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Where’s All That Money Going? (Pharma Edition)

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?

41 comments on “Where’s All That Money Going? (Pharma Edition)”

  1. Big player says:

    I don’t know why companies would buy back stock when they could look at doing some innovative R&D. Pfizer recently dumped CNS development but is missing out on the potential to look at peroxynitrite radicals in Alzheimer’s disease for example.

    1. Some idiot says:

      Be nice… 🙂

    2. Uncle Al says:

      Putting $10 million into Advertising obtains public acclaim. Putting $10 million into research obtains a small vial of powder. Managers get bigger faster boons by curtailing R&D as cost-savings.

      Managed R&D acquires another’s cleverness for cheap, less its management and staff. Ride the tiger or phase it out and be rewarded for that. Nixon’s declared 1971 (47 years) conventional War on Cancer can be the thermonuclear Biden Cancer Initiative. Try this: End NIH. Boom! Save its meager science aspects as a sparsely managed research diddle wherein lab coats are not penalized for discovery. Replace Human Resources with peer review. Give it seven well-funded years to accomplish something, then swap out everybody if it does not. Could you possibly get less than NIH?

      1. Mark Thorson says:

        Al, you’re kind of new here. The reference to peroxynitrite is an inside joke. Has to do with a well-known crank who shows up here from time to time.

        1. Uncle Al says:

          OK on the upcheck. I’ve worked at NIH. Ablate it. OTOH, if you think doing EPR on various leathers is a good bio-compatibility grant proposal…especially ablate it.

        2. TheEdge says:

          Mark, in ~20 years of lurking on chemistry blogs, this is the single most coherent thing I’ve ever seen Uncle Al post. Let’s not discourage him.

        3. TheEdge says:

          I’m also 75-80% sure it’s brilliant performance art.

  2. DCRogers says:

    Talked with one pharma exec who said that ALL research activities were not justified by the return on capital – and the natural response from a business perspective would be to eliminate all research, buy successful startups to fill the pipeline, and just be a marketing company. (Though admittedly the optics of this would stink…)

    Not sure what to make of this – perhaps the ROC measure fatally flawed in some way? Because if it is true, it’s not clear why the ROC for startups would be any better. It sounds like an argument for everyone to close down R&D and invest elsewhere.

    1. Derek Lowe says:

      That would be Valeant. There are not enough deals out there to make this a viable strategy, is my guess, and if a big Pharma were to announce this as their path, the price of deals would go right up as well (making it even less viable). I feel certain that the numbers have been run on this idea, many times.

    2. Anon says:

      The ROC in startups is not better, maybe even worse since most of them fail, but the costs for that do not have to be carried by the company that is buying the successful ones. So again, a good business decision, but it is not getting drug development anywhere.

    3. Hap says:

      There probably won’t be enough labor to make this work, either. Since people from successful startups generally get whacked, and people from unsuccessful startups get whacked, this seems like a recipe for a (relative to the amount of investment required to get there) low-paying spot on the hamster wheel, with occasional feedings to the local boa constrictor.

      I expect it’s like hoping to buy well-performing college teams for the NFL instead of having teams and paying them – once the money for being good at something goes away, most of the people who would have done it (and thus the mass of people needed to find the few very good ones) go away too.

      If the ROE on research and development is low (for companies that have economies of scale), how is it going to be better for startups? Where will their money come from?

      1. steve says:

        I thought that already WAS the case. How many new products are from internal large pharma R&D and how many from in-licensing? Might be an interesting exercise but my guess is that the ratio has greatly increased since the marketing guys took over large pharma.

        1. saul Richmond says:

          That information is available from HBM partners (see

    4. CR says:

      So, they want to buy successful start-ups? Nice plan. Did anyone clue this person to why these start-ups are successful? Because they did RESEARCH! So, maybe, just maybe, research is a good thing?

    5. Bruce Grant says:

      That, of course, was Accenture’s “paradigm-shifting” strategy (when they were still Andersen Consulting) for AZ (when it was still Astra Merck) — in-license or acquire and commercialize. Who knows what they might have made of it if one of the “marginal” drugs Astra contributed to the JV to generate short-term cashflow — a niche drug for Z-E Syndrome — hadn’t turned out to be Prilosec.

  3. Abbvie Employee says:

    Abbvie for their part raised base salaries to all non-executives by $1,000 per year, and at about 30,000 employees that’s about 30mil. Along with a 1% bump to bonuses below a certain level. Which is more than can be said for some companies. Share buyback was 10 billion. I personally think abbvie is a great place to work and love it. But they could have done better.

    1. Michael Sacco says:

      Are you receiving stock options as part of your employment?

      1. A different AbbVie employee says:

        Stock grants that vest over 3 years actually, if you are senior enough to rate them. Whatever Nancy Pelosi et al. think, I was happy to take the “crumbs” given to me. While the company is spending plenty on stock buy backs (and already was before the tax law change), we also announced investing something like 2.5 billion in US facilities and a large donation to charities in places where we operate, e.g. to habitat for humanity for housing in Puerto Rico and money for a local school district in Illinois to build a new Middle School. Not 10 billion, but not crumbs either.

  4. richard w says:

    as u know biopharma has to strike a balance between R&D spending and earnings otherwise their stock prices will suffer. but given the lack of productivity within their own R&D labs, it is hard to throw good money after bad. CELG which is the poster child of low R&D productivity actually spent 45% of revenues in R&D in 2017, and 40% in the prior two years. all their new products have been the result of acquisitions.

    in general back in the 1980s to the end of that century, large cap pharma spent about 13-15% of sales on R&D. nowadays, on average they spend more and also do more acquisitions which to me is buying R&D and the same as spending on R&D as this money gets recycled into more biotech startups. MRK spent over 25% in 2016 (10-k not out for 2017).

    yes, there is now more money thanks to repatriation but now is the time to spend it wisely. buybacks not the worse thing to do given the output of R&D. (Science is hard)

  5. Just saying says:

    In fairness, other than acquisitions how could a large company productively spend $10 billion on R&D in a short period of time as a one off? I suppose you could renovate labs or buy some fancy equipment with some of the money, but you can’t really just double or triple your R&D spend for a year then go back to what you were doing before and expect to get your money’s worth.

    1. CMCguy says:

      Just Saying raises a good point as if only a one time bonus then is incompatible with to long-term cycles of most projects. If industry could ignore the ROI arguments in my experience at both large pharma and small they were often a number of viable concepts or compounds that where shelved or back burner-ed due to budget constraints therefore if could use significant portion to set up a “long-shots” fund it could support a spike in innovation. Likely no improvement in R&D productivity yet could open doors that have been locked because a project champion did not have enough pull to garner budget support.

    2. Hap says:

      You’d have to save it – you could announce that you’re devoting $X to R+D (after internal study on where you could best have a chance to find something useful) and then stage it. Alternatively, you could invest some of it and use the proceeds to fund the added R+D – it would be sustainable, but you wouldn’t get many jobs, and the cash would make you a target for takeover or for complaints from (activist) shareholders that you weren’t making as much money as you could. You could also seed some startups with that money, but the cash might make them targets for acquisition and pillage.

      1. tt says:

        Spot on…these buy backs are in their own way an investment to keep institutional shareholder/fund managers happy (ie keep dividends high) and also fend off potential mega mergers. It’s highly unlikely that just temporary or even gradual increases in R&D budgets or simply going on an acquisition binge would accomplish much. As both an employee and shareholder, I reluctantly buy into the notion of a buy back as the most reasonable use of at least a portion of this jackpot.

      2. Emjeff says:

        This seems reasonable, but you’re forgetting that a company sitting on loads of cash becomes a prime take-over target. I was at DuPont Pharma when BMS bought them. This deal turned out to be a good one for BMS (they got apixaban, a multi-billion dollar/year drug for ~$7B). But they could not have known this at the time, and in fact were criticized for “over-paying” for DuPont. However, the sole reason they bought DuPont is that they were sitting on a load of cash from their sale of Elizabeth Arden a year or two earlier, and were concerned about being taken over – I got this story from a guy in BMS finance. So, it seems like holding on to cash and spending it in stages is not always an option.

        1. Hap says:

          I thought I said that though – I was aware that having free cash might (unfortunately) not be an option for that reason.

          It seems like a problem when having issued stock prevents you from being able to do what the stock paid for you to do. Having any sort of money (or, in another example I’ve heard, property – Bob Evans owned its own stores but sold them and leased to free up the money) is a siren song for someone to take it, but saving money (or owning your own property) is the primary way to avoid your business dying from short-term problems. If taking money by issuing stock means that you will be able to build a house of straw, it seems to present a problematic choice for businesses that actually want to do something (and make money by doing it) rather than by financial engineering. It limits people starting businesses based on function to those wealthy enough and willing enough to fund it themselves, which is pretty limiting. It’s a less extreme version of legalizing insider information – in both cases, if the piranhas own the pool, not many people are going to want to swim there anymore.

  6. 10 Fingers says:

    Thirty years ago, during my first week on the job at a successful big pharma I attended a lunch time seminar where a young finance guy got up and gave a talk that began with the concept that ROE in the pharmaceutical industry had never averaged better than the return on a CD over any long stretch.

    He was kind of being a jerk, in the interests of provocation, but he was making a well-intentioned point: success isn’t just a goal; beating the odds is a matter of survival.

    That company, which was about the size of Lilly at the time, has long since been assimilated and razed.

  7. Peter Kenny says:

    First Lieutenant Minderbinder would have approved of this.

  8. Atticus says:

    I liked when Ian Read sent us an email saying employees weren’t going to see a dime from this giant pile of cash. Of course once a couple hundred got laid off they magically found money for a one time bonus, but that’s probably just a coincidence. Not to say that I fault them for not throwing more money at the seemingly bottomless alzheimers pit, or that I know anything about finance or management, but they can hire a few hundred people and keep expenses about the same, have $10 billion to buy whatever they need to set up a new labs, and they go for… stock buybacks?

  9. Curious says:

    Quick R&D / M&A question / thought experiment: does history repeat or rhyme:
    … in similar low interest rate environment to now (early/mid 1960s) what was the effect on rising Fed Fund rates the next 20 years (lower / mid 1980s)?

    I ask this because no yield on investments or savings seems to be the reason companies across many industries (Apple, Warren Buffett) have said that they are giving for holding cash, where its held, eg. bringing it back on shore, doesn’t seem to matter. As far as R&D start placing bets what ponys will race when the starting gun goes off, whether its digital bandaids or therapy planes full of sick dogs.

  10. Lawyer says:

    The money isnt going to research science thats for damn sure. Its going to some former business or pre-law major frat kid that got drunk every monday – friday and now needs to teach us nerds a thing or two about work ethic and whatnot.

  11. Lawyer says:

    Why is there a single business guy or lawyer working in science, period? We dont need them. There are way way to many PhDs, every single one of them works 10x compared to the lawyers, and yet we tell ourselves dumb crap like ” well, they were trained to organize institutions OK ” as if that were 1 tenth as hard as it is to something as simple as purify a protein, let alone make a drug. And then, for all your understanding, they lay you off and go to Tahiti for the summer.

  12. Lawyer says:

    The dirty little secret is that white collar labor is one big welfare project— lawyers, business, CEOs, grant writting, reviews, educators —- anyone who spends all day writting or in meetings is on welfare because they cant generate real value, so society tricks them into thinking they are doing something “important”. If sitting around talking generated value, my stoner friends from high school would be kings.

  13. Anon says:

    When a country is facing economic ruin the different ethnic factions blame and persecute each other. But as the pharma industry faces ruin, the scientists and business types blame and persecute each other:

    Scientists: “why don’t we get rid of some business types, they’re lazy and don’t produce anything of value”

    Business types: “why don’t we get rid of some scientists, they haven’t delivered enough products to pay their own salary”

    Frankly, both are right, but pointing the finger does not help.

    1. Lawyer says:

      Sorry, this country isnt facing economic ruin, see the quality of life versus 100 y/a, we are waking up to the fact that 99% of that increase in qol was generated by one thing and one thing only: scientific labor– airplanes, cars, antibiotics, medical devices. Wake up.

    2. Hap says:

      If you don’t have anything to sell, how do you make money? The main economic hazards (the 2008 crash and previous ones) depend on pretending that nothing is something and paying lots of people to parrot it for their own benefit). Since an economy is a way to distribute and create goods and services efficiently and fairly, having a dominant economic model that values robbery over production is not going to work for long, and you’ll almost certainly like less what replaces it.

  14. nowwhatdoido? says:

    What R&D??

    The business model has changed forever, now it’s broke health care systems and cheap generics that serve the majority.

  15. A stock buy back does not mean that the access to capital has disappeared. Thee companies can tap into public markets for debt and equity anytime they want. Cashless stock swaps and other techniques are available to any of the companies, if they chose to use them.

    The bigger problem is the lack of capital for smaller, innovative companies, especially between pre-IND and Phase IIa. If these companies are not pursuing research in areas which are of interest to Big Pharma, then it can be exceedingly difficult for them to raise venture capital/venture debt.

    As long as Big Pharma is generating FCF and Dividends, they can be patient and pay BioBucks for the small companies that actually make it. It’s risk-adjusted innovation…but on someone else’s dime.

    1. Hap says:

      Is there any situation when someone else’s dime would go away? No one likes to make money for someone else’s benefit (at their own expense) if they can avoid it.

  16. Hap says:

    Another old comment: If you don’t think you can make money doing research (or can’t make enough for it to make sense), why do you have it? How much do you have to spend in internal research to keep the cost of the companies you want low? Particularly since stock buybacks seem to say ” we either aren’t smart enough to find anything we can work on to make money or we don’t think any such thing exists” (we don’t have any worthwhile internal research), it would seem to take a lot of internal research to convince external companies that you actually have something to generate your own drugs rather than simply M+A camouflage. Stock buybacks seem to be a poor and limited method of giving stockholders back their money if you don’t think the purposes for which they lent it (you can make drugs and money) are any longer useful.

  17. ClinDev ATx says:

    This is actually proving something important.

    That compound isn’t getting cut because we don’t have the money. It is not as though if money appeared we could push that project we think might work into the next phase. That new ADC platform we are cutting is not because we don’t have enough money. This is telling us that our budgets (discovery depts, clinical, advertising, etc) are not actually a percentage of how much money the company has. Even if there is an assymetrical distribution (maybe advertising needs a little extra because we just got an indication expanded) that might make sense. Instead we are seeing the money used entirely differently which means that a given company thinks their pipeline is dry of platforms ANS individual compounds AND targets. I think I am just restating the obvious, but for companies that so this, it shows that last year’s budgets were also decided not on the amount of cash available, but based on mgmt’s confidence [Or more likely, understanding of] the science.
    It means if they were given a trillion dollars tomorrow because they cured Alzheimer’s overnight, then their pipeline would remain untouched

  18. Kaleberg says:

    There’s an old saying: when there’s nothing to invest in, buy stock. It’s been a great strategy at least since the early 1990s.

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