In The USA: the Next Revolution

[Dayuhan]

Can you give a solid explanation of why a firm would invest in share buybacks rather than long term research, especially given the short-term incentives for CEOs to indulge in the former rather than the latter?

Here's what the company says:

http://www.stltoday.com/business/nat...7a4a78c22.html

“We have to fix our innovative core, and that’s what this R&D change is about,” Read told reporters at Pfizer headquarters in New York Tuesday. The reductions are part of a plan to overhaul the company’s research operation to focus on the most-profitable programs, Read said.

Research and development spending will be $6.5 billion to $7 billion in 2012, the CEO said. That compares with $9.4 billion in 2010 and is $1.5 billion lower than previous Pfizer forecasts. Pfizer plans to buy back $5 billion in shares next year as part of a $9 billion repurchase program, he said.

Tuesday was the first earnings report under Read, who succeeded Jeffrey Kindler in December. Pfizer is counting on products from the $68 billion Wyeth acquisition in 2009 to replace sales lost to generic copies of the cholesterol pill Lipitor, the world’s best-selling drug. Read said Wyeth drugs won’t be enough to make up for that shortfall, and the company must rein in its unproductive spending.

“It’s like being the New York Yankees and having a huge bankroll and never being able to win the pennant,” said Tony Butler, an analyst at Barclays Capital in New York. “This is saying: ‘I’ll take the Cleveland Indians budget and see what we can do with that.’ Spending more doesn’t mean getting anything out.”

“This is all good,” Butler said.

The company plans to halt funding research in the areas of allergy, urology, respiratory, internal medicine and tissue repair, Read said. Pfizer will focus on the more-profitable areas of cancer, neuroscience, inflammation, vaccines and immunology, he said.

“At some point your shareholders and stakeholders demand you have a return on investment in research,” Read said. “We’re looking at areas where we think it’s not a competitive advantage.”

In other words, the strategy is to cut spending on areas they see as having low potential for results and focus on areas perceived as having high potential for results. That's obviously a gamble, just as it would be to pour money into everything regardless of perceived potential, but it's not overtly irrational, and anyone who's going to criticize it would need to look into the actual state of the programs being cut and have an informed opinion on the potential of those programs to generate profitable products. Of course many people will comment without that knowledge, but what does that mean?

The shares being bought back can also be sold back onto the market at a later date if market conditions call for a more expansionary policy and financing is needed. The Company apparently believes that it will be able to sell at a higher price if recovery in the broader economy progresses... again a gamble, but all decisions are a gamble. If it pays off they'll do well. If not they won't. That's business.

As for why people besides shareholders should care - if you haven't noticed, this thread is about wealth inequality and responses to such in the U.S. A very large part of this in the U.S. is driven by CEO pay, which has become incredibly skewed in the past 25 years despite no corresponding growth in performance?

CEO pay has little to no impact on the broader economy, and is primarily an emotional issue. What response would you suggest, really... having the government tell private companies what salaries they can and cannot pay? If the company doesn't generate results the market will have the final say. What more do you want?