QLT converts profits into growth opportunities

cVANCOUVER, British Columbia – On Aug. 10, roughly two months after QLT Inc. announced plans to buy Fort Collins-based Atrix Laboratories Inc., the Canadian company flexed its biotechnology muscles once more.
On that day QLT disclosed a drug discovery collaboration with Array BioPharma Inc. of Boulder, in which QLT would fund Array’s (Nasdaq: ARRY) research on cancer therapy treatments. QLT will sell the resulting products.
“It shows (QLT) is behaving more like a pharmaceutical company, by having the other company do the early-stage discovery,´ said Paul Stinson, executive director of B.C. Biotech, an industry trade group based in Vancouver.
QLT, also based in Vancouver, has grown up from lean beginnings in 1981 to become an international force in the pharmaceutical industry, based largely on the success of its Visudyne product. Visudyne currently stands alone as a treatment for age-related macular degeneration, and helped QLT rake in $44.8 million in profit last year.
Some of those proceeds helped QLT fund the proposed $885 stock and cash acquisition of Atrix (Nasdaq: ATRX) , which should close before the end of the year, and puts the company in position to be a patron to companies like Array.
The back-to-back Atrix and Array deals would seem to reflect QLT has taken an aggressive stance toward expansion. In fact, an earlier collaboration deal with a biotech company called Kinetek Pharmaceuticals Inc. led to QLT’s decision earlier this year to buy Kinetek.
“With respect to the fact we are profitable and have a product on the market … that drives a lot of the things we’re able to do,´ said Mike Smith, vice president of business development for QLT.
QLT’s effort to partner with other biotech companies “shows it is looking to the future,” added Justin Stephenson, managing partner for Vancouver-based Galiano Ventures, a securities brokerage and research firm.
“They have the ability, since they have such a strong balance sheet, to pick and choose the best technologies of some of these younger companies,” Stephenson said. “So I think that’s strongly positive.”
QLT is also in an enviable position with respect to its Canadian corporate citizenship.
In recent years the Canadian federal government has invested heavily to make biotechnology successful in that country.
For instance, Biotech companies in Canada earn federal government tax credits for investment in research and development at three times the rate of what’s available in the United States. For every $1 (U.S.) spent on R&D in Canada, a company can get 18.7 cents in federal tax relief. That compares to 6.6 cents in the United States.
Canada’s government has also poured $800 million over the last four years into the Canadian Foundation for Innovation to support bricks-and-mortar needs for biotech companies and university research laboratories.
The government support – Canada’s premier even attended a biotechnology trade show in the United States earlier this year to lobby on behalf of the nation’s industry – might explain why Canada leads the world in biotech companies per capita and is second in the world in the number of biotech companies, at 470. (QLT is the nation’s largest biotech firm).
Canada is also third in the world in biotechnology research-and-development expenditures and third in revenues for biotech firms.
“You get much better bang for your buck (in biotechnology research) in Canada than you do in the U.S.,´ said Stephenson.
QLT has said it plans to keep the Atrix name and staff intact. Still, with Canada’s tax and grant advantages to consider, Stephenson speculated QLT might want to initiate early-stage research for the combined companies in Canada.
But Stephenson, who is not a QLT shareholder, said commercialization would be funneled through Colorado because of the U.S. market size and the evolution of the biotech industry.
While Canada’s investment incentives are attractive, the actual availability of capital for biotech companies remains slim compared to American sources.
“We need more funds in Canada – we need bigger funds in Canada and we need U.S. venture capital partners to initiate deals with us in Canada,” acknowledged Stephenson, who is currently working to raise $40 million for a new biotechnology investment fund.

Southern exposure
QLT’s pending purchase of Atrix is its first acquisition of an American company, but it doesn’t mean the company is foreign to U.S. investors.
Currently, about 60 percent of company’s 69.6 million shares are held by American investors, according to Tamara Hicks, the company’s investor relations manager.
The company’s largest shareholder is Fidelity Investments, which holds about 13 percent of QLT stock. In all, institutions own about 70 percent of the company.
The company’s stock value has suffered since the announcement of the Atrix deal in mid June, when QLT shares were priced at about $21 per share. The stock has fallen to as low as $14.69 in late August, before rebounding to $17.92 in early October. At the time this issue of The Northern Colorado Business Report went to press, QLT stock was valued at $16.16 per share.
Stephenson thinks the company does not get enough credit for the Atrix deal, which includes Atrix’s pipeline of multiple pharmaceutical products, nor for QLT’s other products in development.
“The marketplace generally wants to see later-stage, clinical-stage products,” he said. “At the moment it (the investment community) isn’t giving much value to anything that’s (early-stage). It’s just too far away from the marketplace and therefore too far away from earning revenues and profits for companies and shareholders to think about. But that will cycle back.”

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