When it comes to ranking the greatest investors, Warren Buffett is among the best of the modern era. He has built the largest conglomerate of them all in Berkshire Hathaway Inc. (NYSE: BRK-B) to more than $550 billion in market capitalization, and he previously held the title of the world’s wealthiest man on paper. Buffett’s $200-plus billion portfolio of public equity holdings rivals most of the top mutual funds and exchange-traded funds by size. All this suggests that Buffett probably knows more than just the basics of investing.

What the public is not used to hearing is the word “biotech” used in the same sentence as anything ever to do with Buffett and Berkshire Hathaway’s investments. Investors get to see the portfolio changes of Buffett and Berkshire Hathaway every quarter in the vast slew of 13F filings with the U.S. Securities and Exchange Commission. At the end of 2019, Berkshire Hathaway’s equity portfolio was valued at a whopping $242 billion. One major surprise in that filing was that Buffett’s portfolio managers purchased shares of Biogen Inc. (NASDAQ: BIIB).

The total combined holdings were listed as 648,447 Biogen shares. That was worth some $192.4 million at the end of 2019. For whatever it is worth, that same number of shares was worth $215.9 million as of the most recent close due to its 12% appreciation so far in 2020. The entities under the Berkshire Hathaway umbrella that were the beneficial owners of Biogen were listed as Berkshire Hathaway Life Insurance, National Indemnity and Buffett himself.

This obviously was purchased by one of the portfolio managers rather than by Buffett himself, but there are some reasons that Team Buffett would have wanted to make a specific biotech bet here. It’s very possible that the team was able to use a value investing and growth at a reasonable price (GARP) logic behind the decision to invest in Biogen, but there is also a huge implied call option, or maybe even a bet, that could create even larger gains ahead.

That biggest bet of them all is perhaps more speculative than Buffett and his disciples would pursue, but it may be that Biogen has the chance of becoming the first major biotech or pharmaceutical company to get a drug to treat Alzheimer’s disease approved by the FDA. If that were to occur, Biogen’s revenues and earnings would skyrocket, as even a drug for only a portion of the Alzheimer’s and dementia-related patient populations would be a mega-blockbuster worth billions in sales.

Biogen saw a highly publicized reversal of sorts when the company announced that its trial for aducanumab as a treatment against Alzheimer’s was back on track. That reversed what appeared to be negative news on that trial from earlier in 2019.

Buffett has stated many times that he does not necessarily care about a single analyst call from Wall Street, but chances are high that he and his team at least have to consider the collective and consensus data for estimates out in future years.

Canaccord Genuity said back in January that Biogen may be the best current bet of any major company that has a chance of getting further toward an FDA approval for Alzheimer’s. The firm even raised its rating to Buy from Hold and its target price to $360 from $305 at that time. The firm’s analyst opined that there is still a “decent shot at FDA approval” for its aducanumab, but he also noted that any approval for this indication is not baked into the shares now, with a projected cost of roughly $8,700 per year in the United States.

While the ratings picture itself has been mixed, many analysts raised their price targets on Biogen in the first part of February: Nomura Instinet to $392 from $320, Morgan Stanley to $302 from $261, Baird to $290 from $250, SVB Leerink to $410 from $350, Wells Fargo to $311 from $286 and SunTrust Robinson Humphrey to $360 from $337.

Buffett and his team also likely do not care about short sellers, but the move by Buffett’s team into the biotech coincided with a hefty reduction in Biogen’s short interest that was still almost five times larger than the stake held by Buffett’s team.

There is also no real way to know when Berkshire Hathaway bought shares, nor at what price. Biogen was closer to $220 at the start of the fourth quarter, but it had traded up as high as $305 by the end of 2019. That’s a huge range and means that Team Buffett may have jumped in after the big pop at the end of the year, but the gain in 2020 still makes the purchase look smart regardless of what price was paid for the shares.

The driving force behind Biogen’s gain in 2020 has been a ruling from the U.S. Patent Trial and Appeal Board that kept Biogen’s Tecfidera patent valid and ended Mylan’s inter partes review proceeding. Other patent litigation continues for Biogen, but this was a significant source of revenue protection for Biogen.

Biogen is considered the standalone leader when it comes to drugs to treat multiple sclerosis. Its total companywide sales figure of $14.4 billion in 2019 was up from $13.45 billion in 2018 and $12.27 billion in 2017. As for the outlook ahead, Biogen’s own guidance called for revenues to be in a range of $14 billion to $14.3 billion for 2020. The company put its adjusted earnings in a range of $31.50 to $33.50 per share and net earnings of $29.50 to $31.50 per share in 2020.

Assuming Biogen’s own outlook is correct, that implies that the projected same-year earnings estimates would value Biogen at barely 10 times adjusted earnings. That multiple is almost half of the market multiple for a company that is still growing revenues and that has a potential mega call option built in if the Alzheimer’s drug is approved for sale.

Biogen pays no dividend, like some of its large-cap biotech rivals and Big Pharma players, but the company easily could start to pay dividends if it chooses to. Biogen carries a cash and investment balance of almost $4.5 billion that almost pairs off directly with its long-term debt, but backing out the $13.9 billion in total liabilities from the $27.2 billion in total combined assets still leaves an equity balance of more than $13.3 billion.

Buffett’s portfolio managers were able to use the value justification here, and they also received a massive call option on getting to place a bet on the first mainstream Alzheimer’s drug and its mega-blockbuster potential.

Shares of Biogen were last seen trading up fractionally at $334.96 on Tuesday morning, with a $58 billion market cap and a 52-week trading range of $215.78 to $374.99. Its consensus target price from Refinitiv was $331.26, and this was higher than a $400 stock back in 2015.

Buffett used to preach endlessly that he would not buy into technology stocks, but he is now a large holder of technology shares. Maybe his younger portfolio managers are creating a Buffett 2.0 model for the 21st century.

In addition, see why Buffett just bought into the top grocery store chain in America.

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