Dive Brief:

• Medtronic is stepping up investment in its surgical robotics capabilities as it seeks to double or triple its sales in its 2023 financial year.

• The company expects the unit to generate $50 million to $100 million in its current 2022 financial year, suggesting sales could come in anywhere from $100 million to $300 million in 2023.

• Medtronic expects an operating loss of $400 million in robotics and renal denervation, its other big opportunity, as it invests ahead of the generation of significant sales. William Blair analysts wrote they "remain encouraged" by the company’s pipeline but contend many products are still years from launch while near-term investments put pressure on margins in the short term. 

Dive Insight:

Talking to investors after reporting 37% sales growth in the fourth quarter, Medtronic executives set out how they plan to maintain the upward trajectory by placing bets in anticipation of future sales. 

"Two of our largest opportunities are surgical robotics and renal denervation," Medtronic CFO Karen Parkhill said. "We're purposely making significant investments in them to ensure we fully capitalize on the multi-billion dollar opportunities ahead."

Parkhill expects the investments in marketing, customer service and support capabilities to lead to a $400 million operating loss across the two nascent businesses. Medtronic has set up the renal denervation opportunity through years of investment in its Symplicity device. Three-year data in multi-drug resistant hypertensive offered encouragement last year ahead of the delivery of pivotal results toward the end of 2021.

William Blair analysts noted that in fiscal year 2022 Medtronic expects a larger-than-usual increase in operating expenses, largely from R&D, as the company ramps up investments in long-term growth initiatives. Medtronic is planning to increase its R&D spend by more than 10% in FY22, the biggest increase in the company's history.

"We like these investments, which pave a way toward long-term growth and profitability, though they ultimately led to a fiscal 2022 EPS guide that we believe was in line with to modestly below street expectations," the analysts wrote.

Medtronic, which sees renal denervation as a $3 billion opportunity, could face a fight for the market, though, with ReCor Medical expecting to complete enrollment in its pivotal study this year.  

The competition is more intense in robotics, where long-term incumbent Intuitive Surgical is being swarmed by new rivals. Medtronic already sells the Mazor robotic system, which CEO Geoffrey Martha estimates "continues to outpace [its] closest competitor," and recently gained FDA clearance to run a clinical trial of its Intuitive-challenger Hugo in urologic procedures.

"Gaining real-world experience after a prolonged period of lab testing—and providing intense clinical and commercial support—will ultimately be a key to one day being a more material competitor in the market (still likely several years away, in our opinion). Still, we believe there is demand in the market for new players and the success will rely on whether the technology and service will meet surgeons' high demands and expectations," William Blair analysts wrote.  

Medtronic booked its first revenue for soft tissue robotics system Hugo in the fourth quarter from placements outside the U.S. Data from the overseas hospitals could support approvals in the U.S. Martha has high hopes for the system, telling investors he expects "soft tissue robotics to be a meaningful growth driver going forward, not just for med-surg, but for overall Medtronic."

With Medtronic predicting it can invest in robotics and renal denervation while expanding its overall operating margin, the company will have capacity to spend elsewhere. Supporting organic growth is a priority but Medtronic is also set to spend time at the deal table.

"We did a number of deals last year, tuck-in deals, and I'd say tuck-ins are still [a] focus," Martha said. "Those tuck-in deals could be up to several billion dollars. We're committed to investing in growth, both organically, inorganically."

The acquisition of privately-held RIST Neurovascular, which closed in August 2020 for an undisclosed amount, was the eighth in a series of tuck-in acquisitions Medtronic has announced since January 2020.