Qlt Inc., an establish-ed Vancouver-based bio-pharmaceutical company, is entering a key phase in its history — and some analysts are waving a cautionary flag.

The claim to fame of the 26-year-old company, which specializes in treatments for eye diseases, as well as dermatological and urological conditions, is a product called Visudyne. When it was launched in 2000, it was the first therapeutic treatment approved worldwide for certain types of age-related macular degeneration. This affliction, known as AMD, is the leading cause of blindness in people over age 55.

QLT’s other main product is Eligard, approved in North America and a number of European countries, along with Australia, New Zealand and some Latin American countries as a palliative treatment for advanced prostate cancer.

But, despite its product successes, there are still many challenges for this Toronto Stock Exchange– and Nasdaq-listed company.

As QLT announced in mid-January, Visudyne sales have been declining. Global sales for Visudyne for the year ended Dec. 31, 2006, were US$353.8 million, down 26.9% from 2005. In the fourth quarter alone, Visu-dyne’s sales of US$76.5 million were down 28.7% over the same period the previous year.

“We see a pronounced decline in Visudyne sales to the U.S. and anticipate similar decline in Europe,” says Brian Bapty, a biotechnology analyst at Raymond James Ltd. in Vancouver.

Bapty stated in a January research report on QLT that Visudyne is being used in combination with other drugs to treat AMD, meaning less dosage per patient. Specifically, there is some recently solid evidence that Visudyne, when used in combination with other drugs such as Lucentis or Avastin, has a better outcome for the patient.

“Our central thesis is combination therapy will become more prevalent as the benefits of this therapy further emerge,” Bapty’s research paper stated. “Overall, we are forecasting lower retreatment rates than were historically seen in Visudyne monotherapy.”

When asked for a reaction to Bapty’s report, QLT spokesperson Bal Bains says it is company policy not to comment directly on analysts’ reports.

“However, we continue to believe Visudyne will remain an important part of the treatment regimen for AMD and that combo-therapy with Visudyne is the future of AMD treatments,” she says.

Bapty is maintaining his “market perform 3” rating on QLT shares, which means he expects they will perform generally in line with the S&P/TSX composite index over the next 12 months. Bapty has a six- to 12-month target price of US$7.50 on the stock.

That is a significant decline from the level at which the stock was recently trading on Nasdaq — its 52-week high of almost US$10 a share. On the TSX, the stock was also at its 52-week high, in the $11 range.

Bapty’s report was also concerned about QLT’s business development options: “Our major concern remains the company’s ability to execute on growing its pipeline through acquisition, especially considering the competitive landscape and resulting premium valuations that are being seen in the biotech landscape.

“We note that 2007 will be a critical year for the longevity of the Visudyne franchise, with our focus largely on that outcome,” the report continued. “We are maintaining our ‘market perform’ rating as this unfolds.”

On the other hand, Eligard sales are growing, according to Bapty’s report. He has forecast a 33% year-over-year increase in Eligard sales to US$159.9 million, encouraged by Germany’s approval of the drug on Dec. 1, 2006.

“QLT is in a bit of a box right now. We’re waiting to see which way the pendulum swings,” the report continued.

There was also good news for QLT in February, when the company announced it had reached an out-of-court settlement in a long-standing patent dispute over Eligard in the U.S.

Under the settlement’s terms, QLT’s U.S. subsidiary, QLT USA Inc., will pay US$112.5 million to TAP Pharmaceutical Products Inc. and a group of co-plaintiffs, while another company, Sanofi-Synthelabo, will pay the plaintiffs US$45 million.

In an action launched in 2003, the plaintiffs had sued Atrix Laboratories Inc. — which QLT purchased in November 2004 — alleging the treatment for advanced prostate cancer infringed the patent they held.

Bains notes QLT could offer little comment, but she did say: “Now that QLT USA has resolved the litigation, we can focus on our business, building our ocular pipeline and divesting non-core assets.”

With the settlement, QLT will record a US$112.5-million charge in its consolidated 2006 results.

@page_break@“This is a positive development,” says Karen Boodram, a biotechnology analyst with Pacific International Securities Inc. in Vancouver. “We knew there would be a settlement of some sort, and now we know how much it costs.”

Boodram says QLT has enough cash for the settlement and to move forward. She estimates there is a net cash balance of slightly less than US$100 million. “It’s still a revenue- and profit-generating company, so, it’s OK for now,” she says.

Boodram also has revised her outlook, increasing her 12-month target price to US$8.40 from US$7 while maintaining a “neutral” rating on the stock, whose risk she classifies as “above average.”

“Based on our revised thesis, which assumes a slow and steady increase in the use of combination therapy with Visudyne to treat AMD, we have revised our global Visudyne estimates to US$280 million in 2007 from US$270 million, and to US$290 million in 2008 from US$256 million,” she stated in a Feb. 12 research report. “This is predicated on sales growth in the U.S. offset by sales erosion in the European Union in 2007, with a somewhat slowed erosion in EU sales in 2008, giving rise to overall growth in 2008.”

Boodram’s revised valuation is based on earnings per share of 42¢ in 2008 and a P/E ratio of 20.

Meanwhile, QLT has other products under development and owns two unique drug-delivery technologies.

The first DDT, photodynamic therapy, is used to treat a range of diseases associated with rapidly growing tissue, including the formation of abnormal blood vessels associated with AMD and other eye diseases. When a light-activated drug, such as Visudyne, is injected in the patient, it’s activated by a specific dose of light at a certain wavelength and then destroys the abnormal blood vessels.

The other DDT is Atrigel. This patented technology was developed by QLT USA for the sustained release of drugs over periods ranging from days to months. It’s used to administer Eligard, but is also appropriate to deliver some other drugs that are either already approved or in clinical trials. IE