Mazor reaches Europe under Medtronic’s auspices

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CE mark for its robotic surgery system Mazor X, plus another chunk of financing from partner Medtronic, is good news for Mazor Robotics – a rare commodity in a segment still overwhelmingly occupied by Intuitive Surgical. Mazor’s ADRs jumped 7% yesterday on news of the CE marking.

But the partnership might hold a sting for the smaller group. Medtronic is the sole distributor for the X system, and though this means an acceleration in system placements the price discount Medtronic will enjoy – estimated at 50-60% – means Mazor’s revenues could be lower than expected. Mazor might prefer simply to be taken over by its partner – and this just might be on the cards.

Unusually for a medical technology Mazor X was approved in the US ahead of Europe, going on sale there last October. Orders for 59 of the systems have been placed since then.

But the agreement between the two groups dates from May 2016, when Medtronic spent $12m to buy 4% of Mazor’s outstanding shares and agreed to promote Mazor’s Renaissance surgical guidance system. A second payment, this time of $20m with which Medtronic took its ownership of Mazor to 7.3%, was triggered in August 2016 by Mazor meeting sales and marketing milestones ahead of schedule.

A new phase

Last week Medtronic bought a further 3.2% of Mazor for $40m, again triggered by sales milestones. Mazor also issued warrants to Medtronic to purchase an additional 1.21 million shares. If the warrants are fully exercised Medtronic’s investment in Mazor will reach $125m and its ownership 14.2%.

And, with that, the agreement between the two companies entered its second phase.

Medtronic has now assumed exclusive worldwide distribution for the Mazor X and its accessories, and must buy a certain number of the systems from Mazor “with the cumulative potential of hundreds of Mazor X systems over a four and a half year period”. Around 30 staff will move from Mazor’s sales organisation to Medtronic.

The second phase of the agreement is expected to accelerate system placements in 2018, according to analysts from Wells Fargo, but the transfer price discount, which could be as high as 60% – putting the per-system price at $450,000 – will slow Mazor’s revenue growth. They forecast Mazor’s 2018 revenue at $32m, down slightly on the $33m forecast for 2017.  

On the plus side the shift from direct sales to outsourced distribution will shave around $13m from Mazor’s annual operating expenses, according to the Israeli company. These totalled around $53m in 2016.

Expensive

As for the chances of a takeover, it could be argued that Medtronic has missed its opportunity. If the company were to jump on Mazor it should have done so when it signed the initial agreement, at which point Mazor’s stock was trading at under $11; shares now go for nearly $50.

Still, an acquisition should not be ruled out entirely. Medtronic is taking baby steps in this area, with management stating this May that it would launch a surgical robotics product outside the US in early 2018 and in the US during fiscal 2019. It expects to realise material revenue from this in 2019, but what the actual device might look like, and what operations it might be used for, are still under wraps.

It will be many a long year until Medtronic can compete with Intuitive Surgical, by far the largest robotic surgery group. Buying Mazor might help – but if it does decide to take this route it will find Mazor a more expensive purchase than it was last spring.

To contact the writer of this story email Elizabeth Cairns in London at elizabethc@epvantage.com or follow LizVantage on Twitter

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