IT’S THE EPA & THE USDA: HOW REGULATORY AGENCIES IMPACT AgTECH PRODUCT TIMELINES AND INVESTOR RETURNS

Introduction
 
          At a recent Royse Law Firm AgTech event the panel was asked to discuss why a “Google exit” had not yet occurred for AgTech investments. They discussed the fragmented supply chain and VC return formulae, but a much simpler answer exists. The agriculture sector produces different returns at longer timetables because the end product is a living, breathing organism. The production of food also creates unique social, economic, environmental, political, and moral issues that society regulates. Public policies exist to assure the safety and availability of those living goods. Agricultural regulation can distinctly affect AgTech startups’ ability to scale when compared to traditional venture-backed startups in information technology industries. Monsanto’s latest 2016 product launch of its Roundup Ready 2 Xtend Crop System perfectly illustrates the added complexities of bringing agricultural technologies to market under U.S. regulatory law.
Although Monsanto is attempting to market its latest seed and associated herbicide technologies under one platform, it is currently legal for growers to buy the seed, but illegal for growers to apply the appropriate herbicide and illegal to use other herbicides because genetically engineered seed and herbicides are each regulated by two different federal agencies: the USDA and EPA. Although the USDA approved the biotech seeds in January 2015, the EPA is still reviewing the safety of using dicamba on the seed.
This article introduces the world of crop protection, how the EPA regulates pesticides, and overviews the market impact regulatory effects can have an AgTech product pipeline.
Crop Protection: How to Manage the Unpredictable
To produce food every day, farmers must deal with the unpredictable. They defend their crops against untimely weather, unwanted pests, and unrelenting pathogens. Damaged crops lead to unsellable and unusable product. Crop loss from weeds, insects, and pathogens historically accounts for up to 40% of global agricultural productivity. To combat crop loss, growers deploy crop protection solutions.
Crop protection, the management of weeds, insects, and diseases in growing crops, is a daily, and at times hourly, concern for all growers. To minimize pests and pathogens, growers usually adopt several methods of crop protection through integrated pest management (IPM) strategies. Chemical applications became the most effective but least desirable strategy. The “Big 6” (now the Big 5) agricultural input companies provide farmers with crop protection tools such as chemicals, cultural management practices, and biological solutions, and seed, both biotech and conventional.
The Roundup Ready Xtend Crop System is Monsanto’s next tool designed to help maximize weed control and yield potential. This System is comprised of two IPM strategies, herbicide resistant seed and updated herbicides.
Monsanto’s Main Crop Protection: RoundUp Ready’s Technological Evolution
In 1996, Monsanto began commercializing its genetically modified soybeans resistant to glyphosate, commonly known as RoundUp Ready (RR).  In 2008, Monsanto launched its second generation of glyphosate tolerant seed, RoundUp Ready 2 Yield (RR2Y) which was marketed as higher yielding glyphosate tolerant seeds. Then Monsanto and Dupont-Pioneer resolved a 5 year patent and antitrust suit that included a $1 billion jury award to Monsanto for infringement of its expiring RR patents and granted Pioneer access to future RR2Y and related products. Monsanto latest RR iteration is the Genuity Roundup Ready Xtend Soybeans (Genuity RR2X), the industry’s first trait stacked soybean with both dicamba and glyphosate herbicide tolerance.
 
USDA Deregulation of Genuity RR2X
Every time Monsanto evolved its RR technology, it was first reviewed and “deregulated” by the USDA before being commercialized. This regulatory process was introduced in the Summer 2016 issue of this legal newsletter. (It should be noted that every time a GM plant is introduced, the plant variety must be deregulated. Even if the same traits are introduced to different crops, all crops must be deregulated separately). After a decade of development and review, the USDA deregulated RR2X Soybeans in January 2015 finding RR2X did not pose a plant pest risk.
Monsanto waited, however, an additional year before commercially launching the seed for the 2016 growing season. While RR2X Soybeans have started receiving import approvals around the world, the EPA is operating on a different timetable with the second half of the solution: the updated dicamba formulation.
EPA Regulation of Pesticides
Federal law defines a pesticide as any substance or mixture of substances intended for preventing, destroying, repelling, or mitigating any pest. A pest is broadly defined to include any insect, rodent, nematode, fungus, weed, or any other form of terrestrial or aquatic plant or animal life or virus, bacteria, or other micro-organism, except viruses, bacteria, or other micro-organisms on or in living man or other animals. Pesticides can further be organized based on target species: herbicides, insecticides, fungicides, bactericides, etc. In 1947, Congress passed the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) to protect consumers from product ineffectiveness and deceptive labelling as opposed to environmental or health issues. After the creation of the EPA and a series of amendments to FIFRA in the mid-20th century, the EPA became the enforcement agency of pesticides.
A pesticide cannot be manufactured, distributed, or imported until it is registered and approved by the EPA. Separate registration is required each time a pesticide will be applied to different crop or insect and includes a scientific review of different dosages and research data on health, safety, efficacy, and other relevant information.
Labelling compliance is also a huge enforcement mechanism of the EPA registration process. The ingredient statements, directions for use, and hazardous warnings become the basis under which the pesticide can be used without causing unreasonable adverse effect on the environment.
Glyphosate is a broad spectrum herbicide formulated to kill both broadleaf plants and grasses. Dicamba is a selective herbicide that targets only grasses. Although dicamba has been previously approved for use on other crops, EPA registration and approval was required for dicamba on Monsanto’s new seed: controlling weeds on genetically-engineered dicamba-tolerant soybean.
When used properly per their EPA labeling requirements, all registered U.S. herbicides sold in the market are considered safe for everyone, including infants, the developing fetus, the elderly, and have been determined not to cause unreasonable adverse effects on the environment, including endangered species.
Thus, the EPA is primarily responsible for registering and monitoring pesticides, and any use outside the label’s descriptions constitutes illegal misuse subject to civil and criminal penalties. Both the USDA GM deregulation process and EPA pesticide registration process take years and millions of dollars.
The EPA announced it expected to issue a final decision on the RR2X dicamba formulation in 2016.
The Market Dilemma of the RR2X Crop System
Currently, it is legal for growers to plant the tolerant RR2X soybeans, but it is illegal violation of federal and state law to make an in-crop application of any dicamba herbicide. No dicamba herbicides have been approved for use on the RR2X seeds.
Monsanto chose to sell the dicamba and glyphosate tolerant seed for 2016 with clear, heavy warnings not to use “off-label” dicamba, only the approved glyphosate. With no alternative dicamba herbicide on the market, farmers were left to decide the risk-return of spraying off-label dicamba. Slowly, reports of neighbor crop damage due to such unauthorized use of off-label dicamba formulations began to spread in August and September.
The scientific problem is that old formulations of dicamba are not supposed to be applied to crops. It is more susceptible to drift away from where it is applied. Additionally, dicamba should be applied as a pre-emergent to the soil to kill weed seeds prior to planting because soybean varieties, other than RR2X, are highly susceptible to crop damage even at low concentrations of old dicamba.
Conclusion
 
Agriculture is unique in its regulatory regime to protect living products. The USDA determines whether to allow the sale of seeds that have been genetically engineered, and the EPA regulates the pesticide used on those seeds or crops.
So the current state of the crop protection market is: an Ag biotech company spent millions for a two-part technology, the research, development, and regulatory review process will have taken over a decade, farmers tried to substitute old, outdated technology to a new crop protection solution, and the net result was crop loss instead of crop protection. Additionally, crop insurance companies have indicated they will not compensate farmers for losses due to illegal herbicide usage.
So what should a company do when the base of their technology is approved, but not the full suite? Should a company not release its minimum viable product? Can you trust your customers to follow the law or should a company be required to enforce the law?
As the RR2X product launch shows, there are inherent strategic risks in the market of living goods. AgTech founders are learning and accepting that they operate under different timelines than most other startup companies. AgTech iterations are much more limited due to the lifecycle of a plant, and the additional hurdles unique to agriculture delay investor returns for both big and small companies.

 

Erica Riel-Carden
erielcarden@rroyselaw.com
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