Competition is perhaps the single most important dynamic to understand when evaluating companies. Take a random assortment of the highest multiple companies: chances are they’re described as “market leaders” with “large moats” and "excellent competitive position”.

On the flipside, take a random assortment of the lowest multiple companies: they’re likely described as “undifferentiated products” operating in “increasingly competitive spaces”.

Sometimes competition is obvious a mile away, and other times it sneaks up and rips through markets rapidly.

The impact of GLP-1 drugs on bariatric surgery (weight loss surgery) is an example of the latter - competition that snuck up quietly but then manifested severely and rapidly. The timeline and dynamics of this story provide important lessons for competition more broadly.

GLPs Gain Ground

In hindsight, it seems obvious that extremely effective weight loss drugs like GLP-1s would decrease demand for bariatric surgery. If you’re morbidly obese and considering bariatric surgery, why not at least try GLP-1s first, a much less invasive solution that can yield similar levels of weight loss?

Across many conditions, this “medication then surgery” protocol is a common patient journey. Medication is typically used as first-line therapy, with surgery only recommended if medication fails.

At minimum, you’d expect a GLP-1s to cause a significant air pocket in bariatric volumes, as patients who otherwise would have undergone surgery try medication. At maximum, bariatric demand could be permanently decreased.

The surprising thing is that it took the market a really long time to realize the GLP-1 threat.

It wasn’t until July 2023 that Intuitive Surgical (ISRG) - a leading robotic surgery company with a then-booming bariatric surgery business - first mentioned weight loss drugs in an earnings call. To put this into context, Ozempic was first approved (for diabetes) in 2017. Wegovy was first approved specifically for weight loss in 2021. In summer 2022, Lilly released tirzepatide’s spectacular Phase III trial results that showed a category-leading 22% weight loss with low side effect burden. In November 2022, Elon Musk tweeted that Ozempic was the key to his own weight loss.

Rounding into 2023, it was increasingly clear that GLP-1s were not only highly effective medications, but highly charismatic products with broad consumer appeal.

Despite this, Intuitive had never been asked a single question about weight loss drugs in public-facing earnings calls or conferences1. This was long after GLP-1s had garnered significant public interest, as seen in the below Google Trends chart.

Chart: GLP-1 search interest, via Google Trends.

Growth, then None

Throughout 2022, bariatric surgery was the single fastest growing procedure type for Intuitive, and was always mentioned first when they recited the highest growth areas within their US business:

• Q1’22: “growth was led by bariatric procedures, cholecystectomy, hernia repair”

• Q2’22: “U.S. procedure growth was led by bariatric surgery, cholecystectomy and colorectal procedures…”

• Q3’22: “…fueled by bariatric surgery, cholecystectomy, hernia repair…”

• Q4’22: “areas of strength included…bariatric surgery, cholecystectomy, and hernia repair”

As late as January 2023, Intuitive spoke of a bright future for bariatrics:

“While still in the early stages of adoption in the U.S., robotic-assisted bariatric surgery has been one of the fastest-growing procedures in general surgery for Intuitive.”

-Intuitive Surgical, January 2023 (Q4'22 earnings call)

The first time anything seemed off - and only to most perceptive of sleuths - was April 2023, at the Q1’23 earnings call. This time, bariatrics was listed as the second fastest-growing procedure:

“On a procedure basis, cholecystectomy, bariatric surgery and hernia repair led the way.”

-Intuitive Surgical, April 2023 (Q1'23 earnings call)

This was extremely subtle. So much so that there were no questions about weight loss drugs or GLP-1s on the call, nor any more mentions of bariatric surgery at all.

Subsequently, things changed rapidly. Only one quarter later - the Q2 earnings call (July 2023) - Intuitive called out the GLP-1 impact:

“Within one of our target procedure areas, bariatric surgery, our growth rate in the U.S. slowed during the quarter. Some customers have indicated that they are seeing increased patient interest in weight loss drugs. It is too early to conclude if the slowing growth is a temporary pause as patients evaluate these new drug therapies or if it's a trend that continues.”

-Intuitive Surgical, July 2023 (Q2’23 earnings call)

Markets rapidly woke up to the new reality. Indeed, only 2 months later (September 2023), Intuitive was already fielding “worst case scenarios” conference questions:

“…People are sitting there worried, well, bariatric is going to slow, I don't know how much because of GLP-1s. What can make up for that?”

-Wells Fargo analyst (Sept 2023) - Wells Fargo Healthcare Conference

As it turns out, analysts were right to worry about bariatrics. The slowdown came fast, steadily, and relentlessly, as seen in Intuitive’s subsequent quarterly commentary:

• Q3’23: “In bariatrics, we continued to see double digit growth albeit at a modestly lower growth rate compared to Q2”

• Q4’23: “We saw a continued deceleration in growth throughout 2023, likely the result of the uptake of GLP-1 drugs.”

• Q1’24: “Bariatric procedure growth continued to moderate and was flat year-over-year.”

• Q2’24: “Bariatrics procedures in the US declined in the mid-single digit range.”

• Q3’24: “Bariatrics procedures in the US declined in the mid-single digit range.”

• Q4’24: “Bariatric procedures in the US declined low-to-mid single digit range.”

Within a year of first mentioning the GLP-1 threat, Intuitive’s bariatrics franchise went from growing 20%+ growth to negative growth.

Chart: Intuitive Surgical year-over-year bariatric procedure growth.

Unaware, then Very Aware

Why did it take so long for the market to see GLP-1s as a risk to Intuitive’s bariatrics business?

Since Intuitive is a device business and GLP-1s are pharmaceutical products, competition was somewhat orthogonal. Investors that cover med device are often different than those that cover biopharma. The same goes for sell-side analysts. While these market participants are generally aware of the big happenings in other verticals, the dots are incrementally harder to connect.

But this doesn’t fully explain the story. I believe the market was uniquely slow to recognize the potential of GLP-1s for several reasons specific to this drug class.

First, weight loss drugs had a troubled history and were thus very much a “show me” market. Past drugs had both modest efficacy (e.g., only 5% body weight loss) and/or serious side effects (e.g., fen-phen was used widely for weight loss in the 90s, but after the discovery that one of the components caused heart valve problems, it was recalled from the market2). The semaglutide and tirzepatide clinical trials went a long way towards expelling these worries, but skepticism remained.

Second, GLP-1s seemed almost grotesquely ambitious within a biopharma industry that had evolved away from mass market drugs and towards advanced modalities for niche, genetically-determined oncology and rare disease indications. In the age of genetically-modified autologous T cells used in 2nd line refractory multiple myeloma, the idea that a single peptide could treat almost everyone that was obese seemed incomprehensible, a Mad Men-esque throwback to the 90s with Prozac, Lipitor, and Viagra.

Third, and more speculatively, weight loss was perhaps considered an “unserious” reason to take a drug, more a question of willpower than pharmacology. Would Americans really want to take drugs to lose weight? Would it be socially stigmatized to do so? Would insurance companies pay?

As a result of all these factors, there were real questions on how big the class would be, even through early 2023. I vividly remember debating the GLP-1 market size with sell-side analysts around this time, and several contested the TAM was $30-50B, even though my conservative napkin math pointed to $100B-$300B3.

Once investors realized that the drugs worked, were quite safe4, and a heck a lot of people wanted them, the market responded rapidly. Between July 2023 - when Intuitive first mentioned weight loss drugs - and October 2023, medical device companies that were deemed GLP-1 losers sold off aggressively (e.g., diabetes medical devices, sleep apnea devices, bariatric surgery), while the GLP-1 companies themselves (Eli Lilly and Novo Nordisk) increased in value much more than the broader market.

Chart: Stock performance between July 2023 and October 2023: GLP-1 exposed medtech vs. GLP-1 pharma vs. indexes.

Conclusion

Since 2023, GLP-1s have been on a meteoric launch trajectory. When compared against previous best-selling drugs of all-time (Keytruda, Humira, Lipitor), GLP-1s look to be on a record-shattering revenue ramp trajectory5.

Chart: Revenue by year-post launch, best selling drugs of all time6. GLP1s (semaglutide and tirzepatide) vs. Keytruda, Humira, and Lipitor.

As for Intuitive Surgical, while GLP-1s have rearranged the growth drivers, it remains one of the best businesses in healthcare, a fixture among the top 5 multiple companies. Despite the impact of GLP-1s on its bariatrics franchise, Intuitive still has little to no competition within robotic surgery, and a diverse portfolio of non-bariatric use cases for its da Vinci robot.

Indeed, if you had bought Intuitive at the beginning of 2023, while the market was blissfully unaware of the GLP-1 threat, you’re up 97%. Not quite as good as if you had bought Eli Lilly at the same time (+106%), but much better than the other major GLP-1 stock, Novo Nordisk (incredibly, down 4% since the beginning of 2023).

The dispersion between Novo and Lilly again goes to show the incredible power of competition to dictate stock outcomes: despite Novo’s excellent financial performance since 2023 (31% growth in 2023, 25% growth in 2024, 48% EBIT margins), the stock has declined because of competition: investors think Eli Lilly is the emerging winner within GLP-1s, given the stronger weight loss profile of tirzepatide (Mounjaro/Zepbound) versus semaglutide (Ozempic/Wegovy), and Lilly’s more attractive weight loss pipeline assets.

I take two lessons from this story.

First - paraphrasing Andy Grove - it pays to be paranoid. By the time Intuitive mentioned GLP-1s, bariatrics’ rapid deceleration was well underway.

Second, paraphrasing Peter Thiel - when the balance of power shifts, it always happens more completely and aggressively than you think. In the case of Intuitive’s bariatric procedures, growth didn’t just slow. Rather, rapid growth turned into negative growth in the span of just a year. And while the market was slow to wake up to the GLP-1 opportunity, once awoken, it sent medtech stocks spiraling in short order.

Sometimes competition means playing chess. Other times, it means getting the chessboard upended entirely. Attention must always be paid to the next move, but every once in a while, it pays to pick up one’s head to see if any board-upenders are approaching.