Why it's time to focus on healthcare stocks, not weight loss miracles

The healthcare sector, a dynamic and ever-evolving landscape, has consistently been at the forefront of ground-breaking innovations. In recent times, the emergence of drugs such as Ozempic, Wegovy, and Mounjaro has garnered significant attention, with many hailing them as "miracle" weight loss solutions.

 These drugs, with their potential to offer transformative treatments for obesity and Type 2 diabetes, have stirred a mix of excitement, hope, and scepticism among professionals, patients, and observers. While their immediate benefits are evident, a deeper, more critical assessment is essential to understand their long-term impact and the broader implications for the healthcare industry.

They promise to rid the world of obesity, which has investors in established drug/device manufacturers running scared. The rise of these drugs has created big opportunities in the healthcare sector, but not where you would think. 

Obviously, it has been extremely positive for the manufacturers of GLP-1 drugs but, conversely, has triggered widespread selling in the broader healthcare sector with investors anointing the treatment with “miracle cure” status. This has, in turn, provided some of the cheapest entry prices in quality pharma companies in years

As is common in the healthcare sector, the problem with these valuation shifts is that they are very emotive, simplistic, and binary.

The emotive - human preference for “quick fixes” where the drug is used to decrease weight and doesn’t address the unhealthy habits that are the root cause of obesity, which could escalate other health problems

The simplistic - Investors quote very broad stats like an addressable market of two-thirds of the population overweight or with obesity. It sounds like a huge addressable market however, that shrinks considerably when filtering out a few key factors like who can take or afford the treatment

Who can take these drugs? - recommendations are for anyone with type 1 diabetes, pancreatic/thyroid/kidney issues, who is pregnant or breastfeeding, and anyone under 18. Then there are the ”off-label” issues of pancreatitis, kidney failure, gallbladder disease, changes in vision, hypoglycemia (low blood sugar), and allergic reactions. That eliminates quite a few people, but not as many as the next issue, price.

Who can afford these drugs? - You will need USD$10,000 to $15,000 of post-tax disposable income a year to take it…..for life, per person. To put that in context, the cost of taking these wonder drugs is around half what the average Australian pays on their mortgage per month or a quarter of the average Australian disposable income.

The Binary - The market has treated this like it is a binary outcome, with every health condition caused by obesity to be solved. Therefore we won't need any other treatments. Walter Willett, professor of nutrition at the Harvard T.H. Chan School of Public Health, says that the likelihood is that there are two pathways ahead. Path 1 - the new drugs help people with severe obesity lose meaningful amounts of weight, which then increases the chances of success of lifestyle-based approaches. Path 2 - People don’t improve their diet, don’t increase exercise, and use drugs to counter unhealthy habits they maintain, which may have contributed to the problem. On this path, people’s health would still be poor because good lifestyles contribute to well-being in many ways unrelated to weight control

Either way, it’s a win for big pharma, but it certainly isn’t a winner-takes-all situation for one treatment.

If you are coming to this late from an investment standpoint and have missed the boat on the GLP-1 treatments, now is not the time to buy with huge shortages and eye-watering valuations. However, the selling of quality healthcare companies like CSL and RMD due to “miracle cure” selling, is a big opportunity.

Resmed (ASX: RMD) (NYSE: RMD) – the sleep apnea device manufacturer has comfortably been a solid performer for many years and with only two players in the market currently, this should continue despite the recent devastation to the share price. Only 18.5% of sleep apnea sufferers will be assisted by the weight-loss drug GLP-1 RA, and with this market largely untapped Resmed should easily pick up the 3% uptick in market share it needs to cover the loss of those patients. And that is only if they lose all of them, as mentioned, the availability of the GLP-1 drugs is scarce for at least 18 months and the comparable price of the Resmed treatment is about a tenth of the cost of the drugs.

CSL Limited (ASX: CSL)  – The main business of CSL is blood plasma, which shouldn’t be affected directly by the GLP-1. The recent acquisition of Vifor, with its focus on kidney disease and obesity, may be affected, although a very solid pipeline of new products in the works is focused on areas GLP-1 drug will have little bearing on. CSL is also very close to trial results for a heart attack drug CSL112, a key pipeline product for the company. Base case assumptions imply a valuation of around $30/share.

Given these factors, it seems unwarranted that the share price in either of these quality healthcare names be discounted due to the “miracle cure” and current levels provide one of the best long-term buying opportunities in a long time. 

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