Now we know which shares are owned by Warren Buffett Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) added to its portfolio in the third quarter. The giant conglomerate’s regulatory declaration to the US Securities and Exchange Commission revealed on Monday that Buffett seems quite bullish in the big pharmacies.
Berkshire’s new positions in Q3 include four of the largest drug manufacturers on the market: AbbVie (NYSE: ABBV),, Bristol Myers Squib (NYSE: BMY),, Merck (NYSE: MRK), and Pfizer (NYSE: PFE). Here are three possible reasons why Buffett is stocking up on big pharmaceutical stocks.
1. They are relatively advantageous offers
Although Warren Buffett is not the hard investor he once was, he still likes to buy stocks at a good price. All major pharmaceutical stocks purchased from Berkshire in Q3 are relatively profitable.
AbbVie, for example, trades just over eight times the expected profits. Bristol Myers Squibb’s multiple profits are slightly higher than AbbVie’s. Shares of Merck and Pfizer traded at nearly 12 times expected earnings. These multiple cost-to-profit ratios are even cheaper than Berkshire Hathaway’s own forward P / Es of just under 17 years.
It makes some sense why AbbVie is cheap. The company faces bio-like competition in the United States for its best-selling drug Humira in 2023. Bristol Myers Squibb will also begin competing with generic versions of the blockbuster blood cancer drug Revlimid, starting in 2022. Both drug manufacturers have newer drugs that need to be developed by drivers, especially BMS.
2. They are cows in cash
There is one thing you can count on for large pharmaceutical stocks – strong, stable cash flow. This is exactly what Buffett and Berkshire will get with AbbVie, BMS, Merck and Pfizer.
AbbVie tops the group with an operating cash flow of nearly $ 16 billion over the past 12 months. BMS and Pfizer generated an operating cash flow of $ 12.4 billion and $ 12.5 billion, respectively, over the same period. Merck did not lag far behind with an operating cash flow of $ 11 billion.
These operating cash flows are pale compared to a total of more than $ 41 billion over the past 12 months. However, all four major drug manufacturers generate significantly more operating cash flow than Biogen and Teva, two other biopharmaceutical stocks in Berkshire’s portfolio.
3. They provide diversification in the fast-growing sector
This brings us to the last reason why Berkshire probably bought shares in these four major pharmaceutical companies: They diversify the conglomerate in the fast-growing healthcare sector. In addition to the aforementioned Biogen and Teva, Berkshire held positions in only two other health stocks before the third quarter – DaVita and Johnson and Johnson.
Healthcare accounts for nearly one-fifth of US gross domestic product. Surprisingly, Berkshire was no longer more exposed to the important sector.
Many observers (including yours indeed) questioned Berkshire’s investment in Biogen earlier this year. I suspect Buffett will regret this purchase if he doesn’t already. Biogen’s growth prospects are threatened after the Food and Drug Administration’s advisory committee votes against the drug candidate Alzheimer’s disease, obrazovanumab.
However, I think Buffett and Berkshire have made smart moves with this latest foray into the biopharmaceutical industry. Bristol Myers Squibb should have great growth prospects thanks to the many potential blockbusters taken with the acquisition of Celgene last year. Merck appears to be in good shape with its immunotherapy against keygruut cancer. Pfizer will return to steady growth after the merger of the Upjohn business with Mylan is completed.
AbbVie is unlikely to achieve impressive growth any time soon due to the upcoming challenges facing Humira. However, the company still needs to generate a decent overall return with its juicy dividend and continued momentum for a number of blood cancer drugs and immunology.
Overall, I think the launch of big pharmaceutical stocks is a big step in the right direction for Berkshire – and one that Buffett will not regret.