Responsible Investment Solutions

ESG Viewpoint

October 2021

Public health: Antimicrobial resistance (AMR) and the animal health industry

At a glance

Intensive farming practices have led to increased dependence on antibiotics – companies in the animal health industry have an important role to play in stopping the spread of antibiotic-resistant bacteria.

We have been engaging on AMR since 2019, recognising the importance of a cross-sector approach. Our engagement with animal health companies is building on our positive engagement with pharmaceutical companies and food producers and purchasers.

We believe companies can take steps to counter the threat of AMR. These include the use of alternatives, better oversight and management of antibiotic suppliers and responsible sales and marketing.

Catherine McCabeAnalyst, Responsible Investment

Overview

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Companies in the animal health industry have an important role to play in stopping the spread of “superbugs” – harmful bacteria that have acquired resistance to one or more of the antibiotics used to treat the serious infections they can cause1.

Antimicrobial resistance (AMR) – dubbed the “silent pandemic” – was back on the agenda at the G7 Summit in June 2021. Against the backdrop of COVID-19, the G7 Leaders committed to improving pandemic preparedness and combatting longstanding global health threats, including AMR. Crucially, a spotlight was shone on the importance of a “One Health” approach, recognising the interconnectedness of human, animal and environmental health.

As highlighted in our Antimicrobial Resistance: Overcoming challenges Viewpoint, animal protein production is estimated to account for 73% of global antibiotic use2. Unfortunately, the spread of intensive farming practices has resulted in increased dependence on antibiotics, which are used to:

• Treat diseases

• Prevent diseases (“prophylaxis”) that can be caused by unsanitary and crowded conditions

• Promote growth

Antibiotics are supplied to animal protein producers by companies in the highly consolidated $47 billion animal health industry, which manufactures veterinary pharmaceuticals, vaccines and other animal health products. Given that there is growing evidence that the use of antibiotics in animal protein production is fuelling the spread of AMR and undermining public health, animal health companies need to ramp up their efforts to prevent the misuse and overuse of antibiotics. Furthermore, they need to channel R&D spending into the development of effective alternatives to antibiotics.

In this Viewpoint, we explore some of the key points and case studies in Feeding Resistance, which clearly articulates the need for investors to urge animal health companies to engage more actively in the global fight against AMR.

Animal health companies need to ramp up their efforts to prevent the misuse and overuse of antibiotics.

AMR is an escalating and highly complex problem – ultimately, we are in an arms race against microbes, which are expert at evolving resistance rapidly, so we have to respond quickly and in a multifaceted way.

Dame Sally Davies in Nature, May 2019

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Interested in learning more? Keep on scrolling or click the quick links.

Farm Animal Investment Risk & Return Initiative (FAIRR) published a report – Feeding Resistance – in July 2021, which examines the 10 major publicly-listed animal health companies’ exposure to antibiotics and their efforts to mitigate AMR. FAIRR’s research revealed that sales of antibiotics account for c. 24% of the total animal health market, and between 7-43% of individual companies’ total revenue.

Learn about the rising risks facing animal

health companies

Access our final thoughts

Read about our engagement

Source: https://www.nature.com/articles/d41586-019-01409-x

How can companies help counter the

threat of AMR

Animal health companies are facing rising risks from selling antibiotics

use of antibiotics. Restaurant and supermarket chains are responding to shifting consumer preferences, and we are encouraged by the increasing number of food retailers making commitments on responsible antimicrobial use. Ultimately, these commitments mean that their suppliers have to use antibiotics more judiciously.

Interestingly, FAIRR’s analysis of major animal health companies shows that some of these companies’ proportion of revenue from antibiotics/antimicrobials has already declined due to – among other factors – regulation and portfolio diversification:

The animal health industry is not only facing pressure from investors to tackle AMR. There are also key trends which may negatively impact the industry’s ability to grow antibiotic-linked revenue over the medium-term:

Regulation – Regulation in several countries, including the UK and South Korea, has already banned the use of antibiotic growth promoters, and new EU legislation – coming into force in 2022 – will prohibit the preventative use of antibiotics in farming. As AMR rises up the global agenda, we think that regulation to control antibiotic use will become increasingly stringent.

Loss of effectiveness of antibiotics – There is evidence which suggests that the efficacy of antibiotic growth promoters is diminishing. Research in the 1980s found that antibiotics could increase pig growth by c. 15%, while more recent research suggests that this figure has dropped to an increase of only a few per cent3. If this trend continues, animal protein producers may be more likely to turn to antibiotic alternatives.

Shifting consumer preferences – Consumers, particularly consumers in high-income countries, are increasingly aware of the drawbacks of meat production. As a result, there is growing demand for plant-based sources of protein and meat raised without the routine

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Yum! Brands, which owns KFC, Pizza Hut and Taco Bell, is piloting a regular assessment of the impact of its suppliers’ husbandry practices on antimicrobial use in poultry. For example, the company has achieved a 50% reduction in the use of antimicrobials (based on net kilograms used) in two European markets as a result of the efforts of third-party auditing and consulting partners. Source: http://citizenship.yum.com/pdf/Good-Antimicrobial-Stewardship.pdf

Share of revenue from antibiotics/antimicrobials for key animal health companies from 2015-2020.

Source: FAIRR 2021, Feeding Resistance report

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How are we engaging animal health companies?

and their Roadmap, which sets out action points to reduce the need for antibiotics through to 2025.

We are planning to re-instate our dialogue with animal health companies, leveraging the findings of FAIRR’s Feeding Resistance report to inform our questions and encourage the adoption of best practices.

We initiated our engagement on AMR in 2019, recognising the importance of a cross-sector approach. Our engagement with animal health companies is building on our positive engagement with pharmaceutical companies and food producers and purchasers.

In 2020, we reached out to a select group of animal heath companies and focused on gathering information from publicly available sources about their strategies to address AMR, enabling us to identify leading practices and shortcomings. Companies in the animal health industry are not frequently engaged by investors, and – unfortunately – the majority of the companies we contacted did not respond. However, one company helpfully pointed us to HealthforAnimals, a non-profit NGO which represents several of the major animal health companies, including Elanco and Zoetis. HealthforAnimals provided us with a statement outlining its members’ perspective on responsible antibiotic use

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Our engagement with animal health companies is building on our positive engagement with pharmaceutical companiesand food producers and purchasers.

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With root causes in sectors ranging from health, food safety and agriculture to environment and trade, antimicrobial resistance (AMR) is one of the most complex public health threats the world has faced. No single government department or independent organization can tackle it alone. Containing and controlling AMR demands coordinated action across diverse sectors and disciplines, with a broad range of stakeholders.World Health Organization Source: https://www.who.int/antimicrobial-resistance/publications/Tackling-AMR-multisectoral-coordination-june2018.pdf?ua=1

Animal health companies’ antibiotic stewardship strategies vary in quality

FAIRR’s research and our research has revealed significant differences between animal health companies’ strategies to mitigate AMR. Although they are generally making good progress on product diversification, thereby reducing the animal health industry’s overall exposure to antibiotics, there are some concerning gaps in their environmental risk management and responsible sales and marketing strategies. The table below highlights leading practices, as well as some examples of suboptimal antibiotic stewardship:

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*FDA – U.S. Food and Drug Administration. Source: BMO GAM and FAIRR.

Oversight of antibiotic suppliers Responsible sales and marketing

Leading practices

Orion has a risk-based approach to managing its global supply chain. If sustainability risks are seen as high, the company can conduct on-site sustainability audits. All audit observations are followed-up via a “Corrective Action Preventive Action” plan4. The company is also a member of the Pharmaceutical Supply Chain Initiative (PSCI), one aim of which is to improve environmental risk management in supply chains, leveraging collective expertise.

Vetoquinol provides guidance on the use of its antimicrobials on its website. For example, for an amoxicillin-based product called Amoxinsol, the product description states that it should be used for the treatment of infections and that its use should be based on susceptibility testing5.

Examples of suboptimal antibiotic stewardship

Aurobindo, one of India’s largest generics manufacturers, was a previous supplier of antibiotics to Zoetis. In 2016, resistance to three major classes of antibiotics was detected at Aurobindo’s Unit VII site near Hyderabad6. Aurobindo has received numerous FDA* Form 483s in recent years due to (among other reasons) quality control issues.

In 2018, Elanco ran a marketing campaign called “Pig Zero” which promoted the indiscriminate preventative use of an antibiotic product called Denagard in pig herds. This marketing campaign also emphasised Denagard’s ability to promote weight gain7.

The PSCI promotes control of pharmaceuticals in wastewater effluent using a risk-based approach to ensure that pharmaceuticals in surface waters do not exceed predicted no effect concentrations (PNECs). PNECs are chosen to protect aquatic organisms in surface water as well as humans or wildlife that use surface water from harmful effects of pharmaceuticals. PNECs are also set to minimise the risk of development of AMR in environmental bacteria from the presence of antibiotics in surface water. Source: https://pscinitiative.org/resource?resource=552

MSD Animal Health is one of the world’s largest manufacturers of vaccines for animals, and is commercialising or developing vaccines for 15 animal diseases. In addition, the company offers the Whisper® Veterinary Stethoscope System, which can measure the severity of bovine respiratory disease – ill animals can easily be identified and treatments tailored accordingly8.

MSD Animal Health is one of the world’s largest manufacturers of vaccines for animals, and is commercialising or developing vaccines for 15 animal diseases. In addition, the company offers the Whisper® Veterinary Stethoscope System, which can measure the severity of bovine respiratory disease – ill animals can easily be identified and treatments tailored accordingly8.

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Numerous scientific reports confirm a beneficial effect of probiotics on animal health, particularly in terms of protection against pathogens, stimulation of immunological response and increased production capacity. Source: https://gutpathogens.biomedcentral.com/articles/10.1186/s13099-018-0250-0

How can animal health companies meaningfully contribute to the fight against AMR?

– Test antibiotics to ensure that they contain the correct proportion of antibiotic active pharmaceutical ingredients (APIs) – poor quality antibiotics can fuel the development of antibiotic resistance

• Responsible sales and marketing

– Ensure that antibiotic packaging and promotional materials do not promote the non-therapeutic use of antibiotics, especially shared-class antibiotics

– Harmonise global marketing policies (used for both human and animal bacterial infections) to avoid advocating the use of shared-class antibiotics as growth promoters and/or for routine disease prevention in countries where antibiotic regulation is less stringent

– Disclose antibiotic distributors and terminate relationships with those which have irresponsible sales practices

Taking current leading practices into consideration, we believe the following actions would be particularly impactful:

• Antibiotic alternatives – e.g. probiotics and vaccines which help to reduce the incidence of disease in farm animals

– Invest in R&D to accelerate the development of antibiotic alternatives

– Educate customers to encourage the uptake of antibiotic alternatives

– Fund research to evaluate the cost-effectiveness of using antibiotic alternatives instead of antibiotics

• Oversight of antibiotic suppliers

– Implement a strategy to prevent antibiotic manufacturers from releasing antibiotic discharges* into the environment

– Terminate relationships with antibiotic manufacturers which fail to take action to mitigate the environmental impact of antibiotic discharges

* In European countries, only trace levels of antibiotics in the environment can be attributed to waste from production, but in some countries – e.g. China and India – where discharges are less well-controlled, studies have found very high levels of active residues in the discharge vicinity of antibiotic factories. Source: https://www.amrindustryalliance.org/wp-content/uploads/2019/11/Making-antibiotics-responsibly_A-common-manufacturing-framework-to-tackle-AMR.pdf

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Final thoughts

As it currently stands, the picture is very mixed. It is positive that a number of major animal health companies are channelling more resources towards antibiotic alternatives, especially vaccines, but there is significant scope to improve the oversight of environmental supply chain risks and the messaging in antibiotic sales and marketing materials.

Looking ahead, animal health companies are likely to accelerate their revenue growth in Emerging Markets,

especially in Brazil, India and China, where – comparatively speaking – antibiotic consumption in animal agriculture is high and antibiotic regulation is fairly weak. The time is now for animal health companies to step up their AMR risk mitigation efforts to curb their potential contribution to the spread of AMR in Emerging Markets. We also think they could increase their engagement in public policy initiatives to push for and cement best practices in antibiotic stewardship.

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With thanks to FAIRR for their valuable expertise and insights. BMO GAM is one of FAIRR’s network members, with collective AuM of c. $40 trillion (as at August 2021).

1 https://www.antibioticresearch.org.uk/about-antibiotic-resistance/bacterial-infections/superbugs/2 https://cddep.org/blog/posts/global_livestock_antibiotic_use_expected_increase_67_2030/3 https://www.nature.com/articles/d41586-020-02889-y4 https://www.orion.fi/globalassets/documents/orion-group/sustainability/orion_sustainability_report_2020.pdf.

Please also refer to pg. 25 in FAIRR’s Feeding Resistance report.5 https://www.vetoquinol.co.uk/content/amoxinsol-100-powder6 https://www.mightyearth.org/wp-content/uploads/2016/10/CHANGING-MARKET-SUPERBUGS-IN-THE-SUPPLY-CHAIN-GUARD-FONT-FIN-PRINT.pdf.

Please also refer to pg. 27 in FAIRR’s Feeding Resistance report.7 Please refer to pg. 33 in FAIRR’s Feeding Resistance report.8 https://msd20-assets.s3.amazonaws.com/wp-content/uploads/2020/09/15204428/MSD_GAAP_Combined_Digital_One-Pagers_9-15-20.pdf

©2021 BMO Global Asset Management. BMO Global Asset Management is a registered trading name for various affiliated entities of BMO Global Asset Management (EMEA) that provide investment management services, institutional client services and securities products. Financial promotions are issued for marketing and information purposes; in the United Kingdom by BMO Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority; in the EU by BMO Asset Management Netherlands B.V., which is regulated by the Dutch Authority for the Financial Markets (AFM); and in Switzerland by BMO Global Asset Management (Swiss) GmbH, acting as representative office of BMO Asset Management Limited. These entities are all wholly owned subsidiaries of Columbia Threadneedle Investments UK International Limited, whose direct parent is Ameriprise Inc., a company incorporated in the United States. They were formerly part of BMO Financial Group and are currently using the “BMO” mark under licence. 108252 (11/21). This item is approved for use in the following countries; AT, BE, DK, FI, FR, DE, IE, IT, LU, NL, NO, PT, ES, SE, CH, UK.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

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Get to know the author

Catherine McCabe, Analyst, Responsible Investment

Catherine joined the Responsible Investment team in 2018, and currently covers engagement on public health issues. She also leads work on BMO GAM’s Responsible product range. Outside of work, Catherine enjoys listening to podcasts about science and history, and hiking in the Alps. She speaks German and Italian because she studied both languages at university.

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