Vivian Wohl admits that she spends an inordinate amount of time on Facebook—following patient groups to see what people are saying about new medical devices or services. Such chatter is never the basis of an investment decision, but it can spark an idea or reaffirm an existing one.
In 2014, for instance, she learned that a diabetes advocacy group had hacked DexCom (DXCM) glucose monitoring devices in a way that made them send alerts to family members if a patient's blood-sugar levels plunged dangerously low. That pointed to strong demand for the company's next product in the pipeline, which had the alerts feature built in. "It showed me the urgency for the company to get their sharing technology through the FDA, and I think it helped accelerate approval," says Wohl, who is one of eight portfolio co-managers of the $1.7 billion Federated Kaufmann Small Cap fund (FKASX) and focuses on medical devices and health-care software and services.
Wohl's sleuthing also entails long calls with health-care providers and a packed calendar of medical conferences and trade shows, where she takes particular interest in early-stage companies in the "low-rent district" on the perimeter of the convention floor. It's time well spent. Last year, the 20 companies that Wohl covers returned 69%, no small contribution for a fund that typically has 25% to 30% of its assets in health care; co-manager Tom Brakel covers pharmaceuticals and biotechnology.
In 2018, the fund returned 6.9%, versus an average decline of minus 5.8% for Morningstar's small-growth category. Over the past three years, the fund is up an average of 32.6%, better than 98% of its peers, and it ranks in the top decile for every major trailing-return period since it launched in 2002.
Conventional investment screens are of little use for Wohl's style of investing—spotting innovative health-care companies and, in many cases, taking small positions on the initial public offering, or even sooner.
Instead, she has developed her own process over the course of her 35-year investing career. For one thing, a company has to have potential to be No. 1 or No. 2 in its market. "It's tough to make money or attract an acquirer as the No. 3 or No. 4," says Wohl, who studied design and the history of science at Cornell University—an odd mix of majors that now seems prescient—before getting her M.B.A. at Columbia University.
In general, companies need to have 65% gross margins—that's what it takes to fund research and development and ultimately turn out 20% operating margins, she says. There needs to be growing demand for a product or service—it's not enough to take market share—but Wohl doesn't shy away from companies that solve niche problems.
Case in point: Last year, Wohl invested in SI-Bone (SIBN), which makes minimally invasive implants to treat sacroiliac joint disorders. "They're creating that market, and they were growing it," says Wohl, of the company, which went public in 2018 and had 89% gross margins in the third quarter of that year.
Of course, profitability depends on a critical detail for Wohl. "Will the payers pay?" she asks.
When Inspire Medical Systems (INSP) went public last May, Wohl took a small position in the company. It makes an implant that treats sleep apnea by stimulating the muscles at the back of the tongue to keep the airway open. For many people, this is a better alternative to continuous positive airway pressure, or CPAP, machines, which require wearing a mask.
The product received Food and Drug Administration approval in 2014, but insurance reimbursement was a key hurdle. "We know that patients want the product and doctors want to implant the product, but it needs to be paid for," she says. Last summer, Aetna announced that it would cover the implant, and last month Evidence Street, the medical review platform for the Blue Cross Blue Shield Associations, upgraded its recommendation of Inspire's product. Insurers have since been steadily giving it the thumbs-up for reimbursement. "I think Inspire can be a billion-dollar company," says Wohl, referring to its revenue, which was $48 million in 2019.
Wohl also pays close attention to the quality of senior management and its ability to execute on a plan. "First-generation products are often crude, so it's critical that a company have the right team to make product improvements, create a sales organization, field clinicals, and manage resources," she says, adding that a change in management is often the impetus for her to invest or take a more substantial position.
This is how Wohl came to buy Dexcom when it was trading around $3 a share. She initially bought the company in 2002, when it was still private, but sold after its 2005 IPO because, she believed, Dexcom's glucose monitoring system still needed work. When the company brought in a new CEO in 2007, Wohl bought again. "It's the stock that keeps on giving," she says. The shares recently traded around $152 apiece.
While Wohl looks for promising young companies to pick up, she will also hold on to her winners. The fund's average market capitalization is a tad over $2 billion, but it can own larger names as long as 80% of its holdings fall squarely in the small-cap universe.
Wohl's largest position, Veeva Systems (VEEV), is a stock she bought shortly after its 2013 IPO and has continued to own. It's also a holding in the mid-cap and large-cap funds that Wohl co-manages with her Federated Kaufmann colleagues.
The company specializes in cloud software for life-sciences companies and other regulated industries. "They have figured out the formula of knowing what software to build for this market and how to build it," she says, noting that Veeva's has 35% operating margins and is growing revenue at about 20% a year. At about $118 recently, the stock has more than quadrupled since the IPO.
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