What Prompted Buffett to Dump GlaxoSmithKline? - Views on News from Equitymaster

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The Equitymaster Research Digest

What Prompted Buffett to Dump GlaxoSmithKline?
Jun 15, 2016

  • Deceptive companies must be avoided
  • An exciting pharma play for the Megatrend
  • Major shake-up in the world of money and man

Once upon a time, Berkshire Hathaway had three pharmaceutical stocks in its portfolio - Sanofi, GlaxoSmithKline Plc (GSK Plc), and Johnson & Johnson (J&J). Over the years, though, Buffett's company has substantially trimmed its holdings in these stocks.

Why?

Let's take a look at GSK Plc.

In 2014, Warren Buffett sold off Berkshire's entire stake in GSK Plc. Since the pharma company accounted for a very minor percentage of his portfolio, the move didn't make headlines.

But I still wanted to understand his reasons behind the move. Turns out, there were several.

For starters, as reported on The Motley Fool, GSK Plc had been reporting poor growth in sales and profits for the previous five years. A large part of this had to do with the loss of exclusive rights for a number of key treatments. But there was more.

Debt had begun to pile up on the company's books. So much so that GSK's debt-to-equity ratio was much higher than its peers such as Pfizer and Sanofi.

While these are perfectly acceptable reasons for Buffett to sell his stake, all was not necessarily lost for GSK. It still had a healthy R&D pipeline that had the potential to bolster GSK's performance in the long term despite the near-term headwinds it was facing at the time.

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