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AbbVie’s Cost Structure and EBITDA Margins

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Biotechnology margins

The majority of mature biotechnology companies manage to earn EBITDA (earnings before interest, tax, depreciation, and amortization) margins in the range of 30%–40%.

The above graph shows that in the first half of 2015, AbbVie (ABBV) underperformed its peers such as Gilead Sciences (GILD) and Biogen (BIIB), but it surpassed Celgene (CELG) in terms of EBITDA margins.

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AbbVie’s expense breakdown

Compared with its expenses in 1H2014, AbbVie’s total operating expenses increased by 5.3% in 1H2015. In 1H2015, the company’s research and development (or R&D) expenses accounted for 17% of its total revenues. AbbVie’s R&D expenses as a percentage of total revenues are in line with Biogen’s 18.5%, lower than Celgene’s 37%, and higher than Gilead Sciences’s 8.7%.

AbbVie’s increase in total operating expenses can be attributed to higher selling, general, and administration (or SG&A) expenses and to higher R&D expenses compared to 1H2014.

In 1H2015, AbbVie’s SG&A expenses included $194 million in expenses related to AbbVie’s separation from Abbott Laboratories in 2013. SG&A expenses also increased due to additional $222 million in expenses related to the Pharmacyclics acquisition and integration. Since these were one-time costs, their impact on the company’s future profitability is limited.

SG&A expenses have been rising as the company requires more selling and marketing support for newly launched products such as Viekira Pak and for Humira’s approval for new indications and geographies.

AbbVie also witnessed an increase in R&D expenses in absolute terms, as the company has strong mid- to late-stage products in its research pipeline. The company is also aggressively involved in Humira’s label expansion as well as additional investments in Pharmacyclics research projects.

Investors can limit their exposure to AbbVie’s high costs by investing in the VanEck Vectors Pharmaceutical ETF (PPH). PPH holds 4.84% of its total holdings in AbbVie.

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