Dialysis Long-Term Growth May Be Hit by Obesity Drug Trial Success, but Shares Still Undervalued

Shares of dialysis-related narrow-moat companies—DaVita, Fresenius Medical Care, Fresenius SE, and Baxter—all declined substantially on news that a kidney-related trial of Novo Nordisk's obesity drug Ozempic slowed the progression of kidney disease in patients with chronic kidney disease and diabetes. These results suggest the new obesity drugs may slow the incidence rate of patients needing dialysis in the long run, which we plan to account for in new fair value estimates by reducing our long-term growth assumptions in this group. With the most exposure to dialysis patient growth, we plan to reduce our fair value estimates on DaVita and Fresenius Medical Care by about 10%. Fresenius SE holds a large stake in Fresenius Medical Care, but the diversity of its operations constrained our fair value decline to the midsingle digits. Baxter's business diversity also helps blunt the impact of this news along with recently generated cash flows, and we do not plan on making any change to our Baxter fair value, although market sentiment around its 2024 kidney care spinoff valuation may be lackluster. Even with these challenges and lower fair values, we continue to view shares in these firms as significantly undervalued.