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Amgen’s Cost Structure and Ebitda Margins

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Biotechnology margins

The entry of new blockbuster therapies has enabled biotechnology companies to achieve Ebitda margins (earnings before interest, tax, depreciation, and amortization) as high as 70%.

The above graph shows that Amgen (AMGN) has consistently underperformed its peers such as Gilead Sciences (GILD), Biogen (BIIB), and Celgene (CELG) in terms of Ebitda margins.

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Amgen’s expense breakdown

Compared with its expenses in 1H2014, Amgen’s (AMGN) total operating expenses declined by 2% in 1H2015. The decrease in Amgen’s total expenses is a result of the company’s restructuring program aimed at generating operational efficiencies.

In 1H2015, the company’s research and development expenses accounted for 17.9% of its total revenue—a drop from 21.1% in 1H14. This has resulted from decreased costs associated with the development and marketing of new products. Amgen’s research and development expenses as a percentage of total revenue are in line with those of its peer Biogen at 18.5%, lower than that of Celgene at 37%, and higher than that of Gilead at 8.7%.

Amgen has increased its prioritization of research projects based on expected return on investment. The activities of Amgen’s Discovery Research and Translational Sciences, or DRTS, department, responsible for finding target molecules for further development, have been optimized, leading to savings of about $163 million in 1H15. Additionally, the company has adopted leaner clinical trial programs and reduced the cycle time for each trial phase. Amgen also enters into partnerships with companies that have complementary competencies to further accelerate the research and development process.

Compared to 1H2014, Amgen’s cost of sales, or material costs, decreased by 2.3% in 1H2015, as the company paid lower royalties and obtained higher prices for its drugs. Amgen also includes the 4% excise tax charged by Puerto Rico on intercompany purchases from its Puerto Rico manufacturing subsidiary in its cost of sales.

Selling, general, and administration expenses increased by 1.2% in the same time frame, as Amgen is involved in marketing several new products such as Repatha, Blincyto, and Corlanor. These expenses have been partially reduced by savings generated from the cost restructuring efforts.

Investors can gain exposure to Amgen while limiting risk associated with its high costs by investing in the iShares NASDAQ Biotechnology ETF (IBB). IBB maintains 8.53% of its total holdings in Amgen.

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