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1 Green Flag for Medtronic in 2022, and 1 Red Flag

By Jeff Little – Jan 14, 2022 at 11:37AM

Key Points

  • A 22% CAGR in the robotic surgery market provides ample room for revenue growth.
  • An FDA warning letter highlights issues in addressing recalls.
  • A 20% drop in stock price may provide an opportunity for long term investors.

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When the stock price follows the action of the FDA, investors hope the news is good.

Medtronic (MDT 2.32%), is a global producer of medical technology and therapies, probably best known for its cardiac devices such as pacemakers -- and after two years of sudden, sharp dives in its stock prices, its investors are probably all too familiar with a racing heartbeat. Shares hit an all-time high in January 2020 before COVID-19 fears swept the world; fell 21% by June 2020; bounced back 48% by August 2021; and have plunged 22% since. This time, COVID-19's not to blame, but while the company is waving a green flag for investors, a darker red flag may take time to overcome. 

two people sitting at breakfast table have displaying opposite facial expressions

Image Source: Getty Images

A green flag named Hugo

In February 2020, Medtronic acquired British AI and analytics specialist Digital Surgery to help bolster Medtronic's ambitions in robotic surgery. 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 of getting FDA approval for Hugo in the U.S., and further developing 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. Successful results proving Hugo's safety and effectiveness will help the company pursue FDA approval to sell and market the system in the U.S. 

CEO Martha and other Medtronic executives expect Hugo to win the FDA's approval,  and Martha pointed out that the company's booking increasing orders for Hugo as more surgeons get excited about its prospects. He expects that Hugo could bring in double-digit sales this year, and a larger increase in fiscal 2023.

The diabetes segment waves a red flag

Growing sales from Hugo cannot come soon enough, as the company faces trouble in its diabetes segment that could shrink its sales and swell its costs. Diabetes brings in over $500 million per quarter for the company, making up 6% of total revenue for Q2. Although the segment pulled in positive quarterly revenue growth -- 2% year over year --  an FDA warning letter soon followed on Dec. 15. The agency notified Medtronic that it had found inadequate safety measures during an inspection of its California diabetes business headquarters that concluded in July 2021.

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 the warning letter lists 38 outstanding actions that Medtronic still needs to fix, and 14 actions that require it to create a new safety monitoring plan. To address those requirements, Medtronic is reallocating some current personnel and hiring outside experts to clean up the mess and make sure it doesn't happen again. This is likely to cost the company some as-yet-unknown amount of extra expenses in the current quarter, if not beyond. 

Investors didn't like that letter, costing shares roughly 11% of their value in the days following. But Medtronic has since regained most of that decline, and as of this writing it continues to trend upward. 

Where's the net?

All things considered, Medtronic is an established company -- a dividend aristocrat -- and a major player in medical technology with innovative products such as leadless pacemakers. Recalls and warning letters 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 Medtronic amid its recent dip. 

Jeff Little has no position in any of the stocks mentioned. The Motley Fool owns and recommends Intuitive Surgical. The Motley Fool recommends the following options: long January 2022 $193.33 calls on Intuitive Surgical and short January 2022 $200 calls on Intuitive Surgical. The Motley Fool has a disclosure policy.

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