THE BENEFITS TO PESTICIDE MANUFACTURERS OF BECOMING PESTICIDE
REGISTRANTS UNDER THE U.S. PESTICIDE LAW (FIFRA)
Abstract: Companies that produce chemical substances intended to
control pests may not sell freely into the U.S. market without obtaining
approvals from the relevant agency of the U.S. Government. Absent an
approval, such substances may only be sold to companies that hold an
appropriate U.S. pesticide approval. This article discusses the significant
advantages that belong to companies that obtain their own approvals.
I.
Introduction
Exporting pesticides is big business in China, a business that continues to experience
growth. In 2004 alone, over 390 million kilograms of pesticides were exported. The value of
these exports totaled $1.19 billion U.S. dollars (USD), over 12 times more than the value of all
pesticide exports from China only 11 years earlier. In fact, the value of the 2004 exports was
greater than the value of all Chinese pesticide exports from 1993 through 1997, combined. The
individual unit value of exported pesticides has also soared. The value of one kilogram of
exported pesticides in 2004 was $3.04 USD, greater than 50 percent more than the value of a
kilogram in 1993. In just one year, from 2003 to 2004, the unit value of exported pesticides rose
by 14 percent. Based upon this sustained growth, targeting and promoting pesticide exports to
global markets should be incorporated into the business model of every Chinese pesticide
manufacturer, regardless of size. This paper is intended to help Chinese pesticide manufacturers
unlock the doors and gain entry to the most lucrative of those markets, the U.S.
The United States law applicable to pesticides is the Federal Insecticide, Fungicide and
Rodenticide Act (FIFRA). A pesticide approval is known as a “registration.” It is a license to
sell a pesticide and it is issued by the U.S. Environmental Protection Agency (EPA). Without a
registration, a company is limited to being a mere supplier of a bulk chemical for companies that
hold registrations. To obtain a registration, an applicant must generate data to support the
approval or acquire the rights to such data from others if it is not yet publicly available.
Manufacturers that do not hold their own pesticide registrations are not able to market their
© 2005 Keller and Heckman LLP
products freely to U.S. formulators of pesticide products. Profit margins will be limited by
competition from other bulk chemical suppliers. To better realize the full profit potential of U.S.
pesticide markets, Chinese manufacturers should consider the advantages of becoming registered
under FIFRA. This paper outlines the advantages of pesticide registration in the U.S., discusses
how to gain access to data through a mandatory data sharing feature of FIFRA, and explains the
benefits of holding a pesticide registration.
II.
Overview of Pesticide Registration in the U.S. under FIFRA
Pesticides are regulated in the U.S. by the EPA under FIFRA. A registration is a license
to an individual company to sell a specific pesticide with the EPA approved label.
Whether a substance requires registration as a pesticide is not primarily dependent upon
the chemical characteristics of the substance but on whether the substance is sold with the
“intent” to control pests. Although intent can be demonstrated in several ways, it is most
commonly evidenced by pesticidal claims made for the product on its label and associated
promotional material (labeling). A pesticidal claim is any representation that a product will kill,
repel, control, or otherwise reduce the number or severity of pests. A “pest” is defined broadly
under FIFRA to include bacteria, fungi, viruses or other microorganisms, in addition to common
pests like insects, weeds and rodents. With some exceptions, FIFRA requires a pesticide
registration for every chemical substance sold and distributed in the U.S. with the intent that it
control pests.
FIFRA requires pesticide registrations for substances considered active ingredients –
specific chemicals that have or are intended to have pesticidal effects – and for formulated
products containing them. Active ingredient products are known as "Technical Grade Active
Ingredients” (TGAI). Formulated pesticide products are those that contain the active ingredient
mixed with other ingredients, such as surfactants, emulsifiers or diluents, called “inert”
ingredients. The term “inert ingredient” is used to refer to all components of pesticide products
that are not the active ingredient(s), regardless of their potential toxicity to man or animals or
their reactivity in the environment. Products that are sold for use in formulating other pesticide
products are called "manufacturing-use" products (MP or MUP). An active ingredient (TGAI)
sold on its own, and not in a mixture may also be called a MUP because it can be used to
manufacture formulated pesticides. The data requirements supporting the registration of a TGAI
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(explained in Section III below) are called “core data” or “generic data,” and include many of the
long-term safety studies on the active substance, such as chronic toxicity, environmental fate,
etc.
Finished formulations have directions for use which specify how to use the product to
control pests. These are called "end-use" products (EP). Additional data pertaining to the
composition of formulated products and their risks are required for EPs. In obtaining a
registration for an EP, applicants do not need to satisfy the core data requirements as long as a
registered active ingredient is purchased for use in the formulation. This waiver of the
requirement for core data is known as the “formulator’s exemption.”
Chinese manufacturers may improve their profit margins and expand their customer
options in the U.S. by obtaining a TGAI registration. Nothing prevents a manufacturer from
obtaining an EP registration, but this makes little sense until such time as the manufacturer
establishes marketing and distribution capability in the U.S.
III.
Advantages of Being a Pesticide Registrant
There are advantages for a company to become a TGAI pesticide registrant rather than
toll manufacturing for a third party who holds a registration. With limited exception under
FIFRA, a pesticide manufacturer cannot sell an unregistered pesticide directly in the U.S.
Therefore, because many Chinese companies do not hold pesticide registrations, they must toll
manufacture for a contractor who owns the registration. These Contractors in turn sell directly to
U.S. end-use pesticide product manufacturers. The cost of complying with regulatory
requirements (even when none of the core data are subject to the data compensation requirements
discussed below) means that registered TGAI’s sell for a premium as compared to an
unregistered version of the substance when sold as a commodity chemical. These price
premiums result in higher product profit margins once the registration costs have been recovered.
For example, registered hydrogen peroxide sells for more per gallon as a registered TGAI,
which is considerably higher than the commodity price by 16%. Registered boric acid sells for a
14% premium over the commodity price. Hydrogen peroxide and boric acid illustrate the price
premium available for registered TGAIs simply because the manufacturer has registered its
product. Virtually all of the core safety data for hydrogen peroxide and boric acid has been on
file at EPA for so long that the original submitters of the core safety data are no longer entitled to
© 2005 Keller and Heckman LLP
compensation when EPA relies on the data to approve new registrations. If significant data
obligations (or compensation to existing registrants for access) exist for a TGAI, the price
differential between the registered product and the commodity chemical price will be even more
significant. Since it is illegal to sell an unregistered product for a pesticidal purpose, the
enforcement activities of EPA’s Office of Enforcement and Compliance Assurance (OECA)
helps to maintain the price differential for registered product. Strong enforcement is a vital
protection for the registrant’s investment in developing the data required for registration. A
manufacturer holding a TGAI registration must still compete with other TGAI registrants, but as
a registrant, it no longer needs to compete against commodity chemical manufacturers. 1
Holding a TGAI registration provides a pesticide manufacturer greater autonomy in the
U.S. marketplace. As previously mentioned, a pesticide registration is a proprietary license
granted by the EPA, enabling the holder to sell a particular TGAI in the U.S. Each company
needs a separate registration for each TGAI it intends to sell to a U.S. producer of pesticide
products. Every formulator of an EUP containing the TGAI becomes a potential direct customer
by the operation of the above referenced “formulators exemption.” By holding a TGAI
registration, a Chinese company can directly sell pesticide products to U.S. companies holding
EP registrations, thereby providing more control over marketing and sales, eliminating fees for
middlemen, and insuring the company’s best interests are protected. Furthermore, merely
holding a TGAI registration establishes a presence in the U.S. market. All registrants are
included in the EPA’s Pesticide Product Information System (PPIS). This database contains
information concerning all pesticide products registered in the U.S., including the registrant’s
name and address. The databases are available at
http://www.epa.gov/opppmsd1/PPISdata/index.html. Therefore, a U.S. EP registrant looking for
alternative sources and/or competitive bids for the TGAI’s it uses will start by searching the
A common marketing strategy is known as “split” labeling. A registered master label often permits several
end uses. A “split” label would contain instructions limited to use in a specific market segment. Price differentials
between registered and unregistered versions of the same substance are well justified and “split” labels permit useful
targeting of markets. State consumer fraud laws may be violated, however , if a “split” label is used to support a
price premium for pesticide sales to markets where there is little or no competition if the same pesticide with a
different label “split” is sold at lower prices in other markets. See Peterson v. BASF Corporation, 618 N.W.2d 821
(Minn. 2004).
1
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PPIS database to identify the limited number of companies that have the licenses necessary to be
a supplier.
Finally, a Chinese TGAI manufacturer that registers its product could use its registration
to establish a unique distribution system for its products in the U.S. Rather than being “product
focused,” the Chinese company could offer U.S. companies technical support and solutions. For
example, a Chinese pesticide producer holding a TGAI registration could develop flexible
intermediate and end use formulations, containing its registered TGAIs, that are specially
designed for specific end use markets. The Chinese producer could then market to prospective
U.S. EP registrants a complete product formulation and registration package. Such a “solutionfocused” business model would eliminate the need for a Chinese manufacturer to establish a
large U.S. sales force, distribution system and the expenditures associated with such. The more
registration packages sold to U.S. companies, the more widely distributed the Chinese producer’s
products would be in the U.S. marketplace.
IV.
Costs Associated with Becoming a TGAI Registrant
Under FIFRA, a pesticide applicant may either generate and submit safety data to EPA to
support its application, or refer to data previously submitted to EPA. If an applicant refers to
data that is not publicly available, FIFRA requires that the registrant submit an offer to pay
compensation to the original submitter of supporting data (i.e., the “data submitter”) and,
promise to negotiate, in good faith, reasonable compensation for its reliance on the data to obtain
its pesticide registration. Typically, the data compensation process involves the original inventor
or sponsor of a chemical, who is usually the submitter of supporting data, and a competing
generic company that intends to enter the market — post-patent — that intends to sell a generic
version of the chemical, called the “follow-on” registrant or “data citer.” To avoid spending
years generating duplicative data, FIFRA allows (in most cases) the follow-on registrant to cite
the data previously submitted to EPA by the propriety company. EPA will grant the follow-on
registration on the basis of the “offer to compensate;” registration is not delayed pending
resolution between the original data submitter and the subsequent registrant as to what amount of
compensation is reasonable.
Neither the FIFRA statute nor its regulations provide a specific formula or standard for
determining the amount of compensation that must be paid for access to data. Rather, a data
© 2005 Keller and Heckman LLP
submitter is free to make (within good faith) whatever demands or claims it wishes based on the
cost of the data and its perceived value. If the parties are unable to reach settlement, either party
may seek resolution of the matter through the arbitration process before the American
Arbitration Association (AAA). Arbitration decisions, although not binding precedent, have
provided the pesticide industry with a set of principles for assessing the value of data.
(1) Which data are compensable?
To determine the costs of compensable data, one must first determine which data are
“compensable.” FIFRA provides a mandatory right to applicants to refer to previously submitted
data, as long as that data is not protected under FIFRA’s “exclusive use” provisions. Data under
exclusive use protection can only be relied upon if the original data submitter gives the applicant
permission to rely upon the data. Otherwise, the original submitter has the right to exclusive use
of the data for ten years after a new active ingredient registration is granted by EPA. (The state
of California has a similar exclusive-use provision, with no time restriction.)
Data that are not subject to exclusive use protection may be referred to by an applicant.
If that reference occurs within a period of 15 years after the data have been submitted to EPA,
then the data citer must offer to pay compensation to the data submitter. A data submitter is not
entitled to any compensation when a follow-on registration application refers to data submitted
more than 15 years after the data were originally submitted to EPA. Such data may be freely
relied upon to obtain an EPA registration, but the data are still owned by the submitter and
cannot be used for other purposes unless such rights have been obtained from the data submitter.
Thus, “compensable” data includes data submitted to EPA within the fifteen-year period
following the date the data were originally submitted. Further, data in the public literature, or
generated by, or at the expense of, any government agency are not compensable.
(2) What is the cost of compensable data?
To assess the cost of compensable data, one begins by adding the direct historical costs
(e.g., payments made to laboratories for study generation (invoices)) and the indirect historical
costs (e.g., regulatory support and overhead). Direct costs are those required to generate the data
and may include protocol preparation, the development and conduct of a study, and data
evaluation by research and development staff. Indirect costs are those related to the development
of the data, such as administrative and overhead expenses. These costs may include the
regulatory support costs of internal staff and outside consultants, including the cost to resolve
© 2005 Keller and Heckman LLP
data-related questions raised by EPA. Each of these costs elements is then subjected to a timevalue adjustment to calculate a present value of the expenditure.
In arbitration proceedings, the data submitter has the burden of demonstrating the amount
that it paid for a study and the costs of associated expenses to design, contract for, monitor and
otherwise obtain the final study report. Because of the difficulty of obtaining accurate records on
indirect costs, it is typical for industry to apply a standard percentage between 15-35% of direct
costs as representing reasonable indirect costs. Of course, claimants are more likely to obtain
indirect costs closer to 35% if they can provide reliable records.
(3) Should compensation include an additional “value” or “risk” component?
In recent data compensation cases, the data owner has been awarded a “risk” premium or
royalty added on after determining the present value of the compensable data costs. Data owners
commonly ask for premiums to account for business risk (registering an unknown product) or
regulatory risk (conducting difficult studies that may need to be re-generated if initially rejected
by EPA). Under the risk premium theory, the data owner incurred not just the actual capital
outlays to fund the data development, but also the risk that the investment might be in vain. Data
owners also ask for a value component to compensate for the value of the follow-on’s early entry
into the market place. These factors may be expressed through premiums or through royalties on
the follow-on’s sales. In recent arbitration cases arbitrators have assessed risk premiums ranging
from 10-25%.
(4) What share of the compensable data costs should the follow-on pay?
After determining the compensable data costs, the next step is to determine the fair share
of costs the follow-on registrant should pay. The highest possible share is an “equal” share of
50%. If a follow-on pays an equal share of the costs, it should obtain equal rights to the data
(i.e., hard copies of the data). Hard-copy rights will allow the follow-on to register its product in
California and in other countries outside the U.S., and may give the follow-on the right to receive
compensation for citation by future applicants. FIFRA grants a mandatory right for a
subsequent registrant to refer to data. It does not demand that ownership be shared. Thus, a data
submitter is not required to grant hard-copy rights to a subsequent registrant. If the follow-on
registrant does not obtain “hard rights” it should pay a lower share, perhaps 35-45%.
© 2005 Keller and Heckman LLP
V.
Conclusion
While pesticide registration may require initial expenditures, it is reasonable to expect
these costs will be offset by the increased profit margins and increased market access and
flexibility realized by holding a pesticide registration. In addition, if a company has purchased
full rights to the data, it will also acquire rights to compensation from future follow-on
registrants within the compensable period. In summary, holding a registration clears the
channels leading to the U.S. marketplace of the unavoidable barriers that limit the profitability of
a mere supplier of a commodity chemical.
Keller and Heckman LLP’s team of attorneys and scientists have extensive and direct
experience in pesticide registration. Our professional staff can work with you to develop product
approval programs and to produce high quality registration applications. We can review existing
data sets and provide an estimate for the likely range of potential data compensation liability. In
addition, we can provide representation in data compensation arbitration proceedings and help
you to develop effective strategies to minimize costs associated with acquiring data rights. All of
our knowledge-based solutions will help you to efficiently bring your product to the U.S. market.
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For further information, please contact John Eldred in our Shanghai office by phone at 86
21 5116-2930 or e-mail at eldred@khlaw.com.
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