Medtronic (MDT -0.01%), is a global producer of medical technology and therapies, probably best known for its cardiac devices such as pacemakers. Some of its investors have likely felt the nausea from stock price cliff dives that have come over the past two years. In January 2020 the company's stock was at a, then, all time high before Covid fears swept the world, leading to a decline of 21% by June of that year.
Since then the stock has made a comeback, surpassing the old high to set a new high this past August, providing investors with a 48% rebound from the dip. Now, the stock is once again on a 22% decline, but this time Covid is not the primary factor to blame, and although the company is waving a green flag for investors, a darker red flag may take time to overcome.
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A green flag named Hugo
In February 2020 Medtronic acquired British AI and analytics specialist, Digital Surgery, to help bolster Medtronic's development as a major player in the robotic surgery market. Sixteen months later, the company's Hugo robotic surgery platform system performed its first procedure -- a soft tissue surgery performed in Chile. Four months after that, Medtronic received the CE Mark -- akin to a U.S. FDA approval -- allowing the company to market and sell the system in Europe for use in urologic and gynecological procedures, which make up half of robotic assisted surgery procedures.
Although the system has experienced launch delays because of manufacturing and supply chain constraints, today Hugo remains at the forefront of Medtronic's goals, offering investors optimism that the company's somewhat subdued 3% total revenue growth during its second quarter will pick up going forward. At the 40th Annual J.P. Morgan Healthcare Conference this week, CEO Geoff Martha emphasized the importance achieving FDA approval of the Hugo platform in the U.S., and to further develop the system into a challenger to Intuitive Surgical's leading robotic surgery platform, da Vinci.
To put the potential into perspective, Intuitive Surgical had an installed base of 6,525 systems as of this past October. The 336 units it sold during the quarter represented a 72% year-over-year increase. As the global surgical robot market grows at an expected rate of 22% annually through 2028 Medtronic's Hugo should be able to grab a piece of that $14 billion market.
With Hugo already approved in Europe, Latin America, and India, Medtronic is now focused on setting up clinical trials as part of its investigational device exemption with the FDA, and expects to have its first surgery in a U.S. trial soon. Upon approval of the IDE and successful results proving the safety and effectiveness, the company would then pursue FDA approval to sell and market the system in the U.S.
Company executives including Martha expect the approval process to be a succcess, and are looking at an expected ramp up in deliverables and revenue during the next 12 months. Martha pointed out that the order book is filling, and anticipation of surgeons is growing. He expects that Hugo could bring in double-digit sales this year, and a larger increase fiscal 2023.
The diabetes segment waves a red flag
Growing sales from Hugo cannot come soon enough, as the company is experiencing its share of obstacles that could lead to a reduction in revenue from, as well as growing costs associated to, its diabetes segment. Although the segment pulled through in positive revenue growth -- 2% -- for the quarter on a year over year basis, that was soon followed up with an FDA warning letter on Dec. 5 notifying the company of inadequacies found during an inspection that concluded in July 2021 of the diabetes business headquarters in California.
The warning letter addressed how the company handled recalls of its MiniMed 600 series insulin pumps and its remote controller device for the MiniMed 508 and Paradigm pumps. It went on to state that the company failed to effectively process complaints, risk assessment, corrective and preventive action, and reporting of adverse events, during which time the FDA received over 57,000 complaints ultimately resulting in the recall of 463,000 devices three years after initial complaints began.
Medtronic provided an original response to the FDA in November upon the agency's initial review, but has been informed as of the warning letter that there are still 38 outstanding actions that require corrective measures. There are also 14 actions requiring a new monitoring plan. In an effort to address the requirements by the FDA the company is reallocating some current personnel as well as hiring outside experts to clean up the mess and put the company on a path to avoid recurrence of the issues. This is likely to add to unanticipated costs for the current quarter and possibly beyond.
News of the letter did not sit well with investors, leading to a steep 12% decline in stock price the three days following. It has since regained most of that decline and continues to trend upward.
Where's the net?
All things considered, Medtronic is an established company -- a dividend aristocrat -- that is considered a major player in medical technology with innovative products such as leadless pacemakers. The setback experienced by recalls and an accompanying warning letter may scare some investors away, and it may take a while for buyers to regain any potential lost trust. But for the long term investor, recent declines in the stock price combined with the potential to gain market share in the massive robotic surgery market make for a compelling reason to buy into the recent 22% dip.
