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Are Share Buybacks a Wise Investment for Biopharma

Biogen Idec, Genzyme and Amgen have eached announced large share buybacks recently. Wall street smiles on these buybacks and the conventional wisdom suggests they are a tax-efficient way of returning cash to shareholders. But in biopharmaceuticals, there is a downside to these shareholder sweeteners.

Biotech companies often argue that the market undervalues them. And sometimes they have a point—particularly if you pay attention to the robust acquisition scene, where it isn’t unusual to expect 50-70% premiums tacked on to market value. (See "Reviewing Five Years of Big Pharma’s Biotech Acquisitions," IN VIVO, May 2007 Also see "Reviewing Five Years of Big Pharma's Biotech Acquisitions" - In Vivo, 1 May, 2007..) Even big biotechs and pharmaceutical companies are increasingly valued based solely on their marketed products, with a smidgen thrown in to account for late-stage pipeline products (but only a smidgen).

One basic theory put forth to explain the biotech valuation gap suggests that Big Pharma, flush with cash but relatively...

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