Bruce Booth published a nice analysis in his Life Sci VC blog a couple days ago, where he looked at the amount of money the top 15 big pharma companies spent in the past two years on buying back their own stock. Any guesses as to his tally?
Would you believe $75 B -- yes with a big B - in past two years? J&J leads the pack with $14.3 B and it trails down to Lilly's mere $420 M in 15th place. How does that $75 B compare with other investments in biopharma sector?
- It’s bigger than the NIH budget for both 2011-2012 by nearly 25%.
- It’s 4.5x bigger than all of the private venture-backed M&A that occurred in the past 18 months – and that involved over 70 biotech companies.
- It’s 12x bigger than the sum total of venture dollars invested in biotech in that period.
- Its nearly 80x bigger than all the capital raised by fifteen biotech IPOs during that period.
That's big. It's long been debated whether stock buy backs provide the best return. Many think buy backs are a sign that a management/board has run out of ideas as to where to invest. Not usually a good thing. Companies will not stay healthy unless they can continue to grow their sales and profits. Buy backs generally provide a (somewhat unpredictable) increase in price per share in short term -- but the street and investors seem to like this.
However, a short term bump may not compensate investors at all for long term gains they could have had if the money was better invested in higher return projects. The pharma industry has traditionally been fueled by innovation and R&D spending. R&D returns haven't been so great in the past decade (across the industry) so aren't as in vogue right now. Regardless, it is difficult for me to see how pharma companies will heat up their revenue and profit growth without more new products -- that normally come from R&D efforts.
I had a boss who used to say you can tell a company's strategy by how it chooses to spend its money. Are stock buy backs pharma's growth strategy? Is that the best they can do with piles of cash?
Posted by Bruce Lehr Aug 24th 2012.