Weight-Loss Drugs Divide Wall Street on Medical Device Stocks

With weight-loss drugs that reduce the risk of heart attacks and diabetes potentially improving millions of lives, stock investors have had the somewhat unpleasant task of sussing out the impact on a host of health-care companies.

(Bloomberg) — With weight-loss drugs that reduce the risk of heart attacks and diabetes potentially improving millions of lives, stock investors have had the somewhat unpleasant task of sussing out the impact on a host of health-care companies.

Take makers of devices that treat conditions associated with diabetes for instance. As patients drop pounds by taking a new class of drugs like Ozempic and Wegovy — known as GLP-1s — there’s a likelihood that diabetes cases may decline. That’s great for health outcomes, but poses a demand issue for device makers, where investors are already choosing sides. Quarter-to-date, the top three decliners in the S&P 500 Health Care index — Insulet, ResMed Inc and Dexcom Inc — are diabetes-related.

Most affected is insulin pump maker Insulet Corporation which lost about 45% of its market value in the past three months and had its worst quarterly performance in nearly 15 years. And while traders continue to shed their portfolios of the diabetes device stocks, sell-side analysts are pushing back by noting that the companies are unlikely to be impacted in the near-term — and even the future financial impact of GLP-1 drugs could be less damaging than feared.

“There are some large investors out there who worry that the risk could be even bigger than we’re saying,” said Baird analyst Jeffrey Johnson. “A lot of this, I think, is just a buyer’s strike and a concern about what could happen in the future.”

Wall Street’s hankering for weight-loss medications like Wegovy has buoyed drugmakers Novo Nordisk A/S and Eli Lilly & Co. But an August study update showing Novo Nordisk’s Wegovy reduces heart-related risks sent diabetes device makers plummeting. 

The disconnect between what the market is doing and what Wall Street is saying extends beyond diabetes device stocks, seeping into the medical device sector. ResMed, which makes breathing-machines for sleep apnea, — a condition often tied to excess weight — has fallen more than 30% this quarter. The stock had its biggest three-month drop in 24 years.

“There’s a mismatch right now in the actual fundamentals and market sentiment,” said Matt Henriksson, a Bloomberg Intelligence analyst. “The market sentiment is imagining that worst case scenario where the GLP-1s are kind of the cure all and it prevents or delays all medical procedures in the future when the fundamentals are saying that that seems to be unlikely.”

Read more: Health Stocks Battered as Obesity Drugs, Oversight Upend Market

Some view the sector-wide weakness as a buying opportunity. JPMorgan in a late August note described sentiment on medical devices as the worst it’s been since the global financial crisis of 2008. This means now is the time to snap up the device stocks, according to analyst Robbie Marcus. 

To be sure, these stocks could still see a rebound. As a combination of side-effects and usage risks begin to confront prescribers and patients alike, chances are that the stocks may go back up, analysts say. Investors could also start to place bets on a turnaround story as soon as early 2024 if the stocks continue to sell off.

Still, reservations to own these device stocks persist as projections show the global market for the weight-loss drugs could reach $100 billion by 2035, leading investors to pull back even further.

“The main overhang right now on these stocks isn’t so much that people think there’s a bigger financial risk than these stocks have already embedded in their valuation,” Baird’s Johnson said of diabetes stocks. “It’s just that there’s a pause here of investors not wanting to own stocks where you really don’t have a whole lot of insight into exactly how to quantify these things over the next five or 10 years.” 

Read more: A Stock Investor’s Guide to Navigating Weight Loss Opportunities

Betting against the device stocks has been profitable for short-sellers this quarter. Paper profits for bearish bettors on the handful of stocks — Insulet, Tandem Diabetes Care Inc., ResMed and Dexcom — were roughly $1 billion in the third quarter through Thursday’s close, according to data from S3 Partners LLC’s Ihor Dusaniwsky.

More news await these stocks as Lilly’s tirzepatide — already approved for diabetes as Mounjaro — is expected to enter the weight-loss market with an approval for obesity expected by the end of the year. Additional trial results showing the benefits of the weight-loss drugs are expected in the next six to 18 months and positive data could add more pummeling to these diabetes and insulin pump stocks, Johnson said.

The best case scenario for these diabetes stocks, according to BI’s Henriksson, is for the companies to post third-quarter earnings “that shows that it’s business as usual.”

–With assistance from Bre Bradham.

(Updates with closing prices throughout.)

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