In 2000, when he and his colleagues at Celera Genomics, in Rockville, Md., finished sequencing the human genome, J. Craig Venter announced the advent of the "century of biology." But IEEE Spectrum's fourth annual R&D survey shows that the biotech century has had a slower than expected start among the world's top 100 R&D spenders.

While the 100 companies, taken as a whole, increased their R&D spending by a healthy 7.6 percent in 2004, to US $254 billion, the pharmaceuticals and biotechnology sector actually cut back by 1.1 percent, to $51.7 billion [see box, "Sector Trends"], mirroring a sales drop of 1.6 percent. What's more, in the five years since Venter's grandiose prediction, the pharma-biotech sector's share of the Top 100 has been stuck at 20 percent. Its only relative gain came in the top 25 spots, where the sector took seven places, up from four in 2000. That's just behind the automobiles and components sector, which had eight in the top 25.

You would expect the life sciences sector to have a high R&D profile. First, drugmakers and biomedical companies are busily creating products for a rapidly growing market spurred on by an aging population. Second, they spend billions to attract still more customers—you can't watch TV for half an hour without seeing two or three drug commercials, with branding ads touting research prowess side by side with those aimed at erectile dysfunction. Third, the merger fever that has gripped Big Pharma over the last few years—Pfizer's acquisitions of Pharmacia and Warner Lambert, Astra's merger with Zeneca, and most recently Sanofi-Synthelabo's hostile takeover of Aventis—has reduced overhead, presumably leaving more money for R&D.

On top of that, from 1998 to 2003, the U.S. government more than doubled the National Institutes of Health's annual R&D budget, from $13.1 billion to $26.4 billion. Meanwhile, NASA's R&D budget grew from $9.7 billion to just $10.7 billion, barely keeping pace with inflation. According to numbers compiled by the National Science Foundation, the U.S. government spent nearly 25 percent of its total R&D investment on health, compared with 18 percent by the United Kingdom; 16 percent by Canada; 12 percent by Italy; 7 percent each by Germany, France, and South Korea; and just 6 percent by Japan.

Why hasn't all this government largesse motivated the private sector to spend more of its own money on life sciences R&D? After all, government spending on R&D isn't supposed to replace that of the private sector but to complement it—

by fostering an increase in general scientific understanding, honing the skills of graduate students, and correcting for market failures that would result in underinvestment.

It could come down to a question of timing. On average, it takes more than a decade to bring a drug to market from the discovery phase, and the NIH puts money into basic research, not commercialization. Given that the NIH funding increases began almost eight years ago, it stands to reason that pharmaceutical and biotechnology firms should be increasing R&D spending to exploit new discoveries and technologies generated by NIH-funded projects. And with the exception of 2004, these firms have increased spending, albeit at a more moderate pace than you might expect.

Over the past five years, R&D spending for the pharmaceuticals and biotechnology sector of the R&D 100 grew 24 percent, which was a bit higher than the overall growth on the list and more than twice the growth of its sales, which rose 11 percent. This trend increased the sector's R&D intensity—R&D spending divided by sales—the ratio that analysts use to compare companies' R&D investments.

Pharmaceuticals and biotechnology ranks as the second most research-intensive industry, just behind software and services. This should not be surprising given that R&D spending is the primary way firms differentiate themselves, the high degree to which the businesses depend on blockbuster drugs, and the fact that the market determines companies' values according to the drugs that are in the research pipeline. High research risks have also led to greater consolidation in the industry, with pharmaceutical companies merging to diversify their portfolios of drugs in development and to reduce the risks inherent in research and development.

The five years of R&D Top 100 data from the fiscal years 2000 to 2004 show that the top 100 leaders increased their R&D spending by 21 percent—from $210 billion in 2000 to $254 billion in 2004. R&D intensity in 2004 decreased slightly for the group as a whole, from 6.4 percent to 6.1 percent, as sales jumped by 12.3 percent. But that rosy picture certainly doesn't hold for every industry. Each sector has a different story to tell [see box, "Sector Trends"].