Private equity pursues takeout of QLT

Date: Tuesday, August 29, 2006
Author: Andrew Willis & Leonard Zehr, Globeandmail.com

A major shareholder in QLT Inc. is offering to buy out the troubled drug company, a move that QLT's board is resisting in favour of a massive share buyback.

Rodney O'Connor led a private equity group that offered in February to take QLT private at "a substantial premium to the market," which currently values the Vancouver-based company at $669-million (U.S.).

"We sent a letter to the board, revealed who our private equity backer was, and explained we were ready to make an offer at a substantial premium," Mr. O'Connor said in an interview from New York. He said his group remains interested in buying, but "our overtures were politely rebuffed."

Rather than negotiate with Mr. O'Connor and his backers, cash-rich QLT last month announced it would buy back up to $104-million of its own stock though a so-called Dutch auction.

The share buyback expires on Sept. 8.

QLT's offer to buy back shares, mailed to shareholder on Aug. 3, does not mention Mr. O'Connor's bid. When asked about the takeover overtures yesterday, a QLT spokeswoman said the company does not comment on potential transactions.

Mr. O'Connor holds a 500,000-share stake in QLT worth $3.8-million that he acquired in 2004. The stake came after the 70-year-old former investment banker co-founded Atrix Laboratories Inc., then sold the prostate drug maker two years ago to QLT in a stock-and-cash deal valued at $870-million.

The merger of QLT's strong cash flow and Atrix's pipeline of drugs failed to cure a sagging stock price, with QLT shares now changing hands at a quarter of the price they fetched in 2004.

The company switched chief executive officers last year, with the champion of the Atrix purchase departing. Mr. O'Connor said: "It looked like the perfect marriage, but QLT failed to integrate the businesses and culture of Atrix."

Earlier this year, QLT took a $410.5-million charge against the Atrix acquisition.

It also hired an investment banker to sell Atrix's generic dermatology and manufacturing assets, which have a book value in the mid-$20-million range.

QLT's two biggest shareholders, Jana Partners LLC and Mackenzie Financial Corp., owned 8.5 and 8 per cent, respectively, of the stock as of last April, according to QLT proxy material. Sources say the two funds exerted pressure on the company to implement the Dutch auction as a way of returning cash to shareholders in the face of declining sales of its one big drug, Visudyne.

"Our business plan for QLT is quite different from the strategy that the company is pursuing," said Mr. O'Connor, who has been a successful private equity investor since the 1970s. Prior to that, he spent two decades at Wall Street brokerage houses Kidder Peabody & Co. and Bear Stearns & Co. Inc.

"Dutch auctions are usually employed when a company is doing well, not when it's in decline," Mr. O'Connor said. "It may appease the hedge funds, but it doesn't answer any of the strategic questions facing the company."

Several hedge funds have built up large stakes in QLT in hopes that the company gets sold and do not plan to tender to the Dutch auction, according to financial sources.

New QLT CEO Robert Butchofsky has set a course to keep the drug company independent as a research and development specialist in the eye-care field.

He has put together two deals to acquire licences for early stage ophthalmology products this year. Mr. Butchofsky certainly has the money to wheel and deal. At June 30, QLT's cash and short-term investments stood at $450-million.

QLT faces the spectre of increased competition for its flagship eye drug Visudyne. Sales of the drug have been hit hard in the past year by ophthalmologists using cancer drug Avastin and new eye care drug Lucentis ahead of Visudyne, which has all but controlled the market to treat macular degeneration, the leading cause of blindness in seniors, since 2000.

Raymond James analyst Brian Bapty said there is strong support on the Street for QLT to merge with a strong biotech company and "become a growth story again instead of being a broken specialty pharma company."

The analyst said the planned Dutch auction has helped lift the price of QLT shares, which closed down 8 cents at $7.59 yesterday on Nasdaq Stock Market.

The share buyback will play out at a price not less than $7 and not greater than $8, and expires on Sept. 8.

If the tender is fully subscribed, 13 million common shares will be repurchased, or about 15 per cent of the 88.2 million shares outstanding when the offer was announced at the end of July.