Medical-device Stock Selloff Caused by Ozempic Fears Has Gone Too Far—Now They're Rebounding

Chatterbox Moo wrote a column · Nov 21, 2023 18:20

A new generation of highly effective weight-loss and diabetes drugs known as GLP-1s has led Wall Street to spell doom for companies that have profited from obesity problem. However, the reaction on Wall Street has been extreme, creating opportunities for cooler heads, some analysts and investors say.

To be sure, drugs such as $Novo-Nordisk A/S (NVO.US)$'s Ozempic and Wegovy, and Eli Lilly's Mounjaro have proved highly effective and should create a cascade of health benefits. Sales of Ozempic, Wegovy, and Mounjaro are projected to reach $21 billion in 2023 and swell to $53 billion by 2028, according to FactSet. The two drugmakers have added $345 billion in market cap this year, a sum greater than the value of all but 18 companies in the S&P 500.

Source: FactSet

Those gains are taking a bite out of other sectors. Makers of things like sleep-apnea machines and knee-replacement products, which have lost more than $300 billion in market value in recent months due to the "Ozempic effect," saw enough caveats in the data to argue that the doom-and-gloom scenario bearish investors had been pushing for some time now has been overstated.

Traders last week sided with the medical-device crowd (with a little help from a broad rally in higher-risk stocks after fresh data showed that inflation cooled more than expected). $Penumbra (PEN.US)$, a medical device company specializing in the treatment of strokes and aneurysms, saw its shares surge almost 30% since the beginning of last week. Even makers of diabetes devices like $DexCom (DXCM.US)$ and $Abbott Laboratories (ABT.US)$ rose during the same period, despite data from the study showing Wegovy decreased progression to diabetes by 73%.

Medical-device Stock Selloff Caused by Ozempic Fears Has Gone Too Far—Now They're Rebounding

Investors are sort of saying, even if pharma analysts are right, maybe it won't disrupt the procedure volume for medical device companies as much as had been priced into the stocks." said Goldman Sachs senior healthcare strategist Asad Haider.

Abbott Laboratories and Dexcom both reported surprisingly strong earnings. Sales of Abbott's Libre glucose-monitoring system for diabetes patients were up nearly 31% in the latest quarter.

The reason why patients appear to use their glucose-monitors more frequently while taking these drugs is not complex. Just as patients need to monitor their blood glucose levels when too high to regulate them with insulin, they also need to monitor when levels are too low to avoid hypoglycemia. Taking these medicines is what opens the door to that possibility where it was improbable before. And that's why they aren't actually a threat to Abbott or DexCom.

I think the concerns are overblown," Abbott CEO Robert Ford said on the company's October earnings call, noting that consensus figures put the GLP-1 market at a fraction of the global diabetes market size. "I think early on those initial thoughts about the future are generally impacted more by emotion than facts and data."

Source: WSJ, Financial Times, The Motley Fool

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