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Pharma Company Buybacks: Do They Really Benefit Shareholders?

Ovid Therapeutics (NASDAQ:OVID) CEO Jeremy Levin thinks pharmaceutical companies should funnel more cash into their pipelines and less into stock buybacks.

"A premium must be placed on new products and novel launches because if you don't do that and you invest in buying back your stock instead of buying for your future, then you have satisfied the short-term need for some shareholders but you have, in the long term, lost value," Levin said in a FierceBiotech article.


Levin would argue that for many corporations, not just those in the pharma industry, enriching shareholders through stock buybacks and dividends is based on short-term thinking that doesn't best serve investors.

Levin doesn't think drug companies should buy back even a single share of stock if the money is diverted from research and development. Unfortunately, his exhortations have fallen on deaf ears, for the most part. Drugmakers continue to make substantial buybacks and pay hefty dividends.

Now even biotechs have caught the buyback fever. The six biggest members of this group spent about $100 billion on buybacks between 2014 and late 2018, according to a November 2018 report by Evaluate Pharma. Of course, that figure is in tiny compared to what Big Pharma and Big Biotech spent on mergers and acquisitions and research and development during the same period. Yet, many patient groups and legislators think the money spent on buybacks could be better applied to developing novel treatments and in bringing down drug prices.

One of the most high-profile critics of buybacks is U.S. Representative Alexandria Ocasio-Cortez. At a House Oversight Committee meeting in July, she said that from 2006 to 2015, "$465 billion was spent on research and development. The amount that pharmaceuticals spent in that same time to buy their own stock for the sole purpose of driving up the price was $516 billion."

She pointed out that CEOs often have a selfish motive for supporting buybacks, noting that executive pay is often linked to the company's stock price, so when buybacks push up the share price, the people at the top of the companies "enrich themselves at the expense of the long-term health of their companies. When the company in question is responsible for medicine like insulin, then, these decisions could be matters of life and death."

Legislators have been making noise about addressing the issue--by denying insiders the ability to sell shares after a buyback announcement, or stopping buybacks altogether or putting a ceiling on the amount that could be repurchased.

Ocasio-Cortez homed in on Eli Lilly and Co. (NYSE:LLY) to illustrate the evils of stock buybacks. The Indianapolis-based company is one of the major drug companies that sells insulin in the U.S. In the middle of last year, the company announced it would buy back $8 billion worth of its stock. Ocasio-Cortez said the company could have used the money to lower insulin costs.

Disclosure: The author has a position in Eli Lilly.

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This article first appeared on GuruFocus.