Is Buffett Right about Biogen?

Warren Buffett is betting Berkshire Hathaway (NYSE: BRK.B) can make money from rising rates of dementia caused by America’s aging population.

To explain, Berkshire Hathaway (NYSE: BRK.A) paid $192 million for a 0.4% stake in Biogen Inc. (NASDAQ: BIIB) in 4th Quarter 2019, Markets Insiders reports. Biogen develops treatments for neurological diseases such as Alzheimer’s disease and other forms of dementia.

Biogen is developing aducanumab an experimental treatment for Alzheimer’s. However, some critics charge aducanumab does not work, Ted Whitford alleges at Stat News. Whitford is a former Biogen researcher who questions the results of the company’s research.

How Biogen could Profit from Alzheimer’s Disease?

Aducanumab is an investigational drug. Doctors cannot prescribe an investigational drug in the U.S. or any other country. However, Biogen has asked the U.S. Food and Drug Administration (FDA) for permission to market Aducanumab a press release indicates.

If approved, aducanumab could become the first therapy to reduce the clinical decline of early Alzheimer’s disease, Biogen claims. The market for aducanumab could be huge; because the Alzheimer’s Association estimates 5.8 million Americans suffer from Alzheimer’s disease. Additionally, Medicare could pay for most Americans Alzheimer’s patients’ drugs.

To explain, Medicare; the federal single-payer health insurance plan, covers most Americans over 65. The average Alzheimer’s diagnosis occurs at age 80, CBS News estimates. Thus, America’s taxpayers will pay for most aducanumab treatments in the United States.

I suspect Buffett thinks the FDA could approve aducanumab for the United States. That could help Biogen make money from Alzheimer’s Disease.

How Much Money is Biogen Making?

Biogen (NASDAQ: BIIB) is making money. The drug maker reported a quarterly gross profit of $3.224 billion on 31 December 2019.

Impressively, Biogen made that quarterly gross profit on quarterly revenues of $3.671 billion. Moreover, those revenues grew at a rate of 4.11% in the quarter ending on 31 December 2019.

Consequently, Biogen reported a quarterly operating income of $1.777 billion and a common net income of $1.5 billion on 31 December 2019. In addition, Biogen reported a quarterly operating cash flow of $1.96 billion, a quarterly investing cash flow of $708.4 billion, and an ending cash flow of $569.8 billion on 31 December 2019.

Biogen is a Cash-Rich Company

Buffett likes Biogen because it is a cash-rich company. For instance, Biogen had $4.475 billion in cash and short-term investments on 31 December 2019.

Biogen’s cash was up from $3.58 billion on 31 December 2018 and $4.437 billion on 30 September 2019. Thus, Biogen’s business generates lots of cash, and that cash is increasing.

I think Biogen has a lot of value because it reported $22.734 billion in total assets on 31 December 2019. However, I think Mr. Market grossly overvalued Biogen (NASDAQ: BIIB) at $337.10 a share on 18 February 2020.

Biogen pays no Dividend

I think Biogen is a lousy stock for average people because it pays no dividend. Additionally, I think Biogen has heavy exposure to a confused and troubled U.S. healthcare market.

Buffett’s thinking on Biogen is easy to interpret. Uncle Warren thinks healthcare is a growth industry that could make a lot of money.

“We have a $3.4 trillion industry; which is as much as the federal government raises every year, that basically feels pretty good about the system,” Buffett told Yahoo! Finance in 2018. Additionally, Buffett estimates healthcare comprises 18% of America’s economy.

Consequently, I think Buffett believes he can make a lot of money by investing in healthcare stocks. The Biogen purchase; in particular, shows Buffett believes America’s aging population will enable pharmaceutical companies to make money.

How Buffett is investing in Medicare for All and the Public Option

Remember, Uncle Sam pays for a senior citizen’s healthcare. In addition, politicians such as U.S. Senator Bernie Sanders (I-Vermont), are pushing hard for Medicare for All and the Public Option.

To explain, Medicare for All could be a European style single-payer healthcare system that will cover most medical expenses for most Americans. In addition, the public option could be a new government health insurance system that will cover most Americans.

The difference is, the public option will be an alternative to existing health insurance plans. Sanders’ Medicare for All proposal could ban most private health insurance.  

Either way, the Federal government will pay for most medical treatments for most Americans. Thus, there could be almost limited funding for healthcare for most Americans.

In the final analysis, healthcare is a growth industry and Buffett is investing to make money from it. However, I think average people need to avoid Biogen and investigate Berkshire Hathaway (NYSE: BRK.B)

I believe ordinary investors need to look at Berkshire Hathaway because it is a highly diversified company with a lot of cash. Therefore, Berkshire has a high margin of safety, which average people need.