There have been plenty of winners and losers as a result of the hype surrounding GLP-1 drugs this year. Danish company Novo’s Nordisk’s Ozempic is easily the best known GLP-1 example, and whilst technically it’s only supposed to be used to treat diabetes, it has been touted by celebrities and the internet as the next ‘miracle weight loss cure’.
Resmed (ASX: RMD) has been caught up in the growing debate as to whether these drugs are going to revolutionise the treatment of obesity. This is because many customers for Resmed’s products, which include a range of devices aimed at treating sleep disorders, happen to be obese.
The core argument here is: Obesity is a known contributor to sleep disorders. So if you fix the obesity problem, then potentially there are going to be far fewer customers around for Resmed’s products.
GLP-1 drugs have been around for a while, but it feels like this new threat to Resmed’s future suddenly blew up in August. On August 4, Resmed shares plunged 9.3% following the release of its FY23 results.
There was little mention of the impact of GLP-1 drugs on the business in the announcement, and most commentators put the fall down to an unexpected 80 basis point decline in Resmed's margins. But, looking at Novo Nordisk’s chart, and its stellar performance around the same time as Resmed’s drop, one can’t help wondering if there’s a link here…
On August 8, Novo Nordisk announced positive results from its SELECT cardiovascular trial to test the efficacy of a treatment using the company’s Wegovy drug, a GLP-1 derivative. The trial indicated Wegovy reduced the risk of major adverse cardiovascular events by 20% in adults with overweight or obesity.
Whether it was coincidence or good/bad timing depends on which company's shares you own! But one thing is clear, anyone who bought the initial dip in Resmed shares on August 4 was bitterly disappointed in the days and weeks after the SELECT trail announcement.
If you’re a Resmed shareholder, or if you’re wondering whether the recent sell-off (crash?) in Resmed shares is presenting a major buying opportunity, the factors to consider are both dynamic and extremely complex.
Fortunately for us, the big brokers use their big brains to analyse in painful detail every minutiae of the GLP-1 phenomena and its likely impact on Resmed - so we don’t have to!
Let's see what the big brokers think about Resmed in the wake of the recent price drop, and against growing fears that new weight loss wonder drugs might have a substantial detrimental impact on the company’s profitability.
Analysts as Macquarie do consider potential impacts of GLP-1 drugs as a “key risk” to their Resmed investment thesis, but they also believe the likely impact is “overstated”.
They’re more interested in improving margin dynamics which will be assisted by cost cutting initiatives. They also feel that around current prices Resmed appears “inexpensive on a range of metrics” including price-to-book, return on equity, and price to earnings ratio.
Still, looking forward, Macquarie says it will be watching management’s commentary on the potential impact of GLP-1 drugs for signs management sees a more meaningful impact on Resmed’s earnings.
Analysts at Morgan Stanley note Resmed is trading at 18 times their FY25 forecast compared to the 10-year average of 28 times. MS points out this doesn’t necessarily mean Resmed is cheap, saying “we believe a P/E discount is warranted”. They do note that the current discount is “too great”, however.
It’s interesting to note that if there is “no negative impact from GLP-1”, then MS’s Resmed valuation rises to US$178 or A$27.38*.
Morningstar analysts believe Resmed shares are “materially undervalued”. They feel the company will benefit from margin expansion as newer, higher margin products increasingly contribute to the bottom line.
They’re not too worried about the impact of GLP-1 drugs over their 5-year forecast period because the total addressable market for Resmed’s products is likely to grow faster than any detrimental impact these drugs may cause.
Analysts at Goldman note sales of devices in the US were “soft” last quarter and could be the catalyst for downgrades of Resmed’s FY24 forecasts. On the positive side, sales outside the US continue to show momentum and may well be enough to stabilise sentiment against the impact of GLP-1.
Goldman suggests Resmed’s higher-margin, recurrent-revenue segment “is the core attraction of this business model”. On margins, the outlook is positive as Goldman considers Resmed’s improved update on sales costs and a proposed reduction in headcount.
This note was provided as a read through from Resmed’s major competitor Phillips' results. Citi analysts suggest concerns surrounding the impact of GLP-1 drugs on the sleep disorder device industry are “overly pessimistic”, but could deliver continued short term pain as the market frets about their impact, and about the impact of upcoming trials of other obesity treatments.
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