QLT Inc. (QLIT) Q1 2009 Earnings Call April 28, 2009 8:30 AM ET
Bob Butchofsky - President & Chief Executive Officer
Cameron Nelson - Chief Financial Officer
Karen Peterson - Director of Investor Relations
Doug Miehm - RBC Capital Markets
Welcome to the QLT Inc. first quarter 2009 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.
Good morning everyone and welcome to QLT’s first quarter 2009 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 are 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 related to our clinical development plans, our expectations for the timing of initiation and completion of clinical studies, our expectations of the results from those clinical studies, including our punctal plug program, Visudyne combination therapy studies and our other clinical programs, statements relating to market share and potential success of our current or future products, statements relating to our restructuring and divestment of assets, statements relating to our expected effective income tax rate 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.
Any such risks, uncertainties and other factors are taken into account as part of our assumption underlying these forward-looking statements and include the company’s future operating results are uncertain and likely to fluctuate, uncertainties relating to the timing and results of the clinical development and commercialization of our products and technologies, including Visudyne and our punctal plug technology and the associated costs of these programs.
The timing, expense and uncertainty associated with the regulatory approval process for products; uncertainties regarding the impact of competitive products and pricing, risks and uncertainties associated with the safety and effectiveness of our technology, risks and uncertainties related to the scope, validity and enforceability of our intellectual property rights and the impact of patents and other intellectual property of third parties and general economic conditions and other factors described in detail 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.
With that, I’ll turn the call over to Bob.
Thanks Karen. Good morning everyone and thank you for joining us on our first quarter 2009 earnings call. The first quarter was a positive start to the year for QLT, with our press release today showing positive cash flow and earnings because of higher profitability from Visudyne and double-digit growth in Eligard sales.
We’re also clearly benefiting from the reduced operating expenses stemming from the restructuring we implemented last year and are generating cash, now with $130 million of unrestricted cash on our balance sheet. Cam will highlight the rest of the financial performance during his portion of the call, so I’m going to focus primarily on updating you on the development activities that are ongoing and remind you of our upcoming clinical development milestones.
As we outlined at the beginning of the year we have five active clinical trials underway right now. Four for the punctal plug program and one, the radical trial for Visudyne. We will be generating data on all of these trails in the coming months and I continue to believe that the successful development of the punctal plug drug delivery program has the potential to generate significant shareholder value, so let’s start with that key program.
As a reminder, we completed the Phase II CORE study in patients with ocular hypertension and glaucoma and reported those results in the fourth quarter last year. While we saw about a 20% reduction or approximately a 5 millimeter drop in interocular pressure or ILP in the two-thirds of patients who responded, we believe we need to increase the drug dose delivered with this technology in order to increase the percentage of patients who respond and in order to get a larger mean drop in ILP. We have a 6 millimeter target which is only a modest improvement over the 5 millimeter drop we saw in the CORE responder trial.
Also recall that the highest dose we tested in the CORE study was 21 micrograms, which is the equivalent of about 14 drops of Xalatan, administered over a 90 day period. By the end of last year, we were successful in formulating a plug with the new higher concentration, 44 micro grams of Latanoprost.
As a result we’ve initiated and are very close to completing patient enrollment in an open label trial using the 44 micro gram dose of Latanoprost in our punctal plug delivery system. We expect to report preliminary data from the 44 micro gram portion of this trial, no later than our second quarter earnings call in late July.
In parallel, we are continuing formulations work to try and determine the maximum amount of drug that we can load in the punctal plug system. We learned a lot about the capacity of these plugs since the original CORE study last fall in which our highest dose was 21 micro grams.
Thanks to the diligent work of our research and development team, we were recently able to almost double the 44 micro gram dose we’re currently testing and have a new formulation available that we plan to test in patients as part of our ongoing high dose study in the summer. We are also working to develop an even higher dose and if successful, this could be the upper limit tested in our Phase II program. We would not anticipate having this formulation ready for potential study participants until late in the summer.
Now, to try and give you some idea of where we are in the program, the 21 micro gram dose tested in CORE is the rough equivalent of 15% of the drug dose a patient would receive from administering Latanoprost eye drops. The 44 micro gram dose currently in trials is approximately 30% of the equivalent eye drop dose.
The higher dose we plan on evaluating, starting this summer, is approximately 60% of the equivalent eye drop dose. We are working on a formulation that would be higher than the drug dose administered from eye drops, so that we can definitively define the dose response curve for Latanoprost administered in our punctal plug delivery system. So to be clear, we’re pursuing a number of high doses in parallel in these ongoing studies, in order to further explore dose response.
As outlined earlier, we expect to be in a position to report on our 44 micro gram dose by July and if we’re able to reach our desired ILP, we expect to move forward with a mass controlled confirmatory Phase II study using that formulation later this year. However, if we feel that we could obtain a greater drop in ILP with the higher dose formulations, then we will wait to see the results and move forward accordingly.
Now, I want to turn to device development. Over the past year we’ve been working on designing a new plug prototype that would improve upon the 60% to 75% retention rates of current punctal plugs over a 90 day period. Our internal goal is to strive for 90% retention rates.
We continue to make slight alterations to plug designs in order to enhance ease of insertion and removal, patient comfort and overall retention of the plugs. We feel we’re making progress in these efforts and we expect to be in a position to be able to provide data on retention rates for current designs during our second quarter call.
There are two other studies underway designed to help us understand which patients are more or less likely to respond to treatment. These two trials are designed to answer the following questions: First, does a patient’s tear volume have any influence on the efficacy of the plug system and does the addition of artificial tears and the preservative benzalkonium chloride or BAK have any impact on patient’s likely response?
Second, does the position of the punctal plug in relation to the eye have any influence on patient response? Specifically in the tear study, we are measuring patient’s tear production and adding supplemental artificial tears with BAK to see that enhances the effect of the drug delivery system.
On the plug positioning trial, we’re comparing the effectiveness of treatment for patients that have drug-eluting plugs placed in the upper versus the lower puncta, as well as evaluating the position of the plug relative to the cornea. We expect to provide you with an update on these trials again, no later than our second quarter call.
The goal and purpose of the entire Phase II program is to explore all aspects of this technology and reduce the risk of the program as much as possible before moving forward to the confirmatory trials. In our view, the combination of the CORE study, our ongoing current series of Phase II studies and our planned confirmatory study which we hope to initiate later this year, will provide us with a robust data set, prior to beginning our Phase III trials and present a comprehensive package to the FDA.
So in summary, in July we expect to be in a position to give you a broader and more detailed overview of the full plug program. We hope to share the data from the patients that have received our 44 microgram formulation, our plug placement and tear film studies and while we’re conscious of the need to protect the specifics for competitive reasons, we should be able to go into more detail about our proprietary plug design.
Overall, we’re pleased with the progress we’re seeing in the ongoing work and preliminary results we’ve achieved in our punctal plug program and remain confident that we are advancing this technology, as quickly as possible.
Now I’d like to turn to Visudyne. From Visudyne, we’re awaiting the results from three combination therapy studies, investigating the use of Visudyne at various life flounces in conjunction with Lucentis. All of these studies have completed enrollment.
The Novartis study, MONTBLANC, a 12 month European trial on 318 patients should be completed and analyzed soon and we expect the results to be presented at the 17 Congress of the European society of ophthalmology in June. The data from the U.S. Novartis sponsored DENALI trial investigating 250 patients should be available late in the year.
We will be reporting top line and 12 month data from the QLT sponsored RADICAL study which is the third combo trial in the second quarter and we will be submitting that data for presentation at the combined meeting of the American Society of Retina Specialists and Macula Society, which is held this coming September.
The goal of all these trials is to investigate, whether there is a similar visual acuity benefit between patients treated with combination therapy and those treated with Lucentis monotherapy, but we also hope to establish the diminished treatment burden for a number of injections for those patients treated with combination therapy.
Now, I want to turn to our other development program, QLT091, which is the orally administered synthetic retinoid replacement therapy. This is a potential treatment for Leber’s Congenital Amaurosis or LCA.
In early March of this year, we were pleased to announce results from a Phase Ia trial of our retinoid product in healthy adult volunteers. The trial demonstrated that the drug is safe and well tolerated and achieved its primary goal of estimating an appropriate dose for studies in patients with LCA.
The Phase Ia trial was an open-label, single center, ascending dose trial conducted by QLT, to evaluate the safety and tolerance of multiple administrations of the synthetic retinoid drug in 20 healthy adult volunteers.
Participants were enrolled in six cohorts of increasing doses. Patients in the highest dose cohort reported mild adverse events, including facial flushing and headache, which were transient in nature and were resolved during the treatment period. These are expected adverse events in the retinoid class.
There were no reports of serious adverse events relating to the study treatment. Our plan is to initiate a Phase Ib trial in the second half of 2009, in pediatric patients with LCA. We’re very excited about treating these children, who have poor or virtually no vision and we’re hopeful that this treatment could provide them with functional vision for the first time in their lives. We’re in the process of starting to implement the trial and expect to get started as soon as possible.
So, let me summarize our development efforts. We have four punctal plug trials underway; one, the high dose open-label study, currently testing the 44 microgram formulation, which will be extended to accommodate higher doses of latanoprost; two, the tear and BAK dynamic study; three, the plug placement study; and four, the plug design and retention study.
We expect to be in a position to give you a thorough update on our next conference call with either complete or partial results from those studies At the end of Q2, we’ll be in a position to report results from the RADICAL trial from Visudyne and we expect to hear the results from the MONTBLANC trial as well. Finally, we’ll be starting the retinoid study in children with LCA in the second half of 2009.
There are a couple other organizational items that I want to mention before I turn the call over to Cam. Going forward, we will not be separately releasing Visudyne sales results. We will be reporting sales numbers in conjunction with our full earnings release.
Also on the Visudyne front, we reported at the end of Q1 that we intend to explore our options to ensure that Visudyne is being properly marketed in the U.S., which will be increasingly important if the results from DENALI, RADICAL and MONTBLANC support the use of Visudyne in combination with Lucentis. We remain in discussions with Novartis on this issue, as well as on the MEEI judgment award and their lack of participation thus far in funding the judgment.
Finally, with respect to MGH’s recent complaint filed with the superior court of Commonwealth of Massachusetts against QLT, which states that they believe they’re entitled to the same royalty rate of 3.01% as was warded to MEEI. We filed motions to dismiss this case and those will be heard by Judge Young in the federal court in Boston in May and we expect a ruling on those motions sometime after the oral arguments. We continue to strongly believe in the merits of our case and intend to vigorously defend ourselves
With that update, I’ll turn the call over to Cam to review our financial results.
Thanks Bob. I’ll start with end user sales results for the quarter. The regional split for Visudyne sales was U.S. $8.7 million; Europe, $6.9 million and rest of the world, $12.1 million, for total worldwide sales of $27.8 million. Sequentially the worldwide Visudyne sales decrease from Q4 2008 to Q1 2009 of 9.4% was led by Europe, where sales dropped 17.7%.
Sales in the U.S. increased by 9% over the prior quarter, in part due to a net increase in distributed inventory. U.S. distributors added 225 vials to their inventories in the quarter and ended March holding about 900 vials or slightly under two weeks of supply. In terms of end users, U.S. sales were about 101 vials per day in the first quarter, which was exactly flat to Q4 2008.
Compared to the 2008 first quarter, Visudyne sales dropped 23.9%, with European sales down 47%, U.S. sales down 6.1%, and rest of world sales off 14.2%. Compared to the first quarter of 2008, changes in foreign exchange rates reduced reported sales by approximately $1.8 million, which means that excluding FX, worldwide sales would have been down about 19% instead of the 24% decline reported.
Now looking briefly at Eligard, sales in the quarter of $58.6 million were up 16.4% from last year and down 1.5% sequentially from the fourth quarter of 2008. However, the sequential drop from Q4 ‘08 which amounted to less than $900,000 resulted from small negative impacts due to foreign exchange and minor fluctuations in Average Selling Prices, as unit sales actually grew slightly from Q4 to Q1.
In the U.S., Eligard sales of $21.1 million were up 8.2% from the prior year first quarter and up 3.8% from Q4 2008, while outside the U.S. sales were up 21.5% from the first quarter of ‘08, but down 4.2% from the fourth quarter of 2008.
Foreign exchange, in particular the weakening euro relative to the US dollar continued to have a significant negative impact on reported sales. For example, year-over-year sales growth of 16.4% would have been about 28% if exchange rates had stayed constant from Q1 of last year, as the weakening euro had a $6.1 million negative impact on the year-over-year comparison.
Now turning to our P&L, as a reminder, in the last quarter we moved Eligard back to continuing operation. So revenue for Q1 and the comparative period in 2008 includes all Eligard related revenue. We’re starting with product revenue of $20.8 million for the quarter, $11.8 million of this was revenue from Visudyne and $9 million was Eligard product revenue. The revenue from Visudyne included $8.4 million of profit share and $3.4 million for reimbursed expenses.
Visudyne profit share for the quarter came in at 30.3%, up sharply from 21.5% in the prior year first quarter, due to significantly lower spending on marketing and distribution. 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 quarter, royalty revenue was $8.9million, which represented 15.2% of end user Eligard sales.
As mentioned in the last call in February, we expect this rate will increase throughout the year as annual sales thresholds are achieved, which will trigger a step-up in the tiered royalty structure in one major region.
Now, turning to expenses, cost of sales was $13 million for the quarter, comprising $9.6 million for Eligard and $3.4 million for Visudyne. Visudyne cost of sales for the quarter included $0.6 million in inventory write-offs and adjustments and a $0.4 million charge related to amending one of our supply agreements for Visudyne, while Eligard cost of sales also included about a half million dollars for inventory adjustments.
Cost of sales also included the amount accrued on Visudyne sales pursuant to the judgment in the MEEI litigation; that is, the 3.01% of worldwide sales, which was previously presented as a separate line item on our P&L.
R&D expense came in at $5.9 million for the quarter, including stock compensation expense of about $7.2 million, while G&A expense was $5.2 million and that included approximately $0.3 million of stock comp expense. So combined, R&D and G&A expense of $11.1 million was down about 27% from the same combined spend in Q1 2008 of $15.2 million. The cost savings from our restructuring initiated in January 2008, more than offset increased spending related to our punctal plug program.
We do expect R&D spending will increase as work on our punctal plug delivery technology continues through the year and as a reminder our guidance for 2009 is for R&D expense of $30 million to $33 million and G&A expense of $18 million to $21 million. I’ll also point out that G&A expense which was running at about $4.5 million to $5 million per quarter in the previous three quarters was a bit higher in Q1, primarily due to higher legal fees.
Our interest income of $1.4 million was down over 40% from the prior year, even though our average cash balance was higher than in last year’s first quarter, as interest rates earned on our cash, which is almost entirely invested in very conservative money market funds dropped significantly. The impact of lower interest rates on our cash was partially offset in Q1 by $0.7 million of interest income related to a tax refund received during the quarter.
Interest expense in the quarter of $1.5 million was about half of the level from a year ago, because the prior year first quarter included interest expense on our convertible notes that were redeemed in Q3 2008. The remaining interest expense related solely to interest accruing on the damage award and on post judgment damages from the July 2007 MEEI judgment. The judgment was paid to MEEI earlier this month and following this payment, we do not expect to report further interest expense for the balance of the year.
Moving onto income taxes, the effective rate for the quarter was very high at 76%. For the year we now expect our effective tax rate will be in the 60% to 65% range for 2009; although, as we highlighted in the February call, this is highly variable including between quarters and subject to significant change, so we’ll keep you updated as the year progresses.
Income tax guidance is really difficult for ‘09 given the complexities of tax; including the application of our U.S. loss carry forwards that are subject to annual Internal Revenue Code Section 382 restrictions, as well as the timing and format of an internal reorganization, which could help us achieve greater tax efficiencies going forward.
As outlined in February, the high rate for the year assumes that we keep Eligard and it is reflective of the accounting principles that do not allow us to tax effect the losses incurred by our U.S. subsidiary in the development of punctal plug and do require us to fully tax effect the Eligard operating profit, even though a significant portion is shielded from taxes by QLT USA’s net operating loss carry forwards.
This last point is very important, because it means that although we are reporting a high effective tax rate, a portion of this provision is expected to be shielded by NOLs and as such our accounting tax provision does not reflect the amount of cash tax liability we expect to incur from this year’s results.
Moving onto EPS, just to comment on shares outstanding; recall that we completed our $50 million Dutch auction in the first quarter purchasing 20 million shares or about 27% of our outstanding shares, which were cancelled in early February. The diluted shares outstanding for the quarter of 61.3 million shares included one month of the old share count of $74.6 million and two months of the current share count of $54.6 million.
So the bottom line, we reported diluted EPS of $0.02 per share for the first quarter of 2009 compared to a loss per share in Q1 last year of $0.14. That was driven by the $7.6 million restructuring charge taken last year and also we had cost savings realized from the ‘08 restructuring and higher Eligard royalties which helped increase our EPS from the year ago.
The press release includes a schedule reconciling our GAAP EPS to non-GAAP EPS. The items excluded in determining non-GAAP EPS were licensing and milestone revenues, stock-based compensation expense, litigation charge, restructuring and interest income related to the tax refund mentioned earlier. The net impact of these adjustments however was minimal in Q1, so that our GAAP and non-GAAP EPS were the same for the quarter at $0.02.
Turning to cash flow, adjusted EBITDA was $6.2 million in Q1 2009 and this was derived by starting with operating income and making the same adjustments as for non-GAAP EPS, as well as adding back depreciation expense.
So our total cash balance at the end of the quarter was about $255 million, which included $124.8 million of restricted cash related to the bond posted to stay execution of judgment in the MEEI case. The full amount of this restricted cash, plus an additional $2.2 million was paid to MEEI earlier this month for the judgment that went against us in that case, which means that the restricted cash and corresponding accrued liability will not be in the June 30, 2009 balance sheet. Our unrestricted cash and cash equivalents at March 31, of $130.1 million were held in U.S. Government money market funds and bank deposits.
One last thing to note, capital expenditures for the quarter were less than $100,000. So in conclusion in the first quarter, we realized operating expense savings from last year’s restructuring efforts, we benefited from a meaningful improvement in the profitability of Visudyne and we posted double-digit growth in Eligard sales, despite a tough foreign exchange impact. We also returned $50 million to shareholders via a common share repurchase.
With that, I’ll turn it back to Bob.
I just have a quick closing comment and then we can take questions. I think it’s pretty clear the next few months will be a very exciting time for the company. We look forward to sharing the results of the ongoing Phase II punctal plug studies in July, announcing our plans for moving the program forward. We believe that the punctal plug technology has the ability to transform the treatment of glaucoma through improving patient compliance and efficacy.
Additionally, through the balance of the year, we’ll be presenting the results of three combination trials which we believe will support the use of Visudyne in combination with Lucentis. We look forward to updating you throughout the quarter and speaking with you on the next earnings call in July.
With that, I’d like to open up the floor for questions.
(Operator Instructions) Your first question comes from Doug Miehm - RBC Capital Markets.
Doug Miehm - RBC Capital Markets
Just the commentary around Novartis and it almost sounds like you’re thinking of taking that on yourselves potentially. Is that going to be a function of the results that come out of these 12 month studies or are you working ahead with that assumption anyway?
Well, I think there’s two real issues there. The first is decision on requiring the U.S. support and the second issue is, our position is that Novartis should be participating in the MEEI judgment and they haven’t as yet. So we continue to have a dialogue with them about how we address these issues and beyond that there’s not a whole lot I can say Doug. We’re in the middle of the negotiation. I’m hopeful that it will be resolved amicably and that both companies can go forward, but beyond that, there’s not a whole lot I can say.
Doug Miehm - RBC Capital Markets
Okay. Timing though, perhaps you’d hoped to have something to tell us by the Q2 results?
Yes, I’m not going to be stuck on a timing issue for this. Novartis is a big company. They’ve got a lot of layers of management that have to approve any type of deal structure that we might negotiate. So, it’s really difficult to give you an estimate on when we might resolve this.
Doug Miehm - RBC Capital Markets
Okay, great. As we think about the punctal plugs, what do you feel is more important; the ability to say, get this up to a 60% of Latanprost or the retention rates for the plugs themselves? Maybe you could expand on that. Thanks.
They’re both really important. So there’s really two issues with the plug program. You have to have a plug that is retained and is comfortable for patients and we think you have to have a drug dose that gives you another millimeter or so of a drop in ILP. We think this platform could really be game changing and believe that the benefits from this platform, of taking the patient out of having to take daily drops are potentially huge and really going to be important for treating this disease going down the road.
So we are exploring both of these issues in the platform. We expect to have at least preliminary data by the next quarter’s call and we’re hopeful that we’re on the right path and we’ve got a plan together that will address both of these questions. So we’re pretty excited about the direction the plug program is going.
Okay Brock, if there are no more, I want to thank everyone for participating in the call today and we look forward to updating you on the second quarter call in late July. Thanks again.
Ladies and gentlemen, the conference call is now concluded. You may disconnect your telephones. Thank you for joining and have a pleasant day.
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