Drug, Biotech Research Spending Hangs Tough

Corporate America's research spending shrank 4% overall, or $1.9 billion, from the fourth quarter of 2007 through the second quarter of this year, according to data compiled by Capital IQ on 961 U.S. companies. But many health-care companies have boosted their research outlays.

BusinessWeek sought out 25 companies that most aggressively increased their research budgets during the first six months of 2009. Thirteen members of the group, which collectively boosted its spending by $2 billion, were pharmaceutical and biotech companies. Only eight were high-tech outfits, such as Apple (AAPL) and Microsoft (MSFT).

The main reason pharmaceutical and biotech research budgets are expanding is that companies want to offer a wider range of products. With billions of dollars' worth of branded drugs losing their patent protection, the pharmaceutical industry is under pressure to boost its pipeline of innovative new drugs. That's why much of the additional $372 million Merck (MRK) laid out was for up-front licensing payments to several biotech companies. "A key part of our strategy is to make investment in pursuit of the very best science," says Peter S. Kim, president of Merck Research Laboratories.

Many companies, such as Gilead Sciences (GILD), are also footing the bill for more expensive clinical research. "You've seen a rise in the number of projects that are in late-stage trials," points out Tony Butler, drug analyst at Barclays Capital.

drugmaker consolidation waveIn some cases, research budgets are rising because pharma and biotech companies are buying each other entirely. When Invitrogen bought Applied Biosystems last year to form Life Technologies (LIFE), the result was a $98 million, or 154%, boost to Invitrogen's research budget. The two companies took savings out of integrating their operations and plowed them into key research projects in the areas of DNA sequencing and stem cell research, says Mark Stevenson, Life Tech's president.

Lately, some big drugmakers are turning to partnerships with labs in India and China to boost their return on R&D investment. However, critics question the payoff from the drug industry's consolidation wave. They point out that the number of new drugs coming to market has fallen and that the ratio of R&D spending to sales hasn't increased much for the industry.

Abbott Laboratories (ABT), which increased its research budget by $44 million, or 3.5%, views research as essential to remaining a viable health-care company. "Growth companies like Abbott should not cut R&D because turning off the faucet now will harm a company's ability to deliver new products years down the road," says John M. Leonard, senior vice-president of Pharmaceuticals, Research & Development at Abbott.

Frank Baldino, founder and CEO of biopharma company Cephalon (CEPH), spent $43 million, or 26.7%, more on research because he believes "patients with life-threatening diseases need companies like Cephalon to invest in research and development if we are to improve patient outcomes and the overall cost of health care."

As for the high tech's stalwarts, Microsoft stepped up its research spending by 1.5% vs. a year earlier, despite the fact that it already has the largest research budget in American business. Microsoft CEO Steve Ballmer recently told analysts that the company plans to spend $9.5 billion on research in the next 12 months. "We have to innovate," he said. "We're going to continue what I would call the long-term, tenacious approach which has marked the company."

Apple, which is developing a range of consumer products—including, according to some reports, a tablet-style handheld device—boosted its research spending by 16.8%, to $660 million.

Chipmaker NVIDIA (NVDA) ramped up its research by 14.6%, while rivals like Intel (INTC) and AMD (AMD) cut back, according to Capital IQ's data. (Intel spokesman Tom Waldrop points out that Intel's R&D spending was up as a percentage of revenues. AMD says its cuts primarily reflect lower design costs from a business it divested.) Says Jen-Hsun Huang, CEO of NVIDIA: "There's no better time to invest in R&D than when the competition is cutting investments. We know from experience that doing so puts us in a stronger position once the tide turns."

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