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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-17082
QLT INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BRITISH COLUMBIA, CANADA N/A
-------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
887 GREAT NORTHERN WAY, VANCOUVER, B.C., CANADA V5T 4T5
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (604) 707-7000
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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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
As of May 8, 2003 the registrant had 68,671,525 outstanding Common Shares and
7,714,002 outstanding Stock Options.
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QLT INC.
QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 2003
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I - FINANCIAL INFORMATION
1. FINANCIAL STATEMENTS.................................................................... 1
Consolidated Balance Sheets as of
March 31, 2003 and December 31, 2002.................................................. 1
Consolidated Statements of Income for the three months ended
March 31, 2003 and March 31, 2002..................................................... 2
Consolidated Statements of Cash Flows for the three months ended
March 31, 2003 and March 31, 2002..................................................... 3
Consolidated Statement of Changes in Shareholders' Equity and Comprehensive
Income for the three months ended March 31, 2003...................................... 5
Notes to the Consolidated Financial Statements........................................ 6
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................................... 15
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................. 23
4. CONTROLS AND PROCEDURES................................................................. 23
PART II - OTHER INFORMATION
1. LEGAL PROCEEDINGS....................................................................... 24
2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................... 26
3. DEFAULTS UPON SENIOR SECURITIES......................................................... 26
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 26
5. OTHER INFORMATION....................................................................... 26
6. EXHIBITS AND REPORTS ON FORM 8-K........................................................ 26
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PART I - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
QLT INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(In thousands of United States dollars MARCH 31, December 31,
except per share information) 2003 2002
- -----------------------------------------------------------------------------------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $126,156 $128,138
Short-term investment securities 106,202 79,797
Accounts receivable (Note 4) 29,323 30,186
Inventories (Note 5) 37,427 35,892
Current portion of deferred income
tax assets 16,661 17,092
Other 6,156 1,318
- -----------------------------------------------------------------------------------------
321,925 292,423
LONG-TERM INVESTMENTS AND ADVANCES 3,818 4,170
PROPERTY AND EQUIPMENT 37,338 35,281
DEFERRED INCOME TAX ASSETS 10,970 13,966
- -----------------------------------------------------------------------------------------
$374,051 $345,841
=========================================================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 7,394 $ 9,960
Accrued restructuring charge (Note 11) 1,053 2,631
Other accrued liabilities (Note 7) 3,761 7,027
Deferred revenue 13,073 12,678
- -----------------------------------------------------------------------------------------
25,281 32,296
CONTINGENCIES (Note 13)
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 392,720 391,716
March 31, 2003 -- 68,579,253
December 31, 2002 -- 68,407,753
ACCUMULATED DEFICIT (41,362) (52,901)
ACCUMULATED OTHER COMPREHENSIVE LOSS (2,588) (25,270)
- -----------------------------------------------------------------------------------------
348,770 313,545
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$374,051 $345,841
=========================================================================================
See accompanying notes to the consolidated financial statements.
1
QLT INC.
CONSOLIDATED STATEMENTS OF INCOME
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Three months ended
March 31,
----------------------
(In thousands of United States dollars except per share
information) 2003 2002
- -----------------------------------------------------------------------------------------
(Unaudited)
REVENUES
Revenue from Visudyne(R) (Note 9) $31,445 $22,418
Contract research and development (Note 10) 1,526 1,724
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$32,971 $24,142
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COSTS AND EXPENSES
Cost of sales 5,412 4,991
Research and development 10,875 8,480
Selling, general and administrative 3,033 4,080
Depreciation 726 705
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20,046 18,256
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OPERATING INCOME 12,925 5,886
INVESTMENT AND OTHER INCOME
Net foreign exchange gains 2,533 60
Interest income 1,599 866
Equity loss in NSQ -- (23)
- ------------------------------------------------------------------------------------------
4,132 903
- ------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 17,057 6,789
PROVISION FOR INCOME TAXES (5,518) (2,396)
==========================================================================================
NET INCOME $11,539 $ 4,393
==========================================================================================
NET INCOME PER COMMON SHARE
Basic $ 0.17 $ 0.06
Diluted $ 0.17 $ 0.06
- ------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding
(in thousands)
Basic 68,517 68,103
Diluted 68,547 68,664
- ------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
Visudyne(R) is a trademark of Novartis Ophthalmics AG.
2
QLT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Three months ended
March 31,
----------------------
(In thousands of United States dollars 2003 2002
except per share information)
- -------------------------------------------------------------------------------------
(Unaudited)
CASH PROVIDED BY OPERATING ACTIVITIES
Net income $ 11,539 $ 4,393
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 726 705
Unrealized foreign exchange loss (gain) 697 (14)
Deferred income taxes 5,518 2,396
Equity loss in NSQ -- 23
Changes in non-cash operating assets
and liabilities:
Accounts receivable and other assets (1,989) 3,617
Inventories 1,041 (719)
Accounts payable (1,368) (3,078)
Accrued restructuring charge (1,719) --
Other accrued liabilities (3,661) (1,334)
Deferred revenue (510) 4,175
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10,274 10,164
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CASH USED IN INVESTING ACTIVITIES
Short-term investment securities (20,049) (45,392)
Purchase of property and equipment (1,961) (694)
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(22,010) (46,085)
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CASH PROVIDED BY FINANCING ACTIVITIES
Issuance of common shares 1,004 1,813
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1,004 1,813
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EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 8,750 (160)
- -------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,982) (34,268)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 128,138 69,663
- -------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $126,156 $ 35,395
=====================================================================================
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid $ 67 $ 449
Income taxes paid -- --
3
NON-CASH INVESTING ACTIVITY:
On February 1, 2002, the Company received 135,735 common shares of Diomed, Inc.
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, Inc. 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.
4
QLT INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
- --------------------------------------------------------------------------------
Accumulated Other
Common Shares Comprehensive Income
--------------------- -------------------------
Unrealized
Cumulative Losses on Total
Translation Diomed Accumulated Shareholders'
Shares Amount Adjustment Securities Deficit Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(All amounts except share and per share information
are expressed in thousands) (Unaudited)
BALANCE AT DECEMBER 31, 2002 68,407,753 $391,716 $(25,270) $ -- $(52,901) $313,545
EXERCISE OF STOCK OPTIONS AT PRICES
RANGING FROM CAD $9.28 TO CAD $12.25
PER SHARE 171,500 1,004 -- -- -- 1,004
OTHER COMPREHENSIVE INCOME (LOSS):
Cumulative translation adjustment
from application of U.S. dollar
reporting (Note 3) -- -- 23,110 -- -- 23,110
Unrealized loss on available for
sale securities -- -- -- (428) -- (428)
NET INCOME -- -- -- -- 11,539 11,539
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2003 68,579,253 $392,720 $ (2,160) $(428) $(41,362) $348,770
====================================================================================================================================
See accompanying notes to the consolidated financial statements.
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information as at and for the three month periods ended March 31, 2003 and
2002 is unaudited.)
QLT Inc. ("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
focused specialty sales and marketing team. The Company is a pioneer in the
field of photodynamic therapy, a field of medicine that uses
photosensitizers (light-activated drugs) in the treatment of disease. The
Company is also actively developing pharmaceutical products that do not
employ photodynamic therapy.
1. BASIS OF PRESENTATION
These unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States and pursuant to the rules and regulations of the United States
Securities and Exchange Commission for the presentation of interim
financial information. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with United States generally accepted accounting principles have
been condensed, or omitted, pursuant to such rules and regulations. These
financial statements do not include all disclosures required for annual
financial statements and should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto included as
part of the Company's 2002 Annual Report on Form 10-K. All amounts herein
are expressed in United States dollars unless otherwise noted.
In the opinion of management, all adjustments (including reclassifications
and normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at March 31, 2003 and for
all periods presented, have been made. Interim results are not necessarily
indicative of results for a full year.
2. 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.
3. SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the following are the most significant
accounting policies used in preparing these financial statements.
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 in order to provide information on
a more comparable basis with the majority of the companies in the Company's
peer group. 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 rates. 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 under accumulated
other comprehensive income (loss). The Company retained the Canadian dollar
as its functional currency.
The financial information for the three months ended March 31, 2002 is
presented in U.S. dollars as if the U.S. dollar had been used as the
reporting currency during that period.
6
Property and Equipment
During the first quarter of 2003, the Company reviewed its intended use of
property and equipment and adopted the straight-line method for all newly
acquired property and equipment beginning in 2003. The Company retains the
declining balance method for all property and equipment acquired prior to
2003.
Property and equipment are recorded at cost and amortized as follows:
Methods Rates Methods Years
----------------- ----- ------------- -----
Buildings Declining balance 4%
Office furnishings, fixtures and other Declining balance 20% or Straight-line 5
Research and commercial manufacturing
equipment and computer operating system Declining balance 20% or Straight-line 5
Computer hardware Declining balance 30% or Straight-line 3
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. 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 ("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.
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 4 -- Accounts Receivable and Note 10 -- Contract Research and
Development)
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
7
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:
Three months Three months
(In thousands except per share information) ended March 31, ended March 31,
(Unaudited) 2003 2002
--------------------------------------------------------------------------------------
Net Income (Loss) $11,539 $ 4,393
As reported
Less: Additional employee compensation
expense under the fair value method (5,250) (6,060)
--------------------------------------------------------------------------------------
Pro forma $ 6,289 $(1,667)
--------------------------------------------------------------------------------------
Basic net income (loss) per common share
As reported $ 0.17 $ 0.06
Pro forma $ 0.09 $ (0.02)
--------------------------------------------------------------------------------------
Diluted net income (loss) per share
As reported $ 0.17 $ 0.06
Pro forma $ 0.09 $ (0.02)
--------------------------------------------------------------------------------------
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 the three
months ended March 31, 2003 was $4.05 whereas the fair value of stock
options granted in the three months ended March 31, 2002 was $9.28. 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:
Three months ended Three months ended
March 31, March 31,
2003 2002
------------------ ------------------
Annualized Volatility 73.2% 83.7%
Risk-free Interest Rate 4.2% 3.8%
Expected Life (Years) 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.
8
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) Three months Three months
ended March 31, ended March 31,
(Unaudited) 2003 2002
---------------------------------------------------------------------------------------------------
Numerator:
Net Income $11,539 $4,393
Denominator:
Weighted-average common shares outstanding 68,517 68,103
Effect of dilutive securities:
Stock options 30 561
--------------------------------------
Diluted weighted-average common shares outstanding 68,547 68,664
======================================
Basic net income per common share $ 0.17 $ 0.06
Diluted net income per common share $ 0.17 $ 0.06
Excluded from the calculation of diluted net income per common share for
the three months ended March 31, 2003 were 7,188,720 shares (in the three
months ended March 31, 2002 -- 5,413,956 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 period's presentation.
Recently Issued Accounting Standards
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 adoption of SFAS No. 146 did not 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 adoption of
FIN 45 did not have a material impact on the Company's 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.
9
4. ACCOUNTS RECEIVABLE
(In thousands of United States Dollars) March 31, 2003 December 31, 2002
---------------------------------------------------------------------------------------
(Unaudited)
Visudyne(R) $27,938 $28,636
Contract research and development 905 1,128
Trade and other 480 422
---------------------------------------------------------------------------------------
$29,323 $30,186
---------------------------------------------------------------------------------------
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 the sale of bulk Visudyne to Novartis Ophthalmics and
reimbursement of specified royalty and other costs. The Company does not
require an allowance for doubtful accounts.
5. INVENTORIES
(In thousands of United States dollars) March 31, 2003 December 31, 2002
--------------------------------------------------------------------------------------------
(Unaudited)
Raw materials and supplies $ 1,830 $ 1,706
Work-in-process 24,883 22,057
Finished goods 12,555 13,794
Provision for non-completion of product inventory (1,841) (1,664)
--------------------------------------------------------------------------------------------
$37,427 $35,892
--------------------------------------------------------------------------------------------
Inventories at March 31, 2003 include finished goods with a cost of $12.5
million (December 31, 2002 -- $12.0 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.
6. CREDIT FACILITY
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 March 31, 2002, no amount was drawn against
this portion of the facility. A standby letter of credit in the amount of
CAD $2.5 million was issued under the second segment of the facility. This
letter of guarantee was security for the final payment of a land purchase
and bore interest at 0.7% per annum. Subsequent to March 31, 2003, the land
purchase was completed and the letter of guarantee cancelled.
7. OTHER ACCRUED LIABILITIES
(In thousands of United States dollars) March 31, 2003 December 31, 2002
-----------------------------------------------------------------------------------
(Unaudited)
Royalties $1,904 $2,025
Compensation 1,579 3,557
Manufacturing 147 568
Interest 113 171
Other 18 706
-----------------------------------------------------------------------------------
$3,761 $7,027
===================================================================================
10
8. SHARE CAPITAL
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.
On April 25, 2002, at the Annual General Meeting of the Company, the
shareholders passed a resolution approving an amendment to the Company's
2000 Incentive Stock Option 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.
Stock option activity with respect to all of the Company's stock option
plans is presented below:
Weighted
Number of Exercise Price Range Average
(In Canadian dollars) Shares Per Share Exercise Price
------------------------------------------------------------------------------------------------
Outstanding at December 31, 2002 7,801,238 $ 9.28 - $108.60 $50.85
From January 1 to March 31, 2003:
Granted 876,172 $12.10 - $ 13.35 $13.12
Exercised (171,500) $ 9.28 - $ 12.25 $ 9.89
Cancelled (166,067) $ 9.28 - $ 108.60 $40.34
----------------------------------------------------
Outstanding at March 31, 2003 8,339,843 $11.95 - $ 108.60 $47.93
================================================================================================
Additional information relating to stock options outstanding as of March
31, 2003 is presented below:
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Exercise Number of Exercise Contractual Number of Exercise
Price Range Shares Price Life (Years) Shares Price
-----------------------------------------------------------------------------------------------
Under $25 2,071,721 $ 17.14 3.92 579,256 $ 17.41
$25.00 - $37.50 1,723,904 $ 31.31 2.30 1,281,333 $ 31.18
$37.51 - $50.00 2,614,355 $ 41.63 2.70 1,904,600 $ 42.65
Over $50.00 1,929,863 $104.38 2.10 1,870,272 $104.35
-----------------------------------------------------------------------------------------------
8,339,843 5,635,461
===============================================================================================
11
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 manufacturing, selling, marketing,
and distribution costs and 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 the sales of Visudyne was determined as follows:
Three months ended
March 31,
(In thousands) 2003 2002
---------------------------------------------------------------------
(Unaudited)
Visudyne(R) sales by Novartis Ophthalmics $ 82,054 $ 68,379
Less: Manufacturing and other costs (6,266) (5,635)
Less: Sales, marketing and distribution
costs (27,091) (30,848)
------------------------
Net operating income from Visudyne(R) $ 48,697 $ 31,896
========================
The Company's 50% share $ 24,349 $ 15,948
Add: Manufacturing and other
reimbursements 7,096 6,470
------------------------
Revenue from Visudyne(R) $ 31,445 $ 22,418
========================
For the three months ended March 31, 2003, approximately 51% of total
Visudyne sales by Novartis Ophthalmics were in the United States with
Europe and other markets responsible for the remaining 49%. For the same
period in 2002, approximately 63% of total Visudyne sales by Novartis
Ophthalmics were in the United States with Europe and other markets
responsible for the remaining 37%.
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:
Three months ended
March 31,
(In thousands) 2003 2002
----------------------------------------------------------------
(Unaudited)
Visudyne(R) ocular programs $ 453 $ 565
Visudyne(R) dermatology program 527 605
Others 546 554
------------------
Contract research & development revenue $1,526 $1,724
==================
11. ACCRUED 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 the second
12
half of 2003. At March 31, 2003, restructuring charges of $1.8 million had been
paid out, and the accrued liability relating to the restructuring was $1.1
million. Details are as follows:
December 31, 2002 Payments March 31, 2003
-------------------------------------------------
Severance and termination
benefits accrued $1,981 $1,517 $ 464
Other related expenses accrued 650 61 589
-------------------------------------------------
$2,631 $1,578 $1,053
=================================================
The Company estimated that the restructuring will result in annual savings of
$4.4 million. For the three months ended March 31, 2003, the Company realized
savings of approximately $1.1 million.
12. SEGMENTED INFORMATION
Details of revenues and property and equipment by geographic segments are
as follows:
Revenues(1) Three months ended
March 31,
(In thousands) 2003 2002
-----------------------------------------------------------
(Unaudited)
United States $19,084 $16,587
Europe 10,949 6,458
Canada 1,731 944
Other 1,207 153
-----------------------------------------------------------
$32,971 $24,142
===========================================================
Property and equipment March 31, December 31,
(In thousands) 2003 2002
--------------------------------------------------------------------
(Unaudited)
Canada $36,746 $34,608
United States 592 673
--------------------------------------------------------------------
$37,338 $35,281
====================================================================
(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 funding entity in the case of revenues
from contract research and development and collaborative arrangements.
13. 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
judgment 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
13
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, sought: (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 judgment 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. Final
judgment of dismissal was entered in April 2003. In May 2003, MEEI filed a
notice of appeal. With respect to QLT's counterclaim requesting correction
of inventorship of the '349 patent to add an additional MGH inventor, the
Court stayed the claim pending the outcome of Civil Action No.
01-10747-EFH, described below. QLT voluntarily dismissed the remainder of
its counterclaims in Civil Action No. 00-10783-JLT without prejudice in
April 2003.
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 judgment 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 Civil Action No. 01-10747-EFH, and none is
expected until the first half of 2004 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.
14
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 claims. 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 judgment 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.
14. SUBSEQUENT EVENTS
On May 12, 2003, the Company announced that it will stop its two current
Phase III tariquidar trials in non-small-cell-lung cancer. This decision
was made following a recommendation by the Independent Data Safety
Monitoring Committee who completed the un-blinded review of the data from
both ongoing trials in this indication. The Company will make planning
decisions regarding tariquidar after a thorough analysis of the data
collected from these clinical trials. The Company expects that there will
be cost savings associated with stopping the trials and is in the process
of analyzing the impact of this cost savings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the accompanying
unaudited 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 below under the heading Liquidity and Capital Resources --
General, and in the sections outlined in the Company's most recent Annual Report
on Form 10K under "Business -- Risk Factors", "Legal Proceedings", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the "Notes to Consolidated Financial Statements".
15
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 focused specialty sales and
marketing team. The Company is a pioneer in 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 70 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 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 March 31, 2003, the
Company had an accumulated deficit of $41.4 million and total shareholders'
equity of $348.8 million.
CRITICAL ACCOUNTING POLICIES
In preparing the Company's consolidated financial statements, management is
required to make certain estimates, judgments 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
principles 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
the three months ended March 31, 2003 have been prepared in accordance with U.S.
GAAP and for consistency, all prior period financial statements and financial
information are also prepared in accordance with 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 periods. Translation gains and losses are
included as part of the cumulative foreign currency translation adjustment which
is reported as a component of shareholders' equity under accumulated other
comprehensive income (loss).
16
The financial information for the three months ended March 31, 2002 is presented
in U.S. dollars as if the U.S. dollar had been used as the reporting currency
during that period.
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 ("the Visudyne 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.
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.
17
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 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 adoption of SFAS No. 146 did
not 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 adoption of FIN 45 did not have a material impact on the
Company's 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.
RESULTS OF OPERATIONS
For the three months ended March 31, 2003, the Company recorded net income of
$11.5 million, or $0.17 per common share. These results compare with net income
of $4.4 million, or $0.06 per common share for the three months ended March 31,
2002.
REVENUES
Revenue from Visudyne(R)
The Company's revenues from the Visudyne alliance were determined as follows:
18
For the three months ended
March 31,
(In thousands) 2003 2002
- --------------------------------------------------------------------------
Visudyne(R) sales by Novartis Ophthalmics $82,054 $68,379
Less: Manufacturing and other costs (6,266) (5,635)
Less: Sales, marketing and distribution
costs (27,091) (30,848)
--------------------------
Net operating income from Visudyne(R) $48,691 $31,896
==========================
The Company's 50% share $24,349 $15,948
Add: Manufacturing and other
Reimbursements 7,096 6,470
--------------------------
Revenue from Visudyne(R) $31,445 $22,418
==========================
For the three months ended March 31, 2003, revenue from the Visudyne alliance
increased by 40% over the three months ended March 31, 2002. This increase was
primarily due to a 20% increase in Visudyne sales, which resulted from higher
market penetration in markets outside the U.S. and favorable exchange rates.
Favorable exchange rates contributed 8 percentage points of the 20% growth in
sales. In addition, lower sales, marketing and distribution costs by the
Visudyne alliance resulting from greater efficiency and a decline in advertising
and promotion spending also contributed to the increase in revenue from
Visudyne.
For the three months ended March 31, 2003, approximately 51% of total Visudyne
sales by Novartis Ophthalmics were in the United States, compared to
approximately 63% in the three months ended March 31, 2002.
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 three months ended March 31, 2003,
contract research and development revenue totaled $1.5 million, a decrease of
11% as compared to the same period in 2002. This decrease is due mainly to
decreased activities by the Company on joint Visudyne programs with Novartis
Ophthalmics.
COSTS AND EXPENSES
Cost of Sales
For the three months ended March 31, 2003, cost of sales of $5.4 million were 8%
higher than the three months ended March 31, 2002, due primarily to increases in
Visudyne sales.
Research and Development Costs
Research and development ("R&D") expenditures totaled $10.9 million for the
three months ended March 31, 2003, an increase of 28% compared to the three
months ended March 31, 2002. The increase was largely attributable to costs
associated with the Phase III trials for tariquidar in non-small cell lung
cancer ("NSCLC") (which have since been discontinued) and for Visudyne in occult
AMD.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses include overhead expenses
associated with the manufacture of bulk Visudyne. For the three months ended
March 31, 2003, SG&A expenses of $3.0 million were 26% or $1.0 million
19
lower than the three months ended March 31, 2002. The decrease was primarily due
to savings as a result of workforce reduction in the fourth quarter of fiscal
2002, and lower legal expenses.
Depreciation Expense
Depreciation expense relates to the depreciation of property and equipment. For
the three months ended March 31, 2003, depreciation expense of $0.7 million was
flat in comparison to the three months ended March 31, 2003.
Restructuring
In the fourth quarter of fiscal 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 fiscal
2002 related to severance and termination costs. The Company expects to complete
final activities associated with the restructuring in the second half of 2003.
At March 31, 2003, restructuring charges of $1.8 million had been paid out, and
the accrued liability relating to the restructuring was $1.1 million. The
Company estimated that the restructuring will result in annual savings of $4.4
million. For the three months ended March 31, 2003, the Company realized savings
of approximately $1.1 million.
INVESTMENT AND OTHER INCOME
Net Foreign Exchange Gains
Net foreign exchange gains comprise gains from the impact of foreign exchange
fluctuation on the Company's cash and cash equivalents, derivative financial
instruments, foreign currency receivables and foreign currency payables. For the
three months ended March 31, 2003, the Company recorded net foreign exchange
gains of $2.5 million versus a net foreign exchange gain of $0.1 million in the
same period in 2002. The gains in the quarter ended March 31, 2003 were due to
gains on the Company's foreign currency derivative financial instruments. (See
Liquidity and Capital Resources -- Interest and Foreign Exchange Rates)
Details of the Company's net foreign exchange gains are as follows:
For the three months ended
March 31,
(In thousands) 2003 2002
- ------------------------------------------------------------------------
Cash and cash equivalents $ (636) $(241)
Foreign exchange contracts 4,122 200
Foreign currency receivables and
payables (953) 101
---------------------------
Net foreign exchange gains $2,533 $ 60
===========================
Interest Income
Interest income of $1.6 million for three months ended March 31, 2003,
represented an 85% increase compared to the three months ended March 31, 2002.
This increase was mainly a result of higher cash reserves, coupled with
increased yields on the Company's short-term investments. The Company's treasury
policy is focused on minimizing risk of loss of principal.
OUTLOOK FOR 2003
Based on recent sales results and current trends in Visudyne sales, the Company
announced, on April 24, 2003, that it has narrowed its forecast range of
Visudyne sales from $310-335 million to a new range of $320-335 million, which
represents projected growth of 11% to 17% over 2002.
On May 12, 2003, the Company announced that it will stop its two current Phase
III tariquidar trials in non-small-cell-lung cancer. This decision was made
following a recommendation by the Independent Data Safety Monitoring Committee
who completed the un-blinded review of the data from both ongoing trials in this
indication. The Company will make planning decisions regarding tariquidar after
a thorough analysis of the data collected from these clinical trials. The
Company expects that there will be cost savings associated with stopping the
trials and is in the process of analyzing the impact of this cost savings.
20
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 March 31, 2003, the Company had $232.4 million of available cash resources,
comprising cash, cash equivalents and short-term investment securities, all of
which were invested in liquid, investment-grade securities.
For the three months ended March 31, 2003, the Company generated $10.3 million
of cash from operations, $1.0 million from stock option exercises, and used $2.0
million in purchases of property and equipment. This compared with $10.3 million
generated from operations, $1.8 million from stock option exercises, and $0.8
million used in purchases of property and equipment in the same period in 2002.
In the aggregate, cash, cash equivalents and short-term investment securities
increased by approximately $24.4 million during the three months ended March 31,
2003. The effect of changes in foreign exchange rates contributed $15.1 million
to this increase.
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 March 31, 2003, the Company had an
investment portfolio consisting primarily of fixed interest rate Canadian dollar
securities with an average remaining maturity of approximately 24 days. If
market interest rates were to increase immediately and uniformly by 10% of
levels at March 31, 2003, 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, and cash
flows The net unrealized gain in respect of such foreign currency contracts, as
at March 31, 2003, was approximately $3.2 million.
At March 31, 2003, the Company had $232.4 million in cash and short-term
investments, primarily Canadian dollar denominated with approximately $2.7
million denominated in U.S. dollars. If the U.S. dollar were to decrease in
value by 5% against the Canadian dollar, the Company's U.S. dollar denominated
cash and short-term investments will experience an unrealized foreign currency
translation loss of approximately $0.1 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 Obligation
The Company's material long-term obligations as of March 31, 2003 comprised the
Visudyne supply agreements with contract manufacturers, clinical and development
agreements, and operating lease commitments for office equipment. Details of
these commitments are described in the Company's 2002 Annual Report on Form 10K
under the section "Liquidity and Capital Resources -- Long Term Obligations".
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
Company's 2002 Annual Report on Form 10K under 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
21
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.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
ITEM 4. 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 1934 (the "Exchange Act") is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms. Our principal
executive and financial officers have evaluated our disclosure controls and
procedures within 90 days prior to the filing of this Quarterly Report on Form
10-Q and have determined that such disclosure controls and procedures are
effective.
Subsequent to our evaluation, 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.
- --------------------------------------------------------------------------------
23
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
Certain of the Company's legal proceedings are discussed below and in Note 13 to
the unaudited 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 Age Related
Macular Degeneration ("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.
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, sought: (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 judgment 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. Final judgment of
dismissal was entered in April 2003. In May 2003, MEEI filed a notice of appeal.
With respect to QLT's counterclaim requesting correction of inventorship of the
'349 patent to add an additional MGH inventor, the Court stayed the claim
pending the outcome of Civil Action No. 01-10747-EFH, described below. QLT
voluntarily dismissed the remainder of its counterclaims in Civil Action No.
00-10783-JLT without prejudice in April 2003.
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
24
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 judgment 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 Civil Action No. 01-10747-EFH, and none is
expected until the first half of 2004 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.
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 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 claims. 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.
25
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
10.81 Employment Agreement dated as of February 19, 2003
between QLT Inc. and Dr. Mohammad Azab (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
99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
(i) On January 23, 2003, the Company reported, under "Item 5 --
Other Events", that its alliance partner, Novartis,
announced global Visudyne(R) (verteporfin) sales of
approximately US$77.0 million (CAD$120.9 million) for the
quarter and US$287.1 million (CAD$450.6 million) for the
year ended December 31, 2002.
(ii) On February 6, 2003, the Company reported, under "Item 5 --
Other Events", 2002 Fourth Quarter and Full-year earnings
per share, excluding special charges, of Canadian $0.16 and
$0.47, respectively. In reporting its earnings on a GAAP
basis, QLT reported a write-down of an equity investment, as
well as a previously disclosed restructuring charge. Based
on 2002 results, QLT announced 2003 sales guidance, in the
range of US$310-335 million and 2003 EPS guidance in the
range of Canadian $0.53 to $0.68. All particulars are set
out in the filed Press Release.
(iii) On February 24, 2003, 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.
(iv) On March 31, 2003, the Company reported, under "Item 5 --
Other Events", that effective December 31, 2002, the Company
changed its reporting to U.S. Generally Accepted Accounting
Principles (GAAP) and reporting currency to the U.S. dollar
from the Canadian dollar. The Company adopted the U.S.
dollar and U.S. GAAP in order to provide information on a
more comparable basis with the majority of the companies in
its peer group. The Company has retained the Canadian dollar
as its functional currency.
26
(v) On March 31, 2003, the Company reported, under "Item 5 --
Other Events", that the Company has filed its Annual Report
on Form 10-K with the Securities and Exchange Commission. In
that Form 10-K, the Company reported in U.S. dollars and
U.S. generally accepted accounting principles (US GAAP).The
Company has also prepared and filed a condensed financial
statement data reconciliation between US GAAP and Canadian
GAAP for comparative purposes.
(vi) On April 15, 2003, the Company reported, under "Item 5 --
Other Events", that its alliance partner, Novartis,
announced global Visudyne (verteporfin) sales of
approximately US$82.1 million for the quarter ended March
31, 2003. This represents an increase of 20% over sales in
the first quarter of 2002.
(vii) On April 24, 2003, pursuant to Securities and Exchange
Commission Release No. 33-8216 dated March 27, 2003, and
pursuant to Item 12, "Disclosure of Results of Operations
and Financial Conditions", the Company furnished its
financial results for the quarter ended March 31, 2003. The
full text of the press release announcing the Company's
financial results for the quarter ended March 31, 2003 was
filed as Exhibit 99.4 to this Current Report on Form 8-K.
(viii) On May 6, 2003, the Company reported, under "Item 5 -- Other
Events", that new data presented at the Association for
Research in Vision and Ophthalmology annual meeting
suggested that Visudyne therapy reduces the risk of vision
loss in wet age-related macular degeneration (AMD) patients
with minimally classic lesions, a form of wet AMD previously
considered untreatable.
(ix) On May 9, 2003, pursuant to Securities and Exchange
Commission Release No. 33-8216 dated March 27, 2003, and
pursuant to Item 12, "Disclosure of Results of Operations
and Financial Conditions", the Company furnished Condensed
Consolidated Statements of Income Data Reconciliation for
the three month periods ending March 31, June 30, September
30 and December 31, 2002, presenting such information in
U.S. dollars and in accordance with U.S. GAAP.
On May 12, 2003, the Company reported, under "Item 5 -- Other Events", that it
will discontinue its two Phase III trials of tariquidar in the treatment of
non-small cell lung cancer, following a recommendation of the independent Data
Safety and Monitoring Committee which completed the interim analysis of
unblinded data for both trials.
SIGNATURES
Pursuant to the requirements 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.
QLT INC.
----------------------------------------
(Registrant)
Date: May 13, 2003 By: /s/ Paul J. Hastings
---------------- ----------------------------------------
Paul J. Hastings
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 2003 By: /s/ Michael J. Doty
---------------- ----------------------------------------
Michael J. Doty
Senior Vice-President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
27
CERTIFICATION
I, Paul J. Hastings, President and Chief Executive Officer of QLT Inc.
("registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the registrant;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: May 13, 2003
/s/ Paul J. Hastings
- -------------------------------------
Paul J. Hastings
President and Chief Executive Officer
28
CERTIFICATION
I, Michael J. Doty, Senior Vice-President and Chief Financial Officer of QLT
Inc. ("registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the registrant;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: May 13, 2003
/s/ Michael J. Doty
- --------------------------------------------------
Michael J. Doty
Senior Vice-President and Chief Financial Officer
(Principal Financial and Accounting Officer)
29
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.81 Employment Agreement dated as of February 19, 2003 between QLT Inc.
and Dr. Mohammad Azab (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
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
30