An Eye on Eye Disease...

07/29/2005 12:00 am EST

Focus:

Michael Murphy

Former Editor, New World Investor

With an expertise in the always-popular areas of tech and biotech, it's no surprise that Mike Murphy packs the house at his Money Show presentations, appealing to both traders and investors. Here, he looks QLT, a play on treating age-related macular degeneration.

"If you have never heard of age-related macular degeneration (AMD), be grateful. It is the leading cause of vision loss and blindness in Americans over the age of 65, and it is a growing problem. AMD may have genetic components, but it is strongly linked to age after a lifetime of free radical and UV radiation damage. About 9.1 million people in the US have intermediate or advanced AMD, and this number is expected to increase dramatically over the next decade as the population continues to age.

"QLT Inc. (QLTI NASDAQ) is a biopharmaceutical company with the leading drug for the 'wet' form of macular degeneration. Visudyne is a photodynamic, or light-sensitive drug that QLTI discovered and co-developed with Novartis, who also markets the drug. Visudyne is the leading treatment for this disease, Although QLTI has a  strong pipeline, and is profitable with a strong balance sheet, it is trading at just 13.5 times estimated 2005 earnings and at prices not seen since the biotech market bottom of early 2003. Obviously, a stock doesn’t get priced this way without some reason. I believe it is due to the uncertainty with emerging competition.

"There are now three treatments that some see as a threat to QLT’s corner on the market. The first challenger is Macugen—sold by Eyetech and Pfizer. A new product from Alcon called Retaane may also have some impact. Finally, a new drug from Genentech called Lucentis could hit the market in a year or so. All these drugs threaten to change the competitive landscape around the treatment of AMD, and the threat has sent QLTI near multi-year lows. However, I believe the challenge is overblown and that Visudyne will continue to find an important, often central role in AMD treatment. And, if combination therapy proves to be better than the sum of its parts, Visudyne usage could actually increase in certain indications.

"Further, QLTI is far from a one trick pony and has a number of other approved products, the most significant of which is Eligard. Approved in eight countries, Eligard is a sustained release luteinizing hormone-releasing hormone drug used for palliative treatment of prostate cancer. QLTI is accelerating its R&D spending in line with revenue growth, a sign of a management that’s determined to build a big, long-term winner rather than pander to Wall Street’s love of quarterly earnings. I really like companies that are run this way, and I love the chance to buy their stocks before the results of that R&D hit the bottom line. At a p/e just equal to their 20% growth rate, QLTI should be a $16 stock by the end of this year or early 2006."

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