In a transaction valued at $855 million, QLT Inc. and Atrix Laboratories Inc. are merging into a single entity with two marketed products and a multitude of pipeline possibilities.

With Visudyne as its one approved product, QLT, of Vancouver, British Columbia, needed to expand its pipeline to build its business. Fort Collins, Colo.-based Atrix had been looking for ways to carry forward its pipeline without losing the profitability it achieved last year with the Eligard launch.

For both, the solution was a combined company that should have $300 million in cash upon closing of QLT's takeover, which is expected in the second half of this year following stockholder approvals and government clearance.

The transaction is structured as a tax-free reorganization in the form of stock and cash, with Atrix shareholders receiving one common QLT share plus $14.61 in cash for each Atrix share held. In total, QLT will issue about 24 million shares.

"This was just an incredible opportunity for us," said Paul Hastings, president and CEO of QLT, in a conference call Monday.

While the offer value is $855 million, the transaction value net of Atrix's cash is $751 million. Upon closing, Atrix shareholders will own 23 percent of the combined entity, with QLT shareholders owning the rest.

The companies both focus in the ocular, oncology, urology and dermatology areas. While both said the merger would accelerate strategic initiatives, in turn enhancing shareholder value, investment analysts told BioWorld Today on Monday that QLT might have a bargain in Atrix, considering Atrix will bring $100 million in cash to the table. One analyst said Atrix should have been able to command a significant premium.

Atrix's stock (NASDAQ:ATRX) shot up $3.37 Monday, or 12 percent, to close at $31.39. In contrast, QLT's stock (NASDAQ:QLTI) dropped 16.5 percent, or $3.47, to close at $17.55.

Although he said the merger was "a good thing for Atrix shareholders," David Bethune, CEO of Atrix, said the company had to make a choice. Faced with moving back to unprofitability while exploiting its pipeline or merging with QLT to push pipeline products forward and maintaining profitability, the decision was obvious, Bethune said.

The clear opportunity was that Atrix would gain "the financial and human resources needed to accelerate our business with QLT," he said in the conference call.

The combined company expects annual revenue growth of 15 percent to 20 percent. It will be accretive to QLT in 2006, not including the amortization of acquired intangibles. The company is targeting a long-term cash earnings-per-share compound annual growth rate of 20 percent to 25 percent.

Together, the companies will have two marketed products: QLT's Visudyne for age-related macular degeneration and Atrix's Eligard for prostate cancer. Another two products could reach the market by 2005: an improved 6-month, sustained-release formulation of Eligard and the topical acne product Atrisone.

As one entity, the companies will leverage Atrix's Atrigel sustained-release technology to develop next-generation protein and peptide therapeutics for systemic and ocular delivery. Over time, the entity will develop a commercial organization to market its products. Atrigel (octreotide depot) likely would be the first product it would market on its own, Hastings said, adding that the company needs to have sustained profitability before it attempts to establish a commercial infrastructure.

"Are we going to build a sales force? Absolutely," he said. "Are we going to do it today or tomorrow? You've got to walk before you run."

QLT's board will be expanded from eight to 10 members, with Atrix choosing the additional two members. One member, Bethune, will serve as nonexecutive vice chairman for at least three months following the closing. QLT plans to retain much of Atrix's senior management team and will keep the Fort Collins, Colo., operations, which will house the cGMP manufacturing facility, the dermatology business and certain development programs under way by Atrix. Atrix's vice president and general manager, Michael Duncan, will become vice president and general manager of QLT's Fort Collins facility.

Visudyne, cleared in 2000, is the only drug approved to treat wet age-related macular degeneration. Partnered with Novartis Opthalmics, a unit of Basel, Switzerland-based Novartis AG, 2004 sales are expected to reach between $430 million and $455 million. While Visudyne sales have increased steadily since its launch, the growth has been slower than some anticipated. Analysts originally forecast sales of $458 million in 2002 and $627 million in 2003, but actual sales were $287 million and $357 million, respectively. Hastings said the product had nothing to do with QLT's decision to acquire Atrix.

"We're not worried that the growth of Visudyne is what is creating a need to do a transaction like this," he said. "We believe that you can never have a pipeline that's full enough."

Eligard, an extended-release injectable depot to treat prostate cancer, is available in one-, three- and four-month formulations that were approved and launched last year. Partnered with Sanofi-Synthelabo Inc., a division of Paris-based Sanofi-Synthelabo, Atrix believes it could have a significant lead over competitor Lupron (Takeda Abbott Pharmaceuticals Products Inc.), which has annual worldwide sales of about $1.6 billion. The drug is partnered in Europe with Yamanouchi Pharmaceutical Co. Ltd., of Tokyo, and Medigene AG, of Martinsried, Germany. It also has separate partnerships in Australia, New Zealand, South America and Mexico. For the first quarter of 2004, Eligard had sales of $15 million.

The combined product pipeline will include Eligard in its six-month formulation, for which the company filed a new drug application in February, and Atrisone, a topical gel for acne, which completed Phase III trials and will soon be the subject of an NDA filing. The product is partnered in North America with Fujisawa Healthcare Inc., of Deerfield, Ill.

"One of this new company's goals will be to accelerate the dermatology business, including introducing Atrisone," Hastings said.

Further back in the clinical pipeline are Atrigel (octreotide depot), which is in Phase I for carcinoid tumors, acromegaly and diabetic retinopathy; QLT0074 (lemuteporphin), which is in an ongoing Phase I/II trial for benign prostatic hyperplasia, a Phase II trial for androgenetic alpecia, and a Phase I trial to begin this year in acne; and Atrigel-GHRP-1, which is in Phase I for growth promotion and muscle wasting.

At the preclinical stage, the new company will have Atrigel (PYY 3-36) for obesity; a psoriatic topical product; MICRaS for locally advanced solid tumors; Atrigel-risperidone for schizophrenia; ILK inhibitors for cancer, inflammation, kidney and eye diseases; and various Atrigel formulations for ophthalmics.

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