Could you make fat profits from the fight against flab?

The world is in the grip of an epidemic. A billion of us are overweight. So can you make money from the battle against obesity?

Tory MP Ann Widdecombe once said in typically blunt fashion that she had turned down a publisher's request to write a diet book. "I said if I wrote it, it would be only four pages long, with one word on each page: Eat. Less. Exercise. More." But it seems too few people are following her advice: 300 million, to be exact that's the number of clinically obese people in the world. According to the World Health Organisation (WHO), it's the planet's largest chronic health problem. One in four people in the UK is obese; by 2010, that will be one in three. Healthcare and lost productivity cost the country £1bn a year.

In the United States, the problem is worse: almost a third of Americans are obese. And in India and China, obesity threatens to overtake communicable diseases as the major killer by 2020, as a newly urbanised population takes to high-calorie, high-fat foods that were never a part of their traditional diets.

The obesity crisis: a health timebomb

Being fat means you are more likely to die from cancer 9,000 extra cases a year in Britain alone and can make you vulnerable to other diseases, including heart disease, type two diabetes, hypertension, stroke and arthritis.

Yet if on average we are larger than ever before, a minority are thinner than ever. We are a society in conflict equally repelled, it seems, by the very thin and the very fat. As London Fashion Week began, culture secretary Tessa Jowell called for a ban on "stick-thin" models from the capital's catwalks, following Madrid Fashion Week's barring of models with a body mass index of less than 18. Milan Fashion Week looks set to follow, just as the Great Ormond Street Hospital revealed it was treating girls as young as seven for eating disorders.

Few people know that there are more overweight people in the world (one billion) than malnourished (800 million). Nevertheless, Britain is beginning to wake up to the problem. The Government has appointed a minister for fitness'; primary schoolchildren are to be routinely weighed; poster campaigns urge people with waists larger than 37 inches to check whether they have diabetes; the TV schedules are full of programmes such as Celebrity Fit Club and footballer Ian Wright's Unfit Kids.

Last year, chef Jamie Oliver's show Jamie's School Dinners exposed the piles of processed junk' fed to the nation's children at school a diet which, says Channel 4, is "leading to a health time bomb, with soaring rates of obesity and hugely increased risks of heart disease". This week, he was back on our screens in a fat suit to continue his campaign for healthy school dinners, just as a group of recalcitrant mothers underscored the scale of the problem: they were caught handing sandwiches and crisps through the fence of a school where their children were supposed to be eating healthily.

Earlier this month, the tenth International Congress on Obesity was held in Sydney. The WHO has called on food companies to play their part in improving public health something most are doing, it seems, with extreme reluctance. "Companies do not just respond to public taste; they also help shape it through marketing and product formulation they seem to be distancing themselves from their responsibility for unhealthy consumer choices," said the Centre for Food Policy at City University.

We have, therefore, no excuse not to know the scale of the problem. But we're MoneyWeek readers, so our cry is show me the money'. Where is the financial advantage in all this worry over weight?

The obesity crisis: should you choose healthy alternatives?

Food is the obvious choice for investing in the fight to combat obesity. And there are several areas where you can profit. Plenty of companies are turning to healthier products for healthier profits. Healthy foods', such as yoghurts, fruit juices, bottled water and canned fish make up 18 of the 24 fastest-growing food categories, according to an ACNielsen study.

However, some companies those that are behind in jumping on the health bandwagon are showing slower growth, or are even declining, according to a report from JP Morgan. Sales of soft drinks, flavoured milks, snacks, sweets, frozen foods and meals, canned vegetables and fruits are all down.

And it's becoming harder and harder to produce and sell unhealthy food, in Europe at least. Less healthy food is coming under regulatory pressure, so manufacturers will no longer be able to make spurious health claims. Vending machines are now banned in schools in both France and Britain. In France, food advertising will have to carry health information. In Britain, the Food Standards Agency has tested front-of-pack multiple traffic light' schemes detailing salt/fat/sugar content (red for stop, green for go, amber for beware).

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Doing business in Europe will now be more difficult and more expensive. Health claims will have to be approved by the European Food Safety Agency and supported by scientific studies pushing up research and development costs. Larger firms are likely to have the advantage as smaller ones struggle with higher R&D costs and bureaucracy. And then there's the fact that there are simply lower profit levels in food or drink that is less processed, or which has less added value' bottled water is less profitable than soft drinks, and fresh meat or vegetables far less so than a ready-made lasagne.

Arnaud Langlois, head of food equity research at JP Morgan, thinks the worldwide obesity crisis is going to reshape the industry. "It will be the key driver of change in terms of how companies are in phase with consumers. Consumers are becoming more educated; they are certainly more willing today to pay attention to the labels." People are learning to make more educated choices, he believes choosing more healthy food and spending more time at the gym.

"The UK and France are the two countries doing the most to tackle obesity. In the US, nothing much is happening at a regulatory level, other than pressure from tort lawyers threatening to take legal action. The industry is responding to this by taking self-regulatory measures."

Langlois recommends Danone (FP:BN), whose best-known product is the prebiotic yoghurt, Actimel. "Danone has been the fastest-growing company in the food industry in the last couple of years," he said. "Actimel sales in the UK are up 50%." Danone and Nestl (CH:NESN) were both very well positioned to address consumer desires for more healthy products, he said. "Nestl's food and beverage business remains significantly undervalued." Nestl producer of coffee, confectionery, chocolate and (more controversially) infant formula has recently bought Jenny Craig, the US diet company founded in the mid-1980s.

The obesity crisis: demand for drugs

But of course, food is only part of the story. For those who are sick of dieting, what about drugs that can help make you thinner? A UK biotech, Alizyme (LSE:  AZM), has developed an anti-obesity drug called Cetilistat, which works by restricting the absorption of fat in the gut.

Ed Bowsher, from The Motley Fool, points out that Alizyme has permission from the US Federal Drugs Administration for phase-three trials. This would normally be good news, as most drugs at this stage have a 60% chance of winning regulatory approval. But Alizyme has failed to find a licensing partner to pay for the trials, and its share price has suffered. It may also find that it is tarred with the same brush as another obesity drug, Xenical, which causes unwanted side-effects, including incontinence. Campaigners in the US also claim that Xenical which, like Cetilistat, inhibits the absorption of fat in the gut causes bowel cancer.

Sanofi-Aventis's drug Acomplia has also been facing some difficulties. It works by making users feel full acting on the Cannabinoid receptors in the brain, which when stimulated by cannabis, cause what is known to pot-smokers as the munchies'. It has been approved in Europe, but has yet to receive approval from the FDA.

The rewards of a successful drug are clearly immense but the path to riches is seldom smooth, particularly for small biotechs. If Alizyme succeeds in getting Cetilistat to market, the drug could generate as much as £700m a year, according to forecasts from Nomura.

Then, of course, there are always remedies traditionally used by the Bushmen. Phytopharm (PYM), a small British biotech, has developed the P57 slimming drug from a herb, Hoodia Gordonii, which has been used for centuries by the San people of the Western Cape in South Africa to combat hunger and thirst in the desert. Unlike Acomplia, the plan is now to market it as a food supplement. It's been licensed to Unilever for use in meal-replacement products such as Slimfast, but faces two clinical trials before it can be used.

The obesity crisis: other avenues

Slimming drugs offer big rewards and carry big risks. But there are plenty of other areas to turn to. If slimming drugs won't work, how about surgery? Stomach stapling (or bariatric surgery) involves surgically reducing the size of the stomach and re-attaching the bowel to it. The resulting reduction in food absorption can mean weight loss of up to 70% but can also lead to serious complications, including (according to the University of Chicago Hospital Center), death for one in 200 patients.

People combat the physical fallout of obesity with other methods, too: such as liposuction, or even breast reduction. Except in rare cases, this is unlikely to be prescribed on the NHS, so the private-healthcare companies will benefit.

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Those who are more active will turn to the gym to fight the flab. In contrast to cosmetic surgery, gym membership can be prescribed on the NHS, so the growing number of health clubs will benefit. This week, Virgin Active, part of Richard Branson's Virgin Group, announced it was taking over Holmes Place and may float the merged group, which will have a total of 165 health and fitness clubs (and 900,000 members) in the UK, Italy, Spain and South Africa.

But it seems the healthy-living message hasn't got through to everyone. A survey from Deloitte's of 1.4 million members at 470 health clubs, including the UK's largest operator, Fitness First, found that gym membership has fallen by more than half a million in the first six months this year, as rising bills and interest rates have forced a drop in consumer spending. Weight Watchers (US:WTW) the organisation viciously parodied by Matt Lucas in Little Britain - has been another victim. Its membership has fallen 15% over the past year, despite the fact that studies show slimming groups are the best way to lose weight.

But more than 12 million adults and one million children in the UK will be obese by 2010. If only a fraction of them turn to the companies we've discussed, their profits will swell as the nation slims down.

How to pile on the pounds

The healthier-eating message has got through to many Britons, writes Graham Buck, but we also continue to indulge in alcohol and calorie-packed treats, a survey issued last month by research group TNS Worldpanel concluded. Among the brands to benefit from more health-conscious consumers were Flora low-cholesterol margarines and yoghurts, with sales 20% higher year-on-year and Hovis, which was 14% up.

The Flora range is owned by Anglo-Dutch group Unilever (ULY), which has suffered from sluggish sales growth in the past few years. However, it has been quicker than many rivals to latch on to the healthier-eating message (while the real bodies' advertising campaign for its Dove cosmetics range also won a positive reception) and the SlimFast product range has performed strongly. The group's Choices programme, launched in May, will provide logos on packaging to promote foods with limited amounts of trans-fats, saturated fats, sodium and sugar, and Unilever has switched to a "healthy option" message for promoting its Birds Eye frozen foods range. UBS analysts believe that disappointing growth has lowered investor expectations and Unilever's current share price doesn't reflect the pick-up that it expects in the second half.

The increased demand and bigger market share for Hovis, one of the main brands of RHM (RHM), has been undermined by an ill-judged move to take its Mr Kipling's cakes range upmarket and charge a premium price. But the group has now arrested the resulting sales decline and has also benefited from Stuart Rose's success in turning around the fortunes of Marks & Spencer, for which it manufactures chilled ready meals and pizzas.

Tate & Lyle (TLY) has been lessening its dependence on sugar in favour of value-added products such as its low-fat, no-added sugar ice cream, which goes under the somewhat indigestible name of Ice Cream Rebalance 50. It's even venturing into biofuels, with plans for a new ethanol plant in the US. The group continues to benefit from the runaway success of its artificial sweetener, Sucralose, which also goes under the brand name Splenda. The zero-calorie product is used in a growing range of bakery products and confectionery. Although Tate & Lyle has expanded its production capacity, supply is struggling to keep pace with steadily rising demand for sucralose, which UBS says puts it in a strong negotiating position for its 2007 contracts.

For those of us in need of more than will power in order to eat less, the pharmaceutical giants are putting technology to work on a new generation of weight-loss drugs. One of those generating the greatest buzz is Acomplia, developed by French group Sanofi-Aventis (SNY). An anti-obesity diet pill, Acomplia is being promoted as blocking the CB1 receptors of the Endocannabinoid system present in the body's nervous system. In doing so, it suppresses the appetite and reduces food intake, also reducing bad cholesterol levels and blood pressure in the process. Acomplia has won regulatory approval in Europe and can be obtained through prescription in the UK. The big test will be getting the green light in America from the US Food & Drug Administration, which could pave the way for it to become a best seller.

GlaxoSmithKline (GSK) has also gained welcome publicity this month on what the tabloid press dubbed a "superpill that will save millions". The Lancet last week reported that daily doses of the drug Rosiglitazone, marketed as Avandia, could significantly reduce the chances of developing type-two diabetes by increasing the body's sensitivity to insulin, which breaks down food into energy. The condition has become more common due to growing obesity rates and is reported to affect at least 2.5 million Britons and more than 20 million Americans.

Glaxo's confidence on Avandia's potential has enabled it to agree flexible pricing deals with two European governments (it hasn't yet revealed which ones), enabling it to raise the price of some drugs if their benefits prove to live up to their potential.

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