Medtronic enters robotic spinal surgery in a partnership with, investment in Israeli small cap

Mazor's Renaissance System--Courtesy of Mazor

Medtronic has made its long-awaited entrance into robotic surgery in a deal with small cap Israeli player Mazor Robotics ($MZOR). The investment will likely be for more than $50 million and will come in three potential tranches. It will result in Medtronic ($MDT) owning about 15% of Mazor, if all the tranches are executed.

The deal creates the third major surgical robotics new entrant to step into the ring officially in the last year, setting up a challenge with the long-standing, sole dominant player, Intuitive Surgical ($ISRG). Auris Surgical Robotics last month said it would micro-cap surgical robotics player Hansen Medical ($HNSN)--both were founded by Dr. Fredrick Moll, who was also an Intuitive Surgical founder. Last fall, Auris disclosed a $150 million investment in an SEC filing.

In addition, in December Johnson & Johnson ($JNJ) set up a robotic surgery joint venture with Google parent company Alphabet ($GOOG), which is known as Verb Surgical.

The Medtronic-Mazor partnership includes co-promotion, co-development and potential global distribution for some Mazor spine products. The commercial deal has an initial U.S. co-promotion phase. If milestones are met by the end of 2017 in that, then Medtronic will assume global sales and distribution rights for Mazor's future spine products.

"The structure of the commercial agreement features some very important points for our customers as well as our shareholders," said Mazor CEO Ori Hadomi in a statement "New developments, such as synergistic implants, could generate new revenue streams for Mazor, beyond the anticipated growth in our current revenue streams from capital equipment, service agreements and disposables. The synergy between the organizations' teams will potentially yield operational efficiency benefits for Mazor."

In the second phase, there are annual sales quotas for hundreds of next generation systems over four years. Medtronic will buy 15 of these systems in 2016. Here, Medtronic becomes Mazor's sole strategic partner for developing and commercializing robotic-based spine systems and applications.

As for the investment details, in the first tranche Medtronic will buy newly issued shares representing 4% of Mazor's shares for $11.9 million. That's set at a price equal to the trailing 20-day volume weighted average of its share price. Mazor closed at $10.63 prior to the deal announcement--with a market cap of $225 million.

The price for the subsequent tranches is not yet set, but it will be calculated similarly. In the second tranche, Medtronic will buy 6% of Mazor and in a potential third tranche it will purchase up to an additional 5% of share. Both of the final tranches are subject to the start of the global distribution agreement and Medtronic may cap each of them at $20 million.

Mazor will continue to sell its Renaissance System through its own sales team and distribution partners. It will also continue to innovate on its own in spine, as well as other market indications. The system was cleared by the FDA in 2011 for spinal surgery.

The tiny company reported first quarter sales of $6.4 million--when it sold 5 of its Renaissance systems.

Mazor moved up quickly on the news, gaining 30% in early trading.

- here is the announcement

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