Medtronic’s diabetes unit has suffered a series of setbacks over the last several quarters including losing ground in the diabetes technology market and product safety issues — all amid heightened competition.
The business’s challenges continued last quarter as Medtronic reported that the unit’s revenue decreased 8% from a year earlier to $597 million.
At the same time, the medical device company forecasts that the diabetes group’s revenue will drop 8% to 10% this quarter and by 6% to 7% for fiscal year 2023. Its fiscal year for 2022 ended April 29.
The news follows a challenging period for the business. Medtronic said in December it received a warning letter from the Food and Drug Administration, which highlighted several product safety issues and critiqued how the company handled recalls for MiniMed insulin pumps. The letter has held up the review of two devices — the Guardian 4 glucose sensor and the 780G MiniMed pump — while Medtronic's competitors are launching new products.
CEO Geoff Martha said on a May 26 earnings call that the Guardian 4 CGM and the 780G pump have been well received in markets where the products are available. However, there is still uncertainty as to when the FDA will make a decision for the devices and when revenue contributions will begin.
“While we are hopeful that we can receive approval for 780G and Guardian 4 sensor in the United States, we've elected not to include it in our guidance,” CFO Karen Parkhill said on the call.
The questions around the FDA warning letter are creating uncertainty about the group's future, according to some analysts.
Truist Securities analysts 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 FY2022
SOURCE: Medtronic earnings reports
While Medtronic has struggled in the diabetes technology sector, rivals have been growing revenues year over year even amid the pandemic.
“Diabetes is such an attractive end market with very strong double-digit growth profile, and within this market … Medtronic has definitely underperformed,” said Shagun Singh, an RBC Capital Markets analyst.
Singh added that the business's growth has been “very substandard.”
Even before Medtronic reported results for last quarter, analysts were questioning whether the company should hold on to its diabetes business.
In an April report, Needham analysts wrote that the diabetes unit is a likely spin-off option for the medical device maker due to its “recent underperformance, FDA warning letter, and different customer base and sales channel from the rest of [Medtronic.]”
A spinoff would add to the trend in the medical device space. Last year, Johnson & Johnson announced it was selling its consumer health business, while Zimmer Biomet said it was spinning off 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 that will focus on kidney care.
Mike Matson, a Needham analyst, said that the trend in the medical device space is that smaller companies outperform the bigger and more diversified companies.
In regard to Medtronic, which is one of the biggest companies in the medtech industry, Matson said that the company doesn't have the same focus as others in the diabetes technology space.
Medtronic is the only company in the market offering both CGMs and insulin pumps. It competes against smaller companies like Dexcom in the CGM space, and Insulet and Tandem Diabetes Care in the insulin pump space. Abbott, another larger medtech company, also competes against Medtronic in CGMs.
RBC's Singh made a similar point, saying that people are asking if Medtronic is "too diversified that they can't get something right." The analyst added that Medtronic may be looking to shed the business as it has been dragging the company's overall growth.
Singh agreed that spinning off the diabetes unit is an option given the revenue losses, previous earnings call comments about portfolio management and the impact of the FDA’s warning letter.
Needham's Matson said that a sale could happen rather than a spinoff. Still, "who wants to buy it with all these issues?" he added.
The outcome of the regulatory review of the 780G pump and Guardian 4 sensor as the company addresses the FDA's warning letter may be key for Medtronic going forward.
Medtronic has two products ready for a U.S. launch, while regulatory delays may cause the medtech to lose even more ground as Insulet offers its newest insulin pump in the U.S. and Dexcom awaits an FDA decision for its G7 CGM system.
Sean Salmon, president of Medtronic's cardiovascular portfolio and former leader of the diabetes group, said during last week’s earnings call that the company is more than 80% through the commitments outlined in the warning letter. Still, the medtech didn't provide a timeline for when decisions will come from the agency and when subsequent releases will happen.
Medtronic may be able to get a “variance” from the FDA, which would allow for the review of its products to continue while the company still addresses the warning letter, according to RBC's Singh.
However, getting 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 bleed, but they'll probably need more than just these two products to be competitive."