Investors have such high hopes for popular weight-loss medications like Wegovy and Ozempic, the wonder drugs have sent shock waves through the stock market.
Yet besides helping patients shed pounds, the meds have shaved billions in market valuation from companies that investors think will suffer as a result.
This means obesity-related medical technology companies including Zimmer Biomet Holdings
ZBH,
Medtronic
MDT,
and Abbott Laboratories
ABT,
along with processed-food companies such as Utz Brands (UTZ
UTZ,
), Mondelez International
MDLZ,
and J.M. Smucker
SJM,
among others like them. These are up in the recent market rally. But they’d be up a lot more without this challenge.
The damage will wear off. There are several reasons to think expectations for GLP-1 weight-loss drugs are high, say analysts at RBC Capital Markets, and Stanford University bariatric surgeon and weight-loss expert Dan Azagury.
“GLP-1 noise is overdone,” says RBC Capital Markets analyst Shagun Singh. Stanford’s Azagury says it will be many years before there’s broad adoption and health benefits from these drugs. Plus, corporate insiders at several of the damaged stocks are buying shares on weakness, confirming this view.
All of this makes the companies getting hit look like timely buys, as the reality sets in. Here are three reasons why, and several companies to consider, according to both analysts and corporate insiders:
1. Widespread adoption of these drugs will take longer than people think: GLP-1 drugs help people lose weight by stimulating receptors that produce hormones which slow digestion and curb hunger. They can lead to as much as 20% weight loss. But widespread use of these drugs will take a long time, Azagury says.
“The time frame for this is different from what the market is thinking,” he says. “The effect people are counting on in market will be way slower than expected.” He cites two reasons:
First, the drugs are hard to get. Supply cannot keep up with demand because these therapies are tricky to produce. Next, the drugs are hard to pay for. Insurers don’t cover their use for weight loss, and they cost about $12,000 per year.
Azagury thinks that will change. “You can’t have a drug that has so many benefits for patients and hold off on it.” He says increased competition will drive down prices, citing as many as 16 similar weight-loss drugs in pipeline development. But again, all of this will take years to play out.
Medtech stocks: This suggests the near-term concerns about the shares of obesity-related medical technology companies like Medtronic, Stryker
SYK,
Zimmer, Abbott Laboratories, and Insulet
PODD,
are exaggerated, and the stocks are attractive.
Medtronic sells equipment used in weight-loss surgery, devices for diabetics like insulin pumps, and equipment used to diagnose and treat cardiovascular disease. People who are obese are more prone to joint replacement, diabetes and cardiovascular issues.
Stryker sells equipment used in weight-loss and joint replacement surgery. Zimmer sells artificial knees and hips used for joint replacement surgery, and related surgical equipment. Abbott sells continuous glucose monitors. Insulet sells an insulin delivery system. Insiders were recently big buyers of company stock at Zimmer and Insulet.
Food stocks: Likewise, the long-timeline for broad GLP-1 usage suggests near term relative weakness in snack-food stocks such as Hershey
HSY,
Utz Brands, Mondelez is overdone.
TD Cowen analysts think the overall reduction in calorie consumption caused by GLP-1 drugs will be too small to matter to food companies. Only part of the population will use them, and some of the damage will be offset by population growth.
So, TD Cowen has outperform ratings on the snack-related stocks, Utz Brands, Mondelez, and J.M. Smucker. “We remain skeptical about whether GLP-1 adoption will have a material impact on their long-term trajectory,” says the brokerage. Insiders agree. They were recently big buyers at the packaged food companies Utz Brands, Post Holdings
POST,
and WK Kellogg
KLG,
confirming TD Cowen’s view.
2. By prolonging life and reducing weight, the drugs will actually increase demand for artificial joints and other medical technology: Significant weight loss can extend life by as much as a decade, says Stanford’s Azagury. Because age is the biggest risk factor for most medical issues, an aging population will need more artificial joint surgery, insulin pumps and cardiovascular interventions.
Med-tech companies will also benefit because people who were too obese for joint replacement surgery and bariatric surgery will become eligible. This equates to “millions of patients,” says Zimmer CEO Ivan Tornos. And if people become more active in sports due to weight loss, that will increase wear and tear on joints, notes John Buckingham at The Prudent Speculator investment newsletter, which suggests Zimmer as a buy. These trends would benefit Zimmer and Stryker. Abbott says its Libre continuous glucose monitor plays a role in GLP-1 dose adjustments.
These companies also benefit from the aging of the baby boomer generation, and a bounce back in medical care deferred during the pandemic.
3. The weight loss drugs have some nasty side effects and other issues that may curb use: Azagury tells me his patients don’t mind that they have to inject these drugs. It’s only once a week. But there are other obstacles to widespread adoption, says RBC Capital Market analysts.
They note that the European Medicines Agency, which regulates drugs, is examining reports of self-injury and suicidal thoughts among GLP-1 users. RBC analysts also cite GLP-1 side effects including nausea, vomiting, stomach paralysis and muscle-mass loss. They think these factors may limit GLP-1 use. There are also questions about whether people will really use them their entire life; for instance, many people quit lifesaving drugs like statins.
Azagury pushes back on most of this. His clinic treats about 2,000 patients a year, and it has prescribed GLP-1 drugs to thousands of patients, so he’s worth listening to.
On suicidal ideation and self-harm, he notes that people who suffer from obesity have a higher incidence of trauma and psychological conditions than the general population. “There is a strong psychological aspect to this disease,” he says. “The number of people battling mental health issues in this group is high.” In other words, it is not clear that GLP-1 drugs are to blame.
Azagury says unpleasant side effects like nausea are often temporary and can be managed by adjusting dosages. “The majority of patients are able to navigate through the side effects and tolerate the drug,” he says. On stomach paralysis, he says he’s never seen a case that was so bad it sent a patient to the hospital.
Azagury agrees that GLP-1 users loose muscle mass. But he notes that happens with anyone who loses a lot of weight, no matter how they do it. He says this problem can be managed by resistance training and eating more protein.
There may be an investing angle here. William Blair analyst Jon Andersen says companies that sell protein-shake powder and protein bars may benefit, citing BellRing Brands
BRBR,
and Simply Good Foods
SMPL,
Their products “should lend themselves to a GLP-1 lifestyle,” he says.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned ZBH and PODD. Brush has suggested ZBH, MDT, SJM, PODD and SMPL in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks
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