- Fear and doubt created by the emergence of new obesity and diabetes drugs may affect medtech stocks for years, according to analysts at J.P. Morgan.
- The analysts think medtech “can live side by side with GLP-1s” and expect device volumes to rise over time. However, with portfolio managers exiting medtech, and few people keen to buy their holdings, the analysts caution that stocks could continue to suffer through 2024 and 2025.
- J.P. Morgan published its take days after analysts at Needham warned that GLP-1s are “very likely to disrupt certain areas of the medtech industry,” and their counterparts at RBC Capital Markets reported that Zimmer Biomet sees the drugs as a positive for its business.
Eli Lilly and Novo Nordisk have linked GLP-1 receptor agonists to weight loss of 15% and more. The data has led both companies and rivals such as Amgen and Pfizer to invest in the drug class, spurring work on drug candidates that could surpass the first products in terms of convenience, tolerability or efficacy. A safe, convenient weight-loss drug could reduce sleep apnea, cardiovascular disease and other conditions.
Because obesity-related conditions are central to medtech growth, GLP-1 drugs have alarmed some investors. The J.P. Morgan analysts accept that a drug that slows medtech end markets could emerge, but see multiple reasons for optimism.
The current GLP-1 drugs, injectable products that affect lean muscle mass, have limitations that could curb uptake. Better drugs may emerge, but that is uncertain. If investors assume improvements to GLP-1 drugs, the J.P. Morgan analysts argue it is “intellectually honest to also assume that medtech will continue to innovate and grow both existing markets and enter new markets.”
As the analysts note, large medtech companies have transformed themselves over the past decade, a period in which major categories such as transcatheter aortic valve replacement and continuous glucose monitors have emerged. By the time GLP-1 drugs that are a major threat to medtech emerge, companies may have refocused on growth areas unrelated to obesity.
The analysts “see multiple pathways” that medtech can “work in 2024, 2025.” Yet, having seen the value of an index of medtech stocks fall by 20% in the past three months, the analysts acknowledge that attitudes will need to change for share prices to rebound.
“If these levels of fear and doubt remain the primary emotional response, then medtech could suffer without long-only [portfolio managers] returning to the space. That said, we expect investors should be able to price in a reasonable bad/worst case scenario and return to investing in fundamentals soon,” the analysts wrote in a note to investors.
The Needham note articulates why some investors have fears and doubts. After talking to an obesity physician working at Massachusetts General Hospital, the analysts concluded that GLP-1 drugs are very likely to disrupt medtech markets, particularly obstructive sleep apnea and cardiovascular disease. Eli Lilly is trialing its lead GLP-1 drug in obstructive sleep apnea. A study published earlier this year found the drugs can prevent major cardiac events.
Patients’ mobility can improve after taking the weight-loss medicines, but the doctor “didn't highlight a reduction in orthopedic surgeries,” the analysts wrote.
Zimmer Biomet recently published an analysis, which was shared by RBC analysts, of how it expects GLP-1s to affect orthopedics. Zimmer thinks GLP-1 drugs could make more people eligible for surgery.