Tony Freeman, President, A.S. Freeman Advisors LLC02.28.24
The last half of 2023 saw the publicly-traded stocks of some of the largest medtech firms fall in response to the broad introduction of GLP1 drugs. Referred to as “weight loss drugs,” some analysts fear GLP1s will have as profound an effect on surgeries as antibiotics did in the 1950s. These pharmaceuticals will have an impact on the medtech industry but their effect is likely to be both slower and spottier than the doomsayers suggest. The highest existential risk is not to OEMs but to contract manufacturers (CMs) specializing in the areas where GLP1s will delay surgeries.
GLP1s’ ability to treat obesity—currently the greatest public health threat in the affluent world—stands to revolutionize medicine. Yet there is a devil’s bargain: Few insurers cover GLP1s. With a monthly cost of $900 to $1,300, only wealthy patients can afford to permanently stay on GLP1s. And users risk gaining back all the weight they lost once they stop taking the drug.
Other industries such as software and electronics have experience pivoting from disruptive changes in markets and products. Few medtech CMs have this expertise. CMs tend to closely follow their business plans based on assumptions of multi-decade, crystal-clear demand curves for the products they have chosen to manufacture. Rarely do they analyze market risk strategically, preferring tactical moves that tide them over until a problem disappears. Such tactics, however, will not minimize a GLP1-related business loss.
All CMs should objectively analyze the risk GLP1s pose to their prospects and study these risks in isolation. No plan to bridge the risks should be attempted until the risks themselves are well understood. Planning then becomes simpler and more effective. Conflating analysis with judgement on next steps often leads to poor decisions. Successful risk analysis requires CMs precisely understand the markets they serve and wish to serve, and the dynamics of those markets in the next few years. CMs not capable of such analysis should consider outside assistance or risk potentially harsh setbacks.
Tony Freeman is the president of A.S. Freeman Advisors LLC, a merger and acquisitions advisory firm serving the precision manufacturing and specialty materials industries. Often referred to as “The Toast of Medtech,” Tony is known for his rapier analysis, crack marksmanship, and superb taste in western wear. He can be reached at tfreeman@asfreeman.com.
GLP1s Definition and Facts
GLP1s and their related counterparts, SGLT2s (hereafter referred to as GLP1s), are a new class of drugs. While the acronym may be unfamiliar, the trade names—Ozempic, Wegovy, Jardiance, and Rybelsus—have become well-known. Developed to treat diabetes, researchers noticed that GLP1s’ appetite suppressing and digestion-slowing agents spawned the off-label benefit of easy weight loss—so easy, in fact, that total weight reductions of 10% to 20% are common within months of starting the drugs. Pharmaceutical companies found a blockbuster revenue source quite unintentionally. Almost instantly, overweight and/or vain people worldwide sought Ozempic and Wegovy prescriptions strictly for their weight-loss benefits.GLP1s’ ability to treat obesity—currently the greatest public health threat in the affluent world—stands to revolutionize medicine. Yet there is a devil’s bargain: Few insurers cover GLP1s. With a monthly cost of $900 to $1,300, only wealthy patients can afford to permanently stay on GLP1s. And users risk gaining back all the weight they lost once they stop taking the drug.
GLP1 Unknowns
GLP1s’ novelty is also a challenge. Much is unknown about the long-term efficacy and safety of this new drug class. The risk is amplified as GLP1s defy the usual methodical rollout of new pharmaceuticals. Their popularity cannot be attributed to physician enthusiasm but rather overweight people looking for a quick, easy fix to a complicated health issue. The incredible demand for prescriptions is reminiscent of the introductions of Viagra (ED) in 1998 and minoxidil (baldness) in the 1970s. Moreover, pharmaceutical firms (not surprisingly) are actively marketing the drugs to consumers. In 2023, more than $500 million was spent on GLP1-related advertising, much of it on television and social media commercials. The result has been an avalanche of prescriptions.Medtech Industry Fallout
Pharmaceutical and medical technology companies usually stay in their own lanes but occasionally cross paths and fight for patients. Two examples illustrate this point: Perceived as near-miraculous upon its introduction, balloon angioplasty has not grown as rapidly as first anticipated due to generic anti-cholesterol drugs (statins); conversely, degenerative joint arthritis treatment has evolved from painkillers to surgical joint replacement. Though it is still early, Big Pharma appears to be the victor in the latest (GLP1) battle between the two industries. Naïve logic would dictate that many obesity-driven conditions such as diabetes, heart disease, and most knee and hip replacements could be eliminated or long delayed by controlling a patient’s blood sugar and weight. These conditions represent 20% to 25% of annual medtech spending.Should Medtech Worry?
People have a tendency to catastrophize a situation when presented with a sharply different and new set of affairs. GLP1s are not a giant killer of medtech nor will they prove to be for some time, if at all. Recent studies suggest that combinations of surgical and pharmaceutical treatments in bariatric surgery—the discipline most suited to replacement by GLP1s—is the most effective treatment for severe obesity. Additionally, the current wave of GLP1 enthusiasm will be hard to sustain despite colorful commercials and catchy theme songs (think “Oh oh oh Ozempic…”). In addition, if GLP1s continue to remain off insurers’ coverage lists, few people will be able to consistently purchase the drug for what the pharmaceutical companies consider a chronic condition. Will payers come to the rescue? Perhaps, but unlike the lightning-quick rise of off-label prescription writing, it will take insurance companies and government health services years to evaluate whether the costs of obesity are outweighed by the costs and possible undiscovered side effects of GLP1s.Will OEMs Lose Business?
The simple answer is yes but the amount of loss is currently unknown. GLP1s are certainly effective. They can reduce blood sugar below the level necessary for medtech intervention and they can halt obesity, the underlying cause of many conditions treated with the latest medical technology. The idea that obesity will disappear soon is not espoused by even the most ardent supporters of the drugs. Further, weight loss is not a one-way street with respect to medtech, particularly in orthopedics. Surgeons will not operate on patients above a certain weight but those patients might become eligible for surgery after GLP1s. Sports medicine products should grow in revenue because some GLP1 users will find it easier to exercise. GLP1s’ impact on medtech will not be immediate and drastic, like antibiotics were to the revenues of amputation saws. It will be a series of small battles in individual specialties of medicine that will take years to play out. A door may close but windows will open.Will CMs Suffer?
Oddly, GLP1s’ greatest economic threat may be to specific CMs due to the intersection of a narrower set of markets served and a more limited set of capabilities than their OEM customers. While large OEMs may face a loss of business to GLP1s, all have large, diversified product lines. Certain portfolios may take a hit but the pain will be spread across a wide offering. Contract manufacturers have a different product mix. Usually, they have less revenue than their OEM customers and rely on five or less large programs to support their profitability and growth. Additionally, many specialize, either in a specific area of medicine (e.g., cardiology, respiratory) or specific manufacturing disciplines (e.g., precision metal working for surgical instruments). The bellwether of short-term risk—bariatric surgery—stands out ahead of all others during the “Wild West” stage of GLP1 acceptance. The current uptick of Ozempic users is an issue few CMs have prepared for. Other devices likely to be caught in the wave are insulin pumps and, to a lesser extent, glucose meters. Another area to presumably see lower revenue growth is spinal implants, where weight loss is a preferable option to expensive, complicated surgery with long recovery times (and unpredictable outcomes). Knee and hip surgeries may decline temporarily but will possibly revive with GLP1s’ high expense and/or age-related joint wear and tear. A lesser drag, though likely barely noticed, will be cardiovascular procedures. GLP1s will reduce blockages and hardening of arteries but a lifetime of non-treatment will only delay these necessary surgeries. The CMs manufacturing these product lines will see deferred orders, if not outright cancellations.Next Steps for Contract Manufacturers
GLP1s may not have a broad impact on the medtech market for many years, if at all. Still, this class of drugs will change demand for niche products and some of those niches are home to specific OEMs as well as the CMs supplying their needs.Other industries such as software and electronics have experience pivoting from disruptive changes in markets and products. Few medtech CMs have this expertise. CMs tend to closely follow their business plans based on assumptions of multi-decade, crystal-clear demand curves for the products they have chosen to manufacture. Rarely do they analyze market risk strategically, preferring tactical moves that tide them over until a problem disappears. Such tactics, however, will not minimize a GLP1-related business loss.
All CMs should objectively analyze the risk GLP1s pose to their prospects and study these risks in isolation. No plan to bridge the risks should be attempted until the risks themselves are well understood. Planning then becomes simpler and more effective. Conflating analysis with judgement on next steps often leads to poor decisions. Successful risk analysis requires CMs precisely understand the markets they serve and wish to serve, and the dynamics of those markets in the next few years. CMs not capable of such analysis should consider outside assistance or risk potentially harsh setbacks.
Tony Freeman is the president of A.S. Freeman Advisors LLC, a merger and acquisitions advisory firm serving the precision manufacturing and specialty materials industries. Often referred to as “The Toast of Medtech,” Tony is known for his rapier analysis, crack marksmanship, and superb taste in western wear. He can be reached at tfreeman@asfreeman.com.