Merck: How to Spend the Money

by: Derek Lowe

So Merck has announced that they're spending another $5 billion to buy back their own stock. How does this square with the CEO's recent refusal to give detailed earnings guidance, on the grounds that R&D spending comes first and is inherently unpredictable?

"Not too well" is my first response. Wall Street liked the news, taking it as a sign that the company has put its J&J problems behind it, and has (let's lapse into Streetspeak) "the visibility to deploy its capital". And stock buybacks help keep up the share price, and help the earnings-per-share, so what's not to like, if you're holding the stock?

Well, what's not to like is that there are other places for the company to deploy all that capital, now that it's so visible and everything. Like, for example, on their business. (Note that I'm not just saying that they should spend it on R&D alone - I've addressed the whole "how come Big Pharma spends so much on marketing" question, and if Merck wants to spend some of this on marketing, that's fine by me. Short explanation: marketing is supposed to bring in even more money; if it doesn't, you're doing it wrong).

I think that if Ken Frazier really wanted to stand out from the crowd, he could say that Merck is not going to spend all this money buying their own stock - that he feels that the best thing that they could do for their shareholders is to redouble their efforts to find, discover, buy, in-license, develop, and sell drugs. That, after all, is what they're on this planet to do, when you get down to it. Isn't it?

Disclosure: None