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Despite End-Market Concerns, Genomic Tools Vendors Keep up R&D Pace

By Tony Fong

NEW YORK (GenomeWeb News) – Despite an uncertain economy and softness in key end markets, genomic tools and molecular diagnostics firms continued to invest in new technologies as R&D spending through the first half of 2011 rose 13 percent year over year among the firms tracked in the GenomeWeb Daily News Index.

Through the first six months of the year, R&D spending by the 33 publicly traded firms in the Index totaled $2.14 billion, up from $1.90 billion during the first half of 2010, according to earnings documents filed by the companies with the US Securities and Exchange Commission. At the same time, total revenues from the companies also grew 13 percent to $28.95 billion in H1 2011 from $25.68 billion in H1 2010.

As a percentage of revenue, R&D spending during the first half of the year was 7 percent, unchanged from a year ago.

With expected cuts to government funding looming and continued lumpiness in the pharmaceutical end market, some experts said spending on new technology development in the coming years may soon start retreating. Harry Glorikian, founder and managing partner of life science consulting firm Scientia Advisors, said that the improvement in R&D spending during the first half of 2011 may be smoke and mirrors, due to an easy year-ago comparison.

Year-over-year "comparisons may look quite strong because 2010 revenues and R&D spending were in recovery mode but still relatively weak," he told GWDN in an e-mail. "In other words, the observed [year-over-year] strength in the first half may not be indicative of continued strength in 2012 and onward."

Still, even against that backdrop, R&D spending by some firms, particularly in the molecular diagnostics space, was dramatically up. For example, Exact Sciences increased spending 110 percent through the first half of the year, and Myriad Genetics raised spending by 56 percent.

Some tools vendors, such as Complete Genomics, up 33 percent, and Bruker, up 39 percent, also significantly increased their R&D spending.

In some instances, large spending increases were the result of critical technology build-outs and improvements.

Exact Sciences, for example, has invested much of its future on its Cologuard colorectal cancer assay, which has been in development for several years now. As the test progresses toward possible regulatory submission, its 110 percent bump in H1 2011 was the biggest year-over-year jump among the 33 firms.

In addition to initiating a clinical trial for the test during the second quarter in preparation of a submission to the US Food and Drug Administration, Exact Sciences has also been developing an automation solution for the test to perform DNA extraction and plate setup for incubation and detection.

Similarly, newly minted public firms historically have invested heavily into R&D projects in order to reinforce their technology foundations. Complete Genomics, which went public last fall, is aggressively moving ahead to reduce the turnaround time needed to sequence a whole human genome while increasing the number of genomes it can sequence daily. It publicly has said its goal is to crank out 10 genomes per day by the second half of 2012, a 5-fold increase over its current capacity, and is developing the next generation of its sequencers.

Another sequencing technology firm, Pacific Biosciences, which also went public last fall, ratcheted down its R&D costs 17 percent year over year in H1 2011, but still burned through $43.7 million on R&D costs, or four times the amount of revenues, $10.9 million, it took in during the period.

Hot Technologies Draw R&D Dollars

In addition to being new to the public markets, Complete Genomics and PacBio operate in possibly the hottest technology space in the life sciences tools universe, next-generation sequencing, where competition to keep upping the technological ante fuels R&D spending.

"Looking over the entire life science R&D complex, some areas, such as genomics, [in particular] high-throughput sequencing, are attracting an increasing fraction of overall funding," Glorikian said. "This dynamic is due to the increased return on R&D spending that these new tools are expected to provide."

David Ferreiro, an analyst at investment bank Oppenheimer who covers genomics firms, said that in addition to sequencing platforms, firms such as Life Technologies and Illumina are funneling dollars to the development of downstream tools for analysis of the data.

"I wouldn't say that we've reached … a stopping point in where we can go with the technology in terms of throughput and innovation," Ferreiro said, "but for sure, one of the biggest future areas for continued R&D spending is going to be how to analyze the data and make the bioinformatics as easy [and] as complete as possible, especially as we move from basically a research product into the clinic."

The potential of the technology is also spurring on R&D spending by firms that are only peripherally in the sequencing space. Through six months of the year, Caliper Life Sciences' R&D costs rose 27 percent year over year to $10.9 million. Part of that increase can be attributed to technologies it is developing for the next-generation sequencing market, according to Kevin Hrusovsky, CEO of the company, which is in the midst of being acquired by PerkinElmer for around $600 million.

During the firm's second-quarter earnings conference call in August, Hrusovsky said the firm is investing R&D dollars into products that address both high-throughput and benchtop sequencing in anticipation of "a rapid build-out … of our microfluidic" automation in the clinic for next-generation sample preparation, and added that he believes that is "going to be a very fast growing segment."

Another technology area where R&D spending continues to be relatively high is mass spectrometry, Dan Leonard, an analyst at investment bank Leerink Swann, said, pointing to the number of new platforms and other products that were introduced at the American Society for Mass Spectrometry annual conference in the spring.

Among the firms developing mass specs, R&D spending through the first half of 2011 rose between 8 percent (Agilent) and 39 percent (Bruker) year over year — though it is unclear how much of the increases can be linked directly to the development of new mass spec platforms because the firms don't report R&D expenses on such a detailed level and they have diversified product offerings.

R&D also continues to be a priority at companies in the molecular diagnostics space, Leonard added. In addition to Exact Sciences and Myriad Genetics, companies such as Vermillion, up 69 percent, and Sequenom, up 30 percent, sharply increased their investments into new product development.

Some companies also developing MDx platforms increased R&D spending, as well. GenMark upped its R&D dollars 53 percent from a year ago, while Cepheid's R&D expenses rose 38 percent year over year, and Luminex's increased 30 percent.

Other molecular diagnostics firms were more conservative. Qiagen, which derives about 45 percent of its total revenues from molecular diagnostics, increased its spending only 7 percent year over year. And Gen-Probe reduced its R&D costs by a fraction of 1 percent, as it had already completed development of its Panther molecular diagnostic platform that was launched in December 2010.

"The marketplace in molecular diagnostics is increasingly becoming platform-oriented where the name of the game is to develop a platform and then to put as many tests on that platform as you can," Leonard said, "so a number of players in the field now have their stakes in the ground with their platforms … [and] they're just expanding menu as aggressively as they can."

Reining in R&D?

Of course, not all companies increased their R&D expenditures, and in the midst of turnaround bids and reorganizations, some firms have been forced to cut their spending. CombiMatrix Diagnostics and Helicos BioSciences (which is no longer part of the GWDN Index due to its delisting from Nasdaq last year) cut their R&D expenses 56 percent and 76 percent, respectively, as they continued to recalibrate their businesses.

Two other firms, Affymetrix and Pressure BioSciences, reduced their R&D costs, 13 percent and 19 percent, respectively, during the first half of the year. Affy has struggled to meet Wall Street estimates this past year, and Pressure Bio has battled dwindling cash levels and possible delisting by Nasdaq.

But even while total dollars were down, these firms kept R&D a priority, if spending as a percentage of revenue is any indication. By that measure, CombiMatrix's and Helicos' R&D spending continued to be high during the first half of the year: 31 percent for CombiMatrix, and 107 percent for Helicos.

Pressure Bio even increased its R&D costs as a percentage of revenue to 130 percent in H1 2011 from 86 percent a year ago, while Affymetrix kept R&D spending relatively stable year over year, 23 percent in H1 2011, compared to 24 percent a year ago.

Moving ahead, though, some industry observers expect R&D spending to be scaled back amid anticipated cuts to the National Institutes of Health budget and reluctance on the part of pharma to spend.

Looming NIH cuts are particularly worrisome. According to Leerink Swann's Leonard, pharmaceutical spending has been soft for several years, "so there's really nothing incremental on that front," and if anything, the picture may actually have improved from just two years ago.

During the most recent earnings conference calls, though, he said, nearly every life science tools firm said they had started feeling the pinch from weaker US academic and government spending.

Scientia's Glorikian said that government-sponsored research in certain geographies such as China will "likely remain as healthy publicly sponsored life science R&D growth centers." However, in the US and Europe a down-turn in such research is imminent.

One factor, though, that could shield R&D spending from reductions in the long term, may be a shift away from the research market to commercial and clinical applications, he said. Life science tools developers have been handcuffed by researchers who often want the most innovative tools but don't have the money to buy them.

The vendors are compelled to spend large amounts of R&D money "developing new products even though they know that overall revenues will not increase that much," Glorikian said. "Over time, this dynamic is not very sustainable and R&D levels will have to come down somewhat.

"On the other hand, [these companies] may strategically decide that they must invest a great deal of R&D money to get themselves out of the slow-growth research market and into the higher growth commercial and clinical applications," he said.

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