Google's Alphabet gets ready for the 10%--Life Sciences biz reporting to start for Q4
Alphabet ($GOOG) gained more than 12% in market trading after it reported its first quarterly earnings since it officially became the parent company to search engine unit Google as well as other businesses including Life Sciences, Google X, Nest as well as Access and Energy. That puts the company up a whopping roughly one-quarter for 2015 so far in what has been a rocky stock market in recent months.
Investors got a few clues about what to expect from the reorganized company--as well as the latest glimpse at Alphabet's incredibly deep resources. But the company won't detail the activity within each business segment until its fourth quarter earnings report, which should come in late January.
Jessica Mega, a Harvard Medical School cardiologist, will help to lead GLS research efforts as the Chief Medical Officer of Google Life Sciences. In May, Google had brought her on board to head its Baseline Study a deep, ambitious dive into disease biomarkers and their implications for drug and diagnostics development. Prior to joining GLS, Mega's work had focused specifically on the genetics and biomarkers involved in cardiovascular disease, including testing novel anticoagulants in acute coronary syndrome patients.
Overall, Alphabet spent $3.23 billion in R&D last quarter. That's up by more than 20% from a year earlier when that spend was $2.65 billion. Research and development represents the bulk of the company's non-GAAP operating expenses, which were $5.7 billion or 31% of revenue. That's a gain of 14% over the same quarter a year earlier, most of which was driven by R&D expense.
Just to put that enormous R&D spending in context, it exceeds the $2.9 billion invested during the third quarter in all of the U.S. life sciences venture capital investments, according to recent data from the National Venture Capital Association.
It's not clear yet if Alphabet will continue to grow R&D spending so rapidly, or even push the envelope further. But it certainly has the cash to do so. It had $3.6 billion in free cash flow last quarter and ended the period with about $73 billion in cash, of which most of which, $42 billion (58%), is held ex-U.S.
|Alphabet SVP and CFO Ruth Porat|
Google has long emphasized a rough 70-20-10 rule in which the proportion of corporate effort going to core areas being 70%, with 20% going to adjacent areas and 10% going to "exciting new opportunities" including Google Life Sciences, Alphabet SVP and CFO Ruth Porat highlighted on a July earnings call.
But Porat cautioned that Wall Street shouldn't see this rough model as a "specific guide to financial modeling." Although, she did reaffirm Alphabet's commitment to this view.
"On 70-20-10, it's intended to be instructive and it's intended to mirror the founders' vision and really capture how we devote our resources, which for us means, how do we apply effort," said Porat on the Oct. 22 earnings call. "This mantra is really about pushing people to look at new areas, invest in newer areas, to look for things that are adjacent, the 20%, and even the unrelated big bets, the 10%."
For the specifics, investors will have to wait until Alphabet breaks out its businesses in detail next quarter.
"Starting in the fourth quarter with our move to segment reporting, we intend to provide additional detail for Google, on the one hand, and all the other Alphabet businesses, on the other hand," Porat said. "We refer to those other Alphabet businesses as 'Other Bets.' We expect Other Bets to include among others Access and Energy, Nest, Life Sciences, our investment arms and X, which is where driverless cars and certain other incubation efforts reside."
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