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Sustainable Investment Spotlight_Overweight And Diabetes, a Global Epidemic


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Sustainable Investment Spotlight_Overweight And Diabetes, a Global Epidemic

  1. 1. 1 | Sustainable Investment Spotlight – Sustainable Investment Research, Bank J. Safra Sarasin Overweight and diabetes – a global epidemic • Rates of overweight and obese people are increasing worldwide and have reached epi- demic scale. • Obesity and diabetes engender very high costs and burden for society. • At the same time, they offer opportunities for innovative pharmaceutical, medical technology and food companies. • As a sustainable investor Bank J. Safra Sarasin is harnessing these opportunities to the benefit of clients, while contributing to enhance health in society. Sustainable Investment Spotlight Sustainable Investment Research, Bank J. Safra Sarasin November 2016 Overweight, a big challenge to society Overweight seems to be relentlessly growing trend, as its global prevalence has steadily risen over the last 30 years. This evolution has been observed in both developed and developing economies, creating a truly glob- al challenge. As a result, more than 2 billion people are overweight or obese today. From direct health consequences and asso- ciated costs to hundreds of billions in lost productivity, the overweight epidemic has major consequences for society. It is no wonder that combatting obesity has emerged as one of the nine goals set forth by the World Health Assembly in 2013. Solutions and opportunities to address obesity and related diabetes According to the World Health Organization (WHO), obesity is a major cause of diabe- tes. The incidence of both conditions has indeed grown in parallel and reached un- precedented levels year after year (Chart 1). In Mexico, for example, around 70% of adults are overweight or obese, while the country features the highest prevalence of diabetes among OECD countries. The treatment of diabetes, and more widely of obesity, engenders tremendous costs, both directly and indirectly (Chart 2). In the US, direct and indirect costs associated with diabetes amount to over USD 170bn every year, accounting for c. 10% of total healthcare spending. This makes diabetes one of the most costly diseases, but also represents an attractive market for pharma- ceutical and medical technology companies. For investors, this means that opportunities exist to contribute to tackling the global overweight challenge while benefiting from related commercial developments. Rapid growth of the diabetes drug market The global market for diabetes drugs amounts to USD 60bn and has grown at 15% p.a. in the last 10 years (Chart 3). In addition to the sheer size of the patient population and its long term growth, the chronic nature of diabetes requiring treat- ment for life and the health economic argu- ment for intense treatment both enhance the appeal of the diabetes market. Chart 1: Growth of overweight and obesity vs diabetes in the global population Source: WHO, IHME, Bank J. Safra Sarasin, 2016 Chart 2: Share of health care costs associ- ated with diabetes in the US Source: American Diabetes Association, 2013 Contacts Chi Tran-Brändli Sustainable Investment Analyst MedTech David Kägi Sustainable Investment Analyst Pharma and Biotech Guillaume Krepper Sustainable Investment Analyst ESG
  2. 2. 2 | Sustainable Investment Spotlight – Sustainable Investment Research, Bank J. Safra Sarasin Chart 3: The global market for diabetes drugs by treatment class (USD bn) Source: Novo Nordisk, IMS, Bank J. Safra Sarasin, 2016 Drug treatments for obesity and diabetes The options to treat obesity with drugs are very limited. Due to mediocre efficacy, sig- nificant safety risks and some rather spec- tacular failures in the past, this market has stayed quite small. While losing weight through diet and exercise is usually encour- aged as a first step of type 2 diabetes ther- apy, this has a negligibly low sustainable success rate. Thus most patients are treat- ed with one or several of the many effective drugs, which have become available since insulin was discovered in the 1920s. Treat- ment has become more intense over the years, as it was realized that tight control of blood sugar is crucial to avoid the severe and costly complications of diabetes, which include heart attacks, strokes, limb amputa- tions, blindness and kidney failure. Definition of Diabetes Diabetes is a chronic condition that occurs when blood sugar rises to high uncontrolled levels due to either an inability to produce enough insulin (type 1 diabetes) or due to the body becoming unresponsive to insulin (type 2 diabetes). Type 2 diabetes is strong- ly associated with obesity. Treatment of type 2 diabetes usually starts with Metformin, an effective and safe drug that is available as an inexpensive generic. It acts by reducing the production of glucose in the liver. Over time, most patients will have to add additional drugs such as sul- phonylureas, DPP-4 inhibitors or SGLT-2 in- hibitors, in order to continue to control their blood glucose level. The former two stimu- late the release of insulin from the pancre- as, while the latter increases the excretion of glucose via the kidneys. Eventually, many patients have to add injected drugs to their treatments, most often in the form of long acting insulin or GLP-1. An intense treat- ment plan would also require the injection of short-acting insulin at mealtime. As insulins are the eminent cornerstone of diabetes treatment, it should not surprise that the companies that dominate the insu- lin category are those with the highest 2015 share in the diabetes drug market: Novo Nordisk at 27% is leading, followed by Sano- fi with 20% and Eli Lilly with 15%. New drugs are changing diabetes treat- ment In the last few years, two new classes have been added to the armatorium against dia- betes. Both are rapidly gaining in im- portance, because, in each class, a repre- sentative drug has been shown to reduce cardiovascular disease. This is a much de- sired effect of a diabetes drug, given that cardiovascular disease is the main culprit for the shortened life expectancy of diabet- ics. The first class are the SGLT-2 inhibitors, which lead to modest weight loss and lower blood pressure. Both of these effects may play a role in reducing cardiovascular risk. The drug with the best clinical data in this class is Jardiance from Eli Lilly. The second class comprises the GLP-1 ana- logues. They are derived from the natural hormone incretin, which stimulates the re- lease of insulin after a meal. In contrast to insulin, their risk to lower blood glucose be- low critical levels is small and they also help to lose body weight by promoting the feeling of satiety. Some of the newer GLP-1 ana- logues have to be injected only once a week, which has added to their success. Combinations of GLP-1 analogues with basal insulin are about to arrive to markets this year and have a good chance to become an important new treatment modality. Opportunities for growth in emerging mar- kets Globally, the majority of diabetes cases are in developing countries (Chart 4). Of the 415m of diabetics worldwide, China and In- dia alone account for 110m and 69m, re- spectively, with numbers expected to in- crease steeply in the next 20 years. De- mand for drugs in those markets will in- crease even more by the still very low percentage of patients, who are getting treatment at all today. Novo Nordisk esti- mates that in China, only 37% of diabetics are diagnosed, only 23% are treated and on- ly 10% achieve adequate blood sugar con- trol. For multinational pharma companies, the diabetes drugs market in some emerging markets, particularly China, has grown re- markably fast in the past. The products sold there were mostly relatively inexpensive oral drugs and human insulins. Recently, the competition from local players in those ma- ture drug classes has become much strong- er, with the effect that multinational compa- nies such as Novo Nordisk have seen their growth rates moderate. It is becoming clear, that going forward multinational companies will have to adapt their portfolio in emerging markets to demands of the emerging middle classes, which will increasingly afford more modern and effective diabetes treatments. Chart 4: Prevalence of overweight and obesity (% of total adult population) Source: WHO, IHME, Bank J. Safra Sarasin, 20166 Advances in Medical Devices Insulin use has traditionally involved taking measurements of blood glucose level with blood drawn through a finger prick and injec- tions of insulin several times a day. Medical devices aim to make the use and proper management of insulin more hassle-free. The two main areas of innovation involve in- sulin pumps and continuous glucose moni- toring (CGM) devices. An insulin pump provides the diabetic pa- tient with rapid or short-acting insulin con- tinuously. A bolus of insulin could also be delivered at mealtime by the pressing of a button by patients. This device frees pa- tients of the hassle of carrying around an insulin pen. The latest types of insulin pumps are disposable, lasting about 3 days, and are discretely thin and are free of tubing to allow the maximum comfort. However, pa- tients still need to track their blood glucose levels separately. Companies involved in the latest insulin pump technologies are Med- tronic, Abbott Laboratories, Roche and Johnson & Johnson. Smaller companies in- clude Insulet, Tandem and Ypsomed. CGM devices are wearable and track glu- cose level every 30 seconds. The sensors do not test blood but rather the fluid under the skin for glucose. Although CGM has been recommended as appropriate for con- trolling the risk of hypoglycaemia, the U.S. Food and Drug Administration (FDA) only re- cently approved the information given by a
  3. 3. 3 | Sustainable Investment Spotlight – Sustainable Investment Research, Bank J. Safra Sarasin CGM device (from Dexcom) as an appropri- ate basis for the dosing of insulin. This approval opened the way for the crea- tion of the so-called artificial pancreas. This would entail a wearable device that con- nects an insulin pump to a CGM device, al- lowing the pump to automatically inject small amounts of insulin based on the measurements of the CGM device to keep the patient’s insulin level within the desired range. Medtronic recently received approval in the US to commercialize a not fully auto- mated device that represents the first step towards an artificial pancreas. Artificial pancreas Source: Mayo Clinic, 2016 Getting to the roots: more sectors need to contribute If treatment and adaptation in the health care system are necessary to address over- weight and its related costs, fundamental lifestyle and dietary changes are also need- ed to tackle its causes. Here again, compa- nies can be part of the solution. Indeed, the food industry is increasingly seen as having a responsibility to reduce the growth rate of obesity. Recent implementation of sugar taxes in various countries – most recently in the United Kingdom but previously also in France, Hungary and Mexico among others – has created an immediate business risk no- tably for soda makers. Providing healthy low- sugar and low-fat alternatives also represent a lucrative opportunity for the sector. Ac- cording to Euromonitor, a global market in- telligence firm, the healthy food market will indeed reach the $1trillion threshold by 2017 representing nearly a 100% increase in 10 years. Bariatric surgery also treats diabetes It is increasingly recognized that the best and most effective method of treating diabe- tes in obese patients, however, does not in- volve medication but rather surgery. Bari- atric surgery, or metabolic surgery, involves various surgical methods (gastric banding or bypass) to reduce the size of the stomach. It has been seen in the past as a drastic way of treating severe obesity. Chart 5: Diabetes remission rates after bar- iatric surgery vs. after diet and exercise Source: ConscienHealth, Bank J. Safra Sarasin, 2016 However, researchers have demonstrated in numerous studies over the years that, fol- lowing bariatric surgery, not only do patients achieve great weight loss but their diabetes also disappears in most case within a rela- tively short period of time (Chart 5). The preponderance of evidence has there- fore led the American Diabetes Association, along with 44 other medical associations, in April 2016 to recommend bariatric surgery as a treatment for diabetes in obese pa- tients. Thus, it could be expected that healthcare insurers would be in future more willing to finance the costs of bariatric sur- gery, which are currently carried by patients out-of-pocket. Medtronic offers products to facilitate bariatric surgery. Investing in solutions To capture these opportunities in the health care sector and beyond, investors need to identify companies providing relevant prod- ucts and services. At Bank J. Safra Sarasin, this is achieved by analysing industries and companies both from a thematic and sus- tainability perspective through dedicated key issues integrated in issuers’ sustainability rating as well as thematic universes target- ing companies with suitable offerings. Selection of sustainable companies with a strong positioning related to overweight. Source: Bank J. Safra Sarasin, 2016 As a result and to the benefits of our cli- ents, we are able to target companies that are best positioned to thrive along these opportunities while contributing to tackle the global overweight challenge. Bundled payments as cost-control measure With concerns over rising medical costs (with diabetes and other comorbidities of obesity being major contributors), govern- ment payers are increasingly turning to a ‘value based’ or ‘bundled payment’ reim- bursement model for medical products and services. In this model, unlike in the tradi- tional fee-for-service model, providers are paid a predetermined amount of money to care for the totality of a patient’s condition including drugs, medical devices and ser- vices. This approach should align medical providers’ financial interest with the goal of giving patients the best care at the low- est amount of costs. The more efficient a provider (or coordinated group of providers) is able to achieve this goal versus the av- erage of their competitors, the higher their profit would be. The US government has introduced this payment model for the care of certain target groups of patients that engender the highest amount of costs in the medical system. One of these groups is patients with end stage renal disease (ESRD), which is mainly comprised of the sickest diabetes patients. Early studies have shown that savings of at least 10% could easily be expected. The trend to- wards bundled payments has begun to lead to vast changes in the medical pro- viders and services space in the US. Those companies that are investing early to adapt to and capitalize on this trend will be able to survive and thrive best in the fu- ture.
  4. 4. Important legal information This publication has been prepared by the Sustainable Investment Research Department of Bank J. Safra Sarasin Ltd, Switzerland, (hereaf- ter “Bank”) for information purposes only. It is not the result of financial research conducted by the Bank’s CIO private clients research department. Although it may contain quotes of research analysts or quote research publications, this publication cannot be considered as investment research or a research recommendation for regulatory purposes as it does not constitute of substantive research or analysis. Therefore the “Directives on the Independence of Financial Research” of the Swiss Bankers Association do not apply to this document. Any views, opinions and commentaries in this publication (together the “Views”) are the views of the Sustainable Investment Re-search De- partment and may differ from those of the Bank’s research or other departments. The Bank may make in-vestment decisions or take pro- prietary positions that are inconsistent with the Views expressed herein. It may also provide advisory or other services to companies men- tioned in this document resulting in a conflict of interest that could affect the Bank’s objectivity. While the Bank has taken steps to avoid or disclose, respectively, such conflicts, it cannot make any representation in such regard. The Views contained in this document are those of the Sustainable Investment Research Department as per the date of writing and may be subject to change without notice. This publication is based on publicly available information and data (“the Information”). While the Bank makes every effort to use reliable and comprehensive Information, it cannot make any representation that it is actually accurate or com- plete. Possible errors or incompleteness of the Information do not constitute legal grounds (contractual or tacit) for liability, either with re- gard to direct, indirect or consequential damages. In particular, neither the Bank nor its shareholders and employees shall be liable for the Views contained in this document. Sustainability Rating Methodology The environmental, social and governance (ESG) analysis of companies is based on a proprietary assessment methodology developed by the Sustainable Investment Research Department of BJSS. All ratings are conducted by in-house sustainability analysts. The sustainability rating incorporates two dimensions which are combined in the Sarasin Sustainability-Matrix®: - Sector Rating: Comparative assessment of industries based upon their impacts on environment and society. - Company Rating: Comparative assessment of companies within their industry based upon their performance to manage their environ- mental, social and governance risks and opportunities. Investment Universe: Only companies with a sufficiently high Company Rating (shaded area) qualify for Bank J. Safra Sarasin sustainability funds. Key issues When doing a sustainability rating, the analysts in the Sustainable Investment Research Department assess how well companies manage their main stakeholders’ expectations (e.g. employees, suppliers, customers) and how well they manage related general and industry- specific environmental, social and governance risks and opportunities. The company’s management quality with respect to ESG risks and opportunities is compared with its industry peers. Controversial activities (exclusions) Certain business activities which are not deemed to be compatible with sustainable development (e.g. armaments, nuclear power, tobacco, pornography) can lead to the exclusion of companies from the Bank J. Safra Sarasin sustainable investment universe. Data sources The Sustainable Investment Research Department uses a variety of data sources which are publicly available (e.g. company reports, press, in- ternet search) and data/information provided by service providers which are collecting financial, environmental, social, governance and reputa- tional risk data on behalf of the Sustainable Investment Research Department. The entire content of this publication is protected by copyright law (all rights reserved). The use, modification or duplication in whole or part of this document is only permitted for private, non-commercial purposes by the interested party. When doing so, copyright notices and branding must neither be altered nor removed. Any usage over and above this requires the prior written approval of the Bank. The same applies to the circulation of this publication. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data provided and shall have no liability for any damages of any kind relating to such data. © Bank J. Safra Sarasin Ltd 2016 Bank J. Safra Sarasin Ltd Elisabethenstrasse 62 P.O. Box CH -  4002 Basel Tel + 41 (0)58 317 44 44 Fax + 41 (0)58 317 44 00 Printed on 100% recycled paper