The only thing better than a well-made steak is an environmentally friendly well-made steak. Livestock farming has had its problems with greenhouse gas emissions, and the push for cleaner production has brought the need for innovations.
Enter Elanco Animal Health (NYSE:ELAN), an animal pharmaceutical company that may have a new product that can help make farming more environmentally sustainable. Elanco has received approval for a drug called Experior that can reduce emissions for feedlot cattle. This drug has the potential to not only improve the environment, but also make money for shareholders.
The feedlot market
The livestock industry is truly beefy. By 2026, the global beef market will be worth roughly $375 billion. This growth is being driven by increasing demand for protein across the world as the global population continues to grow and consumers in developing countries get richer. A direct result of this trend is the need to raise more cattle herds.
The need to supply ever-growing amounts of beef has led to the design of factory-style feedlot systems whose purpose is to increase cattle’s weight as much as possible in an economical way. Feedlot systems use high grain rations and medicines to fatten cows for a period of up to 120 days.
One common objection to feedlots is that their waste, primarily urine, contributes to ammonia gas pollution. Since feedlot cattle are so centralized, waste buildup presents a problem that has few solutions.
With climate groups and government agencies announcing the need to reduce emissions, changes will likely need to be made.
Experior, a new drug for “greener farming”
Elanco, like many animal-focused pharmaceutical companies, has recognized the need to provide solutions to livestock farmers. The company plans on being first to market with Experior, a pill that limits ammonia emissions by 14% to 18%. Experior works by utilizing a beta-agonist called lubabegron to bind with beta-adrenergic receptors and is used in the last 90 days before slaughter.
Experior has received approval in the United States and Canada, the two largest feedlot markets. It will launch this quarter, and Elanco claims this product can reach blockbuster status. Blockbuster drugs bring in over $100 million in sales each year.
There are over 31 million beef cows in the United States. This means Experior could reduce a total of 202 million pounds of ammonia (assuming Experior is used for 90 days and limits emissions by 16%). While it is unlikely Experior will reach every cow in the country, large feedlot operators like Red River Cattle have almost 1 million head of cattle. Making deals with companies like this would still lead to a considerable improvement.
Experior faces two main challenges that investors should be aware of.
First, the livestock industry operates with slim profit margins. Farmers will need to see a financial benefit in anything they adopt. Experior is currently a pure-play environmental drug, and while that brings sustainability and favorable consumer preferences, some factory-style farms may not be able to justify the cost.
That’s not to say there aren’t any potential financial incentives down the road. Consumers may be willing to pay a premium for “greener” beef — similar to how many people pay up for organic produce. Furthermore, if the Environmental Protection Agency (EPA) starts to limit livestock emissions, Experior could become a go-to product for the feedlot industry. Beta-agonists like Experior are also known to increase weight gain in cattle. If data comes out showing that Experior shares this effect, it will become a blockbuster faster than a charging bull.
The second issue is a lawsuit filed against the FDA challenging its approval of Experior, citing the potential risks beta-agonists have on animals and consumers. Both the FDA and Elanco moved to dismiss the case. However, a judge recently moved to allow the plaintiffs to go to trial. All eyes will be on this lawsuit to see what happens to Experior, and see if pharma companies will have to step away from beta-agonists and go back to the drawing board.
What this means for Elanco
Experior is an exciting drug whose effects may very well be the first step in the right direction for the cattle industry. This could become a blockbuster drug for Elanco if farmers see the benefit of promoting more environmentally sustainable practices. This of course would be good for the environment, but also good for Elanco shareholders.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.