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Parkinson's and the environment


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November 5, 2001
Volume 79, Number 45
CENEAR 79 45 pp. 8-9
ISSN 0009-2347
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R&D spending

I thank Fred Siemer for his recent comments on my study (with David Aboody) of the productivity of chemical R&D (C&EN, Oct. 1, page 10). Let me briefly respond.

First, Siemer writes, "the professors used seven years of R&D spending." In fact, our model related the operating income of a sample company in a given year to R&D in that year and the preceding nine years (10 years of R&D in total). The seven-year span mentioned by Siemer is the outcome of our statistical (econometric) analysis, not our choice of data span. Specifically, the data tell us that current operating income of chemical companies is positively associated with current R&D expenditures, as well as with R&D expenditures made in the previous six years. We find that R&D expenditures made earlier--seven, eight, or nine years ago--are uncorrelated with current performance (operating income). This decay rate of R&D benefits is consistent with the voluminous economic research on R&D productivity, which yields, on average, a six- to eight-year life span of R&D--varying, of course, by sector and technology.

Siemer also writes, "We would note that the investment portion of R&D is typically capitalized by chemical companies, and we doubt this 'expense' was captured in the data used for the regression analysis." I understand that this observation is derived from Siemer's industry experience, but would like to note that accounting principles governing financial reports of U.S. companies and the audit of these reports require the expensing of all R&D expenditures, with software development costs being the only exception. I would be interested to learn from Siemer of specific cases in which publicly traded chemical companies capitalized part of their R&D, and how this R&D is amortized.

In addressing the issue of annual return on R&D, Siemer suggests "that the probable return of R&D to operating income may lie closer to the 2.7% return, allowing for a 10% success rate for R&D projects, rather than the 26.6% calculated by Lev and coauthors." I, and surely many readers too, would like to know whether the 2.7% return is based on Siemer's intuition or on hard data. Also, given that the cost of capital of most chemical companies is probably in the range of 10 to 12%, a return of 2.7% on R&D implies that R&D expenditures cause significant harm to shareholders--negative present value of R&D, leading to destruction of shareholder value. And yet, chemical companies continue to invest in R&D. What gives?

Siemer may be right that the success rate of R&D projects in the chemical industry is 10%; we didn't study this issue. Yet this is not inconsistent with a 26.6% average return on R&D, or any other average return. What follows is simple hypothetical example: Suppose 50 projects are under development, and the R&D invested in each amounts to $20 for a total R&D investment of $1,000. Five projects make it to the market--a 10% success rate--and they enhance future operating income by $260 per year. The average return on the total R&D investment is 26%, consistent with a 10% success rate.

I wish to make an important point related to the finding of 26.6% return on R&D. We made it clear in the study, as well as in subsequent interviews, that this is a before-tax return. On an after-tax basis, most relevant to managers and shareholders, the estimated return is 16 to 17%. This is a reassuring, above-cost-of-capital return, but definitely not "incredible" as mentioned in Siemer's comments.

Siemer concludes by indicating that "it's back to the drawing board." I agree, it's always back to the drawing board. Good research and consulting is a cumulative, continuous process, with eyes on the drawing board--the fundamental objectives. I believe our study on the productivity of chemical R&D provides a solid first step in a process informing managers and investors about the optimal conduct of chemical R&D.

Baruch Lev
New York University


Parkinson's and the environment

Bette Hileman's recent article on the environment and Parkinson's disease (C&EN, Sept. 17, page 35) should have at least mentioned that many active teams are researching environmental factors in other countries besides the U.S. Since the discovery of MPTP (1-methyl-4-phenyl-1,2,3,6-tetrahydropyridine) in the early 1980s, major contributions have been made by a significant number of researchers in Japan, Italy, Germany, England, and Spain. In addition to pesticides and metals, these researchers have focused attention on trace alkaloidal constituents throughout the environment with carboline or isoquinoline structures that closely resemble MPTP or its active form. From the article one could believe that the only research on putative environmental triggers is in the U.S.

Michael A. Collins
Maywood, Ill.




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