It's a rare event in the specialty pharmaceutical space, but yesterday, cardiovascular-treatment-focused Sciele Pharma (Nasdaq: SCRX) announced that it would follow last year's share buyback with an even larger one this year.
Very few drugmakers ever become cash flow-positive, and even fewer use that cash to buy back shares. Usually, their shares head in the opposite direction. That's why yesterday's news that Sciele will buy back as much as $100 million worth of shares over the next 12 months is relatively unorthodox. The new program supersedes a previous $40 million buyback set to expire this coming August; Sciele only purchased $30 million of that total.
There are three ways that any corporation can use its cash to improve shareholder value:
- Pay dividends to shareholders.
- Reinvest in its business.
- Buy back shares, giving remaining shareholders a bigger stake in the company.
Each has its drawbacks and benefits, and all can be appropriate at times, depending on the situation. It's too early to say whether share buybacks will be a smart use of Sciele's cash. There's certainly no harm in authorizing such a program, but whether the company should actually buy back shares is another question.
For instance, in last year's third and fourth quarters, Sciele repurchased approximately 925,000 shares ($20 million worth), at an average price of about $21.60 a share. True, a few quarters rarely represent a long enough period of time to make any judgments about a buyback, but the company's shares currently trade almost 10% lower than the average price it paid for those repurchases.
Pfizer (NYSE: PFE) and Amgen (Nasdaq: AMGN) are two examples of large drugmakers that have made badly timed decisions to buy back billions of dollars in shares in recent years. Others have bought back shares for the wrong reasons -- attempting to expunge the effects of excessive options grants, for example, or to artificially sweeten per-share earnings numbers to conceal stagnant net income.
A company's management truly earns its paychecks by deciding how to spend shareholders' cash. If Sciele pays too much for its own shares, or if this otherwise proves to be a raw deal, shareholders should hold the company's managers accountable.
