AbbVie shows allure of pharma stock buybacks
- AbbVie's board of directors has authorized the pharma to spend an additional $5 billion on stock buybacks, the company said Thursday, bringing the total amount newly allocated to repurchasing shares to $15 billion.
- Through a $10 billion buyback program authorized in February, AbbVie has bought back 83.2 million shares for $8.5 billion over the first nine months of 2018. Adding in the value of shares repurchased under an earlier program, and the sum AbbVie's spent this year on buybacks climbs to nearly $10 billion.
- AbbVie's not alone among pharma in its attraction to buybacks. Following the recent overhaul of the U.S. tax code, many large drugmakers newly flush with repatriated earnings have turned to the strategy to return cash to shareholders and prop up stock prices.
Stock buybacks have a number of different uses for large companies seeking ways to deploy cash. Reducing the number of outstanding shares, in theory, can increase the value of the fewer remaining shares publicly traded. That can have knock-on effects for key metrics that companies and investors play close attention to, like earnings per share.
But buybacks are also a lightning rod for criticism in biotech and pharma, as the industry is finding to be the case this year.
Money spent on buybacks can't be used to other ends, like capital investment or R&D. Lawmakers critical of the industry, meanwhile, have raised questions about why pharma companies have used savings from the recent tax cuts for buybacks rather than lowering drug prices.
A recent article from The Wall Street Journal, for example, reported that 16 Democratic representatives have sent letters to drugmakers seeking answers and may request additional information or hold Congressional hearings next year.
That same report found eight of 10 pharma companies it analyzed increased stock buybacks in 2018 over their 2017 amounts. AbbVie has been one of the most aggressive in doing so, along with Amgen, Pfizer and Celgene.
Companies have increased capital investment following the tax overhaul, too, but many plan to spread out spending over multiple years and details remain vague on what such plans will actually entail.
It's also not clear if buybacks accomplish what the companies intend.
In a recent analysis, Leerink analyst Geoffrey Porges concluded that stock buybacks conducted by six major drugmakers, including AbbVie, actually destroyed value and generated no positive return over a five-year period.
"In an industry characterized by large dominant products of finite duration and with very few sustainable sources of competitive advantage, we believe investors should view buybacks with caution, and possibly regard them as value destroying," Porges wrote.
"Buybacks make sense in the context of long duration predictable cash flows that are unreasonably discounted at the prevailing stock price; they don’t make sense in the context of a wasting asset of fixed duration and finite potential, which increasingly characterizes biotech companies," he continued.
AbbVie, for example, spent a total of $15.3 billion on stock buybacks between 2014 and 2018 that generated a negative 1% return as measured by the company's share price at the end of October.
So far this year, shares in AbbVie are down about 10%.
Still, share buybacks could remain an attractive and predictable choice, particularly if a company finds M&A too pricey or too risky.
- The Wall Street Journal Congress to Drug Makers: Why Stock Buybacks Over Lowered Drug Prices?
- BioPharma Dive Senator questions big pharma buyback strategy
- BioPharma Dive Pharma tees up US capital spending, yet details remain vague
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