QLT dresses for ophthalmology courtship dance

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Four years after a fire sale that turned it into an ophthalmology play, QLT has undergone another transformation. With the sale of its one marketed product to a fellow Canadian specialty pharma company, Valeant Pharmaceuticals International, the Vancouver group has become an early-stage drug developer focusing on its phase I orphan drug QLT091001.

The move adds $112m immediately to a war chest of $203m, which should be more than enough to advance the treatment for inherited eye diseases sufficiently to begin partnering discussions. If its plan to offload the second-most-valuable developmental asset in the hot ophthalmology space also comes off, QLT will have an even a healthier cash pile – making it an attractive acquisition target.

Strategic shift

Investors were positive about the deal, pushing QLT’s US-listed shares up 7% Monday to $8.14. Some share price uplift has already been driven by a summertime board coup sparked by the healthcare-focused institutional investor NB Capital that resulted in the departure of chief executive Robert Butchofsky, several senior executives and two thirds of QLT's employees.

Along with slashing the workforce came announcement of a strategic decision to focus strictly on QLT091001. At the time, the company was reviewing options to sell Visudyne and also cut a deal on the punctal plug programme that has advanced as far as phase II with a latanoprost-eluting implant.

Now that the first transaction has come to pass, the sale or outlicensing of the punctal plug delivery system will be a keenly awaited catalyst for investors. The system involves inserting a small-drug secreting device in the tear duct; the latanprost plug to treat glaucoma has a net present value of $536m, putting it behind only ThromboGenics’ Jetrea in the ranking of most-valuable ophthalmology products in development (Therapeutic focus – Eye care products in demand in market dominated by few, March 23, 3012).

Punctal plugs are used to block the drainage of fluid from the eye in patients with dry eye. Latanaprost is a well-known glaucoma treatment sold under the brand name Xalatan, and so it would seem to be a relatively low-risk development option.

However, board chairman Jason Aryeh told investors that the punctal plug system lay outside the company’s expertise. “It is truly a medical device, and QLT has been a therapeutics company,” he said. “Clearly this will be a smaller company, a more acutely focused company and a development company with, fortunately, a tremendous balance sheet.”

Attractive target

Following the share price rise yesterday, QLT now has a market capitalisation of $406m. The new cash makes it seemingly inexpensive, with an enterprise value of $91m. A deal on the plug technology would only add to its cash and increase its attractiveness in the M&A game.

The board is not saying much about the possibility of a takeout right now, choosing instead to focus on the opportunity of QLT091001, a synthetic retinoid now in phase I trials in the rare diseases Leber congenital amaurosis and retinitis pigmentosa. A phase Ib proof-of-concept trial in both conditions could report early next year, making this a key partnering milestone.

The group has reported net losses since 2004 as Visudyne saw its patient base erode with the entry of Lucentis in wet age-related macular degeneration, draining a much larger cash pile than the company holds today.

Mr Aryeh said the capital raised with the Visudyne deal would “offset” those losses, ultimately returning value to shareholders. That would follow through on a stated goal of eventually returning $100m in capital to shareholders, although the mechanism has not been stated so far.

At the current market capitalisation, a takeout would accomplish that goal, and the company has both the cash and the market listing that, for example, might make it an attractive target for a private company needing access to the public equity markets. QLT's fortunes in its dealmaking and R&D in coming months will be closely watched.

To contact the writer of this story email Jonathan Gardner in London at jonathang@epvantage.com

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