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Author: bjanssen Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1856  
Subject: Some thoughts on R&D Date: 6/18/2000 9:55 PM
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Hi Folks

I've been reading for some time now various attempts to find a way of quantifying the R&D efforts of biotech companies. Unfortunately every one of those analyses has left me somewhat disquieted. So I tried to figure out what I don't like about those metrics and here's my thoughts, somewhat disorganised.

It seems to me that what folks are trying to establish with the metrics is which biotech companies are most likely to come up with the next breakthrough drug or crop or whatever. That may be stating the obvious but let me elaborate, people don't care how much research is done, or where it's done, or what the research is done on, but rather how efficiently is that research converted into a big money earner. After all we are investing right, we want the company to make money and lots of it :).

So we get metrics like total R&D, which measure just how much money a company throws at research and then we try and balance that with numbers that try and measure how efficiently that research is converted into revenue.

But there are problems with the metrics so far.

First up current sales and revenue don't depend on current research. Basically for a biotech the science that led to todays sales was carried out 5-10 years ago, or more. So any measure of the efficiency of a companies research should really use R&D numbers from the past and compare them with sales figures from the present. Of course most times that's really hard to do, many of the companies we want to look at didn't exist when the research that led to tadays sales was done. And most of them don't have sales anyway!

So how the heck do you measure efficiency of research? I don't have an answer sorry. The way I do it is the hard way, I read the science as presented on the web page and then in the annual report and then I hit the literature and look at publications and sometimes patents. But I'm sorry that approach just won't work for most folks and even for me with the training I have there are fields where most of what I read is gobbledygook. I guess the best guide is if the folks doing the science have strong publication records then they are probably good scientists and good scientists are usually efficient at their science. Of course that says nothing about the ability to turn science into revenue.

Next problem I've come across is knowing who did the science. If a company carried out really good R&D 5 years ago, who did that work? Are they still there? Seriously in most of the smaller companies with maybe 50-500 staff most of the key programs will be the product of only a few or even one mind. Sure there will be excellent developmental work taking standard approaches and making great progress with them and many of the science staff will be talented....but the kind of mind that makes a breakthrough isn't as common as we'd like and many companies are lucky to have even one thinker who can step beyond the standard idea. So the question is how many key minds are there in a given company? If a company is based on a couple of key breakthroughs made by one thinker then, is that person still there? Because if they've moved on then all the R&D dollars are now going into developmental work and not breakthroughs. Not that that is bad, heck most scientists (including myself) spend their lives doing developmental work quite productively and much of a value of any company will depend on solid developmental work......just don't bet money on another earth shattering breakthrough if the principle scientist has moved on.

So I guess for me looking at R&D is about looking at the people leading the research. Find out who they are and how good they are? Use publications and patents to identify good scientists (although sometimes that is misleading).

Once you've nailed the science then think about the business that converts that science to revenue and that's where good deal makers and salesmen come in.

Anyway just some food for thought.

cheers
Bart



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