Profit from Asian appetites

Although farmers have effectively been engaging in genetic engineering for centuries, we've only really had an insight into the science behind animal husbandry for about 60 years. Life down on the farm has never been more complex, as the number of practical farmyard applications has expanded across a range of technologies. Put simply, farming has gone high-tech; irreversibly in the west, and increasingly so in the world's emerging economies. And if, like high-profile investors such as Jim Rogers, you believe that investing in global agriculture is a must over the next few decades, then the animal health and biotechnology sector presents a key opportunity.

The importance of new animal health technologies is easily appreciated when you consider the damage done to the UK livestock industry in recent times by the outbreaks of bovine spongiform encephalitis and foot-and-mouth disease. Imagine the effects of these types of infections on a global scale. Sick livestock simply cannot pass muster for human consumption, and any ensuing shortage of animal protein products will invariably push up costs and trigger food price inflation - hardly an ideal scenario in Asian markets being driven by a switch to high-protein diets (see table). Currently, the US is the biggest consumer of animal health products, but Asia is the fastest-growing global region, with annual sales growth of 10.5 per cent predicted over the next five-years.

A growth sector

While animal biotechnology already generates around $33bn (£20.4bn) a year in global revenues, it is usually bound up in investors' minds with the wider animal health market that is usually characterised as a mature industry. In reality, the animal biotechnology segment is a growth market. Since 2006, the industry has grown at an average annual rate of 3.6 per cent, which stacks up favourably against most other sectors over the same period, and we believe that it will continue to outperform the market in years to come due to demographic changes and advances in genetic science.

The projected growth of animal biotech is impressive but, realistically, investors should only opt for the sector if they're prepared to back their capital over the long haul, because there are some obvious parallels with the pitfalls associated with the human biotech market. Barriers to entry, in the form of robust intellectual property assets, are on the rise. For established companies that's a positive factor, but biotechnology start-ups are often spin-offs linked to novel technologies from academic research. So investors can be lumbered with high fixed costs and long lead times through to production. It's worth remembering that smaller start-ups are often backed by venture capitalists in one form or another, so merger and acquisition activity is a feature of the sector as backers attempt to exit their investments.

The animal biotech sector, including novel breeding technologies, is currently about one-third of the size of the total animal medication market, but its importance is growing as genetic science plays an ever greater role in animal health. The most important biotechnology-based products consist of vaccines, particularly genetically engineered or DNA vaccines, but genetic science is an increasingly important component of livestock breeding programmes. Below we've highlighted a number of companies that derive all, or the substantial part, of their revenues through animal health and biotechnology, but it's worth noting that some of the world's best-known chemical and pharmaceutical companies have growing interests in this attractive niche: Bayer AG, Pfizer Inc,, Novartis and Sanofi - to name but a few.

Structural changes at play

It's not simply advances in technology that have enhanced the growth prospects for companies operating in the animal health/biotechnology segment; there are also structural changes at play. For example, the average size of cattle and dairy herds within the European Union (EU) has been shrinking due to a gradual reduction in the level of livestock subsidies. Data compiled by the US Department of Agriculture indicates that EU beef production is set to fall to its lowest ebb for nearly 50 years. This fall has been partly brought about by dairy farmers paring back their herds as price support subsidies have been gradually removed across the continent. However, because of advances in animal sciences and breeding technology, dairy farmers have been able to produce more milk with fewer cows; it's expected that milk output across the EU will rise by 1.1 per cent next year despite a 0.9 per cent fall in herd numbers. This rise in EU milk yields serves to illustrate why agricultural biotechnology is being viewed as so important by the UN.

IC VIEW:

To meet the expected rise in food demand, it's estimated that farmers will need to produce as much food during the next five decades as was produced over the previous 10,000 years. Obviously, a new agrarian revolution is required - one driven by 21st century applied science - and this is opening up growth opportunities for investors across the agriculture sector, while animal health/biotechnology looks a particularly interesting niche.