Eying Profits in Eye Sight

When my children were young and they had to go to the doctor, I'd tease them that he was going to stick a needle in their eye. While I might not win any good parenting awards, I would remind them to take proper care of their eyes: Don't sit too close to the TV, don't read in the dark, and eat your carrots.

Losing your eyesight is not a pleasant thought. Yet as we age, the probability of contracting macular degeneration increases significantly. It's the leading cause of blindness in people age 50 and over. The macula is the part of the eye that lets us see in detail and perform tasks such as reading. Age-related macular degeneration (AMD) is expected to become even more of a problem within the next 10 years as the baby-boom population reaches its senior years.

The FDA recently approved Macugen to combat AMD. Manufactured by Pfizer (NYSE: PFE) and Eyetech (Nasdaq: EYET), a tiny biotech that went public early last year, Macugen blocks the formation of a protein called vascular endotheliel growth factor (VEGF) which stimulates abnormal blood vessel growth behind the eye. These wayward blood vessels leak fluid and blood, damaging the macula with scar tissue and causing blurry vision. VEGF also creates what appears to be a black hole in the center of the field of vision. Known as wet AMD, it's responsible for only 10% of all AMD cases, but 90% of the severe vision loss associated with the disease. Macugen promises to have a fairly large and growing market: Approximately 1.6 million people have been diagnosed with wet AMD and 200,000 new cases are diagnosed each year. Pfizer expects revenues from Macugen to eventually reach $1 billion worldwide.

Treatment with Macugen sounds rather ghastly, though, as doctors must inject it with a needle into the viscous liquid between the retina and the lens every six weeks. The treatment is not cheap, either -- about $1,000 an injection. Patients need as many as 18 injections for a full treatment.

The only other FDA-approved treatment is market leader Visudyne, which is manufactured by Hidden Gems pick QLT Inc. (Nasdaq: QLTI) and Novartis (NYSE: NVS). Its treatment is limited to one subtype of wet AMD, yet that subtype accounts for about 25% of the patient population. It does have approval in Europe, though, for all three types of wet AMD. QLT has more products in the pipeline, but to date it has essentially been a one-trick pony, with Visudyne generating some $357 million in sales in 2003 and an estimated $455 million in 2004, or 27% growth. And treatment doesn't require a needle in the eye. Injected into the arm, Visudyne is activated by shining a cold laser into the eye which closes the leaky vessels. It's also expensive, at about $1,500 per dose, but requires only four or five doses for a full treatment.

Other possible treatments are on the horizon. Lucentis, which has been developed by Genentech (NYSE: DNA) and Novartis, blocks the formation of all forms of VEGF, but does require a needle to the eye to be administered. Retaane, by Alcon (NYSE: ACL), is similar to Visudyne in that it blocks the chemical process that allows abnormal blood vessels to grow, but it is administered once every six months. And several companies are exploring RNA interference as a treatment for AMD. Sirna Therapeutics (Nasdaq: RNAI), Alnylam Pharmaceuticals (Nasdaq: ALNY), and venture-stage Acuity Pharmaceuticals are studying how to use RNA -- the genetic messenger in DNA -- to shut down the production of VEGF altogether instead of just blocking it. Again, though, it might require sticking a needle in the patient's eye.

Small-cap investors eyeballing this sector would be quick to see that only QLT is cash-flow positive and sports a price-to-sales ratio half that of its nearest competitor. The others sport multiples magnitudes larger and while Macugen is a near-term threat, Visudyne remains the leader. When it was selected as a Hidden Gems recommendation in October, QLT was trading at $16.50 and currently is off some 2% from there. It could still make a profitable addition to your portfolio, leading to some eye-popping returns.

Funny, though, as I age I realize that my kids might just get the last laugh by taking me to the doctor to actually have that needle stuck in my eye.

Looking for more eye-popping returns for your portfolio? Check out Tom Gardner's Hidden Gems where his stock selections are up an average 46% compared to 11% for the S&P 500.

Fool contributor Rich Duprey remembers his mother's admonition not to run with scissors. He does not own any of the stocks mentioned in this article.