Can European pharma's cash flow cover buyback plans?

It's no secret Big Pharma is all about dividends and stock buybacks right now. With short-term earnings under pressure from patent expirations, drugmakers have been using these promises to keep investors happy--or at least patient enough to stick around in the meantime.

But these sops aren't without their risks. Earlier this week, Moody's Investors Service said European drugmakers may find their credit ratings pressured by their buyback plans. "If companies make share buybacks in excess of their free cash flow generation, and their cash flows are not growing, their credit metrics will weaken as a result, since they will either need to raise debt or use cash on their balance sheets to fund these transactions," the ratings agency noted.

Case in point: AstraZeneca ($AZN), which says it plans to buy back $4.5 billion in stock this year. That's more than the $2.5 billion Moody's expects in post-dividend free cash flow, Bloomberg reports. GlaxoSmithKline ($GSK), on the other hand, probably has enough free cash flow to cover its planned £1 billion to £2 billion (roughly $1.6 billion to $3.2 billion) in buybacks this year.

Sanofi ($SNY) is taking a different, more flexible approach: Rather than setting out a target for repurchases, CEO Chris Viehbacher is focusing on "opportunistic" buybacks, Bloomberg notes. Same with Novartis ($NVS): Although the Swiss drugmaker has $7 billion remaining in a previously authorized buyback program, the company isn't setting particular goals. "We are definitely not saying there are no buybacks; we're just not announcing a structured program that has a defined limit to it," CFO Jon Symonds recently said (as quoted by Bloomberg).

- read the Bloomberg story