Agrochemicals avoid the slide

25 June 2007 00:00  [Source: ICB]

THE NUMBER of new active ingredients (actives) reaching the agrochemical market has been slipping, despite increased efforts by research and development (R&D) companies. Yet these agrochemical innovators have continued to expand their revenues, in part by directing their capacity for innovation towards the elaboration of established products. They are trimming their portfolios to concentrate on higher-value products, but are actively maintaining their dominance in off-patent active ingredients.

The success of such measures is apparent. In the EU, for example, more than 70% of actives no longer have patent protection, and yet the top six agrochemical companies hold more than 70% of the total agrochemicals market, notes Nigel Uttley, managing director of UK-based agrochemical consultancy Enigma Marketing Research. Enigma publishes AgriBase - a specialist database - and multi-client reports, the latest of which is New Generic Agrochemicals - Post 2007.

The stakes are high. In 2006, the market for agrochemicals totalled $35.6m (€26.7m), a decline of 1.4% from 2005, according to Matthew Phillips, partner of Phillips McDougall, an agrochemical consultancy based in the UK. The crop protection component, which declined 2.5% from 2005, accounted for $30.4bn, while non-crop applications, which increased by 5%, contributed $5.1bn.

Proprietary, patented products accounted for about 30% of sales, while the generic share of the industry, based on company sales, increased slightly to 27.5%, says Phillips. The remainder is largely accounted for by products that were off-patent, but not truly commodities, as the majority of their sales is held by one company, generally the product's originator.

Diminishing returns

Nine actives went off patent last year, according to Phillips. The agrochemical innovators, in a costly search for new, patent-protected replacements, have generally maintained or added to R&D budgets that run near to 10% of revenues. In 2000, each new agrochemical product cost about $184m to discover and develop, according to a study Phillips McDougall conducted for global plant-science federation CropLife International - and the cost has likely risen since then.

Unfortunately, finding better molecules that are price-competitive with those on the market is an increasingly tall order.

"There were six new active ingredients introduced last year," Phillips observes. "In 2005, there were 10 new active ingredients." To examine the trend, however, it is better to look at the number of new actives introduced decade by decade, he suggests.

In the 1970s, 101 actives were introduced, an average of 10.1 a year. For the 1980s, the average was 12.3 a year, and for the 1990s, 12.6 a year. The 2000s have seen 73 actives introduced so far, or 10.4 a year.

"It is arguable that the rate of new product introductions is declining slightly from a peak average rate of around 12 per year in the 1980s and 1990s to around 10 now," Phillips concludes.

Uttley prefers to assess the market through the International Organization for Standardisation (ISO) yearly assignment of common names to product introductions. "That is the best way of tracking actives coming to market, because every active ingredient has to have a common name. You'll see a fair decline over the years," he says, noting that none have been assigned yet this year.

Several factors have slowed the introduction of new actives, says Uttley.

First of all, many farmers' needs have already been met. Regulatory hurdles are also more rigorous than in the past, so that agrochemical companies employing the same discovery tools used in pharmaceuticals are achieving similarly disappointing results. "There are far more actives being discovered, but they're not getting through to the marketplace," he says.

The industry's consolidation has had an effect, as well. "The number of research companies has reduced significantly," Uttley observes.

Notably, many of the newest actives have been discovered by the fragmented Japanese agrochemical industry. "The Japanese look at the business in a much longer term," Uttley remarks. But he expects the pipeline from Japan to slow with consolidation. "There is restructuring going on - about five or six years ago, there were far too many Japanese research-based companies, and not one in the top eight," he says.

Nonetheless, there remains ample room for innovative actives. Resistance is an increasing problem, particularly for insecticides and fungicides. Opportunities also exist for products that can improve crop yield, simplify use, reduce metabolites, and provide a safer and more environmentally friendly profile.

The new actives developed towards these objectives tend to have a relatively narrow focus. But while they may be niche products, they have the potential to add great value in combination with other products, owing to their patent-protected status.

House cleaning

Despite such hurdles, the agrochemical innovators have, since the beginning of this decade, dramatically increased the proportion of new products in their portfolio - by divesting old products.

"The leading companies have adopted a strategy of focusing on products that are considered core to the company's future growth," explains Phillips. "As a result, many products that have relatively modest sales or offer limited growth opportunities have been divested. The ongoing re-registration system in the EU and also in the US has been a further factor influencing product divestment, as several companies have decided it is not in their interests to support a product through this process."

Bayer CropScience divested 29 actives between 2000 and 2006. During the same period, the company launched 17 new actives. "Bayer CropScience was able to more than compensate for the drop in sales with the successful market launches of new active ingredients," says a company official.

As a result, Bayer increased the share of new actives in agrochemical (both crop protection and non-agricultural) sales to nearly 20% in 2006. Four of the new product families have taken a place among the company's top 10 performing actives. A total of 26, with a combined peak-sales potential of about €2bn ($2.7m), are scheduled for launch between 2000 and 2011.

For 2007, two new active ingredients are scheduled for market launch: the insecticide Flubendiamide, which was developed jointly with the Japanese firm Nihon Nohyaku, and the herbicide Tembotrione.

"Our active ingredients launched since 2000 performed strongly, and we achieved a sales target of more than €1bn last year," says the official. "The innovative agrochemicals segment is the most important value driver in the market as a whole."

Bayer CropScience plans to increase its R&D budget by 20% between 2006 and 2015, to €750m/year. Most of the gain will go to the bioscience business, but crop protection is slated to receive €500m a year by the end of the period.

Syngenta has reduced its portfolio of actives from 120 to about 80. Last year, it spent 10% of sales on R&D - $490m on crop protection - and the company expects to maintain that level of spending going forward, says Medard Schoenmaeckers, head of media relations. The company introduced one new proprietary active last year, the herbicide pinoxaden (Axial), and launched the fungicide mandipropamid (Revus) this year.

Syngenta has also looked externally to bolster its portfolio, in-licensing DuPont's insecticide Rynaxypyr and, in the North Americas Free Trade Agreement (Nafta) region, Dow's Florasulam, a broad-spectrum, broadleaf herbicide for cereals. "Products based on these third-party technologies will be introduced over the next 18 months, pending regulatory approvals," Schoenmaeckers states.

Products launched in the past five years are key drivers of sales growth in crop protection at Syngenta, he notes. Sales of new products rose 25% in the first quarter of 2007 to $363m, with Actara/Cruiser, Axial and Avicta "delivering strong performances".

BASF made a substantial cull, reducing its portfolio of actives from over 300 in 2001 to about 130 last year, and the company now claims to have the "highest level of patent-protected sales", with more than 50% of revenues derived from products with patented actives.

Left unsaid is the extent to which these patent-protected BASF products combine off-patent actives.

Something borrowed

Agrochemical innovators have several means available for protecting their off-patent products, says Uttley. Combination products are one. If two off-patent actives are combined, and the innovator can demonstrate a synergistic effect, the combination product may be granted its own patent. A single active could be included in several combinations. Each commercially successful, patented combination will carve another chunk away from a generic contender's potential market.

Off-patent actives can also be combined with patented actives. An off-patent, broad-spectrum fungicide might be enhanced with a patented, highly specific fungicide targeting a particular market. The off-patent product would essentially piggy-back on the patented product.

Number of New Product Introductions and Number in R&D

Company	Introduced 1990-2005	Currently in R&D
Bayer	37	9
Syngenta	23	5
BASF	22	7
Dow Chemical	21	3
Sumitomo Chemical	17	4
DuPont	10	1
Monsanto	2	0
Other Japanese companies	45	20
Rest of the world	19	9
TOTAL	196	58Source: Phillips McDougall

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