The year has been a challenging one for medical device companies, as concerns about the effects of new obesity medicines continue to weigh heavily on their stocks.
Declining Share Prices
The iShares U.S. Medical Devices ETF (ticker: IHI ) has seen a decline of approximately 13% this year, contrasting with the S&P 500’s rise of about 14%. Some key players in the industry have experienced even greater setbacks: Abbott Laboratories (ABT) shares are down 16% and Baxter International (BAX) shares have plummeted by 37%.
Shifting Investor Sentiment
Since the summer, investors have become increasingly anxious about the potential impact of weight-loss drugs developed by Eli Lilly (LLY) and Novo Nordisk (NVO). The concern stems from the anticipation that these medications could significantly alter Americans’ health, potentially diminishing the demand for the products offered by medical device companies.
A Root Cause for Many Ailments
As stated by Mizuho analyst Anthony Petrone, there is a prevailing belief that excessive weight serves as the underlying cause for various ailments such as cardiac artery disease and sleep apnea. The reasoning follows that if excess weight is effectively managed, the need for surgeries may diminish over time.
Market Cap Erosion
Petrone further highlighted that these fears have resulted in a staggering “total market cap destruction” of $370 billion across the U.S. MedTech sector.
It remains uncertain how these concerns will ultimately play out for medical device companies. However, it is evident that the impact of obesity medicines is currently exerting significant pressure on the industry.
Impact of New Obesity Drugs on Medical Device Companies
Despite the current selloff, the true consequences of the introduction of new obesity drugs on medical device companies remain uncertain. In an interview with CFO Joe Wolk, Johnson & Johnson (JNJ) acknowledged that individuals with obesity might not qualify for certain procedures such as knee and hip replacements. However, if they were to undergo weight loss, they could potentially become eligible for these procedures.
The impact of these obesity drugs on Johnson & Johnson’s medtech business is yet unknown. Wolk expressed that it is still too early to determine the extent of this impact.
Identifying Medical Device Stocks with Growth Potential
While the future remains unclear for medical device companies, investors can take advantage of this uncertainty by strategically selecting stocks.
To identify medical device stocks with room to grow, we conducted a thorough screening of the iShares U.S. Medical Devices ETF. Our criteria included companies with market values over $5 billion and average analyst target prices that suggest significant upward potential. We focused on medical device stocks that analysts have the most confidence in.
Despite the current market selloff, several stocks managed to meet our screening criteria. Among them are Insulet (PODD) and DexCom (DXCM). Insulet specializes in a wearable insulin management system, while DexCom offers a wearable glucose monitor. Both companies face potential challenges from the introduction of new obesity medicines, as these drugs have proven highly effective in controlling Type 2 diabetes.
Insulet’s average analyst price target is nearly twice its recent price, indicating significant growth potential. Similarly, DexCom’s average price target sits approximately 75% above its recent price.
Top Stocks that Passed the Screen
Here are some noteworthy stocks that successfully passed the screen:
- Penumbra (PEN)
- ResMed (RMD)
- Zimmer Biomet Holdings (ZBH)