October 10, 2016

Out with antibiotics, in with vaccines: American integrators, government seek to reinvent livestock farming


An eFeedLink Hot Topic
  • America's gradual, incrementalist approach to phasing out livestock AGPs takes a large step forward with the banning of antibiotics used in human medicine for AGP use in 2017
  • Encouraged by booming antibiotic free meat sales amid flat, declining consumption, integrators and fast food chains have been restricting or phasing out their use of AGPs
  • Traditional AGP suppliers are re-tooling to develop, manufacture and market a wide array of animal vaccines in their place
  • As antibiotic restrictions tighten up, expect US integrators to demand trade protection from imports containing AGPs under food safety/fair treatment rules. This may create a strong incentive to transition away from antibiotics in many meat exporting countries.
In response to accumulating evidence of a connection between the use of sub therapeutic levels of antibiotic growth promoters (AGPs) in livestock and untreatable human infections, the United States introduced voluntary guidelines to restrict AGP use several years ago. Everyone however, knew that this was the start of an incremental, decade spanning roadmap towards the minimization or elimination of AGPs from protein production.

In the ensuing years, both government and the agribusiness took first steps towards minimizing their reliance on antimicrobials. In the private sector, McDonald's for example, has declared that by 2017, it would, "stop using antibiotics important to human medicine in chicken production" in the operations of its US suppliers and by 2018 in Canada. -Towards this end, Tyson Foods, which supplies most of McDonalds chicken in America is phasing out the use of antibiotics in the chickens it raises by the end of 2016.
Earlier, Subway and Chick-fil-A also announced the elimination of antibiotics from their chicken servings, with the latter also eliminating them from their beef and pork dishes too by 2019.
The increased demand for antibiotic-free meat has also incited a response from large suppliers. Last year, Tyson Foods, the largest U.S. poultry producer, pledged to eliminate the use of human antibiotics in its chicken flocks by September 2017. It also announced plans to reduced antibiotic use in the swine it grows by 20%.
Probably in response to demand for antibiotic free beef from chains such as Chipotle, Similarly, Cargill has pledged to reduce its antibiotic use by 20%, mostly by no longer using as AGPs those which are used to treat human diseases. It follows the same company's elimination of AGPs from its turkey producing facilities two years earlier.
Much of this is being driven by the industry observing the marketing impact of earlier moves away from AGPs. For example, when Chipotle first introduced antibiotic free pork in 2000, to pay for the higher cost of antibiotic free items, it raised their menu prices by an average of US$1.00, but its sales still doubled.
Both integrators and multinational fast food chains have followed the lead of smaller distributors such as Chipotle and Panera, which have already eliminated antibiotics from their meat. Larger competitors such as McDonalds have watched them eliminate antibiotics from their meat, boost prices and garner significantly higher sales. -Consequently, there is a lot of rational business opportunism behind this trend: From 2009 through 2012, even as US per capita meat consumption fell, revenues from sales of antibiotic free meat jumped by 33% over this time.
Alongside mounting evidence that phasing out antibiotics makes for good consumer marketing, tightening US restrictions on antibiotics are motivating the industry. Until now, feed-grade antibiotics incorporated into livestock feed were freely available over-the-counter and did not require a vermination's approval. This is now changing: Starting January 2017 the FDA is banning the use of antimicrobials critical to treating human infections as AGPs. Such antibiotics are being reclassified as veterinary feed directive drugs (VFDs). Livestock growers can only obtain such antimicrobials listed as VFDs from a veterinarian with whom they have a longstanding relationship. VFD prescriptions will only be allowed for animal disease treatment and not for growth promotion.
This however, does not mean that American livestock will cease being raised with AGPs: Carbadox, ractopamine, bambermycin, melengestrol, tiamuline, fenbendzole, amprolium, decoquinate, bacitracin and ionophores such as monensin and lasalocid are exempted from the new regulations. All of the above can be used as AGPs unless they are used in conjunction with a VFD regulated antibiotic. Moreover, injectable antibiotics, such as Pulmotil® (a.k.a. "tilmicosin"), which is commonly used in swine, are still allowed. Going forward however, the US FDA has made clear that it intends to expand the number of antimicrobials on its official VFD list, which effectively outlaws their use as AGPs.
Thus, everyone in US agribusiness know that the restrictions being introduced in 2017 are a stepping stone towards much stricter AGP restrictions to come, if not an outright ban in the future. -Furthermore, a US state with a history of introducing health, safety and environmental laws before the rest of America has already taken the lead in this matter: California passed a new law that starting in 2018, bans all use of livestock AGPs in that state and restricts livestock antimicrobial use to the treatment of animal infections only.
For this reason, US agribusiness is winding up four decades of political resistance to AGP bans and finding new means of maintaining animal immunity, stocking densities and feed conversion ratios without the aid of antibiotics. Towards this end, supplement suppliers who supply some of the industry's most widely used AGPs are now focusing their research on developing their designated replacement: livestock vaccines. From inconsequential revenues in 2000 to a MarketsandMarkets estimated US$5.2 billion in 2015, US livestock vaccine revenues are expected to rise 35% to US$7.0 billion by 2020. -Even so, based on current industry and legislative trends, this estimate may turn out to be too low.
Eli Lilly & Company owned Elanco, for example, recently constructed a 48,000 square foot R&D centre next to its Greenfield, Indiana world headquarters. Traditionally a large supplier of livestock antibiotics such as tetracycline (which is being banned for AGP use), Elanco's new R&D Centre is dedicated to developing vaccines and natural compounds that will prevent livestock diseases previously treated with antibiotics. Elanco is currently seeking approval in European salmon producing countries for Clynav, a vaccine that protects them from pancreatic disease and has at least six other livestock vaccines currently under development.
It will join a large, expanding roster of recently developed Elanco livestock vaccines designed to prevent infectious bronchitis, Newcastle disease, REO and infectious bursal diseases. Elanco has also answered allegations that AGPs have led to antibiotic resistance in the most socially responsible manner possible: It now offers livestock vaccines against the three strains of antibiotic resistant salmonella strains with a history of infecting people (S. Typhimurium, S. Enteritidis and S. Heidelberg). It also introduced Imrestor, a protein-based product that activates bovine immune systems so as to help prevent mastitis. Elanco is at the leading edge of an important US agribusiness industry reversal –from supplying AGPs and resisting bans to offering sustainable solutions -both to boosting animal productivity and mitigating incurable human diseases.
Merck Animal Health, another longstanding antibiotic supplier to the industry last year introduced Porcilis Ileitis, a vaccine for swine intestinal and markets the COCCIVAC-B52 vaccine, which prevents intestinal disease in chickens without recourse to antibiotics. Knowing that it needs a roster of revenue-producing vaccines to replace the gradual phasing out of AGPs, 2015 saw Merck acquire Harris Vaccines Incorporated, an Iowa-based developer of animal vaccines. In 2015, Harris Vaccines gained notoriety by developing the first USDA approved vaccine against PEDv. Rick Sibbel, Merck's Head of Food Animal Technical Services for cattle, poultry and swine, states that, "The future of our company is heavily grounded in vaccine development."
In the same vein, Zoetis (formerly Pfizer's animal health subsidiary), another large scale supplier of livestock antibiotics, was granted a license in 2013 for Fostera PCV MH, a vaccine designed to prevent outbreaks of porcine circovirus and enzootic pneumonia. This year, American regulatory agencies granted it a conditional license for a vaccine to help prevent disease H5N1 outbreaks in poultry.
US agribusiness's transitioning from AGPs to livestock vaccines carries implications for the world agribusiness trade -consequences that could, over the next decade, accelerate Asian countries move away from AGPs, particularly meat exporting countries. -You cannot redefine AGPs as dangerous to human health without creating potential for new trade barriers. In 2015 and again this year, even before the new AGP restrictions come into effect, the number of shrimp, tilapia and catfish shipments rejected by US customs due to excessive antibiotic residues and/or high bacterial levels have been at record levels.
As an increasing number of antibiotics become illegal to use as AGPs, US integrators will inevitably redefine their presence in imports of meat and seafood as an unfair competitive advantage, similar to the presence of banned pesticides. To maintain their share of the lucrative US market, that could force many integrators in exporting countries in Asia or Latin America to remove AGPs from their own production of beef, chicken, pork or seafood. In this way, tightening US restrictions on AGP use could result in AGPs being voluntarily phased out in many other countries too.
Over the long run, if both the United States and the EU make it impossible to export AGP containing meat products to their markets, EU suppliers of natural growth promoters (NGPs) and US suppliers of livestock vaccines will be the greatest beneficiaries -for they are increasingly in a perfect position to market sustainable livestock growing technologies to export-driven customers in Latin America, Eastern Europe and Southeast Asia.
Hence, whether you are an NGP supplier like Biomin or Addcon, or a livestock vaccine supplier like Elanco or Merck, this is the future growth path: America's tightening AGP restrictions will first create strong market expansion in America itself and (as it restricts AGP containing imports) eventually, lead to new opportunities in countries that export their protein to the US. With that in mind, our box article below looks at the livestock vaccine situation in what is indisputably the world's largest agribusiness market: China
---------- BOX ARTICLE ----------
Big changes ahead for China's livestock vaccine market?

The world's largest agribusiness market is poised for waves of consolidation and investment in its vaccine sector
When America's mature market takes the lead, large but less developed markets usually follow, often expanding at a much faster pace.

Chinese livestock has developed a reputation for growing much faster than the rest of global agribusiness and this is also proving to be true in vaccines. According to a new report by research firm MarketsandMarkets, The Chinese animal vaccine market expanded at 25.9% compounded annual rate, growing from RMB1.4 billion (US$169 million) in 2004 to RMB14.0 billion (US$2.3 billion) in 2014 at a high rate of 25.9%. It is expected to keep rising by more than 20% annually through to 2020, with revenues of RMB16.9 billion (US$2.6 billion) in 2015 and RMB20.3 (US$3.04 billion) in 2016 respectively. [Note: US$ values reflect exchange rates prevailing during the years in question and not the current exchange rate].

As is the case with other parts of Chinese agribusiness, the industry remains relatively unconsolidated, with approximately 100 competing companies and no supplier with even a tenth of the market. Leading supplier China Animal Husbandry Industry Company (CAHIC) has a 7.4% share of the market by revenue, with second ranked Jinyu Bio-technology accounting for 7.2% of the market. Behind them, Qingdao Yebio Biological Engineering (5.0%), Xinjiang Tecon Animal Husbandry Bio-Technology (4.6%), Pulike Biological Engineering (2.8%), and Tianjin Ringpu Bio-technology (2.8%) control anywhere from 3% to 5% of the market. Collectively, China's top six vaccine makers control less than a third of its vast, mostly underdeveloped market.

At this time, the entire market is comparable in size to the total revenues of one US vaccine maker, but with potential for rapid growth to multiply it several times over. Several factors are responsible for the market's immaturity.

First, Chinese agribusiness has traditionally used antibiotics far more liberally and with fewer legal controls than even the US market. Second, there is a history of domestically supplied vaccines that failed to prevent the diseases (eg. Blue Ear Disease) which they were designed to vaccinate the animals against.

Third, China's government traditionally did not have many laws in place and until the most recent decade, its once unconsolidated agribusiness sector found it easy to ignore many directives. This situation however, is rapidly changing: After bacterial strains resistant to Colistin (one of the last defense infections used in human infections) were recently been traced to the intestinal flora of 20% of hogs studied, China's government announced that it would soon be passing much stricter controls over AGP use. Second, the mass consolidation that has occurred over the last ten years in the country's swine, poultry and dairy sector makes it much easier to enforce laws on the handful of integrators that are coming to dominate livestock output.

All this implies that the market is poised to enter an expansive phase. By 2020, a new AGP regulatory framework will be in place, probably alongside new official incentives for using vaccines in place of antimicrobials. This implies that while China's livestock vaccine market is poised to grow several times faster than the world average, the next decade may see it exceed official growth expectations.

The only question is whether domestic Chinese vaccine suppliers (which currently supply 90% of the market) can take full advantage of the coming boom. Even at this time, the top tenth of China's animal vaccine market is primarily controlled foreign multinationals such as Zoetis, Merial, Intervet, Fort Dodge, and Boehringer Ingelheim (which was recently acquired by Elanco).

At this time, their market share is accounted for by pet sector and several top integrators. Should China's government place much stricter controls on AGP use, with no recourse to traditional antimicrobials, integrators may become much more particular about the quality of the vaccines they use, possibly preferring western brands with an established history of effectiveness. Western vaccine makers are aware of this and are already stepping up their investments in China's market in preparation for such a situation. 

Thus, while livestock vaccine uptake is just several official announcements or (at the latest) a five-year plan away from going mainstream, whether western or Chinese vaccine makers will benefit more is an open question. The latter must at the very least consolidate and make new investments. Going forward, aside from the predictable M&A activity, will China's leading domestic vaccine makers might find it in their best interest to create joint ventures which join their domestic distribution networks to the production and R&D capacity of established multinationals? Only time will tell.

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