What Should Investors Make Of Medtronic’s Investment In Mazor Robotics?

Early Start Advantage Is Not Lost For Medtronic

Mazor’s Renaissance products have both FDA and CE Mark approval with total installed base of over 100 devices. The partnership and equity stake (which we expect to increase over time) should help Medtronic be in same league as early starters in surgical robotics. According to a report by WinterGreen Research, the global  market for spine surgical robots is expected to grow to $2.77 billion by 2022. In the table below we have estimated potential revenue attributable to Medtronic assuming Mazor continues to have 35% market share and Medtronic has 7.27% equity stake in Mazor.

 

This translates into a cumulative revenue of about $430 million over next 6 years, which is roughly 10% of the cumulative revenue expected to be generated from surgical solutions and spine segment of Medtronic over the same period. Further, the agreement with Medtronic should help increase the market penetration and adoption of Mazor’s devices, fostering increases in Mazor’s market share from the present 35%, implying even greater benefits to Medtronic.

Medtronic is a major player in restorative and cardionvascular therapies (via its RTG and CAVG segments), as well as in minimally invasive therapies (via its MITG  segment). The co-promotion and potential exclusive distribution rights with Mazor widen its product portfolio and offerings. It also provides an opportunity to cross-sell products which is likely to translate into higher revenue, higher gross margins and lower SG&A for both the companies. Even though Mazor’s platform is open architecture, it does give Medtronic an opportunity to tag along its own products which are complementary in nature. It is worth noting that selling & marketing expense for Mazor is about 95% of its revenue while SG&A for Medtronic is 22%. Using Medtronic’s expansive sales channel would help Mazor improve its profitability.

The Agreement Would Help Speed Up Medtronic’s Robotics Plan

The co-development agreement should have learning curve effect on Medtronic’s in-house robotics plan, reducing the time and cost to roll-out its own products. There is possibility of cross-divisional learning between spine and MITG segment. It is worth noting that MITG division has made investments in surgical robotics which it expects would contribute 50-150 bps to the revenue growth of segment by FY’19.

The total investment of about $32 million is mere 2.5% of Medtronic’s cash and short-term investments (as of April’16). Mazor does not have any significant debt on its books and has cash and short-term investments close to $42 million (as of June’16, excluding Medtronic’s second tranche). The second tranche investment from Medtronic comes up after introduction of Mazor X Surgical Assurance Platform. Such milestone based investments reduce speculative nature of investments.