As We See It...                                                                   Third Quarter 2004

This past month we attended two healthcare conferences where about six hundred companies made presentations. Demand for medical care is almost infinite. There are many unmet needs. Witness: diabetes, cancer, and obesity, to name but a few. AIDS has reached epidemic proportions not only in Africa but also in Russia (where it is being ignored). The population is aging and will require more care. 

In his book, “Running On Empty” Peter Peterson points out that in 1940 there were about the same number of eighteen to twenty-one year olds as there were people over sixty-five. Now there are almost four times as many over sixty-five relative to the younger set, and the baby boomers have yet to retire! Because the over sixty-five population is increasing faster than the rest of society, the base paying for Medicare is shrinking in relative terms. There is no doubt, however, that demand for medical care, is and will be expanding. Financing is another question.

Our conclusion is that the healthcare industry remains an attractive sector for investment. We prefer companies that have a strong research effort, pricing flexibility and growing profits. These conferences have helped us to sharpen our focus on the medical device area and biotechnology as well as the companies that supply the tools they use. The third focus is in genetics that has immense long run promise. 

In general, the market environment has been tricky. The only approach we know in times like this is to focus on individual companies. We continue to look for strong, sustainable franchises that we can own for a long time.

Company Focus:  Pall Corporation

Research is particularly exciting when you see portfolio companies offering products and solutions that will make a difference. We have been tracking the development of just such a product from Pall Corporation.

Prion diseases or transmissible spongiform encephalopathies (TSEs) are fatal neurodegenerative diseases that affect both humans and animals. One prion disease, variant Creutzfeldt-Jakob Disease (vCJD) is the human form of “mad cow” disease. While very rare, vCJD is becoming an increasing concern among health care officials. A particular worry is how the disease can be spread by blood transfusion by and to unsuspecting participants. Testing for vCJD is expensive. The risk of spreading the disease via blood transfusions is unacceptable. 

Pall has devised a solution based on filtering the blood. Pall is a leading filter company for applications ranging from aerospace to biotech. They have developed intellectual property positions that have allowed them to gain large market shares in many attractive markets. Typical of the companies we look at, they spend substantial amounts on research and development, and in this case it may well have led to a breakthrough in patient safety from blood transfusions. 

Building on its position in leukocyte reduction, or the removal of white blood cells from donated blood, Pall has invented a technology to remove prions from the same blood. Product introduction is expected in early spring in the US and Europe after approval from the appropriate regulatory agencies. We have spoken with Pall management several times over the last few months to learn more about the product and to track its progress to market. While nothing is certain, we share the company’s optimism that approval is near and that market acceptance will be strong. With a market potential estimated in the hundreds of millions, adoption should provide a nice increment to Pall’s revenues, margins, and returns over time.