For example, we have a long-standing investment in Gilead Sciences. Gilead has the best in class medicines for the treatment of HIV AIDS, and its market cap, over the nine years that we have been involved with the company, has gone from about $750 million or $1 billion, all the way up to $26 billion today. That is a dramatic return and it speaks of the value Gilead’s medicines have for a very serious illness.

Relative to our peer group, our median market cap is smaller because we tend to have a greater number of holdings whose market caps are below $10 billion, as opposed to above $10 billion.

Q:  But with the smaller companies in most cases this may be their only medicine.

A: That is correct. One-product companies are at much greater risk of something unpredictably bad happening to them, than a company that has ten or twelve products and if you lost one, it is not that devastating. So, that is why I say all else being equal.

Q:  How many analysts work for you to help you identify these companies?

A: We have six full-time healthcare analysts whose job it is to cover the sectors and we generate healthcare ideas not only for the T Rowe Price Health Sciences Fund, but for the firm overall. We have a pharmaceutical analyst in London who has the non-U.S. pharmaceutical companies, as well as Japan and some healthcare companies in Europe. I myself also function as an analyst and we have four other full-time healthcare analysts.

Q:  How is your research process organized?

A:We have an internal rating system. We have daily written research commentary. We spend the majority of our time visiting companies on site; they visit us; we speak frequently to management; we go to every significant major medical meetings for diabetes, cardiovascular disease, infectious disease, cancer to obtain a good understanding of a lot of drugs that are still in their experimental, development phase.

Our best ideas generally relate to companies with unrecognized value. Unrecognized value can come from a growth rate that is about to accelerate or something that is totally unrecognized in the pipeline. That component of unrecognized value could be where our perspective on the company’s growth is greater and more sustainable, than is currently embedded in its share price.

We are not held to any particular investment style. We have companies that one might call value stocks and companies that have high multiples and growth rates but the common denominator is a belief that we are holding a core position that has underappreciated value in the marketplace and we can deliver to our shareholders below average risk.

Q:  How do you control risk?

A: We use three ways to control risk. One is referencing position size or the percentage that a security comprises in your portfolio. The second way to control risk is based on the price of a stock. The third way has to do with the use of options.

Q:  Can you describe your buy and sell disciplines?

A: In general we will sell a stock outright if it is clear that our investment thesis turns out to be wrong. We won’t try to re-weave a story and we won’t wait longer to see if something else might materialize.

Alternatively, we both add to a position and trim a position that remains a core position, which means that the investment thesis is intact but the company’s share price is fluctuating at a considerable range.

In that regard, we might modestly trim a core position by 10% or 15% or add to it based on the inherit volatility that affects many of the holdings in the portfolio.

Q:  Do you consider yourself a value investor or a growth investor?

A: Looking at the majority of our holdings, most people would describe us as growth investors. I believe that the healthcare sector as a whole is a growth sector. Within our sector we are looking for growth that we don’t have to overpay for, or we are looking for a return to growth that may be underappreciated. So it’s both value and growth at a reasonable price.

Imagine a graph and on the “x” axis is time and on the “y” axis is value or money. You start a straight line from the origin and have it at a 30-degree angle off of the “x” axis - that is the growth profile in earnings per share of a growth company. You keep that line and put one more line that only goes about five or ten degrees off of the “x” axis – that is what you might call a “value stock,” slow growth, inexpensive, etc. The reward for a value investor is to identify the companies that are slow growing but whose growth rate is going to improve and that second line is going to move up. The risk to the value investor is if that growth rate simply maintains itself and never moves up.

The inverse of that is the growth situation. The reward for a growth investor is if a company can maintain a high or above average growth rate for some sustainable period of time, hopefully measured, at least in terms of a few years. The reward for the investor is to have an investment in that company while the slope of the growth line did not change over a period of time because stocks absolutely track their level of earnings over time.