The biotechnology sector can be a land of immense spoils and incredible heartbreak. It's not uncommon to see small and midsized biotech companies swing wildly in each direction because of clinical trial data or a decision by the Food and Drug Administration.
Pros and cons of owning biotech stocks Last month I presented my case for how the typical long-term investor could use biotech stocks to their advantage. My suggestions entailed focusing on companies with established pipelines, selecting clinical-stage companies that were running a large number of trials with multiple partnerships, or buying a biotech ETF that would take a lot of the guesswork out of your purchase and spread out your risk among a number of companies.
Conversely, my Foolish cohort Brian Orelli last week presented his three reasons a long-term buy-and-hold investor like Warren Buffett would never buy a biotech company. Brian noted that Buffett's unwillingness to follow a biotech's upcoming pipeline, biotechs' wild valuation fluctuations, and their often small size, would make them unlikely candidates to grace Berkshire Hathaway Inc. (NYSE:BRK.A)'s portfolio, which is usually looking for heavy hitters to help "move the needle," as Brian put it.
The Buffett factor To date, Warren Buffett and Berkshire Hathaway Inc. (NYSE:BRK.A) have been very conservative with their health-care investments, opting to own shares of some of pharma's biggest names, including Johnson & Johnson (NYSE:JNJ), GlaxoSmithKline plc (ADR) (NYSE:GSK), and Sanofi SA (ADR) (NYSE:SNY).
But, with all due respect to Brian, I think Buffett is missing a crucial piece of the puzzle in his investment portfolio, and that missing piece is a biotechnology investment.
The way I see it, in its simplest form, Buffett values three things: business sustainability, growth, and income. Let's have a look at how these three values might play into the biotech sector, and ultimately, what biotech company Buffett would be foolish to pass up.
Sustainability By sustainability, what I'm really focusing on is an established pipeline of drugs already in existence. This would mean that many companies that have one or two drugs approved by the FDA and have the remainder of their pipeline currently in trials wouldn't fit the bill. Warren Buffett has the "set-it-and-forget-it" type of investing style that only sustainable and established pipelines would satiate. Two names in particular that come to mind here are Amgen, Inc. (NASDAQ:AMGN) and Biogen Idec Inc. (NASDAQ:BIIB).