Last month, when the U.S. economy grew at its fastest pace since 2011, corporate research and development spending got some of the credit.
Investment in what the U.S. Commerce Department calls “intellectual property products,” which includes R&D, increased by 5.5 percent in the second quarter, compared with a 4.6 percent climb in the preceding quarter. It was also the fourth-strongest showing since early 2010.
But when the books are closed on 2014, R&D spending trends by public companies are likely to show wide variations from city to city, according to Schonfeld & Associates.
The Libertyville-based research firm examined hundreds of public companies in major cities, including more than 90 in the Chicago area. Schonfeld, in a report published in June, estimated that the Chicago companies it reviewed will spend a combined $16.2 billion to develop new products or services in 2014, down 4.4 percent from 2013.
Also, of the 20 markets that Schonfeld assessed, Chicago, New York and Dallas-Fort Worth were the only cities in which the public companies it studied would likely pull back on combined R&D budgets. In contrast, San Francisco, Seattle, South Florida and Phoenix were expected to see double-digit percentage gains in spending, said Schonfeld, which bases its forecast on a combination of company filings and on industry trends.
Research and development is one way businesses spend money in hopes of making more money later. Drug companies develop new treatments. Technology providers create new systems or work on the Internet of Things.
The Tribune recently examined the R&D spending of 28 large Illinois companies dating as far back as 2007 — measured as a percentage of sales or revenues — and found:
*Fifteen increased spending from 2012 to 2013.
*Spending at four of the companies peaked in 2007.
The ratio of R&D spending to sales is also called R&D “intensity.”
Among the companies whose spending as a percentage of sales rose in 2013 from 2012 is Allscripts Healthcare Solutions, a Chicago-based developer of electronic health records systems. Its R&D outlays have been climbing over the years and are now up to about 15 percent of sales as health care providers increasingly seek ways to connect patient data across different information technology systems and devices. Allscripts’ spending rose from the previous year partly due to higher employment levels in its R&D efforts.
Spending was also up at Nanophase Technologies, which earmarked nearly 18 percent of its sales to research and development in 2013, up from 16 percent the previous year.
The Romeoville-based developer of advanced materials said it expects R&D spending in 2014 to be equivalent to 12 percent to 13 percent of revenues. One recent research area for Nanophase has been what is basically polishing products for commercial glass and electronics manufacturers. .
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Over the past seven years, Nanophase’s spending on R&D has ranged from 14 percent to 26 percent.
“Longer-term we are comfortable at 10-plus percent,” said Frank Cesario, chief financial officer. “Once a project is handed off to operations, the R&D spend decreases and the commercial benefits begin, feeding into the next project cycle.”
Similarly named Northbrook-based Nanosphere spends more on R&D than it generates in sales. For example, it spent $18.6 million on R&D in 2013 and had revenue of $10 million.
Nanosphere, which develops diagnostic testing that helps detect diseases, spent $21.4 million on R&D in 2007, when its revenues were $1.2 million.
Its R&D costs have remained relatively consistent over the past several years. As a result, the decline in the company’s R&D spending as a percentage of sales can be attributed to its increase in revenue.
As of the end of 2013, Nanosphere had 165 full-time employees. Of those, 56 worked in R&D. Its headquarters, R&D and manufacturing are in Northbrook.
Another company whose R&D peaked in 2007 is Chicago-based Merge Healthcare. The health care software developer spent 14 percent of its sales on R&D in 2013, or $32 million on $232 million in sales. That’s up from 13 percent in 2012. Its high mark over the past seven years was in 2007, when it spent 35 percent of revenues on R&D.
Merge’s revenues have increased over the years, meaning R&D represented a bigger percentage of spending years ago. For example, it spent $21 million on R&D in 2007, when it had $60 million in revenues.
More than a fourth of Merge’s 800-person workforce is in R&D.
Motorola Solutions has about 7,000 people working in R&D, where much of its work is focused on public-safety broadband networks. Such systems are supposed to collect and improve the flow of information among citizens, government agencies and emergency responders.
Motorola Solutions’ $1.06 billion in R&D spending in 2013 represented 12.1 percent of its sales, down from 12.4 percent the previous year. As of Dec. 31, Motorola Solutions owned 6,600 U.S. and foreign patents and had an additional 2,400 pending.
R&D is also critical for pharmaceutical and medical device companies that develop new drugs and products to treat various diseases, executives at four local companies said.
Clinical trials are essential to bringing drugs and products to market, but they’re also expensive. And as many of these companies — including Baxter International, Hospira, Abbott Laboratories and Akorn — focus on global expansion and global research, R&D spending trends over the past seven years have been largely steady or rising.
Hospira, a Lake Forest-based pharmaceutical and medical device company known for its injectable drugs and biosimilars — lower-cost versions of complex drugs made from living organisms — has also seen an upward tick in spending for R&D. The company’s R&D spending rose from 5.86 percent of sales in 2007 to 7.54 percent in 2013.
Hospira spends $100 million to $200 million over the course of eight to 10 years to develop its biosimilars, spokeswoman Tareta Adams said, considerably more time and money than typical generic drug companies invest on any particular drug.
“That type of R&D is crucial to building the business,” Adams said. “We made the decision a long time ago that we wanted to be a biosimilars leader. Early R&D investment is critical. If you don’t make that investment up front and early, you play catch-up.”
Lake Forest-based Akorn is in the generic drugs sector, and its R&D sweet spot also hovers around 7 percent, said Jennifer Bowles, vice president of corporate strategy. Although R&D spending as a percentage of total sales has dropped significantly since 2007, she attributed that to management missteps before 2009.
“The company was just about bankrupt in 2009. Sales were just so low,” Bowles said. When new management came in, “we shed business that was not very profitable and invested heavily to turn business around.”
She said that in the generic drugs business, a company isn’t sustainable unless it has constant R&D investment.
“The only way to stay alive as a generic pharmaceutical company is to come out with a new product,” Bowles said. “When (a brand-name drug) goes generic, the pricing at first doesn’t fall rapidly, but once there are enough generic players, the price really crashes. At that point you’re only making a marginal profit on a product.”
Deerfield-based Baxter, a medical products company that’s spinning off its bioscience unit into an entity called Baxalta, has been spending more on R&D in recent years for projects like developing products to allow more people to do dialysis at home. As a percentage of sales, R&D has gone from 6.75 percent to 8.17 percent since 2007, and spokeswoman Deborah Spak said she anticipates that trend will continue.
“Our pipeline has definitely grown as different research projects advance into later stages,” Spak said.
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