QLT Inc (QLTI) reported positive retreatment data on Thursday for its synthetic oral retinoid compound QLT091001 (-001), indicated for the orphan designated Leber Congenital Amaurosis (LCA) and Retinitis Pigmentosa (RP, with RPE65 and LRAT mutation). PropThink originally outlined our buy thesis on QLT back in November, and shares have returned 25% since. With continued momentum from study results and a wealth of 2014 catalysts, we believe shares still have room to run through the remainder of 2014. QLTI is under the radar, but a shareholder-centric board, with the presence of a notable activist group, and the opportunity for a “strategic” exit should keep value-focused investors involved. On Friday, QLTI released its FY13 results, indicating cash/equivalents of $119 million. The company did not update investors on progress with its strategic review, but the forthcoming 10Q filing may include an update.
We are encouraged by preliminary results of QLTs Phase 1b LCA/RP extension study that showed an ongoing, clinically meaningful improvement in visual fields (VF) and visual acuity (VA) for patients dosed with -001 during a previous 7-day treatment course. Patients were administered a daily oral dose of -001 for 7 days (one course), and the extension study evaluated the safety of -001 and whether three additional courses improved visual function over a six-month period. 70% of subjects demonstrated an increase in VF retinal area from baseline of >20% in at least 1 eye. Further, 70% of subjects had an increase in VA from baseline of >5 letters in at least 1 eye at two consecutive visits during treatment. The safety profile of -001 during the extension study mirrored results from previous trials, with all AEs (mostly headaches) being transient in nature and/or reversible through each treatment course. Patient follow-up is ongoing with final clinical data, including duration of response, anticipated to be a 3Q14 event.
The 3Q14 release of final extension trial data is just one of a few upcoming value-driving events for QLT. Notably, the following 3 catalysts will draw investor attention throughout 2014:
1) -001 is being studied in a Phase 2a proof of concept trial indicated for impaired dark adaption (IDA). PropThink originally discussed IDA here. This randomized placebo controlled study is a 7-week trial (n=40) and top-line data will likely come available by mid-2014 after having kicked off in early December with the first patient dosing
2) QLT has commented that it will be providing the FDA and EMA with final LCA/RP pivotal trial guidance by the end of 1Q14 and it will be trial ready by mid-2014. We view progression of -001 through the clinic as a meaningful catalyst since QLTs operations have been restructured around this asset. QLT has met with both the FDA and EMA to discuss trial design and signs point to continued advancement for orphan LCA/RP indications.
3) All has been quiet on the news front after the company announced in a November press release that it hired Credit Suisse to review strategic alternatives. Partner/investor interest should be elevated on the back of positive phase 1b extension trial data and progression of -001 through the clinic. We note the speculative nature of this catalyst but view it as a more likely outcome given that QLT’s multi-year turnaround is gaining traction.
The turnaround, and shareholder friendly stance throughout 2013, are largely a result of activist efforts from Mark Lampert’s Biotechnology Value Fund (BVF), which now owns 4.6% of outstanding shares (per 4Q13 13F filing). Mr. Lampert has a history of buying undervalued companies and restructuring them through divestitures, as was the case for QLT when selling its Visudyne and Eligard assets. Leadership and board positions are being restructured as well, with its Senior VP of Business Development having recently been terminated. BVF has a reputable track record with historical investments in Avigen Inc., Ligand Pharmaceuticals, Exelixis Inc., Isis Pharmaceuticals Inc., Nektar Therapeutics, Neurocrine Biosciences and Array Biopharma to name a few. Many of these holdings have generated 100%+ returns.
We have one qualm with QLT as it stands: Axial Capital has an 8.9 million share position (presumably long) in QLT. Axial began winding down operations late in 2013 and has been spinning out most of its holdings. QLTI is, in fact, the funds only position. So what does Axial do with 8.9M shares of QLT, a stock that trades less than 100K shares per day? We suspect that given the profile of the parties involved and the size of the position, Axial, QLT, and other shareholders will step in to aid Axial’s exit in an orderly fashion. Selling nearly 9 million shares into the open market would put tremendous pressure on the stock, not in the best interest of Axial investors given the size of this position. We’re optimistic that Axial and existing/potential institutional shareholders, with the company, can orchestrate a non-disruptive exit in some form. We’ll be anxious to see how this plays out this year, particularly given QLTI’s review of strategic alternatives.
In connection with QLTI, PropThink has taken a long position.
