R&D Investment is Exploding

A rising tide of revenues, profits and stock prices floated the R&D performance of Canada's Top 100 R&D companies to unprecedented levels in Fiscal 2000. Research and Development (R&D) investment by Canada's Top 100 research spenders leaped 28.5% over their Fiscal 1999 spending, fuelled by an even larger 32.1% year-on-year increase in revenues. Total spending on R&D topped $11.1 billion, compared with around $8.7 billion in Fiscal 1999. As usual, telecom giant Nortel Networks dominated the R&D spending scene, accounting for over $5.9 billion (53%) of Top 100 total expenditures, which is slightly up from 52% in Fiscal 1999. While Top 100 R&D spending jumped handsomely during Fiscal 2000 the important research-intensity ratio (the ratio of R&D spending to revenues) actually dipped slightly to 4.4% from 4.5% in Fiscal 1999. This may reflect nothing more than the lag time required for companies to translate growing revenues into new R&D.

The $100 Million Club

This year, 15 companies gained membership in RE$EARCH Infosource's elite "$100 Million Club", spending $100 million or more on R&D. This compares with only 11 club members in 1999. Twelve of the fifteen companies are Canadian and three are foreign subsidiaries, indicating a strong showing by domestic companies. Two crown corporations - Atomic Energy and Hydro Québec - are also included.

Based on past performance, IBM Canada, Merck Frosst Canada and Alcatel may also have qualified for the $100 Million Club, had their numbers been available, raising membership to 18 firms. Members of the $100 Million Club accounted for fully 75% ($8.4 billion) of Top 100 R&D spending, and a still-impressive 22% if Nortel's spending is excluded.

New to the $100 Million Club in 2000 are PMC Sierra ($203 million versus $70 million in Fiscal 1999), JDS Uniphase ($168 million vs. $40 million), Alcan ($120 million vs. $99.5 million) and Apotex ($110 million vs. $85 million).

Industry Performance

Led by the overwhelming influence of Nortel's spending, the Communication/Telecommunication Equipment industry easily dominated Top 100 spending, with 15 companies in the industry investing a total of $6.8 billion in R&D in 2000. (However, if Nortel's spending was excluded, the industry would only manage to capture second place overall, with $887 million of investment.) Normally overshadowed by its larger rival, Ericsson Canada posted strong spending results, devoting nearly $238 million to R&D on revenues of $694 million. Ericsson's R&D/Revenue ratio of 34.3% easily led the established firms in the industry, and was eclipsed only by the 152% ratio of 724 Solutions ($32 million of revenues) and 58.7% ratio of MOSAID Technologies ($47 million of revenues), two much smaller rivals. Overall, between Fiscal 1999 and Fiscal 2000 these industry firms increased their spending on R&D by a healthy 31.8%, exceeding the Top 100 percent change of 28.5%.

Second place among the industries goes to Pharmaceuticals & Biotechnology. Twenty four (24) companies - the largest number of firms in any Top 100 industry - spent over $970 million on R&D. But for the influence of Nortel on the Top 100 results, the Pharmaceuticals & Biotechnology industry would be the largest R&D performer in the country. For the first time, a Canadian firm, Apotex Inc., leads spending in this industry. Data from traditional industry leader Merck Frosst were not available; however, based on past performance it is likely that Merck would have retained its industry-leading position. These pharma/bio companies increased their R&D spending by 24.4% over the previous year, which was somewhat less than the Top 100 total of 28.5%.

Third among industry performers is Software & Computer Services. Seventeen firms, led by Geac Computer Corporation, spent a total of nearly $614 million in 2000. The industry posted a 39.4% increase in R&D spending over Fiscal 1999, which easily exceeded the 28.5% Top 100 spending increase.

Though only 3 firms are included in the Top 100 Aerospace industry, their combined R&D spending was nearly $590 million, and placed the industry fourth overall. As in the Communications/telecommunications equipment industry, Aerospace investment is dominated by one firm, Pratt & Whitney Canada. Pratt, Canada's successful producer of small gas turbine engines, accounted for $331 million - or 56% - of the Aerospace industry's R&D spending. Airframe manufacturer Bombardier, which has enjoyed outstanding success internationally with its family of regional airline products, spent $132 million on R&D, which represents only 1% of revenues, compared with 15.9% for Pratt. While total industry spending is still strong, it actually fell slightly, from $590.3 million in 1999 to $589.6 million in 2000.

Ten companies in the Electronic Parts & Components industry devoted nearly $435 million to research, placing the industry in fifth position overall. Industry spending was dominated by PMC Sierra, which accounted for 47% of the total. PMC Sierra's R&D jumped nearly three-fold over 1999 ($203 million vs. $70 million), one of the largest company increases among the Top 100. Three other companies - C-MAC Industries, Sierra Wireless, and Spectrum Signal Processing - doubled or nearly doubled their R&D during the year. Overall, for this industry group, spending on R&D nearly doubled, growing by almost 86.8%.

Another way of expressing the performance of the different industries is to rank their companies' total research intensity (R&D as a percent of revenue). Three industries stand out, with their companies spending upwards of 13.2% of revenues on R&D.

The Top 10 R&D-Intensive Firms

The R&D intensity of this select group of firms greatly exceeds the 4.4% R&D-to-revenue ratio of the Top 100 companies. Six of 10 firms who reported spending the most on R&D as a proportion of their revenues are from the Pharmaceuticals & Biotechnology industry.

With R&D expenditures of over $42 million against revenues of only $1.1 million, Biomira easily topped the list. Three other firms - Hemosol, AltaRex, and Inex Pharmaceuticals - had high R&D expenditures, but little or no revenues against which to calculate a ratio.

All the Top 10 companies in this R&D intensive group are more or less in a start-up mode. The long lead time required for investments to come to market accounts for the high R&D-intensities of the pharma/ bio companies on the list, as it does for medical devices firm World Heart Corporation and energy company Ballard Power Systems.

Gainers and Losers

A remarkable number of the Top 100 firms - 28 companies in total - increased their R&D spending by 50% or more between Fiscal 2000 and Fiscal 1999. Bell Canada led the 10 companies whose R&D grew fastest, increasing its R&D spending from only $2 million in 1999 to $11.4 million in 2000. (Bell's figure does not include any subsidiaries' R&D spending.)

Alberta Energy, the only natural resources firm in the Top 10 gainers grew its R&D spending from $13.8 million to $27.4 million on revenues of $6.3 billion. Other well-known firms who dramatically increased their R&D spending are 724 Solutions, JDS Uniphase, Sierra Wireless, Cognicase, C-MAC Industries, IMAX Corporation and CREO Products.

The Millennium was not kind to all the Top 100 firms. Sixteen firms, including many household names, saw declines in R&D ranging from -1.1% to -54.5%. The 10 companies whose R&D shrank most are headed by Petro-Canada, whose R&D spending contracted from $22 million to $10.0 million. TransCanada PipeLines (down 43%) and Imperial Oil (down 20.3%) added to a non-stellar year for these energy-oriented firms. Running very much against the trend of pharma/bio spending, Hoffmann-La Roche's R&D shrank 37.9%. Atomic Energy of Canada, a crown corporation that receives most of its funding from the federal government, decreased its R&D investments by 14.8%, while BAE Systems Canada and Moore Corporation also experienced investment declines.

Will the Bubble Burst?

Overall, Canada's Top 100 R&D firms had a stellar year for R&D investments in Fiscal 2000. However, based on current trends in the economy the Fiscal 2001 results could well suffer a reversal, especially in two IT sectors, Communication/Telecommunication Equipment, and Electronic Parts and Components. The latter group, which includes such fast-growing firms as PMC Sierra and Sierra Wireless, is closely tied to the fortunes of Nortel, which is facing unprecedented negative financial prospects.

Two questions present themselves: "How deeply will these two IT sectors cut their R&D activities to make up for declining revenues" and, "To what extent will R&D growth in other industries compensate for declines in IT?". The IT reversal of fortune will test the mettle of IT managers and investors, who will face a serious short-term pain vs. long-term gain conundrum. However, hope lies in the rapidly-growing Pharmaceuticals & Biotechnology industry, which appears to be on a roll.

RE$EARCH Infosource will continue to track corporate R&D spending trends in 2001, using our proprietary Canadian Corporate R&D Database.

Copyright notice: Canada's Top 100 R&D Corporate R&D Spenders is a copyrighted publication of RE$EARCH Infosource Inc., and may not be reproduced in whole or in part without the express permission of the publisher. Photocopying or other forms of mechanical or electronic reproduction are strictly prohibited.