February 24, 2017
Fewer new products, more competitive pressure in the world animal health market
By ERIC J. BROOKS
An eFeedLink Hot Topic
- Coinciding with a rapid expansion of the animal health market, the cost of developing traditional animal health products has skyrocketed even as number of new releases has fallen
- This has given large dominant tier 1 animal health suppliers an aging product portfolio vulnerable to competition from generics
- An unexpected slowdown in agribusiness market growth further intensified pressure on their bottom lines.
- Government legislation, voluntary integrator moves away from AGP-based livestock rearing is creating new opportunity for young, nimble tier 3 livestock health suppliers
As an industry, animal health is facing challenges, opportunities and evolution imperatives that almost mirror those of the evolving microbes it seeks to manage. Like the livestock they seek to optimize and microbes they try to control, suppliers can capitalize on a large, ongoing increase in world meat demand. From 1993 through 2013, BRIC (Brazil/Russia/India/China) country production of meat and milk increased by 111% and 86% respectively. While BRIC livestock production will grow somewhat more slowly in the years up to 2013, it will be complimented by the accelerating per capita protein consumption among Southeast Asia's 500 million people.
Alongside fast growing meat demand among the 3.5 billion people in developing countries, new legislation on the use of antibiotics is redefining mature American, European and North Asian livestock markets. This is creating animal health opportunities even in mature, developed economies –but with large ramifications for mature and emerging companies alike.
A study by PWC ("Animal Health Strategy Playbook for An Evolving Industry", August 2015, Price Waterhouse Coopers) estimates that the portion of animal health market accounted for by livestock and aquaculture increased at a 5.6% annual rate in the ten years up to 2014. From US$8.26 billion in 2004, livestock and aquaculture health revenues totaled US$14.3 billion by 2014.
Thereafter, an unprecedented deceleration in the feed and livestock demand within China and the poultry and aquaculture lines has dented the pace's medium term prospects. Estimated at US$15.17 billion in 2016, growth across all animal health lines is forecast at a slower 3% per annum through 2020, when revenues are forecast at US$17.14 billion. If we take a conservative approach and assume agribusiness growth only partly rebounds from its current slow growth rate to 3.7% per annum from 2020 onwards, animal health products and services will still total over US$20 billion by 2025.
Even though it may not remain that way, the industry is highly concentrated. PWC's report that multinationals like Merck, Elanco-Novartis, Merial and Zoetis collectively own 62% of the world animal health market. Below these so-called "tier 1" suppliers, tier 2 companies like Bayer, CEVA Sante and BIVI control the market's second tier and account for 24%. Even though they only control 14% of the market, Animal Health's accelerating pace of evolution, its structural change is being driven by fast growing tier 3 suppliers like Biomin, Kemin, Alltech and Addcon.
For it is this third wave of companies that pioneer natural products and are transitioning agribusiness to a sustainable, safer livestock rearing paradigm. Moreover, industry statistics clearly show us why we can expect emerging tier 3 animal health companies to lead the way. Tier 1 and 2 companies traditionally received the bulk of their revenues from so-called "new chemical entities" (NCEs), synthetic compounds dominated by antibiotic product lines. Even in their move towards "biologicals" (natural based solutions), larger players find themselves having to buy out nascent firms like vaccine makers or designers of plant-based supplements, rather than doing the R&D work in-house.
That's because even as antibiotic resistance is rising, it is getting harder –and far more expensive– to make new antimicrobial types. This has led to declining R&D productivity among leading suppliers. As the accompanying graph shows, from the mid-1990s through to 2005, PWC estimated that total animal health R&D spending increased by a third, from US$375million to US$500 million. On average, 12 NCE-based animal health products were approved annually by America's FDA over this time. Interestingly, the number of approved NCEs fell in the latter part of this period, just as R&D expenditures started to increase. After the mid-2000s however, this comfortable world changed.
From 2005 through 2014 inclusive, expenditures on animal health R&D jumped 50%, from US$500 million in 2005 to around US$750 million by 2014. Despite higher and accelerating rate of R&D expenditure growth, the number of approved NCEs that came to market fell 42% to an average of 7 per year, down from 12 the previous decade.
Consequently, the average R&D expenditure per approved NCE product skyrocketed, from a PWC estimated US$25 million in 2001 to US$50 million by 2005, US$85 million by 2010 and over US$100 million today. This was not a mere case of researcher salaries and lab coats becoming more expensive.
On one hand, antibiotics, their traditionally most important market was hit with EU legislation, with restrictions on their use following within a decade in Japan, South Korea and the United States. On the other hand, each new antibiotic is more expensive to develop than the previous one, as the easy biochemical combinations with antimicrobial properties have already been developed.
Consequently, the average age of tier 1 company products is rising and this is putting huge competitive pressure on them, as animal health products are protected by weaker intellectual property laws. According to PWC, "Product exclusivity is most often for 3 to 5 years in animal health, compared to 10 to 12 years of effective exclusivity (and 20 years of total exclusivity) in human pharmaceuticals".
Innovative animal health companies already had a shorter time to charge above market prices and recoup their R&D costs. They must now use that same shorter time period to recoup R&D costs per product that, on average, are 400% higher than they were sixteen years ago. With fewer new products being developed, anywhere from 60% to 90% of animal health products offered by tier 1 companies are merely newer versions of old, established products.
They have had their structure slightly modified to differentiate them from rising generic competition and extend their product lifecycle. With their aging product portfolios, only 10% to 20% of most tier one company products are from innovative NCEs. PWC concludes that, "It is harder to extend product lines that may include molecules over twenty years old, and there are increasing pressures from generics and [even] branded generics".
While lower cost generic manufacturers from places like India and China chip away at the market share of established products, there is another source of competition at work. On one hand, there are increasing government restrictions on products like antimicrobials. In the case of the FDA for example, newly developed antimicrobials may no longer be used as growth promoters. On the other hand, a rising number of integrators such as Tyson Food are opting to minimize or completely phase out their use of synthetic antimicrobials.
This mix of government legislation and consumer-driven industry moves away from such products creates a market vacuum for natural-based alternatives to supplements, be they organic acidifiers, essential oils or spice-derived compounds that function as natural growth promoters (in place of AGPs).
Even here however, there are challenges. While they may be larger and far more capitalized than the tier 3 suppliers of new paradigm natural supplements, these companies have a decades-long head start on the natural supplement R&D process. While many of these new competitors have already established regional offices in fast growing markets around the world, they lack the burden of the overhead infrastructure associated with developing synthetic products.
In many cases, they are also privately owned and therefore immune to being acquired by tier 1 animal health suppliers. Thus, antibiotic resistance and new legislation is doing more than changing how we farm. It may also result in a changing of the guard among who leads and lags in the animal health market itself.
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