Biogen announced its quarterly earnings on April 22 and revealed it had repurchased $600 million of its shares in the first quarter — a majority (78%) of its operating cash flow for the quarter. In contrast, Biogen invested a fraction (12%) of its operating cash flow on capital expenditures.
And this was actually a light quarter of share repurchases for Biogen. In 2020, the company repurchased a whopping $6.7 billion of its shares, or 1.67 times its net income of $4 billion for 2020.
One the most critical events in Biogen’s history is looming: the Prescription Drug User Fee Act action date of June 7 the FDA set for aducanumab, its drug for treating Alzheimer’s disease. Despite aducanumab’s somewhat controversial history, Alzheimer’s disease imposes a huge disease burden on society, affecting millions of Americans and their caregivers. It is also among the top 10 causes of death around the world.
Aducanumab may be on the cusp of approval for Alzheimer’s — the closest drug to do so in many years. Yet in the last five quarters alone, Biogen has spent $7.3 billion on repurchasing its own shares.
That seems like a profound mismatch of priorities. If the company believes in aducanumab and its other programs, it shouldn’t be buying back its shares at such an aggressive pace. It would make far more sense to poise the company for longer-term success by investing in its sales force, capital expenditures, research and development, and new programs. Instead, it has focused on repurchasing shares to increase its price per share.
It’s not uncommon for pharma companies to buy back their shares. This serves to increase earnings per share by decreasing the number of outstanding shares. Gilead’s massive hepatitis C franchise, for example, generated significant cash flow. In 2016, Gilead authorized a $12 billion share repurchase program to increase its share value.
The practice of shareholder value originated in the 1980s. It refers to the concept that the primary purpose of corporations is to make profit for their shareholders. In the pharmaceutical and biotech sphere, however, prioritizing shareholders — or maximizing shareholder value — may hinder the innovation process for delivering medicines to patients.
Instead of reinvesting income into research and development, many larger biopharma companies instead invest accumulated capital into buying back their own shares or distributing dividends to shareholders. From 2009 to 2018, the top 18 pharmaceutical companies in the S&P 500 Index spent $335 billion repurchasing their own shares, which is 1.14 times their R&D expenditures during that period.
At the same time, there’s been a steady decline in productivity measured by the number of new FDA-approved new molecular entities as a function of spend on R&D. To be sure, this is partly due to reorienting investments toward high-risk/high-premium targets, but it could also indicate companies prioritizing earnings instead of investing in R&D.
Although such strategies benefit shareholders, they often extract value out of the biopharma innovation process and neglect the intended beneficiary of value: patients. Biogen, for instance, could do a lot more with the $6 billion it spent on buying back shares in 2020 to create enormous value for shareholders. It could acquire a number of assets or companies, build infrastructure for marketing aducanumab, or invest in internal R&D, among many other endeavors. In the long run, these activities could return substantial more value down the road than the current incremental increase in value due to its share repurchases.
Covid-19 has demonstrated the importance of tackling diseases to ensure the continuity of the economy and normal human life. Biopharma companies have been able to both invest in innovation and create tremendous shareholder value in the process: Moderna and BioNTech are great examples that have created billions of dollars in value while having nearly immeasurably positive impacts on society.
Biopharma companies should reassess the strategy of share buybacks that often come at the expense of true innovation to create value — especially at the scale of Biogen, which used 1.7 times its net income in 2020 to buy back shares.
To tackle some of the massive health problems affecting society, such as Covid-19 and Alzheimer’s disease, biopharma companies should invest income into R&D and innovation — not shareholders who, in the long run, are likely to benefit even more from prioritizing innovation.
Travis Whitfill is a health policy researcher at Yale University; a partner in Bios Partners, a venture capital firm; and a graduate researcher at the University College London Institute for Innovation and Public Purpose. He reports serving on the boards of, or consulting for, several biopharma companies.