To say we are in a market of historical dislocations is to state the obvious these days. Due to massive deleveraging across all asset classes, interesting short- and long-term opportunities are being created, particularly in the mid- and small-cap arena.
One interesting dislocation occurs between a company’s market capitalization, or the total shares outstanding multiplied by the current price per share, and the associated net cash on that company’s balance sheet.
Take, for example, QLT (QLTI).
Currently, QLT, which closed on Tuesday at $1.82, has a market cap of $135.8 million and 74.6 million shares outstanding.
But QLT has $155.95 million in cash sitting on its balance sheet! With that market cap, that amount of cash and zero debt, QLT is trading with a negative enterprise value of $8.2 million. And companies with negative EVs are always worth looking at.
QLT, a small biotech firm based in Vancouver, Canada, makes prostate cancer drug Eligard, macular degeneration drug Visudyne and acne treatment Aczon.
Eligard, launched in 2002, has been approved in eight countries, including North America, various E.U. countries, Australia and New Zealand. In the U.S. alone, there are about 220,000 new cases of prostate cancer each year. The worldwide market is more than $1.5 billion, of which $800 million is in the U.S.
Even better, QLT hired Goldman Sachs as a financial adviser, and QLT management is looking to sell off the Eligard part of the business. Merrill Lynch says that Eligard is worth $150 million to $180 million, while RBC says $125 million to $145 million.
Launched in 2000, Visudyne, which is used for the treatment of wet age-related macular degeneration, is approved and used in more than 75 countries. Sales are currently declining, but if it's approved for use as a combination therapy, sales should pick up again.
For the fourth quarter of 2008, QLT reported Visudyne sales of $30.6 million for the quarter, down 32.7% over the same quarter in 2008, and $141.9 million for the full year ended Dec. 31, 2008, down 34% from annual sales in 2007. Sales in the U.S. for the quarter were $8 million, down 20% from the prior-year fourth quarter, while sales outside the U.S. were $22.6 million, down 36.3% from the same quarter of the prior year.
Merrill says Visudyne is worth $150 million, while RBC says Visudyne is worth $225 million. These estimates all assume two times current sales.
Aczon, a gel used for the treatment of mild to moderate forms of acne, is approved in the U.S and Canada. Assuming two times current sales, it's worth $25 million to $50 million.
On Jan. 13, the U.S. Court of Appeals for the First Circuit affirmed a lower court's judgment against QLT in a patent case brought by Massachusetts Eye and Ear Infirmary, citing unfair trade practices under Massachusetts state law. QLT has to pay out $120 million, something the firm has already planned and for which it has the associated capital sitting in bonds. Thus, there is no negative affect from the court's decision.
On Dec. 1, 2008, QLT announced that its board of directors approved a buyback plan worth up to $50 million though a Dutch tender offer, as the company would pay between $2.20 and $2.50 per share for stock. On Jan. 30, QLT reported that approximately 24.5 million shares were properly tendered and not withdrawn at or below a price of $2.50 per share. This represented roughly 26.8% of total shares outstanding, and approximately 81.8% of the 24.5 million shares will be accepted by the company.
QLT offers an interesting opportunity based on the following:
1. QLT is currently trading below its cash in the bank.
2. QLT has three cash-flow-positive businesses, one of which Goldman Sachs is trying to sell.
3. Since October 2008, insiders have bought roughly $1 million worth of common stock.
4. The Dutch tender offer, while slightly oversubscribed at 24.5 million shares, still shows investors positive outlook on QLT going forward.
QLT closed on Tuesday at $1.82, down 8.1%. It hit a 52-week high on June 9, 2008, of $4.15 and a 51-week low on Nov. 26, 2008, of $1.69.
For more biotech ideas, check out the QLT Biotech portfolio on Stockpickr.
Know what you own: QLT is mid-sized biotech company. Some of the larger biotech companies in the industry include Genentech (DNA), Pfizer (PFE), Amgen (AMGN), Biogen Idec (BIIB), Merck (MRK) and Celgene (CELG).
Posted on Feb. 17, 2009
