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The emergence of weight-loss drugs with the potential to reduce the risk of heart attacks and diabetes has set stock investors on a tricky course as they navigate the impact on various health-care companies.

Consider the makers of devices designed to treat conditions linked to diabetes. As patients shed pounds by embracing a new class of drugs such as Ozempic and Wegovy (known as GLP-1s), there’s a chance that diabetes cases could decrease. While this is undoubtedly a positive development for public health, it poses a demand conundrum for device manufacturers, leading investors to take sides. Notably, the top three decliners in the S&P 500 Health Care index this quarter—Insulet, ResMed Inc, and Dexcom Inc—are all diabetes-related companies.

Insulet Corporation, specializing in insulin pumps, has been hit the hardest, losing approximately 45% of its market value over the past three months and experiencing its worst quarterly performance in nearly 15 years. Despite traders offloading diabetes device stocks, sell-side analysts are pushing back, suggesting that these companies are unlikely to be significantly impacted in the short term. They even argue that the future financial impact of GLP-1 drugs may be less detrimental than feared.

While Wall Street’s appetite for weight-loss medications like Wegovy has benefited drugmakers Novo Nordisk A/S and Eli Lilly & Co., an August study update revealing that Wegovy reduces heart-related risks sent diabetes device manufacturers into a tailspin.

This disconnect between market activity and Wall Street analysis extends beyond diabetes device stocks, reaching into the broader medical device sector. ResMed, known for producing breathing machines for sleep apnea (a condition often linked to excess weight), has seen its stock drop by over 30% this quarter, marking its most substantial three-month decline in 24 years.

Some market participants view this sector-wide weakness as an opportunity to buy. JPMorgan, in a late August note, described sentiment on medical devices as the worst since the global financial crisis of 2008, suggesting that now is the time to invest in device stocks, according to analyst Robbie Marcus.

While these stocks could stage a comeback, potential side-effects and usage risks may come into play for prescribers and patients, potentially causing stock prices to rise again. Investors might also start betting on a turnaround story as early as 2024 if the stocks continue to decline.

However, reservations about owning these device stocks persist. Projections indicate that the global market for weight-loss drugs could reach $100 billion by 2035, prompting investors to remain cautious.

Short-sellers have found it profitable to bet against diabetes stocks this quarter, with bearish investors on select stocks—Insulet, Tandem Diabetes Care Inc., ResMed, and Dexcom—reporting roughly $1 billion in paper profits in the third quarter through Thursday’s close, according to data from S3 Partners LLC’s Ihor Dusaniwsky.

More developments await these stocks as Lilly’s tirzepatide, already approved for diabetes as Mounjaro, is expected to enter the weight-loss market with an obesity approval anticipated by year-end. Additionally, further trial results demonstrating the benefits of weight-loss drugs are expected within the next six to 18 months, and positive data could continue to impact diabetes and insulin pump stocks.

The best-case scenario for these diabetes-related stocks, as indicated by BI’s Henriksson, is for the companies to post third-quarter earnings “that show it’s business as usual.”