QLT Inc. Q2 2010 Earnings Call Transcript

Executives

Karen Peterson – Investor Relations Specialist

Bob Butchofsky – President and CEO

Cameron Nelson – Chief Financial Officer

Analysts

Scott Henry – Roth Capital

Seth Hamot – RRH

Eric Shahinian – Kingstown Capital

QLT Inc. (QLTI) Q2 2010 Earnings Call July 27, 2010 8:30 AM ET

Operator

Welcome to the QLT, Inc. Second Quarter 2010 Conference Call. As a reminder, all participants are in a listen-only mode. And the conference is being recorded. After the presentation there will 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 second quarter 2010 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 statements. On behalf of the speakers you follow we caution investors that certain statements in this conference call are forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, and constitute forward-looking information within the meaning of Canadian Securities laws.

The purpose of this caution, we refer to such statement is forward-looking statements. Forward-looking statements include but are not limited to, our statements relating to our business and Clinical development plans and objectives, timing to commence studies, complete enrollment and receive results, sales and other financial guidance, the potential benefits, targets and commercial success of our products and technologies and other statements which contain language such as may, will, likely, potential, believe, anticipate, expect, intend, plan, estimate and other similar expressions.

Forward-looking statements are predictions only which involve known and unknown risks and uncertainties and undue reliance should not be placed on such statements. Current material factors or assumptions are implied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements.

Forward-looking statements are based on estimates and assumptions made by QLT in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors that QLT believes are appropriate in the circumstances.

For additional information about the material factors or assumptions underlying such statements and about the material factors that may cause actual results to vary for those expressed terms or implied in such statements, please consult QLT’s press release dated July 27, 2010 and available on our website as well as filings with the U.S. Securities and Exchange Commission and the Canadian Securities regulatory authorities including its risk factors detailed in the most recently filed annual report on Form 10-K and quarterly report on Form 10-Q.

The information set forth herein should be considered in light of such factors. QLT has no intention and undertakes no obligation to update such information to reflect later events or developments, except it’s required by law.

The presentation includes a discussion of non-GAAP financial measures as defined by applicable securities laws in most directly comparable U.S. GAAP financial measures. Information reconciling those non-GAAP financial measures QLT’s financial results prepared in accordance with U.S. GAAP have been included in the earnings press release issued today and posted on our website.

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

Bob Butchofsky

Great. Thanks a lot Karen, and good morning, everyone. Thank you for joining us on our second quarter earnings call. I’m going to spend a little time and give you some of the financial highlights but Cam will discuss that in more detail, we’ll also talk about the pipeline.

Kind of to put the quarter in perspective as well as the call today, overall, we continue to deliver solid financial results as we strive to build shareholder value by appropriate spending on R&D programs related to our pipeline of innovative drugs and technologies, which is solely focused now on treating ocular diseases.

I’m pleased with our financial performance in the second quarter and through the first half of this year and there’s a couple of points I just want to highlight for you. First, starting with adjusted EBITDA, plus the contingent consideration, that was $6.7 million in the second quarter and $10.4 million for the first half of the year.

Turning to Visudyne, Visudyne sales grew sequentially from $21.1 million in the first quarter to $24.4 million in the second quarter. Cash at the end of the second quarter on hand is $186 million and as a reminder, we have no long-term debt or other obligations outstanding.

Contingent consideration now stands at $138 million at the end of the second quarter and this gives you an implied underlying asset value of cash and contingent consideration of about $324 million. We are generating cash from operations. We’re using some of that cash in addition to funding our R&D programs. We continue to buying back stock and we recently expanded our stock buyback. In the second quarter we purchased 1.2 million shares in the quarter and the total buyback since 2005 is now up to 42.3 million shares.

Now, following those highlights, I just want to spend a few moments talking through some of the development milestones. I want to update you on the progress we’ve made thus far in developing our punctal plug program. We’re now targeting two prevalent ocular diseases, glaucoma and allergic conjunctivitis. We’ll be starting new studies in both of those conditions.

Give you a brief update also on the status of QLT-001 for the treatment of Leber’s Congenital Amaurosis which is currently in Phase Ib and then I want to speak briefly about some of the combination trial results we got both from the DENALI and RADICAL studies with Visudyne both which evaluate the use of Visudyne as part of a combination treatment regiment for patients with wet age related macular degeneration.

So let start with punctal plug program. Punctal plugs are – as most of you know have been developed in glaucoma patients. We’ve been doing studies there. We’re about to initiate a new study also with olopatadine for allergic conjunctivitis.

We continue to believe that our proprietary drug delivery technology has a capability to both improve compliance as compared to topical eye drops and also potentially to improve patient outcomes. We think this is especially true in glaucoma. We’re focused on implementing two new clinical studies using the punctal plug drug delivery technology in the coming months.

First, I’ll start with latanoprost for glaucoma. This will be a Phase II study and importantly we’re going to place punctal plugs in both the upper and lower puncta in an effort to increase the overall drug load delivered to the eye. We expect that we will be administering a drug load that will be very similar to what you would get from Xalatan eye drops which is about 135-micrograms over a 90-day period, which breaks down to about 1.5-micrograms per day.

Some of the specifics around the trial, we expect to enroll approximately 75 patients, it will be a four week trial, it will be masked, it will be randomized and also there will be an active control, and the active control for this study will be Xalatan eye drops.

Now based on pre-defined criteria for this study, the study is really designed with the objective of enabling us to make a definitive go or no go decision on latanoprost in a punctal plug, based on the outcomes of the study.

Currently the data is anticipated in the first half of 2011, since we haven’t begun patient enrollment yet it’s really difficult to estimate exactly when we’ll have the data, but I will tell you, we’ll give you an enrollment update on our October earnings call and hopefully have a clearer idea of when to see results from this study.

Now, I want to turn to punctal plugs with olopatadine for allergic conjunctivitis. This trail will be a Phase II proof-of-concept study, its plan to begin in the second half of this year and this trail will examine both the efficacy and safety of olopatadine being alluded from a punctal plug delivery system for the treatment of acute ocular allergy and this will be used using a well known and validated environmental challenge model.

Now, even though we’re studying this for acute ocular allergy which we’re defining as essentially one week. A commercial product for this disease or for this indication would be targeted as delivering six weeks of therapy, so that’s why this is a proof-of-concept study. Results are expected again in the first half of 2011 and as with latanoprost we plan on giving you an enrollment update on our next quarterly call.

Still sticking to punctal plugs, I’d like to spend a minute or two just talking about where we are with the devices themselves. Overall, retention rates of the newest and latest plug design, which again is just device only, not eluting a drug, this continues to be studied in patients and we’re generating longer term follow-up. We’re still holding at approximately 80% retention over 12 weeks.

In addition, we’re continuing to refine and standardize the insertion procedure for placing these plugs both to assist in the overall placement but also we think that will possibly aid in plug retention. We’re continuing to develop implantation aids, which will assist us in making this procedure less invasive, both for the insertion but also potentially as these plugs are removed. And finally, we continue efforts around the development of a detection device, which will allow patients to confirm the presence of a plug during the course of their treatment.

That’s it for the plug program. I’d like to turn briefly to QLT-001. And as a reminder, this program is in a Phase Ib study for patients diagnosed with Leber’s Congenital Amaurosis or LCA. Now that trial is ongoing and as many of you know, in the second quarter, in the May time period, we announced results from the study, which were subsequently presented at the are ARVO meeting in May.

We continue to be very excited and positive about the future prospects of this drug based on the early safety and efficacy readouts we’ve had on this compound, in particular, the impact that we’ve seen it have on patient’s lives who have been treated.

We continue to enroll patients and have a number of patients lined up for treatment now. We have completed treatment on one additional patient and will share the results when the study is completed. We expect to complete enrollment of all eight patients in this proof-of-concept study before the end of this year.

We – it’s important to highlight that we recognize that additional safety and efficacy studies for this compound are going to be required in order to pursue a regulatory approval. So we’ll outlay our plans as we complete this trial and plan on moving forward in 2011. But we continue to explore the science around this compound to better understand how it might address additional unmet medical needs.

Now, I would like to turn to Visudyne. In the past quarter, we announced final results from both the Novartis, sponsored DENALI study but also the QLT sponsored RADICAL study. And both of these studies evaluate the use of Visudyne in combination with other treatments and they were designed to improve visual outcomes and reduce the number of doctor visits for patients who are being treated treatments for wet AMD.

The final 24-hour month RADICAL data was announced in June. The purpose of that study was to determine if treatment with Visudyne followed by Lucentis reduced the retreatment rates compared with Lucentis given its monotherapy for patients with exudative AMD.

The 24-month results showed that significantly fewer retreatment visits were required with combination therapies than with Lucentis monotherapy. Mean visual acuity change from baseline was not statistically different among the treatment groups although the sample sizes were insufficient to draw definitive conclusions regarding visual acuity outcomes.

Overall adverse events incidence was similar across treatment groups with no unexpected safety findings. The complete set of data is planned to be presented at the upcoming annual meeting of the American Society of Retina Specialists meeting -- specialists which is taking place here in Vancouver in late August.

On the promotional front, our efforts continue to support Visudyne sales in the U.S. U.S. average daily demand which is really what we follow closely was at 72 vials per day in the second quarter that compared to 75 vials per day in the first quarter. We do expect to see incremental growth following a typically slow third quarter and particularly the August time frame where many retina specialists are on vacation. And the sales force remains highly motivated to generate the incremental growth through the remainder of this year.

That being sad, we still expect to be at the lower end of our guidance, both for U.S. but also for the worldwide sales for this year. Briefly turning to QLT568, this is the beta blocker that we acquired late last year from Othera for the treatment of glaucoma.

We continue efforts to evaluate this molecule and understand how it might be best addressed developed to address medical needs in glaucoma. We expect to get the molecule back in the clinic in 2011.

With that Cam will go through in some more details with sales almost from the quarter expectations for the rest of the year.

Cameron Nelson

Thanks Bob. We had a strong quarter financially in Q2 and I’m going to start as I usually do by talking about Visudyne sales results for the quarter. End-user sales of Visudyne in Q2 were $24.4 million, down 16% from the second quarter of 2009. The regional split for Visudyne sales was U.S. $6.4 million, Europe, $6.9 million and rest of world, $11 million.

In the U.S. in the second quarter, distributors added over 300 vials to that inventory leaving them with about 12 or 13 days of supply, which is slightly above average. In terms of end-user sales in the U.S., as Bob just mentioned we sold about 72 vials per day in the second quarter which compared to 75 vials per day in Q1 and about 79 vials per day in the fourth quarter last year.

Looking at the worldwide sequential change versus the first quarter of 2010, Q2 sales you were up $3.1 million or 15%, U.S. sales increased sequentially by $1.4 million. But the improvement was driven by changes in distributor inventory, which you may recall reduced the 2010 first quarter number quite significantly. Sales outside the U.S. increased by $1.7 million or almost 11%but they would have increased by even more, about $2.4 million or 15% without a negative foreign exchange impact quarter over quarter.

Now, turning to the financial statements, as a reminder net product revenues comprises three things. One our sales of Visudyne to U.S. distributors, two, revenues for supplying product to Novartis for sale in rest of world markets and three, reimbursement of certain royalties and other costs from Novartis.

In the second quarter, net product revenues included $6.4 million of Visudyne sales to distributors in the U.S. about $2 million for a batch of Visudyne shipped to Novartis during the quarter and about $0.4 million for reimbursement from Novartis for rest of the world royalties and other expenses. The second revenue line item we have on the P&L is royalty revenue, which is $3.6 million for the quarter and this represents the 20% royalty that we now earn on Novartis sales of Visudyne outside of the U.S.

In total, reported QLT revenue of $12.4 million was up $1.6 million or 16% despite the 16% decline in Visudyne sales year-over-year, primarily due to revenue improvement resulting from our amended agreement with Novartis and due to the batch of Visudyne shift in Novartis during Q2, which added the $2 million revenue for the current period.

In the second half, we are expecting to ship one more batch of Visudyne to Novartis likely in the fourth quarter. As mentioned in previous calls in periods when we ship product to Novartis, you can expect to see an increase in revenue and a corresponding increase in cogs or cost of sales. This will lead to swings in their gross profit, if you look at it as a percent of sales in revenue but there won’t be a material impact on our bottom line in terms of dollars because there is little profit margin on these product shipments in Novartis.

Turning now to expenses, cost of sales dropped significantly compared to the prior year because the 2009 Q2 number included a $4.6 million charge to reserve for obsolete Visudyne inventory. R&D expense was $14.7 million in the first half which is below the run rate that would take us to our full year guidance of 33 to $37 million. But we do expect R&D to be higher in the second half due to the anticipated ramp up and development programs that Bob discussed.

The foreign exchange loss of $1 million in the quarter resulted primarily from the revaluation of our Canadian dollar denominated assets including our mortgage receivable, income tax receivable, deferred tax assets and Canadian dollar denominated cash.

As a reminder, effective January 1 this year, we switched from the Canadian dollar to the U.S. dollar as the functional currency for QLT Inc. And this means that the impact of the exchange rate fluctuations on monetary assets and liabilities that we hold in currencies other than U.S. dollars, principally the Canadian dollar may generate gains and losses.

Investment and other income for the quarter also included a $2.5 million increase in the fair value of our contingent consideration asset. This gain reflects the fact, that on our balance sheet the contingent consideration asset is carried at the estimated present value of the expected remaining payments due from Eligard royalties.

Every quarter as we move closer to the completion of collecting the $200 million payable to us from last year’s sale of QLT USA, there is less discounting in all remaining expected payments, so their present value goes up. It is this increase in value due to less discounting that creates the gain and this gain will occur every quarter until the full amount is collected, even if the underlying cash collection forecast does not change.

In Q2, this impact would have led to a gain of about $3.3 million in the quarter but we also had minor changes to the discount rate and the underlying Eligard forecast which reduced the gain to the $2.5 million recorded. On the balance sheet, the contingent consideration asset now sits at $137.8 million, which is split into a current portion and a long-term portion.

This amount represents the estimated present value of the expected $173.3 million of remaining payments due from Eligard royalties over the next several years. The effective tax rate for the quarter was about 19% but for the year-to-date the tax rate was heavily skewed by the $5.6 million non-cash income tax recovery that we recorded in the first quarter related to the amendment of the Visudyne agreement with Novartis.

Moving onto EPS, we reported a diluted GAAP loss per share of $0.02 for the quarter, down from EPS of $0.16 last year, primarily because income from discontinued operations was nil in Q2 2010 following the divestment of QLT USA in the fourth quarter last year.

The press release includes a schedule reconciling the GAAP EPS to non-GAAP EPS for the quarter. The most significant adjustment related to the contingent consideration where we took out the gain arising from the change in fair value because it is non-cash. But then added in the entire $9.5 million contingent consideration earned in Q2 which will be received as cash in Q3. Also note that the Q2 contingent consideration earned was about $0.5 million higher than it would otherwise have been due to favorable resolution of pricing discussions would helped authorities in one Eligard territory.

Moving on, we had adjusted EBITDA plus contingent consideration during the second quarter of $6.7 million and our total cash and cash equivalents balance at the end of the quarter was $186.3 million. The cash balance reflects the fact that during the second quarter, we repurchased about 1.2 million shares at an average price of $6.08 per share for a total cost of $7.2 million.

This brought the cumulative purchases under the normal plug program to 2.3 million shares at an average price of $5.41 per share for a total cost of $12.3 million. During the second quarter, we announced the expansion of our current normal course issuer bid which commenced on November 3 last year to a total of 4.7 million shares.

This means that we have an additional 2.4 million shares available to purchase before this program expires in the fourth quarter this year. And finally, capital expenditures for the quarter were approximately $650,000.

So, wrapping up, we continue to be pleased with our financial performance in the second quarter. The increased revenue we get from the amended Visudyne agreement combined with the ongoing payments we received from the 2009 sale of QLT USA means that the business continues to generate cash with adjusted EBITDA plus Contingent Consideration earned for the quarter of $6.7 million. This has allowed us to maintain a strong cash balance while continuing to buy back stock in their current normal course issuer bid. And with that I will turn it back to Bob.

Bob Butchofsky

Thanks a lot, Cam. And as we head into Q&A, I just want to close by saying that we continue to focus on delivering solid financial results while we’re making appropriate investments in our ocular focused R&D pipeline. And particularly around the punctal plug technology but also around the retinoid program QLT001.

The Phase 1 B study of the synthetic retinoid treatment for patients with LCA continues to progress and we’re excited to see how patients live are being in -- lives are being impacted by this treatment. We will continue to update you on this program as well as the two punctual plug programs as enrollment progresses.

With that, I think we can turn it over to -- hopefully answer your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from Scott Henry of Roth Capital. Please go ahead.

Scott Henry – Roth Capital

Thank you, and good morning, guys.

Bob Butchofsky

Good morning.

Cameron Nelson

Hi, Scott.

Scott Henry – Roth Capital

Just starting out the latanoprost program, the decision to go to the upper and lower puncta, I guess my understanding was that you weren’t seeing a dose response already but this seems to be going to the same idea of just putting more drug in the plugs. I’m curious what the thought process was, what kind of, you know, proof-of-concept you have in that solution. I mean are you effectively creating a bolus there? I just wanted to get a sense of the reasoning behind that solution.

Bob Butchofsky

Sure, sure, Scott. It is really a drug loading issue. But also a bit of a placement issue as well. About a year and a half ago, we did a small proof-of-concept study just comparing study results, placing plugs in the upper puncta versus placing them in the lower puncta. And we actually showed in that little proof-of-concept trial that there was a benefit of placing the drug in the upper puncta as compared to the lower and when you are giving even the same amount of drug elution. So, it is – We think that because of the blink response and how tears spread over the eye that that might aid in terms of overall residence time on the cornea but also with corneal penetration.

So the thinking is we are blocking both puncta. We will increase the overall residence time. We will increase the drug load, obviously, to the surface of the eye and because we are giving drug. On the top of the eye, it will help potentially spread the drug more evenly and again we are basing that on some proof-of-concept studies. And as to your point about those response, remember that the highest dose that we have used was still only about two-thirds of the equivalent eye drop load.

So this study in addition to giving the benefit of a potential upper puncta placement and the longer residence time that will result because of that, this study will give us a drug load that really is very, very close or similar to what you would get from Xalatan eye drops. So we are hopeful, really excited to get this study underway. It is a larger study and we plan on making a definitive go or no go decision based on the trial’s outcomes.