A Sustainable Growth Opportunity: Tackling Obesity

The global obesity epidemic is straining health care systems and public budgets in many countries across the world. After decades of failing to manage rising health care costs, governments are increasingly responding by introducing regulations aimed at preventing the onset of obesity. We believe these regulations combined with growing public awareness are creating a secular growth opportunity for companies, which can help address obesity by improving the nutritional quality of food in modern diets.

Surprising Statistics and a Growing Need

The World Health Organization estimates that global health care expenditure reached $7.5 trillion in 2016, or nearly 10% of global GDP. The report also highlights that health care expenditure is increasingly funded by public budgets. While there are multiple factors driving higher rates of health care spend, obesity has been identified as a major contributor as it is closely linked to the rapid growth in diseases including hypertension, cardiovascular disease, and diabetes. With the costs of treating a diabetic being two to three times greater than that of a non-diabetic, the International Diabetes Federation estimates that global health care spend, related to treating diabetes, has reached $727 billion in 2017. Given the lag of about twelve years between obesity incidence and the onset of diabetes, it is clear that obesity-related diseases will continue to pressure public health care systems and budgets over the coming decades.

Despite the link between obesity, health risks, and the associated strain on health care budgets, the global rate of obesity continues to rise (Figure 1). Since 1975, the number of obese adults in the world has tripled to over 650 million with 1.9 billion considered overweight. An increasingly sedentary lifestyle combined with diets consisting of energy-dense, nutrient-poor foods that are high in fat, sugar, and salt are the main contributors to rising rates of obesity. The McKinsey Global Institute estimates that at the current trajectory, nearly half of the world’s adult population will be overweight or obese by 2030.

What We Are Looking At

As investors focused on sustainable growth companies that benefit from long-term secular trends, we have invested in a number of pharmaceutical and medical device companies with long-term growth prospects driven by the rising rates of obesity and related diseases over the years. While we continue to see strong demand for the treatment of obesity related diseases, we believe increased government regulations aimed directly at preventing the onset of obesity combined with growing public awareness creates an additional secular growth opportunity for companies focused on improving the nutritional value of the modern diet. The direct correlation between excess free sugar consumption and obesity has made sugar an obvious target for government intervention. Added sugars have become so prevalent in modern diets that they account for more than 10% of the average total daily energy intake. It is estimated that 75% of grocery store foods have added-sugars and that foods designed for children have 85% more sugar than adult versions of the same foods. Governments in countries including the US, UK, India, Mexico, and France have already began tackling sugar consumption by implementing measures including sugar taxes, more stringent food labelling, and advertising restrictions.

The Subindustries Positioned to Benefit

We believe more aggressive regulations will only continue to force Food & Beverage manufactures to improve the nutritional values of the products, which account for the majority of items commonly found on grocery store shelves. A recent study in the UK shows that reformulation, or reducing sugar, salt, and fats from existing foods, is one of the most cost effective measures for reducing obesity (Figure 2). While reformulation is cost effective, it is also very difficult to achieve without losing the flavor, structure, texture, and consistency of foods for which consumers have specific expectations. In order to comply with new regulations and maintain their appeal to consumers, Food & Beverage manufacturers are becoming increasingly dependent on the Flavor & Fragrance industry, as they are the holders of the knowledge and technology required for successful reformulations. We believe the leading innovators in the Flavor & Fragrance industry are an interesting opportunity to invest in the trend towards preventing the onset of obesity through improved nutrition.

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