SPECIAL SECTION: PESTICIDES: A New World for Suppliers

In some industries a company can gain a patent for a product and begin selling it immediately and enjoy patent protection for almost 17 years.

Because pesticides are a highly-regulated industry, patent law provides fewer actual years to market and sell a product. In fact, getting a patent is just the first step in a long and costly process. Bringing a new turf and ornamental active ingredient to market today requires 10 to 12 years, $150 million and perhaps 200 tests to meet expanded federal and state regulatory requirements.

To get maximum marketing time with patent protection it would seem to make sense for a basic manufacturer to delay patent application for as long as possible. In reality, manufacturers are under pressure to get patent protection as soon as possible because competitors might be researching the same chemistry, or could do so if they learned about the research. So, as soon after a promising compound is identified the manufacturer will apply for a patent.

A patent is no guarantee that even the most promising chemistry will be viable or successful. The manufacturer must also research formulation and manufacturing options and do extensive laboratory and field efficacy research to meet the regulatory hurdles necessary to earn Environmental Protection Agency (EPA) registration. In recent years special state regulatory requirements have become more common and complex. In reality only a small percentage of patented chemistries actually make it to market.

If all research and regulatory requirements can be satisfied the company can begin to market a new product. However, from the time that the patent was granted until marketing can begin may use up five to 10 years of the 17-year patent, leaving seven to 12 years to build market acceptance and sales. Sales and profits are not instantaneous since applicators have to be made aware of the product and convinced to try it.

The more successful a new product is, the more interest formulators will have in the active ingredient as a post-patent product. The situation is even more tenuous overseas. United States patents are not universally recognized, so an overseas manufacture might simply disregard the U.S. patent and begin producing the active ingredient for its own end-use products.

From the investment side there are four other important considerations.

• First, the product performance bar in the turf and ornamental market has been raised. Any new product must compete against already good products.
• Second, research in agricultural products has decreased.
• Third, other markets in the U.S. and overseas are competing for limited research dollars. In a publicly held company the stockholders are most concerned with the potential return on their investment.
• Fourth, the day of the blockbuster pesticide has passed. The Food Quality Protection Act (FQPA) made it more difficult to develop a product that is used extensively in several major markets. FQPA sets a limit on total theoretical exposure to a chemical class that cannot be exceeded. For example, an insecticide could be used in food crops, cotton, nurseries, golf, sports turf and professional turf. The sum of the potential human exposure from all of its uses is estimated and weighed against the theoretical “risk cup” limit set by the EPA. If all of the uses of all of the insecticides in that chemical class exceed the risk cup limit, then manufacturers must reduce uses to get below the FQPA limit.

Taken together these challenges make investment in new specialty chemicals increasingly risky and difficult.

Post-patent suppliers face a competitive marketing challenge. Bringing a post-patent product to market requires more than buying the active ingredient, developing a formulation and selling it at a discount. Rather, it is a process that requires considerable time and money.

The chief challenge in using a post-patent active ingredient is finding a winning marketing strategy in a competitive sales environment. To do so a formulator must consider its core competencies, distribution channel partners and special expertise. Based on those strengths, formulating a post-patent product strateg begins by identifying what promising active ingredients are available and which would be the best additions to the company’s product line.

Since the main challenge is marketing, the critical up front work is to analyze the competitive situation. Are distributors and customers open to the proposed post-patent product? Does it make financial sense? Answering these questions usually takes three-to-six months before a go/no go decision can be made. Add months if upper management approval is required for funding.

If a go decision is made the next step is to file an application for registration. Contracts are needed for purchasing the active ingredient, formulation, packaging and distribution.

An offer of “data compensation” must also be made to the basic manufacturer. Data compensation is legal recognition that the basic manufacturer is due compensation for its investment in research and development. Once an offer for data compensation is made it becomes a matter of arbitration. Data compensation is usually a one-time payment of $1 million to several million dollars, depending upon the original research investment made, how current the research is and more.

Once a post-patent formulation has been developed, field trials can begin to generate data for marketing purposes. If field trials are positive, toxicology tests are needed to gain EPA registration. EPA will require additional research to register the new post-patent formulation, as well as ongoing research to maintain it. In some cases ongoing funding is required by all registrants to pay for research to protect the molecule. For example, companies formulating herbicides with 2,4-D must contribute to the 2,4-D Task Force, a coalition of companies that have invested about $40 million to keep this workhorse compound registered.

Depending upon the above variables, the process to bring a post-patent product to market can require six to 18 months. If the new formulation involves a combination of two active ingredients not previously registered in combination by the EPA, add more time and expense. Developing a formulation for a new label use can also add time and cost. And if the active ingredient had never been registered in the United States for the turf and ornamental market, then introducing it would follow the same basic process and timeline as required to introduce any newly-discovered active ingredient.

A the other end of the spectrum, the easiest way to sell an post-patent active ingredient is to buy it from the basic manufacturer, re-brand it and make the necessary marketing and sales adjustments. Another simple arrangement is to negotiate an agreement with the basic manufacturer to serve as its marketing and sales arm for the product (a “re-packager”). In this scenario the basic manufacturer retains registration of the active ingredient and ownership of the product, but both companies share the profit. Re-packaging arrangements can be completed relatively quickly.

The goal for any pesticide manufacturer or formulator is to take its product line to the next level. In the post-patent environment, business decisions depend upon what active ingredients are available, the market fit and the ever-changing competitive situation.