Editor's Note: Originally published in the November issue of Penny Stock Fortunes.

The health care sector's dismal performance has been Wall Street's worst-kept secret this year. And with uncertainly swirling around the health care debate right now, many investors are shying away from health care stocks for good reason - governmental reforms could affect medical businesses enormously.

But we've just uncovered one health care small cap that's facing a 42% upside regardless of which direction Capitol Hill takes taxpayers.

While other industries - like financials - rebounded more than 40% on average from March lows, health care has remained slow to come back as rightfully nervous investors ponder what additional health care regulation might mean for their investments.

But our latest play doesn't rely on price gouging or government subsidies to survive. Instead, this under-the-radar company develops life-changing therapies for some of the worst diseases in the world - and it does it at a profit. And unlike the major pharma companies, this tiny drug developer doesn't have to worry about marketing and advertising its products. Instead, it lets firms like Novartis and Sanofi-aventis take care of the dirty work.

Here's everything you need to know to profit from this small-cap health play...

The company is QLT Inc. (NASDAQ: QLTI), a Vancouver-based biopharma that creates and produces drugs designed to treat macular degeneration - the leading cause of blindness in people 55 and older in North America and Europe - and prostate cancer.

Visudyne, the company's macular degeneration therapy, is marketed and distributed by Novartis, while its prostate cancer drug Eligard is licensed to Sanofi-aventis, Astellas Pharma and Medigene.

This arrangement with some of the biggest players in the pharmaceutical industry means that QLT avoids dealing with expensive advertising campaigns and distribution networks. The company instead focuses its resources on developing new, profitable therapies. At the same time, licensing its patents to consumer-facing pharmaceuticals mitigates the effect that new drug legislation is sure to have on the rest of the industry.

But it gets better... You see, this amazing drug developer is essentially free.

While that may sound unbelievable at first, shares of QLT currently trade for approximately the company's net quick assets per share. In other words, if QLT had to liquidate tomorrow, shareholders would be left with potentially more than they paid for shares. That ample asset base is a huge hedge against nearly any risk this company faces.

Right now, the company has no debt, and with $5.53 in net assets per share, every dollar invested in this company buys $1.42 in assets. That's a staggering value - and it represents a 42% upside potential.

On top of that, QLT's mature product lineup is making money every quarter, thanks in part to nearly 12% net margins that delivered $14.5 million in profits last year. That equates to a price-to-earnings ratio of only 7.18 - five times lower than the average stock on the S&P 500. Improving margins and solid licensing contracts ensure that cash-machine trend should continue for a while.

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Dollar for dollar, QLT is one of the most fundamentally fit companies in the health sector today. Its small $211 million market cap will ensure that the company stays that way until corporate news garners attention from the investing public. A third-quarter earnings release scheduled for Oct. 27 could be just that catalyst. More on that in a bit...

Like any company, QLT isn't without its blemishes. For this company, those scuffs come in the form of falling demand and litigation. In the last several years, QLT's Visudyne sales have tumbled somewhat as new therapies designed to treat wet age-related macular degeneration, known as anti-VEGFs, have come onto the market. But with Phase II clinical studies currently taking place to show that Visudyne may, in fact, work well alongside anti-VEGF drugs, QLT's sales could see a significant increase as more and more patients add Visudyne to their treatment regimens.

The company also has two main legal actions regarding patent infringement and royalties. The first, which resulted in a relatively modest judgment against QLT, is under appeal, and the second recently saw all but one of the plaintiffs' charges against QLT dropped by the presiding judge.

While the outcomes of these cases are far from certain, we don't believe that either would significantly impact QLT's business.

Reinventing QLT as the Ocular Therapy Leader

That business has changed dramatically in the last couple of weeks. On Oct. 1, QLT announced the sale of its U.S. subsidiary to one of its suppliers for up to $230 million. The sale of that subsidiary, which owns the company's Eligard patent, clears the path for a move to QLT's specialization in ocular therapies only.

The deal also makes sense from a financial perspective. By selling the U.S. division, QLT gets lump cash payments of $20 million and $10 million followed by an 80% cut of Eligard's all-but-guaranteed royalty revenues until 2024 - or until the company is paid a combined total of $230 million, whichever comes first.

In other words, QLT keeps the majority of Eligard's profits for the next 15 years while avoiding any legal complications or licensing issues and collecting $30 million in guaranteed cash in the process.

The deal also lines QLT's corporate coffers with cash at a very opportune time. With three new therapies in the development pipeline - two of which are in Phase II - the company avoids hitting up its cash to pay for research and development costs that have already increased 43% since 2006.

We fully expect QLT to garner a new degree of investor attention in the third quarter with sale-bolstered financials and new developments on the ocular therapy front. The company's timing of the financial release on Oct. 27 makes moving on this stock even more significant. Good news next quarter could be the catalyst this stock needs to head to the next level.

Sincerely,
Jonas Elmerraji

December 10, 2009