Investors are concerned that diabetes and obesity medicines Ozempic and Wegovy — and other glucagon-like peptide-1 (GLP-1) drugs — could reduce the need for Resmed's medical devices.
This is because 70% of people suffering from obstructive sleep apnoea (OSA) patients are obese.
Today Resmed shares are rallying, up 1.71% to $23.80 at the time of writing. The S&P/ASX 200 Index (ASX: XJO) is down 0.1%.
Let's investigate what's happening with Resmed shares.
Short selling of Resmed shares up 500% in 4 months
It's not just ordinary investors selling off Resmed shares.
Professional traders are increasingly short-selling the ASX healthcare share.
Data from the Australian Securities and Investments Commission (ASIC) shows a 522% rise in short selling of Resmed shares in just four months.
The short position is only 2.66%, though — which is not high.
The top 10 ASX shares shorted at the moment all have short positions above 7.3%.
So, while the rise in short selling indicates concern among some market players, others disagree.
What do the brokers think?
In The Australian today, Wilsons analyst Shane Storey says Ozempic won't hurt Resmed shares.
He retains his overweight rating on the stock and a 12-month share price target of $36.25.
This implies a potential upside of more than 50% for ASX investors who buy the stock today.
Our equanimity on this issue is based on two observations.
As stunning as some of the new GLP-1Ra agents look, they are unlikely to impact the gross epidemiology of OSA.
Whether they are approved or not for an OSA indication, they look unlikely to provide complete resolution of OSA symptoms and to combat CPAP as standard of care.
Analysts at US broker Jefferies also don't think Ozempic and other GLP-1s are a threat.
In a note to clients, analysts Matthew Taylor, Michael Sarcone and Young Li wrote (courtesy Australian Financial Review (AFR)):
… for a condition like sleep apnoea, the problem is not just weight but anatomical or central (brain related).
Bell Potter currently has a buy rating and a $39 price target on Resmed shares.
The market for OSA and chronic obstructive pulmonary disease (COPD) remains under penetrated, and we expect industry volume growth to continue in the 6-8% range for the foreseeable future.
In this regard, the competitive dynamics are very much in favour of RMD due to the Philips recall and improving semiconductor availability.
Macquarie recently retained its outperform rating on Resmed but lowered its price target of $32.60.
What does the Resmed boss think of Ozempic?
Resmed CEO Mick Farrell says there are three reasons not to worry about Ozempic and other GLP-1s:
I think there are three factors that'll mitigate GLPs in the space.
One is cost, two is adherence, and three is side effects.
There's another factor weighing on Resmed shares
As my colleague James covered, ResMed's revenue jumped 18% to US$4.2 billion, but its full-year gross margin fell 80 basis points to 55.8%.
The company blamed an unfavourable product mix and higher component and manufacturing costs for the decline.
Farrell was pleased with the FY23 results, saying:
ResMed's fourth quarter and full-year 2023 results reflect strong double-digit growth as we continue to produce and deliver cloud-connected flow generator device volume to meet the ongoing strong global demand from patients, accompanied by high growth of our market-leading patient interface and software solutions.
Are Resmed shares a buy?
My colleague Mitch recently opined that Resmed shares are "starting to get ridiculously oversold".
As Mitch points out:
Would you expect an ASX healthcare share that grew its revenue and earnings by more than 15% in FY23 to fall 24%?
Does a 2% reduction in gross margins justify a share price decline ten times greater?
Or, could this be another time investors responded more out of fear than rational thought?
Mitch notes that Resmed hasn't traded on a price-to-earnings (P/E) ratio this low since 2017.