Thursday, March 21, 2013

How To Profit From Obesity

Funnily enough, I think that long term investors should be investing in the long term. In this article I’m going to discuss obesity, its prevalence and suggest some of the stocks that might be bought and avoided as a consequence.

Obesity Prevalence

Everyone loves looking at a national league table in order to compare and contrast, and the evidence from the OECD is clear: The US, Canada, Mexico and the UK are right at the top of the developed world obesity league. There are other countries like Hungary, Greece, Estonia and the Czech Republic that have higher than OECD average obesity rates. But there are two unique features that these countries have in common with each other but not with the UK and US.

Firstly, in the US and UK there is a tendency for women to have notably higher rates of obesity than men whereas in the other higher obesity countries (apart from Mexico, Chile and Ireland) the rates tend to be similar. Second, there is a tendency for women in the UK and US to be obese earlier on in life and stay that way.

Before looking at the chart demonstrating these points please understand that the data was pulled from two separate sources and for slightly different age groups so it is not directly comparable. No matter, the important point is the trend. The US data was sourced from the Centers for Disease Control and Prevention while the European data comes from the EU, and the US data is for the 20-39 year old range.

The key is that there is no great quantum leap within obesity rates between young and old in the UK and US, while the evidence suggests that in other European countries women tend to experience a ‘natural’ step up in weight gain as they get older. UK and US women seem to get obese at an earlier age.

To demonstrate this I’ve tabulated the ratio of overall female obesity rates and divided them by the 18-24 year old rates. A low ratio indicates the tendency for women to be obese at an earlier age and stay that way.

Based on the data above I think it is safe to assume that the US ratio would be similar to the UK. Note that Romania, Greece, Hungary and Poland have high ratios. They are countries where women are slimmer earlier on.

Why the Focus on Women?

Before the complaints come in I should explain that I am focusing on women (even though global trends with men and women are pretty similar) in order to highlight some remarkable data. According to the OECD data, US women are noticeably more obese then the men, but it is not even comparable to the huge divergence in the UK.

A quick breakdown of the stats for the UK demonstrates the point:

There is clearly some factor responsible for UK and US women being more obese at an earlier age. As for UK men, if you go back to the second chart their ratio works out to be bang in the middle.

I can't give a definitive verdict but allow me to humbly speculate that both countries have a similar income distributions with net worth skewed to upper deciles, and both have strong feminist influences in the media and within their welfare states. I think the solution involves a little bit more than getting Jamie Oliver to run around and introduce more broccoli into school meals.

How to Profit and Avoid Loss?

The current bugbears are of course the fast food restaurant chains and the snack & beverage companies. The highest profile of which are McDonald’s (NYSE: MCD) and Pepsico (NYSE: PEP). Indeed, not a day seems to go by without someone jumping on the bandwagon and criticizing these companies. The central argument seems to be that they offer cheap carb laden foods that poorer people (who tend to be more obese) are minded to eat. I have a serious issue with this kind of criticism. There are many other countries in the world that have lower GDP income levels and high fast food penetration rates, but they are not subject to the same levels of obesity.

Of course it is so easy to criticize these companies rather than have the courage to at least try to delve into the underlying causes of obesity. Let me put it this way: A city like Budapest (Hungary) is saturated with fast food joints. Now if McDonald’s shuts down tomorrow will there be mass anorexia among the young? I think not because I believe the key determinant of obesity is the willingness to lose weight, and that is guided by the social acceptability of being obese or not. However, I’m not optimistic that politicians will share my view anytime soon so I suspect McDonald’s and Pepsico are faced with these kinds of unfortunate challenges in future.

Another impact is on health care. The correlation between weight gain and diabetes is well documented, and companies with large diabetes franchises look set for strong growth in the years ahead. The big two players are Sanofi (NYSE: SNY) and Novo Nordisk (NYSE: NVO). I’ve discussed Sanofi in more length linked here and for those interested in more pure diabetes plays there is some discussion linked here. Novo has the broadest range of products in the marketplace including injectables like Victoza, which helps to lower blood sugar levels in Type 2 patients.

However, the big battle is being fought over Novo getting its long acting insulin (Tresiba) approved and into the market so it can compete with Sanofi’s leading insulin Lantus. Both companies have had setbacks recently with Tresiba requiring more detail from the FDA and Sanofi’s Lxyumia (intended to be used in combination with Lantus and help extend the franchise beyond Lantus’ upcoming patent expiry) not being able to initiate Phase III trials this year as previously planned. Nevertheless if you want a diabetes play, these are the stocks to start looking at.

Another area worth looking at is Bariatric surgery, and I think Covidien (NYSE: COV) is an interesting candidate. Its minimally invasive surgical (MIS) solutions see this type of surgery as the biggest single profit driver. Furthermore, MIS represents the key growth area of the firm and will be even more so when it completes the split from its pharmaceuticals division. There is some discussion of Covidien linked here. My point is a simple one; if there is more obesity then there will be more Bariatric surgery.

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