EU Pharma Ups Share Buybacks In 2012
This article was originally published in The Pink Sheet Daily
Executive Summary
Share buybacks are controversial in the biopharma industry, but European pharma companies, facing tough operating environments and pressures on near-term financials, are planning to invest in them in 2012 more than in recent years.
In efforts to woo shareholders as their businesses come under intense pressure, European pharmaceutical companies are reinstituting share-buyback programs that they dropped in 2009 and 2010.
But such buybacks are not likely to dominate capital-allocation strategies because companies want to maintain certain levels of liquidity to pay for unexpected events and protect optimal credit ratings that will help them obtain cheap debt if needed, according to a report by Moody’s Investor Services on European pharma’s share buyback plans for 2012, released March 14.
Share buybacks are more tax efficient than large dividend payouts, but too much reliance on them has been controversial in the industry because they consume money that otherwise could go to drug development (Also see "Are Share Buybacks a Wise Investment for Biopharma" - In Vivo, 1 Jun, 2007.). Nevertheless, they help prop up vulnerable stocks, particularly when competition for investors from other sectors is fierce .
Among European pharma, AstraZeneca PLC and GlaxoSmithKline PLC have announced the year’s most ambitious buyback plans, but others, namely Sanofi and Novartis AG, are likely to conduct buybacks as well, albeit on a more opportunistic basis, Moody’s says.
In general, the credit agency believes that in 2012, large-scale buybacks are unlikely. Of the five top EU pharma companies, AstraZeneca’s goal is potentially the most ambitious, which is hardly surprising given the company’s poor mid-term financial outlook. Facing one of the industry’s biggest patent cliffs, with few viable new drugs to offset the losses, analysts expect earnings and revenues to decline between 2011 and 2015.
The company’s board has authorized a target of $4.5 billion in net share repurchases in 2012, subject to market conditions and business needs, CFO Simon Lowth said in a year-end earnings call on Feb. 2. That amount, if fully realized, would exceed the $2.5 billion in post-dividend free-cash flow, which Moody’s expects the company to generate for the year. This situation happened in 2011, when AZ implemented a $5.6 billion buyback program, which exceeded its annual free cash flow by $1.6 billion. But last year, it filled in the gap with proceeds from the $1.8 billion sale of its Astra Tech AB business unit to Sirona Dentsply, an event not likely to be replicated [See Deal].
Still, AZ’s mixed R&D track record means it is unlikely to introduce new products in enough of a timely manner to offset its losses, so its ability to whet investors’ appetite through share buybacks and dividends is one of the stock’s current main attractions for investors. Wall Street has stepped up pressure on AZ management to look to M&A to shore up its business, but so far the company’s management says it is interested only in smaller deals (Also see "AstraZeneca Hit By U.S. Generic Competition In 2010; Extends Share Buyback Program" - Pink Sheet, 31 Jan, 2011.).
That said, because AZ’s stock offers investors a low valuation and a high dividend yield (current yield ~6%), with a fair number of sell (or commensurate) ratings,” it is worth periodically evaluating whether a bull case can be made with the name,” wrote Sanford Bernstein analyst Timothy Anderson in a March 20 note. He characterizes AZ’s current operating performance as “unsustainable” but notes that the company is doing “a comparatively good job” in terms of “shareholder friendliness" on measures like capital allocation decisions.
Opportunistic Buybacks Likely At Sanofi And Novartis
GSK has also authorized a comparatively large-share buyback program for 2012, of between £1 billion and £2 billion this year ($1.6 billion to $3 billion). It has enough free cash flow to cover the amount, but will also need cash to pay for large litigation settlements with the U.S. government on various investigations; Moody’s estimates those may total up to $3 billion (Also see "GSK's Lost Quarter: $3 Billion DoJ Settlement Far Outstrips Net Profit" - Pink Sheet, 3 Nov, 2011.). By putting a range to its buyback program, however, GSK is giving itself flexibility, the report pointed out.
GSK has said that it plans to buy back shares unless the acquisition of bolt-on businesses beats the rate of return of the share buyback – a situation it faced in 2011. Overall the company is remaining “balanced around the different interests of our shareholders,” said CEO Andrew Witty to investors on Feb. 7. To that end, it also announced a special dividend of 5 pence, paid for from the sale of its non-core U.S. over-the-counter business in late 2011 for £.426 million [See Deal]. In 2011, the company paid out £3.4 billion in dividends and £2.4 billion in share buybacks.
Novartis and Sanofi have less formal buyback plans. Although neither has announced specific targets for 2012, both said they intend to pursue buybacks on an opportunistic basis. Those amounts are likely to be well below the free cash flow they generate, Moody’s said, giving the companies a cushion if they need cash to respond to unexpected events and offset the patent expirations of some of their best-selling drugs, such as Diovan (valsartan)and Plavix (clopidogrel). In 2011, Sanofi purchased €1 billion ($1.3 billion) of its own shares, largely, as CEO Chris Viehbacher told investors on Feb. 8, “to start to mop up the dilution that was created when we issued a stock dividend.”
Only Roche has not disclosed any plans to buy back stock. It did propose a 3% dividend increase, however, representing a payout ratio of 55%. Roche has stated as a capital-allocation priority the paying off of $47 billion in debt it incurred to buy the 44% of Genentech it did not already own in 2009.
Overall, Moody’s predicted that 2012 will see the same or greater amount of share repurchases in 2012 as it did in 2011, when the figure totaled about $13 billion – the second-highest level of activity since 2005 (Also see "Pharma, Uncertain Of What To Do With Its Cash, Turns To Share Buybacks" - Pink Sheet, 7 Feb, 2011.).