Medical device stocks of every kind were pummeled over the past week as investors tried to calculate the ripple effects of recent weight reduction drugs. It wasn’t the primary rout within the sector — the pressure has endured for several months. The fear has been that at any time when you’ve a big group of consumers changing their habits, that can affect the forms of products they buy and the services they are going to need. While using the GLP-1 drugs to treat obesity continues to be very limited at this point, it is predicted to soar to a $100 billion market or more, by some estimates. That is since the potential market is vast given the prevalence of obesity and obese within the U.S., where greater than 70% of the population has considered one of those two conditions. Also, ongoing studies have shown these drugs could produce other useful effects comparable to reducing heart and kidney disease. Still, the danger for investors is that the assumptions being made lack nuance, and the bet is improper. One great example is knee replacements. Judging by the momentum within the stocks, investors have been betting that as people drop extra pounds, there might be a decline in knee substitute surgery. The American College of Rheumatology estimates 790,000 total knee replacements are performed within the U.S. annually. Being obese or obese may put an individual at greater risk for needing surgery, but other aspects are also at play. A case for more knee surgery? “We have had questions on the potential of dramatic weight reduction reducing demand for knee replacements by relieving stress on the joints,” Benchmark analyst Bill Sutherland wrote in a research note Thursday. “The early anecdotal evidence actually suggests that the alternative could occur as previously very obese individuals overexert, creating an array of [musculoskeletal] injuries.” While GLP-1 medications are helpful in aiding weight reduction by suppressing appetite and increasing feelings of fullness, to achieve success, patients are advised to adopt healthy habits, including exercise. This is particularly true if patients have to wean themselves off the medication after reducing weight. Many individuals have regained the load they lost after they stop the medication unless they’re able to make sufficient lifestyle adjustments. Piper Sandler analyst Matt O’Brien recently met with executives from Stryker , who said the number of huge joint surgeries is just not declining because of this of GLP-1 drugs comparable to Novo Nordisk’s Ozempic and Wegovy and Eli Lilly’s Mounjaro, they usually don’t expect it to. “They were emphatic that they aren’t seeing any impact from these drugs and that the first driver of joint substitute is just not weight but motion and the eventual bone-on-bone pain attributable to osteoarthritis (lack of cartilage),” O’Brien said. “We agree with this view and imagine any concerns here for the orthopedic firms are overblown…” He also doubts weight reduction will increase the number of people that receive joint substitute in a meaningful way. Stryker shares are still up 5% in 2023, however the stock has fallen greater than 15% since June 30, when the sentiment shifted against medical device stocks. O’Brien rates the stock obese and sees shares heading to $310, or about 20% above where shares closed Friday. SYK 3M mountain Stryker shares over the past three months Do the facts matter? But we could also be at the purpose where the facts don’t matter as much because the sentiment. “… [T]here is considerable debate amongst investors as as to if fundamentals even matter this qtr with the GLP-1 overhang limiting investor willingness to purchase MedTech stocks broadly,” said Truist analyst Richard Newitter in a research note Thursday. “For our part, we proceed to imagine the dramatic GLP1-driven sector pullback is probably going overdone and that ‘narrative’ (i.e. cannot disprove the worst-case long-term negative) is driving indiscriminate selling more so than tangible (knowable) fundamental impact. Nevertheless it’s hard to say when/if the GLP-1 overhang will subside,” Newitter said. Based on Truist’s polling of fifty hospital administrators, the analyst expects the third quarter will show a slowing pace of knee substitute surgeries in comparison with the primary half of 2023. SGRY 3M mountain Surgery Partners shares over the past three months There are other headwinds as well for stocks comparable to Surgery Partners , a number one operator of surgical facilities. Benchmark’s Sutherland reiterated his buy rating on the stock, which has fallen 48% since June 30. Along with the overhang from GLP-1 weight reduction medications, the corporate has been hurt by pressure on hospital stocks within the wake of the Kaiser Permanente strike . That labor motion, in addition to a possible strike by Tenet Healthcare staff, could push worker pay higher. Indeed, Kaiser reached a tentative labor agreement with medical experts Friday, and the deal includes a rise in wages . “Surgery Partners stays immune from these labor issues,” Sutherland said. His price goal of $50 suggests Surgery Partners’ stock could greater than double from Friday’s close. — CNBC’s Michael Bloom contributed to this report.
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