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Bill Ackman: Healthcare Offers Great Promise
Aspire, Thought Leaders | 15 May 2015
By: Vance Wong
Articles (74) Profile

In the recent Ira Sohn Conference, Bill Ackman was interviewed by Bloomberg and he provided valuable insights about healthcare companies and how long-term shareholders can directly or indirectly influence their returns. Ackman also talked about interest rates in the US and how bonds might not always be the best and safest investments now.

Healthcare: High Gross Margins; Low Net Margins

When asked by Bloomberg’s interviewer Stephanie Ruhle about his view on healthcare, Ackman commented that most healthcare companies are “not run to the benefit of the owners.”

Some healthcare companies are able to achieve 80 to 90 percent gross margins but they do not exercise cost controls. Ackman notes that many healthcare companies pursue frivolous Research and Development (R&D) projects that do not offer the kind of returns that a more disciplined management would look for.

Ackman said that this is where activist investors like his Pershing Square Capital Management hedge fund would step into the company and voice their concerns. He emphasised the importance of shareholders pressuring the management of healthcare companies to reduce unnecessary costs.

In a sense, this is not only for the benefit of the shareholders but also for the companies in the long-term. Ackman gave a few examples of healthcare companies that are actually doing well and in line with his ideals namely Valeant Pharmaceuticals and Actavis in the US.

Analyst chart of Valeant as at 07/05/2015; Source: FactSet Fundamentals

Analyst chart of Actavis as at 07/05/2015; Source: FactSet Fundamentals

As can be seen clearly from the graphs above, both Valeant and Actavis are doing particularly well this year, and analysts are definitely bullish on these two pharmaceutical companies.

Berkshire Hathaway: A Conglomerate For Passive Investors

On the other extreme side, Ackman was asked if Berkshire Hathaway, chaired by legendary billionaire investor Warren Buffett, was “too big, could never get real control, doesn’t make sense?” To which he agreed but said that Berkshire is a very good company, or conglomerate to be passively invested in.

The Pershing Square CEO even dismissed the interviewer’s concerns about a “post-Warren Buffett” Berkshire simply because Buffett “has done an incredible job kind of engraining a culture in the company with a goal of it surviving him.”

To Ackman, the “conglomerate structure” of Berkshire is justified by it being “very decentralised” and its subsidiaries being run on an “autonomous basis.” Buffett spent a lot of effort building the culture and it is strong enough to keep the company going even if he steps down or passes on.

As such, it is the kind of company that Bill Ackman will be happy with just by sitting on his shares and allowing it to reap returns, without the need to actively analyse the company.

Current Rates Bad For Bonds

Although Ackman did not provide much ideas on interest rates, he did mention that bonds or any other fixed incomes are not particularly attractive at all. The overall interest rates in the US is “about as low as it can get” and the “credit markets are pretty tight,” making yields very low, especially with “below investment grade credit” ratings.

For example, a 4.5 percent bond coupon would not bring in much returns “unless the credit is going to improve,” according to Ackman. The risk is still too high: one might be able to “be right on the credit improving” but what if the interest rate climbs? Bonds are definitely not what investors would want to look at, at least at current rates.

With a Communications background, Vance has the passion to write with a purpose - to provide content supported with substantial evidence to vested readers.

Please click here for more information about this author.

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