Medtronic extended the medtech industry losing streak on Tuesday, reporting second quarter sales that fell around $200 million short of the consensus Wall Street forecast. The sales miss reflected the same pressures faced by other medical device companies, notably COVID-19 cases and healthcare staffing shortages, and the resulting discussion shed light on the future of Medtronic and the wider industry.

Investors seemed cautious about the update, driving shares down 3% Tuesday. The company's stock price was down slightly when the market opened Wednesday.

Analysts used the fiscal 2022 second-quarter results conference call to ask Medtronic about a wide range of big issues, from whether procedure volumes rebounded in November to the chances of the company spinning off non-core or underperforming business units. Here's a snapshot of the key takeaways.

November sees 'some improvement' in volumes

Medtronic follows a different quarterly results cycle than its competitors, making each readout a chance to peer into the future of the broader medtech industry. The good news is procedures and average daily sales showed "some improvement" in the first few weeks of November. The bad news? The recovery is slower than after earlier COVID-19 waves because cases are just one of the headwinds currently.

"Before, it was more of an epidemiology discussion around COVID cases and the severity of them and the impact to ICU beds. Now, you've got this critical staffing shortage in hospitals around the world, particularly in the U.S.," Medtronic CEO Geoff Martha said on Tuesday's conference call with investors. 

Medtronic is erring on the side of caution with its guidance for the current quarter, leading it to cut its forecast for organic sales growth to 3% to 4%, well below the consensus analysts estimate of 6.5% to 7%. Yet, the company also sees signs that the impact of healthcare staffing shortages is moderating, potentially because hospitals are acting to improve the situation.

"Hospitals are getting more aggressive when it comes to retaining staff to offset these challenges, something that could drive an acceleration in the ongoing shift to the [ambulatory surgery center] given lower resource utilization in this setting," analysts at J.P. Morgan wrote in a note to investors. 

Supply problems drag on Hugo

Medtronic went into its current financial year with hopes that the company's Hugo robotic surgical system would bring in $50 million to $100 million. Martha ended those hopes on the second quarter call. Now, the expectation is that Hugo will generate revenues of more than $10 million but less than $50 million, a forecast the J.P. Morgan analysts interpreted as implying sales of around $25 million.

The shortfall stems from "some supply chain issues and some initial manufacturing issues," Martha said, adding that Medtronic underestimated the challenge of delivering a "complex program" like Hugo. Aside from those problems, Medtronic was upbeat on Hugo, a device that analysts at Jefferies said has the potential to "address cost/utilization barriers presented by Intuitive Surgical's da Vinci platform." 

Demand is higher than Medtronic can meet, Martha said, and use is set to expand from urological and gynecological cases to general surgery imminently. A U.S. clinical trial is due to start soon and Medtronic expects a "strong ramp" in sales next year, leading Martha to state the company is "off schedule but not off track" and to reassure analysts about Hugo's longer-term prospects. 

"While the setback marks the latest in a long development journey, Hugo is still positioned as a potential growth catalyst for MDT upon full-launch when the context of the ~$30bn surgery [total addressable market] and shift toward robotics is factored," analysts at Jefferies wrote in a note to investors. 

The road to growth in 2023

The delay to significant Hugo sales follows an earlier setback to development of the device and news that Medtronic's renal denervation system will come to market later than expected. The system was no better than a sham treatment at lowering blood pressure at a recent interim analysis of a clinical trial, forcing Medtronic to keep gathering more data to reach a final conclusion.

Martha expressed optimism in the project, noting that all other sham-controlled studies have shown efficacy and setting out a timeline that would see Medtronic file for FDA approval after completing follow-up in the second half of 2022. However, the combination of the delays to significant robotics and renal denervation sales has dented confidence in some quarters.

"We think the lowered Hugo guidance on top of the push-out of renal denervation to next year is the main investor concern and think management will need a few wins – whether on the pipeline, estimates moving higher, etc. – before the pipeline-driven growth thesis returns to favor," analysts at J.P.Morgan wrote.

The analysts at BTIG took a more upbeat view, stating that Medtronic's pipeline for the next financial year is "still largely intact" and tipping the company to "make up the slower robotics ramp on other product launches."

Will Medtronic spin off units?

Wells Fargo analyst Larry Biegelsen used the second quarter results conference call to ask Martha if he sees opportunities to spin off "non-core or underperforming segments." Martha's response points to the potential for Medtronic to revise its portfolio.

"I do see opportunities. I'm not signaling anything. But I can tell you that this is something that we're constantly looking at. I don't see ourselves as like a GE or a J&J that have dramatically different businesses. But I do think it's an opportunity for us over time," the CEO said.

Martha expanded the discussion beyond non-core and underperforming segments, explaining that Medtronic is always looking at all areas of its operation, including high performance and high growth units, to ensure it is still the right owner. The assessments consider whether Medtronic can provide the "right amount of capital" and if there are "synergies between businesses that matter."