When he says that biotechs are hard to beat, he is correct.
There is a good chance that Warren Buffett is aware of some investing concepts that we are unaware of. Because of this, it is somewhat noticeable that he does not own any biotech stocks. Why would the Oracle of Omaha choose to completely forego such a high-tech, high-growth industry?
It turns out that Berkshire Hathaway’s investing style doesn’t work well with biopharma companies for a lot of different reasons (BRK.A -2.76%, BRK.B -2.81%). Regardless of whether your methodology may be a digit unique, it merits understanding a couple of his issues to further develop your financial planning process.
Here are three of his most likely reasons to avoid purchasing biotechs.
1. They’re really unsafe
Biotech stocks are unsafe, and there isn’t exactly some method of de-taking a chance with their line of business, the two of which are things that Buffett in all likelihood can’t stand about them.
The nature of the clinical trials procedure is a major contributor to the risk. It is extremely challenging to develop a novel medication that has been rigorously demonstrated to be both safe and effective for its intended function. The majority of attempts fail, wasting money on research and development (R&D) and driving down stock prices for businesses.
A program entering phase 1 of its clinical trials has a chance of commercialization of 13.8%, and Buffett is known for preferring slam dunks to long shots.
The risk of a clinical trial decreases as a program progresses through the process. However, even businesses that are successful in bringing their medicines to market can be terrible investments, which is another risk factor that would severely agitate Buffett.
For instance, Novavax was able to successfully market its coronavirus vaccine, but its shares have decreased by 91 percent over the past year as a result of competitors like Moderna saturating the market before it could gain a sizeable enough share to thrive.
Any investor would not have had a clear understanding of what would happen if they had looked at Novavax’s financial data for ten years prior to its failure to gain traction in the market. As a result, Buffett’s diligence-heavy investment strategy would not significantly reduce his risk exposure. The majority of biotechs are the same.
2. Their income and incomes are everything except stable
Another Buffett bandy with biotechs may be that their monetary execution is in many cases more like a thrill ride than the steady, unsurprising, and trudging development that he likes.
Once more, it is a characteristic of the beast that biotech companies do not generate much revenue until they are successful in commercializing one of their projects. After that, they experience a massive growth spurt as sales of their product increase, but then the legal safeguards that prevent rivals from creating generic versions of the drug expire, causing revenue from the drug to plummet, frequently to near zero.
This pattern occurs even in enormous and highly successful businesses like Moderna, though not always due to generic competition. Moderna’s coronavirus vaccine sales generated $18.8 billion in 2022, but the average estimate from Wall Street suggests that the company will only generate $7.6 billion this year.
The market for doses is decreasing as a result of the fact that most people who wanted to get vaccinated received shots. Although it is highly likely that Moderna will commercialize new vaccines in the future to bolster its revenue, the fact that the star performer of the past few years can become a fallen star practically overnight — through no fault of its own — is likely to be a major turnoff for an investor like Buffett.
3. Even more difficult to obtain
are competitive advantages that Buffett values, particularly economic moats that enable businesses to maintain their market share in the face of determined competitors.
However, biotechs can only occasionally use their intellectual property rights to their advantage, preventing competitors from copying their medicines and technologies exactly for a limited time.
Take a look at it. There is no real way for biotech companies to have traditional sources of competitive advantage like power over branding or customer lock-in. In addition, despite the fact that there may be a lot of claims that the development of technologies lowers the costs of discovering and commercializing new drugs, it frequently takes years for those claims to be proven, and many of them are not.
As a result of lacking a competitive advantage, biotechs frequently find themselves competing in the same disease markets with no real advantage. And because there is neither a clear path to success nor a guarantee that success will continue in the future, that is probably a significant risk for Buffett.