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Merck rolls out new training program for Zilmax customers

By P.J. Huffstutter, Lisa Baertlein and Ransdell Pierson

(Reuters) - As questions about the health effects of Merck and Co's Zilmax feed additive intensified in the beef industry, the pharmaceuticals giant on Tuesday unveiled a program to retrain and certify beef producers in administering the weight-adding drug to cattle.

The news comes a week after Tyson Foods Inc declared it would stop accepting beef from Zilmax-fed cattle after it observed animals arriving at its slaughter facilities with signs they were having difficulty walking or moving.

Merck's animal health unit said it would require cattle feeders that use Zilmax to undergo more training as part of a five-step plan to deal with mounting concerns over possible negative effects of the drug.

Merck also said in the next 30 days it would re-certify feed lot operators that use Zilmax, a process the company said was designed to ensure the safe use of the drug. It will conduct what it termed a "scientific audit," following Zilmax-fed cattle from the feed yards to the packing plant to determine potential causes of lameness and other mobility issues seen by Tyson and JBS USA, a second beef producer.

Tyson Foods, the nation's largest meat processor, said its decision was based on animal welfare, not food safety. It said it did not know what was causing the animals' behavior, but animal health experts have suggested the use of Zilmax may be a possible cause.

Tyson's move has presented its cattle suppliers with a choice of sticking with Zilmax and selling to other packers, or switching to an alternative feed supplement in the beta-agonists category, or even stopping the use of beta-agonists altogether.

Beta-agonists are a class of drug approved and deemed safe by the U.S. Food and Drug Administration and long used by the livestock industry to add muscle weight to cattle, pigs and turkey in the weeks before slaughter.

An FDA spokeswoman told Reuters on Tuesday the agency requires drug sponsors to report adverse drug events. The agency declined to discuss whether it would investigate reports of animal behavior publicly discussed by Tyson and JBS, a unit of JBS SA of Brazil.

Beta-agonists have come under scrutiny in recent months over industry concerns over animals that showed signs of distress and had difficulty walking after being fed beta-agonist additives.

At an industry conference last week, JBS USA's top animal health executive showed video footage taken at one JBS facility showing cattle having difficulty moving and showing signs of lameness, Reuters reported.

STEADY CASH GENERATOR

Merck's animal health business is the world's second biggest, with $3.4 billion in sales last year, or 7 to 8 percent of Merck's total global sales. It sells a wide array of products for pets, cattle, pigs, sheep, horses and other farm animals - including vaccines, antibiotics and antiparasitic drugs.

The unit, where sales rose 4 percent last year, is considered a steady cash generator whose revenues can be used to bolster Merck's spending on research for human prescription drugs. Animal health revenue can also help stabilize Merck when its human prescription drug sales falter - as they did last year, when drug sales slipped 2 percent due to patent expirations.

Merck does not disclose sales data related to Zilmax. But Kevin Kedra, an animal health analyst for Gabelli & Co, said Merck has little to lose financially from the Zilmax controversy and the loss of Tyson's business because it is a niche product compared with the company's array of human pharmaceuticals that bring in more than $36 billion a year.

"From a financial standpoint, it doesn't move the needle at Merck," Kedra said. "An advantage of having animal health is you're not as reliant on a single product; you have a diversified portfolio. And as long as there's nothing nefarious behind (Zilmax), it probably doesn't damage their reputation," he said.

But Kedra noted that images of lame cattle heading for slaughter, like JBS's video presented at a beef industry conference in Denver last week, could fuel the controversy. "Whenever there's a video, it can go viral," he said.

Eli Lilly's Elanco animal health unit had sales in 2012 of $2.04 billion, a 21 percent jump from the prior year, helped by the acquisition of some products that had been sold in Europe by Johnson & Johnson. Elanco sales in the United States soared 30 percent last year, mainly on increased demand for pet-related products. The unit generated 9 percent of Lilly sales last year.

An Elanco spokeswoman told Reuters it is too soon to know how Tyson's decision will impact the Lilly unit's business.

BEEF PREMIUMS

While Tyson announced its change only last week, some feed lots say the company has paid them a premium for beef raised free of beta-agonists. The company's Open Prairie Natural Angus beef program features beef produced from cattle raised without hormones, antibiotics or beta-agonists.

According to several feed lot operators interviewed by Reuters, the company began paying some feeders premium prices about six months ago to supply cattle that had not been fed beta-agonists.

A feed operator in Kansas, who declined to be identified by name because of concerns that "this could be a big political issue," said he plans to discontinue Zilmax use and instead exclusively use a competing beta-agonist, Eli Lilly's Optaflexx.

"The whole deal don't matter to me one way or the other because their issue is not with Optaflexx," the cattle feeder said.

Herman Schumacher, co-owner of L.D.L. Cattle Co, a 10,000- head feedlot in Ipswitch, South Dakota, said he has raised cattle free of beta-agonists since beginning the business in 1986. Six months ago, he said, Tyson without any explanation began offering him a premium on cattle that had never consumed beta-agonists.

Schumacher said he expects Tyson's rivals to discontinue the use of beta-agonists, too. "Other packers have not floated out of this (Zilmax) yet, but with Tyson taking the lead on this, I think the others will follow," he said.

Gary Mickelson, a spokesman for Tyson, told Reuters in a statement that the company has not been encouraging feed lots to produce cattle without beta-agonists and has not paid a premium for such cattle in recent months. The company does pay a premium for cattle used in specialty programs, such as Open Prairie Natural Angus beef, he said.

The National Cattlemen's Beef Association, the beef industry's trade group, said in a statement that its members base their feed decisions "on science, not speculation. At this time, there is no scientific basis for saying the use of beta-agonists caused the animal welfare concerns cited by Tyson in their decision to stop buying cattle fed Zilmax."

(Reporting By P.J. Huffstutter in Chicago, Lisa Baertlein in Los Angeles and Ransdell Pierson in New York; Additional reporting by Theopolis Waters in Chicago; Editing by Chris Gallagher)

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