2007 R&D Spending by Instrument Firms

In calendar year 2007 (CY07), total R&D spending by 18 major analytical and life science instrument companies sustained strong growth, according to IBO’s annual survey of R&D expenditures, signifying a prudent commitment to the development of new products.

R&D spending in US dollars by 18 instrument companies (see table, page 6) climbed 10.3% to $1.23 billion in CY07, compared to 9.8% growth in CY06. The increase in R&D was primarily confined to several small- and medium-sized companies, in particular Luminex and Illumina. Excluding these two companies, CY07 R&D spending would have grown only 6.3%, compared to 9.3% in 2006. The median growth rate for the companies in the table slowed to 7.7% from 11.1% in CY06, while the average growth rate jumped 190 basis points to 15.5%. Excluding Luminex and Illumina, the median and average growth rate for R&D would have slowed 260 basis points and 570 basis points to 6.5% and 5.0%, respectively.

As a percentage of sales, R&D expenses declined 13 basis points to 5.9% for the 18 companies. In fact, only five companies increased R&D as a percentage of sales—Luminex, Illumina, Tecan, OI and Dionex. For 11 companies, R&D as a percentage of sales declined and for two companies, it was unchanged. This was expected due to the impact of foreign currency transactions on a number of companies in the table.

The largest increase in total R&D expenses was for companies with annual sales of $200–$500 million (defined as medium-sized companies). For these companies, R&D spending increased 17.2% in CY07. Medium-sized companies also recorded the largest revenue increase among the three groups of companies in the table, as total sales climbed 22.2%. The average and median R&D growth rates were 24.9% and 13.0% in 2007, compared to 8.4% and 9.1% in 2006, respectively. However, due to the strong revenue growth for a number of these companies, total R&D spending as a percentage of sales declined 50 basis points to 12.4%.

Smaller companies, whose annual sales are less than $200 million, recorded the highest level of R&D expenses as a percentage of sales at 15.5% in CY07, despite declining 130 basis points from CY06. Total R&D spending increased 12.2%, down from a 21.3% increase primarily due to Analytik Jena AG and Caliper Life Sciences. This group recorded an average R&D growth rate of 13.7%, but had the lowest median growth rate of 3.6%.

Total R&D expenses for the large companies, whose CY07 sales exceeded $500 million, slipped 130 basis points to 8.1%, while revenue growth improved 190 basis points to 11.4%. As a result, R&D as a percentage of sales slipped 14 basis points to 4.8%. The average and median R&D growth rates for the large companies were 7.9% and 7.7% in 2007, compared to 10.6% and 12.3% in 2006, respectively.

Seven of the 18 companies in the table reported double-digit increases in R&D in CY07. For many of these companies, the higher costs were attributed to the addition of R&D employees, either through acquisitions or organic growth.

Illumina recorded the largest increase in R&D last year as spending climbed 121.6% to 20.2% of sales. Approximately 80% of the growth was attributed to the Solexa acquisition (see IBO 11/15/06), 24% of the growth was due to the development of BeadArray technology and 18% of the growth was due to stock options. Luminex’s R&D spending increased 77.4% to 20.5% of sales, due to personnel increases related to the acquisition of Tm Bioscience (see IBO 12/15/06). The company increased its R&D workforce 82% to 111 employees.

Bruker and PerkinElmer also reported double-digit R&D growth last year, climbing 17.0% and 11.9% respectively, due to acquisitions. Nonetheless, the companies’ R&D expenses as a percentage of sales declined due to double-digit increases in sales. Thermo Fisher Scientific also recorded double-digit growth in R&D in CY07 related to acquisitions, as R&D climbed 11.3%. (Thermo Fisher Scientific’s 2005 and 2006 figures are based on pro forma results.) However, R&D expenses as a percentage of sales remained low at 2.4%, which Thermo attributed to strong revenue growth and a lack of any major new projects requiring significant capital.

Although Dionex and Sequenom did not make any acquisitions in CY07, each reported double-digit R&D increases, at 16.3% and 20.2%, respectively. Sequenom’s R&D increased in order to expedite the development of diagnostic products and expand the applications for MassARRAY technology. As a percentage of sales, R&D declined nearly 15 percentage points due to 43.9% revenue growth. But not all companies increased R&D expenditures in conjunction with revenue growth in 2007. Caliper’s R&D grew less than 1% despite 30.4% revenue growth. As a percentage of sales, the company’s R&D expenses fell 520 basis points to 17.6%.

R&D spending declined last year for Affymetrix, Biotage AG and, when calculated in local currency, Oxford Instruments. In local currency, Biotage and Oxford’s R&D spending fell 29.5% (down 23.1% in US dollars) and 5.0% (flat in US dollars) in CY07. Notably, the declines alluded to the companies’ cost-cutting efforts and product line adjustments. Affymetrix attributed its 15.7% decline in R&D spending to a decrease in supplies and services purchases, reduced headcount and stock-based compensation, and a “reprioritization” of projects. Neither company provided details on their declines in R&D spending, but both divested businesses last year. Biotage shut down its Chemical Development business (see IBO 3/31/07) and Oxford exited it high-field magnet business, as well as discontinued unprofitable product lines. Biotage’s CY07 revenues fell 4.4% in local currency. Also, both firms’ R&D figures include the depreciation of tangible and intangible assets related to R&D.

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