2 Healthcare Picks With Long Runways for Growth

Christopher Franz: Hi, I'm Chris Franz with Morningstar. I'm here with Keith Lee and Damien Davis of Brown Capital Management. The two are portfolio managers on Gold-rated Brown Capital Management Small Company.

Gentlemen, thanks for being here.

Keith Lee: Thank you for having us. It's a pleasure.

Damien Davis: Thank you.

Franz: So, Keith, you've been on the strategy since its 1992 inception, and you and your team have a rather differentiated long-term focus. You've owned life sciences company Bio-Techne since 1993. I'm kind of wondering what's made it such a great long-term holding.

Lee: Great. Yes, as you said, Bio-Techne has been in our portfolio since 1993. But first, let me just tell you just briefly what we look for. We define smallness in terms of revenues as opposed to market capitalization, shares outstanding, time and market price. So, we look for companies very early in their lifecycle, companies that we think have the ability to grow for long periods of time and become--exceptional small companies that can become exceptional larger companies. And Techne fit that--it was Techne at the time we initially purchased--fit that model.

With Techne, it caused us to think about how we would invest in the biotech area as opposed to looking for companies, which we've done and some successful, most not successful that had a binary outcome. We said, we wanted--we thought more in terms of using the analogy of people going looking for gold out West, just very few people struck it rich looking for gold. But the hardware store in most mining towns, the owners of those stores did exceptionally well, because they sold the picks, shovels, screens, all the things that the miners needed to search for gold.

Techne is similar in that they provide the cytokines and please excuse the technical term, but the other stuff, that biotech firms and large pharma needs in order to develop therapeutics. And so, we saw it as a company with a long runway of very high-quality product. And they did a great job and continue to do a great job of talking to their customers to determine what their needs are. And at one point, 60% to 70% of their revenues came from products that were developed over the last three years. So, that showed an incredible R&D focus. It still has a long runway, in our opinion. The company has grown. When we bought it, the revenues were significantly less than $250 million. Sitting here today, revenues are over $700 million, and the return has been over 6,000%. But we're not investing by looking in the rearview mirror. We think the future is still in front of Techne.

Franz: Interesting. Yeah, thanks for that context. Maybe Damien, turning to a newer holding, you guys have recently added Abiomed within the last few years. And it's been a news lately, so just want to get your take on that stock.

Davis: Sure. So, Abiomed is a medical device company that specializes in heart pumps. So, for very sick patients who might not be able to survive or are too risky to survive receiving a heart stent or drug-coated balloon or some atherectomy to clear out the plaque, it uses pump that is inserted through a catheter through the femoral artery, and that supports the heart so that the person can then receive lifesaving care.

Recently, the company has announced that it missed earnings, and it also had a negative letter from the FDA. They were able to close out that letter from the FDA but still missed earnings most recently, and that had a very negative effect on the stock price. Longer term, we believe that the company has a long runway for growth. And despite having hyper-growth in the past few years, it had a 15% to 20% announced growth this time around. And that caused the stock to be down greatly. And so, we'll kind of figure out if that is the new normal, 20% revenue growth or is it a slight pause. The stock reacted like it's the new normal. Either way we're okay with it if it's a 20% grower or a 30% grower. But with such a long runway for growth, only being about 15% penetrated, we believe the stock can be in our portfolio for a long period of time.

Franz: Great. For Morningstar, I'm Chris Franz. Thanks for watching.