The Companies in the 2013 Hot Seat

Chris Hill: I think it's natural, at the beginning of the year, to look out and think not only in terms of potential, but in terms of pressure.

When you look at health care companies in 2013 that are on the hot seat -- that in some ways for some of them maybe it's not a make-or-break year, but it's a year where there's more pressure than they've seen in the past -- what are some companies that you think are on the hot seat?

David Williamson: I'd like to break that up into two categories. One is drug launches, and the other is companies that have stumbled a bit in 2012.

Drug launches in this space tend to actually get sold off because, like I said before when we were talking about the obesity drugs, in some ways getting the drug approved is just the first step. A lot of short-term traders like to ride that wave up, and then once you actually have to get in the business of selling drugs they don't want to be bothered with that, so you see a lot of pressure.

It becomes more of a "show me" mentality. Amarin, whose drug Vascepa was approved for high triglycerides -- they got approval in the summer. They still haven't launched it. They were hoping to get bought out; they've been looking for a buyer.

Chris: That has just a whiff of desperation about it.

David: A little bit. A little bit.

It's a good drug, though. It works, but they just really wanted to be bought out, and I think investors were hoping for that too, so when they announced they were launching the drug, shares collapsed a bit. That doesn't preclude a buyout necessarily, but I think now the pressure's on them to show that there is a market for this drug if they are potentially going to get bought out.

They have some other trials pending to expand it to a wider patient population, but... It should be successful, in the sense that it is a superior product to GlaxoSmithKline's Lovaza, but they still have to do it.

I mentioned the obesity drugs before. That's a market where we've seen a lot of issues, and doctors may be hesitant to prescribe a drug with serious safety issues, when diet and exercise tend to work pretty well without too many safety issues, other than maybe a twisted ankle and some aches and pains in the morning.

That will be a real interesting race to watch, between Arena's Belviq and VIVUS' Qsymia. Qsymia has been a bit of a dud, so far on launch. Now, prescriptions were been picking up. They've had some insurance coverage.

They've seen a 30% abandonment rate because of a lack of insurance. Doctors would prescribe it to a patient, and only about two out of three would actually get the prescription filled, so as more get insured that should come down, which should boost sales.

Now as far as companies that have stumbled, you look at Dendreon, that has a $93,000 prostate cancer drug, Provenge. Expectations were high on launch. They built all this extra manufacturing capacity that it turned out was unnecessary. Demand didn't really materialize. Doctors originally balked at the cost, because there were...

It was the only one indicated for pre-chemo use, but Johnson & Johnson's Zytiga, which actually just got approved for pre-chemo use, was prescribed basically off-label for it. It only costs $5,000 a month, so if you use Zytiga for a while it does get more comparable in cost, but that $93,000 outlay is a lot all at once.

Doctors have to pay that until they're reimbursed, so there's a bit of trepidation, as far as cash flow of an office. Dendreon replaced its CEO; they're revamping the sales team; they're trying to lower cost of goods sold.

It's unlike most drugs; it's an immunotherapy, so it's tailored for each individual person, so it's really expensive to make. It'll be interesting to see whether... They're running a trial using it in sequence with Johnson & Johnson's Zytiga.

Medivation has a drug called Xtandi. I actually like Medivation as a stock to watch for 2013 as well. I think Xtandi is really poised to displace Zytiga.

Dendreon, if this trial is successful, they can potentially argue, "You do need to pay $93,000, because you're getting significantly better outcomes." If the trial is not successful, the company may continue to really struggle to sell their drug.

Then MAKO Surgical is another company that stumbled with sales. They've had a couple of bad quarters in a row. The first quarter, they missed by a little bit, they revised guidance down. The next quarter, they missed even worse and revised guidance down further.

Chris: That's a bad trend.

David: It is a bad trend, especially when you're a growth stock that's not profitable. You want to see those sales keep going. Third quarter was a little better, but it's still troubling. Share prices have been really hammered.

I know it's a popular stock with Fools and with a lot of our viewers, and so it's important to see that they can turn it around. It's a device that has a wide application, as far as partial knee replacement and hip replacement, so there's a lot of patients that could use it but they just need to continue to ramp up sales and really reverse the trend.

Hopefully, with the health care law passed and deemed constitutional, hospitals may be more willing to open up the vault, as far as buying new equipment, if they know, "OK, we're now going to get X dollars from every patient."