Can Medtronic revive its beleaguered diabetes unit?

Medtronic is showing signs of reaching a turning point in a market that it pioneered — diabetes care — after several years of critical setbacks.

The company's latest insulin pump came on the market late spring in the U.S. after a stretch of years of recalls, sales declines and issues at a California plant, leading to warnings from the U.S. Food and Drug Administration.

While diabetes remains Medtronic's smallest business category — generating $2.3 billion, or 7.2%, of total fiscal 2023 sales — it is being watched closely by analysts, investors and the company itself. CEO Geoff Martha in September listed it as one of the company's priority areas because of the potential size of the market.

"Getting this diabetes business back to being competitive and driving innovation like we've done was a big one, and we had fallen behind," said Martha in September at the Bank of America Global Healthcare Conference.

The company reported in August that U.S. diabetes sales were still down 8.7% in the May-July period, but globally they were up 6.8%. Industry analysts generally saw encouraging signals but still voiced caution.

"[Medtronic's] diabetes franchise seems to be turning the corner somewhat, but we still believe they will be in a challenging position going forward," wrote analysts with Minneapolis-based Piper Sandler Cos. in its research note.

In the big picture, analyst Mike Matson with Boston-based Needham & Co., said he now sees a turnaround in diabetes devices for Medtronic.

"In the U.S., [Medtronic] had its best quarter in over three years for new patient adoption and saw its attrition levels reverse. Additionally, the [MiniMed] 780G is driving full system sales," wrote Matson in a research note in August.

In a June interview Que Dallara, operating president of Medtronic's diabetes business, acknowledged that the company needed to re-establish some relationships.

"Do we have to do work to win back some of the hearts and minds? Of course we do. We always have to earn the business of our customers," Dallara said. "It's good to get some of these challenges behind us."

April marked a turning point for the business. After 16 months the FDA lifted its warning letter over how the diabetes division had handled complaints and recalls. The agency also granted approval to its MiniMed 780G, the newest generation of Medtronic's insulin pump that has been available in Europe since 2020. Approval was delayed while regulatory issues were being sorted out.

Medtronic will announce financial results of the August-October quarter on Tuesday.

Diabetes is a major public health issue in the U.S. and an increasingly intractable problem globally. According to the Centers for Disease Control and Prevention, 37.3 million Americans have diabetes and another 96 million U.S. adults have prediabetes.

MiniMed, which Medtronic acquired in 2001, introduced the first-ever commercially available insulin pump in 1983. The new MiniMed 780G adds many new features including what Medtronic calls its "meal detection technology." It checks sugar levels every five minutes and then automatically increases or reduces the amount of insulin being delivered.

The FDA approval of the MiniMed 780G included using the pump with Medtronic's Guardian 4 continuous glucose monitor sensor. As Martha, the company's CEO, describes it, the true growth will come in the sales of the sensors and other technology that work with the MiniMed and any other devices. That allows for continual sales beyond the devices themselves.

"The response to our MiniMed 780G system in the U.S. has been incredible," said Ali Dianaty, senior vice president of product innovation and operations for the diabetes division.

About half of patients who already use a Medtronic pump have either transitioned or placed orders for the new version, Dianaty said.

And while competitors make various components, Dianaty said Medtronic is the only company that makes an integrated system combining an insulin pump and a continuous glucose monitor.

Medtronic's largest competitors in the insulin pump markets are Massachusetts-based Insulet Corp. and its Omnipod 5 and California-based Tandem Diabetes Care Inc. with its T:slim X2. Insulet makes a patch insulin pump, a space that both Medtronic and Tandem want to enter.

Medtronic has different competitors when it comes to continuous glucose monitors, which use skin sensors to monitor blood sugar, eliminating a patient's need to prick fingers for a blood sample.

Companies such as California-based Dexcom Inc. are established in the market, as well as Abbott with its FreeStyle Libre, which was introduced in 2017 and has proven successful. Abbott reported Libre sales of $4.3 billion for 2022, significantly more than Medtronic's entire diabetes division.

Libre is the most widely used continuous glucose monitor in the world with more than 5 million total users, nearly 2 million of whom are in the U.S. Unlike Medtronic, Abbott does not make an insulin pump that pairs with Libre.

An important addition to Medtronic's diabetes portfolio is Simplera, the company's next-generation continuous glucose monitor, a successor to Guardian 4. The device is approved in Europe but awaiting FDA approval and is seen as a competitor to Dexcom and FreeStyle Libre.

Simplera is designed for patients to use with a MiniMed 780G or Medtronic's InPen smart insulin pen.

John Boylan, an analyst with Edward Jones, said adding Simplera to the product mix "gets them a little closer to their competition."

Dr. Elizabeth Seaquist, an endocrinologist with M Health Fairview, said diabetes patients typically continue to use their prescribed insulin pumps until they are out of warranty. That means that MiniMed 780G sales won't skyrocket overnight.

But Seaquist said she's hearing good feedback from patients using the new pump.

"My patients tell me it's much easier to use. So that's a big step forward," said Seaquist, who noted that the MiniMed 780G has a "much more reliable sensor" and is exceeding her expectations.

Seaquist, the Department of Medicine chair at the University of Minnesota Medical School, said Medtronic was long the market leader because it didn't have much competition.

Now, it must compete on quality.

Before securing FDA approval for the MiniMed, the future of Medtronic's diabetes business seemed cloudy. Regulatory issues drove changes in leadership in the division, and Martha said the reorganization was one of his priorities as CEO.

Medtronic received its warning letter from the FDA in December 2021. In March 2022, the company named Dallara, previously CEO for Honeywell's Connected Enterprise business, as the new leader for the diabetes division.

"We think that Medtronic is really making progress in turning its diabetes business around. We're seeing a lot more attention and management focus on diabetes and it continues to show," said Boylan, the analyst with Edward Jones.

Medtronic is now trying to grow the business as well. In May the company announced plans to acquire South Korea-based EOFlow Co., maker of a wearable insulin patch, for $738 million. The deal is expected to close by the end of the year.

Medtronic also has numerous new diabetes developments in the pipeline in various stages of clinical trials.

As business is improving, Medtronic's diabetes division still faces some legal challenges. In August, a proposed class-action suit in California charged that the app used with InPen was sharing user data with companies like Google. Data breach issues are a sensitive area for patients.

In a September statement the company said, "Medtronic has reviewed the complaint and will vigorously defend against the lawsuit in court."

Medtronic cannot afford another misstep.

"Diabetes technology remains one of the fastest growing, innovative, and rapidly evolving markets in med-tech," wrote Robbie Marcus, analyst with J.P. Morgan, after the annual meeting of the American Diabetes Association in June.

In an October research note after a group investor meeting with a Medtronic team, Marcus was encouraged by what he saw as the emerging strategy of the diabetes business.

The company is concentrating on the right components and strategy, he said.

"The turnaround in diabetes is real and underway," Martha said during an earnings call in August.