Four ways to fat profits

published 8 June 2006

Improbable as it may sound, says Marc Gunther on CNNMoney.com, the latest addition to the McDonald's menu is a 15-minute exercise DVD. The initiative is an effort "to get out in front of escalating social concern about obesity". To date, it appears to be working: since 2002, like-for-like sales at McDonald's have grown for 36 consecutive months, while its share price is up by over 30% in the past two years.

But the reality, says Palash Ghosh on BusinessWeek.com, is that there is "no end in sight" to obesity in the US. According to the American Obesity Association, two-thirds of adults and one-third of children are overweight, and it is the second largest cause of "unnecessary deaths" in the country. One of the side effects of this epidemic is the rise of associated conditions, such as type 2 diabetes. Amid the plethora of companies producing insulin treatments, however, one stands out. At present, there is no such thing as an insulin pill, which is where Emisphere Technologies (EMIS, $9.48) comes in. It has an oral insulin product in the pipeline. Yet against a potential market which must be measured in billions of dollars (as demonstrated by conventional insulin and inhaled insulin products), Emisphere's current market capitalisation is still only $225m.

The real "holy grail" of the drug industry, says Lawrence Carrel on SmartMoney.com, is an obesity treatment pill. Vivus (VVUS, $4.40) has announced that a study of 200 obese people showed that more than 50% of those taking its product, Qnexa, "experienced a 10% or greater loss of total body weight over six months". The drug is expected to come to market "no earlier than 2010". Clinical trials are not cheap typically costing $300-500m in non-capital expenses. Vivus has around $33m on its balance sheet, so some sort of dilution is almost inevitable. But the company only has a market capitalisation of $196m; so, in effect, investors are paying $196m in order to spend another (say) $400m, at the most, in order to enter a $2bn-plus a year market where initial margins could be as high as 95%. Though biotech is a high-risk sector, I reckon those aren't bad odds.

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Other companies worth investigating include Arena Pharmaceuticals (ARNA, $13.44) and Nutrition 21 (NXXI, $2.07).

Charles has previously written for the MoneyWeek, giving readers his share tips regularly and covering other topics on the side such as stock markets and the economy. He has also written for The Business, Shares, Investors Chronicle and The Evening Standard, and Charles has presented on LBC and been a guest on BBC One and BBC World. Aside from his journalist background, Charles graduated as a chemist from the University of Oxford specialising in ligand gated ion channels.