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As
We See
It... Fourth
Quarter 2004
The markets for
securities have changed dramatically in recent years. Markets today have become
increasingly complex with many crosscurrents. Trading patterns have changed.
About half of the shares traded are generated by sophisticated computer-driven
programs, taking advantage of small spreads between stocks and their
derivatives. In these trades there is no need to know what a company does or
what its prospects are. All that is needed is the ticker symbol and the last
sale. The minimum trade is said to involve a $10 million basket of stocks.
Markets
have changed, but sound investment principle has not changed. Peter Lynch
focused on the long run, “The Ten Baggers,” those stocks that had the
potential to appreciate ten-fold. Know your company, its markets, competitive
position, and its finances. We
believe in concentrating on a few individual companies where we can know the
business and the management. These are companies that have a sustainable
competitive advantage because they are solving problems through research.
We aim to be holders for the long run, achieving “Ten Baggers” rather
than playing for pennies by trading in and out.
For the last few
quarters, we have affirmed our belief that the medical area was attractive for
investment. The population is aging, and there still are many unmet medical
needs. To our thinking big pharma, while attractive, is becoming less so,
especially relative to the medical device-companies. Recently this idea was
borne out when Johnson & Johnson made a bid for Guidant, a company that
makes implantable devices to control heart functions. We feel positive, for
example, about Boston Scientific and Varian Medical, both attractive device
companies.
Company
Focus:
Boston
Scientific
Boston
Scientific (BSX, 32.70) is best known for its stents, the tiny little scaffolds
that prop open clogged arteries. The
company has enjoyed explosive growth recently after the debut of its drug coated
stent product line, which, while
second to market, managed to gain significant share from the Goliath of the
industry, Johnson & Johnson. They
now lead this market but are not resting on
their laurels.
They
have 30 research and development programs underway in this product line.
They are conducting trials for new applications, refining and improving
the product and delivery system. Share
holders should continue to enjoy growth in this product line for many years.
Nonetheless,
this is old news. What excites us
are the other offerings that the company is developing.
We attended Boston Scientific’s analyst meeting and got a glimpse of
the deep bench of exciting products that the company is working on.
Two products particularly intrigued us.
Through their
investment in Cameron Health, BSX has access to a technology that could
potentially revolutionize the cardiac rhythm management business.
These are the devices that are typically known as pace-makers or
implantable defibrillators. Cameron’s
team believes that the current state of the technology is much more complex than
it needs to be. They believe the
same functionality is possible in a smaller device implanted closer to the heart
without the long lead wires that are currently in use.
It allows for greater patient comfort, less risky implantation
procedures, and fewer potential complications.
As investors in BSX, we are excited about the potential for this
approach, but as owners of competing technologies, we are also monitoring the
development to see what impact this potentially disruptive technology will have
on other companies.
Through their
acquisition of Advanced Bionics, BSX has strengthened its position in another
exciting field, neuro-modulation. Pain
is an increasing focus of the healthcare industry.
Pain, besides being painful, hinders recoveries from injury, leads to the
use of potentially harmful drugs, and produces other unwanted secondary effects.
Advanced Bionics is a leader in the field of electrical nerve stimulation
to reduce chronic pain, including back pain and migraines.
At the meeting we were shown a tiny implantable device that can provide a
minute electrical stimulus to nerves to alleviate specific types of pain.
The device is rechargeable in the body and can be controlled with a
remote control. Self contained with
all electronics it needs, it is about the size of a Tylenol capsule.
Implantation should take a surgeon less than ten minutes.
These are but
two of many projects underway at the company, but they typify what we like about
Boston Scientific. They invest to
innovate, rarely to follow. They
have a long investment horizon, as do we.
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