Aftershock: Atrix weighs on QLT

VANCOUVER, B.C – It appeared to be a promising union of pharmaceutical up-and-comers.

Vancouver-based QLT Inc., the pride of western Canada’s biotech sector, was generating healthy profits from a market-leading product. Atrix Laboratories Inc. of Fort Collins was building up a precious “pipeline” of new drugs, either in development or recently approved.

The two sides seemed to have much to offer each other when they agreed to a merger in June 2004.

But one year later the honeymoon is over. While company insiders maintain optimism about the potential fruits of the business nuptials, some observers are predicting a rocky future or even recommending divestiture.

Shares of QLT, priced above $21 when the merger was announced, have slipped below $8. The QLT executive who helped to orchestrate the deal has quit. And competitive and regulatory issues are dogging several of the company’s chief products.

QLT Inc. (Nasdaq: QLTI) wooed Fort Collins-based Atrix 16 months ago when it offered stock and cash worth $885 million. The net value to Atrix shareholders was $36 for each share, a robust 27 percent premium on the stock.

Optimism was high and excitement filled the air, as CEOs for both companies spoke of a grand future.

David R. Bethune, chairman and CEO of Atrix Laboratories, called the merger a combination of “two complementary companies” that could benefit from “a growing revenue base of proprietary products.”

In Vancouver, QLT CEO Paul Hastings reassured analysts and stockholders they were expanding the company pipeline in everyone’s best interest.  The merger would create a “world-class biopharmaceutical company” and “create sustainable shareholder value beyond what either company might have achieved independently.”

Now both Bethune and Hastings are out of the picture – Bethune retired after the merger and Hastings was recently forced out by QLT’s board of directors – and analysts can’t agree on what’s next.

One analyst ventured to say QLT would be better off if it cut its losses with QLT USA division (the new name for Atrix), and looked for a more suitable match.

“I don’t know right now what the company has planned, but a new CEO could really change the future of QLT,´ said Prakash Gowd, analyst with Canaccord Capital. “It also depends on what the board wants to do, but I just don’t think there is enough in the pipeline. A new owner (of Atrix) would be good for research and development. This deal has not been appropriate for QLT and Atrix. QLT needs to find another partner with more synergy and with more products in the late stages.”

Trouble in paradise?

Before the merger with Atrix, QLT was known as one-product company. The ample profits – nearly $45 million in 2003 on just $150 million in revenue – were drawn largely from Visudyne, a treatment for age-related macular degeneration, a major cause of blindness in the elderly.

To protect the company from an increase in market competition, QLT’s Hastings and other officials began searching for merger candidates. They became interested in Atrix because of its patented Atrigel drug delivery system, a biodegradable gel that releases medicine in the bloodstream over a period of weeks or months. The product’s attraction is that it minimizes the number of injections or pills that a patient must take.

“We were initially interested in the possibility in the Atrigel drug delivery platform for its back-of-the-eye applications,´ said Tamara Hicks, senior manager, media and investor relations. “When we did more research we became very interested in the whole company because Atrix already had revenues and had several products in the late stages of development or delivery. The merger allowed us to diversify our pipeline and also allow us to successfully diversify segments.”

In addition to the Atrigel system, Atrix developed several dermatological drugs and Eligard, a prostate cancer drug with one-, three-, four- and six-month formulations. The U.S. Food and Drug Administration approved the six-month version of Eligard after the merger closed in November 2004.

But soon after receiving approval from the FDA, QLT was dealt a major blow toward the distribution of Eligard.

Changes in Medicare policy meant that physicians would be reimbursed based on the cost of the least expensive drug among Eligard’s competitors, which was priced significantly less than Eligard.

This reimbursement issue, along with increasing competition for Visudyne, is causing observers to look upon QLT and the merger with “bear eyes,” according to one securities analyst. Since July 15, 10 of the company’s analysts have downgraded the stock and reduced the target price on company shares seven times.

“The reimbursement issues are causing Eligard not to get any traction in the market,´ said Campbell Parry, analyst with

Scotia Capital.

“Lupron (a competing prostate cancer drug) holds 80 percent of the market, but it is still a different product with lower dosing than Eligard six-month,” he said. “If they get the reimbursement figured out, I could see Eligard sales ramp up slowly.”

Through the year, QLT has lowered the forecast for Eligard from a range of $140 million to  $160 million in sales down to a range of $90 million to $115 million.

Still, Motley Fool Analyst Charly Travers is optimistic about the future of Eligard six-month, and anticipates it could be the new flagship product of QLT.

“Eligard needs to be the company’s growth driver, and the status of this product is important, since the shorter durations have been facing declining sales,” Travers said in an article titled, “Where is QLT going?”

“Uptake of this product is crucial for reversing that trend and delivering top-line growth that QLT was looking for when it purchased Atrix Laboratories and its Eligard franchise last year,” Travers said.

Eligard is not QLT’s only troubled product. The FDA recently approved QLT’s Aczone anti-acne medication – another product inherited from Atrix – but with a label restriction. According to the restriction, patients will need to be screened to detect if they are predisposed to hemolytic anemia because of a specific enzyme

deficiency.

Visudyne is experiencing its own problems, as Genentech Inc. gets ready for a 2006 launch of Lucentis, a competing drug that is already projected as a serious rival for market share.

“We are waiting for the Lucentis anchor study results to see the impact for Visudyne,´ said QLT’s Hicks. “We have not adjusted the guidance – it is still $500 million to $530 million in 2005.”

Changes at the top

On Aug. 8, QLT officials named Cameron Nelson as its new chief financial officer, replacing Michael J. Doty who resigned from the post in April. All indications from analysts are that Doty was replaced because of the poor performance of the company after the Atrix merger.

The company ax didn’t stop there. On Sept. 25, Hastings stepped down as president and chief executive officer. QLT moved its former senior vice president of marketing and sales, Robert Butchofsky, into the interim CEO position.

“While there were some differences with the board regarding the vision of the company, I continue to strongly believe in the people, products and projects of QLT and I am honored to have been part of it,” Hastings said.

Brian Bapty, analyst with Raymond James Financial, said he feels the company paid too much for Atrix and that Hastings stepped down as a result of fallout from the merger.

“I would suggest there was a shakeup in management as a result of the purchase and he fell on the sword for the acquisition,” Bapty said.

The day before QLT announced its merger with Atrix its stock price was $21. With the announcement the price dropped below $18 and over past year, shares of QLT have traded lower and lower by the month, slipping below $7 at one point in September – a seven-year low – and hovering around $7.50 in the first week of October.

It’s apparent that Wall Street has not widely accepted the merger and a majority of the company’s analysts have marked the stock as a “sell.”

According to one analyst who no longer follows the company – and declined to be identified – the merger between QLT and Atrix was “like two drunks in the night who found each other to lean on so they

wouldn’t fall down.”

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