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Merck or AbbVie: Which Has the Better Cost Structure?

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Jan. 15 2019, Updated 10:30 a.m. ET

Expense guidance

In its third-quarter earnings conference presentation, Merck & Co. (MRK) said that it expects its operating expenses to rise YoY (year-over-year) in the low to mid-single digits in 2018, mainly driven by increased R&D (research and development) expenses. The company also expects its GAAP (generally accepted accounting principles) effective tax rate to be in the range of 26.0%–27.0%.

According to its third-quarter earnings conference call, AbbVie (ABBV) has projected an increase in investments to support the launch of new products such as Orilissa, Venclexta, upadacitinib, and risankizumab.

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Expense projections

Wall Street analysts expect Merck & Co.’s SG&A (selling, general, and administrative) expenses as a percentage of its revenues to be 23.94%, 23.46%, and 22.50%, respectively, in 2018, 2019, and 2020. On the other hand, AbbVie is expected to report SG&A expenses as a percentage of revenues of 20.49%, 20.39%, and 19.52%, respectively, in 2018, 2019, and 2020. While both companies are expected to reduce their SG&A spending-to-revenue ratios from 2018 to 2020, AbbVie is expected to spend a lower percentage of its revenues on sales activities compared to Merck & Co.

Wall Street analysts expect Merck & Co.’s R&D expenses as a percentage of its revenues to be 18.88%, 18.40%, and 18.02%, respectively, in 2018, 2019, and 2020. On the other hand, AbbVie is expected to report R&D expenses as a percentage of revenues of 15.75%, 15.76%, and 15.38%, respectively, in 2018, 2019, and 2020. AbbVie is expected to dedicate a lower percentage of its revenues to R&D activities than Merck & Co. from 2018 to 2020.

In the next article, we’ll compare the shareholder value generated by Merck & Co. and AbbVie in greater detail.

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