October 12, 2023

Things have been rough in the MedTech world lately.

The new class of weight loss drugs (GLP-1s) is shaking things up way more than expected. And rather than think things through it appears that larger investors have decided to take down their exposure to MedTech now and ask questions later.

Just take a look at the iShares Medical Device ETF (IHI). It has fallen from 58 in late July to under 46 today, a greater than 20% decline.

The big-picture change coming is that GLP-1s appear to turn off the desire to eat. That’s made them somewhat of a wonder drug, capable of helping people lose a lot of weight. They are approved to treat diabetes today and are expected to be approved for weight loss before the end of the year.

The big question is, what areas of the MedTech and healthcare market does this totally disrupt?

We can’t cover everything today. There are far too many variables. But we can think very high level about spine surgery, which could potentially impact SIBN and ATEC, as well as organ health, which could impact TMDX.

Cutting right to the chase, the question is whether weight loss across a significant portion of the population could reduce the need for spine surgery and/or organ transplant.

I’m not so sure. Yes, lower body mass means less stress on your back and SI joint. And a healthier heart and kidneys. But on the other hand, it might also mean those same people become more active, which could nullify any positive impact on vertebrae, SI joints, etc. And for the organ transplant market, there are a lot of reasons people need a new organ.

Also, losing some weight isn’t going to automatically “fix” people that have spine, organ, or other issues right now (or that are about to develop them).

On the other hand, it does seem logical that a healthier, lower-weight population would net-net need less from the health care system.

This is a developing story and one I don’t have concise answers to today. But I do think that, given what we’re seeing in the market, it’s time to take down our MedTech exposure a little. Hopefully this is a mistake and our remaining “oversold” MedTech stocks will bounce right away.

Recent Changes

TransMedics (TMDX) moves to SELL A QUARTER, HOLD HALF

R1 RCM (RCM) moves to HOLD

SI-Bone (SIBN) moves to SELL

Updates

Alphatec (ATEC) is gearing up for the North American Spine Society (NAAS) Annual Meeting next week (October 18 – 21) in L.A. The company will be talking about its automation capabilities, starting with what’s being integrated into the EOS platform for 2024 (alignment and surgical planning abilities) and what’s expected to be released in 2025 and beyond. Shares are roughly flat over the last five sessions. HOLD

Braze (BRZE) hosts its ninth annual customer conference next week (October 16-17) in New York with a long list of notable speakers, including keynote speakers Guy Raz (NPR), Leslie Odom Jr. (actor, singer, author) and Omar Johnson (former CMO for Beats by Dre). Nothing else major to report, and shares are roughly flat over the last week. BUY

Build-A-Bear (BBW) is our newest position and has held up well through its first week in our portfolio. The company is a specialty retailer and entertainment company that, depending on location, allows guests to buy off-the-shelf furry friends, make their own stuffed animals, or host group events with stuffed animal-centric activities. It’s one of those companies that seems like it should be owned by a private equity group. Revenue growth is modest (5% to 7% expected this year) but profit is expected to grow at about twice the rate of revenue this year (+15% to $3.63). The company has done a lot of work over the last year or two to get revenue growing again (it was a no-growth business prior to the pandemic) and has also delivered a few sizeable special dividends in the last couple of years (last one was equal to a 7% yield). It’s an interesting story and there are a few analysts starting to get engaged. DA Davidson and Northland Capital both picked up coverage in September with price targets of 42 and 36, respectively (stock at 28 today). BUY

Duolingo (DUOL) reached its highest level in two years this week after shares moved through resistance in the 160 – 168 zone on Monday. It helped that the company picked up coverage from Barclays and also got a price target increase from Evercore ISI (from 180 to 200, stock at 177 today). We already knew the company was expanding from language learning into math, but the latest news is that it’s expanding further, into music. It sounds like the math app will be turned off and all these modules will be consolidated into one app. I think this is a neat development. BUY HALF

Enovix (ENVX) has had a wild ride lately, and I wrote a Special Bulletin last week discussing the strategic shift for the California-based Fab1 facility. The gist of that bulletin was that it’s not surprising and, from a strategic perspective, makes a lot of sense. Since then the sharks have come out, trying to get investors to band together and get a class action lawsuit going. These things typically benefit one group a lot – the lawyers. Provided Enovix management achieves its goals to manufacture millions of cells of batteries in Asia, shareholders should be plenty happy. HOLD

Flywire (FLYW) picked up new coverage from Seaport Research (40 price target) and got a nod from RBC Capital (43 price target) over the last week. The stock is near 30 today (same as last Thursday), which has proven to be a support level. The 200-day moving average line is at 29.4 so watching that closely. One of the reasons for recent weakness in the stock is likely because of recent dollar strength, which could be a very slight headwind to Q3 and Q4 profitability. This isn’t a super material thing (at least not yet), but is worth being aware of as we look toward the Q3 earnings report (probably around November 7). BUY

Intapp (INTA) has put together a decent string of days to lift itself off a recent low of 30.6 (September 25) and get back into the mid-30s. Shares are around 36 today, which puts them back above their 25- and 50-day moving average lines (200-day is at 37.8). No fundamental developments. BUY

R1 RCM (RCM) has been trending down about since we jumped in, which is frustrating to say the least. The odd thing here is that the company’s solutions do exactly what healthcare providers need, namely helps them reduce all the costs that have gone up (labor, inflation, utilization, etc.). Management has sounded very positive in recent calls, noting that new technology (AI/ML) is driving a lot of customer inquiries. This all said, the healthcare market is trying to sort out the impact of the new class of weight loss drugs and RCM is caught up in that. Minding the chart and moving to hold. HOLD

Remitly Global (RELY) is benefiting from a price target increase (from 25 to 34) by Goldman today. The stock is trading around 26, where it hasn’t been since November of 2022. The trend is good. BUY

Repligen (RGEN) has been stable lately, and is having a good day in the early going today. There’s been no news since the company announced the $170 million acquisition of Metonova, a Swedish company with single-use magnetic impellers and drive trains. That company should generate around $26 million in revenue next year (+5% to 10%) then be back on track to grow more than 20% into 2025 and beyond. We’ll learn more later in October when Q3 earnings are out, but this looks like a good move to help build the business back up. HOLD A QUARTER

SI-Bone (SIBN) was stable in the low 20s until yesterday, when the stock broke lower. While recent commentary at conferences has been positive management never raised guidance and it’s another case where the selling pressure in the MedTech space is just too strong. Moving to SELL. SELL

TransMedics Group (TMDX) is, just like ATEC, RCM and SIBN, getting sold every day as the MedTech space crumples. We’re going to let go of another quarter of our position, which will leave us with a half-sized stake, and keep a close eye on TMDX (as well as a lot of other MedTech names) for signs of which will be the bigger next move, up or down. SELL A QUARTER, HOLD HALF

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.