OAKMARK FUNDS'
BILL NYGREN & HENRY BERGHOEF

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An above-average industry at a below-average price….

Nygren: We talked earlier about how we think the set of opportunities the market is providing today is changing. A lot of the names that are getting to attractive prices seem to be larger-cap names that were selling at prices that we thought were way, way too high a couple of years ago - and have come down now to below-market multiples.

I think all of our healthcare names fit that characterization. The healthcare industry - certainly historically - has been an above-average growth industry. And it's traded at better than average multiples because it's had stronger than average growth, stronger than average cash flow generation and better than average predictability.

We think it's just a matter of time.

Nygren: But as concerns have come up recently on the political side, a lot of the pharmaceutical companies have gotten to below-average multiples. Guidant is another great example of a company that used to be in growth portfolios that now has more value-like pricing.

But we think it's only a matter of time until these companies get back to premium valuations to the market.

Despite the politics, industry should continue to be strong.

Berghoef: The drug industry has relied a lot on price increases over the last two or three years - and we think those days are over. But when you look at what's going on with the population, there's going to be very, very strong volume growth in the pharmaceutical industry.

The other thing is that the pipelines of late have been fairly dry in the industry. But if you look historically, new drug discovery has not been a straight line. It's been more of an undulating line with a generally upward slope. And we think at some point, there's going to be a breakthrough of lots of new drugs. And a lot of that's going to be driven by gene engineering and those kinds of technologies.

So fundamentally, despite the political pressures, we think the industry broadly should continue to be a very strong one.

PORTFOLIO REPORTS estimates the following were
Oakmark Select Fund's largest equity purchases
during the 3 months ended 9/30/02:

Industry's always succeeded despite the political outcry.

Nygren: I think that the attacks on the pharmaceutical companies are generally misplaced. The economics of pharmaceutical pricing suggests that it's more effective than almost any other method of healthcare. So I think any answer to slowing the rising rate of healthcare expenditures has to include better use of pharmaceuticals.

It's a hot button politically because most people's insurance plans don't cover pharmaceuticals as well as they do hospital stays. If you had people paying for half of their hospital stay rather than half of their prescription drug refill, they'd be complaining about hospital prices. But the insurance company covers all of that, and then makes the individual pay much more on what is the most cost-effective treatment. It's kind of backwards. However, I think that's why the politicians make such an issue out of it - because that's what their constituents complain about.

This has happened a couple of other times including when Hillary Clinton had her healthcare reform plans in front of Congress. The industry's always succeeded despite the political outcry. And that's our expectation again.

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