Transcript:

Healthcare feels like a mess today, doesn’t it? There’s been a tremendous amount of price inflation but very little price transparency. People don’t know what drugs cost. They don’t know what procedures cost. And we think that needs to change.

So we think the companies that are best positioned are those that can manage the tension between innovating and reducing costs for the overall system. And we think they exist; you just have to work really hard to find them.

We don’t believe you can consistently predict scientific outcomes and deliver a repeatable investment process over the long term, so we focus on the business. And as it relates to the business, we care a lot about return on invested capital. Most investors care about EPS growth, and we think those sorts of metrics are easily manufactured and manipulated. But ROIC really tells the true story about the value a company creates for its shareholders, and when you look at healthcare through that lens, there are lots of interesting companies in the medical device space, in the healthcare IT space and even in the drug development space.

We think that there are a couple of sectors that present some challenges. The first is the hospital sector, because there’s no price transparency, and we think ultimately procedures will end up leaving the hospital as technologies improve and patients can get their procedures done in the same day in outpatient centers. We think drug distributors present some challenges. Their pricing model is different than a typical distributor such as UPS or FedEx. They charge based on how long they’re taking the package and how much the package weighs. A drug distributor charges based on the value, and that’s different and doesn’t make a lot of sense to us. Lastly, we think that there are some areas in the drug sector that are also challenged, and those are the companies that have taken egregious price increases for older drugs and haven’t innovated, and it doesn’t make a lot of sense. You wouldn’t pay more for an older iPhone, right?