4 Health-Care Stocks Worth Watching

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With earnings season nearly upon us, we recently asked four Motley Fool writers and analysts what health-care companies they're keeping an eye on as the third-quarter numbers began to trickle in. Here's what they had to say.

Sean Williams, Fool writer: I've made it no secret that I look toward small-cap and micro-cap biotechs for unique opportunities. With few analysts willing to pay micro-cap biotechs and their surprising pipelines the proper credence, the potential for huge pops is always there. This quarter I'm intrigued to see what progress Zalicus (NAS: ZLCS) has made on its pipeline.

Specifically of interest is the company's phase 2b clinical trial for Synavive. Synavive has thus far shown promise at reducing inflammation in patients with rheumatoid arthritis, as well as hand and knee osteoarthritis. The rheumatoid arthritis market is slated to grow by 50% over the next decade, and with few competitors, Zalicus could stomp out its footprint early.

Don't dismiss the company's early-stage ion channel product candidates, either. Instead of focusing on N-type and T-type inhibitors, which are calcium channel blockers and already have commercialized representation in the marketplace, the really exciting possibility rests with its sodium channel blockers. They're currently in preclinical trials, and CEO Mark Corrigan anticipates that one or more of these ion channel products could be in phase 1 clinical trials before the end of the year.

Zalicus doesn't look like much now, but it has a lot to offer for those with a strong stomach and a long-term view.

Brian Orelli, Fool writer: I'm looking forward to seeing what "modest quarter-over-quarter growth" looks like for Dendreon's (NAS: DNDN) Provenge.

Sales of the prostate-cancer treatment hit a roadblock when the company expanded beyond academic hospitals to community doctors. Dendreon claims doctors were slow to prescribe the treatment because shelling out $93,000 in just over a month was difficult for independent doctors who don't have deep pockets like university hospitals.

After pulling its sales guidance of $350 million to $400 million for the year, the company switched to an essentially-useless "modest quarter-over-quarter growth" guidance. Modest growth isn't like porn; you don't know it when you see it. The best we can do is get some idea of what Dendreon thinks it means from monthly sales figures it's released so far.

The company said it sold $19 million in July and stuck with the guidance when it said sales grew to $22 million in August. If you assume that growth continues, September sales could come in at about $25 million, or $66 million for the quarter. That's a whopping 28% quarter-over-quarter increase from the second-quarter gross sales.

I guess that's modest compared with the previous guidance that put fourth-quarter sales double the first three combined, but it's still outstanding year-over-year growth. If Dendreon could keep up that growth rate, it'll have a blockbuster in a little over a year. Wonder what it'll call the growth then?

David Williamson, health-care editor: Let's shift gears and switch from small-cap biotech to small-cap medical-device companies. One company I'm excited to see Q3 results for is  MAKO Surgical (NAS: MAKO) .  MAKO has a similar story to Intuitive Surgical (NAS: ISRG) , but it's nowhere near as far along.  MAKO's RIO system may be the future of arthroplasty, but as of now the company still has not turned a profit and is burning cash.

I don't expect that to change anytime soon, but I am looking for explosive top-line growth. For example, Q2 saw revenue grow 81% year over year. I also want to see how many units the company is moving. As of now, the global install base is 86, and  MAKO would have to top 12 units to beat last quarter's performance. These systems aren't cheap, but getting doctors to adopt the RIO system and perform more procedures is step one on a path to recurring revenue and, ultimately, profitability.

Shares popped earlier this month, when the company introduced a total hip-replacement procedure that was approved in February. Shares certainly aren't cheap in the classic sense, but they could very well keep the positive momentum going with some good numbers.

Rich Smith (TMFDitty),Fool writer: My favorite undiscovered idea in health care? That's gotta be AngioDynamics (NAS: ANGO) , maker of the cancer-killing NanoKnife, which uses electricity to zap cancer cells dead. It reports next Thursday, and I want to see if it's keeping up with past trends.

I first profiled this company in October of last year, in a column titled "Is This the Cheapest Stock Ever?" Amazingly, today this "cheap" stock is even cheaper -- down 5% from when I first profiled it -- but the value's still there. Still waiting for investors to notice it. AngioDynamics, you see, sells for a scary-seeming P/E ratio of 41, which looks pretty high for a stock that most analysts expect will grow at only about 10% per year over the next five years.

Looks can be deceiving, however. For example, AngioDynamics' cash-flow statement reveals that this company -- ostensibly only an $8.1 million-a-year earner -- actually generated nearly $31 million in free cash flow over the past year. If you back out the company's $120 million net cash position, therefore, this supposed 41 P/E stock is really costing you only an enterprise value-to-free cash flow ratio of 7. For a 10% grower, that looks cheap to me. Its third-quarter results should continue to vindicate my beliefs.

As I wrote in a follow-up column just this past summer: At a price this low, "I'd probably be willing to buy AngioDynamics based on its legacy businesses alone. Throw the disruptive profit-making potential of 100%-grower NanoKnife into the equation, and this stock's a no-brainer."

Well, there you have it. We suggest you add Zalicus, Dendreon,  MAKO Surgical, and AngioDynamics to our personalized My Watchlist feature. It's free, and once you sign up, you won't miss any news on the companies that interest you.

At the time this article was published David Williamsonowns shares of Dendreon, but he holds no other position in any company mentioned. Check out hisholdings and a short bio. The Motley Fool owns shares of Dendreon.Motley Fool newsletter serviceshave recommended buying shares of  MAKO Surgical and Intuitive Surgical. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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