SUPPLEMENT TO ECONOMIC EVALUATION OF THE APPROPRIATENESS
OF A SEVEN-YEAR COMPENSATION PERIOD FOR USE OF DATA
TO REGISTER PESTICIDES
OFFICE OF PESTICIDE PROGRAMS
U.S. ENVIRONMENTAL PROTECTION AGENCY
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SUPPLEMENT TO ECONOMIC EVALUATION OF THE APPROPRIATENESS
OF A SEVEN-YEAR COMPENSATION PERIOD FOR USE OF DATA
TO REGISTER PESTICIDES
Robert E. Lee II
Economic Analysis Branch
Criteria and Evaluation Division
Office of Pesticide Programs
U.S. Environmental Protection Agency
September 14, 1977
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SUPPLEMENT TO ECONOMIC EVALUATION OF THE APPROPRIATENESS OF A
SEVEN-YEAR COMPENSATION PERIOD, FOR USE OF DATA TO REGISTER PESTICIDES
INTRODUCTION AND SUMMARY
The purpose of this paper is to supplement the paper titled, "Economic
Evaluation of the Appropriateness of a Seven Year Compensation Period for
Use of Data to Register Pesticides", with information about pesticide
industry health, the effects of regulatory actions, and the relationships
between patent protection and compensation.
It is concluded that the pesticide industry is quite healthy with
increasing production, sales and R&D expenditures, despite fears in some
quarters that EPA regulatory actions would severely hamper the industry. It
was found that EPA actions have affected no more than 5 percent of industry
production. Economically, these actions are estimated to have a total impact
of 54 cents per person, which compares quite favorably with the estimated
cost of $1,000 per person for all pollution abatement programs in the U.S.
Not only have EPA actions not had major negative impacts on the pesti-
cides industry, it is likely that they have had positive impacts. When a
pesticide is cancelled or suspended, a void is created in the marketplace
which increases the potential market for environmentally sound pesticides
capable of filling the void.
For newly patented chemicals, the 17-year patent period overlaps the
7-year compensation period being proposed in S. 1678. Patent protection
provides better opportunity to the firm to recover R&D costs, thereby making
compensation somewhat superfluous for patented products.
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However, compensation may be important for non-proprietary products.
Firms may find it too risky to undertake expenditures to develop data
support of registration if competing firms will have immediate, free
access to the data for use in supporting their own registration.
HEALTH OF PESTICIDE INDUSTRY
While some people fear that EPA regulatory actions will damage the health
of the pesticides industry, the evidence does not support this fear. Since
1972, when the first EPA regulatory action took effect, the industry has
continued to increase production, sales (Table 1) and research and development
(R&D) expenditures (Table 2).
With the possible exception of 1975, when preliminary estimates of sales
volume were down slightly, both sales quantities and value increased each year
since 1972. This is true even when the effects-of inflation are accounted for
and values are deflated to 1972 dollars.
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Table 1
Synthetic Organic Pesticides: U-S. Production
and Sales, 1972-1975^'
Production
Year
1972
1973
1974,,
1975^-'
Quantity
(bil. Ibs)
1.16
1.29
1.42
1.61
Nominal
Value^'
($ bil.)
1.34
1.50
1.98
2.92
Value in ~ i
1972 Dollars^-'
($ bil.)
1.34
1.33
1.47
1.99
Sales
Quantity
(bil. Ibs)
1.02
1.20
1.37
1.32
(domestic and export)
Nominal
Value-'
($ bil.)
1.09
1.34
1.82
2.36
Value in
i /
1972 Dollars^'
($ bil.)
1.09
1.18
1.35
1.61
-
_,
--
Includes a small quantity of soil conditioners
Value of production: calculated (unit value x quantity); sales value: as
reported by the U.S. International Trade Commission
-j-. Calculated using Wholesale Price Index, all commodities
— Preliminary
Source: ASCS, USDA, The Pesticide Review, 1976
U.S. Bureau of the Census, Statistical Abstract of the United States: 1975
U.S. Bureau of Economic Analysis, Survey of Current Business, June 1977
R&D expenditures have also been increasing in recent years. The best
information on pesticide R&D expenditures available are reported by the
National Agricultural Chemicals Association (NACA) in its periodic industry
profile studies. One must use care in comparing these expenditures through
time since they are a non-random representation of industry R&D expenditures.
However, it is believed that these expenditures represent a major portion of
R&D expenditures and are reasonably representative of the total. R&D expenditures
each year.
An examination of the figures in Table 2 shows that average R&D expen-
diture per respondent firm remained relatively steady at $2.7 million from 1972
to 1974, but over the whole period from 1971 to 1976, trended upwards. These
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figures are expressed in 1972 constant dollars. If they.were expressed in
nominal dollars, the rate of increase would appear to be much sharper. Thus,
not only were firms increasing nominal R&D expenditures, they were also
increasing the expenditures in real terms.
Table 2
Research and Development Expenditures
for Firms Reporting, 1971-1976
Year
Total R&D expenditure
($ million) .
Total R&D Expenditure-
($ million)
Number of Companies
Reporting
Average R&D 1 ,
Expenditure—
($ million)
1971
87.7
91.7
36
2.5
1972
98.5
98.5
36
2.7
1973
•
110.7
97.9
36
2.7
1974
134.8
100.3
37
'
2.7
1975
160.5
109.3
37
3.0
1976
195.2
127.1
33
3.9
— Expressed in constant 1972 dollars
Source: National Agricultural Chemicals Association, "1975 Industry Profile
Study"
National Agricultural Chemcials Association, "1976 Industry Profile
Study"
These findings support the following conclusion from a recent study, "the
chemical pesticide industry has been healthy and profitable, and many major
companies...are maintaining or increasing their investments in R&D and new
plants, and are expected to continue their efforts to commercially develop new
chemical pesticides...[SRI, 1977]". This despite not only EPA cancellation/
suspension actions, but also factors such as the energy crisis, new effluent
guidelines, new EPA registration requirements, inflation, and lagging economic
activity.
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There has been a shift from an R&D emphasis on insecticides to an
emphasis on herbicides in the pesticides industry coinciding with the sales
growth in herbicides. This is especially true for firms which were only
marginally effective in developing insecticides. "Companies have had less
success in developing insecticides [recently] because new functional groups
possessing insecticidal activity have been generally exhausted in the search
for new compounds. Additionally, the market for insecticides has been
around a longer time and is saturated with inexpensive, non-proprietary
compounds which make the cost of producing insecticides a very important
factor and one which tends to eliminate compounds early in the development
process [EPA-540/9-75-018, 1975]."
While insecticide R&D was facing these difficulties, herbicide production
was growing rapidly and attracting R&D effort. U.S. herbicide production
grew rapidly during the 1960's, dropped sharply in 1969 to 393 million pounds,
then grew slowly until 1973, and spurted to 788 million pounds in 1975
(Table 3). From 1960 to 1968 the average annual rate of growth was 21 percent.
This slowed to an average annual rate of growth of 2 percent from 1968-1973,
reflecting the almost 80 million pound decline in production from 1968 to
1969, and then grew at an average rate of 26 percent from 1973 to 1975. For
comparison, insecticides have grown at a maximum average annual rate of
6 percent, from 1960 to 1968, and fungicides have grown at a maximum 2 percent
rate, from 1968 to 1973.
Since herbicide markets tend to be larger and longer lived than insecti-
cide markets, the effect of this shift has been to make small changes in R&D
expenditures of less consequence than ever.
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Table 3
U.S. Pesticide Production
by Classes, 1960-1975
Class
Herbicide Insecticide Fungicide
Year (million pounds) (million pounds) (million pounds)
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974.. ,
1975^
103
121
151
175
226
263
324
409
469
393
404
429
451
496
604
788
366
411
461
478
444
490
552
496
569
571
490
558
564 '
639
650
666
180
168
118
111
113
124
137
144
154
141
140
149
143
154
163
155
Annual growth (percent)
1960 - 1968
1968 - 1973
1973 - 1975
21
2
26
6
3
2
-1
2
<1
— Preliminary
Source: A.D. Little, Inc., Economic Analysis of Interim Final Effluent
Guidelines for the Pesticides and Agricultural Chemicals Industry-
Group II, EPA-230/l-76-065f, September 1976.
A.S.C.S., USDA, The Pesticide Review, 1976
EPA Calculations
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EFFECTS OF PESTICIDE CANCELLATIONS/SUSPENSIONS
Since EPA's inception in December of 1970, four major pesticide
cancellation/suspension actions have been taken by EPA. The four
actions are: DDT cancellation - 1972, aldrin/dieldrin suspension -
1974, chlordane/heptachlor suspension - 1975, mercury cancellation - 1976.
"These actions have involved 6 of the 1,400 registered active ingredients
in pesticides, about 70 million pounds of active ingredient used per
year...and have generated projected total economic impacts of about
$114 million...[Aspelin, Gaede, and Luttner, 1977]." These impacts
do not include certain minor/voluntary actions to take pesticides off
the market.
Annually in the U.S., approximately 1 billion pounds of pesticides are
used. Active ingredients involved in EPA cancellations/suspensions represent
use of 38-47 million pounds annually or 3.8 to 4.7 percent of the total use.
The impact on use by individual chemical and type of pesticide is presented
in Table 4. These figures show that the largest impact on use to date has
been on the insecticides sector of the pesticide industry.
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Table 4
Annual Quantities of Active Ingredient
Use Which Were Cancelled/Suspended by EPA Regulatory Actions
Regulatory Action
Cancelled/Suspended
Use of Active Ingredient
. (million Ibs)
DDT cancellation
A/D cancellation/suspension
C/H suspension
Total insecticides
Mercury cancellation _,
Herbicides (No major actions)— ~,
Rodenticides (No major actions)—
Total pesticides
14
10
14
38
0
0
0
38
- 20
- 11
- 16
- 47
.23
.23-47.23
(% of
4.7
3.3
4.7
12.7
0.12
0
0
3.8
U.S.)-7
- 6.7
- 3.7
- 5.3
-15.7
- 4.7
— Percentages are based on the approximate total U.S. annual use in millions
of pounds: insecticides (300); fungicides (190); herbicides (500);
„, rodenticides (10); all pesticides (1,000).
— Regulatory actions initiated on 2,4,5-T; certain rodenticides; have
not been concluded.
Source: Aspelin, A.A., Gaede, H.W., Jr., and Luttner, M.A. "EPA Pesticide
Cancellation/Suspensions: An Estimate of Overall Ecomomic Impacts",
February 1977
The impacts of cancellations and suspensions are expected to occur over
a period of years after the action is taken. During this time period, the
total direct economic impact for all four EPA actions was estimated to be
$114 million, equivalent to 540 per capita. A summary of the individual
actions is presented in Table 5.
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Table 5
Economic Impacts of Four EPA
Regulatory Actions
Regulatory Action
DDT cancellation
Aldrin/dieldrin -
chlordane/heptachlor
suspension
Mercury cancellation
Typical Year
Immediately
After Action
($ millions)
8.25-21.9
9.5 -19.0
3.3 - 8.01
Number
of Years
of
Impact
7
7
4
TOTAL
Overall U.S.
Impact-
Total
($ mil)
52.76
49.88
11.31
113.95
Per
Capita
($)
0.25
0.24
0.05
0.54
I/
- 1973/75 prices
Source: Aspelin, A.A., Gaede, H.W., Jr., and Luttner, M.A., "EPA Pesticide
Cancellation/Suspensions: An Estimate of Overall Economic Impacts",
February 1977 •
While these impacts are significant, they appear nominal when compared
with the cost of pollution abatement programs in the U.S. These programs
are estimated by the Council on Environmental Quality to cost $200 billion from
1974 to 1983, [CEQ, 1974]. On a per capita basis, this total pollution abate-
ment cost approaches $1,000, as compared with the 54£ per capita .for EPA
regulatory actions.
Oftentimes, voids left in the marketplace by EPA regulatory actions are
viewed solely as a loss. Actually, a cancellation or suspension can have a
strong positive impact, as the void will need to be filled by some other pesticide,
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one which is more environmentally sound. Consequently, a cancellation
or suspension action both removes environmentally damaging pesticides
from the market and at the same time encourages introduction and/or
market growth of more desirable pesticides.
PATENTS AND COMPENSATION
The significance of a compensation period varies, depending on whether
or not the pesticide is patented and, if patented, whether the compensation
period ends within the patent period. A patent, with its exclusive pro-
duction and marketing rights, is a more powerful means for a firm to recover
R&D costs than is mandatory compensation for use of registration data.
Therefore, if the compensation period falls within the patent period, as it
does for newly patented products, there is little value in discussing the
reasonableness of a compensation period.
Firms developing new chemicals usually apply for patents early in the
R&D process to protect themselves against loss of commercial rights to the
chemical through independent development and patent acquisition by another
firm. The patent "provides that during the 17-year period commencing with
the issuance of the patents, no one other than the patent's owner can 'practice'
the invention without the owner's permission. The owner may license others
to practice the invention", but has no motive to do so unless he receives
compensation sufficient to improve profitability over what could be obtained by
retaining exclusive production and distribution rights [Senate Report
No. 95-334, 1977].
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During the patent period, the patent-holding firm will have better pro-
tection and opportunity to recover R&D costs than during the 7-year compen-
sation period. With patent protection, the firm has the option of refusing
permission to a competitor to produce and market the chemical or setting a
high price on such permission, high enough to more than recover R&D costs.
Since application for a patent is made early in the R&D process, part
of the 17-year patent period may be lost by the beginning of the sales period.
The extent of this loss will depend on the relative lengths of the R&D/
registration period and the patent pending period. Generally, at least
12 years of patent protection remain when a pesticide registration is issued.
Therefore, by the time a patent expires on a newly patented chemical, the
proposed 7-year compensation period will have already expired.
Consequently, a FIFRA imposed compensation period appears to be
unimportant for patented pesticides with greater than 7 years of patent
protection remaining. The matter of compensation for data submitted
during the last 7 years of patent protection and for unpatented products
is discussed in the next section of this report. The FIFRA purpose of
insuring that firms have a reasonable opportunity to recover registration-related
R&D expenditures is accomplished by patent protection without assistance
from a compensation provision.
UNPATENTED PESTICIDES AND COMPENSATION
For firms marketing unpatented pesticides, pesticides for which the
patent has expired or pesticides with less than 7 years of patent
protection remaining, a compensation period does have some importance.
Without a compensation period protecting the use.of data under these
circumstances, a firm would probably be faced with producing a pesticide
in competition with other producers who have not incurred the costs of
developing data.
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The reasonableness of the 7-year time period for compensation
proposed in Senate Bill 1678 was the subject of the September 2, 1977,
report which this report supplements. In that report, it was concluded
that a 7-year compensation period was reasonable for recovering these
expenditures.
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LITERATURE CITED
Aspelin, Arnold A.; Gaede, Harold W. , Jr.; and Luttner, Mark A., "EPA
Pesticide Cancellation/Suspensions: An Estimate of Overall
Economic Impacts", Economic Analysis Branch, Office of Pesticide
Programs, U.S. Environmental Protection Agency, submitted to
Natural Resources Journal, February 1977.
Council on Environmental Quality, The Economic Impact of Environmental
Programs, Executive Office of the President, Washington, D.C.,
November 1974.
Office of Pesticide Programs, U.S. Environmental Protection Agency,
Evaluation of the Possible Impact of Pesticide Legislation on
Research and Development Activities of Pesticide Manufacturers,
EPA-540/9-75-018, Washington, D.C., February 1975.
Stanford Research Institute, New, Innvovative Pesticides: An
Evaluation of Incentives and Disincentives for Coirmercial Development
by Industry, prepared for Office of Pesticide Programs, U.S.
Environmental Protection Agency, Washington, D.C., May 1977.
U.S. Senate Committee on Agriculture, Nutrition, and Forestry,
"Extension of the Federal Insecticide, Fungicide, and Rodenticide
Act", Senate Report No. 95-334, July 6, 1977.
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