Analyst: QLT may face rivals for Atrix

FORT COLLINS — In the afterglow of the June 14 announcement that QLT Inc. of Vancouver, B.C. would buy Atrix Laboratories Inc. of Fort Collins, the $772 million proposal wasn?t entirely welcome by investors and securities analysts.
In fact, one analyst painted a scenario of a bidding war for Atrix, in which QLT?s proposal could be washed away by powerful ?Big Pharma? companies.
The day after the QLT-Atrix announcement, Mike Krensavage, analyst for Raymond James, issued a report to claim that Atrix (Nasdaq: ATRX) was worth much more than the roughly $36 per share QLT(Nasdaq: QLTI) was set to pay.
The QLT offer, when adding Atrix?s cash-on-hand, values Atrix at $885 million. The offer represented a 27 percent premium for Atrix shareholders as of June 14. Current Atrix shareholders would end up owning 23 percent of the combined company.
Still, Krensavage, who had contended in a May 7 research report that Atrix was worth $46 per share, said the company ?is likely to achieve a higher offer from other potential bidders, as compared to QLT?s pending takeover bid of about $36 per share.?
Krensavage identified French pharmaceutical giant Sanofi-Synthelabo, Swiss company Novartis AG and Johnson & Johnson as likely suitors. Another possible contender would be Cephalon Inc., a specialty drug company.
If a bidding war were to dislodge QLT, the Canadian company could receive a breakup fee estimated at $25 million, according to an account in the Toronto Globe and Mail.
The speculation caused by Krensavage?s opinion was met philosophically by Atrix Chairman and CEO David Bethune.
?You can look at different transactions where someone else comes in and offers a higher price,? Bethune said. ?And then of course that makes it a situation where the shareholders would have a choice to decide.?
Bethune said Atrix has not considered a contingency plan for a rival bidder, and appeared to take a discouraging stance.
?I don?t anticipate that happening ? We think we?ve got a great deal, a great transaction, with QLT. We fit together wonderfully. They?ve got a good culture that kind of fits our culture. They have a can-do spirit. We both pride ourselves in doing things right the first time.?
Paul Hastings, CEO of QLT, tried to dismiss the Krensavage statement.
?That?s wishful thinking on his part,? Hastings said of the $46 target. ?It probably has nothing to do with reality.?
He added, ?It would make sense to us that other people would be interested in Atrix.?
But if a bidding process was in the works, Hastings said that would have been reflected by fluctuating market values in the two companies after the Krensavage report. In fact, values for both companies stabilized after the initial activity on June 14.
After June 14, when QLT stock plunged 16.5 percent to $17.55 per share, the price kept above $18 to finish the week at $18.39. Similarly, Atrix stock surged 12 percent on June 14 to $31.39, then leveled off to finish that week at $32.54.
?Having said that, you always have to face that situation,? Hastings allowed. ?If someone bids against us, we?ll deal with it when it happens.?
Interestingly, two of the possible bidders named by Krensavage are already partners with Atrix. Sanofi-Synthelabo, best known as the maker of the sleeping aid Ambien, is the North American distributor of Atrix?s prostate cancer drug Eligard. Novartis, meanwhile, is the parent company of Sandoz, which is a 50-50 joint venture partner with Atrix in its dermatology products.
?We have not talked with him (Krensavage),? Bethune said. ?We do not know his thinking here.?
Bethune has talked to other analysts and shareholders who have tendered mixed responses to the deal.
?We?ve had a number of phone calls,? Bethune said. ?A lot of them are very positive. A higher percentage of those who have called have offered congratulations ? On the other hand, there are people who called and said they think it?s not a good thing.
?That?s a normal reaction in a situation like this.?
Paul Hastings, CEO of QLT Inc., relayed to Bethune that ?some of his shareholders think they paid too much for us. I said, ?Well, some of our shareholders think you didn?t pay enough.???
Said Hastings, ?That probably means we paid the right price.?

Two of a kind
The QLT-Atrix merger combines two companies with relatively low profiles in the pharmaceutical industry, but both showing signs of rising stardom.
QLT?s flagship product is Visudyne, the leading treatment on the market for age-related macular degeneration, a major cause of blindness in the elderly. Visudyne represented 50 percent of QLT?s profits last year.
Atrix is best known for Eligard, and company officials said it?s on pace for a profitable year in 2004.
But Atrix?s attraction as a merger partner runs much deeper than Eligard. The company has multiple drugs for a variety of ailments in its product pipeline. Atrix also holds a patent on Atrigel, a drug delivery platform that consists of a biodegradeble gel. When a drug is mixed with the gel, it?s injected under the skin. The gel hardens, then gradually releases the drug into the bloodstream.
The timed-release technology is especially valuable, Atrix supporters argue, because of the increasing trend toward protein-based drugs that are hard to digest in pill form.
QLT?s Hastings touted the merger because it takes his company out of the realm of being overreliant on one product, albeit highly successful. The Atrix pipeline, combined with the Atrigel drug delivery platform, would appear to shore up a long-term weakness for QLT.
Still, Michael Lachman, a San Francisco-based analyst who follows QLT for ThinkEquity Partners, professed a neutral position on the proposed merger.
?The fit between the two companies is not obvious,? he said. ?I don?t think it?s a case were the Atrix drug delivery technology is immediately applicable to the compounds under development at QLT.?
Lachman, nevertheless, said there could be long-term value in the deal.
He granted that Eligard and Atrix?s new dermatological product Atrisone, like Visudyne, are ?growing products.?
?If the companies can show, for example, that the Atrix drug delivery technology can be successfully applied to ophthalmologic use, that would be an important thing to show to demonstrate the fundamental synergy between the two.?
While QLT seeks gain from the diversity of Atrix?s products, Atrix officials have their own needs from QLT.
The would-be parent company is highly profitable ? net income was $44.8 million last year, compared to a loss of $1.7 million for Atrix. QLT also has a robust rate of growth, with sales expected to increase at least 20 percent this year to $430 million. Collectively, those figures represent resources to fund Atrix?s research demands.
Bethune said Atrix was committed to making a profit this year, which would have meant tightening the reins on research-and-development spending.
?We were in kind of a dilemma of having a pipeline,? he said. ?With that pipeline comes costs. How do you maintain that and grow the business from a profit standpoint??
The QLT deal also allows Atrix to maintain its integrity as a business group in Fort Collins, Bethune said.
?I suspect if a large company such as Pfizer was to acquire something like this, history has shown it would take out all the human resources and just acquire the patents and technology,? Bethune said.
Both Bethune and Hastings said they don?t anticipate any layoffs as a result of the merger. The deal is expected to be acretive to earnings by 2006 without any layoffs, Hastings said.
?We don?t want to kill the geese that have laid the golden eggs,? He said. ?It?s a fact that both companies have been very lean in terms of the employee head count. We want to reward that rather than punish that.?
Another potential benefit to QLT from the merger is the manufacturing capacity now owned by Atrix. QLT currently has its drugs manufactured by third-party manufacturers. Atrix produces all of its drugs at a facility in Fort Collins, and the company owns enough land to expand that plant, located in the Centre for Advanced Technology.
If QLT moves Visudyne production to Fort Collins, the result would be likely job growth at Atrix, Bethune said.
Talks leading up to the merger also included the request that Atrix keep its identity.
?I don?t see where we would take Atrix and eliminate that name,? Bethune said. ?It could be Atrix, a wholly owned subsidiary of QLT.?

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