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

Opportunities for Food Manufacturers Arise as Demand for Appetite Suppressing Anti-Obesity Drugs Grows

LONDON/NEW YORK (Reuters) – Investors argue that the market’s initial negative response to the growth in demand for appetite suppressing anti-obesity drugs, such as Novo Nordisk’s Wegovy, may be exaggerated. They believe that food manufacturers can actually benefit from this trend.

Recently, when Walmart revealed that food consumption slightly declined when individuals took the medication, it triggered a sell-off in shares of companies like Nestle, the largest packaged food maker in the world.

“This feels like a significant overreaction,” commented Richard Saldanha, Aviva portfolio manager. “People are making assumptions about long-term consumer habits.”

Wegovy has already achieved tremendous success in the United States and is now being introduced in select European markets including Norway, Denmark, and Germany. This development has raised concerns in the consumer and retail industry regarding potential impacts on food sales.

“Novo’s breakthrough can certainly lead to major changes—both for food and beverage companies, as well as other health-related stocks within the obesity industry,” stated Kiran Aziz, head of responsible investments at Norway’s largest pension fund KLP, which holds stakes in both Novo Nordisk and several food companies.

She also acknowledged that more attention should be given to supermarkets, where margins are slimmer and the profitability impact may be more significant.

Nestle has already begun working on products that complement weight loss drugs like Wegovy, according to CEO Mark Schneider. This may include supplements to help with issues such as “loss of lean muscle mass” and “rapid regain of weight”.

These initiatives, combined with the limited availability of the drug due to Novo’s struggle to meet the demand, have convinced some investors that the so-called “miracle drugs” will not harm the industry in the long run.

The initial market response to this new class of weight-loss drugs is reminiscent of the early hype around the metaverse, which eventually waned as investors and companies realized that behavior change takes time, explained Arda Ural, EY Americas Industry Markets Leader, Health Sciences and Wellness.

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“The problem is that lower socioeconomic groups face higher rates of obesity and risk factors, but the cost of taking these medications is a limiting factor,” Ural said. “Making them more affordable and witnessing positive downstream impacts will be a slow process.”

Nevertheless, some food manufacturers were left “trembling” due to the impact on the stock market, according to John Plassard, senior investment specialist at Mirabaud Group, an investor in Nestle.

“Companies that primarily focus on ‘junk food’ or restaurant chains with limited alternative options could be the most vulnerable,” Plassard explained.

Brian Frank, portfolio manager of the Frank Value fund, which holds positions in Tyson Foods and Arcos Dorados, the largest McDonald’s franchisee globally, expressed optimism about buying stocks that suffer from Wegovy-related setbacks.

“If the market offers me a discount, I will gladly take advantage of it,” he stated.

The increased use of appetite suppressing drugs appears to be primarily driven by the United States, according to My Nguyen, research analyst at Legal & General Investment Management America. “In other regions, trends such as the rise of wealthier and more mobile middle classes in emerging countries support the demand for snacking and convenience foods.”

A portfolio manager at Germany’s Union Investments, which holds stakes in Unilever and Coca Cola, struck a more cautious tone, suggesting that it will be difficult to change the perception that weight loss drugs are detrimental to the industry.

“Everyone assumes that people will take these pills, become slim, and eat less,” they remarked. “And companies cannot prove otherwise.”

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