Medtronic expects diabetes unit struggles to continue as rivals increase sales and launch products

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Medtronic’s diabetes unit has suffered a series of setbacks in recent quarters, including a loss of ground in the diabetes technology market and product safety issues, all amid increased competition.

The company’s challenges continued into the final quarter, with Medtronic announcing that unit revenue fell 8% from a year earlier to $597 million.

Meanwhile, the medical device company expects diabetes group revenue to fall 8% to 10% this quarter and 6% to 7% in fiscal 2023. Its 2022 fiscal year ended April 29. .

The news follows a difficult period for the company. Medtronic said in December it received a warning letter from the Food and Drug Administration, which highlighted several product safety issues and criticized the company’s handling of MiniMed insulin pump recalls. The letter delayed review of two devices – the Guardian 4 glucose sensor and the MiniMed 780G pump – while Medtronic’s competitors launch new products.

CEO Geoff Martha said on a May 26 earnings call that the Guardian 4 CGM and 780G pump have been well received in markets where the products are available. However, there is still uncertainty about when the FDA will make a decision on the devices and when revenue contributions will begin.

“While we hoped to receive approval for the 780G sensor and Guardian 4 in the United States, we chose not to include it in our guidelines,” Chief Financial Officer Karen Parkhill said on the call.

Questions around the FDA’s warning letter are creating uncertainty about the group’s future, some analysts said.

Analysts at Truist Securities wrote in a May 27 note that “the warning letter limits visibility into the turnaround of the company’s struggling Diabetes division.”

Medtronic’s diabetes unit for the company’s fiscal year 2022
Q1 Q2 Q3 Q4 Full year
Revenue
(annual change)
$572 million
(2% increase)
$585 million
(2% increase)
$584 million
(7% decrease)
$597 million
(8% decrease)
$2.34 billion
(3% decrease)

SOURCE: Medtronic Revenue Reports

While Medtronic has struggled in the diabetes tech business, rivals have increased revenue year on year, even amid the pandemic.

“Diabetes is such an attractive end market with a very strong double-digit growth profile, and within that market…Medtronic has definitely underperformed,” said RBC Capital Markets analyst Shagun Singh.

Singh added that the company’s growth has been “far below standard”.

And after?

Even before Medtronic released its results for the last quarter, analysts debated whether the company should keep its diabetes business.

In an April report, Needham analysts wrote that the diabetes unit is a likely option for the medical device maker due to its “recent underperformance, FDA warning letter and its customer base and sales channel different from the rest of [Medtronic.]”

A spin-off would add to the trend in the medical device space. Last year, Johnson & Johnson announced it was selling its consumer healthcare business, while Zimmer Biomet said it was in the process of divesting its spine and dental units, GE announced its healthcare business would become independent, and Becton Dickinson said it would sell its diabetes business.

Medtronic announced plans last week to launch a joint venture with DaVita which will focus on kidney care.

Mike Matson, an analyst at Needham, said the trend in medical devices is for smaller companies to outperform larger, more diversified companies.

As for Medtronic, which is one of the biggest companies in the medical technology industry, Matson said the company doesn’t have the same focus as others in diabetes technology.

Medtronic is the only company on the market to offer both CGMs and insulin pumps. It competes with smaller companies like Dexcom in the CGM space, and Insulet and Tandem Diabetes Care in the insulin pump space. Abbott, another large medical technology company, also competes with Medtronic in CGMs.

RBC’s Singh made a similar point, saying people wonder if Medtronic is “too diverse that they can’t do something good.” The analyst added that Medtronic may be looking to get rid of the business because it has held back the company’s overall growth.

Singh agreed that splitting the diabetes unit is an option given the revenue losses, comments from previous earnings calls on portfolio management and the impact of the FDA warning letter.

Needham’s Matson said a sell-off could take place rather than a spinoff. Still, “who wants to buy it with all these issues?” he added.

The outcome of the 780G pump and Guardian 4 sensor’s regulatory review as the company responds to the FDA’s warning letter could be critical for Medtronic in the future.

Medtronic has two products ready for launch in the United States, while regulatory delays could cause medical technology to lose even more ground, as Insulet offers its newest insulin pump in the United States and Dexcom awaits a decision from the FDA for its G7 CGM system.

Sean Salmon, president of Medtronic’s cardiovascular portfolio and former head of the diabetes group, said on last week’s earnings call that the company is more than 80% in compliance with the covenants outlined in the warning letter. Still, Medical Technology did not provide a timeline for when decisions will come from the agency and when subsequent releases will take place.

Medtronic may be able to obtain a “discretion” from the FDA, which would allow further review of its products while the company still issues the warning letter, according to RBC’s Singh.

However, bringing the products to market may not be enough to turn the group around, Singh noted.

“Are these products going to be competitive? Singh said. “I think, again, it’s going to stop the bleeding, but they’ll probably need more than just those two products to be competitive.”

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