Pharma profits are not going to R&D

Sepatuads.com   Juli 18, 2017   CEO compensation, dividends, Gretchen Morgenson, Institute for New Economic Thinking, New York Times, pharmaceutical industry, profits, stock buybacks   Comment  

Today's Managing Health Care Cost Number is $516 billion

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(Note that I have displayed only those pharmas with over $30b in net income during the study period)

Companies repurchase their own shares when they have no better place to invest their capital, and when their shares are undervalued.  Shareholders like share buybacks because they increase income per share and should increase share price, although companies that are involved in large-scale share buybacks should generally be those with few research and development opportunities.  Companies with large scale stock buybacks also tend to lag the rest of the market going forward.

Gretchen Morgenson of NYTimes reviewed an academic study this weekend which showed that most of the large pharmaceutical companies spent more on share buybacks than research and development over the last decade. There are some exceptions (Lilly and Bristol Myers Squibb spent more on R&D than dollars returned to shareholders).  Overall, Morgenson reports that the 18 pharmaceutical companies in the S&P 500 "spent a combined $516 billion on buybacks and dividends. This exceeded by 11 percent the companies’ research and development spending of $465 billion during these years."

The researchers are opponents of the corporate governance mantra of "maximizing shareholder value."   They point to CEO compensation - which is pushed dramatically higher by this "financialization" of the pharmaceutical industry (see graphic below).  Their conclusion:

In the name of “maximizing shareholder value” (MSV), pharmaceutical companies allocate the profits generated from high drug prices to massive repurchases, or buybacks, of their own corporate stock for the sole purpose of giving manipulative boosts to their stock prices. Incentivizing these buybacks is stock-based compensation that rewards senior executives for stock-price “performance.”

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Note: Estimated fair value is reported to the SEC and the public, and it substantially understates the total value of CEO compensation.