* Merck suspends sales of growth additive in U.S., Canada
* FDA working with Merck to study growth enhancer
* Cattle feeders to turn to less-potent beta-agonists
By Theopolis Waters and Tom Polansek
CHICAGO, Aug 16 (Reuters) - U.S. drugmaker Merck & Co said on Friday it is suspending sales of its Zilmax animal feed additive in the United States and Canada following concerns about animals showing signs of distress after use of the product, which is given to cattle to increase their weight before slaughter.
Zilmax has been the focus of attention in the livestock industry since Tyson Foods Inc announced last week it will no longer accept Zilmax-fed cattle for slaughter.
Chicago Mercantile Exchange cattle futures rose Friday on expectations that a cutback in Zilmax use could trim the supply of beef beginning this fall, although producers said they did not expect major changes.
Reuters reported earlier this week that a second major meat packer, JBS USA, at a cattle industry conference had presented a video from a JBS plant showing cattle having difficulty walking after they were fed beta-agonist drugs, additives that speed weight gain in animals. Zilmax is the leading commercial brand of beta-agonist.
In an interview with Reuters on Friday, Merck said no safety issues had been discovered in 30 studies since the product was introduced in the United States in 2007.
Merck said on Friday it remains confident in the safety of the product, which had sales of $159 million last year in the United States and Canada. But the company added it will conduct an audit of how it is used "from the feedyard to the packing plant." The product is sold by Merck's animal health unit.
Merck said its decision to suspend sales will allow the company time to implement its plan announced on Tuesday to establish study protocols, identify feeders and packers to participate in its audit while creating a third-party team to oversee the process and validate its results.
Also on Friday, the U.S. Food and Drug Administration said it was working with Merck and the U.S. Department of Agriculture to gather information on Zilmax and determine if it poses a safety issue.
Livestock analysts said they were surprised by Merck's decision because the company's earlier move to address concerns about Zilmax had not included a sales halt.
"They laid out a strategy in the last few days that did not include suspension," said Jim Robb, director of the Livestock Marketing Information Center.
The halt in sales will not cause a major disruption in North American beef production if producers switch to Optaflexx, a less-potent growth promoter sold by Eli Lilly and Co's Elanco animal health unit, Robb said.
Prices for CME live cattle to be delivered in late winter 2013 and spring 2014 had been down Friday morning before the Merck announcement and then rebounded after the news.
Investors bought based on a belief that cattle brought to slaughter without feeding on Zilmax would have lower body weight, resulting in less beef and higher prices, traders said.
One of Tyson's rivals, Cargill Inc, the country's third-largest meat producer, called Merck's decision to halt sales "prudent" and said it reflects a "thorough assessment of the situation."
"While Cargill has not experienced some of the cattle wellbeing issues others have, we support Merck's decision," Cargill spokesman Mike Martin said. Cargill will continue to buy cattle fed Optaflexx, he added.
Major beef packers National Beef and JBS USA could not immediately be reached for comment.
The use of Zilmax drew increased scrutiny after Tyson on Aug. 7 said it would stop purchases of cattle fed the popular feed additive after some animals arrived at its packing plants having difficulty walking or moving.
Tyson, the country's biggest meat processor, said it does not know what was behind the animals' behavior, but company executives said that animal health experts have suggested that the use of Zilmax may be a cause.
In response to Merck's suspension of Zilmax, Tyson spokesman Gary Mickelson said: "We appreciate Merck's decision and will continue to monitor this issue. We'll also continue to seek input from our Animal Well-Being Advisory Panel as well as other independent animal health and welfare experts."
Following Tyson's decision to stop buying cattle fed with Zilmax, Merck defended its product. The drug company said in a statement on Friday that tests have proven that Zilmax is safe. Merck also said it was working with Tyson to resolve questions about the drug.
Merck shares closed down 0.6 percent at $47.70 on Friday on the New York Stock Exchange.
The halt of Zilmax sales may translate into a 1 percent drop in U.S. beef production, said Rich Nelson, chief strategist for commodities brokerage firm Allendale Inc.
Feedlots will shift to rival additive Optaflexx from Zilmax because they still want to add weight to their animals, Nelson said.
Optaflexx is less effective at adding weight to animals than Zilmax, according to producers.
Merck's decision to suspend Zilmax sales raises cattle producer Charlie Coblentz's hopes for bigger profit.
Coblentz does not use beta-agonists in his Oklahoma feeder operation because he does not raise cattle to the their finishing weights - the last few weeks before slaughter, when doses of Zilmax or Optaflexx help cattle add weight. However, increased prices for fully grown cattle will have an effect on all cattle prices, even the younger animals Coblentz raises on his Oklahoma operation, he said.
"If everybody would take that out and cattle aren't able to gain as easily as they are now, the price of beef is going to go higher," said Coblentz. "That was my first thought."