Weight-loss drugs are shaking up healthcare stocks: Should you buy the CSL or Resmed dip?

A groundbreaking class of weight-loss drugs called GLP-1s are shaking up entire industries, toppling valuations and reveal a surprising truth: America’s waistlines have been propping up countless businesses.  

The S&P Health Care Equipment Index – which includes names such as GE Healthcare and ResMed – is down 30% since late July, sinking to levels not seen since the onset of the pandemic. 

The diabetes treatment is raising concerns about demand for therapies addressing diabetes-related complications such as sleep apnea, cardiovascular diseases and kidney damage. 

SPDR S&P Health Care Equipment chart (Source: TradingView)

Closer to home, ResMed (ASX: RMD) shares are off around 35% since the beginning of August. Despite a brief oversold bounce in late September, the stock trading near recent lows again.

Resmed price chart (Source: TradingView)

Shares in CSL (ASX: CSL) have sold off more than 20% since June due to a combination of weaker-than-expected earnings and GLP-1 risks. The stock briefly touched $230.80 on Friday, a level not seen since October 2019. 

CSL price chart (Source: TradingView) 

ResMed and CSL are typically viewed as high-quality and defensive companies with a proven track record. With a sharp

Novo Nordisk clears kidney disease trial early

Novo Nordisk ended a clinical trial evaluating the impact of semaglutide (which is branded as the weight-loss drug Ozempic) on kidney function after the results from an interim analysis met the pre-determined criteria for efficacy. 

What does this mean for ASX-listed stocks?

Goldman says “there is a direct link to CSL through the Vifor segment  – potentially a direct earnings impact for a company which sells drugs to the kidney disease/dialysis populations, but also potential consequences for the carrying value of the business itself, which is comprised almost entirely of intangible assets and goodwill.”

“Each positive outcome trial from Novo Nordisk or Eli Lily broadens the potential utility of the GLP-1 receptor agonist class and strengthens the argument that coverage or reimbursement should be expanded.” 

The risks to CSL

Vifor is forecast to generate approximately 15% of CSL Group revenues in FY24, according to the analysts. The breakdown for Vifor’s earnings is noted below.

Source: Goldman Sachs

The investment bank says between 7-8% of CSL revenues are under consideration.

For now, the degree of benefit from GLP-1s for chronic kidney disease won’t be clear until full trial completion in the second half of 2024.

“Therefore, beyond the elevated uncertainty and sentiment negatives, it is not possible to actually assess the impact with any certainty,” the analysts said.

But as we all know, the market hates uncertainty.

Looking ahead

The analysts expect to see several updates from Novo Nordisk and Eli Lilly in the coming weeks and months, potentially positive ones in-line with recent announcements.

“We do not expect any to materially shift our view that this class of drugs will be successfully, that reimbursement, coverage and supply constraints will gradually improve over the years ahead and the combination of these factors could necessitate some re-consideration of future TAMs across several corners of the global sector,” they warned.

Goldman remains upbeat on ASX-listed names

The investment bank said these concerns have “more than adequately priced into ResMed shares and we continue to reiterate our Buy rating.”

• Resmed (ASX: RMD): Buy with $33.00 target price

• CSL (ASX: CSL): Neutral with $298.00 target price

• Fisher & Paykel (ASX: FPH): Buy with $24.00 target price

The thesis for Resmed: The Philips recall (which supplies approximately 35-50% of the market) has afforded Resmed a “generational opportunity to capture market share”. The analysts view current price levels as attractive and believe there is “further upside to the growth trajectory if the [Philips] recall is extended or there is an acceleration in the realisation of the new patient backlog in FY23-24.”

The thesis for Fisher & Paykel: “We remain positive on the longer-term growth profile, supported by the accelerated penetration opportunity from Covid … Whilst the near-term revenue trajectory is still subject to uncertainty, our analysis/feedback suggests the majority of the excess inventory will be cleared by 1H24,” the analysts said. From a valuation perspective, the stock is viewed to be trading in-line with key device peers despite “offering significantly greater growth potential.”

The thesis for CSL: “Whilst we remain constructive on the strong recovery potential across CSL’s plasma/Behring business, uncertainties around the mid/long-term Group margin/ROIC profile lead us to believe the current valuation is fair,” said Goldman Sachs.