QLT CEO Discusses Q4 2010 Results - Earnings Call Transcript

Mar. 1.11 | About: QLT Inc. (QLTI)

QLT Inc. (NASDAQ:QLTI)

Q4 2010 Earnings Call

March 1, 2011 8:30 AM ET

Executives

Karen Peterson – Investor Relations Specialist

Bob Butchofsky – President and CEO

Cameron Nelson – Chief Financial Officer

Analysts

Scott Henry – Roth Capital

Doug Miehm – RBC Capital Markets

Jeffrey Cohen – C.K. Cooper

Cosme Ordonez – GMP Securities

Operator

Hello. This is the Chorus Call Conference Operator. Welcome to the QLT Inc. Fourth Quarter and Year End 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 be an opportunity to ask questions. (Operator Instructions)

At this time, I would 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 fourth quarter and year end 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. 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 Chief Financial Officer. 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, statements relating to our clinical development plans and objectives, timing to commence studies, complete enrollment and receive results, sales and other financial guidance, potential benefits, targets and commercial success of our products and technologies and other statements which contain language such as believe, goal, future, will, project, expects and outlook, and similar expressions.

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.

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 a conclusion, forecast or projection in such statements.

Many such risks and uncertainties are taken into account as part of our assumptions underlying these forward-looking statements, including but not limited to, our future operating results are uncertain and likely to fluctuate, currency fluctuations may impact financial results, risks that future sales of Visudyne or Eligard may be less than expected due to market demand, competition, pricing, reimbursement and other factors.

Uncertainties related to timing, enrollment, cost and success of R&D and commercialization of products, and other future unknown liabilities and other factors including those described in the risks factors section of QLT’s annual report on Form 10-K and quarterly reports on Form 10-Q and in other filings within the U.S. and Canadian Securities regulatory authorities.

These factors should be considered carefully and you should not place undue reliance on QLT’s forward-looking statements. QLT has no intention and undertakes no obligation to update such information to reflect later events or developments except as required by law.

This presentation includes a discussion of non-GAAP financial measures as defined by applicable securities laws. The most directly comparable GAAP financial measures and information reconciling these non-GAAP finance measures to QLT’s financial results prepared in accordance with 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

Thank you, Karen, and good morning, everyone. Thanks for joining us on our 2010 year end earnings call. I want to begin the call by highlighting some of the financial results from last year. First, we generated almost $16 million in adjusted EBITDA, even while we ramped up R&D spending in the second half of the year for both the retinoid and plug programs.

We ended the year with $210 million in cash with no debt. Additionally, we have $130 million of Contingent Consideration on the balance sheet -- the value of the payments due to us from the Eligard royalty stream. Thus we have approximately $340 million in hard asset underlying the value of the company and this doesn’t include any value for Visudyne or for the rest of our pipeline.

We believe our stock has been undervalued in, even though it appreciated almost 50% last year, so in 2010 we repurchased and retired another 2.9 million shares of QLT stock, which represents more than 5% of our outstanding shares.

However, I believe the most significant achievement in the last quarter was the growth we saw in our U.S. Visudyne business. As you know, we became a commercial company in January of last year when we got the U.S. rights to Visudyne from Novartis. By mid-year we had a full compliment of field-based sales and medical affairs staff to support the brand. I was very pleased to see our fourth quarter U.S. Visudyne demand increase from 65 vials per day in the third quarter to 73 vials per day in the fourth quarter, a 13% increase leading to sales of approximately $6 million for the quarter and the first quarter-over-quarter increase in demand for Visudyne in the U.S. for over two years.

I attribute the increase in sales to improve effectiveness of our sales team especially as it relates to our messaging around persistent activity in patients with wet choroidal neovascularization due to AMD. As a result of the improvement in sales, we’ve recently completed an expansion of our field-based team and as of today, have just under 20 field-based people including sales, medical science liaisons and management in place.

The new hires are in place now and have been trained and will be initiating calls on retina physicians during the month of March. The increased reach and frequency resulting from a larger sales force could in my opinion, lead to incremental sales from existing accounts and may also enable us to reengage physicians who have walked away from Visudyne. This will ultimately help us at a minimum to stabilize sales but I’m hopeful it will drive incremental growth in the U.S. Visudyne business this year.

Our 2011 guidance for U.S. Visudyne sales of $23 to $26 million suggest we expect to see growth in the brand in the coming year and we believe the extra promotional effort will generate additional revenue. However, we also want to carefully manage expenses related to our promotional activity, so we have put in place a corporate goal for Visudyne U.S. sales and profitability to help ensure that we appropriately balance and evaluate the ROI of our investments in the brand.

For 2011, the reimbursement levels for the Visudyne procedure have gone up from an average of $264 to $305 and thus plays well in our positioning of Visudyne per patients with persistent activity in wet AMD.

Before I leave Visudyne, I want to turn briefly to the rest of world sales for last year. Visudyne sales slightly exceeded our revised guidance with final year sales results of $90.6 million. Recall that we get a straight 20% royalty from Novartis on $68 million and Visudyne sales generated outside of the U.S.

Rest of world sales last year were down $7 million from 2009. However, we expect relative stability in rest of world sales in 2011, which is also reflected in our guidance, which remains at $85 to $90 million for worldwide sales.

The last financial piece I want to mention is the ongoing strength of Eligard and 2010 was another great year with Contingent Consideration earned of almost $38 million based on 2010 Eligard sales. Now, Cam will review the financial results in more detail later in the call but we’re very pleased with our financial performance in 2010, in particular the improvement of Visudyne sales in the fourth quarter.

Now I want to turn to the pipeline and give you an update on our progress there. I spoke to many of you last week regarding the departure of our Chief Medical Officer. I want to just again reassure you that his departure is not tied to concerns or any issues with our pipeline, especially as it relates to our ongoing clinical studies.

Now broadly, we’re currently enrolling patients for three different site threatening ocular indications. First, for QLT091001, the synthetic retinoid program, we’re enrolling patients in two indications, LCA or Leber’s Congenital Amaurosis and RP or Retinitis Pigmentosa.

In our punctal plug delivery system, enrollment continues in our Phase II trial with latanoprost for glaucoma. I want to start first with the synthetic retinoid program. The Phase 1b trial for QLT091001 and orally administered retinoid is a proof of concept study in patients with two indications, LCA and RP.

Both diseases cause a debilitating vision loss and can often lead to blindness and we’re focusing on treating patients with both diseases that are caused by inherited deficiencies of the same genetic mutations, namely LRAT and RPE65. The most notable difference between the two diseases is that LCA patients are typically diagnosed as infants and RP patients are typically diagnosed as adults.

In the past several months, we received positive Orphan Drug Designation decisions from both the U.S. FDA and the European Medicines Agency for the synthetic retinoid as a treatment for both LCA and for RP, signaling that both major health regulatory organizations recognize the needs of these patients for which they are currently no approved treatment options.

We’re enrolling up to 24 patients in (inaudible) study, up to 12 patients with LCA – 12 patients with RP. And we are including patients with both LRAT and RPE65 genetic mutations. The trial is an open-label proof-of-concept trial being run by Dr. Robert Koenekoop at McGill University Children’s Hospital in Montreal.

Currently, we are treating what we expect will be the last remaining patients in the LCA trial, recall that 001 is administered once daily for seven days, during the trial and we are following the patients in evaluating a number of parameters, including ETDRS, which stands for Early Treatment Diabetic Retinopathy Study for specific visual acuity protocol and best-corrected visual acuity. We’re also looking at visual fields, ERGs or electroretinograms and importantly we’re also evaluating activities of daily living.

We reported preliminary data from the first three patients enrolled in the trial last year at ARVO and again at the American Academy of Ophthalmology meeting. As a reminder, what was reported in these conferences, one of our first patients had a surprisingly positive response with the meaningful gain and visual acuity function test accompanied by a large three-fold expansion of visual field.

The anecdotal at least for most about this little girl’s response is that she was able to go to school without the use of a cane because of the overall improvement in her vision and her ability to navigate around obstacles naturally. While much additional data and analysis are required on the full cohort of all patients, we’re on track to report data from the LCA portion of the trial in the second quarter.

We have a poster accepted at the upcoming ARVO conference in early May on a subset of patients in the trial. I’ve given our plans to discuss the data in this Orphan Drug area with our clinical advisors. The completions of the cohort may or may not be associated with the presentation of the data at ARVO or any other scientific meeting. In other words to be clear, you should not expect our data release for this trial to necessarily occur in conjunction with ARVO or any other meeting in the second quarter.

Now, I just want to turn to the RP portion of the trial. We announced the expansion of the trial to include RP patients in the fourth quarter and this portion of the study was underway in January. Thus far, we have completed treatment on two patients and our goal is to complete enrollment of all 12 patients this year. We’re also in the process of recruiting additional study centers and hope to have at least one other treatment center either in Europe or the U.S. up and running in the second half this year.

Now, for both of these separate patient cohorts, that is the LCA and RP portions of the trial, one of the main goals for 2011 -- to work with regulatory agencies to agree on appropriate validated end point measures for patients with low vision.

It’s not necessarily expected that patients with severe disease and extremely poor vision would have the same level of improvement in visual acuity test that have been used by regulatory agencies or historic drug approvals.

Other visual function test parameters more appropriate to the disease condition, such as visual fields and importantly changes in day-to-day functioning for the patient are also considered very important and relevant to regulatory agencies.

That’s one of our most important tasks this year will be to work with expert clinicians and regulatory authorities to define the most appropriate clinically meaningful outcome measures for future trial designs and I can tell you that we are working closely with an expert panel of clinicians and will soon be talking with global regulatory agencies and sharing our data and thoughts with them about the best way to continue our development of this drug.

This is a very exciting program for all of us here and one where we have the potential to dramatically improve patient lives with a therapy that holds promise -- progression of vision loss or even potentially improve the vision of patients with these devastating diseases.

That said, we acknowledge the programs in its early stages. There is much more research to be done to demonstrate safety and effectiveness of this potential treatment.

Now I want to turn to our proprietary punctal drug delivery program. We’re currently enrolling patients in a Phase II clinical trial using latanoprost for patients with glaucoma and ocular hypertension. In this trial for the first time, plugs are being placed in both the upper and lower punctal of the patient’s eyes with the intend to deliver maximum drug load to the eye and to increase exposure time of the drug to the cornea, which we hope will translate into a better reduction in intraocular pressure, IOP and we’ve seen in other trials thus far.

We’re looking to generate a 5 millimeter mercury reduction in IOP. We have design this ongoing trial to enable us to make a go, no go decision on further development of latanoprost punctal plugs. Enrollment of patients in the trial is slightly behind where we expected to be at this stage.

We started patient enrollment in late November and following the expected enrollment law that you typically see around the holiday time. We got hit with some slower than expected enrollment in January and February, some of which may have been related to some of the major storms that hit the U.S.

Over the past several weeks, the number of patients entering screening has doubled and based on this trend to date, we hope this momentum will help us complete our enrollment in the near future. We currently have about one-third of the 100 patients enrolled at this stage and we currently expect to complete enrollment in the second quarter leading to a late Q2 or Q3 data announcement.

If this trial is successful, there will be additional clinical work on latanoprost plug program, including one or more clinical drug delivery and/or retention trials, it will need to under – need to be undertaken before we can start a Phase III trial.

I want to emphasize that this program has high commercial potential. If we hit our target profile and are the first to market a sustained formulation like this, we estimate that this product could deliver peak worldwide sales of at least $500 million a year.

Additionally, if this program is ultimately successful, we have several other formulations that maybe suitable for clinical trial evaluation in 2012 and these would include other glaucoma agents, anti-inflammatories, dry eye agents, as well as our existing formulation of olopatadine for ocular allergy.

I just want to quickly address results from our Phase II proof-of-concept study of olopatadine punctal plugs for patients suffering from ocular allergies. The data showed no significant reduction in the symptoms of allergic conjunctivitis between patients with the olopatadine plugs and the placebo plugs. And quite frankly, we’re disappointed in those results.

However, the study controls olopatadine drops versus the placebo eye drops also failed to show a difference. This signals that the use of the environmental chamber used in the trial design was not sufficiently sensitive to show definitive results and was not an optimal model for the drug and device.

We’ve halted further clinical development for now. We will continue to evaluate the best test models in trial design and make further decisions when we have the in latanoprost punctal plug trial that I mentioned earlier.

Our business development strategy is largely dependent on what happens with the latanoprost punctal plug program. If the trial is successful, you can look for us to bring in new chemical entities that we think would be suitable to delivery using our Plug Delivery System.

You can also expect that our R&D spending would ramp-up significantly in 2012 with the potential for two retinoid programs proceeding along with possibly two or three punctal plug trials taking place next year. In the event the latanoprost plug system fails, we’ll become a very focused commercial on R&D company behind Visudyne and the inherited retinoid disease program for QLT091001.

Because of latanoprost trial such a major inflection point, we are only giving rough R&D guidance for the first half of the year and expect our R&D spend in both the first and second quarter of this year to be somewhat similar to the fourth quarter spend of approximately $11 million a quarter.

With that overview, I’ll turn the call over to Cam to discuss financial results in more detail.

Cameron Nelson

Thanks Bob. Today, I’m going to go through some highlights for our Q4 2010 financial results and then discuss a few items related to our 2011 guidance. Leading off with Visudyne, end-user sales of Visudyne in Q4 were $24.5 million, down 3.7% from the fourth quarter of 2009. The regional split for Visudyne sales was U.S. $5.9 million, Europe $6.8 million and rest of world $11.8 million.

Compared to the prior year Q4 sales in the U.S. were down 19.1%. However, it’s important to point out that U.S. sales in Q4 2009 included a significant increase in distributor inventories but improved the reported sales number in that quarter by about $1 million. Without this impact, the year-over-year decline in the U.S. would have been less than 6%.

Still comparing to the 2009 fourth quarter, worldwide Visudyne sales declined 3.7%, but would have been essentially flat year-over-year without the impact of the distributor inventory load in the U.S. in Q4 ‘09 and some very minor foreign exchange impact.

Now, looking at the sequential change versus the third quarter of 2010, worldwide Q4 sales are up $4 million or 19.7%. A couple items to point out on the U.S. here, Visudyne sales increased sequentially by $0.7 million or over 13%, end-user sales averaged about 73 vials per day up from about 65 vials per day in the third quarter and in percentage terms, this marks the biggest sequential increase in U.S. daily vial sales since the second quarter of 2004. Also in the U.S., distributors reduced their inventories slightly in Q4 leaving them with about two weeks of supply at year end.

Outside the U.S., the sequential sales increase of $3.3 million or 21.7% included a $0.7 million pickup from foreign exchange rates. Excluding this benefit, rest of world sales would have been up by about 17%.

And finally for the full year, Visudyne sales came in at $90.6 million, down 14.2% from 2009 and just above our revised guidance range of $85 to $90 million. The regional split for full year sales was U.S. $22.6 million, Europe $26.2 million and rest of world $41.8 million.

Now, turning to the financial statements, in the fourth quarter net product revenue of $6.3 million included the $5.9 million of U.S. Visudyne sales plus about $0.4 million for reimbursement from Novartis of rest of world royalties and other expenses. Royalty revenue was $3.7 million for the quarter and represents the 20% royalty that we earn on Novartis sales of Visudyne outside of U.S.

Now on to expense, cost of sales in the quarter included $1 million charge related to the amendment of a supply agreement with one of our Visudyne manufacturers. COGS was high in Q4 2009 because that period included about $4.8 million an obsolescence charges and write-offs split by QLT and Novartis.

So there has been some noise in our COGS line over the past couple of years but going forward we broadly expect our COGS expense to be around 10% to 11% for Visudyne sales, but from quarter-to-quarter this percentage can fluctuate significantly depending on the timing of Novartis’ product purchases from us for sale outside the U.S.

R&D expense was $10.7 million for the quarter and $33.5 million for the year. As we expected, relative to our run rate in the first nine months, spending on R&D accelerated in the fourth quarter due to increased activity on our retinoid and punctal plug programs.

The mix of spend on our R&D programs changed from 2009 to 2010, with increased emphasis on the retinoid program. In 2009, over 81% of our R&D spend was on the punctal plugs while just 7% was on the retinoid. In 2010, approximately 62% of our total R&D expense related to the plugs, 28% was for the retinoid.

SG&A expense for the year was $20.8 million, up $2.5 million from 2009 due to spending on the U.S. sales and marketing infrastructure for Visudyne and also due to negative foreign exchange impact, which increased reported SG&A by approximately $1.4 million year-over-year.

Q4 G&A spend was down approximately $300,000 from the same period 2009. In part because the fourth quarter 2009 included legal and other costs related to the MGH Litigation Settlement, the amended Visudyne agreement with Novartis and the announcement QLT USA and these things are all when we partially offset by the higher Visudyne sales and marketing costs in 2010.

Moving on, we reported relatively modest foreign exchange gains $0.3 million in the quarter and $0.4 million for the full year 2010, that were driven by the revaluation of our Canadian dollar denominated assets, including our mortgage receivable income tax assets and Canadian dollar denominated cash.

As a reminder, effective January 1, 2010 we switched from the Canadian dollar to the U.S. dollar as the functional currency for QLT Inc., which means starting in 2010 the impact of exchange rate fluctuations on monitory assets and liabilities held in currencies other than the U.S. dollar, so principally the Canadian dollar may generate foreign exchange losses and gains.

In 2009, when the Canadian dollar was still our functional currency, the large fourth quarter FX loss was primarily related to the revaluation of our U.S. dollar denominated Contingent Consideration asset and for the full year 2009, the net FX gain was mainly due to an intercompany loan of our subsidiary QLT USA, which has since been divested.

Investment in other income for the quarter also included a $6.3 million increase in the fair value of our Contingent Consideration asset. As a reminder, this gain in part reflects the effects 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 completing collection of the contingent $200 that was originally payable to us from the sale of QLT USA, there’s less discounting on all remaining expected payments and so their present value goes up and this increase in value due to less discounting that will lead to an increase in the fair value of our Contingent Consideration every quarter until the full amount is collected.

In Q4, this impact due to the passage of time would have led to a gain of about $3.1 million in the quarter but we also had a drop in the discount rate used to determine the present value, as well as an increase in the underlying Eligard forecast and both of these factors increased the gain to the $6.3 million reported.

On the balance sheet, the Contingent Consideration asset at $130.6 million, which is split into a current portion and long-term portion, this amount represent the estimated present value of the $154.6 million of payments that as of December 31, 2010 we were expecting to be paid from Eligard royalties over the next several years.

On income taxes, we reported a $16.4 million income tax provision in the quarter, mainly due to the recognition in the fourth quarter of valuation allowance against most of our Canadian deferred income tax assets. Accounting rules require a valuation allowance to be applied as it becomes more likely than not that a tax asset will not be realized.

I’ve mentioned in the press release, in Q4 we complete and intercompany transaction in which the punctal plug IP was transferred from our QLT plug delivery subsidiary to our Canadian entity, which will allow some operational efficiencies for the consolidated company.

This means that ongoing R&D spend for the plugs will be reported by the Canadian entity as well the eventual profit from the technology should it be successfully commercialized. This transaction which in the near-term shifts R&D expense to Canada, coupled with the continued development of our retinoid program, increases the likelihood of incurring operating losses. And on balance, we determined in Q4 that an allowance should be applied.

It’s important to note that similar to the tax recovery we had in Q1 resulting from the Visudyne agreement amendment, this charge to the tax went in Q4 was a non-cash item that has been excluded from our non-GAAP EPS.

Moving on to EPS, we reported a diluted GAAP loss per share of $0.38 for the quarter down from EPS of $1.49 last year, primarily because income from discontinue operations was nil this year but in Q4 2009 it was $116.7 million, which represented the accounting gain from the divestment of QLT USA.

The press release includes a schedule of consolidated GAAP EPS to non-GAAP EPS. For the fourth quarter non-GAAP EPS was $0.06 per share. Aside from removing impact of the tax asset valuation allowance, the most significant adjustment was related to Contingent Consideration, where we took out the gain arising from the change in fair value but then added in the $11.2 million of Contingent Consideration that was earned based on Eligard sales in the fourth quarter.

Moving on, we had adjusted EBITDA plus Contingent Consideration during the fourth quarter of $2.1 million and $15.6 million for the full year. Our total cash and cash equivalents balance at year end was $209.5 million, up from $188.1 million at the end of 2009.

A couple of brief notes on cash, first, on October 1, 2010, we collected the $10 million Note Receivable from TOLMAR, the purchaser of QLT USA. Also capital expenditures for the quarter were approximately $200,000 for the full year, were about $1.6 million.

On the share buyback front, in mid-December we announced the approval of the new normal course issuer bid share buyback program that allows us to repurchase up to 3.6 million QLT shares through December 15, 2011. We repurchased 22,000 shares under the new program at an average price of $6.78 for a total cost of approximately $150,000.

In total for 2010 including the previous buyback program that expired in November. We bought 2.9 million shares at an average price of $5.90 for a total cost of $17.1 million. In terms of guidance for 2011, the notice in the press release that we’re not guiding an R&D or adjusted EBITDA at this time.

The level of R&D spend is going to depend largely on clinical results for the plugs and the retinoid that we expect to generate in the second and third quarter, and we’ll be in a better position to provide some color on 2011 R&D full year spend as clinical data becomes available.

But as mentioned in the press release, we do expect R&D spend in the first and second quarters will be roughly in line with the pace of spending we saw in the fourth quarter last year when the expense was $10.7 million.

A few other highlights from our guidance, on the topline we expect total revenue of $40 million to $44 million for the year. We’ve been encouraged by the efforts of our U.S. Visudyne sales force and are projecting U.S. sales between $23 million and $26 million, which is up from $22.6 million in 2010. We expect worldwide Visudyne sales in 2011 to be between $85 and $90 million, compared to $90.6 million in 2010.

In terms of SG&A, the guidance was $24 to $27 million is up approximately $3 to $6 million over 2010 actual SG&A expense. The main reason for the increase is the expansion of our Visudyne commercial team in the U.S., which Bob outlined earlier.

In 2011, we expect to spend approximately $10 to $11 million in SG&A related to Visudyne, which is up from just under $8 million in 2010. Guidance also includes up to a $1 million of SG&A related to the retinoid program, primarily to conduct health economic modeling and research which will help us to establish a pair strategy for the product.

Also of note, we expect to earn approximately $36 to $39 million in Contingent Consideration in 2011, which represents the 80% royalties earn by TOLMAR and Eligard sales occurring in 2011 and that compares to the $37.9 million we had in 2010.

In terms of the fair value change in Contingent Consideration on our P&L in 2011, we expect that the quarterly impact from the time value of money will be about $2.5 million per quarter or about $10 million for the year. However, the actual amount will also be impacted by any changes in the discount rate or the underlying Eligard forecast, which are difficult to predict.

On income tax, we expect to make some income tax payments during the year, as well as potentially receive certain tax refunds, but by the end of the year we expect these will net to less than $1 million. And finally on guidance, we expect capital expenditures for the year will be in the $2 to $3 million range.

So wrapping up 2010, we saw QLT establish a Visudyne sales force in U.S., which had a positive impact on sales by the end of the year. We reported positive adjusted EBITDA for the year and meaningful increase in our cash position, while still returning over $17 million in cash to shareholders to share buyback. And finally, we continue to be excited about the prospects for R&D programs to reach significant value inflection points this year.

And, with that, I’ll turn it back to Bob.

Bob Butchofsky

All right. Thanks a lot, Cam. Brook, why don’t we just go ahead and open the call for questions, please.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) First question today is from Scott Henry of Roth Capital. Please go ahead.

Scott Henry – Roth Capital

Thank you and good morning.

Bob Butchofsky

Hi, Scott.

Scott Henry – Roth Capital

I guess, just for starters, latanoprost, we were expecting a go, no go decision and I guess we still are. But the language does indicate either talk about further clinical evaluation before entering into a later stage trial. Could you just give a bit of color on what you mean by that?

Bob Butchofsky

Yeah. Scott as you know, this is the first time we’ve done upper and lower plugs placement. So there’s an expectation, a pretty high expectation that our retention rate in the upper lid is probably not going to be satisfactory for us to move that program forward in a pivotal and that’s the biggest issue, I think we face.

So what the expectation is, that we’ll probably have to do some more work on plug retention in the upper lid and that also might entail some dose finding at the same time. But we don’t want to start that work until we know whether or not we need to solve the problem. So we’re going to wait and try and see if we hit our efficacy hurdle with the ongoing study and if we do, then we’ll implement the other trials and my expectation would be that we would be starting a Phase III sometime in 2012.

Scott Henry – Roth Capital

Okay. And your efficacy hurdle is still a decrease of five, I believe?

Bob Butchofsky

Yeah. That’s correct, Scott.

Scott Henry – Roth Capital

And approximately if you did have to do more evaluation of retention of plugs, what kind of costs would those trials be? Are we talking about relatively minor trials here, I would expect?

Bob Butchofsky

Yeah. It depends. What I would expect, Scott, is similar to the other plug studies we’ve done. We probably have a couple iterations with, you know, one or two generations of plugs designed to -- to enhance retention on the upper lid. If we were also doing some more dose ranging with that and that would become a little bit more of an expense issue but it’s really difficult to define what that’s going to be until we see the data from this study and have a better understanding for where we are.

Scott Henry – Roth Capital

Okay. Fair enough. And then with regards to the LCA treatment, you know, I always hate to try to interpret, you know, someone’s body language. So I guess I’ll just ask you. Has your enthusiasm changed at all for this product, I mean, I noticed it’s not as prominent in the press release. I don’t think it comes in until page five. You did give a lot more color than you have previously with regard to what you may or may not need to do and as well, the Chief Medical Officer left. So I just want to get your thoughts. Where do you stand on the LTA program today versus three months ago?

Bob Butchofsky

I am excited about it, Scott and I think the best way to demonstrate that excitement, is you know, we said we’re committing some substantial funds to do health economic modeling and develop a payer strategy around this molecule. So we are also recruiting a marketing head, hopefully someone who’s got orphan drug experience in launching global orphan drugs. So we’re very excited. We’re taking steps in this program forward and I’m looking forward to sharing data with you next quarter.

Scott Henry – Roth Capital

Okay. Fair enough. Appreciate that color. Shifting gears a little bit, Visudyne seems to be turning a quarter -- corner, seems to be becoming more profitable, you have more reps. Have you given any thought -- obviously it depends what’s out there, into trying to put some leverage onto those reps, focusing a little bit more on marketed products? Just want to get your thoughts on how you think about business development, given Visudyne seems to be at least bottoming out and probably rebounding?

Bob Butchofsky

Yeah. Scott, I think that’s a great question. We would love to get another revenue stream that we can leverage across our existing infrastructure. And whether that be a drug or a device or even a diagnostic, if we could bring something in, we would obviously be very interested in doing it and that is one of the underpins of our underlying [BD] strategy. So yeah, we would do a deal like that if we thought we could improve our revenue and our margins based on using existing infrastructure to sell it.

Scott Henry – Roth Capital

Okay. Great. And just a couple very minor questions. COGS, I think you might have mentioned this but it looked a little high in Q4. Anything going on there?

Cameron Nelson

Yeah. There was $1 million charge that we took in negotiations with one of our suppliers that we don’t expect to be repeated this year or in the future.

Scott Henry – Roth Capital

Okay. Fair enough. And are there any one-time events that we should model into 2011 when thinking about EBITDA? I think you do get 2 million on your mortgage in Q2, I believe?

Cameron Nelson

There’s 2 million due on or before May 1, which doesn’t actually hit EBITDA, because that’s just a collection of an asset on our balance sheet. So there’s nothing in the guidance we’ve given that I would point put in what you call the one-time category number.

Scott Henry – Roth Capital

I mean, that probably be on EBITDA in terms of, that would impact your cash balance but sounds like $2 million is the kind of only one-time event.

Cameron Nelson

Yeah. I think that’s fair.

Scott Henry – Roth Capital

Okay. Well, thank you both for taking the questions. Appreciate the call.

Cameron Nelson

Yeah. See you, Scott.

Operator

The next question comes from Doug Miehm of RBC Capital Markets. Please go ahead.

Doug Miehm – RBC Capital Markets

Good morning, Bob, Cam.

Bob Butchofsky

Good morning, Doug.

Doug Miehm – RBC Capital Markets

Just as it relates to LCA and RP, I’m going to start with LCA, provided you get good data and you probably know better than anyone, given this is an open trial, but what are the next steps for that product and can you walk us through the timing of those steps?

Bob Butchofsky

Sure. Doug, what I expect is going to happen is we will share our data with regulatory agencies and let’s just focus on the FDA for now. We are working with an expert panel of outside clinicians to help us really understand the data and try and evaluate what is the most appropriate way to measure vision and to measure the outcomes from this drug in patients that have very low vision.

Historically, the FDA has used a three-line responder and many of the patients in our studies just don’t have three lines of vision to lose. So that may not be the best way to look at this going forward. So we’re going to have to enter negotiations with the FDA and have discussions with them and probably some back and forth about what’s the most appropriate way and what are the most appropriate outcome measures to be included in further development.

My expectation is that’s a process that’s going toe take several months, three to six months, I would guess. And so I would think by the end of this year, we would try and generate some closure around the study design and then begin implementing the next trial early in 2012.

Doug Miehm – RBC Capital Markets

While you’re waiting, can you start to identify sites that you would like to help recruit patients?

Bob Butchofsky

Yeah. That’s a great question and that process is actually already under way and we expect to get at least one more site up and running and approved prior to the completion of enrollment for the RP study later this year. So they should be able to help us in terms of the RP trial.

Doug Miehm – RBC Capital Markets

Is there a possibility that this second trial that you start in 2012 could be pivotal and along with that, would there need to be some type of longer term safety trial?

Bob Butchofsky

Great. Great questions. We would, yeah, I think there certainly is a possibility. It could be a pivotal study. And really it’s unknown how large the trial would need to be and because of that it really becomes a question of what kind of safety information we’re going to collect. Certainly potential that we could have a longer term safety commitment that we’re obligated to submit to regulatory agencies.

But again, all of this is speculative at this point and we’ll be able to give you much more guidance’s once we start having these negotiations and once we bring this to closure, hopefully again before the end of the year.

Doug Miehm – RBC Capital Markets

Okay. Just getting to the other pipeline program then, let’s say the results that come out are 4.5 instead of 5. What is the cutoff, I guess is what I’m asking?

Bob Butchofsky

Yeah. That’s a great question, Doug and I don’t want to be ambivalent here. There is a statistical plan within the protocol that defines exactly what that cutoff is and that is also tied to the control arm of the study. We have been saying for practical purposes, you know, 5mm reduction in pressure but there is a statistical plan that really, you know, makes this -- takes this issue out of our hands.

So I don’t think it’s going to be interpretive at the end of the day. We’re either going to hit our milestone or we’re not. And, that is kind of the disaster scenario, you’re highlighting, where -- we’ve improved, but we’re not quite where we potentially want to be and, hope that doesn’t happen. I hope we get a clear win from this program and that we see something greater than 5mm and they are eagerly moving the program forward.

Doug Miehm – RBC Capital Markets

Okay. Good. Just throughout but then, I’m trying to get my head around, how do you see return on investment in the Visudyne program. It looks like you are looking for sales that will be anywhere from a few $1000 to $3 million higher than they were this year and yet you’re putting that type of cost for sure onto the P&L to help grow that revenue stream. So I’m curious as to what point you start to reap the benefits of that investment, if you do.

Cameron Nelson

Yeah. That’s a very good question, Doug. So just, let me justify what we’ve done because, you know, we knew we were a little on the light side with just having, you know, less than 15 people out there and that’s including a couple managers. So, you know, on average, the territories that we’re covering were anywhere from three to five states on average. So our reach and frequency last year is really not where we wanted it to be.

So we waited to make the investment and move forward with that investment until we saw some turnaround, until we could prove to ourselves that we were having a positive impact in the field. As we increase our reach in frequency and call volume based on the additional manpower, I would expect that we’ll see some additional growth in the second half of this year and you know, if that doesn’t happen, then we’ll reevaluate and judge whether or not that return is worthy of the investment.

Doug Miehm – RBC Capital Markets

Okay. Great. Thank you very much.

Bob Butchofsky

Thanks, Doug.

Operator

(Operator Instructions) The next question comes from Jeffrey Cohen of C. K. Cooper. Please go ahead.

Jeffrey Cohen – C.K. Cooper

Hi. Thank you for taking my questions.

Bob Butchofsky

Morning, Jeff.

Cameron Nelson

Hi, Jeff.

Jeffrey Cohen – C.K. Cooper

Good morning. Although most of them have been asked, I just have a few follow-ups. So, could you maybe – you talked about R&D for 2011, could you maybe give us a ballpark indication as far as what percent of R&D for at least the first couple of quarters maybe related to the plug development?

Bob Butchofsky

No. That percentage is shifting. We were 60-40 last year -- of plugs, probably going to be closer to 50-50.

Cameron Nelson

Yeah. I would it’s going to look more like 50-50, at least through the first half of this year.

Jeffrey Cohen – C.K. Cooper

Okay. And do you have an approximate date for your K in a couple of weeks?

Cameron Nelson

Today.

Jeffrey Cohen – C.K. Cooper

Okay. That’s good to know. And you said you had a shift in the discount rate. That was from -- it was 10.5 or it was 10 and what’s the current rate now?

Cameron Nelson

Current rate now in the third quarter, now we’re down to 9 and we just take a published rate that represents the weighted average cost of capital for a broad array of pharmaceutical companies. So it’s sort of dictated we’ve chosen that metric and it will fluctuate every quarter depending on what the rate is.

Jeffrey Cohen – C.K. Cooper

Okay. So you are using 9, so you are getting 130.6 off of a 154.6 expected less?

Cameron Nelson

Exactly.

Jeffrey Cohen – C.K. Cooper

Approximately, okay. And okay you gave Eligard guidance already, could you talk a little bit more -- I am sorry to hound you, Cam, about the provision for the income taxes that came in for the quarter and what that may look like or might look like in 2011?

Cameron Nelson

Yeah. We gave a better guidance on that. The tax provision for the year on the P&L will probably be in the $2 million to $4 million range of an expense, but we think that the cash tax for the year is going to be less than $1 million, either a payment or a refund, somewhere in that plus or minus a $1 million range.

Jeffrey Cohen – C.K. Cooper

Okay. Less than $1 million, okay. I got it. And plug data is now Q2-Q3, which was from Q2/summer, is that right?

Cameron Nelson

That’s correct.

Jeffrey Cohen – C.K. Cooper

Okay. I think I got it. Thanks a lot.

Bob Butchofsky

Thank you, Jeff.

Cameron Nelson

See you, Jeff.

Operator

The next question comes from Cosme Ordonez of GMP Securities. Please go ahead.

Cosme Ordonez – GMP Securities

Thank you. In the past, you’ve done quite a bit of clinical work to demonstrate the – that using Visudyne combination with Lucentis might have a significant clinical benefits, is this a still a viable marketing strategy or not anymore?

Bob Butchofsky

We think that Visudyne is definitely second line therapy to Lucentis where we really define it now as the patients that have persistent activity after ongoing Lucentis injections. So they either have leakage or decrease in visual acuity or both and for whatever reason, the physician and patient aren’t interested in continuing on and for many patients, an indefinite injection course that’s never ending.

So those are the patients that we really are trying to target, as well as some patients that might be resistant because their choroidal neovascularization is comprised of mature blood vessels and this is found in particularly with patients with polypoidal disease and those patients don’t respond as well to Lucentis. So, even though that’s an off-label indication, it’s a usage has become more common by physicians in particular, those in the US market.

Cosme Ordonez – GMP Securities

Thank you very much.

Bob Butchofsky

You bet, Cosme.

Operator

Gentlemen, there are no further questions at this time.

Bob Butchofsky

All right. Thank you. I just want to close the call by saying that we are very pleased with our financial performance in 2010 with almost $16 million in adjusted EBITDA. The company is in a very solid financial situation with $210 million in cash and a $130 million in Contingent Consideration, representing the net present value, the remaining payments due to us from Eligard royalty stream.

We just completed a strong quarter with underlying demand growth for the US Visudyne business for the first time in over two years and rest of world quarter-over-quarter growth as well. As a result, we are increasing our US sales presence and hope to see further growth in Visudyne sales in 2011.

We have some very important upcoming clinical milestones with our LCA program in the second quarter and the latano plus plug program in either late Q2 or Q3 and we are also looking forward to completing enrollment in the RP portion of the trial this year.

As we looked at 2011 and beyond, I am excited to have the opportunity to provide treatments for patients suffering from debilitating ocular diseases and blindness. Thanks for joining us on the call today. We look forward to sharing our results from our clinical programs with you in the coming months.

Operator

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

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