The Best Way to Play the Looming Superbug Threat

Jim O’Neill, the former chief economist at Goldman Sachs, is best known for coining the BRIC acronym, which stands for the emerging market countries Brazil, Russia, India and China.
But today he is trying to focus the world’s attention on a completely different subject. O’Neill is very concerned about the rising threat that so-called “superbugs” pose. Superbugs are antibiotic-resistant microbes.
O’Neill believes the effects of drug-resistant bacteria on our future world will be very real. His thoughts were revealed in a report issued by a U.K. government-appointed team, which he headed.
He foresees that global gross domestic product growth will be cut by 2% to 3.5% by 2050. That could literally translate to up to $100 trillion – not to mention the cost in possibly millions of human lives if the superbug threat isn’t addressed.
O’Neill is backed up in his concern by the World Health Organization (WHO). It said in a report last April that antibiotic resistance from superbugs is a threat “so serious that it threatens the achievements of modern medicine.” It added that without action, “The world is headed for a post-antibiotic era, in which common infections and minor injuries, which have been treatable for decades, can once again kill.”

More Investments Needed

By action, the WHO means research and development by the pharmaceutical companies on new antibiotics. O’Neill says that as much as $37 billion is needed to incentivize the industry to develop new and innovative drugs to combat the superbug threat.
This money, O’Neill believes, should come in the form of upfront payments from governments. However, the payments would only be made after the antibiotic has been proven effective. That still leaves the pharma companies to foot the initial research costs.
O’Neill is proposing this course of action because there is little market incentive for the companies to do such R&D. Any new drugs developed will only be used after all current treatment options are exhausted.
In other words, the market is too small to interest Big Pharma companies. With such a small market, it may take over a decade of sales for the companies to just cover their development costs. That is the reason why pharmaceutical companies largely moved out of the sector over the past two decades and into more profitable segments, such as cancer treatments.
The once-acknowledged leader in antibiotic research, Pfizer (NYSE: PFE), shut its research operation in 2011. So did Johnson & Johnson (NYSE: JNJ). Eli Lilly (NYSE: LLY) left the field in 2002, as did Sanofi SA (NYSE: SNY) in 2004. Others left in the 1990s.

Pharma Companies to Become Involved

Something has to be done. O’Neill proposes that the industry pool together a $2 billion fund over five years to spur more early stage research on antibiotics.
Two major pharmaceutical companies – GlaxoSmithKline PLC (NYSE: GSK) and Roche Holding AG (OTC: RHHBY) – said they are willing to work within O’Neill’s proposals. Roche just restarted antibiotic research in 2014.
The two companies agree that the antibiotic development process needs to be overhauled. GSK’s president of pharmaceutical R&D, Patrick Vallance, said in a statement, “We are very encouraged by (O’Neill’s) ideas … to modernize the economic model to encourage investment in research and ensure reasonable returns.”
But neither company has committed funds to the proposal yet.

A Biotech Path

The major drug companies may not be the best path to finding the next generation of antibiotics. The answer may lie in the red-hot biotech sector.
Two names that come to mind with antibiotics in Phase 3 clinical trials include Tetraphase Pharmaceuticals (NASDAQ: TTPH) and Cempra (NASDAQ: CEMP).
Analysts in the industry believe the current trials have an 80%-90% chance of success.
The bottom line is that it may be easier for the big pharmaceutical companies to just buy these types of companies, rather than develop new antibiotics on their own.

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