Pharmaceutical companies, fast-food chains and meat producers are among those most at risk from drug-resistant bacteria, says Abigail Herron.
6 minute read
Horror stories surrounding new strains of bacteria that prove resistant to antibiotic treatment would not be out place in a Stephen King movie. But it isn’t just health that’s at risk from the spread of drug-resistant ‘superbugs’: dangerously high levels of antimicrobial resistance (AMR) risk wiping $100 trillion off potential global output by 2050. Investors who ignore the threat of AMR to asset valuations do so at their peril.
At current resistance levels, pneumonia, tuberculosis and blood poisoning are among many infections becoming either more difficult to treat or untreatable as antibiotics become more ineffective. The world risks entering a post-antibiotic age where hip replacements, cancer treatments and standard surgery are among the medical procedures carrying a far greater chance of death.
The path of least resistance
Antibiotic resistance occurs naturally, when bacteria adapt in response to contact with antibiotics. However, the speed of emerging resistance is being accelerated by the misuse and overuse of antibiotics. Global consumption of antibiotics soared by 40 per cent between 2000 and 2010, with usage in Brazil, India, Russia, China and South Africa accounting for three-quarters of this growth1. Increasing awareness of this issue has sparked a focus on prescription practices in human medicine, with health professionals encouraged to curb prescribing antibiotics inappropriately.
Drug-resistant infections are predicted to cost $100 trillion in lost global output between now and 20501, more than the $73.5 trillion produced by the global economy in 2015. The World Health Organisation (WHO) estimates in the European Union (EU) alone the issue is costing more than $1.5 billion in healthcare expenses and productivity losses.
Currently, at least 700,000 people are known to die globally of antibiotic resistant infections each year and that is probably a conservative number. The UK government launched a review on AMR in collaboration with Wellcome Trust, a biomedical research charity, in July 2014. The UK AMR Review Team, led by economist Lord Jim O’Neill, predicted that, left unchecked, AMR could be a bigger killer than cancer by 2050, with 10 million people dying of antibiotic resistant infections1.
Antibiotic resistance in livestock is potentially an even bigger problem. Nearly half of all antibiotics in the UK, two-thirds in Europe and 80 per cent in the US are given to livestock. Additionally, antibiotics are largely administered to animals to prevent illness or promote growth rather than to treat disease2.
Over the past half century, increased agricultural output has been driven by the intensification of production. The human population climbed to slightly over seven billion in 2014 from 3.2 billion in 1963. To meet rising demand, world food production has soared while higher incomes and urbanisation (particularly in developing nations) have encouraged higher demand for meat and fish. By 2013, the number of cattle, pigs, sheep, goats and poultry had leapt to more than 25 billion, with the majority contained in factory farms, from approximately seven billion in 19633.
Excessive use of antibiotics in farming, and the corresponding dangers to human health, creates systemic risks across the food, farming and pharmaceutical industries. These include potential costs of regulatory change and reputational damage. Furthermore, as the momentum for a concerted global effort to address AMR grows, companies risk being caught on the wrong side of the debate; putting profitability before the common good.
As public awareness grows, pharmaceutical companies risk a backlash similar to the one experienced by banks after the 2008 global financial crisis if they fail to increase investment in new antibiotics. Only nine antibiotics have been approved by the US Food and Drug Administration in the last decade, despite the growing rate of resistant bacteria.
The slow progress stems from the fact that the financial benefit of investing in research and development for antibiotics is generally not as profitable for pharmaceutical companies as developing treatments for chronic illnesses. However, as Lord O’Neill warned: “if we get closer to 2050 and there are 10m people around the world dying [from drug resistant infections], guess who is going to be blamed?”4.
Only five of the top 50 pharmaceutical companies are carrying out relevant research, according to the Pew Charitable Trusts. While UK group GSK invested $1 billion over the last decade5, it failed to develop any new antibiotics. In 2013, GSK signed a $200 million partnership with the US-based Biomedical Advanced Research and Development Agency in a bid to develop new antibiotic treatments. Novartis is among one of the other big pharma companies currently contributing to research and development for infectious diseases.
Among the measures being considered to encourage more antibiotic development is the UK government’s recommended ‘pay or play’ approach. The proposal suggests levying 0.25 per cent of annual sales on the pharmaceutical companies that are not funding the development of antibiotics, while rewarding successful antibiotic developers with perhaps a $1.3 billion lump sum6.
The global pharmaceutical industry is also under increasing pressure to tackle pollution in its supply chains. As scientific research increasingly points to pollution from the production of antibiotics as a contributing factor to AMR, attention is now turning to the lack of transparency in the global pharmaceutical supply chain. That said, many of the largest pharmaceutical groups - GSK, Novartis, Pfizer and Johnson & Johnson among them - have publicly committed to shoulder some responsibility for tackling AMR; including cutting the environmental impact from the production of antibiotics7.
Despite recent policy announcements from global food companies such as McDonald’s, Tyson and Walmart; comprehensive policies from leading food retailers and producers are lacking. As investor-initiative Farm Animal Investment Risk & Return (FAIRR), which comprises members managing around $1 trillion of assets, highlighted in a briefing note on the restaurant sector in April, none of the ten leading fast-food and restaurant groups investigated had a fully comprehensive policy2.
These companies can ill-afford to be short-sighted, however. As the risks associated with AMR move up the corporate agenda, the potential dangers to shareholders and management will also increase. FAIRR highlights a number of financial risks associated with antibiotic misuse and growing antibiotic resistance, including reputational damage, legislative changes and potential operational disruption.
Conversely, companies that successfully address AMR risks quickest will stand to gain a commercial edge. There already seems to be evidence of this trend: the value of antibiotic-free chicken sales, for example, rose by 34 per cent in the US in 20132, and in 2014 increased 25 per cent further in dollar terms to account for 11 per cent of total chicken sales in the US8.
Hard to vet?
Elsewhere, antibiotic use in the global veterinary sector faces significant scrutiny globally. European legislative reviews to the Veterinary Medicinal Products and Medicated Feed Regulations are set to substantially limit veterinary prescribing across the EU, including a likely ban to the routine prophylactic administration of antibiotics to groups of animals.
The prophylactic, or precautionary, use of antibiotics in livestock production is under more regulatory scrutiny in the US, too. The use of antibiotics for growth promotion has become increasingly restricted and may even be prohibited in due course.
This changing legislative landscape may disrupt business operations and lead to more loss of livestock due to the increased prevalence of disease and sickness in densely packed facilities. This was seen in Denmark after the 1998 ban on certain antibiotics. A similar ban on antibiotics in the US is estimated to cost producers $4.50 per animal in the first year and could cost the industry more than $700m over a 10-year period (at 2003 prices)2. Those facilities dependent on the prophylactic use of antibiotics to compensate for the overcrowded and unhygienic conditions are most at risk, as the introduction of such legislation would require costly restructuring of facilities.
Momentum behind tackling the threat of AMR is growing as politicians take up the issue. The UK government has committed $300 million to support microbiology surveillance capacity in developing countries9, while heads of the Group of Seven and Group of 20 forums of leading economies have also committed to take action. Furthermore, at the World Economic Forum in Davos in January, more than 80 companies pledged to develop sustainable markets for antibiotics and to reinvigorate the basic scientific research and development needed to create the antibiotics pipeline.
Another sign of the gathering momentum came at the United Nations (UN) General Assembly High-Level Meeting on 21 September 2016. All 193 UN member countries committed to mobilise innovation in antibiotics; to increase public awareness of the threat to human health from increasing levels of antibiotic resistance; and to improve national surveillance data for antibiotic sales for use in both humans and animals.
Regional changes to legislation associated with antibiotics can reduce potential foodstuff sales by cutting off market access. For example, the introduction of EU legislation banning products where antibiotics are used as growth agents is estimated to have cost US beef exports $100m a year2. Although outright EU bans on antibiotics remain limited, this is likely to change. Trade restrictions are expected to be more widely adopted in the medium term, as rising concerns around antibiotic resistance encourage more jurisdictions to restrict the import of livestock and poultry products from animals given antibiotics prophylactically or for growth promotion.
Alongside the legislative and operational risks, companies with consumer-facing brands appear particularly exposed to reputational risks from antibiotic practices and the possible hit to sales as public awareness of AMR grows. For instance, responsible investment charity ShareAction’s ‘e-action’ in August, an online campaign calling for McDonald’s10 to stop using chicken, beef, pork and dairy products that have been given antibiotics in its 30,000 stores globally, attracted over 10,000 participants in the first three weeks.
Health-related food scandals have a rich history in influencing consumer spending habits. For instance, the 2009–2010 swine-flu outbreak prompted an 11 per cent drop in the global pork trade in 2009 and stock market sell-off as investors withdrew money from ‘at-risk’ sectors. Large pork producers, including Tyson Foods and Smithfields Foods, were forced to reduce herds and sell assets. Furthermore, many producers were put out of business as a result of the outbreak11.
Turning to pharmaceutical companies, Pfizer is the target of a public campaign after allegedly using Chinese factories that are depositing untreated antibiotic waste into waterways12, potentially presenting a perfect breeding ground for antibiotic resistant bacteria.
Targeting reduced antibiotic demand
US poultry producer Perdue Farms is doing more than most producers to limit antibiotic consumption; claiming to have ended the routine use of all antibiotics in its operations. It only episodically uses antibiotics when chickens get sick, which generally happens to around five per cent of its flocks according to the company. Perdue Farms started removing antibiotics from its feed in 2007 and by 2015 more than half of its chickens did not receive antibiotics.
In addition to pressurising companies to cut antibiotic usage, a move to rapid point-of-care diagnostic tests by healthcare workers may also limit demand. Rapid diagnostic tools for bacterial infections can allow doctors to identify the nature of an infection in minutes instead of hours or days, while making the treatment process more precise.
The potential public health and business risks of not addressing the issue of antibiotic resistance are substantial. The emerging signs of more coordinated action between government, industry, investors and the public are encouraging. Investors, in particular, have a key role to play in engaging with companies to ensure they have robust policies in place to manage the potential consequences of AMR to their business and to encourage best practice.
The not-for-profit organisation Access to Medicine Foundation is working towards establishing an AMR benchmark that will allow investors to monitor and track how pharmaceutical companies are participating in the fight against AMR. This would be a welcome development and help investors that want to incorporate AMR along with other business risks in their investment processes and research.
4 Superbugs and SuperRisks – What impact will antibiotic resistance have on the capital markets?, Aviva Investors, 13 October 2016