Three perspectives on the R&D challenge.

R&D spending as a percentage of sales among 18 public analytical and life science instrument companies continued to decline in calendar year 2005, according to IBO's annual survey of R&D spending. On average, R&D spending as a percentage of sales for these companies declined 60 basis

points to 8.4% last year and, in 2003-04, fell from 9.7% to 9.0%. The decline continued against a backdrop of stable sales growth. In 2005, sales for these companies rose 8.5%, and in 2004, sales increased 8.2%. This trend reflects more efficient R&D operations, the reallocation of resources from R&D to other areas as well as the timing of new product introductions.

The downward trend is also supported by slower R&D growth over the past two years. In 2005, R&D spending growth among the large (annual sales of more than $500 million), medium (annual sales of more than $100 million) and small companies reviewed by IBO was mostly consistent with the previous year. From 2004 to 2005, R&D spending by the six large instrument firms surveyed rose 0.5%, after falling 0.3% from 2003 to 2004. R&D spending by the six medium-sized companies increased 4.3%, nearly identical to the 4.1% increase from 2(303 to 2004. In both 2003-04 and 2004-05, spending by the six smaller companies declined, falling 7.7% and 8.2%, respectively.

The trend no doubt masks important changes affecting individual companies. In many cases, a sizable decrease in R&D spending as a percentage of sales indicates a reorganization, change in business model or product focus, or acquisitions and divestitures. R&D as a percentage of sales for Applied Biosystems, Caliper Life Sciences, Genetix, Molecular Devices and Tecan each declined more than two poInts from 2003 to 2005. Reorganizations contributed to adjusted R&D spending at Tecan and Genetix, while acquisitions affected spending at Caliper and Molecular Devices. Applied Biosystems divested its MALDI manufacturing business (see IBO 9/15/04) and refocused its product investments. The only company whose R&D spending as a percentage of sales has increased more than two points in the past three years is Analytical Jena due to falling sales, which were primarily the result of the Project Solutions business, which accounts for little of the company's R&D spending.

In connection with the R&D survey, IBO spoke with three instrument companies about their R&D operations. GE Analytical Instruments, Caliper Life Sciences and PANalytical represent three different segments of the instrument market, in terms of both product technologies and end-users. Despite these differences, the R&D process for each company continues to evolve, reflecting advances in electronics, software, manufacturing as well as the impact of acquisitions.

GE Analytical Instruments, formerly Ionics Instruments, manufactures and sells laboratory and online water quality testing instrumentation. When acquired by GE in 2004, Ionics had 2003 sales of $29.8 million (see IBO 11/30/04). Products include Sievers brand total organic carbon (TOC) analyzers and chemiluminescence detectors. According to Wayne Brothers, manager of Research, Development & Engineering for GE Analytical Instruments, the company's structure "is traditional with departments for chemical engineering, electrical engineering, mechanical engineering and software engineering. We have a very strong 'team project' organization." The RD&E department has 25-30 employees, but other units are also very involved with R&D. "Those teams are not only staffed with people from my department, but also with people from marketing, manufacturing and service," he said. Such involvement, said Dr. Brothers, is crucial as the time-to-market for products continues to decrease. "People used to talk about years; now, they're talking about months in terms of the development cycle.... Since so many of the activities are running in parallel now, you need marketing involvement and manufacturing involvement throughout the project, not just at the beginning or at the end."

The company's new product introduction process has six phases: research, feasibility, design, release, ramp-up and closing. The 500 RL online TOC analyzer, the most recent product release, is a good example of the RD&E unit's contributions, according to Dr. Brothers. "It's an instrument designed to serve the pharmaceutical, electronics and power segment customers and is for TOC analysis of ultra-pure water," he explained. "The areas on that product that the technical contributions were particularly strong had to do with the innovations around two things that came back as strong customer needs. One was reliability," he said. For the first time, the company used fluidics manifolds consisting of chemically etched plates for transporting fluids. "I think the technology on the reliability side was moving from what had typically been stainless steel and titanium tubing and connectors and ferrules, to a fluidics manifold that was a single assembly. It dramatically reduced the number of fluidic connections. Therefore, the potential for leaks over time became much less," he noted.

The 500 RL also had to be easy to use and increase customer productivity by reducing run errors. The new Super iOS (integrated online sampling system) consists of a cartridge with a memory chip that stores standard protocols, lot numbers, standard expiration data as well as other information. "That's all encoded into that chip so when this cartridge is put into the instrument, all that information is downloaded automatically," explained Dr. Brothers.

Ease of use is also valued as the international market for instrumentation grows. "The need for products that speak to those particular customers is increasingly important," he said, adding "The growth of software and firmware [embedded software] ... the growth of the development effort associated with the instruments in that area has been just tremendous over the last five to six years because these products are expected to be so much more user friendly, have a much more intuitive interface with the user, [and] are increasingly expected to provide multi-language capability."

As part of General Electric, GE Analytical Instruments is connected to one of the world's largest and most R&D intensive companies. "We have opportunities to look at emerging technologies at a level we did not have previously. That certainly stimulated our innovative desires here in terms of what we might do," commented Dr. Brothers. GE Analytical's RD&E also benefits from its parent company in another way. "GE is a big consumer of instrumentation. There are opportunities to provide instrumentation for other parts of GE that are attractive to us as well," he noted, adding, "It's an opportunity to be close to the customer in a very unique way." As for the effects of the acquisition on the RD&E department, Dr. Brothers told IBO, "It has not changed our organization, although I would say we're much more outwardly focused in terms of what's going on in other GE organizations.... If anything, I would say it has led us to broaden our focus beyond our traditional TOC instrumentation and to look at other instrumentation opportunities."

Caliper Life Sciences' R&D also experienced changes as a result of acquisition activity. In 2003, microfluidics company Caliper merged with laboratory automation firm Zymark to form Caliper Life Sciences (see IBO 6/15/03). The company's Mountain View, California R&D facility is dedicated to microfluidics, while its Hopkinton, Massachusetts R&D location is focused on automation and robotics. Andrea Chow, vice president, of Microfluidics R&D, told IBO, "We have functional groups reporting into R&D. Specifically on the Mountain View side, which is focused on development of lab-on-a-chip products and applications, our functional groups are pretty diverse. We have the traditional engineering groups: hardware, software and firmware engineering. We also have microfluidics chip design, assay development and chip prototyping groups." Despite a bicoastal presence, the two R&D groups work together on projects. As she told IBO, "The functional groups in hardware, software and firmware engineering actually report to my counterpart, Rick Bemal, who is the vice president of Instrument R&D.... We have a lot of informational exchange through the functional group organizations. Some of the people in Mountain View are helping on the projects on the East Coast and vice versa." In total, the company's R&D team has 75-80 people.

The company's main microfluidics product is the LabChip 3000. As Dr. Chow explained, the product, which was initially launched as the LabChip 250, was overhauled following the merger with Zymark. "It's a product where we took a lot of customer input on what they liked and what they didn't like about the prior product offering, the Caliper 250. We took those inputs from our customers and made changes. We reduced the size and cut the costs, but also made it more capable, more reliable, easier to use as well as improved the performance. That's the product we announced in the first quarter of 2004."

Many of the changes resulted from integrating Zymark's resources Into the R&D process. "Our colleagues on the East Coast... have a lot of connections with pharmaceutical companies that were not existing LabChip customers. We went out with our colleagues on the East Coast and talked to some of the customers and described what the instrument was capable of doing and got a lot of feedback ... and the product was shaped partly by those interactions," she explained. "We kept the heart of the technology. The earlier version of the platform was an advanced prototype, and there were still a lot of issues with the ease of use, so we changed the software quite significantly. Some of the issues for customers involved reliability. We changed some of the design to address that and the application breadth. We continue to this day to expand the [applications] menu of the platform,"

Developing an emerging technology, such as microfluidics, presents special challenges. "We are definitely changing from a mentality of a technology-push to a market-pull type product development.... We're also getting more experience in developing microfluidics products," said Dr. Chow. Such experience has also shortened the time-to-market for products. "Some of the things that help shorten the time-to-market are better specifications. The specifications are more relevant in that a lot of them come from the customers." In addition, more is done earlier in the R&D process. "[W]e're better at thinking about subcomponent integration earlier, rather than later, in the produce development life cycle, instead of having all the different pieces (the chip, the reagents, the hardware, the software) come together at one single integration point, then the troubleshooting becomes pretty difficult. Instead, we break it down into pieces.... So now there are many different integration points to take the product development cycle in a more controlled manner, so we discover risks earlier on," said Dr. Chow.

Manufacturing has also become integral to R&D. "One thing that has gotten better--again, as a result of us understanding the complexity of developing our type of products--[is] we are working more closely with manufacturing earlier in the development cycle so we get their input earlier in the development phase with the focus on manufacturability," stated Dr. Chow. "We're also incorporating manufacturing early on to look at cost issues as well."

Part of UK precision instrument supplier Spectris, PANalytical is a manufacturer of x-ray fluorescence (XRF) and x-ray diffraction (XRD) instruments for atomic analysis. PANalytical has two R&D locations in the Netherlands as well as a UK facility, according to Peter van Velzen, the company's managing director. The company spends approximately 7% of sales on R&D and introduces more than 10 new products each year, including three to four major new products. "The coupling between the market and our R&D processes is dose. A continuous flow of key technology developments, where applicable, both with renowned R&D institutes or competent suppliers, enables timely availability of leading edge solutions to our markets," said Mr. van Velzen. "Our product technologies are bundled as comprehensive platforms of x-ray solutions, allowing rapid spin off of competitive high quality products aimed at specific markets or applications." First introduced in 2004, the Axios wavelength-dispersive XRF is now available in application-specific configurations for the cement, metals, minerals, petroleum and polymers industries.

The company's R&D process includes development of a working prototype. "In the early phases of the project the concept of the new product is demonstrated and the feasibility proven, frequently by means of completely working prototypes. Subsequently, engineering focuses on the integration into a world-class product that fulfills or exceeds all specifications and will possess the durability, manufacturability and serviceability that PANalytical is renowned for," he explained. Asked if the emphasis on different disciplines has changed in the last five to ten years, Mr. van Velzen told IBO, "In general, and also in the x-ray market, software technology and smart electronics, much more than some 10 years ago, enable highly functional and precise (electro)mechanical constructions, with inherently lower cost. This in itself has increased the emphasis on software technology and software product development." Automation has also contributed to increased software development. "[O]ur instruments are automated to a higher degree and frequently become more integrated into our customer's processes than in the past, [and] are providing faster and more comprehensive application data, take over data interpretation and deliver complete analytical answers to the most demanding material characterization demands."

Outsourcing also plays a role, according to Mr. van Velzen. "PANalytical's R&D processes concentrate on the core technologies. In acquiring these technologies we work with leading institutes and suppliers. In general we outsource to a large extent the noncom activities where applicable and possible. This is our standard process and as such over the past five years has not significantly increased." PANalytical also collaborates with other Spectris companies. "Driven by the needs of our customers we collaborate with several Spectris companies in the area of market exploration and marketing," said Mr. van Velzen, adding "The collaboration between the various companies is limited to selective areas."

                                      2003
Company                 Sales ($M)     R&D      %

Large

Thermo Electron           $2,097.1   $146.4    7.0%
Applied Biosystems        $1,681.4   $238.5   14.2%
PerkinElmer               $1,344.5    $76.8    5.7%
Bio-Rad Laboratories      $1,003.4    $94.3    9.4%
Waters                      $958.2    $59.2    6.2%
Varian                      $680.5    $45.9    6.8%
Total Large               $7,765.1   $661.2    8.5%

Medium

Affymetrix                  $300.8    $65.9   21.9%
Oxford Instruments *        $250.2    $21.9    8.7%
Bruker BioSciences          $260.7    $38.0   14.6%
Dionex                      $232.0    $18.2    7.9%
Tecan                       $232.5    $38.6   16.6%
Molecular Devices           $115.6    $18.7   16.2%

Total Medium              $1,391.7   $201.3   14.5%

Small

Caliper Life Sciences        $49.4    $33.7   68.2%
Analytik Jena               $108.6     $6.3    5.8%
Biacore                      $63.8     $9.7   15.2%
Luminex                      $26.3     $3.2   12.2%
OI Corp.                     $25.2     $2.7   10.7%
Genetix                      $17.7     $2.0   11.0%
Total Small                 $291.0    $57.6   19.8%

Total                     $9,447.9   $920.1    9.7%

                                      2004
Company                 Sales ($M)     R&D      %

Large

Thermo Electron           $2,206.0   $134.7    6.1%
Applied Biosystems        $1,746.8   $218.2   12.5%
PerkinElmer               $1,429.1    $82.4    5.8%
Bio-Rad Laboratories      $1,090.0   $108.3    9.9%
Waters                    $1,104.5    $65.2    5.9%
Varian                      $749.9    $50.4    6.7%
Total Large               $8,326.4   $659.3    7.9%

Medium

Affymetrix                  $346.0    $73.4   21.2%
Oxford Instruments *        $286.7    $21.3    7.4%
Bruker BioSciences          $284.4    $43.2   15.2%
Dionex                      $277.4    $19.9    7.2%
Tecan                       $230.6    $29.7   12.9%
Molecular Devices           $148.5    $22.0   14.8%

Total Medium              $1,573.6   $209.5   13.3%

Small

Caliper Life Sciences        $80.1    $22.7   28.4%
Analytik Jena                $92.1     $5.5    6.0%
Biacore                      $67.5    $15.9   23.5%
Luminex                      $35.9     $3.8   10.6%
OI Corp.                     $28.5     $3.0   10.5%
Genetix                      $22.6     $2.0    8.8%
Total Small                 $326.8    $52.9   16.2%

Total                    $10,226.7   $921.7    9.0%

                                      2005
Company                 Sales ($M)     R&D      %

Large

Thermo Electron           $2,633.0   $152.8    5.8%
Applied Biosystems        $1,830.8   $185.3   10.1%
PerkinElmer               $1,473.8    $87.4    5.9%
Bio-Rad Laboratories      $1,181.0   $115.1    9.7%
Waters                    $1,158.2    $66.9    5.8%
Varian                      $777.6    $55.1    7.1%
Total Large               $9,054.5   $662.6    7.3%

Medium

Affymetrix                  $367.6    $77.4   21.1%
Oxford Instruments *        $298.6    $20.9    7.0%
Bruker BioSciences          $297.6    $41.4   13.9%
Dionex                      $284.4    $21.0    7.4%
Tecan                       $275.9    $32.6   11.8%
Molecular Devices           $181.2    $25.3   14.0%

Total Medium              $1,705.3   $218.5   12.8%

Small

Caliper Life Sciences        $87.0    $17.5   20.1%
Analytik Jena                $76.6     $7.5    9.8%
Biacore                      $76.2    $13.1   17.2%
Luminex                      $42.3     $5.6   13.2%
OI Corp.                     $29.9     $3.7   12.3%
Genetix                      $22.0     $1.4    6.6%
Total Small                 $334.0    $48.8   14.6%

Total                    $11,093.8   $929.9    8.4%

* For fiscal year April-March.