As weight loss drug stocks rallied on a landmark study, these stocks were over sold, analysts say
Continuous glucose monitoring has been a great tool to help patients with diabetes better manage their blood sugar levels, but all the attention being paid to new obesity drugs has pressured the stocks of the medical device manufacturers. This week was a great example. Novo Nordisk released on Tuesday early results from a study it conducted to gauge whether semaglutide, the active ingredient in its obesity and diabetes medicines Wegovy and Ozempic, can help reduce a person's cardiovascular risk. The Select trial showed obese and overweight adults with a history of heart disease saw a 20% decline in the occurence of heart attacks and strokes when taking the drug. This was seen as a significant reduction for the most common cause of death in the U.S., and many industry experts expect the study to strengthen the argument that GLP-1 agonists should be covered by insurance companies for weight loss. These medicines, which can cost upwards of $10,000 a year, are seen by some as a "vanity drug." However, the pharmaceutical companies are making the case that weight loss can improve health, and possibly lower health-care costs over time. While the study's results stoked confidence in the market potential for GLP-1 medications, it spooked investors who owned shares of medtech companies such as Dexcom and Abbott Laboratories , which make diabetes devices, and Intuitive Surgical , which manufactures robots used in bariatric surgery. Shares of biotech companies developing drugs for nonalcoholic steatohepatitis (NASH) also fell Tuesday. NASH is the most severe form of fatty liver disease, and GLP-1 medicines have shown signs of liver fat reduction in some patients. DXCM YTD mountain Dexcom shares are flat year to date. But analysts have said the news isn't all bad for such stocks, and many were fell too low on Tuesday. Indeed, some recouped lost ground on Thursday, such as Dexcom. Its stock closed up 2.1%, but shares remain down nearly 6% week to date. Abbott shares are down about 3% week to date and were flat in Thursday's trading. With this in mind, CNBC Pro looked at what analysts are saying about how each of these sectors will be affected by rising use of GLP-1 drugs to treat obese or overweight patients. Glucose monitoring devices In a research note Thursday, JPMorgan analyst Robbie Marcus made the case that GLP-1 utilization could actually boost the demand for continous glucose monitoring (CGM), which he said was already the "gold standard" for diabetic patients. Both Dexcom and Abbott are leaders in this category. "GLP-1s improve insulin sensitivity and lower blood sugar, in addition to driving patient weight loss," Marcus wrote. "CGMs will be vital to track progress and determine if the medication is actually working." He added that CGMs are a "cost-effective" way to help guide lifestyle changes and improve diet and can be used with weight-loss medication. "So while GLP-1s have meaningful impacts on the patient, a CGM is, in our view, the best way for patients to monitor their changes ... and create longstanding changes to how diet and exercise impact their bodies," he said. As for insulin pumps, Marcus doesn't expect any immediate threat due to the pool of patients with type 1 diabetes that have yet to adopt these devices. "... The still low Type 1 [diabetic] pumper penetration rates (35-40% in the U.S.) should be able to make up for any potential slowdown in the Type 2 market," he wrote, adding that Insulet is the winner in the pump category. Goldman Sachs analysts said the use of other medical devices may also be disrupted. That includes equipment used to treat obstructive sleep apnea or the possibility that fewer cardiac interventions will be needed. Companies in the sleep apnea market include Inspire Medical Systems , Resmed and Philips . Goldman noted that Resmed management cited three key barriers to GLP-1 adoption: high cost, low adherence and side effects, which can include nausea, vomiting and diarrhea. RMD 5D mountain Resmed share are down slightly week to date. Sleep apnea is commonly associated with obesity and overweight, and the condition can sometimes be reversed when weight is lost. On the other side, there's a possible benefit for companies such as Stryker , Smith & Nephew and Zimmer Biomet that serve the orthopedic market. "Possible that weight loss could modestly expand the patient population in the near-term, as many patients are asked to lose weight prior to Hip and Knee replacements, though unlikely to be material and will likely be offset by some patient delays," Goldman said. Bariatric surgery On its second-quarter earnings call in July, Intuitive Surgical admitted that it didn't yet know how many patients looking to lose weight would opt to try GLP-1 medications instead of undergoing bariatric surgery over the long term. However, it said interest in the new drugs was starting to hurt the number of procedures done by its da Vinci robot. Deutsche Bank analyst Imron Zafar estimated Thursday that bariatric surgery accounts for about 5% of Intuitive Surgical's U.S. robotic surgery business, but has been driving much of the company's growth. ISRG 3M mountain Intuitive Surgical shares have risen nearly 15% since the start of 2023 Although the number of bariatric surgeries performed in the U.S. didn't grow much from 2019 to 2022, more of the market has shifted to using Intuitive's robots rather than conventional laparoscopy, he explained. "Our analysis shows [total addressable market] penetration having roughly tripled since 2019 but yet still stands at just ~30%," Zafar wrote in a note to clients. "Looking ahead, the clinicians collectively project [mid-single digit] annual declines in total bariatric surgery case counts over the next two years, with da Vinci volumes expected to remain more or less flat with overall market contraction offset by robotic penetration continuing to trend higher (albeit at a substantially more modest pace going forward relative to the past few years)," Zafar said. Some of the surgeons Zafar spoke with said any drop off in bariatric surgery was likely to be offset by increased use of the robot for other procedures. Zafar has a hold rating on Intuitive Surgical shares, with a $335 price target. The average analyst price target is $368, or about 21% above where the stock is currently trading, according to Refinitiv. NASH drug developers The Select trial data also sparked a selloff in companies working on treatments for NASH. These stocks include Madrigal Pharmaceuticals , Sagimet Biosciences , Akero Therapeutics , 89Bio , Terns Pharmaceuticals and Viking Therapeutics . Madrigal shares, for example, are down about 12% week to date. Terns shares rose nearly 8% on Thursday, but the stock is down 5% week to date. The weakness came despite the fact that some of these names are also working on their own GLP-1 medications, and may eventually benefit from the growing market for those drugs. TERN 5D mountain Terns shares are down 36% year to date. Early data has shown that GLP-1 medications can reduce fat in the liver. That has led to questions as to whether NASH-only therapies are needed, Goldman analysts said. But they expect the drugs will remain necessary because GLP-1 drugs have yet to show they improve fibrosis, which is associated with NASH. "Given the complicated pathophysiology of NASH, many [key opinion leaders] have posited that combining multiple drugs with different mechanisms of action could offer an attractive benefit," the analysts said.