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By Kevin McDevitt, CFA | 06-08-2011 08:25 AM

Sequoia's Health-Care Picks

Sequoia's David Poppe says the fund likes the tailwinds in health care but has tried to avoid the reimbursement risks.

McDevitt: Last question is dealing with the funds health-care stake. About a quarter of the portfolio is there, and what's interesting to me, one of the things that stuck out to me, was that almost none of the companies or none of the companies are really traditional big pharma, something you find in a lot of other value portfolios.

On other hand, there are more diagnostic companies, more equipment, I won't say medical equipment, but just medical supply companies. What do you like about those types of companies like Idexx, Becton Dickinson and their business models?

Poppe: What we don't like about traditional big pharma and about some of the med devices or other companies is there is a lot of reimbursement risk. There is a lot of "unknowability," what's going to happen with pricing down the road. I think we all know that there is a potential crisis coming in terms of health-care cost and who is going to pay for what, but we don't know when it's going to come or what it will look like. In some ways, our answer has been to just avoid the sector.

There are, obviously, some tailwinds in health care with an aging population. We've tried to look at things that don't have reimbursement risk or that just have dominant positions, Becton Dickinson is a good example, a very dominant position and a very low-cost item that's not ever likely to be a focus of reimbursement pressure, which is the glass syringes.

They are supplying a lot of the sharps for most of the hospitals in the country. It's an extremely low-cost item. They are extremely good at it. It's more about efficient distribution than it is about anything else, and they've got the best system. So we like that business. Again, you benefit from increasing use of health care, utilization of health care, but you don't have so much reimbursement risk.

Idexx is interesting because it's veterinary medicine. It's not human medicine. So there is no reimbursement risk. Your risk is really in a bad economy, the fact is, people will spend less money on their pets. So there is some cyclicality or cyclical risk there, but you don't have reimbursement risk. You also have ... a situation where animals really are living longer, households are smaller, people are willing to spend more money taking care of the pet. Those have all been tailwinds for Idexx, believe it or not, and the lack of reimbursement just makes it a better business.

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