Why Did Buffett Buy Merck?

In 2001, the pharmaceutical industry was valued at $390 billion. By the end of 2020, that figure rose to $1.3 trillion. Investors that were in the right place at the right time saw massive returns – and there is every reason to believe the industry is poised for additional growth.

Warren Buffett hasn’t always been a fan of big pharma. He is well-known for focusing on stocks from undervalued companies in industries that do well with consumers despite economic ups and downs.

For example, he has invested billions in the financial services industry, and he is a fan of consumer goods. Buffett’s holding company, Berkshire Hathaway, has large stakes in Bank of America (BAC), Coca-Cola (KO), Kraft Heinz (KHC), and Wells Fargo (WFC). 

Buffett wasn’t a big pharma investor during the growth that occurred between 2001 and 2020, but he has since added pharmaceutical stocks to the Berkshire Hathaway portfolio.

In the third quarter of 2020, Berkshire Hathaway (BRK.B) opened positions in industry leaders AbbVie, Bristol Myers Squibb, Merck (MRK), and Pfizer (PFE). Did Buffett hold onto those shares, or did he sell? Does Warren Buffett own Merck stock today? 

Does Warren Buffett Own Merck?

When Berkshire Hathaway released its third-quarter 2020 earnings report in November 2020, those who follow Buffett’s trades were somewhat surprised.

Buffett had never demonstrated interest in pharmaceutical companies before, but he had four new pharmaceutical companies in his portfolio, including: 

• 21,264,316 shares of AbbVie valued at $1.86 billion
• 22,403,102 shares of Merck valued at $1.86 billion
• 29,971,194 shares of Bristol Myers Squibb valued at $1.81 billion
• 3,711,780 shares of Pfizer valued at $136 million

Buffett didn’t keep these positions intact for very long.

For example, by the fourth quarter of 2020, Berkshire Hathaway sold all of its Pfizer stock. However, Warren Buffett still owns Merck.

In addition, Berkshire Hathaway has a small position in Organon – a new company made up of product lines that Merck divested.

Organon specializes in women’s health solutions, biosimilars, and legacy brands that still bring in steady revenue. 

What Did Warren Buffett Pay For Merck?

Pharma stocks in general – and Merck stock in particular – were something of a bargain when Buffett initially bought in. That is likely one of the reasons he elected to dabble in the previously ignored pharmaceutical industry. Buffett has always been a proponent of value investing. 

In the third quarter of 2020, when Buffett made his buys, AbbVie was trading at just over eight times expected earnings.

Bristol Myers Squibb was slightly more expensive, and Merck and Pfizer were trading at nearly 12 times expected earnings.

Why Did Buffett Buy Merck Stock?

Aside from its relatively low price, Merck stock – and the other pharmaceutical stocks Buffett bought – have two attractive advantages.

First, at the time of the purchase, all four had substantial operating cash.

• AbbVie recorded operating cash flow of nearly $16 billion for the year preceding Buffett’s decision to buy, and
• Bristol Myers Squibb had approximately $12.4 billion for the same period.
• Pfizer’s operating cash flow was at $12.5 billion, and
• Merck reported a total of around $11 billion. 

The second advantage that likely persuaded Buffett to buy Merck stock and other pharma stocks was the diversification they added to Berkshire Hathaway’s large portfolio.

The healthcare industry is growing rapidly, and these purchases exposed Berkshire Hathaway to a sector that wasn’t previously represented. 

Outside of the pharmaceutical companies, the only other healthcare stock in Berkshire Hathaway’s portfolio today is DaVita (DVA), a company that specializes in kidney care.

That’s somewhat surprising, considering healthcare makes up almost 20 percent of the United States’ gross domestic product (GDP).  

How Many Shares of Merck Does Warren Buffett Own?

Berkshire Hathaway started with approximately 22 million shares of Merck in the third quarter of 2020. The company added to its position with an additional seven million shared during the fourth quarter of 2020.

However, by the end of 2021’s second quarter, it seemed that Buffett had a change of heart.

As of June 30, 2021, Berkshire Hathaway is down to just 9,157,192 million shares. These make up 0.4 percent of Berkshire Hathaway’s total portfolio. 

What Pharma Stocks Does Warren Buffett Own? 

Merck isn’t the only pharmaceutical company that Buffett lost interest in earlier this year.

Berkshire Hathaway is down to 20,527,861 shares of AbbVie after adding to its initial position in the fourth quarter of 2020.

The total number of Bristol Myers Squibb (BMY) shares in Berkshire Hathaway’s portfolio is down a bit as well, now totaling 26,294,266.

Each of these companies makes up 1.2 percent of Berkshire Hathaway’s portfolio. 

Is Merck Stock A Good Investment? 

Merck hasn’t had a particularly impressive year.

Perhaps that’s what prompted Warren Buffett to reduce his stake in the company. However, analysts have high hopes for Merck’s future because Merck’s best-selling cancer drug Keytruda is rapidly gaining market share. 

In 2020, Keytruda achieved a remarkable $14.4 billion in sales, and it is projected to be the number one prescription drug by 2026, with sales forecasted at $25 billion. If the drug meets these expectations, shareholders who buy now could realize substantial returns. 

From a discounted cash flow analysis view, MRK share price has an upside potential to $94.70 per share. From current levels that represents an upside opportunity of around 20%. 11 analysts currently rate the stock a Buy while 6 have placed it as a Hold. At this time, no analysts have a particularly bearish view on the stock with 0 sell ratings present.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.