Eligard Sale very positiveThis is a very good deal for QLT shareholders , as it provides us with cash upfront while assuring steady cash flows over the next 14 years , most likley much earlier because they will reach the royalty accrual of $200 million USD before then.
In essence, QLT is having its cake and eating it too.
Lets break the deal down into its components. Note that this is in USD and that all funds to QLT, from the Eligard sale are net after tax..ie net earnings.
First ,.........................Under the Stock Purchase Agreement, QLT received US$20 million on closing and will receive US$10 million on or before October 1, 2010.
As of the most recent quarter, QLT had cash and liquid investments of about $190 million USD ,which will immediately increase to $210 million USD and to $220 million before Oct 1/2010 ( QLT is cash flow positive ).
Thats $240 million , when converted to C$ or about $4.40 per share.
Secondly,.................... up to an additional US$200 million payable on a quarterly basis in amounts equal to 80% of the royalties paid under the license agreements with each of Sanofi-Synthelabo Inc. and MediGene Aktiengesellschaft for the commercial marketing of Eligard in Canada, the United States and Europe (beginning with the royalties payable for Eligard sales that occurred in the quarter ended September 30, 2009) until the earlier of QLT receiving the additional US$200 million or the expiry of the Stock Purchase Agreement on October 1, 2024.
Given the sales life cycle of drugs , these royalty payments will be earned before Oct 1 2024.
In the most recent quarter, Eligard royalties was about $6 million USD or about $24 million USD per year.
We know that this will increase because sales of Eligard are forecasted to increase ( see last financial report ).
Based on a straight arithmetic average, the average annual royalty payment will be about $14 million USD per year ( $200 million /14 years )..
However, this will be much higher in the earlier part of the sales cycle ( it would be about $19 million USD per year at Q2/09 rates.
In other words , for the next 4-5 years, QLT will receive about $21 million in C$ per year , after tax for its royalty agreement.
That is, an addition of about $0.38/share to annual net earnings.
Thats why we can eat our cake and have it too.
Thirdly....., under the terms of the Stock Purchase Agreement, TOLMAR will pay QLT an additional amount for the shares of QLT USA equal to the balance of cash that QLT USA had on-hand at closing, substantially all of which had been reflected in QLT's consolidated balance sheet at June 30, 2009. The net after-tax proceeds of this transaction are expected to be approximately US$230 million.
That is, we get to keep all of our large cash hoard.
So, a very good deal that should increase our fair value to about $7.25 per share, based purely on our cash position, and future net earnings from this Eligard royalty agreement.
In the meantime , we will still have about $45 million sales from our Visudyne sales and we have 2-3 new drugs in the advanced stages of the clinical trials.
Let say $10 altogether, altho this will be conservative, given the impact of the new drugs coming onstream.