OAKMARK FUNDS'
BILL NYGREN & HENRY BERGHOEF

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Cardiac rhythm management is very much an oligopoly.

Attendee: Could you tell us about some of your healthcare holdings?

Berghoef: Oakmark owns Guidant - which is a device company. They have two segments: The first is cardiac rhythm management - which would include implantable defibrillators and pacemakers among a few other things. And that's a fantastic business. The second, and controversial, part of their business is stents - which are the things you use to clear clogged arteries.

The first business, cardiac rhythm management, is a participant in an industry that's very much an oligopoly. You just don't go out, invent a pacemaker - or an ICD, a cardiac defibrillator - and start putting it in people. The players are Guidant, Medtronic and St. Jude. And they have different market shares in different specific items. But they're all very solidly entrenched.

The industry is extremely profitable and growing very fast.

Berghoef: Furthermore, the industry is showing tremendous rates of growth. I don't know if you've followed it at all, but there have been several studies that came out within the last year that show these kinds of instruments as being more and more beneficial for more and more different kinds of indications. For example, heart failure is a very big new indication today. So the growth rate for these devices is very, very strong - strong double-digit.

And they're extremely profitable. So we're very happy about that with Guidant.

Guidant's locked out of U.S. stent business temporarily….

Berghoef: In the stent business, what's happening is that coated stents are coming along. They're much better than bare metal stents. There Guidant has had a problem - and that is that they haven't had legal access to a coating that they can use. So for the time being - at least in the U.S. - they're shut out of the coated stent market.

We think they will get into the coated stent market, but we're not exactly sure when that'll be. It might be toward the end of '04 or even '05 before they get there. But regardless, we think that that stent business has value.

And we're getting the stent business for free.

Berghoef: And as we look at that company right now, we think that the cardiac rhythm management business is worth at least the current stock price. So while we don't know exactly how the stent business is going to work out, we're confident that it has value.

Another interesting thing (I don't want to get into too many technical details) is that they have a new bare metal stent coming out. It's actually made of cobalt. And it looks like that could be very promising. And it might work for a certain class of patients on whom they don't want to use the coated stent for some reason.

We think it's selling at a significant discount to value.

Berghoef: Guidant has a very high intrinsic growth rate - at least in its cardiac rhythm management division. It generates a tremendous amount of free cash flow and [it has] a very strong balance sheet. And overall, we think it's selling at a significant discount to value.

Finally, we wouldn't rule out the possibility it could be an acquisition candidate here at some point. We're not figuring on that. And I wouldn't run that up the flagpole - I wouldn't tout that possibility. But it could happen.

So here's an example of a business that you'd never think of as a traditional "value" company. But because of the controversy around coated stents, there was an opportunity for us to buy it. And we're very happy to own that business.

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