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.
Berkshire Hathaway (NYSE:BRK.A)
Historical Stock Chart
From Feb 2024 to Mar 2024 Click Here for more Berkshire Hathaway Charts.
Berkshire Hathaway (NYSE:BRK.A)
Historical Stock Chart
From Mar 2023 to Mar 2024 Click Here for more Berkshire Hathaway Charts.