Ozempic: Here’s why 2023’s star obesity treatment is causing headaches for CSL and several other biotech stocks

Ozempic is one of the few things giving CSL (ASX:CSL) shareholders sleepless nights right now. And you could argue this weight-loss drug is also having an impact on all biotech stocks. Because if you get rid of obesity, you might get rid of a lot of health problems that other biotech and medtech stocks are dealing with.

What is Ozempic?

Ozempic is a weight-loss drug that is produced by Novo Nordisk (a biotech headquartered and listed in Denmark), known generically as semaglutide (after the active ingredient). The drug is a weekly injection that helps lower blood sugar by helping the pancreas make more insulin.

It was first approved in 2017 by the FDA for use in adults with type 2 diabetes. Although is not approved for weight-loss, this is a common side effect from the drug. Also keep in mind that the active ingredient is approved for weight loss. Novo Nordisk has another semaglutide-based injection on the market, called Wegovy and this was FDA approved in 2021.

Ozempic is approved in Australia too, although the TGA has warned doctors against starting new patients on the diabetes drug due to supply chain disruptions. The trouble is that this drug is meant to be a long-term treatment and halting the treatment can lead back to ‘bad old ways’. Ozempic is a so-called Glucagon-like peptide-1 (GLP-1) drug after the impact of the hormone it impacts while eating.

Why is it causing a problem for CSL and other biotech stocks?

Because if you aid weight loss – and the data overwhelmingly depicts that that the drug can – you can reduce the risk for many health conditions caused by obesity such as heart disease. In doing so, you eliminate the market for many medtech and biotech companies.

Also keep in mind that Ozempic is proving popular with a significant shortage, both in the USA and Australia – it goes to show that the drug really is a threat. But what specifically sparked this panic among shareholders is that Novo Nordisk revealed interim results of a study showing Ozempic’s efficacy in treating kidney disease and consequently, decided to halt the trial early.

Also helping the cause were comments from Walmart (NYSE:WMT) that people who were buying weight-loss drugs like Wegovy and Ozempic (not to mention Mounjaro by Eli Lilly) were buying less food.

Investment bank Goldman Sachs and Morgan Stanley released data showing that those on the drug used had 52% lower coffee consumption, 58% less casual dining, 71% less pizza consumption and 73% fast-food consumption generally.

As you might imagine, this scared investors in fast-food and soft drink stocks as well as healthcare stocks and even stocks hat sell plus-size fashion like City Chic (ASX:CCX) – although we’ll stick to healthcare here for the ASX’s own fast food stocks don’t appear to be hit just yet.

The potential impact to health stocks

Investors evidently fear that health stocks will see their markets shrink if drugs like these are as good as they say they are at aiding weight loss. This may well be accepted in the longer-term. But even now, the use of these drugs needs to be maintained to keep their effects.

Also keep in mind 2 things. First, weight loss do not treat the diseases when they finally show up. Second, even though the risk of obesity-related diseases is lower if you’re not obese, it does not entirely eliminate the risk altogether. And this is the message that CSL tried to sell investors at its Investor Day earlier this week.

In our view, even if drugs like Ozempic could impact the market for healthcare stocks in the long-term, it would be a while (i.e. decades) to see such an impact take place. We think there are other reasons why healthcare stocks have underperformed. CSL in particular faced shrinking margins in its bread and butter blood plasma business as well as investor scepticism that Vifor was worth the price it paid.

So, while we are not thinking this a chance to ‘buy the dip’ just yet, we don’t think investors should put all their money in Novo and short-sell all other healthcare stocks.

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