Yesterday, QLT Therapeutics (QLTI) announced they have sold Eligard, their palliative treatment for advanced prostate cancer. Eligard is injected under the skin and forms a solid implant that then slowly releases leuprolide acetate as the implant is bioabsorbed. Leuprolide acetate lowers the levels of testosterone in a man’s body, on the theory that will suppress tumor growth in patients with hormone-responsive prostate cancer.
This is absolutely the WRONG way to treat prostate cancer, as there are several studies now coming out in Europe that show there is no relationship between testosterone levels and the progression of prostate cancer. Chemically castrating men will go down as one of the black marks in allopathic medical history. I am glad to see QLTI get rid of this product. From Wall Street’s point of view, this makes QLTI a pure play on ocular medicine, and that is an advantage.
The deal itself will have important impacts on QLTI’s income statement, with a positive but smaller impact on the balance sheet. Technically, QLTI sold their wholly-owned U.S. subsidiary, QLT USA to privately-held Tolmar Holding, Inc., in Fort Collins, CO. Tolmar is the contract manufacturer of Eligard, and QLT resells the product to Sanofi and MediGene to market in Canada, the United States and Europe.
QLTI gets $20 million up front, which they will not be able to report as income, and keeps the cash on the QLT USA balance sheet. Tolmar will pay another $10 million a year from now, and has to pay 80% of the royalty revenues to QLTI until they hit $200 million. This includes the revenues for the quarter just ended So let’s look at the numbers.
In the June quarter, Eligard had $67.6 million in sales, up 12% from the year before. Royalty and product revenue combined were $21.9 million, with $9.2 million in product revenue and $12.7 million in royalty revenue. In the future, Tolmar will get all the product revenue. My guess is that QLTI had very little markup on the product, maybe 5% or 10%, so there won’t be a big hit to their quarterly income by foregoing that.
On the royalty side, there was a $2.2 million one-time benefit from a pricing negotiation in one territory related to prior years, so the ongoing royalty revenue was $10.5 million, or 15.5% of Eligard sales. Tolmar gets 20% of this, so assuming steady growth in Eligard sales in the September quarter, QLTI’s share of the royalty revenue will be $8.65 million, a sequential decline that will fall right to the bottom line. Adding that $1.85 million decline to about $450,000 in profits from product revenues means we should look for $2.2 million less operating income in the September quarter than in June. They reported $4.3 million in operating income for the June quarter, so this is a pretty significant hit. It also will impact their 2009 EBITDA, where they raised guidance in July.
On the other hand, during the June quarter conference call they raised their estimate for Eligard sales in 2009 from a range of $220 million to $240 million up to $240 million to $255 million, so their 80% share of the royalties could be higher than I am calculating. QLTI reports on October 27.
From Tolmar’s point of view, they pay $20 million and immediately get $2.16 million back as their share of the September quarter royalties. Going forward, they get the growing royalty stream plus an additional $450,000 in product profits, or about $2.6 million a quarter, growing at 12%. They have to come up with another $10 million payment in a year, and after that they have a nice return on investment.
The agreement maxes out at $200 million in royalty revenues paid to QLTI. Assuming Eligard royalties continue to grow at 12% a year. QLTI will get about $17 million for the second half of 2009, $38 million in 2010, $43 million in 2011, $48 million in 2012 and $54 million in 2013.
The impact on the balance sheet is that QLT should have $215 million in cash at September 30, giving effect to the $20 million payment, or $3.94 a share, with no debt and positive cash flow. At this writing, the stock is up 56 cents a share today to $4.10, still giving almost no value to the Visudyne franchise or the new punctal plug technology. That’s ridiculous. QLTI remains a Top Buy on any dip back under $4 for my $12 target as Visudyne is used in combination therapy with Lucentis for wet macular degeneration.
Disclaimer: Source: www.newworldinvestor.com
Murphy is dominating once again.
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