Online Extra: A "Highly Focused" Health Fund

The Live Oak Health Sciences fund has delivered impressive returns by scouting both startups and giants for promising treatments

Although health-care funds have been pretty sickly of late, Live Oak Health Sciences is a standout in the group. The $30 million fund focuses on companies that make tools for biotech as well as on big pharma. It's a unique niche, and it has been profitable: The fund is one of the best-performing portfolios in the health-care group, with a gain of 7.3% through June 10. BusinessWeek Personal Business Editor Lauren Young recently spoke to Brandi Allen, co-manger of the fund. Edited excerpts from their conversation follow:

Q: What's a drug-discover company?

A:

These are companies that take a shot-gun, nonlinear approach to discovering drugs. Large drug and biotech companies have a problem with their research and development product: How are they going to discover new drugs and get them to market faster? Now they're opening up their eyes to new ways of discovering drugs. It has been happening over the last five years, but it's becoming more mainstream now.

For example, the fund's top holding is Affymetrix (AFFX ), which uses using semiconductor technology to embed chips used in molecular biology research. The company has 80% market share, and the possibilities for chips are endless. Say someone comes to the doctor with diabetes. Using chip technology, they might be able screen for genetic info in the future and pinpoint the gene that activates diabetes. Downstream, the chips can be used for diagnostic capabilities.

Q: What else do you like in the health-care group?

A:

I like Medtronic (MDT ), the medical-devices company. They're very diversified, and they continue to be successful in their cardiac franchise with defibrillators.

Invitrogen (IVGN ) is another tools company we like. They make serum-based test kits, which are used in R&D labs. This is turnaround company. In the last couple of years, they've gotten new management. They've made several acquisitions. They're very focused on the next generation of life sciences and protein analysis, which is important in the area of aging.

Q: How did so many big-cap drug companies end up in the fund?

A:

We aren't a value shop, but we like bargains, which is why we own Johnson & Johnson (JNJ ) as well as Eli Lilly (LLY ). These companies really got cheap last year.

Another one is Pfizer (PFE ), which is a backdoor biotech play. We currently think the growth prospects for the future are too low. The company has amazing financial leverage, and massive cost cutting will help them grow. There are some things in pipeline people are underestimating. Pfizer is partners with Neurocrine Biosciences (NBIX ), which offers Indiplon, an insomnia drug. If I were a small biotech company, it's the first door I'd knock on. Pfizer has marketing muscle and scale.

Q: What's your investment style?

A:

We're a highly focused fund. Right now, we own about 23 companies. The fund has very low turnover because we try to keep focused on areas we think are going to grow for a long period. Health care is a good area for that -- we have a population that's aging.

Q: What company offers a drug that you're most excited about?

A:

Corcept Therapeutics (CORT ) is a smaller company that's in our portfolio. It hasn't performed well this year, but if their drug works, it's going to be a big deal. They offer a drug to replace electroshock therapy, which is used for psychotics and very depressed people. Electroshock therapy is very costly and scary.

The drug is actually RU486, which is same compound being used in the morning-after pill. It's in Phase 2 clinical trials right now. It could be used on very sick people who are institutionalized and have a high suicide as well as homicide rate. We think that could be an unmet need, and that's something I look for in drug companies.

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