The Recession Damages R&D Spending (AAPL)(PFE)(MSFT)(GOOG)(DNA)

Thomas Alva Edison accumulated 1,093 US patents over his lifetime. Most R&D operations are not that efficient.

Corporations hate research. It is expensive. The scientists know more about a company’s products than the management or sales staff do. But, research is a necessary evil for all pharmaceutical and technology firms and they have to support research or fall behind their competitors.

In the last quarter, Pfizer (PFE) spent $1.8 billion on R&D. The firm’s revenue for the period was under $12 billion, so this cost puts a lot of pressure on profits especially at a pharma company which is facing increasing competition from biotech companies and generic manufacturers.

High tech and internet companies are facing the same trouble. Google (GOOG) spent $704 million on R&D last quarter against $5.5 billion in revenue. Slowing internet advertising is going to make each and every one of those dollars seem more expensive.

The typical series of cost cuts that companies with research arms go through in a slow economy is first to chop sales and marketing. If that does not work, they fire any mid-level managers that they can find. If the financial challenges get worse, they take the axe to R&D.

Pfizer says it is going to fire a large number of its R&D staff. According to The Wall Street Journal, the drug company "is laying off as many as 800 researchers in a tacit admission that its laboratories have failed to live up to the tens of billions of dollars it has poured into them in recent years." With drugs reaching the end of their patent periods, management can no longer plan to recoup this R&D money over the next decade. What counts is next year. During a recession, that is the extent of the vision that most companies can muster.

In 2007, US firms spent $219 billion on R&D  Most reasonable analysis would show that as a good investment. Companies such as Microsoft (MSFT), Google, (NASDAQ:AAPL) and Genentech (DNA), the biotech giant, are rare outside America.  The people who started these companies were gamblers by nature and relied on a certain amount of audacity to drive R&D spending which they were willing to believe would be easily eclipsed by their sales.

Every time an economic slowdown hits the economy, the obituaries for R&D come out. The federal government and university budgets get pruned. The idea of investing in the future gets trampled.

This time around may be a little different. For one thing, there has been a great deal of concern over the last decade that China and India have the economic growth to begin to match some US industries in research spending. That would have put a great deal of the American GDP at risk. Now, China and India may be facing more serious recessions than the West. America has an opportunity to quicken its pace and extend its lead. But, it probably won’t. Resources are needed elsewhere

Pfizer shareholders are not going to regret the spending cut, at least not for several years. Most investors don’t hold stocks that long, so it will become someone else’s problem.

A close look at the economic stimulus package shows that there is very little investment for research spending. Most of the money goes to infrastructure which is a by-product of the work done by scientists.

Infrastructure works well, until the techniques to create it and build it age. At that point it would be nice to replace it with something better. The difference between new drugs and an upgraded energy grid is not as great as it would seem

Douglas A. McIntyre