Commercial Physical and Biological Research

SIC 8731

Industry report:

This industry classification covers establishments primarily engaged in commercial physical and biological research and development on a contract or fee basis. Noncommercial research establishments funded by endowments, grants, or contributions are classified in SIC 8733: Noncommercial Research Organizations. Separate establishments of aircraft, guided missile, or spacecraft manufacturers primarily engaged in research and development on these products are classified in several SICs concerned with transportation equipment manufacturing.

Commercial physical and biological research organizations are supported by commercial firms and organizations that invest a portion of their annual budget in research and development (R&D). These industries apply the knowledge acquired through R&D to developing products for domestic and international markets. Commercial physical and biological research routinely is undertaken in a vast array of subject categories, including agricultural, biological, chemical, engineering, physical, and industrial research. Studies in these arenas serve both to improve already existing products and to develop new ones.

In 2009, 19,506 commercial physical research establishments were in operation in the United States, employing 312,804 people and earning a combined $40.4 billion in revenue. The majority were small establishments, with nearly 80 percent employing fewer than ten people. Nearly every firm in every major industry has a division or subsidiary devoted to commercial physical research. Many products that arise out of these research efforts appear solely in the retail consumer market, while others contribute to improving industrial processes.

Commercial, physical, and biological research was among the fastest growing segments of the U.S. economy beginning in the early 1990s and continuing through the 2000s. While other industries cut back during periods of recession, commercial research and development divisions often enjoyed increased budgets. For instance, a fiercely competitive business environment in the early 1990s led companies to place a substantial premium on first-to-market technology, thus accentuating the importance of research and development for maintaining and expanding market share. Drug companies increased their R&D expenditures 13 percent to about $11 billion or 16 percent of sales.

Economic and political developments following the terrorist attacks of September 11, 2001, on the United States dramatically changed much of U.S. industry's fortunes in the early and mid-2000s. By 2005, overall R&D funding was flat, with the greatest increases coming from federal government spending on defense. Private industry remained the primary source of funds for research and development and was estimated at about $191 billion in the mid-2000s. According to Research-Technology Management, this continued a four-year trend of flat spending, but the outlook would significantly improve.

By the late 2000s, pharmaceutical firms were spending roughly 15 percent of their money on R&D, amounting to $41 billion in 2008. In the latter years of the decade, innovative new concepts, such as controversial experimentation with cloning, further fueled the R&D economy. Despite the downturn in the technology industry in the late 2000s, R&D budgets in the technology sector continued to grow as computer technology continued to turnover at a rapid pace. Industries experiencing decreased R&D spending in the 2000s included aerospace, chemical manufacturing, and basic industries and materials.

By the late 2000s, the landscape of the R&D in the United States was beginning to show the effects of years of slow transformation. Once, much of R&D was considered basic research--the industrial sector had a multitude of research labs, and research was more driven by creativity and curiosity rather than pure commercial relevance. Since the 1970s, there had been a shift away from basic research to applied research, that is, research focused on a specific consumer-driven end. There has also been a shift away from corporate labs to government-funded university research labs. The Bayh-Dole Act of 1980 allowed universities to patent and license the outcomes of federally funded research. University labs also work in public-private partnerships with corporations to conduct research in return for various financial incentives.

As a result, fewer commercial labs dotted the landscape, and those that did no longer carried the same weight they had just two or three decades before. For example, Bell Labs, which, among others, brought into being fax transmission, long-distance television transmission, the transistor, the UNIX operating system, and cellular telephony--the building block for much of modern day computing, telecom, and electronics--had as many as 30,000 labs in 2001. By 2009, the company's employment rolls had declined to 1,000. In 2008, Bell Labs announced that it would cease all basic research operations. In other words, all research would be geared toward products and technology that would be commercially viable within five years.

Generally, in 2009, R&D remained flat, primarily due to the recessive economy that had businesses looking to keep costs low. However, according to Industrial Research Institute's annual surveys, responders suggested that in the coming year they would be investing more in new business products while reducing R&D investments in existing products. Basic research was also expected to continue to decline. Increases were expected across all industries in the level of collaboration with university research departments.

Among the most prominent R&D firms are biotechnology companies that often have a secondary classification in this industry. Some of the leading companies by sales in the late 2000s were Amgen, with $14.3 billion in 2008 revenues; Genentech, with $13.4 billion; and Genzyme, with $4.6 billion. California-based Amgen specializes in cellular biology and medicinal chemistry. About half of its sales are generated by the anti-anemia drugs Epogen and Aranesp. Genentech of San Francisco is the maker of Rituxan, a treatment for non-Hodgkin's lymphoma. Genzyme, of Cambridge, Massachusetts, focused on rare genetic disorders. Applera is based in Connecticut and is a maker of tools to analyze DNA and RNA, small molecules, and proteins.

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