Think of the word ‘obesity’, and the chances are the first image that springs to your mind is that of a baseball-capped American, waddling down the street, alternately sucking on a bucket of coke in one hand and wielding a double cheeseburger in the other.
It’s a persistent and not entirely unfair stereotype. Yet while recent research suggests that America is still a chunky nation by global standards, it’s not getting any fatter. Indeed, the good news is that obesity rates appear to be levelling off in the majority of developed countries, including Britain. The bad news is that it’s now emerging nations that are swelling the ranks of the clinically overweight.
According to the World Health Organisation (WHO), the proportion of the global population classed as clinically obese more than tripled between 1980 and 2007, from 7% to 25%. By WHO rules, you are clinically obese if you have a Body Mass Index (BMI – your weight divided by your height) of more than 30.
During the same period in the US, the proportion of clinically obese adults jumped from 14.4% to 34%, while in Britain the figure rose from 6.7% to 22.7%. That’s pretty drastic – but research from the International Congress on Obesity and the Journal of the American Medical Association shows the trend is levelling off. It is emerging nations that are now seeing the most rapid growth. Of Egyptian adults, 30.3% are obese. In Mexico, the figure is 23.6%; for Brazil, it’s 11.6%. A lack of historical data in some developing countries makes it difficult to assess the rate of growth, but there is growing evidence that we now face a ‘globesity’ epidemic, as the WHO calls it.
We’re hardwired to get fat
Why the expanding waistlines? Blame evolution. According to the 2010 International Congress on Obesity, “it is not surprising that people gain weight”. Eating when we had the opportunity, rather than when we were hungry was a trait that helped us survive throughout “our history as tribal hunter gatherers”, when the source of our next meal was never certain. But it’s not such a helpful instinct now that most of us have sedentary jobs and are constantly surrounded by opportunities to consume whatever we want.
As Sharon Friel notes in the British Medical Journal, a complex global food system, made up of a combination of subsidies, trade agreements, fast-food chains and supermarkets, has “flooded the global market with cheap-to-produce, energy-dense, nutrient-empty foods”.
And food companies have become increasingly sophisticated in putting together and marketing combinations of salt, fat and sugar that some commentators consider addictive.
Of course, individual choice is also an important factor. As Michael Skapinker observes in the FT, “heroin addicts will burgle in the search of money for their next fix”, but people don’t steal “because they are desperate for a fifth packet of chocolate biscuits”. And the spread of obesity is not restricted to urbanites with office jobs. Studies have found that in rich countries, poor people are more likely to be obese, while in poor countries, it is the rich who suffer. Ageing populations are also more likely put on weight than those with younger demographics.
Fat is a financial issue
All of this matters to our economy. The medical problem of obesity is fast turning into a financial one for governments. A 2009 study showed that obesity accounts for 9.1% of all medical spending in the US, or about $147bn. In Britain, estimates suggest that obesity could cost the NHS up to £10bn a year by 2050, while costing the wider economy £50bn through falling productivity and higher levels of disability.
Indeed, in Britain the president of the Royal College of Surgeons recently called for the NHS to fit more gastric bands (basically big elastic bands that shrink the stomach, restricting the capacity to eat). But using the NHS’s limited resources to rectify what many view as a lifestyle choice, while denying costly cancer drugs to others, makes this a controversial issue.
That’s probably why the creation of an effective ‘anti-fat’ pill is often seen as the holy grail of the drug-making sector. Between generic drugs and their patented peers, the worldwide market for anti-obesity drugs in 2009 was estimated to be worth up to $1.6bn. But there’s a far greater opportunity out there. The drugs currently on the market show a very limited ability to reduce obesity. So a pill that could provide quick results without the pain of surgery or the effort of dieting would quickly achieve blockbuster sales.
But anti-obesity drugs have a chequered history when it comes to providing investor returns. The most effective drugs have also come with dangerous side effects. In one high-profile case, US drug-maker Wyeth had to withdraw its ‘fen-phen’ diet product from the market in 1997, after it was found potentially to cause heart complications.
The drugs that have been judged safe to stay on the market simply haven’t helped people shed enough pounds to become big sellers. The three patented anti-obesity drugs, Xenical, Alli and Meridia, only garnered worldwide sales of $300m-$350m each in 2009, far below the massive market potential. As Seeking Alpha’s Dr John Tucker points out, anti-obesity drugs have very high drop-out rates. A general lack of effectiveness, alongside “distasteful” side-effects such as incontinence, means that fewer than 10% of patients remain on the drugs 12 months after their first prescription.
Unsurprisingly, “growing physician disenchantment with high patient dropout rates” has led to poor sales. Tucker calculates that for a patented product to achieve “mega-blockbuster sales” – of $1bn or more – it would need to offer weight loss of at least 10%.
So which companies are trying to bring new drugs to market? And can they succeed? It looks set to be a tough slog. In July one contender, Vivus, had its Qnexa drug rejected by the US health regulator, the Food and Drug Administration (FDA), over safety worries. The result shows that for the FDA “safety is of paramount importance (with) efficacy a distant second”, says JP Morgan’s Cory Kasimov. The FDA’s fear is that an effective obesity drug would be so popular that it would be used by millions of people – so if anything, it is likely to be even stricter than normal in fear of another ‘fen-phen’ debacle. Rival Arena saw its share price tank this week after a disappointing FDA report on its Lorcaserin drug, while another treatment, Contrave, made by Orexigen, will undergo the panel’s scrutiny this December.
The healthy way to lose weight
So much for the quick fixes. There is always the old-fashioned way to lose weight – through healthy eating and exercise. Research from the UK’s Medical Research Council has shown that participation in weight-loss programmes, such as WeightWatchers, has an impressive 61% success rate.
Meanwhile, government anti-obesity policies that have used subsidies and taxes to push consumers towards healthier foods in the likes of Mauritius and Norway are also potential solutions. America may appear to be some way from that point, but food companies would have been worried by the First Lady’s well-publicised claim that “going to fast food more than I’d like” had negative effects on the Obama family. A recent Senate bill is set to allocate an extra $4.5bn for ‘healthy’ school food, special exercise programmes funded by the American Recovery and Reinvestment Act, and a host of anti-obesity drugs.
So will the world’s fast-food chains and junk-food producers lose out when the severity of the obesity crisis leads to tougher regulations? Not necessarily. Food companies have been quick to learn from the lessons afforded by the American tobacco industry, which was forced to pay hundreds of billions of dollars in compensation. They have teamed up with government anti-obesity campaigns on both sides of the Atlantic. Pepsi, which manufactures the fizzy carbonated drinks that most independent nutritionists say have been instrumental in weight gain, has signed up to government campaigns in Britain, America, and France.
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By working with governments, food firms hope to avoid having strict rules imposed upon them. It seems to be working: they successfully lobbied against an EU ‘traffic light’ system that would have warned against unhealthy food. At the same time, the smarter fast-food chains are shifting their developed world offerings in line with consumer demand towards products with a healthier tinge, while still catering to rising demand for traditional junk food in emerging markets. That means large multinationals that can invest in research and development and marketing should be well positioned to profit from both sides of the ‘globesity’ epidemic. We look at one example below.
Three stocks to buy now
The potentially lucrative market for anti-obesity drugs continues to draw investors’ attention, especially with three pharmas going head to head this year. But given a choice of Arena (Nasdaq: ARNA), Vivus (Nasdaq: VVUS), or Orexigen (Nasdaq: OREX), we would choose “none of the above”. The industry’s poor track record in finding a ‘magic pill’ and the FDA’s ‘safety-first’ attitude makes it hard to pick a winner. All three firms are small and highly risky. Take a punt by all means – but make sure it’s money you can afford to lose.
A safer bet is Japanese pharma group Takeda (TYO: 4502). It recently bought the distribution rights to Orexigen’s Contrave, a drug that many analysts think will benefit from being the last to face the FDA. It paid $50m for the rights, yet could stand to make $1bn if the drug is approved. Takeda’s exposure to obesity does not end there. It paid $75m for a similar deal with Amylin Pharmaceuticals, which has several obesity drugs in its pipeline. Takeda also has existing lines in drugs that treat obesity-related chronic illnesses, such as diabetes and high blood pressure. Some of its drugs fall off the patent cliff in 2011, yet this already seems to be in the price. The group trades on a multiple of 12 for 2011 and offers a fairly priced way into the anti-obesity story – and it’s not an ‘all-or-nothing’ bet like the pure plays.
Away from the hype surrounding ‘magic pills’, WeightWatchers (NYSE: WTW) continues to gain traction and respect among medical professionals. The key to its success is simply that peer-based support groups produce significant results. WeightWatchers made 65% of its $1.4bn sales in 2009 from the US, with the bulk of the rest coming from Europe. This exposure to the US consumer caused sales to fall by almost 2% in 2009, while profits fell to their lowest levels since 2004. However, the group’s European business continues to grow and since 2008 it has been building a presence in China. The recent tough trading conditions have created a buying opportunity. At $31 a share, WeightWatchers is trading on a p/e multiple of 12, well below its five-year average of 16.9.
Back in 2004, McDonald’s (NYSE: MCD) received worldwide negative publicity from the documentary Super Size Me, in which film-maker Morgan Spurlock ate solely from the fast-food chain for a month and filmed the impact on his health. Yet the world’s biggest hamburger outlet is a savvy and aggressive marketer and has spent the last few years re-branding its image and stores.
With 32,000 stores in 100 countries, McDonald’s is well placed to take advantage both of the rising demand for junk food in emerging markets and the clamour for healthier options in the West. Its most recent results showed that it is doing just that. Sales in the US were led by its McCafé Real Fruit smoothies.
The “highly profitable” drinks cost more than fizzy alternatives and are attracting customers, says the Associated Press’s Michelle Chapman. Rising demand in emerging markets led to a 7.8% sale increase in Asia/Pacific, Middle East and Africa.
Crucially, McDonald’s is showing real commitment to expanding in emerging markets, especially China. The Middle Kingdom is its fastest-growing market and in August, McDonald’s became the first non-Chinese corporation to issue a Yuan-denominated bond. Its share price has climbed steadily during the last five years, but thanks to its impressive earnings growth its forecast multiple for 2011 of 15.2 is just below its five-year average of 16.5. That means now is as good a time as any to buy into a firm that will profit from both sides of the battle of the bulge.
Is obesity really a big problem?
It may seem a radical notion, but one school of medical thought questions whether the obesity epidemic has any basis in fact. As nations grow more prosperous, the argument goes, it’s only natural for their populations to become taller and heavier. This means that the concept of ‘normal’ weight is a fallacy. As Professor Patrick Basham notes in the British Medical Journal, much of the historical data used to judge current weight levels are “limited, equivocal and compromised”.
Basham’s chief worry is the “extent and the reliability of the measurements and the populations sampled”. Even in America, data on population weights only date back to 1960 – and it has some of the best records. Basham also highlights sample years that are inconsistent with an ‘epidemic’. For example, from 1999 to 2000 and 2001 to 2002 there was no rise in the number of US adults defined as overweight or obese. What’s more, Basham casts doubts on the link between obesity and specific diseases. Rising obesity levels have been accompanied by “falls in US total cardiovascular mortality and mortality from coronary heart disease and stroke”. And “despite the supposedly abnormal levels of [those who are] overweight and obese, life expectancy continues to increase”.
The method of measuring obesity is also controversial. Body Mass Index works by dividing a person’s weight by their height. So smaller, heavier people have a higher score than taller, lighter ones. But the crude system does not account for muscle mass. Several Premiership football players are classed as overweight despite being very athletic. Studies have shown that the risk of death for American men with a ‘healthy’ BMI (19-21) is the same as for those who were overweight and obese (29-31). For Basham, this “destroys the index’s scientific pretensions and diagnostic value”.
This stance is supported in part by Kathy Kater, an American psychotherapist specialising in weight. As “fatter people who are fit are at a lower risk for health problems than thin people who are not fit”, perhaps fitness, not fatness, is the real issue.
• This article was originally published in MoneyWeek magazine issue number 504 on 17 September 2010, and was available exclusively to magazine subscribers. To read more articles like this, ensure you don’t miss a thing, and get instant access to all our premium content, subscribe to MoneyWeek magazine now
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