The good times keep rolling for Novo Nordisk and its diabetes and weight-loss drugs. But company's announcement on Oct. 10 that a weekly dose of Ozempic could also prove effective in treating chronic kidney disease in diabetics triggered a sell-off in shares of medical device makers like Dexcom and DaVita.
The reason: Medical device investors are apparently worried that Novo Nordisk's breakthrough could cause a drop in demand for medical equipment used in treating diabetes and kidney disease, like those made by Dexcom and DaVita.
The news comes during a period of bullish growth for Novo Nordisk. Shares hit a record high on Oct. 13. The company is due to report third-quarter earnings on Nov. 2. Analysts expect sales of weight-loss drugs like Wegovy to nearly triple year over year, and for revenue from diabetes medication Ozempic to rocket almost 57%. Ozempic and Wegovy are two forms of Novo's drug, semaglutide.
The market reaction underlined the excitement surrounding a growing class of weight-loss drugs, called GLP-1 agonists, that experts believe could broadly reduce rates of obesity. But it also highlighted worries that improved weight-loss medication is bad news for medical devices stocks.
The Rise Of New Weight-Loss Drugs
More effective weight-loss drugs could significantly lower obesity rates. But that health care breakthrough could inadvertently hurt demand in other health-related industries.
"Obesity is a contributing factor to many of the diseases treated with medical devices," Needham analyst Mike Matson said in a note. "If GLP-1s lead to a decline in obesity rates, we think it could eventually result in decreased demand for procedures involving medical devices."
Wes Dupray, an analyst with investing firm Eventide, said it is far from certain that weight-loss drugs are poised to dominate medical devices. But fundamentals and valuations among medical technology stocks have diverged, he said.
"Valuations over the past few months have been hit," he told Investor's Business Daily. "We're at trough levels for big caps and we're below trough levels on the small-cap names, some of which do have exposure to GLP-1s and their tangential impacts and some of which don't."
Novo Nordisk Sets The Pace
Recent news from Novo Nordisk appeared to underscore the shift.
In August, Novo said a study called Select showed patients who received semaglutide for five years were 20% less likely to have a heart attack, stroke or other cardiovascular side effects.
Semaglutide is a big business for Novo Nordisk. During the third quarter, analysts expect Wegovy sales to have climbed more than sevenfold to $1.09 billion. Wall Street also projects $3.41 billion in Ozempic sales and $647 million from Rybelsus. Revenue from the latter — a diabetes-treating pill also based on semaglutide — would surge more than 62% year over year.
Then on Oct. 10, the company hinted that a weekly shot of semaglutide delayed progression of chronic kidney disease in patients with type 2 diabetes. The company was making such good progress on its tests that an independent committee recommended Novo stop the study almost a year early after hitting pre-specified measures of effectiveness.
Novo expects to unveil the full reports of that study in early 2024.
Medical Device Stocks Take A Hit
Since then, medical devices stocks have taken it on the nose.
Abbott stock and Dexcom stock are starting to come back. But Intuitive Surgical, the leading robotic surgery company, is still under pressure, and shares of dialysis providers DaVita and Fresenius Medical Systems have plummeted.
More broadly, the iShares U.S. Medical Devices exchange-traded fund has dropped almost 4% since the Oct. 10 announcement, as of the Oct. 23 close.
Analysts say the onslaught has been overdone. While the growing class of weight-loss drugs could dramatically reduce obesity rates, related conditions, like heart disease and diabetes, are degenerative or progressive. For patients with these conditions, even extreme weight loss might not be enough to stave off intervention with medical devices or surgery.
Weight-Loss Drugs Breakthroughs
GLP-1 drugs have been widely used for some time in diabetes treatment.
Novo's semaglutide gained approval as the shot Ozempic in 2017 and as the pill Rybelsus in 2019. Eli Lilly's shot, Trulicity, has been approved for a decade in diabetes treatment.
But drugs in this class are gaining traction for their outstanding weight-loss capabilities. Two years ago, the Food and Drug Administration signed off on a third iteration of semaglutide — Wegovy — as an obesity treatment.
Eli Lilly followed up with a next-generation diabetes treatment based on the same GLP-1 mechanism in 2022. The company now hopes the FDA will approve that drug, dubbed Mounjaro, as an obesity-treating medicine later this year.
Now, Novo is working toward approval for Wegovy in a broad population of patients with heart disease. Analysts say this could help win the case for insurance reimbursement for more patients and undercut obesity rates worldwide. And kidney disease treatment could follow.
Bearish investors say this could hurt sales of devices that treat obesity-related conditions.
Impact On Surgeries
There's a debate on the impact of weight-loss drugs on surgical procedures.
Intuitive Surgical's robotic surgery system, da Vinci, can perform bariatric surgery. The company saw another slowdown in weight-loss surgeries during the September quarter. But analysts say Intuitive is still gaining share in this market.
Bariatric surgery is a very effective means of stoking weight loss. But it's only available to certain people. Patients must have a body mass index, or BMI, of 35 or higher. Or, patients can have a lower BMI of 30 to 35 and an obesity-related condition.
Investors, though, worry patients in line for bariatric surgery could, instead, opt to take a GLP-1 drug. That could undercut the roughly 200,000 bariatric surgeries performed each year in the U.S. But Matson, the Needham analyst, says an obesity-treating physician, Dr. Fatima Stanford, doesn't expect the growing popularity of GLP-1 drugs to have a big impact on bariatric surgeries.
"Patients that are referred for bariatric surgery tend to have higher BMIs and the GLP-1 drugs alone would be unlikely to provide sufficient weight loss," he said, citing a recent conversation with Stanford. She does expect, however, that many patients who undergo bariatric surgery could eventually start taking a GLP-1 drug to help maintain the weight loss.
Intuitive Surgical Chief Medical Officer Myriam Curet offered a similar view. Some patients will undoubtedly try GLP-1 drugs, she said on the company's conference call with analysts. But that doesn't mean they won't need bariatric surgery down the line.
Meanwhile, shares of companies involved in hip and knee replacement surgeries, like Masimo, and those engaged in heart-valve transplants, like Edwards Lifesciences, have also taken a hit due to the growing popularity of weight-loss drugs.
Sleep Apnea And Weight-Loss Drugs
The new class of weight-loss drugs could also have an impact on devices for treating sleep apnea.
Shares of companies like Zimmer Biomet and ResMed have remained under pressure. These companies make continuous positive airway pressure devices. Also known as CPAPs, these devices deliver a steady stream of oxygen to sleeping patients, helping prevent the brief airway closures associated with sleep apnea.
Patients with higher BMIs are more likely to have obstructive sleep apnea, Needham's Matson said. The obesity-treating physician, Stanford, said nine in 10 patients who undergo bariatric surgery can stop using their CPAPs. But it's unclear whether the same is true for patients taking weigh-loss drugs.
Eli Lilly is studying the impact of weight-loss drugs on obstructive sleep apnea. But, according to Stanford, Matson said there is likely a significant number of patients with obesity and obstructive sleep apnea that do not have diabetes.
Notably, there are different types of sleep apnea, which occurs when muscles in the larynx close during sleep. Lateral wall collapse is far more common among patients with obesity. But patients with obesity can have complete concentric collapse, which also involves the soft palate.
Inspire Medical Systems makes an implantable treatment for sleep apnea that stimulates specific muscles, preventing them from closing while asleep. The treatment is approved for patients with sleep apnea due to soft palate collapse. Patients who start taking a weight-loss drug could resolve the issue with lateral collapse. But they may still experience soft palate collapse, and could still require treatment.
Still, Inspire stock has also tumbled this year, following the medtech stock deluge.
Medical Device Makers Push Back
However, some medical device makers reject the view that GLP-1s pose a major threat to their markets.
A day after Novo Nordisk's announcement in chronic kidney disease treatment, DaVita Chief Medical Officer Jeff Giullian downplayed the implications of the news in a statement, saying, "there may be limited application" of the study's findings to people dealing with chronic kidney disease.
And, though Abbott stock and Dexcom stock remain well below their key moving averages, both say the growing popularity of weight-loss drugs will actually stoke deeper use of their devices. Both companies make continuous glucose monitors, or CGMs. These body-worn devices keep tabs on blood sugar in real time — a key advent for people with diabetes.
In late September, Abbott said insurance claims show CGM usage increases among patients starting GLP-1 treatments. Abbott stock jumped almost 3% and Dexcom stock popped close to 4% that day. Dexcom said CGM use increased about fourfold among patients beginning GLP-1 treatment. The news prodded the entire medical devices market higher on Sept. 6.
Upbeat News For Medical Device Makers
Eventide's Dupray says patients starting new weight-loss drugs likely need to monitor their blood sugar as they slowly increase their dosages — a process known as titration. Doctors usually titrate dosages of GLP-1 drugs to tamp down on gastrointestinal side effects, a class-wide side effect.
"I do see that as an opportunity for these companies," he said.
Notably, in the third quarter, Abbott said sales from its diabetes care vision surged 24.5% on an organic basis to $1.47 billion. That included $1.4 billion in sales of its CGM, FreeStyle Libre.
Shares of insulin pump makers Tandem Diabetes and Insulet are also trying to recover. Their devices are most often used by patients with type 1 diabetes. This is a genetic form of diabetes not related to obesity.
Fewer patients with type 2 diabetes need insulin. Their diabetes can be controlled through other drugs. Even fewer type 2 patients who need insulin use pumps. Now, there's a chance weight-loss drugs could prevent their diabetes from worsening to the point that they need insulin, Dupray said.
Weight-Loss Drugs Struggle With Compliance
Insurance coverage will undoubtedly be a critical factor. The Centers for Medicare and Medicaid Services doesn't provide insurance coverage for obesity treatment. Out of pocket, these new weight-loss drugs cost $900 to $1,100 per month, said Matson, the Needham analyst.
"These drugs aren't cheap," Eventide's Dupray said. "There's relatively limited coverage. They're relatively hard to get on for the middle class and below" based on the currently approved uses.
And compliance remains poor among patients taking weight-loss drugs. In a recent report, Bank of America analyst Travis Steed pointed to a study of nearly 5,000 patients from 2009 to 2017. More than 70% discontinued GLP-1 treatment within two years. Researchers performed the study in patients with type 2 diabetes, rather than those taking the meds for weight loss.
Evercore analyst Umer Raffat notes anecdotal evidence suggests 20% to 30% of patients stop taking their GLP-1 drugs within a year.
Meanwhile, Novo, Lilly, Pfizer and Amgen are testing their weight-loss drugs in myriad conditions including diabetes, sleep apnea, cardiovascular conditions and orthopedic diseases. But Raffat of Evercore downplayed the potential impact of that effort.
"Clinical data suggests that when you stop taking GLP-1s, you gain the weight back," Raffat said in a note to clients. "However, that doesn't change the fact that patients just don't take drugs into perpetuity. Not even their blood thinner beyond two or three years on average after a heart attack."
Follow Allison Gatlin on X, the platform formerly known as Twitter, at @IBD_AGatlin.
