By Richa Naidu and David Randall
LONDON/NEW YORK (Reuters) – The growth in demand for appetite suppressing anti-obesity drugs like Novo Nordisk’s Wegovy presents opportunities for food manufacturers and investors believe the market’s initial negative response may be exaggerated.
When Walmart revealed that food consumption slightly declined when individuals took the medication, it triggered a sell-off in shares of companies such as Nestle, the world’s largest packaged food manufacturer.
“It appears to be an overreaction,” stated Aviva portfolio manager Richard Saldanha. “People are making long-term assumptions about consumer habits.”
Wegovy has already experienced tremendous success in the United States and is now being introduced in select European markets, including Norway, Denmark, and Germany. This has raised concerns within the consumer and retail industry about potential impacts on food sales.
“Novo’s breakthrough has the potential for significant changes in the food and beverage sector, as well as other health-related stocks in the obesity industry,” said Kiran Aziz, head of responsible investments at Norway’s largest pension fund KLP, which holds stakes in Novo Nordisk and various food companies.
However, Aziz emphasized the need to focus on supermarkets, where profit margins are thinner and the impact on profitability may be more significant.
Nestle has already begun researching products that can complement weight loss drugs like Wegovy, according to CEO Mark Schneider. This may include supplements to counteract the “loss of lean muscle mass” and “rapid weight regain.”
These initiatives, coupled with the limited availability of the drug as Novo struggles to meet demand, have convinced some investors that these “miracle drugs” will not harm the industry in the long term.
The initial market response to this new class of weight-loss drugs resembles the early hype surrounding the metaverse, which later fizzled out as companies and investors realized that behavior change takes time, said Arda Ural, EY Americas Industry Markets Leader for Health Sciences and Wellness.
“The challenge is that lower socioeconomic groups have higher rates of obesity and risk factors, but the cost of these medications is a limiting factor,” Ural explained. “Making these drugs affordable and witnessing positive downstream effects will be a slow process.”
Nonetheless, the stock market reaction left some food manufacturers feeling nervous, according to John Plassard, senior investment specialist at Nestle investor Mirabaud Group.
“Companies exclusively focused on junk food or restaurant chains that lack alternative options may be most at risk,” he said.
Brian Frank, portfolio manager of the Frank Value fund, which holds positions in Tyson Foods and Arcos Dorados, the largest McDonald’s franchisee worldwide, expressed interest in investing in stocks that may suffer due to Wegovy.
“If the market offers me a discount, I will gladly take advantage of it,” he stated.
The demand for appetite suppressing drugs appears to be primarily driven by the United States, noted My Nguyen, research analyst at Legal & General Investment Management America. “Elsewhere, trends such as wealthier and more mobile middle classes in emerging countries support the shift towards snacking and convenience foods.”
A portfolio manager at Germany’s Union Investments, which holds stakes in Unilever and Coca Cola, expressed a more cautious view, stating that it will be challenging to change the perception that weight loss drugs are detrimental to the industry.
“Everyone assumes that people will take these pills, lose weight, and eat less,” they said. “And companies cannot prove otherwise.”
(Reporting by Richa Naidu; Editing by Matt Scuffham, Kirsten Donovan)
