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Insight: Profit bonanza eludes companies chasing obesity business

An overweight woman sits on a chair in Times Square in New York, May 8, 2012. REUTERS/Lucas Jackson
An overweight woman sits on a chair in Times Square in New York, May 8, 2012. REUTERS/Lucas Jackson

By Ben Hirschler and Martinne Geller

KALUNDBORG, Denmark (Reuters) - Steam rises from pipes at a giant industrial complex on the edge of the Baltic Sea whose success is a testament to the world's diabetes and obesity epidemic.

Novo Nordisk's Kalundborg factory, 100 km west of Copenhagen, makes half the planet's insulin for diabetics, putting it on a list of global sites the United States sees as vital to its interests, according to a WikiLeaks cable in 2010.

Soaring diabetes rates, driven by increasing obesity, have fuelled profits at the Danish company for two decades.

But now the company wants to tackle obesity head on by launching a treatment specifically to help patients lose weight.

It would seem to be a no-brainer. Obesity rates suggest a booming market. Yet it is proving surprisingly difficult for both drugmakers and food companies to develop businesses directly addressing the problem.

In a global economic downturn, modestly effective weight-loss drugs and special diet foods are turning out to be a tough sell when a cheaper alternative is to eat less - or do nothing.

The first new prescription diet drugs to hit the U.S. market in more than a decade, from Vivus and Arena Pharmaceuticals, have registered disappointing sales and food companies' diet lines are struggling.

Switzerland's Nestle has all but given up on the diet business, agreeing to sell the bulk of its Jenny Craig weight-loss unit last week to U.S. private equity firm North Castle Partners.

And as Unilever reviews its portfolio of underperforming food assets, analysts say its Slim-Fast brand is one that could come up for sale. Bernstein Research estimates Slim-Fast had 2012 sales of 300 million euros ($402 million), 34 percent lower than when Unilever agreed to buy it in 2000 for $2.3 billion.

"The need for the services is increasing, unfortunately, but there are a lot of companies that have not done well," said Jon Canarick of North Castle, which also bought the firm behind the Atkins diet from its post-bankruptcy lenders in 2007. "I credit most of that to a combination of the economy and the influx of competition."

Weak economies have curbed demand for pricey, specialist dieting schemes just as competition has exploded from a host of electronic apps that count calories for free - and securing insurance reimbursement has been an uphill fight for new drugs that cost around $160-$200 a month in the United States.

BURDEN OF DISEASE

Obesity prevalence has increased by more than 40 percent across the OECD industrialized countries and half of U.S. adults are now forecast to be obese by 2030 unless Americans change their ways.

The condition is a major risk factor for heart disease, certain cancers and diabetes, with the latter alone expected to kill more than 5 million people this year.

Lars Sorensen, Novo Nordisk's veteran chief executive, hopes the clear medical need will help his firm's move into obesity, although he acknowledges it will not be easy.

"It is going to be challenging. We need to convince employers and insurers in the United States, which is the biggest market, that this is a problem that can be addressed," he said in an interview.

"It's been very disappointing in terms of pharmaceutical interventions up to now, but I see that changing."

Certainly, the medical community is taking more notice.

The American Medical Association classified obesity as a disease for the first time this year, while new guidelines from the American College of Cardiology and American Heart Association back more aggressive therapy.

Binge eating disorder, a related problem, has also entered the latest edition of the Diagnostic and Statistical Manual of Mental Disorders, the reference book for psychiatry, opening a new opportunity for a drug from Shire.

Europe, however, is lagging behind in recognizing obesity and approving new drugs, according to Euan Woodward, executive director of the European Association for the Study of Obesity.

"The U.S. is way ahead. We haven't had the same discussion in Europe yet," he said.

Yet U.S.-approved diet drugs like Vivus' Qsymia and Arena's Belviq are being held back by cost and the modest weight loss they can offer, with safety problems linked to earlier products also making doctors cautious.

The popular fen-phen drug combination was taken off the market in 1997 for causing heart damage, while Sanofi's Acomplia was withdrawn in Europe in 2008 after being linked to suicidal thoughts - it never won U.S. approval - and Abbott's Meridia was pulled in 2010 on heart worries.

As a result, global sales of obesity drugs have halved in the last five years, and even though they are expected to climb again they will remain dwarfed by therapies to treat diabetes, as rates of type 2 disease - the kind linked to obesity - soar.

Consensus analysts forecasts suggest obesity drug sales may grow from $300 million to $3.8 billion by 2018, while the diabetes market, worth some $37 billion at present, will reach more than $57 billion, according to Thomson Reuters Pharma.

Novo Nordisk hopes a high dose of its injectable medicine liraglutide - the active ingredient in its diabetes treatment Victoza - will take pharmacological interventions to a new level, by mimicking the action of a natural hormone.

So far, though, clinical trials have underwhelmed analysts and Matthias Tschoep, head of the Institute for Diabetes and Obesity at the Helmholtz Zentrum in Munich, believes a truly effective medicine will need to combine the effects of multiple hormones to achieve reductions in body weight beyond the 5-10 percent seen with current drugs. That could be a long haul.

"We need to close the gap between existing drug treatments and a gastric bypass surgery, which makes you lose 35 percent of body weight," he said. "I firmly believe that within the next 10 to 20 years, we will have very efficient drugs."

The big problem for dieters and drug designers alike is the fact that human evolution makes it very hard for people to curb their appetite and cut calorie consumption.

A predisposition to gain weight is hard-wired, with animal experiments showing that consumption of sugary food triggers the brain to release dopamine, a neurotransmitter also linked to drug addiction.

THREATENED BY BROCCOLI, MOBILE APPS

Weight Watchers, the leading weight loss company in the United States, is finding the going increasingly tough. Revenue has been roughly flat or down during six of the last seven quarters and the outlook for the next four is even worse.

Last month, the company said that despite progress on cost-cutting, it expected full-year revenue to fall at a low double-digit percentage rate if recruitment trends failed to improve.

Weight Watchers is battling a declining membership base, growing membership at rivals, and the rise of cheap or free smartphone applications and activity monitors such as MyFitnessPal and the Jawbone UP wristband.

There are nearly 2,000 weight-loss apps now available on the iPhone, and Berlin-based market research firm research2guidance estimates that by 2015, 500 million people will be using mobile health applications which cost much less than the packaged meal plans sold by Jenny Craig, Nutrisystem and Medifast that usually cost hundreds of dollars a month in up-front purchases.

Analysts say the lion's share of the world's dieters use a "do-it-yourself" approach.

"Broccoli and lettuce are good competition for weight-loss shakes," said Imperial Capital analyst Mitchell Pinheiro. "Dieting is fickle to begin with and trends are fleeting. While the addressable market is enormous and continues to grow, how dieters choose to diet is not consistent and it's not sustainable."

Meanwhile, the retail market for meal replacement products such as Slim-Fast bars and Herbalife shakes, is estimated at $7.76 billion worldwide, according to data tracker Euromonitor, up from $5.51 billion in 2008.

In a very competitive market, Euromonitor analyst Ildiko Szalai sees the key to success as transcending the natural stigma and impermanence of dieting. She cited Kellogg's Special K cereal bars, protein shakes and diet plan, which has briskly moved in as Slim-Fast has retreated.

"They made it very successful, positioning the product as a lifestyle and not just something for six weeks so you lose weight," Szalai said. "You eat it forever."

(Ben Hirschler reported from Denmark and Martinne Geller from London; editing by Anna Willard)

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