Pharmas spending too much on buybacks, not enough on big deals: report
- The last few years have seen drugmakers spending more on share buybacks than R&D, a trend that may hamper their longer-term earnings potential, according to a new report from EY.
- Big biotechs used about a fifth of their capital on share buybacks through the third quarter this year, which EY found to be about 6% more than the 10-year average. They've also returned more cash to shareholders than they spent on R&D in every year from 2014 through 2017, with big pharma doing much of the same, albeit to a lesser degree.
- EY analysts noted that while buybacks may bolster short-term earnings, they don't provide the digital capabilities or scale life sciences companies will need as the therapeutic areas they operate in become more competitive. Lately, these companies have been wary to pursue larger M&A that could bring in such assets, and have instead pursued less risky bolt-on deals and collaborations.
Repurchases typically serve to lift drugmakers' stock price in the near-term, but the consultancy suggests the money may be better spent acquiring digitally savvy companies. Having greater access to data analytics or artificial intelligence tools could help mitigate the disruption anticipated as big tech firms like Amazon, Apple and Alphabet speed into healthcare.
"As digital technologies become the status quo, companies that have already made their therapeutic bets will be better positioned to accelerate revenue growth using these new skills," EY wrote in the report, released on the eve of the J.P. Morgan Healthcare conference.
Yet life science companies have veered away from big-ticket deals despite these needs and more than $1.2 trillion in firepower (defined by EY as the capacity for companies to pursue M&A).
The consultancy surveyed executives from 22 such companies during the third quarter, and only 3% said megamergers or digital acquisitions were a high priority. In fact, Peter Behner, EY's global life sciences transactions leader, told BioPharma Dive his team foresees at most two biopharma deals worth $40 billion or more this year, and that includes the recent link-up between Bristol-Myers Squibb and Celgene.
As for why that may be, EY said that the costs of acquiring new assets and the logistics of integrating them may be barriers. And in data-centric areas like real-world evidence, it may be hard for buyers to define what a successful return on investment is. (There are exceptions, however, such as Roche's move last February to acquire cancer data specialist Flatiron Health or GlaxoSmithKline's recent collaboration with 23andMe.)
With those barriers still in place, EY's expectation is that life sciences companies will continue to prefer smaller transactions under $10 billion in 2019. Bolt-on deals, valued at 25% or less of the buyer's market cap by EY's definition, accounted for 81% of the deal volume and 43% of the deal value seen across the life sciences industry in 2018.
Aversion to risk, coupled with greater buybacks, could very well dim the prospects for larger deals.
"As life sciences incumbents struggle to satisfy investors' near-term expectations, they may redeploy even more of their available cash from future growth to share repurchases," authors of the EY report wrote.
"If that behavior persists, it could further limit M&A totals, making the M&A totals of more than U.S. $200 billion achieved in recent years the exception rather than the rule."
A chief concern among critics of the big tax corporate tax codes passed at the end of 2017 was that companies both in and outside of pharma would use the lower corporate tax rates to buy back shares rather than create jobs or lower product costs.
In the second quarter alone, corporate America announced a record $437 billion worth of share repurchases — almost double the previous record, which was set in the first quarter of 2017. A recent Wall Street Journal report found AbbVie, Amgen, Celgene and Pfizer to have enacted some of the more aggressive buyback programs across pharma this year.
The buybacks, however, may not be all that worthwhile. A Leerink analysis released in October found large biotechs invested $100 billion in share repurchases since 2014, yet those initiatives destroyed more than $12 billion in value and overall created little positive return.
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