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Yola Edwards

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A cure for what ails you?

Yola Edwards

 

TORONTO (GlobeinvestorGOLD) — Investing in biotechnological and pharmaceutical companies can be risky but the share price decline in selected issues over the past few years may be offering investors a future opportunity.

A biopharmaceutical company, QLT Inc. 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. However, the company's Visudyne product is being challenged by rival Genetech's anti-blindness drug Lucentis, which is still in clinical trials. Genetech states that in "head-to-head tests against Visudyne, Lucentis performed better" and the product will be available in late 2006. Shares of QLT have nose-dived over the past few years, but technical analysis suggests they may be worth a look at current prices.

David Martin, an analyst with Dundee Securities Corp., said investors shouldn't write off Visudyne or QLT just yet. The company "could become a value story if Visudyne sales do not fall off a cliff, and if the pipeline [for new drugs] starts to generate positive results. Visudyne's future may take some time to play out, generating volatility until it does. Pipeline results are expected over the next six to 12 months."

On Dec. 8 the company announced that it is cutting its 2006 sales estimate for Visudyne to a range of $480-485 million 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.

At the end of 2005 the company had $466 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. This fact led to speculation about the possibility of a special dividend but instead QLT announced that it would double the size of its previously announced share buy-back program to $100 million. This will be done through a normal course issuer bid.

There have also been rumors about a possible investor led takeover. However, takeover thoughts aside, technical analysis reveals that the stock's price slide has ended.

QLT

The first positive sign that the stock's price decline was nearing an end appeared in September 2005 when the stock reached a new multi-year low at $7.87, while the moving average convergence/divergence oscillator (MACD) staged a higher low. Although the stock continued to decline further to a low of $6.97 in December, the MACD continued to rise indicating a positive divergence. Since then the share price formed a double bottom from December 2005 to February 2006. In March the stock price ran into overhead resistance from the 200-day MA, and the upper overbought Bollinger band at about $9.10 and was turned back. The stock is also battling the September 2005 falling window gap, which registers at $8.97 — $9.64. Currently the MACD is issuing a sell signal so any short-term pullback should be viewed as an opportunity. Once the rally resumes the stock will run into further overhead resistance at about $13. However, over the next year the rally could take the stock to about $23 as suggested by the monthly Bollinger Bands.

A review of the Philadelphia Pharmaceutical Index technical chart suggests that it may be time to look at investing in the sector. The index has formed several bullish technical patterns but the general overriding one appears to be the ascending triangle formed over the past 3-1/2 years. The pattern is three-quarters complete and a close above 341 would confirm a breakout. The first target to look for would at about 358 over the ensuing six months. Then it should pauses to catch its breath. However, a close above 358 should see the index continue to soar to 460 over the next 16-18 months.

Pharamceutical Index

Aggressive investors may wish to consider shares of Merck & Co., which have shown signs of life lately. The share price was mauled by the recall of its Vioxx drug in September 2004, and the sharp share price decline created a falling window gap from $34.10- $43.04 (U.S.) defined by the initial drop in 2004. However, the overall tone has turned positive over the past six months, as the stock has finally completed a double bottom, bottoming pattern, which extends from November 2004 to October 2005 at about $25.50. Since the stock is currently in the gap down or falling window resistance area it may experience some backing and filling as it also has some conflicting indicator signals. The stock has been turned back from the upper overbought Bollinger Band, but the MACD has issued a buy signal from a relatively oversold area. Although the stock could back off to support at about $34, it appears that once the $36.50 midpoint is surpassed the stock will be poised to rally swiftly to the double bottom's technical target measurement of about $45 within the next year.

Merck Co. Inc.

Yola Edwards is a contributing writer and technical analyst for Bell Globemedia Interactive, providing options and technical analysis research on a variety of North American equities.

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