Healthy Living Obesity A Heavy Burden

SAM Study Healthy Living Obesity A Heavy Burden Diederik Basch Gabriela Grab Hartmann Martin Jochum Giorgia Valsesia

BICYCLE CHAIN RING Ultra-light, durable components are turning the modern bicycle into a healthy and technologically innovative means of transport. SAM Study Healthy Living Obesity a heavy burden 01/2012 Diederik Basch, Gabriela Grab Hartmann, Martin Jochum, Giorgia Valsesia SAM Sustainable Asset Management AG

Table of Contents 1. OBESITY FACTS 7 1.1 Industrialized World 8 1.2 Emerging Markets 8 2. CAUSES OF OBESITY 11 2.1 Unbalanced Diet 13 2.2 Lack of Physical Activity 14 2.3 Genetic Causes 16 3. IMPACT OF OBESITY 17 3.1 Health Consequences 18 3.2 Healthcare Expenditures 20 4. INVESTMENT OPPORTUNITIES 21 4.1 Nutrition 22 4.2 Activity 24 4.3 Healthcare 25 5. CONCLUSIONS 27 BIBLIOGRAPHY 29 Scan QR Code and visit the SAM Sustainable Healthy Living website Download free RedLaser scanning app for iphone and Android SAM 2012 3

Over the past several years, there has been a gradual shift in consumer attitudes towards diet, health and lifestyle. Increasing awareness of the benefits of a healthy lifestyle combined with an obesity crisis that is putting incremental strain on the healthcare system is driving demand for medicine, organic foods, personal care, nutritional supplements, and fitness products. In addition, an aging population in the developed world is interested in living longer and leading more active lifestyles. We believe the Healthy Living theme is wellpositioned to take advantage of these powerful long-term trends. The Healthy Living theme combines investment opportunities in the Nutrition, Activity, Healthcare and Personal Care sectors, as identified by SAM. Despite the economic turmoil since our initial report in 2007, the healthy living industry continues to grow rapidly. Demographics continue to play a significant role as the population in the developed world is getting older, driving demand for health maintenance and preventive medicine. Clinical research and favorable media coverage have increased the awareness of the relationship between diet, lifestyle and health, which has resulted in employers and individuals spending on prevention to reduce healthcare costs. Healthcare costs are exploding around the world partly due to obesity and preventable chronic diseases. Obesity has been identified as the greatest health crisis in America by the former Surgeon General. In fact, obesity and its impact on the healthcare system are perhaps the most significant drivers of the healthy living industry today. Healthy living companies are addressing these needs through products and services focused on promoting healthier lifestyles and preventing chronic diseases. SAM 2012 5

Obesity A Heavy Burden Obesity rates began to accelerate in the 1980 s and the global extent of the obesity epidemic was formally recognized by the World Health Organization (WHO) in 1997. 1 Most recent data from the WHO reveals that in 2008 1.5 billion adults over the age of 20 were overweight, with some 500 million classified as obese. 2 Moreover, the WHO predicts that in 2015, 2.3 billion people will be overweight, and 700 million obese. While obesity rates vary per country, they have been consistently rising. The crisis is well illustrated in the US, where currently two-thirds of the population is overweight and just over one-third is obese. Most alarming is the rise in childhood obesity, which points to elevated obesity rates by 2030. Obesity therefore represents a huge threat to global health and national healthcare systems. In addition to prevention, strategies for mitigating and adapting to the health consequences of obesity have risen to the top of the public health agenda. SAM s Healthy Living Strategy identifies investment opportunities related to obesity prevention, mitigation and adaptation. The strategy invests in companies providing innovative product, technology and service solutions to combat obesity and treat or manage symptoms of obesity-related diseases. 6 SAM 2012

SAM Study Healthy Living: Obesity A Heavy Burden 1 OBESITY FACTS

1. Obesity Facts Obesity is defined by the WHO as a Body Mass Index (BMI) greater than 30. Overweight is defined as a BMI between 25 and 30. BMI is calculated by dividing a person s weight in kilograms by the square of their height in meters. 1.1 INDUSTRIALIZED WORLD People in the industrialized world are getting older and heavier. Although the US recognized the obesity challenge a long time ago, it has the highest obesity rates in the world. If current trends continue unabated, projections show that by 2030 approximately 86% of American adults over the age of 20 will be either overweight or obese, and 51% will be obese. 3 In the US, overweight rates (i.e. BMI of 25 30) among adults over the age of 20 appear to have stabilized, remaining constant at around 32 34% since the 1970 s, while obesity rates (BMI of >30) have continued to rise, doubling from 15% in the 1970 s to 34% in 2008, indicating a gradual shift from overweight to obesity in more recent years. More alarming, the percentage of super obese or extremely obese adults with a BMI of >40 has risen from 1.4% in the mid 1970 s to 6% in 2008. In other words, the fat are getting fatter. 4 In Europe, the spread of obesity has been slower due to different eating habits and lifestyles, but the problem is getting worse. In Germany, the European country with the largest population, 22% of adults are currently obese 5 with the trend heading upwards. 1.2 EMERGING MARKETS Obesity used to be a problem confined mainly to North America and Europe, but this is no longer the case. There is evidence that obesity rates are rising at an even faster pace in emerging markets that have recently experienced rapid economic growth. In China, for example, the obesity rate has increased dramatically in the past few years, particularly among the middle class in urban areas. Assuming current obesity growth trends remain, a projected 141 million Chinese will suffer from obesity in 2030. 6 Though obesity prevalence rates as a percentage of total population may be lower than in developed countries, in terms of absolute numbers, projections indicate that China s overweight and obese population will exceed that of established market economies in 2030. 7 Many developing and newly industrialized countries are facing a dual challenge. While they still have to combat the spread of infectious diseases and malnutrition, they are also experiencing a sharp increase in chronic diseases associated with Figure 1: Comparable Estimates of Overweight & Obesity Rates for 2008 (based on most recently available national data) Source: WHO, Global Status Report on Noncommunicable Diseases 2010, Annex 4, published 2011 80 % Prevalence rate as % of population (20+ years, age adjusted) 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0 % India China Switzerland France Italy Brazil Germany Mexico USA Obese (BMI over 30) Overweight (BMI between 25 and 30) 8 SAM 2012

obesity and overweight, primarily caused by societal change and economic growth. Obesity is more prevalent in urban settings, where lifestyles are changing much faster than in rural areas. Emerging markets are experiencing rapid population growth and urbanization. Urban lifestyles tend to be heavily geared towards convenience, with more opportunities for eating out. In addition, urban work typically demands less physical exertion than rural labor. As rural dwellers migrate to cities, they tend to switch away from their traditional diets rich in vegetables, towards a meatbased western-style diet, which also contains more CASE STUDY: CHILDHOOD OBESITY Throughout history, a plump child was a symbol of health and prosperity, as this meant it was more likely to survive infectious diseases and famines. While this might still hold true to a certain extent, overweight and obesity have become the main health issue faced by children in developed countries, while other parts of the world have begun to catch up with this trend. The consequences of childhood obesity are severe: early onset of obesity in children puts them at risk for a lifetime of obesity-related chronic diseases such as diabetes, cardiovascular disease, hypertension, in addition to psychological problems such as depression and poor self esteem associated with the stigma of being overweight. Type-2 diabetes, which is often caused by an unbalanced diet and a lack if of physical activity, was once rare among teenagers, but this age group currently represents up to half of all new cases of diabetes in some countries. 8 About half of overweight teenagers and one-third of overweight children will grow up to be obese adults. 9 As the population of obese children grows into obese adults, chronic diseases and their associated costs will certainly continue to rise. As the chart below illustrates, childhood overweight and obesity rates in Brazil, the US, China and Japan have increased dramatically within one to two generations (early 1970 s to early 2000 s). In the US, obesity rates among children aged 6 11 reached 19.6% in 2008 and are soon expected to match adult obesity rates. 10 Figure 2: Childhood Overweight and Obesity Rates Sources: International Journal of Pediatric Obesity, NCHS, OECD, IBGE, adapted by SAM 40 % 35 % Obesity prevalence rate for age group indicated 30 % 25 % 20 % 15 % 10 % 5 % 0 % Brazil (10 19) US (12 19) China (6 11) Japan (6 14) France (11 17) Overweight + obese 1970 s Overweight + obese 2000 s Country, age group in parenthesis SAM 2012 9

processed foods, includes more visits to fast food chains, and as a consequence, result in higher fat, salt and sugar intakes. With the various means of mass and individual transportation available in urban centers, people are less physically active. More time spent in front of the television, the computer or video games further accentuates the problem. In some emerging markets, the change from a rural to an urban-based society is happening within one generation, while Western countries experienced this fundamental shift over more than a century. A PUBLIC HEALTH PRIORITY The childhood obesity epidemic is particularly worrisome in the US, where childhood obesity rates have tripled over the last thirty years and approximately one third of all school aged children are either overweight or obese. 11 This has prompted US First Lady Michelle Obama to champion the prevention of childhood obesity as her main public policy priority during her tenure. In early 2010 she launched the high profile Let s Move! campaign, which aims to eliminate childhood obesity within the next generation. This ambitious initiative comprises a series of programs to educate parents, teachers and children on proper nutrition, provide healthier school lunches, improve access to healthy, affordable food, and encourage physical activity among children. In addition to launching a comprehensive informational website, other activities have included partnering with athletes to promote sports and physical activity through a series of public service announcements and appearances. Behind the scenes, Mrs. Obama has lobbied Congress to require schools to provide more nutritious school lunches, has urged food distributors to reduce prices on fruits and vegetables and reduce fat, sugar and sodium content in their store branded food products. Finally, she has worked with nutritionists and the USDA to simplify its dietary guidelines, replacing the old Food Pyramid with a redesigned and more easy to understand MyPlate. 12 Figure 3: MyPlate introduced in 2010 along with USDA s updated Dietary Guidelines for Americans Source: ChooseMyPlate.gov USDA does not endorse any products, services, or organizations. 10 SAM 2012

2 CAUSES OF OBESITY

2. Causes of Obesity Obesity can be attributed to a combination of an unbalanced diet and a lack of physical activity, with genetic factors playing a contributory role. Consumers do seem to be aware of the health benefits of a balanced diet and exercise, as reflected in the popularity of books and magazines offering health and nutritional advice. A 2005 survey by the International Food Information Council found that 89% of US adults indicated that they believe diet, exercise, and physical activity influence health. 13 Despite this awareness, obesity and diet-related illnesses are on the rise. The graph below illustrates the relationship between increased calorie supply per capita, reduced physical activity, rising obesity rates and diabetes. Between 1980 and 2005, average daily caloric intake among US adults increased from 2381 to 2792 (+17%), while lack of physical activity (e.g. sports, walking, gardening) among adults peaked in the late 1980 s with 31% of adults not participating in any form of physical activity during their leisure time. 14 The prevalence of obesity among adults over 20 has risen from 15% in 1980 to 33.8% in 2008 (+125%), 15 16 while the number of US adults diagnosed with diabetes has almost quadrupled over the last thirty years, increasing from 5.5 million in 1980 to 19.6 million in 2009. 17 However, an estimated one third of people living with diabetes have not been diagnosed, suggesting that the total number of Americans suffering from the disease may be as high as 25.8 million. 18 Figure 4: Rising Trends in Calorie Supply, Obesity and Diabetes from 1980 2007 Source: National Center for Health Statistics (NCHS), Centers for Disease Control (CDC), UN FAO Stat, Goldman Sachs, adapted by SAM 260 18 240 16 220 Index (100 = 1980) 200 180 160 140 14 12 10 8 Diabetes cases (mm people) 120 100 80 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 6 4 Obesity Lack of physical activity Calories per day Diabetes (right axis) 12 SAM 2012

2.1 UNBALANCED DIET Unbalanced nutrition is a key contributor to rising obesity rates and other diet-related illnesses, such as diabetes, heart disease, and hypertension. Recent consumption data shows that we eat too much salt, saturated fats, and sugar. 19 On the other hand, we do not eat enough fruit, vegetables and fiber. Although many people intend to change their daily diet, they are failing to choose healthier food options despite dietary recommendations by the WHO or adapted national standards such as those from the US Department of Health and Human Services. Thanks to steady increases in disposable income and technological advances in food processing, people can afford to buy more processed food products, which are less substantial and more fattening than fresh food because they contain less water and fiber, but more added fat and sugar than fresh food. Furthermore, bigger portion sizes have also contributed to the increase of per capital calorie intake. As illustrated below, between the 1970 and 2007, China experienced an increase in the available fat grams per capita of 274% compared to an increase of 34% in the US during the same time period. Although these figures represent avail - able fat supply rather than actual per capita intake, they serve as an indicator of available food, and reflect the rapid change in eating habits that can be observed in emerging markets (see 1.2). Figure 5: Increases in Fat Content in Nutrition since 1970 Source: UN FAO STAT, adapted by SAM 180 160 +34% +33% Fat supply (grams per capita per day) 140 120 100 80 60 +274% +133% +22% +19% +48% 40 20 0 China Brazil US Europe North America Africa World 1970 2007 SAM 2012 13

THE PARENTAL CHALLENGE: THE FOOD SHOPPING PARADOX When analyzing rising obesity rates and consumption patterns compared to the nutritional recommendations accepted by the scientific community, an obvious consumer paradox emerges. Because food consumption patterns are often emotionally and culturally driven, diet and the related food purchasing decisions cannot be clearly explained by economic models. Two different qualitative studies 20 in the UK and Australia have explored the apparent paradox between nutritional knowledge of parents of pre-school children and their actual food purchasing and preparation behavior. The results show that respondents were aware of the nutritional implications of providing their children healthy and unhealthy food, as well as what represents these two categories of food. A shortage of time emerged as an important factor contributing to the purchase and preparation of unhealthy food. However, both studies suggest that parental actions are influenced by factors other than just a perceived lack of time. More importantly, the desire to minimize stress and conflict with children, both in the supermarket and at mealtimes, was a driving factor for purchasing unhealthy but popular food for their children. Thus parents often struggle to balance the need to feed their children healthy meals ( good parenting ) with their desire to enjoy stress-free quality time with the family. A decline in regular physical activity and an increasingly sedentary lifestyle are important contributors to the onset of obesity. 2.2 LACK OF PHYSICAL ACTIVITY Obesity results from an imbalance between the amount of energy consumed and the amount of energy used. A decline in regular physical activity and an increasingly sedentary lifestyle are important contributors to the onset of obesity. 21 This again is linked to the widespread and frequent use of private cars, computers, the Internet and, of course, television. Physical activity levels in the US over the last few years have been slightly increasing, aided by the launch of several US government campaigns and millions of dollars spent on fighting obesity. Nevertheless, the US is still falling short of its targeted activity level. The last few years have witnessed an explosion of technological advances in televisions, home entertainment centers, computers and video games. A new report released in 2010 22 found that nearly two-thirds of children aged 8 18 say the TV is usually on during meals, and nearly half report that TV is left on most of the time in their home. Seven out of ten young people have a TV in their bedroom and 50% also have a console video game player in their room. Overall, 8 18 year-olds spend over 7 hours per day using entertainment media (TV, video games, computers) amounting to more than 53 hours a week. 14 SAM 2012

The number of hours that adults, teenagers, and children spend in front of a television or computer screen reflects their sedentary lifestyle and increases their risk for developing obesity. Further, time in front of the television is often accompanied by mindless snacking on unhealthy, high calorie foods that are heavily advertised to both adults and children. were confirmed by a longitudinal study conducted at the University of Otago in New Zealand. It looked at the amount of time children spent watching television when they were between five and fifteen, and the risk of developing obesity. The study found that the 41% who were overweight or obese by the age of 26 were those who had watched the most TV during childhood. Numerous activity surveys have been conducted on children. The first major evidence that children s media consumption may be related to their body weight emerged in 1985. An analysis of data from a national study of more than 13,000 children in the US, the National Health Exami nation Survey (NHES), found a significant correlation between the amount of time children spent watching television and the prevalence of obesity. 23 These results A survey in the US shows that the major barrier for participation in physical activity for young children between the ages of nine and thirteen is cost, cited by 47% of parents (see below). This was followed by transportation problems and lack of parents time. The expense factor, clearly a problem for lower- income households, seems to explain the higher obesity rates among these socio-economic classes. 24 Figure 6: Barriers to Children s Participation in Physical Activity Source: Youth Media Campaign Longitudinal Survey, United States, 2002; Percentage of parents of children aged 9 13 years who reported barriers to their children s participation in physical activities Expense 47% Transportation Problems 26% Lack of Parents Time Lack of Opportunities in Area 21% 20% Lack of Neighborhood Safety 16% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% SAM 2012 15

Genome-wide studies have identified 19 genes associated with obesity so far. 2.3 GENETIC CAUSES Although environmental factors such as sedentary lifestyles and changing eating habits have driven recent increases in obesity prevalence rates, numerous scientific studies have also shown evidence of a significant genetic component contributing to the development of obesity. According to recent studies, genetic factors are estimated to account for 40 90% of the population s variation in BMI. 25 26 27 28 In 2007 the fat mass and obesityassociated (FTO) gene, which became the first gene to be reproducibly associated with BMI 29, was discovered. Successive genome-wide studies have identified 19 genes associated with obesity so far. 30 Our genetic make up has evolved over tens of thousands of years. Our ancestors were hunters and gatherers and because they led a physically active life, they were lean and muscular. Their diet was rich in fiber and low in saturated fats. The irregularity of their food supply and their huge demand for calories drove the selection of genetic traits that promote weight gain during famines by maximizing the storage of fat and energy. Scientists refer to these genes as thrifty genes. In times of abundance, these genes drive weight gains. 31 Scientific evidence suggests that humans genetic susceptibility to obesity varies according to their racial background. 90% of Africans (and African Americans) and native people in North America have thrifty genes, compared to just 50% of Asians and 20 35% of Europeans. The populations with a high portion of thrifty genes suffer the most from obesity. Scientists have also gathered evidence on the impact of prenatal and neonatal nutrition on the metabolism. Fetal or neonatal growth retardation seems to lead to the development of a thrifty metabolism, which maximizes the extraction and storage of energy and fat. Thus, individuals that had low birth weight or growth retardation during infancy and childhood, and subsequently show catch-up growth have higher risk of developing obesity, type 2 diabetes and cardiovascular diseases later in life. 32 16 SAM 2012

3 IMPACT OF OBESITY

3. Impact of Obesity Globally, more deaths are linked to overweight and obesity than to underweight. 3.1 HEALTH CONSEQUENCES According to the WHO, overweight and obesity are the fifth leading cause of death globally, leading to at least 2.8 million deaths each year. 33 The consequences of obesity surpass those from smoking and drinking and are as severe as the health effects of malnutrition. 34 In fact, globally, more deaths are linked to overweight and obesity than to underweight. 35 Individual optimal caloric intake varies depending on a person s age, weight and daily physical activity. As illustrated in the figure below, outside of this optimal spread, health risks begin to increase. This means that both overweight and underweight persons share a higher risk of developing certain illnesses and disability, shortened life spans and reduced productivity. Type-2 diabetes accounts for 90 95% of all diabetes cases and is strongly associated with obesity, an unbalanced diet, lack of physical activity, and a family history of type-2 diabetes. If it is diagnosed too late or treated inadequately, it can lead to severe complications that predominantly affect the heart (heart attack, chronic heart disease, etc.), kidneys (nephropathy), eyes (proliferative retinopathy, macular edema), nerves (neuropathy) and blood vessels (often leading to amputations of extremities). These are debilitating conditions that require intensive, long-term medical care. There is a large discrepancy in the treatment levels of diabetes between industrialized countries and developing countries. According to the International Diabetes Foundation, high income countries account for 80% of total diabetes care expenditures, but account for less than half of the prevalence. 70% of the current cases of diabetes occur in low-and middle income countries. With an estimated 50.8 million people living with diabetes, India has the world s largest diabetes population, Figure 7: Conditions Related to Under and Over Nutrition Source: Fontana L. et al, JAMA, 2007 Longevity Starvation Infertility Anemia Osteoporosis Hypotension Blood sugar too low Immune dysfunction Diabetes Hypertension Cancer Stroke Inflammation Atherosclerosis Arthritis Kidney diseases Infertility Calorie Intake (Kcal/day) 18 SAM 2012

followed by China, with 43.2 million. Globally, 50% of the costs of treating diabetes, are generated in the United States, where only 8% of the world s diabetic population lives. Hence, the life expectancy of type-2 diabetes patients in emerging and developing markets is shorter, accounting for 80% of all diabetes mortalities. 36 There are several other diseases related to obesity that are not directly linked to diabetes. A study suggests that obese 40-year-old male and female non-smokers in the US can expect their life expectancy to be reduced by about six and eight years respectively. 37 More precisely, studies in the US have shown that a 10% increase in weight cor responds to a 30% increase in the incidence of heart disease, the number one cause of death in the US. 38 Another diet-related disease is cancer. Scientific evidence suggests that about 30 40% of all cancer cases in the world (except for esophageal and prostate cancer) can be attributed to an unhealthy diet (including alcohol consumption) and are associated with obesity. 39 Other research and statistical data indicate that obese people are more prone to developing osteoarthritis and are likely to require knee or hip replacement during the second half of their lives. 40 Scientific evidence suggests that about 30 40% of all cancer cases in the world can be attributed to an unhealthy diet. THE DIABETES EPIDEMIC IN INDIA In India, approximately 50 million adults, representing about 7.1% of the adult population, are suffering from diabetes. 41 Strikingly, Indians are developing the disease approximately ten years earlier at an average age of 42 and at lower BMI levels than their European counterparts. 42 As Indians benefit from their country s recent economic growth, move to cities, enjoy higher incomes and gain access to larger quantities of energy-dense foods, their metabolisms cannot cope with the sudden increase in calorie consumption that accompanies increased affluence. In a perverse twist of medical fate, the very mechanism that helped them survive poverty and malnutrition as children is contributing to the early onset of diabetes later in their lives. SAM 2012 19

US healthcare costs related to obesity are predicted to reach USD 699 785 billion by 2030. 3.2 HEALTHCARE EXPENDITURES Overweight, obesity and associated health problems impose a significant cost burden on society. This ranges from direct costs (prevention, diagnosis and treatment) to indirect costs (income lost from decreased productivity, restricted activity, absenteeism, and extra hospital bed days) and mortality (value of future income lost due to premature death). The costs of treating obesity are expected to grow exponentially. In the US alone, in 1995, obesity had an estimated impact on US healthcare spending of USD 51.6 billion in direct costs and USD 47.6 billion in indirect costs. 43 In 1998, costs related directly to obesity amounted to USD 74 billion or 6.5% of total US healthcare expenditures, while in 2008, these were estimated to have risen to USD 147 billion, or 9.1% of total healthcare expenditures. 44 Healthcare costs related to obesity are predicted to reach USD 699 785 billion by 2030, assuming that the prevalence of obesity will increase at similar rates as in the past three decades. 45 In the EU, the latest figures indicate that healthcare-related obesity costs are currently around 2 8% of total healthcare spending. 46 However, these figures underestimate the real impact of obesity on healthcare costs, as indirect costs such as disability, reduced productivity, missed days of work, and premature death are not included. At the individual level, the costs of obesity are also high. In the US, the medical costs for an obese person are 42% higher than for a person of normal weight, 47 and health insurance for obese people can be two to four times higher than for non-obese people. 48 There are additional discriminating factors for obese people that generate costs. Studies in the US show that obese students find it harder to get into top colleges and that the obese (particularly white, obese women) earn significantly lower wages than non-obese people. The reasons for this discrimination might be that employers fear higher health insurance costs, or the prejudiced view that obese people are lazy and weakwilled. 20 SAM 2012

4 INVESTMENT OPPORTUNITIES

4. Investment Opportunities Organic products: these must meet specified production standards, which impose different growing and processing conditions than conventional agricultural and food safety requirements, e.g. no GMOs, no antibiotics, no growth hormones. Natural products: these are foods that do not contain artificial ingredients and are minimally processed. They are usually more nutritious than refined foods. Governments, businesses, schools, communities and families have taken initiatives to raise the level of public awareness of obesity and its consequences. Despite such obesity prevention efforts, current rates are not expected to decline. Based on this assumption, obesity mitigation and adaptation through healthcare measures will also be required to complement efforts to prevent obesity. Innovative solutions are required and create opportunities for agribusiness companies, food & beverage producers, food & drug retailers and fitness & healthcare companies that can provide them. Private companies in these sectors will play a crucial role in the promotion of health, nutrition and activity. SAM has developed an investment approach to identifying companies in the areas of Nutrition, Activity and Healthcare that are actively tackling the obesity epidemic. Companies that offer products, technologies and services that either help prevent obesity, or help mitigate and adapt to obesity-related chronic diseases are poised to benefit from these market opportunities while contributing to consumers and patients wellbeing. 4.1 NUTRITION Poor diet and eating habits have contributed to the global obesity epidemic. With obesity rates continuing to rise and increasing health awareness among consumers, eating patterns are shifting toward health and wellness categories. SAM has identified investment opportunities within the nutrition cluster. Table 1: Nutrition Source: SAM Investment Category Subcategory 2009 Market Size CAGR in % (USD billion) (next 3 years) Organic and Natural Food Organic Products & Naturally Healthy Products 76 5 10 Healthier Nutrition Fortified/Functional Food Products 29 5 7 Healthier Food Products 113 5 8 Weight-Control Food Products 60 3 6 Organic and Natural Food The desire for a healthier lifestyle has helped drive sales of natural products, including natural and organic foods, to USD 76 billion in 2009. 49 The natural and organic food sector focuses on health and well-being, which has resulted in high growth rates for the industry. As the population continues to become increasingly aware of the important i mpact that food and nutrition have on health, natural/organic food consumption should continue to expand and become more mainstream. Leading the broader natural products category is organic foods. The global market for organic foods 22 SAM 2012

was estimated at USD 55 billion in 2009, more than double the level in 2000. 50 The US is the largest market for organic foods, followed by Europe. Combined, these two regions make up over 90% of the global market. In the US, organic food sales increased 7.7% to USD 26.7 billion in 2010. 51 However, organic food still only represented approximately 4% of the US food industry, which implies further growth opportunities for suppliers, retailers and manufacturers. Recently, food retailers have responded to consumer demand by dedicating more shelf space to natural and organic products and launching private label products. With rising obesity rates, the outlook for natural and organic foods remains strong. Annual growth for natural and organic food and beverages over the next several years is expected to range between 5 10%. 52 Health/nutrition, food safety and the environment are among the top drivers of organic food purchases. Healthier Nutrition The healthier nutrition sector includes fortified/ functional foods, healthier foods and weight-control products. The main drivers are health/nutrition, convenience and taste. Attractive opportunities exist for small and mid-cap food & beverage producers with a focused business model and innovative products in new niches in the nutrition & health segments. Several multinational companies with a superior health & nutrition portfolio are also well-positioned to benefit from strong consumer demand. Fortified/Functional Food Products: As the population tries to improve its health, functional foods have played a bigger role in diets. This category of food products allows consumers to target specific conditions. With health problems like obesity, diabetes, high blood pressure and digestive disorders on the rise, food manufacturers have been taking incremental steps to design foods that can help reduce the risk of these diseases. Popular supplements include calcium, vitamin D, fiber, omega-3 DHA fatty acids and probiotics, as well as herbal supplements like ginseng. The addition of functional ingredients has been particularly strong in sectors such as beverages, cereals and baby food. Companies are compensated for their increased R&D spending, as consumers are generally willing to pay a premium for value-added products with proven health benefits. The functional food category also benefits from widespread distribution into mass market channels. Healthier Food Products: The healthier versions of packaged food products have grown 6% annually, compared to total packaged food growth of 3% in the past years, and account for 29% of total packaged foods. 53 Leading packaged food companies have established healthy individual products or brands that feature reduced salt, sugar, and/or fat without compromising taste. Today, the healthier food category is the largest nutrition & health segment, worth more than USD 110 billion. Weight-Control Food Products: Weight-control food products and services can, in combination with education and fitness programs, help overweight and obese people. Every third person in the US goes on a diet at least once a year. The market is expected to grow in the low to mid single digits over the next few years 54 and can vary significantly by distribution channel. Fortified/Functional food products: processed foods that claim to have a health-promoting and/or disease-preventing property beyond the basic nutritional function of supplying nutrients. Healthier food products: processed food products improved by R&D innovation/renovation for example in terms of reduced salt, sugar, and fat content. Weight-control food products: include meal replacements, meal and dietary supplements and commercial weight control programs. SAM 2012 23

4.2 ACTIVITY Lack of physical activity is an important contributor to obesity. Despite some initiatives by governments and organizations, the situation has not improved over the years. As the cost of obesity is substantial, it is inevitable that efforts will be stepped up to encourage increased levels of activity. Table 2: Activity Source: SAM Investment Category Subcategory 2009 Market Size CAGR in % (USD billion) (next 3 years) Activity Equipment Athletic Footwear 33 6 8 Active Wear 61 4 6 Sports Equipment 55 4 6 Activity Services Fitness Centers 70 6 8 Other Sports Centers NA 4 6 Activity Equipment Manufacturers and retailers of activity equipment benefit from the expected above average growth in physical activity. Branding and technological innovation are key elements that enable companies to expand and maintain their pricing power. Fashion also plays a major role in the choice of apparel, even if the products have been designed to be functional. Modern sportswear and athletic footwear is often worn outside the gym, with new moisture-wicking fabrics and materials being incorporated into fashionable products. The fitness equipment category also contains software-based fitness platforms enabling people to exercise in their living room in front of a television or computer screen. With more children growing up dancing, playing tennis and golf on such devices, there is a possibility that young people will choose to exercise at home instead of venturing outside. Activity services will continue to benefit from governments and corporations vested interest in curbing rising medical, insurance and other costs such as reduced productivity associated with obesity. Prevention-focused initiatives include employersubsidized sports club memberships to motivate participants and employees to stay fit. The fitness center industry, worth approximately USD 70 billion, is relatively young and fragmented. In the US alone, there are close to 38,000 fitness clubs. Market penetration is still very low, with 20% in the US, and far below 10% in Europe and Asia. 55 Since many clubs are independently owned and operated, there is a vast difference in facility conditions. Fitness club chains are generally thought to offer distinct advantages over independent clubs because they can offer the benefit of multi-club use to members. They can also capitalize on their brand equity, have easier access to capital, stronger purchasing power and the ability to invest in modern equipment and IT. All this contributes to their ability to gain greater market share and achieve doubledigit growth rates. Activity Services Some clubs offer much more than just a place to work out and include facilities such as climbing walls, basketball/volleyball courts, indoor and outdoor resort-style swimming pools, as well as child care centers. 24 SAM 2012

4.3 HEALTHCARE Obesity prevalence rates will continue to rise despite initiatives and regulations to combat obesity. Hence, healthcare companies that tackle obesity and obesity co-morbidities will benefit from this trend. The primary focus will be on the mitigation of obesity through weight management and on adaptation, by providing healthcare solutions for diet-related disorders. Table 3: Healthcare Source: SAM Investment Category Subcategory 2009 Market Size CAGR in % (USD billion) (next 3 years) Weight management Pharmaceutical Therapy 0.7 30* Interventional Therapy 1.5 7 Diet-related disorders Diabetes Care 100** 5 10 * for new obesity drugs ** estimates from 2010 Other Diet Related Disorders >100** 5 8 Weight Management Weight management through therapeutics is potentially a vast market, as a safe and effective anti-obesity pill would offer the most convenient solution to reduce weight. The market has not achieved its full potential so far, as products that reached the market have been withdrawn due to safety concerns and unfavorable risk/benefit profiles. After the withdrawal of Acomplia in 2009 and Meridia in 2010 due to serious side effects, Xenical (Orlistat) is the only long-term anti- obesity treatment still available on the market. In 2009 obesity drugs had sales of only around USD 700 million, and are forecast to decrease to USD 375 million by 2014, as Xenical lost patent protection in 2009 and is now also available as an over- thecounter (OTC) version. Still, a drug with improved efficacy (>10% weight reduction), long-term safety, and fewer addictive side effects could generate sales of several billion dollars. 56 Despite recent setbacks, several drugs that could eventually reach the market are currently in clinical development. Surgical procedures are becoming more popular and represent an effective treatment option for severely obese people with a BMI of above 40, or obese persons with co-morbidities. Bariatric interventions include gastric bypass, vertical banded gastroplasty and gastric banding. A recent study by the United Kingdom National Bariatric Surgery Registry revealed that gastric surgery reduced comorbidities and, most remarkably, the number of patients with type 2 diabetes by 85.5% two years after bariatric surgery. 57 However, given the risks inherent to surgery, these procedures are usually a last resort if other less intrusive methods have failed. SAM 2012 25

Sales of diabetes drugs accounted for about USD 35 billion worldwide in 2010 63 and sales will continue to grow at approximately 9% annually until 2015. Diet-Related Disorders Diet-related disorders range from diabetes and diabetes-associated morbidities to other diseases such as cancer and osteoarthritis. The WHO estimates that 44% of the diabetes burden, 23% of the ischemic heart disease burden and between 7% and 41% of certain cancer burdens can be attributed to overweight and obesity. 58 For a detailed overview please see chapter 3.1. Diabetes Care The global prevalence of diabetes has more than doubled over the last three decades and is forecast to increase from 6.6% in 2010 to 7.8% in 2030, an 18% relative increase. 59 The International Diabetes Federation predicts the number of sufferers globally will increase by over 50% in the next 20 years, from 285 million currently to 438 million by 2030. 60 Moreover, a recent study published in The Lancet estimated even higher projected numbers (472 million) for 2030, of which almost 80% will be in low-income and middle-income countries. 61 Global expenditures on diabetes represented 11.6% of total healthcare spending in 2010 and are expected to grow by 30 34% by 2030. 62 Sales of diabetes drugs accounted for about USD 35 billion worldwide in 2010 63 and sales will continue to grow at approximately 9% annually until 2015, outpacing the general pharmaceutical industry. 64 Innovation will continue to drive the market. Improved diabetes drugs such as new therapeutic proteins that provide regenerative effects and contribute to weight loss are being developed. Pharmaceutical and biotech companies hope to improve drug compliance by offering new insulin delivery technologies such as inhalers, transdermal patches and minimally invasive pumps. Price-sensitive demand from emerging markets will be another driver. The global treatment costs of diabetes-related complications amounted to more than USD 70 billion in 2010. The market will continue to grow at around 6 8% per annum in the foreseeable future, driven by demand from emerging markets. As most of the treatments can only mitigate the complications, innovative treatments with improved efficacy will drive the market. For healthcare service providers such as hospitals and dialysis centers, cost-effectiveness will be a crucial success factor. Other Diet-Related Disorders: Certain cancers, such as intestinal, gastric and liver cancer are linked to diet and obesity. Worldwide cancer drug sales reached an estimated USD 57 billion in 2010 and the market is expected to grow at 5 8% p.a. over the next few years. 65 The trend towards personalized and combination therapies will continue. Additional drugs that target specific genetic mutations will enter the market and will be combined with drugs that act as backbone therapy. In addition to more targeted therapies, molecular diagnostics tests, which enable early detection and characterization of cancer will continue to gain traction. These tests are also increasingly gaining importance in the prediction and monitoring of the effectiveness of therapeutic options. Orthopedic companies specializing in knee and hip replacement products will benefit from the overall increase of obesity prevalence. Success factors will be the durability and security of the devices and ease-of-use for surgeons. In addition, medtech companies developing special footwear and transport systems (e.g. electronic carts) will also help to reduce the weight burden on knees and hips. 26 SAM 2012

5 CONCLUSIONS

5. Conclusions Obesity is a ticking time bomb that poses a serious threat to global health and healthcare systems as well as economic productivity. Despite renewed efforts to prevent obesity, current prevalence rates will continue to rise, leading to an exacerbation of obesity-related morbidities such as diabetes, heart disease and stroke, and ultimately, to an increase of the associated healthcare costs to unsustainable levels. Childhood obesity is a harsh reality. Obese children are more likely to remain obese as adults and have a high risk of developing weight-related diseases earlier in life. Type-2 diabetes, once believed to affect only adults, is increasingly being diagnosed among young people. In emerging markets, the change from a rural to an urban lifestyle is also contributing to growing obesity rates, burdening these regions with a future health problem that remains underestimated today, particularly in terms of its economic impact. SAM has developed an investment approach that captures investment opportunities among companies providing solutions to the obesity problem in the investment clusters Nutrition, Activity and Healthcare. These companies are expected to benefit from the strong demand for prevention and mitigation or adaptation to the health consequences of obesity. Solutions in the fight against obesity include a healthy diet, consumer products that provide healthier lifestyle choices and services that prolong and improve patients lives. 28 SAM 2012

Bibliography 1 World Health Organization, Obesity: preventing and managing the global epidemic. Report of a WHO Consultation. Geneva, Switzerland: World Health Organization (WHO), 2000. (WHO technical report series 894) 2 World Health Organization, Obesity Facts, http://www.who.int/mediacentre/factsheets/fs311/en/ 3 Wang, Youfa, et al, Will all Americans become overweight or obese? 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United States Government Accountability Office, Subject: Childhood Obesity: Factors Affecting Physical Activity, December 6, 2006. Behavioral Determinants of Childhood Obesity, James O. Hill, Ph.D., Director, Center for Human Nutrition, University of Colorado Health Science Center, Denver, Colorado. 22 Generation M2 Media in the Lives of 8- to 18-Year Olds; A Kaiser Family Foundation Study, January 2010 23 Dietz, W. and Gortmaker, S., TV or not TV: Fat is the Question, Pediatrics, 91: 499 500, 1993 24 Centers for Disease Control and Prevention; Physical Activity Level Among Children Aged 9 13 Years, United States, 2002 Morbidity and Mortality Weekly Report, August 22, 2003 25 Fawcett, K. A, and I. Barroso, The genetics of obesity: FTO leads the way (2010). Trends Genet. 26: 266 274 26 Hjelmborg, J.B. Genetic influences on growth traits of BMI: a longitudinal study of adult twins. (2008) Obesity 16:847 852 27 Maes, H.H. Genetic and environmental factors in relative body weight and human adiposity (1997) Behav. Genet. 27: 325 351 28 Wardle J. Evidence for a strong genetic influence on childhood adiposity despite the force of the obesogenic environment (2008) Am. J. Clin. Nutr.; 87: 398 404 29 Fawcett, K. A, and I. Barroso, The genetics of obesity: FTO leads the way (2010). Trends Genet. 26: 266 274 30 Vimaleswaran, K. S., and R. J. F. Loos. Progress in the genetics of common obesity and type 2 diabetes. (2010) Expert Reviewes in Molecular Medicine 12: e7 31 Walley, A.J, J.E. Asher and P. Froguel. The genetic contribution to non-syndromic human obesity. (2009) Nature Reviews: Genetics 10: 431 441 32 Dulloo, A. G., J. Jacquet, J. Seydoux and J.-P. Montani, The thrifty catch-up fat phenotype: its impact on insulin sensitivity during growth trajectories to obesity and metabolic syndrome International Journal of Obesity (2006) 30: 23 35 33 WHO Obesity website http://www.who.int/mediacentre/factsheets/fs311/en/index.html 34 WHO Obesity website http://www.who.int/mediacentre/factsheets/fs311/en/index.html 35 WHO Obesity website http://www.who.int/mediacentre/factsheets/fs311/en/index.html 36 International Diabetes Foundation 37 Peeters, A., et al, Annals of internal Medicine, Vol. 138 (1), January 2003 38 Eng, E., Too big to ignore: the impact of obesity on mortality trends 39 Popkin, B., Nature Cancer, Vol. 7, January 2007 40 A. Amin et al, Current Orthopaedics, 2006 41 Gale, Jason, India s diabetes epidemic cuts down millions who escape poverty Bloomberg Markets Magazine, November 7, 2010 42 Gale, Jason, India s diabetes epidemic cuts down millions who escape poverty Bloomberg Markets Magazine, November 7, 2010 43 Wolf, A. M., G.A. Colditz. Current estimates of the economic cost of obesity in the United States. Obesity Research 1998 6: 97 106 44 Finkelstein, E. A., J. G. Trogdon, J. W. Cohen, and W. Dietz. Annual medical spending attributable to obesity: Payer and service-specific estimates Health Affairs 2009, 28: 822 831 45 Wang, Youfa, et al, Will all Americans become overweight or obese? Estimating the progression and cost of the U.S. obesity epidemic Obesity, Volume 16 Number 10, October 2008, pp 2323 2330, Nature Publishing Group 46 European Commission, Green Paper: Promoting healthy diets and physical activity: a European dimension for the prevention of overweight, obesity and chronic diseases, December 2006 47 Wolf, A. M., G.A. Colditz. Current estimates of the economic cost of obesity in the United States Obesity Research 1998 6: 97 106 48 Darlin, Damon, Extra Weight, Higher Costs, New York Times, December 2, 2006 49 Whole Foods Market 2010 10K 50 Organic Monitor 51 Organic Trade Association 52 SAM estimates 53 Sanford Bernstein 54 SAM estimates SAM 2012 29

55 IHRSA International Health, Racquet & Sportsclub Association 56 Spotlight on Obesity: A pharma matters report. 2010 57 R. Welbourn, and A. Fiennes. The United Kingdom National Bariatric Surgery Registry. First Registry Report to March 2010 58 WHO Obesity website http://www.who.int/mediacentre/factsheets/fs311/en/index.html 59 Diabetes Atlas Fourth Edition 2010 60 Diabetes Atlas Fourth Edition 2010 61 Danaei, G., M. M. Finucane, Y. Lu, et al. National, regional, and global trends in fasting plasma glucose and diabetes prevalence since 1980: Systematic analysis of health examination surveys and epidemiological studies with 370 county-years and 2.7 million participants The Lancet 2011; 378: 31 40 62 Diabetes Atlas Fourth Edition 2010 63 IMS 2011: The Global Use of Medicines: Outlook Through 2015 64 EvaluatePharma, 2011, Novo Nordisk. 65 IMS 2011: The Global Use of Medicines: Outlook Through 2015 30 SAM 2012

HEALTHY LIVING INVESTMENT TEAM

Healthy Living Investment Team PORTFOLIO MANAGEMENT Martin Jochum Senior Portfolio Manager Dieter Küffer Senior Portfolio Manager ANALYSTS Gabriela Grab Hartmann Senior Analyst, Deputy Head of Research Diederik Basch, CFA Senior Analyst Giorgia Valsesia, PhD Analyst 32 SAM 2012

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