By Anupreeta Das in Omaha, Neb., and Erik Holm in New York
Warren Buffett offered his assessment of Valeant Pharmaceuticals
International Inc., calling the troubled drug company's business
model "enormously flawed."
The Berkshire Hathaway Inc. chief executive was responding
during the company's annual meeting Saturday to a shareholder
question about a mutual fund he has ties to that made a large bet
on Valeant.
A Valeant spokeswoman declined to comment.
Mr. Buffett reminded the audience that he was in a way "the
father" of the fund, called Sequoia Fund Inc., having directed many
of his early investors to Ruane, Cunniff & Goldfarb Inc. when
he shut down his investment partnerships beginning in 1969. Ruane
Cunniff set up Sequoia in 1970.
Valeant has recently attracted the ire of regulators and
politicians, in part because of its habit of acquiring drugmakers
and then aggressively raising the prices of medicines. A onetime
Wall Street darling, Valeant's stock is down more than 85% since
August.
On Friday, the Canadian drug company filed its long-delayed
annual report and disclosed new and broadened regulatory
investigations. It is being investigated by the Securities and
Exchange Commission.
Valeant is changing the makeup of its board as it looks to
restore credibility in the pharmaceutical industry and among
customers, politicians and investors. Valeant officials have also
pledged to change the company's pricing strategy on drugs.
The Valeant question was just one of dozens of questions that
Mr. Buffett and Berkshire Vice Chairman Charlie Munger answered
during several hours of questions from shareholders, a panel of
analysts and one of journalists. The Q&A has been an annual
tradition that tens of thousands of Berkshire shareholders come to
Omaha, Neb., for every spring.
With Berkshire streaming the event live over the Web for the
first time, some shareholders decided not to make the trip, but Mr.
Buffett estimated during a television interview that nearly 40,000
people would turn up.
This year, the questions ranged from the performance of
Berkshire subsidiaries such as its BNSF railroad, auto insurer
Geico, utility Berkshire Hathaway Energy and its latest
acquisition, industrial components maker Precision Castparts Corp.
Meeting attendees also sought Mr. Buffett's views on investment
banking, shareholder activism, the impact of negative interest
rates on Berkshire and Republican presidential front-runner Donald
Trump.
Mr. Buffett, 85 years old, drank his favorite drink, Cherry
Coke, and snacked on peanut brittle from See's Candies, a Berkshire
subsidiary, as he sat with Mr. Munger, 92, on a stage, both men
dressed nearly identically in black suits, white shirts and
patterned red ties.
Mr. Munger last year weighed in on Valeant, calling its
price-hiking practices "deeply immoral." A Senate committee has
been investigating the strategy used by Valeant and other firms of
buying drugs and significantly raising prices, including for
certain cardiac-care drugs.
Mr. Munger's comments prompted Bill Ackman, a hedge-fund manager
whose fund Pershing Square Capital Management LP is one of
Valeant's biggest investors, to attack Berkshire's ownership of
Coca-Cola Co., arguing that the sugary beverages the company sells
have "probably done more to create obesity and diabetes...than any
other company in the world."
Berkshire owns 9% of Coke and regularly gets questions from
shareholders, including this year, about his love of candy, fizzy
drinks and burgers, and the health hazards of sugar and processed
foods.
Privately, Mr. Ackman had reached out to Messrs. Buffett and
Munger before the dust-up, The Wall Street Journal has reported,
trying to get Mr. Munger to meet with outgoing Valeant CEO Michael
Pearson in an attempt to change Mr. Munger's opinion of
Valeant.
Mr. Buffett said Saturday that Valeant "was touted to us" by
intermediaries, without naming names.
He said Sequoia's long-term track record is still among the best
in the mutual-fund business, despite its recent struggles.
Sequoia investors have pulled nearly $800 million from the fund
this year, according to research firm Morningstar Inc., as
Valeant's stock continued to plummet and Sequoia's lead manager
stepped down. As of this week, the fund had $5.3 billion in assets
under management. Sequoia said in a filing Friday that it would
reopen to new investors, after closing in 2013.
Last year, Sharon Osberg, an independent director of Sequoia and
a close friend and bridge partner of Mr. Buffett's, along with
another director, resigned from the board after raising questions
about whether the fund should have such a large position in
Valeant.
Mr. Buffett said the "unusually large position" Sequoia took in
Valeant was the result of the fund becoming "very entranced with
the business model" of the pharmaceutical company.
He said he advised people privately to stay with the fund and
with Ruane Cunniff, saying that the people who remain there are
"very smart, decent people."
Mr. Buffett said Valeant's troubles illustrate a principle
passed on to him by a friend: "If you're looking for a manager,
find someone who is intelligent, energetic and has integrity. If he
doesn't have the last, make sure he lacks the first two."
Mr. Munger added that Sequoia, as reconstituted, is a reputable
investment fund. "Valeant, of course, was a sewer," he went on.
"Those who created it deserve all the opprobrium that they
got."
Write to Anupreeta Das at anupreeta.das@wsj.com and Erik Holm at
erik.holm@wsj.com
(END) Dow Jones Newswires
April 30, 2016 18:22 ET (22:22 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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