Every quarter, investors get excited for companies to report earnings. Some want the updated numbers that management teams share. Others are more curious to hear about plans and projections. Executives' comments are well-scripted and aren't usually controversial enough to call their judgment into question. But sometimes they are.
On ResMed's (RMD 18.89%) most recent earnings call, CEO Mick Farrell gave three reasons he wasn't concerned about the threat to his company's business posed by GLP-1 weight-loss drugs like Wegovy and Ozempic. That point needed to be addressed since ResMed stock has fallen by 21% year to date while the maker of those drugs, Novo Nordisk (NVO 0.84%), has climbed 39%.
Wall Street suspects that the number of obese people -- a demographic that makes up the primary market for ResMed's sleep apnea machines -- could be greatly reduced through the use of GLP-1 drugs. After listening to Farrell's explanation about why he wasn't worried, I was concerned too. However, instead of selling my ResMed shares out of fear, I dug into the research. Here is what I found and what I plan to do about it.
Busting the budget
Farrell's first reason for not being concerned is that the drugs are too expensive. He pointed out that European governments and many U.S. employers are not covering the $800 to $1,200 per month in their insurance programs. That's true. A 2022 survey found that only about one in five employers covered the cost of these weight-loss drugs.
But the healthcare landscape has shifted over the past decade. Insurers have become much more focused on the total cost of care. That means if a drug costs $12,000 per year, but on average saves the insurer $13,000 a year by reducing the need to treat other conditions, insurers will eventually pay for it. In the meantime, employers are putting up administrative hurdles to try and slow the rising costs associated with the medications.
Also, they may not have to pay such high prices for long. In July, results from clinical trials of two new weight-loss drugs were published in The New England Journal of Medicine. One of them -- Orforglipron -- is much easier to produce and likely to be sold at a significantly cheaper price. That could bring life-changing effects to more people than the ResMed CEO is counting on. However, even if that happens, it will be a drawn-out process. I don't see the GLP-1 drugs as an imminent threat to ResMed's business. But their impact will almost certainly be felt over the next few years.
The silver lining and the cloud
Farrell also pointed to the lack of adherence to the drugs' recommended regimens. In other words, patients might start taking the drugs, but then eventually quit using them. That's important because patients who stop using the drugs typically regain the weight within a few months to a year. He was referencing an analysis of U.S. pharmacy claims showing only one-third of patients who are prescribed the drugs are still taking them a year later. He compared that to ResMed's own measure of adherence -- that 87% of customers are still using their product after 90 days. The number stays at about that level from 90 days on.
I think that's a misleading comparison on multiple levels. First, ResMed's products treat a symptom of obesity -- sleep apnea -- not the root cause. It makes sense that people would keep using the CPAP machines because they are still obese and exhibiting the symptoms of sleep apnea. Second, the 33% number is out of those who are prescribed the drug, not necessarily those who begin taking it or those who can afford it. And many of those who don't stay on the drug may stop taking it because it worked and they are no longer obese. Those people still represent lost potential customers for ResMed -- at least for a while.
I think Farrell's second argument misses the forest for the trees. Even though it's true, the result could still negatively impact ResMed's addressable market as customers and potential customers try the medications.
A bitter pill to swallow
Everyone has heard the long lists of potential side effects in prescription drug commercials and wondered if their benefits are really worth it. Ozempic and Wegovy have their issues, too. They've been linked to nausea and vomiting, for instance. That doesn't sound fun. But over time, patients taking them have lost between 12% and 15% of their body weight in studies, including belly fat. I think it's a safe bet that many will happily deal with those issues to achieve such results.
Besides, doctors think they can manage the side effects by increasing the dosage slowly over time. Even if they can't, there are plenty of examples -- like chemotherapy and antidepressants -- where the benefits of a drug outweigh even extremely unpleasant side effects.
This is another example where Farrell states a fact. But his interpretation of what its impact on ResMed is likely to be seems incomplete. The side effects of Ozempic and Wegovy are well known, but there is still so much demand for them that there is a global shortage, and Denmark -- home to Novo Nordisk -- has had to decouple from the European Central Bank when it comes to interest rates.
For now, I'm holding onto my shares of ResMed. I think the market is reacting as if the threat from Ozempic, Wegovy, and other weight-loss drugs has already played out. And there is a fair chance that the impact those drugs will have on the company will be only moderate over the next few years. However, Farrell's defense didn't increase my confidence in that premise. I'll be watching closely for results that indicate how quickly the company's addressable market is shrinking. I'll also be listening for more realistic comments from its leadership.
