Which stocks might be disrupted next by Ozempic and other GLP-1 drugs

Published Thu, Oct 12 202310:03 AM EDT

Christina Cheddar Berk @in/christina-cheddar-berk-b864404/

Shares of kidney dialysis providers fell sharply Wednesday after Novo Nordisk said a study showed its Ozempic drug could delay the onset of kidney disease in diabetes patients. This latest development reinforces the far-reaching implications GLP-1 medications could have on a wide variety of conditions, from liver disease to sleep apnea to heart disease. Initially developed as a treatment for diabetes, the drugs have shown benefits for other conditions, most notably weight loss . The result for investors has been periodic sell-offs of stocks expected to be disrupted by this emerging category. Wednesday's trading was no different: Companies that have been hit by the trend include owners of dialysis centers, providers of bariatric surgery, manufacturers of insulin pumps — even makers of snack foods and alcohol. Among the stocks that tumbled on the news were Baxter International , which hit its lowest since September 2012, while Insulet fell to a low dating back to August 2019; Medtronic sank to levels last seen in early 2017 and Dexcom hit its lowest since last year. BAX YTD mountain Baxter International year to date performance. The company is in the process of spinning off its kidney care division. How GLP-1 drugs work Sorting through the facts reveals some likely winners and losers. But first, it's worth understanding how the drugs work and how widespread their use is. Glucagon-like peptide-1 (GLP-1) is a hormone released in the gut that stimulates insulin secretion, slows the emptying of the stomach and communicates to the brain a feeling of satisfaction. These mechanisms are the ones that help patients taking the drugs to lose weight and regulate their diabetes. Keeping weight in check can also help patients prevent conditions often associated with a higher body mass index, including sleep apnea and nonalcoholic fatty liver disease, or NASH. And the drugs may also help people resist the temptation to smoke or drink alcohol. LLY YTD mountain Eli Lilly shares year to date performance It is still early days for GLP-1 medications. In a research note, Citi analyst Peter Verdult estimated GLP-1 sales could hit $30 billion this year for diabetes treatment and $6 billion for obesity. That's with less than 10% of diabetes patients taking the drugs and fewer than 1 million patients with obesity being treated, he said. But those numbers will grow quickly to more than $100 billion a year in sales at their peak at the end of the decade, analysts have said. More than 70% of U.S. adults are either overweight or obese, with about 40% in the latter category. At the moment, there are significant hurdles to ramping up sales, including whether insurance companies will pay for the drugs . By law, Medicare cannot cover weight loss drugs and supplies have been constrained due to capacity issues. Who stands to benefit? Still, positive news on the potential benefits from GLP-1 drugs – and expanding use cases – are seen on Wall Street as a boon for makers Novo Nordisk and Eli Lilly . Shares of both companies have surged since the start of the year, Novo by 46% and Lilly by 66%, and stock analysts are only getting more bullish, recently hiking price targets as excitement around GLP-1 balloons. At least 60% of analysts have buy or overweight ratings on both stocks, according to FactSet. Meanwhile, the companies themselves are betting on amped up demand. Both Eli Lilly and Novo Nordisk are already working on second generation versions of their drugs. And, while Eli Lilly has yet to receive FDA approval of its Mounjaro drug for weight loss, that's widely expected by the end of the year. "We continue to argue the GLP-1 story is one of market growth, rather than market share, that will be dominated by Novo and Eli Lilly through the next two decades," wrote Citi's Verdult. "This reflects an entrenched commercial/rebate position, superior product profiles, compelling outcomes data, strongest pipelines … and volume requirements providing significant barriers to entry," he said. To be sure, Novo Nordisk and Eli Lilly aren't the only companies making GLP-1 drugs, or betting on the weight loss market. Bank of America expects the market to remain a "duopoly" through 2026. But other companies —including smaller players — are expected to enter the weight loss treatment industry in the future, including Viking Therapeutics and Altimmune . Structure Pharmaceuticals may be another emerging, under-the-radar winner with a promising oral GLP-1 medication in the works, according to Piper Sandler. "Looking at injectable GLP-1 sales in 2022, Wegovy did $885M and Mounjaro did $483M, yet obesity is largely untapped at only ~2% penetration," wrote analyst Yasmeen Rahimi as she initiated coverage on Structure with an overweight rating in July. "Thus, we believe an oral agent for use in primary care settings is needed to unlock the major opportunity," she added. Wegovy is also made by Novo Nordisk. Even with some setbacks, other pharmaceutical titans, such as Pfizer and Amgen , have entered the contest, vying for a chunk of the blockbuster market. Companies that fill injectable pens administered to patients could win as drugmakers scramble to meet growing demand. That could prove a major boon for companies such as Catalent and Thermo Fisher Scientific , both of which have reportedly tapped manufacturing agreements with Novo Nordisk, according to Reuters . Catalent shares have only risen about 3% year to date, while Thermo Fisher's slumped a little more than 10%. But Wall Street expects more upside ahead, with the average price target implying that shares can gain more than 9% and 25%, respectively. Who loses out? Many have seen the rise of GLP-1 drugs as a threat to the medical device industry. But analysts say investors shouldn't ditch the trade just yet. "We think MedTech can live side by side with GLP-1s and don't see them as mutually exclusive," wrote JPMorgan analyst Robbie Marcus in a Wednesday note. "GLP-1s are/can/will be a huge drug class while MedTech volumes can also increase over time." Marcus expects medical device makers to innovate and enter new markets alongside GLP-1 makers, and views a "reasonable amount" of risk as likely already priced into the market. Inspire Medical Systems looks best insulated in the small- and mid-cap market, while AtriCure , which treats an irregular heartbeat condition known as atrial fibrillation, seems to have "no real" GLP-1 risks, he said. Medical device analysts expect that the near-term impact from GLP-1 medications is limited, but that hasn't prevented the sector from selling off as investors shoot first and ask questions later. With the focus on kidney disease Wednesday, shares of DaVita closed down 16.9%, Baxter lost 12.3% and Intuitive Surgical ended lower by 5.4%, even though Novo Nordisk's kidney disease trial won't immediately translate into fewer patients at dialysis centers. Since July, each new positive piece of data on GLP-1 medications has only added to the pressure in the sector. Resmed offers a good example. Its shares are down 31% year to date. On Tuesday, JPMorgan upgraded the stock to overweight, while revising its price target down to $170 from $210 to reflect the sour sentiment on medical device makers. The company makes CPAP machines to treat sleep apnea. JPMorgan analyst David Low doesn't expect doctors to prescribe obesity drugs for the condition until 2025, and even then the hit to ResMed's sales should be "modest." Moreover, not all instances of sleep apnea are weight-related, which means a range of treatments will still be needed. Also, not all patients are able to tolerate GLP-1 drugs, which can cause side effects such as nausea. "Attrition is relatively high, with side effects and costs large barriers to long-term adoption," Canaccord Genuity analyst William Plovanic said in a research note Monday. But RBC Capital analyst Craig Wong-Pan downgraded shares of ResMed to sector perform from outperform on Thursday, saying that the stock has "long-term valuation appeal but minimal EPS growth will limit a near-term re-rating." Among other medtech stocks, Plovanic sees GLP-1 drugs as an "incremental positive" for Dexcom, which makes continuous glucose monitors (CGMs), but an "incremental negative" for insulin pump makers like Insulet. He expects type 2 diabetes patients who take GLP-1 drugs will continue to use continuous glucose monitors, but expects the insulin control from these medications will stop or delay type 2 diabetes patients from requiring an insulin pump. On Thursday, Piper Sandler analyst Matt O'Brien said Dexcom's 30% decline so far this year "makes the least sense to us." "Our research (as well as the company's) has shown that GLP-1 use will be a neutral-to-positive in terms of CGM utilization as patients rely on CGMs to implement these lifestyle changes (though we do note that if basal patients come off insulin use CGMs might not be covered by their insurance)," O'Brien said. Rippling further into the economy Given the sizable market and the hype that has accompanied the drugs, many are trying to project how changes in consumer habits will ripple through the economy and affect different industries. The speculation has gone far and wide — from airlines saving millions on fuel as they fly slimmer passengers to the hit food and beverage companies would take from people consuming fewer calories to consumers buying new wardrobes. Treading carefully amid the frenzy is advised. Take Walmart . The retailer shared that it has seen customers who are taking GLP-1 medications spend less on food and more on lifestyle and fitness products like athletic apparel. But the stock has suffered as some worried this might hurt the company's performance, even though these shoppers spent more overall. "In aggregate, GLP-1 spending changes are not moving the needle for WMT's total business," Simeon Gutman, an analyst at Morgan Stanley, said in research note Tuesday. WMT 1M mountain Walmet stock performance over the past month. "If WMT's stock weakness (alongside the broader Consumer Staples space) was pricing in a longer-term, more cautious view on GLP-1 impacts, that could be a credible driver for underperformance, even if it won't be proven out for several years. But to the extent WMT shares in particular were singled out for comments that were misinterpreted, the pullback seems less warranted," Gutman said. —CNBC's Michael Bloom contributed to this report.