F O O L’ S C O R N E R

The US financial news of the year is the Senate’s narrow vote in Mayto cut the tax on dividends. With dividends now taxable to individ-uals at a lower 15% rate, corporations that already pay taxes on theirprofits have a much weaker case for withholding cash. Investors inJapan, the United Kingdom and Sweden, for example, with higherdividend taxation, can only dream. And the same goes for biotechinvestors; of 366 companies that touch on the biotech and drugsuniverse and trade on US exchanges, only 23 pay a dividend. Wewonder, where’s our piece of the dividend pie?

Dividends 101A dividend is essentially a cash return on your investment, com-monly expressed in terms of yield or a percentage of the stock price.A company distributing $2 annually per share and trading at $50 hasa 4% dividend yield. To pay the dividend, management gives upsome percentage of the money generated by product sales, but leftover after selling costs; operating expenses, like salaries and adver-tising; taxes; spending for property, plant and equipment; and anyother extraordinary bills are paid.

The more a company pays out, the less it has to invest in its busi-ness. Thus, to offer a dividend, management must believe that themoney cannot be more profitably invested in a company’s own orother research and development—into chimeric monoclonal anti-bodies, for example—or in buying back shares (see Nat. Biotechnol.21, 746, 2003).

Dividends: good or bad?You might fault managers for their inability to find better invest-ments for corporate profits, but academic research shows dividendsaccount for half of the annual long-term gains for the S&P 500(Standard & Poor’s Index that includes ∼ 70% of all publicly tradedUS companies)—8% to 11% depending on the source. And after astock market boom and bust, some investors prefer the dependabledividends of stodgy businesses to the potential growth of specula-tive businesses, thank you very much.

They invest in the likes of tobacco and food giant Altria Group(New York, NY, USA; NYSE:MO; 6.2% dividend) or automakerGeneral Motors (Detroit, MI, USA; NYSE:GM; 4.9% dividend) thatgenerate a lot of cash but don’t have great growth opportunities. Orin real estate investment trusts like Annaly Mortgage (New York, NY,USA; NYSE:NLY; 6.9% dividend) or business development compa-

nies like Allied Capital (Washington, DC, USA; NYSE:ALD; 9.3%dividend) that receive tax exempt status on the condition they payout a high percentage of profits as dividends. Many giddily receive asteady 9.3%, rather than suffer the gyrations of the market.

But nothing is sacred about a dividend. The more financiallysavvy pigs of George Orwell’s Animal Farm might observe that somedividends are ‘more equal than others.’ Not every dividend-payingcompany can always produce enough cash to meet its basicexpenses, fund research and development for growth and save for a rainy day. Business conditions fluctuate, so a dividend may notonly grow over time, but may be ruthlessly cut, harming the stockprice.

Take ailing big pharma Schering-Plough (Madison, NJ, USA;NYSE:SGP). In August, the company slashed its dividend 68% toconserve cash. This, and the concomitant earnings warning, loppedanother 9% off the stock price. Most other big pharmas aren’t hurt-ing and take the middle road. They return some profits to sharehold-ers in small dividends and still invest for future growth (Table 1).

Why no dividend?The obvious reason that few biotechs pay dividends is simple: fewprofits. But even where there are profits, younger growing compa-nies must plow it all back into research and development. Older bigpharmas have cash-eating research and development too, but theyalso sport stodgier consumer products that generate steady cash, butoffer fewer opportunities to invest for growth. While cash machinesAmgen and Genentech may today redeploy every penny into prof-itable recombinant DNA and monoclonal antibody research, wouldyou bet against either offering over-the-counter products in 20years—and then choosing to return some profits to shareholders asdividends?

Biotechs want to grow up to be big pharmas, but as parents nevertire of telling teenagers, “The privileges of adulthood bring respon-sibilities and burdens.” Some day, Amgen and Genentech will pay adividend, however small, and others will follow suit when moreprofitable and mature. It’s not why we may choose to invest in themtoday, but investors won’t refuse a nice bonus when it comes.

Tom Jacobs, of the Internet site Motley Fool(http://www.fool.com/), provides his angle onbiotechnology investments. Read on and become “Foolishly” informed*. He can becontacted about biotechnology and investing atTomJ@Fool.com. Jacobs cannot give individualinvestment advice but welcomes any. TomJacobs owns shares of Meridian Bioscience.

Why biotech don’t pay dividends — yet

* Nature Biotechnology does not guarantee the veracity, reliability, orcompleteness of any information provided on this page; it is not responsiblefor any errors or omissions or for any results obtained from the use of suchinformation; it will not be liable for any loss, damage, or investmentdecision arising from a reader’s reliance on the information provided.

NATURE BIOTECHNOLOGY VOLUME 21 NUMBER 11 NOVEMBER 2003 1283

Table 1 Top 5 yields for big pharma and biotech

Company Annual dividend Yielddividend

Big pharma

Bayer (Leverkusen, Germany; NYSE:BAY) $1.01 4.7%

Bristol-Myers Squibb (Princeton, NJ, USA: NYSE:BMY) $1.12 4.4%

Merck (Whitehouse Station, NJ, USA: NYSE:MRK) $1.48 2.9%

GlaxoSmithKline (Brentford, UK, USA; NYSE:GSK) $1.15 2.7%

Eli Lilly (Indianapolis, IN, USA; NYSE:LLY) $1.34 2.3%

Biotech

Psychemedics (Cambridge, MA, USA: AMEX: PMD) $0.32 4.0%

Meridian Bioscience (Cincinnati, OH, USA: NASDAQ:VIVO) $0.36 3.6%

ICN Pharm (Costa Mesa, CA, USA; NYSE:ICN) $0.31 1.8%

Sanofi-Synthelabo (Paris, France; NYSE:ADR) $0.49 1.6%

Altana (Bad Homburg, Germany; NYSE:AAA) $0.86 1.4%

Sources: Yahoo! Finance, AAII Stock Investor Professional.

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E R R ATA A N D C O R R I G E N D A

Erratum: Why biotech don’t pay dividends–yetTom JacobsNat. Biotechnol. 21, 1283 (2003)

The title of this article contained a typographical error. The title should have read: “Why biotechs don’t pay dividends–yet”. Nature Biotechnologyregrets the error.

Erratum: New biotech hubs may emerge as industry maturesParoma BasuNat. Biotechnol. 21, 1123, 2003

The title of Table 1 incorrectly indicates the presence of data for 48 North American cities or counties. The original article, which appears in theNews section of the Bioentrepreneur web portal (http://www.nature.com/bioent), does indeed contain these data. But the version reprinted heredisplays a truncated version of the table with ten data points: North American cities or counties that rank 1–5 and 43–48 in total annual operat-ing costs for a biomedical research and development facility. Nature Biotechnology regrets the error.

Corrigendum: Invention and commercialization in optical bioimagingDaniel L. FarkasNat. Biotechnol. 21, 1269–1271, 2003

The URL that appeared on p. 1271 was incorrect. The correct URL is http://www.ptei.org/educational_programs/Planetarium/planetarium_project.html.

NATURE BIOTECHNOLOGY VOLUME 21 NUMBER 12 DECEMBER 2003 1513NATURE BIOTECHNOLOGY VOLUME 21 NUMBER 12 DECEMBER 2003 1513

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