Large pharmaceutical companies sharing their cash flow with investors through dividends makes a lot of sense. Honestly, there isn't much reason to own Eli Lilly (NYSE:LLY), GlaxoSmithKline (NYSE:GSK), and AstraZeneca (NYSE:AZN) except for their oversized dividends.
But smaller specialty pharma issuing dividends? I really don't get it.
Earlier this year Questcor Pharmaceuticals (UNKNOWN:QCOR.DL) initiated a quarterly dividend that it's handing out a little early. And this week Spectrum Pharmaceuticals (NASDAQ:SPPI) said it's issuing a $0.15-per-share special dividend.
Really, guys? You can't find any better use for the cash?
Granted, Spectrum's dividend is only a one-time cost of $8.9 million and the board gave management an open invitation to repurchase $100 million worth of its stock. But Spectrum has only used $12 million of it, so it's not as if management has been super stoked to return cash to shareholders.
And for good reason.
Much like the generic drug business, the specialty pharma business has the opportunity to improve profits by increasing margins. Buying more drugs produces economies of scale and reduces risk because the specialty pharma is less reliant on a single drug.
I liked Spectrum's recent acquisition of Allos Therapeutics for those exact reasons. The purchase added Folotyn, which will be prescribed by hematologist-oncologists, the same doctors who prescribe Spectrum's Zevalin. Spectrum has been dependent on Fusilev sales, which have skyrocketed over the last year or so but have the potential to come crashing down if generic-drug makers get their act together and fix manufacturing issues of a related generic.
A token gift of 1.3% of the share price doesn't seem all that useful to investors. They'd be much better off if Spectrum kept the money and used it to buy additional drugs, increasing its operating margins in the process.
Fool contributor Brian Orelli has no positions in the stocks mentioned above, and neither does The Motley Fool. Motley Fool newsletter services recommend GlaxoSmithKline. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.