Johnson & Johnson (JNJ), GlaxoSmithKline plc (ADR) (GSK): 3 Reasons Warren Buffett Hates Biotech

Unlike The Coca-Cola Company (NYSE:KO) or H.J. Heinz Company (NYSE:HNZ) — two Buffett-owned companies — it can be hard to predict patient adoption and physician prescription numbers especially years before the drug is on the market.

The best way to profit in biotechs is to jump in when investors are ignoring the stock and jump out when they’ve overreacted. That’s value investing, but it’s not Buffett’s idea of investing.

“We have got an elephant gun, and it’s loaded.”
Biotechs are far from elephants. Think squirrel or opossum.

A typical clinical-stage drugmaker is valued under $1 billion. Berkshire Hathaway invested $26 billion in Burlington Northern plus $10 billion in debt for the remaining part of the $44 billion company he didn’t already own. Buffett invested about $13 billion in cash to get a large chunk of Heinz.

It takes a lot to move the needle at Berkshire. A little biotech isn’t going to do it.

Ignore Buffett?
I hope they don’t take away my jester cap for saying this, but I think it’s OK not to follow Buffett. Biotech is clearly not for him, but I’ve never actually heard him say it’s a bad idea for me and you.

In fact, all three reasons I’ve cited for why Buffett wouldn’t want to buy biotechs are easily overcome by most investors: Learn about the industry, be willing to sell when companies become overvalued or the thesis changes, and don’t become a billionaire.

The article 3 Reasons Buffett Hates Biotech originally appeared on Fool.com.

Fool contributor Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway, Coca-Cola, H.J. Heinz, and Johnson & Johnson and owns shares of Berkshire Hathaway, Dendreon, and Johnson & Johnson.

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