There’s a lot of repatriated corporate money sloshing around these days thanks to the recent tax code changes. The larger pharma companies were certainly beneficiaries, with lots of foreign operating profits that they didn’t want to bring back to the US under the formerly higher corporate tax rates – you’ll recall that this was the entire reason Pfizer tried to do deals with AstraZeneca and then with Allergan, both non-US companies.
But here we are, problem solved. What’s the landscape like now? First off, weren’t people expecting a lot more merger and acquisition activity? I realize that these are early days and that the rest of the year may well be different (see below), but it certainly doesn’t look like anyone had any big buyout ideas ready to go. What’s happening to all this money right now? Many will have guessed the answer already: it’s being used to buy back shares. The NY Times’ “Dealbook” reports that this quarter has already set the record in announced share buybacks, and biopharma has been doing its part.
My feelings about share buybacks in an R&D driven industry like this one have been a matter of record for some time, for all the good that does. I know, a company has responsibilities to its shareholders. And buying your own stock is basically a no-brainer from that standpoint – it’s really the least controversial thing a company can do with a pile of extra cash, and it requires almost no thought or effort to set up. The stock price gets support from the purchases, both directly and because the company has announced its own confidence in the stock itself, and the earnings per share get set to increase as shares are purchased and then retired. What’s not to like?
Well, the unlikeable part is that it seems odd to have a research-driven company announce that it can earn better returns off its own shares than it can by spending the money on research. (Update: as Michael Gilman points out, from an accounting/tax perspective, these are certainly two different things, so it’s not like there are two identical slots in the wall that you can drop your money down. But the larger point stands.) I suppose part of the point is that it can earn more likely returns that way, which is fair enough. But note that Pfizer, Merck, AbbVie, and Amgen have each announced $10 billion buyback plans, which is a larger sum for each of them than than any of their total R&D budgets. To give you an idea of the scale here, take a look at that 2012 post linked in the above paragraph. The academic study I referenced noted that from 1997 to 2009, Pfizer’s total buybacks over that period were 67% of their total R&D spend over the same time, and Merck’s were 62%. They’re way over that average in 2017, for sure. Have any of the big biopharma companies announced plans to spend any noticeable amount more on R&D using their repatriated earnings? Not that I’ve seen, although I’ll be very happy to be corrected on that point.
A higher (non-bubble!) stock market is no bad thing for the economy, but share buybacks are a rather roundabout way of helping things in general. The great majority of shares are owned by the 10% wealthiest decile of the population – I’m one of them, from what I can see – so buybacks are mostly going to benefit them first. That brings up the main point of that Dealbook piece: the effect of the corporate tax reform itself. The administration, naturally enough, sold this idea as a way to spur investment into jobs, facilities, and operations in the US. But it doesn’t seem to be working out that way. The (one-time) bonuses that some companies have announced are on a much smaller scale than the share buybacks that are also underway at those same companies, just to use one prominent example (one that the administration also enjoys talking about). We’ll see about the long term, but the results of the 2004/5 attempt to repatriate corporate earnings are not encouraging in that regard.
There may well be more M&A activity later in the year – at least, that’s what executives in the business have been saying. It’s another question entirely whether such activity is of benefit to the overall economy, and I’m not going to wade into that one here. As for the biopharma industry itself, buying out smaller companies is one of the anticipated outcomes of venture capital investment, so that’s built in as part of the ecosystem. Fewer companies would be started in the first place if that weren’t as much of an option. Mergers between larger companies, though (as has been discussed many times on this site!) are another thing entirely, and there’s a case to be made that they’re a net negative for the biopharma industry as a whole.
But we might see some anyway. Will we see more spending on research, though? More investment in smaller startups? Or will everyone just quietly buy back shares and bank their executive bonuses?