BC Business
In the words of Warren Buffett, be brave when others are fearful and fearful when others are brave.
Sinking cash into biotech darlings such as QLT is not for the squeamish, but the payoff could be sweet. Paul Hastings lives in the tortured aftermath of great expectations. Two years before he left northern California to take the helm of B.C.’s biggest biotech, QLT, shares had traded as high as $115. QLT’s Visudyne was hailed as a miracle drug, a laser-activated treatment for a wicked condition called wet age-related macular degeneration that can cause blindness in the elderly. Investors were breathlessly anticipating phase-three clinical trials that would pave the way for wider FDA approval in the U.S. “It was an incredible innovation,” says Hastings. And he’s right. Now, fast-forward three years: Visudyne is approved in 72 countries. More than half a million people have been treated. Sales topped $300 million the first half of this year. And QLT is solidly profitable, with roughly half a billion in cash and short-term investments in the bank. Naturally, QLT stock has shed over 80 per cent of its value since enthusiastic buyers snapped it up at $115 five years ago. You could hear the irony in Hastings voice at this year’s AGM: “From an operational point of view,” he told the grim-faced audience, QLT could never be working better than it is today.” He’s right. “And we have a pipeline that rivals any of the large biotech companies.” No disputing that, either. Hastings snapped up Colorado’s Atrix Laboratories a year ago for its fat pipeline of new drugs, including headline treatments for acne and prostate cancer. So, dumbfounded investors are wondering, how did QLT’s shares plummet in value by over $100 as revenues were growing fivefold? Even a year ago, the stock was trading over $40. Hastings gave shareholders a one-word answer, shocking in its clarity – if you can get past the English major’s objection that it’s not a real word. Obsoleted. Visudyne is probably “not going to be obsoleted,” he assured everybody. And everybody in the room knew what it meant to be obsoleted. They watched Eyetech Pharmaceuticals, one of QLT’s competitors, get pretty badly obsoleted one day in May, losing nearly half its market value – about $600 million – in a single trading session after another rival, San Francisco’s Genentech, came out with clinical results for a drug, Lucentis, so powerful it didn’t just stop the degeneration, it actually improved the eyesight of some patients participating in the trial. QLT dropped just ten per cent that day, but investors started hearing footsteps. Five years ago, they eagerly shelled out big bucks for QLT because Visudyne was a potential wonder drug. Nobody seemed to imagine that somebody else (say, Genentech?) might come up with another wonder drug to treat the same disease. When you’re selling medicine for around $1,600 a tablespoon – that’s what QLT’s Visudyne sells for – the last thing you need is some Johnny-come-lately showing up with a better mousetrap. At this stage, nobody knows how big a bite Genentech might take out of QLT. The consensus is that final FDA approval for Lucentis – if it comes – is more than a year away, at the earliest. The two drugs work in completely different ways. And Genentech’s therapeutic benefits come with a gruesome price: Lucentis is injected directly into the eyeball with a needle. Treatment involves as many as 18 injections at about $1,200 a poke. Visudyne is injected in your arm (who can’t take a needle in the arm?) and travels to your eye in your bloodstream, where it’s activated with a laser. Some analysts think economics and squeamishness might work in QLT’s favour. Value investors who can handle risk love this kind of uncertainty. Clinical results make great headlines when they are announced. But the true effect on the market often isn’t clear for years. The best day to sell a stock, they argue, is the day some new miracle cure is making headlines with FDA trials. And a good day to buy is when earnings are strong, there’s cash in the bank and anxiety reigns. In the words of Warren Buffett, be brave when others are fearful and fearful when others are brave.