Bruce Booth has an excellent look at a topic we were discussing around here earlier this year: stock buybacks in biopharma. I didn’t have a lot of good things to say about the concept. I understand that corporations have obligations to their shareholders, and I certainly understand that a stock buyback is about the least controversial thing a big company can do with its money. Paying shareholders through dividends has tax consequences. But you can’t sit on a big pile of cash forever, and what are you supposed to do if you think that market returns will beat the return on investment in your own business?
That brings up another, larger question: if you truly believe that last part, how long do you think that situation will obtain? And how long are you willing to put up with it? If a business really, truly, can’t deliver returns that could be realized through a reasonable investment strategy, then why is it in business to start with? (I’ve seen discussions among economists about this very point when applied to many small businesses).
Booth wonders about the use of capital, too:
In recent years, plowing it back into internal R&D hasn’t been the preferred option given pipeline productivity questions. Returning capital to shareholders via dividends has certainly been high on the list. Another, albeit indirect, way of paying shareholders is through share repurchases (stock buybacks), and it has also been quite popular. The expectation (or hope) with these indirect stock buybacks is that the stock will move upwards because the shares oustanding goes down (or at least the buybacks offset the dilution from the exercise of options).
But buybacks have a more mixed assessment in practice (links at his site – DBL) and are typically only a smart if a company is (a) under-valued and (b) has no better uses of capital. This latter point is where they draw my ire, especially given their scale in our industry and the many strategic alternatives.
Totaling up the buybacks gives you some humongous figures. One thing that I’m not quite sure about with these numbers is whether all these buybacks are actually followed through. You’d think there would be legal consequences if the discrepancy grosw too large, but I don’t know the law on this topic. But taking the figures as we have them, you get this:
To appreciate the magnitude of these buybacks, it’s worth comparing them to other important financial values in the biopharma ecosystem. 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. And it’s nearly 80x bigger than all the capital raised by fifteen biotech IPOs during that period. This is a huge amount of capital washing into stock repurchases.
The problem is, as Booth goes on to show, is that there’s no particular correlation (that anyone can see) between these buybacks and the performance of the stocks themselves. (You could always say that they’d have performed even worse without the buybacks, an unanswerable and untestable point). He’s got some other suggestions for the money, and he’s not even asking for all of it. Or half of it. Or a tenth. Five per cent of the buyback pool would totally alter the funding universe for early-stage companies and precompetitive consortia. In other words, potentially alter the future of the whole industry. But we’re not doing that. We’re buying our own shares. Tens of billions of dollars of our own shares, because we can’t seem to think of anything better to do.