In calendar-year (CY) 2009, total R&D spending in US dollars for 18 major publicly held analytical and life science instrument and laboratory product companies (see table, page 6) grew 0.7% to $1.52 billion, compared to 9.2% in CY08. R&D spending outperformed revenue growth, which declined 2.8% for the 18 companies in CY09. As a result, R&D spending as a percentage of sales increased 23 basis points to 6.6%. However, the modest increase in total R&D expenditures was confined to three companies, Sequenom, Illumina and Life Technologies.

The median change for the 18 companies’ CY09 R&D spending declined 1.5%. Median revenue growth contracted at a comparable pace, down 1.2%. Clearly, both revenue and R&D spending were affected by the global recession, as 12 companies reduced R&D spending in CY09 and 10 companies recorded lower revenues. In response to slower sales, a number of companies initiated restructuring programs, including workforce reductions, budget cuts, reduced compensation and other cost-saving initiatives that impacted R&D operations.

Four of the six companies that increased R&D spending last year also reported higher revenues. Growth in R&D spending was also the result of higher stock-based compensation expenses, product development for new markets and acquisitions. Of the six companies that increased R&D expenses in CY09, four recorded double-digit increases in reported currencies. For three of these companies, the increase in R&D spending also reflected their diagnostic plans. Illumina recorded the fastest R&D growth last year. R&D expenses climbed 40.7%, or $41 million, due to higher personnel-related expenses. Over 14% of R&D expenses were devoted to employee stock options and stock purchases, which grew 41.7% to $20.0 million. R&D expenses also increased as the company focused on the development of diagnostics applications and advancements in sequencing microarray technologies and increased R&D personnel. Illumina’s revenues climbed 16.2%. As a result, R&D expenses as a percentage of sales expand 366 basis points to 21.1% of sales, which is slightly above the company’s historical range.

Sequenom’s R&D expenses jumped 36.4%, or $10 million, in CY09 to account for 98.9% of company sales. The substantial rise in costs driven by the development of diagnostic applications and the latest generation of MassARRAY technology, including increased head count and related-expenses. Over 55% of the company’s R&D expenses were dedicated to the Molecular Diagnostics segment. In addition, stock-based compensation for R&D more than doubled to represent 10.2% of total R&D expenses.

Luminex and Analytik Jena AG also increased R&D spending by double digits, but at a much lower dollar value. Luminex’s R&D expenditures rose 11.4%, or $2.1 million, last year, primarily for assay product development, materials and added personnel. R&D head count climbed 13.8%. Like Illumina and Sequenom, Luminex devoted resources to diagnostic applications. Unlike Illumina and Sequenom, Luminex’s R&D spending as a percentage of sales declined 63 basis points to 17.2%, but was still above the company’s long-term target of 15% of sales. R&D expenses for Analytik Jena grew 12.5%, or $0.9 million, due to acquisitions, product development and personnel. The company’s R&D head count jumped by more than 43% in fiscal 2009 ended September 30.

Life Technologies recorded the largest R&D budget in CY09 among the 18 companies. The company’s R&D spending climbed 3.5%, or $11.2 million, to $333.9 million. Last year, the company launched over 1,000 products and aggressively invested in benchtop instrumentation, acquired sequencing and PCR technologies, as well for emerging growth areas, including cell analysis, biofuels research and molecular diagnostics. In addition, the company expanded its R&D workforce by 8.3% and increased stock-based compensation for R&D by 35.8% to account for 12% of the company’s R&D increase. As a percentage of sales, R&D expenses declined 15 basis points to 10.1%, which is within the company’s target rage of 10.0%–10.5%.

In general, larger organizations are less impacted by spending constraints, and thus more adept at quickly lowering expenses. As such, the largest decline in total R&D expenses was for companies with annual sales exceeding $1 billion. For these six companies, total R&D spending declined 1.1%. Revenue growth slipped 2.8%, leading R&D expenditures as a percentage of sales to increase 0.1% to 5.4%.

For the six medium-sized companies (with annual sales of $300 million–$1 billion), total R&D spending in CY09 grew 3.7%. In contrast, revenues declined 3.6% and R&D costs as a percentage of sales grew 87 basis points to 12.5%.

Finally, for the smallest companies, with CY09 sales of less than $300 million, total R&D expenses jumped 12.3% and revenues climbed 5.2%. R&D spending as a percentage of sales for these companies climbed 124 basis points to 19.7%. However, excluding Sequenom’s sizeable increase of $10 million, R&D expenditures would have slowed to 0.1% and R&D expenses as a percentage of sales would have dropped 103 basis points to 12.6%.

Some companies were more susceptible to the economic downturn than others, which negatively affected R&D spending. Four companies recorded double-digit declines in R&D spending last year in reported currencies. Both OI and Varian were affected by the recession’s impact on industrial end-markets. R&D budgets for OI Corporation and Varian fell 22.5% and 21.4% due to lower revenue growth and restructuring measures. OI reduced its workforce by roughly 18%, as revenue growth fell 31.3%. Varian’s revenues fell 20.3%. Oxford Instruments and Caliper Life Sciences’ R&D spending reductions were notably disproportionate to their revenue performances. Oxford Instruments cut R&D spending by 19.6%, but revenue grew 2.4% in native currency. Like Varian and OI, the company’s sales to industrial customers were negatively affected by the recession, prompting restructuring.

Caliper posted a 2.7% decline in revenue growth, but cut R&D spending by 10.7%. R&D spending was affected by the closure of R&D facilities, the divestment of product lines and head count reductions. Affymetrix also showed disparity between R&D spending, which fell 8.5%, and revenues, which improved 2.1%. The decline in R&D expenditures was attributed to the completion of certain next-generation development. Both Affymetrix and Caliper recorded operating losses last year.

Agilent Bio-Analytical Measurement, Waters and Bruker reduced CY09 R&D expenses as a result of cost-savings plans and the strengthening of the US dollar, which reduced expenses in Europe. Agilent lowered R&D expenses by 3.7% by reducing wages and global infrastructure costs, which benefited from currency movement. Waters’s R&D spending fell 5.4% due to lower incentive compensation and favorable exchange rates, as the majority of the its MS products are developed in the UK. Similarly, Bruker’s R&D expenses fell 5.4% due to currency transactions, as a majority of the company’s R&D is performed in Europe.

Despite CY09 revenues declines in native currencies, Thermo Fisher Scientific, PerkinElmer and Tecan recorded only modest decreases in CY09 R&D spending. Thermo’s R&D budget fell 1.2%. The company is expected to increase R&D by $30 million, or 12%, in CY10. PerkinElmer’s R&D spending fell 1.6%, but grew 36 basis points as a percentage of sales. Tecan’s R&D costs slipped 1.0% in reported currency, but were unchanged as a percentage of sales.

Chart: Average Sales and R&D Growth Among Surveyed Cos., 2009–10

Sales R&D Spending

Large – 2.8% -1.1%

Medium – 3.6% 3.7%

Small 5.2% 12.3%