Under Pressure, QLT Restructures

By Leonard Zehr
The Globe and Mail
December 9, 2005

Canadian blue-chip biotech QLT Inc. unveiled a deep retrenching yesterday, including massive job cuts, driven by competition against its flagship anti-blindness drug and a disastrous acquisition last year. It now faces a dilemma common with one-product companies: Be acquired or buy new products.

It's a situation BioChem Pharma Inc. faced five years ago, when it had a leading HIV/AIDS drug on the market but couldn't get another revenue driver through clinical testing. Chief executive officer Francesco Bellini ultimately sold BioChem to Britain's Shire Pharmaceuticals Group PLC for $6-billion.

That's an outcome QLT's interim CEO Robert Butchofsky wants to avoid. Vying to replace Paul Hastings, who stepped down recently, Mr. Butchofsky plans to rebuild the company's tattered reputation.

"QLT plans to return to its roots as a company that achieved its success by developing innovative products coupled with a new emphasis and discipline in managing our expenses," he said.

The Vancouver-based company had $449-million (U.S.) in cash at the end of the third quarter and Mr. Butchofsky didn't rule out "limited and focused" acquisitions during a conference call with analysts yesterday. But the company doesn't have a great track record of expanding beyond its flagship blindness drug Visudyne, which was launched five years ago.

None of the products of Kinetek Pharmaceuticals Inc., acquired in 2001, have advanced in human studies, a licensed cancer drug failed late-stage trials and last year's $650-million purchase of Atrix Laboratories Inc. probably had a hand in Mr. Hastings' early exit. Sales of Atrix's cancer drug Eligard have been disappointing and regulatory restrictions on a new acne gel have delayed its launch.

Now, QLT faces its greatest threat from competitor Genentech Inc. Its Lucentis drug was superior to Visudyne in clinical testing last month and will likely be launched before the end of 2006 as the gold standard for wet age-related macular degeneration (AMD), the leading cause of blindness in seniors.

Meanwhile, Genentech's Avastin colon cancer treatment is now being used "off-label" by eye doctors to treat AMD. "The dramatic increase in the use of Avastin in the fourth quarter," Mr. Butchofsky said, prompted QLT to reduce its guidance for Visudyne sales in 2005 to a range of $480-million to $485-million from an earlier $500-million to $530-million.

According to published reports, some eye specialists claim Avastin is as effective as Lucentis at a fraction of the cost. Roughly 15 per cent of Avastin's third-quarter sales of $325-million were derived from uses outside of colon cancer, Genentech said in October.

"QLT's pipeline is weak and the company has taken far too long to address the revenue hole that will be left when competition really hits Visudyne in 2007," said National Bank Financial analyst André Uddin.

Mr. Butchofsky's streamlining plan includes chopping QLT's work force by up to 46 per cent to 310 people, selling Atrix's non-core assets, cutting expenses for research and development and general overhead by 20 per cent and narrowing the company's focus to ophthalmology and one other therapeutic area, still to be selected.

QLT also plans to double the size of an continuing share buyback program to $100-million, a move companies often use to bolster their stock price.

Analysts generally welcomed the plan but many argued that the cuts weren't deep enough. Shares of QLT hit their lowest point in nearly a decade yesterday, before closing down 11.1 per cent at $7.20 (Canadian) on the Toronto Stock Exchange yesterday.

GMP Securities downgraded QLT to "reduce" from "hold" and cut its 12-month target price to $6 (U.S.) from $7. On the Nasdaq Stock Market, QLT fell 11.4 per cent to $6.20.