I actually undersold it in the headline. For the three stocks I'm about to discuss, billionaire Andreas Halvorsen's Viking Global Investors LP fund more than tripled its holdings.
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None of these is a major holding -- Anthem is the largest at around 3% of Viking's assets -- but clearly Halvorsen is seeing something interesting in each of these three companies.
So is there a compelling case for these stocks? Let's take a look under the hood.
Kite: on a tear
Have a look at Kite's chart for last quarter:
Since then, Kite has climbed to over $80 per share. Depending on when last quarter it bought, Viking may already be sitting on a sizable gain. Much of that gain can be attributed to positive press around Kite's immunotherapy drug KTE-C19, which is beginning phase 2 trials. KTE-C19 is being examined in a number of different cancers, including non-Hodgkin lymphoma, mantle cell lymphoma, and chronic lymphocytic leukemia. The drug has tremendous potential -- analyst estimates are generally well over a billion dollars in annual peak sales -- but I think there's a big issue that undermines the stock: distance to commercialization.
KTE-C19 is in phase 2, and management has guided for hopeful commercialization in 2017. That's a long way away, and plenty can go wrong in the interim, given that Kite has only gone through very early-stage studies, and especially considering that cancer drugs have an awful track record of approval. While Kite has plenty of cash in the bank -- $368.6 million as of the end of last quarter, with a quarterly cash burn of $24.3 million -- there is a great deal of risk in its mostly early-stage pipeline.
Too risky for my blood -- and maybe for yours, too. Fortunately for investors, McKesson and Anthem are, well, more established.
McKesson: big and growing
If clinical-stage biotechs that break valuation models before breakfast freak you out (and you're not alone, trust me), you might find McKesson a bit more to your taste. It even pays a dividend! Although a 0.6% yield is piddly.
Anyway. McKesson's main line of work (98.5% of its revenue, to be precise) is supplying drugs and surgical tools to pharmacies and hospitals. It's a low-margin, high-volume business; McKesson runs a 5.8% gross profit margin in its Distribution Solutions segment. But there's plenty of demand, and McKesson grew revenue in that line of work by 11% year over year last quarter.
The other side of the business is technology solutions, which runs a 53.5% gross profit margin but is struggling to grow, with a 6% revenue decline year over year last quarter, and represents 1.5% of the company's total revenue.
If you're looking for lightning-rod controversy and a quick double, McKesson's not your kind of stock. This company's a steady Eddy that's been in business for 182 years, and it's done quite well for investors with a 17% compound annual growth rate since 2009.
Anthem: betting on the future
Anthem is investing heavily in two major healthcare growth trends: accountable care and Medicare Advantage.
Anthem currently has over 150 accountable-care organizations (ACOs) under its umbrella, serving around 4.2 million patients. ACOs have a simple but difficult goal: reduce expenses while maintaining or even improving care. They meet their goals by reducing costly inpatient stays and emergency-room visits, mostly through better coordination and preventative care. I'll let Joe Swedish, Anthem's CEO, explain how well it's doing, as quoted at S&P Capital IQ: In the first year of the ACO program, Anthem is "showing 7.8% fewer acute inpatient admissions, 5.7% fewer inpatient days, a 5.1% decrease in outpatient surgery costs, and a 3.5% decrease in ER costs with a 1.6% decrease in ER utilization."
Medicare Advantage, the private Medicare plans -- also known as Medicare Part C -- are a lucrative opportunity to invest in the graying of America. Anthem doesn't have meaningful scale in MA like its competitors Aetna and UnitedHealth Group do, so it's buying Cigna to begin that scale-up. The plan is to take the massive employer-based contracts that Anthem and Cigna currently operate and find a way to retain those patients as they grow old enough to sign up for Medicare. It's a bold move, in keeping with Swedish's great work to capitalize on these big trends.
If I had to buy one...
Anthem is the winner. I'd choose it in a heartbeat. No knock on the others, but I think Anthem gives investors the right combination of business success and forward-thinking growth opportunity. Speaking of growth opportunities...