The companies to back in the war on the superbugs

Bacteria are becoming increasingly resistant to antibiotics – the biotech firms developing alternatives are set to profit handsomely, says Tom Bulford.

In January this year, Britain's chief medical officer, Dame Sally Davies, gathered a group of MPs together to deliver a chilling message. She had grown concerned about a serious problem for modern medicine the growing resistance of bacteria to modern drugs. In September she laid out the grim reality for a wider audience in a short book, The Drugs Don't Work A Global Threat.

No new antibiotics have been introduced since 1987, notes Davies. Meanwhile, harmful micro-organisms have continued evolving, developing mutations that make them resistant, or even immune to the existing drugs. The situation is getting desperate. Doctors now routinely prescribe the most powerful types of antibiotics, such as carbapenems, which are usually only given as a last resort. Now even these are unable to kill some bacteria.

This growing resistance has given rise to what are often life-threatening superbugs', versions of bacteria such as salmonella, staphylococcus aureus (which is behind the MRSA hospital-acquired infections we hear so much about) and escherichia coli, which can't easily be killed with antibiotics. This is already taking a huge human toll. Antibiotic-resistant bugs kill around 25,000 people a year in Europe, and a further 23,000 in the US, according to a report from the US Government's Centres for Disease Control and Prevention (CDC). The burden on health services is high and rising, with many patients needing extra care to fight these new drug-resistant bugs.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Alexander Fleming, the discoverer of penicillin, had warned about the danger of bacteria developing resistance as early as 1945. Sixty-eight years later, he has been proved right. It's "an apocalyptic scenario", Davies told the assembled MPs at the January meeting. It's easy, in the modern era, to take antiobiotics for granted, but as Davies points out, they are critical for our modern quality of life. "If we don't take action, then within 20 years we may all be back in an almost 19th-century environment where people going for simple operations die of routine infections." Her warning has been echoed by the World Health Organisation.

The good news is that both Davies and the CDC offer hope that catastrophe can be averted and the biotech sector is likely to play a crucial role in doing so. Over the next year a series of novel treatments are coming to market that will begin to address this problem. And several companies in particular look well placed to benefit.

How we got into this mess

The extraordinary rise in life expectancy in developed countries in the last 100 years or so is attributable to better hygiene, prophylactic vaccinations and the discovery of antimicrobial drugs (antibiotics). Before these came along, relatively minor injuries had the potential to kill via infection. Infectious diseases could devastate populations: in 1918, Spanish flu and its effects killed 20 to 100 million people worldwide (while antibiotics have no impact on a virus such as influenza, they can deal with the associated infections, such as pneumonia, which experts now agree killed the majority of the victims). Today, thanks to air travel, the ease with which a new infection can spread from country to country has never been greater. So far we have contained new outbreaks using existing drugs, but this cannot be taken for granted.

Your body is host to around 100 trillion micro-organisms. Most are benign, or indeed beneficial, aiding digestion or helping the immune system. But regardless of their role, all micro-organisms have a genetic blueprint. This mutates over time, which can turn harmless micro-organisms into harmful ones. Our bodies have natural defences against the harmful bugs, such as our skin, stomach acid and the tiny hair-like structures in our airways. But sometimes micro-organisms find a way through, particularly when our defences have been weakened by illness, injury or surgery.

"Biotech is likely to play a crucial role in finding alternatives to antibiotics"

Antibiotics kill the bacteria that cause infections. The most famous is penicillin, which Fleming discovered by accident in 1928. Early antibiotics were natural compounds produced by fungi or other micro-organisms. Today they are more likely to be synthetic compounds. They are used for treating ailments from throat infections to infected wounds. But they also make it possible to treat cancer, to transplant organs and undertake many other critical surgeries that, by deliberately weakening the immune system, invite infection. In short, modern medicine is built on antibiotics. As Simon Howard and his peers pointed out in The Lancet medical journal last month, "achievements such as major surgery, organ transplantation, treatment of pre-term babies, and cancer chemotherapy, which we today take for granted, would not be possible without access to effective treatment for bacterial infections".

Unfortunately, their incredible usefulness means that antibiotics are extremely widely used. This creates a survival incentive' for bacteria to evolve resistance. The more resistant strains thrive and outcompete their older, non-resistant rivals. As these new strains are better equipped to deal with the hostile, antibiotic-filled environment, they in turn start to become the dominant strains. It doesn't help matters that we often use antibiotics when we shouldn't using them to treat viruses, for example, against which they are ineffective particularly in countries where medication is freely available over the pharmacy counter. According to a study by US professor James Hughes, about 50% of antibiotic use is unnecessary or inappropriate. Partly as a result of this, micro-organisms sporting antibiotic-resistant genes have mushroomed in recent decades.

Filling the "discovery void"

Another problem is that even as the germs have been evolving, our treatments haven't. In her book, Davies calls this absence of new antiobiotics the "discovery void". It's not because it's impossible to find new treatments it's mainly down to the economics of drug discovery. Pharmaceutical companies can earn a lot more money from drugs that are taken daily to manage chronic conditions such as anti-retrovirals for the treatment of HIV. Antibiotics are less attractive, because they are used for courses lasting just a few days at a time. They simply do not generate enough revenue to justify the massive investment that goes into developing a drug.

So what can be done? Firstly, we can change our behaviour. That includes only using antibiotics where they are likely to work, which could mean making them prescription-only in countries where they are freely available. It's also important for patients to finish courses of treatment to ensure the bacteria are wiped out, rather than leaving survivors to evolve and regroup. But we also need to encourage drug companies to address the problem.

There are many promising avenues for exploration. One way of finding new drugs is to test various substances against invading bacteria. Vast screening programmes can test multiple substances at once to see if they have any effects that might inhibit a given microbe. Another approach is to analyse the structure and workings of the germ, using advanced visualisation technology, and then design a drug that can seek out and disable it. Some small drug firms are already producing antibiotics that can kill superbugs. For more on these companies, see the box on page 26.

But there is another, even more significant, element to this story that fails to get the attention it deserves. Humans are not the biggest consumers of antibiotics on the planet. One industry consumes far more, and it may hold the key to averting an antibiotic crisis. That makes it a fertile area for investment.

The biggest antibiotics consumers

In 1988 six volunteers in France took part in a seminal study. Each was told to eat normally for 21 days, but for the next 17 days all of their food was heated to 105 sufficient to destroy any E. coli bacteria. The day after they began this diet of sterilised food, the number of antibiotic-resistant E. coli bacteria in their bodies fell significantly, hitting a low point in just three days. The scientist conducting the study concluded that the most highly drug-resistant E. coli living in the human gut had come from unsterilised food.

Bacteria obviously spread from human to human, and also occasionally between species (farm workers are more likely to contract bacterial infections from the animals they handle, for example). But bacteria can also be passed along through the food chain. If we eat the meat of a cow that is infected with antibiotic-resistant bacteria, these can then go on to live in our own body. Why is that a worry?

Well, consider this statistic: in America 80% of antibiotics are not given to humans at all they are given to farm animals. We know how easily germs can transmit between individuals in cramped, confined spaces in schools, say, or on the Tube. And animals in factory farms have it a lot worse than the average commuter. Crammed together in minimal space and conditions that are hardly conducive to good health, the risk of infection is extremely high. Rather than wait for it to happen, farmers treat the animals with antibiotics prophylactically. It's a practice that's been likened to a mother sprinkling antibiotics on her child's breakfast cereal every day.

"A backlash against agricultural overuse of antibiotics is coming"

Not only do they prevent disease, but according to Britain's National Office of Animal Health, these antibiotics help "growing animals to digest their food more efficiently, to get maximum benefit from it and allow them to develop into strong and healthy individuals". As a result, they are also used in animal feed as "growth promoters". So the farming industry has come to depend upon the drugs for both animal health and higher yields (more meat per animal), and it is fighting a vigorous campaign to maintain their use.

But a backlash is coming. Just as labels like organic' and free-range' have become increasingly important to consumers as their understanding of industrial farming grows, I suspect it's only a matter of time before we have antibiotics-free' labels on our poultry. It's about self-preservation as much as animal welfare. A recent report in the medical journal Emerging Infectious Diseases calculated that 280 people die in Britain each year due to antibiotic-resistant superbugs derived from chicken. "The number of avoidable deaths and the cost of healthcare potentially caused by third-generation cephalosporin (a type of antibiotic) use in food animals is staggering," said the report, recommending global action to limit the use of such drugs in all farm animals.

Action is already being taken. Antibiotics either specific ones, or their general use in the food chain have been banned in Denmark, Australia, New Zealand, Japan and the European Union. As more countries follow suit, there will be a huge new market in supplying alternatives to antibiotics to animals. I look at how to profit in the box on page 26.

Tom Bulford is the editor of the Red Hot Biotech Alert newsletter. For more, see

The five stocks to buy now

My favourite tip to profit from a crackdown on the use of antibiotics is Anpario (Aim: ANP). The firm sells an alternative to antibiotics to farmers across the world: natural feed additives that prevent and treat diseases in livestock. I recently drove up to Worksop in Nottinghamshire to meet executive vice-chairman Richard Edwards and chief executive David Bullen. Edwards gave me a tour of the factory, where animal feed supplements were being mixed and packed for shipping all over the world.

Anpario has a wide range of products, mainly for pigs, poultry and fish, which use natural ingredients to produce healthier and more productive animals. They also address a wide range of bacterial diseases, such as coccidiosis. This nasty parasitic infection is dreaded by poultry farmers. It causes diarrhoea and is often fatal and it has developed a resistance to antibiotics. Anpario offers an alternative treatment called Orego-Stim. It's made of essential oils and other natural ingredients, which speed the rate of renewal of intestinal cells. This strengthens the immune system and makes gastrointestinal diseases such as coccidiosis less likely. And unlike antibiotics, it does not breed resistance.

Anpario has invested to grow its manufacturing facilities, but still has cash on the balance sheet and no debt. In the first six months of the year it made a pre-tax profit of £1.5m on sales of £13m. For the full year broker estimates are for a profit before tax of £3m on sales of £26m in other words an exact doubling of the first half. Given that this implies no growth in the business throughout the year, this looks conservative, as does the 2014 forecast for sales of £27.5m. I have a 12-month price target of 350p. If we conservatively assume 15% annual growing over the next three years, I would target 407p. And if Anpario can use its cash to make good acquisitions, then the price could be even higher.

In the meantime, the fight to contain superbugs continues in hospitals across the UK. That's why my colleague Paul Hill has tipped Tristel (Aim: TSTL) in his Precision Guided Investments newsletter. Tristel develops chlorine-dioxide-based disinfectants. These sprays, wipes and gels are used to sterilise surfaces and surgical instruments. Tristel's products are already used to decontaminate heat-sensitive endoscopic and ultrasound instruments in over 375 hospitals, representing around 60% of all such sites. The company is expanding abroad rapidly exports to countries such as Australia, Germany and China soared 60.8% to £3.4m in the first half, representing 32% of sales. Paul forecasts sales and earnings before interest, tax and amortisation to climb from £11.5m and £1m for the full-year 2014 results, to £15.2m and £2.2m by 2016. He has a target price of 49p for the stock.

Companies that are targeting treatments specifically include Cubist Pharmaceuticals (Nasdaq: CBST), reports David Sobek on The Street. The CDC reckons there are around 250,000 infections by the superbug clostridium difficile each year in theUS, leading to 14,000 deaths and $1bn in medical costs. Cubist markets Dificid, approved to treat C. difficile, and has a follow-on compound, surotomycin, in late-stage clinical studies. "Based on Phase II study results, the latter has the potential significantly to reduce the risk of C. difficile recurrence, and [also] limited the impact on healthy' bacteria that normally inhabits the bowel."

Sobek also suggests Tetraphase Pharmaceutical (Nasdaq: TTPH), which is working on a next-generation antibiotic that works on a range of drug-resistant bacteria, including those that are resistant even to the most potent existing antibiotics.

If you are uncomfortable investing in such small stocks, consider the Biotech Growth Trust (LSE: BIOG). Over the last three years the shares are up 164.8% compared to the Nasdaq Biotech index at 137.6%. Regeneron, Celgene and Biogen Idec are the main contributors. It's trading at a 6.53% discount to net asset value (so the share price is a little lower than the underlying value of the stocks in its portfolio). MoneyWeek has tipped this regularly in the past and while it's not a direct play on the antiobiotics crisis, it's a good way to get exposure to the biotech boom.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.

Follow Tom on Google+.