How Big Is Roche’s R&D Expense?

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Roche (NASDAQ:RHHBY) spent $12.3 billion in research & development (R&D) expenses in 2018. This figure is one of the highest among pharmaceutical companies. As a percentage of revenue, R&D was 20% in 2018, slightly higher than the 19% figure in 2015. R&D is one of the key expense items for pharmaceutical companies, as their drugs have a limited exclusivity period, post-which, generics and biosimilars enter the market. As such, there is more incentive for pharmaceutical companies to keep developing new compounds to compensate any loss from such competition. Roche in particular has a large cancer drugs portfolio and some of its key drugs have lost exclusivity in the recent past or are about to lose it in the near term, and this could cost the company billions of dollars in sales. As such, the company has been busy investing more in the development of new drugs. However, R&D is not the biggest expense item for Roche. Cost of goods sold (COGS) accounted for 36% of its total expenses in 2018. In this note we discuss the company’s expense drivers. You can look at our interactive dashboard analysis ~ RHHBY Expenses: How Does Roche Spend Money? ~ for more details.

Breakdown of Roche’s Total Expenses in 2018

  • Total = $49.6 Billion
  • Operating Expenses = $45.6 Billion
  • Provision for income taxes = $3.4 Billion
  • Non-operating expenses = $0.6 Billion

Roche’s Net Income Margin Has Declined Slightly Between 2016 And 2018, Although It Saw Significant Decline In 2017, Due To Certain One Time Charges

Roche’s Total Expenses Have Been On A Rise

  • Roche’s total expenses have grown from $43.3 billion in 2016 to about $49.6 billion in 2018.
  • For 2020, we expect total expenses to be around $53.8 billion, which comprises of:
    • Operating Expenses: $49.3 billion
    • Non-Operating Expense: <$1.0 billion
    • Income Taxes: $3.6 billion
  • Below, we take a look at how the company’s key expense components have trended and the key reasons for the change.

1. Operating Expenses Have Increased From $39.0 Billion In 2016 To $45.6 Billion In 2018, Driven By (A) $1.3 Billion Increase In COGS (B) $1.0 Billion Increase In Sales & Marketing Expenses, (C) $690 Million Increase In R&D, And (D) $3.6 Billion Increase In General & Administrative Expenses

  • (A) Cost of Goods Sold (COGS) grew from $16.3 billion in 2016 to $17.6 billion in 2018, driven by higher sales. As a % revenues, COGS has declined from 31% to 29% over the same period.
  • (B) Sales & Marketing expenses have increased from $9.2 billion in 2016 to $10.3 billion in 2018, driven by higher expenses incurred toward new product launches. As a % of revenues, Sales & Marketing has remained around the 17% mark over the past few years.
  • (C) R&D expenses increased from $11.6 billion in 2016 to about $12.3 billion in 2018, led by pharmaceuticals portfolio expansion. As a % of revenue, R&D expenses have declined slightly from 21.9% in 2016 to 20.3% in 2018.
  • (D) General & Administrative expenses have increased from $1.7 billion in 2016 to $5.4 billion in 2018, driven by impairment charges and pension related changes. As a % of revenues, General & Administrative grew from 3.3% to 8.8% over the same period.

2. Roche’s Non-Operating Expenses Have Seen $500 Million Decline

  • Non-operating expenses, which refers to interest & other income/expenses, have declined from $1.1 billion in 2016 to $0.6 billion in 2018, driven by lower financing costs.
  • As a % of Revenues, interest & other expenses declined from 2.0% to 1.0% over the same period.

3. Roche’s Income Tax Expense Has Hovered Around $3.4 Billion Mark Over The Last Few Years. Though The Effective Tax Rate Has Fluctuated In Recent Years, Due To Impact of Changes In The U.S. Taxes.

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