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QLT, Inc. (NASDAQ:QLTI)

Q4 2008 Earnings Call

February 19, 2009 08:30 AM ET

Executives

Karen Peterson - Investor Relations

Robert Butchofsky - President and Chief Executive Officer

Cameron Nelson - Vice President, Finance and Chief Financial Officer

Analysts

David Dean - Cormark Securities

Walter Schenker - Titan Capital

Doug Miehm - RBC Capital Markets

Operator

Welcome to the QLT, Inc. Fourth Quarter Year-End 2008 Conference Call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions).

At this time, I'd like to turn the conference over to Karen Peterson, Investor Relations Specialist. Please go ahead.

Karen Peterson

Good morning everyone, and welcome to QLT's year-end 2008 earnings conference call. If you have not yet received a copy of our press release, you can find it by visiting our website at www.qltinc.com. The conference call is being webcast live and will be available on our website for the next 30 days.

Presenting today is Bob Butchofsky, our President and CEO and Cameron Nelson, our CFO.

Before I turn the call over to Bob, I'd like to take a few moments to go over the Safe Harbor statement. I need to remind you that certain statements in this conference call is forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and constitute forward-looking information within the meaning of Canadian Securities laws.

Forward-looking statements include but are not limited to our financial projections, statements relating to our clinical development plans, our expectations for timing and results of studies on combination therapy and other clinical programs. Statements relating to market share and success of our products, statements relating to our restructuring and, divest in the assets, and statements which contain language such as believe, goal, future, projects, expects and outlook and similar expressions.

Forward-looking statements are predictions only which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from those expressed in such statements. Many such risks and uncertainties are taken into account as part of our assumptions underlying this forward-looking statements including but not limited to our future operating results are uncertain unlikely to fluctuate. Currency fluctuations may impact financial results.

The risks that future sales of products maybe less than unexpected, uncertainties related to costs and success of R&D, commercialization of products and litigation, uncertainties related to the timing and ability to divest assets on acceptable terms and prices and other factors including those described in QLT's annual report on Form 10-K, quarterly reports on Form 10-Q and other filings with the U.S. and Canadian Securities Regulatory Authorities.

Forward-looking statements are based on the current expectations of QLT, and QLT does not assume any obligation to update such information to reflect later events or developments except as required by law.

And with that, I'll turn the call over to Bob.

Robert Butchofsky

Thanks Karen. Good morning everyone, and thanks for joining us on our year-end 2008 earnings call. On the call today, I want to highlight first our achievements from 2008. It really was a transformational year for the company. And then I want to provide you with an outlook for our approved products and our clinical programs.

Let me just start by talking broadly about QLT and where we are today. We realized our first real success of the company in the ocular field and now after transformational year have returned to our roots, and emerge from 2008 as an ocular focus company.

We've developed innovative approaches to treating the two largest causes of blindness AMD and Glaucoma, first with Visudyne for AMD but now with our new punctal plug drug delivery technology for glaucoma, and that technology also have the added benefit, they can also be used to treat other ocular diseases.

We've also emerged from 2008 with the clean balance sheet with no debt, with the cash generating company with two revenue streams coming from Visudyne and Eligard. 2008 was also marked with a number of key events for the company. We successfully executed the corporate restructuring plan and divesting non-core assets and improving the company's balance sheet.

In January, we made the difficult decision of reducing overall head count by 45% or approximately 115 employees. In March, we received the FDA's decision on to move the need for blood monitoring test requirements for patients taking Aczone, a topical acne treatment. This positive action by the FDA was in response to a clinical trial we conducted and submitted to the agency. And results not only validated our clinical and regulatory strategy but also greatly increased the value of this asset.

Importantly, this effort by QLT ultimately led to the successful sales of Aczone to Allergan for $150 million last June.

In August, we entered into an exclusive license agreement with Reckitt and Kaiser, for our drug delivery platform Atrigel, with an aggregate upfront payment of $25 million and the potential to receive up to $5 million and milestone payments based on a successful development of two Atrigel formulated products.

Additionally, last summer before the onset of the credit crisis and subsequent rapid market deterioration, we completed the sale of our corporate headquarters in the adjacent undeveloped parcel of land in Vancouver. And this was sold to Discovery Parks Holdings for $65.5 million Canadian Dollars.

In total, for all of the assets we've sold last year, we received approximately $228 million from the sale of these non-core holdings and that's something we're all very proud of. Now the money we've received from these assets sales enabled us to redeem $172.5 million in convertible debt, leading QLT debt rate which is obviously a key attribute in today's economic climate.

Additionally, we were able to return meaningful cash to our shareholders by initiating and recently completing a modified Dutch auction tender offer, in which we bought back 20 million common shares or approximately 27% of our outstanding stock for a total cost of $50 million. This leaves us today with just under 55 million shares outstanding.

As a result of our restructuring and our ability to focus our development efforts, we also delivered strong financial results for 2008. Cam will go through these in more detail later in the call, so for now I just want to touch on a few of the highlights.

Eligard gross, largely offsetting ongoing declines in Visudyne sales, led to essentially flat year-over-year revenue. However while Visudyne sales declined last year, we were successful in getting a higher profit share percentage of sales from Novartis last year than in 2007.

Our earnings per share for the quarter was $0.08 and adjusted EBITDA was $9 million. Thanks to the positive influence of our asset sales, earnings per share was a $1.81 and adjusted EBITDA was $80 million for the year.

Our cash position net of restricted cash and following our Dutch auction is approximately $115 million or just over $2 a share.

In 2008, in addition to executing our restructuring plan, we focused our efforts on our ocular programs including most importantly the punctal plug but also Visudyne and our synthetic retinoid compound. First I want to focus on our punctal plug program.

We believe our sustained drug delivery punctal plug program can provide a radical change for how physicians and patients will administer medications, including most importantly glaucoma drugs. To prove the potential of this platform technology, last year we completed two proof of concepts studies. In May, we reported the results from a small five patient study indicating that our drug illusion technology was effective in controlling intraocular pressure and was well tolerated.

Building on this positive trial last October, we announced results from our phase II CORE study in 61 patients. The CORE study was designed to confirm that our drug-elution delivery system leads to a clinically meaningful drop in intraocular pressure over 90 days in patients with glaucoma or ocular hypertension. The results from this trial showed a meaningful decrease of 5 millimeters a mercury or approximate 20% drop in intraocular pressure in the two-thirds of patients who responded to treatment.

While we do not see any differences among the three doses tested, we did show conclusively the one we administered our drug eluting punctal plug, patients get a therapeutic response for 90 days.

Based on the results of this trial alone, I believe we have a commercially viable platform that would be competitive today with other glaucoma agents. However given that we did not see a dose response for the three formulations tested, we are currently investigating higher drug doses to see if we can increase the percentage of responding patients and increase the average drop in IOP. We are hoping to see a six millimeter mercury or approximately 25% or greater average decrease in IOP.

Now turning to Visudyne, we reported the results from an investigator sponsored phase II study in patients with subfoveal choroidal neovascularization, secondary to AMD at the Annual Macular Society Conference last March. The results show that combination therapy of Visudyne followed by Avastin reduced by half the number of treatments required during the first six months and visual acuity improvement were similar in the combination therapy arm compared to Avastin monotherapy.

We also completed enrollment in the phase II RADICAL study and announced interim six months results in December. As a reminder, the purpose of the RADICAL study is to determine a combination therapy, reduces re-treatment rates compared with Lucentis monotherapy, while maintaining similar vision outcomes.

During the six month interim results of the trial, mean visual acuity for all treatment groups increased from baseline and the increase was similar between groups. The mean cumulative treatments were lower in the combination group, Lucentis monotherapy group. However, we believe it's too early to draw any firm conclusions about comparative treatment frequencies, because this outcome was influenced by the mandatory treatments during the first three months in the Lucentis monotherapy group.

We continue to believe that Visudyne market share will begin to grow again if the results from well controlled clinical trials, supporting a label change demonstrate efficacy and cost savings for these Visudyne followed by one on one anti-VGEF agents.

Now turning to our last development program QLT091, our orally administered synthetic retinoid therapy. We announced in October the initiation of a phase I safety study and healthy adult volunteers. The phase I study is an open label, single center, ascending dose trial and 18 healthy adult volunteers. We anticipate announcing the results of this study in the first half of 2009.

As you will recall, this drug is being developed for the treatment of Leber Congenital Amaurosis or LCA which is an inherited progressive retinal degenerative disease that leads to retinal dysfunction and visual impairment beginning at birth.

The small group of patients impacted by this disease are essentially born with a significant vision loss or blindness because they lack the ability to produce rhodopsin. They come up a largely responsible for transmitting light impulses to the brain. We plan on initiating a phase IB trial in pediatric patients with LCA in the second half of 2009.

The important steps that we took in 2008 to focus the company not only help to put the company in a good position for today's tight credit markets, we further expect it will also contribute to positive results in 2009.

Turning now to the New Year, we issued our guidance today and I want to highlight a couple of points for you. We expect our overall spending levels to be essentially flat this year, and we expect to generate EBITDA in the range of $10 to $15 million in 2009 while we focus our attention on rapidly advancing our punctal plug, sustained delivery technology.

The point, however, is that we are not currently managing towards profitability beyond 2009. However, we are looking to strike the right balance between developing our pipeline and managing our cash, and Cam will have a few more comments to add about this later in the call.

Our broad goals for the punctal plug platform are to address two primary development issues. But first, is to see if we can improve on the overall efficacy and the percentage of patient responders compared to what we showed in the phase II CORE study report in October. We believe we'll address this issue by treating patients with a higher dose of latanoprost in our drug eluting core.

The second issue is to see if we can design a proprietary punctal plug that gives high levels of retention for 90 days. We're currently taking the time and necessary steps to ensure we have the right dose in plug design before proceeding with a confirmatory phase II study. Our goal is to de-risk this program as much as possible while in phase II development to ensure the best possible outcome for a phase III pivotal trial.

We're taking important steps in building up our entire platform simultaneously including our plug insertion tool and detection device, in addition to finding the optimal dose in final plug design.

At the moment, we have several studies underway. Number one in our highest priority, we are enrolling patients in an open label trial using a 44 microgram formulation of latanoprost in our drug eluting technology. A reference, the highest dose tested in the CORE trial was 21 micrograms.

We have two other exploratory studies underway to address questions around pure dynamics, that we can better understand the impact on our drug illusion technology on patients with either dry eyes or conversely higher tear production.

Number three; we are also accessing the placement of plugs in the upper punctal versus the lower punctal to help us assess that any differences in eyelid anatomy can influence results in patients treated with our technology.

Number four, additionally and in parallel, we continue to test prototypes of punctal plugs without drug that QLT has internally designed. We continue to make slight but important modifications to our plug prototypes to improve the level of retention and ease of insertion which are critical factors both for clinicians but also for patients.

Our goal is to move forward with the plug that demonstrates a 90% retention rate over 90 days of follow up. To remind you, conventional plugs have a retention rate around 60 to 65% according to the literature.

Ideally, we would have like to have been in a position to update you on our proprietary plug design study on this call, but we will be in a better position to do so no later than our Q2 call in July when we discuss the various improvements we've made on our entire punctal plug platform.

We will continue to update you on each of these studies, including progress on our higher dose study, in addition to other smaller studies answering questions around tear film and investigating the effectiveness of inserting plugs into the upper tear duct. Again, we feel it's important to spend the development time now, before we move forward with program into phase III trials, when the stakes are higher and much more expensive.

With regards to timelines, we currently plan to initiate a phase II confirmatory study in the second half of 2009, once we have determined the right drug dose and plug design, but obviously the timelines will ultimately be driven by the current results of our ongoing trials.

In addition to the development goals, we have just outlined our first glaucoma program, we have a goal of getting our second drug candidate in punctal plugs into initial proof of concept testing during 2009. We're working on several formulations but expect that this candidate will also be a well known glaucoma agent.

Turning to Visudyne, our goals for 2009 include reporting the 12 months results from our RADICAL trial. We expect to have data announced in the first half of the year. Also expect to hear the one year results from the Novartis run MONTBLANC trial during the first half of the year, and the DENALI trial in the second half of the year.

Finally, as previously mentioned we expect to initiate the first trial using our synthetic retinoid with patients with LCA in the second half of the year.

While 2008 was full of many successes, we've received some unfavorable news in early 2009 regarding our litigation with Massachusetts Eye and Ear Infirmary or MEEI. We announced in January that the First Circuit Court of Appeals upheld the decision that QLT was liable for unfair trade practices in connection with the 349 patent. That decision upheld the District Court decision whereby we were obligated to pay MEEI 3.01% on past, present and future worldwide net sale of Visudyne.

We filed a petition for rehearing of the appeal and that's the case is still under review by the Appeals Court. In connection with this litigation last week, Massachusetts General Hospital or MGH filed a complaint against QLT alleging that QLT owes MGH the same royalty as the judgment for MEEI. This claim has emerged because we also signed a side letter agreement with MGH which was importantly drafted by MGH in which we agreed that if QLT entered into a license agreement with MEEI at a higher royalty rate, we would pay MGH the higher royalty rate. QLT's position is that we have not entered into a license with MEEI at a higher rate and so we feel we have a strong position in the case.

There is one other point worth mentioning here. If the Appeals Court reaffirms its decision for MEEI, we believe that judgment will be chargeable to the QLT-Novartis alliance. We've not reached an agreement with Novartis on this point, but our discussions are ongoing. We will continue to update you with any material developments concerning this litigation until its final resolution.

And before I pass the call over to Cameron, I'll take a few minutes to highlight and discuss our commercial plans for Visudyne and Eligard, and highlight our guidance for 2009 sales.

Last quarter we learned from our marketing licensee Novartis that they've made a unilateral decision to eliminate their U.S. ophthalmology sales force, but they would continue to support Visudyne in the U.S. with indirect sales methods.

For those of you of that have been following the company for a while, you may know that Visudyne sales in the U.S. have been essentially flat for about two years with sales averaging between 110 and 125 barrels per day during that time, but they dipped to a 101 barrels per day in the fourth quarter.

Most of our sales come from Europe and other countries like Japan, where Novartis will continue to market Visudyne actively. We're currently exploring our auctions in the United States to ensure the Visudyne is being properly marketed and supported. Our 2009 guidance for worldwide Visudyne sales is between $90 and $110 million, of which we expect our share profit to be approximately 24% to 26%.

Our guidance assumes that current trends continue for Visudyne with relative stability in the U.S. market and ongoing declines in rest of other countries as Lucentis and Avastin adoption increased.

Now regarding Eligard, we originally intended to divest this asset as part of our 2008 restructuring plan. We entertained request from numerous companies, but we did not feel that the offers we received ocular reflected the true value of this product. We feel comfortable including Eligard in our guidance for 2009 with the caviar that there is still the possibility that we could receive an attractive offer for the asset, and therefore could divest Eligard at some point in the future.

Eligard performed exceptionally well last year with sales growth of 25%. For 2009, our guidance includes the potential for modest growth and we expect end user sales to be in the range of $220 million to $240 million. Now Cam will be highlighting for you the impact of foreign exchange rates on our guidance for Eligard, its important issue.

And with that, I'll turn the call over to him.

Cameron Nelson

Thanks Bob. The first thing you'll notice in our results that we're now reporting our Eligard results in continuing operations instead of discontinued operations as we did in the first three quarters.

As Bob mentioned, this certainly doesn't mean that we'll not ultimately sell Eligard but the accounting rules are pretty clear that we cannot keep reporting it as a discontinued operation, since it is more than one year since we announced our plans for divesture.

Moving on to the results. I'll start with end user sales. The regional split for fourth quarter Visudyne sales was $8 million in U.S., Europe was $8.4 million, and the rest of world was $14.2 million for total worldwide sales of $30.6 million. Sequentially, the worldwide Visudyne sales decreased from the third quarter to the fourth quarter at 10.1% was led by Europe, where sales dropped 16.4%. While sales in the U.S. were down 12.4% and sales outside of the U.S. and Europe were down 4.5%.

During the quarter, the U.S. dollar strengthened significantly relative to Q3, which sequentially further reported sales comparison by about $1.8 million. The exchange rates from Q3 that held in Q4 are sequential sales declined would have been less than 5% instead of the 10.1% reported.

Compared to the 2007 fourth quarter, sales dropped 32.7% with U.S. sales down 20% while EU sales go 55.7%, and rest of the world sales dropped 14.2%. Compared to the fourth quarter of 2007, foreign exchange reduced sales by about $1.2 million which means that excluding FX, worldwide sales would have been down above 30% instead of the 32.7% decline reported.

And finally, non-U.S. sales, the inventory at distributors changed very little from the third quarter to the fourth quarter and ended the year at about 700 barrel.

In terms of end users, U.S. sales were about 101 barrels per day in the fourth quarter down from sales of 113 barrels per day through the first nine months of the year, and down from 121 barrels per day through the full year of 2007.

Now looking briefly at Eligard. Sales in the quarter were $59.4 million, or up 23.6% from last year, 8.6% sequentially from the third quarter. In the U.S., sales of $20.4 million were up 16.8% from the prior year quarter and up 20.4% from Q3 '08. Outside the U.S. sales were up over 27% from the fourth quarter of 2007, and up 3.4% from the third quarter of '08.

Despite the impressive reported performance from Eligard, foreign exchange, in particular the weakening euro relative to the U.S. dollar had a significant impact negatively on reported sales. For example, sequential sales growth from Q3 to Q4 of 8.6% would have been above 19% exchange rates have stayed constant in Q4.

Now turning to our P&L, with Eligard reported within continuing operations, revenue for the quarter now includes all Eligard related revenue.

So, starting with product revenue of $24.8 million for the quarter, $11.9 million of this was revenue from Visudyne and $12.9 million was Eligard product revenue. The revenue from Visudyne for the quarter included $7.8 million of profit shared and $4.1 million for reimbursed expenses. With the Visudyne profit share for the quarter coming in at 25.3% which was up from an adjusted profit share rate in the prior year fourth quarter to 20.1%.

Most of the rest of our revenue in the quarter came from royalty revenue, which is recognized from the license agreements between our subsidiary QLT USA and its Eligard licensees.

For the fourth quarter, royalty revenue was $11 million which represented 18.5% of end user Eligard sales, up from 17.5% from the prior year quarter primarily because in the fourth quarter we passed an annual sales threshold in Europe of $100 million that triggered a higher royalty rate on European sales. Beginning in Q1 '09, the royalty rate will drop back to its original level until sales thresholds are reached in 2009.

And finally on revenue, during the fourth quarter, we had a milestone of almost $3 million for MediGene because we achieved annual sales of Eligard in Europe of over $100 million for the year. This was a one-time milestone that will not be repeated going forward.

Turning now to our expenses, R&D expense came in at $6.5 million for the quarter including stock compensation of about $0.2 million, while G&A expense was $4.6 million including approximately $0.3 million for stock compensation. So, combine the R&D and G&A expenses of $11.1 million were down over 41% from the combined spend in 2007 of 18.9 million. In large part due to lower spending on preclinical research and savings from the restructuring announced in January of '08.

For the full year, R&D expense was just under $30 million and G&A came in at $21.7 million. The reported G&A number includes some expenses related to Eligard that were not included in the operating results as we reported them in the first three quarters, were in our G&A guidance for the year because they were included in discontinued operations. Without this Eligard related G&A, we would have been below the top-end of our G&A guidance for 2008 of $21 million.

Moving on, for the full year, we recorded a gain on sale of long-lived assets to $27.7 million related to the third quarter sale of our headquarters building vacant land and certain equipment for 65.5 million Canadian Dollars. In conjunction with this transaction, we provided vendor financing in the form of a second mortgage to the acquirer for 12 million Canadian Dollars. This amount has reported as a mortgage receivable on our balance sheet for $9.8 million U.S. The mortgage has a two year term, when we collect 6.5% simple interest while the mortgage is outstanding. On the restructuring charge, we expensed another 300,000 for the quarter, bringing our full year total up at 10.2 million.

Interest expense in the fourth quarter of $1.5 million is now since the redemption of our convertible notes made up only of interest accruing in the damage award and on post judgment damages from the July 2007 MEEI judgment. This interest will continue to accrue at the 5% range stipulated by the court, prior to the judgment until the case is resolved.

Also on interest, our interest income for the quarter at $1.5 million was about half of the level from the year ago, even though our average cash balance throughout the quarter was higher than in 2008 than in 2007. The interest rate earned in our cash which is almost entirely invested in very conservative money market funds, dropped significantly in the year.

Moving onto income tax, as the effective rates on our pre-tax income including discounts for the quarter was high at 51%, primarily reflecting the fact that a significant amount of our expenses are incurred in our U.S. subsidiary QLT Plug Delivery, Inc, that is developing our punctal plugs. Because this subsidiary has no revenue and no history of profitability, we're not able to tax effect the losses incurred there which pushes up our overall effective rate.

Also on tax, I want to point out that the majority of the income tax receivable on our balance sheet at year-end, related to a request to carry back losses sustaining from the MEEI judgment in 2007.

For the full year, we reported income from discontinued operations net of tax of $119.9 million. This amount was driven by the gains from the divestments of Aczone and Atrigel and is reflective of the fact that most of these gains were sheltered from tax by QLT USA's loss carry forwards. The pre-tax gains on the sale of Aczone and Atrigel were $134.9 million, which reflected the fact that GAAP requires some portion of the goodwill related to QLT USA to be allocated or charged to the divested assets, just as we did when sold the generic dermatology and manufacturing businesses in 2006.

The amount of goodwill allocated to these two transactions was about $32 million, so if you exclude this allocated goodwill which is purely a function of financial accounting, the gain on the two transactions was about a $167 million which is basically the gross proceeds of $175 million plus the deal fees expenses and minor inventory and other assets that were part of the deal.

Please note that at the end of the fourth quarter, QLT USA had approximately $70 million of federal net operating loss carry forwards remaining that can potentially be used to shelter future Eligard operating income or gains from a divestment of Eligard depending on the nature of such a transaction.

So, on the bottom-line we reported diluted EPS of $0.08 for the fourth quarter compared to a loss per share in Q4 2007 of $0.62 that was driven by the charge for in process R&D related to our acquisition of the punctal plug technology in '07.

For the full year '08, EPS of $1.81 was driven by the gains on asset sales, while the comparable loss in 2007 of $1.47, was due to the litigation charge related to MEEI judgment and to the in-process R&D charge for the plugs.

For the quarter and the year, we've included in the press release, schedules that reconcile our GAAP EPS to non-GAAP EPS. The items excluded in determining non-GAAP EPS were the gains on the three deals completed in the year, licensing the milestone revenue, the recognition of the tax asset related to the reversal of the valuation allowance at QLT USA, stock-based compensation, inventory and fixed asset charges, restructuring expense and litigation charges. So, with all those adjustments, non-GAAP EPS for the fourth quarter was $0.07, while for the year it was a penny. And for the year, the non-GAAP EPS included a loss per share $0.04, from discontinued operations that will not be present in 2009.

Adjusted EBITDA for the quarter was $9.1 million and for the year it was $18.4 million and this was derived starting with continuing operations, operating profit and making the same adjustments as for non-GAAP EPS as well adding back depreciation expense.

Turning to cash, our total cash balance at the end of the year was about $290 million which included $124.6 million of restricted cash related to the bond posted to stay the execution of judgment in MEEI case. Our unrestricted cash and cash equivalents at December 31st of $165.4 million reflected the cash collected from the three assets divestments in the year as well as repayment in full of our $172.5 million convertible notes, but the balance did not reflect the $50 million paid to conclude the Dutch auction tender completed in 2009. And one last thing, to note, CapEx for the quarter was $100,000 and for the year it was about $1.5 million.

So, turning now to our guidance. We set Visudyne guidance that reflects further reductions in sales from the Q4 sales figure, the profit share guidance of 24% to 26% reflects significant cuts in expenses to support the brand and it's based on budget discussions that we have had with Novartis.

On Eligard, I want to point out that our guidance for 2009 compared to 2008 reflects a negative impact of approximately $20 million due to changes in foreign exchange rates, specifically, the significant strengthening of the U.S. dollar.

In other words, if average exchange rates for 2008 were to hold in 2009, our guidance range for Eligard sales would have been 240 to 260 million. Also on Eligard, we expect the ratio of royalty revenue, the Eligard end user sales for the year will be in the 16% range, but this percentage will be lower early in the year and higher by Q4, reflecting the incremental royalty rate, excuse me, on sales in Europe and annual sales for past $50 million and then $100 million for the year. As in the past, product revenue will essentially be offset by cogs in those shipments, with likely a small negative margin on this product revenue.

On expenses, combining our R&D guidance of $30 to $33 million and our G&A guidance of $18 to $21 million, if you combine projected spending of $48 to $54 million. So, we're essentially projecting that spending will be flat with 2008 when the combined actual spend was $51.3 million.

Our R&D guidance of $30 to $33 million reflects some growth in R&D spend as our entire R&D budget is now being spent on the ocular therapeutic area with about 80% of the budget for punctal plug development.

Within our G&A guidance for the year of $18 to $21 million, the biggest variable as legal fees. It's a very difficult to forecast given the uncertain nature of the underlying litigation, in terms of both scope and timing of potential expenditures.

Moving down to P&L. We expect interest income to continue to decline in 2009 given the low interest rate environment and the conservative short-term nature of our cash investments. Interest expense now relates only to interest accrual on the MEEI judgment, which is currently above $1.5 million per quarter. But this expense will go away if the case is concluded during the year.

Income tax guidance is particularly difficult for 2009 as we determine and execute the appropriate corporate structure for the remaining company assets. At this point, our best estimate is an effective tax rate in the 50% range for 2009 similar to the fourth quarter rate in 2008. Although, this is highly variable and subject to significant change so we'll keep you updated as the year progresses.

Similar to my explanation for the fourth quarter, the high rate is reflective of the accounting principle that does not allow us to tax effect the losses incurred by our U.S. subsidiary in the development of our punctal plug program.

And finally on guidance, we expect capital expenditures in 2009 to be about $2 million primarily to fund capital requirements for the punctal plug program, Eligard manufacturing requirements and an upgrade to our information systems.

In conclusion, in 2008 we redeemed all of our convertible notes leaving us at year-end '08 with no long-term debt and with $165 million of unrestricted cash before payment in early 2009 for the $50 million Dutch auction. After the Dutch auction, now approximately 55 million shares outstanding, we still have over $2 per share of cash with no long-term debt.

In addition, the fourth quarter was a profitable one and we are projecting to be cash flow positive in 2009 despite what we hope is relatively conservative top-line Visudyne guidance.

As Bob mentioned earlier, we are not committing to profitability beyond 2009, mainly because of potential variability with our revenue streams, and because as we move our punctal plug program forward, our R&D spend will likely rise. However, we are streamlined company focused purely on ocular R&D, the two revenue streams that are more than ample to fund our current spin levels.

And with that, I'll turn it back to Bob for some closing comments.

Robert Butchofsky

Thanks a lot, Cam. 2008 was truly transformational year for QLT. We're pleased to be in a position that allows us to primarily focus on our development programs that we believe will drive shareholder value in 2009 and beyond.

We're coming up on an important time for the companies. We anticipate data from three different development programs in the next several months, including additional data from the Novartis, Visudyne combination study MONTBLANC and our RADICAL trial. Our LCA phase I study and most importantly, a base on our punctal plug phase II studies.

Thanks for joining us on the call today, and we'll now look forward to answering any questions you may have.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Our first question today comes from David Dean of Cormark Securities.

David Dean - Cormark Securities

Hi guys, good morning.

Robert Butchofsky

Hey David.

Cameron Nelson

Hi David.

David Dean - Cormark Securities

What can you give us more on the MGH -- I am picking more about -- if you can provide any guidance with the process -- what the process will look like relative to MEEI. Should -- will this be a different because there might be President out there?

Robert Butchofsky

Well, it's always difficult to comment on what's going to happen, David. I've like to reiterate a couple points we made. We feel we have a strong case. We have a strong argument. It's a very limited document that we're going to be arguing over, and I'm referring to side letter.

And I think important to reference to that was drafted by MGH, and the dispute essentially revolves around what the definition of that paragraph refers to and we feel strong that we have not entered into a license with MEEI. And we feel that that again, is a pretty strong case. So, we plan on defending ourselves. And in terms of timing, the MEEI case is dragged on for years. Literally, I think this case started eight or nine years ago.

And I would hope that we don't have that overhang from this litigation but we do plan on defending ourselves rigorously. And we'll take it a step at a time and keep you updated as this progresses.

David Dean - Cormark Securities

Do you have any relevant date, on anything yet?

Robert Butchofsky

It's too soon David, we've just got served, basically last week, it will take probably several months before we really even determine where the venue is in the court before it moves forward.

David Dean - Cormark Securities

Okay, okay. Moving to the plug, do you have any insight as to, why one-third of patients did not respond, whether its maybe the oncology (ph) related or I guess, you're thinking it might be dose, any insight, do you know if these patients would have responded to the drug dropped in?

Robert Butchofsky

We have some data on that David, and we think the highest probably just to sort through what we know. We think the highest rationale is that we're probably still low on the dose response curve, part of the justification for this is the side effect profile that we saw in the CORE II study, including importantly red eyes, which is a very common side effect from Xalatan drops, while our reported ratio of that was around 3%, and the Xalatan literature would suggest that that incidents of red eyes or hyperemia is anywhere from 10% to 30%. So we feel that that's a good surrogate marker to indicate that we're probably still low on the dose response curve. So doubling the dose in the next phase II study, we hope it put us closer to the range of efficacy that we're hoping to achieve.

David Dean - Cormark Securities

And is there any physical limitations with the amount of drug that you can provide within the plug, obviously within reason?

Robert Butchofsky

Yeah, there are, and we continue to overcome some of those challenges when we launched the CORE study, which was launched basically last summer, the 21 microgram formulation was the highest dose that we could formulate at that time. We formulated the 44 micrograms that's in the clinic now, we're enrolling patients, but we continue to work on expanding and increasing that dose and we would expect to have a higher concentration dose available if we needed, that we could slot into this dose response study in the phase II program.

David Dean - Cormark Securities

And, how far do you think you are away from having to look at a possible prudent to the issues and such as increasing the dose?

Robert Butchofsky

Well, we're going to address some of those questions with the other two studies that are ongoing. So, we're trying to address the question of whether there is any impact on the tear dynamic and whether a patient that potentially has most severe dry eye, whether or not, they just wouldn't be a good candidate for the system. Now we would hope ultimately that just boosting the dose will enable us to have efficacy even in a patient that does have dry eye, but what these other two studies that we're doing, the tear study and also the lower versus upper punctal installation trial, we expect that those two phase will help us address some of these other questions.

David Dean - Cormark Securities

Okay. Just one last question from me.

Robert Butchofsky

Sure.

David Dean - Cormark Securities

So, can you give us some more clarity on the profit share that of 24% to 26%. Visudyne sales -- you report that in Q4, but it seems based upon some commentary on the call that that might be -- that rate might be at risk, its depending upon whether or not, Novartis follows through with some outcomes of recent discussions, is that correct or you're pretty firm that...

Robert Butchofsky

Well, we feel that Novartis has done a very nice job in decreasing expenses starting late last year, but then continuing that with further declines in 2009. So, we're pleased to see that we're finally getting what we think is a more reasonable level of spending. In the U.S. situation specifically, we did not agree with the position for them to move to indirect sales methods in the U.S. and so we're continuing to look for resolutions to that issue. But I mean to directly answer your question, we're very comfortable with the guidance range we gave today on the profit share rate.

David Dean - Cormark Securities

Okay. Thanks guys.

Robert Butchofsky

Thanks David.

Operator

Our next question comes from Sapna Srivastava, of Morgan Stanley.

Unidentified Analyst

Hi, it's Dave calling in for Sapna. Just a question on the punctal plug study that you guys have on clinical trials with artificial tears, the exclusion criteria for that trial include patients who seem to have dry eye to these requiring tears. So, I guess I was wondering what is the purpose of the study in that, it seems to be running patients with -- without the need for artificial tears but its an artificial tear study, I just trying to understand to what the end result that you're going to use the data for?

Robert Butchofsky

Really, we are just trying to understand what dynamic that the tear film could potential play in terms of helping us pre-select patients who would be more likely to be responders to treatment.

So we'll be analyzing tear components and looking at concentrations in the tear film of the drug as well as other proteins that are available in the tear film that help us assess, what factors are playing a role and determining which patients respond and which lack response.

Unidentified Analyst

Okay. And so are you doing that also in patients that are not using artificial tears and understandings sort of concentrations in their tear film as well, or do you need to use artificial tears to do that type of work?

Cameron Nelson

No. We're also doing it with patients that are not using our official tears. So, we can understand what's going on with their natural tear production.

Unidentified Analyst

Okay. And then just, a second question.

Robert Butchofsky

Sure.

Unidentified Analyst

Regarding the intellectual property around this type of program, is your primary IP going to be with your proprietary plug or do you have IP about plug related delivery because I've seen other companies start to pursue this concept which -- and so I was just wondering sort of what your kind of area is going to be in terms of what you control of this whole kind of world?

Robert Butchofsky

Yes, that's a great question. We have a number of patent families that were actively pursuing and expanding literally on daily, if not weekly basis. That would include, our proprietary plug, the drug eluting core and technologies, insertion devices and many things that we think are important for the overall platform.

We are the first in clinical studies and so we think we're expanding our IP portfolio broadly, but we don't feel -- we have exclusivity for this concept and this idea and if you haven't picked it up on clinical trials, Johnson & Johnson subsidiary Vistacom is also exploring this type of drug delivery system. They're using a different molecule. It's my understanding they're using Bimatoprost which is another prostaglandin analog but Bimatoprost compound doesn't come out patent until virtually a year, year and half after latanoprost which is the product we're developing.

So we are hopeful and we expect that we will be in a position to launch first in this marketplace. But again I think it's complementary and we think that there is room for competition in this marketplace because there is a significant commercial market opportunity.

Unidentified Analyst

Okay. Thank you.

Robert Butchofsky

You bet.

Operator

(Operator Instructions) Our next question comes from Walter Schenker of Titan Capital.

Walter Schenker - Titan Capital

Thank you. Just two questions on the MEEI litigation. I am not that familiar so it may be known to other people so I apologize. To the extent the QLT, no QLT Novartis alliance is liable, roughly that proves to be the case roughly how significant would that be toward Novartis also paying toward that settlement?

Cameron Nelson

Well, as we mentioned, we continue to have a dialog with Novartis around that. The judgment is upheld. Currently, we've put in about $120 million into the restricted cash bucket and that would include payments on the 3.01% royalty rate and also include payments of interest expense. The total amounts of legal fees are still undecided. And it's something that is going to be remanded down to the core.

So we're talking something in the ballpark of around $120 million of exposure if the decision is ultimately upheld and our position would be that we should share that equally with Novartis.

Walter Schenker - Titan Capital

Okay. And obviously, you would be slightly upset about first results but filing for the tax carry back is likely if again obviously predicated on loosing but would likely also lessen it to what sort of a degree?

Robert Butchofsky

Cam you want to address that one?

Cameron Nelson

Yes. The tax offset to that is in the low $30 million range.

Walter Schenker - Titan Capital

And that's predicated on your paying at all or you paying half of it?

Robert Butchofsky

That's predicated on us paying all of it. So, what we've shown in our financial statements, it was back in Q2, 2007 when we took the charge, in our statements and we booked the offsetting tax provision credit and it all assumes that we're paying the whole thing, both end of it.

Walter Schenker - Titan Capital

Okay. Thanks a lot.

Robert Butchofsky

You bet.

Operator

Our next question comes from Doug Miehm of RBC Capital Markets.

Doug Miehm - RBC Capital Markets

Hi, good morning, Bob, Cam.

Robert Butchofsky

Hi Doug.

Cameron Nelson

Hi Doug.

Doug Miehm - RBC Capital Markets

Hi, a quick question with respect to the hearing, or the rehearing on the foreign sales portion, can you comment on timing and when you'd expect resolution there? And why do you think you'd, perhaps end up getting a benefit here when even on a appeal you got turned down?

Robert Butchofsky

The basic concept is really a simple one and it is underlying our rationale for filing the petition for rehearing. And it essentially involves that we don't feel a worldwide royalty, is justified when the basis for this dispute is on IP, that's only valid in North America. So, it's a very simple argument, we think it's just logical in fairness, and we intend to continue to defend ourselves. Now the decision and timing could literally happen any day and we'll have no forewarning about this, it will be posted whenever they've made their decision, but it could literally happen any day.

Doug Miehm - RBC Capital Markets

Okay. So, that could happen any day. Now I imagine, in the Appeals Court hearing you did make the same argument. What was the reasoning behind their decision to making it not valid?

Robert Butchofsky

That is -- would require a longer discussion, and mine not being a lawyer, I feel uncomfortable going into it, quite honestly Doug. I'll stick to my previous comments and just leave it at that and if you want to follow up, we can arrange in another call.

Doug Miehm - RBC Capital Markets

Okay, that's great. Then with respect to the damages, damages versus royalty and I think this is an important point. If the MEEI has seen the damages, your position with Novartis is probably weaken to a degree but probably strengthened with respect to MGH, can you walk us through that?

Robert Butchofsky

Again, I think that is a probably something I'm not comfortable talking about, probably at this time.

Doug Miehm - RBC Capital Markets

All right. Okay. And then just with respect to the $8 million in U.S. sales, for Visudyne, was there any reasoning behind what appeared to be a bit of a drop after being sideways for a while?

Robert Butchofsky

No, I think there was some concern expressed at the American Academy of Ophthalmology meeting, that there was maybe a lack of commitment to Visudyne and it maybe the results of the combination studies, we're looking to be negative. I think we dispel that with the six month data release in December of the RADICAL study, because clearly the combinations aren't performed at least as well as Lucentis monotherapy. And January sales seem to have improved a bit. So, we feel again comfortable that our guidance range is appropriate, and we also feel that we're taking guidance into account and just looking at where the current trends are going and really not forecasting a significant uptick once we've got in the combination studies later in the year.

Doug Miehm - RBC Capital Markets

Okay. That's great. And then under the original agreement with Novartis, as it relates to marketing Visudyne, are they required to do significant marketing or can they do basically what they please?

Robert Butchofsky

Well the standard is, they need to use reasonable commercial effort, and again we continue to have a productive dialogue with Novartis, and we hope that we're going to reach a productive solution with them about the whole issue with contribution to MEEI but also the U.S. field force issue.

Doug Miehm - RBC Capital Markets

Perfect. Okay, thanks very much.

Robert Butchofsky

Thanks a lot, Doug.

Cameron Nelson

Hey Doug.

Operator

Gentlemen, there are no further questions at this time.

Robert Butchofsky

Well then I want to thank all of you for participating today and we'll look forward to updating you with ongoing progress for the punctal plug program, as well as Visudyne and QLT091. Thanks again.

Operator

Ladies and gentlemen, the conference is now concluded. You may disconnect your telephones. Thank you for joining and have a pleasant day.

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Source: QLT Q4 2008 Earnings Call Transcript

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