As part of Cornerstone’s ongoing research on antibiotics and livestock production, we attended the FAIRR Initiative’s event on antibiotic resistance and investment risk in New York City on Monday, March 20, at BlackRock’s office. (FAIRR, or Farm Animal Investment Risk and Return, is an investor initiative that aims to put factory farming on the ESG agenda.)

The event was well attended by a mix of investors, industry participants, and NGOs. Dr. Lance Price of the Milken Institute School of Global Health gave the keynote presentation. Erik Olson, Director of the Health Program at the Natural Resources Defense Council (NRDC), provided a policy and market trends update. The event closed with a session with panelists from Aviva Investors, Green Century Capital Management, Chipotle, and Perdue. Attendees who were new to the topic received a useful overview, while those that have been following the issue were presented with valuable perspective.

With increasing global demand for animal protein, traditional farming methods are being replaced by a new industrial model – the factory farm. While this new method has increased food production and lowered prices for consumers, antibiotics are being utilized more in the process. One speaker said Pew Charitable Trust data shows that approximately 80% of all antibiotics used in the US are fed to farm animals. We note that the Animal Health Institute refutes this figure, saying it was deduced by comparing two data sets that are not comparable. While the number may be debatable, our research indicates that the proliferation of antibiotic resistance is primarily attributed to the misuse and overuse of the drugs in human medicine and animal agriculture. (See our October 2015 report Antibiotics and Animal Health: Value-Chain Implications in the US, as well as subsequent updates.)

One of the most concerning developments is the discovery of the mcr-1 gene on Chinese pig farms and on meat in supermarkets. This single, easily spreadable gene makes the bacteria that carry it resistant to colistin, our “antibiotic of last resort”. The scientific report that originally reported this issue also presented evidence that the mcr-1 gene has already been transferred from pigs to humans.

From a regulatory standpoint, Maryland and Oregon are considering legislation like California’s SB 27, a bill limiting the use of medically important antibiotics (MIAs) in animal agriculture. In addition to prohibiting antibiotics for growth promotion, SB 27 prohibits the use of MIAs in a “regular pattern” (i.e., for growth promotion and disease prevention), thus going beyond federal policy outlined in the FDA’s Guidance for Industry (GFI) 213. This addresses concerns that animal producers may use antibiotics for growth promotion under the guise of disease prevention. As we have discussed in prior research, the potential for more restrictive regulation (as seen with SB 27) and shifting consumer demand poses a risk to antibiotics sales for animal health companies.

A discussion of company policies on antibiotic use at various points in the value chain provided valuable insight. One speaker said that in 2012 less than 10% of chicken was raised with no routine antibiotics. In 2015, that number had grown to 45%, illustrating the speed at which industry is reacting to changing consumer preferences. Perdue began the process of removing antibiotics from production in 2002 and by 2006 had completely removed antibiotics used for growth promotion. The company finished removing antibiotics in hatcheries in 2014 and in 2016 pulled animal-only antibiotics (ionophores). Currently, Perdue only uses antibiotics when chickens are getting sick, which occurs in about 5 percent of its flocks. This means that 95% of the company’s production eligible to be sold under the label “no antibiotics ever.”

Our prior research assessed poultry producers’ antibiotics use policies and we highlighted Perdue as a leading performer and Sanderson Farms as lagging. Sanderson does not believe the antibiotic-free (ABF) movement is grounded in proper science and ethics, and believes competitors’ efforts are a marketing gimmick aimed at charging higher prices. While Sanderson’s view about strict ABF policies compromising animal welfare is worthy of examination, we question the company’s strategy to combat shifting consumer demand. In February 2017, a non-binding shareholder proposal requesting that Sanderson phase out the use of MIAs for growth promotion and disease prevention failed, though it received support from 30% of votes cast.

In the restaurant space, KFC stands out as a major laggard in the NRDC’s 2016 Antibiotics Scorecard, which grades the US’s top 25 restaurant chains on their policies and practices regarding antibiotics use and transparency in their meat and poultry supply chains.

While most companies have been focused on reducing antibiotics in poultry, pork and beef are beginning to attract attention. One speaker said pork is where chicken was a few years ago and noted that the pork industry is more vertically integrated than commonly believed (he believes it is about 80% integrated). Vertical integration should, in theory, make the process of reducing antibiotics more achievable. The beef industry is “significantly” more diffuse. Companies’ recent actions also suggest movement on phasing out antibiotics from pork and beef. Subway committed to serve antibiotic free beef and pork by 2025, Tyson and Smithfield now have “no antibiotics ever” pork product lines, and Perdue purchased Niman Ranch, which adds an array of antibiotic free beef and pork to its product portfolio.

Rounding out the conversation, speakers discussed alternatives to antibiotics. Probiotics, vaccines, and biosecurity are being viewed as promising areas for growth. This supports our prior research highlighting investment opportunities in companies producing probiotics (e.g., Novozymes) and biosecurity products (e.g., Neogen). We also believe vaccines can help offset the pressure on animal health companies (e.g., Zoetis and Phibro Animal Health) due to falling sales in medicated feed additives.

Michael Shavel is a Global Thematic Analyst at Cornerstone Capital Group.  He is responsible for researching industries, companies and trends in the field of sustainable finance.  Prior to joining the firm, Michael was a Research Analyst on the Global Growth and Thematic team at AllianceBernstein where he covered the energy, industrials, and materials sectors. He holds a B.S. in Finance from Rutgers University and is a CFA Charterholder.