ISRG - The Sell-Off Caused By Wegovy And Mounjaro In Medtech Stocks Offers A Huge Opportunity

2023-08-13 23:31:51 ET

Summary

• Wegovy and Mounjaro obesity and diabetes drugs are expected to have a significant impact on society and may lead to a decrease in demand for certain medical devices and surgeries.
• Medical device stocks, such as Shockwave, DexCom, and Intuitive Surgical, have experienced sell-offs due to concerns about the future impact of these drugs.
• However, there are still millions of overweight and obese individuals who will require medical interventions, creating potential opportunities for these stocks.

Wegovy and Mounjaro are going to change a lot of lives in the future

There’s a lot of conjecture about where these obesity and diabetes drugs can take us. Investors are already discounting joint replacement, heart surgery, Arterial health products, continuous glucose monitors, etc. At some point, the discounting might reach snack makers like PepsiCo (PEP), or Mondelez ( MDLZ ) sound whacky? Well, these drugs are supposed to turn off cravings, they have already been found to reduce alcohol consumption. So who knows maybe Constellation Brands ( STZ ) could be next. Even if these drugs will have such a widespread and deep effect on society hardly anywhere near the number of people are actually taking the treatment for weight loss right now. Tens of millions of people will have to be injecting this themselves for at least a few weeks for these cravings moderate. We do know that a major study has shown a 20% reduction in heart disease in people who have taken the treatment for an extended amount of time. Though, no study has actually shown it was the weight reduction that caused the 20% lower occurrence of heart disease and not some other mechanism in these treatments. I know that this is beside the point right now, it’s all about weight reduction right now. Though the people fighting to get it are pressing for it for cosmetic reasons. Putting that aside there are some current real-world effects that are happening at this moment.

There are many stocks that have been selling off because of what may happen in the future.

The first casualties of this errant futurism are the medical device stocks. Let me explain this way, the harm of tobacco has been well-documented for decades. It has only been through massive social engineering that cigarette smoking has been curtailed. Eating is an even more basic need and much more widespread in abuse today. According to the NIH that a little over 42% of American adults have obesity, while about 30.7% are overweight. It’s going to take decades to get everyone taking these injections. Not everyone will want to be injecting themselves on the regular, so they’ll have to wait for pills. The point I am trying to make is simple, there are still going to be plenty of overweight and obese Americans for the next several decades. They will still need stents, continuous glucose monitors, blood pressure medication, knee replacement, and all sorts of medical interventions. Here’s the title of a recent Investors Business Daily Article: “Intuitive Surgical Crumbles As Weight-Loss Drugs Weigh On Bariatric Surgery”. At first glance this makes sense, why would anyone go under bariatric surgery if they can just take injections? Yet, there will still be bariatric surgeries, and that isn’t the only thing Intuitive Surgical's ( ISRG ) Da Vinci robotic system is involved in. The last time I did a deep dive on ISRG most of their surgeries were for prostates, not bariatric applications. Let’s take Zimmer Biomet ( ZBH ) as another example it has been trading near its 52-week high all summer at 149, only until recently when it cratered 20%. Now let us all remember that both UnitedHealth ( UNH ) and Humana ( HUM ) said that they are seeing a ton of elective surgeries. ZBH is the embodiment of elective surgeries so why on August 1 did ZBH start sliding? Isn’t it obvious now? Stryker ( SYK ) seems to have started a bit earlier but it fell 10% as well. Not a perfect overlay but still something to weigh on the side of Semaglutide (Wegovy and Mounjaro treatment) and not on the demand side of elective surgery. Frankly, these latter 2 examples are less impressive than the ones I really want to talk about.

I see the tremendous value created by Wegovy and Mounjaro's “scare” for these 3 stocks.

Shockwave (SWAV), DexCom ( DXCM ), and Intuitive Surgical.

SWAV is a very fast-growing medical device company that uses ultrasonic waves to pulverize calcified plaque deposits in the arteries and on the heart valves. I believe these plaques got there from high levels of cholesterol. As we all (should) know, high cholesterol usually comes from eating too many calories. It has been mooted that these new obesity treatments will make a company like SWAV obsolete. I have hopefully given you enough reason to reject this hypothesis. I say hypothesis even though market participants are bandying the idea of obsolescence about as if it was a fact. Let them, I, and hopefully, you will consider this as an opportunity to exploit. So let’s look at a chart and see if SWAV has reached a level that is giving support and an opportunity to trade or invest in the name. Let’s have a look at the 1-month chart.

Not too long ago this was a stock trading over 300. The stock has been falling hard since the middle of July. Though it certainly fell harder around the time that Wegovy was found to have a 20% reduction in heart attacks. Still, is that really going to have an effect on such important MedTech devices? Arterial plaques develop over decades. Assuming that you could force every overweight person to start injecting themselves now there will still be millions out there who have these plaque deposits just waiting to break off and cause a stroke or heart attack. No SWAV has enough potential patients to keep them going for years, maybe decades. I already have it as a long-term investment among my other medtech names, and I will continue to add to it at these crazy prices. I also will start a trading position using Call options starting tomorrow.

Next on my list is DXCM let’s look at a 1-month chart here as well.

I think this is an even better chart. I put in the green trendline because we can see the 52-week high and the drop to nearly 100 even. Again the slide began mid-July right about the time everyone was talking up the coming miracle drug that will defeat not only obesity but diabetes as well. Taking the logic to its most illogical extreme we won’t need the best and most advanced Continuous Glucose Monitor - CGM anymore. This is just plain silly. First of all type 1 diabetes is not brought on by obesity, second it will take years to get the 10s of millions of overweight people on this treatment. They will still have to monitor their glucose level until Diabetes Type 2 goes away if it goes away. Also, there is a movement to get prediabetes on these CGMs before they become full diabetics. So again this is a name that has been sold off to ridiculous levels and looks like it will regain its value. Yes, I have this name among my medtech holdings in my long-term account, and I started building a trading position last week as well.

Finally, there is ISRG

In its earnings report, it did cite a slowing in bariatric surgery as patients evaluate the alternative using drugs instead of surgery. Even with this piece of news Intuitive Surgical still upped its 2023 procedure growth rate projection to 20%-22% from 18%-21%. ISRG reported on July 20, again loosely aligned with the fascination regarding weight loss drugs. Here again, is the 1-month chart.

We can see the 52-week high in this chart and that is approximately around July 20. The chart is a bit less satisfying than the prior two, however, if you squint your eye you can make out an inverse head and shoulders making this a bullish configuration. There is no “gap down” to be quickly filled like the prior two. It would likely not surprise you but I haven’t yet pulled the trigger on this name. Partly because I tried to get into it at the beginning of its slide and now I am a bit more circumspect in getting in again. That said ISRG is a great medical device company with a huge moat. If I can find a safe point to get in, it will certainly be worth another try.

A quick word about the overall market

We are still in the midst of the toughest part of the year. As I outlined in my last article I got back into hedging rather quickly starting on Monday, including Call options on the VIX futures. I ended the week still well hedged breaking my general approach of not hedging over the weekend. We’ll see if I get my just deserts for not sticking to my own rules. In this case, my gut said more downside to come. We do have the Fed minutes to be revealed on Wednesday which could cause some worry over more rate hikes, or talk of higher for longer. It’s all getting very jejune, Yes, it will be higher for longer, maybe there’s one more rate hike but likely not. Can we just move on? Unfortunately not yet, not until we start seeing better earnings, based on lower costs and stronger economic growth. The problem is, gasoline is going up, and so are food costs, as we noted last week. So I am going to keep the hedges on and be very selective on the long side. I think biotech and medtech have the potential to give us some opportunities. Once all the members of Group Mind Investing are well invested in 5 biotech names that I introduced last week, I will share all of them with you next week. Until then, happy trading

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