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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 September 30, 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.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BRITISH COLUMBIA, CANADA N/A
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer 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
--------------
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 November 10, 2003 the registrant had 68,869,937 outstanding Common Shares
and 7,314,093 outstanding Stock Options.
QLT INC.
QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 2003
TABLE OF CONTENTS
ITEM PART I - FINANCIAL INFORMATION PAGE
- ---- ----
1. FINANCIAL STATEMENTS.............................................................................. 1
Consolidated Balance Sheets as of
September 30, 2003 and December 31, 2002........................................................ 1
Consolidated Statements of Income for the three months and nine months ended
September 30, 2003 and September 30, 2002....................................................... 2
Consolidated Statements of Cash Flows for the three months and nine months ended
September 30, 2003 and September 30, 2002....................................................... 3
Consolidated Statement of Changes in Shareholders' Equity and Comprehensive
Income for the three months and nine months ended September 30, 2003............................ 5
Notes to the Consolidated Financial Statements.................................................. 6
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................................... 17
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................ 27
4. CONTROLS AND PROCEDURES........................................................................... 27
PART II - OTHER INFORMATION
1. LEGAL PROCEEDINGS................................................................................. 28
2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................................................... 29
3. DEFAULTS UPON SENIOR SECURITIES................................................................... 29
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................... 30
5. OTHER INFORMATION................................................................................. 30
6. EXHIBITS AND REPORTS ON FORM 8-K.................................................................. 30
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PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
QLT INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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(In thousands of United States dollars) SEPTEMBER 30, 2003 December 31, 2002
- ---------------------------------------------------------------- -------------------------- -------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 229,160 $ 128,138
Short-term investment securities 231,820 79,797
Accounts receivable (Note 4) 34,629 30,186
Inventories (Note 5) 28,882 23,900
Current portion of deferred income tax assets 13,722 17,092
Other (Note 6) 16,108 13,310
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554,321 292,423
PROPERTY AND EQUIPMENT 40,319 35,281
DEFERRED INCOME TAX ASSETS 1,889 13,966
OTHER LONG-TERM ASSETS (Note 9) 6,073 4,170
- ---------------------------------------------------------------- -------------------------- -------------------------
$ 602,602 $ 345,841
================================================================ ========================== =========================
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 5,334 $ 9,960
Accrued restructuring charge (Note 13) - 2,631
Other accrued liabilities (Note 8) 10,516 7,027
Deferred revenue 8,129 12,678
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23,979 32,296
LONG-TERM DEBT (Note 9) 172,500 -
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196,479 32,296
CONTINGENCIES (Note 15)
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 10)
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 395,196 391,716
September 30, 2003 - 68,848,275
December 31, 2002 - 68,407,753
ACCUMULATED DEFICIT (17,053) (52,901)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) 27,980 (25,270)
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406,123 313,545
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$ 602,602 $ 345,841
================================================================ ========================== =========================
See accompanying notes to the consolidated financial statements.
QLT INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three months ended Nine months ended
September 30, September 30,
----------------------------- ------------------------------
(In thousands of United States dollars except per share
information) 2003 2002 2003 2002
- ------------------------------------------------------------- --------------- ------------- ---------------- -------------
REVENUES
Revenue from Visudyne(R) (Note 11) $ 37,158 $ 26,477 $ 103,767 $ 72,279
Contract research and development (Note 12) 1,124 2,236 3,495 5,232
- ------------------------------------------------------------- --------------- ------------- ---------------- -------------
$ 38,282 $ 28,713 $ 107,262 $ 77,511
- ------------------------------------------------------------- --------------- ------------- ---------------- -------------
COSTS AND EXPENSES
Cost of sales 6,211 4,715 17,681 13,268
Research and development 9,684 10,702 32,646 29,572
Selling, general and administrative 3,653 3,474 10,118 12,453
Depreciation 825 799 2,266 2,300
Restructuring (Note 13) - - (394) -
- ------------------------------------------------------------- --------------- ------------- ---------------- -------------
20,373 19,690 62,317 57,593
- ------------------------------------------------------------- --------------- ------------- ---------------- -------------
OPERATING INCOME 17,909 9,023 44,945 19,918
OTHER INCOME AND EXPENSES
Net foreign exchange gains (losses) 406 (985) 3,320 (552)
Interest income 2,443 1,402 6,087 3,337
Interest expense (773) - (773) -
Equity gain (loss) in NSQ (Note 2) - 3 - (276)
Other gains (losses) 1,813 (371) 1,813 (169)
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3,889 49 10,447 2,340
- ------------------------------------------------------------- --------------- ------------- ---------------- -------------
INCOME BEFORE INCOME TAXES 21,798 9,072 55,392 22,258
PROVISION FOR INCOME TAXES (8,649) (3,169) (19,545) (7,838)
- ------------------------------------------------------------- --------------- ------------- ---------------- -------------
NET INCOME $ 13,149 $ 5,903 $ 35,847 $ 14,420
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NET INCOME PER COMMON SHARE
Basic $ 0.19 $ 0.09 $ 0.52 $ 0.21
Diluted $ 0.19 $ 0.09 $ 0.52 $ 0.21
- ------------------------------------------------------------- --------------- ------------- ---------------- -------------
Weighted average number of common shares outstanding (in
thousands)
Basic 68,837 68,257 68,686 68,188
Diluted 69,196 68,406 68,882 68,507
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See accompanying notes to the consolidated financial statements.
Visudyne(R) is a trademark of Novartis Pharma AG.
2
QLT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three months ended Nine months ended
September 30, September 30,
------------------------------ ---------------------------
(In thousands of United States dollars) 2003 2002 2003 2002
- -------------------------------------------------------------- -------------- --------------- ------------- -------------
CASH PROVIDED BY OPERATING ACTIVITIES
Net income $ 13,149 $ 5,903 $ 35,847 $ 14,420
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 825 799 2,266 2,300
Amortization of deferred financial expenses 122 - 122 -
Unrealized foreign exchange (gain) loss (159) (1,225) 1,939 (327)
Deferred income taxes 8,649 3,169 19,545 7,838
Restructuring (Note 13) - - (394) -
Equity (gain) loss in NSQ (Note 2) - (3) - 276
Changes in non-cash operating assets and liabilities:
Accounts receivable (935) (2,719) 94 878
Inventories (791) 2,423 (1,083) 7,936
Other assets 7,310 1,835 3,093 (5,171)
Accounts payable (1,759) (975) (4,080) (4,678)
Accrued restructuring charge (432) - (2,437) -
Other accrued liabilities 2,623 1,099 2,607 (2,719)
Deferred revenue (1,800) 369 (6,398) 5,970
- -------------------------------------------------------------- -------------- --------------- ------------- -------------
26,802 10,675 51,121 26,723
- -------------------------------------------------------------- -------------- --------------- ------------- -------------
CASH USED IN INVESTING ACTIVITIES
Short-term investment securities (137,636) (53,824) (139,328) (589)
Purchase of property and equipment (1,284) (458) (3,495) (1,425)
- -------------------------------------------------------------- -------------- --------------- ------------- -------------
(138,920) (54,282) (142,823) (2,014)
- -------------------------------------------------------------- -------------- --------------- ------------- -------------
CASH PROVIDED BY FINANCING ACTIVITY
Long term debt (net) 167,748 - 167,748 -
Issuance of common shares 833 372 3,472 2,929
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168,581 372 171,220 2,929
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EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 836 (5,264) 21,504 (1,418)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 57,299 (48,499) 101,022 26,220
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 171,861 144,382 128,138 69,663
- -------------------------------------------------------------- -------------- --------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 229,160 $ 95,883 $ 229,160 $ 95,883
============================================================== ============== =============== ============= =============
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid $ 114 $ 186 $ 365 $ 781
Income taxes paid - - - -
3
NON-CASH INVESTING AND FINANCING 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 owed 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.
A standby letter of credit in the amount of CAD $2.5 million was issued under
the second segment of the Company's unsecured credit facility. This letter of
guarantee was security for the final payment of a land purchase and bore
interest at 0.7% per annum. During April 2003, the land purchase was completed
and the letter of guarantee cancelled.
See accompanying notes to the consolidated financial statements.
4
QLT INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(Unaudited)
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Accumulated Other
Common Shares Comprehensive Income
--------------------------- ---------------------------
Unrealized
(Losses)
Cumulative Gains on Total
Translation Diomed Accumulated Shareholders'
Shares Amount Adjustment Securities Deficit Equity
- -------------------------------------------- ------------ -------------- ------------- ------------- -------------- ---------------
(In thousands of United States dollars)
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):
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
EXERCISE OF STOCK OPTIONS AT PRICES
RANGING FROM CAD $11.95 TO CAD $13.78 PER
SHARE 174,028 1,647 - - - 1,647
OTHER COMPREHENSIVE INCOME:
Translation adjustment from application
of U.S. dollar reporting (Note 3) - - 31,677 - - 31,677
Unrealized gain on available for sale
securities - - - 34 - 34
NET INCOME - - - - 11,159 11,159
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BALANCE AT JUNE 30, 2003 68,753,281 $ 394,367 $ 29,517 $ (394) $(30,203) $ 393,287
EXERCISE OF STOCK OPTIONS AT PRICES
RANGING FROM CAD $11.95 TO CAD $13.78 PER
SHARE 94,994 829 - - - 829
OTHER COMPREHENSIVE INCOME:
Translation adjustment from application
of U.S. dollar reporting (Note 3) - - (1,112) - - (1,112)
Unrealized loss on available for sale
securities - - - (31) - (31)
NET INCOME - - - - 13,149 13,149
============================================ ============ ============== ============= ============= ============== ===============
BALANCE AT SEPTEMBER 30, 2003 68,848,275 $ 395,196 $ 28,405 $ (425) $(17,053) $ 406,123
See accompanying notes to the consolidated financial statements.
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information as at and for the three and nine month periods ended September 30,
2003 and 2002 is unaudited.)
QLT Inc. ("the Company") is a bio-pharmaceutical company engaged in the
development and commercialization of innovative products that address unmet
medical needs. The Company focuses in the areas of ophthalmology, oncology,
dermatology and other fields in which products can be marketed by a focused
specialty sales and marketing team. The Company is a pioneer in the field
of photodynamic therapy ("PDT"). PDT is a minimally invasive medical
procedure utilizing photosensitizers (light-activated drugs) to treat a
range of diseases associated with rapidly growing tissues.
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 September 30, 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
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These consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions have been
eliminated.
The long-term investment in NS & QLT Technologies ("NSQ") in which the
Company exercised joint control was recorded using the equity method
whereby the Company included a pro rata share of NSQ's earnings in the
carrying value of the investment and in the Company's net income. NSQ was
the Company's only investment accounted for using the equity method in
2002. In December 2002, dissolution procedures for NSQ were commenced and
NSQ's remaining assets have been distributed back to its shareholders. The
Company does not currently have any investments recorded using the equity
method.
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 and nine month periods ended
September 30, 2002 is presented in U.S. dollars as if the U.S. dollar had
been used as the reporting currency during those periods.
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.
6
Property and equipment are recorded at cost and amortized as follows:
Method Rates Method 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
-------------------
Under the terms of the Company's collaborative agreement with Novartis
Ophthalmics, a division of Novartis Pharma AG ("Novartis Ophthalmics"), the
Company is responsible for manufacturing and product supply and Novartis
Ophthalmics is responsible for sales, marketing and distribution of
Visudyne. Our agreement with Novartis Ophthalmics provides that the
calculation of total revenue for the sale of Visudyne be composed of three
components: (1) an advance on the cost of inventory sold to Novartis
Ophthalmics, (2) an amount equal to 50% of the profit that Novartis
Ophthalmics derives from the sale of Visudyne to end-users, and (3) the
reimbursement of other specified costs incurred and paid for by the Company
(See Note 11 - Revenue from Visudyne). The Company recognizes revenue from
the sale of Visudyne when persuasive evidence of an arrangement exists,
delivery to Novartis has occurred, the end selling price of Visudyne is
fixed or determinable, and collectibility is reasonably assured. Under the
calculation of total revenues noted above, this occurs upon "sell through"
to the end user.
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 12 - Contract Research and
Development)
The Company does not offer rebates or discounts and has not experienced any
material product returns; accordingly, the Company does not provide an
allowance for rebates, discounts, and returns.
Cost of Sales
-------------
Cost of sales, consisting of expenses related to the production of bulk
Visudyne sold to Novartis Ophthalmics and royalties on Visudyne sales, are
charged against earnings in the period of the related product sale by
Novartis Ophthalmics to third parties. The Company utilizes a standard
costing system, which includes a reasonable allocation of overhead
expenses, to account for inventory and cost of sales with adjustments being
made periodically to reflect current conditions. Overhead expenses comprise
direct and indirect support activities related to the manufacture of bulk
Visudyne and involve costs associated with activities such as quality
inspection, quality assurance, supply chain management, safety and
regulatory. Overhead expenses are allocated to inventory during each stage
of the manufacturing process under a standard costing system, and
eventually to cost of sales as the related products are sold by Novartis
Ophthalmics to third parties. The Company records a provision for the
non-completion of product inventory based on its history of batch
completion.
Stock-Based Compensation
------------------------
In accordance with the provisions of SFAS No. 123 "Accounting for
Stock-based Compensation" ("SFAS 123"), the Company applies Accounting
Principles Board ("APB") Opinion No. 25 and related interpretations in the
accounting for employee stock option plans. SFAS 123 requires that all
stock-based awards made to non-employees be measured and recognized using a
fair value based method. The standard encourages the use of a fair value
based method for all awards granted to employees, but only requires the use
of a fair value based method for direct awards of stock, stock appreciation
rights, and awards that call for settlement in cash or other assets. Awards
that a company has the ability to settle in stock are recorded as equity,
whereas awards that the company 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, compiled using the
Black-Scholes option pricing model, presents the net income and net income
per common share had the Company recognized stock-based compensation using
a fair value based accounting method:
7
Three months ended Nine months ended
--------------------------------- --------------------------------
(In thousands except per share information) September 30, September 30, September 30, September 30,
(Unaudited) 2003 2002 2003 2002
---------------------------------------------- ---------------- ---------------- --------------- ----------------
Net Income (Loss) $ 13,149 $ 5,903 $ 35,847 $ 14,420
As reported
Less: Additional employee compensation
expense under the fair value method (4,330) (6,122) (14,715) (19,106)
---------------------------------------------- ---------------- ---------------- --------------- ----------------
Pro forma $ 8,819 $ (219) $ 21,132 $ (4,686)
---------------------------------------------- ---------------- ---------------- --------------- ----------------
Basic net income (loss) per common share
As reported $ 0.19 $ 0.09 $ 0.52 $ 0.21
Pro forma $ 0.13 $ - $ 0.31 $ (0.07)
---------------------------------------------- ---------------- ---------------- --------------- ----------------
Diluted net income (loss) per share
As reported $ 0.19 $ 0.09 $ 0.52 $ 0.21
Pro forma $ 0.13 $ - $ 0.31 $ (0.07)
---------------------------------------------- ---------------- ---------------- --------------- ----------------
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 Black-Scholes option pricing model was developed for use in estimating
the value of traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of
highly subjective assumptions including the expected stock price
volatility. The Company uses projected data for expected volatility and
expected life of its stock options based upon historical and other economic
data trended into future years. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the estimate, in management's opinion, the existing
valuation models do not provide a reliable measure of the fair value of the
Company's employee stock options.
The weighted average fair value of stock options granted in the three and
nine month periods ended September 30, 2003 were $5.45 and $4.36,
respectively, whereas the fair value of stock options granted in the three
and nine month periods ended September 30, 2002 were $3.25 and $7.12,
respectively. The Company used the Black-Scholes option pricing model to
estimate the value of the options at each grant date, under the following
weighted average assumptions:
Three months ended Nine months ended
September 30, September 30,
2003 2003
-------------------- --------------------
Annualized Volatility 63.4% 72.8%
Risk-free Interest Rate 3.3% 4.1%
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.
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.
8
The effect of approximately 9,692,637 shares related to the assumed
conversion of the $172.5 million 3% convertible senior notes (as described
in Note 9) has been excluded from the computation of diluted earnings per
share for the three and nine months ended September 30, 2003 as none of the
conditions that would permit conversion has been satisfied.
The following table sets forth the computation of basic and diluted net
income per common share:
Three months ended Nine months ended
---------------------------------- --------------------------------
(In thousands, except per share data) September 30, September 30, September 30, September 30,
(Unaudited) 2003 2002 2003 2002
------------------------------------------- ----------------- ---------------- ---------------- ---------------
Numerator:
Net Income $ 13,149 $ 5,903 $ 35,847 $ 14,420
Denominator:
Weighted-average common shares 68,837 68,257 68,686 68,188
outstanding
Effect of dilutive securities:
Stock options 359 149 196 319
----------------- ---------------- ---------------- ---------------
Diluted weighted-average common
shares outstanding 69,196 68,406 68,882 68,507
================= ================ ================ ===============
Basic net income per common share $ 0.19 $ 0.09 $ 0.52 $ 0.21
Diluted net income per common share $ 0.19 $ 0.09 $ 0.52 $ 0.21
Excluded from the calculation of diluted net income per common share for
the three and nine month periods ended September 30, 2003 were 6,244,678
and 6,444,678 shares, respectively, (in the three and nine month periods
ended September 30, 2002 were 7,493,175 and 7,458,975 shares, respectively)
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 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 November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. Issue 00-21 provides guidance on
how to account for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. Revenue
arrangements with multiple deliverables should be divided into separate
units of accounting if the deliverables meet certain criteria, including
whether the fair value of the delivered items can be determined and whether
there is evidence of fair value of the undelivered items. In addition, the
consideration should be allocated among the separate units of accounting
based on their fair values, and the applicable revenue recognition criteria
should be considered separately for each of the separate units of
accounting. The provisions of Issue 00-21 apply to revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The adoption
of Issue 00-21 did not have a material impact on the Company's consolidated
financial position or 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
9
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.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities". FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual
returns or both. A variable interest entity is a corporation, partnership,
trust, or any other legal structures used for business purposes that either
(a) does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the entity
to support its activities. FIN 46 is effective for all new variable
interest entities created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The adoption of FIN 46 did not have a
material effect on the Company's consolidated financial position or results
of operations.
In April 2003, the FASB issued Statement No. 149 (SFAS No. 149), Amendment
of SFAS No. 133 on Derivative Instruments and Hedging Activities. The
Statement amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities under SFAS No. 133. In particular, it (1) clarifies
under what circumstances a contract with an initial net investment meets
the characteristic of a derivative as discussed in SFAS No. 133, (2)
clarifies when a derivative contains a financing component, (3) amends the
definition of an underlying to conform it to the language used in FASB
Interpretation No. 45, Guarantor Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others and (4)
amends certain other existing pronouncements.
SFAS No. 149 is effective for contracts entered into or modified after June
30, 2003, except as stated below and for hedging relationships designated
after June 30, 2003.
The provisions of SFAS No. 149 that relate to SFAS No. 133 Implementation
Issues that have been effective for fiscal quarters that began prior to
June 15, 2003, should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to
forward purchases or sales of when-issued securities or other securities
that do not yet exist, should be applied to existing contracts as well as
new contracts entered into after September 30, 2003. The remaining
provisions of SFAS No. 149 should be applied prospectively.
The Company adopted the provisions of SFAS No. 149 for all contracts
entered into after June 30, 2003 and was not affected by Implementation
Issues that would require earlier adoption. The adoption of this statement
did not have a material impact on the Company's results of operations and
financial position.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
This Statement requires that three types of financial instruments be
reported as liabilities by their issuers: (1) mandatorily redeemable
instruments; (2) forward purchase contracts, written put options, and other
financial instruments not in the form of shares that either obligate or may
obligate the issuer to repurchase its equity shares and settle its
obligation for cash or by transferring other assets; and (3) certain
financial instruments that include an obligation that may be settled in a
variable number of equity shares, has a fixed or benchmark tied value at
inception, and varies inversely with the fair value of the equity shares.
The provisions of SFAS 150 are effective for instruments entered into or
modified after May 31, 2003 and pre-existing instruments as of the
beginning of the first interim period that commences after June 15, 2003.
The Company adopted the provision for pre-existing instruments beginning
July 1, 2003. The adoption of this Statement did not have a material impact
on the Company's results of operations and financial position.
4. ACCOUNTS RECEIVABLE
- ------------------------
(In thousands of United States dollars) September 30, 2003 December 31, 2002
-------------------------------------------------------- --------------------------- -------------------------
(Unaudited)
Visudyne(R) $ 33,673 $ 28,636
Contract research and development 488 1,128
Trade and other 468 422
--------------------------------------------------------- --------------------------- ------------------------
$ 34,629 $ 30,186
-------------------------------------------------------- --------------------------- -------------------------
Accounts receivable -Visudyne represents amounts 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 has not, in the past, experienced bad debts. Based on
10
this history and because the Company's accounts receivable consists
primarily of receivables from its strategic partner, Novartis Ophthalmics,
the Company does not provide an allowance for doubtful accounts.
5. INVENTORIES
- ----------------
(In thousands of United States dollars) September 30, 2003 December 31, 2002
------------------------------------------------------ -------------------------- -----------------------
(Unaudited)
Raw materials and supplies $ 1,667 $ 1,706
Work-in-process 29,674 22,057
Finished goods 60 1,801
Provision for non-completion of product inventory (2,519) (1,664)
------------------------------------------------------ -------------------------- -----------------------
$ 28,882 $ 23,900
------------------------------------------------------ -------------------------- -----------------------
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. The Company has not, in the past, experienced inventory
spoilage. Based on this history, inventory turnover, and expected sales,
the Company believes that at this time the risk of inventory obsolescence
is negligible. Accordingly, the Company has not established any reserve for
obsolescence.
6. OTHER
- ----------
(In thousands of United States dollars) September 30, 2003 December 31, 2002
------------------------------------------------------ -------------------------- -----------------------
(Unaudited)
Inventory in transit (held by Novartis Ophthalmics) $ 9,525 $ 11,993
Foreign exchange contracts 4,574 -
Prepaid expenses and other 2,009 1,317
------------------------------------------------------ -------------------------- -----------------------
$ 16,108 $ 13,310
------------------------------------------------------ -------------------------- -----------------------
Inventory in transit comprises finished goods that have been shipped to and
are held by Novartis Ophthalmics. Under the terms of the Company's
collaborative agreement, upon delivery of inventory to Novartis
Ophthalmics, the Company is entitled to an advance equal to the Company's
cost of inventory. Inventory in transit is also included in deferred
revenue at cost, and will be recognized as revenue in the period of the
related product sale and delivery by Novartis Ophthalmics to third parties
where collection is reasonably assured.
7. CREDIT FACILITY
- --------------------
The Company maintains a CAD $3.5 million unsecured credit facility
agreement. The first segment of the facility is structured as a CAD $1.0
million revolving demand 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 September 30, 2003, no amount was drawn against this
portion of the facility.
8. OTHER ACCRUED LIABILITIES
- ------------------------------
(In thousands of United States dollars) September 30, 2003 December 31, 2002
----------------------------------------------------------- ---------------------------- -------------------
(Unaudited)
Royalties $ 2,042 $ 2,025
Compensation 3,771 3,557
Foreign exchange contracts 2,239 706
Manufacturing 1,409 568
Interest 750 171
Other 305 -
----------------------------------------------------------- ---------------------------- -------------------
$ 10,516 $ 7,027
----------------------------------------------------------- ---------------------------- -------------------
11
9. LONG TERM DEBT
- -------------------
In August 2003, the Company completed a private placement of $172.5 million
aggregate principal amount of 3% convertible senior notes due 2023. The
notes bear interest at 3% per annum, payable semi-annually beginning March
15, 2004.
The convertible senior notes are convertible at the option of the holders
into common shares at the conversion rates referred to below only in the
following circumstances: (i) if the company's common share price,
calculated over a specified period, has exceeded 120% of the effective
conversion price of the convertible senior notes; (ii) if the trading price
of the convertible senior notes over a specified period has fallen below
95% of the amount equal to the Company's then prevailing common share price
times the applicable conversion rate; (iii) if the convertible senior notes
are called for redemption; or (iv) if specified corporate transactions were
to occur. The notes are convertible into common shares of the Company, at
an initial conversion rate of 56.1892 shares per $1,000 principal amount of
notes, which represents a conversion price of approximately $17.80 per
share.
The Company has the right to redeem the convertible senior notes for cash
at any time on or after September 15, 2008. Holders of the convertible
senior notes have the right to require the Company to redeem these notes,
for cash, at their issue price plus accrued interest on September 15 in
each of 2008, 2013, and 2018. On certain events, such as a change in
control or termination of trading, holders of the notes may require the
Company to repurchase all or a portion of their notes for cash at a price
equal to the principal amount plus accrued unpaid interest to, but
excluding, the repurchase date. The notes also become immediately due and
payable upon certain events of default by the Company.
The notes are senior unsecured obligations and rank equally with all of the
Company's future senior unsecured indebtedness. The notes are effectively
subordinated to all of the Company's future secured indebtedness and all
existing and future liabilities of our subsidiaries, including trade
payables.
Total debt issue costs of $4.9 million, are included in Other long term
assets and are being amortized over 5 years commencing August 2003.
10. 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.
On August 11, 2003, the Company announced a share buy-back program. The
share purchases will be made as a normal course issuer bid; the Company may
purchase for cancellation up to a maximum of 5,000,000 common shares, being
approximately 7.32% of the public float of 68,338,072 common shares on
August 11, 2003. All purchases will be effected in the open market through
the facilities of The Toronto Stock Exchange and the Nasdaq National
Market, in accordance with all regulatory requirements, and will be
effected during the period commencing August 13, 2003 and ending August 12,
2004. As of September 30, 2003, the Company has not purchased any of its
common shares as part of this program.
12
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 September 30, 2003:
Granted 1,005,322 $12.10 - $ 18.36 $ 13.45
Exercised (440,522) $ 9.28 - $ 13.78 $ 11.23
Cancelled (916,833) $ 9.28 - $108.60 $ 53.94
------------------------------------------- ----------------- ----------------------- -----------------
Outstanding at September 30, 2003 7,449,205 $12.10 - $108.60 $ 47.76
=========================================== ================= ======================= =================
Additional information relating to stock options outstanding as of
September 30, 2003 is presented below:
(In Canadian dollars) Options Outstanding Options Exercisable
--------------------- -------------------------------------------- ------------------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Exercise Number of Exercise Contractual Exercise
Price Range Shares Price Life (Years) Number of Shares Price
--------------------- ------------ -------------- ---------------- ------------------ -----------------
Under $25 1,853,354 $ 17.64 4.03 574,016 $ 19.85
$25.00 - $37.50 1,521,732 $ 31.37 1.89 1,259,082 $ 31.30
$37.51 - $50.00 2,384,736 $ 41.54 2.23 1,991,267 $ 42.12
Over $50.00 1,689,383 $104.35 1.62 1,685,619 $ 104.40
--------------------- ------------- -------------- ---------------- ------------------ -----------------
7,449,205 5,509,984
--------------------- ------------- -------------- ---------------- ------------------ -----------------
11. REVENUE FROM VISUDYNE(R)
- -----------------------------
Under the terms of the Company's collaborative agreement with Novartis
Ophthalmics, the Company is responsible for manufacturing and product
supply and Novartis Ophthalmics is responsible for sales, marketing and
distribution of Visudyne.
The Company's Revenue from Visudyne was determined as follows:
For the three months ended For the nine months ended
September 30, September 30,
----------------------------- ------------------------------
(In thousands of United States dollars) 2003 2002 2003 2002
------------------------------------------------- ------------- --------------- -------------- ---------------
Visudyne(R) sales by Novartis Ophthalmics $ 89,822 $ 70,418 $ 261,082 $ 210,065
Less: Inventory and other costs (7,492) (5,468) (21,740) (17,062)
Less: Sales, marketing and distribution costs (24,933) (24,085) (78,457) (85,561)
------------- --------------- -------------- ---------------
$ 57,397 $ 40,865 $ 160,885 $ 107,442
============= =============== ============== ===============
QLT share of remaining revenue on final sale $ 28,699 $ 20,433 $ 80,442 $ 53,721
(50%)
Add: Inventory costs reimbursed to QLT 4,430 3,261 12,563 9,709
Add: Other costs reimbursed to QLT 4,029 2,783 10,762 8,849
------------- --------------- -------------- ---------------
Revenue from Visudyne(R) as reported by QLT $ 37,158 $ 26,477 $ 103,767 $ 72,279
============= =============== ============== ===============
For the three months ended September 30, 2003, approximately 52% of total
Visudyne sales by Novartis Ophthalmics were in the United States with
Europe and other markets responsible for the remaining 48%. For the same
period in 2002, approximately 59% of total Visudyne sales by Novartis
Ophthalmics were in the United States with Europe and other markets
responsible for the remaining 41%.
For the nine months ended September 30, 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,
13
approximately 60% of total Visudyne sales by Novartis Ophthalmics were in
the United States with Europe and other markets responsible for the
remaining 40%.
12. 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 Nine months ended
September 30, September 30,
------------------------------- --------------------------------
(In thousands of United States dollars) 2003 2002 2003 2002
---------------------------------------------- -------------- ---------------- --------------- ----------------
(Unaudited)
Visudyne(R) ocular programs $ 626 $ 1,019 $ 1,397 $ 2,117
Visudyne(R) dermatology program 8 721 1,062 1,972
Others 490 496 1,036 1,143
-------------- ---------------- --------------- ----------------
Contract research & development revenue $ 1,124 $ 2,236 $ 3,495 $ 5,232
============== ================ =============== ================
13. 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. During
the quarter ended June 30, 2003, the Company reassessed its restructuring
reserve based on expected remaining cash outlays for severance, termination
benefits and other related costs, and accordingly reduced the reserve by
$0.4 million. In the quarter ended September 30, 2003, the Company
completed final activities associated with the restructuring, the details
of which are as follows:
Reduction of
accrued
(In thousands December Cash March 31, Cash restructuring June 30, Cash Payments September 30,
of U.S. dollars) 31, 2002 Payments 2003 Payments charge 2003 /Reclassification 2003
------------------- ---------- ---------- ---------- ---------- ------------- -------- ----------------- -------------
Severance and
termination
benefits accrued $ 1,981 $(1,517) $464 $(197) $ - $ 267 $(267) $ -
Other related
expenses
accrued 650 (61) 589 (20) (394) 175 (175) -
---------- ---------- ---------- ---------- ------------- -------- ---------------- -------------
$ 2,631 $(1,578) $1,053 $(217) $(394) $ 442 $(442) $ -
========== ========== ========== ========== ============= ======== ================ =============
14
14. SEGMENTED INFORMATION
- --------------------------
Details of revenues and property and equipment by geographic segments are
as follows:
Revenues(1) Three months ended Nine months ended
September 30, September 30,
---------------------------- ---------------------------
(In thousands of United States dollars) 2003 2002 2003 2002
--------------------------------------------------- --------------- ------------ -------------- ------------
(Unaudited)
United States $ 23,128 $ 18,912 $ 63,979 $ 52,684
Europe 12,054 7,975 34,730 20,502
Canada 1,874 1,084 5,344 3,333
Other 1,226 742 3,209 992
--------------------------------------------------- --------------- ------------ -------------- ------------
$ 38,282 $ 28,713 $ 107,262 $ 77,511
--------------------------------------------------- --------------- ------------ -------------- ------------
Property and equipment September 30, December 31,
(In thousands of United States dollars) 2003 2002
--------------------------------------------------- ---------------- ---------------
(Unaudited)
Canada $ 39,738 $ 34,608
United States 581 673
--------------------------------------------------- ---------------- ---------------
$ 40,319 $ 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.
15. CONTINGENCIES
- ------------------
(A) LITIGATION WITH MEEI
The First MEEI Lawsuit
----------------------
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.
15
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.
The Second MEEI Lawsuit
-----------------------
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.
In April 2003, QLT moved to dismiss MEEI's Count II for unjust enrichment
on the grounds that this claim had been previously decided by a court. The
Court granted QLT's motion on May 28, 2003.
No trial has been scheduled in Civil Action No. 01-10747-EFH, and none is
expected until the second half of 2004 at the earliest.
The Company believes MEEI's claims in both lawsuits are without merit and
intends to vigorously defend against such actions and pursue its
counterclaims. The outcomes of these disputes are not presently
determinable or estimatable and there can be no assurance that the matters
will be resolved in favor of the Company. If the lawsuits are not resolved
in the Company's favor, the Company may be obliged to pay damages, to pay
an additional royalty or damages for access to the inventions covered by
claims in issued U.S. patents, may be subject to such equitable relief as a
court may determine (which could include an injunction) or may be subject
to a remedy combining some or all of the foregoing.
(B) THE SECURITIES CLASS ACTION LAWSUIT
In January and February, 2001, seven proposed securities class actions were
filed in the United States District Court for the Southern District of New
York on behalf of purchasers of the Company's common shares between August
1, 2000 and December 14, 2000. On May 3, 2001, the court ordered
consolidation of the seven actions.
The complaints name as defendants: the Company; Julia Levy, former
President, Chief Executive Officer and a current Director of the Company;
and Kenneth Galbraith, the Company's former Executive Vice President, Chief
Financial Officer and Corporate Secretary. The plaintiffs allege that the
defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934.
The plaintiffs allege that on December 14, 2000, the Company announced that
it expected to miss its Visudyne sales estimates for the fourth-quarter
2000, and that in response, the Company's common share price dropped
approximately 31%. The plaintiffs claim that the Company's December 14,
2000 statements contradicted prior information issued by the defendants
concerning the demand for Visudyne and the Company's prospects. The
plaintiffs allege that the defendants overstated the demand for Visudyne,
did not properly disclose reimbursement issues relating to Visudyne and
that the defendants had no basis in the months preceding the December
announcement for their projections of
16
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.
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.") and 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 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; and the anticipated timing and receipt of regulatory approvals for
expanded uses for Visudyne and for QLT's other products, the Company's
expectation that it will repurchase its common shares, and statements with
respect to our intentions to expand our pipeline through strategic product or
technology acquisitions. 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, 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; the outcome of QLT's
applications for regulatory approvals for expanded uses for Visudyne and for
QLT's other products, our ability to fund share repurchases pursuant to the
Company's normal course issuer bid, the need to fund our operating activities,
potential acquisitions or investments in businesses, products or technologies,
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 under "Legal Proceedings", and in the sections outlined in the
Company's most recent Annual Report on Form 10-K under "Business - Risk
Factors", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the "Notes to Consolidated Financial Statements".
OVERVIEW
The Company is a biopharmaceutical company engaged in the development and
commercialization of innovative products that address unmet medical needs. The
Company focuses on the areas of ophthalmology, oncology, dermatology and other
fields in which products can be marketed by a focused specialty sales and
marketing team. The Company is a pioneer in the field of photodynamic therapy
("PDT"). PDT is a minimally invasive medical procedure utilizing
photosensitizers (light-activated drugs) to treat a range of diseases associated
with rapidly growing tissue.
Visudyne, the Company's commercial product, is a photosensitizer for the
treatment of wet age-related macular degeneration ("AMD"). Wet AMD is the
leading cause of severe vision loss in people over the age of 50 in North
America and Europe. Visudyne is marketed through the Company's alliance with
Novartis Ophthalmics. The Company and Novartis Ophthalmics are currently
investigating the use of Visudyne in additional ophthalmologic indications to
expand the existing label. At the same
17
time, the Company is pursuing development of Visudyne (referred to as
verteporfin in non-ocular indications) in multiple basal cell carcinoma
("MBCC"), a form of skin cancer. The Company is also pursuing the development of
other clinical candidates in the treatment of benign prostatic hyperplasia
("BPH"), a progressive condition that results from the excessive benign growth
of prostatic tissue, and androgenetic alopecia, or male pattern baldness.
In addition to its research and development programs, the Company is actively
exploring opportunities to expand its product pipeline by identifying,
evaluating and acquiring rights to potential products and technologies developed
by third parties, beyond PDT and the field of ophthalmology. The Company also
intends to continue to explore strategic collaborations or acquisitions to
facilitate its development and commercialization efforts.
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 September 30, 2003, the
Company had an accumulated deficit of $17.1 million and total shareholders'
equity of $406.1 million.
RECENT DEVELOPMENTS
In July of 2003, the Company entered into an agreement with Novartis
Ophthalmics, whereby the Company received back certain rights which it had
previously granted to Novartis Ophthalmics to develop and commercialize Visudyne
(verteporfin) in non-ocular indications. The Company now has full rights to
develop and commercialize Visudyne in multiple basal cell carcinoma ("MBCC") and
has taken over the funding of the Phase III clinical trial of Visudyne
(verteporfin) in MBCC.
On August 15, 2003, the Company completed a private placement of $172.5 million
aggregate principal amount of 3% convertible senior notes due 2023. The notes
bear interest at 3% per annum, payable semi-annually beginning March 15, 2004.
Under certain circumstances, the convertible senior notes are convertible into
common shares of the Company at an initial conversion rate (subject to
adjustment) of 56.1892 common shares per $1,000 aggregate principal amount of
notes. This results in an initial conversion price of approximately $17.80 per
share.
On August 11, 2003, the Company announced a share buy-back program. The share
purchases will be made as a normal course issuer bid; the Company may purchase
for cancellation up to a maximum of 5,000,000 common shares, being approximately
7.32% of the public float of 68,338,072 on August 11, 2003. All purchases will
be effected in the open market through the facilities of the Toronto Stock
Exchange or the Nasdaq National Market, in accordance with all regulatory
requirements, and may be effected during the period commencing August 13, 2003
and ending August 12, 2004. The Company has not purchased any of its common
shares as part of this program.
On September 9, 2003 the Company announced a favourable vote by the Medicare
Coverage Advisory Committee ("MCAC") regarding questions relevant to the
decision to be made by the U.S. Centers for Medicare and Medicaid Services
("CMS") on whether to expand the current reimbursement of Visudyne therapy to
include patients with the occult form of CNV due to AMD. The MCAC is a
consultative body of researchers, clinicians and consultants who advise CMS on
scientific and clinical questions regarding Medicare coverage. CMS will consider
the panel opinion when it evaluates whether the procedure should be covered in
the population of Medicare beneficiaries who have AMD and occult with no classic
CNV. A decision on this additional indication is expected before the end of
2003.
On September 18, 2003 the Company announced that the U.S. Food and Drug
Administration (the "FDA") had granted fast track review status for Visudyne
therapy for both the occult with no classic and the minimally classic CNV due to
AMD. The designation means that the FDA will facilitate the development and
expedite the review of Visudyne in such indications.
On October 16, 2003, the Company announced that health authorities in Japan
approved Visudyne for the treatment of all types of CNV due to AMD. Approval for
the laser device used in Visudyne therapy is required in Japan before treatment
of patients may commence.
On October 23, 2003, the Company announced that results from the Phase II early
retreatment (VER) study with Visudyne showed that the early retreatment regimen
did not result in a significant improvement in vision outcomes over the standard
retreatment regimen every three months. This study involved earlier and more
frequent treatments in patients with predominantly classic lesions to reduce the
risk of the initial moderate vision loss compared to the standard treatment of
Visudyne. These data did reconfirm the vision benefits and safety shown in the
original TAP or Treatment in Age-related macular degeneration with Photodynamic
therapy study. The results will be presented at the upcoming American Academy of
Ophthalmology meeting later in November.
18
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, income 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 and nine month periods ended September 30, 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 rates. 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).
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.
The financial information for the three and nine month periods ended September
30, 2002 is presented in U.S. dollars as if the U.S. dollar had been used as the
reporting currency during that period. As a result of the translation into U.S.
dollars for reporting purposes, Canadian dollar denominated balance sheet
balances are reflected at current exchange rates. At September 30, 2003, the
increase in the value of the Canadian dollar relative to the U.S. dollar since
December 31, 2002, had the impact of increasing assets by $85.1 million,
increasing liabilities by $27.7 million, and increasing the cumulative
translation adjustment (other comprehensive income, in shareholders' equity)
from $(25.3) million at December 31, 2002 to $28.4 million at September 30,
2003. Future fluctuations in the exchange rate of U.S. dollars to Canadian
dollars will impact the reported value of the Company's assets, liabilities and
other comprehensive income (loss). A 1% increase in the value of the U.S. dollar
relative to the Canadian dollar would decrease the Company's reported assets at
September 30, 2003 by $6.0 million, decrease liabilities by $2.0 million and
decrease other comprehensive income (loss) by $4.0 million.
REVENUE RECOGNITION
Under the terms of the Company's collaborative agreement with Novartis
Ophthalmics, the Company is responsible for manufacturing and product supply and
Novartis Ophthalmics is responsible for sales, marketing and distribution of
Visudyne. Our agreement with Novartis Ophthalmics provides that the calculation
of total revenue for the sale of Visudyne be composed of three components: (1)
an advance on the cost of inventory sold to Novartis Ophthalmics, (2) an amount
equal to 50% of the profit that Novartis Ophthalmics derives from the sale of
Visudyne to end-users, and (3) the reimbursement of other specified costs
incurred and paid for by the Company. The Company recognizes revenue from the
sale of Visudyne when persuasive evidence of an arrangement exists, delivery to
Novartis has occurred, the end selling price of Visudyne is fixed or
determinable, and collectibility is reasonably assured. Under the calculation of
total revenues noted above, this occurs upon "sell through" to the end user.
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
19
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 Company is required to settle 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.
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 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 November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. Issue 00-21 provides guidance on how to
account for arrangements that involve the delivery or performance of multiple
products, services and/or rights to use assets. Revenue arrangements with
multiple deliverables should be divided into separate units of accounting if the
deliverables meet certain criteria, including whether the fair value of the
delivered items can be determined and whether there is evidence of fair value of
the undelivered items. In addition, the consideration should be allocated among
the separate units of accounting based on their fair values, and the applicable
revenue recognition criteria should be considered separately for each of the
separate units of accounting. The provisions of Issue 00-21 apply to revenue
arrangements entered
20
into in fiscal periods beginning after June 15, 2003. The adoption of Issue
00-21 did not have a material impact on the Company's consolidated financial
position or 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.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities". FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. A variable interest entity is
a corporation, partnership, trust, or any other legal structures used for
business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The adoption of Issue 00-21 did not have a
material effect on the Company's consolidated financial position or results of
operations.
In April 2003, the FASB issued Statement No. 149 (SFAS No. 149), Amendment of
SFAS No. 133 on Derivative Instruments and Hedging Activities. The Statement
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. In particular, it (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in SFAS No. 133, (2) clarifies when a derivative contains a
financing component, (3) amends the definition of an underlying to conform it to
the language used in FASB Interpretation No. 45, Guarantor Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of others and (4) amends certain other existing pronouncements.
SFAS No. 149 is effective for contracts entered into or modified after September
30, 2003, except as stated below and for hedging relationships designated after
September 30, 2003.
The provisions of SFAS No. 149 that relate to SFAS No. 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, certain provisions relating to forward purchases or sales of
when-issued securities or other securities that do not yet exist, should be
applied to existing contracts as well as new contracts entered into after
September 30, 2003. The remaining provisions of SFAS No. 149 should be applied
prospectively.
The Company adopted the provisions of SFAS No. 149 for all contracts entered
into after September 30, 2003 and was not affected by Implementation Issues that
would require earlier adoption. The Company does not expect that the adoption of
this Statement will have a material impact on its results of operations and
financial position.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
requires that three types of financial instruments be reported as liabilities by
their issuers: (1) Mandatorily redeemable instruments; (2) Forward purchase
contracts, written put options, and other financial instruments not in the form
of shares that either obligate or may obligate the issuer to repurchase its
equity shares and settle its obligation for cash or by transferring other
assets; and (3) Certain financial instruments that include an obligation that
may be settled in a variable number of equity shares, has a fixed or benchmark
tied value at inception, and varies inversely with the fair value of the equity
shares. The provisions of SFAS 150 are effective for instruments entered into or
modified after May 31, 2003 and pre-existing instruments as of the beginning of
the first interim period that commences after June 15, 2003. The Company adopted
the provision for pre-existing instruments beginning July 1, 2003. The adoption
of this Statement did not have a material impact on the Company's results of
operations and financial position.
RESULTS OF OPERATIONS
For the three months ended September 30, 2003, the Company recorded net income
of $13.1 million, or $0.19 per common share as compared to $5.9 million, or
$0.09 per common share for the three months ended September 30, 2002. Net income
for the nine months ended September 30, 2003 was $35.8 million, or $0.52 per
common share as compared to $14.4 million, or $0.21 per common share for the
nine months ended September 30, 2002.
21
REVENUES
REVENUE FROM VISUDYNE(R)
The Company's Revenue from Visudyne was determined as follows:
For the three months ended For the nine months ended
September 30, September 30,
------------------------------- -------------------------------
(In thousands) 2003 2002 2003 2002
- -------------------------------------------------------- --------------- --------------- ---------------- --------------
Visudyne(R) sales by Novartis Ophthalmics $ 89,822 $ 70,418 $ 261,082 $ 210,065
Less: Inventory and other costs (7,492) (5,468) (21,740) (17,062)
Less: Sales, marketing and distribution costs (24,933) (24,085) (78,457) (85,561)
--------------- --------------- ---------------- --------------
$ 57,397 $ 40,865 $ 160,885 $ 107,442
=============== =============== ================ ==============
QLT share of remaining revenue on final sale (50%) $ 28,699 $ 20,433 $ 80,442 $ 53,721
Add: Inventory costs reimbursed to QLT 4,430 3,261 12,563 9,709
Add: Other costs reimbursed to QLT 4,029 2,783 10,762 8,849
--------------- --------------- ---------------- --------------
Revenue from Visudyne(R) as reported by QLT $ 37,158 $ 26,477 $ 103,767 $ 72,279
=============== =============== ================ ==============
For the three months ended September 30, 2003, Revenue from Visudyne increased
by 40% over the three months ended September 30, 2002. This increase was
primarily due to a 28% increase in Visudyne sales, which resulted primarily from
higher market penetration in markets outside the U.S. and favorable exchange
rates. Favorable exchange rates contributed 7% of the 28% growth in sales.
For the nine months ended September 30, 2003, Revenue from Visudyne increased by
44% over the nine months ended September 30, 2002. This increase was primarily
due to a 24% increase in Visudyne sales, which resulted primarily from higher
market penetration in markets outside the U.S. and favorable exchange rates.
Favorable exchange rates contributed 8% of the 24% growth in sales. In addition,
lower sales, marketing and distribution costs by Novartis Ophthalmics, resulting
from greater efficiency and a decline in advertising and promotion spending,
also contributed to the increase in the Company's Revenue from Visudyne.
For the three month period ended September 30, 2003, approximately 52% of total
Visudyne sales by Novartis Ophthalmics were in the United States, compared to
approximately 59% for the same period in 2002. Approximately 51% of total
Visudyne sales by Novartis Ophthalmics were in the United States during the nine
months ended September 30, 2003, compared to 60% for the same period in 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 September 30, 2003,
contract research and development revenue decreased 50% to $1.1 million,
compared to $2.2 million for the same period in 2002. For the nine months ended
September 30, 2003, contract research and development revenue decreased 33% to
$3.5 million, compared to $5.2 million for the same period in 2002. For both the
quarter and the nine months ended September 30, 2003, the decrease is due to the
Company assuming full responsibility for the MBCC program and Novartis
Ophthalmics assuming a higher proportion of activities on joint Visudyne ocular
programs with the Company.
COSTS AND EXPENSES
COST OF SALES
For the three months ended September 30, 2003, cost of sales increased 32% to
$6.2 million compared to $4.7 million for the same period in 2002. Cost of sales
for the nine months ended September 30, 2003, increased 33% to $17.7 million
compared to $13.3 million for the same period in 2002. These increases are due
primarily to an increase in Visudyne sales in 2003 and a $1.2 million reduction
in the provision related to non-completion of product inventory in the second
quarter of 2002.
RESEARCH AND DEVELOPMENT COSTS
Research and development ("R&D") expenditures decreased 10% to $9.7 million for
the three months ended September 30, 2003, compared to $10.7 million for the
three months ended September 30, 2002. For the nine months ended September 30,
2003, R&D expenditures increased 10% to $32.6 million, compared to $29.6 million
for the same period in 2002. The
22
decrease for the three months ended September 30, 2003, when compared to the
same period in 2002, was largely attributable to the reduced development
spending due to the termination of the Company's tariquidar clinical trials.
The increase for the nine months ended September 30, 2003, when compared to the
same period in 2002, was due to costs associated with trials for tariquidar in
non-small cell lung cancer ("NSCLC") and for Visudyne in occult AMD. During the
second quarter of 2003, the Company halted its Phase III tariquidar trials.
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
September 30, 2003, SG&A expenses increased 5% to $3.7 million compared to $3.5
million for the same period in 2002. For the nine months ended September 30,
2003, SG&A expenses decreased 19% to $10.1 million, compared to $12.5 million
for the same period in 2002. The increase for the three months ended September
30, 2003, was a result of the increase in the value of the Canadian dollar
relative to the U.S. dollar when compared to the same period in 2002. Without
this negative foreign exchange impact, SG&A expenses would have been slightly
lower than the same period in 2002.
The decrease for the nine months ended September 30, 2003, when compared to the
same period in 2002, was attributable to higher absorption of overhead into
inventory, lower legal and consulting fees, lower recruiting and relocation
expenses, and savings from the workforce reduction in the fourth quarter of
fiscal 2002.
DEPRECIATION EXPENSE
Depreciation expense relates to the depreciation of property and equipment. For
the three and nine month periods ended September 30, 2003, depreciation expense
of $0.8 million and $2.3 million, respectively, were flat in comparison to the
same periods ended in 2002.
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. During the second quarter of
fiscal 2003 the Company reassessed its restructuring reserve based on expected
remaining cash outlays for severance, termination benefits and other related
costs, and accordingly reduced the reserve by $0.4 million. During the three
months ended September 30, 2003, the Company completed final activities
associated with the restructuring. The Company estimated that the restructuring
will result in annual savings of $4.4 million. For the three and nine month
periods ended September 30, 2003, the Company realized savings of approximately
$1.1 million and $3.3 million, respectively.
OTHER INCOME AND EXPENSES
NET FOREIGN EXCHANGE GAINS
Details of the Company's net foreign exchange gains are as follows:
For the three months ended For the nine months ended
September 30, September 30,
------------------------------------- ------------------------------------------
(In thousands of United States dollars) 2003 2002 2003 2002
- --------------------------------------- ---------------- -------------------- -------------------- ---------------------
Cash and cash equivalents $(5,060) $ 692 $(6,625) $(1,070)
U.S. dollar long term debt 5,354 - 5,354 -
Foreign exchange contracts (303) (2,462) 6,960 (349)
Foreign currency receivables and
payables 415 785 $ (2,369) 867
---------------- -------------------- -------------------- ---------------------
Net foreign exchange gains (losses) $ 406 $ (985) $ 3,320 $ (552)
================ ==================== ==================== =====================
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, foreign currency payables and U.S.
dollar denominated long term debt. For the three months ended September 30,
2003, the Company recorded net foreign exchange gains of $0.4 million versus net
foreign exchange losses of $1.0 million in the same period in 2002. Net foreign
exchange gains for the nine months ended September 30, 2003 were $3.3 million in
comparison to a $0.6 million loss for the same period in
23
2002. The gains in the three month period ended September 30, 2003 were from
gains on U.S. dollar long term debt and foreign currency receivables and
payables offset by losses on cash and foreign exchange contracts. The gains for
the nine month periods ended September 30, 2003 were due to gains on the
Company's U.S. dollar long term debt and foreign currency derivative financial
instruments which more than offset losses on cash and foreign currency
receivables and payables. (See Liquidity and Capital Resources - Interest and
Foreign Exchange Rates)
INTEREST INCOME
For the three months ended September 30, 2003 interest income increased 74% to
$2.4 million compared to $1.4 million for the same period in 2002. Interest
income for the nine months ended September 30, 2003 was $6.1 million compared
with $3.3 million for the nine months ended September 30, 2002, representing an
increase of 82%. 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.
INTEREST EXPENSE
Interest expense comprised the interest payable on the 3% convertible senior
notes issued on August 15, 2003, and amortization of deferred financial expenses
related to the above placement. For the three and nine month periods ended
September 30, 2003, interest expense increased to $0.8 million from nil.
OTHER GAINS (LOSSES)
For the three months ended September 30, 2003 other gains (losses) increased
$2.2 million to $1.8 million compared to ($0.4) million for the same period in
2002. Other gains (losses) for the nine months ended September 30, 2003 were
$1.8 million compared to ($0.2) million for the same period in 2002. The
increase is related to the $1.8 million milestone payment received from Axcan
Pharma Inc.
OUTLOOK FOR 2003
Based on recent sales results and current trends in Visudyne sales, the Company
announced, on October 23, 2003, that it has updated its forecast range of 2003
Visudyne sales from $335-350 million to a new range of $350-355 million, which
represents projected growth of 22% to 24% over 2002. The Company has also
updated its net income per common share forecast for 2003 to $0.62 to $0.67.
This update in net income per common share forecast reflects the new sales
forecast and incorporates the shift in timing and priorities of the Company's
development pipeline.
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, private placement of
convertible senior notes, licensing and collaborative funding arrangements with
strategic partners, and interest income.
At September 30, 2003, the Company had $461.0 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 September 30, 2003, the Company generated $26.8
million of cash from operations, $167.7 million from the 3% convertible senior
notes private placement, $0.8 million from stock option exercises, and used $1.3
million in purchases of property and equipment. This compared with $10.7 million
generated from operations, $0.4 million from stock option exercises, and $0.5
million used in purchases of property and equipment in the same period in 2002.
Cash flow from operations for the three months ended September 30, 2003
increased from the same period in 2002 as a result of increased net income ($7.2
million), the utilization of previously benefited tax losses ($5.5 million), a
decrease in other assets ($5.5 million) mostly as a result of a deferred payment
received from Axcan Pharma Inc. and lower levels of inventory in transit,
fluctuation in accounts receivable ($1.8 million), an increase in other accrued
liabilities ($1.5 million) due to interest on the convertible senior notes and
related debt issue costs, manufacturing, and compensation, offset by an increase
in inventory level during the quarter as compared to a decrease in inventory in
the same period in 2002 ($3.2 million), a decrease in accounts payable ($0.8
million) due to cash outlays related to the halting of the Phase III trials for
tariquidar in NSCLC, and by a reduction in deferred revenue ($2.2 million) on
lower levels of inventory held by Novartis for sale. In aggregate, cash, cash
equivalents and short-term investment securities increased by approximately
$192.5 million during the three months ended September 30, 2003. Changes in
foreign exchange rates had a negative impact of $0.4 million on cash, cash
equivalents and short-term investment securities.
24
For the nine months ended September 30, 2003, the Company generated $51.1
million of cash from operations, $167.7 million from the 3% convertible senior
notes private placement, $3.5 million from stock option exercises, and used $3.5
million in purchases of property and equipment. This compared with $26.7 million
generated from operations, $2.9 million from stock option exercises, and $1.4
million used in purchases of property and equipment in the same period in 2002.
Cash flow from operations for the nine months ended September 30, 2003 increased
from the same period in 2002 as a result of increased net income ($21.4
million), the utilization of previously benefited tax losses ($11.7 million), a
decrease in other assets mostly as a result of lower levels of inventory in
transit included in other assets and a deferred payment received from Axcan
Pharma Inc. ($8.3 million), a higher level of accrued liabilities ($5.3 million)
as compared to 2002 due to interest on the convertible senior notes and related
debt issue costs, manufacturing and compensation, and fluctuations in accounts
receivable ($0.8 million). This increase was offset by the increase in inventory
level during the period as compared to a decrease in inventory in the same
period in 2002 ($9.0 million), payment of severance and other benefits to
terminated employees in 2003 as part of the Company's restructuring in the
fourth quarter of 2002 ($2.4 million), and by a reduction in deferred revenue
($12.4 million) on lower levels of inventory held by Novartis for sale. In
aggregate, cash, cash equivalents and short-term investment securities increased
by $253.0 million during the nine months ended September 30, 2003. The effect of
changes in foreign exchange rates contributed approximately $36 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 September 30, 2003, the Company had
an investment portfolio consisting of fixed interest rate securities with an
average remaining maturity of approximately 80 days. If market interest rates
were to increase immediately and uniformly by 10% of levels at September 30,
2003, the fair value of the portfolio would decline by an immaterial amount.
At September 30, 2003, the Company had $461.0 million in cash and short-term
investments, with approximately $172.9 million denominated in U.S. dollars, and
$172.5 million of U.S. dollar denominated debt. If the U.S. dollar were to
decrease in value by 10% against the Canadian dollar, the decline in fair value
of the Company's U.S. dollar denominated cash and short-term investments will be
mostly offset by the decline in the fair value of the Company's U.S. dollar
denominated debt, resulting in an immaterial amount of unrealized foreign
currency translation loss.
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 September 30, 2003, was approximately $4.6 million.
The Company purchases goods and services primarily in Canadian and U.S. dollars
and earns a significant portion of its revenues in U.S. dollars. Foreign
exchange risk is also managed by satisfying U.S. dollar denominated expenditures
with U.S. dollar cash flows or assets.
LONG TERM OBLIGATIONS
During August, 2003, the Company completed a private placement of $172.5 million
aggregate principal amount of 3% convertible senior notes due 2023. The notes
bear interest at 3% per annum, payable semi-annually beginning March 15, 2004.
Under certain circumstances, the convertible senior notes are convertible into
common shares of the Company at an initial conversion rate (subject to
adjustment) of 56.1892 common shares per $1,000 aggregate principal amount of
notes. This results in an initial conversion price of approximately $17.80 per
share. On or after September 15, 2008, the Company may at its option redeem the
notes, in whole or in part, for cash at a redemption price equal to 100% of the
principal amount of the notes to be redeemed, plus any accrued and unpaid
interest to, but excluding, the redemption date. The Company will also have the
option at any time to redeem for cash all, but not less than all, of the notes
at 100% of their principal amount, plus any accrued and unpaid interest to, but
excluding, the redemption date, in the event of certain changes to Canadian
withholding tax requirements. On each of September 15, 2008, 2013 and 2018,
holders of the notes may require the Company to purchase all or a portion of
their notes for cash at a purchase price equal to 100% of the principal amount
of the notes, plus accrued and unpaid interest to, but excluding, that date. On
certain events, such as a change in control or termination of trading, holders
of the notes may require the Company to repurchase all or a portion of their
notes for cash at a price equal to the principal amount plus accrued unpaid
interest to, but excluding, the repurchase date. The notes also become
immediately due and payable upon certain events of default by the Company. Total
proceeds from the private placement were $167.6 million, net of debt issue costs
of $4.9 million. The notes are senior unsecured obligations and rank equally
with all of the Company's future senior unsecured indebtedness. The notes are
effectively subordinated to all of the Company's future secured indebtedness and
all existing and future liabilities of our subsidiaries, including trade
payables.
The Company's other material long-term obligations as of September 30, 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 10-K under the section "Liquidity and Capital Resources -
Long Term Obligations".
25
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 10-K under the section "Costs and Expenses
- - Research and Development".
GENERAL
The Company believes that its available cash resources and working capital, and
its cash generating capabilities, should be more than sufficient to satisfy the
funding of product development programs, and other operating and capital
requirements for the reasonably foreseeable future. Depending on the overall
structure of current and future strategic alliances, the Company may have
additional capital requirements related to the further development, marketing
and distribution of existing or future products.
The Company's working capital and capital requirements will depend upon numerous
factors, including: the progress of the Company's preclinical and clinical
testing; fluctuating or increasing manufacturing requirements and R&D programs;
the timing and cost of obtaining regulatory approvals; the levels of resources
that the Company devotes to the development of manufacturing, marketing and
support capabilities; technological advances; the status of competitors; the
cost of filing, prosecuting and enforcing the Company's patent claims and other
intellectual property rights; the ability of the Company to establish
collaborative arrangements with other organizations; and the outcome of legal
proceedings.
The Company may require additional capital in the future to fund clinical and
product development costs for certain product applications or other technology
opportunities, and strategic acquisitions of products, product candidates,
technologies or other businesses. Accordingly, the Company may seek funding from
a combination of sources, including product licensing, joint development and new
collaborative arrangements, additional equity and debt financing or from other
sources. No assurance can be given that additional funding will be available or,
if available, on terms acceptable to the Company. If adequate capital is not
available, the Company's business can be materially and adversely affected.
26
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 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 as of the end of
the period covered by this report and have determined that such disclosure
controls and procedures are effective. No changes were made to the Company's
internal controls over financial reporting in connection with this evaluation
that has materially affected, or is reasonably likely to materially affect, our
internal controls over financial reporting.
27
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
Certain of the Company's legal proceedings are discussed below and in Note 15 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.
The effect of a negative judgment or likely loss with respect to one or both of
the below-mentioned claims, if any, will be recorded in the period it becomes
determinable.
MEEI LITIGATION
(a) The First MEEI Lawsuit
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.
(b) The Second MEEI Lawsuit
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
28
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.
In April 2003, QLT moved to dismiss MEEI's Count II for unjust enrichment on the
grounds that this claim had been previously decided by a court. The Court
granted QLT's motion on May 28, 2003.
No trial has been scheduled in Civil Action No. 01-10747-EFH, and none is
expected until the second half of 2004 at the earliest.
The Company believes MEEI's claims in both lawsuits are without merit and
intends to vigorously defend against such actions and pursue its counterclaims.
The outcome of these disputes are not presently determinable or estimatable and
there can be no assurance that the matter will be resolved in favor of the
Company. If the lawsuits are not resolved in the Company's favor, the Company
may be obliged to pay damages, to pay an additional royalty or damages for
access to the inventions covered by claims in issued U.S. patents, may be
subject to such equitable relief as a court may determine (which could include
an injunction) or may be subject to a remedy combining some or all of the
foregoing.
SECURITIES CLASS ACTION LAWSUIT
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) since July 1, 2003, the Company has issued and sold unregistered
securities as follows:
(1) On August 15, 2003, the Company sold $172.5 million aggregate
principal amount of 3% convertible senior notes due 2023 (the
"Notes") in a private placement to UBS Securities LLC and
CIBC World Markets Corp., as placement agents and initial
purchasers in the offering. The issuance of the Notes to the
initial purchasers was exempt from the registration
requirements of the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to Section 4(2) thereof. The
initial purchasers thereafter offered and sold the Notes to
qualified institutional buyers in reliance on Rule 144A under
the Securities Act. We incurred approximately $(4.9) million
of costs in connection with the issuance of the Notes. The
Notes are senior unsecured obligations of the Company and are
convertible into our common shares based on an initial
conversion price of approximately $17.80 per share, subject
to adjustment in certain circumstances, all as described
elsewhere in this Quarterly Report on Form 10-Q. In
connection with the Notes offering, the Company entered into
a registration rights agreement with the initial purchasers
pursuant to which the Company is required to (and has) filed
a registration statement to register for resale the Notes as
well as the shares issuable upon conversion thereof.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
29
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
------- -----------
31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002
32.2 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 July 21, 2003, the Company reported, under "Item 5 - Other
Events", that its alliance partner, Novartis, announced global
Visudyne (R) (verteporfin) sales of approximately US$89.2 million
for the quarter ended June 30, 2003. This represented an increase
of 25% over sales in the second quarter of 2002.
(ii) On July 23, 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 June 30, 2003. The full text of the press release
announcing the Company's financial results for the quarter ended
June 30, 2003 was filed as Exhibit 99.1 to this Current Report on
Form 8-K.
(iii) On August 11, 2003, the Company reported, under "Item 5 - Other
Events", that it filed as exhibits to this Current Report on Form
8-K the Special Resolution and "Company Act" Amended Memorandum
of QLT Inc. dated May 5, 2000, and certain material contracts.
(iv) On August 11, 2003, the Company reported, under "Item 5 - Other
Events", its intention to sell $150 million aggregate principal
amount of convertible senior notes (the "Notes") due 2023, plus
up to $22.5 million of Notes issuable upon the exercise of the
initial purchasers' option, in a private placement. The Company
also reported that it intended to repurchase up to $50 million of
its common shares, subject to regulatory approval.
(v) On August 12, 2003, the Company reported, under "Item 5 - Other
Events", that it had agreed to issue $150 million of 3%
convertible senior notes due 2003 by private placement and that
the Toronto Stock Exchange had accepted the Company's notice of
its intention to repurchase up to $50 million of its common
shares through the Toronto Stock Exchange and/or the NASDAQ Stock
Market.
30
(vi) On August 13, 2003, the Company reported, under "Item 5 - Other
Events", that the initial purchasers of its previously announced
offering of $150 million 3.0% convertible senior notes due 2023
(the "Notes") had exercised their full option to acquire an
additional $22.5 million aggregate principal amount of Notes.
(vii) On September 9, 2003, the Company reported, under "Item 5 -
Other Events", that a favourable vote by the Medicare Coverage
Advisory Committee regarding questions relevant to the decision
to be made by the U.S. Centers for Medicare and Medicaid Services
(CMS) on whether to expand the current reimbursement of Visudyne
(R) therapy to include patients with the occult choroidal
neovascularization (CNV) due to age-related macular degeneration
(AMD).
(viii) On September 18, 2003 the Company reported, under "Item 5 -
Other Events", that the U.S. Food and Drug Administration granted
fast track review status to Visudyne therapy for both the occult
with no classic and the minimally classic subfoveal choroidal
neovascularization due to age-related macular degeneration
patient populations.
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: November 13, 2003 By: /s/ Paul J. Hastings
----------------- -------------------------------------
Paul J. Hastings
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2003 By: /s/ Michael J. Doty
----------------- -------------------------------------
Michael J. Doty
Senior Vice-President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
31
EXHIBIT INDEX
-------------
Exhibit
Number Description
- ------- -----------
31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002
32