Growth of R&D Spending Slows in 2008

In calendar-year 2008 (CY08), total R&D spending in US dollars for 20 major analytical and life science instrument companies (see table, page 4) climbed 9.5% to $1.41 billion, compared to 10.9% growth in CY07. The median growth rate grew 60 basis points to 8.5% in CY08. The increase in R&D spending was primarily a result of acquisitions and increased product development, including related personnel and stock-option expenses. Overall, 16 of the 20 companies reported higher R&D expenses. In local currency, 15 companies increased R&D spending.

While nearly half the companies reported double-digit R&D growth, four companies—Bruker, Illumina, Sequenom and Agilent Bio-Analytical Measurement (BAM)—accounted for 7.6% of the total R&D growth in CY08. Excluding these companies, total R&D growth would have slowed to 2.6% in CY08, compared to 7.9% in CY07. Applied Biosystems (CY ended September 30, 2008) recorded the only significant decline in R&D spending, falling 7.0% due to reorganization efforts, including divested product lines and reduced headcount. Excluding Applied Biosystems, total R&D spending for the companies in the table would have grown 12.7% in CY08, compared to 10.4% in CY07.

As a percentage of sales, annual R&D expenses were unchanged at 6.1% for the 20 companies. Despite a 370 basis point drop in revenue growth to 9.2% in CY08 for the 20 companies in the table, only seven companies increased R&D as a percentage of sales, while for 13 companies, the percentage declined. The results were similar when calculated in local currency. The two significant changes in R&D spending as a percentage of sales were for Sequenom and Affymetrix, which both increased R&D spending, while sales either slowed or declined.

The largest increase in total R&D expenses was for companies with annual sales of up to $100 million, which are defined as small-sized companies in the table. For these six companies, total R&D spending increased 43.6% in CY08, compared to 7.0% in CY07. The median R&D growth rate was 11.3% in CY08, compared to 7.1% in 2007. For a majority of small-sized companies, revenues either declined or slowed, but R&D expenditures as percentage of sales increased 410 basis points to 18.4%.

The large increase in R&D spending for small-sized companies was primarily limited to Sequenom, which nearly doubled its R&D budget due to the development of diagnostic products. Excluding Sequenom, R&D spending for the small-sized companies would have grown 7.0% in CY08, compared to a decline of 1.3% in CY07, while R&D expenditures, as a percentage of sales, would have slipped 30 basis points to 9.5%.

For the medium-sized companies, whose annual sales are $100–$999 million, total R&D expenses climbed 15.1% in CY08, representing a decline of 270 basis points from CY07. The median growth rate was 8.9%, down from 9.8% in the previous year. As a percentage of sales, R&D spending rose 40 basis points to 13.9%, as revenue growth was cut in half to 11.9%.

Finally, total R&D expenses for large companies, whose CY08 sales exceeded $1 billion, slipped 40 basis points to 7.6%, while the median growth rate fell 280 basis points to 4.4%, the lowest among all groups. However, due to the acquisitions by both Agilent BAM and Bruker, R&D expenditures as a percentage of sales, climbed 170 basis points to 6.8%.

For those companies that reported appreciably higher R&D expenditures, investments to improve existing products and develop new technologies to sustain competitive advantages remained the prevailing theme. R&D costs associated with the development of products include expenses for new employees, stock-based compensation and materials. Nine of the 20 instrument companies reported double-digit growth, compared to eight companies in CY07. In local currency, half the companies reported double-digit growth, compared to seven in CY07.

Last year, Sequenom recorded the largest increase in R&D spending, which climbed 91.3% due to development of the MassARRAY system and diagnostic assays, particularly for various non-invasive prenatal diagnostic tests. Given that the diagnostic products have yet to produce any financial returns and that 2008 revenue growth slowed significantly, R&D expenditures as a percentage of sales jumped to 58.2% from 35.0% in CY08. Similarly, Illumina and Luminex each reported double-digit R&D growth last year due to intense product development that like Sequenom targeted both research and diagnostic markets. R&D expenditures for Illumina rose 35.2%, including 14.1% and 12.3% for the BeadArray and Sequencing technologies, respectively, while stock-based compensation expenses accounted for 5.5% growth. In fact, stock-based compensation costs accounted for 14.1% of Illumina’s total R&D expenses in CY08. However, the company’s R&D workforce climbed 46% to 406 employees. Luminex R&D expenses climbed 21.1%, but were significantly lower than the 77.4% growth in CY07. Despite the sharp rise in development costs, R&D as a percentage of sales for both Illumina and Luminex declined due to strong revenue growth.

R&D spending for Bruker, Affymetrix, OI Corporation, Cybio AG, Varian and Agilent BAM each increased in double digits last year. Bruker’s R&D expenses grew 20.8% due to higher costs of materials for newly developed products and an increase in head count following the acquisition of BioSpin (see IBO 12/15/07). In addition, changes in foreign-exchange rates resulted in higher R&D costs, as a majority of the company’s R&D is performed in Europe. R&D expenses for Agilent BAM grew 20.9% following the acquisitions of Stratagene (see IBO 4/15/07) and Velocity11 (see IBO 11/15/07), which together accounted for 12% of the R&D growth. R&D spending for Affymetrix grew 16.2% as the company made three acquisitions and undertook new development projects. R&D as a percentage of sales for Bruker, Agilent BAM and Affymetrix climbed 140, 50 and 680 basis points to 12.1%, 9.1% and 16.2%, respectively, due to weaker revenue growth.

R&D spending for OI and Varian climbed 16.1% and 10.1%, respectively, without any additions to the company’s workforce. OI attributed its increased expenses to materials used to construct prototypes of new MS and total organic carbon analyzer products. Varian stated that its R&D costs were devoted to the development of magnet-based products, MS and certain consumable products, as well as restructuring and stock-based compensation costs.

Aside from Applied Biosystems, R&D spending declined last year for Caliper Life Sciences, Biotage AG, Oxford Instruments (fiscal year ended March 31) (see page 7) and, when calculated in local currency, Tecan and Analytik Jena AG. However, in local currency, Oxford’s R&D spending grew 15.7%.

Declines in R&D spending were primarily attributed to reorganization efforts. Caliper’s R&D spending fell 19.6% due to the divestment of two product lines and the consolidation of two R&D facilities, resulting in the termination of several employees. Likewise, Biotage AG and Analytik Jena AG each sold businesses, which lowered R&D expenses by 3.4% and 0.8%, respectively. In local currency, Tecan’s R&D expenses dipped 190 basis points due to reduced internal expenses. As a percentage of sales, R&D spending increased 30 basis points to 10.2% as a result of declining revenues.

Chart: Average Sales and R&D Growth Among Surveyed Companies, 2007–08

Sales R&D Spending

Large 8.9% 6.8%

Medium 11.9% 15.1%

Small 11.5% 43.6%

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