ScoPo’s Powerplays: ASX health stocks fall, CSL recovers after sinking on latest Novo Nordisk news
Health & Biotech
Health & Biotech
Healthcare and life sciences expert Scott Power, who has been a senior analyst with Morgans Financial for 26 years, explains what the movers and shakers have been doing in health and gives his ASX Powerplay.
There has been a surge of interest regarding the use of a class of drugs called GLP-1 agonists with previous research showing their effectiveness in weight loss.
Danish drug maker Novo Nordisk produces a GLP-1 Semaglutide, sold under brand names Ozempic and Rybelsus in Type 2 diabetes and Wegovy in obesity, which has been labelled a “weight-loss” wonder drug.
In June 2021 the US FDA approved Wegovy semaglutide injection (2.4mg once weekly) for chronic weight management in adults with obesity or overweight and at least one weight-related condition like high blood pressure, type 2 diabetes, or high cholesterol, for use in addition to a reduced calorie diet and increased physical activity.
According to the FDA the medication dose must be increased gradually over 16 to 20 weeks to 2.4mg once weekly to reduce gastrointestinal side effects.
Novo Nordisk has seen its share price soar to become Europe’s biggest company with a market cap of ~US$438 billion.
Nevertheless, like all medications, GLP-1 agonists carry potential side effects, which may include nausea, vomiting, diarrhea, and headaches.
Furthermore, due to their impact on slowing down stomach emptying, previous studies have associated GLP-1 agonists with a potential risk of gastroparesis or stomach paralysis.
A recent study from the University of British Columbia and published in JAMA now offers additional evidence connecting the use of GLP-1 agonists to an elevated risk of serious gastrointestinal problems, including stomach paralysis, pancreatitis, and bowel obstruction.
Where the hype around Novo Nordisk’s weightloss wonder drug continues. The ASX healthcare sector is feeling the fallout of more positive news from the company this week, which announced it was stopping the trial of its semaglutide GLP-1 to treat kidney failure in diabetes patients early because interim analysis showed the treatment would succeed.
At 12.20pm (AEDT) on Friday the S&P/ASX 200 Healthcare index (ASX:XHJ) was down 2.8% for the past five days, while the benchmark S&P/ASX 200 (ASX:XJO) was up 1.9%.
Australia’s biggest healthcare name CSL (ASX:CSL) fell 2.7% this week, caught up in a global sell down of kidney dialysis related stocks following the news from Novo Nordisk.
Shares in CSL picked up on Friday and were up by ~1.5% by with investors buying the dip.
The plasma products giant last year acquired Swiss global specialty pharmaceutical company Vifor Pharma (now CSL Vifor) with leadership positions in iron deficiency, nephrology (kidney care) and cardio-renal therapies.
According to Novo Nordisk’s announcement the kidney outcomes trial FLOW, initiated in 2019, was a randomised, double-blind, parallel-group, placebo-controlled, superiority trial.
The trial enrolled 3,534 people with type 2 diabetes and chronic kidney disease (CKD) across more than 400 sites worldwide to compare 1mg injectable Semaglutide with placebo as an adjunct to standard of care on kidney outcomes for prevention of progression of renal impairment and risk of renal and cardiovascular mortality.
“Looks like yet another promising result for the GLP-1 class of drugs, and right on cue, the market is extrapolating potential dire consequences for companies targeting CKD and provided it with yet another reason to sell down companies targeting the diabetes/sleep apnoea space,” Morgans healthcare analyst Dr Derek Jellinek wrote in an email to clients.
Leader in obstructive sleep apnoea and other sleep-related respiratory disorders ResMed (ASX:RMD) has fallen ~3% this week and tumbled 28% YTD as Ozempic continues to gain attention as a weight loss drug that could potentially lead to reductions in obesity related conditions such as CKD and sleep apnoea.
“As the data from FLOW is yet to be released, it is difficult to determine Semaglutide’s risk/benefit profile, so it remain unknown how well it can slow down the growth and worsening of CKD in people with type 2 diabetes,” Jellinek says.
“In line with our prior comments around the potential disruptive impact of GLP-1s on the sleep apnoea space for RMD, which we view as overdone, we believe this class of drugs is unlikely to be the panacea for curing CKD, given the disease is a heterogeneous disorder that is generally progressive and irreversible, but it could certainly add to the treatment options.”
“However, that said, we expected CSL to be weaker on the Novo Nordisk FLOW trial update, given its exposure to the kidney dialysis sector via CSL Vifor, with around 40% of the division’s total sales derived in that vertical, representing around 5% of CSL total revenue, but would use any weakness as a buying opportunity.”
Power says the latest drop in the CSL share price is tough on the healthcare sector, which is now down ~13% YTD.
“A selloff on something that might impact 5% of revenue would seem a bit overdone but we’ve been battling an incoming tide all year and the sector can not take a break,” he says.
CSL will hold a capital markets briefing day on Monday focusing on the company’s business activities and initiatives for growth.
IMEXHS (ASX:IME) is up ~3% this week after winning announcing it had won a new contract worth $2 million with Colombia’s National Police Force.
Under the deal, IME’s Enterprise Software will be implemented at a new police hospital in the southern region of Bogota. In all, the company will provide radiology outsourcing services to ~48,000 patients.
The contract is initially for 15 months, and is expected to generate $1.6 million in annual recurring revenue (ARR), with an immediate start and provision for automatic renewal every seven and a half months.
“That is good news for IMEXHS which is heading towards cashflow breakeven and has been successful in picking up a number of contracts,” Power says.
“Most of their business in South America with perceived higher country risk but nevertheless they’re moving towards profitability, which is very important from an investor perspective.”
Morgans has a speculative buy rating on IME with a 12-month trading price of $1.80.
Health imaging company Volpara Health Technologies (ASX:VHT), which is specialising in the early detection of breast cancer, is Power’s pick of the week.
The company is due to report its Q2 FY24 cashflow report on October 17, which has reported three consecutive positive operating cashflow quarters.
“This is a seasonally strong quarter so we would expect a positive cashflow result and if that is the case that will be their fourth positive cash flow in a row,” Power says.
He says credit must be given to Teri Thomas who took over as CEO of New Zealand-based VHT in April 2022, having come from a background in health technology in the US.
“Up until Teri Thomas came along the company was making losses every quarter.”
Power says VHT is also well positioned to take advantage of investor interest in artificial intelligence (AI).
“They are also is well placed with AI, is using it and getting paid for it and so they’re really monetising it compared to a lot of the hype sitting out there.”
Morgans has an add rating on VHT and target price of $1.25.
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.
Disclosure: The journalist held shares in CSL & RMD at the time of writing this article.