R&D Spending on the Rise

R&D spending by analytical and life science instrument companies showed a robust increase last year, according to IBO’s annual survey of R&D spending, indicating healthy business conditions and an optimistic forecast among instrument companies. In fact, several companies, both large and small, made sizable increases to R&D.

R&D spending by the 15 instrument companies surveyed by IBO increased an average of 10.7% in US dollars in calendar year 2006, compared to growth of 1.5% in calendar year 2005. The low percentage increase in 2005 is due to Applied Biosystems’ decreased spending that year. Excluding Applied Biosystems, average R&D spending rose 7.9% in 2005. Double-digit increases in R&D expenditures by 10 companies drove the increase. For several companies, acquisitions added to their R&D dollars, for others, stock option expensing and concerted R&D efforts boosted total spending.

As a percentage of sales, average R&D spending in 2006 among the companies surveyed was 7.6%, down from 8.3% in 2005. Illumina’s 200 basis-point drop in R&D as a percentage of sales was largely responsible for the decrease. Nonetheless, the companies in the table (see page 7) with sales of less than $200 million (defined as small companies) continued to spend the largest percentage of sales on R&D at 16.4%, compared to 12.4% and 6.3% for companies with sales in the $200–$500 million range (medium companies) and companies with sales of more than $500 million (large companies), respectively. In total, R&D spending by small, medium and large companies increased 22.6%, 10.5% and 9.4%, respectively.

Eight of the 10 companies with double-digit increases in R&D spending last calendar year also posted double-digit increases in revenues. In many cases, R&D spending is correlated with sales growth. However, R&D investments can also be indicative of companies’ strategic efforts in terms of growth initiatives, new product lines, cost savings and outsourcing. Luminex’s R&D spending increased 55.4% last year to 16.4% of sales. The company’s creation of research assay and diagnostic assay businesses, including a 45% increase in the number of R&D employees to 61, added to the increase. Oxford Instruments noted in its annual presentation to investors that the number of its R&D projects increased 46% to 19 in fiscal 2007, sending its R&D spending from 9.3% of sales to 10.0% of sales in British pounds, including amortized R&D and capitalized R&D.

Affymetrix, Dionex and PerkinElmer each posted double-digit increases in R&D spending in calendar year 2006, despite single-digit sales increases. Affymetrix attributed its increase in 2006 R&D spending to new hires related to the acquisition of ParAllele Bioscience (see IBO 6/15/05) and an increase in stock option expenses. For Dionex, whose fiscal year ends in June, increased R&D spending may be related to new products for the fast-growing, but highly competitive HPLC market. PerkinElmer’s 14.1% increase in R&D in 2006 (which includes spending for both the company’s analytical and optoelectronics businesses) exceeded its 2.7% growth in sales. For more than a year, the company has stated that it is accelerating R&D spending in genetic screening and reagents for cellular screening, two of its fastest growing product segments.

One the most influential factors on 2006 R&D spending among the 15 companies surveyed was acquisitions and mergers. Acquisitions added to increased R&D spending by Affymetrix, Bruker BioSciences, Caliper Life Sciences and Varian (Varian’s figures include both the company’s Scientific Instruments and Vacuum Technologies units). For example, Caliper stated in its annual financial report that, excluding spending related to acquisitions and stock option expensing, its R&D expenditures actually decreased. In other cases, acquisitions decreased overall R&D spending for a company. Tecan noted that its 2005 acquisition of REMP (see IBO 6/15/05) was partially responsible for its 4.3% decline (4.9% in Swiss francs) in 2006 R&D spending as REMP’s product lines require less R&D than Tecan’s other products. In addition, cost savings can affect R&D expenditures. Tecan’s exit of its Boston facility in 2005 also reduced R&D spending last year.

Tecan was one of three companies among the 15 surveyed that reduced R&D spending in calendar year 2006. Analytik Jena AG, whose fiscal year 2006 ended in September, reduced its R&D spending 21.8%, despite a double-digit increase in sales. According to OI, its 15.5% reduction in R&D expenses last year was due to a reclassification of certain expenses to cost of goods sold.

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