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Flagship Report: Toward Transparency
Antibiotics and Animal Health: Value-Chain Implications in the US
Antibiotic resistance a growing concern. The proliferation of antibiotic resistance is primarily attributed to the misuse and overuse of the drugs in human medicine and animal agriculture. With respect to the latter, a confluence of regulatory action and heightened consumer awareness is exerting pressure on livestock producers to reassess their usage of antibiotics. In this report we aim to provide transparency on trends in antibiotic use as well as on other nutritional feed additives.
What’s currently used to maintain animal health and promote growth? Antibiotics are a simple and cost-effective way for meat and poultry producers to increase production and manage animal health. But there are a number of other specialty and nutritional feed additives that are utilized for similar purposes. We review the range of feed additives that are currently used and in development.
Investment implications. In offering a framework for further inquiry, we assess the impact of curbing antibiotic usage in livestock and poultry production across several parts of the animal nutrition value chain.
For animal health companies, we believe regulation in its current form presents limited near-term risk to earnings, though shifting consumer demand and more stringent regulation could have a more significant impact longer term.
Specialty and nutritional feed additives are generally produced by major chemical companies and represent a small portion of overall revenues.
However, for companies with more concentrated exposure, prebiotic and probiotic feed additives appear to offer the greatest growth potential.
From a producer standpoint, poultry processors that are proactive and innovative in reducing antibiotics use are well-positioned to meet consumer-driven demand.
Key public companies highlighted in this report: Animal health – Phibro Animal Health, Zoetis; specialty and nutritional feed additives – BASF, DSM, DuPont, Novozymes; processors – Tyson Foods, Pilgrim's Pride, Sanderson Farms.
Fonterra Co-op. Group Ltd FCG.NZ NZD5.25 Walmart Stores Inc. WMT $64.98
JBS SA JBSS3.SA BRL16.82 Whole Foods Market Inc. WFM $33.92
Kroger Co. KR $37.14 Zoetis Inc. ZTS $43.02
3 Please see important disclosures at the back of this report.
What’s driving the conversation?
Antibiotic resistance is a growing concern
Antibiotic resistance occurs when an antibiotic can no longer effectively control
or kill bacterial growth. Resistant bacteria survive exposure to the antibiotic and
continue to multiply in the body, potentially causing more harm and spreading to
other animals or people.
The phenomenon was first identified in 1940, only 12 years after penicillin, the
first commercialized antibiotic, was discovered1. While the emergence of drug-
resistant bacteria is not a recent phenomenon, public health officials widely
agree it represents a growing health concern worldwide. In the US alone, the
Centers for Disease Control and Prevention (CDC) estimates more than two
million illnesses and 23,000 deaths are caused by antibiotic resistance each year.
Research indicates that multi-resistance, whereby strains of bacteria are
resistant to numerous antibiotics, is on the rise (Figure 1)2. According to the
White House’s recently published National Action Plan for Combating Antibiotic-
Resistant Bacteria, “drug choices for the treatment of many bacterial infections is
becoming increasingly limited, expensive and, in some instances, non-existent.”
Figure 1: Antibiotic resistance of E.coli in the US
Source: Emerging Infectious Diseases Journal, Cornerstone Capital Group
Multi-resistance, whereby strains of bacteria are resistant to numerous antibiotics, is on the rise
4 Please see important disclosures at the back of this report.
The proliferation of antibiotic resistance is primarily attributed to the misuse
and overuse of the drugs in human medicine and animal agriculture. With
respect to the latter, a confluence of regulatory action and heightened consumer
awareness is exerting pressure on livestock producers to reassess how they use
antibiotics.
Increasing regulation
Regulatory action that addresses the use of antibiotics in animal feed has largely
been limited to the developed world, with the most progressive policies enacted
in Europe.
Figure 2: Notable regulation on the use of antibiotics in animal feed
Source: Cornerstone Capital Group
Sweden banned the use of antibiotics for growth promotion and disease
prevention in 1986 and 1988, respectively. Denmark also moved early in phasing
out antibiotics; in 1995 the country banned avoparcin, an antibiotic growth
promoter (AGP), and limited veterinarians’ profit from the sale of antibiotics.
Germany, Switzerland, and the EU followed suit, and by 2006 the EU had
instituted bans on all AGPs (with exemptions in a few member states).
A confluence of regulatory action and heightened consumer awareness is exerting pressure on livestock producers to reassess how they use antibiotics
5 Please see important disclosures at the back of this report.
Relative to their European counterparts, US regulators have taken a gradual and
piecemeal approach to this issue, though the pace and scope of regulation is now
increasing.* Since 2010, the FDA has published annual summary reports of
antimicrobials for animal feed to inform stakeholders about sales and
distribution of such products. In 2013, the FDA released its final Guidance for Industry (GFI 213) and draft Veterinary Feed Directive (VFD), the full
implementation of which will result in a ban on medically-important AGPs in
2016. Importantly, the VFD final rule in 2015 requires a VFD by a licensed
veterinarian for use of VFD-governed drugs, including many medically important
antimicrobial drugs.†
Elsewhere, Taiwan has been phasing out AGPs and requires veterinary
prescription of antibiotics in food-producing animals. Other countries with such
requirements include Brazil, Hong Kong, Japan and Mexico. Notably, large
economies including Australia, Brazil, Canada, mainland China, and Japan have
no formal restrictions on AGPs at the national level.3
Figure 3: Summary of regulatory actions globally
Country National ban on
antibiotic growth promoters National veterinary
prescription requirement
Australia No No
Brazil No Yes
Canada No No
China (Mainland) No No
Denmark Yes Yes
EU Yes Yes†
Germany Yes Yes
Hong Kong No Yes
Japan No Yes
Mexico Yes† Yes
Netherlands†† Yes Yes
Sweden Yes Yes
Taiwan Yes Yes
US In progress* Yes (VFD)
† with exceptions.
†† calculations include Netherlands Antilles.
* Banning medically important AGPs
Source: Globalization and Health, Cornerstone Capital Group
* The USDA and the FDA are primarily responsible for the safety and wholesomeness of the US human food supply. The FDA regulates foods intended for human
consumption and, through the Center for Veterinary Medicine (CVM), regulates the manufacture and distribution of animal drugs that will be given to animals from which human foods are derived.
† A VFD is a written (nonverbal) statement issued by a licensed veterinarian that authorizes the use of a VFD drug or combination VFD drug in or on an animal feed. A VFD is different from a prescription (Rx) but essentially serves the same purpose. For further detail, please see the FDA’s website: http://www.fda.gov/AnimalVeterinary/DevelopmentApprovalProcess/ucm455417.htm
In the US, the pace and scope of antibiotic regulation is increasing
6 Please see important disclosures at the back of this report.
Heightened consumer awareness
Consumer demand for meat and poultry raised without the routine use of
antibiotics is driving change throughout the meat production supply chain.*
According to market research firm IRI, while antibiotic-free (ABF) beef, pork and
chicken account for only about 5% of meat sold in the US, that share is growing
quickly.
Antibiotic-free chicken is of particular focus for two reasons: It’s easier for
suppliers to reduce antibiotics usage in chickens due to their relatively short life
cycle, and US consumers are now eating more chicken than any other meat. IRI
notes that during the 52 weeks ending January 25, 2015, sales of antibiotic-free
chicken increased 25% in dollar terms, representing 11% of overall chicken
sales. They also note that sales of organic chicken, which is, by definition,
antibiotic-free, increased 33% during the same period.4
In addition, various surveys and companies indicate that consumers are
concerned about overuse of antibiotics in agriculture and that they’d be willing to
pay more for antibiotic-free meat and poultry. We recognize that consumers
sometimes say they will pay more for sustainable products but don’t actually do
so. Still, we believe these data points are directionally informative.
Consumers Union, the advocacy arm of Consumer Reports, conducted a
survey in 2012 that found 86% of consumers think meat raised without
antibiotics should be available in their local supermarket. It also found that
61% of consumers would pay an additional 5 cents or more per pound (a
level cited as being attainable based on prior studies), and 37% indicated
they would pay $1.00 or more extra per pound.
Technomic, a research and consulting firm focused on food and food services,
released its 2014 Healthy Eating Consumer Trend Report, which revealed
that more than one-third of consumers said they would pay “significantly
more” or “slightly more” for items that were antibiotic-free (Figure 4).
Cited in an NRDC case study, online grocer FreshDirect says that its overall
meat sales continue to grow despite the meat industry as a whole seeing flat
or declining sales volumes. It attributes this largely to a shift in customer
demand to antibiotic-free and organic meats (Figure 5).
* “Meat raised without the routine use of antibiotics” refers to meat raised entirely without antibiotics as well as meat raised without routine, sub-therapeutic uses
of antibiotics.
Antibiotic-free chicken is of particular focus
7 Please see important disclosures at the back of this report.
Figure 4: Consumers purchase and pay more for food that gives them peace of mind
Numbers to the right of each bar represent the percentage of consumers surveyed who said they would be more likely to purchase food or beverages described by the term on the vertical axis (e.g., preservative-free). The numbers within the bar reflect how much more, if at all, those consumers are willing to pay.
Source: Technomic, Cornerstone Capital Group
Figure 5: FreshDirect is seeing antibiotic-free and organic chicken taking share
Source: NRDC, FreshDirect, Cornerstone Capital Group
11%
10%
9%
8%
10%
9%
7%
10%
6%
10%
26%
27%
27%
21%
24%
20%
22%
19%
17%
21%
39%
38%
38%
44%
36%
38%
36%
33%
39%
28%
76%
75%
74%
73%
70%
67%
65%
62%
62%
59%
Preservative-free
Hormone-free
Antibiotic-free
Having no artificial sweeteners
GMO-free
Natural
Unprocessed
Clean
Real
Organic
I would be more likely to purchase and am willing to pay __ for food or beverage described as ...
Significantly more (5% increase or more) Slightly more (up to a 5% increase) No more
8 Please see important disclosures at the back of this report.
Company announcements
Shifting consumer preferences have been met with a range of responses by
retailers, restaurants and supermarket chains.
In the quick-serve restaurant (QSR) industry, the Pew Trust reports that 22 QSR
chains including McDonald’s, Chipotle and Chick-fil-A have announced policies
intended to reduce the amount of antibiotics used in meat for their menu items5.
An analysis of the antibiotics announcements made by several QSR chains shows
substantial differences, which result in various levels of antibiotic use (Figure 6).
The policy at McDonald’s aligns with the FDA’s new directives, while Chick-fil-A’s
policy exceeds the FDA’s guidelines, banning all antibiotics by 2016.
Quick Serve Companies Meat Antibiotic-free items on menu
Prohibit antibiotic growth promotion
Prohibit use of antibiotics use by humans and animals
No antibiotics to be used in meat production
Carl's Jr. Beef
Chick Fil-A Chicken *
Chipotle Mexican Grill* Chicken, beef, pork **
McDonald's Chicken
Panera Bread Chicken, turkey, ham
Shake Shack Beef
*Antibiotic free by 2016
**Chipotle retains the option to purchase meat from sources where antibiotics have been used on individual, sick animals at times when antibiotic-free meat is not available.
Source: Company announcements, Cornerstone Capital Group
Supermarkets are a major end market for meat and poultry consumption. Some
are concerned that the premium prices required for antibiotic-free meat (due to
higher production costs) create a risk to sales. To this end, various studies have
arrived at conflicting conclusions. A USDA study concluded that eliminating
antibiotics in growth promotion and sub-therapeutic applications in hog
production could increase wholesale meat prices by 2.3%.6 A separate study
presented in the Journal of Agriculture and Applied Economics stated that
production costs for hogs would rise 9% as a result of banning AGPs7.
Antibiotics policies for several major supermarkets include:
Costco –Announced in March 2015 that it would phase out the use of both
medically and non-medically important antibiotics, but did not provide a
timeline for such action.
An analysis of the antibiotics announcements made by several QSR chains shows substantial differences
9 Please see important disclosures at the back of this report.
Kroger – Launched the Simple Truth brand, including an organic line of
chicken, though it has not disclosed a broad antibiotics policy for other meat
sold in stores.
Walmart – Announced in May 2015 a new position on antibiotics use in meat
production that focuses on guidelines set by the American Veterinary Medical
Association and the FDA. The announcement prohibits AGPs but allows
antibiotics to be used for treatment and prevention.8
Whole Foods Market – Meat from any animal that is treated with antibiotics,
even for therapeutic reasons, cannot be sold in its stores.9
What is currently used to maintain animal health and promote growth?
Antibiotics are a simple and cost-effective means for producers to increase
production and manage animal health. But there are a number of other
medicated and nutritional feed additives that are utilized for similar purposes.*
Figure 7 shows the range of feed additives that are currently used and in
development.
Figure 7: Antibiotics and feed additives
Source: Cornerstone Capital Group
* There are other methods of maintaining animal health, e.g. free range, vaccines, and biosecurity, but we focus on antibiotics and feed additives for the purpose
of this report.
10 Please see important disclosures at the back of this report.
There are two primary applications for antibiotics in livestock production:
Growth promotion – The use of low-dose antibiotics in livestock,
particularly in the US, has been noted to increase an animal’s ability to retain
nutrients and develop greater amounts of protein. The move to ban the use of
the antibiotics in growth promotion is based on the fact that broad usage of low doses in livestock promotes optimal conditions for bacteria to develop
antibiotic resistance.10 Additionally, a 2014 study by the USDA determined
that antibiotics used for growth promotion weren’t particularly effective,
accounting for an increase in hog production of less than 2%.11
Therapeutic – The FDA classifies therapeutic use of antibiotics as treatment,
control or prevention of disease. Previous terminology classified
“therapeutic” as the use of prescribed doses of antibiotics to treat clinically ill
animals, and “sub-therapeutic” as the use of lower-than-prescribed doses to
control and prevent disease. Control and prevention applications are
particularly important for livestock production in low-quality environments
such as feedlots and large farms.*
There are also two classifications for antibiotics in livestock production.
Medically important – According to the FDA, the term “medically important
antimicrobial drugs”— sometimes called “human use antibiotics” —
generally refers to antimicrobial drugs that are important for therapeutic use
in humans. The category contains common drugs like tetracycline and
penicillin, and others more critical to human medicine, such as cephalosporin
and fluoroquinolones.
Non-medically important – The remaining antimicrobial drugs are not
currently deemed “medically important” and are sometimes referred to as
non-human-use antibiotics.
Other specialty and nutritional feed additives that assist in managing animal
health and promoting growth have long been utilized, and interest is increasing
with the growing pressure to reduce antibiotic usage:
Organic acids provide support for digestion of food. Fumaric acid, citric acid,
formic acid, lactic acid and sorbic acid as well as salts have been
demonstrated as effective in improving health in livestock such as piglets.12 A study found that organic acids can also offset negative effects of
environmental pollution on animals.13
* FDA no longer uses “sub-therapeutic,” as it believes the term lacks sufficient clarity
There are two primary applications for antibiotics used in livestock production: growth promotion and therapeutic
US regulation is focused on medically important anti-microbial drugs
Interest in specialty and nutritional feed additives is growing as antibiotics usage is reduced
11 Please see important disclosures at the back of this report.
Amino acids provide additional support for immune system resilience to
foreign bacteria and viruses. The addition of amino acids to conventional feed
can maximize growth in young animals as well as prevent disease.14
Enzymes increase an animal’s ability to absorb and utilize nutrition, and
reduce the impact of poor or unsuitable feed.15 Enzymes were first
introduced in the 1980s and are now included in 95% of broiler chicken
diets. When used in conjunction with probiotics, enzymes can improve
growth at a lower cost. A study on the use of enzymes and probiotics in
chickens showed a net benefit of 14% in cost per kg live weight relative to
using AGPs.16
Probiotics affect the composition of intestinal microbiota, providing growth
and health benefits. A meta-study found that probiotics offer greater
protection against pathogens and enhanced immune response, though there
are still questions about the effectiveness of probiotics in large groups of
livestock.17
Prebiotics are fibers and other compounds that feed beneficial
microorganisms and protect against harmful ones in the stomachs of
livestock18. Prebiotics have been shown to benefit digestion, animal growth
and the immune system.
Essential oils are compounds present in plants and spices that provide
immune and nutritional benefits to animals.
Vitamins are a group of complex organic compounds present in small
amounts in natural foodstuffs. They are essential in promoting normal
metabolism and preventing deficiency-related diseases.
Investment implications
We assess the impact of curbing antibiotic usage in livestock and poultry
production across several parts of the animal nutrition value chain, including
producers of antibiotics and medicated feed additives, producers of specialty/
nutritional feed additives, and processors.
Antibiotics and medicated feed additives
Animal health (AH) companies manufacture products such as anti-infectives,
medicated feed additives, vaccines, and parasiticides. Antibiotics are a sub-
categorization of products that make up anti-infectives and medicated feed
additives.
12 Please see important disclosures at the back of this report.
The animal health industry represents a portion of the much larger
pharmaceutical industry, with six of the ten largest AH players representing
divisions of such companies. The question of reduced antibiotic use in animal
feed represents a relatively minor risk to parent company revenues.
Figure 8: Example Animal Nutrition Value Chain
Note: This is not an exhaustive list of companies and focuses on the European value chain.
Source: DSM
For stand-alone animal health companies, antibiotics restrictions represent a
more significant risk. Zoetis, the leading producer of anti-infectives (antibiotics
and anti-bacterials, antifungals, antivirals, etc.) for animal use, states that the
animal health industry will grow 5-6% annually over the next five years while
antibiotics sales will grow by 2-3% annually, primarily due to the restriction in
some markets on the use of antibiotics. Phibro Animal Health says it expects
medicated feed additives to deliver mid-single-digit growth annually as certain
markets transition away from the use of antibiotics for growth promotion.
The animal health industry is largely a part of major pharmaceutical organizations
Antibiotics restrictions represent a more significant risk for stand-alone AH companies
13 Please see important disclosures at the back of this report.
Source: Vetnosis Executive’s Guide 2015, Zoetis, Cornerstone Capital Group
While there is discussion of this risk, consensus believes that US antibiotics
regulation (FDA Guidance #213) has little chance of decreasing overall quantities
of antibiotics used in livestock production. This is largely because there is
significant overlap between antibiotics used for growth promotion and those
used for disease prevention.
Furthermore, the usage of antibiotics for growth promotion is relatively limited.
Animal Health Institute, an industry group, estimates that 5-15% of antibiotic use
in the US is for growth promotion. This estimate includes both medically and
non-medically important antibiotics (Figure 10).
This overlap likely explains why AH companies appear cautiously optimistic
regarding this risk. Zoetis points out the following:
The focus in the US is around AGP and antibiotics deemed critical for human
use, which, in aggregate, represents a small percentage of the company’s
portfolio. Zoetis presents Europe as a point of reference. In 2013, the
European antibiotics market declined by 7% while Zoetis’s portfolio in the
same region declined by 2%.
The company has products in its portfolio that can replace those that might
be eliminated from the market. For instance, Zoetis says producers will need
to increase the use of vaccines to protect animals when they move away from
antibiotics.
Despite regulatory challenges, antibiotics will continue growing globally due
to the increasing demand for protein in emerging markets.
4.9%
2.7%
4.5%
9.1%
0.8%5.5%
0.3%4.9% 22.6%
5.1%
$-
$1,000
$2,000
$3,000
$4,000
$5,000
20
14
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ale
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14 Please see important disclosures at the back of this report.
Figure 10: Overlap between growth promotion and disease prevention uses in food animal antibiotics
Antibiotic class FDA ranking of importance to human medicine Antibiotic name Approved uses by animal
Cattle Poultry Swine
Macrolides Critically important Tylosin X X
Erythromycin X X X
Lincosamides Highly important Lincomycin X X
Penicillin Highly important Penicillin G Procaine X X
Streptogramins Highly important Virginiamycin X X X
Tetracyclines Highly important Chlortetracycline X X X
Oxytetracycline X X X
Pleuromutilins Highly important Tiamulin X
Glycolipids Not ranked Bambermyciins X X X
Polypeptides Not ranked Bacitracin X X X
Quinoxalines Not ranked Carbadox X
Ionophores Not ranked Monensin X X
Lasalocid X X
Laidlomycin X
An “X” indicates FDA-approved growth promotion uses, including weight gain and improving feed efficiency. Light blue shading denotes the overlap between antibiotics approved for growth promotion and disease prevention purposes. Light green shading denotes antibiotics not ranked by the FDA as important to human health.
Source: Government Accounting Office analysis of FDA data; Cornerstone Capital Group
In addition to these comments, Phibro Animal Health originally estimated a
potential impact of $15-20 million associated with Veterinary Feed Directive
(VFD) changes, but recently lowered the estimate to $10-15 million. This
represents only 1.5-2% of the company’s guidance for revenue in 2016.
While regulations in their current form may present limited risk to antibiotics
sales, we believe there are two factors that could heighten the risk.
1) Shifting consumer demand may continue to drive additional companies
throughout the value chain to phase out antibiotics beyond the level
required by FDA guidelines. While organic livestock is still a niche market
at 5% of total production in developed markets, it is growing rapidly.
Producers selling products in the US cannot use the “organic” label if
antibiotics are used even once (this is more stringent than in Europe,
where an animal can be treated three times with antibiotics and keep the
organic label).
2) If GFI 213 and VFD fail in reducing the levels of antibiotics used in meat
production, we believe more restrictive guidelines could be put in place.
There is historical precedence for this. In the Netherlands, when AGPs were banned in 2006, therapeutic drug usage increased to levels that
While regulations in their current form present limited risk to antibiotics sales, shifting consumer demand and more restrictive regulation should be considered
15 Please see important disclosures at the back of this report.
kept total antibiotic use static. In response, the Dutch issued a mandate to
reduce antibiotic usage by 50% over a three-year period (using 2009 as
the base year) and established a registration process for veterinary
prescriptions of antibiotics (Figure 11). Regulation in the Netherlands is
notably different than in the US, and we don’t believe the FDA would follow the same path, but investors would be wise to anticipate a re-
evaluation of policies and practices should regulation in its current form
prove ineffective.
Figure 11: Dutch antibiotic sales for therapeutic use in animals (in kg x 1,000), 1999-2014
Source: Netherlands Veterinary Medicines Authority (SDa), Cornerstone Capital Group
Specialty and nutritional feed additives
We believe specialty and nutritional feed additives have significant potential for
growth, though we temper our expectations in the short term given the need for
research and large-scale trials to demonstrate efficacy and optimize
combinations of additives.
Our research indicates that the global feed additives market, which we estimate
is valued at approximately $15 billion, could experience mid-single-digit growth
annually through 2020. However, the opportunity and growth outlook isn’t
uniform across additives. Amino acids and vitamins dominate the market but will
be characterized by slower growth and more intense competition. Probiotics and
Specialty and nutritional feed additives have significant growth potential, but we temper our expectations in the short term
Probiotics and prebiotics are forecast to grow more quickly than other feed additives
16 Please see important disclosures at the back of this report.
prebiotics are less developed, but are forecast to grow more quickly and face less
competitive pressure.
Figure 12: Feed additives outlook
Bubble size denotes the current size of each market; market growth outlook is estimated through 2020.
Source: DSM, Novozymes, DuPont, Grandview Research, Transparency Market Research, Cornerstone Capital Group
Figure 12 provides an overview of our estimates for the current market value,
growth outlook and competitive environment for various feed additives. We are
mindful that the market is opaque and data reliability is an issue, and will update
our estimates as data availability improves.
Figure 13 provides a summary of the product portfolios for the major feed
additive companies.
Amino acids
VitaminsMycotoxin solutions
Acidifiers/Organic acids
Enzymes
Probiotics
Prebiotics
Antioxidants
0.0%
4.0%
8.0%
12.0%
0 3
Ma
rke
t G
row
th
CompetitionHigh Low
Hig
hLow
High Low
Hig
hLow
17 Please see important disclosures at the back of this report.
Figure 13: Major feed additive companies’ product portfolios and annual animal nutrition revenue
Company
Animal Nutrition
Revenue - FY2014 Feed Additives
€1.2 billion
(100% of sales)
Amino acids and organic acids targeted at poultry, pigs and dairy cows
Rovabio product provides enzymes to poultry and pigs that assist in digestion
Developing a probiotic product in partnership with Novozymes
Range of products that provide vitamin supplements for poultry, pigs and cattle
€1.0 billion*
(2.7% of sales)
Provides a range of vitamins for livestock including poultry, pigs and cattle
Enzyme products that improve digestion of poultry and pigs in collaboration with Direvo and via its purchase of Verenium
Range of products for poultry and pigs
€120 million
(15% of sales)
Leading proponent of probiotics (BioPlus) as growth promoter for pigs, poultry and cattle
Undertakes significant research and development in probiotics for livestock, has developed proprietary strains of probiotics
€2.1 billion
(22% of sales)
Developed a range of feed enzymes in partnership with Novozymes
Leading provider of livestock vitamins through Optimum Vitamin Nutrition (OVN) approach and range of vitamin products (ROVIMIX and Hy-D)
Acids to help livestock with digestion
Essential oil products (CRINA) that support livestock growth and health
Probiotic feed additive that limits the growth of harmful bacteria in animals
$1.4 billion
(4% of sales)
Launched enzymes over 25 years ago for poultry, pigs and cattle
Markets a range of probiotic products as well as a probiotic/enzyme mix which is promoted as an active replacement to antibiotic growth promotion
Provides essential oil blended products for poultry and pigs
€2.1 billion**
(16% of sales)
Leading amino acid producer with a range of amino acid products
Distributes Chr Hansen probiotic products in Asia
€230 million***
(14% of sales)
Developed enzyme products in conjunction with DSM
Entered in partnership with Adisseo to develop probiotic products
*Denotes “Health and Nutrition” business unit sales. We use this as a proxy for animal nutrition sales as this business unit produces and markets essential amino acids for animal nutrition.
** Denotes Nutrition sales for livestock and companion animals
*** Exchange rate from Danish Krone to Euro on Sept 14, 2015
Source: Company information, consultation and Cornerstone Capital Group
18 Please see important disclosures at the back of this report.
Processors
The US poultry producer market is concentrated, with the top four producers
representing 53% of ready-to-cook pounds. It’s also vertically integrated, with
the large producers’ operations consisting of breeding stock, contract growers,
feed production, processing, and marketing and transportation. Because of the
vertically integrated and concentrated nature of the industry, the policies
adopted by the large players influence the supply chain materially.
Figure 14: US chicken production (based on ready-to-cook pounds)
Source: Tyson, Watt Poultry USA (March 2015), Cornerstone Capital Group
Antibiotic-free chicken commands higher margins than conventional chicken.
Based on industry sources, it costs 10-15% more to produce but sells at a
premium which, in many instances, more than offsets the increased cost. We
believe this mix shift to higher-margin poultry offers some benefit in the near
term.
Some experts believe, however, that a ceiling exists for the number of birds that
can be produced without antibiotics. As it stands, birds that become ill are given
antibiotics but are moved out of the antibiotic-free flock to the conventional
flock. As antibiotic-free production increases, this strategy becomes less
attractive. Using an extreme example for the purposes of illustration, if 100% of
production were to become antibiotic-free, there wouldn’t be a conventional
flock to which antibiotic-treated birds could be moved.
Tyson Foods22%
Pilgrim's Pride17%
Sanderson Farms7%Perdue Farms
7%
Other47%
We believe the mix shift to higher-margin poultry offers some benefit in the near term
19 Please see important disclosures at the back of this report.
This supports our view that processors that are proactive and innovative in
reducing antibiotics use are well-positioned to meet consumer-driven demand.
From this standpoint, Perdue Farms is a leading performer while Sanderson
Farms is a laggard.
Tyson Foods
Responding to demand from consumers, Tyson, the largest US meat packer by
sales, is increasing its efforts to reduce antibiotics use in its animal feed. The
company has stopped using antibiotics at all of its 35 hatcheries (where eggs go
through a vaccination robot when the chicks are almost ready to hatch), and
eliminated medically important antibiotics from all chicken feed (for broiler
chickens). Between 2011 and 2014, use of medically important antibiotics on
Tyson’s farms declined by 84%.
Tyson substituted the use of medically important antibiotics with vaccines,
biosecurity advancement and probiotics. The company’s CFO, Dennis Leatherby,
said that “the additional cost associated with raising chicken is minimally more
expensive and often times at parity with other traditional methods.”
For retail customers, Tyson also offers “no-antibiotics-ever” meat products via its
NatureRaised Farms brand.
Pilgrim’s Pride
Pilgrim’s Pride, the second-largest US chicken processor after Tyson, says it will
eliminate all antibiotics from 25% of its chicken production by the end of 2018,
up from the current 5%. It is also working to eliminate all medically important
antibiotics from its hatcheries and broiler flocks.
As with Tyson, the company says it has invested in probiotics and biosecurity
measures to reduce reliance on antibiotics. The company acknowledges that
reducing antibiotics entails additional costs, but expects to charge a premium on
some of its products: “As we convert more of our production to A.B.F., we will be
able to sell an increasing amount of whole bird equivalents, which includes the
back half, for a premium in domestic markets.”
Sanderson
Unlike other major US poultry producers, Sanderson has resisted the industry’s
moves to curb antibiotics use. The company’s position can be summarized as
follows:
Processors that are proactive and innovative in reducing antibiotics use will be well- positioned to meet consumer-driven demand
Tyson is investing in vaccines, biosecurity and probiotics…
…as is Pilgrim’s Pride
Sanderson has resisted the industry’s moves to curb antibiotics use
20 Please see important disclosures at the back of this report.
Use of antibiotics is necessary to treat certain types of disease, thus it
contributes to animal welfare;
Without antibiotics, animals would take more time and resources to reach
market weight, inconsistent with the company’s sustainability and
environmental responsibility programs; and
Ceasing the use of antibiotics increases the company’s food safety risks.
Sanderson also rejects the scientific argument behind the industry-wide trend,
saying “there’s no evidence whatsoever that using these antibiotics really does
cause antibiotic resistance bacteria”. The company states that should credible
scientific data become available supporting this notion, it will re-evaluate its
position.
Perdue
Perdue has been the most aggressive in moving away from antibiotics. The
company recently announced that it is raising more than half of its chickens with
no antibiotics, and that 96% of its flocks never receive medically important
antibiotics.
In achieving these reductions, Perdue is incurring higher costs. It has estimated
that antibiotic-free chickens cost 10-15% more to produce than their
conventional counterparts, though they also can retail for up to $2 per pound
more (depending on the cut, this represents a premium of up to 200% according
to Bureau of Labor Statistics’ average retail chicken prices). To better capture the
price premium in a growing market, Perdue is increasing its product offerings
with the “No Antibiotics Ever” label.
Supporting our optimistic view on probiotics growth, Perdue is adding more
probiotics to its chicken feed, and in 2014 stated that it had increased the
amount of probiotics by five times over the past five years.
Perdue has been the most aggressive in moving away from antibiotics
21 Please see important disclosures at the back of this report.
Going forward – what are we looking for?
Our research raises questions for further exploration and identifies trends to
watch as consumer awareness of antibiotics use and potential alternatives
increases. Below are pertinent questions that we’ll look to address as the issue
evolves.
Margin profile – To what extent will economies of scale, alternative feed
additives, and producer experience drive down costs for antibiotic-free
chicken? Will retailers and producers continue to realize the current
premiums charged for antibiotic-free chicken?
Consumer demand – How will consumers respond to retailers, restaurants
and supermarket chains’ announcements to reduce antibiotics? Will
consumer demand force suppliers to be more aggressive in phasing out
antibiotics beyond what’s required?
Antibiotic alternatives – How will additional research and large-scale trials
influence uptake of specialty and nutritional feed additives? Will certain feed
additives, such as probiotics, make it through the FDA’s approval process,
thereby allowing manufacturers the ability to make product claims on labels?
Expanding focus on cattle/swine – How will a more pronounced shift away
from antibiotics usage in cattle and swine impact the supply chain? Company
announcements to reduce antibiotics usage have primarily been focused on
chicken opposed to cattle and swine. There are additional challenges in
reducing antibiotics usage in animals that have longer lifecycles.
Vaccines – Will animal health companies benefit from increased use of
vaccines as antibiotics usage is reduced? To what extent will new vaccine
products be able to address disease that was once only treated with
antibiotics?
22 Please see important disclosures at the back of this report.
Sources cited in this report:
1 http://www.cdc.gov/drugresistance/about.html 2 Tadesse D.A., Zhao S., Tong E., Ayers S., Singh A., Bartholomew M.J., et. al., “Antimicrobial drug resistance in Escherichia coli
from humans and food animals,” United States, 1950–2002. Emerging Infectious Disease Journal [serial on the Internet]. 2012 May.
3 http://www.globalizationandhealth.com/content/9/1/48 4 http://www.bloomberg.com/news/articles/2015-04-28/the-biggest-chicken-seller-in-the-u-s-is-eliminating-antibiotics 5 Pew Trusts, 2015, “Top Food Companies Moving Away from Overuse of Antibiotics on Industrial Farms,”
6 Matthews, 2001, “Antimicrobial Drug Use and Veterinary Costs in US Livestock Production,” USDA, http://www.ers.usda.gov/media/480677/aib766_1_.pdf
7 G.Y. Miller, P.E. McNamara, and E.J. Bush, 2003. “Productivity and Economic Effects of Antibiotics Used for Growth Promotion in Pork Production.” Journal of Agricultural and Applied Economics 35: 469-482.
8 Walmart, 2015, “Position on Responsible Use of Antibiotics in Farm Animals,” http://corporate.walmart.com/article/position-on-responsible-use-of-antibiotics-in-farm-animals
10 Hughes et. al., “Antibiotic Growth Promoters in Food Animals,” http://www.fao.org/docrep/article/agrippa/555_en.htm 11 USDA, 2014, “Antibiotics Used for Growth Promotion Have a Small Positive Effect on Hog Farm Productivity,”
12 Dr. Jiri Broz, Dr. Christophe Paulus, “Eubiotics: Definition and different concepts,” DSM 13 Luckstadt, 2011, “The Use of Organic Acids In Animal Nutrition, with Special Focus on Dietary Diformate Under European and
Austral-Asian Conditions,” Recent Advances in Animal Nutrition – Australia 18 (2011) 14 Wu, 2010, “Functional Amino Acids in Growth, Reproduction and Health,” American Society for Nutrition,
http://www.novozymes.com/en/solutions/agriculture/animal-nutrition/Pages/default.aspx 16 Romero, 2015, “The Role of Feed Enzymes in Poultry Gut Health,”
http://animalhealthmedia.com/wp-content/uploads/2015/05/14.-The-Role-of-Feed-Enzymes....pdf 17 Musa et al, 2009, “The Potential Benefits of Probiotics in Animal Production and Health,” Journal of Animal and Veterinary
Advances, http://www.medwelljournals.com/fulltext/?doi=javaa.2009.313.321 18 Jacela JY, DeRouchey JM, Tokach MD, et al. “Feed Additives for Swine: Fact Sheets – Prebiotics and Probiotics, and
Phytogenics,” Swine Health Prod. 2010;18(3):132–136. https://www.aasv.org/shap/issues/v18n3/v18n3p133.html
23 Please see important disclosures at the back of this report.
Michael Shavel is a Global Thematic Analyst at Cornerstone Capital Group. Prior to joining the firm, Michael was a Research Analyst on the Global Growth and Thematic team at Alliance Bernstein. He holds a B.S. in Finance from Rutgers University and is a CFA Charterholder.
Sebastian Vanderzeil is a Research Analyst with Cornerstone Capital Group. He holds an MBA from New York University’s Stern School of Business. Previously, Sebastian was an economic consultant with global technical services group AECOM, where he advised on the development and finance of major infrastructure across Asia and Australia. Sebastian also worked with the Queensland State Government on water and climate issues prior to establishing Australia’s first government-owned carbon broker, Ecofund Queensland.
Andy Zheng is a Research Associate at Cornerstone Capital Group. Andy graduated from Bowdoin College with an interdisciplinary major in Mathematics and Economics and a minor in Visual Arts. He spent his junior year studying abroad at the University of Oxford and the summer prior to that at the Sorbonne in Paris. Andy passed Level I of the CFA Program in January 2014.
24 Please see important disclosures at the back of this report.
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