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In the months leading up to QLT Inc.'s big drug approval in 2000, a debate was raging in its Vancouver offices about how to spend the revenue windfall from its new highly successful Visudyne anti-blindness drug. The big question was whether it should stick with the eye care market and expand, or to take the technology and develop new applications outside of eye care.

The first camp was pushing hard on a strategic plan to expand by buying up existing businesses in eye care. "The strategy was not just to hope you could do another Visudyne but to create a real business," one former QLT employee recalls. "Ophthalmology products, manufacturing, and sales and marketing businesses were undervalued back then." It was a compelling argument but it failed to win over the board.

The second camp was led by QLT co-founder and chief executive officer Julia Levy, who was reluctant to turn QLT into an integrated eye care business. "She's the scientist who developed Visudyne as a photodynamic therapy and she thought it was going to create a lot of opportunities in the oncology space," said another source familiar with QLT's first photodynamic drug, Photofrin, used to treat esophageal cancer.

Indeed, Visudyne was something of a pet project for Ms. Levy, whose mother was suffering from age-related macular degeneration (AMD), the leading cause of blindness in seniors. Through a spokeswoman, Ms. Levy, who remains a director, said the strategy was to "acquire, through in-licensing or acquisitions, new technologies that would enhance the QLT pipeline beyond our in-house competencies."

But things haven't worked out. In fact, just about everything that could go wrong has gone wrong in the past five years.

QLT now finds itself reeling from a series of drug-testing disappointments, a court ruling of patent infringement, executive defections, a disastrous acquisition in 2004 and new competition eroding Visudyne's market share. Not surprisingly, its stock price has cratered from $119 in 2000 to a recent low of $6.81 on the Toronto Stock Exchange.

The depressed stock price has even led to rumblings that a group of investors is attempting to put together financing for a leveraged buyout of the Vancouver-based company. The QLT spokeswoman said the company is aware of the market rumours but does not comment on them.

QLT's fall from grace is a classic story of a one-product company that waited too long to find a second revenue stream.

Visudyne in 2000 was hailed as a saviour for people suffering from so-called wet AMD, when it was launched by marketing partner Novartis AG, the Swiss drug giant. So great was the demand that even before Visudyne received regulatory clearance, QLT was bombarded by requests from wealthy Americans seeking treatments for family members. Up until then, retinal specialists tried to slow the disease's progress with a regime of vitamins, often with little success. Left untreated, AMD can bring on blindness in anywhere from two months to three years.

Photodynamic therapies involve injecting a drug into a patient's arm and then activating it with a cold-light laser. Visudyne is designed to seal leaky blood vessels at the back of the eye, which create scar tissue and destroy central vision. Worldwide, some 500,000 new cases of wet AMD occur each year, with the incidence expected to grow as the population ages.

Within months of Visudyne's launch, the internal battle for QLT's future took a dramatic turn. Chief financial officer Kenneth Galbraith, a 12-year veteran, stepped down suddenly. Long considered the heir apparent to replace Ms. Levy in the executive suite, Mr. Galbraith's departure in the fall of 2000 left a gaping hole in QLT's succession planning and shook investor confidence.

Ms. Levy then asked the board to begin an executive search to find her replacement.

Meanwhile, she continued the hunt for new drugs.

During 2001, QLT struck three collaborations to develop early-to-mid-term drugs for the treatment of eye, immune system and kidney disorders with Kinetek Pharmaceuticals Inc. of Vancouver; non-melanoma skin cancer with Novartis; and drug resistance in cancer with Xenova Group PLC of London.

After a year-long search, the company tapped American biotech executive Paul Hastings to replace 67-year-old Ms. Levy, giving her a continuing scientific advisory role at the company and board seat.

At the time, she said her only regret in six years at the helm of QLT was not wheeling and dealing when the company's stock price was at a premium.

"We did make several attempts, but we were novices at it and somewhat overcautious. But I'm not going to apologize for the length of time we've taken to move on building our pipeline. This is a high-risk business, and there are no rewards for making mistakes," Ms. Levy said.

Mr. Hastings set as his ambitious goal building a drug giant with $10-billion (U.S.) in annual revenue and a commercial infrastructure, not only to develop the next blockbuster drug internally but also to launch it with the company's own sales force, keeping all the profits in-house. Under an existing accord with Novartis, QLT gets about 30 per cent of Visudyne's sales, which reached $484-million in 2005.

But his grandiose plans ran aground in 2003 when cancer drug Tariquidar encountered toxicity problems during late-stage clinical testing and was dropped. Moreover, none of Kinetek's early stage products have advanced to human testing. And Visudyne failed in clinical testing with another segment of AMD patients.

"QLT's development pipeline continues to suffer from a combination of failures, lack of progress, and uninspiring content," Raymond James analyst Brian Bapty said after the recent failure of another QLT cancer drug, Lemuteporfin.

Under pressure to diversify, the company paid $870-million in stock and cash in 2004 to acquire U.S. drug developer Atrix Laboratories Inc., a deal that was roundly criticized at the time as too expensive, prompting further pressure on QLT's stock price. Operationally, Atrix has been a colossal disappointment. Sales of flagship prostate cancer drug Eligard have fallen well short of expectations and the launch of acne drug Aczone has been delayed by a regulatory setback and additional testing.

Moreover, a U.S. court in Illinois recently denied QLT's last line of defence to overturn a patent infringement ruling against Eligard, putting QLT at risk of major damages. Sanofi-Aventis SA, which sells Eligard, has taken it off the market until May when the disputed patent expires.

The aftershocks led to the departures last year of Mr. Hastings, citing "differences with the board regarding the vision of the company," and his handpicked chief business officer Bill Newall. Chief financial officer Michael Doty also stepped down as did chief medical officer Dr. Mohammad Azab.

Last month, QLT took a $410.5-million charge against the Atrix acquisition.

But all that pales in comparison with Visudyne's outlook in 2007 when Genentech Inc.'s Lucentis drug is expected to become the standard of care in treating AMD. Lucentis is a fancy version of Genentech's Avastin drug, which is a leading treatment for colorectal cancer and being shown effective for breast and lung cancer.

In clinical testing last year, Lucentis outperformed Visudyne in a head-to-head competition, prompting as many as two-thirds of all U.S. retinal specialists to try Avastin with their AMD patients, according to a new QLT survey. Moreover, about 20 per cent of new AMD patients are now on a treatment regime that includes Avastin.

Newly installed CEO Robert Butchofsky has admitted that the growth in the use of Avastin has surprised QLT. Based on current trends, it is now forecasting Visudyne sales will range from $370-million to $400-million in 2006, a possible 24-per-cent year-over-year decline, and higher than several analysts' forecasts.

So what's QLT supposed to do?

"Both the board and management are clearly aware of the challenges facing the company and we know that we need to take real action to turn the business around," Mr. Butchofsky told investors on a conference call last month.

For one thing, QLT has cash: $466-million at the end of 2005. Raymond James's Mr. Bapty contends that as company's assets continue to focus on cash, Visudyne and Eligard, and not on the pipeline, the "impetus for an outright sale or merger transaction increases." He suggests that a prime merger candidate would be a late-stage biotech company that needs cash to get its drug candidates across the finish line.

Analysts also say QLT's best chance at retaining a share of the AMD market is to demonstrate better patient outcomes, with fewer procedures, using Lucentis in combination with Visudyne. Ironically, Novartis will sell Lucentis in addition to Visudyne.

To counter disappointments at Atrix, QLT is hunkering down.

Mr. Butchofsky's streamlining prescription includes chopping QLT's work force by up to 46 per cent to 310 people; selling Atrix's non-core assets, including its generic dermatology business and manufacturing facilities in Fort Collins, Colo.; cutting expenses for R&D and general overhead by 20 per cent; and narrowing the company's focus to ophthalmology and one other therapeutic area, still to be selected.

And to create a floor for its stock price, the company has doubled the size of its share buyback program to $100-million.

Like its original photodynamic technology that sparked a breakthrough drug, QLT has high hopes for Atrix's drug delivery system, known as Atrigel, a biodegradable gel that releases medicine in the bloodstream over a period of weeks or months.

"We think the full value of the [Atrix]transaction has not yet been fully realized and we see tremendous potential in the Atrigel platform," the QLT spokeswoman said, noting that Eligard is an example of the technology.

In many ways, the company now finds itself at the same fork in the road it faced six years ago when deciding how to deploy its original cash flow.

Drug development is a risky business, but this time around Mr. Butchofsky has the luxury of a big bankroll as he struggles to reinvent the company on a new growth plan. While he acknowledges the difficulties in repeating QLT's original success with Visudyne, he wants to avoid the mistakes of the past.

"For QLT to be saved, it will need vision and thinking that's outside the box," Mr. Bapty said. "And shareholders are going to have to buy into the story."

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