A Technical "Eye"

01/13/2006 12:00 am EST

Focus:

Yola Edwards

Contributing Editor, Internet Wealth Builder and Top Stocks

Yola Edwardsis an expert in technical analysis with a particular emphasis on Canadian stocks. For her top pick, she looks at speculative biopharmaceutical firm based in Toronto, trading both there and in the US. Here, she turns her technical eye to a play on eye disease.

"QLT Inc. (QLTI NASDAQ) is dedicated to the discovery, development, and commercialization of therapies to treat eye diseases, cancer, and immune disorders. Combining expertise in ophthalmology, oncology, and photodynamic therapy, QLT has commercialized two products to date, including Visudyne, which is the most successfully launched ophthalmology product ever. But the stock has dropped precipitously over the past two years from $30.70 to $5.97 as its Visudyne product is being challenged by rival Genetech’s anti-blindness drug Lucentis, which is still in clinical trials. Genentech states that in ‘head-to-head tests against Visudyne, Lucentis performed better’ and the product will be available late next year.

"It is estimated that approximately 1.2 million Americans, are afflicted with ‘wet’ form macular degeneration, a disease where the central and most important area of the retina, the macula, degenerates. The numbers of those afflicted are expected to rise as baby boomers age. The government estimates that by 2020 there will be 2.9 million people with advanced age-related macular degeneration (AMD). Currently about 500,000 cases of ‘wet’ form AMD are diagnosed globally each year.

"In December, company officials announced that the company is cutting its 2006 sales estimate for Visudyne to a range of $480 - $485 million (all figures in Canadian dollars) from the previous range of $500 - $530 million. Acting CEO Robert Butchofsky also announced an extensive restructuring plan. Here are the highlights:

  1. QLT will restrict its focus to ophthalmology and one other therapeutic area, 'which will be selected based on milestones in 2006.'
  2. Major staff cutting which will see the work force reduced by as much as 46%. Half the cuts will take place as early as January with the remainder achieved through divestitures of non-core operations, assets, and programs.
  3. A 20% reduction from 2005 levels in combined research and development (R&D) and selling, general and administrative (SG&A) expenses in 2006.
  4. Implementation of new processes to ensure greater financial discipline and cost control and to streamline clinical development planning and management.

"These initiatives are expected to result in annualized savings of about $10 million but the company will take a restructuring charge of approximately $5-$6 million in the fourth quarter. The company has $448.6 million in cash and only $172.5 million in debt. There are 92.5 million shares outstanding with a book value of just over $8 per share. Also, QLT announced that it will double the size of its previously announced share buy-back program to $100 million.

"The cost cutting measures are a start but may not be enough and the share buy-back program seems odd in my opinion but QLT is a buy, even with the announcement. All the bad news should now be in the stock price and with the high volume on December 8, 2005 (about 6.6 million shares changed hands on the Toronto exchange and Nasdaq) the selling pressure should be over. Any hint of good news from here will propel the stock forward. This is clearly a turnaround situation so risk-averse investors should stand clear.

"Although QLT Inc. has been a total disappointment, the stock does appear to be trying to form a bottom and the moving average convergence/divergence oscillator (MACD), as well as the momentum indicator have been diverging positively since mid-September. The stock has been trading in a very narrow range over the past four months and appears to have formed a bullish declining wedge, which is now complete. The stock has broken out to the upside out of the wedge and the January 6, 2006 high $6.80 has also confirmed a recent four-week high and a continuation of higher prices to come. The stock should rally to about $9 over the next four to six months with a possibility of a further rally to $12 by year-end."

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