Medical examination

Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.

Now widely stigmatised in much of the modern world, obesity – from the Latin obesitas, meaning stout, fat or plump – was for many parts of history perceived as a symbol of wealth and/or fertility. Nonetheless, over two thousand years ago the Greek physician Hippocrates first recognised obesity as a medical disorder, writing that “corpulence is not only a disease itself but the harbinger of others.” Little could Hippocrates have known how sizeable a problem obesity has become. Although easily preventable, its prevalence is placing an increasing strain on already bloated health budgets globally, not to mention the broader economy. This piece aims to discuss the topic in more detail and present a series of investment opportunities that arise from it.

The World Health Organisation (WHO) defines obesity as a medical condition in which excess body weight has accumulated to the extent that it may have an adverse effect on health, leading to reduced life expectancy and/or increased health problems. It is measured via the body-mass index (BMI), which compares weight and height, where a person would be defined as overweight with a BMI of between 25 and 30kg/m2 and as obese with a measurement of over 30kg/m2. On these definitions, the WHO calculates that in 2008 (the last year for which statistics were available) 1.5bn adults globally were overweight and, of these, some 500m were obese.

The 7% of the world’s population falling into the WHO’s obese category is a number that has doubled in the last thirty years. The problem is also a growing one. In the US, less than 15% of the population was obese in 1971, according to the Journal of the American Medical Association, relative to more than 30% in 2009. Meanwhile, the UK’s National Health Service (NHS) calculates that 25% of the British population was obese in 2008, but forecasts that if no action were taken, by 2025, one in two men and one in three women would be obese. Moreover, bulging waistlines are not only a ‘western’ concern, with a recent United Nations (UN) study highlighting that there is a direct correlation between levels of GDP per capita and obesity. In China, the percentage of the population defined as overweight has increased by 50% in the last three years, while in Brazil and Colombia, those classified as obese are comparable to European levels.

If the UN’s correlation analysis is correct, then there is every reason to believe that obesity will remain a significant issue. Put simply, it is increasingly easy to get fat: food (particularly the ‘wrong’ sorts) is abundant and cheap and lifestyles are becoming progressively more sedentary. The average calories available per person per day have been increasing in the developed world since the early 1970s. The typical American now consumes 3,800 calories per day (Europe is not far behind, at just under 3,400) against a government recommendation of just 2,000. Forty years ago, fewer than 20% of these calories were eaten outside of the home, relative to more than 40% now. Food eaten on-the-go or in restaurants, in general, tends to contain more saturated fat, less fibre, more cholesterol and significantly more calories than homemade food. An ‘Extra Value Meal’ from McDonalds comprising a quarter-pounder with cheese, a super-size portion of fries and a super-size soft drink, for example, contains 1,550 calories, over 75% of one’s recommended daily allowance. Americans under the age of forty now derive more than 25% of their calories from snacks according to a study in the academic journal Epidemiol, while there has been a 500% jump in the consumption of carbonated soft drinks in the States in the fifty years through to the end of the last decade.

Furthermore, people are generally doing physically less demanding work than was the case historically, with a recent WHO report asserting that some 60% of the world’s population gets insufficient exercise. Many other academic studies have identified the negative relationship between increased obesity and hours spent in front of the television. Based on the experience of the US and other comparable developed nations, it would seem that as emerging economies industrialise and their much-vaunted middle classes expand in numbers, so will their consumption and leisure choices change, generally for the worse, leading to further growth in obesity levels.

The consequences of the fat-epidemic are significant and indubitably negative. The WHO reports that being overweight/ obese is set soon to replace more traditional public health concerns (such as under-nutrition or infectious diseases) as the most significant cause of poor health. Obesity increases the likelihood of various illnesses including heart disease (high blood pressure, cholesterol), type-2 diabetes, certain forms of cancer and osteoarthritis, as well as having a harmful impact on anxiety, stress and fertility levels. The UK’s NHS estimates that obese adults over the age of forty can expect to see their life expectancy reduced by between six and seven years.

Beyond the physical (and social) cost, there is also a distinct economic cost attached to obesity. Methods of calculation vary, but the National Audit Office (NAO) in the UK arrives at a figure of £4.2bn ($6.7bn) to the NHS and a number of at least £20bn ($32bn) to the wider economy in terms of lost productivity. Data in Obesity Journal, a US academic publication, put the figures as substantially higher for the US, with an estimate of $61bn in terms of direct medical cost and $117bn relating to indirect economic losses. Whatever the numbers may be, they are certainly not insignificant (around 10% of all US medical expenditure is on obesity and related matters, around 50% of which is funded by Medicare and Medicaid) and are clearly growing. The NAO forecasts that UK spend on treating the overweight and obese is to double between 2010 and 2050.

Getting fat and also staying fat are, however, usually preventable. Of course, whether there is the will to redress the problem is another issue, since the majority of the solutions come in the form of self-help measures driven by a combination of better food choices and more physical exercise. Anti-obesity drugs and/ or surgery (think gastric bands) are options, but tend only to be used in more extreme cases. Public health policy via the form of education (such as the UK’s ‘Change4Life’ programme, a national social marketing campaign to promote healthy weight via recipe ideas and exercise tips) can play a role, as can the food industry. The latter has been (albeit perhaps not as quickly or willingly as the public authorities may wish) reducing the fat, sugar and salt content of processed foods, while also making healthy, nutritious and cheap alternatives available too. Some countries are also considering levying taxes on certain ‘bad’ food and drink products.

The reality remains though that changing behaviour takes time and existing patterns may be reinforced across generations. A recent study by academics at Yale University highlighted 40% of US parents reporting that their children ask to go to McDonalds once a week, and 15% every day; of the parents surveyed, 84% acquiesced and said they had taken their children to a fast-food restaurant in the previous seven days – and 66% to McDonalds. Furthermore, loath as we may be to admit it, perhaps we (secretly) enjoy eating less healthy food. A recent study in the British Medical Journal conducted in New York showed that even with the listing of calories on menus in certain restaurants (both high-end and quick-service), only 15% of diners consciously chose a lower rather than a higher calorie option.

The World Bank calculates that obese individuals spend 36% more on healthcare and 21% more on medication than either daily smokers or heavy drinkers, implying that there is plenty of scope for corporates involved in this area to ‘get fat’ on the profits. One of the clearest ways in which obesity manifests itself is via type-2 (self-inflicted, through dietary choices, as opposed to hereditary) diabetes. The WHO shows that excess body fat underlies 64% of cases of diabetes in men and 77% in women, and the number of people with diabetes has more than doubled in the last ten years, to 366m. Danish-listed Novo Nordisk is the market-leader in the provision of insulin for diabetes treatment, with a 24% share of the market by value. Its business has high operating margins and is generating significant levels of free cashflow. Sanofi is the second largest player in the field. Companies including Medtronic and Insulet are also active in diabetes treatment. Novo estimates that by 2050, 522m people globally (a 40% increase from current levels) will have diabetes.

While diabetes may be one of the starkest ways in which obesity manifests itself, excess weight can also have an adverse impact on the kidneys and increase levels of incontinence, among other deleterious side-effects. Fresenius Medical Care and DaVita lead the kidney dialysis market with respective shares of 33% and 19%, while Coloplast controls over 35% of the market for colostomy-based products. Moreover, although most hospitals are state-owned, Rhoen-Klinikum in Germany and Life Healthcare in South Africa represent two listed means for investing in this area.

Viewed from a different perspective, investing in companies that have significant exposure to sportswear/ exercise equipment, leisure facilities, dietary products or healthy food propositions may represent alternative means of gaining exposure to the trends discussed above. Nonetheless, our sobering concluding thought is the following: in the ten years to 31 December 2011, investing in Novo Nordisk would have generated annualised shareholder returns of 16.3%, a highly respectable gain, almost four times better than the MSCI World’s advance of 4.2%. However, with its 33,000 restaurants that serve 68m people, or just under 10% of the world’s population, daily with burgers and fries, McDonalds has outpaced Novo, returning 17.0% over the same period. While obesity and its consequences is clearly no laughing matter, whether we like it or not, people look set to continue gorging themselves on unhealthy food only to find that they subsequently may well need to deal with the consequences and treat themselves with insulin-based (and other) medications.

Alexander Gunz, Fund Manager


The document is provided for information purposes only and does not constitute investment advice or any recommendation to buy, or sell or otherwise transact in any investments. The document is not intended to be construed as investment research. The contents of this document are based upon sources of information which Heptagon Capital LLP believes to be reliable. However, except to the extent required by applicable law or regulations, no guarantee, warranty or representation (express or implied) is given as to the accuracy or completeness of this document or its contents and, Heptagon Capital LLP, its affiliate companies and its members, officers, employees, agents and advisors do not accept any liability or responsibility in respect of the information or any views expressed herein. Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation. Where this document provides forward-looking statements which are based on relevant reports, current opinions, expectations and projections, actual results could differ materially from those anticipated in such statements. All opinions and estimates included in the document are subject to change without notice and Heptagon Capital LLP is under no obligation to update or revise information contained in the document. Furthermore, Heptagon Capital LLP disclaims any liability for any loss, damage, costs or expenses (including direct, indirect, special and consequential) howsoever arising which any person may suffer or incur as a result of viewing or utilising any information included in this document. 

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