Biopharmaceutical company and former Motley Fool Hidden Gems pick QLT (NASDAQ:QLTI) is a company I've been watching for a while. Currently sporting an estimated forward P/E ratio of around 15 and with almost two-thirds of the company's market cap consisting of cash, the company looks cheap at first glance. However, there are good reasons why investors are staying away from QLT.

The primary reason has to do with competitive pressures on QLT's lead drug, Visudyne. With the approval of Genentech's (NASDAQ:DNA) Lucentis last Friday, the market for drugs treating age-related macular degeneration (AMD) just got a little more crowded. AMD is a disease that causes vision loss and eventually blindness, and the current top treatments for it are Visudyne, Genentech's Avastin, and OSI Pharmaceutical's (NASDAQ:OSIP) Macugen.

The approval of Lucentis puts QLT in a tough position because Lucentis has already exhibited superior efficacy versus Visudyne in head-to-head trials. Combine this with the fact that many sufferers of AMD are already being treated with Avastin off-label because of its ultra-cheap price and similarity to Lucentis, and there will be little room for Visudyne in the AMD market unless future combination studies show a benefit to using Visudyne with Lucentis.

In the first quarter of 2006, Visudyne sales in the U.S. were down more than 40% compared with Q1 2005. This most likely occurred because of increased usage of Avastin to treat AMD. Now that Lucentis is approved, I expect that Visudyne's sales declines will increase in the United States. As OSI's Macugen and Genentech's Lucentis start to roll out in Europe and elsewhere, the same sort of Visudyne sales declines will probably occur overseas. This is bad news for QLT shareholders, since Visudyne accounted for more than 80% of the company's $50 million in revenues in the latest quarter.

The one thing QLT does have in its favor is more than $400 million in cash and equivalents currently sitting on its balance sheet. Before you start getting excited about all of the things QLT could do with this cash pile, though, just remember what QLT got with the $855 million it spent to acquire Atrix Laboratories in 2004. In the latest quarter, Eligard, the top drug QLT got from Atrix, provided the company with less than $10 million in revenues, and now QLT is saddled with lawsuits and the potential of having to pay millions of dollars in punitive damages for patent infringement.

Thus far, the only thing QLT's management has been able to do with its cash hoard is use it to buy back boatloads of shares. With a declining revenue base and a weak pipeline at the company, I'm not convinced that this is the best use of its cash. QLT either needs to ramp up research-and-development spending and get new drugs into the clinic, pronto, or else acquire a drug pipeline via an acquisition.

With a cloudy future for Visudyne, a patent lawsuit, and no solid cash management strategy, QLT is a company that I'd stay away from, despite how cheap it may look.

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Fool contributor Brian Lawler does not own shares of QLT and welcomes your feedback. The Motley Fool has a disclosure policy .