R&D: Value Gain or Brain Drain

The 15th annual DTI Research & Development Scoreboard provides a rich
source of information concerning how seriously UK companies take R&D
expenditure. The survey offers detailed analysis of 750 of the UK’s top R&D
players and compares them with the world’s 1,000 most R&D intensive
companies. The findings are illuminating.

According to the research there are “wellestablished” links between R&D
and company performance. “R&D intensity (investment as a percentage of
sales) is strongly correlated with sales growth, wealth creation efficiency and
market cap-to-sales ratio,” according to the research authors.

Indeed, 81% of companies with an above average wealth creation efficiency
also have above average investment intensity in R&D, capex or both. Perhaps
most telling is that the growth in market value for those FTSE-100 companies
with the highest R&D intensities was 69% over the last eight years. The
FTSE- 100 average was just 7%.

But a conflicting report from Booz Allen Hamilton into what it calls the top
1,000 global innovation spenders, concluded that, despite a 2004 R&D spend
of $384bn, there is “no relationship between R&D spending and corporate
performance”. This is despite the average annual growth rate since 2002 reaching
11% among those companies.

The DTI report highlights three conditions to corporate success, only one of
which directly involves R&D spend: good strategic choices, such as organic
growth and smaller bolt-on acquisitions; operational excellence, efficient
business practices and a focus on customers; and, wise and balanced investments,
which includes R&D as well as capex and other expenditures.

“A company which consistently under underinvests with an R&D intensity
well below the best competitors in its sector is likely to see its product range
become less and less competitive and will find that this is reflected in its
value added and business performance,” the research finds.

The study allows finance directors and CEOs to take a detailed look at
comparative data on a company, industry and country- basis. The US continues to
lead the pack with Japan, Germany and the UK following.

DaimlerChrysler tops the global list of R&D spenders, followed by Pfizer
and Ford. The UK’s two pharmaceutical giants, GlaxoSmithKline and AstraZeneca,
lead the UK’s list with only GSK making it into the global top 15, in 11th
place.

Worryingly, R&D spend in the UK decreased over last year, with a 0.5%
reduction over the previous 12 months for the 750 UK companies in the scorecard.
Despite this the number of firms classed as R&D intensive (those that spend
upwards of 4% of sales and £1m in total on R&D) increased by 7%.

One of the simplest forms of measurement that the study uses is the share
price performance of R&D-intensive companies. These companies spend upwards
of 4% of sales revenue on R&D and at least £1m, and as mentioned those
companies in the FTSE-100 have enjoyed a growth of 69% compared to the
FTSE-100’s overall growth of just 7%.

“The strong performance of the R&D-intensive portfolio over a number of
years demonstrates that those R&D-active companies do have share price
performance above that of the index and are therefore useful candidates for
inclusion in a portfolio,” concludes the research.

For a copy of the 2005 R&D Scoreboard visit
www.innovation.gov.uk/finance
or call 08450 150 010