UPDATE: Dec. 17, 2021: Medtronic's stock price has fallen by nearly 9% since the company announced its diabetes group headquarters received an FDA warning letter following a facility inspection.

The medtech giant's stock price dropped by 6% Wednesday — the day of the announcement — and continued to drop by 2.6% Thursday. Medtronic's stock price was up slightly when the market opened Friday.

Along with the stock hit, the company has been downgraded by several Wall Street firms. Wells Fargo and J.P. Morgan lowered their ratings of the company due to the warning letter and other recent setbacks in key product categories, such as renal denervation and its surgical robot Hugo.

One crucial question for Medtronic's diabetes group is whether the warning letter is going to delay the regulatory process for the MiniMed 780G insulin pump, an important product for the company as it continues to lose ground in the diabetes tech space.

However, that question may not be answered quite yet. BTIG analysts wrote after speaking with Medtronic management Thursday that the company has not yet met with the FDA on the path forward following the warning letter.

"Under some scenarios [the 780G pump] could still be approved given the patient need, but the main priority is fixing the Warning Letter and 483 deficiencies," the analysts wrote.

Meanwhile, insulin pump rival Tandem Diabetes Care has been boosted by Medtronic's setback. Tandem's stock price closed up by nearly 10.5% Wednesday and slid back only slightly Thursday.

As competition in the space heats up, and adoption in diabetes tech overall takes off, pump players like Tandem and Insulet are likely to gain even more ground if there are any additional delays or setbacks for Medtronic.

"With both [Insulet] and [Tandem] gaining momentum in recent years, and both with new products approvals expected in 2022 (OmniPod 5 and Mobi), the setup could lead to accelerated share losses for [Medtronic,]" Jefferies analysts wrote.

While Insulet's stock price closed Wednesday up by about 5.4%, the company's shares dropped by 3.8% Thursday.

Dive Brief:

• Medtronic has received an FDA warning letter for the company's diabetes group headquarters in Northridge, California, following an inspection of the facility that concluded in July.
• The warning letter is regarding past recalls for MiniMed 600 series insulin pumps and remote controllers for MiniMed 508 and Paradigm pumps, according to a Wednesday announcement from Medtronic. The company said the warning letter "focuses on the inadequacy of specific medical device quality system requirements at the Northridge facility in the areas of risk assessment, corrective and preventive action, complaint handling, device recalls, and reporting of adverse events." Medtronic received the warning letter Thursday.
• J.P. Morgan analysts wrote that this is another blow for a diabetes segment that "was already falling meaningfully behind the competition and suffering heavy patient turnover with a non-competitive [continuous glucose monitor] and a delayed launch of its hybrid closed-loop pump to compete with Tandem's Control-IQ, this will only exacerbate the problem." Medtronic's stock price was down over 5.5% early Wednesday and continued falling by nearly 7% after the market opened.

Dive Insight:

The FDA's warning letter is regarding recalls that were initiated more than two years ago.

In 2018, Medtronic recalled remote controllers for the MiniMed 508 and MiniMed Paradigm insulin pumps due to cybersecurity risks. The recall was later expanded in October — after the FDA concluded its inspection referenced in the Wednesday announcement — with instructions for anyone still using the pumps to stop the use of the remote control and disconnect it from pumps.

The second recall referenced was for MiniMed 600 series pumps in 2019, which was initiated due to a malfunctioning part that could cause incorrect insulin dosing amounts. This recall was also expanded in October and ultimately impacted over 463,000 devices in the U.S.

Medtronic is not recommending any action for physicians or patients as a result of the warning letter and said that resources will be taken from across the company to address the issues highlighted by the FDA. However, the company's statement lacked any specific details of what will be done or how many resources would be committed.

"To ensure the most effective response to the warning letter, Medtronic will apply resources from across the company and utilize external experts. The company is implementing a range of corrective actions and process improvements related to the observations, and will continue reviewing these actions with the FDA," the company said.

While Medtronic is one of the largest medtech companies and has a history of developing diabetes technology products like insulin pumps and continuous glucose monitors, the company has continually struggled as the market has taken off.

Smaller companies like Insulet and Tandem Diabetes Care are competing at the top of the insulin pump space with Medtronic, and projections suggest that these companies will steal even more market share away from the medtech giant. Meanwhile, the CGM space is being dominated by Dexcom and Abbott Laboratories.

Ali Dianaty, vice president of product innovation for Medtronic's diabetes portfolio, told MedTech Dive in January that the company was refocusing on its diabetes business. The refocus includes new investments and a strategic shift to thinking about diabetes tech products more like consumer electronic products than medical devices, which the rest of the industry has similarly done.

However, the diabetes group has continued to struggle this year, and the warning letter is another setback.

In a Securities and Exchange Commission form 8-K filing, also released Wednesday, Medtronic said it now expects high-single-digit declines for the diabetes business in its fiscal year 2022 third quarter and a mid-single-digit decline for the group's fiscal year 2022. The new guidance is a slight drop from previous projections.

"We'd expect further pressure on MDT shares today, and see [Tandem] as the big winner as it gets ~50% of new pump patients from competitive switches (ie. Medtronic), and to a lesser extent [Insulet,] which gets ~20% of new patients from competitor switches," J.P. Morgan analysts wrote.

The analysts questioned whether the warning letter will impact the FDA's review of Medtronic's MiniMed 780G pump. The pump is Medtronic's latest automated insulin delivery system to compete with Tandem and Insulet's highly-anticipated, but recently-delayed, Omnipod 5 pump.

The 780G pump received CE mark and launched in Europe in 2020, and the product is currently under review by the FDA for a U.S. launch.

J.P. Morgan analysts said that while Medtronic has not confirmed whether the warning letter could mean a halt of the FDA's review for the 780G pump, it's "a realistic and prudent assumption."

Evercore ISI analysts wrote that Medtronic has 15 days to respond to the letter and "will seek guidance on whether the 780G approval will be tied to the lifting of warning letter," noting that there is a chance an approval can still happen.

While Medtronic did not specifically reference the pump in its 8-K filing, the company said the lowered guidance is due to "the potential impact on Diabetes business drivers, including uncertainty on the timing of U.S. Diabetes product approvals."

Following the announcement, rivals Tandem's and Insulet's stock prices were up by 10% and 5.6%, respectively.