Incremental R&D Expenses May Pressure AbbVie’s 2017 Operating Margins



Operating margins

In its 4Q16 earnings conference, AbbVie (ABBV) projected its earnings per share (or EPS) for fiscal 2017 to range from $5.44–$5.54. If we compare the midpoint of this range with AbbVie’s EPS for fiscal 2016, it translates into year-over-year (or YoY) growth of ~13.9%. However, this guidance doesn’t include the impact of non-cash amortization and other events on EPS projections, which should be ~$0.89.

If AbbVie’s actual EPS for 2017 surpasses this guidance, it may have a positive impact on ABBV stock and on the Vanguard S&P 500 ETF (VOO). AbbVie comprises ~0.49% of VOO’s total portfolio holdings.

Wall Street analysts have projected that AbbVie could report adjusted operating margins of ~43% in 2017. This is in line with the operating margin guidance provided by the company in its 4Q16 earnings conference.

AbbVie is confident that in 2017, it can maintain stable gross profit margins of ~81% on a year-over-year (or YoY) basis. Its peers Amgen (AMGN), Biogen (BIIB), and Celgene (CELG) are expected to earn gross profit margins of around 85.4%, 87.2%, and 96.1%, respectively.

Article continues below advertisement

Incremental research and development expenses

AbbVie (ABBV) plans to achieve its target of a 50% operating margin by 2020. This requires the company to grow its operating margin by 100–200 basis points every year. In 2017, AbbVie expects to fall short of this annual target, as the company must spend substantially on research programs to drive future growth.

A major portion of the company’s investments is targeted at the pipeline acquired from Stemcentrx, as well as the risankizumab research program. In 2017, AbbVie expects to spend ~17% of its total revenues on research and development (or R&D) expenses.

In the final article of this series, we’ll discuss AbbVie’s financial projections for 1Q17.


More From Market Realist