Today, we are seeing this cycle play out across multiple sectors, giving rise to massive wealth creation. But these developments and product launches don't just happen overnight. They are the result of heavy spending and many tireless R&D hours.
Take Regeneron Pharmaceuticals (NSDQ: REGN). Founded thirty years ago by a group of physician-scientists, Regeneron invests heavily to develop effective biologic treatments for cancer, asthma, and other ailments. Those drugs brought in $14.2 billion in revenue last year, and management dutifully pumped $5.1 billion right back into research & development (R&D).
That means the company is reinvesting one-third of its sales to fuel the discoveries of tomorrow. And those investments are paying off handsomely. Regeneron currently has a robust pipeline of 40 promising candidates awaiting clinical trials and FDA approval – including several potential blockbusters.
Investors don't always appreciate the unsung efforts of professionals toiling away in research labs. But this is the nursery of new ideas and advances.
It stands to reason that tomorrow's winners are on the cusp of big breakthroughs today. There's no better place to begin looking for these future stars than the R&D department – the lifeblood of most organizations. Without enough ideas circulating through the system, even powerful firms can wither up and die.
By contrast, those with a culture of innovation typically find ways to elevate their products, engage customers, and generate market-beating returns for shareholders. I classify R&D breakthroughs by their potential to shake the ground around them.
Incremental Innovation: These are routine tweaks that enhance existing products. Think of Hershey (NYSE: HSY) sweetening its chocolate Kisses by filling them with cherry or peanut butter – a new twist on an old favorite.
Breakout Innovation: This next level involves bigger enhancements that raise the bar for all other players. Think adaptive cruise control, lane departure and collision warnings, automatic breaking and other sensor-enabled safety features becoming common in the auto industry.
Game-Changing Innovation: These financial earthquakes can be orders of magnitude more powerful than the first two. They not only transform an industry, but create brand new ones from scratch. We're seeing this seismic shift play out today in the quantum computing and artificial intelligence fields.
The never-ending process of creative destruction can be a double-edged sword for investors, punishing businesses that are behind the curve and slow to adapt, while greatly rewarding those on the cutting edge.
That doesn't mean blindly invest in companies that are throwing around buckets of cash. Like anything else, you'll want to see a return on that investment. Some failure-ridden firms continually pour money into black holes with little to show for it. Look for tangible signs of success… patents, intellectual property rights, and a proven history of commercializing ideas and bringing viable new products to market.
Legendary hockey player Wayne Gretzky scored a record 894 goals during his remarkable career. When asked his secret, he replied: "skate where the puck is going to be, not where it has been."
One thing's for sure – the puck never stops. Congratulations to Professor Mokyr and his team.
