What does Merck's $10B buyback plan say about pharma M&A?

Adding $10 billion to its stock buyback program might mean Merck & Co. ($MRK) wants to keep investors happy as its sales continue to shrink. That would be the typical explanation. But The Wall Street Journal sees a different possibility--one the rest of the industry might want to pay attention to.

Merck spent $6.5 billion on buybacks last year--almost as much, the WSJ notes, as it laid out on R&D. From 2012 to 2014, in fact, Merck laid out $17 billion on its own shares, according to a company presentation.

So far this year, the company has added $1 billion to that repurchase total. Now, with the board's go-ahead for a $10 billion addition to its buyback budget, Merck is authorized to shell out $11.7 billion more.

Merck CFO Rob Davis

The board's green light doesn't expire, which means Merck could take years to spend those billions, counting on the promise of buybacks to help please investors. But zeroing in on a recent comment from Merck CFO Rob Davis, the Journal posits that Merck's major outlay on its own stock means that it's not impressed with its M&A opportunities these days.

Merck is weighing potential buyout targets against the returns from buying back stock, Davis said earlier this month. Disappointing acquisition prospects, whopping $10 billion expansion of its share repurchasing plan. Or so the idea goes.

The WSJ points out that M&A is getting increasingly expensive in pharma these days. AbbVie's ($ABBV) $21 billion deal for Pharmacyclics ($PCYC) is but one obvious example. Other industry executives have lamented the het-up M&A climate, and some say they're too disciplined to engage unless an unexpected bargain comes along.

But then again, Merck can afford to wheel and deal even as it lays out the big bucks on its own shares. It's not overloaded with debt, so borrowing is certainly an option--did we mention that the $10 billion approval is open-ended? Perhaps its buyback plan is a stalling tactic to pacify investors who might otherwise demand big dealmaking--just long enough to give Merck a chance to find solid buyout prospects at decent prices. It could save the rest of that buyback authorization for a rainy day.

Merck hasn't sat on the sidelines completely as its Big Pharma peers made deals. At the end of last year, it agreed to pay $9.5 billion for Cubist Pharmaceuticals, the antibiotics specialist, and though Cubist met with a costly patent loss soon after, the deal has since closed--and the company won FDA approval for a key new product, Zerbaxa.

- see the Merck presentation (PDF)
- check out the WSJ piece (sub. req.)

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