The medical-device industry experienced a significant drop in stock prices during the September quarter, marking the largest decline since the lockdowns of 2020. This downward trend can be attributed to concerns about the impact of new weight-loss drugs on the demand for devices that treat diabetes, sleep problems, and other weight-related conditions.
Although the financial results for the September quarter are yet to be released, Mizuho Securities analyst Anthony Petrone suggests that these results won't reflect significant damage caused by the introduction of these weight-loss drugs. In fact, Petrone's estimates for the medtech sector are slightly higher than Wall Street's consensus estimates.
Petrone states, "For now, we believe the risk is more perceived than real." This implies that the negative sentiment surrounding medical-device stocks may be unfounded.
Over the past few months, medical-device stocks have witnessed a decline of almost 20%, as measured by the U.S. Medical Device iShares exchange-traded fund (ticker: IHI). This translates to a reduction of approximately $370 billion in market capitalization. Conversely, pharmaceutical companies like Eli Lilly (LLY) and Novo Nordisk (NVO) have experienced a surge in stock prices due to optimism surrounding their weight-loss drugs Ozempic, Mounjaro, and Wegovy, which are expected to help combat the obesity epidemic.
Due to this negative sentiment towards device stocks, Petrone and other medtech analysts have lowered their price targets. However, feedback from doctors leads Petrone to believe that sales and earnings for most of these companies will hold steady in the September quarter.
One example is Edwards Lifesciences (EW), a heart-valve vendor that is not exposed to weight-loss drugs. Petrone expects Edwards to report a profit of $2.55 per share for the September quarter when they release their earnings report on Oct. 26. Consequently, he maintains a Buy rating on the stock.
Medtech Stocks Facing Challenges, But Some Opportunities Remain
The recent sell-offs in diabetes-device stocks have raised concerns in the medtech industry. DexCom (DXCM) and Insulet (PODD) have experienced significant declines. Additionally, businesses that specialize in sleep apnea treatment have also lost favor among investors. However, Mizuho analyst, Petrone, believes there are positive surprises to come.
Petrone anticipates encouraging September results from ResMed (RMD) and Inspire Medical Systems (INSP). Despite the challenges faced by Inspire, with its stock dropping over 50% since July due to concerns of reduced demand for apnea implant devices, doctors have reported increased volumes. Petrone has adjusted his September-quarter sales estimate to $160 million, compared to $109 million last year. Although Inspire continues to operate at a loss as it builds its business, Petrone's optimistic about its strong sales growth, which he believes will reassure investors when the company reports on November 7.
ResMed has also shown promising sales volumes for the September quarter, according to Petrone. While there are concerns that weight-loss drugs may decrease demand in the long run, he predicts that ResMed will report sales of $4.6 billion and earnings per share of $7.04 when it releases its financial report on October 26.
The medtech industry faced a setback when Intuitive Surgical (ISRG) reported a pause in weight-loss surgical volumes due to the use of weight-loss drugs during their earnings call in July. As a result, Petrone rates Intuitive as Neutral on the shares. He has mixed expectations for Intuitive's September-quarter earnings report, partially due to hospitals moderating their capital spending.
Weight-loss drugs will likely be a significant topic discussed during Intuitive's upcoming earnings call on Thursday, October 19, according to Petrone.