ResMed (RMD) is enduring a tough quarter having already fallen -27.6%, making it the 8th worst-performing stock in the ASX200. The issue has been two-fold: a disappointing result in August and fears that weight loss drugs such as Ozempic will become more prevalent, reducing the demand for RMD’s sleep apnea products.
- 4Q revenue came in below expectations, plus it was also accompanied by weaker margins when the market was looking/positioned for expansion – a poor result but not one to warrant the share price slide.
- Selling pressures gathered momentum as investors focused on the rise in weight loss drugs amid increasing media coverage as fears intensified about their potential impact on sleep apnea, given the known linkage between obesity & sleep disorders
Like most new major trends, the origin is often in the US, we have no doubt that if the drugs become readily available and reasonably cheap, many people will try them, although the long-term success is open to conjecture. Ozempic currently costs Australians ~$150 a month if you can find it, but this could come down due to the government healthcare savings enjoyed by a slimmer society.
- The critical question with regard to RMD is, how could this impact the demand for ResMed’s products and what type of revenue hit could ensue? This is the classic million-dollar question, and in typical fashion, markets are running from uncertainty – “If in doubt, get out”.
There are a number of moving parts with weight loss drugs, that in simple terms, mimic the action of a hormone called glucagon-like peptide 1, which sends signals to the appetite centre in the brain to reduce hunger and increase fullness. While these drugs are FDA-approved, most insurance companies do not cover the cost of weight loss treatments, but that could change if they see the cost benefits from a reduction in obesity levels e.g. Ozempic was developed to treat diabetes but the side effects are garnering far more interest.
The direct correlation between body weight issues and sleep apnea is clear. If the funding mechanism for weight loss medication does change, the impact on ResMed could be significant, although the quantum is unknown at this stage. We have held our position in RMD, believing the stock to be oversold when focusing on its Q4 result, but the goalposts have clearly moved as the evolution of weight loss drugs gathers momentum. We are conscious that reduced obesity levels will save governments billions in healthcare, and this in itself may facilitate wider adoption of weight loss medications.
- RMD will likely trade on a lower multiple relative to history until we see the actual level of adoption of weight loss drugs and the subsequent knock-on impact on RMD’s earnings – this may take years!
MM is considering how/when to cut our RMD position
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