Berkshire Hathaway Makes Big Bet on Pharma – GuruFocus.com

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Berkshire Hathaway Makes Big Bet on Pharma – GuruFocus.com

Berkshire Hathaway Makes Big Bet on Pharma – GuruFocus.com

Barry Cohen

Buffet-led company investing $5.7 billion in major drug companies

Despite solid gains in pharma sales and profits, Big Pharma’s overall share value has pretty much stagnated over the past five years—but better days appear to be ahead, in my opinion.

Just a few weeks ago, Reuters reported that Berkshire Hathaway Inc. (BRK.A) (NYSE:BRK.B), long underweighted in health care, made a total of $5.7 billion worth of new investments in AbbVie Inc. (ABBV), Bristol-Myers Squibb Co. (BMY), Merck & Co. Inc. (MRK) and Pfizer Inc. (PFE).

Walter Todd, chief investment officer at Greenwood Capital, whose funds hold shares of Pfizer, Merck and Eli Lilly and Co. (LLY), told Reuters that investors are recognizing there’s some value in the industry stocks.

That view was seconded by Jim Shanahan, an Edward Jones analyst. He told Reuters that although big pharma has underperformed, it now looks cheap relative to historical valuations and the market overall. “These are large, dominant companies in an industry that has demonstrated strong, long-term growth.”

Prescription drugs continue to generate big sales, with growth expected to accelerate at a compound annual rate of 7.4% between 2019 and 2016, far outpacing the 2.7% CAGR between 2012 and 2019, reports the research firm EvaluatePharma. Due to the impact of the pandemic, the percentage increase is expected to ease somewhat before resuming its rapid pace.

Of course, what’s most important is how much falls to the bottom line. Pharma shines here too. According to a March 2020 article in JAMA, from 2000 to 2018, the median net income expressed as a fraction of revenue was significantly greater for pharmaceutical companies compared with nonpharmaceutical companies (13.8% vs 7.7%).

Although large pharma stocks look to be returning to favor, investors still have some concerns. One is that the U.S. legislature could put price ceilings on some life-saving drugs to make them more accessible.

Another issue causing distress among pharma investors is patent expirations. The one with the highest profile is AbbVie’s Humira, the best-selling drug in the world. It loses exclusivity in 2023, the same year Johnson & Johnson (JNJ) is likely to start getting generic competition for its multi-billion-dollar blockbuster Stelara. All told, patent expirations could shave off more than $250 billion in pharma revenues over the next five years, which would need to be replaced somehow.

This puts pressure on companies’ R&D programs to develop new medicines to fill the gap. Here, Lilly is well-positioned, in my view. As measured by net present value, the company owns the top spot with its anti-diabetic and obesity entry tirzepatide, which is in phase 3 testing, according to EvaluatePharma. The medication has an NPV of more than $7.8 billion, with 2026 sales forecasted to be $2.2 billion. That should help Lilly to continue to reward investors, who have enjoyed a 75% gain in the value of their shares in the past year.

Following is a list of Worldwide Prescription Drug Sales (2019-2026) by company and market share:

Company

WW Drug Sales 2026 ($bn)

WW Market Share (%)

1. Roche (RHHBY)

61.0

4.4%

2. Johnson & Johnson (JNJ)

56.1

4.0%

3. Novartis (NVS)

54.8

3.9%

4. Merck & Co. Inc.

53.2

3.8%

5. AbbVie

52.7

3.8%

6. Pfizer Inc.

51.1

3.7%

7. Bristol-Myers

44.7

3.2%

8. Sanofi (SNY)

41.7

3.0%

9. AstraZeneca (AZN)

41.0

2.9%

10. GlaxoSmithKline (GSK)

40.8

2.9%

Source: EvaluatePharma

Disclosure: The author holds positions in Johnson & Johnson, AbbVie, Eli Lilly, Pfizer, Bristol-Myers, and Sanofi.

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About the author:

Barry Cohen

Barry Cohen has nearly 40 years experience in communications and marketing, the majority in senior positions at large international health care companies, including Abbott Laboratories and Bayer Inc.

He has contributed to a number of financial websites, writing primarily about the stocks of health care companies.

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