Biotech VC: Big Pharma misspends fortune with major share buybacks

Cash-rich pharma giants have been plowing billions of dollars into buying back the drugmakers' own shares from investors, making investors and Wall Street happy. Yet are the colossal sums spent on share buybacks the best use of Big Pharma outfits' funds? Atlas Venture Partner Bruce Booth argues in favor of alternative ways to put those billions to work that could deliver bigger returns than buybacks in the long-term.

In Booth's estimation, three quarters of the 20 largest drugmakers plan to or have invested $75 billion into share buyback plans in 2011 and this year, a whopping sum that trumps the National Institutes of Health's budget for those two years and dwarfs spending on acquisitions of VC-backed biotechs (presumably one of Booth's favorite uses of pharma dollars), venture funding for drug developers and the amount raised in biotechs' initial public offerings. (However, pharma giants are likely to spend way more on R&D than share buybacks during the two-year period.)

Across the biopharma landscape, CEOs from companies big and small have raised concerns about funding for potentially groundbreaking drug research. With heavy capital demands in biotech, wary VC outfits have treaded carefully in the therapeutics arena and some have bailed on the biotech sector altogether. Booth's Cambridge, MA-based firm has been one of a dying breed of VC outfits to continue funding newly hatched biotechs, and he has several ideas about how Big Pharma could reallocate some of those buyback dollars to bring new life to the industry's innovation ecosystem.

Among those alternatives, Booth prescribes: More early-stage tie-ups between pharma and biotech startups such as Sanofi's ($SNY) partnership with Warp Drive Bio and Celgene's ($CELG) deal with Agios Pharamceuticals; backing biotech's new public offers that have seen mixed interest investors in recent years; fueling pre-competitive efforts in biotech such as Sage Bionetworks, which has pushed for greater sharing of scientific data and models to speed up the pace of discoveries; and, unsurprisingly, investing as limited partners in venture funds that back life sciences startups.

Booth isn't even saying he wants all or even most of the $75 billion earmarked for buybacks. "These four ideas could be very well funded with 5% or less of the aggregate share buybacks being done today," he wrote in his blog. "And I'm sure others have lots of better ideas."

- get more from Booth's blog

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