Analysis: Anti-obesity drugs can be boost for food makers, investors say

Arcos Dorados Holdings

23/10/2023 06:00

By Richa Naidu and David Randall
       LONDON/NEW YORK, Oct 23  (Reuters) - The growth in
demand for appetite suppressing anti-obesity drugs like Novo
Nordisk's  NOVOb.CO  Wegovy presents opportunities for food
manufacturers and the market's initially downbeat reaction may
be overdone, investors say.
    When Walmart  WMT.N  said this month that it saw a slight
pullback in food consumption when people took the medication, it
sparked a sell off in shares of companies including Nestle
 NESN.S , the world's biggest packaged food maker.
    "It feels like quite an overreaction," said Aviva portfolio
manager Richard Saldanha. "People are extrapolating long-term
consumer habits."
    Wegovy has already proved a phenomenal success in the United
States and is now being rolled out in some European markets
including Norway, Denmark and Germany, prompting concerns in the
consumer and retail industry that food sales may be impacted.
    "Novo's breakthrough can definitely lead to major changes -
both for food and beverage companies, but also for other
health-related stocks within the obesity industry," said Kiran
Aziz, head of responsible investments at Norway's biggest
pension fund KLP, which holds stakes in both Novo Nordisk and a
number of food companies.
    She added, however, that more focus should be paid to the
impact on supermarkets, where margins are thinner and the impact
on profitability may be greater.
    Nestle has already started work on products that "companion"
weight loss drugs like Wegovy, CEO Mark Schneider said last
week, which may include supplements to help compensate for the
"loss of lean muscle mass" and "rapid regain of weight".
    Those initiatives, and the limited availability of the drug
as Novo struggles to keep up with demand, have persuaded some
investors that the so-called "miracle drugs" will not hurt the
industry in the long term. 
    The initial market reaction to the new class of weight-loss
drugs is reminiscent of early hype over the metaverse, which has
since flamed out as investors and companies realise that
behaviour is slow to change, said Arda Ural, EY Americas
Industry Markets Leader, Health Sciences and Wellness.
    "The problem is that lower social economic groups have more
obesity and risk factors, but the cost of taking these
medications is a limiting factor," Ural said. "Making this
affordable and starting to see the positive downstream impacts
will be something that changes at glacial speed."
    Still, the stock market impact left some food manufacturers
"trembling," said John Plassard, senior investment specialist at
Nestle investor Mirabaud Group.
    "The companies most at risk could be those dedicated
exclusively to 'junk food', or restaurant chains that don't
offer much in the way of alternatives," he said.
    Brian Frank, portfolio manager of the Frank Value fund,
which has positions in Tyson Foods and Arcos Dorados, the
largest McDonald's franchisee in the world, said he will look to
build stakes in stocks that take a Wegovy-related hit.
    "If the market is going to give me a discount I will happily
take it," he said.
    The uptake in appetite suppressing drugs seems to be a
U.S.-led dynamic, said My Nguyen, research analyst at Legal &
General Investment Management America. "Elsewhere, trends such
as wealthier, more mobile middle classes in emerging countries
can support shifts towards snacking and convenience foods."
    A portfolio manager at Germany's Union Investments, which
has stakes in Unilever  ULVR.L  and Coca Cola  KO.N , sounded a
more cautious note, saying the perception that weight loss drugs
will be bad for the industry will be hard to break.
    "Everybody assumes people will take these pills, get slim,
and eat less," they said. "And companies cannot prove that this
is not true."
    
    

 (Reporting by Richa Naidu; Editing by Matt Scuffham, Kirsten
Donovan)
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