Karen Peterson - IR Specialist
Bob Butchofsky - President and CEO
Cameron Nelson - SVP and CFO
Steve Yoo - Leerink Swann
John Gibbons - Odin Partners
QLT, Inc. (QLTI) Q3 2011 Earnings Call November 3, 2011 8:30 AM ET
Welcome to the QLT Inc. third quarter 2011 conference call. (Operator Instructions) At this time, I would like to turn the conference over to Karen Peterson, Investor Relations Specialist.
Good morning, everyone. And welcome to QLT's third quarter 2011 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, Senior Vice President and Chief Financial Officer. Before I turn the call over to Bob, let me review the Safe Harbor statement.
On behalf of the speakers who follow, we caution investors that certain statements in this conference call is 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.
For the purposes of this caution, we refer to such statements as forward-looking statements.
Forward-looking statements are predictions only, which involve known and unknown risks, and uncertainties and undue reliance should not be placed on such statements. Certain 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.
For additional information about the material factors or assumptions underlining such statements, and about the material factors that may cause actual results to vary from those expressed or implied in such statements, please consult our earnings press release sent out earlier this morning and available on our corporate website, as well as our filings with the U.S. Securities and Exchange Commission and the Canadian Securities Regulatory Authorities, including the risk factors detailed in the most recently filed annual report on Form 10-K and quarterly reports on Form 10-Q. QLT undertakes no obligation to update such information to reflect later events or developments, except as required by law.
This call also includes a discussion of non-GAAP financial measures as defined by applicable securities laws. The most directly comparable U.S. GAAP financial measures and the information reconciling these non-GAAP finance measures to QLT's financial results prepared in accordance with the 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.
Good morning, everyone, and thank you for joining us on the call today. Overall, it was a pretty straightforward financial result for the quarter. We generated $500,000 in adjusted EBITDA and now have $204 million in cash on the balance sheet, and another $109 million in net present value of the contingent consideration asset.
I really want to focus my remarks today, starting with the brief overview of our punctal plug program, followed by a retinoid program. And then make a few brief comments about Visudyne sales before turning the call over to Cam to walk you through financial results for the quarter.
Following the positive data that we announced at the end of August from our Glau 11 Phase II trial with latanoprost and punctal plugs and recall that was with plugs placed in both the lower and upper tear ducts of the eye. Now we initiated a proof-of-concept device-only study, using one of our proprietary punctal plug designs that was specifically modified for upper lid placement.
Very pleased to announce this morning, to see the initial retention rate is significantly improved from the rates that we reported using a commercial punctal plug in the upper puncta in the earlier 11 trial. The data we announce this morning shows that we retained plugs in 22 of 27 eyes, a retention rate of 81% at one month.
As a reminder, the retention rates in the Glau 11 drug trial were less than 50% for the upper plug and this was generated with a commercially available punctal plug design. Also something to highlight for you is our experience over the past several years, shows that retention rates for our devices is slightly better in drug trials than it is in the device-only trials.
And usually that is favoring the drug trials by about 5%. And we expect this is the case, because the patients enrolled in the drug trials, generally are more careful about their plugs, since they're aware the device is delivering their daily glaucoma medication.
So this initial retention rate of 81% is encouraging to us. And we'll continue to refine our proprietary upper plug and strive to generate more and longer-term data, to ensure that we have an upper plug that is relatively easy to insert, it's comfortable for the patients and has good retention rates like our proprietary lower punctal plug. You can expect to hear periodic updates from us during 2012 on the progress on the device front.
Now, I want to turn to the drug delivery front. We will soon be initiating two Phase II trials, enrolling approximately 110 to 115 patients in total between the two trials. And the trials are designed to answer the question, what drove the efficacy we demonstrated in the last trial? As a reminder, we demonstrated a 5.7 mmHg reduction and intraocular pressure in one month.
We will be looking at several different treatment arms in these trials to determine if the additional efficacy was primarily due to double plugging, a higher drug load, or possibly because the placement of the drug in the upper lid changes the dynamic of how the drug penetrates the cornea to reach its target inside the eye.
We're in a process of finalizing the trial designs at this time, so I'm not going to go into any detail at this point. However, I did want to make you aware that we will be holding an R&D Day for analysts and investors in New York on December 16, at the Grand Hyatt Hotel. And at that time we'll spend some time and struggle of our medical experts, who can discuss the trial designs in more detail. So I hope all of you can join us at that event.
So in summary, on our punctal plug delivery program in the course of slightly more than two months since the Glau 11 data was announced, we're very pleased to see much higher retention rates in our proprietary upper lid punctal plug. And the milestones will be the initiation of the two Phase II trials in the first quarter with data expected before the end of 2012. And if trials are successful, we would look to initiate our Phase III program in 2013.
We will obviously be able to give you more details on the timing of the trial results and the expenses associated with the studies, as we get closer to commencing the studies. We'll also continue to modify our upper lid punctal plug and generate more retention and comfort data in the months ahead. And those efforts will be running in parallel to the drug trials. However, we will be using our proprietary plug in the upper plug arms of the upcoming trials.
Finally, we expect to make a decision about next products to put into the plug that we can initiate human proof-of-concept trials in the second half of 2012. It's a very exciting time for us with regards to our punctal plug program.
Now, I want to turn to QLT091001, our synthetic retinoid program for Leber Congenital Amaurosis or LCA and Retinitis Pigmentosa RP. We continue to be on track to hit all of the milestones that I outlined for you on our Q2 call.
Since our last conference call, we've received Fast Track designation for both LCA and RP indications from the Food & Drug Administration. This can enable a quicker review time and more dialogue with the agency, as we move this program in the post-pivotal trial next year.
Recently at the American Academy of Ophthalmology, Annual Meeting in Orlando, Dr. Rob Koenekoop from McGill University, Montreal, our principal investigator in the trial, presented the full data cohort on 14 subjects treated with 001 with LCA. The results continue to be promising importantly with many patients having significant improvements in visual field and some patients also having significant improvement in visual acuity.
Our development and regulatory team was in Europe just last week and had a very productive scientific advice meeting with EU Regulatory Authorities. And like the meeting we held last summer with the FDA, our path toward a registration trial in LCA is becoming much clear. We continue to expect that we will need to treat approximately 30 to 40 subjects with LCA in a pivotal trial.
We expect a placebo control arm in the trial. However, the placebo arm will be crossed over to active treatment with QLT001 at some point during the trial. Visual field will be the primary trial end point, and that will likely be used with the Goldmann visual field measure. Visual acuity and quality of life measurements will be secondary or supportive end points.
Overall, we still expect to start the pivotal trial for LCA in the mid-2012 timeframe. In order to gain broader input from our key international experts working in inherited retinal diseases, as well as to facilitate faster patient enrollment with expanded the number of treatments centers to now include three major European sites and three additional sites in the U.S. for total of seven centers including the existing center of McGill University. These sites are now in the process of enrolling Retinitis Pigmentosa patients with both LRAT and RPE65 gene mutations, so that we can complete enrollment in this 14-patient cohort by yearend.
In addition, we now have a re-treatment protocol approved for patients with LCA, and Dr. Koenekoop is now able to re-treat patients, some of whom are almost approaching the two-year mark since their first course of treatment. We expect to see some re-treatment data emerging in the coming months. So I can tell you again at this point that we're unscheduled, and we remained very excited about the potential of this program.
So in summary for the retinoid program we have a number of upcoming milestones tied to the program. First, we've now completed meeting with the FDA and EMEA and our gaining clarity about the requirements for pivotal study and LCA. Second, we've expanded the number of treatment centers for total of seven in North America and Europe. Third, we will expect given the number of additional centers that will complete RP-patient enrollment by yearend and report data in the first quarter of 2012.
Fourth, we'll begin second dosing for LCA patient shortly, now that, we have completed the LCA-patient cohort enrollment. And fifth, we expect to be in a registration trial for LCA in mid-2012. Again, it's very exciting about this advancement in the program, primarily because it holds such great promise in treating specific gene mutations in LCA and RP patients, probably the two most devastating inherited retinal diseases.
We'll be sharing more with you about that program as we continue to generate data in LCA, in particular the re-treatment data and as we complete the RP enrollment and report data for that trial next year.
And also importantly, Dr. Koenekoop, will be joining us for our R&D Day in New York. So that will provide you with an opportunities speak directly with Rob, about his experience in treating these patients and I am sure you gain a much better perspective on the disease and the treatment effect we're seeing as far with our Synthetic Retinoid 001.
Now, I want to shift to our Visudyne business. Third quarter worldwide sales were basically flat versus last year, but lower than expected in the U.S. market particularly and in the several months July and August. U.S. sales did rebound in September. They're not to the level that we had expected earlier and that resulted in the lowering of our U.S. guidance announced for this morning.
We remain on tract to achieve our worldwide sales guidance and our revenue targets, especially with another good quarter of Eligard contingent consideration earnings. In addition, we were pleased to see pockets of growth from Novartis' efforts related to Visudyne sales outside of the U.S. particularly in Japan and China.
So before I turn the call over to Cam, I'd like to highlight that our goal is to have three Phase III programs running in 2013. Two, with the Synthetic Retinoid and LCA and RP, and one with the punctal plug (technical difficulty). The upcoming milestones help us achieve this goal are the completion of the enrollment in the RP portion anticipated by yearend.
A retreatment protocol and active for patients with LCA, and the initiation of two Phase II trials with the punctal plug program with Latanoprost spinning in early 2012, with results available before the end of next year. And finally, as I mentioned briefly earlier, I would like to personally invite all of you to participate in our R&D Day in New York on December 16. We'll be sending out more detailed information to each of you shortly on this event.
And with that, I'll turn the call over to over to, Cam, to walk you through financial highlights for the quarter.
Thanks, Bob. On the financial front in the third quarter, we once again maintained positive adjusted EBITDA and we continue to return cash to shareholders though our stock buyback program. I'm going to briefly outline our Q3 financial results and then we'll open the call up for Q&A.
Leading off with Visudyne sales, worldwide sales in Q3 2011 were $20.6 million up slightly from $20.5 million in the third quarter of 2010. The regional split for Visudyne sales in the third quarter was U.S. $3.9 million, Europe $5.7 million, and rest of the world $11 million.
With regards to third quarter sales, let me first review the comparison to the prior year and then look at the sequential comparison versus Q2. U.S. Visudyne sales in Q3 were down 26.2% from the prior year. End-user demand averaged 56 vials per day in the third quarter, which was down from 65 vials per day in the third quarter of last year. It's worth noting definitely that there was a $0.8 million negative impact in the quarter from a net decrease in U.S. distributor inventory is during the third quarter.
Excluding distributor inventory changes in the current and prior year quarters, the year-over-year decline in U.S. sales would have been approximately 14%, which is in line with the drop in the daily vial sales.
Visudyne sales outside the U.S. increased by approximately 10% or $1.5 million compared to the prior year third quarter. The increase was driven by favorable foreign exchange rate movements, which added about $1.2 million of the $1.5 million increase reported.
On a sequential basis, world wide Visudyne sales were down $4.8 million or 18.9% compared to Q2. U.S. sales were down $2.7 million sequentially but this included a $1.1 million negative impact from net changes in distributor inventories. Excluding this inventory impact, the sequential decline in the U.S. was about 25%, again inline with the end user.
Sales demand declined from 74 vials per day in Q2. Outside the U.S. sale declined sequentially by 11.2% or $2.1 million, at this level of decline reflected typical seasonality in the third quarter and was expected.
Regarding Visudyne for 2011 as noted in the press release we did reduce our guidance for U.S. Visudyne sales which we now expect to come in between $20 million and $22 million for the year, compared to the original guidance range of $23 million to $26 million.
However, we maintained our guidance for worldwide Visudyne sales and expect worldwide sales to come in near the high end of the $85 million to $90 million guidance range. Also, we did not adjust our guidance for full year revenue which remains at $40 million to $44 million for the year.
In the third quarter, we reported total revenue of $9.6 million which bought our year-to-date revenue to $31.2 million. In the quarter net product revenue was $6.2 million which included the $3.9 million of U.S. Visudyne sales. $2 million related to the shipment of a batch of a Visudyne to Novartis. And there is about $0.3 million for reimbursement from Novartis across the world royalties and other expenses.
Royalty revenue which is a 20% royalty that we are in Novartis, as sales of Visudyne outside of the U.S. was up 10% year-over-year to $3.4 million, in line with the increase in sales outside the U.S. Cost of sales was $2.7 million in Q3, up from the third quarter in the prior year primarily due to COGS related to the product shipment in Novartis.
For the year, we now expect to ship three batches of product to Novartis, more than original end, and this is why our COGS guidance for the year was increased to $10 million to $11 million from the original range of $8 million to $10 million.
R&D expense in the third quarter was $11.3 million flat to the prior quarter and up $3.2 million or 39% from last years third quarter, mainly due to higher spend on our synthetic retinoid program. In the third quarter of 2011, the retinoid program continued to account for more than half of our total R&D spend with the punctal plugs represent more than 40% of R&D and the remainder related to Visudyne.
SG&A expense for the quarter was $5.8 million, with that $0.5 million increase from the prior year mainly due to higher Visudyne U.S. sales in marketing. And freelance research and activities to potentially establish a pair program for the retinoid product if it eventually launches.
Investment and other income of the quarter included a $1.8 million increase in the fair value of our contingent consideration asset, down from $5.2 million in last year's third quarter. In general, the amount of the gain will diminish each quarter, because there are fewer outstanding payments left to revalue.
The decline from last year was further impacted, because last year's third quarter benefited from a 0.5 percentage point reduction in the discount rate, whereas in this year's third quarter there was no change in the discount rate, which remains at 10% and it has been there since Q1. Also there was a reduction in our long-ranged Eligard forecast this quarter that was largely due to negative foreign exchange movements with the euro.
On the balance sheet, the contingent consideration asset was reported of $108.9 million, which is split into current and long-term. This amount represents the estimated present value of the $126 million of payments that as of September 30, 2011, we expect to be paid from Eligard royalties over the next three to four years.
On income taxes we reported a $0.2 million income tax provision in the third quarter. On a cash basis in Q3, we collected a $2 million tax refund related to our prior year's R&D tax claim. Net of cash income tax payments year-to-date we've received about $1 million.
As a reminder, on the prior year, the tax recovery reported over the first three quarters of 2010 was due to the accounting for income tax as associated with the amended Visudyne agreement with Novartis. And this resulted in a $5.6 million credit to the income tax provision in Q1, 2010, when the new agreement took effect.
Moving on, we had positive adjusted EBITDA plus contingent consideration during the third quarter of $0.5 million, which brought our year-to-date total adjusted EBITDA to $2.9 million. Our contingent consideration earnings totaled $10 million in Q3 and $27.9 million year-to-date.
Our cash and cash equivalents balance at September 30, was $204 million, up slightly from $201.1 million at the end of the second quarter in large due to the tax refund received in Q3. During the quarter we repurchased just under 630,000 shares at an average price of $7.15 for a cost of $4.5 million. This brought cumulative purchases under our current normal course issuer bid program to approximately 2.2 million shares.
And as a reminder, the share buyback program was approved late last year and allows us to repurchase upto 3.6 million shares through December 15, this year. And we have approximately 1.4 million shares available to buyback, before the current program expires. And finally, capital expenditures in Q3 were approximately $0.5 million and now stand at $2 million year-to-date.
And with that, I'll turn it back to Bob.
Alright thanks a lot Cam. Can we open the call now for questions please.
(Operator Instruction) The first question comes from Steve Yoo from Leerink Swann.
Steve Yoo - Leerink Swann
I was wondering, can you tell me what's the status of the retreatment for the LCA patients are?
Steve, it's basically approved now at Rob Center. They are going through the logistics of getting some patients lined up. To my knowledge, no one has been retreated yet. And I have the fortune of having dinner with Rob last week at the academy meeting. But he is very excited about getting some of those patients retreated and may expect to get at least a couple patients retreated before yearend.
Steve Yoo - Leerink Swann
So I remember their capacity constrains for diplonia, one patient at a time. Will that still be an issue during the retreatment period?
I don't think it will be. They've geared-up their center. They are enrolling RP patients at the same time. They're planning on doing some of the LCA retreatments. So I do think that they'll be able to handle excess capacity or additional capacity.
Steve Yoo - Leerink Swann
As far as the modifications of the upper plugs, congratulation in improving the retention. I was just wondering, is there a way to improve like the volume of drugs. Because if I remember correctly, the upper plug had a 45 microgram was the upper limit or is that sort of the hard limit, because of the design, or can you make the number go higher?
Yes, we're working on that Steve. And that is something that we think we can improve. There will be some constraint. I know we've hit the barrier on the lower plug. And that barrier is really driven by the size and the diameter of the plug itself. So I do think we can make some improvement in the upper plug design. And that is something we plan on discussing more at our R&D Day in December.
(Operator Instructions) We have a question from John Gibbons of Odin Partners.
John Gibbons - Odin Partners
Bob, I'm just curious about the additional sites for the RP treatment. I think when you're back here in September for UBS you were not sure when it was going to happen. I guess what broke the logjam there? And are the sites all up? And can you tell us where some of them are?
The sites are up, John. We haven't been disclosing the centers, because we just, quite frankly don't want them to get a bunch of phone calls from people. But there is a site in the U.K. and then two sites in Central Europe. And then again, three additional sites in the U.S., I believe all of them are now, if they are not enrolling patients they are certainly right on the verge of getting their patients set up and all their agreements completed and finalized.
Though, we still fully expect that they've got patients lined up. We fully expect to have enrollment completed by year end. And there is a total of seven centers, so it will only take a couple patients per center to get us through our enrollment goal by the end of the year.
Well, it sounds like we're done here. So again I want to thank everyone for listening in on the call today. We look forward to seeing in New York on December 16, for our Analyst Day. Thanks again everyone.
Ladies and gentlemen, the conference is now concluded. And you may disconnect your telephones. Thank you for joining and have a pleasant day.