Meet the Company That May Become Healthcare's Version of Berkshire Hathaway

When it comes to investing, Warren Buffett is arguably the best in the business. One need only look at the 40,000-plus people who packed into CenturyLink Center in Omaha, Neb., last weekend to hear Buffett preach his wisdom during Berkshire Hathaway's annual shareholders meeting to get confirmation of this point.

What's really amazing about Warren Buffett, aside from the fact that his wealth is self-made, is the fact that his holding company, Berkshire Hathaway, has an incredible success rate when it comes to acquiring companies and getting its money's worth out of those acquisitions.

When looking at Berkshire's holdings you'll see approximately five dozen different companies purchased throughout the years from a variety of sectors. Buffett made most of his personal fortune from the insurance industry, so you'll find ample financial sector representation within Berkshire. But you'll also find transportation, energy, healthcare, and retail among Berkshire's owned companies, too.

Other companies have tried to emulate Buffett's and Berkshire Hathaway's success at gobbling up and integrating other businesses, but few have had much success. However, one company with a penchant for acquisitions and demonstrated success integrating those acquisitions thus far could be on the verge of becoming healthcare's version of Berkshire Hathaway -- at least according to Pershing Square's CEO and activist investor, Bill Ackman.

Say hello to healthcare's version of Berkshire Hathaway According to Ackman, who spoke at the annual Sohn Investment Conference this past week to benefit the Sohn Foundation and pediatric cancer research, Valeant Pharmaceuticals is "a very early stage Berkshire."

Bill Ackman. Source: Flickr user Insider Monkey.

Before you continue reading, keep one thing in mind: Ackman's fund, Pershing Square, has about 20% of its investable capital tied up in Valeant, so it has a vested interest in its success. In other words, Ackman is going to be a bit biased in his assessment of Valeant.

That being said, based on Ackman's view, Valeant is much more than just a traditional pharmaceutical company. Instead, Ackman describes Valeant as a "platform company," and compared it to a special purpose acquisition company, which is a shell company that's used to purchase other companies, much like Berkshire Hathaway is for the many companies it owns.

To some extent Ackman's view is correct, as Fortune notes Valeant has made more than 100 acquisitions since 2008. While many of Valeant's acquisitions have been pharmaceutical-based, it did agree to purchase Solta Medical in 2013 in order to get its hands on Solta's energy-based medical devices, which are used for aesthetic applications. Additionally, the 2013 announcement of its Bausch & Lomb acquisition landed Valeant a product portfolio filled with ophthalmic products and devices. Thus there is already some degree of diversity at Valeant.

Per Ackman's estimates, Valeant should be capable of between $7 billion and $20 billion worth of acquisitions on an annual basis. Ackman believes these acquisitions, and Valeant's transformation into a platform company, make it difficult for investors to properly value Valeant, which has led to the perceived discount that Ackman alluded to in his presentation.

Source: Flickr user Nguyen Hung Vu.

Valeant isn't perfectHowever, investors should also realize that Valeant Pharmaceuticals isn't perfect, and it does have a few black-and-blue marks in its attempted acquisition history.

The most recent failed buyout attempt came with its efforts to acquire Botox maker Allergan. Following multiple bids, Allergan wound up selling itself to Actavis-- which, ironically, Valeant attempted to acquire in 2013. Actavis instead purchased Warner Chilcott shortly after rebuffing Valeant, and recently closed on its Allergan purchase.

Valeant was also rebuffed in 2011 when it took a $5.7 billion hostile bid to shareholders of Cephalon, a drug developer that makes cancer and neurological disorder drugs. Cephalon's board had rejected all previous offers from Valeant. Ultimately, Cephalon claimed the offer from Valeant was too low, and wound up selling itself to Teva Pharmaceuticalfor $6.8 billion.

Valeant's failure to secure these deals didn't exactly translate into tangible losses for its shareholders, but it did represent a number of missed opportunities for the company to make a rapid and sizable impact on its top- and bottom-lines.

Source; Official U.S. Navy Page via Flickr.

Who could be next on Valeant's radar? The thing with platform companies is they make so many acquisitions that guessing what direction they could be headed next is almost fruitless. However, for the sake of pure speculation on my part, I'd opine the following companies could be on Valeant's radar.

1. ZELTIQ Aesthetics Since Valeant has already made a major push into the eye care and aesthetics market in recent years, the idea of snagging ZELTIQ, a company that utilizes its proprietary CoolSculpting system for the selective reduction of fat, could be tough to pass up. ZELTIQ recently turned the corner to profitability, has essentially no debt to speak of, and is sitting on a multi-billion dollar market opportunity. Personally, I could see interest from Valeant making sense.

2. Accuray By itself, Accuray, the medical device developer behind the robotic radiosurgery device known as the CyberKnife System for cancer patients, has been a bit of a disappointment, with losses continuing to bog down share price upside. Yet the opportunity for precision-assisted radiosurgery devices cannot be denied as global cancer cases are expected to rise substantially in the coming decades. Valeant could find Accuray's sub-$600 million valuation very attractive, and I believe its financial backing could help Accuray lower its expenses and become profitable within a few quarters.

CyberKnife M6 System. Source: Accuray via Facebook.

3. Lannett Since Valeant couldn't land Actavis, it could consider gobbling up the next best thing: Lannett. Though much smaller than Actavis, Lannett is in the same business of marketing generic medications -- a market expected to grow by leaps and bounds as branded therapies continue to come off patent. Both consumers and physicians are looking for ways to lower prescription costs, and generic drugs tend to be the easy answer. Lannett is very profitable, carries more than $5 in cash per share, and is sporting a sub-one PEG ratio. It'll take some wooing from Valeant, but this would make a good fit in my opinion.

Should you buy Valeant? Now that you have a better idea of why Ackman likes Valeant, how Valeant operates, and what companies I believe could be on its radar, the question comes down to "should you buy Valeant Pharmaceuticals for your portfolio?"

On one hand, it's hard to argue against its recent results. Although cash flow may not be the best measure of Valeant's growth simply because it may be using substantial chunks of its cash to make acquisitions, we've witnessed its full-year revenue jump tenfold between 2009 and 2014 to $8.26 billion, and its net income improve from just $176 million to $914 million over that same period. Book value has also more than doubled.

Source: Pixabay.

On the other hand, integrating business can be difficult. Berkshire Hathaway and Warren Buffett are successful because they have a very "hands-off" approach to their acquisition strategy. It's not easy to purchase companies in the dynamic healthcare space and simply "keep your distance." Furthermore, there's always the concern of asset writedowns if the biotech bubble bursts. A number of biotech stocks are arguably at nosebleed valuations, yet Valeant is none too afraid to pull the trigger if its sees a product or device it likes. Getting caught on the wrong side of the tracks during a sector downturn could really hit Valeant hard.

Personally, I believe Ackman has a point if you're buying this stock for the next 10 to 20 years. Valeant's portfolio of healthcare companies is going to take a few years to really get ramped up, and the high costs of making acquisitions are going to weigh on its results for the time being. At some point the value of its assets and the potential of its products will likely surprise investors (and potentially cause them to buy Valeant stock and drive it significantly higher), but I suspect this "investor renaissance" is still a few years away.

The article Meet the Company That May Become Healthcare's Version of Berkshire Hathaway originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool owns shares of, and recommends Berkshire Hathaway and Valeant Pharmaceuticals. It also recommends Teva Pharmaceutical and ZELTIQ Aesthetics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.