The giant investment fund run by Warren Buffett, Berkshire Hathaway, has doubled down on pharmaceutical companies in the wake of the pandemic.
All US funds that manage over $100m must submit filings with the Securities and Exchange Commission each financial quarter.
And it’s a 13-F filing from 16 November that shows exactly what Warren Buffett bought. The billionaire spent over $5.5bn (£4.3bn) on four drug companies between July and September 2020.
They are Pfizer, Merck, AbbVie, and Bristol-Myers Squibb.
The decade of pharma
Buffett clearly believes we are entering an age of massive new investment in pharmaceutical products. Investors on both sides of the Atlantic tend to hang on his every word. And so there could be some useful clues here about the trends that will define the next 20 years.
It’s not just about investing in toilet paper manufacturers. Although it is fair to say that small AIM companies like the £100m market cap Accrol Group may have benefited from early pandemic panic buying.
Instead the big bet by Buffett hangs on the idea that governments were caught on the hop by the outbreak. They won’t want to be put in the same position again. So we infer that they will have much larger budgets for buying and supporting vaccines, antiviral and antibacterial treatments.
Follow Warren Buffett
UK investors who want to follow Buffett can do one of two things. They can fill out a W8-BEN form if they are investing in an ISA. This is a regulatory compliance thing which means they are allowed to buy stakes in US companies. Or, they can pick the FTSE 100, FTSE 250 or AIM-listed companies they think Buffett would choose.
Remember: Buffett buys companies he thinks have a very long runway for future success. He bets big, then creams off dividend income for as long as he possibly can. Buffett famously said: “Our favourite holding period is forever.”
So two FTSE 100-listed pharmas that spring to mind are Astrazeneca and GlaxoSmithKline. The latter has a much better dividend payout of 5.75%, which usually forms part of my calculations.
Research, then develop
R&D is can be ruinously expensive. And there’s no guarantee that there will be a successful product at the end of it.
Drug development firms can burn through millions of investor cash without ever making a profit. And the smaller the company, the more likely this is to happen. That’s probably why Buffett is focused on the world’s largest pharma firms.
There are simply better economies of scale inside the Astrazenecas and GlaxoSmithKlines of this world. That’s because they are already selling profitable products which support expensive R&D.
I would also avoid companies in the Covid-19 testing business, simply because Covid-19 vaccines are coming in 2021. The major revenue source that has pushed them to new heights is probably cut off for good. I’m thinking of the likes of Omega Diagnostics, Avacta, and Synairgen.
If I’m a more adventurous investor? I would be looking at contract research organisations (CROs). These businesses help design clinical trials, process data, and run studies. It’s a picks and shovels play. That why I think it’s what Buffett would choose.
