QLT Gets New Lease On Life With Multi-Pronged Deals

QLT Inc. is moving on from a failed merger last year, repositioning itself as a fully-funded, multi-asset, pure-play ophthalmic pharma company through a series of deals.

The innovative business development initiative – which includes the acquisition of InSite Vision Inc. and an investment in a new company, Aralez Pharmaceuticals[See Deal] – will position QLT as an independent company after struggling for the last couple of years to review strategic alternatives and determine the best path forward (Also see "QLT Shows Off Its Assets In Hopes Of Attracting A Suitor" - Pink Sheet, 21 Nov, 2013.).

The company thought it had figured out a way to return value to shareholders last year when it agreed to be acquired by Auxilium Pharmaceuticals Inc. in a reverse merger for $345 million, but the deal was hijacked by Endo International PLC, which stepped in to buy Auxilium for $2.6 billion, only without QLT (Also see "Auxilium Accepts Endo Offer, Dumps QLT Merger Plans" - Pink Sheet, 9 Oct, 2014.).

Now QLT has landed on a new strategy, with the help of investment advisor Greenhill & Co., that will provide the company with more flexibility.

First, as QLT announced June 8, the company will buy InSite Vision for $0.178 per share in an all-stock transaction, valuing the company at around $21.1 million. The deal will establish QLT as a multi-asset ophthalmic company that will be in a position to advance its own late-stage asset, the Phase III-ready retinoid program QLT091001 for the treatment of certain inherited retinal diseases [See Deal].

Advancing Several Assets To Market

The company will also secure a royalty revenue stream from InSite on the sale of AzaSite (azithromycin) for bacterial conjunctivitis. InSite also has a late-stage drug pending at FDA; the company announced an NDA filing for BromSite (bromfenac ophthalmic solution 0.075%) with FDA June 11 for the treatment of inflammation and pain following cataract surgery.

QLT’s buyout is contingent upon FDA’s acceptance of the BromSite NDA. A third drug, Dexasite (dexamethasone 0.1%), has also completed Phase II development for ocular inflammation, including blepharitis, inflammation of the eyelids.

“Instead of a singular bet for shareholders with just the retinoid asset, QLT now has multiple late-stage shots on goal,” said Ashish Contractor, a managing director at Greenhill and one of the architects of the deal, along with QLT’s Chairman Jason Aryeh. Contractor and Aryeh talked about the transformative deals during a recent interview.

The development of QLT091001, a synthetic retinoid, will be a priority, Aryeh said. Development of the drug had more recently been sidetracked by the company’s extended state of strategic review.

QLT has largely been overseen by the board of directors – led by Aryeh – since mid-2012 after a management shakeup spurred by dissident shareholders. QLT sold its top-selling product, Visudyne (verteporfin injection), to Valeant Pharmaceuticals International Inc. shortly thereafter for $112 million upfront, with the aim of returning capital to shareholders and investing in QLT091001.

Now the company will have the cash to fully fund QLT091001 through Phase III, the firm said.

It is being studied in multiple indications, including two rare inherited retinal diseases (IRD) caused by RPE65 or LRAT gene mutations. There are currently no approved therapeutic treatment options for these patients. The company believes it has determined an accelerated regulatory path forward for QLT091001 in Europe based on conditional approval for IRD. The company also plans to initiate a pivotal study in the first half of 2016 in patients with impaired dark adaptation and/or impaired low luminance vision.

The drug could have annual sales potential of $500 million or more, the company forecast.

QLT settled on acquiring InSite after a thorough review process that included evaluating several other ophthalmic companies, orphan drug companies and reverse merger opportunities.

A large part of the deal’s valuation was based primarily on the royalty revenue stream with lots of upside for investors, according to the company.

InSite stands to receive an 8%-9% royalty on sales of AzaSite from partner Akorn Inc. In January, InSite also reached a licensing agreement with Nicox SA to develop and commercialize AzaSite, AzaSite Xtra and BromSite in Europe, the Middle East and Africa, under which InSite would receive tiered, mid-single-digit to double-digit royalties on net sales.

QLT will have about $70 million in cash following the acquisition, with investment coming from new health care investors Broadfin Capital LLC, JW Asset Management LLC and EcoR1 Capital LCC. The company will retain its NASDAQ and Toronto Stock Exchange listings and will continue to be headquartered in Canada, where it can take advantage of the country's lower corporate tax rate. QLT is based in Vancouver, while InSite is based in Alameda, Calif.

QLT has not determined who will lead the new business but said it will be assessing the leadership situation.

Investing In Aralez Pharma

In a second deal, QLT will make a $45 million equity investment in Aralez Pharmaceuticals, a new company that will be created out of the merger of Pozen Inc. and Tribute Pharmaceuticals Canada Inc. and headed by Auxilium’s former management team: CEO Adrian Adams and General Counsel and Chief Administrative Officer Andrew Koven.

U.S.-based Pozen said it would pay $146 million to acquire Tribute, based in Canada, June 8, along with plans to redomicile the merged company in Ireland [See Deal].

QLT is investing in Aralez along with other investors, including Deerfield Management and Broadfin Capital, which together will invest $350 million in the new company. QLT will receive ordinary shares in Aralez representing an approximately 9% ownership stake.

The well capitalized new company will be on the prowl to bring in new assets. It will sell Tribute’s broad portfolio of drugs and continue pushing forward with approval of Yosprala, Pozen’s formulation of the proton pump inhibitor omeprazole layered around a pH-sensitive enteric-coated aspirin, positioned to reduce gastric toxicities associated with daily use of aspirin to prevent cardiovascular events. Yosprala has received two “complete response” letters from FDA, and Pozen lost its big pharma partner, Sanofi, last year (Also see "More Bad News For Pozen: Another Delay To Market For Yosprala" - Pink Sheet, 17 Dec, 2014.).

“Post the Auxilium transaction, Adrian and his team and I very much wanted to work together to build a specialty pharma that had the tax advantages of being domiciled advantageously,” Aryeh said.

QLT’s shareholders will have a choice in whether or not they agree to participate in the Aralez investment. The co-investors have agreed to provide a backstop for up to $15 million of QLT’s investment in Aralez. As a result, QLT shareholders will be able to elect to receive a portion of the distribution in cash instead of Aralez shares, subject to proration.

Following the completion of the two transactions, QLT intends to return $25 million to QLT shareholders by issuing redeemable convertible notes, as the company attempts to provide more liquidity options to its shareholders.