clinical long-term evidence of net benefits, a market saturation problem exacerbated by

territorial exclusivity agreements MAKO signed with many hospitals that had previously agreed

to purchase the system, as well as the very high price for the system.

(h) The depletion of MAKO’s sales pipeline for RIO systems in December

2011 and heading into 2012; and

(i) The cancellation of RIO system orders by several accounts in December

2011 and beginning of 2012, further demonstrating the declining RIO sales trends.

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160. Analysts reacted positively to MAKO’s inflated guidance, reassured of the

Company’s continued ability to sell a high volume of RIO systems and expand the adoption of

MAKOplasty in 2012, even without the benefit of a bulk RIO systems order. As Matthew

O’Brien of William Blair wrote in his report later that day, entitled “Select Fourth Quarter

Operating Results and 2012 Guidance Imply Continued Strong Demand for RIO and

Makoplasties:”

MAKO provided 2012 guidance, which calls for between 56 and 62 systems sold and 11,000 to 13,000 procedures performed on the robot, which are both ahead of our previous estimates (54 systems in 2012, with 11,000 Makoplasties). We expect this guidance range will quell growing concerns about MAKO’s ability to sell robots during 2012 without the benefit of the HMA contract. Overall, we view the company’s 2012 guidance as a reflection of the strong demand for robotically assisted orthopedic procedures, and we continue to expect use of these systems and techniques to expand significantly in the coming years.

161. Piper Jaffray & Co. analysts similarly viewed MAKO’s positive 2011 sales results

and 2012 guidance as assuaging investors’ concerns about MAKO’s continued ability to achieve

high RIO system sales in 2012 even in the absence of any bulk sales orders with large hospital

systems (such as the HMA contract in 2011):

MAKO reported better than expected robots, implants and hip systems, and provided in line 2012 guidance. As a result of the announcement, we expect some of the high-end outlier estimates to come more closely in line with management’s guidance, and we expect some of the noise and concerns to ease regarding the company’s ability to consistently place new systems at a healthy clip regardless of the gives and takes around sales agreements with larger hospital systems. We reiterate our Overweight rating on MAKO, and view the stock as attractive at current levels.

162. The market also reacted favorably to MAKO’s false and misleading announced

guidance. On January 9, 2012, MAKO’s stock closed at $31.07, rising almost 8% or $2.29 per

share from the prior trading day’s closing price of $28.78.

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B. March 6, 2012 Press Release

163. After the market closed on March 6, 2012, Defendants issued a press release

reporting complete 4Q11 and FY11 operating results, many of which ( e.g. , RIO system sales and

MAKOplasty procedure volume) had been previewed in its January 9 press release. In

particular, the March 6 press release reiterated MAKO’s increased RIO system sales and

Defendants’ expectations that these positive results would continue in 2012:

“We are pleased with our strong operating results for the fourth quarter and the full year 2011, particularly our 91% growth in revenue from the prior year . In addition, we believe the increased level of RIO system sales, initial interest in our hip application, increased MAKOplasty procedure volume and utilization trends point to the clinical value of our technology ” said Maurice R. Ferré, M.D., President and Chief Executive Officer of MAKO. “We anticipate that our positive results in 2011 will carry

forward into 2012 as we continue to drive the adoption of MAKOplasty.”

164. Defendants’ statements in the March 6 press release, see ¶ 163, supra, touting its

increased RIO system sales and financial results as indicative of MAKO’s ability to continue to

have unimpeded success in 2012 in achieving its sales goals, which were earlier specifically

stated on January 9, 2012 and not changed in the March 6 press release (leading investors to

believe they remained in place), and were repeated later on the same the day as the March 6

press release (as alleged in detail below), were materially false and misleading and lacked a

reasonable basis when made because they failed to disclose the adverse facts, among others,

which were known to Defendants at that time that are listed in paragraph 159, supra, as well as

the fact that there was a materially slowed sales trend for RIO systems and procedures (in

particular, a substantial drop in the utilization rate) at the beginning of 2012, which was atypical

even by first quarter standards, already evident internally by the end of February 2012 and

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troubling enough for Defendants, particularly LaPorte, to task a marketing manager to

investigate the decrease with respect to procedures.

C. March 6, 2012 Earnings Conference Call

165. Following the press release, on March 6, 2012, Defendants held an earnings

conference call reiterating MAKO’s strong financial results for 4Q11 and FY11 and 2012 sales

and procedure guidance. Defendant LaPorte reaffirmed MAKO’s 2012 annual guidance during

the conference call as follows:

Turning to guidance, we are continuing to provide annual guidance on RIO System sales and total annual MAKOplasty procedures. As stated in our January 9 press release, we anticipate that in 2012, we will sell 56 to 62 RIO Systems worldwide and, similar to prior years, we expect that one-third of system sales will occur in the first half of the year and two-thirds will occur in the second half of the year. We also anticipate that our customers will perform 11,000 to 13,000 MAKOplasty procedures and we expect that 40% of these procedures will be performed in the first half of the year and 60% will be performed in the second half.

166. During the call, Defendant Ferré reaffirmed MAKO’s positive sales and

procedures results, and stressed his confidence in MAKO continuing these trends into 2012 and

meeting its 2012 guidance:

I am pleased with the progress we’ve made in the fourth quarter and 2011 as a whole. In particular, I’m encouraged by the new RIO System placements, the sale of hip applications, MAKOplasty procedure volumes, and utilization that we are experiencing in these markets. Specifically, we sold 18 RIO Systems in the quarter. 16 of these were installed in domestic commercial sites, increasing our install base of domestic commercial systems to 111, up from 95 at the end of the third quarter of 2011. For the fourth quarter, we sold 48 systems worldwide, which was above our original guidance of 40 to 46 systems, and at the top end of the revised guidance of 44 to 48 systems.

* * *

As we look forward to 2012, I remain confident that the pieces are in place that can allow us to achieve our goals for the year and continue to grow our business . We look forward to keeping you updated on our progress.

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167. Later during the conference call, Ferré continued to express his confidence in

2012 annual guidance when questioned by JPMorgan analyst Kim Gailun:

Kim Gailun – JPMorgan - Analyst

So I guess, first question on your systems guidance, the 56 to 62, consistent with your preannouncement and what you said back in January. Curious on whether you can give us any color on the demand you’re seeing through the sales channel, how you’re feeling about that guidance, particularly with the [streak] toward the upper end. And part of that is, how many of those systems you are expecting to come from International side?

Maurice Ferré - MAKO Surgical Corp - President, CEO and Chairman

So Kim, I think that this year, we did give our guidance earlier than we did the year before, or in prior years. I think that it’s fair to say that from our perspective, we still feel very confident about the numbers. And we also gave in our prepared remarks the way that it’s going to break up. We think it’s similar to be a one- third/two-third. Coming out of the Academy, specifically for those

that were there, it was remarkable how backed our booth was.

We had so many presentations. We had over 30 presentations going on and it was deep into doctors seeing this technology. And I think that we’ve been able to expand the size of our sales force,

where now we have 30 selling systems and I think that a combination of all these things and knowing where we are in the year and the funnel, I think we’re still feeling pretty confident about the guidance that we gave. And with regards to the International side, I think it’s fair to say that’s probably going to be consistent with what it’s been in prior years, which we think is about 10%.

168. Defendant Ferré’s statements during the March 6 earnings call, see ¶¶ 165-167,

supra, touting MAKO’s continued strong RIO system sales and MAKOplasty adoption trends as

indicative of MAKO’s ability to continue to have unimpeded success in 2012 in achieving its

sales and procedures goals, were materially false and misleading when made because they failed

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to disclose the adverse facts, among others, which were known to Defendants at that time, that

are listed in paragraphs 159 and 164, supra.

169. Further, Defendants’ statements during the March 6 earnings call reaffirming and

expressing their “confidence” in MAKO’s 2012 annual guidance, see ¶¶ 165 and 167, supra,

were materially false and misleading when made because Defendants lacked a reasonable basis

for the guidance provided and were aware of the preceding undisclosed facts, see ¶¶ 159 and

164, supra, tending to seriously undermine the validity of the issued guidance.

170. The news of MAKO’s full operating results for 2011 and its 2012 guidance was

no surprise to analysts since the Company had pre-announced its key results and annual guidance

in early January. All in all, analysts were reassured that MAKO was on track to reaching its

2012 guidance. For example, on March 7, 2012, William Blair’s research note titled “Fourth

Quarter Results Better Than Expected; Story Remains on Track,” stated:

MAKO placed 18 systems during the quarter, which beat our previous target by two units. Additionally, the company sold 37 hip upgrades during the quarter (roughly 44% of the installed base had the hip application at the end of 2011), which we view as a compelling sign for the adoption of this key new application in the coming quarters.

We continue to view MAKO’s RIO system as a highly differentiated, platform technology that helps hospitals generate incrementally higher revenues, which should result in strong system placements and procedure volumes in the coming quarters. While the stock trades at a premium valuation, we believe it is warranted, and we recommend investors start positions in this dominant provider of robotic surgery and become increasingly aggressive on any pullbacks. We rate the stock Outperform.

171. Similarly, a March 6, 2012 Canaccord Genuity analyst report viewed MAKO’s

reaffirmance of its RIO system sales guidance and “steady” RIO systems sales growth, in line

with the results pre-announced in January, as positive indicators for MAKO’s prospects:

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Guidance for 2012 was reiterated with 56-62 systems and 11,000- 13,000 procedures, but note system sales are back end-loaded.

* * *

Box sales growth steady as she goes, consistent growth guidedfor 2012 – System sales were in line with preliminary results (16 US, 2 OUS). We do note that the revenue strength in the quarter was driven in part by strong upgrades to the hip application, which presented upside to initial expectations. We note there were 28 hip system upgrades in the quarter with an average ASP of $165,000 (vs. our estimate of $134,000). The ASP is in line with previous management guidance for a range of $100,000-$200,000, and up from $134,000 in the Q3/11. Management guided for system sales of 56 – 62 in 2012, noting it anticipates finishing 2012 with 50% of installed systems utilizing the hip applications.

D. March 14, 2012 Barclays Capital Global Healthcare Conference

172. On March 14, 2012, almost a week after MAKO filed its 2011 Form 10-K,

Defendant LaPorte participated in the Barclays Capital Global Healthcare Conference. At this

conference, LaPorte continued to mislead investors by confirming MAKO’s 2012 guidance

figures:

Our guidance has been focused on two key metrics -- system placements and procedures. We give annual guidance, not quarterly guidance. Particularly on the systems sales side quarterly could be lumpy, a little harder to predict.

But for 2012 our annual guidance for system placements is 56 to 62 RIO systems. We sold in total 48 in 2011. From a procedure standpoint it is 11,000 to 13,000 procedures; again we did just under 7,000 last year.

173. Moreover, in response to a Barclays analyst’s questions about RIO system sales

and the challenging capital spending environment, LaPorte reassured investors that market

factors such as potential healthcare reforms were factored into the Company’s guidance and that

hospitals were continuing to invest in capital such as MAKO products that provide “a good

economic story and return on investment”:

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Matt Taylor - Barclays Capital - Analyst

Just in terms of the US environment for capital spending, there's a lot of questions I'm sure about the health of hospitals and their ability to spend incremental capital. So tell us a little bit about your experience with the environment, and the interest you have seen, and what gives you confidence in that placement guidance this year for a lot of those hospitals that are -- will be taking on additional systems?

Fritz LaPorte - MAKO Surgical Corp.- SVP Finance & Administration, CFO, Treasurer

Sure. In our relatively short commercialization history we have been in a challenging environment since day one as it relates to hospital CapEx spending. So clearly 2009 was probably the tightest and most challenging period. We do see that improving.

I think hospitals are still keeping tight purse strings on their overall spending, and as you alluded to I think, with a little bit of uncertainty around where healthcare and the reform might go ultimately. But we are seeing them continue to invest in capital

that has a good economic story and return on investment.

I think that is where [we are] with our partial knee business -- and hopefully we can demonstrate that as well in hip -- that we provide that value and have continued to see in all those macroeconomic environment considerations, to the extent we can predict them or understand where they might be going, are all factored into our guidance.

174. Defendant LaPorte’s statements reaffirming MAKO’s 2012 annual guidance, see

¶ 172, supra, were materially false and misleading when made because he lacked a reasonable

basis for the guidance provided and was aware of adverse, undisclosed facts tending to seriously

undermine the validity of the issued guidance, including those listed in paragraphs 159 and 164,

supra.

175. Further, LaPorte’s statements made during the Barclays conference, see ¶ 173,

supra, that hospitals were continuing to invest in capital equipment such as MAKO’s RIO

system that provide “a good economic story and return on investment” with respect to its partial

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knees business, and that any such capital expenditure issues were factored into MAKO’s

guidance were materially false and misleading when made because, in fact, MAKO had been

experiencing materially slowed RIO system sales trends by this time, in substantial part because

hospitals were increasingly reluctant to invest in the expensive RIO system due to the low

surgeon “buy-in” for the benefits of MAKO’s RIO system and PKA MAKOplasty over

conventional, manual knee procedures, particularly, given the RIO’s “buggyness” and longer

surgery time, which was wholly at odds with the implied representation that generally hospitals

found the RIO system represented a “good return on investment.”

176. Defendants’ repeated positive statements in March 2011 touting MAKO’s healthy

RIO system sales and optimistic 2012 guidance continued to buoy MAKO’s stock price, which

reached its Class Period closing high of $44.98 on March 26, 2012, less than two weeks after the

Barclays conference. In fact, MAKO’s Class Period high of $44.98 represented a stunning 56%

or $16.20 increase from its closing price of $28.78 on the last trading day before the January 9

press release.

177. In early May 2012, leading up to MAKO’s announcement of its first quarter 2012

(“1Q12”) operating results, analysts remained enthusiastic about the Company, expecting to see

strong quarterly sales results and successful execution on its 2012 guidance. For example, a May

4, 2012 Piper Jaffray & Co. analyst report reiterated the analysts’ “Overweight” rating and $50

share price target for MAKO, explaining:

We view MAKO as well-positioned to outperform the market over the weeks following Q1 results, driven by the upcoming launch of its recently-approved Pipeline hip and successful execution on 2012 guidance. Our historical analysis supports our view, showing on average over 2,000 bps of upside relative to the S&P 500 following Q1 over the past three years (please see Exhibit 2 on page 3). Given the substantial short interest in MAKO and the difficulty in predicting quarterly robot placements, the stock typically

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discounts a miss heading into results. We suspect this is true at current levels, and expect the stock to trade well on robot placements simply within the range of expectations (consensus +/- 2 robots), supported by procedures, utilization, pricing and hip system conversions. We reiterate our Overweight rating on MAKO and $50 target, and remain buyers of the stock ahead of Q1 results next week.

VII. INVESTORS SUFFERED DAMAGES AS THE TRUTH BEGINS TO EMERGE BUT DEFENDANTS PERPETUATE THEIR FALSE AND MISLEADING STATEMENTS, BLUNTING THE FULL IMPACT OF THE FIRST CORRECTIVE DISCLOSURES

178. Lead Plaintiffs’ claims for securities fraud are asserted under the fraud on the

market theory of reliance, or alternatively the Affiliated Ute doctrine, alleged infra at Section

XII. The market price of MAKO common stock traded on the NASDAQ was artificially inflated

by the false and misleading statements and material omissions complained of herein, including

MAKO’s misleading statements and omissions about its RIO systems sales and 2012 annual

guidance as to the systems, and the other matters complained of herein. Defendants’ false

statements and omissions inflated the price of MAKO’s common stock and maintained that price

at a higher level than would have resulted from disclosure of the true condition of MAKO’s

operations and prospects.

179. The Class Period inflation in MAKO’s stock price was removed when the

conditions and risks concealed by Defendants’ scheme were revealed or otherwise materialized

themselves to the market. The information was disseminated through several partial disclosures

on two separate occasions, May 7, 2012 and July 9, 2012, that revealed the true nature of

MAKO’s slowing RIO system sales and inflated 2012 RIO systems sales guidance. These

disclosures on May 7 and July 9, 2012, more particularly described below, reduced the price of

MAKO’s common stock, causing economic injury to Lead Plaintiffs and other members of the

Class.

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180. However, the corrective impact of the disclosures on May 7 alleged herein was

tempered by Defendants’ continued false and misleading statements, both on May 7 and after,

about their confidence in MAKO’s ability to improve its sales and meet its revised 2012

guidance. These continued misrepresentations maintained the price of MAKO stock at a level

that was inflated by the fraud, inducing Class members to continue purchasing shares in MAKO

even after the May 7 disclosures of poor sales and reduced guidance, and leading to further price

declines later upon the disclosure of additional information about the true condition of MAKO’s

sales trends, causing additional injury to the Class. 12

181. The risks and conditions concealed from investors by Defendants’ scheme to

defraud the public reached the market through a series of partial disclosures on May 7, 2012 and

July 9, 2012. Each of these disclosures revealed some of the risks and conditions concealed by

Defendants’ fraudulent scheme, or the financial, legal, and operational consequences thereof,

causing the price of MAKO stock to decline, and reducing the extent to which the price of the

stock was inflated by Defendants’ misrepresentations, thereby causing economic injury to Lead

Plaintiffs and other Class members.

182. The disclosures on May 7, 2012 were insufficient on their own to fully remove

the inflation from MAKO’s stock price, because each only partially revealed the risks and

conditions that had been concealed from investors, which would not be fully revealed until July

9, 2012. In addition, the individual corrective impact of these disclosures on May 7, 2012 was

reduced by Defendants’ contemporaneous false assertions that the slowing sales were merely a

transient issue and that MAKO would be able to meets its revised annual sales guidance.

12 The inflationary and corrective events identified and described herein are based upon Lead Plaintiff’s preliminary analysis, and investigation to date. Upon further investigation, discovery, and analysis, Lead Plaintiff may alter or amend its theory of damages, including by identifying additional inflationary or corrective events that caused or contributed to the damages claimed in this action.

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A. May 7, 2012 Press Release

183. The first partial disclosures occurred on May 7, 2012. After the market closed on

May 7, 2012, MAKO issued a press release titled “MAKO Surgical Corp. Reports Operating

Results for the First Quarter 2012 and $50 Million Debt Funding Commitment.” The press

release revealed disappointing 1Q12 financial results that widely missed analysts’ and investors’

expectations—in particular, only six quarterly RIO systems sales (compared to analysts’ average

estimates of nine) and decreased 2012 guidance for RIO system sales by four units. Further,

while MAKO’s guidance as to the range of total number of procedures remained unchanged at

11,000 to 13,000, the average number of procedures per month (the utilization rate) in the first

quarter decreased from that performed in the fourth quarter, and the total number of procedures

in the first quarter was lower than analysts’ estimates (remaining essentially flat compared to the

fourth quarter). In relevant part, the press release stated:

RIO Systems—Six RIO systems were sold during the first quarter , of which five were sold to domestic customers and one was sold to our distributor in Japan, for use in securing regulatory approvals and to demonstrate MAKOplasty to build interest in that market. These six RIO systems bring MAKO's worldwide commercial installed base of RIO systems to 118 systems and domestic commercial installed base to 116 systems as of March 31, 2012. The revenue associated with the sale of the international system was deferred due to a contingent obligation to reimburse the distributor for the costs it incurs in the regulatory process should the agreement be terminated prior to obtaining regulatory approval. The revenue associated with this sale will be recognized upon obtaining regulatory approval.

MAKOplasty Procedure Volume—During the first quarter, 2,297 MAKOplasty procedures were performed, of which 2,219 were performed at domestic sites. Of the 2,219 domestic procedures, 211 were Total Hip Arthroplasty (THA) procedures. The 2,297 MAKOplasty procedures performed represent a 2% increase over the procedures performed in the fourth quarter of 2011 and a 76% increase over the procedures performed in the first quarter of 2011. The average monthly utilization per system was 6.6 procedures during the first quarter of 2012, a decrease from 7.2 procedures

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per system per month in the fourth quarter of 2011 and an increase from 6.2 procedures per system per month in the first quarter of 2011. Through March 31, 2012, over 15,000 procedures had been performed since the first procedure in June 2006.

* * *

“ While the first quarter is typically our slowest quarter of the year and system placements are very difficult to predict on a quarterly basis, our results this quarter were at the low end of our expectations ,” said Maurice R. Ferré, M.D., President and Chief Executive Officer of MAKO. “On the positive side, we were encouraged by the continued interest shown in our hip application and the quality and quantity of clinical data that continues to be generated that supports the clinical and economic benefit of MAKOplasty.

* * *

Outlook

Based on the slower than expected start to the year, MAKO now anticipates selling 52 to 58 RIO systems in 2012, which compares to prior guidance of 56 to 62 RIO system sales. MAKOplasty procedure guidance remains unchanged at 11,000 to 13,000 expected procedures in 2012.

184. Defendants’ revised 2012 annual guidance in their May 7 press release, see ¶ 183,

supra, though decreased by 4 units with respect to RIO unit sales, but unchanged with respect to

procedures, was still artificially inflated with respect to both metrics, and thus materially false

and misleading when made because Defendants lacked a reasonable basis for making it and were

aware of undisclosed, adverse facts tending to seriously undermine the validity of the issued

guidance, including those listed in paragraphs 159 and 164, supra, as well as CW4’s analysis at

the Upstream Marketing meeting in August 2011, at which he was the only presenter tasked with

providing a forecast for all 2012 sales of both RIO systems and MAKOplasty procedures.

Defendants found that analysis sufficiently credible that they abandoned their prior inflated

procedures goal and adopted procedures guidance closer to CW4’s conclusions. However, the

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analysis, based on substantially similar concerns also concluded that system sales in 2012 would

likely amount to units in the high 40’s or at most low 50’s, still materially below even the revised

guidance. And, with respect to procedures, Defendants were aware as early as February 2012 of

a substantial decrease in the number of procedures and the utilization rate, a slowdown abnormal

even by MAKO’s first quarter standards and troubling enough for LaPorte to task a marketing

manager to investigate the decrease, further rendering Defendants’ reaffirmed 2012 procedures

guidance in the May 7 press release false and misleading.

B. May 7, 2012 Earnings Conference Call

185. Later that day after the press release was issued, MAKO held a conference call for

investors and analysts to discuss MAKO’s 1Q12 results. Defendant LaPorte confirmed the

lowered guidance for RIO system sales based on the slow sales during the first quarter, but

reaffirmed the prior procedures guidance:

Turning to guidance; based on the slower than anticipated start to the year, we are lowering our previously issued 2012 annual guidance on RIO system sales to 52 to 58 RIO systems. This compares to our previously issued guidance of 56 to 62 RIO system sales. We continue to anticipate that our customers will perform 11,000 to 13,000 MAKOplasty procedures.

Similar to prior years, we continue to expect that approximately one-third of system sales will occur in the first half of the year and two-thirds will occur in the second half of the year. And we continue to expect that 40% of MAKOplasty procedures will be performed in the first half of the year, and 60% will be performed in the second half.

186. During the call, a Piper Jaffray analyst asked about the “robot number and the

slow start” during MAKO’s first quarter 2012. In explaining the sales shortfall, Defendant Ferré

stated that they closed fewer deals at the end of the quarter than in prior ones, and falsely

reassured analysts that the missed guidance simply amounted to delayed sales still in the

“funnel”:

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Okay, Matt. So first, let me say that obviously we were disappointed by the system placements in the quarter. And I have personally spent a great deal of time looking and understanding what happened in the quarter, just like I do every quarter. So there’s nothing inconsistent there. And how -- and really, especially the beginning of the first quarter, I look at this and how it may change our outlook for the year.

The bottomline is our analysis did not identify any, what I would call, a negative macro trends in our Business . And here are various typical reasons on the count by count basis on system sales that didn’t occur in the quarter. It’s important to note that none of these accounts fell out of our sales funnel. I would also say, I believe that the fundamentals remain strong , but we are selling expensive equipment, innovative technology in a field -- in an industry that hasn’t seen a lot of innovation. And I think that that kind of resulted in sometimes some of the unpredictability in our

Business.

Specifically, in terms of visibility, on issues -- on annual guidance, from our fourth -- from our call, our Q4 call -- from system placements perspective, we had a good start to the first quarter relative to previous first quart quarters. So we saw some of the systems kind of come in earlier. The difference this time for us was that at the end of the quarter, we just -- we didn’t expect to see as fewer [sic] closures as we normally see.

187. Ferré further discussed the reasons for the expected RIO sales not closing in

1Q12, including a “couple situations” of missed orders where the hospitals refused to buy

because of the high price of RIO systems, which MAKO refused to “budge on.” Once again, he

emphasized that MAKO had not lost any of these sales from its “funnel” and that these missed

orders were merely delayed:

Matt Miksic - Piper Jaffray - Analyst

And just, if I could, before I -- my follow-up here, I just want to make sure I understand you. You said they didn’t fall out of your funnel, but they -- did any of them -- have any of them closed? Is there any color that you can provide?

Maurice Ferré - MAKO Surgical Corp.- CEO

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I can’t provide whether they closed or not closed. But I can tell you that they haven’t fallen out of our funnel. And if you ask me, what are the type of reasons? There are typical reasons of why they fell out, some of it was a diversion of capital dollars spent. There was a hospital that had an emergency and it had to use the dollars that it was going to spend on MAKO. Nothing that’s atypical. We had an academic institution that we anticipated was going to close, but they went -- additional paperwork had to be done. And then we had another couple situations where there was some at the end, the hospital wanted to come back with reduction of price and we didn’t budge on the price . And we decided to move on to it. And I would say that none of these -- once again, none of these accounts fell out of the funnel. And from my view, I think the fundamentals still continue to be in place .

188. Again, later during the conference call, when asked how many RIO systems sales

had closed since the end of 1Q12 for the deals “that were pushed back on price,” Ferré refused to

provide an answer, but claimed that the Company’s revised 2012 guidance factored in these

sales: “I can’t give color on that. That’s something that we just don’t want to do. But I think

that what is accurate for us to say is we have recasted what we think our guidance is that

covers it. ”

189. In response to another analyst’s question about the disappointing RIO system

sales, Ferré again insisted that the shortfall was not due to macroeconomic issues in the market,

but isolated, happenstance, non-recurrent issues faced by hospitals, that MAKO still expected to

close these deals “imminently” and that MAKO’s 2012 sales projections were still “sound”:

I wouldn’t define anything that we experienced as macro, where we have seen -- where we saw in 2008, where the markets just clammed up. I don’t see that at all. What these were, were kind of - - when we looked post-mortem after the quarter ended, the deals that we anticipated were going to close, what happened? What bucket do they fall into? And they just happen to be a couple of them that fell under a situation where the hospital, for an emergency that they needed to spend additional money on equipment in the hospital -- in one case. One was an infrastructure facility that they needed and they didn’t want to incur additional - that was the money they had budgeted for that quarter. And we feel that that specific deal is on target to close

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imminently. So we don’t see that that’s like a -- it’s not going to happen.

With regards to the ones that -- the one I mentioned on an academic situation, it’s just a long, gruesome process. As you know, a lot of our deals have been done more on the community basis. So, pulling in, we want to put more of these academic centers out there. We think it’s an important thing and it’s starting to happen. We are starting to see trends that are occurring. We had a few of those that fell into that bucket of just going through the paperwork. Which is something that is -- something that we need as we continue to build out.

And we always say, sometimes you just can’t predict these things. Sometimes they fall in and we work through it. And this quarter, we just got -- we are short changed on the number of systems we anticipated. And we think that that will -- eventually, as we grow out and you look at it on a yearly basis, I think we are sound.

And I think we are consistent with -- we still believe in the consistency of the one-third/two-thirds.

190. When asked by Kim Gailun, a J.P. Morgan analyst, how the Company determines

its guidance, Ferré stated that the Company used “closing ratios,” which it had to adjust based

upon disappointing sales performance in 1Q12, resulting in the lowered 2012 guidance, and

falsely asserted that MAKO has “always given guidance where we feel is a number that we can

make:”

So Kim, to give you some perspective, how we set guidance, we always -- we have always analyzed our sales funnel and assigned certain, what we call closing ratios, based on the prospects and the status of our sales funnel. We are still relatively early in the commercialization cycle. As more data becomes available, we always refine the forecast process to be more accurate. So based on what happened in Q1, we have adjusted our anticipated closing ratios for the balance of the year, which is why we elected to lower guidance. Just put another way, what we do is we look at that closing ratio and we made an adjustment, and we felt it was appropriate to be where – we always have given guidance where we feel is a number that we can make. So that’s why we decided to go forward and change the guidance.

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191. In response to Gailun’s further questions about the lowered sales guidance, Ferré

again echoed his earlier statements that none of the deals that failed to close prior to the quarter’s

end were lost, but were “moved out,” and characterized MAKO’s decreased guidance as still

“conservative”:


Okay. So just to paraphrase, essentially, your lower guidance isn't necessarily just pushing, let's say, those three systems out of the air, it's lowering the close rate on a quarterly basis for the rest of the year.

Maurice Ferre – MAKO Surgical Corp.- CEO

Correct.


Including the 1Q shortfall?

Maurice Ferre – MAKO Surgical Corp.- CEO

Yes, I think we want to be conservative. [O]ne of the positive things that I saw out of this is that we didn’t lose anything on these deals that we thought we were going to close. It’s just that they kind of got moved out . So we thought the appropriate thing to do is -- when we looked at our sales funnel and the way we define closures that we change the ratios of closing ratios and what we anticipated and that kind of drew out a shift of about four systems.

192. When other analysts pressed Ferré about his confidence in MAKO’s ability to

achieve the forecasted sales in upcoming quarters and meet its reduced 2012 RIO sales guidance,

Ferré falsely reiterated that he was comfortable with the revised guidance given the Company’s

healthy sales funnel, and assured that “the fundamentals are in place” with respect to its sales

such that there would be not be “a significant drop off” that would impact the guidance further:

Michael Matson - Mizuho Securities - Analyst

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Okay. And then just doing some quick math, on the one-thirds/two-thirds phenomenon on your system placements; it looks like to hit the low end of your guidance range of 52 systems, you would have to do -- you would have to sell 11 systems in the second quarter, which seems like a – it’s down from last year, but it's still a pretty big step up from the first quarter. So how confident are you that you can get to that 11 system number in the next quarter ? I know you are not giving quarterly guidance. But you kind of are with the one third/two-thirds, I guess, so -- ?

Maurice Ferre - MAKO Surgical Corp - CEO

We don’t give quarterly guidance. But this is what we trended in past. And based on what we’ve looked at and looking at our funnel, that’s how we feel.

* * *

David Roman - Goldman Sachs - Analyst

Hi, good evening. Thank you for taking the question. I just wanted to follow up on the previous question, actually, Maurice. When you say you are confident that your funnel is intact and the one-third/two-third split is what you’ve done historically and you remain comfortable for that in this year; how does the level of confidence in the funnel compare to what it was a month ago?

Maurice Ferre - MAKO Surgical Corp - CEO

What we did was, we changed our closing ratios. So I think that that in itself kind of builds up the probabilities. And I personally have gone through a lot of these deals and look at it and drilled down and see where they are . And I feel that the fundamentals are in place. I don’t think that we have -- all of a sudden are going to see something significant -- a significant drop off.

Sometimes it’s just very hard to predict.

This is -- if you look at it, to be very candid, this is the first time that we have really kind of missed in our view, in terms of internally, and it’s reflective. And so we have got to take -- we’ve got to kind of regroup and say, is there anything fundamentally wrong here? And the answer is no. I go back and I look at these systems that are working and hospitals and the type of interest, the type of level, the stage of where these deals are at, in terms of we drill down in looking at these deals on a deal to deal basis. And we just have to make sure that we have enough of them in

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the funnel. And that we have our guys out there in the street doing their jobs. And we are seeing that.

193. Defendants’ statements made during the May 7 conference call referenced above

in ¶¶ 185-192 were a partial disclosure of the falsity of Defendants’ misstatements and omissions

on January 9, 2012, March 6, 2012, March 8, 2012, and March 17, 2012 regarding MAKO’s

purported continued strong sales and procedures and its positive 2012 annual sales guidance,

which lacked a reasonable basis when made. Nonetheless, Defendants’ revised 2012 annual

guidance provided in the May 7 conference call, see ¶ 185, though decreased by 4 units with

respect to RIO system sales, but unchanged with respect to procedures, was still artificially

inflated with respect to both metrics, and thus materially false and misleading when made, as

was Defendants’ expression of confidence in that revised forecast, because Defendants lacked a

reasonable basis for making the forecast and were aware of undisclosed, adverse facts tending to

seriously undermine the validity of the issued guidance, including the facts listed in paragraphs

159, 164, and 184, supra.

194. Ferré’s statement during the May 7 earnings call that “The bottomline is our

analysis did not identify any, what I would call, a negative macro trends in our Business,” see ¶

186, supra, was false and misleading when made because, among other reasons, at the time, he

was aware of MAKO’s declining RIO sales and utilization rate trends, evident as early as the

second quarter of 2011, due to low surgeon “buy-in” for the benefits of MAKO’s RIO system

and PKA MAKOplasty over conventional, manual knee procedures, particularly, given the

RIO’s “buggyness” and longer surgery time; MAKO marketing personnel’s internal analyses

demonstrating as early as August 2011 that the pool of surgeons who sufficiently believed in

MAKO’s technology sufficiently to be early adopters was exhausted, leaving mostly others who

were skeptical and preferred to wait for clinical long-term evidence of net benefits, a market

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saturation problem exacerbated by territorial exclusivity agreements MAKO signed with many

hospitals that had previously agreed to purchase the system, as well as the very high price for the

system; the depletion of MAKO’s sales pipeline for RIO systems in December 2011 and heading

into 2012; and, a materially slowed sales trend for RIO systems and procedures (in particular, a

substantial drop in the utilization rate) at the beginning of 2012, which was atypical even by first

quarter standards, already evident internally by the end of February 2012 and troubling enough

for Defendants, particularly LaPorte, to task a marketing manager to investigate the decrease

with respect to procedures.

195. Further, Defendant Ferré’s repeated statements during the May 7 earnings call

reassuring investors that the disappointing 1Q12 sales were merely a transient, happenstance

issue as a result of a few missed orders that failed to close as expected, and were not lost but only

delayed in the year, for example, “ that none of these accounts fell out of our sales funnel,” that

the “fundamentals are still in place,” and that the Company is “sound,” such that MAKO

would make up the quarterly shortfall and meet its revised 2012 RIO guidance, see ¶¶ 186, 187,

and 189 were false and misleading when made because, among other reasons, at the time

LaPorte knew or recklessly disregarded that MAKO’s sales pipeline for RIO systems had dried

up in December 2011 and heading into 2012; that several hospitals had in fact cancelled and not

just delayed their orders in December 2011 and the beginning of 2012; and that there was low

and continually declining surgeon “buy-in” for the benefits of MAKO’s RIO system and PKA

MAKOplasty over conventional, manual knee procedures, particularly, given the RIO’s

“buggyness” and longer surgery time, such that they were permanently not interested in buying

the systems, rather than merely postponing their orders.

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196. Additionally, Ferré’s statement made during the May 7 earnings call that “we

always have given guidance where we feel is a number that we can make,” see ¶ 190, supra, was

false and misleading when made because Defendants, as alleged above, had previously given

2012 annual guidance on multiple occasions, including on January 9, March 6, and March 14,

2012, that lacked a reasonable basis when made because they were aware of undisclosed, adverse

facts tending to seriously undermine the validity of the issued guidance, which are described

above in ¶¶ 159, 164, and 184.

197. As expected, the market was shocked by MAKO’s May 7 announcements of

disappointing results, particularly the missed RIO system sales and abrupt guidance revision,

which partially revealed the truth of MAKO’s poor sales trend in 2012 and, as noted below, led

to some speculation as to whether MAKO’s prior RIO systems sales guidance had lacked a

reasonable basis. The next day, May 8, 2012, MAKO’s share price plummeted $15.13 or

approximately 37% from the prior day’s price of $41.40, closing at $26.27, on unusually high

trading volume exceeding 13 million shares (compared to the average trading volume of

approximately 1.3 million shares during the Class Period). This $26.27 closing price was nearly

half of the stock’s Class Period closing high of $44.98 on March 26, 2012, which was less than

two weeks after Defendants’ last misrepresentations regarding MAKO’s strong sales and

optimistic guidance. Moreover, the $15.13 or 37% drop in MAKO’s share price represented a

market capitalization loss of more than $644 million.

198. The financial press and securities analysts were similarly stunned by MAKO’s

news. Particularly given MAKO’s continued failure to disclose the significant adverse factors

alleged above that should have cast material doubt on its 2012 sales guidance, analysts were left

to wonder whether the shortfall was attributable to MAKO’s false claims of mere happenstance

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or something more fundamental that MAKO had not as yet disclosed or acknowledged. For

example, a May 8, 2012 Reuters article titled “MAKO Shares Plunge on Weak Results, Outlook”

described prompt downgrades by Mizuho Securities and William Blair analysts:

Mako Surgical Corp (MAKO.O: Quote, Profile, Research, Stock Buzz) lost a third of its market value on Tuesday after the orthopedic device maker posted disappointing quarterly results and lowered its sales forecast for a key product.

Mako now expects to sell 52 to 58 RIO systems -- a robotic-arm interactive system used for minimally invasive knee procedures -- during the full year. It had previously forecast sales of 56 to 62 RIO systems.

“While management reduced its guidance by a small amount, we are concerned that it remains too high and see a risk of further misses and/or guidance reductions,” Mizuho Securities analyst Michael Matson wrote, downgrading the stock to "neutral" from “buy”.

Echoing Matson’s view, William Blair & Co analyst Matthew O’Brien said the revised outlook range requires a strong performance from Mako during the remainder of the year, which may prove challenging as the sales cycle appears to be showing only modest improvement.

Matson downgraded Mako shares to “market perform” from “outperform”.

Mako shares, which have gained 44 percent since the company gave an upbeat outlook for 2012 in January, fell 33 percent to $27.89 on Tuesday on the Nasdaq.

199. In a report on the same day titled “Model Not Broken but Near-Term Risks Push

Us to Sidelines; Downgrading to Market Perform,” a William Blair analyst explained their

downgrade of MAKO as based on the missed RIO system sales (and reduced sales guidance) and

missed procedures volume in the first quarter. Given these facts, the William Blair analyst

concluded that the 2012 guidance for both metrics would be “challenging” to achieve, likely

resulting in future downward revisions, in the rest of the year. In addition, the William Blair

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analyst highlighted the fact that MAKO’s new hip application roll-out was “slower” and

“shallower” than expected, warning that this would further hamper MAKO’s RIO system sales

and procedures volume and related guidance:

• Yesterday evening, MAKO reported first-quarter results that missed our targets on the top and bottom lines. Additionally, the company lowered its full-year system guidance by four units (now 52-58).

• While we do not believe the model is broken (this remains a unique, platform technology that we expect will dominate an eventual billion-dollar robotically assisted orthopedic surgery market) and understand that the first quarter is typically a seasonally soft period for the company, we believe there is a risk of additional downward estimate revisions (primarily on the procedure side of the business) in the coming quarters.

• The company only sold six RIO systems during the first quarter, which missed our target by four (we believe the Street was around nine total units). While the system choppiness is not overly surprising, the revised guidance range requires a strong performance from the company during the remainder of the year, which may prove challenging as the sales cycle appears to be increasing modestly (likely as centers require additional due diligence time related to the new hip application).

• In the quarter, 2,297 procedures were performed on the company’s robots (up 76% year-over-year but flat sequentially); this missed our target by 161. Although we were not overly concerned about the procedure shortfall in the quarter, the midpoint of management’s guidance range (maintained at 11,000-13,000) implies exceptional sequential growth in this key metric during the remainder of the year, which we believe will prove challenging with more competition emerging in the partial knee market and a shallower hip trajectory, due to the lack of a full product portfolio. Consequently, we believe procedure estimates could fall during the course of the year.

* * *

Reasons for the Downgrade [to Market Perform] Although we continue to view RIO as a game-changing technology that will dominate the sizable long-term market for robotically assisted orthopedic procedures and we try not to read too much into a single quarter, several factors make us more cautious in the

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near term, which prompted the downgrade. First and most importantly to us, the procedure performance in the quarter (2,297) was below our target (2,458). While not shockingly below our estimate, the sequential slowdown in partial knee results (essentially flat compared to the fourth quarter) was the most troubling, as growth here remains the key nearterm growth driver for MAKO. Specifically, for the company to reach the midpoint of its procedure guidance for the year, partial knees need to grow by more than 61% this year (off a difficult 92% comparison), which we believe will become increasingly difficult as it faces more competition (in the form of patient-specific instruments), higher saturation levels, and a somewhat distracted salesforce (as it focused on driving hip uptake).

Second, we believe the rollout of the hip application will be slower than initially expected. While we believe there is clinical utility to using RIO for hip arthroplasty (more-precise placement of the cup and better leg alignment for the patient), the lack of a robust implant lineup appears to be keeping some surgeons away in the near term and even pushing some to use competitive stems (the company indicated that its hip ASPs fell to $4,800 during the first quarter due to this dynamic). We anticipate the use of competitive stems will persist for several more quarters until MAKO can introduce its newer system (expected late this year). Without a full complement of compelling implants, we expect surgeons will delay trialing RIO for these procedures and that the trajectory of this important new feature will be shallower than initially expected, which will reduce case results during the remainder of this year and into 2013 as well (putting more pressure on partial knee growth to meet expectations). In aggregate, we believe reaching the midpoint of the procedure guidance range (11,000-13,000) may be difficult to achieve (though we are keeping our target there for now), which may result in additional downward estimate revisions in the coming quarters. Further, even if the company reaches the low end of its procedure guidance range for 2012, the revenue outlook for this key metric next year will likely be below current estimates (additional applications remain in the queue but are likely still more than a year from commercialization).

Third, we believe reaching the midpoint of the revised system guidance range (now 52-58 or four lower than before) could be more challenging than expected , as centers spend more time investigating the clinical aspects of the new hip application before purchasing a robot. With only six sold during the first quarter (this was not overly surprising, as it is typically the slowest period for capital purchases and additional HMA sales last year,

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skewed results a bit), meeting the midpoint of the new guidance range, requires a material pickup in unit sales during the last three quarters of the year, and management indicated that its visibility into the closing process has dimmed somewhat, which may put the full-year system placement estimate at risk (again requiring a downward revision).

200. Also on May 8, in a research report titled “Some Quarters Will Be Good, Some

Will Be Bad — This Was A Shocker,” Mark Landy of Summer Street Research Partners

described the news of slower sales as “shocking,” significantly below analysts’ average

estimates, and based upon “poor execution”:

MAKO reports a shocking quarter. RIO robot sales were dismal, with six units placed and five paid for. Our estimate was in line with consensus at nine units. The unpaid unit was sold to a Japanese distributor; payment was withheld to offset expenses incurred in the approval process. Revenue will be recognized on approval in Japan. RIO placement is the single metric investors focus on, and it is no surprise that MAKO’s market cap was slashed by 30% in aftermarket selling. While we recognize that first quarter sales are historically slower than the other three quarters, we had higher expectations for 1Q12 based on sales trends through 2011. In the quarter revenues were $19.6MM (+51%), below our estimate of $22.9MM (+76%). EPS was ($0.28), below our estimate of ($0.17). Utilization and procedures were as we forecasted.

Is something fundamentally wrong, or did MAKO just fluff the quarter? Based on competitor commentary it seems the market for capital equipment did not deteriorate sequentially, and MAKO noted it did not feel a change in market dynamics during the quarter. The shortfall was blamed on poor execution. Reasons given for the three units not closed were: 1) hospital reallocating RIO funds to an emergency infrastructure requirement, 2) academic institution needing more paperwork, and 3) hospital wanting a better price, which MAKO was unwilling to give. As MAKO reiterated guidance for six to nine units on March 6, it seems reasonable that extraneous matters and not a collapse in the capital equipment market are to blame for this quarter’s shortfall.

201. Moreover, a J.P. Morgan analyst report on the same day titled “Tough Quarter

Resets Expectations; Lowering Estimates,” also lowered its sales and revenue estimates for

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MAKO based on MAKO’s missed RIO sales results, emphasizing that while management

insisted that sales shortfall was transient, “the result of a few missed orders,” the decreased

guidance raised uncertainty on that point. J.P. Morgan also was disappointed by MAKO’s

decreased utilization rate and low procedures volume in the quarter, which missed their and other

analysts’ estimates:

This was a tough quarter for Mako, and expectations are likely to reset following: (1) a miss across both system placements and utilization; as well as (2) lower hip ASPs. The quarter points to a steady but gradual hip launch, which is consistent with management guidance as well as our physician feedback over the last several months. Management indicated that the shortfall in system placements was not a reflection of the capital spending environment, but rather the result of a few missed orders. These issues may prove transient, but the reduced guidance suggests the backlog was not strong enough to pick up the slack, at least in the near term.

Utilization was also light in the quarter as Mako reported a total of 2,297 implants [i.e. procedures], below Street consensus of 2,427. Starting with knees, total procedures were 2,008, versus our outlook and consensus of about 2,200. Management indicated that of the 18 systems added in 4Q11 (16 domestic), a good number were added late in the quarter, contributing to the lower-than- expected procedure number in 1Q12. We expect knee utilization rates to step up as we move through the year and volumes accelerate across newer centers. Procedure guidance is unchanged for the year, with Mako calling for total implants of 11,000-13,000. We are lowering our forecast to 11,600 implants versus our prior 12,300.

Mako sold a total of 211 hip implants which was 4 more than we forecast but about 26 below Street consensus . Management reiterated its comfort with prior implant guidance of 1-2 implants per system per month, with about half of the Rio installed base hip-enabled during the year. We arrive at about 1,200 hip procedures at the mid point of this range (based on an average installed base of 128 systems), and closer to 1,500-1,600 at the upper end of the range. Street consensus heading into the quarter was close to 1,600, which we think is achievable but dependent on a timely launch for new hip stem offerings (Pipeline in particular). We are lowering our hip procedure number from 1,570 to 1,420 for 2012.

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* * *

We are lowering our estimates for Mako in 2012 and beyond. We now forecast 51 system sales for 2012, just below the bottom end of guidance. We forecast total sales of $117M (+38% YOY), which is below our prior $123M forecast due primarily to our lower systems (51 vs 60) forecast. We forecast a loss per share of $0.74 versus our prior $0.67. Looking to 2013, we are lowering our sales forecast by $21M to $161 million (+37%) and increasing our expected loss per share by $0.31 to $0.59. For 2014 and 2015, we are also reducing our sales forecasts by $39M and $47M, respectively to $207 million and $265 million.

202. Additionally, on the same day, a Seeking Alpha article by Stephen Simpson, titled

“MAKO Surgical Hooked, But Not Gutted,” expressed disappointment in weak RIO sales and

decreased guidance. The article was also “troubled” by MAKO’s decreased utilization rate for

procedures compared to the prior quarter, pointing out that MAKO’s “slowdown” was

inconsistent with its competitors’ experience that the orthopedic procedure market was “stable.”

In relevant part, the article stated:

Q1 Numbers Miss The Mark

MAKO broadly disappointed the Street in terms of its top-line components, which is really the only thing many investors care about right now .

Revenue rose 51% from last year, but dropped about 40% from the fourth quarter and missed consensus by about 20% . Procedure volume rose 76% and procedure revenue increased 79%, but that volume number missed by about 5%. Similarly, system revenue rose just 9% and the company’s six system placements missed the average analyst target of nine.

* * *

So, What Went Wrong?

Management claimed that a “few missed orders” played into the shortfall in robot sales, but then they also loweredfull-year placement guidance by more units (four) than they missed by this quarter (three). I don’t really know how to interrupt [sic] “missed

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orders” in this context, and it doesn’t sound like they’re coming back in this year.

I believe it would be a mistake to take this result and try to apply it to Intuitive Surgical (ISRG) or make sweeping comments about the hospital capital equipment market. The fact is that hospital budgets are still tight, but they’re finding the money for the devices/equipment that they really want or believe they need. Yes, Stryker (SYK) and Hill-Rom (HRC) are seeing slowdowns again in the sale of equipment like beds, but Intuitive is going strong and big-ticket equipment vendors like General Electric (GE) have seen pretty solid order trends recently.

The utilization numbers trouble me a bit more. Utilization per machine dropped about 8% sequentially. Management mentioned that utilization was hurt by a back end-loaded fourth quarter, and the company did indeed place a lot of systems (18) in that quarter. Still, it represents a slowdown at a time when orthopedic companies like Stryker, Zimmer (ZMH), and Johnson & Johnson (JNJ) have all talked about a stable, if not improving, orthopedic procedure market.

203. In another May 8, 2012 article titled “Does MAKO Surgical Deserve This

Beating?” Evan Niu of The Motley Fool wrote:

There’s only one word for shareholders of MAKO Surgical (Nasdaq: MAKO) today: Ouch . That includes me, mind you, so I’m also hurting with all you MAKO investors out there. Shares have gotten crushed by more than 37% at the low today after the company reported a weak first quarter. How bad could it be?

* * *

Ouch

One of those six RIO systems was sold to a distributor in Japan to try to land regulatory approvals and also to demonstrate the system to build interest in the region. The revenue on this system has been deferred due to a contingent obligation to reimburse costs associated with the regulatory process if things fall through, but should be recognized if and when regulatory approval is granted.

Deferred revenue only rose by $443,000 from December, so this one system doesn’t come close to covering the shortfall. There’s really no way to sugarcoat it: RIO system sales were disappointing.

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The last time we saw this few RIO system sales was two years ago, when four were sold in first-quarter 2010. A sequential drop-off in the first quarter from seasonal factors is expected, but this quarter's was particularly brutal. Especially considering the strong showing in the fourth quarter that gave investors hope that adoption was accelerating.

CEO Maurice Ferre said the results were on the low end of the company's expectations, although management is encouraged by continued interest in the THA application. As a result of the soft RIO sales, MAKO is now slashing its outlook on RIO systems this year.

204. Nonetheless, despite the skepticism by certain analysts, Defendants blunted the

full impact of the May 7 partial disclosures by their continued reassurances and insistence in the

May 7, 2012 announcements that these sales shortfalls were merely a temporary hiccup for

MAKO and that they remained confident that MAKO would meet its revised guidance. The

impact of these reassurances, uttered by those the market presumed to be the only ones with full

possession of all relevant facts, is shown by many analysts’ still cautiously optimistic reactions.

For example, in a May 7, 2012 analyst report, Canaccord Genuity maintained a “Hold” rating for

MAKO, comforted by Defendants’ assertions of confidence in meeting its reduced,

“conservative” guidance of RIO systems sales:

We reiterate our HOLD rating following disappointing Q1/12 results that came in below our and consensus estimates. Systems sales were soft, causing management to update full year guidance.

* * *

Box sales weak, a step back in Q1/12 but consistent growth guided for 2012 - System sales were disappointing with 5 US and 1 OUS (for which revenue was deferred and will be until regulatory approval) vs. our expectation for 9 US and no OUS.

Management noted that timing caused by special situations and pricing pushback contributed to the shortfall. We commend management in holding firm on price (a slippery slope discounting leads). Furthermore, we note management was confident updated guidance was “conservative” and achievable.

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o Management noted its “funnel” for box placements remains strong and is confident it can meet its adjusted box guidance of 52-58 placements in 2012 despite the Q1/12 weakness which was attributed to timing and pushback on system pricing.

205. Similarly, in a May 7, 2012 report, Piper Jaffray & Co. still remained positive

about MAKO, based in part on Defendants’ assurances that the RIO systems deals that failed to

close in 1Q12 were still “in the pipeline” and that the sales issues were “transitory”:

MAKO’s shortfall on robots and implants was disappointing, only partially offset by upside to hips. While the 2-3 deals that didn’t close in the quarter remain in the pipeline and may in fact have closed here in Q2 , each system represents around $1 mil in revenues, hence the $3.3 mil miss to our estimate. As we have often published, we believe the stock heads into almost every quarter discounting some probability of a miss by 1-2 robots, but the 3 robot miss and cut to guidance will clearly drive additional volatility in the near-term. That said, we see no permanent damage as a result of the miss, and given early stages of the hip system product cycle, we see substantial upside for the stock. We reiterate our Overweight rating on MAKO, trim our target from $50 to $49, and would be aggressive buyers of the stock on weakness.

• Implications: The shortfall was unexpected and the stock will react accordingly. Given that the issues appear transitory, however, we would not be surprised to see the pullback abate as investors on the sidelines take this opportunity to step in. We have trimmed our estimates slightly, in line with management’s 4-robot reduction in guidance.

206. Accordingly, the May 7 announcements were merely a partial disclosure of

Defendants’ fraud, which was tempered by Defendants’ continued misrepresentations regarding

its sales trends and guidance made during the May 7 announcements and afterwards, as

described further below, such that the artificial inflation in MAKO’s stock price was not fully

removed until after the final disclosure on July 9, 2012.

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C. June 13, 2012 William Blair and Co. LLC Growth Stock Conference

207. Approximately a month later, on June 13, 2012, shortly before the market closed,

Defendants Ferré and LaPorte participated in the William Blair and Company LLC Growth

Stock Conference. Specifically, LaPorte reaffirmed the 2012 guidance announced the prior

month:

From a commercialization ramp standpoint, we did our first procedure back in June of ‘06 and have continued to place RIO Systems in orthopedic centers throughout the US. Our focus is primarily in the US, we’ve begun to [seed] our international opportunities. Last year we sold a total of 48 RIO systems worldwide and performed just under 7,000 procedures.

A key focus for us is utilization, which is measured in average monthly utilization per system. You can see we ended last year at 7.2 procedures per month per system; in the first quarter of this year that came down to 6.6. We anticipated that based on the addition of the 16 domestic RIO Systems in Q4. As they come up the curve they have a dilutive of effect on the overall utilization.

For this year we gave guidance or last updated guidance as of the end of Q1 was 52-58 RIO Systems and between 11,000 and 13,000 MAKOplasty procedures. We believe that will translate to a utilization rate throughout the year of about 6.5 to 7.5 procedures across our installed base.

From an operating results perspective, we generate about $20 million in the first quarter. We’re pretty back-end loaded from a top-line basis, we expect about two-thirds of our RIO Systems sales to incur [sic] in the back half of the year. Here in early stages of commercialization the RIO revenue is the majority of our revenue stream.

208. Defendant LaPorte’s statements made during the June 13 William Blair

conference referenced above in ¶ 207 reiterating MAKO’s revised 2012 annual guidance, made

at a time approximately two weeks before the close of the second quarter, was materially false

and misleading when made because LaPorte lacked a reasonable basis for making that guidance,

which was still artificially inflated, and he was aware of undisclosed, adverse facts tending to

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seriously undermine the validity of the issued guidance, including the facts listed above in

paragraphs 159, 164 and 184, as well as the fact that, as alleged in detail below, just three weeks

later MAKO significantly reduced its 2012 guidance, based on sales trends that should have been

clear near the end of the second quarter.

209. Analysts were reassured by Defendant LaPorte’s false statements at the William

Blair conference reaffirming its prior RIO sales guidance of 52-58 units and 11,000-13,000

procedures. For example, a June 13, 2012 William Blair analyst report by Matthew O’Brien

noted that Defendants reiterated MAKO’s reduced RIO sales guidance at the conference, and

stated that “we continue to expect the company to hit the consensus estimate of 11” RIO systems

units for the second quarter 2012, which would be in line with the revised annual guidance.

Although MAKO’s stock traded down approximately 5% during that same day (but closed at

$23.90 with a decline of only $0.06 per share or only 0.2% from the prior day’s closing price of

$23.96), O’Brien “did not attribute the weakness to anything management said during our

conference.”

VIII. INVESTORS SUFFERED DAMAGES WHEN MAKO’S STOCK PRICE DROPPED AS THE TRUTH IS FULLY REVEALED

A. July 9, 2012 Press Release

210. The truth regarding MAKO’s continued poor RIO system sales and procedures

volume and inability to meet its guidance was fully revealed on July 9, 2012. On that day, soon

after the market closed, MAKO issued a press release pre-announcing its selected second quarter

2012 (“2Q12”) operating results, shocking the market with disappointing RIO systems sales and

decreased 2012 annual guidance for the second quarter in a row, this time lowering the guidance

range by a full ten units, or approximately 20%, to 42-48 units, in line with or even lower than

CW4’s analysis, which he presented at the August 2011 Upstream Marketing meeting, compared

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to the prior guidance of 52-58, and the original guidance of 56-62 in January. Because MAKO

had sold 48 RIO systems in 2011, this reduced guidance range was below, or at most in line

with, the Company’s 2011 results, meaning that 2012 would be the first year since MAKO’s

inception that its RIO system sales would not grow, and likely decrease, from year to year. This

time, MAKO also lowered its 2012 procedures volume guidance from 11,000-13,000 to 11,000-

12,000, which was also more in line with CW4’s analysis:

2012 Second Quarter Review

RIO Systems – Nine RIO systems were sold during the second quarter, of which eight were sold to domestic customers and one was sold to a distributor in China, which in turn was sold for commercial use to a prominent hospital in Hong Kong. The average selling price for RIO systems was in line with the prior quarter. These nine RIO systems bring MAKO’s worldwide commercial installed base of RIO systems to 126 systems and domestic commercial installed base to 123 systems as of June 30, 2012.

MAKOplasty Procedure Volume – During the second quarter, 2,590 MAKOplasty procedures were performed, of which 2,494 were performed at domestic sites. Of the 2,494 domestic procedures, 280 were Total Hip Arthroplasty (THA) procedures. The average selling price for all procedures was comparable with the prior quarter. The 2,590 MAKOplasty procedures performed represent a 13% increase over the procedures performed in the first quarter of 2012 and a 66% increase over the procedures performed in the second quarter of 2011. The average monthly utilization per system was 7.2 procedures during the second quarter of 2012, an increase from 6.6 procedures per system per month in the first quarter of 2012 and an increase from 6.4 procedures per system per month in the second quarter of 2011. Through June 30, 2012, approximately 17,700 procedures had been performed since the first procedure in June 2006.

MAKOplasty Total Hip Arthroplasty – In the second quarter, nine MAKOplasty THA applications were sold, seven of which were sold with the domestic RIO systems sales during the quarter and two of which were sold as upgrades to existing commercial systems. As of June 30, 2012, 71 RIO systems, or 58% of our domestic installed base, have the MAKOplasty THA application.

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Outlook

Based on the slower than expected start during the first six months of the year, MAKO now anticipates selling 42 to 48 RIO systems in 2012, which compares to prior guidance of 52 to 58 RIO system sales. Additionally, as a result of adjusted guidance for 2012 RIO sales, MAKO is narrowing 2012 MAKOplasty annual procedure guidance to 11,000 to 12,000, which compares to prior guidance of 11,000 to 13,000 procedures.

“ With six months of 2012 behind us, we have experienced slower than expected growth ,” said Maurice R. Ferré, M.D., President and Chief Executive Officer of MAKO. “While our core belief in the significant market opportunity and the transformational value of our technology remains intact, management’s near term focus will be to improve our execution for the remainder of 2012 and beyond. ”

B. July 9, 2012 Conference Call

211. Later that day, the Defendants held a conference call to discuss the selected 2Q12

operating results. During the call, Defendant Ferré revealed that contrary to his prior false

assurances, the low 1Q12 RIO system sales were not a temporary hitch in MAKO’s otherwise

healthy sales pipeline that would recover the shortfall in future quarters, enabling MAKO to still

meet its revised guidance. Although he again attempted to reassure investors that MAKO still

had a “healthy number of qualified accounts in [its] sales funnel,” Ferré stated that once again

MAKO could not close its expected deals at the end of the quarter and this time attributed the

shortfall partially to a larger “buy-in” requirement from surgeons affiliated with potential

purchasers, an issue not identified in 1Q12 low sales. However, as CW2 and CW4 reported, it

was widely known internally at MAKO that even in 2011 that there was minimal surgeon “buy-

in” in the orthopedic community for MAKO’s RIO system and MAKOplasty, such that increased

sales would be difficult, which was not factored into MAKO’s inflated 2012 guidance or

disclosed to investors. Ferré further disclosed that, as a result of these continued sales problems,

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MAKO was forced to once again reduce its already lowered sales guidance as well as its

procedures guidance for the first time:

The second quarter continued some of the trends we saw in the first quarter. Most notably, the results of our RIO sales for Q2 were below our expectations. As we have discussed previously, in our experience, RIO system sales are typically back-end loaded in any given quarter. As the quarter came to a close, some sales were reasonably expected, would close in the quarter did not. Hospital interest in our technology remained strong, as reflected in a healthy number of qualified accounts in our sales funnel.

However, our analysis suggests that as we approach the shift from early adopter phase to early majority phase of the technology adoption life cycle, we are finding that a growing number of potential purchasers require buy-in from a larger number of surgeons to support the return on investment of a MAKOplasty program. Surgeon’s interest in MAKOplasty also remains high, as we believe it will continue to grow. We see an increasing attendance at our regularly conducted regional BioSkills training labs, which requires a meaningful surgeon time commitment as a leading indicator of the future use of the RIO.

* * *

With respect to guidance, our review of the business after the first quarter led to revised annual RIO guidance of 52 to 58 systems , with no change in annual MAKOplasty procedure guidance of 11,000 to 13,000. We continue to scrutinize our business throughout the second quarter, and examine the business closely at quarter-end. Based on this examination, and our experience with the long RIO sales cycle due to some of the reasons I mentioned, we are reducing our 2012 annual RIO guidance to 42 to 48 systems. And as a result, narrowing MAKOplasty procedure guidance to 11,000 to 12,000 procedures .

212. Additionally, during the conference call, Ferré was specifically asked by an

analyst whether the price of the RIO system was a problem for hospitals, and Ferré denied it was

an issue, despite his prior acknowledgement on the 1Q12 earnings call that at least one hospital

at the time had refused to buy because of price:

Michael Matson - Mizuho Securities – Analyst

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All right. Fair enough. And I guess I just wanted to go back to the pricing question. Particularly now that you have got the hip system in there. Because it is pushing the pricing, I guess into the seven digits, versus just the six digits. I mean, I don’t know that $1 million mark is all that important or even meaningful, but is that becoming an issue here for the hospitals, in terms of increasing the hurdles and so forth?

Maurice Ferré - MAKO Surgical Corp - President, CEO and Chairman

The answer is no. We don’t see that. We don’t see that as a clear - - this is all once again based on incremental use of doing procedures at a hospital. There is a threshold, and there is an absolute halo affect, and we have documented that. And we understand it. And hospitals get that. I think from their perspective, it is all about getting surgeon support.

213. Despite Ferré’s continued assurances that the expected sales were not lost but

simply delayed again as a result of a prolonged sales cycles and that price concerns or any other

fundamental issues existed, these two sequential quarters of dismal sales and reduced guidance

provided sufficient evidence to investors of the truth regarding MAKO’s broken sales pipeline.

Investors were no longer buying Defendants’ false and misleading reassurances about lagging

sales, procedures and guidance, and the market reacted accordingly.

214. The day after these disclosures, July 10, 2012, MAKO’s stock plunged by $10.60

per share or approximately 43% from the prior day’s closing price of $24.61 to $14.01, on

extremely high trading volume of over 21 million shares (compared to the average Class Period

trading volume of 1.3 million shares). According to a July 10, 2012 Bloomberg article titled

“Mako Surgical Falls Most Ever After Cutting Device Forecast,” this drop was “the biggest one-

day decline since the shares began trading in February 2008.” Additionally, this July 10 $14.01

closing price was less than a third of the stock’s Class Period closing high of $44.98 on March

26, 2012, which was less than two weeks after Defendants’ last misrepresentations regarding

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Feb Mar Apr May Jun Jul Aug Sep


MAKO’s strong sales and optimistic guidance. Moreover, the $10.60 or 43% drop in MAKO’s

share price represented a market capitalization loss of more than $451 million.

215. The following chart represents the stock price movement during the Class Period

(and afterwards during the PSLRA 90-day look-back period, which has not yet ended), showing

the significant drops after each of the disclosures on May 7 and July 9, 2012:

MAKO i:Mak:':' Surgical GM @ ctockChft.crri, 11-Sp-2U12 Open 17.93 High 18.54 Low 17.87 Close 18.11 Volume 1.7k1 Chg +0.4 (+2.55 %) A ,

. 4.':' 42.

77 :3.I:I :32.

27 2.':' 22

216. Multiple securities analysts promptly and sharply downgraded MAKO’s stock in

response to the July 9 news. For example, on July 9 and 10, 2012 after MAKO’s

announcements, Summer Street Research Partners, Goldman Sachs and Mizuho Securities USA

downgraded MAKO from “Buy” to “Neutral.”

217. In explaining its downgrade action, the Summer Street Research Partners analyst

report emphasized the high significance of RIO system sales to investors and the analysts’

complete lack of confidence in MAKO’s ability to meet its doubly-slashed sales guidance or

close the allegedly delayed deals, despite management’s assurances to the contrary:

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MAKO preannounced poor 2Q12 sales yesterday. The issues that persisted in the first quarter continue. MAKO released poor second quarter placements of nine RIO robots, coming in below our estimate of 12 placements and the consensus expectation of 11 RIO robot placements. Eight were placed domestically and one was placed in China. This is another misstep for management, as RIO placement is the single metric investors focus on, and it is no surprise that MAKO’s market cap was slashed by 38% in aftermarket selling. A conversation with management did not leave us with any confidence that guidance for the remaining part of the year is achievable, given their comment that they have yet to come to grips with the issues that have plagued placements over the past two quarters.

* * *

Not all doom and gloom ahead for MAKO. MAKO has a large number of products in the pipeline, which is unlikely to improve investor confidence in 2012. Management is technically correct in saying they have not lost any business, as some hospitals have not said outright they will not be purchasing a robot. However, nonaction must be seen as a “no,” and we do believe, contrary to management, that many of these delayed orders are not happening.

We are downgrading MAKO to NEUTRAL and slashing our numbers through 2017. Based on this second consecutive revenue miss and following management’s slashing of RIO guidance from that established at the beginning of the year, we are making a number of stout reductions to our financial models and valuation parameters. Based on these changes, we now see MAKO’s valuation ranging from $10 (DCF) to $20 (take out). We expect the next few days to be exceedingly volatile, and depending on where the stock settles we will better be able to figure out an appropriate rating.

As CW6 stated, contrary to Defendants’ continued false reassurances that no sales orders were

lost but merely delayed, several hospitals did in fact cancel their expected orders at the end of

2011 and early 2012. Further, according to CW2, RIO Account Executives reported that

MAKO’s RIO sales pipeline was depleted at the end of 2011 and that MAKO immediately began

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to experience sales problem in 2012, which continued through the year, undermining

Defendants’ contention that these sales were merely pushed off. Similarly, as CW2 and CW4

explained, it was widely known internally at MAKO before Defendants issued their 2012

guidance, as early as 2011, that the surgeon “buy-in” for MAKO’s RIO systems and

MAKOplasty solution was low, with many surgeons in a “waiting mode” to see long-term

benefits of MAKOplasty over manual procedures. Thus, Defendants knew or recklessly

disregarded as to representations of current and historical facts, that even if there were no

definite “No’s” there would also not be any early “Yes’s,” rendering their inflated RIO guidance

and related representations unreasonable. Moreover, as Summer Street pointed out, even to the

extent there was some basis to Defendants’ claims that at least as to some prospects there had

been no definite “no,” the continued “nonaction” by these potential hospital customers over a

long period of time should have, much earlier in time during the Class Period, communicated to

Defendants that these purportedly delayed sales were “not happening,” leading them to stop

persisting in their inflated public sales guidance.

218. With respect to Goldman Sachs’ downgrade, a July 10, 2012 Bloomberg

Businessweek article reported Goldman analysts as stating that they had been too “bullish” about

MAKO’s RIO systems sales capabilities:

Analysts at Goldman Sachs said they have been “too bullish” on medical-device maker MAKO Surgical Corp.’s (MAKO, $14.01, - $10.60, -43.07%) “ability to sell systems outside of large contract orders,” as the firm lowered the stock to neutral from buy. Mako’s reduced outlook also weighed on other makers of robotic surgical equipment, specifically Intuitive Surgical Inc. (ISRG, $531.77, -$ 19.62, -3.56%) and Hansen Medical Inc. (HNSN, $2.21, -$0.14, - 5.96%).

219. Moreover, according to July 10, 2012 Bloomberg article titled “Mako Surgical

Falls Most Ever After Cutting Device Forecast,” Mizuho Securities downgraded MAKO’s rating

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to neutral in response to MAKO’s sequentially weak sales and missed guidance, which it viewed

as signs of serious issues with regard to MAKO management’s credibility, the Company’s

growth and demand for its products:

“I think it’s an issue of management credibility and of growth ,” said Michael Matson, a New York based analyst with Mizuho Securities USA, in a telephone interview. “The growth is not as strong as people had thought.” Matson reduced his rating on Mako to neutral after the company missed forecasts for the first quarter. He has a price target of $15 on the stock. . . . “ I think demand is just not at the level that people thought ,” Matson said.

220. A Reuters article on the same day, titled “Mako Shares Plunge on Sales View of

its Surgical Robot,” also quoted Mizuho’s Matson as stating that “RIO System sales in particular

disappointed, while procedures were just below our estimate.” Mizuho reportedly halved its

price target on MAKO’s shares to $15 from $30. According to the article, Matson stated: “ It

appears that MAKOplasty adoption has slowed and that MAKO is struggling to gain traction

beyond its initial earlyadopter customers. ”

221. Similarly, other analysts also reacted negatively to MAKO’s July 9 news. For

example, in a July 9, 2012 analyst report titled “Second Shoe Drops: Q2/12 Prelim Results

Weak, Guidance Lowered; Reit Hold, Pt to $16,” Canaccord Genuity, although it maintained its

“Hold” rating, nevertheless dropped its price target on MAKO’s stock to $16 from $29 and

lowered its revenue estimates based on the Company’s sales misses and guidance reduction:

We are lowering our price target to $16.00 from $29.00. . . .

Preliminary Q2/12 box sales weak, another step back in Q2/12 - System sales were disappointing with 8 US and 1 OUS vs. our expectation for 9 US and 1 OUS (we were at the low end of expectations).

* * *

Guidance and estimates

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MAKO Surgical lowered its RIO system sales guidance for 2012 to 42-48 from 52-58 systems, and 11,000-12,000 from 11,000- 13,000 procedures in 2012. Additionally, average monthly utilization was maintained at 6.5-7.5 procedures a month (6-7 for knee, and 1-2 for hip installed systems). We have lowered our revenue estimates to reflect the updated guidance for RIO System sales. We have made only minor changes to our utilization expectations.

222. Additionally, in a July 10, 2012 report titled “The Other Shoe Has Dropped; 2Q

Misses and Guidance Comes Down Again,” JP Morgan emphasized analyst fears from early

2012 that sales guidance was possibly distorted by the 2011 HMA multi-system order and

drastically reduced its price target for MAKO from its prior “downside case” upon lowering

other financial estimates:

Mako pre-announced 2Q system and procedure numbers Monday afternoon, coming in below consensus for the second quarter in a row. The company sold nine systems in the quarter (8 domestic) versus the consensus of 11 systems and our own 10 system forecast. Total Makoplasty procedures were 2,590, which also came in below the Street's 2,657. . . .

• System guidance was lowered to a range of 42-48 for 2012 versus the prior 52-58 and 56-62 to start the year. Mako also lowered its procedure outlook to 11-12K procedures versus the prior 11-13K range, citing the lower system sales. For 2012, we are lowering our system sales forecast by eight systems to 43, including 38 domestic. We now forecast 11,128 procedures, including 1,250 hips, versus our prior 11,589 and 1,423 estimates, respectively. Our total sales outlook comes down from $25.6M to $24.3M for 2Q12 (full results due out in August), and from $117.1M to $106.8M for the full year. We now forecast a loss per share of $0.21 in 2Q12 (vs prior $0.22) and a loss of $0.77 for the full year (vs prior $0.74).

* * *

What Happened? At the midpoint, Mako has lowered its system guidance range by 24% since January. We think this is a function of two things: (1) the sales cycle has become more complex; and (2) under-estimation of the one time nature of HMA purchases in 2011. HMA purchased 13 systems in 2011, including 11 under a bulkorder contract, and while these were systems that were already in the sales funnel, there was likely a pull-forward of business that

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would otherwise have come over the course of 2011-2013. Mako also indicated that in 2Q it saw a longer sales cycle, with hospitals wanting broader physician buy-in before committing to a purchase . This is a function of today’s hospital environment, but also seems like a natural progression as MAKO works beyond accounts that represented lower hanging fruit.

* * *

We are lowering our Dec-12 price target for Mako from $28 to $17, which represented our previous “downside case".

223. Moreover, as JP Morgan report pointed out, the July 9 announcements revealed

that MAKO’s sales had deteriorated in part because the RIO and MAKOplasty market was

saturated such that MAKO was unable to expand the adoption of its technology beyond the

“lower hanging fruit accounts” of early adopters, an issue that CW4 had warned Defendants

about in 2011 and was exacerbated by MAKO’s RIO system contract exclusivity provision,

which had not been disclosed as a material risk factor to investors.

224. Moreover, a Morgan Stanley analyst report on July 10, titled “More Than

Transient,” stated that MAKO’s sales woes no longer appeared to be a “transient” or

“temporary” issue, as Defendants had falsely insisted after the May 7 announcement:

The negative pre-announcement and downward guidance revision come on the heels of disappointing 1Q results and suggest more structural issues around the hip opportunity and execution. In our May 15 report, Throwing Out the Baby?, we suggested alignment offered lower clinical value in hips vs. knees, but felt transient portfolio gaps could be addressed to relieve pressure on near term adoption . Considering 2Q placements declined y/y for the second straight quarter , the debate will now focus acutely on the hip application’s ROI as headwinds appear less temporary. In addition, various execution issues are emerging which further cloud visibility.

225. The financial press was likewise shocked by MAKO’s announcements and highly

pessimistic about MAKO’s prospects. For instance, Evan Niu of The Motley Fool , in a July 9,

2012 article titled “Why MAKO Surgical Is Tanking 40% After Hours,” stressed that sales for

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the first two quarters were lower than for the same quarters the prior year and that the 2012

guidance was now slashed for two critical metrics, sales and procedures volume:

There’s blood out there right now. And it’s not related to any type of surgical procedure, unless you consider a massive haircut a surgical procedure. In this case, this haircut is so deep that it might as well be a lobotomy.

MAKO Surgical (Nasdaq: MAKO) has just reported its second-quarter earnings, and there’s a lot to be pessimistic about. As if its first-quarter release wasn’t bad enough, this one adds insult to injury. RIO system sales came in at just nine, of which eight were sold domestically. The other one went to a distributor in China for use in a hospital in Hong Kong.

When you include the six sold in the first quarter, that brings the year-to-date total up to just 15. Both figures are less than was sold in the same respective quarters in 2011. In the first two quarters of last year, MAKO sold seven and 12 systems, respectively.

* * *

Last quarter got off to a slow start, but the bright side that time around was that MAKO had affirmed its total procedure volume while it was forced to reduce guidance on full-year RIO system sales. RIO system outlook was reduced from a range of 56 to 62 systems to a lower range of 52 to 58 systems, while total procedures were still expected between 11,000 and 13,000.

This quarter, we’re seeing outlook on both metrics being slashed, meaning the RIO system outlook is getting cut two quarters in a row because of the rough patch. Full-year RIO system sales are now expected between 42 and 48, and procedures are getting notched down to an expected range of 11,000 to 12,000. Not good.

I’ll be digging in deeper overnight, so check back tomorrow. For now, it’s no wonder that shares are getting absolutely crushed after hours.

IX. POST-CLASS PERIOD EVENTS

226. Shortly after MAKO’s disclosures of its disappointing sales and guidance, on July

18, 2012, MAKO announced that its Senior Vice President of Sales & Marketing, Steven J.

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Nunes, had resigned as of July 17, 2012. The resignation of MAKO’s head of Sales &

Marketing was not surprising given the Company’s dismal sales and slashed guidance in the

preceding few months. As security analyst Matthew O’Brien of William Blair, in a research note

from the same day titled “Another Near-Term Body Blow as Senior Vice President of Sales and

Marketing Resigns,” reported: “Given the first half shortfall in volumes and systems sold, we

are not overly surprised by this transition.” Despite Defendants’ continued protestations to the

contrary, MAKO’s sales woes were not a temporary nor minor glitch, as the resignation of its

Sales & Marketing chief reinforced.

227. The William Blair report also cautioned that the management change reflected in

Nunes’ resignation could hurt MAKO’s RIO system sales even more going forward and further

jeopardize MAKO’s ability to meet its annual sales guidance:

However, these sudden changes invariably lead to an adjustment period by the affected organizations, which, in this case, may slightly hamper MAKO’s selling efforts in the coming quarters. While we have confidence in the company’s ability to meet our procedure estimate for the full year (11,267) as they are booked well in advance, we are increasingly concerned about MAKO’s

ability to meet its system placement guidance for 2012 (42 -48) following this resignation .

228. Moreover, in the month after MAKO’s disappointing sales and guidance

announcement on July 9 and leading up to the release of complete 2Q12 results (scheduled for

August 1, 2012), the Company’s stock price continued to deteriorate as the market absorbed the

full implications of Defendants’ latest disclosure. Specifically, the share price declined,

gradually over several weeks, by an additional $1.83 or 13% from the July 9 closing price of

$14.01 to close at $12.18 on August 1, 2012 (trading as low as $11.99 on that day – before the

Company announced its complete 2Q12 results later in the day).

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229. Immediately after the market closed on August 1, 2012, MAKO issued a press

release announcing its complete 2Q12 operating results. In the press release, MAKO reaffirmed

its 2Q12 low sales and reduced 2012 annual guidance for both RIO system sales and

MAKOplasty procedures volume, as well as other results, which had been pre-announced on

July 9. MAKO also provided full financial results for 2Q12 and the first half of the year.

Additionally, Defendant Ferré repeated his prior message that “[a]s noted in our release of

selected operating results on July 9th, we have experienced slower than expected growth in

2012” and that “management’s near term focus will be to improve our sales and marketing

execution for the remainder of 2012 and beyond.” Additionally, the press release revealed for the

first time that MAKO’s unsold inventory had increased by approximately 48% from 19,529 on

December 31, 2011 to 28,905 on June 30, 2012, reinforcing the prior disclosures that MAKO

was having difficulty selling its RIO systems and other products.

230. MAKO’s announcements on August 1 were largely repetitive of the key operating

results revealed in the July 9 disclosures, as analysts noted. For example, a Piper Jaffray analyst

report on August 1, 2012, titled “In Line with Preannouncement, Management Focused on

Delivering 2H12,” stated: “There were few surprises on MAKO’s final results conference call,

as most of the key operating results were released on July 10 [sic].” Similarly, Summer Street

Research Partners, in a report titled “Nothing New From Mako,” also pointed out the lack of

significant new information from MAKO, emphasizing that the “issues that persisted in the first

quarter continue.”

231. Many analysts remained pessimistic about MAKO after the August 1

announcement. For instance, a Summer Street analyst continued to be negative about MAKO’s

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sales problems, stating that it would be “tough task” for MAKO to meet its RIO system sales

guidance in the second half of 2012:

Nothing to hang your hat on here. Management is still not able to show they have a firm grasp on how to handle the issues that have plagued placements over the past two quarters. As the future of the capital equipment market remains uncertain, MAKO needs to show medical benefit and ROI not only to the large hospital systems that make up most of their sales, but to the emerging market in smaller standalone hospitals.

MAKO reiterated guidance for 2012 of fewer RIO robot placements and MAKOplasty procedures. MAKO now guides to 42-48 RIO systems in 2012, compared to prior guidance of 52-58 and the 56-62 that was originally provided on the 4Q11 call. MAKO is also lowering the annual procedure guidance range to 11,000-12,000, compared to prior guidance of 11,000-13,000 procedures. MAKO will need to place 30 robots in 2H12 to meet guidance, which we see as a tough task.

As a result, Summer Street reiterated its “Neutral” rating and valuation range of $10 to $20 per

share on MAKO, both of which it had previously downgraded after the July 9 disclosures

“[b]ased on this second consecutive revenue miss and following management’s slashing of RIO

guidance from that established at the beginning of the year.”

232. Moreover, according to an August 2, 2012 Daily Political article titled “Mizuho

Sets MAKO Surgical Price Target at $13.00 (MAKO)”, analysts at Mizuho Securities once again

lowered their price target on MAKO shares from $15.00 to $13.00, maintaining their “neutral”

rating on the stock, which they had downgraded after the July 9 disclosures.

233. Further, in another August 2, 2012 report titled “Circling The Wagons,” Morgan

Stanley analysts pointed out that MAKO’s downward guidance revisions were attributable not

only to poor execution, but also to “overzealous hip launch expectations,” as CW4 had warned

MAKO as early as 2011, see Section IV.B.3., supra:

Last night’s call was not very enlightening. Multiple factors behind recent systems placement and knee utilization

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underperformance were cited, including product readiness, sales training, and execution, but we see execution and overzealous hip launch expectations with an early design as the primary factors driving recent downward guidance revisions.

234. Financial reporters also noted that the increased inventory figures disclosed in the

August 1 press release further confirmed that MAKO’s sales had slowed from prior quarters,

casting more doubt on MAKO’s ability to recover and meet the reduced guidance in the rest of

the year. An August 2, 2012 Motley Fool article commented: “MAKO’s inventory of unsold

equipment totaled $28.9 million in the quarter, up from $23.2 million in the previous quarter,

suggesting that management is still struggling to find takers for its technology. ”

X. CLASS ACTION ALLEGATIONS

235. Lead Plaintiffs bring this case as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of the Class, consisting of all persons and entities who

purchased or otherwise acquired MAKO’s common stock from January 9, 2012 through July 9,

2012, inclusive, and who were damaged thereby. Excluded from the Class are Defendants, the

Company’s officers, directors, employees, successors, and assigns, and any person, entity, firm,

trust, corporation or other entity related to, affiliated with, or controlled by any of the

Defendants, as well as the immediate families of the Individual Defendants.

236. This action is maintainable as a class action.

237. The members of the Class are so numerous that joinder of all members is

impracticable. During the Class Period, the Company’s stock traded on the NASDAQ Global

Select Market under the ticker symbol “MAKO.” As of March 31, 2012, a date during the Class

Period, there were 42,089,500 shares of issued and outstanding MAKO common stock. While

the exact number of Class members is unknown to Lead Plaintiffs at this time and can only be

ascertained through appropriate discovery, Lead Plaintiffs believe that the proposed Class

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numbers in the thousands and is geographically widely dispersed. Record owners and other

members of the Class may be identified from records maintained by MAKO or its transfer agent

and may be notified of the pendency of this action by mail, using a form of notice similar to that

customarily used in securities class actions.

238. Lead Plaintiffs’ claims are typical of the claims of the members of the Class. All

members of the Class were similarly affected by Defendants’ allegedly wrongful conduct in

violation of the Exchange Act as complained of herein.

239. Lead Plaintiffs will fairly and adequately protect the interests of the members of

the Class and has retained Lead Counsel, who are competent and experienced in class and

securities litigation.

240. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by Defendants’ acts as

alleged herein;

(b) whether the statements made to the investing public during the Class

Period contained material misrepresentations or omitted to state material information;

(c) whether and to what extent the market prices of MAKO’s common stock

were artificially inflated during the Class Period because of the material misstatements alleged

herein;

(d) whether Defendants acted with the requisite level of scienter;

(e) whether Individual Defendants were controlling persons of MAKO;

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(f) whether Lead Plaintiffs and the Class are entitled to the fraud-on-the

market presumption to establish reliance;

(g) whether Lead Plaintiffs and the Class are entitled to a presumption of

reliance under the Affiliated Ute doctrine to establish reliance; and

(h) whether the class members of the Class have sustained damages as a result

of the conduct complained of herein and, if so, the proper measure of damages.

241. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation make it impossible for members of the Class to redress the wrongs

done to them individually. There will be no difficulty in the management of this case as a class

action.

XI. INAPPLICABILITY OF STATUTORY SAFE HARBOR

242. The PSLRA’s safe harbor provisions for forward-looking statements under certain

circumstances do not apply to any of the materially false and misleading statements and

omissions alleged in this Complaint. First, many of the identified false and misleading

statements and omissions herein are not forward-looking statements, but instead are statements

of current or historic fact regarding MAKO’s RIO system sales trends. For example, each of the

following is a statement of current or historic fact :

(a) Defendant LaPorte’s statement during the March 14, 2012 Barclays

Capital Global Healthcare Conference: “I think hospitals are still keeping tight purse strings on

their overall spending, and as you alluded to I think, with a little bit of uncertainty around where

healthcare and the reform might go ultimately. But we are seeing [hospitals] continue to invest

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in capital that has a good economic story and return on investment. I think that is where [we

are] with our partial knee business ...”

(b) Ferré’s statement during the May 7, 2012 earnings conference call: “[W]e

always have given guidance where we feel is a number that we can make.”

(c) Ferré’s statement during a May 7, 2012 earnings conference call: “And

here are various typical reasons on the count by count basis on system sales that didn’t occur in

the quarter. It’s important to note that none of these accounts fell out of our sales funnel. ”

243. Second, some of the specific false and misleading statements alleged herein were

not identified as “forward-looking statements” when made. For example, statements made by

Defendant LaPorte at the March 14, 2012 Barclays Capital Global Health Conference appear not

to be accompanied by any Company reference to any of his statements being forward-looking in

nature.

244. Third, to the extent there were any forward-looking statements that were

identified as such at the time made, there were no meaningful cautionary statements identifying

important factors that could cause actual results to differ materially from those in the purportedly

forward-looking statements. For example, all of Defendants’ statements made during the Class

Period providing 2012 annual guidance for RIO system sales and MAKOplasty procedures were

not accompanied by meaningful cautionary language because the “risk” they warned of had

already materialized, as Defendants knew, at the time they made these statements. For instance,

as was reported by multiple CW’s, by the time Defendants issued their 2012 annual guidance for

RIO sales and procedures, there were already many current or historical facts that had occurred

by that time showing that these goals were inflated and unrealistic, including: the low “buy-in”

of the majority of orthopedic surgeons for MAKO’s RIO systems and MAKOplasty procedures,

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and in particular for the new total hips application, over conventional, manual procedures; RIO

Account Executives’ reports that MAKO’s sales pipeline of prospective, new customers had

been depleted by end of 2011; the cancellation of several RIO sales orders in late 2011 and early

2012; low utilization resulting from surgeon frustration with the “buggyness” of the RIO

system, which in many cases required procedures to be completed manually; and the exhaustion

of the pool of early adopter surgeons coupled with exclusivity agreements leaving the RIO

market saturated.

245. Additionally, such false and misleading statements regarding the Company’s 2012

guidance did not have accompanying cautionary language that was meaningful because any such

warnings or “risk” factors contained in, or incorporated by reference in, the relevant press

release, SEC filings, earnings calls, analyst conference or other public statements described

herein were general, “boilerplate” statements of risk that would affect any similar company, and

misleadingly contained no factual disclosure of any of the specific problems currently affecting

the Company during the Class Period or similar important factors that would give investors

adequate notice of such risks. For example:

(a) January 9, March 6, and May 7, 2012 press releases:

This press release contains forward-looking statements regarding, among other things, statements related to expectations, goals, plans, objectives and future events. MAKO intends such forward- looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Securities Exchange Act of 1934 and the Private Securities Reform Act of 1995. In some cases, forward-looking statements can be identified by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing,” “guidance” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. . . . These statements are based on the current estimates and assumptions of our management as of

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the date of this press release and are subject to risks, uncertainties, changes in circumstances, assumptions and other factors that may cause actual results to differ materially from those indicated by forward-looking statements, many of which are beyond MAKO’s ability to control or predict. Such factors, among others, may have a material adverse effect on MAKO’s business, financial condition and results of operations and may include the potentially significant impact of a continued economic downturn or delayed economic recovery on the ability of MAKO’s customers to secure adequate funding, including access to credit, for the purchase of MAKO’s products or cause MAKO’s customers to delay a purchasing decision, changes in competitive conditions and prices in MAKO’s markets, unanticipated issues relating to intended product launches, decreases in sales of MAKO’s principal product lines, decreases in utilization of MAKO’s principal product line or in procedure volume, increases in expenditures related to increased or changing governmental regulation or taxation of MAKO’s business, both nationally and internationally, unanticipated issues in complying with domestic or foreign regulatory requirements related to MAKO’s current products or securing regulatory clearance or approvals for new products or upgrades or changes to MAKO’s current products, the impact of the recently enacted United States healthcare reform legislation on hospital spending, reimbursement, and the taxing of medical device companies, the potential impact of the informal Securities and Exchange Commission inquiry and the findings of that inquiry, loss of key management and other personnel or inability to attract such management and other personnel and unanticipated intellectual property expenditures required to develop, market, and defend MAKO’s products.

(b) Additional language in the January 9, 2012 press release:

Examples of such [forward-looking] statements include, but are not limited to, statements about the nature, timing and number of planned new product introductions; market acceptance of MAKOplasty, including the RIO system, and MAKO RESTORIS® family of implant systems; the future availability from third-party suppliers, including single source suppliers, of implants for and components of the RIO system; the anticipated adequacy of our capital resources to meet the needs of MAKO’s business; MAKO’s ability to sustain, and MAKO’s goals for, sales and earnings growth including projections regarding systems installations; and MAKO’s success in achieving timely approval or clearance of products with domestic and foreign regulatory entities.

(c) Forms 10-K for FY10 and FY11:

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We will likely continue to experience extended and variable sales cycles, which together with the unit price of the RIO system, could cause significant variability in our results of operations for any given quarter.

(d) Forms 10-K for FY10 and FY11: “Negative worldwide economic

conditions and the long lead times required by certain suppliers could prevent us from accurately

forecasting demand for our products, which could adversely affect our operating results.”

(e) June 13, 2012 William Blair and Co. LLC Growth Stock Conference: “So

with that, what we want to do is just kind of go through our presentation that we normally give.

So this is our -- always our forward-looking statement [sic] in terms of materials that’s [sic]

being said here. So let’s just talk in general over the next 20 minutes. What I’d like to talk to you

about is talk to you about MAKO.”

246. Thus, for example, the risk factor warning of extended and variable sale cycles,

see ¶ 245 was boilerplate rather than meaningful cautionary language because it did not give

investors adequate notice of the specific problems known internally that were causing not simply

an “extended and variable sales cycle” but structural difficulties that made unavoidable a

materially slower growth rate. These included the low surgeon buy-in or interest in MAKO’s

RIO system and MAKOplasty, beyond early adopters, because of either skepticism or

dissatisfaction with the system’s touted improvement over manual methods, and the fact that the

many of the deals were not just delayed as a result of an extended sales cycle, but cancelled, and

therefore not in MAKO’s sales pipeline.

247. Fourth, to the extent there were any forward-looking statements that were

identified as such at the time made, Defendants are liable for those false and misleading forward-

looking statements because at the time each of those forward-looking statements was made, the

particular speaker knew that the particular forward-looking statement was false, or, by reason of

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what the speaker failed to note, was materially misleading, and/or that each such statement was

authorized and/or approved by a director and/or executive officer of MAKO who actually knew

that each such statement was false and/or misleading when made. In particular, at the time such

statements were made, Defendants knew that their 2012 guidance for RIO systems sales and

MAKOplasty procedures was inflated and lacked a reasonable basis because Defendants were

aware of the following undisclosed, adverse, material facts, among others: (i) 2011 sales results

could not properly be used as a baseline for 2012 guidance for the reasons set forth in paragraph

140 (a) through (c); (ii) declining RIO sales and utilization rate trends due to low surgeon “buy-

in” resulting from exposure to RIO system “buggyness” and longer surgery times; (iii)

manipulative use of MAKOplasty “super centers” to ramp up procedures numbers and conceal

the low and continually declining utilization rates across MAKO’s installed base; (iv) internal

analyses by marketing personnel demonstrating that as early as August 2011 that the Company’s

high RIO sales goals and procedures were unreasonable; (v) internal analyses by marketing

personnel demonstrating that as early as August 2011 that pool of surgeons who believed in

MAKO’s technology sufficiently to be early adopters was exhausted, leaving mostly others who

were skeptical and preferred to wait for clinical long-term evidence of net benefits, which was a

market saturation problem exacerbated by territorial exclusivity agreements and the high cost of

the system; (vi) the depletion of MAKO’s sales pipeline for RIO systems in December 2011 and

heading into 2012; (vii) the cancellation of RIO system orders by several accounts in December

2011 and beginning of 2012; and (viii) a materially slowed sales trend for RIO systems and

procedures (in particular, a substantial drop in the utilization rate) at the beginning of 2012,

which was atypical even by first quarter standards, already evident internally by the end of

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February 2012 and troubling enough for Defendants, particularly LaPorte, to task a marketing

manager to investigate the decrease with respect to procedures.

248. Accordingly, the PSLRA safe harbor provisions do not protect Defendants’

material misstatements and omissions.

XII. PRESUMPTION OF RELIANCE UNDER THE AFFILIATED UTE DOCTRINE AND/OR, IN THE ALTERNATIVE, THE FRAUD ON THE MARKET DOCTRINE

249. Lead Plaintiffs are entitled to a presumption of reliance under Affiliated Ute

Citizens of Utah v. United States , 406 U.S. 128 (1972), because the claims asserted herein

against Defendants are predicated in part upon omissions of material fact which there was a duty

to disclose.

250. In the alternative, Lead Plaintiffs are entitled to a presumption of reliance on

Defendants’ material misrepresentations and omissions pursuant to the fraud-on-the-market

theory because:

(a) MAKO’s common stock was actively traded on the NASDAQ, an open,

well developed, and efficient market, throughout the Class Period;

(b) MAKO’S common stock traded at high weekly volumes during the Class

Period;

(c) As a regulated issuer, MAKO filed periodic public reports with the SEC;

(d) MAKO regularly communicated with public investors by means of

established market communication mechanisms, including through regular dissemination of

press releases on the major news wire services and through other wide-ranging public

disclosures, such as communications with the financial press, securities analysts and other

similar reporting services;

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(e) The market reacted promptly to public information disseminated by

MAKO;

(f) MAKO securities were covered by numerous securities analysts employed

by major brokerage firms who wrote reports that were distributed to the sales force and certain

customers of their respective firms, including: Canaccord Genuity, Goldman Sachs & Co.,

Dougherty & Company LLC, J.P. Morgan Securities LLC, Mizuho Securities USA, Inc.,

Morgan Stanley & Co. LLC, Oppenheimer & Co. Inc., Piper Jaffray & Co., Summer Street

Research Partners, and William Blair & Company, LLC. Each of these reports was publicly

available and entered the public marketplace;

(g) The material misrepresentations and omissions alleged herein would tend

to induce a reasonable investor to misjudge the value of MAKO’s common stock; and

(h) Without knowledge of the misrepresented or omitted material facts alleged

herein, Lead Plaintiffs and other members of the Class purchased shares of MAKO’s common

stock between the time Defendants misrepresented or failed to disclose material facts and the

time the true facts were disclosed.

XIII. CAUSES OF ACTION

COUNT I

VIOLATION OF SECTION 10(b) OF THE EXCHANGE ACT AND SEC RULE 10b-5

(Asserted Against All Defendants)

251. Lead Plaintiffs incorporate by reference and reallege each and every allegation

contained above as if fully set forth herein.

252. This Count is asserted pursuant to Section 10(b) of the Exchange Act and Rule

10b-5 promulgated thereunder by the SEC against all Defendants.

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253. During the Class Period, Defendants carried out a plan, scheme and course of

conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing

public, including Lead Plaintiffs and other Class members, as alleged herein; (ii) artificially

inflate and maintain the market price of MAKO’s stock; and (iii) cause Lead Plaintiffs and other

members of the Class to purchase MAKO’s stock at artificially inflated prices. In furtherance of

this unlawful scheme, plan and course of conduct, Defendants, each of them, took the actions set

forth herein.

254. Defendants, individually and in concert, directly and indirectly by the use of

means and instrumentalities of interstate commerce, the mails, the facilities of national securities

exchange: (i) employed devices, schemes, and artifices to defraud; (ii) made untrue statements

of material fact and/or omitted to state material facts necessary to make the statements not

misleading; and (iii) engaged in acts, practices, and a course of business that operated as a fraud

and deceit upon the purchasers of the Company’s stock in an effort to maintain artificially

inflated market prices for MAKO’s stock in violation of Section 10(b) of the Exchange Act and

Rule 10b-5 promulgated thereunder. All Defendants are sued as primary participants in the

wrongful and illegal conduct charged herein. The Individual Defendants are also sued as

controlling persons of MAKO, as alleged below.

255. The Individual Defendants’ primary liability, and Individual Defendants’

controlling person liability, also arise from the following facts: (i) the Individual Defendants

were high level executives and/or directors at the Company during the Class Period and members

of the Company’s management team; (ii) each of these Defendants, by virtue of his or her

responsibilities and activities as a senior officer and/or director of the Company, were privy to

and participated in the creation, development and reporting of the Company’s internal budgets,

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plans, forecasts and/or reports; (iii) Defendants enjoyed significant personal contact and

familiarity with the other Defendants and was advised of and had access to other members of the

Company’s management team, internal reports and other data and information about the

Company’s finances, operations, and sales at all relevant times; and (iv) Defendants were aware

of the Company’s dissemination of information to the investing public that they knew was

materially false and misleading, or, as to representations of current or historical fact, recklessly

disregarded whether such information was true or not.

256. As a direct and proximate result of Defendants’ wrongful conduct, Lead Plaintiffs

and the other members of the Class suffered damages in connection with their respective

purchases and sales of the Company’s stock during the Class Period.

257. By virtue of the foregoing, Defendants have violated Section 10(b) of the

Exchange Act, and Rule 10b-5 promulgated thereunder.

COUNT II

VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE ACT (Asserted Against All Individual Defendants)

258. Lead Plaintiffs incorporate by reference and reallege each and every allegation

contained above as if fully set forth herein.

259. This Count is asserted against each of the Individual Defendants. Throughout the

Class Period, the Individual Defendants, by virtue of their positions, stock ownership and/or

specific acts described above, were controlling persons of MAKO within the meaning of Section

20(a) of the Exchange Act.

260. The Individual Defendants had the power to, and did, directly and indirectly,

exercise control over MAKO, including the content and dissemination of statements that Lead

Plaintiffs allege are false and misleading. The Individual Defendants were each provided with

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and/or had access to reports, filings, press releases and other statements alleged to be misleading

prior to and/or shortly after they were issued and had the ability to prevent the issuance or correct

the statements. The Individual Defendants had direct and supervisory involvement in the day-to-

day operations of the Company and engaged in the acts constituting violations of the federal

securities laws, as set forth in Count One above.

XIV. PRAYER FOR RELIEF

WHEREFORE, Lead Plaintiffs pray for relief and judgment, as follows:

A. Determining that this action is a proper class action and certifying them as class

representatives under Rule 23 of the Federal Rules of Civil Procedure;

B. Awarding compensatory damages in favor of Lead Plaintiffs and the other Class

members against all Defendants, jointly and severally, for all damages sustained as a result of

Defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;

C. Awarding Lead Plaintiffs and the Class their reasonable costs and expenses

incurred in this action, including counsel fees and expert fees; and

D. Such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Pursuant to Rule 38(b) of the Federal Rules of Civil Procedure, Lead Plaintiffs hereby

demand a trial by jury of all issues so triable.

Dated: September 12, 2012 Respectfully submitted,

By: /s/ Jack Reise Jack Reise (Florida Bar No. 58149) [email protected] Douglas Wilens (Florida Bar No. 79987) [email protected] ROBBINS GELLER RUDMAN

& DOWD LLP

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120 East Palmetto Park Road, Suite 500

Boca Raton, Florida 33432 Telephone: (561) 750-3000 Facsimile: (561) 750-3364

Liaison Counsel for the Class

Joel H. Bernstein [email protected] Ira A. Schochet [email protected] Irina Vasilchenko [email protected] Felicia A. Mann [email protected] LABATON SUCHAROW LLP 140 Broadway New York, New York 10005 Telephone: (212) 907-0700 Facsimile: (212) 818-0477

Counsel for Lead Plaintiffs Oklahoma Firefighters Pension and Retirement System and Baltimore County Employees’ Retirement System, and Lead Counsel for the Class

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CERTIFICATE OF SERVICE

I hereby certify that on September 12, 2012, I electronically filed the foregoing with the Clerk of the Court using the CM/ECF system, which will send notification of such filing to the following CM/ECF participants:

Louise McAlpin [email protected] Stephen Patrick Warren [email protected] Tracy Ann Nichols [email protected] HOLLAND & KNIGHT 701 Brickell Avenue, Suite 3000 Miami, Florida 33131 Telephone: (305) 374-8500 Facsimile: (305) 789-7799

Attorneys for Defendants Mako Surgical Corporation, Maurice R. Ferré, and Fritz L. LaPorte

Dated: September 12, 2012 By: /s/ Jack Reise Jack Reise (Florida Bar No. 58149) [email protected] ROBBINS GELLER RUDMAN

& DOWD LLP 120 East Palmetto Park Road, Suite 500 Boca Raton, Florida 33432 Telephone: (561) 750-3000 Facsimile: (561) 750-3364

in re: mako surgical corporation securities litigation 12...

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