Canadian Acquisitions: QLT Inc. Fits the Trend

It seems QLT Inc. may be on the block after a press release on Wednesday evening indicated the company has engaged Credit Suisse as a financial advisor and is evaluating “strategic alternatives.” An acquisition of this Canadian company would fit the recent trend of tax-incentivized buyouts of Canadian life science companies.

On Wednesday, PropThink took note of the price action in QLT Inc. (QLTI) as the stock broke through a major resistance level and into a previous void (read the article) on abnormal volume and no apparent news. The activity piqued our interest because investors have been waiting for the company to outline its plans for moving forward with the orphan drug QLT091001. We took a long position on the technical signals.

Just after the close, QLT announced a clinical and regulatory update related to the retinoid program (QLT091001), as well as a review of strategic alternatives with Credit Suisse acting as financial advisor. Given the high-volume day, its apparent that the stock was giving off a signal.

Regardless, the company has a track record of creating shareholder value through dividends (cash distributions), divestitures, and buybacks, and the initiation of a strategic review suggests that there may have already been M&A overtures. As we mentioned on Wednesday, QLTI fits the trend of recent life science acquisitions designed to take advantage of Canadian tax rates – see Endo Health’s (ENDP) purchase of Paladin Labs for an example.  Whether the company sells itself, continues as a standalone entity, or even spins out a subsidiary to continue work on the 091001 asset before an acquisition, is up in the air, we’re optimistic that this management team will continue to create shareholder value one way or another. QLT returned $200 million to shareholders through a special cash distribution in June (a move that came after a planned share repurchase program for up to 3.44M common shares); sold Visudyne for $133 million to Valeant Pharmaceuticals (VRX); sold off QLT’s punctal plug drug delivery system; and cut expenses significantly in a 2012 restructuring. QLT’s January letter to shareholders is worth reading to understand where this relatively new board is taking the company.

While the market on Thursday is taking a somewhat neutral stance on the strategic news, we think QLTI is worth holding in recognition of this board’s commitment to increasing shareholder value. Given the benefits of Canadian domicile, and a glance at similar acquisitions, QLTI could be picked up by a strategic at a handy premium: ENDP bought Paladin Labs at a 20% increase over the market price. Moreover, QLTI is developing QLT091001 in two orphan settings – Leber Congenital Amaurosis (LCA) and Retinitis Pigmentosa (RP) – and is initiating a phase 2a trial in a third indication, Impaired Dark Adaptation (IDA). The company expects QLT091001 to be proof-of-concept-ready in LCA and RP in the first half of 2014. QLT Inc. is also beginning a compassionate use program for 091001 and will have data from an ongoing retreatment study of the drug in LCA and RP in the first quarter of 2014. Ultimately, we think there are several ways to win here, and it’s comforting to know that leadership has demonstrated an ability to execute.

In connection with QLTI, PropThink has taken a long position.