Instrument company R&D: challenges and opportunities.
For instrument companies, where technology often reigns supreme, R&D remains key to long-term growth. This is particularly true for life science related technologies, where a changing set of problems demands new and more advanced solutions and where the questions researchers ask continue to multiply.
As IBO's annual survey of R&D spending by the instrument industry in 2002 found, instrument companies have been affected by economic trends. Of the 23 companies examined by IBO, R&D spending increased 5.7% from 2001 to 2002 compared to a 13.5% increase from 2000 to 2001 (see table, page 7). However, this decrease is not surprising when one examines sales for the same period. From 2000 to 2001, sales for these 23 companies increased 8.1%, but grew only 2.8% from 2001 to 2002. (Please note that these results also include R&D and sales figures for the businesses of eight companies not associated with analytical instruments.)
Of course, many factors can affect R&D spending levels besides sales, including currency exchange rates, one-time projects and acquisitions and divestments. Although some companies' R&D spending levels are more varied than others year to year, the trend holds true across all three categories of company size and across the broad range of technologies these companies represent.
Examined as a percentage of sales, the numbers show a slight increase. In 2001, the 23 companies in the table spent an average of 9.2% of sales on R&D, for an increase of 20 basis points. However, from 2000 to 2001 the percentage increased 40 basis points. Thus, while it is clear that instrument companies are still investing in R&D, downward adjustments have been made in line with sales growth.
To further examine the current R&D environment in the instrument industry, IBO spoke with three instrument companies: Applied Biosystems, Waters and Agilent Technologies' Life Science Chemical Analysis (LSCA). As part of their R&D efforts, these companies must face several challenges presented by instrument-related R&D, such as the short product life cycles and increasing technical advances of life science technologies. In meeting these challenges, all three companies draw upon similar thinking, including collaborations, greater customer input and faster time to market. However, each company also remains distinct in its R&D approach and structure.
Applied Biosystems is among the highest R&D spenders in the industry, regularly devoting a double-digit percentage of annual sales to R&D investment. With R&D operations located in Foster City, California; Framingham and Bedford, Massachusetts; Rockville, Marlyand; and Singapore, the company spent $234 million, 14% of sales, on R&D in calendar year 2002. But this is to be expected from a company that built its business by introducing new technologies, ranging from DNA sequencers to ICAT Reagent Technology, and that is focused on a life science market where complex problems often demand technically advanced solutions.
As Applied Biosystems has also demonstrated, these solutions go beyond instrumentation to include software and consumables. It is this aspect of the company that also characterizes its R&D undertakings, according to Applied Biosystems Senior Director of Engineering for R&D Peter Lundberg, Ph.D. "We take a systems approach. I think that is the most distinguishing feature of Applied Biosystems compared with other companies where I've worked," he says. Part of this systems approach is input from different disciplines. "We have molecular biology, chemistry, engineering, physics, software, bio-informatics and on and on. We have all these skill sets working closely together. In fact, one of the things we try to do is put these people in close proximity when they work together on a program so that they can learn from each other."
As a company focused solely on life science technologies, Applied Biosys-tems, more so than some of its competitors, has had to anticipate end-users' needs and evolving applications. Dr. Lundberg cites early-access programs as an important source of insight into the latest needs of researchers. In addition, feedback from customers and the company's field application specialists also contribute to the R&D process.
Collaborations and partnerships are also key considerations. The company's ongoing collaborations include research and academic institutions, such as the Institute for Systems Biology for proteomics techniques, and Richard M. Caprioli, Ph.D. at Vanderbilt University for the use of mass spectrometry and direct imaging for tissue analysis without sample prep. The company's collaboration with academic institutions tends to be for early-stage development. Corporate collaborations range from a partnership with 3M Technologies, with whom it developed the recently introduced 7900HT Micro Fluidic Card, to the highly successful partnership with MDS Sciex, which is responsible for the new 4000 Q TRAP LC/MS/MS system. On its website, the company lists 12 research partners/collaborations.
"We continue to have these strategic collaborations to get new ideas and to leverage other peoples' expertise along with our own.... We recently set up a scientific advisory committee to help us sort through some of these opportunities when they come up," says Dr. Lundberg. In addition, he adds, the company has undertaken other measures to respond to short product life cycles. "We also have an internal strategic initiative called the 'idea to margin initiative' that focuses on improving how Applied Biosystems develops products and introduces them quickly into the marketplace," he says. Among other changes, he says, "We're focusing on streamlining the R&D process. We've also instituted senior management tracking of schedules, resources and issues on projects."
Asked about the adverse economic climate and slower spending by pharma and biotech end-users and delays in government funding, Dr. Lundberg told IBO that such developments have little effect on R&D efforts at the company. "What I would say about Applied Biosystems is that we continue to invest heavily in R&D and we see that as a way to spur growth through new product introductions."
Although the company's R&D expenses increased in the first six months of fiscal 2003, they are expected to return to historical levels. As Lori Murray, manager of Media Relations and Communications for Applied Biosystems, told IBO, the increase was due to Applied Biosystem's role in the Applera Genomics Initiative, for which it resequenced the genomes of 50 individuals. "When we started the Applera Genomics Initiative, we bumped our R&D up to 14% of our revenue. When we completed the research phase of AGI, we returned it to more traditional levels, which is about 10-11%," says Ms. Murray. SNP and gene expression Asssays-on-Demand products as well as the SNPlex high throughput genotyping technology have been the first product introductions resulting from the initiative.
The R&D story is somewhat different for Waters, which spent 5.8% of sales on R&D in 2003, or $51.9 million. As a company focused on liquid chromatography (LC), mass spectrometry (MS) and thermal analysis products, its R&D demands include both life science markets, including proteomics, and more traditional end-users, such as the chemicals industry. Mass spectrometry R&D is headquartered at Micromass in Manchester, England, while LC and associated chemistry R&D is done out of Milford, Massachusetts. The company's thermal analysis business, TA Instruments, is headquartered in New Castle, Delaware, with some rheology R&D based in England.
According to Waters Executive Vice President and Chief Technology Officer John R. Nelson, Ph.D., "Our overall strategies have to work under [these] general guiding principles: take care of your current business, extend your current business, expand it and then bring in new market segments or bring in technology that could create new market segments." He also emphasizes the importance of the commercialization process in addition to R&D. "The ability to commercialize the technology is something that is often vastly underestimated." Part of that process is customer education and support. "That's as big a part of the success of any technology company as the technology itself," he says.
In a recent reevaluation of company operations, Waters last year reorganized, integrating the field sales, service and distribution organizations of its Waters and Micromass divisions (see IBO 7/15/03). This integration, while not directly related to R&D, has contributed to the R&D process. "One of the things that the integration of the two [divisions] has greatly helped us with is to facilitate the process of helping to define total solutions. [For example], there are certain application areas where a small improvement in sample preparation makes a huge improvement in mass spectrometry detection."
Other changes afoot include an emphasis in certain areas. "Over the past year or so, independent of the field integration ... we've been increasing the amount of involvement as it relates to things that might be developed on the chemistry side," explains Dr. Nelson.
On the MS side, Dr. Nelson acknowledges the short product life cycles of life science related products, but has seen it slow. "You definitely can characterize the MS industry--maybe a little bit more than the LC industry--10 years ago as being much more willing to really pre-introduce something. I think now the marketplace is maturing to where people want to know what's coming and they want to know it's coming in the reasonable near future."
One way of dealing with the demand for new products is shared platforms. "[T]he standard when you try to deal with something like shorter life cycles is by using one form or another of a platform technology.... For instance, with the newest triple quadrupole that we just put out, the Quattro Premier, we were able to quickly bring that product to market using a lot of the technologies from the Quattro Micro." The Quattro Premier, which debuted at ASMS (see IBO 6/15/03), is a high-end quadrupole MS designed for high-sensitivity quantitative analyses.
As for collaborations, Dr. Nelson says, "It's not a big part of your investment, but it is a very important part of crafting your own wish list for what you could do." He emphasizes the role of collaborations, especially for the development and integration of software and for methodology development. The company's software collaborators include Taratec and Advanced Chemistry Development. On the MS side, it is collaborating with Ion Spec for FTMS technology.
At Agilent Technologies LSCA, which accounted for 18% of Agilent's total revenues for fiscal 2002, the R&D process is very much related to Agilent's central research organization, Agilent Labs. "For us, it's a balance of long-term and short-term investments. Nearer term is the one-to-three year R&D associated with new product development. The longer term is our Life Sciences Technologies Laboratory at Agilent Labs," explains Darlene Solomon, Ph.D., director of the Life Science Technologies Laboratory and R&D Technology Manager for Agilent's Life Sciences Chemical Analysis business. "There's a lot of technology consulting that goes on, and a lot of the strategic planning for near-term products is done across the labs. They're not as separate as you might think. There's actually a high degree of overlap in terms of the interaction, but the product development is separate." The Central Lab is also important to LSCA R&D as a meeting place for Agilent's range of technical expertise across its businesses. For example, says Dr. Solomon, "High speed electronics is an important part of Agilent's non-life sciences business but we get leverage [from it] for our time-of-flight mass spectrometer."
Like Waters', Agilent's products span both life science and more traditional markets, which affects its R&D approach. Microarray and gene expression R&D is located in Santa Clara, California; gas-phase products and proteomics R&D is in Little Falls, Delaware; R&D for pharmaceutical analysis and proteomics, including LC and microfluidics, is in Waldbronn, Germany; and gas chromatography R&D is located in Shanghai, China. Agilent Labs is headquartered in Palo Alto, California and has satellite labs worldwide.
"Within LSCA, we're also doing some portfolio optimization of our R&D investments, and that's around areas that are more mature. Where we have strong market share, we might be making investments that are less R&D centered, but may be more towards providing more value to the customer in other ways versus the higher-growth, newer areas which might require a higher level of R&D spending," Dr. Solomon explains. In addition, she says, "[W]here we used to be more platform focused, now we tend to be more market focused."
Other changes fit with the shorter life science product cycle, which has encouraged greater early-access involvement from customers, and with current economic uncertainties, which has prompted more proactive project management and more milestone-based agreements in some cases. For fiscal year 2002, Agilent reported that LSCA's R&D expenses as a percentage of net revenue were flat compared to fiscal 2001. "It certainly helps that when we talk about revenue for even just the Life Sciences and Chemical Analysis piece, we're talking about $1.2 billion, so if you're looking at 9% or 10%, then you've still got $100 million to play with. So it's a relatively large investment, but in these times, with things being more flat, we have to do better portfolio management of our investments."
Helping with such management is Agilent Technologies' venture fund, which invests in early-stage technology companies. In addition, Agilent has sought out more government funding for projects, such as a 2001 Defense Advanced Research Projects Agency project in collaboration with the University of Colorado, to increase the speed of DNA synthesis for application to the manufacture of DNA microarrays. Other government collaborations include a partnership with the National Institutes of Health's National Human Genome Research Institute, which validated Agilent DNA microarrays and a joint research agreement between Agilent Labs and Harvard University to develop nanopore technology for the analysis of nucleic acids. In terms of collaborations with companies, it is an R&D venture with Caliper that brought Agilent's LabChip and BioAnalyzer to market, while ongoing partners include DiagnoSwiss SA for Off-Gel Electrophoresis and Millennium Pharmaceuticals for its SpectrumMill software.
Although uncertainty pervades the current marketplace for instrument companies, R&D is one area that is fairly stable. For these three instrument companies, R&D is just as important as it has ever been and, one could argue, even more important. Even though their common goals may beget some similar approaches, each of these companies' R&D strategies remains distinct and uniquely attuned to the company's strengths, and thus remains crucial to its successes.
2002 Company Sales R&D % Thermo Electron 2086.4 155.1 7.4% Applied Biosystems 1678.5 234.8 14.0% PerkinElmer 1505.0 86.5 5.7% Amersham Biosciences 1000.7 131.3 13.1% Large Bio-Rad Laboratories 892.7 82.9 9.3% Waters 890.0 51.9 5.8% Varian 791.4 41.8 5.3% Invitrogen 648.6 33.7 5.2% Average % of Sales 9493.3 818.0 8.6% Qiagen 298.6 28.2 9.4% Affymetrix 289.9 69.5 24.0% Tecan 212.9 25.3 11.9% Dionex 190.2 15.8 8.3% Medium Bruker Daltronics 116.4 20.7 17.8% Bruker AXS 104.3 9.9 9.5% Molecular Devices 102.2 18.0 17.6% Average % of Sales 1314.5 187.4 14.3% Biacore 63.1 10.7 17.0% Isco 59.0 6.2 10.5% Harvard Bioscience 57.4 4.1 7.1% Transgenomic 37.6 12.2 32.4% Small Argonaut Technologies 26.3 5.7 21.7% OI Corp. 23.7 2.2 9.3% Mocon 19.9 1.3 6.5% Genetix 18.8 2.2 11.5% Average % of Sales 305.8 44.6 14.8% 2001 Company Sales R&D % Thermo Electron 2188.2 171.6 7.8% Applied Biosystems 1622.6 201.4 12.4% PerkinElmer 1525.3 80.1 5.3% Amersham Biosciences 986.2 124.6 12.6% Large Bio-Rad Laboratories 817.5 76.5 9.4% Waters 859.2 46.6 5.4% Varian 751.0 36.8 4.9% Invitrogen 629.3 38.1 6.1% Average % of Sales 9379.3 775.7 8.3% Qiagen 263.8 26.8 10.2% Affymetrix 224.9 68.2 30.3% Tecan 215.9 26.0 12.0% Dionex 184.4 15.1 8.2% Medium Bruker Daltronics 92.7 18.5 20.0% Bruker AXS 82.6 7.7 9.3% Molecular Devices 92.2 15.1 16.4% Average % of Sales 1156.5 177.4 15.3% Biacore 52.7 10.1 19.2% Isco 57.9 5.3 9.2% Harvard Bioscience 40.9 3.2 7.8% Transgenomic 38.5 9.4 24.4% Small Argonaut Technologies 17.1 7.1 41.5% OI Corp. 25.9 2.2 8.5% Mocon 19.3 1.0 5.2% Genetix 18 1.7 9.4% Average % of Sales 270.3 40.0 15.2% 2000 Company Sales R&D % Thermo Electron 2280.5 176.8 7.8% Applied Biosystems 1546.5 165.9 10.7% PerkinElmer 1538.0 76.1 4.9% Amersham Biosciences 914.7 101.6 11.1% Large Bio-Rad Laboratories 725.9 68.1 9.4% Waters 795.1 42.5 5.3% Varian 726.8 32.6 4.5% Invitrogen 246.2 23.6 9.6% Average % of Sales 8773.7 687.2 7.8% Qiagen 216.8 23.4 10.8% Affymetrix 200.8 57.4 28.6% Tecan 161.8 17.1 10.6% Dionex 162.0 14.5 9.0% Medium Bruker Daltronics 76.6 20.0 26.1% Bruker AXS 68.1 5.9 8.7% Molecular Devices 96.0 16.8 17.5% Average % of Sales 982.1 155.1 15.8% Biacore 48.9 8.4 17.2% Isco 55.2 5.5 10.0% Harvard Bioscience 30.6 1.5 4.9% Transgenomic 25.9 7.7 29.7% Small Argonaut Technologies 17.4 5.1 29.3% OI Corp. 24.4 1.9 7.8% Mocon 17.3 1.1 6.4% Genetix 16.3 1.1 7.0% Average % of Sales 236.0 32.3 14.2%
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|Publication:||Instrument Business Outlook|
|Date:||Jun 30, 2003|
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