Pesticide Management and Insecticide Resistance

Entomology.

The Costs of Commercializing Pesticides

C.A.I. Goring*,     Agricultural Products Department, Dow Chemical U.S.A., Midland, Michigan

Publisher Summary

The chapter focuses on the costs involved in commercializing pesticides as related to their profit potential. There is a continuing need to discover and commercialize new insecticides and insect control agents because of shifts in the relative importance of various pest populations and the development of resistance. Although new products will replace some of the current products, few really novel markets will be developed. The scope of research and development (R&D) is now similar for all companies commercializing new products, particularly because of the standardization being imposed on the industry by government regulatory organizations. Each company has its own program for securing chemicals (either by purchase or synthesis) and a laboratory evaluation group. They also have an internal field evaluation group and in addition, an external field program in cooperation with many public and private organizations. The manufacturer must develop new pesticides with large potential markets or extraordinary biological activity if his R&D efforts are to pay off. The chances of doing either are limited, and if the costs of R&D continue to increase more rapidly than the size of the available markets, there will eventually be little or no financial incentive for discovering new and improved pesticides.

The commercialization of new pesticides is vitally necessary for the expansion of world food production. New pesticides are needed for unsolved production problems, when pest resistance occurs, or to further reduce the potential for human toxicity or environmental damage.

The private corporations commercializing new pesticides must generate adequate profits. The need for adequate profits severely constrains the manufacturer’s choice of research objectives and pesticides for commercialization. The costs and risks must be weighed against the potential rewards of success. The manufacturer has to cope with a changing environment in which expanding government regulation is disproportionately increasing the product costs relative to the potential rewards. Furthermore, each new product in the marketplace reduces the chances for further improvement.

The purpose of this paper is to describe the pesticide industry on a worldwide basis and to provide a perspective on the costs of commercializing pesticides as related to their profit potential.

DIMENSIONS OF THE PESTICIDE INDUSTRY

The worldwide market for pesticides at the user level in 1975 was slightly over five billion dollars (Anonymous, 1975). Sales of pesticides produced in the USA increased about 26% in 1975 (National Agricultural Chemical Association, 1976). A similar increase is expected worldwide. The market at the manufacturer’s level is about 75%−80% of the market at the user level and thus equal to about 4.5−5.5 billion dollars in 1975.

The cost of research and development (R&D) is probably in the range of 6%-7% of sales (NACA, 1976) which amounts to 270−385 million dollars. Companies commercializing older products probably spend no more than 2%-3% of sales on research and development. Companies committed to commercializing new products could spend as much as 8%−10% of sales on research and development and even more where current sales are minimal and a determined effort is being made to enter the market with new products.

The relation between the number of companies and number of pesticides manufactured per company (Anonymous, 1976) is shown in Fig. 1. Thirty of the largest companies manufacture 522 pesticides while the remaining 125 companies made 374 materials. The former group probably accounts for 85%−90% of pesticide sales at the manufacturer’s level.

Fig. 1 Relationship between number of companies and number of pesticides manufactured per company in 1975.

The estimated number of pesticides manufactured (Anonymous, 1976), sales income, and R&D expenditures for 16 major producers is shown in Table 1. This group probably accounts for over 80% of total sales. There is a general relationship between sales income and the number of pesticides manufactured. Bayer and Ciba-Geigy together probably account for as much as 25%–30% of total sales. However, Monsanto and Elanco are examples of companies that, despite a relatively narrow product line, have large sales generated primarily by one pesticide, Alachlor for Monsanto and Trifluralin for Elanco.

TABLE 1

Estimated Number of Pesticides Manufactured, Sales at the Manufacturing Level, and R&D Expenditures for 16 Major Producers in 1975

The estimated markets for the various types of pesticides at the consumer level in 1974 are shown in Table 2 (Anonymous, 1975). The herbicide market was the largest, especially in the United States. It is expected to grow in importance even more; particularly outside of the United States. The bulk of the research effort will continue to be in this area even though a rather comprehensive assortment of herbicides is currently available.

TABLE 2

Size and Distribution of the Markets for Pesticides at the User Level in the United States and the World in 1974

There is a continuing need to discover and commercialize new insecticides and insect control agents because of shifts in the relative importance of various pest populations and the development of resistance. Although new products will replace some of the current products, few really novel markets will be uncovered.

The fungicide market is half the size of the herbicide and insecticide markets and much less important in the United States than the rest of the world. This is largely because economical products for control of fungi problems (especially soil borne diseases) for such major US crops as corn and soybeans have not as yet been discovered and commercialized.

The markets for soil fumigants, defoliants, and desiccants are relatively small, and there is little likelihood that they will ever approach the other larger markets in size. Considerable research effort is currently being invested in plant growth regulators. It remains to be seen whether a large market for these kinds of materials can be developed.

Table 2 suggests that pesticides with larger sales volumes will be herbicides and insecticides rather than fungicides. Estimates of sales distribution shown in Table 3 were made by listing a probable sales range for every pesticide described by Martin and Worthing (1974). Only one in about four pesticides exceeds sales of $10 M (million). This ratio increases to about 1 in 15 for sales above $25 M, 1 in 40 for sales above $50 M, and 1 in 80 for sales above $100 M. The top 25% of the pesticides probably account for over 75% of the sales and the top 2.5% for over 30% of the sales. The probability of discovering a new pesticide with potential sales in excess of $100 M is low.

TABLE 3

Estimated Numbers of Pesticides with Various Sales Volumes at the Manufacturer’s Level in 1975

The markets for pesticides are concentrated in relatively few crops, as illustrated in Table 4 (Anonymous, 1975). Approximately 63% of the market is concentrated in cotton, corn, rice, soybeans, and small grains. Concentration is greatest for herbicides, with these crops accounting for 80.7% of the market. Cotton, corn, rice, apples, and citrus crops account for 68.5% of the insecticide market, and rice, small grains, apples, potatoes, and citrus crops account for 49.6% of the fungicide market.

TABLE 4

Size and Distribution of the Crop Markets for Pesticides at the User Level in 1974

SCOPE OF RESEARCH AND DEVELOPMENT

The scope of R&D is now similar for all companies commercializing new products, particularly because of the standardization being imposed on the industry by government regulatory organizations.

Each company has a program for securing chemicals (either by purchase or synthesis) and a laboratory evaluation group. They also have an internal field evaluation group and, in addition, an external field program in cooperation with many public and private organizations. This latter effort is extremely important and its diminution or disappearance would severely hamper the development of pesticides. Companies also have extensive programs for evaluating the toxicity, environmental behavior, and residue levels of candidate products, as well as research groups devoted to developing formulations and production processes.

Differences between companies are associated with the sizes and percentages of their R&D budgets spent on the various categories of effort. Companies attempting to establish a position in the market with new pesticides may choose to concentrate initially on synthesis, screening, and preliminary field evaluation and finance many of the other types of research externally. Established companies continually developing new pesticides usually have internal capabilities for most of the types of research needed. However, they still depend on outside institutions when they have peak research loads.

COSTS OF RESEARCH AND DEVELOPMENT

A typical cost distribution pattern for R&D is shown in Table 5 (NACA, 1976). Over the years there has been a substantial erosion of the percent of R&D spent on discovery (Goring, 1975; NACA, 1976) and an increased proportion for all other phases largely because of more stringent regulatory requirements.

TABLE 5

Average Distribution of Costs for R&D on Pesticides in 1975

Using the percentages shown in Table 5, estimates were made of money available for various categories of R&D at a worldwide expenditure level of 320 million dollars. These estimates are shown in Table 6.

TABLE 6

Estimated Funds Available for Various Types of R&D Expenditures on Pesticides

a60% of total funds assumed to be available for new product development.

Not all of this money is available for the discovery and development of new pesticides (Johnson and Blair, 1972). An R&D expenditure equivalent to at least 2%-3% of sales is needed to ensure the continued viability of mature products. Thus only 4%–5% of sales is available for discovery and development of new pesticides. This translates into approximately the amounts of money shown in Table 6.

The number of new pesticides introduced each year seems to have fallen from 28 in 1966 to less than 10 in 1974 (Martin and Worthing, 1974; NACA, 1976), as shown in Figure 2. Assuming optimistically that 15 new pesticides will be introduced each year, the estimated costs of discovery and development per pesticide are shown in Table 7. These costs take into account products that were partially developed but never commercialized.

TABLE 7

Estimated Costs of R&D per Pesticide in 1975

aAssuming commercialization of 15 pesticides.

Fig. 2 Number of pesticides introduced each year from 1930 to 1974.

for each new pesticide. The cost per person in research and development in 1975 was probably $30-40 M (thousand) per year (NACA, 1976) but the cost per synthesis chemist is more likely $45-50 M per year. Assuming $45 M per chemist, the number of chemist-years required for each new pesticide would be 40–60. Assuming a synthesis rate of 50–100 compounds per year per chemist, the number of compounds synthesized for each new pesticide would be in the range of 2–6M. The evaluation of from 8–15 M compounds is required to discover a viable new pesticide (Mullison, 1975; NACA, 1976). The difference represents purchased compounds or compounds synthesized in the company for some purpose other than obtaining pesticidal activity. The cost of procuring compounds is, on a per compound basis, much less than the costs of directed synthesis. However, compounds from a directed synthesis effort are much more likely to become viable new pesticides. The purpose of evaluating a random selection of compounds as part of the discovery effort is to uncover new structural types of active compounds which can then be further optimized by a directed synthesis program.

The costs of biological screening are probably in the range of 1/2-2/3 of the costs of discovery. The largest part of these costs are usually associated with the studies conducted subsequent to the initial screening. Thus the programs are quite flexible in terms of the number of compounds that can be preliminarily tested.

The rate of discovery should exceed the capacity of the rest of the research organization to develop the new pesticides. Unless this occurs, development resources (about 75% of R&D) could be dissipated on inconsequential goals. An excess of new pesticides at the discovery level helps to ensure the judicious selection of candidates for development, and minimizes the risks of commercialization.

The costs of developing pesticides have already been briefly outlined in Tables 5, 6, and 7. A more detailed outline of estimated costs for studies on field efficacy, metabolism and environmental behavior, residues in foods and feed, mammalian and wildlife toxicology, and formulations is shown in Table 8. The cost of the testing required for each new active ingredient is substantial. Much greater costs are associated with evaluation of all of the formulations and uses needed for full development of the pesticide.

TABLE 8

Estimated Costs for Various Types of R&D Studies on Pesticides in 1975

aStudies conducted only on formulations of the active ingredient.

bStudies conducted on each formulation in addition to the active ingredient.

Process, pilot-plant, and registration expenses must be added to all of the other costs. The first two vary enormously, but even for the simplest chemical they can easily exceed $500 M and for a complex chemical, millions of dollars. The registration costs also vary greatly depending on the number of uses and formulations to be registered.

Total costs shown in .

TABLE 9

Estimated Costs for Discovering and Developing a New Pesticide in 1975

The costs of R&D for a new pesticide are spread over a period of at least 15–20 years. The discovery effort (including all related synthesis and biology) is apread over a period of three to four years or more. The third to eighth years involve the performance, metabolism, environmental, residue, and toxicological studies required for initial registration. During this period, process and pilot-plant studies are also completed, semiplant production is started, and construction of the plant begun. Initial registration is usually obtained in the ninth or tenth year. Sales are initiated from semiplant production in the ninth year and from full-scale production in the tenth year. The market is then gradually extended by developing additional uses. Refinement of the manufacturing process also takes place during this latter period. The distribution of R&D costs over the 20-year period is shown in Table 10.

TABLE 10

Distribution of R&D Costs for a New Pesticide over a Period of 20 Years

COSTS OF COMMERCIALIZATION

No corporation is eager to invest money in the risky pesticide business unless it can generate substantially more profit than a banking investment. Comparison of pesticide and banking investments is illustrated in Fig. 3. Banking investment refers to potential loans of money by the corporation using banks as a vehicle for accomplishing the transactions. It does not refer to the conventional banking business which is structured somewhat differently. The calculation of net profit (net income) is essentially the same for the two types of investments except that there are more kinds of costs in the pesticide business than for a banking investment. Also, most of the capital in the pesticide business is used to build a plant which eventually becomes worthless. Thus it has to be recovered from sales income via depreciation.

Fig. 3 Comparison of pesticide and bank investments.

Comparisons of pesticide and banking investments are shown (Table 11) for pesticides with differing sales incomes at plant capacity, selling prices, R&D costs, production costs, and capital expenditures. The project life was assumed to be 20 years with sales of the pesticide in the last 12 years. Sales were assumed to be 2.5%, 20%, 40%, 60%, 80%, and 90% of plant capacity in the ninth through the fourteenth years, and 100% of plant capacity in the fifteenth through twentieth years.

TABLE 11

Data Base for Comparing Pesticide and Banking Investments

(plant capacity/40)⁰.⁶

For the banking investment, interest income started the first year. The amount of principal outstanding at the end of each year was invested at 10%, and the principal to be added was assumed to be uniformly invested during the year at 10%.

The costs of R&D for the pesticide project were spread over 20 years, as shown in Table 10. Production costs per pound at 100% capacity, including formulation of the pesticide, and the percentage of fixed costs at 100% capacity are shown in Table 11. The fixed costs are associated to a considerable extent with manpower and constitute a larger fraction of production costs with decreasing plant size. Administrative and selling costs for the pesticide projects were assumed to be 10% of sales. Administrative costs for the banking projects were assumed to be 0.5% per year of the principal outstanding.

Direct fixed capital and total capital (direct fixed, allocated, and working capital) varied with the size of the plant, as shown in Table 11. Direct fixed capital is the money required to build the plant and was injected into the pesticide projects in the seventh, eighth, and ninth years.

Allocated capital represents the capital backing up utilities, internally produced raw materials, research and administrative facilities, etc. Some was injected in the first, second, and fifth years (research and administrative) and then each year from the ninth through the fifteenth year (utilities and raw materials).

Working capital represents purchased raw materials, inventories, etc., and was injected into the pesticide projects from the ninth through the fifteenth years. It is equivalent to about 25% of production costs (exdepreciation), or about three months’ inventory.

The various injections of capital by year are shown in Table 12. Principal was borrowed from the corporation for the banking investment cases on the same schedule as capital investment in the pesticide projects. Principal equivalent to the costs of R&D, production, sales, and administration (until such time as sales income exceeded these costs), less a 48% tax credit was also borrowed from the corporation for the banking investment cases.

TABLE 12

Direct Fixed Capital, Working Capital, and Allocated Capital Inputs by Year for Eight Pesticide Investment Cases

Only direct and allocated capital was depreciated since this money is used to erect buildings and plants. Working capital was not depreciated because raw material and product inventories are considered as equivalent to cash. Depreciation was calculated using the method of double declining balance sum of the years digits (half-year convention). This type of depreciation results in relatively rapid recovery of capital.

Principal for the bank investment examples was paid back to the corporation on the same schedule as depreciation.

Taxes were assumed to be 48% of operating margin for the pesticide projects and 48% of income for the banking investments.

An example of the flow of money for the two types of investments is shown in Table 13. Definitions of annual cash flow, cumulative cash flow, and close-out position are shown in Fig. 4.

TABLE 13

Comparison of a Pesticide and Bank Investment after Ten Years (Case 1)

Fig. 4 Indicators of financial performance.

.

less than the pesticide project burdened with undepreciable R&D costs.

) greater than the pesticide project.

Evidently, a few more years are needed before the close-out position for the pesticide equals or exceeds the bank investment. Furthermore, at close-out the recoverable pesticide investment is a physical facility which is not easily converted into cash. Thus, it is usually more realistic to compare cumulative cash flow for the pesticide with the close-out position for the bank investment.

In addition to such indicators as cumulative cash flow and close-out position, other indicators such as return on investment (ROI), return on sales (ROS), turnover ratio (ROI/ROS), and discounted cash flow (DCF%) can be used to compare pesticide and banking investments. The definitions for most of these terms are given in Fig. 4. Discounted cash flow, which is often called interest rate of return (ROR), is the after tax rate of interest that a project could afford to pay on the net cash invested over its useful life and break even.

Table 14 shows all of these indicators for the eight pesticide investment cases. For the bank investments the ROI is 9.5%, the ROS is 95%, the turnover ratio is 0.1, and the DCF is 4.9. The points in time when the cumulative cash flows and close-out positions for the pesticide projects intersect with the close-out positions for the corresponding bank investments are also shown. Money flow over the 20-year period for both types of investments is shown in Fig. 5.

TABLE 14

Indicators of Financial Performance for Eight Pesticide and Banking Investment

Fig. 5 Cumulative cash flows (CCFP) and close-out positions (COP) for the eight pesticide investments over a period of 20 years in comparison with the close-out positions (COB) for the corresponding banking investments.

The ROIs for the pesticide projects, except for case 2, greatly exceed the ROI for the bank investment (9.5%). Even allowing for the fact that pesticides are a very risky business and, therefore, deserve better returns than banking investments one might be tempted to conclude that, except for case 2, all of the pesticide projects are worthy. This may be true if the worth of the projects is judged seven years after their initiation. At this time a decision on whether or not to build a plant has to be made. However, much of the R&D money has already been spent and the calculated ROIs include only capital investment to be spent in the future. Thus some of the projects, although currently viable, could be inadequate for the overall health of the business because they do not take into account R&D money already spent. They should be counterbalanced with projects of much higher potential.

The ROS for the pesticide projects are all much lower than for the bank investment simply because bank investments are low in cost relative to income. As ROS decreases, decreases in selling price cause a much larger percentage decrease in profitability since the price reduction is taken directly out of the operating margin. Case 2 has an unacceptable ROS and for case 3 the ROS is marginal.

The turnover ratio represents the number of times per year the capital investment is turned over in the form of sales income or interest income. For the bank investment the turnover ratio (0.1) is low but then costs are low and there are few risks. The pesticide industry as a whole strives for a ratio in excess of one because of high costs and risks. Seven of the pesticide projects had good to excellent turnover ratios but case 6 was marginal.

compared with a banking investment. Similar conclusions can be drawn from the values for discounted cash flow (DCF%).

The crossover point for the pesticide and banking investment is superb for case 1 and good for cases 4, 7, and 8 since the manufacturer hopes to recover his investment within 5–7 years after initiating sales. Cases 3 and 5 are unacceptable and cases 2 and 6 are disastrous.

DISCUSSIONS AND CONCLUSIONS

in sales.

If the manufacturer miscalculates and has to sell the product at 1.25 times the costs of production per pound in order to be competitive, it will be a very long time, if at all, before the project (case 2) finally equals a bank investment and the risks are enormous.

(case 3). The project will eventually be more profitable than a bank investment. However, it will have been very risky and the manufacturer will have to wait in excess of 20 years to be compensated for that risk.

The manufacturer has a much better chance of discovering a pesticide with a market of at least $25 M since there are currently about 34 such pesticides. If such a pesticide is sold for at least 2.5 times the production costs per pound, the project (case 4) will generate a profit far superior to a bank investment and with only about half the risk of an analogous $100 M project.

markets, since about 123 products fit the former category. Furthermore, the risks of development are about one-third the risks for a $100 M market. However, at a selling price of 2.5 times the production costs per pound, the project will not start compensating for the risks taken for at least 20 years (case 5).

market that has biological activity so unique that he can sell it for ten times the production costs per pound (case 7), the project will generate almost as much profit at the end of 20 years as the $25 M project (case 4) with less than half the risk. The probability of discovering such unique biological activity is low.

markets are excellent. However, with this size of market the product must be sold at more than 2.5 times the production costs per pound if it is ever going to pay-off the investment and compensate for the risk (case 6). The project can pay off handsomely if the biological activity is unique and the selling price per pound of product can be 20 times the production costs per pound (case 8). The chances of discovering this level of biological activity are minimal.

Clearly, the current risks of R&D in the pesticide business are substantial. The manufacturer must develop new pesticides with large potential markets or extraordinary biological activity if his R&D efforts are to pay off. The chances of doing either are limited; and if the costs of R&D continue to increase more rapidly than the size of the available markets, there will eventually be little or no financial incentive for discovering new and improved pesticides.

REFERENCES

Copplestone, J.F., et al. Exposure to pesticides in agriculture. Bull. WHO. 1977. [(in press)].

Hayes, W.J., Jr. Occurrence of poisoning by pesticides. Arch. Environ. Health. 1964; 9:621–625.

United Nations, 1976. The growth of World Industry (1973 ed., Vol. II) United Nations, New York.

World Health Organization (1973). Safe use of pesticides, WHO Tech. Rep. Ser. No. 513, 42–43.

World Health Organization. 1973, Recommended classification of pesticides by hazard, WHO Chronicle 29, 397–401.

*The author wishes to express his sincere appreciation for help given in compiling this information to W. M. Gentry, P. A. Thomas and especially to R. E. Bellew, who made all of the business calculations.

1

Pesticide Residues and Their Relationship to Pesticide Management

Pesticide Residues and Agricultural Workers—An Overview

F.L. McEwen,     Department of Environmental Biology, University of Guelph, Ontario, Canada

Publisher Summary

The chapter provides an overview on the impact of pesticide residues on agricultural workers. Modern agriculture relies heavily on chemical pesticides. Many species of insects developed resistance to these chemicals and agriculturalists moved to heavy the use of two new classes of insecticides: the organophosphorus compounds and the carbamates. In many cases, these insecticides were much more toxic to humans than the chlorinated hydrocarbons. Some organophosphorus compounds are highly toxic dermally as well as orally. Dermal exposure, not previously a major problem with the organochlorine compounds, became a serious consideration. As the usage of the organophosphorus compounds increased, instances of illness were reported in field workers in close contact with treated foliage. In some cases, cholinesterase levels were depressed and organophosphate poisoning was confirmed. Most of the suspected pesticide poisonings involving groups of workers have been associated with parathion. In addition to farm workers, two other groups of people must be considered, namely, research workers and pest management scouts. The activities of the research workers involved in the evaluation of pesticides for insect control may require a great deal of exposure within the recently treated crops and contact with plant foliage that may present a high pesticide residue.

Modern agriculture relies heavily on chemical pesticides. In the United States alone more than one billion pounds of pesticides are used annually, and evidence suggests that while the nature of the products involved may change the heavy use of chemical pesticides will be a continuing part of intensive agriculture. There is no doubt that pesticides have contributed much to improve the quality and quantity of agricultural products on a worldwide basis. But attendant with these benefits have been certain risks, some of which we have been slow to