One Huge Opportunity

Obesity is a huge and growing crisis in the U.S., and wherever there are problems, opportunities exist for enterprising companies. Just how big is the crisis? According to the Centers for Disease Control, 34% of adults are obese, while another 34% are overweight -- making up 68% of the adult U.S. population.

This prevalence is a major problem, since obesity is the driver of many chronic conditions including heart disease, vascular diseases, diabetes, and cancer. In fact, obesity surpassed smoking last year as the top preventable health threat in the U.S., contributing to the huge rise in medical expenses.

According to the Society of Actuaries, the total economic cost of obesity and being overweight is estimated at $270 billion per year in the U.S. and $30 billion per year in Canada. That $300 billion is the result of an increased medical care ($127 billion) and loss of worker productivity because of: higher death rates ($49 billion), disability of active workers ($43 billion), and total disability ($72 billion). That's a huge drag on the economy and a growing one.

Huge opportunity
One way to fix this problem would be for Americans to take responsibility for their actions, exercise more, eat a balanced diet, etc. The other way is more popular and lucrative for companies: pills!

As of a year ago, there was one obesity drug out on the market, Abbott Labs' (NYSE: ABT  ) Meridia, but the drug was withdrawn in October after clinical trial data indicated an increased risk of heart attack and stroke. The drug wasn't the panacea people were looking for. It was originally approved by the FDA in 1997 based on clinical data that showed more people receiving the drug lost at least 5 percent of their body weight than people on placebo who relied on diet and exercise alone. Investors and the FDA are hoping future drugs can do better with the same risks as diet and exercise, a tall order.

At least three companies are still vying for the obesity prize, though:

Company

Drug

Results So Far

Arena Pharmaceuticals (Nasdaq: ARNA  ) lorcaserin Marginal efficacy and produces cancer in rats.
VIVUS (Nasdaq: VVUS  ) Qnexa More safety data needed.
Orexigen (Nasdaq: OREX  ) Contrave Marginal efficacy and four safety issues -- psychiatric adverse events, seizures, serum creatinine, and cardiovascular.

All three have the potential to skyrocket if their respective drugs make it past the FDA. So far, though, the results have not been overwhelming. Each company is sitting on a small pile of cash, which should see it through the next couple years. However, I would stay away from them unless you are looking for a very high-risk, high-reward stock.

A better way
There are other ways to play this opportunity. Americans do not want to be obese, but like everything else, it will take a lot to get people to change their behavior. A Society of Actuaries survey of 1,000 adults found that 83 percent would be willing to follow a healthy lifestyle program if they received incentives from their health insurance plan.

That's good news for companies that run programs to help people lose weight. NutriSystem (Nasdaq: NTRI  ) and Medifast (NYSE: MED  ) sell weight management and other consumable health and diet products in the United States. However, the best of breed in this space is Weight Watchers (NYSE: WTW  ) , a Motley Fool Inside Value recommendation. The company runs a network of more than 15,000 meeting locations, where every week group leaders help approximately 1.3 million members lose weight at more than 50,000 meetings.

The social aspect of its meetings -- and the mutual support and encouragement that results -- is a key competitive advantage. It not only helps clients lose weight but also gives customers an incentive to stick with the program. The company also provides an online program for those who live too far from a meeting spot or who just don't want to go to meetings.

This has translated into a great business, with an ROA of nearly 20% and free cash flow that consistently exceeds net income. The company does have one weight issue of its own: It's currently overweight with debt from its previous private equity owners. However, the company has begun its own weight-loss program and has been disciplined in paying down debt.

Foolish takeaway
Arena, Orexigen, and VIVUS are long shots, but if one hits, investors will make FAT profits! In the meantime, you are better off buying Weight Watchers if you want to play the obesity trend.

If you're looking for more stocks, check out this free report on the "risky" health-care company Warren Buffett is secretly buying.

Dan Dzombak's musings and articles he finds interesting can be found on his Twitter account: @DanDzombak. He doesn't own shares of companies listed above.

Weight Watchers International is a Motley Fool Inside Value pick. Motley Fool Alpha owns shares of Abbott Laboratories. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 19, 2011, at 8:29 PM, mountain8 wrote:

    Well don't make 5000 calorie meals available for us at mcdonalds etc. Give me a family with one parent at home so I can have healthy, planned meals and quit promote fantasy diets that only make you gain weight if you don't keep paying them a fortune.

  • Report this Comment On January 20, 2011, at 12:26 PM, icantknow wrote:

    Bull. Irresponsible article. Read between the lines people. VVUS - birth defects? seizures? c'mon... If you want to bet on these how about doing the smart thing and jumping in after some wishful - wishful - approval.

    These are things to think about for the 3 - OREX, VVUS, and ARNA. The last 2 failed to pass the FDA Advisory. Neither had the data the FDA had required to submit a complete proposal.

    And on VVUS one panelist, said: "Elaine Morrato, who was on the panel for review of Qnexa, said that the drug’s approval would have meant a huge public health experiment. A risk that the panel did not feel was worth taking. In their review, the panel said that the drug does work, but it has potential side effects such as depression, memory loss, birth defects and increased heart rate.

    (see Beacon Equity July 16, 2010)

    Reminder that comment was made on VVUS (not OREX) as this article is referring to.

    The point is that I agree completely with the problems of obese people who have sadly created so many variables and complications with their health.

    For OREX, it is my opinion - that the (Wellbutrin) Buproprion is an existing drug which is prescribed for Obsessive Compulsive Disorder / depression - please research for yourselves - but this is my experience and understanding.

    Ironically - in my opinion - this is the best bet for a Dr. to simply prescribe the various OCD disorders, as in my opinion, obesity is a compulsive / depressed behavior. And these drugs already exist.

    I know that this is an area for much enthusiasm, and I wish the best for anyone who can come up with a miracle drug... I just feel like Elaine Moratto: Why risk the metabolism side of these drugs, how about birth defects? How about that she said it would be a 'public experiment'...

    I got out of OREX and ARNA, and am short on VVUS. Get out before the FDA OREX decision, investors can always hop back in after the results. Most of the FDA advisory panel members said to OREX that they were "just squeaking by" on the efficacy.

    The other 2 VVUS and ARNA have a to go still this year on both it's phase III drugs, and it doesn't help that they burned investors (along with ARNA) to proceed to Advisory Panels without full study information that the FDA required. Now each of them has to step back and over to get in front of an FDA Advisory again, after being rejected the first time.

    We shall see later this month how the FDA really feels about all this. Meanwhile dream on...

  • Report this Comment On January 20, 2011, at 12:29 PM, icantknow wrote:

    I do not disagree about the non-drug comments, which are smart investments. I do agree with the authors comments of LONG-SHOTS and I disagree with the headline huge opportunity...

  • Report this Comment On January 20, 2011, at 4:18 PM, yazzbro wrote:

    Huge Opportunity?? More like a huge roll of the dice that will most likely come up craps. If you are looking for some good drug companies at relatively cheap prices look at Amarin(AMRN) or Depomed (DEPO).

  • Report this Comment On January 20, 2011, at 9:14 PM, TMFDanDzombak wrote:

    @icantknow Thank you for your thoughtful comment.

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