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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-17082
QLT INC.
(Exact Name of Registrant as Specified in its Charter)
BRITISH COLUMBIA, CANADA N/A
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
887 GREAT NORTHERN WAY, VANCOUVER, B.C., CANADA V5T 4T5
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (604) 707-7000
Securities registered pursuant to Section
12(b) of the Act:
NONE
Securities registered pursuant to Section
12(g) of the Act:
COMMON SHARES, WITHOUT PAR VALUE
COMMON SHARE PURCHASE RIGHTS
(Title of class)
--------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
As of June 28, 2002, the aggregate market value of the common shares held
by non-affiliates of the registrant (based on the last reported sale price of
the common shares of U.S.$ 13.35, as reported on The Nasdaq Stock Market) was
approximately U.S.$ 903,914,216.
As of February 28, 2003, the registrant had 68,560,793 outstanding common
shares.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for use in connection with the
annual meeting of shareholders to be held on May 22, 2003, including information
as to directors' and officers' remuneration, principal holders of the
registrant's common shares, options to purchase common shares and interests of
management and others in material transactions, which proxy statement will be
filed with the Securities and Exchange Commission within 120 days after December
31, 2002, are incorporated by reference into Part III of this Report. A copy of
the proxy statement may be obtained upon written request to the Corporate
Secretary, QLT Inc., 887 Great Northern Way, Vancouver, British Columbia, Canada
V5T 4T5.
CURRENCY AND ACCOUNTING STANDARD
In this Annual Report on Form 10-K all dollar amounts are in U.S. dollars,
except where otherwise stated, and financial reporting is made in accordance
with U.S. generally accepted accounting principles ("U.S. GAAP"). Effective
December 31, 2002, the Company adopted U.S. GAAP as its primary basis of
disclosure on Form 10-K. In addition, on December 31, 2002, the Company adopted
the U.S. dollar as its reporting currency. In the past the Company reported in
Canadian dollars and in accordance with Canadian generally accepted accounting
principles ("Canadian GAAP").
The Company continues to maintain the Canadian dollar as its functional
currency.
The Company has also prepared consolidated financial statements in accordance
with Canadian GAAP, which are available on the Company's website at:
www.qltinc.com.
EXCHANGE RATE
The table below shows relevant exchange rates which approximate the noon
buying rates in New York City as reported by the Federal Reserve Bank of New
York for cable transfers expressed in Canadian dollars for the five most recent
fiscal years of the Company.
FISCAL YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
High..................... $ 1.5770 $ 1.5302 $ 1.5600 $ 1.6023 $ 1.6128
Low...................... 1.4075 1.4440 1.4350 1.4933 1.5108
Average.................. 1.4836 1.4858 1.4855 1.5487 1.5704
Period End............... 1.5375 1.4440 1.4995 1.5925 1.5800
NOTICE REGARDING WEBSITE ACCESS TO COMPANY REPORTS
The Company makes available on its website its Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and amendments
thereto, as soon as reasonably practicable after such material is electronically
filed with the United States Securities and Exchange Commission. QLT's website
address is: www.qltinc.com.
QLT INC.
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2002
TABLE OF CONTENTS
Item 1. BUSINESS.................................................................................................. 1
Item 2. PROPERTIES................................................................................................28
Item 3. LEGAL PROCEEDINGS.........................................................................................28
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................................30
Item 5. MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS.................................31
Item 6. SELECTED FINANCIAL DATA...................................................................................38
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................39
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................53
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............................................................54
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE......................77
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................................78
Item 11. EXECUTIVE COMPENSATION....................................................................................78
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................78
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................79
Item 14. CONTROLS AND PROCEDURES...................................................................................79
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...........................................80
QLT INC.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements of QLT Inc.
("QLT") within the meaning of the Private Securities Litigation Reform Act of
1995, which involve known and unknown risks, uncertainties and other factors
which may cause our actual results to differ materially from any future results,
performance or achievements expressed or implied by such statements.
Forward-looking statements include, but are not limited to, those with respect
to: anticipated levels of sales of Visudyne(R), including patient and physician
demand for Visudyne therapy, anticipated future operating results, anticipated
timing for and receipt of further reimbursement approvals for Visudyne therapy
and QLT's other products, the anticipated outcome of pending patent and
securities litigation against QLT, the anticipated timing and progress of
clinical trials, the anticipated timing of regulatory submissions for expanded
uses for Visudyne and for QLT's other products, including tariquidar, and the
anticipated timing and receipt of regulatory approvals for expanded uses for
Visudyne and for QLT's other products, including tariquidar. These statements
are predictions only and actual events or our actual results may differ
materially. Factors that could cause such actual events or our actual results to
differ materially from any future results expressed or implied by such
forward-looking statements include, but are not limited to, the ability and
efforts of QLT's alliance partner, Novartis Ophthalmics AG, to commercialize and
market Visudyne, the outcome of pending patent and securities litigation against
QLT, QLT's ability to maintain and expand its intellectual property position,
the timing and success of planned or existing clinical trials for Visudyne and
for QLT's other products, including tariquidar; the outcome of QLT's
applications for regulatory approvals for expanded uses for Visudyne and for
QLT's other products, including tariquidar, the successful development or
acquisition of complementary or supplementary products or product candidates,
technologies or businesses, as well as the risk factors described below under
the headings "Business -- Risk Factors", "Legal Proceedings", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the "Notes to the Consolidated Financial Statements".
PART I
ITEM 1. BUSINESS
OVERVIEW
QLT is a bio-pharmaceutical company engaged in the development and
commercialization of innovative products in ophthalmology and oncology and in
other fields where the product can be marketed by a focussed specialty sales and
marketing team. QLT was incorporated in 1981 under the laws of the Province of
British Columbia. QLT is a pioneer in the field of photodynamic therapy, a field
of medicine that uses photosensitizers (light-activated drugs) in the treatment
of disease. QLT is also actively developing pharmaceutical products that do not
employ photodynamic therapy.
Visudyne(R), QLT's commercial product, is a photosensitizer used to treat
choroidal neovascularization ("CNV") in patients with the wet form of
age-related macular degeneration ("AMD"), the leading cause of severe vision
loss in people over the age of 50 in North America and Europe, as well as other
ocular conditions. Visudyne has been approved in over 65 countries, including
the United States, Canada and those of the European Union, for the treatment of
predominantly classic subfoveal CNV in AMD. In addition, Visudyne has been
approved in over 50 countries for extended indications, including occult CNV in
the European Union, Australia and New Zealand, CNV due to pathologic myopia
("PM") in the United States and the European Union and CNV due to presumed
ocular histoplasmosis syndrome ("OHS") in the United States.
QLT is currently conducting clinical trials of tariquidar, a new compound
which QLT in-licensed in 2001. One of the major barriers to successful cancer
treatment is the development of resistance by cancer cells to several drugs used
in chemotherapy, which is known as multi-drug resistance, or MDR. The current
clinical trials are determining the potential of tariquidar, which targets the
most common form of MDR, to increase the efficacy of chemotherapy treatment.
Phase III studies began in 2002 to assess tariquidar in the treatment of
non-small cell lung cancer, the most common form of lung cancer. A Phase II
study of tariquidar in the treatment of refractory breast cancer is also
ongoing. (See -"Non-PDT Products- Tariquidar").
QLT is evaluating its proprietary photosensitizer Visudyne (referred to as
verteporfin in respect of indications other than ophthalmic) for the treatment
of multiple basal cell carcinoma (a form of non-melanoma skin cancer), and the
proprietary photosensitizer QLT0074 in the treatment of benign prostatic
hyperplasia ("BPH"), the most common prostatic disease, and androgenetic
alopecia (male pattern baldness).
In addition to developing its proprietary PDT products in new indications,
and developing tariquidar, QLT is researching and developing other products by
itself and in collaboration with other companies for the treatment of cancer,
immune disorders and other conditions. The Company continues to seek growth
opportunities to build its product pipeline by developing new indications for
Visudyne, progressing with both early and late stage programs, and examining
potential strategic acquisitions of products, product candidates, technologies
or other businesses.
References in this Form 10-K to "QLT" and the "Company" include QLT Inc.
and/or one or more of its subsidiaries, unless the context indicates otherwise.
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PRODUCTS APPROVED OR IN DEVELOPMENT (1)
PRODUCT/INDICATION LOCATION(S) REGULATORY STATUS
------------------ ----------- -----------------
VISUDYNE(R)
Predominantly classic subfoveal Over 65 countries including the United Approved
choroidal neovascularization ("CNV") States, Canada, and those of the European
in age-related macular degeneration Union (2)
("AMD") ...........................
Subfoveal CNV in AMD............. Japan Application for Marketing
Authorization submitted
Occult with no classic subfoveal CNV Over 30 countries including Australia, New Approved
in AMD............................. Zealand, and those of the European Union
Canada and Switzerland Application for Marketing
Authorization
submitted
United States Phase III(3)
ongoing
Subfoveal CNV due to pathologic Over 50 countries including the United Approved
myopia............................. States, Canada, and those of the European
Union
Predominantly classic subfoveal CNV United States Approved
due to presumed ocular
histoplasmosis syndrome............
Minimally Classic CNV in AMD... United States, Canada, European Union Phase II ongoing
Diabetic macular edema............. United States Phase I/II ongoing
VERTEPORFIN (4)
Multiple basal cell carcinoma...... United States, Canada Phase III ongoing(5)
TARIQUIDAR(6)
Non-small cell lung cancer......... United States, Canada, European Union Phase III (7)
and Russia ongoing
Breast cancer...................... United States Phase II(8)
ongoing
QLT0074
Benign prostatic hyperplasia....... United States, Canada Phase I/II(9)
ongoing
Androgenetic alopecia.............. United States, Canada Phase I/II(10)
ongoing
- ---------
3
(1) The terms used in the above table and elsewhere are defined in this Annual
Report on Form 10-K. In particular, see "-- Government Regulation".
(2) The European Union includes Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain,
Sweden and the United Kingdom.
(3) This study has been initiated and enrollment is expected to be completed by
the end of 2003. Approximately 360 patients will be enrolled at up to 43 centers
in North America.
(4) Verteporfin is marketed under the tradename Visudyne(R) for ophthalmic
indications and is referred to as verteporfin in this Annual Report on Form 10-K
for non-ophthalmic indications.
(5) The Phase III study in multiple basal cell carcinoma commenced in October of
2002.
(6) Tariquidar has been accepted both as the United States Adopted Name (USAN)
and the Recommended International Nonproprietary Name (INN) for XR9576.
(7) This study was commenced in June 2002; on February 20, 2003, enrollment was
temporarily halted pending review of interim safety and efficacy analysis of
data from 150 patients enrolled in the trial, which is expected to occur in May
and June of 2003. (See "Non-PDT Products- Tariquidar").
(8) This study commenced in December 2001.
(9) This study commenced in March of 2003. It is a proof of concept study
intended to evaluate safety and preliminary efficacy.
(10) This study commenced in the third quarter of 2002. It is a proof of concept
study intended to evaluate safety and preliminary efficacy.
BUSINESS STRATEGY
QLT's business strategy is to pursue expanded indications for Visudyne
therapy and develop and commercialize other products which can be marketed by a
focussed specialty sales and marketing team, in ophthalmology, oncology and for
other diseases. QLT has expanded its research and development pipeline by
acquiring rights to new product candidates and access to new technologies. QLT
intends to continue to expand its product pipeline by continuing its
in-licensing efforts and pursuing strategic acquisitions.
QLT'S PDT PRODUCTS
BACKGROUND
Photodynamic therapy or PDT is a minimally invasive medical procedure that
utilizes photosensitizers (light-activated drugs) to treat a range of diseases
associated with rapidly growing tissue (such as the formation of solid tumors
and abnormal blood vessels). PDT is a two-step process. First, the
photosensitizer is administered to the patient by intravenous infusion or other
means, depending on the condition being treated. While circulating in the
bloodstream, the photosensitizer attaches itself to molecules called
lipoproteins. Because rapidly-proliferating cells may require greater amounts of
lipoproteins, the photosensitizer may accumulate more quickly and in higher
concentrations in these cells than it does in normal cells. Second, a
pre-calculated dose of non-thermal light is delivered at a particular wavelength
to the target site to interact with the photosensitizer. The photosensitizer
traps energy from the light and causes oxygen found in cells to convert to a
highly energized form called "singlet oxygen" that causes cell death by
disrupting normal cellular functions. Since the photosensitizer and light have
no effect unless combined, PDT is a relatively selective treatment that
minimizes damage to normal surrounding tissue and allows for multiple courses of
therapy.
The most commonly noted side effect of photosensitizers is a transient skin
sensitivity to bright light. Recipients of PDT are advised to avoid direct
sunlight (or wear protective clothing) during the period of heightened skin
sensitivity. Patients' indoor activities are unrestricted and patients are
encouraged to undertake activities in ambient light, which helps to bring about
inactivation of residual photosensitizer molecules in the skin by a process
known as photobleaching. The period of skin photosensitivity varies among
different photosensitizers and is related to the dose given.
For external and ocular PDT applications (including in the treatment of
AMD), non-laser light sources or diode lasers have been developed and are
available to provide the necessary intensity of light required for PDT. For
applications of PDT to internal organs, physicians use lasers and fiber optics
to deliver the appropriate intensity of light to abnormal tissue. The
wavelength, or color, of light is critical to the activation
4
of the photosensitizer. Generally, a longer wavelength will penetrate tissue
more deeply and thereby activate the photosensitizer deeper in the target
tissue. See "-- Medical Devices for PDT".
VISUDYNE(R) THERAPY
Visudyne is a photosensitizer developed by QLT and Novartis Ophthalmics AG
("Novartis Ophthalmics"), formerly CIBA Vision, for the treatment of wet AMD,
the leading cause of severe vision loss in people over the age of 50 in North
America and Europe. QLT has been co-developing Visudyne with Novartis
Ophthalmics since 1995 pursuant to a product development, manufacturing and
distribution agreement which created a contractual alliance between the two
companies. Under that alliance, QLT is responsible for manufacturing and product
supply and Novartis Ophthalmics is responsible for sales, marketing and
distribution. In this Annual Report on Form 10K, the "alliance" or the
"Alliance" refers to QLT and Novartis Ophthalmics.
About Wet AMD
Wet AMD is characterized by the growth of abnormal blood vessels under the
central part of the retina, called the macula. Because these vessels do not
mature properly, they begin to leak and, over time, cause photoreceptor damage
that results in the formation of scar tissue and a loss of central vision.
Although the progression of the disease varies by patient, the majority of
patients with wet AMD become legally blind in the affected eye within
approximately two years following the onset of the disease.
Wet AMD accounts for approximately 15% of all AMD cases and is responsible
for approximately 90% of the severe vision loss associated with the disease.
Based upon its proprietary market research, QLT estimates that worldwide
approximately 500,000 new cases of wet AMD develop annually, of which 200,000
develop in North America, 200,000 develop in Europe and 100,000 develop in the
remainder of the world. Until Visudyne, no satisfactory treatment existed for
approximately 85% to 90% of wet AMD cases.
Visudyne(R) Approvals
Predominantly Classic CNV in AMD
Visudyne has been approved for marketing for predominantly classic
subfoveal CNV in AMD in over 65 countries, including the United States, those of
the European Union, Canada, Australia and New Zealand.
Visudyne therapy is typically performed as an outpatient procedure with the
goal of stopping or slowing the progression of wet AMD by selectively closing
the abnormal blood vessels that form due to AMD without damaging normal vessels
or photoreceptors.
In January of 2001, the Centers for Medicare and Medicaid Services ("CMS")
in the United States (formerly the Health Care Financing Administration)
announced their U.S. national coverage policy for Visudyne therapy in patients
with predominantly classic subfoveal CNV secondary to AMD, which policy was
formally issued later that year. In most provinces in Canada reimbursement for
all or part of the Visudyne therapy has been approved. Predominantly classic
reimbursement has also been approved in several countries in Europe, including
France, Germany, Italy and Switzerland.
CNV due to Pathologic Myopia (PM)
Pathologic myopia ("PM") is a degenerative form of near-sightedness that
occurs largely in persons aged 30 to 50 and can result in CNV. Based on
proprietary market research, QLT estimates that the worldwide incidence of CNV
secondary to PM is approximately 50,000 new patients every year. Before
Visudyne, there was no approved treatment for the majority of patients with PM.
Based on data from the Phase IIIb clinical studies for Visudyne therapy
(referred to as the "VIP Trial" - Verteporfin in Photodynamic Therapy) conducted
by QLT and Novartis Ophthalmics, QLT has received regulatory approval of
Visudyne for the treatment of subfoveal CNV due to PM in over 50 countries,
including the United States, Canada, and those of the European Union.
5
CNV due to Presumed Ocular Histoplasmosis Syndrome (OHS)
Presumed ocular histoplasmosis syndrome ("OHS") is a condition caused by a
fungal infection endemic to certain areas in central and eastern United States.
It can lead to severe, irreversible vision loss and is a leading cause of
blindness in adults who have lived in geographic areas where the soil mould
Histoplasma capsulatum is found. There are an estimated 100,000 people who are
at risk for vision loss within this endemic area.
Based on data from an open label safety study involving 26 patients with
OHS, the United States Food and Drug Administration (the "FDA") approved
Visudyne for the treatment of subfoveal CNV secondary to OHS in August of 2001.
The results of the open label study showed Visudyne was safe in patients with
OHS and that visual acuity improved from baseline by an average of one line on a
standard eye chart at six months with 27% of patients experiencing a visual
acuity improvement of three lines or more.
Expansion and Improvement of Visudyne Therapy
QLT and Novartis are engaged in efforts to expand the indications for which
Visudyne is approved to treat other forms of AMD and other ocular diseases. QLT
and Novartis are seeking approval for marketing authorization in Japan for
subfoveal CNV in AMD. The Alliance is also continuing efforts to improve
Visudyne therapy by exploring alternative treatment regimens.
Japan - Subfoveal CNV in AMD
QLT and Novartis Ophthalmics are conducting an open label registration study
of Visudyne in Japan in patients with classic-containing subfoveal CNV in AMD.
Enrollment in this Japanese study was completed at the end of 2000 with a total
of 64 patients recruited at five centers. Based on six-month data from this
study, in April of 2002, Novartis Ophthalmics, on behalf of the Alliance,
submitted applications for marketing authorizations for Visudyne therapy for
patients with subfoveal CNV in AMD. A decision on those applications is expected
during 2003.
Occult with no Classic CNV in AMD (VIP Trial and VIO Investigation)
In early 2001, QLT and Novartis Ophthalmics announced top-line 24-month
results from the Phase IIIb VIP Trial. Part of the VIP Trial (the "VIP Occult
Trial") was designed to investigate the efficacy and safety of Visudyne therapy
in wet AMD patients mainly with occult lesions ("occult" and "classic" are terms
used to describe different patterns of CNV leakage as seen on fluorescein
angiography). The VIP Occult Trial involved 339 AMD patients treated at 28
centers throughout North America and Europe over a period of 24 months. The
24-month results from the VIP Occult Trial indicated that Visudyne therapy
reduces the risk of both moderate and severe vision loss in an additional
population of patients with wet AMD who had lesions composed of occult CNV
without classic components.
The VIP Occult Trial included mainly patients with occult CNV without
classic components with presumed recent disease progression, plus some patients
with a component of classic CNV having vision better than 20/40. At the 24-month
examination, 46% of all patients treated with Visudyne therapy lost less than
three lines of vision, or 15 letters, on a standard eye chart (moderate vision
loss) compared to 33% of patients on placebo (p=0.023). With respect to severe
vision loss, 70% of Visudyne treated patients lost less than six lines of
vision, or 30 letters, on a standard eye chart versus 53% of patients on
placebo, representing a difference of 17% (p=0.001). At the 24-month time point,
Visudyne also showed statistically significant outcomes for other visual acuity
endpoints. On average, patients treated with Visudyne received five treatments
during the 24-month period.
Based on the two-year results of the VIP Occult Trial, during 2002 marketing
authorization for the treatment of occult subfoveal CNV secondary to wet AMD was
obtained for the European Union, Australia, and New Zealand.
The FDA advised QLT in 2001 that replication of the VIP Occult Trial results
would be required as the FDA considered the results of the VIP Occult Trial
inadequate for expansion of the Visudyne label to occult without classic CNV in
AMD. Accordingly, in response to the FDA's advice, QLT and Novartis
6
Ophthalmics initiated a Phase III clinical trial (referred to as the "VIO Study"
- - Visudyne in Occult) designed to investigate whether Visudyne therapy
significantly reduces the risk of vision loss compared with placebo treatment in
patients who have occult with no classic subfoveal CNV secondary to AMD.
Approximately 360 patients are being enrolled at approximately 43 centers and
followed for 24 months. Enrollment is expected to be completed by the end of
2003.
In March of 2002, the Centers for Medicare and Medicaid Services (CMS)
announced that they would not uphold their original intention to expand the
national coverage policy for Visudyne therapy to include reimbursement for
patients with occult only subfoveal CNV secondary to AMD, based on the two-year
results of the VIP Occult Trial. That decision was a reversal from the decision
communicated in the CMS's Decision Memorandum dated October 17, 2001.
Minimally Classic CNV in AMD (VIM Investigation)
QLT and Novartis Ophthalmics have initiated a Phase II clinical trial
(referred to as the "VIM Investigation" - Visudyne in Minimally Classic) to
study the efficacy and safety of a reduced light dose in patients with minimally
classic lesions of AMD. The goal of the VIM Investigation is to determine
whether patients with minimally classic subfoveal CNV due to AMD can benefit
from Visudyne therapy. The VIM Investigation is comprised of 117 patients. QLT
and Novartis Ophthalmics announced the six-month results of the VIM
Investigation on December 17, 2002. Early outcomes at six months showed that the
mean change in visual acuity scores of patients in both Visudyne treatment arms
was statistically better than the mean change of those patients who received
placebo. The VIM investigation will continue until the 24 month period to
confirm longer term benefit. The 12-month results of this investigation will be
known during the second quarter of 2003. The development strategy for this
indication is under consideration by the Company and Novartis Ophthalmics.
Early Retreatment Study (VER Investigation)
In August of 2002 QLT and Novartis Ophthalmics completed enrollment in Phase
IIIb clinical trials (referred to as the "VER Investigation" - Visudyne Early
Retreatment), designed to investigate the efficacy and safety of earlier
retreatment with Visudyne in patients with predominantly classic subfoveal CNV.
The VER Investigation will investigate whether optimizing Visudyne treatment
frequency will lead to further improvements in stabilizing vision for aggressive
AMD disease, without adversely affecting the product's safety profile. The VER
Investigation is being conducted at 31 centers throughout North America and
Europe and involves 323 patients. In prior studies with Visudyne, patients were
given treatments of Visudyne every three months in case of leakage from CNV. The
VER Investigation protocol calls for re-evaluation and possible retreatments
with Visudyne every six weeks in the first six months of treatment in case of
leakage from CNV, instead of every three months. It is expected that results
from the VER Investigation will be available in the fourth quarter of 2003.
Altered/Delayed Light in Occult (VALIO)
QLT and Novartis Ophthalmics have initiated a Phase II clinical trial
(referred to as the "VALIO Study" - Visudyne with Altered (Delayed) Light In
Occult). The study is designed to investigate whether delaying the time of light
application to 30 minutes after the start of Visudyne infusion will improve
visual and angiographic outcomes in patients with subfoveal occult CNV with no
classic component compared to Visudyne therapy with light application at 15
minutes after the start of infusion. Approximately 60 patients with AMD have
been enrolled at seven centers in the United States and are being followed for a
period of twelve months. QLT and Novartis Opthalmics announced three-month
results in December, 2002. At three months, additional vision benefit over the
standard Visudyne regime was not apparent, results that were not unexpected at
such an early time point. The six-month outcomes are expected to become
available in the first half of 2003, and the 12-month results late in 2003.
Adjunctive Diclofenac (Voltaren) after Visudyne(R) (ADD-V Study)
Preclinical research by QLT and Novartis Ophthalmics has shown that
inhibiting the inflammatory responses seen in Visudyne therapy may increase the
benefit of the therapy. QLT and Novartis Ophthalmics
7
have initiated a Phase II trial (referred to as the "ADD-V Study" - Adjunctive
Diclofenac (Voltaren) after Visudyne) to determine whether the topical
application of the non-steroidal anti-inflammatory drug diclofenac reduces the
inflammation associated with Visudyne therapy and thereby improves the
treatment. 61 patients have been enrolled at 14 centers in North America.
Three-month results were announced in December, 2002. At three months additional
vision benefit over the standard Visudyne regime was not apparent.
Diabetic Macular Edema (VIDME Study)
QLT and Novartis Ophthalmics have initiated a Phase I/II clinical trial
(referred to as the "VIDME Study" - Visudyne In Treatment of Diabetic Macular
Edema). The VIDME Study is designed to assess the safety and preliminary
efficacy of Visudyne therapy in diabetic macular edema. 30 patients with diffuse
diabetic macular edema are enrolled at two centers in the United States and will
be followed for a period of three months. Three-month results from this study
are expected to become available during the first half of 2003.
VERTEPORFIN
Multiple Basal Cell Carcinoma
QLT has been evaluating verteporfin as an alternative treatment for certain
forms of non-melanoma skin cancer, including multiple basal cell carcinoma
("MBCC"). MBCC is a form of basal cell carcinoma ("BCC") in which patients
present with more than one BCC tumor. Each year over 800,000 cases of BCC are
diagnosed. QLT believes that a small subset of the BCC population who develop
multiple lesions may benefit from PDT with verteporfin.
The most common cause of BCC is chronic exposure to the sun. As a result,
areas of the body which are most frequently exposed to the sun, including the
face, neck and hands, are among the most likely areas to develop skin cancer
tumors. Some patients develop MBCC due to greater sensitivity to sun exposure
caused by genetic disorders or immunosuppressive therapy following an organ
transplant.
MBCC is more challenging to treat than single BCC because multiple tumors
have to be treated individually and are therefore more costly and time-consuming
to treat. When patients have a large number of BCCs, individual treatment of
each tumor is sometimes not feasible and dermatologists often have to limit
treatment to selected tumors rather than treating all tumors. Surgical therapy
in patients with MBCC may also not be acceptable to patients because of
undesirable or poor cosmesis. Using PDT with verteporfin to treat MBCC may allow
for the treatment of multiple tumors in one session and may result in more
acceptable cosmesis.
In October of 2000, QLT announced positive results for its Phase II study
using PDT with verteporfin to treat non-melanoma skin cancer. The open-label
study, conducted in North America, involved 54 patients, with a total of 421
tumors.
The highest light dose was found to be the most effective, with 98% of the
assessed tumors showing a complete clinical response six months after initial
treatment. There were no systemic safety issues. The most commonly reported
adverse events related to reversible pain at the treatment site. PDT with
verteporfin appears to offer a cosmetic outcome similar to or better than
current standard treatments for non-melanoma skin cancer which result in some
degree of scarring.
QLT and Novartis Ophthalmics agreed to co-develop verteporfin for
non-melanoma skin cancer and potentially other dermatological conditions in
mid-2001 through their Alliance. In October of 2002, QLT and Novartis
Ophthalmics initiated a Phase III clinical trial of verteporfin for the
treatment of patients with MBCC, with the aim of enrolling 180 patients.
Enrollment has not progessed as quickly as had originally been projected. QLT's
initial estimate for completion of enrollment was the end of 2003; however, that
estimate may have to be revised in the future if the current enrollment rate
continues to be slower than originally expected.
8
QLT0074
QLT0074 is a proprietary photosensitizer to which QLT has all rights. QLT is
currently developing QLT0074 for the treatment of benign prostatic hyperplasia
and androgenetic alopecia (male pattern baldness), and is also exploring its
application in other indications.
In 2001, based on the results of preclinical studies, QLT initiated and
completed a placebo-controlled Phase I study on healthy volunteers of both
genders of QLT0074 administered by single and repeated intravenous infusions.
Results showed that QLT0074 is a potent photosensitizer and is rapidly
eliminated from the human body.
Particulars of the ongoing and planned clinical studies for QLT0074 are set
out below.
Benign Prostatic Hyperplasia (BPH)
Benign prostatic hyperplasia ("BPH") is the most common prostatic disease.
According to the United States National Institute of Diabetes and Digestive and
Kidney Diseases, over 50% of men in their sixties and older have symptoms of
BPH. It is a progressive condition that results from an excessive benign growth
of prostatic tissue. The majority of patients with this disease will experience
more or less rapidly developing symptoms of urinary obstruction (lower urinary
tract symptoms) of progressive severity. The management of BPH symptoms
parallels the severity of the symptoms. Initially, watchful waiting is
recommended, followed by pharmacological treatment, minimally invasive therapy,
and finally prostate resection.
Preclinical studies completed in 2002 support the hypothesis that PDT with
QLT0074 may be useful in the treatment of BPH. In January of 2003 QLT secured
the agreement of the FDA to the start of the first efficacy and safety proof of
concept trial. In March 2003 QLT commenced a Phase I/II proof of concept
clinical study of QLT0074 in BPH to evaluate safety and preliminary efficacy.
Androgenetic Alopecia
Androgenetic alopecia (male pattern baldness) is a widespread condition for
which many men seek treatment. Present pharmacological therapies have limited
efficacy and have certain limitations or pose inconveniences. Hair transplants
provide satisfactory outcomes but are costly and invasive.
Preclinical studies conducted in 2001 suggest that under certain conditions,
PDT with QLT0074 may be useful in this indication. QLT commenced a Phase I/II
proof of concept clinical study with QLT0074 to evaluate safety and preliminary
efficacy in October of 2002. Six-month results from the Phase I/II study are
expected to become available in the second quarter of 2003.
NON-PDT PRODUCTS
TARIQUIDAR
Multi-Drug Resistance in Non-Small Cell Lung Cancer and Breast Cancer
Approximately 30% to 80% of cancers, depending on tumor type, are resistant
or can develop resistance to chemotherapy, leaving patients and doctors with few
options when conventional treatments fail. The most common form of resistance to
chemotherapy is multi-drug resistance ("MDR"), which occurs when chemotherapy
drugs are actively pumped out of tumor cells. MDR is seen with many of the most
widely used chemotherapeutic drugs used in the treatment of common cancers.
The expulsion of a chemotherapy drug is believed to be due in part to the
over-production in the cancer cell membrane of a protein pump known as
P-glycoprotein (P-gp). The goal of a multi-drug P-gp inhibitor is to effectively
block the P-gp pump, thereby permitting higher concentrations of
chemotherapeutic drug to remain within the tumor cell. If successful, such a
compound would be used in combination with certain chemotherapy drugs to
potentially increase the efficacy of the chemotherapy drugs.
9
In August of 2001, QLT entered into an exclusive development and license
agreement with Xenova Limited ("Xenova") in respect of tariquidar (formerly
called "XR9576"), a non-cytotoxic compound designed to inhibit P-gp mediated MDR
in certain common cancer types. Under the terms of the agreement, QLT has the
exclusive right to develop tariquidar in North America and Europe and to market
tariquidar in North America for the treatment of cancer.
Xenova began Phase IIa trials with tariquidar early in 1999 and completed
them in 2001. In these trials, the pharmacokinetic behaviour of tariquidar was
studied in combination therapy with a range of marketed cancer drugs, namely
vinorelbine, doxorubicin and paclitaxel. The primary purpose of these trials,
which were carried out at a number of centers in the United States and Europe,
was to assess the degree of pharmacokinetic interaction, if any, between
tariquidar and certain cancer drugs. During 2000 and 2001 QLT reported that
minimal clinically significant pharmacokinetic interaction between tariquidar
and widely used chemotherapy drugs was observed in the three Phase IIa trials.
In June of 2002 QLT commenced two Phase III clinical trials for non-small
cell lung cancer in combination with chemotherapy. At the time enrollment in the
two trials was commenced, QLT expected to enroll approximately 1,000 patients in
over 100 centers in North America, Europe and Russia. The two studies are
randomized, placebo controlled trials using tariquidar in combination with two
of the most commonly used chemotherapy treatment regimes (paclitaxel plus
carboplatin in the trial known as TLC1, and vinorelbine alone, in the trial
known as TLC2). The trials are designed to demonstrate the ability of tariquidar
to enhance the efficacy of chemotherapy agents. Overall survival is the
end-point in both trials.
In October of 2002, the FDA granted fast track review status to tariquidar
for the treatment of multi-drug resistance in non-small cell lung cancer
patients.
On February 20, 2003, QLT temporarily halted further enrollment in the two
trials, pursuant to the recommendation of the Data Safety and Monitoring
Committee ("DSMC"), based on safety concerns regarding toxicity levels, pending
an interim analysis of safety and efficacy, on 150 patients in the two trials
(the first 100 in TLC1, and the first 50 in TLC2). The interim analyses are
expected to occur in May of 2003, for TLC1, and June of 2003, for TLC2. Over 350
patients are currently enrolled in the trials. These patients will continue to
be treated in accordance with the trial protocol, also in accordance with the
recommendation of the DSMC. Prior to the temporary enrollment halt, QLT had
expected to complete enrollment in both trials during the fourth quarter of
2003.
In December of 2001, QLT began enrolling patients into its Phase II clinical
trial of tariquidar for the treatment of refractory breast cancer. This trial
may enroll up to 30 patients. The Company expects to complete enrollment in the
trial by the end of 2003.
STRATEGIC ALLIANCES AND COLLABORATIONS
Strategic alliances and collaborations are an integral part of QLT's
strategy for the research, development, manufacture and marketing of its
products.
NOVARTIS OPHTHALMICS. On February 6, 1995, the Company entered into an
agreement (the "NVO Co-Development Agreement") with Novartis Ophthalmics to
pursue worldwide joint development and commercialization of PDT products,
including Visudyne, as potential treatments for certain eye diseases through the
Alliance. Under the terms of that agreement, QLT is responsible for 40% to 50%
of research and development costs for Visudyne, and Novartis Ophthalmics is
responsible for the remaining 50% to 60% of such costs. QLT is responsible for
the manufacturing and product supply of Visudyne and Novartis Ophthalmics is
responsible for sales, marketing and distribution. QLT and Novartis Ophthalmics
share equally the profits realized on revenues from product sales after
deductions for marketing costs and manufacturing costs (including any
third-party royalties).
On July 23, 2001, the Company and Novartis Ophthalmics entered into an
agreement to amend the NVO Co-Development Agreement to include the
co-development of PDT with verteporfin to treat non-melanoma skin cancer and
other dermatological conditions. Under the terms of the amended NVO
Co-Development Agreement, Novartis Ophthalmics has committed to fund 100% of the
future development costs of verteporfin in non-melanoma skin cancer to a maximum
of $9.7 million or until the filing for marketing
10
approval in the United States or the European Union. Thereafter, each of QLT and
Novartis Ophthalmics will be responsible for 50% of any remaining development
costs, and QLT and Novartis Ophthalmics will share equally the profits realized
on revenues from product sales after deductions for marketing costs and
manufacturing costs (including any third-party royalties).
XENOVA. On August 13, 2001, the Company entered into an exclusive
development and license agreement with Xenova for tariquidar, a P-gp inhibitor
for multi-drug resistance in cancer which has completed Phase II clinical
trials. Under the agreement, QLT assumed responsibility for the continued
development of tariquidar in North America and Europe and acquired marketing
rights for North America. QLT paid Xenova an initial licensing fee of $10
million and agreed to make additional payments up to a maximum of $50 million
upon achievement of certain milestones. If tariquidar is commercialized, the
Company will pay a royalty to Xenova in the range of 15% to 22% based on the
level of North American sales. Under the agreement, Xenova contributes $2
million to QLT in respect of its development efforts during the first two years.
KINETEK PHARMACEUTICALS, INC. QLT and Kinetek Pharmaceuticals, Inc.
("Kinetek") are collaborating to develop compounds known as signal transduction
inhibitors for the treatment of ocular, immune system and kidney diseases
pursuant to a research and development agreement entered into during 2001. Under
that agreement QLT has an option to obtain an exclusive license for up to five
compounds. Under the terms of the option, the Company will have the right, on
making certain payments, to take over the clinical development and
commercialization of each compound at a specified stage of development. Further
information regarding Kinetek is provided in "Management Discussion and Analysis
- - (Writedown) Gain on Investments."
PRODUCT MANUFACTURING
QLT does not own or operate any manufacturing facilities at present.
Visudyne is currently manufactured in stages by several contract facilities
located in the U.S., Canada, Europe and Japan. QLT has long-term supply
agreements with Raylo Chemicals, Nippon Fine Chemicals of Japan, Parkedale
Pharmaceuticals, Merck KGaA, Harimex Ligos BV and Sato Pharmaceuticals for
manufacturing activities in the commercial production of Visudyne.
QLT has entered into a development agreement with R.P. Scherer West, Inc.
(formerly SP Pharmaceuticals L.L.C) in support of a secondary manufacturing
facility for certain activities in the commercial production of Visudyne. That
agreement contemplates the parties entering into a long-term supply agreement;
negotiations of the long-term supply agreement are in progress.
The key starting materials for the Visudyne manufacturing process are
secured by long-term supply agreements. No significant delays or interruption of
supply have been experienced with respect to the key starting materials for
Visudyne.
QLT is in the process of finalizing a development agreement with Raylo for
the manufacturing of tariquidar. QLT has entered into a Master Services
Agreement with Hollister-Steir (U.S.A.) for manufacturing tariquidar for
clinical supply.
QLT's other products are manufactured by various contract facilities in the
U.S., Canada, Europe and Japan.
MEDICAL DEVICES FOR PDT
An integral component of PDT is the requirement for a medical device or
devices to deliver light to the target tissue to activate the photosensitizer.
QLT leverages the expertise of medical device companies to develop and market
lasers, laser diodes and other photonic devices to use with its drugs. QLT
continues to play an active role with medical device companies in North America
and Europe to ensure the availability of commercial, state-of-the-art light
sources and delivery systems to the medical community. See " -- Government
Regulation".
11
Diode laster systems required for Visudyne therapy are manufactured and sold
by two medical device companies, Zeiss-Meditic ("Zeiss") (formerly Carl Zeiss,
Inc.) and Lumenis Ltd. ("Lumenis"), formerly Coherent Inc. The Alliance
collaborates with Lumenis and Zeiss for the supply of lasers for use in
conjunction with Visudyne therapy. Both Lumenis and Zeiss have portable diode
lasers that have been commercially approved for use with Visudyne in the U.S.
and Europe. Approximately 1,700 of these diode lasers have been placed with
medical facilities. With the FDA's approval of the device applications, QLT
transferred ownership of the regulatory approvals for the Lumenis and Zeiss
laser products to the respective companies. See "-- Government Regulation -
Regulation of Combination Products".
PATENTS AND PROPRIETARY RIGHTS
QLT seeks to protect its proprietary technology through patents and security
measures to the extent it deems appropriate. QLT currently owns or has rights
under a number of patents and patent applications that cover certain of its
technologies and products in the U.S., Canada and other jurisdictions.
QLT's policy is to file patent applications on a worldwide basis in such
jurisdictions as it deems beneficial depending on the subject matter. QLT also
relies on trade secrets to maintain its competitive position.
QLT has an exclusive worldwide license from the University of British
Columbia ("UBC") for all of the patents and know-how owned by UBC relating to
verteporfin, QLT0074 and certain additional photosensitizers and their use in
PDT. In the U.S. and other jurisdictions, verteporfin is claimed as a
composition of matter as well as for use in methods to destroy or impair the
function of unwanted cells.
QLT has numerous U.S. patents issued and many corresponding non-U.S. patents
issued relating to PDT. Some of these patents are general to photoactive agents
and others are limited to the use of verteporfin or QLT0074.
QLT has an exclusive license from Xenova to certain patent rights related to
tariquidar. The compound tariquidar and methods of using it to modulate
P-gp-mediated multidrug resistance in the treatment of tumors are the subject of
an issued U.S. patent held by Xenova and licensed to QLT. Equivalent patent
applications are pending in many other jurisdictions, including Canada.
In addition, QLT has several registered trademarks in the U.S. and Canada
and in other jurisdictions.
QLT indirectly receives government grants and other assistance for certain
of its research and development programs. The manner in which QLT commercializes
inventions developed through government assistance may be subject to certain
restrictions and control by the relevant government-funding agency. QLT does not
believe that any such restrictions will have any material adverse effect on the
commercialization of its products.
Although a patent has a statutory presumption of validity, the issuance of a
patent is not conclusive as to its validity or as to enforceability of its
claims. Accordingly, there can be no assurance that QLT's patents will afford
legal protection against competitors, nor can there be any assurance that the
patents will not be infringed by others or that others will not obtain patents
that QLT would need to license.
Unpatented trade secrets, improvements, confidential know-how and continuing
technological innovation are important to QLT's scientific and commercial
success. Although QLT attempts to and will continue to protect its proprietary
information through reliance on trade secret laws and the use of confidentiality
agreements with its corporate partners, collaborators, employees and consultants
and other appropriate means, there can be no assurance these measures
effectively will prevent disclosure of QLT's proprietary information or that
others will not develop independently or obtain access to the same or similar
information or that QLT's competitive position will not be affected adversely
thereby.
There are two pending lawsuits relating to QLT's rights to two U.S. patents.
See "Legal Proceedings".
12
GOVERNMENT REGULATION
OVERVIEW. All drugs developed or marketed in the United States, including
Visudyne, tariquidar and QLT's other products, are subject to extensive and
rigorous regulation by the United States federal government, principally the
FDA, and by state and local governments in the United States. The regulatory
clearance process is lengthy, expensive and uncertain. The Federal Food, Drug,
and Cosmetic Act (the "FDC Act"), and other federal statutes and regulations,
govern or influence the development, design, testing, manufacture, labeling,
storage, approval, advertising, promotion, sale and distribution of such
products. Failure to comply with applicable FDA and other regulatory
requirements can result in sanctions being imposed on QLT or the manufacturers
of its products, including warning letters, fines, product recalls or seizures,
injunctions, refusals to permit products to be imported into or exported out of
the U.S., refusals of the FDA to grant approval of drugs or to allow QLT to
enter into government supply contracts, withdrawals of previously approved
marketing applications and criminal prosecutions.
In addition to the applicable FDA requirements, QLT is subject to Canadian
regulations governing clinical trials and sales and the regulations in any other
country in which QLT proposes to market drugs. In the EU countries and Canada,
regulatory requirements and approval processes are similar in principle to those
in the United States.
Depending on the type of drug for which approval is sought, there are
currently two potential tracks for marketing approval in the EU countries:
mutual recognition and the centralized procedure. These review mechanisms may
ultimately lead to approval in all EU countries, but both methods grant each
participating country some decision-making authority in product approval.
Whether or not FDA approval has been obtained, approval of a product by the
comparable regulatory authorities in Europe, Canada and other countries must be
obtained prior to the commencement of marketing of the product in those
countries. The approval process varies from country to country and the time
required may be longer or shorter than that required for FDA approval.
Unapproved new drugs in the U.S. can only be exported from the U.S. to certain
countries if they are approved in the country of import and otherwise comply
with the laws of that country, among other requirements. There can be no
assurance that QLT will be able to obtain necessary U.S., Canadian or foreign
clearances or approvals, where necessary, on a timely basis, if at all, for any
of its products under development, and delays in receipt or failure to receive
such clearances or approvals, the loss of previously received clearances or
approvals, or failure to comply with existing or future regulatory requirements
could have a material adverse effect on QLT's business, financial condition and
results of operations.
Drugs manufactured or distributed pursuant to FDA approvals are subject to
pervasive and continuing regulation by the FDA and certain state agencies.
Manufacturers are subject to inspection by the FDA and those state agencies, and
must comply with the host of regulatory requirements that apply to drugs
marketed in the U.S., including the FDA's labeling regulations, Good
Manufacturing Practice ("GMP") requirements, adverse event reporting
(requirements that a manufacturer report to the FDA certain types of adverse
events involving its products), and the FDA's general prohibitions against
promoting products for unapproved or "off-label" uses. Non-compliance with
applicable regulatory requirements could result in enforcement action by the
FDA, which could have a material adverse effect on QLT.
REGULATION OF DRUGS. Different types of FDA regulation apply to various drug
products, depending upon whether they are marketed only upon the order of a
physician or over-the-counter, are biological drugs, or are controlled drugs
such as narcotics. Product development and approval within this regulatory
framework takes a number of years, involves the expenditure of substantial
resources and is uncertain. Many drug products that initially appear promising
ultimately do not reach the market because they are not found to be safe and
effective or cannot meet the FDA's other regulatory requirements. In addition,
there can be no assurance that the current regulatory framework will not change
or that additional regulation will not arise at any stage of QLT's product
development that may affect approval, delay the submission or review of an
application or require additional expenditures by QLT.
The activities required before a new drug product may be marketed in the
U.S. primarily begin with preclinical testing. Preclinical tests include
laboratory evaluation of product chemistry and other characteristics and animal
studies to assess the potential safety and efficacy of the product as
formulated. Many preclinical studies are regulated by the FDA under a series of
regulations called the current Good
13
Laboratory Practice ("GLP") regulations. Violations of these regulations can, in
some cases, lead to invalidation of the studies, requiring such studies to be
replicated.
The entire body of preclinical development work necessary to administer
investigational drugs to human volunteers or patients, along with relevant
manufacturing information about the drug and the proposed clinical protocol, is
summarized in an Initial New Drug ("IND") application to the FDA. FDA
regulations provide that human clinical trials may begin 30 days following
receipt of an IND application, unless the FDA advises otherwise or requests
additional information, clarification or additional time to review the
application. There is no assurance that the submission of an IND will eventually
allow a company to commence clinical trials. Once trials have commenced, the FDA
may stop the trials, or particular types of trials, by placing a "clinical hold"
on such trials because of concerns about, for example, the safety of the product
being tested. Such holds can cause substantial delay and in some cases may
require abandonment of a product.
Clinical testing involves the administration of a drug to healthy human
volunteers or to patients under the supervision of a qualified principal
investigator, usually a physician, pursuant to an FDA reviewed IND protocol.
Each clinical study is conducted under the auspices of an Institutional Review
Board ("IRB") in respect of each of the clinical sites at which the study will
be conducted. An IRB will consider, among other things, ethical factors, the
safety of human subjects and the possible liability of the clinical site. Human
clinical trials typically are conducted in three sequential phases, but the
phases may overlap. Phase I clinical studies consist of testing the product in a
small number of patients or normal volunteers, primarily for safety, in one or
more dosages, as well as characterization of a drug's pharmacokinetic and/or
pharmacodynamic profile. In Phase II, in addition to safety, the efficacy of the
product is evaluated in a patient population. Phase III clinical studies
typically involve additional testing for safety and clinical efficacy and an
expanded population at geographically dispersed sites. A clinical plan, or
"protocol," accompanied by the approval of an IRB, must be submitted to the FDA
prior to commencement of each Phase of clinical study. All patients involved in
a clinical study must provide informed consent prior to their participation. The
FDA may order the temporary or permanent discontinuance of a clinical study at
any time for a variety of reasons, particularly if safety concerns exist. These
clinical studies must be conducted in conformance with the FDA's bioresearch
monitoring regulations.
A company seeking FDA approval to market a new drug that is a new chemical
entity must file an New Drug Application (an "NDA") with the FDA pursuant to the
FDC Act or a Market Authorization Application ("MAA") in Europe. In addition to
reports of the preclinical and clinical trials conducted under an effective IND
application, the NDA includes information pertaining to the preparation of the
drug substance, analytical methods, drug product formulation, details on the
manufacture of finished products and proposed product packaging and labeling.
Submission of an NDA does not assure FDA approval for marketing. The application
review process generally takes one to three years to complete, although reviews
of treatments for cancer, AIDS, and other life-threatening diseases may be
accelerated, expedited or subject to fast track handling. The process may take
substantially longer if, among other things, the FDA has questions or concerns
about the safety and/or efficacy of a product. In general, the FDA requires at
least two properly conducted, adequate and well-controlled clinical studies
demonstrating efficacy with sufficient levels of statistical and clinical
significance. However, additional information may be required. For example, the
FDA also may request long-term toxicity studies or other studies relating to
product safety or efficacy. Notwithstanding the submission of such data, the FDA
ultimately may decide that the application does not satisfy its regulatory
criteria for approval and may not approve the NDA. Finally, the FDA may require
additional clinical tests following NDA approval to confirm safety and efficacy
(Phase IV clinical studies).
In addition, the FDA may in some circumstances impose restrictions on the
use of the drug that may be difficult and expensive to administer. Product
approvals may be withdrawn if compliance with regulatory requirements is not
maintained or if problems occur after the product reaches the market. After a
product is approved for a given indication, subsequent new indications or dosage
levels for the same product are reviewed by the FDA via the filing and upon
approval of a supplement. The supplement is much more focused than the original
application and deals primarily with safety and effectiveness data related to
the new indication or dosage. Finally, the FDA requires reporting of certain
safety and other information that becomes known to a manufacturer of an approved
drug. If an active ingredient of a drug product has been previously approved,
there may be other types of drug applications that can be filed that are less
time-consuming and costly. No assurance exists that any of these types of drug
applications will be available or benefit QLT.
14
The product testing and approval process is likely to take a substantial
number of years and involve expenditure of substantial resources. There can be
no assurance that any approval will be granted on a timely basis, or at all. The
FDA also may require postmarketing testing and surveillance to monitor the
record of the product and continued compliance with regulatory requirements.
Upon approval, a prescription drug may only be marketed for the approved
indications in the approved dosage forms and at the approved dosage. Adverse
experiences with the product must be reported to the FDA.
Among the requirements for product approval is the requirement that the
prospective manufacturer conform to the FDA's current GMP regulations for drugs.
In complying with the GMP regulations, manufacturers must continue to expend
time, money and effort in product, record keeping and quality control to assure
that the product meets applicable specifications and other requirements. In
addition, advertising and promotional materials relating to QLT's drugs are
subject to regulation by the FDA. The FDA periodically inspects manufacturing
facilities in the U.S. and abroad in order to ensure compliance with applicable
GMP requirements and all other regulatory requirements. Failure of QLT or QLT's
contract manufacturers of Visudyne to comply with the FDA's GMP regulations or
other FDA regulatory requirements could have a significant adverse effect on
QLT's business, financial condition and results of operations. See "-- Product
Manufacturing".
QLT currently has active INDs for the ongoing clinical trials for Visudyne
and for verteporfin for the treatment of various ocular indications and multiple
basal cell carcinoma. In addition, QLT has active INDs for QLT0074 (BPH and
androgenetic alopecia) and tariquidar (non-small cell lung cancer and breast
cancer). It is uncertain if and when QLT will submit NDAs for any of these drugs
for any of the studied indications. There can be no assurance that any of these
studies will be completed or, if completed, will demonstrate that the drugs are
safe and effective for their intended uses, nor can assurance be given that
approval will be granted by the FDA on a timely basis, or at all, for any of
these drugs for the studied indications.
REGULATION OF COMBINATION PRODUCTS. Medical products containing a
combination of drugs, including biologic drugs, or devices may be regulated as
"combination products" in the U.S. A combination product generally is defined as
a product comprised of components from two or more regulatory categories
(drug/device, device/biologic, drug/biologic, etc.). Each component of a
combination product is subject to the requirements established by the FDA for
that type of component, whether a drug, including a biologic drug, or device.
In order to facilitate premarket review of combination products, the FDA
designates one of its centers to have primary jurisdiction for the premarket
review and regulation of both components. The FDA makes the determination
whether a product is a combination product or two separate products on a
case-by-case basis.
OTHER REGULATIONS. QLT is subject to numerous federal, state, provincial and
local laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control and disposal of
hazardous or potentially hazardous substances. There can be no assurance that
QLT will not be required to incur significant costs to comply with such laws and
regulations in the future or that such laws or regulations will not have a
materially adverse effect upon QLT's ability to do business. Unanticipated
changes in existing regulatory requirements, failure of QLT to comply with such
requirements or adoption of new requirements could have a material adverse
effect on QLT.
COMPETITION
The pharmaceutical and biotechnology industries are characterized by rapidly
evolving technology and intense competition. QLT's competitors include major
pharmaceutical and bio-pharmaceutical companies, many of which have financial,
technical and marketing resources significantly greater than those of QLT and
substantially greater experience in developing products, conducting preclinical
and clinical testing, obtaining regulatory approvals, manufacturing and
marketing. In addition, many bio-pharmaceutical companies have formed
collaborations with large, established pharmaceutical companies to support
research, development and commercialization of products that may be competitive
with QLT's products. Academic institutions, government agencies and other public
and private research organizations also are conducting research activities and
seeking patent protection and may commercialize products on their own or through
joint ventures. The existence of these products, or other products or treatments
of which QLT is not aware, or
15
products or treatments that may be developed in the future, may adversely affect
the marketability of products developed by QLT.
QLT is aware of a number of competitors or potential competitors developing
therapies in markets of interest to QLT, including AMD. In particular, QLT
believes that EyeTech Pharmaceuticals and Pfizer, Genentech, Inc., Alcon
Laboratories, Inc., and Iridex Corporation are developing or may develop
competitive therapies targeted for the AMD employing different technologies,
several of which involve injections directly into the eye.
QLT is also aware that other companies are engaged in the development of
products which might become competitive to QLT's products, but none are
considered as advanced as those of the companies' mentioned above.
QLT believes that these competitors are or might be conducting preclinical
studies and clinical testing on their own or with certain third parties in
various countries for a variety of diseases and medical conditions in which we
have ongoing development programs. These and other companies also may be
involved in competitive activities of which we are not aware.
An important competitive factor is the timing of market introduction of
products by QLT or its competitors. Accordingly, the relative speed with which
QLT and QLT's present and future collaborative partners can develop products,
complete the clinical trials and approval processes and supply commercial
quantities of products to the market is critical. QLT does not believe that
regulatory approval for the products of the competitors named above would be
obtainable before the end of 2004.
QLT's competition will be determined in part by the potential indications
for which QLT's products are developed and ultimately approved by regulatory
authorities. The development by competitors of new treatment methods for those
indications for which QLT is developing products could render QLT's products
non-competitive or obsolete. QLT expects that competition among products
approved for sale will be based, among other things, on product efficacy,
safety, reliability, availability, price and intellectual property protection.
LIABILITY AND PRODUCT RECALL
The testing, manufacture, marketing and sale of human pharmaceutical
products entail significant inherent risks of allegations of product defects.
The use of QLT's products in clinical trials and the sale of such products may
expose QLT to liability claims alleged to result from the use of such products.
These claims could be made directly by patients or consumers, healthcare
providers or others selling the products. In addition, QLT is subject to the
inherent risk that a governmental authority may require the recall of one or
more of QLT's products. QLT currently carries clinical trials and product
liability insurance to cover certain claims that could arise during the clinical
studies of QLT's products, or during the commercial use of Visudyne. The limits
of liability under the insurance policy are $20 million per incident and per
year in the aggregate. Such coverage and the amount and scope of any coverage
obtained in the future may be inadequate to protect QLT in the event of a
successful product liability claim, and there can be no assurance that the
amount of such insurance can be increased, renewed or both. A successful product
liability claim could materially adversely affect the business, financial
condition or results of operations of QLT.
Further, liability claims relating to the use of QLT's products or a product
recall could negatively affect the Company's ability to obtain or maintain
regulatory approval for its products. QLT has agreed to indemnify certain of its
collaborative partners against certain potential liabilities relating to the
manufacture and sale of QLT's products.
ENVIRONMENT
QLT seeks to comply with all applicable statutory and administrative
requirements concerning environmental protection. It is not anticipated that
expenditures for environmental protection will have a material adverse effect on
QLT's capital expenditures, earnings or competitive position.
16
QLT is the owner of the land on which its head office and research
facilities are located in Vancouver, British Columbia, and an adjacent site.
When the head office site was purchased in 1998, the vendor provided QLT
with a Certificate of Compliance, issued by the Ministry of Environment, Lands
and Parks of the Province of British Columbia, concerning the satisfaction of
environmental standards and regulations as prescribed or required under the
Waste Management Act (British Columbia).
When the adjacent site was purchased by QLT in 2001, the vendor provided QLT
with a Certificate of Compliance issued by the Ministry of Environment, Lands
and Parks of the Province of British Columbia, concerning the remediation of the
lands to meet environmental standards and regulations as prescribed or required
under the Waste Management Act (British Columbia).
In addition, QLT has an indemnification from the vendor of both properties
concerning future environmental liabilities associated with the property. See
"-- Properties".
RESEARCH AND DEVELOPMENT
During the years ended December 31, 2002, 2001, and 2000, QLT's total
research and development expenses were $42.3 million, $42.9 million and $32.8
million respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
HUMAN RESOURCES
As of February 28, 2003, QLT had 336 employees, of which 179 were engaged in
research, development, clinical and regulatory affairs, manufacturing and
process development, and medical devices. 157 of these employees were engaged in
administration, commercial operations and materials management, corporate
communications, corporate development, finance, information technology, human
resources and marketing and sales planning. All QLT employees are located in
Canada. None of QLT's employees belong to a labor union and QLT considers its
relationship with its employees to be good. QLT believes it offers competitive
compensation, incentive and fringe benefit programs, which include equity
participation plans.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set out below is certain information with respect to the Company's executive
officers as of February 28, 2003:
NAME AGE POSITION
---- --- --------
Paul J. Hastings..................... 43 President, Chief Executive Officer and Director
Mohammad Azab........................ 47 Senior Vice President and Chief Medical Officer
Robert L. Butchofsky................. 41 Vice President, Marketing and Sales Planning
Alain H. Curaudeau................... 46 Senior Vice President, Project Planning and Management
Michael J. Doty...................... 56 Senior Vice President and Chief Financial Officer
Therese Hayes........................ 36 Vice President, Corporate Communications and Investor
Relations
17
NAME AGE POSITION
---- --- --------
Linda M. Lupini...................... 43 Senior Vice President, Human Resources and
Administration
Lawrence D. Mandt.................... 50 Senior Vice President, Quality and Regulatory Affairs
William J. Newell.................... 45 Senior Vice President and Chief Business Officer
Ian Patrick, 60 Vice President, Manufacturing and Pharmaceutical
Ph.D.................... Development
Paul J. Hastings was appointed President, Chief Executive Officer and a
Director of the Company effective February 17, 2002. From January 2001 to
February 15, 2002, Mr. Hastings was President, CEO and a Director of Axys
Pharmaceuticals, Inc., where he was responsible for all aspects of the
organization including leading the strategic acquisition of Axys by Celera
Corporation. Since starting his career in 1984 with Hoffman La Roche, Mr.
Hastings has held various positions of increasing responsibility with notable
biotech and pharmaceutical companies. From June 1999 to January 2001, Mr.
Hastings was President of Chiron BioPharmaceuticals. From June 1998 to June
1999, Mr. Hastings was President and Chief Executive Officer of LXR
Biotechnology. From 1994 to 1998, amongst his positions of increasing
responsibility at Genzyme, Mr. Hastings was Vice-President, Global Marketing,
Genzyme Corporation; Vice-President, General Manager of Genzyme Therapeutics
Europe; President, Genzyme Therapeutics Europe; and President, Genzyme
Therapeutics Worldwide. From 1988 to 1994, included in Mr. Hastings' increasing
positions of responsibility at Synergen, Mr. Hastings was Vice-President,
Marketing and Sales of Synergen, Inc. and Vice-President, General Manager of
Synergen Europe, Inc. Mr. Hastings holds a Bachelor of Science in Pharmacy from
the University of Rhode Island. Mr. Hastings is a member of the boards of
directors of several organizations including ViaCell Inc., B.C.'s Leading Edge
Endowment Fund, Arriva Pharmaceuticals, the B.C. Biotech Association and
Vancouver's St. Paul's Hospital.
Mohammad Azab, M.D., joined the Company as Vice President, Clinical Research
and Medical Affairs in 1997 and was promoted to Senior Vice President, Clinical
Research and Medical Affairs in March 2000. Dr. Azab became Chief Medical
Officer in February of 2003. Prior to joining QLT, Dr. Azab spent five years
with Zeneca Pharmaceuticals in Manchester, England, where he was responsible for
international clinical development of oncology and gynecology drugs and three
years with Sanofi as worldwide medical manager of oncology. Dr. Azab has been
actively involved in the development of several currently approved drugs mainly
in the fields of oncology and ophthalmology. Before joining industry, Dr. Azab
practiced as an oncologist and lectured in oncology at the Institute Gustave
Roussy, the University of Paris-Sud in France and at Cairo University in Egypt.
Dr. Azab has authored over one hundred papers and abstracts and is a member of
the American Society of Clinical Oncology and the European Society of Medical
Oncology.
Robert L. Butchofsky joined QLT in 1998 as Associate Director, Ocular
Marketing and was appointed Vice President, Marketing and Sales Planning in
September 2001. Mr. Butchofsky is now responsible for the ongoing marketing of
Visudyne as well as the creation of an oncology sales force within QLT to market
new products currently in development. Prior to joining QLT, Mr. Butchofsky
spent eight years at Allergan where he built an extensive background with ocular
products including sales, health economics, worldwide medical marketing, and
product management. Prior to joining Allergan, Mr. Butchofsky spent several
years managing clinical trials at the Institute for Biological Research and
Development. Mr. Butchofsky holds a Bachelor of Arts degree in Biology from the
University of Texas and a Masters of Business Administration from Pepperdine
University.
Alain H. Curaudeau joined QLT in 2000 as Vice President, Project Planning
and Management and was promoted to Senior Vice President, Project Planning and
Management in July 2001. He came to QLT with extensive global experience in
pharmaceutical R&D after serving more than 15 years with Rhone-Poulenc Rorer
("RPR"), a major international pharmaceutical company. Mr. Curaudeau's tenure
with RPR included 14 years of progressively senior positions in project
management, in France and in the U.S. Most recently he was designated head of
Project Management for Aventis, a new company formed in 1999 by the merger
between RPR and Hoechst AG. Mr. Curaudeau holds a Bachelors and Masters degree
in Pharmacy from the University of Chatenay-Malabry, Paris, France. He is also a
graduate of the Toxicology and
18
Pharmacokinetics Programs from the same university and received academic
training in toxicological pathology from the National Veterinary School in
Toulouse, France.
Michael J. Doty joined QLT as Senior Vice President and Chief Financial
Officer of the Company in November 2001. Mr. Doty is a Certified Public
Accountant with more than 25 years of experience in a wide range of financial,
administrative and planning positions at companies such as 3M, Honeywell, Inc.
and Reckitt & Colman, PLC (now Reckitt Benckiser PLC). Prior to joining QLT,
from May 1999 to October 2001, he was Senior Vice President and Chief Financial
Officer of Inamed Corporation, a global supplier of medical devices. From 1997
to 1999, Mr. Doty was the Vice President and Chief Financial Officer of O-Cedar
Brands, Inc., a private consumer product company based in Cincinnati, and from
1994 to 1997, he was the Vice President and Chief Financial Officer of White
Systems, Inc., a manufacturer and software developer. Mr. Doty holds Bachelor of
Chemistry, Institute of Technology and Bachelor of Science, Business
Administration degrees from the University of Minnesota and a Master of Business
Administration degree from the University of St. Thomas.
Therese Hayes became Vice President, Corporate Communications and Investor
Relations in February, 2003. Ms. Hayes joined QLT in 2001 as Senior Director,
Corporate Communications and Investor Relations. Ms. Hayes is responsible for
all aspects of internal and external communications and investor relations for
the Company. Ms. Hayes brought 15 years of management experience in healthcare
and biotechnology, including scientific research, financial and scientific
communications and business development to QLT. Prior to joining QLT, Ms. Hayes
was Vice President Corporate Communications at SangStat Medical Corporation, a
biotechnology company based in California. Ms. Hayes holds a Bachelor of Science
degree from the University of Waterloo, a Masters of Microbiology and Immunology
and a Masters of Health Administration, both from the University of Ottawa.
Linda M. Lupini was promoted to Senior Vice President, Human Resources and
Administration in February of 2003. Ms. Lupini joined QLT in 1997 as Director,
Human Resources, and was promoted to Vice President, Human Resources and
Administration in March 2000. Ms. Lupini joined QLT after serving as Human
Resources Director at MacDonald Dettwiler and Associates Ltd., a leading
technology firm in Western Canada. Ms. Lupini, who holds a Bachelor of Arts
degree in psychology from the University of British Columbia, is a member of
several human resource and industry associations and is currently serving as a
member representing employers on the British Columbia Employment Standards
Tribunal.
Lawrence D. Mandt joined QLT in 1999 as Vice President, Regulatory Affairs
and was promoted to Senior Vice President, Quality and Regulatory Affairs in
September 2000. Mr. Mandt brought 25 years of experience and a strong base of
scientific research and regulatory and medical affairs management when he joined
the Company. During his 15 years at the U.S.-based headquarters of Bausch &
Lomb, he rose through progressively senior positions in clinical and biological
research management before joining CIBA Vision where he led the regulatory and
medical affairs team and was their chief liaison with the FDA. In addition to
previous posts held at Merck Sharp & Dohme and Amstar, Mr. Mandt, who holds a
Bachelor of Science degree in Biology from Mankato State University, has also
been an active member in a number of industry organizations.
William J. Newell joined QLT as Senior Vice President and Chief Business
Officer in June of 2002. Mr. Newell is a lawyer with extensive legal and
business development experience. Prior to joining QLT, Mr. Newell was Senior
Vice President, Corporate and Business Development of Celera Genomics
(previously Axys Pharmaceuticals). Mr. Newell joined Axys in 1998 and held
various positions of increasing responsibility including Vice President, General
Counsel and Senior Vice President, Corporate and Business Development and
General Counsel. Prior to joining Axys Mr. Newell was a partner in the law firm
of McCutchen, Doyle, Brown & Enersen LLP, where he specialized in strategic
business transactions, including mergers and acquisitions and licensing and
financing transactions. Mr. Newell is a member of the board of BIOTECanada.
Ian Patrick Ph.D. became Vice-President, Manufacturing and Pharmaceutical
Development in February of 2003. Dr. Patrick joined QLT in 2001 after several
years as a consultant to the British biotechnology industry where he specialized
in regulatory affairs including redesign and validation of facilities, processes
and controls. He has many years of experience in manufacturing and process
development as well as project management and facility development, and he began
his career as a research scientist. Dr. Patrick has his
19
Bachelor of Science degree (Honours) and his Ph.D. from Leeds University in the
United Kingdom. He is a long standing Fellow of the Royal Society of Chemistry
in the U.K.
To complement its own expertise in various fields, QLT utilizes scientific
consultants and advisors, all of whom have formal consulting agreements with the
Company.
RISK FACTORS
In addition to the other information included in this Annual Report, you
should consider carefully the following factors, which describe many, but not
necessarily all, of the risks, uncertainties and other factors that may
materially and adversely affect our business, financial condition and operating
results. We are identifying these as important factors that could cause actual
events or our actual results to differ materially from those contained in any
written or oral forward-looking statements within the meaning of the Private
Securities Reform Act of 1995 made by us or on our behalf in this Annual Report
or elsewhere. We are relying upon the safe harbor for forward-looking statements
and any such statements are qualified by reference to the cautionary statements
set out elsewhere in this Annual Report.
FUTURE SALES FROM VISUDYNE(R) MAY BE LESS THAN EXPECTED.
Our prospects are highly dependent upon increasing the sales of our only
commercial product, Visudyne. Our revenues to date have consisted largely of
revenue from product sales of Visudyne by Novartis Ophthalmics. If sales of
Visudyne fail to increase, it would have a material adverse effect on our
business, financial condition and results of operations.
A number of factors may affect the rate and breadth of market acceptance of
Visudyne, including:
- - Perception by physicians and other members of the health care community on
the safety and efficacy of Visudyne
- - Patient and physician demand for Visudyne
- - Novartis Ophthalmics' effectiveness in marketing and selling Visudyne
- - Reimbursement policies of various government and third-party payors
- - Availability of sufficient commercial quantities of Visudyne
- - The placement and maintenance of a sufficient number of laser systems or
suitable alternate light sources in medical facilities
- - The price of Visudyne relative to other drugs or competing treatments
- - The need for retreatment of Visudyne throughout the treatment process may
not approximate retreatment rates during clinical development
- - The scope and timing of additional marketing approvals and favorable
reimbursement programs for expanded uses of Visudyne
- - Increased competition for Visudyne from new or existing products
- - Adverse side effects or unfavorable publicity concerning Visudyne or other
drugs in its class
20
OUR FUTURE OPERATING RESULTS ARE UNCERTAIN AND LIKELY TO FLUCTUATE.
Until the fourth quarter of 2000, QLT had a history of operating losses.
Although QLT was profitable for the years 2000, 2001 and 2002, future operating
performance is not certain and the Company may not be able to maintain operating
profitability. Our accumulated deficit at December 31, 2002 was approximately
$52.9 million.
Our operating results may fluctuate from period to period for a number of
reasons. In budgetting our operating expenses, some of which are fixed in the
short term, we assume that revenues will continue to grow. Even a relatively
small revenue shortfall or a small increase in operating expenses may cause a
period's results to be below our expectations. A revenue shortfall or increase
in operating expenses could arise from any number of factors, such as:
- - Lower than expected revenues from sales of Visudyne by Novartis Ophthalmics
- - Changes in our product pricing strategies
- - High levels of marketing expenses for Visudyne, in particular outside of the
United States
- - Fluctuations in currency exchange rates
- - Unfavorable outcome of pending patent or securities litigation against QLT.
See "Legal Proceedings"
- - Higher than expected operating expenses as a result of increased costs
associated with the development or commercialization of Visudyne,
tariquidar, and our other product candidates
- - Increased operating expenses as a result of product, technology acquisitions
or other acquisitions or business combinations
OUR PRODUCT DEVELOPMENT EFFORTS FOR VISUDYNE(R), TARIQUIDAR AND OUR OTHER
PRODUCTS IN DEVELOPMENT MAY NOT YIELD MARKETABLE PRODUCTS DUE TO UNFAVORABLE
RESULTS OF CLINICAL STUDIES OR TRIALS, FAILURE TO ACHIEVE REGULATORY APPROVALS
OR MARKET ACCEPTANCE, PROPRIETARY RIGHTS OF OTHERS OR MANUFACTURING ISSUES.
Our success depends on our ability to successfully develop and obtain
regulatory approval to market new pharmaceutical products. Development of a
product requires substantial technical, financial and human resources even if
the product is not successfully completed.
Our potential products may appear to be promising at various stages of
development yet fail to reach the market for a number of reasons, including:
- - Lack of sufficient treatment benefit or unacceptable safety issues during
preclinical studies or clinical trials
- - Lack of commercial market opportunity
- - Results from preclinical and early clinical studies may not be predictive of
results obtained in large scale clinical trials
- - The FDA may suspend our clinical trials at any time if, among other reasons,
it concludes that patients participating in such trials are being exposed to
unacceptable health risks
- - Failure to receive necessary regulatory approvals after completion of
clinical trials
- - Existence of conflicting proprietary rights of third parties
- - Inability to develop manufacturing methods that are efficient,
cost-effective and capable of meeting stringent regulatory standards
21
Additional regulatory approvals will also be needed to expand the uses for
which Visudyne may be marketed in the United states and the European countries
and other markets where it is already approved or applications are pending, and
those approvals may be delayed, may not be obtained or may be more limited than
anticipated.
Pursuant to the recommendation of the Data Safety and Monitoring Committee
of the two Phase III studies of tariquidar in non small cell lung cancer,
enrollment in these trials has been halted pending an interim satefy and
efficacy analyses of 150 patients already enrolled in the two trials. There can
be no assurance that the Data Safety and Monitoring Committee will recommend
that enrollment in these trials recommence following these analyses. These
trials remain blinded, and QLT cannot predict what might be the outcome of the
interim analyses.
FAILURE OF NOVARTIS OPHTHALMICS TO EFFECTIVELY MARKET VISUDYNE(R) WOULD REDUCE
POTENTIAL REVENUES.
We are reliant on the efforts of Novartis Ophthalmics in promoting and
selling Visudyne. If Novartis Ophthalmics does not dedicate sufficient resources
to the promotion of Visudyne, or if Novartis Ophthalmics fails in its marketing
efforts, the revenues we receive from the sale of Visudyne would decrease and
our business and operating results would be adversely affected.
VISUDYNE(R) SALES ARE WORLDWIDE, AND CURRENCY FLUCTUATIONS MAY IMPAIR OUR
REPORTED FINANCIAL RESULTS.
In most significant markets, Visudyne is sold in the local currency.
Although we implement currency hedging techniques to mitigate the impact of
currency fluctuations on our financial results, these techniques do not
eliminate the effects of foreign currency fluctuations with respect to
anticipated revenues or cash flows, and, as they are short term in nature, do
not protect us from prolonged periods of currency fluctuations.
WE ARE DEPENDENT UPON THIRD-PARTIES TO DEVELOP AND COMMERCIALIZE SOME OF OUR
PRODUCT CANDIDATES.
Our strategy for the research, development, manufacture and marketing of
Visudyne and our other products includes entering into various arrangements with
third parties and therefore is dependent upon the subsequent success of these
third parties in performing their responsibilities under such arrangements.
Although we believe that parties to such arrangements have an economic incentive
to succeed in performing their contractual responsibilities, the amount and
timing of resources to be devoted to these activities generally are not under
our control. We cannot predict whether such parties, including Novartis
Ophthalmics, will perform their obligations as expected or whether significant
revenue will be derived or sustained from such arrangements. To the extent such
parties do not perform adequately under our various agreements with them, the
development and commercialization of our products may be delayed, may become
more costly to us or may be terminated.
In some cases, these agreements may be terminated by the other party with
limited notice, and, in certain circumstances, the other party may acquire
certain rights to the products under development upon termination.
IN THE FIELD OF PDT, WE ARE DEPENDENT UPON THE SUCCESS AND CONTINUED SUPPLY OF
THIRD-PARTY MEDICAL DEVICE COMPANIES WITH COMPLEMENTARY LIGHT SOURCE AND LIGHT
DELIVERY DEVICES.
Because PDT requires a light source, and in some instances a light delivery
system, to be used in conjunction with our photosensitizers, we are dependent
upon the success of medical device companies in placing and maintaining light
sources with the appropriate medical facilities and in distributing the light
delivery systems. If the medical device companies with whom we or our
collaborative partners have strategic relationships are unable to achieve the
appropriate placements of light sources and ensure an uninterrupted supply of
light delivery systems, as applicable, if they terminate the collaborative
arrangements to pursue more profitable market opportunities, or if they, as a
result of industry consolidation or for other reasons no longer supply
complementary light sources or light delivery systems, the sale of Visudyne by
our distribution partners and our share of revenues from the sale of Visudyne
may be adversely affected. We may not be able to secure additional arrangements
with other leading medical device companies to complement the activities of our
current providers.
22
WE MAY BE UNABLE TO HAVE MANUFACTURED OR CONTINUE TO HAVE MANUFACTURED
EFFICIENTLY COMMERCIAL QUANTITIES OF VISUDYNE(R), OR OUR OTHER PRODUCTS, SUCH AS
TARIQUIDAR, IN COMPLIANCE WITH FDA AND OTHER REGULATORY REQUIREMENTS.
Our ability to conduct clinical trials and commercialize Visudyne and our
other products, either directly or in conjunction with others, depends, in large
part, on our ability to have such products manufactured at a competitive cost
and in accordance with FDA and other regulatory requirements. Our contract
manufacturers' manufacturing and quality procedures may not achieve or maintain
compliance with applicable FDA and other regulatory standards, and, even if they
do, we may be unable to produce or continue to produce commercial quantities of
Visudyne and our other products at an acceptable cost or margin.
If current manufacturing processes are modified, or the source or location
of our product supply is changed, regulatory authorities will require us to
demonstrate that the material produced from the modified or new process or
facility is equivalent to the material used in the clinical trials or products
previously approved. Any such modifications to the manufacturing process or
supply may not achieve or maintain compliance with the applicable regulatory
requirements. In many cases, prior approval by regulatory authorities may be
required before any changes can be instituted.
We depend on several third parties in the U.S., Canada, Europe and Japan to
manufacture Visudyne and, if such third parties fail to meet their respective
contract commitments, we may not be able to supply or continue to supply
commercial quantities of the product or conduct certain future clinical testing.
We have limited experience in the manufacture of tariquidar, and may be
unsuccessful in securing a long-term supply agreement for the commercial
manufacture of tariquidar on terms which are favorable to the Company.
THE SUCCESS OF VISUDYNE(R) AND OUR OTHER PRODUCTS MAY BE LIMITED BY GOVERNMENTAL
AND OTHER THIRD-PARTY PAYORS.
The continuing efforts of governmental and third-party payors to contain or
reduce the costs of health care may negatively affect the sale of Visudyne and
our other products. Our ability to commercialize Visudyne and our other products
successfully will depend in part on the timeliness of and the extent to which
adequate reimbursement for the cost of such products and related treatments is
obtained from government health administration authorities, private health
insurers and other organizations in the U.S. and foreign markets. Product sales,
attempts to gain market share or introductory pricing programs of our
competitors could require us to lower our prices which could adversely affect
our results of operations. We may be unable to set or maintain price levels
sufficient to realize an appropriate return on our investment in product
development. Significant uncertainty exists as to the reimbursement status of
newly approved therapeutic products or newly approved product indications.
Third-party payors are challenging the price and cost-effectiveness of
medical products and services, and the adoption of new legislation and
regulations affecting the pricing of pharmaceuticals could further limit
reimbursement for medical products and services. To the extent such governmental
or private third-party payors focus their efforts on Visudyne or our current or
future product candidates, sales of such products could be negatively affected.
There can be no assurance that any of our applications for reimbursement for
all or any component of Visudyne therapy will result in approvals or that our
current reimbursement approvals will not be reduced or reversed in whole or in
part. For example, during 2002 the CMS aanounced that they would not uphold
their original intention to expand the national coverage policy for Visudyne
therapy to include reimbursement for patients with occult only subfoveal CNV
secondary to AMD. That decision constituted a reversal of the CMS' original
position.
23
PATIENT ENROLLMENT MAY NOT BE ADEQUATE FOR OUR CURRENT TRIALS OR FUTURE CLINICAL
TRIALS.
Our business could suffer if we fail to develop and maintain sufficient
levels of patient enrollment in our current or future clinical trials. Our
ability to complete clinical trials is dependent upon, among other factors, the
rate of patient enrollment, which is a function of many factors, including:
- - The nature of our clinical trial protocols or products
- - The existence of competing protocols
- - The size and longevity of the target patient population
- - The proximity of patients to clinical sites
- - Eligibility criteria for the trials
- - Patient drop out rates for the trials
Delays in planned patient enrollment may result in increased costs, delays
or termination of clinical trials, which could materially harm our business.
VISUDYNE(R), TARIQUIDAR AND QLT'S OTHER PRODUCTS MAY EXHIBIT ADVERSE SIDE
EFFECTS THAT PREVENT THEIR WIDESPREAD ADOPTION OR THAT NECESSITATE WITHDRAWAL
FROM THE MARKET.
Visudyne (or verteporfin), tariquidar and QLT's other products may exhibit
undesirable and unintended side effects that may prevent or limit their
commercial adoption and use.
Even after approval by the FDA and other regulatory authorities, Visudyne
and our other products may later exhibit adverse side effects that prevent
widespread use or necessitate withdrawal from the market. New unexpected side
effects not previously observed during clinical trials could emerge in the
future. The manifestation of such side effects could cause our business to
suffer. In some cases, regulatory authorities may require labelling changes that
could add warnings or restrict usage based on unexpected side effects seen after
marketing a drug.
WE MAY FACE COMPETITION AND NOT BE SUCCESSFUL IN ADDRESSING IT.
We may be unable to contend successfully with current or future competitors.
The pharmaceutical and biotechnology industries are characterized by rapidly
evolving technology and intense competition. Our competitors include major
pharmaceutical and bio-pharmaceutical companies, many of which have or have
access to financial, technical and marketing resources significantly greater
than ours and substantially greater experience in developing and manufacturing
products, conducting preclinical and clinical testing, and obtaining regulatory
approvals
We are aware of certain products manufactured or under development by
competitors that are used for the prevention and treatment of certain diseases
which we have targeted for product development. The existence of these products,
or other products or treatments of which we are not aware, or products or
treatments that may be developed in the future, may adversely affect the
marketability of our products.
We are aware of a number of competitors developing treatments for AMD,
including EyeTech Pharmaceuticals, Genentech, Inc., Alcon Laboratories, Inc.,
and Iridex Corporation. We also believe that Visudyne could be competing against
surgical or other treatments for AMD, including macular translocation,
submacular surgery and laser photocoagulation, among others.
We believe that each of these competitors is or might be conducting
preclinical studies and clinical testing on their own or with certain third
parties in various countries for a variety of diseases and medical conditions in
which we have ongoing development programs. These and other companies also may
be involved in competitive activities of which we are not aware.
24
WE DEPEND ON KEY PERSONNEL, AND IF WE DO NOT ATTRACT AND RETAIN KEY PERSONNEL,
OUR BUSINESS COULD BE ADVERSELY AFFECTED.
Our success depends upon the continued contributions of our executive
officers and scientific and technical personnel. Many of our key
responsibilities have been assigned to a relatively small number of individuals.
The competition for qualified personnel is intense, and the failure to secure
the services of key personnel or loss of services of key personnel could
adversely affect our business.
OUR BUSINESS COULD SUFFER IF WE ARE UNSUCCESSFUL IN NEGOTIATING OR INTEGRATING
FUTURE ACQUISITIONS, BUSINESS COMBINATIONS AND STRATEGIC ALLIANCES.
We may not be successful in initiating or completing negotiations to expand
our operations and market presence by future product, technology or other
acquisitions and business combinations, joint ventures or other strategic
alliances with other companies. If we are successful in these negotiations,
these transactions create risks, such as:
- - Difficulty assimilating the operations, technology and personnel of the
combined companies
- - Disruption of our ongoing business, including loss of management focus on
existing businesses and other market developments
- - Problems retaining key technical and managerial personnel
- - Expenses associated with the treatment of in-process research and
development and amortization of other purchased intangible assets
- - Impairment of relationships with existing employees, customers and business
partners
- - Additional losses from any equity investments we might make
We may not succeed in addressing these risks, and we may not be able to make
acquisitions and business combinations, joint ventures or strategic alliances on
terms that are acceptable to us. If we are not successful, our earnings may be
adversely affected. In addition, any businesses we may acquire may incur
operating losses.
WE ARE A DEFENDANT IN A PENDING CLASS ACTION LAWSUIT THAT MAY REQUIRE US TO PAY
SUBSTANTIAL DAMAGES OR OTHERWISE SERIOUSLY HARM OUR BUSINESS.
Class action litigation is often expensive and time-consuming and the
outcome of such litigation is often uncertain. Regardless of its outcome, the
class action lawsuit may cause us to incur significant expenses and divert the
attention of our management and key personnel from our business operations. In
the worst case, the class action lawsuit may require us to pay substantial
damages and may otherwise seriously harm our business. See "Legal Proceedings".
WE MAY NOT BE ABLE TO OBTAIN AND ENFORCE EFFECTIVE PATENTS TO PROTECT OUR
PROPRIETARY RIGHTS FROM USE BY COMPETITORS, AND PATENTS OF OTHER COMPANIES COULD
REQUIRE US TO STOP USING OR PAY TO USE REQUIRED TECHNOLOGY.
We may not be able to obtain and enforce patents, to maintain trade secret
protection for our technology and to operate without infringing on the
proprietary rights of third parties. The extent to which we are unable to do so
could materially harm our business.
We have applied for and will continue to apply for patents for certain
aspects of Visudyne and our other products and technology. Such applications may
not result in the issuance of any patents, and any patents now held or that may
be issued may not provide us with a preferred position with respect to any
product or technology. It is possible that patents issued or licensed to us may
be challenged successfully. In that event, to the extent a preferred position is
conferred by such patents, any preferred position held by us would be lost.
25
If we are unable to secure or to continue to maintain a preferred position,
Visudyne and our other products could become subject to competition from the
sale of generic products.
Patents issued or licensed to us may be infringed by the products or
processes of other parties. The cost of enforcing our patent rights against
infringers, if such enforcement is required, could be significant, and the time
demands could interfere with our normal operations.
It is also possible that a court may find us to be infringing validly issued
patents of third parties. In that event, in addition to the cost of defending
the underlying suit for infringement, we may have to pay license fees and/or
damages, and may be enjoined from conducting certain activities. Obtaining
licenses under third-party patents can be costly, and such licenses may not be
available at all. Under such circumstances, we may need to materially alter our
products or processes.
Although we believe that the claims of MEEI in the lawsuits described under
"Legal Proceedings" are without merit, these lawsuits may not ultimately be
resolved in our favor. If either or both lawsuits are not resolved in our favor,
we may be obliged to pay an additional royalty or damages for access to the
inventions covered by the claims in the issued U.S. patents. Unpatented trade
secrets, improvements, confidential know-how and continuing technological
innovation are important to our scientific and commercial success. Although we
attempt to and will continue to attempt to protect our proprietary information
through reliance on trade secret laws and the use of confidentiality agreements
with our corporate partners, collaborators, employees and consultants and other
appropriate means, these measures may not effectively prevent disclosure of our
proprietary information, and, in any event, others may develop independently, or
obtain access to, the same or similar information.
WE MAY FACE FUTURE PRODUCT LIABILITY CLAIMS THAT MAY RESULT FROM THE SALE OF
VISUDYNE(R) AND OUR OTHER PRODUCTS.
The testing, manufacture, marketing and sale of human pharmaceutical
products entail significant inherent risks of allegations of product liability.
Our use of such products in clinical trials and our sale of Visudyne and our
other product candidates may expose us to liability claims allegedly resulting
from the use of these products. These claims might be made directly by
consumers, healthcare providers or others selling our products. We carry
clinical trials and product liability insurance to cover certain claims that
could arise during the clinical trials for our product candidates, or during the
commercial use of Visudyne. The limits of liability under the insurance policy
are $20 million per incident and per year in the aggregate. Such coverage, and
any coverage obtained in the future, may be inadequate to protect us in the
event of a successful product liability claim, and we may not be able to
increase the amount of such insurance or even renew it. A successful product
liability claim could materially harm our business.
WE MAY BE UNABLE TO COMPLY WITH ONGOING REGULATORY REQUIREMENTS.
Visudyne and our products under development are subject to extensive and
rigorous regulation for safety, efficacy and quality by the U.S. federal
government, principally the FDA, and by state and local governments. To the
extent Visudyne and our products under development are marketed abroad, they are
also subject to export requirements and to regulation by foreign governments.
The regulatory clearance process is lengthy, expensive and uncertain. We may not
be able to obtain, or continue to obtain, necessary regulatory clearances or
approvals on a timely basis, or at all, for Visudyne or any of our products
under development, and delays in receipt or failure to receive such clearances
or approvals, the loss of previously received clearances or approvals, or
failure to comply with existing or future regulatory requirements could
materially harm our business.
Drugs manufactured or distributed pursuant to the FDA's approval are subject
to pervasive and continuing regulation by the FDA, certain state agencies and
various foreign governmental regulatory agencies such as the EMEA. Manufacturers
are subject to inspection by the FDA and those state agencies, and must comply
with the host of regulatory requirements that usually apply to drugs marketed in
the U.S., including but not limited to the FDA's labelling regulations, Good
Manufacturing Practice requirements, adverse event reporting, and the FDA's
general prohibitions against promoting products for unapproved or "off-label"
uses. Our failure to comply with applicable requirements could result in
sanctions being imposed on us. These sanctions could include warning letters,
fines, product recalls or seizures, injunctions, refusals to permit
26
products to be imported into or exported out of the United States, refusals of
the FDA to grant approval of drugs or to allow us to enter into governmental
supply contracts, withdrawals of previously approved marketing applications and
criminal prosecutions.
We, our contract manufacturers and manufacturers of light sources and
delivery systems used with Visudyne and our other PDT products under development
are subject to numerous federal, state and local laws relating to such matters
as safe working conditions, manufacturing practices, environmental protection,
fire hazard control and disposal of hazardous or potentially hazardous
substances. In addition, advertising and promotional materials relating to
medical devices and drugs are, in certain instances, subject to regulation by
the Federal Trade Commission or the FDA. We, our contract manufacturers and
manufacturers of light sources and delivery systems used with Visudyne and our
PDT products under development may be required to incur significant costs to
comply with such laws and regulations in the future, and such laws or
regulations may materially harm our business. Unanticipated changes in existing
regulatory requirements, failure of us, our contract manufacturers or
manufacturers of light sources and delivery systems used with Visudyne and our
PDT products under development to comply with such requirements or the adoption
of new requirements could materially harm our business.
WE MAY NEED ADDITIONAL CAPITAL, AND OUR PROSPECTS FOR OBTAINING IT ARE
UNCERTAIN.
We may be unable to obtain necessary additional capital in the future. Our
business may not generate the cash necessary to fund our operations and we
expect that the funding requirements for our operating activities will continue
to increase substantially in the future, primarily due to the expanded clinical
testing of Visudyne, tariquidar and our other products. The amount required to
fund additional operating expenses will also depend on other factors, including
the status of competitive products, the success of our research and development
programs, the extent and success of any collaborative research arrangements and
as a result of product, technology or other acquisitions or business
combinations. We could seek additional funds in the future from a combination of
sources, including product licensing, joint development and other financing
arrangements. In addition, we may issue debt or equity securities if we
determine that additional cash resources could be obtained under favorable
conditions, or if future development funding requirements cannot be satisfied
with available cash resources. Additional capital may not be available on terms
favorable to us, or at all. If adequate capital is unavailable, we may have to
reduce substantially or eliminate expenditures for research, development,
clinical testing, manufacturing and marketing for Visudyne, tariquidar and our
other products. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital Resources".
VARIOUS PROVISIONS OF OUR CHARTER AND OUR SHAREHOLDER RIGHTS PLAN MAY HAVE THE
EFFECT OF IMPEDING A CHANGE OF CONTROL, MAKING REMOVAL OF THE PRESENT MANAGEMENT
MORE DIFFICULT OR RESULTING IN RESTRICTIONS UPON THE PAYMENT OF DIVIDENDS AND
OTHER DISTRIBUTIONS TO THE SHAREHOLDERS.
With shareholder approval, the Company has adopted a shareholder rights plan
which will be in effect for six years commencing March 17, 2002, subject to
further confirmation by shareholders after three years. The general effect of
the plan is to require anyone who seeks to acquire 20% or more of our
outstanding common shares to make a bid complying with specific provisions
included in the plan. In certain circumstances, holders of common shares may
acquire additional shares of QLT (or those of the acquiror) at a 50% discount
from the then-prevailing market price. The provisions of the plan could prevent
or delay the acquisition of our company by means of a tender offer, a proxy
contest or otherwise, making it more difficult for shareholders to receive any
premium over the current market price that might be offered.
Our authorized preference share capital is available for issuance from time
to time at the discretion of our board of directors, without shareholder
approval. Our charter grants the board of directors the authority, subject to
the corporate law of British Columbia, to determine or alter the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued series of preference shares, including any dividend rate, voting
rights, conversion privileges or redemption or liquidation rights. The rights of
any future series of preference shares could have an adverse effect on the
holders of our common stock by delaying or preventing a change of control,
making removal of the present management more difficult or resulting in
restrictions upon the payment of dividends and other distributions to the
holders of common stock.
27
THE MARKET PRICE OF OUR COMMON STOCK IS EXTREMELY VOLATILE.
The stock prices of pharmaceutical and bio-pharmaceutical companies,
including QLT, are extremely volatile, and it is likely that the market price of
our common stock will continue to be highly volatile. In addition to being
affected by the stock market generally, our stock price could be subject to wide
fluctuations in response to a number of factors, including:
- - Announcements by us or our competitors of significant acquisitions,
strategic relationships, joint ventures or capital commitments
- - Announcements by us or our competitors of technological innovations or new
commercial products
- - Results of clinical trials for Visudyne, tariquidar and our other products
under development
- - Developments relating to patents, proprietary rights and potential
infringement
- - Expense and time associated with obtaining government approvals for
marketing of Visudyne, tariquidar and our other products under development
- - Reimbursement policies of various government and third party payors
- - Public concern over the safety of Visudyne, tariquidar and our other
products under development or those of our competitors
- - Changes in estimates of our revenue and operating results
- - Variances in our revenue or operating results from forecasts or projections
- - Recommendations of securities analysts regarding investment in our stock
These broad market and industry factors may materially and adversely affect our
stock price, regardless of our operating performance.
ITEM 2. PROPERTIES
QLT owns and occupies 160,000 square feet of laboratory, administrative and
dedicated amenity space on the single site where its head office and research
facilities are located. QLT also owns an additional 2.63 acres of land
immediately adjacent to its head office and research facilities. There is
currently no proposal to construct facilities on the adjacent site.
The Company believes that its existing facilities are adequate to meet its
needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Certain of the Company's legal proceedings are discussed below and in Note
17 to the consolidated financial statements, "Contingencies". While the Company
believes these proceedings are without merit and intends to vigorously defend
against these claims, it is impossible to predict accurately or determine the
eventual outcome of these proceedings.
MEEI LITIGATION
On April 24, 2000, Massachusetts Eye and Ear Infirmary ("MEEI") filed a
civil suit against the Company in the United States District Court for the
District of Massachusetts seeking to establish exclusive rights for MEEI as the
owner of certain inventions relating to the use of verteporfin as the
photoactive agent in the treatment of certain eye diseases including AMD. During
2002, the Court granted summary judgment in favor of QLT, dismissing all counts
of MEEI's complaint against the Company in this lawsuit.
28
The lawsuit (Civil Action No. 00-10783-JLT) relates, in part, to an ongoing
dispute involving U.S. Patent No. 5,798,349 (the "'349 Patent") which was issued
on August 25, 1998 to the Company, MEEI and Massachusetts General Hospital
("MGH") as co-owners. The complaint alleges breach of contract, misappropriation
of trade secrets, conversion, misrepresentation, unjust enrichment, unfair trade
practices and related claims and asks that the Court: (i) declare MEEI the owner
of certain inventions claimed in the '349 Patent; (ii) enjoin the Company from
infringement of those claims or any action that would diminish the validity or
value of such claims; (iii) declare that the Company breached an agreement with
MEEI to share equitably in any proceeds derived as a result of collaboration
leading to the '349 Patent; (iv) impose a constructive trust upon the Company
for any benefit that the Company has or will derive as a result of the '349
Patent; and (v) award MEEI monetary relief for misappropriation of trade secrets
in an amount equal to the greater of MEEI's damages or the Company's profits
from any such misappropriation, and double or treble damages under Massachusetts
law.
The Company's counterclaim, filed in 2000, against MEEI and two employees of
MEEI, seeks: (i) to correct inventorship on the '349 Patent by adding an
additional MGH researcher as a joint inventor; (ii) a declaration that the
Company and MGH are joint owners of the '349 Patent; (iii) a determination that
MEEI is liable to the Company for conversion and unfair trade practices under
Massachusetts law; (iv) an injunction to prohibit MEEI from prosecuting any
patent application claiming subject matter already claimed in the '349 Patent;
and (v) an award of damages and attorneys' fees. QLT subsequently dismissed
voluntarily its counterclaim for conversion.
In 2002, QLT moved for summary judgement against MEEI on all counts of
MEEI's complaint in Civil Action No. 00-10783-JLT. The Court granted QLT's
motions, thus dismissing all of MEEI's claims in this lawsuit. QLT's
counterclaims against MEEI remain outstanding.
On May 1, 2001, the United States Patent Office issued United States Patent
No. 6,225,303 (the "'303 Patent") to MEEI. The `303 Patent is derived from the
same patent family as the '349 Patent and claims a method of treating unwanted
choroidal neovasculature in a shortened treatment time using verteporfin. The
patent application which led to the issuance of the `303 patent was filed and
prosecuted by attorneys for MEEI and, in contrast to the '349 patent, named only
MEEI researchers as inventors.
The same day the `303 patent was issued, MEEI commenced a second civil suit
against the Company and Novartis Ophthalmics, Inc. alleging infringement of the
`303 Patent (Civil Action No. 01-10747-EFH). The suit seeks damages and
injunctive relief for patent infringement and unjust enrichment. The Company has
answered the complaint, denying its material allegations and raising a number of
affirmative defenses, and has asserted counterclaims against MEEI and the two
MEEI researches who are named as inventors on the `303 patent. The Company's
counterclaim seeks to correct inventorship of the `303 patent by adding QLT and
MGH researchers as joint inventors and asks the court to declare that QLT and
MGH are co-owners of the `303 patent. The counterclaim also requests a
declaration that QLT does not infringe, induce infringement, or contribute to
infringement of the `303 patent, asserting, among other reasons, that QLT and
MGH are rightful co-owners of the patent and QLT has a license from MGH of MGH's
co-ownership rights under the patent. In addition, the counterclaim seeks a
declaratory judgement that the `303 patent is invalid and unenforceable.
Finally, the Company's counterclaim seeks an award of monetary damages for
breach of material transfer agreements governing MEEI's use of verteporfin,
based upon MEEI's failure to notify QLT of MEEI's intent to file the patent
application that led to the issuance of the `303 patent to MEEI.
In November 2001, MGH sought and was granted leave to intervene in the
action to protect its rights in the `303 patent. MGH's complaint in
intervention, like QLT's counterclaim, asks the court to correct inventorship of
the `303 patent by adding QLT and MGH researchers as joint inventors of the
inventions claimed in the patent and by declaring that MGH is a joint owner of
those inventions.
No trial has been scheduled in either case, and none is expected until the
latter part of 2003, at the earliest.
The Company believes MEEI's claims are without merit and intends to
vigorously defend against such action and pursue its counterclaims. The outcome
of this dispute is not presently determinable or estimable and there can be no
assurance that the matter will be resolved in favor of the Company. If the
dispute is not resolved in the Company's favor, the Company may be obliged to
pay additional royalties or damages for access to the inventions claimed in the
patents named in the suits.
29
SECURITIES LITIGATION
In January and February 2001, seven proposed securities class actions were
filed in the United States District Court for the Southern District of New York
on behalf of purchasers of the Company's common shares between August 1, 2000
and December 14, 2000. On May 3, 2001, the court ordered consolidation of the
seven actions.
The complaints name as defendants the Company; Julia Levy, former President,
Chief Executive Officer and a current Director of the Company; and Kenneth
Galbraith, the Company's former Executive Vice President, Chief Financial
Officer and Corporate Secretary. The plaintiffs allege that the defendants
violated Sections 10(b) and 20(a) of the U.S. Securities and Exchange Act.
The plaintiffs allege that on December 14, 2000, the Company announced that
it expected to miss its Visudyne sales estimates for the fourth-quarter 2000,
and that in response, the Company's common share price dropped approximately
31%. The plaintiffs claim that the Company's December 14, 2000 statements
contradicted prior information issued by the defendants concerning the demand
for Visudyne and the Company's prospects. The plaintiffs allege that the
defendants overstated the demand for Visudyne, did not properly disclose
reimbursement issues relating to Visudyne and that the defendants had no basis
in the months preceding the December announcement for their projections of
fourth-quarter sales. The plaintiffs further allege that the intent of the
individual defendants to mislead investors can be inferred from their sale of a
substantial amount of the Company's common shares during the months of August
and September 2000. The plaintiffs seek injunctive relief, fees and expenses and
compensatory damages in an unspecified amount.
The Company believes that the plaintiffs' claims are without merit and
intends to vigorously defend against such actions. However, the outcome of this
claim is not presently determinable or estimable and there can be no assurance
that the matter will be resolved in favor of the Company and the other
defendants. If the lawsuit is not resolved in the Company's favor, there can be
no guarantee that the Company's insurance will be sufficient to pay for the
damages awarded to the plaintiffs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter of the fiscal year 2002.
30
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER
MATTERS
COMMON SHARE INFORMATION
The common shares of the Company trade in Canada on the Toronto Stock
Exchange under the symbol "QLT" and in the United States on the Nasdaq Stock
Market under the symbol "QLTI". The following table sets forth, for the periods
indicated, the high and low closing sales prices and trading volumes of the
common shares, as reported by the Toronto Stock Exchange and the Nasdaq Stock
Market.
THE TORONTO STOCK EXCHANGE THE NASDAQ STOCK MARKET
------------------------------------ ---------------------------------------
HIGH LOW VOLUME HIGH LOW VOLUME
-------- -------- ---------- ---------- --------- ----------
(CAD$) (CAD$) (U.S.$) (U.S.$)
2002
Fourth Quarter $15.58 $12.00 15,905,850 $ 9.97 $ 7.54 16,458,028
Third Quarter 18.88 11.94 18,226,677 12.44 7.57 23,750,992
Second Quarter 24.70 17.40 25,171,492 15.66 11.20 30,700,025
First Quarter 40.50 26.63 20,328,349 25.48 16.70 48,540,654
2001
Fourth Quarter $41.23 $23.50 24,960,389 $25.82 $14.97 44,788,638
Third Quarter 35.98 24.44 12,306,716 23.46 15.43 27,544,515
Second Quarter 42.80 26.91 15,849,432 27.86 17.00 55,054,675
First Quarter 53.25 31.25 19,543,363 35.13 20.00 63,575,994
The last reported sale price of the common shares on The Toronto Stock
Exchange and on The Nasdaq Stock Market on February 28, 2003 was CAD$13.56 and
US$9.09, respectively.
As of February 28, 2003, there were 442 registered holders of the common
shares of the Company, 263 of whom were residents of the United States. Of the
total 68,560,793 common shares outstanding, the portion held by registered
holders resident in the U.S. was 20,663,330 or 30.14%.
DIVIDEND POLICY
The Company has not declared or paid any dividends on its common shares
since inception. The Company currently anticipates that it will retain any
future earnings, if any, to finance the expansion of its business and does not
anticipate paying dividends in the foreseeable future.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING HOLDERS OF COMMON SHARES
There is no law, governmental decree or regulation in Canada that restricts
the export or import of capital, or which would affect the remittance of
dividends or other payments by the Company to non-resident holders of common
shares in the Company, other than withholding tax requirements.
There is no limitation imposed by Canadian law or the charter or other
constituent documents of the Company on the right of non-residents to hold or
vote common shares in the Company, other than those imposed by the Investment
Canada Act (Canada) (the "Investment Act").
The Investment Act requires each individual, government or agency thereof,
corporation, partnership, trust or joint venture that is not a "Canadian" as
defined in the Investment Act (a "non-Canadian") who commences a new business
activity in Canada or acquires control of an existing Canadian business, where
the establishment or acquisition of control is not a reviewable transaction, to
file a notification with Industry
31
Canada. The Investment Act generally prohibits implementation of a reviewable
transaction by a non-Canadian unless after review the minister responsible for
the Investment Act is satisfied that the investment is likely to be of net
benefit to Canada. An investment in common shares of the Company by a
non-Canadian would be reviewable under the Investment Act if it were an
investment to acquire control of the Company and the value of the assets of the
Company was $5 million or more. Higher limits apply for acquisitions by or from
World Trade Organization ("WTO") member country investors.
The acquisition of a majority of the voting interests of an entity or of a
majority of the undivided ownership interests in the voting shares of an entity
that is a corporation is deemed to be acquisition of control of that entity. The
acquisition of less than a majority but one-third or more of the voting shares
of a corporation or of an equivalent undivided ownership interest in the voting
shares of the corporation is presumed to be acquisition of control of that
corporation unless it can be established that, on the acquisition, the
corporation is not controlled in fact by the acquiror through the ownership of
voting shares. The acquisition of less than one-third of the voting shares of a
corporation or of an equivalent undivided ownership interest in the voting
shares of the corporation is deemed not to be acquisition of control of that
corporation. Certain transactions in relation to common shares in the Company
would be exempt from review from the Investment Act, including:
(a) acquisition of common shares by a person in the ordinary course of that
person's business as a trader or dealer in securities;
(b) acquisition of control of the Company in connection with the realization
of security granted for a loan or other financial assistance and not for
any purpose related to the provisions of the Investment Act; and
(c) acquisition of control of the Company by reason of an amalgamation,
merger, consolidation or corporate reorganization following which the
ultimate direct or indirect control in fact of the Company, through the
ownership of voting interests, remains unchanged.
The Investment Act was amended with the Act to Implement the Agreement
Establishing the World Trade Organization to provide for special review
thresholds for WTO member country investors. Under the Investment Act, as
amended, an investment in common shares of the Company by a non-Canadian who is
a "WTO investor" (as defined in the Investment Act) would be reviewable only if
it were an investment to acquire control of the Company and the value of the
assets of the Company was equal to or greater than a specified amount (the
"Review Threshold"), which increases in stages. The Review Threshold was $209
million in 2001, $218 million in 2002, and is $223 million in 2003. This amount
is subject to an annual adjustment on the basis of a prescribed formula in the
Investment Act to reflect inflation and real growth within Canada.
CERTAIN CANADIAN FEDERAL INCOME TAX INFORMATION FOR UNITED STATES RESIDENTS
The following is a summary of certain Canadian federal income tax
considerations generally applicable to holders of common shares who, for
purposes of the Income Tax Act (Canada) (the "Canadian Tax Act"), deal at arm's
length with the Company, hold such shares as capital property, do not carry on
business in Canada, have not been at any time residents of Canada for purposes
of the Canadian Tax Act and are residents of the United States ("U.S.
Residents") under the Canada-United States Income Tax Convention (1980) (the
"Convention").
This summary is of a general nature only and is not intended to be, and
should not be construed to be, legal, business or tax advice to any holder of
common shares or prospective holder of common shares and no opinion or
representation with respect to any tax consequences, including, but not limited
to, Canadian federal, Canadian provincial, U.S. federal or U.S. state tax
consequences, is made to any particular holder of common shares or prospective
holder of common shares. Accordingly, holders of common shares and prospective
holders of common shares should consult with their own tax advisers for advice
with respect to the tax consequences to them having regard to their own
particular circumstances, including any consequences of purchasing, owning or
disposing of common shares arising under Canadian federal, Canadian provincial,
U.S. federal, U.S. state or local tax laws or tax laws of jurisdictions outside
the United States or Canada. No advance income tax ruling has been requested or
obtained from the Canada Customs
32
and Revenue Agency (formerly Revenue Canada) to confirm the tax consequences of
any of the transactions described herein.
This summary is based on the current provisions of the Canadian Tax Act and
the regulations thereunder (the "Regulations"), proposed amendments to the
Canadian Tax Act and/or Regulations publicly announced by the Minister of
Finance (Canada) prior to the date hereof (the "Proposed Amendments"), and the
provisions of the Convention as in effect on the date hereof. No assurance can
be given that the Proposed Amendments will be entered into law in the manner
proposed, or at all.
This summary is not exhaustive of all possible Canadian federal income tax
consequences for U.S. Residents and does not take into account or anticipate any
changes in law, whether by legislative, administrative, governmental or judicial
decision or action, nor does it take into account Canadian provincial, U.S. or
foreign tax considerations which may differ significantly from those discussed
herein. No assurances can be given that subsequent changes in law or
administrative policy will not affect or modify the opinions expressed herein.
A U.S. Resident will not be subject to tax under the Canadian Tax Act in
respect of any capital gain on a disposition of common shares unless such shares
derive their value principally from real property situated in Canada and
constitute taxable Canadian property, as defined in the Canadian Tax Act, of the
U.S. Resident. Common shares will constitute taxable Canadian property if, at
any time during the 60-month period immediately preceding the disposition of the
common shares, the U.S. Resident, persons with whom the U.S. Resident did not
deal at arm's length, or the U.S. Resident together with all such persons, owned
25% or more of the issued shares of any class of the capital stock of the
Company.
Amounts in respect of common shares paid or credited or deemed to be paid or
credited as, on account or in lieu of payment of, or in satisfaction of,
dividends to a U.S. Resident will generally be subject to Canadian non-resident
withholding tax at the rate of 25%. Currently, under the Convention the rate of
Canadian non-resident withholding tax will generally be reduced to: (i) 5% of
the gross amount of dividends if the beneficial owner is a company that is
resident in the United States and that owns at least 10% of the voting stock of
the Company; or (ii) 15% of the gross amount of dividends if the beneficial
owner is some other resident of the United States.
CERTAIN UNITED STATES FEDERAL INCOME TAX INFORMATION FOR UNITED STATES HOLDERS
The following is a general discussion of certain U.S. federal income tax
considerations that may apply to a U.S. Holder (as defined below) of common
shares. This discussion is based on the United States Internal Revenue Code of
1986, as amended (the "Code"), Treasury Regulations promulgated thereunder, and
judicial and administrative interpretations thereof, all as in effect on the
date hereof and all of which are subject to change possibly with retroactive
effect. This discussion addresses only those U.S. Holders that hold common
shares as "capital assets" and does not address U.S. federal income tax
considerations that may be relevant to particular U.S. Holders in light of their
individual circumstances or to U.S. Holders that are subject to special
treatment under certain U.S. federal income tax laws, such as:
33
o tax exempt organizations or pension plans;
o financial institutions;
o insurance companies
o investors in pass-through entities;
o broker-dealers;
o 10% U.S. Shareholders (as defined below);
o persons who hold their common shares as a hedge or as part of a straddle,
constructive sale, conversion transaction, or other risk management
transaction; or
o persons who acquired their common shares through the exercise of employee
stock options or otherwise as compensation.
This discussion is for general information only and it is not intended to
be, nor should it be construed to be, legal or tax advice to any particular
holder of common shares or prospective holder of common shares. No opinion or
representation with respect to the U.S. federal income tax consequences is made.
Moreover, this discussion does not include a description of the tax laws of any
state or local governments within the United States. Accordingly, holders and
prospective holders of common shares should consult with their own tax advisors
about the U.S. federal, state, local, and foreign tax consequences of
purchasing, owning and disposing of common shares.
U.S. Holders
As used herein, the term "U.S. Holder" includes a holder of common shares
that is a citizen or resident of the United States, a partnership, corporation
or other entity created or organized in or under the laws of the United States
or any state thereof, certain trusts and estates, and any other person or entity
whose ownership of common shares is effectively connected with the conduct of a
trade or business in the U.S.
Distributions on Common Shares
Subject to the discussion of the "passive foreign investment company" rules
below, a U.S. Holder receiving dividend distributions (including constructive
dividends) with respect to common shares is required to include in gross income
for U.S. federal income tax purposes the gross amount of such distributions to
the extent of the Company's current and accumulated earnings and profits without
reduction for Canadian income tax withheld. Such Canadian tax withheld may be
credited, subject to certain limitations against the U.S. Holder's U.S. federal
income tax liability or, alternatively, may be deducted in computing the U.S.
Holder's U.S. federal taxable income by those who itemize deductions (see
discussion at "Foreign Tax Credit" below). To the extent that distributions
exceed current or accumulated earnings and profits of the Company, they will be
treated first as a return of capital up to the U.S. Holder's adjusted basis in
the common shares and thereafter as capital gain from the sale or exchange of
the common shares. Preferential tax rates for net long term capital gains may
apply to certain U.S. Holders that satisfy minimum holding period and other
requirements (see discussion at "Sale of Common Shares"). Corporate U.S. Holders
generally will not be allowed a deduction for dividends received in respect of
distributions on common shares.
If a dividend distribution is paid in Canadian dollars, the amounts
includable in income will be the U.S. dollar value, on the date of receipt, of
the Canadian dollar amount distributed. Any subsequent gain or loss in respect
of such Canadian dollars arising from exchange rate fluctuations generally will
be ordinary income or loss.
34
Foreign Tax Credit
Subject to the limitations set forth in the Code, as modified by the United
States-Canada income tax treaty, a U.S. Holder may elect to claim a credit
against his or her U.S. federal income tax liability for Canadian income tax
withheld from dividends received in respect of common shares. Holders of common
shares and prospective holders of common shares should be aware that dividends
paid by the Company generally will constitute "passive income" for purposes of
the foreign tax credit, which could reduce the amount of foreign tax credit
available to a U.S. Holder. The rules relating to the determination of the
foreign tax credit are complex. Holders of common shares and prospective holders
of common shares should consult their own tax advisors to determine whether and
to what extent they would be entitled to such credit. U.S. Holders who itemize
deductions may instead claim a deduction for Canadian income tax withheld.
Sale of Common Shares
Subject to the discussion of the "passive foreign investment company" rules
below, a U.S. Holder generally will recognize capital gain or loss upon the sale
of common shares equal to the difference between (i) the amount of cash plus the
fair market value of any property received, and (ii) the U.S. Holder's tax basis
in such common shares. This gain or loss will be long-term or short-term capital
gain or loss, depending on the holding period of the U.S. Holder. Capital gains
and losses are netted and combined according to special rules in arriving at the
overall net capital gain or loss for a particular period. Preferential tax rates
for net long-term capital gains are applicable to a U.S. Holder that is an
individual, estate or trust. There currently are no preferential tax rates for
net long-term capital gains applicable to a U.S. Holder that is a corporation.
Deductions for net capital losses are subject to significant limitations.
For U.S. Holders that are individuals, any unused portion of such net capital
loss may be carried over to be used in later tax years until such net capital
loss is thereby exhausted. For U.S. Holders that are corporations (other than
corporations subject to Subchapter S of the Code), any unused net capital loss
may be carried back three years from the loss year and carried forward for the
five years following the loss year to be offset against capital gains.
Passive Foreign Investment Company
Special rules are applicable to U.S. Holders that hold stock in a "passive
foreign investment company" ("PFIC"). A foreign corporation generally will be a
PFIC for any taxable year in which either (i) 75% or more of its gross income is
"passive income" (which includes interest, dividends and certain rents and
royalties) or (ii) the average percentage by value of its incoming producing
assets that are held for the production of "passive income" is 50% or more.
The Company believes that it was not a PFIC in 2002 and anticipates that it
will not be a PFIC with respect to any subsequent taxable year. However, there
can be no assurance that the Company's determination concerning its PFIC status
will not be challenged by the Internal Revenue Service. Therefore, holders of
common shares and prospective holders of common shares are urged to consult with
their own tax advisors with respect to the application of the PFIC rules to
them.
The Company believes that it was a PFIC in one or more taxable years prior
to 2000. Accordingly, a U.S. Holder whose common shares were held at any time
during a taxable year in which the Company was a PFIC may be required to prorate
all gains realized on the disposition of those common shares and all "excess
distributions", as specially defined, with respect to those common shares over
their entire holding period. All gains or excess distributions allocated to
prior years of the U.S. Holder (other than years prior to the first taxable year
of the Company during such U.S. Holder's holding period and beginning after
January 1, 1987 for which it was a PFIC) will be taxed at the highest tax rate
for each such prior year applicable to ordinary income. The U.S. Holder also
will be liable for interest on the foregoing tax liability for each such prior
year calculated as if such liability had been due with respect to each such
prior year. A U.S. Holder that is not a corporation must treat this interest
charge as "personal interest," which is non-deductible. The balance of the gain
or the excess distribution will be treated as ordinary income in the year of the
disposition or distribution, and no interest charge will be incurred with
respect to such balance. There exist certain other adverse tax consequences that
may apply to any U.S. Holder that owns, directly or indirectly, an interest in a
PFIC.
35
These adverse tax consequences will not apply, however, if the U.S. Holder
timely filed and maintained an election to treat the Company as a qualified
electing fund ("QEF"):
o for all taxable years during which the Company was a PFIC that are included
wholly or partly in the U.S. Holder's holding period of those common shares;
or
o for at least one, but not all, of the taxable years during which the Company
was a PFIC that are included wholly or partly in the U.S. Holder's holding
period of those common shares, AND the U.S. Holder made an election to
recognize as an "excess distribution" (i) under the rules described above,
any gain that he would otherwise recognize if the U.S. Holder sold his stock
on the first day of the U.S. Holder's taxable year for which the QEF
election is made or (ii) if the Company was a controlled foreign corporation
("CFC"), the U.S. Holder's pro rata share of the corporation's earnings and
profits on such first day.
In addition, if the U.S. Holder failed to meet the requirements described in
the immediately preceding sentence, the U.S. Holder may make a timely election
under Section 1298(b)(1) of the Code to recognize any gain (which will be taxed
as an "excess distribution" under the rules described in the immediately
preceding sentence) as if the U.S. Holder's common shares had been sold as of
December 31, 1999. If such an election is made , the adverse tax consequences
described above (including the interest charge and the treatment of gains as
ordinary income) would not apply to any gain on the U.S. Holder's common shares
that accrues (and any distribution that is received from the Company) after the
effective date of the election. Each U.S. Holder that owned, directly or
indirectly, common shares at any time during a taxable year of the U.S. Holder
beginning before January 1, 2000 is urged to consult with his or her own tax
advisor with respect to the advantages and disadvantages of, and time for,
making an election under Section 1298(b)(1) of the Code.
The Company intends to comply with all record-keeping, reporting and other
requirements so that U.S. Holders, at their option, may maintain a QEF election.
However, if meeting those record-keeping and reporting requirements becomes
onerous, the Company may decide, in its sole discretion, that such compliance is
impractical and will so notify U.S. Holders. UNTIL SUCH TIME, U.S. HOLDERS THAT
DESIRE TO MAINTAIN A QEF ELECTION MAY CONTACT OUR INVESTMENT RELATIONS GROUP FOR
THE PFIC ANNUAL INFORMATION STATEMENT, WHICH MAY BE USED TO COMPLETE THEIR
ANNUAL QEF ELECTION FILINGS. THIS STATEMENT IS AVAILABLE ON THE COMPANY'S
WEBSITE AT: WWW.QLTINC.COM.
THE PFIC AND QEF ELECTION RULES ARE COMPLEX. ACCORDINGLY, HOLDERS AND
PROSPECTIVE HOLDERS OF COMMON SHARES ARE STRONGLY URGED TO CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE IMPACT OF THESE RULES ON THEIR INVESTMENT OR PROSPECTIVE
INVESTMENT IN THE COMPANY.
36
Controlled Foreign Corporation
Generally, if more than 50% of the voting power of all classes of stock or
the total value of the stock of the Company is owned, directly or indirectly, by
U.S. Holders, each of whom own 10% or more of the total combined voting power of
all classes of stock of the Company ("10% U.S. Shareholders"), the Company would
be treated as a CFC under Subpart F of the Code. For tax years of U.S. Holders
beginning after 1997, if the Company qualifies as a CFC, the PFIC rules
generally will not apply to those U. S. Holders that are 10% U.S. Shareholders.
The classification of the Company as a CFC would effect many complex results,
including the required inclusion in income by 10% U.S. Shareholders of their pro
rata shares of Subpart F income of the Company. In addition, under Section 1248
of the Code, gain from the sale or exchange of common shares by a U.S. Holder
who is or was a 10% U.S. Shareholder at any time during the five-year period
ending with the sale or exchange is treated as ordinary dividend income to the
extent of earnings and profits of the Company attributable to the common shares
sold or exchanged. Because of the complexity of Subpart F, and because it is not
clear that Subpart F would apply to U.S. Holders, a more detailed review of
these rules is outside the scope of this discussion.
Legislative Proposals.
Legislation has been introduced in the United States Congress that would
allow U.S. persons to receive dividends tax-free in certain circumstances. In
general, that legislation only applies to United States corporations and foreign
corporations that are engaged in a trade or business within the United States
and thus it is not expected that this legislation, if enacted, would apply to
the Company.
Information Reporting and Backup Withholding
United States information reporting and backup withholding requirements may
apply with respect to the payment to U.S. Holders of dividends with respect to,
or proceeds from the sale of, common shares. Under Treasury regulations
currently in effect, non-corporate holders may be subject to backup withholding
currently at a 30% rate with respect to dividends when such holder (1) fails to
furnish or certify a correct taxpayer identification number to the payor in the
required manner, (2) is notified by the Internal Revenue Service that it has
failed to report payments of interest or dividends properly or (3) fails, under
certain circumstances, to certify that it has been notified by the Internal
Revenue Service that it is subject to backup withholding for failure to report
interest and dividend payments.
37
ITEM 6. SELECTED FINANCIAL DATA
ANNUAL FINANCIAL DATA
YEAR ENDED DECEMBER 31, 2002 2001 2000 1999 1998
- ----------------------- --------- --------- --------- --------- ---------
(In thousands except per share information)
CONSOLIDATED STATEMENT OF INCOME DATA
Total revenues $ 110,513 $ 83,375 $ 32,399 $ 17,689 $ 8,320
Research and development costs 42,252 42,909 32,802 32,457 22,983
Net income (loss) available to common
shareholders 13,595 71,512 4,399 (24,560) (17,918)
Basic net income (loss) per common share 0.20 1.05 0.07 (0.40) (0.34)
Diluted net income (loss) per common share 0.20 1.04 0.06 (0.40) (0.34)
CONSOLIDATED BALANCE SHEET DATA
Cash, cash equivalents and short-term
investment securities $ 207,935 $ 162,774 $ 165,430 $ 178,294 $ 50,977
Working capital 260,127 223,585 201,319 180,724 55,500
Total assets 345,841 317,933 259,957 222,938 67,251
Long term obligations -- -- 8,716 -- --
Total shareholders' equity 313,545 292,701 235,982 199,995 55,022
QUARTERLY FINANCIAL DATA
Set forth below is selected unaudited financial information for the fiscal
quarters of 2002 and 2001.
THREE MONTHS ENDED DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
- ----------------------- ----------- ------------ -------- ---------
(In thousands except per share information)
2002
Total revenues $ 33,002 $ 28,713 $ 24,656 $ 24,142
Research and development costs 12,682 10,702 10,390 8,480
Net income (loss) available to common
shareholders (827) 5,903 4,124 4,393
Basic net income (loss) per common share (0.01) 0.09 0.06 0.06
Diluted net income (loss) per common share (0.01) 0.09 0.06 0.06
2001
Total revenues $ 27,889 $ 20,201 $ 20,408 $ 14,877
Research and development costs 8,280 19,864 9,762 5,003
Net income (loss) available to common
shareholders 61,918 (1,934) 3,248 8,280
Basic net income (loss) per common share 0.91 (0.03) 0.05 0.12
Diluted net income (loss) per common share 0.90 (0.03) 0.05 0.12
38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the Company's
2002 consolidated financial statements and notes thereto, which are prepared in
accordance with generally accepted accounting principles ("GAAP") in the United
States ("U.S."). All amounts following are expressed in U.S. dollars unless
otherwise indicated.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion and analysis of financial conditions and results of
operations contains forward-looking statements of the Company, within the
meaning of the Private Securities Litigation Reform Act of 1995, which involve
known and unknown risks, uncertainties and other factors which may cause QLT's
actual results to differ materially from any future results, performance or
achievements expressed or implied by such statements. Forward-looking statements
include, but are not limited to, those with respect to: anticipated levels of
sales of Visudyne(R), including patient and physician demand for Visudyne
therapy; anticipated futurE operating results; anticipated timing for and
receipt of reimbursement approvals for Visudyne therapy and other QLT products;
the anticipated outcome of pending patent and securities litigation against QLT;
the anticipated timing and progress of clinical trials; the anticipated timing
of regulatory submissions for expanded uses for Visudyne and for QLT's other
products, including tariquidar; and the anticipated timing and receipt of
regulatory approvals for expanded uses for Visudyne and for QLT's other
products, including tariquidar. These statements are predictions only and actual
events or our actual results may differ materially. Factors that could cause
such actual events or our actual results to differ materially from any future
results expressed or implied by such forward-looking statements include, but are
not limited to, the ability and efforts of QLT's alliance partner, Novartis
Ophthalmics AG, to commercialize and market Visudyne, the outcome of pending
patent and securities litigation against QLT, QLT's ability to maintain and
expand its intellectual property position, the timing and success of planned or
existing clinical trials for Visudyne and for QLT's other products, including
tariquidar; the outcome of QLT's applications for regulatory approvals for
expanded uses for Visudyne and for QLT's other products, including tariquidar;
the successful development or acquisition of complementary or supplementary
products or product candidates, technologies or businesses, as well as the risk
factors described in this Report under the headings "Business -- Risk Factors",
"Legal Proceedings", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the "Notes to Consolidated Financial
Statements".
OVERVIEW
The Company is a bio-pharmaceutical company engaged in the development and
commercialization of innovative products in ophthalmology and oncology and in
other fields where the product can be marketed by a focussed specialtly sales
and marketing team. The Company is a pioneer in the field of photodynamic
therapy ("PDT"), a field of medicine that uses photosensitizers (light-activated
drugs) in the treatment of disease, and is now also developing pharmaceutical
products that do not employ photodynamic therapy.
Visudyne, the Company's commercial product, is a photosensitizer used to
treat predominantly classic subfoveal choroidal neovascularization ("CNV") in
patients with wet age-related macular degeneration ("AMD"), the leading cause of
severe vision loss in people over the age of 50 in North America and Europe, and
other ocular conditions. Visudyne has been approved in over 65 countries,
including the United States, Canada and the European Union, for the treatment of
predominantly classic subfoveal CNV in wet AMD. In addition, Visudyne has been
approved in over 50 countries for extended indications, including occult CNV in
the European Union, Australia and New Zealand, CNV due to pathologic myopia in
the United States and the European Union, and CNV due to presumed ocular
histoplasmosis in the United States.
Currently the Company is developing photosensitizers for the treatment of
certain forms of non-melanoma skin cancer, benign prostatic hyperplasia and
androgenetic alopecia (commonly known as male pattern baldness). In addition to
developing photodynamic therapy product candidates, the Company is developing
other products by itself and in collaboration with other companies for the
treatment of cancer, and other conditions, including tariquidar for multi-drug
resistance in cancer. The Company continues to seek growth opportunities and
build its product pipeline by developing new indications for Visudyne,
progressing with
39
both early and late stage programs, and pursuing potential strategic
acquisitions of products, product candidates, technologies or other businesses.
The Company operates in a single reportable segment. The Company's
profitability depends upon the commercial success of Visudyne in major markets
worldwide and the achievement of product development objectives. As of December
31, 2002, the Company had an accumulated deficit of $52.9 million and total
shareholders' equity of $313.5 million.
CRITICAL ACCOUNTING POLICIES
In preparing the Company's consolidated financial statements, management is
required to make certain estimates, judgements and assumptions that the Company
believes are reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. Significant estimates are used for, but
not limited to, provisions for non-completion of inventory, assessment of the
net realizable value of long-lived assets, accruals for contract manufacturing
and research and development agreements, allocation of costs to manufacturing
under a standard costing system, taxes and contingencies. The significant
accounting policies which the Company believes are the most critical to aid in
fully understanding and evaluating its reported financial results include the
following:
Basis of Presentation
Effective December 31, 2002, the Company changed its primary accounting
standard from Canadian GAAP to U.S. GAAP in order to provide information on a
more comparable basis with the majority of the companies in the Company's peer
group. Consequently, the consolidated financial statements of the Company for
2002 have been prepared in accordance to U.S. GAAP and for consistency, all
prior period financial statements and financial information are also prepared in
accordance to U.S. GAAP.
Reporting Currency and Foreign Currency Translation
Effective December 31, 2002, the Company changed its reporting currency to
the U.S. dollar from the Canadian dollar. The consolidated financial statements
of the Company are translated into U.S. dollars using the current rate method.
Assets and liabilities are translated at the rate of exchange prevailing at the
balance sheet date. Shareholders' equity is translated at the applicable
historical rate. Revenue and expenses are translated at a weighted average rate
of exchange for the respective years. Translation gains and losses are included
as part of the cumulative foreign currency translation adjustment which is
reported as a component of shareholders' equity.
The financial information for the years ended December 31, 2001 and 2000 is
presented in U.S. dollars as if the U.S. dollar had been used as the reporting
currency during those periods.
The Company adopted the U.S. dollar as its reporting currency in order to
provide information on a more comparable basis with the majority of the
companies in the Company's peer group. The Company retained the Canadian dollar
as its functional currency.
Revenue Recognition
Revenue from Visudyne(R) consists of the Company's 50% share of pre-tax
profits generated from the Company's collaborative manufacturing, marketing and
distribution arrangement with Novartis Ophthalmics, revenue from the sale of
bulk manufactured Visudyne product to Novartis Ophthalmics, and reimbursement
from Novartis Ophthalmics of third party royalties, and specified other costs.
Pre-tax profits are determined by Novartis Ophthalmics and the Company and are
derived by taking net sales of Visudyne to third parties, less manufacturing,
selling, marketing and distribution costs, and third party royalties. The
Company recognizes revenue on product sales only upon final delivery to third
parties where collection is reasonably assured. Deferred revenue represents
amounts received by the Company for inventory shipped at cost to Novartis
Ophthalmics for sale to third parties. Proceeds of the QLT-Novartis Ophthalmics
Alliance from Visudyne sales are received initially in trust by Novartis
Ophthalmics for the equal benefit of Novartis
40
Ophthalmics and the Company and are held until distributed in accordance with
the agreement between the Company and Novartis Ophthalmics.
Cost of Sales
Cost of sales, consisting of expenses related to the production of bulk
Visudyne sold to Novartis Ophthalmics, and royalties on Visudyne sales, are
charged against earnings in the period of the related product sale by Novartis
Ophthalmics to third parties. The Company utilizes a standard costing system,
which includes a reasonable allocation of overhead expenses, to account for
inventory and cost of sales, with adjustments being made periodically to reflect
current conditions. Overhead expenses comprise direct and indirect support
activities related to the manufacture of bulk Visudyne and involve costs
associated with activities such as quality inspection, quality assurance, supply
chain management, safety and regulatory. Overhead expenses are allocated to
inventory during each stage of the manufacturing process under a standard
costing system, and eventually to cost of sales as the related products are sold
by Novartis Ophthalmics to third parties. The Company records a provision for
the non-completion of product inventory based on its history of batch
completion.
Stock-Based Compensation
In accordance with the provisions of SFAS No. 123 "Accounting for
Stock-based Compensation" ("SFAS 123"), the Company applies Accounting
Principles Board ("APB") Opinion No. 25 and related interpretations in the
accounting for employee stock option plans. SFAS 123 requires that all
stock-based awards made to non-employees be measured and recognized using a fair
value based method. The standard encourages the use of a fair value based method
for all awards granted to employees, but only requires the use of a fair value
based method for direct awards of stock, stock appreciation rights, and awards
that call for settlement in cash or other assets. Estimates of fair value are
determined using the Black-Scholes model. The use of this model requires certain
assumptions regarding the volatility, term, and risk free interest rate
experienced by the holder. Awards that a company has the ability to settle in
stock are recorded as equity, whereas awards that the entity is required to or
has a practice of settling in cash are recorded as liabilities. The Company has
adopted the disclosure only provision for stock options granted to employees and
directors, consistent with SFAS 123.
Research and Development
Research and development costs consist of direct and indirect expenditures,
including a reasonable allocation of overhead expenses, associated with the
Company's various research and development programs. Overhead expenses comprise
general and administrative support provided to the research and development
programs and involve costs associated with support activities such as facility
maintenance, utilities, office services, information technology, legal,
accounting and human resources. Research and development costs are expensed as
incurred. Costs related to the acquisition of development rights for which no
alternative use exists are classified as research and development and expensed
as incurred. Patent application, filing and defense costs are expensed as
incurred and included in general and administrative expenses.
41
Income Taxes
Income taxes are reported using the asset and liability method, whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carry forwards using applicable enacted
tax rates. An increase or decrease in these tax rates will increase or decrease
the carrying value of future net tax assets resulting in an increase or decrease
to net income. Income tax credits are included as part of provision for
(recovery of) income taxes.
Recently Issued Accounting Standards
In August 2001, the FASB issued SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, and
the accounting and reporting provisions of Accounting Principles Board Opinion
("APB") No. 30, Reporting the Results of Operations--Report the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS No. 144 requires that companies (1)
recognize an impairment loss only if the carrying amount of a long-lived asset
is not recoverable based on its undiscounted future cash flows and (2) measure
an impairment loss as the difference between the carrying amount and fair value
of the asset. In addition, SFAS No. 144 provides guidance on accounting and
disclosure issues surrounding long-lived assets to be disposed of by sale. The
adoption of this statement in 2002 did not have a material impact on the
Company's financial position or results of operations. No material impairment
relating to property or equipment have been identified by the Company for the
years ended December 31, 2002, 2001 and 2000. However, in the fourth quarter of
2002, based on an assessment and the recent events affecting Kinetek, the
Company wrote off its entire investment in Kinetek shares and recorded a
writedown of $6.2 million. There were no other impairment adjustments to
investments recorded in 2002, 2001 and 2000.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Among other things, SFAS No. 145 rescinds both SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and the amendment of
SFAS No. 4, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. Through this rescission, SFAS No. 145 eliminates the requirement
(in both SFAS No. 4 and SFAS No. 64) that gains and losses from the
extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. Generally, SFAS No.
145 is effective for transactions occurring after May 15, 2002. The Company does
not expect SFAS No. 145 to have a material impact on the Company's results of
operations or its financial position.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement provides guidance on the
recognition and measurement of liabilities associated with exit and disposal
activities. Under SFAS No. 146, liabilities for costs associated with exit or
disposal activities should be recognized when the liabilities are incurred and
measured at fair value. This statement is effective prospectively for exit or
disposal activities initiated after December 31, 2002. The Company does not
expect the adoption of SFAS No. 146 to have a material impact on the Company's
consolidated financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. FIN
45 clarifies the requirements of FASB Statement No. 5, Accounting for
Contingencies, relating to the guarantor's accounting for, and disclosure of,
the issuance of certain types of guarantees. FIN 45 requires that upon issuance
of a guarantee, the guarantor must recognize a liability for the fair value of
the obligation it assumes under that guarantee. The initial recognition and
measurement provisions are effective for guarantees issued or modified after
December 31, 2002. The Company does not expect the adoption of FIN 45 to have a
material impact on its financial position or its results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123.
This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company's consolidated
financial statements currently comply with the disclosure requirements of SFAS
No. 148.
42
COMPARISON OF YEARS ENDED DECEMBER 31, 2002 AND 2001
- ----------------------------------------------------
For the year ended December 31, 2002, the Company recorded net income of
$13.6 million, or $0.20 per common share. These results compare with net income
of $71.5 million, or $1.05 per common share for the year ended December 31,
2001. During the fourth quarter of 2001, the Company recognized deferred tax
assets of $56.4 million, which favorably affected 2001 earnings per share by
$0.83. During the fourth quarter of 2002, the Company recorded a restructuring
charge of $2.9 million relating to a reduction in work force, and a writedown of
$6.2 million related to the impairment of the Company's equity investment in
Kinetek Pharmaceuticals, Inc. ("Kinetek"). These two special charges negatively
impacted 2002 earnings per share by $0.12.
REVENUES
REVENUE FROM VISUDYNE(R)
The Company's revenues from the Visudyne alliance were determined as follows:
For the year ended
December 31,
----------------------
(In thousands) 2002 2001
- -------------- --------- ---------
Visudyne(R) sales by Novartis Ophthalmics $ 287,098 $ 223,343
Less: Manufacturing and other costs (23,028) (18,066)
Less: Sales, marketing and distribution expenses (107,293) (87,622)
--------- ---------
Net operating income from Visudyne(R) sales $ 156,777 $ 117,656
========= =========
The Company's 50% share $ 78,388 $ 58,828
Add: Manufacturing and other reimbursements 25,699 20,694
--------- ---------
Total revenue from Visudyne(R) $ 104,087 $ 79,522
========= =========
For the year ended December 31, 2002, approximately 59% of total Visudyne
sales by Novartis Ophthalmics were in the United States, compared to
approximately 63% in 2001.
For the year ended December 31, 2002, revenue from the Visudyne alliance
increased by 31% over 2001. This increase is due primarily to the increased
penetration in key markets, such as France, Germany and Italy, and to ongoing
geographic and label expansion throughout the world.
CONTRACT RESEARCH AND DEVELOPMENT REVENUE
The Company receives non-refundable research and development funding from
Novartis Ophthalmics and other strategic partners which is recorded as contract
research and development revenue. For the year ended December 31, 2002, contract
research and development revenue totalled $6.4 million, increased by 67% over
2001. This gain resulted from increased development work by the Company on
Visudyne programs with Novartis Ophthalmics, and on tariquidar programs with
Xenova Limited.
COSTS AND EXPENSES
COST OF SALES
For the year ended December 31, 2002, cost of sales of $19.1 million were
28% higher than 2001 due primarily to increases in Visudyne sales. During the
first half of 2002, the Company received FDA approval for a secondary
manufacturing site. As a result, the Company reviewed its provision related to
non-completion of product inventory and reduced its provision by $1.3 million
during the second quarter of 2002.
43
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenditures totalled $42.3 million for the
year ended December 31, 2002, down by 2% compared to 2001. R&D expenditures in
2001 included the purchase of development and marketing rights from Xenova and
Kinetek totalling $11.1 million. Excluding these costs, R&D expenditures in 2002
would have been 32% higher than 2001. This increase in R&D spending is due to
increased clinical development costs for the following projects:
- - Tariquidar (which commenced two Phase III trials in 2002);
- - Multiple basal cell carcinoma ("MBCC") (which also commenced two Phase III
trials in 2002);
- - QLT0074 androgenetic alopecia and benign prostatic hyperplasia) (which
commenced or prepared to commence Phase I/II trials in 2002); and
- - Visudyne in Occult.
Approximately $16.9 million of 2002 R&D expenditures were Visudyne-related
with the remaining $25.4 million related to the rest of the Company's product
pipeline.
Novartis Ophthalmics - Visudyne(R)
Under the terms of the February 6, 1995 agreement with Novartis Ophthalmics
to pursue worldwide joint development and commercialization of photodynamic
therapy products, including Visudyne, as potential treatments for certain eye
diseases, the Company is responsible for 40% to 50% of R&D costs for Visudyne
and Novartis Ophthalmics is responsible for the remaining 50% to 60%. The
Company and Novartis Ophthalmics reconcile joint R&D costs, on a quarterly
basis, and when it results in funding payments to the Company, the Company
records such non-refundable amounts as contract research and development
revenue.
On July 23, 2001, the Company and Novartis Ophthalmics announced the
expansion of the existing strategic alliance to co-develop photodynamic therapy
with verteporfin to treat skin cancer and other dermatological conditions. Under
the terms of this expanded co-development agreement, Novartis Ophthalmics is
funding future development costs of verteporfin in multiple basal cell carcinoma
(a form of non-melanoma skin cancer) to a maximum of $9.7 million, beyond which
profits and development costs will be shared equally by the Company and Novartis
Ophthalmics. The Company will receive potential milestone payments of $0.6
million upon filing of a submission for marketing approval for the use of
verteporfin in an indication within the dermatological field in North America or
Europe, and $1.0 million upon receipt of such approval.
Xenova Limited - Tariquidar
In August of 2001, the Company entered into an exclusive development and
license agreement for tariquidar, a P-gp inhibitor for multi-drug resistance in
oncology, with Xenova Limited ("Xenova"). Under the agreement, the Company
assumed the marketing rights of tariquidar for North America and responsibility
for continued development of the product in exchange for payment to Xenova of an
initial licensing fee of $10.0 million and future milestone payments up to a
maximum of $50.0 million. Xenova has agreed to contribute up to $2.0 million
towards QLT's development efforts. Upon commercialization, the Company will pay
royalties to Xenova in the range of 15% to 22% based on the level of North
American sales.
Kinetek Pharmaceuticals, Inc. - Signal Transduction Inhibitors
On June 7, 2001, the Company entered into a long-term research, development
and license agreement with Kinetek to develop compounds known as signal
transduction inhibitors for the treatment of ocular, immune system and kidney
diseases. The transaction included an equity investment by the Company valued at
$6.2 million for 3.14 million common shares of Kinetek stock, plus an option,
valued at $1.1 million, to obtain exclusive licenses for up to five compounds
for the treatment of ocular, immune system and/or kidney diseases. The value
attributable to the common shares was based on the cash consideration paid by
third parties for Kinetek common shares on the same date as the Company's
investment. Under the terms of the
44
option, the Company has the right to take over the clinical development and
commercialization of each compound at a specified stage of development in
exchange for milestone payments of up to a maximum of $59.5 million for the five
compounds, including royalties and equity investments in Kinetek. During the
fourth quarter of 2002, the Company contracted an impairment assessment of
Kinetek by an independent valuation consultant. Based on this assessment and the
recent events affecting Kinetek, the Company has written off its investment in
common shares of Kinetek and recorded a write-down of $6.2 million.
Under this agreement, upon meeting certain conditions, Kinetek may demand
that a convertible loan facility of up to $3.3 million be made available by the
Company to Kinetek, during the period which commenced January 1, 2002 and ending
June 7, 2004 at an interest rate equal to 12% in excess of the Royal Bank of
Canada's prime lending rate, compounding quarterly. At December 31, 2002, no
funds had been advanced to Kinetek in relation to this Convertible Loan Facility
and the Company does not expect that Kinetek is or will be in a position to
satisfy the stringent conditions for the loan which are set out in the
agreement.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses include overhead
expenses associated with the manufacture of bulk Visudyne. For the year ended
December 31, 2002, SG&A expenses of $16.1 million were 111% or $8.5 million
higher than 2001. SG&A expenses in 2001 were unusually low due to the absorption
to inventory of overhead expenses associated with exceptionally high
manufacturing levels in the second half of that year. Additionally, higher
directors' and officers' (D&O) insurance premiums, salaries, and legal and
consulting fees contributed to the increase in SG&A.
DEPRECIATION EXPENSE
Depreciation expense relates mainly to the depreciation of property and
equipment. Depreciation expense for 2002 of $3.1 million was 11% higher than the
amount recorded in the same period in 2001.
RESTRUCTURING
In the fourth quarter of 2002, the Company restructured its operations to
reduce operating expenses and concentrate its resources on key product
development programs and business initiatives. The Company reduced its overall
headcount by 62 people or 17%. The Company provided affected employees with
severance and support to assist with outplacement. As a result, the Company
recorded a $2.9 million restructuring charge in the fourth quarter of 2002
related to severance and termination costs. The Company expects to complete
final activities associated with the restructuring in 2003. At December 31,
2002, restructuring charges of $0.3 million were paid out, and the accrued
liability relating to the restructuring was $2.6 million. During January of
2003, $1.3 million of the restructuring charges was paid out, reducing the
accrued liability related to the restructuring to $1.3 million.
INVESTMENT AND OTHER INCOME
NET FOREIGN EXCHANGE (LOSSES) GAINS
Net foreign exchange (losses) gains comprise (losses) gains from the impact
of foreign exchange fluctuations on the Company's cash and cash equivalents,
derivative financial instruments, foreign currency receivables and foreign
currency payables. For the year ended December 31, 2002, the Company recorded
net foreign exchange losses of $0.3 million versus a net foreign exchange gain
of $3.8 million in the same period in 2001. The losses in the current year were
due to losses on the Company's foreign currency cash holdings as well as losses
on foreign currency derivative financial instruments. (See Liquidity and Capital
Resources - Interest and Foreign Exchange Rates).
45
Details of the Company's net foreign exchange (losses) are as follows:
For the year ended
December 31,
------------------
(In thousands) 2002 2001
- -------------- ------- -------
Cash and cash equivalents $ (887) $ 3,370
Foreign exchange contracts (620) (50)
Foreign currency receivables and payables 1,229 494
------- -------
Net foreign exchange (losses) gains $ (278) $ 3,814
======= =======
INTEREST INCOME
Interest income of $4.8 million for the year ended December 31, 2002, was
29% lower compared to the same period in 2001. This decrease, despite rising
cash reserves, was due to reduced yields on the Company's short-term
investments. The Company's treasury policy is focused on minimizing risk of loss
of principal.
(WRITEDOWN) GAIN ON INVESTMENTS
During the fourth quarter of 2002, the Company contracted an impairment
assessment by an independent valuation consultant. Based on this assessment and
recent events affecting Kinetek, the Company wrote off its $6.2 million
investment in Kinetek shares.
During 2001, the Company sold its short-term investment in Axcan Pharma Inc.
("Axcan") for net proceeds of $11.5 million, resulting in a gain of $3.4
million.
INCOME TAXES
Provision for income taxes was $11.4 million for the year ended December 31,
2002, compared to recovery of income taxes of $42.2 million in 2001. On December
31, 2001, the Company reversed its valuation allowance and recognized deferred
income tax assets relating to prior year losses and unclaimed R&D expenses, as
the Company's stage of development and operations suggested that it was more
likely than not that the tax assets would be realized. As such, beginning in
2002, the Company began providing for income tax expenses.
As at December 31, 2002, the Company had $44.0 million of R&D expenditures
available as deductions for tax purposes that have no expiration date. The
Company also has non-capital loss carry forward balances for Canadian income tax
purposes of $14.3 million that are available to offset future taxable income and
will expire at various dates through 2006. The deferred tax benefit of these R&D
expenditures, non-capital losses and other temporary differences creating
deferred tax assets is estimated to be approximately $31.1 million, and is
ultimately subject to final determination by taxation authorities.
The realization of the Company's deferred tax assets is primarily dependent
on generating sufficient taxable income prior to expiration of any loss carry
forward balances. During the fourth quarter of 2002, the Company set up a
valuation allowance of $1.1 million against the tax effect of the writedown of
its investment in Kinetek. The valuation allowance is reviewed periodically and
if the "more likely than not" criterion changes for accounting purposes then the
valuation allowance will be adjusted accordingly. (See Note 13 in "Notes to the
Consolidated Financial Statements").
COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND 2000
- ----------------------------------------------------
RESULTS OF OPERATIONS
For the year ended December 31, 2001, the Company recorded a net profit of
$71.5 million, or $1.05 per common share. These results compare with a net
profit of $4.4 million, or $0.07 per common share for the
46
year ended December 31, 2000. In the fourth quarter of 2001, the Company
recognized deferred tax assets related to prior years, amounting to $56.4
million, favorably affecting earnings per share for the year by $0.83.
Additional details of this tax asset are described below in the section "Income
Taxes".
REVENUES
REVENUE FROM VISUDYNE(R)
The Company's revenue from the sales of Visudyne was determined as follows:
For the year ended For nine months ended
(In thousands) December 31, 2001 December 31, 2000
- -------------- ----------------- -----------------
Visudyne(R)sales by Novartis Ophthalmics $ 223,343 $ 94,371
Less: Manufacturing and other costs (18,066) (7,757)
Less: Sales, marketing and distribution expenses (87,622) (54,029)
--------- ---------
Net operating income from Visudyne(R)sales $ 117,656 $ 32,585
========= =========
The Company's 50% share $ 58,828 $ 16,292
Add: Manufacturing and other reimbursements 20,694 8,638
--------- ---------
Total revenue from Visudyne(R) $ 79,522 $ 24,930
========= =========
Revenue from Visudyne of $79.5 million for the year ended December 31, 2001
was 219% higher than the $24.9 million recorded in fiscal 2000. The increase was
due primarily to fiscal 2001 being the first full year of commercialization of
Visudyne and further regulatory approvals and reimbursement approvals in markets
worldwide. For the year ended December 31, 2001, approximately 63% of total
Visudyne sales were in the U.S. compared to 66% in 2000.
CONTRACT RESEARCH AND DEVELOPMENT REVENUE
The Company receives non-refundable research and development funding from
Novartis Ophthalmics which is recorded as contract research and development
revenue. For the year ended December 31, 2001, contract research and development
revenue of $3.9 million decreased by 24% compared to fiscal 2000 contract
research and development revenue of $5.1 million. This is due mainly to Novartis
Ophthalmics' assuming a greater proportion of research and development
activities for the joint Visudyne program.
ROYALTIES ON PRODUCT SALES - PHOTOFRIN(R)
In June of 2000, the Company finalized the sale of the worldwide rights to
Photofrin to Axcan . Under the terms of the sale, the Company transferred to
Axcan the worldwide development, manufacturing and marketing rights to Photofrin
in exchange for an initial cash payment of $1.7 million, a $2.7 million deferred
payment, 1,283,333 common shares of Axcan and $9.1 million in preferred shares
of Axcan which were redeemable within twelve months in cash or additional common
shares of Axcan. In addition, the Company is entitled to future milestone
payments of up to $10.1 million, payable in cash or preferred shares, based on
future events. Concurrent with the sale to Axcan, the Company terminated its
agreement with Ligand Pharmaceuticals Inc., the Company's Photofrin marketing
and distribution partner in Canada, and agreed to assign its Japanese Photofrin
royalty rights under its agreement with Wyeth-Ayerst Japan, Ltd. to Axcan. The
Company also re-acquired the exclusive Photofrin marketing and distribution
rights in the U.S. and Caribbean from Sanofi-Synthelabo Inc. in exchange for a
portion of the consideration received by the Company from Axcan at the closing
date and rights to receive a portion of the future consideration payable to the
Company by Axcan. The Company recorded earned royalties on sales of Photofrin by
these distribution partners up to the closing of the transaction on June 8,
2000. At closing, Axcan assumed responsibility for the marketing efforts for
Photofrin and future costs and obligations relating to the Photofrin business.
As a result, the Company no longer receives royalty payments from Photofrin
sales.
47
During 2001, Axcan redeemed the preferred shares and the Company sold all of
its Axcan common shares. Further details are described below in the section
"Investment and Other Income - (Writedown) Gain on Investments".
REVENUE FROM COLLABORATIVE ARRANGEMENTS
During the third quarter of 2000, the Company recorded net milestone revenue
of $1.7 million from Axcan resulting from the receipt of FDA approval to market
the Diomed 630 nm diode laser co-developed by the Company and Diomed Inc. for
use in conjunction with Photofrin.
The extent and timing of any future licensing fees or milestone payments are
dependent upon the terms of current and any additional future agreements,
including the achievement of development milestones defined therein.
COSTS AND EXPENSES
COST OF SALES
During 2001, cost of sales increased by 116% compared to 2000, due primarily
to higher Visudyne sales.
MARKET AND BUSINESS DEVELOPMENT COSTS
Market and business development costs represented the Company's equal share
of initial costs associated with planning and initiation of an Expanded Access
("EA") Program for Visudyne therapy, net of EA pre-commercial or commercial
revenues realized, and marketing and pre-launch costs for the first quarter of
2000.
Effective with the second quarter of 2000, the Company commenced recording
its share of revenues from Visudyne as a revenue item on the statement of
income. See "Revenue from Visudyne(R)".
RESEARCH AND DEVELOPMENT
R&D expenditures for the year ended December 31, 2001 were $42.9 million.
This represented an increase of 31% compared to fiscal 2000 R&D costs of $32.8
million. This increase in R&D expenditures was due primarily to the purchase of
development and marketing rights from Xenova and Kinetek totalling $11.1
million. Approximately $15.2 million of R&D costs were Visudyne-related, with
the remaining $27.7 million related to the Company's product pipeline.
48
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses include overhead expenses associated with the manufacture of
bulk Visudyne. For the year ended December 31, 2001, SG&A expenses of $7.6
million were 25% lower compared to fiscal 2000 selling, general and
administrative expenses of $10.2 million. A primary contributor to this decline
was unusually high absorption to inventory of overhead expenses associated with
exceptionally high manufacturing levels in the second half of 2001.
DEPRECIATION EXPENSE
Depreciation expense relates mainly to the depreciation of property and
equipment. Depreciation expense of $2.8 million was 33% higher compared to
fiscal 2000 depreciation expense of $2.1 million, due primarily to the
depreciation impact of Phase II of the Company's new facility completed in
November 2000.
INVESTMENT AND OTHER INCOME
NET FOREIGN EXCHANGE (LOSSES) GAINS
Net foreign exchange (losses) gains comprise (losses) gains from the impact
of foreign exchange fluctuations on the Company's cash and cash equivalents,
derivative financial instruments, foreign currency receivables and foreign
currency payables. For the year ended December 31, 2001, the Company recorded
net foreign exchange gains of $3.8 million versus net foreign exchange gains of
$4.6 million in the same period in 2000. The gains in both years were due
primarily to gains on the Company's foreign currency cash holdings. (See
Liquidity and Capital Resources - Interest and Foreign Exchange Rates)
Details of the Company's net foreign exchange gains are as follows:
For the year ended
December 31,
------------------
(In thousands) 2001 2000
- -------------- ------- -------
Cash and cash equivalents $ 3,370 $ 3,846
Foreign exchange contracts (50) --
Foreign currency receivables and payables 494 723
------- -------
Net foreign exchange gains $ 3,814 $ 4,569
======= =======
INTEREST INCOME
Interest income of $6.8 million for the year ended December 31, 2001, was
36% lower compared to the same period in 2000. This decrease, despite rising
cash reserves, was due to reduced yields on the Company's short-term
investments. The Company's treasury policy is focused on minimizing risk of loss
of principal.
(WRITEDOWN) GAIN ON INVESTMENTS
The Company's short-term investment in Axcan consisted of Axcan common
shares and preferred shares and was acquired as part of the consideration
received from the sale of the worldwide rights to Photofrin to Axcan. During
2001, the Company sold its short-term investment in Axcan for net proceeds of
$11.5 million, resulting in a gain of $3.4 million.
In June of 2000, the Company finalized the sale of the worldwide rights to
Photofrin to Axcan. Under the terms of the sale, the Company transferred to
Axcan the worldwide development, manufacturing and marketing rights to Photofrin
in exchange for consideration consisting of cash, Axcan preferred shares, Axcan
common shares, and a deferred payment valued at $20.2 million. After deducting
the cost of re-acquiring from Sanofi Synthelabo Inc. the U.S. and Carribbean
rights to Photofrin, the Company recorded a gain of $10.6 million from the sale
of Photofrin rights to Axcan.
49
In November of 2000, the Company finalized the sale of its Optiguide Fiber
Optics business to Diomed. Under the terms of the sale, the Company transferred
to Diomed its rights to commercialize Optiguide Fiber Optics in exchange for an
initial cash payment of $25,000, a $365,000 short-term receivable due within six
months after closing, and a $810,000 long-term receivable which bore interest at
5% and was due two years after closing and payable in cash or an equivalent
number of shares at Diomed's option pursuant to a formula. (See Consolidated
Statement of Cash Flows - Non-cash Investing and Financing Activities)
INCOME TAXES
The realization of the Company's deferred tax assets is primarily dependent
on generating sufficient taxable income prior to expiration of any loss carry
forward balances. During 2001, the Company's development and operations
suggested that the "more likely than not" test for accounting purposes had been
met and accordingly, the valuation allowance that had been recorded in the past
against the net deferred tax asset was reversed and a recovery of taxes of $51.9
million was recognized. The valuation allowance is reviewed periodically and if
the "more likely than not" criterion changes for accounting purposes then the
valuation allowance will be adjusted accordingly.
As at December 31, 2001, the Company had $42.8 million of research and
development expenditures available as a deduction for tax purposes which have no
expiration date. The Company also has non-capital loss carry forward balances
for Canadian income tax purposes of $42.5 million that are available to offset
future taxable income and will expire at various dates through 2006. The
deferred tax benefit of these research and development expenditures, non-capital
losses and other temporary differences creating deferred tax assets is estimated
to be approximately $41.9 million, and is ultimately subject to final
determination by taxation authorities. (See Note 13 in "Notes to the
Consolidated Financial Statements")
OUTLOOK FOR 2003
- ----------------
REVENUES
Total revenues for the Company are expected to range from $122 million to
$135 million in 2003, up 10% to 20% from 2002. The Company expects that its
share of profit from its alliance with Novartis Ophthalmics (excluding the
recovery of manufacturing and other costs) will be approximately 28% to 30% of
Visudyne sales for 2003.
RESEARCH AND DEVELOPMENT
The Company expects to increase R&D spending by approximately 20% to 27%
over 2002, due mainly to its expenditures associated with its ongoing clinical
trials, including the two ongoing Phase III studies for tariquidar in non-small
cell lung cancer ("NSCLC"), continued clinical studies for Visudyne to expand
labeling and to optimize the treatment outcome in the approved indications, and
additional proof of concept studies to progress QLT0074 in both androgenetic
alopecia and benign prostatic hyperplasia. Other product development, potential
product in-licensing opportunities, and preclinical and clinical testing of the
Company's products under development will also likely contribute to the
projected increase in R&D expenditures.
50
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company expects to manage SG&A expenses in 2003 to remain flat to
slightly below the 2002 level.
CASH
The Company expects to continue to add to its cash reserves throughout 2003,
bringing these reserves (including short-term investments) to approximately $244
million or more by the end of the year.
PILOT PLANT FACILITY
During 2003 the Company intends to initiate a project for the construction
of a pilot plant facility on 4,000 square feet of its existing facilities for
the manufacture of clinical drug supply. The Company expects to make a capital
expenditure of approximately $5 million dollars in the facility, during 2003.
EFFECT OF INFLATION
- -------------------
The Company does not believe that inflation has a significant effect on its
business.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has financed operations, product development and capital
expenditures primarily through the Company's proceeds from the commercialization
of Visudyne, public and private sales of equity securities, licensing and
collaborative funding arrangements with strategic partners and interest income.
At December 31, 2002, the Company had $207.9 million of available cash
resources, comprised of cash, cash equivalents and short-term investment
securities, all of which were invested in liquid, investment-grade securities.
For the year ended December 31, 2002, the Company generated $41.3 million of
cash from operations, compared with $11.5 million generated from operations in
the same period in 2001. The increase in 2002 was the result of the continued
growth of the Company's Visudyne business. The Company's investing activities,
excluding net investment in short-term investment securities, used $(1.8)
million in 2002, compared with $0.8 million provided in the same period of 2001.
Investing activities in 2002 consisted of capital expenditures of $(2.2)
million, offset by proceeds from disposal of investment of $0.5 million.
Investing activities in 2001 consisted of capital expenditures $(3.6) million
and purchases of investments $(7.1) million, offset by proceeds from sale of
investment in Axcan of $11.5 million. The Company's financing activities
provided $3.7 million in 2002 compared to the $(5.8) million used in 2001. Cash
provided by financing activities in 2002 was the result of stock option
exercises. The high level of cash used in financing activities in 2001 was
primarily the result of the repayment of long-term debt. In the aggregate, cash,
cash equivalents and short-term investment securities increased by approximately
$45.2 million during the year ended December 31, 2002.
INTEREST AND FOREIGN EXCHANGE RATES
The Company is exposed to market risk related to changes in interest and
foreign currency exchange rates, each of which could adversely affect the value
of the Company's current assets and liabilities. At December 31, 2002, the
Company had an investment portfolio consisting primarily of fixed interest rate
Canadian dollar securities with an average remaining maturity of approximately
34 days. If market interest rates were to increase immediately and uniformly by
10% of levels at December 31, 2002, the fair value of the portfolio would
decline by an immaterial amount. The Company believes that its results of
operations and cash flows would not be affected to any significant degree by a
sudden change in market interest rates relative to its investment portfolio,
given the Company's current ability to hold its fixed income investments until
maturity.
The Company enters into foreign exchange contracts to manage exposures to
currency rate fluctuations related to its expected future net earnings
(primarily in U.S. dollars and EUROs), and cash flows ( in U.S.
51
dollars and Swiss francs). At December 31, 2002, the Company has outstanding
forward foreign currency contracts as noted below. The net unrealized loss in
respect of such foreign currency contracts, as at December 31, 2002, was
approximately $0.7 million.
Maturity Period Quantity Average Price
(to the year) (millions) (Canadian dollars)
------------- ---------- ------------------
U.S. dollar option-dated forward contracts 2003 U.S. $15.5 per US$ 1.60297
Swiss franc option-dated forward contracts 2003 CHF 13.0 per CHF 1.02660
At December 31, 2002, the Company had $207.9 million in cash and short-term
investments, primarily Canadian dollar denominated. If the Canadian dollar were
to increase in value by 5% against the U.S. dollar, the Company's U.S. dollar
denominated cash and short-term investments will experience an unrealized
foreign currency translation loss of approximately $0.2 million. The Company
purchases goods and services primarily in Canadian dollars and earns a
significant portion of its revenues in U.S. dollars. Foreign exchange risk is
also managed by satisfying foreign denominated expenditures with cash flows or
assets denominated in the same currency.
LONG-TERM OBLIGATIONS
In the normal course of business, the Company enters into Visudyne supply
agreements with contract manufacturers, which expire at various dates to 2006
and total $19.9 million. In addition, the Company has entered into operating
lease agreements and clinical development agreements. The minimum annual
commitment related to these agreements payable over the next five years are as
follows:
Year ending December 31, $ Million
------------------------ ---------
2003 3.3
2004 0.7
2005 0.7
2006 15.5
2007 --
The Company also has long-term obligations as part of its collaborative
arrangements with various strategic partners for research and development
purposes. The details of these collaborative arrangements are described in the
section "Cost and Expenses - Research and Development".
GENERAL
The Company believes that its available cash resources and working capital,
and its cash generating capabilities, should be more than sufficient to satisfy
the funding of product development programs, and other operating and capital
requirements for the reasonably foreseeable future. Depending on the overall
structure of current and future strategic alliances, the Company may have
additional capital requirements related to the further development, marketing
and distribution of existing or future products.
The Company's working capital and capital requirements will depend upon
numerous factors, including: the progress of the Company's preclinical and
clinical testing; fluctuating or increasing manufacturing requirements and R&D
programs; the timing and cost of obtaining regulatory approvals; the levels of
resources that the Company devotes to the development of manufacturing,
marketing and support capabilities; technological advances; the status of
competitors; the cost of filing, prosecuting and enforcing the Company's patent
claims and other intellectual property rights; the ability of the Company to
establish collaborative arrangements with other organizations; and the outcome
of legal proceedings.
The Company may require additional capital in the future to fund clinical
and product development costs for certain product applications or other
technology opportunities, and strategic acquisitions of products, product
candidates, technologies or other businesses. Accordingly, the Company may seek
funding from a combination of sources, including product licensing, joint
development and new collaborative arrangements, additional equity and debt
financing or from other sources. No assurance can be given that additional
funding will be available or, if available, on terms acceptable to the Company.
If adequate capital is not available, the Company's business can be materially
and adversely affected.
52
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources".
53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT REPORT
The consolidated financial statements contained in this annual report have
been prepared by management in accordance with generally accepted accounting
principles in the United States and have been approved by the Board of
Directors. The integrity and objectivity of these consolidated financial
statements are the responsibility of management. In addition, management is
responsible for all other information in the annual report and for ensuring that
this information is consistent, where appropriate, with the information
contained in the consolidated financial statements.
In support of this responsibility, management maintains a system of internal
controls to provide reasonable assurance as to the reliability of financial
information and the safeguarding of assets. The consolidated financial
statements may include amounts that are based on the best estimates and
judgements of management.
The Board of Directors is responsible for ensuring that management fulfills
its responsibilities for financial reporting and internal control, and exercises
this responsibility principally through the Audit and Risk Committee. The Audit
and Risk Committee consists of three independent directors not involved in the
daily operations of the Company. The functions of the Audit and Risk Committee
are to review the quarterly and annual consolidated financial statements, review
the adequacy of the system of internal controls, review any relevant accounting,
financial and security regulatory matters, and recommend the appointment of
external auditors. The Audit and Risk Committee meets on a quarterly basis with
management and the external auditors of the Company to satisfy itself that their
responsibilities have been properly discharged.
The external auditors, Deloitte & Touche LLP, conducted an independent
examination, in accordance with auditing standards generally accepted in the
United States and Canada, for the years ended December 31, 2002, 2001 and 2000,
and expressed their opinion on the consolidated financial statements. Their
examinations included a review of the Company's system of internal controls and
appropriate tests and procedures to provide reasonable assurance that the
consolidated financial statements are, in all material respects, presented
fairly and in accordance with generally accepted accounting principles in the
United States. The external auditors have free and full access to the Audit and
Risk Committee with respect to their findings concerning the fairness of
financial reporting and the adequacy of internal controls.
/S/ PAUL J. HASTINGS /S/ MICHAEL J. DOTY
President and Chief Executive Officer Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
54
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
QLT INC.
We have audited the accompanying consolidated balance sheets of QLT Inc. as
at December 31, 2002 and 2001 and the consolidated statements of income, cash
flows and changes in shareholders' equity for each of the three years in the
period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as at December 31, 2002 and 2001 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States
of America.
/S/ DELOITTE & TOUCHE LLP
Chartered Accountants
Vancouver, Canada
February 4, 2003
55
CONSOLIDATED BALANCE SHEETS
As at December 31, 2002 2001
- ------------------ --------- ---------
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 128,138 $ 69,663
Short-term investment securities 79,797 93,111
Accounts receivable (Note 2) 30,186 25,998
Inventories (Note 3) 35,892 38,617
Current portion of deferred income tax assets (Note 13) 17,092 18,904
Other 1,318 2,524
--------- ---------
292,423 248,817
LONG-TERM INVESTMENTS AND ADVANCES (Note 4) 4,170 9,982
PROPERTY AND EQUIPMENT (Note 5) 35,281 36,121
DEFERRED INCOME TAX ASSETS (Note 13) 13,966 23,013
--------- ---------
$ 345,841 $ 317,933
--------- ---------
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 9,960 $ 10,200
Accrued restructuring charge (Note 11) 2,631 --
Other accrued liabilities (Note 7) 7,027 7,513
Deferred revenue 12,678 7,519
--------- ---------
32,296 25,232
COMMITMENTS (Note 15)
CONTINGENCIES (Note 17)
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 8)
Authorized
500,000,000 common shares without par value
5,000,000 first preference shares without par value, issuable in series
Issued and outstanding
Common shares 391,716 387,990
December 31, 2002 - 68,407,753 shares
December 31, 2001 - 67,991,179 shares
ACCUMULATED DEFICIT (52,901) (66,496)
ACCUMULATED OTHER COMPREHENSIVE LOSS (25,270) (28,793)
--------- ---------
313,545 292,701
--------- ---------
$ 345,841 $ 317,933
========= =========
See accompanying notes to the consolidated financial statements.
56
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, 2002 2001 2000
- ----------------------- --------- --------- ---------
(All amounts except share and per share information are
expressed in thousands)
REVENUES
Revenue from Visudyne(R)(Note 9) $ 104,087 $ 79,522 $ 24,930
Contract research and development (Note 10) 6,426 3,853 5,128
Royalties on product sales - Photofrin(R) -- -- 663
Revenue from collaborative arrangements -- -- 1,678
--------- --------- ---------
110,513 83,375 32,399
--------- --------- ---------
COSTS AND EXPENSES
Cost of sales 19,073 14,925 6,895
Market and business development costs (Note 9) -- -- 3,650
Research and development 42,252 42,909 32,802
Selling, general and administrative 16,092 7,636 10,204
Depreciation 3,121 2,807 2,121
Restructuring charge (Note 11) 2,867 -- --
--------- --------- ---------
83,405 68,276 55,672
--------- --------- ---------
OPERATING INCOME (LOSS) 27,108 15,099 (23,273)
INVESTMENT AND OTHER INCOME
Net foreign exchange (losses) gains (278) 3,814 4,569
Interest income 4,814 6,815 10,738
(Writedown) gain on investments (Note 12) (6,204) 3,366 11,307
Equity loss in NSQ (Note 4) (277) (29) --
Other (169) 233 1,058
--------- --------- ---------
INCOME BEFORE INCOME TAXES 24,994 29,297 4,399
(Provision for) recovery of income taxes (Note 13) (11,399) 42,215 --
--------- --------- ---------
NET INCOME $ 13,595 $ 71,512 $ 4,399
--------- --------- ---------
Other comprehensive income 3,523 (17,724) (4,004)
--------- --------- ---------
COMPREHENSIVE NET INCOME $ 17,118 $ 53,788 $ 395
========= ========= =========
NET INCOME PER COMMON SHARE
Basic $ 0.20 $ 1.05 $ 0.07
Fully diluted $ 0.20 $ 1.04 $ 0.06
--------- --------- ---------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (THOUSANDS)
Basic 68,228 67,832 66,875
Fully diluted 68,432 68,548 68,739
--------- --------- ---------
See accompanying notes to the consolidated financial statements.
57
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 2002 2001 2000
- ----------------------- --------- --------- ---------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 13,595 $ 71,512 $ 4,399
Adjustments to reconcile net income to net cash by
operating activities
Depreciation 3,121 2,807 2,121
Employee stock option expense -- 3 1,312
Write-down (gain) on investment (Note 12) 6,204 (3,366) (11,307)
Unrealized foreign exchange gains (566) (1,065) (616)
Deferred income tax assets ( Note 13) 11,399 (42,215) --
Equity loss in NSQ(Note 4) 277 29 --
Changes in non-cash operating assets and liabilities
Accounts receivable and other assets (2,592) (13,888) (4,073)
Inventories 3,234 (11,732) (17,031)
Accounts payable (341) (270) (4,477)
Accrued restructuring charge (Note 11) 2,631 -- --
Other accrued liabilities (654) 3,581 494
Deferred revenue 5,031 6,102 (2,880)
--------- --------- ---------
41,339 11,497 (32,058)
--------- --------- ---------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Short-term investment securities 15,907 (88,088) 102,099
Purchase of investments -- (7,132) --
Purchase of property and equipment (2,242) (3,628) (18,598)
Proceeds from dissolution or sale of investments 488 11,545 --
Purchase of U.S. marketing and distribution rights -- -- (591)
Sale of Photofrin(R)and related rights -- -- 881
--------- --------- ---------
14,153 (87,303) 83,791
--------- --------- ---------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
Increase in long-term debt -- -- 9,189
Repayment of long-term debt -- (8,693) --
Issuance of common shares 3,726 2,928 34,626
--------- --------- ---------
3,726 (5,765) 43,815
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS (743) (8,193) (3,134)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 58,475 (89,764) 92,414
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 69,663 159,428 67,014
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 128,138 $ 69,663 $ 159,428
--------- --------- ---------
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid: $ 970 $ 418 $ 503
Income taxes paid: -- -- --
--------- --------- ---------
58
NON-CASH INVESTING AND FINANCING ACTIVITIES:
1. On January 14, 2000, the holder of 368,069 Series D preference shares
having a carrying value of $5.0 million exercised its right to convert them
into 736,138 common shares of the Company.
2. On June 8, 2000, the Company sold the worldwide rights to Photofrin in
exchange for $1.7 million in cash, 1,283,333 common shares of Axcan with a
value of $7.8 million, preferred shares of Axcan with a value of $8.6
million, a deferred payment with a value of $2.2 million, and future
milestone payments of up to $9.5 million. Transaction costs of $0.8 million
have been recorded as a reduction of cash proceeds (see Note 12 -
(Writedown) Gain on Investments).
3. Also on June 8, 2000, the Company re-acquired the marketing and
distribution rights to Photofrin in the U.S. and the Caribbean in exchange
for $0.6 million in cash, 641,667 shares of Axcan with a value of $3.9
million, Axcan preferred shares with a value of $4.3 million and a right to
receive up to $6.8 million in future milestone payments (see Note 12 -
(Writedown) Gain on Investments).
4. On November 8, 2000, the Company finalized the sale of its Optiguide Fiber
Optics business to Diomed, Inc. ("Diomed"). Under the terms of the sale,
the Company transferred to Diomed its rights to commercialize Optiguide
Fiber Optics in exchange for an initial cash payment of $25,000, a $365,000
short-term receivable due within six months after closing, and a $810,000
long-term receivable due two years after closing payable in cash or an
equivalent number of shares at Diomed's option pursuant to a formula (see
Note 12 - (Writedown) Gain on Investments).
5. On February 1, 2002, the Company received 135,735 common shares of Diomed
and on August 5, 2002, received 696,059 preferred shares of Diomed
Holdings, Inc. as part of the consideration received by the Company from
the sale of its Optiguide(R) FiberOptics business to Diomed on November 8,
2000. Under the terms of the sale, Diomed elected to settle the amount
owing in shares. The Company recorded this investment at a carrying value
of $0.7 million and recorded a loss of $0.4 million on settlement of
accounts receivable of $1.2 million.
See accompanying notes to the consolidated financial statements.
59
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
Accumulated Other
Common Shares Preference Shares Comprehensive Income
----------------------- ------------------------ ------------------------
Unrealized
Cumulative Gains on
Translation Axcan
Shares Amount Shares Amount Adjustment Securities
---------- ---------- ---------- ---------- ---------- ----------
(All amounts except share and per share information are
expressed in thousands)
Balance at January 1, 2000 64,855,435 $ 344,122 368,069 $ 5,000 $ (7,065) $ --
Exercise of stock options at
prices ranging from CAD $4.50
to CAD $108.60 per share 2,108,634 34,626 -- -- -- --
Issuance of common shares to
Sanofi-Synthelabo Inc. upon
conversion of Series D first
preference shares 736,138 5,000 (368,069) (5,000) -- --
Paid-in capital from stock
option modifications -- 1,312 -- -- -- --
Other comprehensive income -- -- -- -- (6,921) 2,917
Net income -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 67,700,207 $ 385,059 -- $ -- $ (13,986)$ $ 2,917
---------- ---------- ---------- ---------- ---------- ----------
Exercise of stock options at
prices ranging from CAD $6.75
to CAD $48.88 per share 290,972 2,928 -- -- -- --
Paid-in capital from stock
option modifications -- 3 -- -- -- --
Other comprehensive income -- -- -- -- (14,807) (2,917)
Net income -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2001 67,991,179 $ 387,990 -- $ -- $ (28,793)$ $ --
---------- ---------- ---------- ---------- ---------- ----------
EXERCISE OF STOCK OPTIONS AT
PRICES RANGING FROM CAD $9.28
TO CAD $39.23 PER SHARE 416,574 3,726 -- -- -- --
OTHER COMPREHENSIVE INCOME -- -- -- -- 3,523 --
NET INCOME -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 2002 68,407,753 $ 391,716 -- $ -- $ (25,270) $ --
---------- ---------- ---------- ---------- ---------- ----------
(TABLE CONTINUED BELOW)
Total
Accumulated Shareholders'
Deficit Equity
---------- ----------
(All amounts except share and per share information are
expressed in thousands)
Balance at January 1, 2000 $ (142,407) $ 199,649
---------- ----------
Exercise of stock options at
prices ranging from CAD $4.50
to CAD $108.60 per share -- 34,626
Issuance of common shares to
Sanofi-Synthelabo Inc. upon
conversion of Series D first
preference shares -- --
Paid-in capital from stock
option modifications -- 1,312
Other comprehensive income -- (4,004)
Net income 4,399 4,399
---------- ----------
Balance at December 31, 2000 $ (138,008) $ 235,982
---------- ----------
Exercise of stock options at
prices ranging from CAD $6.75
to CAD $48.88 per share -- 2,928
Paid-in capital from stock
option modifications -- 3
Other comprehensive income -- (17,724)
Net income 71,512 71,512
---------- ----------
Balance at December 31, 2001 $ (66,496) $ 292,701
EXERCISE OF STOCK OPTIONS AT
PRICES RANGING FROM CAD $9.28
TO CAD $39.23 PER SHARE -- 3,726
OTHER COMPREHENSIVE INCOME -- 3,523
NET INCOME 13,595 13,595
---------- ----------
BALANCE AT DECEMBER 31, 2002 $ (52,901) $ 313,545
---------- ----------
See accompanying notes to the consolidated financial statements.
60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
United States generally accepted accounting principles ("GAAP"). All
amounts are expressed in U.S. dollars unless otherwise indicated.
Principles of Consolidation
These consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions have been
eliminated.
Long-term investments in which the Company exercises joint control are
recorded using the equity method whereby the Company includes a pro rata
share of the investee's earnings in the carrying value of the investment
and in the Company's net income.
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting periods presented. Significant estimates are used for, but not
limited to, provisions for non-completion of inventory, assessment of the
net realizable value of long-lived assets, accruals for contract
manufacturing and research and development agreements, allocation of costs
to manufacturing under a standard costing system, taxes and contingencies.
Actual results may differ from estimates made by management.
Basis of Presentation
Effective December 31, 2002, the Company changed its primary accounting
standard from Canadian GAAP to U.S. GAAP in order to provide information on
a more comparable basis with the majority of the companies in the Company's
peer group. Consequently, the consolidated financial statements of the
Company have been prepared in accordance to U.S. GAAP, on a consistent
basis for all periods presented.
Reporting Currency and Foreign Currency Translation
Effective December 31, 2002, the Company changed its reporting currency to
the U.S. dollar from the Canadian dollar. The consolidated financial
statements of the Company are translated into U.S. dollars using the
current rate method. Assets and liabilities are translated at the rate of
exchange prevailing at the balance sheet date. Shareholders' equity is
translated at the applicable historical rate. Revenue and expenses are
translated at a weighted average rate of exchange for the respective years.
Translation gains and losses are included as part of the cumulative foreign
currency translation adjustment which is reported as a component of
shareholders' equity.
The financial information for the years ended December 31, 2001 and 2000 is
presented in U.S. dollars as if the U.S. dollar had been used as the
reporting currency during those periods.
The Company adopted the U.S. dollar as its reporting currency in order to
provide information on a more comparable basis with the majority of the
companies in the Company's peer group. The Company retained the Canadian
dollar as its functional currency.
Segmented Information
The Company is considered to operate in one industry segment and currently
generates revenue from a single pharmaceutical product, Visudyne.
61
Cash, Cash Equivalents and Short-term Investment Securities
Cash equivalents include highly liquid investments with insignificant
interest rate risk and original maturities of three months or less at the
date of purchase. Investments with maturities between three months and one
year at the date of purchase are considered to be short-term investment
securities. Short-term investment securities consist primarily of
investment-grade commercial paper (R-1 DBRS rating), bankers' acceptances
and certificates of deposit. All short-term investment securities are
carried at cost plus accrued interest which, due to the short-term maturity
of these financial instruments, approximate their fair value.
Inventories
Raw materials and supplies inventories are carried at the lower of actual
cost and market value. Finished goods and work-in-process inventories are
carried at the lower of weighted average cost and net realizable value. The
Company records a provision for non-completion of product inventory to
provide for potential failure of inventory batches in production to pass
quality inspection.
Investments
Short-term investment securities, all of which are categorized as available
for sale, are carried at cost plus accrued interest which, due to the
short-term maturity of these financial instruments, approximate their fair
value.
Investments in affiliates, where the Company exercises significant
influence and/or has an ownership interest from 20% to 50%, are accounted
for using the equity method. Investments in shares of other companies are
classified as available-for-sale investments. Unrealized gains and losses
on these investments are recorded in accumulated other comprehensive income
as a separate component of shareholders' equity, unless the declines in
market values are judged to be other than temporary in which case the
losses are recognized in income in the period.
Long-lived Assets
In August 2001, the FASB issued SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of, and the accounting and reporting provisions of Accounting
Principles Board Opinion ("APB") No. 30, Reporting the Results of
Operations -- Report the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. SFAS No. 144 requires that companies (1) recognize an
impairment loss only if the carrying amount of a long-lived asset is not
recoverable based on its undiscounted future cash flows and (2) measure an
impairment loss as the difference between the carrying amount and fair
value of the asset. In addition, SFAS No. 144 provides guidance on
accounting and disclosure issues surrounding long-lived assets to be
disposed of by sale. The adoption of this statement in 2002 did not have a
material impact on the Company's financial position or results of
operations. No material impairment relating to property or equipment have
been identified by the Company for the years ended December 31, 2002, 2001
and 2000. However, in the fourth quarter of 2002, based on an assessment
and the recent events affecting Kinetek, the Company wrote off its entire
investment in Kinetek shares and recorded a writedown of $6.2 million.
There were no other impairment adjustments to investments recorded in 2002,
2001 and 2000.
Property and Equipment
Property and equipment are recorded at cost and amortized as follows:
Methods Rates
----------------- -----
Buildings Declining-balance 4%
Office furnishings, fixtures and other Declining-balance 20%
Research and commercial manufacturing equipment and
computer operating system Declining-balance 20%
Computer hardware Declining-balance 30%
Revenue Recognition
Revenue from Visudyne(R) consists of the Company's 50% share of pre-tax
profits generated from the Company's collaborative manufacturing, marketing
and distribution arrangement with Novartis Ophthalmics AG ("Novartis
Ophthalmics"), revenue from the sale of bulk manufactured Visudyne product
to Novartis Ophthalmics, and reimbursement from Novartis Ophthalmics of
third party royalties, and specified other costs.
62
Under the terms of the collaborative arrangement with Novartis Ophthalmics,
the Company is responsible for manufacturing and product supply and
Novartis Ophthalmics is responsible for sales, marketing and distribution
of Visudyne. Pre-tax profits are determined by Novartis Ophthalmics and the
Company and are derived by taking net sales of Visudyne to third parties,
less manufacturing, selling, marketing and distribution costs, and third
party royalties. Revenue from bulk Visudyne sales to Novartis Ophthalmics
is not recognized until the period of the related product sale and delivery
by Novartis Ophthalmics to third parties where collection is reasonably
assured. Proceeds of the QLT-Novartis Ophthalmics Alliance from Visudyne
sales are received initially in trust by Novartis Ophthalmics for the equal
benefit of Novartis Ophthalmics and the Company and are held until
distributed in accordance with the agreement between the Company and
Novartis Ophthalmics.
Contract research and development revenues consist of non-refundable
research and development funding under collaborative agreements with the
Company's various strategic partners, including (but not limited to)
Novartis Ophthalmics. Contract research and development funding generally
compensates the Company for discovery, preclinical and clinical expenses
related to the collaborative development programs for certain products and
product candidates of the Company, and is recognized as revenue at the time
research and development activities are performed under the terms of the
collaborative agreements. Amounts received under the collaborative
agreements are non-refundable even if the research and development efforts
performed by the Company do not eventually result in a commercial product.
Contract research and development revenues earned in excess of payments
received are classified as contract research and development receivables.
(See Note 2 - Accounts Receivable and Note 10 - Contract Research and
Development)
Royalties on product sales of Photofrin were recognized as earned under the
Company's marketing and distribution agreements which were consistent with
the period of the product sale by the distributors.
Revenue from collaborative arrangements typically includes initial
technology access or licensing fees, milestone payments based on the
achievement of specified events, and contract or collaborative research
funding. Initial technology access or licensing fees and milestone or other
contingent payments are recognized ratably over the period that the related
products or services are delivered or obligations as defined in the
agreement are performed.
Cost of Sales
Cost of sales, consisting of expenses related to the production of bulk
Visudyne sold to Novartis Ophthalmics and royalties on Visudyne sales, are
charged against earnings in the period of the related product sale by
Novartis Ophthalmics to third parties. The Company utilizes a standard
costing system, which includes a reasonable allocation of overhead
expenses, to account for inventory and cost of sales with adjustments being
made periodically to reflect current conditions. Overhead expenses comprise
direct and indirect support activities related to the manufacture of bulk
Visudyne and involve costs associated with activities such as quality
inspection, quality assurance, supply chain management, safety and
regulatory. Overhead expenses are allocated to inventory during each stage
of the manufacturing process under a standard costing system, and
eventually to cost of sales as the related products are sold by Novartis
Ophthalmics to third parties. The Company records a provision for the
non-completion of product inventory based on its history of batch
completion.
Stock-Based Compensation
In accordance with the provisions of SFAS No. 123 "Accounting for
Stock-based Compensation" ("SFAS 123"), the Company applies Accounting
Principles Board ("APB") Opinion No. 25 and related interpretations in the
accounting for employee stock option plans. SFAS 123 requires that all
stock-based awards made to non-employees be measured and recognized using a
fair value based method. The standard encourages the use of a fair value
based method for all awards granted to employees, but only requires the use
of a fair value based method for direct awards of stock, stock appreciation
rights, and awards that call for settlement in cash or other assets. Awards
that a company has the ability to settle in stock are recorded as equity,
whereas awards that the entity is required to or has a practice of settling
in cash are recorded as liabilities. The Company has adopted the disclosure
only provision for stock options granted to employees and directors, as
permitted by SFAS 123.
The following pro forma financial information presents the net income and
net income per common share had the Company recognized stock-based
compensation using a fair value based accounting method:
63
(In thousands except per share information) 2002 2001 2000
- ------------------------------------------- ---------- ---------- ----------
Net Income (Loss)
As reported $ 13,595 $ 71,512 $ 4,399
Add: Employee stock option expense -- 3 1,312
Less: Additional employee compensation
expense under the fair value method (25,525) (25,667) (43,278)
---------- ---------- ----------
Pro forma (11,930) 45,848 (37,567)
---------- ---------- ----------
Basic net income (loss) per common share
As reported $ 0.20 $ 1.05 $ 0.07
Pro forma $ (0.17) $ 0.68 $ (0.56)
---------- ---------- ----------
Diluted net income (loss) per share
As reported $ 0.20 $ 1.04 $ 0.06
Pro forma $ (0.17) $ 0.67 $ (0.56)
---------- ---------- ----------
The pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be granted in future years.
The weighted average fair value of stock options granted in 2002 was CAD
$11.82 whereas the 2001 and 2000 options were valued at CAD $18.16 and CAD
$37.63 respectively. The Company used the Black-Scholes option pricing model
to estimate the value of the options at each grant date, under the following
weighted average assumptions:
2002 2001 2000
----- ----- -----
Annualized Volatility 83.1% 81.1% 57.0%
Risk-free Interest Rate 4.4% 4.8% 6.1%
Expected Life (Years) 2.5 2.5 2.5
Research and Development
Research and development costs consist of direct and indirect expenditures,
including a reasonable allocation of overhead expenses, associated with the
Company's various research and development programs. Overhead expenses
comprise general and administrative support provided to the research and
development programs and involve costs associated with support activities
such as facility maintenance, utilities, office services, information
technology, legal, accounting and human resources. Research and development
costs are expensed as incurred. Patent application, filing and defense
costs are expensed as incurred and included in general and administrative
expenses.
Income Taxes
Income taxes are reported using the asset and liability method, whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases, and operating loss and tax credit carry forwards using
applicable enacted tax rates. An increase or decrease in these tax rates
will increase or decrease the carrying value of deferred net tax assets
resulting in an increase or decrease to net income. Investment tax credits
are included as part of the provision for (recovery of) income taxes.
Derivative Financial Instruments
The Company enters into foreign exchange contracts to manage exposure to
currency rate fluctuations related to its expected future net earnings and
cash flows. The Company does not engage in speculative trading of
derivative financial instruments. The foreign exchange contracts are not
designated as hedging instruments and as a result all foreign exchange
contracts are marked to market and the resulting gains and losses are
recorded in the statement of income in each reporting period. Details of
foreign exchange contracts outstanding at December 31, 2002, are described
in Note 14.
64
Net Income Per Common Share
Basic net income per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income
per common share is computed in accordance with the treasury stock method
which uses the weighted average number of common shares outstanding during
the period and also includes the dilutive effect of potentially issuable
common stock from outstanding stock options.
The following table sets forth the computation of basic and diluted net
income per common share:
(In thousands, except per share data) 2002 2001 2000
- ------------------------------------- ------- ------- -------
Numerator:
Net Income $13,595 $71,512 $ 4,399
Denominator:
Weighted-average common shares outstanding 68,228 67,832 66,875
Effect of dilutive securities:
Stock options 203 716 1,864
------- ------- -------
Diluted weighted-average common shares outstanding 68,432 68,548 68,739
======= ======= =======
Basic net income per common share $ 0.20 $ 1.05 $ 0.07
Diluted net income per common share $ 0.20 $ 1.04 $ 0.06
Excluded from the calculation of diluted net income per common share for
the year ended December 31, 2002 were 7,334,365 shares (in 2001 - 4,965,562
shares, in 2000 - 2,277,972 shares) of common stock from stock options
because their effect was anti-dilutive.
Reclassification
Certain comparative figures have been reclassified to conform with the
current year's presentation.
Recently Issued Accounting Standards
In August 2001, the FASB issued SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of, and the accounting and reporting provisions of Accounting
Principles Board Opinion ("APB") No. 30, Reporting the Results of
Operations - Report the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
SFAS No. 144 requires that companies (1) recognize an impairment loss only
if the carrying amount of a long-lived asset is not recoverable based on
its undiscounted future cash flows and (2) measure an impairment loss as
the difference between the carrying amount and fair value of the asset. In
addition, SFAS No. 144 provides guidance on accounting and disclosure
issues surrounding long-lived assets to be disposed of by sale. The
adoption of this statement in 2002 did not have a material impact on the
Company's financial position or results of operations. No material
impairment relating to property or equipment have been identified by the
Company for the years ended December 31, 2002, 2001 and 2000. However, in
the fourth quarter of 2002, based on an assessment and the recent events
affecting Kinetek, the Company wrote off its entire investment in Kinetek
shares and recorded a writedown of $6.2 million. There were no other
impairment adjustments to investments recorded in 2002, 2001 and 2000.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Among other things, SFAS No. 145 rescinds both SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and the amendment
of SFAS No. 4, SFAS No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. Through this rescission, SFAS No. 145 eliminates
the requirement (in both SFAS No. 4 and SFAS No. 64) that gains and losses
from the extinguishment of debt be aggregated and, if material, classified
as an extraordinary item, net of the related income tax effect. Generally,
SFAS No. 145 is effective for transactions occurring after May 15, 2002.
The Company does not expect SFAS No. 145 to have a material impact on the
Company's results of operations or its financial position.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement provides guidance on the
recognition and measurement of liabilities associated with exit and
disposal activities. Under SFAS No. 146, liabilities for costs associated
with exit or disposal activities should be recognized when the liabilities
are incurred and measured at fair value. This statement is effective
prospectively for exit or disposal activities initiated after December 31,
2002. The Company does not expect the adoption of SFAS No. 146 to have a
material impact on the Company's consolidated financial position or results
of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation
of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation
No. 34. FIN 45 clarifies the requirements of FASB Statement No. 5,
Accounting for Contingencies, relating to the guarantor's accounting for,
and disclosure of, the issuance of certain types of guarantees. FIN 45
requires that upon issuance of a guarantee, the guarantor must recognize a
liability for the fair value of the obligation it assumes under that
guarantee. The initial recognition and measurement provisions are effective
for guarantees issued or
65
modified after December 31, 2002. The Company does not expect the adoption
of FIN 45 to have a material impact on its financial position or its
results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123. This Statement amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. The Company's consolidated financial statements currently
comply with the disclosure requirements of SFAS No. 148.
NOTE 2. ACCOUNTS RECEIVABLE
(In thousands) 2002 2001
- -------------- ------- -------
Visudyne(R) $28,636 $23,044
Contract research and development 1,128 1,338
Diomed, Inc. (Note 4) -- 1,215
Trade and other 422 401
------- -------
$30,186 $25,998
------- -------
Accounts receivable -Visudyne is due from Novartis Ophthalmics and consists
of the Company's 50% share of pre-tax profit on sales of Visudyne, amounts
due from sale of bulk Visudyne to Novartis Ophthalmics and reimbursement of
specified manufacturing, royalty and other costs. The Company does not
require an allowance for doubtful accounts.
NOTE 3. INVENTORIES
(In thousands) 2002 2001
- -------------- -------- --------
Raw materials and supplies $ 1,706 $ 497
Work-in-process 22,057 25,882
Finished goods 13,794 14,685
Provision for non-completion of product inventory (1,664) (2,447)
-------- --------
$ 35,892 $ 38,617
-------- --------
Inventories include finished goods with a cost of $12.0 million (2001 -
$7.3 million) that have been shipped to and are held by Novartis
Ophthalmics. These finished goods will be recognized as costs of
manufacturing in the period of the related product sale by Novartis
Ophthalmics to third parties and are included in deferred revenue at cost.
The Company records a provision for non-completion of product inventory to
provide for potential failure of inventory batches in production to pass
quality inspection. Consistent with this policy, during the second quarter
of 2002, the Company reduced its provision for non-completion of product
inventory by $1.3 million, as a result of the release of validation batches
of verteporfin for injection previously on hold for second source supplier
qualification.
66
NOTE 4. LONG-TERM INVESTMENTS AND ADVANCES
(In thousands) 2002 2001
- -------------- ------ ------
Kinetek Pharmaceuticals, Inc. $ -- $6,113
Axcan Pharma Inc. 2,359 2,201
Diomed Holdings, Inc. 679 --
NS & QLT Technologies Ltd. -- 755
Other 1,132 913
------ ------
$4,170 $9,982
------ ------
The long-term investment in Kinetek Pharmaceuticals, Inc. ("Kinetek")
represents the amount invested by the Company for 3.14 million Kinetek
common shares. During the fourth quarter of 2002, the Company assessed the
carrying value of its investment and incurred a write-down of $6.2 million
(see Note 12 - (Writedown) Gain on Investments). The long-term receivable
from Axcan represents the present value of a $2.5 million receivable
relating to the sale of Photofrin (see Note 12 - (Writedown) Gain on
Investments) which does not bear interest and is due in cash or an
equivalent value of common shares not later than June 8, 2004. The
long-term investment in Diomed Holdings, Inc. represents the restricted
Class A Convertible Preferred Stock the Company received as consideration
for the sale of the Company's Optiguide fiber optic business to Diomed
Holdings, Inc. Other long-term investments consist principally of long-term
employee loans which are non-interest bearing with terms ranging from one
to five years and will be forgiven if certain conditions are met.
On September 10, 2001, the Company entered into an agreement with Nippon
Fine Chemicals ("NFC") of Japan to form NS & QLT Technologies Ltd. ("NSQ"),
a Canadian corporation, to develop and operate a North American Verteporfin
Presome plant, to be located in Edmonton, Alberta, for the purpose of
securing a secondary supply chain for Verteporfin Presome. Under the terms
of the agreement, the common shares of NSQ are owned 50% by the Company and
50% by NFC, based on equal cash contributions by each party. An initial
investment of $0.8 million by each party was made in September 2001. During
the second quarter of 2002, the Company decided not to continue with the
development of NSQ. In December 2002, the Company and NFC agreed to
dissolve NSQ. As a result, the remaining assets have been distributed back
to its shareholders. The Company accounted for this investment using the
equity method. As a result, the Company recorded an equity loss of $0.3
million.
NOTE 5. PROPERTY AND EQUIPMENT
2002 2001
---------- ----------
Accumulated Net Net
(In thousands) Cost Amortization Book Value Book Value
- -------------- ------- ------------ ---------- ----------
Buildings $22,641 $ 2,132 $20,509 $20,679
Office furnishings, fixtures, and other 4,043 2,025 2,018 2,454
Research equipment 6,283 3,728 2,555 2,728
Commercial manufacturing equipment 2,028 935 1,093 1,084
Computer hardware and operating system 9,528 4,405 5,123 5,241
Land 3,983 -- 3,983 3,936
------- ------- ------- -------
$48,506 $13,225 $35,281 $36,121
------- ------- ------- -------
NOTE 6. CREDIT FACILITY
67
On August 8, 2001, the Company entered into a CAD $3.5 million unsecured
credit facility agreement. The first segment of the facility is structured
as a CAD $1.0 million revolving operating loan which bears interest at the
bank's prime rate for Canadian dollar drawdowns and the U.S. base rate for
U.S. dollar drawdowns. As at December 31, 2002, no amount is currently
drawn against this portion of the facility. A standby letter of credit in
the amount of CAD $2.5 million has been issued under the second segment of
the facility. This letter of guarantee is used to secure a land purchase
and bears interest at 0.7% per annum.
NOTE 7. OTHER ACCRUED LIABILITIES
(In thousands) 2002 2001
- -------------- ------ ------
Royalties $2,025 $1,581
Compensation 3,557 2,201
Manufacturing 568 721
Photofrin clinical trials -- 1,899
Interest 171 464
Other 706 647
------ ------
$7,027 $7,513
------ ------
NOTE 8. SHARE CAPITAL
(a) Authorized Shares
On May 5, 2000, at the Annual General Meeting of the Company, the
shareholders passed a Special Resolution to increase the authorized
common share capital of the Company from 100,000,000 common shares to
500,000,000 common shares. There were no other changes to the
authorized share capital of the Company during the three-year period
ended December 31, 2002.
(b) Shareholder Protection Rights Plan
Effective March 17, 2002, the Company adopted a Shareholder Rights
Plan, which was then amended and restated effective April 8, 2002 (the
"Rights Plan"), and approved, as amended, by the shareholders of the
Company on April 25, 2002. The Rights Plan replaced the shareholder
rights plan (the "Initial Rights Plan") that was initially adopted by
the Company on March 17, 1992, confirmed by shareholders on April 28,
1992, amended March 31, 1997 and re-confirmed, as amended, by
shareholders on May 12, 1997. The Initial Rights Plan expired on March
17, 2002. The Rights Plan will remain in effect, unless earlier
terminated pursuant to its terms, until the 2005 annual meeting of
shareholders, and, if reconfirmed at the 2005 annual meeting, the
Rights Plan will remain in effect until the 2008 annual meeting of
shareholders. Under the Rights Plan, holders of common shares are
entitled to one share purchase right for each common share held.
Generally, if any person or group makes a take-over bid, other than a
bid permitted under the Rights Plan (a "Permitted Bid") or acquires
beneficial ownership of 20% or more of the Company's outstanding common
shares without complying with the Rights Plan, the Rights Plan will
entitle these holders of share purchase rights to purchase, in effect,
common shares of the Company at 50% of the prevailing market price. A
take-over bid for the Company can avoid the dilutive effects of the
share purchase rights, and therefore become a Permitted Bid, if it
complies with provisions of the Rights Plan or if it is expressly
approved by the Board of Directors.
(c) Stock Options
The Company has in place three incentive stock option plans which are
described below. At present the Company may only grant options from one
of these plans, namely the 2000 Incentive Stock Option Plan (the "2000
Plan"), described below. The other plans remain in place for so long as
options previously granted under those plans remain outstanding. The
2000 Plan provides for the grant of options to purchase common shares
to directors, officers and employees of the Company, or any of its
subsidiaries, to provide
68
incentive to develop the growth of the Company. The 2000 Plan is
administered by the Executive Compensation Committee (the "Committee")
appointed by the Board of Directors. Since 2001, vesting of stock
options for all employees and directors, which is at the discretion of
the Committee, has occurred ratably over three years.
(i) 1995 Incentive Stock Option Plan ("1995 Plan")
The 1995 Plan, which provided for the issuance of up to 4,000,000
common shares, was approved by shareholders in May 1995. The
maximum term of any option granted under the 1995 Plan was five
years. No option could be granted under the 1995 Plan if it would
have resulted in the optionee holding options or rights to acquire
in excess of 5% of the issued and outstanding common shares (on a
non-diluted basis). The 1995 Plan automatically terminated on
February 10, 1998, but options granted before this date may be
exercised until they expire in accordance with their original
terms. At December 31, 2002, options to purchase an aggregate
total of 32,328 common shares were outstanding under the 1995 Plan
and are exercisable in the future at a price of CAD $9.28 per
common share.
(ii) 1998 Incentive Stock Option Plan ("1998 Plan")
The 1998 Plan, which provided for the issuance of up to 5,000,000
common shares, was approved by shareholders in May 1998. The
maximum term of any option granted under the 1998 Plan is five
years. Under this Plan, the exercise price of an option was set by
the Committee at the time of granting and could not be less than
the fair market price of the common shares on the date of the
granting. No option could be granted under the 1998 Plan if it
would have resulted in the optionee holding options or rights to
acquire in excess of 5% of the issued and outstanding common
shares (on a non-diluted basis). The 1998 Plan automatically
terminated on February 10, 2003 but options granted before the
termination of the 1998 Plan may be exercised until they expire in
accordance with their original terms. At December 31, 2002,
options to purchase an aggregate total of 2,484,435 common shares
were outstanding under the 1998 Plan and exercisable in the future
at prices ranging between CAD $9.28 and CAD $51.50 per common
share.
(iii) 2000 Incentive Stock Option Plan ("2000 Plan")
The 2000 Plan, which provides for the issuance of up to
5,000,000 common shares, was approved by shareholders on May 5,
2000. On April 25, 2002, at the Annual General Meeting of the
Company, the shareholders passed a resolution approving an
amendment to the 2000 Plan by increasing the maximum number of
common shares issuable under the Plan by 2,000,000 common shares
from 5,000,000 common shares to 7,000,000 common shares. The 2000
Plan is to replace the 1995 Plan and the 1998 Plan. A guideline
currently set in place by the Committee is for the maximum term of
any option granted under the 2000 Plan not to exceed five years,
subject to the right of the Committee to extend the term in
certain circumstances. The exercise price of an option granted is
set by the Committee at the time of granting and may not be less
than the fair market price of the common shares on the date of the
granting. No option may be granted under the 2000 Plan if it would
result in the optionee holding options or rights to acquire in
excess of 5% of the issued and outstanding common shares (on a
non-diluted basis). The Committee may suspend, amend, or terminate
the 2000 Plan at any time without notice, provided that no
outstanding option is adversely affected thereby. The 2000 Plan
will automatically terminate on March 1, 2010, unless it has
previously been terminated by the Committee, but options granted
before termination of the 2000 Plan may be exercised until they
expire in accordance with their original terms. At December 31,
2002, options to purchase an aggregate total of 5,284,475 common
shares were outstanding under the 2000 Plan and exercisable in the
future at prices ranging between CAD $12.93 and CAD $108.60 per
common share.
Stock option activity with respect to all of the Company's stock option
plans is presented below:
69
Exercise Price
(In Canadian dollars) Number of Shares Per Share Range
--------------------- ---------------- ---------------
Outstanding at December 31, 1999 4,788,465 $ 4.50 - 60.00
Granted 2,889,989 43.95 - 108.60
Exercised (2,108,634) 4.50 - 108.60
Cancelled (76,513) 4.88 - 108.60
---------------- -----------------
Outstanding at December 31, 2000 5,493,307 $ 4.56 - 108.60
Granted 3,381,707 31.40 - 108.60
Exercised (290,972) 6.75 - 48.88
Cancelled (431,646) 4.56 - 108.60
---------------- -----------------
Outstanding at December 31, 2001 8,152,396 $ 9.28 - 108.60
Granted 1,047,862 12.93 - 39.23
Exercised (416,574) 9.28 - 39.23
Cancelled (982,446) 13.78 - 108.60
---------------- -----------------
Outstanding at December 31, 2002 7,801,238 $ 9.28 - 108.60
---------------- -----------------
The weighted average exercise price of outstanding options as at December
31, 2002 and December 31, 2001 are CAD $50.85 and CAD $53.37, respectively.
Additional information relating to stock options outstanding as of December
31, 2002, is presented below:
Options Outstanding Options Exercisable
------------------------------------------------------------------------- ------------------------------------
(In Canadian dollars) Weighted
Average
Weighted Remaining
Number of Average Contractual Weighted Average
Price Range Shares Exercise Price Life (Years) Number of Shares Exercise Price
----------- ------ ---------------- ------------ ---------------- ---------------
Under $25.00 1,410,961 $ 18.93 3.03 658,320 $14.74
$25.00- $37.50 1,773,702 31.33 2.55 1,161,148 31.13
$37.51-$50.00 2,668,460 41.60 2.94 1,738,229 42.99
Over $50.00 1,948,115 104.40 2.35 1,773,005 104.32
---------- ----------
7,801,238 5,330,702
---------- ----------
The number of options issued and outstanding under all plans at any time is
limited to 15% of the number of issued and outstanding common shares of the
Company. As of December 31, 2002, the number of options issued and
outstanding under all plans was 11% of the issued and outstanding common
shares.
70
For the nine months
NOTE 9. REVENUE FROM VISUDYNE(R)
Under the terms of the Company's development, marketing and distribution
agreement with Novartis Ophthalmics, the Company is responsible for
Visudyne manufacturing and product supply and Novartis Ophthalmics is
responsible for sales, marketing and distribution of Visudyne. The Company
and Novartis Ophthalmics share equally the profits realized on revenues
from product sales after deductions for marketing costs and manufacturing
costs (including third party royalties). Proceeds of the Alliance from
Visudyne sales are received initially in trust by Novartis Ophthalmics for
the equal benefit of Novartis Ophthalmics and the Company and are held
until distributed in accordance with the agreement between the Company and
Novartis Ophthalmics.
The Company's revenue from sales of Visudyne was determined as follows:
For the year For the year For the nine months
ended ended ended
(In thousands) December 31, 2002 December 31, 2001 December 31, 2000
- -------------- ----------------- ----------------- -------------------
Visudyne(R) sales by Novartis Ophthalmics $ 287,098 $ 223,343 $ 94,371
Less: Manufacturing and other costs (23,028) (18,066) (7,757)
Less: Sales, marketing and distribution expenses (107,293) (87,622) (54,029)
------------- ----------------- ------------------
Net operating income from Visudyne(R)sales $ 156,777 $ 117,656 $ 32,585
============= ================= ==================
The Company's 50% share $ 78,388 $ 58,828 $ 16,292
Add: Manufacturing and other reimbursements 25,699 20,694 8,638
------------- ----------------- ------------------
Total revenue from Visudyne(R) $ 104,087 $ 79,522 $ 24,930
============= ================= ==================
For the year ended December 31, 2002, approximately 59% (2001 - 63%, 2000 -
66%) of total Visudyne sales were in the United States, with Europe and
other markets responsible for the remaining 41% (2001 - 37%, 2000 - 34%).
Market and business development costs represented the Company's equal share
of initial costs associated with planning and initiation of an Expanded
Access ("EA") Program for Visudyne therapy, net of EA pre-commercial or
commercial revenues realized, and marketing and pre-launch costs for the
first quarter of 2000.
Effective with the second quarter of 2000, the Company commenced recording
its share of revenues from Visudyne as a revenue item on the statement of
income.
NOTE 10. CONTRACT RESEARCH AND DEVELOPMENT
The Company receives non-refundable research and development funding from
Novartis Ophthalmics and other strategic partners which is recorded as
contract research and development revenue. Details of the Company's contract
research and development revenue are as follows:
71
(In thousands) 2002 2001 2000
- -------------- ------ ------ ------
Visudyne(R) ocular programs $2,475 $2,503 $5,128
Visudyne(R) dermatology programs 2,745 1,318 --
Tariquidar programs 1,000 -- --
Others 206 32 --
------ ------ ------
Contract research & development revenue $6,426 $3,853 $5,128
====== ====== ======
NOTE 11. RESTRUCTURING CHARGE
In the fourth quarter of 2002, the Company restructured its operation to
reduce operating expenses and concentrate its resources on key product
development programs and business initiatives. The Company reduced its
overall headcount by 62 people or 17%. The Company provided affected
employees with severance and support to assist with outplacement. As a
result, the Company recorded a $2.9 million restructuring charge in the
fourth quarter of 2002 related to severance and termination costs. The
Company expects to complete final activities associated with the
restructuring in 2003. At December 31, 2002, restructuring charges of $0.3
million were paid out, and the accrued liability relating to the
restructuring was $2.6 million. During January of 2003, $1.3 million of the
restructuring charges was paid out, reducing the accrued liability related
to the restructuring to $1.3 million.
NOTE 12. (WRITEDOWN) GAIN ON INVESTMENTS
(In thousands) 2002 2001 2000
- -------------- ------- ------- -------
Writedown of investment in Kinetek Pharmaceuticals, Inc. $(6,204) $ -- $ --
Gain on sale of investment in Axcan Pharma Inc. -- 3,366 --
Gain on sale of Photofrin(R) rights -- -- 10,558
Gain on sale of Optiguide(R) Fiber Optics rights -- -- 749
------- ------- -------
$(6,204) $ 3,366 $11,307
------- ------- -------
The Company performs periodic evaluations of its investments to assess for
indications of impairment. During the fourth quarter, the Company
contracted an impairment assessment by an independent valuation consultant.
Based on this assessment and the recent events affecting Kinetek, the
Company has written off its entire investment in Kinetek shares and
recorded a writedown of $6.2 million.
The Company's investments in Axcan were acquired as part of the
consideration received from the sale of worldwide rights to Photofrin to
Axcan. The Axcan Series A preferred shares were redeemed on June 8, 2001 by
Axcan for an equivalent value of common shares plus a common share dividend
totalling $4.5 million in value. In 2001, all of the Axcan common shares
were sold for net proceeds of $11.5 million, resulting in a gain on sale of
$3.4 million.
On June 8, 2000, the Company finalized the sale of the worldwide rights to
Photofrin to Axcan. Under the terms of the sale, the Company transferred to
Axcan the worldwide development, manufacturing and marketing rights to
Photofrin in exchange for consideration consisting of cash, Axcan perferred
shares, Axcan common shares, and a deferred payment with a total value of
$20.2 million. After deducting the cost of re-acquiring from
Sanofi-Synthelabo Inc the U.S. and Caribbean rights to Photofrin, the
Company recorded a gain of $10.6 million from the sale of Photofrin rights
to Axcan.
On November 8, 2000, the Company finalized the sale of its Optiguide Fiber
Optics business to Diomed. Under the terms of the sale, the Company
transferred to Diomed its rights to commercialize Optiguide Fiber Optics in
exchange for an initial cash payment of $25,000, a $365,000 short-term
receivable due within six months after closing, and a $810,000 long-term
receivable which bears interest at 5% and is due two years after closing
and
72
payable in cash or an equivalent number of shares at Diomed's option
pursuant to a formula.
NOTE 13. INCOME TAXES
The components of the provision for (recovery of) income taxes are as
follows:
(In thousands) 2002 2001 2000
- -------------- -------- -------- --------
Provision for deferred income taxes $ 10,294 $ 9,641 $ 2,411
Increase in (reduction of) valuation allowance 1,105 (51,856) (2,411)
-------- -------- --------
Provision for (recovery of) income taxes $ 11,399 $(42,215) --
-------- -------- --------
Differences between the statutory income tax rates applicable to the
Company and the Company's effective income tax rate applied to the earnings
consist of the following:
(In thousands) 2002 2001 2000
- -------------- -------- -------- --------
Net earnings before income taxes $ 24,994 $ 29,297 $ 4,399
Canadian statutory tax rates 39.62% 44.62% 45.62%
-------- -------- --------
Expected income tax provision $ 9,902 $ 13,072 $ 2,007
Investment tax credits (1,356) (4,030) --
Increase in (reduction of ) valuation allowance 1,105 (51,856) (2,411)
Valuation allowance on Kinetek writedown 1,229 -- --
Permanent differences and other 519 599 404
-------- -------- --------
Provision for (recovery of) income taxes $ 11,399 $(42,215) --
-------- -------- --------
The tax effects of temporary differences that give rise to significant
components of the deferred tax assets and deferred tax liabilities are
presented below:
73
(In thousands) 2002 2001
-------- --------
Non-capital loss carry forwards $ 5,327 $ 17,368
Research and development expenditures 16,241 16,182
Investment tax credits 5,466 3,574
Kinetek writedown 1,105 --
Development rights 3,069 3,804
Other temporary differences 955 1,545
-------- --------
Total gross deferred tax assets $ 32,163 $ 42,473
Less: valuation allowance (1,105) --
-------- --------
Total deferred tax assets $ 31,058 $ 42,473
-------- --------
Total gross deferred tax liabilities -- (556)
-------- --------
Net deferred tax assets $ 31,058 $ 41,917
-------- --------
Less: current portion (17,092) (18,904)
-------- --------
Net long-term portion of deferred income tax assets $ 13,966 $ 23,013
-------- --------
As at December 31, 2002, the Company had $44.0 million of unclaimed
research and development expenditures available for tax purposes which have
no expiration date. The Company also had non-capital loss carry forward
balances for Canadian income tax purposes of $14.3 million available to
offset future taxable income, if any, and expiring at various dates through
to the year 2006. The future tax benefit of these expenditures and
non-capital losses is ultimately subject to final determination by taxation
authorities.
The realization of the Company's deferred tax assets is primarily dependent
on generating sufficient taxable income prior to expiration of any loss
carry forward balances. During 2001, the Company's development and
operations suggested that the "more likely than not" test for accounting
purposes had been met and accordingly, the valuation allowance that had
been recorded in the past against the net deferred tax asset was reversed.
During the fourth quarter of 2002, the Company set up a valuation allowance
relating to the writedown of its investment in Kinetek. The valuation
allowance is reviewed periodically and if the "more likely than not"
criterion changes for accounting purposes then the valuation allowance will
be adjusted accordingly.
NOTE 14. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
As at December 31, 2002 and 2001, the carrying amounts for the Company's
Cash and cash equivalents, Short-term investment securities, Accounts
receivable, Accounts payable, Accrued restructuring costs, and Other
accrued liabilities approximated fair value due to the short-term maturity
of these financial instruments. With respect to Accounts receivable,
Visudyne revenue and contract research and development receivables comprise
the aggregate amounts owing from the Company's co-development partner,
Novartis Ophthalmics, as at December 31, 2002 and December 31, 2001.
Long-term investments and advances comprise primarily the long-term
receivable from Axcan relating to the sale of Photofrin and the long-term
receivable from Diomed (see Note 12 - (Writedown) Gain on Investments). The
carrying value of these receivables approximates fair value, as they bear
market interest rates.
The Company purchases goods and services in both Canadian and U.S. dollars
and earns most of its revenues in U.S. dollars and EUROs. The Company
enters into foreign exchange contracts to manage exposure to currency rate
fluctuations related to its expected future net earnings (primarily in U.S.
dollars and EUROs) and cash flows (in U.S. dollars and Swiss francs).
Foreign exchange risk is also managed by satisfying foreign denominated
expenditures with cash flows or assets denominated in the same currency. At
December 31, 2002,
74
the Company has outstanding forward foreign currency contracts as noted
below. The net unrealized loss in respect of such foreign currency
contracts, as at December 31, 2002, was approximately $0.7 million.
Maturity Period Quantity Average Price
(to the year) (millions) (Canadian dollars)
------------- ---------- ------------------
U.S. dollar option-dated forward contracts 2003 U.S. $15.5 per US $1.60297
Swiss franc option-dated forward contracts 2003 CHF 13.0 per CHF 1.02660
NOTE 15. COMMITMENTS
In the normal course of business, the Company enters into Visudyne supply
agreements with contract manufacturers, which expire at various dates to
2006 and total $19.9 million. In addition, the Company has entered into
operating lease agreements and clinical development agreements. The minimum
annual commitment related to these agreements payable over the next five
years are as follows:
Year ending December 31, $
------------------------ ----
2003 3.3
2004 0.7
2005 0.7
2006 15.5
2007 -
NOTE 16. SEGMENTED INFORMATION
Details of the Company's revenues and property and equipment by geographic
segments are as follows:
Revenues(1)
Year ended December 31,
---------------------------------------------------
(In thousands) 2002 2001 2000
-------------- --------------- -------------- ---------------
United States $ 73,309 $ 61,274 $ 25,475
Europe 30,722 19,056 5,751
Canada 4,544 2,517 2,517
Other 1,938 528 (1,344)
--------------- -------------- ---------------
$ 110,513 $ 83,375 $ 32,399
--------------- -------------- ---------------
Property and equipment
December 31,
---------------------------------
(In thousands) 2002 2001
-------------- ---------------- --------------
Canada $ 34,608 $ 35,380
United States 673 741
---------------- --------------
$ 35,281 $ 36,121
---------------- --------------
- ---------------
(1) Revenues are attributable to a geographic segment based on location of the
customer for revenue from Visudyne and royalties on product sales, and
location of the head office of the collaborative partner in the case of
revenues from contract research and development and collaborative
arrangements.
75
NOTE 17. CONTINGENCIES
(a) On April 24, 2000, Massachusetts Eye and Ear Infirmary ("MEEI") filed a
civil suit against the Company in the United States District Court for the
District of Massachusetts seeking to establish exclusive rights for MEEI
as the owner of certain inventions relating to the use of verteporfin as
the photoactive agent in the treatment of certain eye diseases including
Age Related Macular Degeneration ("AMD"). During 2002 the Court granted
summary judgement in favor of QLT, dismissing all counts of MEEI's
complaint against the Company in this lawsuit.
The lawsuit (Civil Action No. 00-10783-JLT) relates, in part, to an
ongoing dispute involving U.S. Patent No. 5,798,349 (the " '349 Patent")
which was issued on August 25, 1998 to the Company, MEEI and Massachusetts
General Hospital ("MGH") as co-owners. The complaint alleged breach of
contract, misappropriation of trade secrets, conversion,
misrepresentation, unjust enrichment, unfair trade practices and related
claims and asked that the Court: (i) declare MEEI the owner of certain
inventions claimed in the '349 Patent; (ii) enjoin the Company from
infringement of those claims or any action that would diminish the
validity or value of such claims; (iii) declare that the Company breached
an agreement with MEEI to share equitably in any proceeds derived as a
result of collaboration leading to the '349 Patent; (iv) impose a
constructive trust upon the Company for any benefit that the Company has
or will derive as a result of the '349 Patent; and (v) award MEEI monetary
relief for misappropriation of trade secrets in an amount equal to the
greater of MEEI's damages or the Company's profits from any such
misappropriation, and double or treble damages under Massachusetts law.
The Company's counterclaim, filed in 2000, against MEEI and two employees
of MEEI, seeks: (i) to correct inventorship on the '349 Patent by adding
an additional MGH researcher as a joint inventor; (ii) a declaration that
the Company and MGH are joint owners of the '349 Patent; (iii) a
determination that MEEI is liable to the Company for conversion and unfair
trade practices under Massachusetts law; (iv) an injunction to prohibit
MEEI from prosecuting any patent application claiming subject matter
already claimed in the '349 Patent; and (v) an award of damages and
attorneys' fees.
In 2002, QLT moved for summary judgement against MEEI on all counts of
MEEI's complaint in Civil Action No. 00-10783-JLT. The Court granted QLT's
motions, thus dismissing all of MEEI's claims in this lawsuit. MEEI does
have a right of appeal. The Company does not know whether MEEI will appeal
the decision. QLT's counterclaims in this lawsuit remain outstanding.
On May 1, 2001, the United States Patent Office issued United States
Patent No. 6,225,303 (the "'303 Patent") to MEEI. The `303 Patent is
derived from the same patent family as the '349 Patent and claims a method
of treating unwanted choroidal neovasculature in a shortened treatment
time using verteporfin. The patent application which led to the issuance
of the `303 patent was filed and prosecuted by attorneys for MEEI and, in
contrast to the '349 patent, named only MEEI researchers as inventors.
The same day the `303 patent was issued, MEEI commenced a second civil
suit against the Company and Novartis Ophthalmics, Inc. alleging
infringement of the `303 Patent (Civil Action No. 01-10747-EFH). The suit
seeks damages and injunctive relief for patent infringement and unjust
enrichment. The Company has answered the complaint, denying its material
allegations and raising a number of affirmative defenses, and has asserted
counterclaims against MEEI and the two MEEI researchers who are named as
inventors on the `303 patent. The Company's counterclaim seeks to correct
inventorship of the `303 patent by adding QLT and MGH researchers as joint
inventors and asks the court to declare that QLT and MGH are co-owners of
the `303 patent. The counterclaim also requests a declaration that QLT
does not infringe, induce infringement, or contribute to infringement of
the `303 patent, asserting, among other reasons, that QLT and MGH are
rightful co-owners of the patent and QLT has a license from MGH of MGH's
co-ownership rights under the patent. In addition, the counterclaim seeks
a declaratory judgement that the `303 patent is invalid and unenforceable.
Finally, the Company's counterclaim seeks an award of monetary damages for
breach of material transfer agreements governing MEEI's use of
verteporfin, based upon MEEI's failure to notify QLT of MEEI's intent to
file the patent application that led to the issuance of the `303 patent to
MEEI.
76
In November 2001, MGH sought and was granted leave to intervene in the
action to protect its rights in the `303 patent. MGH's complaint in
intervention, like QLT's counterclaim, asks the court to correct
inventorship of the `303 patent by adding QLT and MGH researchers as joint
inventors of the inventions claimed in the patent and by declaring that
MGH is a joint owner of those inventions.
No trial has been scheduled in either case, and none is expected until the
latter part of 2003 at the earliest.
The Company believes MEEI's claims are without merit and intends to
vigorously defend against such actions and pursue its counterclaims. The
outcome of this dispute is not presently determinable or estimatable and
there can be no assurance that the matter will be resolved in favor of the
Company. If the dispute is not resolved in the Company's favor, the
Company may be obliged to pay additional royalties or damages for access
to the inventions claimed in the patents named in the suits.
(b) In January and February, 2001, seven proposed securities class actions
were filed in the United States District Court for the Southern District
of New York on behalf of purchasers of the Company's common shares between
August 1, 2000 and December 14, 2000. On May 3, 2001, the court ordered
consolidation of the seven actions.
The complaints name as defendants the Company; Julia Levy, former
President, Chief Executive Officer and a current Director of the Company;
and Kenneth Galbraith, the Company's former Executive Vice President,
Chief Financial Officer and Corporate Secretary. The plaintiffs allege
that the defendants violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934.
The plaintiffs allege that on December 14, 2000, the Company announced
that it expected to miss its Visudyne sales estimates for the
fourth-quarter 2000, and that in response, the Company's common share
price dropped approximately 31%. The plaintiffs claim that the Company's
December 14, 2000 statements contradicted prior information issued by the
defendants concerning the demand for Visudyne and the Company's prospects.
The plaintiffs allege that the defendants overstated the demand for
Visudyne, did not properly disclose reimbursement issues relating to
Visudyne and that the defendants had no basis in the months preceding the
December announcement for their projections of fourth-quarter sales. The
plaintiffs further allege that the intent of the individual defendants to
mislead investors can be inferred from their sale of a substantial amount
of the Company's common shares during the months of August and September
2000. The plaintiffs seek injunctive relief, fees and expenses and
compensatory damages in an unspecified amount.
The Company believes that the plaintiffs' claims are without merit and
intends to vigorously defend against such actions. However, the outcome of
this claim is not presently determinable or estimatable and there can be
no assurance that the matter will be resolved in favor of the Company and
the other defendants. If the lawsuit is not resolved in the Company's
favor, there can be no guarantee that the Company's insurance will be
sufficient to pay for the damages awarded to the plaintiffs.
The effect of a negative judgement or likely loss with respect to one or both of
the above-mentioned claims, if any, will be recorded in the period it becomes
determinable.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
77
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Company's directors is set forth in the section
entitled "Election of Directors" contained in the proxy statement for use in
connection, with the Company's Annual Meeting of Shareholders to be held on May
22, 2003 which proxy statement will be filed with the Securities and Exchange
Commission within 120 days after December 31, 2002, and is incorporated herein
by reference. Information concerning the Company's executive officers is set
forth in Item 1 of Part I herein under the section entitled "Executive Officers
of the Registrant".
ITEM 11. EXECUTIVE COMPENSATION
Information concerning compensation paid to executive officers of the
Company and certain related matters is set forth in the section entitled
"Executive Compensation" contained in the proxy statement for use in connection
with the Company's Annual Meeting of Shareholders to be held on May 22, 2003,
which proxy statement will be filed with the Securities and Exchange Commission
within 120 days after December 31, 2002, and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information regarding our common stock that
may be issued upon the exercise of options, warrants and other rights granted to
employees, consultants or directors under all of our existing equity
compensation plans, as of December 31, 2002:
(c)
--------------------------
(a) (b) Number of securities
--------------------------- ------------------------ remaining available for
Number of Securities to Weighted-average issuance under equity
be issued upon exercise exercise price of compensation plans
of outstanding options, outstanding options, (excluding securities
PLAN CATEGORY warrants and rights warrants and rights reflected in column (a))
- ------------- -------------------------- ------------------------ -------------------------
Equity compensation plans 7,801,238(1) $50.85 1,823,364
approved by security holders
Equity compensation plans not 0 N/A 0
approved by security holders
---------- ------- ----------
Total 7,801,238 $50.85 1,823,364
- -----------
(1) The Company currently maintains three equity compensation plans, all of
which were approved by shareholders, which provide for the issuance of common
stock to officers and other employees, directors and consultants. These three
equity compensation plans are designated as the 1995 Incentive Stock Option
Plan, the 1998 Incentive Stock Option Plan, and the 2000 Incentive Stock Option
Plan. As of February 28, 2003, no Company securities remain available for
issuance under the 1995 Stock Option Plan or the 1998 Stock Option Plan. The
1995 and 1998 Incentive Stock Option Plans remain in effect for so long as
options previously granted under those Plans remain outstanding
Other information concerning the security ownership of certain beneficial
owners and management is set forth in the section entitled "Voting Securities
and Principal Holders Thereof" contained in the proxy statement for use in
connection with the Company's Annual Meeting of Shareholders to be held on May
22, 2003, which proxy
78
statement will be filed with the Securities and Exchange Commission within 120
days after December 31, 2002, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is set
forth in the section entitled "Interest of Management and Others in Material
Transactions" contained in the proxy statement for use in connection with the
Company's Annual Meeting of Shareholders to be held on May 22, 2003, which proxy
statement will be filed with the Securities and Exchange Commission within 120
days after December 31, 2002, and is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures and
internal controls designed to ensure that information required to be disclosed
in filings made pursuant to the Securities Exchange Act of 1934is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. The Company's principal
executive and financial officers have evaluated the Company's disclosure
controls and procedures within 90 days prior to the filing of this Annual Report
on Form 10-K and have determined that such disclosure controls and procedures
are effective.
There were no significant changes in internal controls or other factors that
could significantly affect internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses subsequent to
the evaluation of the disclosure controls and procedures conducted by the
Company's principal executive and financial officers.
79
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
(i) The following financial statement documents are included as part of
Item 8 to this Form 10-K.
Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders' Equity
Notes to the Consolidated Financial Statements
(ii) Schedules required by Article 12 of Regulation S-X:
All schedules have been omitted because they are not applicable or
not required, or because the required information is included in the
consolidated financial statements or notes thereto.
(b) REPORTS ON FORM 8-K
(i) On October 4, 2002, the Company reported, under "Item 5 - Other
Events", that the U.S. Food and Drug Administration granted
fast-track review status for tariquidar for the treatment of
multi-drug resistance in first-line treatment of non-small cell
lung cancer patients.
(ii) On November 22, 2002, the Company reported, under "Item 5 - Other
Events", a reduction of its workforce by 65 people, or
approximately 18%, to reduce operating expenses and concentrate
its resources on key product development programs and business
initiatives.
(iii) On December 17, 2002, the Company reported, under "Item 5 - Other
Events", statistically significant preliminary results of the
six-month vision outcomes of patients being treated with altered
treatment regimens of Visudyne for minimally classic wet
age-related macular degeneration.
(viii) On February 24, 2002, the Company reported, under "Item 5 - Other
Events", that enrollment of additional patients in its ongoing
phase III studies of tariquidar in non-small cell lung cancer
patients was being suspended for approximately three months
pending the completion of the planned interim safety and efficacy
analysis by an Independent Data and Safety Monitoring Committee
(DSMC), upon the recommendation of the DSMC.
(c) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------- ----------------------------------
3.0 Memorandum and Articles; (1)
3.1 Article 24 of the Articles of Quadra Logic Technologies Inc. as filed with the
Registrar of Companies (British Columbia) on July 13, 1989; (4)
3.2 Article 26 of the Articles of Quadra Logic Technologies Inc. as filed with the Registrar of
Companies (British Columbia) on November 15, 1989; (4)
3.3 Part 27 of the Articles of Quadra Logic Technologies Inc. dated February 21, 1991; (10)
3.4 Part 28 of the Articles of QLT PhotoTherapeutics Inc. dated December 15, 1995; (17)
4.1 Omitted
4.5 Omitted
4.6 Shareholder Rights Plan Agreement, as amended and restated, dated as of March 17, 2002,
between QLT Inc. and ComputerShare Trust Company of Canada (20)
80
EXHIBIT
NUMBER DESCRIPTION
- --------- ----------------------------------
Executive Compensation Plans and Arrangements
10.1 Agreement, dated April 8, 1982, between Dr. Julia Levy, Quadra Logic Technologies Inc. and
the University of British Columbia; (1)
10.9 Agreement, dated January 15, 1988, between Dr. David Dolphin, Quadra Logic Technologies Inc.
and the University of British Columbia; (6)
10.14 Form of Employee Stock Option Agreement; (11)
10.15 Royalty Adjustment and Stock Option Agreement dated, August 10, 1989, between Quadra Logic
Technologies Inc. and Dr. David Dolphin; (2)
10.16 Royalty Agreement, dated December 15, 1987, between Quadra Logic Technologies Inc. and Dr.
David Dolphin; (2)
10.38 The 1991 Incentive Stock Option Plan; (10)
10.41 1995 QLT Incentive Stock Option Plan; (17)
10.68 1998 QLT Incentive Stock Option Plan; (21)
10.69 Form of Employment Agreement; (23)
10.72 2000 QLT Incentive Stock Option Plan (as amended in 2002); (23) (formerly numbered 10.70)
10.77 Employment Agreement dated December 18, 2001 between QLT Inc. and Paul J. Hastings (filed
herewith)
10.78 Employment Agreement dated October 9, 2001 between QLT Inc. and Michael J. Doty (filed
herewith)
10.79 Employment Agreement dated as of June 10, 2002 between QLT Inc. and William J. Newell (filed
herewith)
10.80 Employment Agreement dated May 19, 2000 between QLT Inc. and Alain Curaudeau (filed herewith)
Other Material Contracts
10.5 Asset Purchase Agreement, dated December 21, 1987, between Quadra Logic Technologies Inc.,
Photomedica and Ortho Pharmaceutical Corporation; (6)
10.25 Omitted
10.29 License Agreement, dated June 19, 1990, between Quadra Logic Technologies Inc. and the
Regents of the University of California; (9)
10.30 License Agreement, dated August 14, 1990, between Quadra Logic Technologies Inc. and the Long
Island Jewish Medical Center; (9)
10.31 License and Royalty Agreement, dated September 14, 1990, between Quadra Logic Technologies
Inc. and the Beth Israel Hospital Association; (9)
10.41 Agreement, dated May 1, 1992, between Health Research Inc. and Quadra Logic Technologies Inc.
(11)
10.42 Omitted
10.43 Omitted
10.45 Photodynamic Therapy Product Development, Manufacturing and Distribution Agreement, dated
July 1, 1994, between Quadra Logic Technologies Inc. and CIBA Vision AG, Hettlingen; (12)
10.46 Omitted
10.47 Omitted
10.48 Omitted
10.49 Omitted
10.50 Omitted
10.51 Bridging Agreement, dated December 1, 1996, between QLT PhotoTherapeutics Inc. (British
Columbia), QLT PhotoTherapeutics Inc. (Delaware), American Home Products Corporation and
American Cyanamid Company; (18)
10.52 Omitted
10.53 License and Distributorship Agreement, dated December 1, 1996, between QLT PhotoTherapeutics
Inc. (British Columbia), QLT PhotoTherapeutics Inc. (Delaware) and American Cyanamid Company;
(14)(19)
81
EXHIBIT
NUMBER DESCRIPTION
- --------- ----------------------------------
10.54 BPD-MA Verteporfin Supply Agreement, dated March 12, 1999 between QLT PhotoTherapeutics Inc.
and Parkedale Pharmaceuticals, Inc; (14)(21)
10.55 BPD-MA Presome Supply Agreement, dated February 26, 1998, between QLT PhotoTherapeutics Inc.
and Nippon Fine Chemical Co., Ltd.; (14)(21)_
10.56 BPD-MA Supply Agreement, dated December 11, 1998, between QLT PhotoTherapeutics Inc. and
Raylo Chemicals Limited; (14)(21)
10.57 Supply Agreement, dated November 7, 1997, between QLT PhotoTherapeutics Inc. and Roussel
Canada Inc. and Hoechst Marion Roussel; (14)(21)
10.58 Omitted
10.59 Offer to Purchase, dated January 23, 1998, between QLT PhotoTherapeutics Inc. and Finning
International Inc., as amended; (21)
10.60 Assignment Agreement between QLT PhotoTherapeutics Inc. and 560677 B.C. Ltd., dated September
3, 1998; (21)
10.61 Assumption Agreement among Finning International Inc., QLT PhotoTherapeutics Inc., and 560677
B.C. Ltd., dated September 3, 1998; (21)
10.62 Declaration of Trust between QLT PhotoTherapeutics Inc. and
560677 B.C. Ltd., dated September 3, 1998; (21)
10.63 License Agreement, dated December 8, 1998, between QLT
PhotoTherapeutics Inc. and The General Hospital Corporation;
(14)(21)
10.64 Omitted
10.65 Omitted
10.66 Omitted
10.67 Omitted
10.70 PHOTOFRIN Purchase and Sale Agreement, dated April 28, 2000 between Axcan Pharma Inc., QLT
PhotoTherapeutics Inc. (British Columbia) and QLT PhotoTherapeutics Inc. (Delaware); (14)(23)
10.71 Omitted
10.73 Research and Early Development Agreement dated as of June 7, 2001 between Kinetek
Pharmaceuticals, Inc. and QLT Inc.; (14) (25)
10.74 Amending Agreement to PDT Product Development, Manufacturing and Distribution Agreement dated
as of July 23, 2001 between Novartis Ophthalmics AG and QLT Inc.; (14) (25)
10.75 Development and Commercialization Agreement dated as of August 13, 2001 between Xenova
Limited and QLT Inc.; (14) (22)
10.76 Definitive Development and Commercialization Agreement dated as of August 13, 2001 between
Xenova Limited and QLT Inc. (filed herewith) (22)
11. Statement re: computation of per share earnings; (filed herewith)
23. Consent of Deloitte & Touche LLP (filed herewith)
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002: Paul J. Hastings, President and Chief Executive Officer
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
99.2 Sarbanes-Oxley Act of 2002: Michael J. Doty, Senior Vice President and Chief Financial Officer
- ----------
Notes:
82
(1) Filed as an exhibit to the Company's Registration Statement on Form F-1
(File No. 33-31222 filed on September 25, 1989).
(2) Filed as an exhibit to Amendment No. 1 to the Registration Statement on
Form F-1 dated November 6, 1989.
(4) Filed as an exhibit to Amendment No. 3 to the Registration Statement on
Form F-1 dated November 22, 1989.
(6) Filed as an exhibit to the Company's Annual Report on Form 20-F dated July
31, 1989.
(9) Filed as an exhibit to the Company's Transition Report on Form 10-K dated
March 29, 1991.
(10) Filed as an exhibit to the Company's Annual Report on Form 10-K dated March
20, 1992.
(11) Filed as an exhibit to the Company's Annual Report on Form 10-K dated March
15, 1993.
(14) Certain portions of this exhibit have been omitted and filed separately
with the Commission pursuant to a grant of confidential treatment under
Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as
amended.
(18) Filed as an exhibit to the Company's Annual Report on Form 10-K dated March
26, 1997.
(19) Filed as an exhibit to the Company's Quarterly Report Form 10-Q dated
November 11, 1998.
(21) Filed as an exhibit to the Company's Annual Report on Form 10-K dated March
29, 1999.
(22) Certain portions of this exhibit have been omitted and filed separately
with the Commission pursuant to an application for confidential treatment
under Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as
amended.
(23) Filed as an exhibit to the Company's Annual Report on Form 10-K dated March
22, 2001
(24) Filed as an exhibit to the Company's Form S-8 filed on September 20, 2002
(25) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q dated
November 12, 2002
83
CERTIFICATION
I, Paul J. Hastings, President and Chief Executive Officer of QLT Inc.
("registrant"), certify that:
1. I have reviewed this annual report on Form 10-K of the registrant;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003
/s/ Paul J. Hastings
- --------------------
Paul J. Hastings
President and Chief Executive Officer
84
CERTIFICATION
I, Michael J. Doty, Senior Vice-President and Chief Financial Officer of QLT
Inc. ("registrant"), certify that:
1. I have reviewed this annual report on Form 10-K of the registrant;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003
/s/ Michael J. Doty
- -------------------
Michael J. Doty
Senior Vice-President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
85
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 27, 2003
QLT INC.
By: /s/ Paul J. Hastings
-----------------------------------------
Paul J. Hastings, President
and Chief Executive Officer
By: /s/ Michael J. Doty
-----------------------------------------
Michael J. Doty, Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
86
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of QLT Inc. do hereby
constitute and appoint Paul J. Hastings and Michael J. Doty, and each of them,
the lawful attorney and agent or attorneys and agents with power and authority
to do any and all acts and things and to execute all instruments which said
attorneys and agents, or either of them, determine may be necessary or advisable
or required to enable QLT Inc. to comply with the Securities Exchange Act of
1934, as amended, and any rules or regulations or requirements of the Securities
and Exchange Commission in connection with this Form 10-K Annual Report. Without
limiting the generality of the foregoing power and authority, the powers granted
include the power and authority to sign the names of the undersigned officers
and directors in the capacities indicated below to this Form 10-K or amendments
or supplements thereto, and each of the undersigned hereby ratifies and confirms
all that said attorneys and agents or either of them, shall do or cause to be
done by virtue hereof. This Power of Attorney may be signed in several
counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney on behalf of the Registrant and in the capacities and on the dates
indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Paul J. Hastings President, Chief Executive Officer and Director March 27, 2003
- ----------------------------------- (Principal Executive Officer)
Paul J. Hastings
/s/ Michael J. Doty Senior Vice President and Chief Financial Officer March 27, 2003
- ----------------------------------- (Principal Financial and Accounting Officer)
Michael J. Doty
/s/ E. Duff Scott Chairman of the Board of Directors and Director March 27, 2003
- -----------------------------------
E. Duff Scott
/s/ Peter A. Crossgrove Director March 27, 2003
- -----------------------------------
Peter A. Crossgrove
/s/ Jan Dlouhy Director March 27, 2003
- -----------------------------------
Jan Dlouhy
/s/ Ronald D. Henriksen Director March 27, 2003
- -----------------------------------
Ronald D. Henriksen
/s/ Julia G. Levy Director March 27, 2003
- -----------------------------------
Julia G. Levy
/s/ Alan C. Mendelson Director March 27, 2003
- -----------------------------------
Alan C. Mendelson
/s/ Jack L. Wood Director March 27, 2003
- -----------------------------------
Jack L. Wood
87
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- --------- ----------------------------------
3.0 Memorandum and Articles; (1)
3.1 Article 24 of the Articles of Quadra Logic Technologies Inc. as filed with the
Registrar of Companies (British Columbia) on July 13, 1989; (4)
3.2 Article 26 of the Articles of Quadra Logic Technologies Inc. as filed with the Registrar of
Companies (British Columbia) on November 15, 1989; (4)
3.3 Part 27 of the Articles of Quadra Logic Technologies Inc. dated February 21, 1991; (10)
3.4 Part 28 of the Articles of QLT PhotoTherapeutics Inc. dated December 15, 1995; (17)
4.1 Omitted
4.5 Omitted
4.6 Shareholder Rights Plan Agreement, as amended and restated, dated as of March 17, 2002,
between QLT Inc. and ComputerShare Trust Company of Canada (20)
Executive Compensation Plans and Arrangements
10.1 Agreement, dated April 8, 1982, between Dr. Julia Levy, Quadra Logic Technologies Inc. and
the University of British Columbia; (1)
10.9 Agreement, dated January 15, 1988, between Dr. David Dolphin, Quadra Logic Technologies Inc.
and the University of British Columbia; (6)
10.14 Form of Employee Stock Option Agreement; (11)
10.15 Royalty Adjustment and Stock Option Agreement dated, August 10, 1989, between Quadra Logic
Technologies Inc. and Dr. David Dolphin; (2)
10.16 Royalty Agreement, dated December 15, 1987, between Quadra Logic Technologies Inc. and Dr.
David Dolphin; (2)
10.38 The 1991 Incentive Stock Option Plan; (10)
10.41 1995 QLT Incentive Stock Option Plan; (17)
10.68 1998 QLT Incentive Stock Option Plan; (21)
10.69 Form of Employment Agreement; (23)
10.72 2000 QLT Incentive Stock Option Plan (as amended in 2002); (23) (formerly numbered 10.70)
10.77 Employment Agreement dated December 18, 2001 between QLT Inc. and Paul J. Hastings (filed
herewith)
10.78 Employment Agreement dated October 9, 2001 between QLT Inc. and Michael J. Doty (filed
herewith)
10.79 Employment Agreement dated as of June 10, 2002 between QLT Inc. and William J. Newell (filed
herewith)
10.80 Employment Agreement dated May 19, 2000 between QLT Inc. and Alain Curaudeau (filed herewith)
Other Material Contracts
10.5 Asset Purchase Agreement, dated December 21, 1987, between Quadra Logic Technologies Inc.,
Photomedica and Ortho Pharmaceutical Corporation; (6)
10.25 Omitted
10.29 License Agreement, dated June 19, 1990, between Quadra Logic Technologies Inc. and the
Regents of the University of California; (9)
10.30 License Agreement, dated August 14, 1990, between Quadra Logic Technologies Inc. and the Long
Island Jewish Medical Center; (9)
10.31 License and Royalty Agreement, dated September 14, 1990, between Quadra Logic Technologies
Inc. and the Beth Israel Hospital Association; (9)
10.41 Agreement, dated May 1, 1992, between Health Research Inc. and Quadra Logic Technologies Inc.
(11)
10.42 Omitted
10.43 Omitted
10.45 Photodynamic Therapy Product Development, Manufacturing and Distribution Agreement, dated
July 1, 1994, between Quadra Logic Technologies Inc. and CIBA Vision AG, Hettlingen; (12)
10.46 Omitted
10.47 Omitted
10.48 Omitted
10.49 Omitted
10.50 Omitted
10.51 Bridging Agreement, dated December 1, 1996, between QLT PhotoTherapeutics Inc. (British
Columbia), QLT PhotoTherapeutics Inc. (Delaware), American Home Products Corporation and
American Cyanamid Company; (18)
10.52 Omitted
10.53 License and Distributorship Agreement, dated December 1, 1996, between QLT PhotoTherapeutics
Inc. (British Columbia), QLT PhotoTherapeutics Inc. (Delaware) and American Cyanamid Company;
(14)(19)
10.54 BPD-MA Verteporfin Supply Agreement, dated March 12, 1999 between QLT PhotoTherapeutics Inc.
and Parkedale Pharmaceuticals, Inc; (14)(21)
10.55 BPD-MA Presome Supply Agreement, dated February 26, 1998, between QLT PhotoTherapeutics Inc.
and Nippon Fine Chemical Co., Ltd.; (14)(21)_
10.56 BPD-MA Supply Agreement, dated December 11, 1998, between QLT PhotoTherapeutics Inc. and
Raylo Chemicals Limited; (14)(21)
10.57 Supply Agreement, dated November 7, 1997, between QLT PhotoTherapeutics Inc. and Roussel
Canada Inc. and Hoechst Marion Roussel; (14)(21)
10.58 Omitted
10.59 Offer to Purchase, dated January 23, 1998, between QLT PhotoTherapeutics Inc. and Finning
International Inc., as amended; (21)
10.60 Assignment Agreement between QLT PhotoTherapeutics Inc. and 560677 B.C. Ltd., dated September
3, 1998; (21)
10.61 Assumption Agreement among Finning International Inc., QLT PhotoTherapeutics Inc., and 560677
B.C. Ltd., dated September 3, 1998; (21)
10.62 Declaration of Trust between QLT PhotoTherapeutics Inc. and 560677 B.C. Ltd., dated September 3,
1998; (21)
10.63 License Agreement, dated December 8, 1998, between QLT PhotoTherapeutics Inc. and The General
Hospital Corporation; (14)(21)
10.64 Omitted
10.65 Omitted
10.66 Omitted
10.67 Omitted
10.70 PHOTOFRIN Purchase and Sale Agreement, dated April 28, 2000 between Axcan Pharma Inc., QLT
PhotoTherapeutics Inc. (British Columbia) and QLT PhotoTherapeutics Inc. (Delaware); (14)(23)
10.71 Omitted
10.73 Research and Early Development Agreement dated as of June 7, 2001 between Kinetek
Pharmaceuticals, Inc. and QLT Inc.; (14) (25)
10.74 Amending Agreement to PDT Product Development, Manufacturing and Distribution Agreement dated
as of July 23, 2001 between Novartis Ophthalmics AG and QLT Inc.; (14) (25)
10.75 Development and Commercialization Agreement dated as of August 13, 2001 between Xenova
Limited and QLT Inc.; (14) (22)
10.76 Definitive Development and Commercialization Agreement dated as of August 13, 2001 between
Xenova Limited and QLT Inc. (filed herewith) (22)
11. Statement re: computation of per share earnings; (filed herewith)
23. Consent of Deloitte & Touche LLP (filed herewith)
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002: Paul J. Hastings, President and Chief Executive Officer
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002: Michael J. Doty, Senior Vice President and Chief Financial Officer
- ----------
Notes:
(1) Filed as an exhibit to the Company's Registration Statement on Form F-1
(File No. 33-31222 filed on September 25, 1989).
(2) Filed as an exhibit to Amendment No. 1 to the Registration Statement on
Form F-1 dated November 6, 1989.
(4) Filed as an exhibit to Amendment No. 3 to the Registration Statement on
Form F-1 dated November 22, 1989.
(6) Filed as an exhibit to the Company's Annual Report on Form 20-F dated July
31, 1989.
(9) Filed as an exhibit to the Company's Transition Report on Form 10-K dated
March 29, 1991.
(10) Filed as an exhibit to the Company's Annual Report on Form 10-K dated March
20, 1992.
(11) Filed as an exhibit to the Company's Annual Report on Form 10-K dated March
15, 1993.
(14) Certain portions of this exhibit have been omitted and filed separately
with the Commission pursuant to a grant of confidential treatment under
Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as
amended.
(18) Filed as an exhibit to the Company's Annual Report on Form 10-K dated March
26, 1997.
(19) Filed as an exhibit to the Company's Quarterly Report Form 10-Q dated
November 11, 1998.
(21) Filed as an exhibit to the Company's Annual Report on Form 10-K dated March
29, 1999.
(22) Certain portions of this exhibit have been omitted and filed separately
with the Commission pursuant to an application for confidential treatment
under Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as
amended.
(23) Filed as an exhibit to the Company's Annual Report on Form 10-K dated March
22, 2001
(24) Filed as an exhibit to the Company's Form S-8 filed on September 20, 2002
(25) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q dated
November 12, 2002