SUNDAY REVIEW / Korner's Review Of Canadian Markets & O&G Related (1)
January Continues To Push Stock Markets Upward
The New Year's revelry that has lifted the markets for most of 1999 continued its record setting pace Friday as investors celebrated stronger metals prices and snapped up high-tech stocks.
Investors were buying after a new employment report showed that the U.S. economy remains healthy. The Labor Department said the unemployment rate fell to 4.3 per cent in December and averaged 4.5 per cent for 1998, the lowest since 3.5 per cent in 1969 during the Vietnam War. Employers added 378,000 jobs to their payrolls -- the most in 15 months and nearly double what analysts expected.
Statistics Canada told a similar story, with job gains of 24,000 -- a far cry from the negative predictions of some economists and well above the consensus estimate. The jobless rate in Canada stayed steady at eight per cent -- its lowest level of the 1990s.
The Canadian equity market reveled in the strength of the U.S. economy -- our largest export market -- as the TSE 300 gained 1.0%.
In New York, the Dow Jones industrial average closed at a record high for the second time in five days, up 105.56 at 9,643.32. The TSE 300 composite index gained 66.74 points to close at 6,868.93. Advancers outnumbered decliners 611 to 390 with 300 unchanged in trading of 145.5 million shares worth $2.56 billion.
The TSE 100 rose 4.20 points to 421.37.
Active stocks included Research in Motion Ltd. (RIM/TSE), up 20c to $11.40, on volume of one million shares. Stock in the company, which develops and manufactures technology for the wireless communications industry, gained another 1.8% yesterday to cap the first week of trading in 1999. After closing at $9.60 on Monday, the stock rose 18.8% in the next four sessions. The heaviest day of trading occurred on Thursday when the company announced it had applied to list its shares on the Nasdaq National Market System in the United States. The stock also broke through to a new 52-week intraday high of $11.70.
Northern Telecom Ltd. (NTL/TSE), down 55c to $84.25, on volume of 1.3 million shares. The telecommunication giant's stock, which soared 15.3% during the first three sessions of the week, was off after the stock was downgraded. Canaccord Capital Corp. cut Nortel stock to "hold long-term" and "reduce short-term."
Microcell Telecommunications Inc. (MTIb/TSE), up 85c to $13, on volume of 157,465 shares. Stock in Microcell, operators of the Fido wireless phone service, rose 7% after the company said it added 101,336 subscribers in the fourth quarter of 1998. The additions mean Microcell's customer base has risen by 56% from the third quarter to 282,174 subscribers at Dec. 31, which exceeds its yearend target of 200,000 network users. The new customers include 61,941 on the Fidomatic prepaid service.
JDS Fitel Inc. (JDS/TSE), up $2.30 to $43.85 on volume of 277,321 shares. Stock in the country's largest maker of fibre optic components rose 5.5% after an analyst raised his target price. Michael Urlocker of Credit Suisse First Boston reiterated his "buy" recommendation on the stock and raised his one-year target price to $48 from $30.
T. Eaton Co. (ETN/TSE), down 75c to $6, on volume of 63,300 shares. The stock fell 11.1% after the retailer was cut to "underperform" from "hold" by David Brodie, an analyst with CIBC Wood Gundy Securities Inc.
The non-resource sector was solid in its advance as the financial services and conglomerates sub-indices climbed 1.3% and 0.6% respectively. YMG Growth and Industrial Horizon accordingly posted respective gains of 2.1% and 1.1%.
But the real action was in the cyclical resource sector as the metals and minerals sub-index soared by a remarkable 7.4%. That gain was triggered by better-than-expected earnings from American aluminum giant Alcoa, which leapt more than $8 US on the New York Stock Exchange to finish at about $85.20 US. The logic flows that if people are working and are making things, Alcoa's results must mean that they are using raw materials. Higher nickel prices in London also boosted the fortunes of investors who hold Inco Ltd., which jumped $2.55 to $19.85 on volume of nearly two million shares.
The mining and minerals sub-group led 12 of 14 groups higher.
The other shining star of the day was the gold and precious metals sub-index as it gained 1.8% despite a neutral day for bullion and silver. Reaping the rewards were Dynamic Global Resources and Universal Precious Metals, which advanced by 5.1% and 2.6% respectively. Barrick Gold Corp. gained 70 cents to $32.20 on volume of 2.7 million shares; Placer Dome Inc. was up 30 cents to $19.55. Rio Algom rose $1.20 to $17.65.
Transportation stocks were also strong, with the transportation and environmental services group gaining 1.38 per cent as Air Canada jumped 60 cents to $7.20 and Canadian National Railway Co. surged $1.10 to $81.90.
Among Toronto's industrials, Noranda Inc. climbed $1.20 to $18.15; Dundee Capital slipped seven cents to $1.38, Laidlaw Transportation Ltd. five cents to $15.35.
Among mines, Royal Oak Mines rose $1.20 to $17.65, Falconbridge Ltd. $1.40 to $19.10; Miramar Mining fell one cent to $1.20.
Among oils, Canadian Natural Resources gained 55 cents to $25.60, Renaissance Energy 95 cents to $20.20; Probe Exp. lost five cents to $1.65, Canadian Occidental Petroleum 25 cents to $17.50.
Only two sub-groups found negative territory Friday; pipeline stocks finished 0.15 per cent lower while the merchandising group slipped 0.06 per cent. Utilities stocks managed a 0.36 per cent gain, thanks to General Motors, up $4 to $121.
Friday's earnings and dividends:
Tecsyn International Inc.: Three months ended Nov. 30, 1998, $2,764,043, $0.16 a share; 1997, $1,586,376, $0.09 a share. Revenue: 1998, $14,030,218; 1997, $14,438,774.
There were no dividends declared Friday.
"It's been a slightly amazing week," said Fred Ketchen, head of equities at Scotia Capital Markets in Toronto. "There still is a fair amount of money looking for a resting place in the stock market, a lot of it coming from equity mutual funds that have accumulated funds for investment over the last six weeks. "We're going to have to get back to the land of reality. This is a non-sustainable, one-week rally."
Friday's performance among mining and minerals stocks gave the TSE sub-group the weekly honours for best performer with a 13.51 per cent gain, followed by financial services, up 9.9 per cent, and conglomerates, up 9.1 per cent.
The pipelines group was worst on the week with a 0.27 per cent loss; real estate and construction stocks gained just 1.72 per cent while merchandising was up 1.76 per cent.
The TSE 300 gained 383 points or 5.9 per cent on the week, while the Dow finished the week 462 points higher, a five per cent gain.
Prices closed higher at the Montreal Exchange Friday. The portfolio index was down 55.90 to close at 3,599.67. Volume was 21.3 million shares traded, compared with 15 on Thursday. Value traded was $329,003,918.33.
The banks index gained 109.48 to 6,612.06, mines 102.16 to 2,024.72, oils 0.42 to 2,153.27; forest products slipped 3.42 to 2,181.27, industrials 11.57 to 3,597.43, and utilities 9.82 to 4,423.15.
The portfolio index had a weekly gain of 195.21.
At the Alberta Stock Exchange, the combined value index rose 0.9% or 16.54 points to 1817.56. 140 issues advanced and 113 issues declinced with another 112 unchanged. Trading volume was 10.4 million shares worth $4.8 million.
Top dollar volume traded issues imcluded Telebackup Systems, gaining $0.50 to $11.00, Aastra Technologies up $0.90 to $4.15 and Valu-Net Corp. rose $0.23 to $1.00.
Vancouver stocks closed higher Friday. Prices were higher in active trading. Volume at 2 p.m. PST was 28.3 million shares. Advances led declines 156 to 89 while 292 stocks were unchanged. The VSE index stood at 415.35, up 6.68 from Thursday's close.
Among the most active companies, Forbes Media gianed $0.80 to $17.00, Winspear resources $0.36 to $4.10; Argentina lost $0.25 to $5.50, Fletcher Challenge $0.45 to $16.50.
The VSE index finished with a loss on the week of 203.13.
Hot Stocks
QLT PhotoTherapeutics Eyes A Blockbuster
A new drug to treat a disease of the retina may bring this biotech company into billion-dollar sales territory
By JOHN GREENWOOD - The Financial Post
Nearly two decades after the biotechnology industry was born, only a handful of companies have succeeded in fulfilling their early dreams of fabulous wealth. Vancouver-based drug developer QLT PhotoTherapeutics Inc. appears set to join that exclusive group.
Early last week QLT released results of clinical trials of its most promising drug, a potentially breakthrough treatment for something called age related macular degeneration, a leading and largely untreatable cause of blindness worldwide.
To a layman, the findings were hardly dramatic. According to the company, of the 609 patients in the study, 61.4% of those on the drug, called Visudyne, experience stabilization or improved vision, compared to 45.9% of patients given a placebo. Furthermore, the company extrapolated, patients on Visudyne were 34% more likely to retain their vision than patients taking the placebo.
Nonetheless, industry analysts and the medical community were overjoyed, describing the event in terms rarely heard in this country. "Certainly Visudyne is being tossed around as a potential blockbuster, the numbers are there," said Michael Lorimer, an analyst at ScotiaMcleod Inc. (A blockbuster in industry parlance is a drug with more than $1-billion in annual sales.) "This is a huge success story," said Ezra Lwowski, a normally low-key analyst at Yorkton Securities Inc.
On Tuesday, when results were announced, QLT's share price shot up 25%, and unlike other biotech companies whose shares soar on the strength of positive news and then settle back, QLT has kept on climbing. Yesterday it closed in Toronto at a record high of $47, up a whopping 37% since Monday's close. Investors apparently believe there's more good news to come.
One reason for the optimism is that QLT is likely to be the first company to come out with an effective therapy for what is a devastating disease that has stubbornly resisted attempts to find a cure. AMD is a disease of the elderly; most sufferers are in their sixties and seventies. It starts off as a thinning of one of the layers of the retina. That phase is called dry AMD. Eventually, about 10% to 15% of those cases develop into what's called wet AMD, where the bottom retinal layer becomes so atrophied it cracks, allowing the growth of abnormal blood vessels. Within five years (usually less) nearly all people who develop the wet form of the disease are legally blind.
Most of the time "there is really nothing you can do," says Patricia Harvey, a doctor at The Toronto Hospital and a leading retinal specialist who took part in the Visudyne trial. "We provide them with visual aids like magnifiers and software programs that allow them to read text on a computer screen, but that doesn't change visual acuity, it just helps them to use what they've got a little better."
QLT's drug is good only against the wet form of the disease. But that's still a potentially huge market with about 500,000 new cases worldwide every year, 200,000 of them in North America, according to the company. Even though it appears Visudyne is effective in a fraction of cases, it represents the only option available.
So if the drug is approved, analysts expect a high proportion of suffers to try the therapy. (At least in rich countries; neither the company nor its licensee CIBA Vision have released pricing information, but analysts speculate that a full treatment regimen will cost about $5,000 US.)
Visudyne, which is derived from pigs' blood, is part of a new generation of photodynamic, or light-activated drugs, that are injected into the patient and then migrate to the afflicted part of the body. In this case, within about 15 minutes, the drug collects in the cells of the abnormal blood vessels in the retina. The patient then undergoes a 90-second procedure in the ophthalmologist's office with a laser. Activated by the light, the Visudyne produces oxygen singlet, a toxin that rapidly kills the cells in the abnormal blood vessel. Only harmful tissue is killed and there is no scarring.
The drug is at least a year away from market approval, but some analysts are already predicting that it will have a major impact with sales in the hundreds of millions of dollars, perhaps even topping $1-billion, a year. At the other, more conservative end of the spectrum are those like Yorkton's Mr. Lwowski, who's calling for sales of $330-million (US) three years out.
Visudyne appears likely to live up to its billing. First, it has virtually no competitors. Though some AMD cases can be treated by thermal laser, Visudyne appears to be the only safe treatment candidate applicable to nearly all cases of wet AMD.
Second, the trial results may be a lot better than they appear. Observers say that while people with AMD do sometimes experience episodes where the disease appears to go into remission, they never last. If the trials tracked patients over five years instead of just 12 months, the disease would have taken its natural course in the patients receiving the placebo. Still, even QLT doesn't know how many times patients must be treated before the disease is halted, or even whether the halts are permanent.
Julia Levy, the company's president and chief executive, is confident that won't be a problem. "We have been saying for the past six months that this has huge breakthrough potential," she says.
Observers agree that sales will take time to ramp up, as doctors acquire the laser machines and become comfortable with the technology. At about $40,000 (US) each, the lasers are expensive pieces of equipment, but if the drug is approved a sufficient number of doctors is expected to make the investment.
With QLT poised to hit the big time, Dr. Levy is feeling proud -- and more than a little amused, given the drug that is causing all this fuss was only recently given the auspicious name Visudyne. Back in the '80s, when Dr. Levy and a colleague discovered it, it was simply called "Green Stuff."
QLT was founded in 1981 at the dawn of the biotechnology revolution by a group of scientists from the University of British Columbia who were frustrated at the lack of government funding available for their projects. By starting a company, they hoped to solve the problem themselves. "It wasn't at all focused, as a lot of [biotech] companies at the time weren't," she recalls.
But they did have some good ideas. In the mid-'80s, QLT attracted the attention of New Jersey-based drugs giant American Cyanamid (now a subsidiary of American Home Products Corp.), which agreed to inject $19-million into the company. It used part of the money to acquire the rights to Photofrin, another photodynamic drug being developed as a treatment for cancer. It was further along in development than Visudyne and therefore would allow the company to generate revenue much sooner than by simply relying on Visudyne.
Though it still has promise, Photofrin never quite lived up to early expectations. When Health Canada approved it in 1993 for the treatment of bladder cancer, it became the first photodynamic drug to make it onto the market anywhere in the world.
Photofrin was later okayed in the U.S., Europe, and Japan, for lung cancer and oesophageal cancer. But approvals came fitfully (it was only in December that the FDA gave QLT the go-ahead to market the drug for early stage lung cancer). And doctors haven't exactly been beating down the door at QLT to get at supplies. In 1997, total sales of Photofrin amounted to just $4.8-million.
In QLT's defence, observers say Photofrin (also made from pigs' blood) was a first-generation product. Plus it's a radically new way of treating cancer, requiring oncologists to learn new techniques and to take chances. That's a lot to ask, especially when there are plenty of traditional alternative treatments around.
But the company isn't giving up hope. Phase 3 trials for Photofrin as a treatment for Barretts oesophagus are expected to wind up later this year and more approvals are expected.
Among investors and industry analysts, however, the attention is focused on Visudyne. For once, a biotechnology product appears set to achieve one of the key goals of the biotech industry, to provide a remedy for a major disease.
Of the thousands of biotech drugs being developed in North America, only about 100 have actually made it onto the market. Of that group, only a handful have achieved blockbuster status. So far, Laval, Que.-based BioChem Pharma Inc. is the only Canadian biotech to achieve success on that scale.
Last year, BioChem's AIDS drug 3TC had sales of about $980-million -- more than all other Canadian biotech companies combined.
Now for the first time, it seems BioChem Pharma is about to see some real competition.
Microcell Telecommunications On A Roll
Microcell Telecommunications Inc. shares gained $0.85 to close at $13.00 on both the TSE & MSE.
The company, best known for its Fido wireless phone service, reports its subscriber base grew 56% in the final quarter of 1998.
The company said it acquired 101,336 customers in the three months ended Dec. 31, including 61,941 on the Fidomatic prepaid service.
This took its total personal communications services subscriber base to 282,174 -- up from 65,667 at the end of 1997.
"These figures greatly exceeded our expectations and reflect the strong sales of Fidomatic, as well as Fido's very attractive holiday promotion and its competitive monthly airtime packages," said Microcell chief executive officer Andre Tremblay.
"Prepaid service certainly appears to be having a major impact on the PCS industry."
BioChem Pharma Close To Launching Drug In China
By ROBERT GIBBENS - The Financial Post
MONTREAL -- BioChem Pharma Inc. has taken a major step towards launching its hepatitis B drug, lamivudine, in China.
BioChem said yesterday Glaxo, its licensee for lamivudine outside Canada, has obtained Chinese Government approval or a Class I drug certificate for the drug. Glaxo would have exclusive manufacturing rights in China for eight years.
The next step is issue of a Chinese import drug permit and pricing approval. These should be received this year enabling the launch to go ahead, BioChem said.
Lamivudine, similar to BioChem's 3TC anti-Aids drug, will be made alongside antibiotics at a $200-million plant Glaxo plans in Suzhou for 2001 startup ( if all approvals are won). China has the world's highest incidence of hepatitis B and lamivudine is already approved in North America and several European and Asian countries.
Analysts expect world lamivudine sales will be $150-$190 million (US) this year. Its contribution to BioChem will be modest at first -- it gets a 13% royalty on sales outside Canada. British-based Glaxo holds a 15% equity stake in BioChem.
"The approval is a critical step forward in BioChem's evolution and in the long haul lamivudine will drive results as 3TC sales level off," said Mchael Jams, an analyst with Levesque Beaubien Geoffrion Inc. "We still expect a mid-year launch in China."
BioChem (BCH/TSE&MSE) shares rose $2.00 to $44.60 yesterday, near the 52-week high, in light trading.
"The Chinese market will be massive and lamivudine will be exported from Britain at first," said Tim Wilson, analyst with S.G. Cowen, a brokerage unit of France's Societe Generale bank, in London.
A Case Of Wait And See For Spar Aerospace
By PETER FITZPATRICK - The Financial Post
Spar Aerospace Ltd. investors are like guys at a stripshow, watching the company gyrate as it sheds its various operations.
Yet the whistles and clapping have been curiously absent, less because the audience has grown bored with a dance that's gone on too long and more because it's still waiting for a final, strategic piece to drop.
Even last month Spar elicited little more than muted applause when it whirled the equivalent of its brassiere and pantaloons into the crowd by selling the last two parts of its once-core satellite business. Spar Aerospace Ltd.
No, say analysts, it's only by settling a $135-million (US) lawsuit over a faulty communications satellite that Spar will bring the gawkers to their feet.
"The moment we have any indication the lawsuit is going away the thing will pop to $13, $14," says James David, an analyst at Bunting Warburg Inc., commenting on Spar's stock (SPZ/TSE), which closed up 30c at $9.80 yesterday.
"But it's a coin toss. If the suit goes away you've got yourself a nice 40% return. If they lose, you've got yourself a problem."
Analysts agree the suit by American Mobile Satellite Corp. is the overarching concern. Recent mediation efforts failed, so the case appears headed for court in California next October with Spar's insurers reserving the right not to pay if Spar loses.
At the very best, jokes one analyst, the suit makes an excellent poison pill.
Yet, the lawsuit aside, investor discontent has been long simmering. Spar underperformed, posting losses of $37-million in 1997 and $52.8-million in 1996.
In the first nine months of 1998 net income was $3.8-million or 25c a share, versus a loss of $3.5-million (24c) in 1997. Revenue was $222-million, up from $179.9-million.
Still, many believe Spar, after several false starts, is finally on track now that it has sold most of its operations to focus on aviation services and robotics.
Over the past two years, the company divested itself of at least six units that comprised its satellite, communication, and software businesses because their earnings were too erratic and Spar realized it was too small to be a meaningful player in these sectors.
The sell-off has left Spar free of interest-bearing debt and with expectations of having $50-million to $60-million in the bank once the satellite unit sales close.
"We've got a growing, stable, predictable cash flow now and the businesses that terrified us over the years are gone," says Colin Watson, president and chief executive.
From now on, he says, Spar will concentrate on earnings rather than revenue growth that has hitherto been its preoccupation.
Mr. Watson expects Spar to grow internally 15% a year. It is also eyeing two complementary acquisitions in Canada and the United States that could add a total of $100-million in revenue, but wouldn't be completed before the second quarter.
At the same time that it was shedding companies, Spar built its aviation services by acquiring CAE Aviation Ltd. in 1998 and Godfrey Aerospace Inc. in 1996.
Aviation services include aircraft repair and overhaul, maintenance, and program management or integrated logistics support.
The most notable contract is maintaining Hercules aircraft for the Canadian military, a line it plans to expand to other countries.
Spar's other division is robotics and mostly involves servicing its marquee product, the space arms aboard NASA's space shuttles and the International Space Station.
Mr. Watson says the two businesses contribute equally to total revenue of about $250-million, on an ongoing basis.
Most analysts laud Spar's move to simplify, saying it will make it easier to value the company after years of wrestling with uneven results from its hodgepodge of undertakings.
"As they focus on fewer areas it's easier because the comparables in Canada and the United States are less broad," says Kevin Binnie, an analyst at Pacific International Securities.
"The whole satellite communications area can be a bit of a trick shot because some people are making money, but for a lot of people it's not where a lot of money is being made."
Mr. David says aviation was always Spar's most profitable segment and it holds growth potential as governments outsource work previously done in-house by armed forces.
But at the same time, other analysts are still skeptical.
Years of "strategic repositioning" that have seen it lurch from a focus on "communications" and then "satellite subsystems" have left some wondering if Spar has really found itself.
"What is there left and are they going to go into some other new market? I'm not impressed at all," says one analyst, expressing an exasperation born of Spar's feints and dodges over the years.
The analyst adds that even if Spar has finally chosen a focus, it's not entirely clear that building a company on aerospace servicing is the best choice.
"If you're just doing retrofits of planes, well, you're not going to get the same multiple as an aerospace company building subsystems," he continues.
"It's a business that some companies are trying to get out of and others are keeping because it enhances their product strategy, but that's it, it's not the main driver of growth."
Another analyst, also requesting anonymity, says margins in repair and overhaul and maintenance are lower than those for manufacturers, noting that Boeing Co. is struggling to make 10%.
With respect to robotics there is also skepticism Spar can earn as much servicing Canadarms as it does making them.
Most analysts declined to value Spar because they are grappling with an earnings model.
But Tony Yue, an analyst at Canaccord Capital Corp., hazards it could be worth $15 a share.
His estimate is based on Spar being worth about $13 a share if it were to be sold for 80c per dollar of revenue plus its cash, which amounts to $3 per share but which requires a market discount.
"I think the market is still cautious in terms of wanting to see what's next," he says.
"The key is for Spar is to make an acquisition that will be accretive to earnings."
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