Its main use is to kill Gnat swarms and Rabid Beetles. Gnats cannot be killed with a regular weapon (unless they are frozen beforehand), while any Rabid Beetle that runs through the cloud will die instantly. It can also be used to ease a fight by reducing the health of enemies a little bit.
Another Use of the Bug B'Gone is to kill bug-type creatures. Currently, the cloud this creates will apply poison to Weevoles, Scorpions, and Mants, and, given enough time, will kill them with a single use.