Shares of biotech drug maker QLT (NASDAQ:QLTI) rumbled up 22.5% to earn the No. 2 slot among Nasdaq percentage gainers yesterday. And there was actually some legitimate business news to back it up.

A Medicare advisory committee yesterday voted to expand uses of QLT's $360 million-a-year drug Visudyne for which Medicare -- or more properly the U.S. Centers for Medicare and Medicare Services (CMS) -- will reimburse doctors. Because Visudyne treats age-related macular degeneration (AMD), the leading cause of blindness for people over 50, CMS reimbursement is crucial for business success.

If CMS adopts the panel's recommendation -- and a decision is expected by the end of 2003 -- it would agree to reimburse practitioners for another type of AMD that, according to QLT, affects about 60,000 new people each year. Given that the company says 250,000 patients have used Visudyne for AMD so far, and with sales at a $360 million-a-year run rate, it's significant to expand the reimbursement market another 60,000 annually.

And you thought FDA approval was the big hurdle? For most drugs, it's just the beginning.

When I wrote A Quick Double?, QLT was underpriced relative to its free cash flow growth. With an enterprise-to-free cash flow multiple a mere 10.7 vs. a free cash flow growth rate twice that or more, the stock offered the potential for a quick double or more. Today, that multiple is around 22.

I don't claim prescience, and no sane person predicts short-term stock price movements. What happened? You could say that "the market" in its wisdom found the value. Or you could observe that the investing herd's two-year desertion of all things biotech -- whether with growing sales and free cash flow or not -- including QLT simply thundered in the other direction beginning at the end of March when biotech as a whole zoomed, spurred by positive news from trials of Genentech's (NYSE:DNA) Avastin.

Either way, with the masses aside and QLT's price up 70% since then, would CMS approval bring enough new U.S. Visudyne revenues to QLT and the division of big pharma Novartis (NYSE:NVS) (with whom it splits revenues 50-50) to make the stock a value today?

The market inefficiency that led to QLT's undervaluation is gone. From today the question is whether the company will use its Visudyne riches to make investments that offer sufficient return. Bolstered by $267 million in cash and equivalents at the end of Q2, plus $172.5 million from its recent 3.0% convertible debt offering, QLT can pursue its ambition to be an established drug maker for some time.

With this cash and prodigious revenue from growing Visudyne sales -- perhaps soon to receive another boost -- it can advance its current pipeline, make selective purchases and partnerships to fill it, and compensate for May's news that it had stopped Phase 3 trials of its non-small cell lung cancer candidate tariquidar.

It can, but QLT is still a speculation until the pipeline offers more promise. The cash and Visudyne revenues cushion the risk while time shows management's investment skill.

Senior Analyst Tom Jacobs often writes about biotech and drugs at Fool.com and pens the monthly investing column for the journal Nature Biotechnology. Join him as the guest analyst for the upcoming issue of Tom Gardner'sHidden Gems. He owns no shares of companies mentioned in this Take, but does own others you can find in hisprofile.