Economic Analysis of Fermentation Processes

Harold B. Reisman

• Publisher: CRC Press
• Year: 2019
• Print ISBN: 9780367206260
• eBook ISBN: 9780429557637
• Edition: 1
• Topic: Technology & Engineering
• Subtopic: Biotechnology in Medicine
• Index: Technology & Engineering

Published in 1988: It is the purpose of this book to outline and detail the many steps which are involved in bringing a fermentation product to market.

Chapter 1

RESEARCH AND DEVELOPMENT

I. RESEARCH ORGANIZATION

The research organization is a critical determinant in the economic success of most companies. This is all the more so in a high technology business. Successful development of new biological products depends upon integration of the research organization at all levels in the company. The person in charge of the research organization should be included in the highest policy-making level of the company. Research interfacing with all staff groups, manufacturing, and especially marketing is imperative to smooth and accelerate product introduction.

Characteristics of a smoothly functioning and productive organization are

1. Responsive to changes in market need (including means of delivery); marketing and sales information flows constantly to research managers; program corrections are made so that solutions match real problems.

2. Selectivity is exerted so that available resources (manpower, money, materials) are not dissipated, but applied and focused on strategic programs.

3. There is an ongoing search for novel, but related product concepts, while reexamination leads to dissolution of programs which show little promise or progress.

4. Functional levels are kept to a minimum. There is movement of people to match needs whether they arise in the research laboratory, the pilot plant, the operating plant, or the marketplace. Structure is fluid.

5. Innovation is fostered and rewarded. There is a climate of creativity that is recognized within and without the company.

6. Research results are reported (not overreported) in a timely fashion. A sense of enthusiasm pervades the research group and members are anxious to resolve issues and let others know of that resolution. Progress is made (translation to production scale, for example) without all possible design data in hand. Risks are mutually understood and accepted.

7. Corporate objectives are clear and there is an agreed-upon balance between short- and long-term projects. Strategic decisions are made or changed with intimate involvement of key research personnel.

8. Research personnel have, or are taught, a financial understanding of the company (and industry) and so can understand and explain business implications of various modes of action.

Why spend this effort on research and development when the subject is “economics”? The answer is clear. The commercial success of a venture or a fermentation company is tied to research success; furthermore, the cost of research is very high and going higher. The difference between success and failure can easily be measured in tens of millions of dollars; it is not unusual to involve swings in the hundreds of millions. Clearly, the costs of numerous failures will mean shrinkage or dissolution of the company. Some 15 years ago, cost per professional research staff member was $50,000 annually. Even at an inflation rate of 5%, the annual cost now would be slightly over $100,000/year. Indeed, published information supports the rough estimate.¹ A survey of 157 industrial research organizations indicates that operating cost per professional was $119,000 in 1985 compared to $113,000 in 1984. Fifteen pharmaceutical companies were included in the survey; for that set, cost per professional was $84,000 in 1984 and $91,000 in 1985. For the pharmaceutical group, R&D expenses as a percent of sales averaged 7.5 in 1984 and 7.3 in 1985.

Data for four large companies (full year 1984) are shown below:²

	Sales ($million)	Earnings ($million)	R&D expenditures ($million)	R & D as % of sales
Eli Lilly	3109	490.2	341	11.0
Pfizer	3855	507.9	252	6.5
Merck	3560	493.0	393	11.0
G.D. Searle	1246	161.6	120	9.6

Earnings exclude extraordinary and nonrecurring items. R & D expenditures are a very high percentage of net income; values of 50 to 80% are common. For start-up firms, R & D costs may be many times net earnings, if there are earnings at all. For 30 pharmaceutical firms, R & D expense was 6.7% of sales (on the average) and accounted for 40% of pretax income (also an average value).³ The average R & D cost per company employee was $5704. To compare to other research-oriented groups, average R & D expense as a fraction of sales for the chemical industry was 3.0% and for the electronics industry, 4.3%. Even with these levels of R & D expenditures (some might conclude because of these levels of expenditure), Lilly, Merck, and Pfizer can be found among the top 100 U.S. firms when ranked in order of corporate cash flow.⁴ Their respective returns on equity were 22.1, 19.4, and 20.7%; these are very respectable figures.

There are about 400 firms that can be called biotechnology oriented. It is a matter of conjecture as to how much of the orientation is real and how much is capitalization on an area of great interest. Among the so-called start-up companies, R&D expenditures (1984) range from less than $1 million (Ribi) to about $55 million (Genentech). What is consistent is the high ratio of R & D expense to total expense. Table 1 is a compilation of data for selected biotech companies of differing sizes. Expenditures for R & D are often equal to, or greater than, annual sales figures.

A ten-person team (with necessary support structure) is not very large even for a start-up company. Cost is in excess of a $1 million/year. Ten man-years (or in more conventional terminology 120 man-months) pass very rapidly; most often, multiyear commitments are essential. The reason for inclusion of this subject is clear, as is the need for careful research planning.

While much of the interest in biotechnology is focused on the smaller, start-up firms, major changes have occurred in very large organizations as well. In the early 1970s, Monsanto spent less than 3% of sales on R & D. The figure has moved to greater than 5% of sales a decade later, with dollar spending on R & D approaching 400 million. Much of this transformation is related to a shift to biotechnology, agricultural chemicals, and health care. This is a major restructuring of a very large chemical company. Many aspects of the strategic change and the company’s research and development structure are detailed in a very useful article on Monsanto, including an interview with H. A. Schneiderman (senior vice-president of R & D).⁵ In 1985, Monsanto purchased G.D. Searle, thus, making a further and major commitment to pharmaceuticals and biotechnology. The cost to Monsanto was $2.7 billion. Not only is a massive change for a corporation involved, but there is a directed effort into new business and technical areas. Cultural changes are involved, a new regulatory outlook has been introduced, and a new time frame for development is in place. Technical-marketing interactions and needs are explained. It will be instructive to read this article and monitor the company in the next decade. The picture that emerges after expenditure of hundreds of millions of dollars in capital and equal or greater sums in R & D expense will present a classic case study whatever the economic outcome.

Table 1
R&D EXPENDITURES AND SALES FOR SELECTED START-UP COMPANIES: 1984^a

Setting of product objectives is a management decision. It is imperative that once these objectives are communicated, two important summaries be detailed and recorded. One concerns allocation or development of capabilities and resources. The second involves total resource allocation, including funds needed for research and development, regulatory affairs and clearance, capital (or lease/rental), and marketing. Both summaries must be updated on a routine basis. It is obvious that the early summaries are merely best estimates and may ...

Table of contents

• Cover
• Title Page
• Copyright Page
• Introduction
• The Author
• Acknowledgment
• Dedication
• Table of Contents
• Chapter 1 Research and Development
• Chapter 2 Engineering Design
• Chapter 3 Review of Published Economic Data
• Chapter 4 Plant Construction and Regulatory Affairs
• Chapter 5 Profitability
• Chapter 6 Conclusion
• Appendices
• References
• Index