Back to GetFilings.com
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-17082
QLT INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BRITISH COLUMBIA, CANADA N/A
- ------------------------------------------------------------- ---------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
887 GREAT NORTHERN WAY, VANCOUVER, B.C., CANADA V5T 4T5
- --------------------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (604) 707-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of May 6, 2004 the registrant had 69,569,121 outstanding Common Shares and
7,021,774 outstanding Stock Options.
QLT INC.
QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 2004
TABLE OF CONTENTS
ITEM PART I - FINANCIAL INFORMATION PAGE
- ---- ----
1. FINANCIAL STATEMENTS.............................................................................. 1
Consolidated Balance Sheets as of
March 31, 2004 and December 31, 2003............................................................ 1
Consolidated Statements of Income for the three months ended
March 31, 2004 and March 31, 2003............................................................... 2
Consolidated Statements of Cash Flows for the three months ended
March 31, 2004 and March 31, 2003............................................................... 3
Consolidated Statement of Changes in Shareholders' Equity and
Comprehensive Income for the three months ended March 31, 2004.................................. 4
Notes to the Consolidated Financial Statements.................................................. 5
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 15
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................ 22
4. CONTROLS AND PROCEDURES........................................................................... 22
PART II - OTHER INFORMATION
1. LEGAL PROCEEDINGS................................................................................. 23
2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES.................. 25
3. DEFAULTS UPON SENIOR SECURITIES................................................................... 25
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................... 25
5. OTHER INFORMATION................................................................................. 25
6. EXHIBITS AND REPORTS ON FORM 8-K.................................................................. 25
- --------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
QLT INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands of United States dollars) MARCH 31, 2004 December 31, 2003
- --------------------------------------- -------------- -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 269,498 $ 262,408
Short-term investment securities 239,669 233,022
Accounts receivable (Note 5) 39,288 35,395
Inventories (Note 6) 28,209 26,808
Deferred income tax assets 17,126 11,801
Other current assets (Note 7) 10,392 16,150
----------- -----------
604,182 585,584
PROPERTY AND EQUIPMENT 46,770 43,262
OTHER LONG-TERM ASSETS 5,412 5,876
----------- -----------
$ 656,364 $ 634,722
=========== ===========
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 8,578 $ 8,683
Other accrued liabilities (Note 8) 5,415 13,574
Deferred revenue 4,792 6,594
----------- -----------
18,785 28,851
LONG-TERM DEBT 172,500 172,500
----------- -----------
191,285 201,351
CONTINGENCIES (Note 13)
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 9)
Authorized
500,000,000 common shares without par value
Issued and outstanding
Common shares 407,229 395,627
March 31, 2004 - 69,501,188
December 31, 2003 - 68,892,027
RETAINED EARNINGS (DEFICIT) 15,937 (8,084)
ACCUMULATED OTHER COMPREHENSIVE INCOME 41,913 45,828
----------- -----------
465,079 433,371
----------- -----------
$ 656,364 $ 634,722
=========== ===========
See accompanying notes to the consolidated financial statements.
QLT INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
March 31,
(In thousands of United States dollars ------------------------
except per share information) 2004 2003
- -------------------------------------- -------- --------
REVENUES
Revenue from Visudyne(R) (Note 10) $ 40,519 $ 31,445
Contract research and development (Note 11) 792 1,526
-------- --------
$ 41,311 $ 32,971
-------- --------
COSTS AND EXPENSES
Cost of sales 6,922 5,412
Research and development 9,410 10,875
Selling, general and administrative 4,781 3,033
Depreciation 809 726
-------- --------
21,922 20,046
-------- --------
OPERATING INCOME 19,389 12,925
INVESTMENT AND OTHER INCOME
Net foreign exchange gains 276 2,533
Interest income 2,482 1,599
Interest expense (1,528) --
-------- --------
1,230 4,132
-------- --------
INCOME BEFORE INCOME TAXES 20,619 17,057
PROVISION FOR INCOME TAXES (6,990) (5,518)
-------- --------
INCOME BEFORE EXTRAORDINARY GAIN 13,629 11,539
EXTRAORDINARY GAIN (Note 3) 10,393 --
-------- --------
NET INCOME $ 24,022 $ 11,539
======== ========
BASIC NET INCOME PER COMMON SHARE
Income before extraordinary gain $ 0.20 $ 0.17
Extraordinary gain 0.15 --
-------- --------
Net income $ 0.35 $ 0.17
-------- --------
DILUTED NET INCOME PER COMMON SHARE
Income before extraordinary gain $ 0.19 $ 0.17
Extraordinary gain 0.15 --
-------- --------
Net income $ 0.34 $ 0.17
-------- --------
Weighted average number of common shares outstanding
(in thousands)
Basic 69,276 68,517
Diluted 69,911 68,547
-------- --------
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)
Three months ended
March 31,
--------------------------
(In thousands of United States dollars) 2004 2003
- --------------------------------------- --------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES
Net income $ 24,022 $ 11,539
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 809 726
Amortization of deferred financing expenses 239 --
Unrealized foreign exchange loss 2,088 697
Extraordinary gain (10,393) --
Deferred income taxes 6,990 5,518
Changes in non-cash operating assets and liabilities:
Accounts receivable (3,870) 2,339
Inventories (1,646) 664
Other assets 5,643 (3,951)
Accounts payable (911) (1,368)
Accrued restructuring charge -- (1,719)
Other accrued liabilities (8,893) (3,661)
Deferred revenue (1,728) (510)
--------- ---------
12,350 10,274
--------- ---------
CASH USED IN INVESTING ACTIVITIES
Short-term investment securities (9,220) (20,049)
Purchase of property and equipment (3,169) (1,961)
Purchase of Kinetek Pharmaceuticals Inc., net of cash
acquired (2,316) --
--------- ---------
(14,705) (22,010)
--------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES
Long-term debt (net) (71) --
Issuance of common shares 11,696 1,004
--------- ---------
11,625 1,004
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS (2,180) 8,750
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,090 (1,982)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 262,408 128,138
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 269,498 $ 126,156
========= =========
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid $ 3,019 $ 67
Income taxes paid -- --
See accompanying notes to the consolidated financial statements.
3
QLT INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Accumulated
Common Shares Other Total
------------------------- Comprehensive Accumulated Comprehensive Shareholders'
Shares Amount Income Deficit Income Equity
---------- ---------- ---------- ---------- ---------- ----------
(All amounts except share and per share information are expressed in thousands of United States dollars)
Balance at December 31, 2003 68,892,027 $ 395,627 $ 45,828 $ (8,084) $ -- $ 433,371
Exercise of stock options at
prices ranging from CAD
$12.10 to CAD $31.40 per
share 609,161 11,602 -- -- -- 11,602
OTHER COMPREHENSIVE INCOME:
Cumulative translation
adjustment from
application of U.S. dollar
reporting -- -- (3,816) -- (3,816) (3,816)
Unrealized loss on available
for sale securities -- -- (99) -- (99) (99)
Net income -- -- -- 24,022 24,022 24,022
----------
Comprehensive income -- -- -- -- $ 20,107 --
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT MARCH 31, 2004 69,501,188 $ 407,229 $ 41,913 $ 15,937 -- $ 465,079
========== ========== ========== ========== ========== ==========
See accompanying notes to the consolidated financial statements.
4
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information as at and for the three month periods ended March 31, 2004 and
March 31, 2003 is unaudited.)
QLT Inc. ("the Company") is a global bio-pharmaceutical company dedicated to
the discovery, development and commercialization of innovative therapies to
treat eye diseases, cancer and dermatological conditions. 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 2003 Annual Report on Form 10-K. All amounts herein
are expressed in United States dollars unless otherwise noted.
In the opinion of management, all adjustments (including reclassifications
and normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at March 31, 2004 and for
all periods presented, have been made. Interim results are not necessarily
indicative of results for a full year.
2. PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions have been
eliminated.
3. BUSINESS COMBINATION
On March 31, 2004, the Company acquired all the outstanding shares of
Kinetek Pharmaceuticals, Inc. ("Kinetek"), a privately held
bio-pharmaceutical company based in Vancouver, British Columbia, that
focused on discovery and development of new targets and therapies. The
results of operations of Kinetek are included in the condensed consolidated
statement of operations since the acquisition date, and the related assets
and liabilities were recorded based upon their respective fair values at
the date of acquisition. The Company paid an aggregate cash purchase price
of $2.4 million, which includes acquisition related expenditures of $0.1
million. The extraordinary gain resulting from this acquisition relates to
the estimated fair value of net assets acquired, including the recognition
of certain tax assets, in excess of the total consideration paid by the
Company.
The total consideration paid by the Company for Kinetek, including
acquisition costs, was allocated based on management's preliminary
assessment as to the estimated fair values on the acquisition date. This
preliminary assessment is subject to change upon the final determination of
the fair value of the assets and liabilities assumed.
(In thousands of United States dollars)
Purchase price $2,447
Current assets acquired (including cash of $130) 13,137
Property and equipment acquired 604
Current liabilities assumed (901)
------
Extraordinary gain 10,393
======
5
4. SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the following are the most significant
accounting policies used in preparing these financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses
during the reporting periods presented. Significant estimates are used for,
but not limited to, provisions for non-completion of inventory, assessment
of the net realizable value of long-lived assets, accruals for contract
manufacturing and research and development agreements, allocation of costs
to manufacturing under a standard costing system, allocation of overhead
expenses to research and development, determination of fair value of assets
and liabilities acquired in purchase business combinations, taxes and
contingencies. Actual results may differ from estimates made by management.
Reporting Currency and Foreign Currency Translation
The Company uses the U.S. dollar as its reporting currency while retaining
the Canadian dollar as its functional currency. 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.
Property and Equipment
During the first quarter of 2003, the Company reviewed its intended use of
property and equipment and adopted the straight-line method for all newly
acquired property and equipment beginning in 2003. The Company retains the
declining balance method for all property and equipment acquired prior to
2003.
Property and equipment are recorded at cost and amortized as follows:
Methods Rates Methods Years
------- ----- ------- -----
Buildings Declining balance 4%
Office furnishings, fixtures and other Declining balance 20% or Straight-line 5
Research and commercial manufacturing equipment
and computer operating system Declining balance 20% or Straight-line 5
Computer hardware Declining balance 30% or Straight-line 3
Revenue Recognition
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 10 - Revenue from Visudyne). The Company recognizes revenue from
the sale of Visudyne when persuasive evidence of an arrangement exists,
delivery to Novartis Ophthalmics 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 customers.
Contract research and development revenues consist of non-refundable
research and development funding under collaborative agreements with the
Company's various strategic partners. 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
6
revenues earned in excess of payments received are classified as contract
research and development receivables. (See Note 5 - Accounts Receivable and
Note 11 - 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
As allowed by 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 an entity has the ability
to settle in stock are recorded as equity, whereas awards that the entity
is required to or has a practice of settling in cash are recorded as
liabilities. The Company has adopted the disclosure only provision for
stock options granted to employees and directors, as permitted by SFAS 123.
The following pro forma financial information presents the net income and
net income per common share had the Company recognized stock-based
compensation using a fair value based accounting method:
(In thousands except per share information) Three months ended Three months ended
(Unaudited) March 31, 2004 March 31, 2003
-------------------------------------------------- ------------------ ------------------
Net Income (Loss)
As reported $24,022 $11,539
Less: Additional employee compensation expense
under the fair value method (3,270) (5,250)
------- -------
Pro forma $20,752 $ 6,289
------- -------
Basic net income (loss) per common share
As reported $ 0.35 $ 0.17
Pro forma $ 0.30 $ 0.09
------- -------
Diluted net income (loss) per share
As reported $ 0.34 $ 0.17
Pro forma $ 0.30 $ 0.09
------- -------
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.
7
The weighted average fair value of stock options granted in the three
months ended March 31, 2004 was $9.19 whereas the fair value of stock
options granted in the three months ended March 31, 2003 was $4.05. The
Company used the Black-Scholes option pricing model to estimate the value
of the options at each grant date, under the following weighted average
assumptions:
Three months ended Three months ended
March 31, March 31,
2004 2003
------------------------- -------------------------
Annualized Volatility 56.6% 73.2%
Risk-free Interest Rate 2.9% 4.2%
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 the deferred net tax assets
resulting in an increase or decrease to net income. A valuation allowance
is provided when it is more likely than not that a deferred tax asset may
not be realized. 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 and convertible debt. In
addition, the related interest and amortization of deferred financing fees
on convertible debt (net of tax) are added back to income, since these
would not be paid or incurred if the convertible senior notes were
converted to common shares.
The following table sets forth the computation of basic and diluted net
income per common share:
(In thousands, except per share data) Three months ended Three months ended
(Unaudited) March 31, 2004 March 31, 2003
------------------------------------------- ----------------------- ------------------------
Numerator:
Income before extraordinary gain $ 13,629 $ 11,539
Extraordinary gain 10,393 -
-------- --------
Net Income $ 24,022 $ 11,539
======== ========
Denominator:
Weighted-average common shares outstanding 69,276 68,517
Effect of dilutive securities:
Stock options 635 30
-------- --------
Diluted weighted-average common shares outstanding 69,911 68,547
======== ========
8
Basic net income per common share
Income before extraordinary gain $ 0.20 $ 0.17
Extraordinary gain 0.15 -
------- -------
Net income $ 0.35 $ 0.17
======= =======
Diluted net income per common share
Income before extraordinary gain $ 0.19 $ 0.17
Extraordinary gain 0.15 -
------- -------
Net income $ 0.34 $ 0.17
======= =======
The effect of approximately 9,692,637 shares related to the assumed
conversion of the $ 172.5 million 3% convertible senior notes has been
excluded from the computation of diluted earnings per share for the three
months ended March 31, 2004. In addition, also excluded from the
calculation were 5,513,243 shares (in the three months ended March 31, 2003
- 7,188,720 shares) of common stock from stock options. These potential
shares of common stock and their effects on income were excluded from the
diluted earnings per share calculations because their effects were
anti-dilutive.
Reclassification
Certain comparative figures have been reclassified to conform with the
current period's presentation.
5. ACCOUNTS RECEIVABLE
(In thousands of United States Dollars) March 31, 2004 December 31, 2003
--------------------------------------- -------------- -----------------
(Unaudited)
Visudyne(R) $ 35,916 $ 34,035
Contract research and development 772 1,032
Foreign exchange contracts 752 -
Trade and other 1,848 328
-------- --------
$ 39,288 $35,395
======== =======
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 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.
6. INVENTORIES
(In thousands of United States dollars) March 31, 2004 December 31, 2003
--------------------------------------- -------------- -----------------
(Unaudited)
Raw materials and supplies $ 1,395 $ 2,066
Work-in-process 27,256 24,660
Finished goods 83 82
Provision for non-completion of product inventory (525) -
------- -------
$28,209 $26,808
======= =======
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.
9
The Company has not experienced inventory spoilage to date. 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.
7. OTHER CURRENT ASSETS
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. The 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.
Foreign exchange contracts consist of unrealized gains on foreign currency
derivative financial instruments.
(In thousands of United States dollars) March 31, 2004 December 31, 2003
--------------------------------------- -------------- -----------------
(Unaudited)
Inventory in transit held by Novartis Ophthalmics $ 6,883 $ 10,122
Foreign exchange contracts - 4,447
Prepaid expenses and other 3,509 1,581
--------- ----------
$ 10,392 $ 16,150
========= ==========
8. OTHER ACCRUED LIABILITIES
(In thousands of United States dollars) March 31, 2004 December 31, 2003
- --------------------------------------- -------------- -----------------
(Unaudited)
Royalties $ 2,252 $ 2,470
Compensation 2,152 5,325
Foreign Exchange Contracts 443 3,589
Interest 341 2,132
Other 227 58
---------- -----------
$ 5,415 $ 13,574
========== ==========
10
9. SHARE CAPITAL
On August 11, 2003 the Company announced a share buy-back program. Share
purchases by the Company would be made as a normal course issuer bid. The
Company may purchase for cancellation up to a maximum of 5,000,000 common
shares. All purchases would 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 would be effected during
the period commencing August 13, 2003 and ending August 12, 2004. As of
March 31, 2004, the Company had not purchased any of its common shares
under this program.
Stock option activity with respect to all of the Company's stock option
plans is presented below:
Weighted
Number Exercise Price Range Average
(In Canadian dollars) of Shares Per Share Exercise Price
------------------------------------------- ----------------- ----------------------- -----------------
Outstanding at December 31, 2003 7,236,624 $ 12.10 - $108.60 $ 47.82
From January 1 to March 31, 2004:
Granted 819,450 $ 31.60 - $ 32.85 $ 32.76
Exercised (609,161) $ 12.10 - $ 31.40 $ 26.56
Cancelled (214,615) $ 13.35 - $108.60 $ 47.93
----------------- ----------------------- -----------------
Outstanding at March 31, 2004 7,232,298 $12.10 - $108.60 $ 47.90
================= ======================= =================
Additional information relating to stock options outstanding as of March
31, 2004 is presented below:
(In Canadian dollars) Options Outstanding Options Exercisable
------------------------------------------------------------------ -------------------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Exercise Number of Exercise Contractual Number of Exercise
Price Range Shares Price Life (Years) Shares Price
-------------------- ------------- --------------- --------------- ------------------- -----------------
Under $17.50 854,116 $ 13.46 3.97 238,355 $ 13.48
$17.51 - $25.00 736,893 $ 22.40 3.12 435,262 $ 22.46
$25.01 - $37.50 1,791,783 $ 32.89 3.39 868,352 $ 32.13
$37.51 - $50.00 2,245,486 $ 41.44 1.76 2,091,668 $ 41.69
Over $50.00 1,604,020 $104.33 1.12 1,600,520 $104.38
-------------------- ------------- --------------- --------------- ------------------- -----------------
7,232,298 5,234,157
-------------------- ------------- --------------- --------------- ------------------- -----------------
10. 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 marketing and
distribution of Visudyne.
The Company's revenue from the sales of Visudyne was determined as follows:
Three months ended
March 31,
------------------------
(In thousands of United States dollars) 2004 2003
--------------------------------------- --------- ---------
(Unaudited)
Visudyne(R) sales by Novartis Ophthalmics $ 101,056 $ 82,054
Less: Marketing and distribution costs (29,279) (27,091)
Less: Inventory costs (5,261) (4,407)
Less: Royalties (2,262) (1,859)
--------- ---------
$ 64,254 $ 48,697
========= =========
11
Three months ended
March 31,
------------------------
(In thousands of United States dollars) 2004 2003
--------------------------------------- --------- ---------
(Unaudited)
QLT share of remaining revenue on final sales by
Novartis Ophthalmics (50%) $ 32,127 $ 24,349
Add: Inventory costs reimbursed to QLT 4,555 3,840
Add: Royalties reimbursed to QLT 2,240 1,821
Add: Other costs reimbursed to QLT 1,597 1,436
--------- ---------
Revenue from Visudyne(R) as reported by QLT $ 40,519 $ 31,445
========= =========
For the three months ended March 31, 2004, approximately 45% of total
Visudyne sales by Novartis Ophthalmics were in the United States with
Europe and other markets responsible for the remaining 55%. For the same
period in 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%.
11. CONTRACT RESEARCH AND DEVELOPMENT
The Company received non-refundable research and development funding from
Novartis Ophthalmics and other strategic partners which was recorded as
contract research and development revenue. Details of the Company's
contract research and development revenue are as follows:
Three months ended
March 31,
-----------------
(In thousands of United States dollars) 2004 2003
--------------------------------------- ------ ------
(Unaudited)
Visudyne(R) ocular programs $ 792 $ 453
Visudyne(R) dermatology program -- 527
Others -- 546
------ ------
Contract research & development revenue $ 792 $1,526
====== ======
12. SEGMENTED INFORMATION
Details of revenues and property and equipment by geographic segments are
as follows:
Three months ended
March 31,
Revenues(1) ----------------------
(In thousands) 2004 2003
-------------- ------- -------
(Unaudited)
United States $21,803 $19,084
Europe 15,761 10,949
Canada 2,120 1,731
Other 1,627 1,207
------- -------
$41,311 $32,971
======= =======
Property and equipment March 31, December 31,
(In thousands) 2004 2003
-------------- ------- -------
(Unaudited)
Canada $46,131 $42,687
United States 639 575
------- -------
$46,770 $43,262
======= =======
(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.
12
13. CONTINGENCIES
(a) PATENT 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.
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. (now Novartis
Ophthalmics, a division of Novartis Pharma AG) in the United States
District Court for the District of Massachusetts 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
13
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 claim 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 late 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 estimable 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) SECURITIES CLASS ACTION
In January and February of 2001 seven proposed securities class actions
were filed in the United States District Court for the Southern District
of New York on behalf of purchasers of the Company's common shares between
August 1, 2000 and December 14, 2000. On May 3, 2001, the court ordered
consolidation of the seven actions.
The complaints name as defendants: the Company; Julia Levy, former
President, Chief Executive Officer and a current Director of the Company;
and Kenneth Galbraith, the Company's former Executive Vice President,
Chief Financial Officer and Corporate Secretary. The plaintiffs allege
that the defendants violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934.
The plaintiffs allege that on December 14, 2000 the Company announced that
it expected to miss its Visudyne sales estimates for the fourth-quarter
2000, and that in response, the Company's common share price dropped
approximately 31%. The plaintiffs claim that the Company's December 14,
2000 statements contradicted prior information issued by the defendants
concerning the demand for Visudyne and the Company's prospects. The
plaintiffs allege that the defendants overstated the demand for Visudyne,
did not properly disclose reimbursement issues relating to Visudyne and
that the defendants had no basis in the months preceding the December
announcement for their projections of fourth-quarter sales. The plaintiffs
further allege that the intent of the individual defendants to mislead
investors can be inferred from their sale of a substantial amount of the
Company's common shares during the months of August and September 2000.
The plaintiffs sought injunctive relief, fees and expenses and
compensatory damages in an unspecified amount.
On March 31, 2004 the United States District Court of the Southern
District of New York issued an Opinion and Order dismissing the class
action complaint with prejudice. The court also found that the plaintiffs
failed to state a valid claim for securities fraud. On April 14, 2004, the
plaintiffs filed a motion with the same court for reconsideration of the
Opinion and Order dismissing the class action complaint.
The Company believes that the plaintiffs' claims are without merit and
intends to continue to vigorously defend against such claims, the
plaintiffs' motion for reconsideration and any other avenues of appeal
which the plaintiffs may attempt. However, although the complaint was
dismissed with prejudice on March 31, 2004, since the plaintiffs have
filed a motion for reconsideration the outcome of this litigation is not
presently determinable or estimable and there can be no assurance that the
matters will continue to 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.
14
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 2003 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 our
actual results to differ materially from any future results, performance or
achievements expressed or implied by such statements. Forward-looking statements
include, but are not limited to, those with respect to: anticipated levels of
sales of Visudyne(R), including patient and physician demand for Visudyne
therapy, anticipated future operating results, anticipated timing for and
receipt of further reimbursement approvals for Visudyne therapy, 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, the
anticipated timing and receipt of regulatory approvals for expanded uses for
Visudyne and for QLT's other products, and statements regarding the intentions
of QLT to expand its pipeline through strategic product or technology
acquisitions. These statements are predictions only and actual events or 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, a division of Novartis
Pharma AG, to commercialize and market Visudyne, the outcome of pending patent
and securities litigation against QLT, QLT's ability to maintain and expand its
intellectual property position, the timing and success of planned or existing
clinical trials for Visudyne and QLT's other products, the outcome of QLT's
applications for regulatory approvals for expanded uses for Visudyne, QLT's need
to fund its operating activities, potential acquisitions or investments in
products or technologies and the successful development or acquisition of
complementary or supplementary products or product candidates, or technologies,
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 global bio-pharmaceutical company dedicated to the discovery,
development and commercialization of innovative therapies to treat eye diseases,
cancer and dermatological conditions. 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 the wet form of 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 our alliance with Novartis
Ophthalmics and together we are currently investigating the use of Visudyne in
additional ophthalmologic indications to expand the existing label. 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
(male pattern baldness).
In addition to the Company's own 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 nature and form of any future in-licensing or
acquisition may have a material impact on the financial position, share capital
and results of operations of the Company.
15
The Company operates as a single reportable segment. The Company's profitability
depends upon the commercial success of Visudyne in major markets world-wide and
the achievement of product development objectives. Key performance indicators as
viewed by the Company's management include Visudyne sales figures, the Company's
percentage profit share of Visudyne sales by Novartis Ophthalmics, net income
per common share, achievement of product development milestones, and the
obtaining of marketing approvals and reimbursement approvals in additional
jurisdictions. These performance indicators are discussed in the "Results of
Operations" section below. As of March 31, 2004, the Company had retained
earnings of $15.9 million and total shareholders' equity of $465.1 million.
RECENT DEVELOPMENTS
During the first quarter of 2004, certain conditions were met which allow the
Company's convertible senior notes to be convertible to common shares such that
note holders may convert such notes during the second quarter of 2004 if they so
elect. The conditions which cause the notes to become convertible must be met in
subsequent quarters for the notes to remain convertible.
On April 23, 2004, Visudyne reimbursement was initiated in Japan. Visudyne was
previously approved by the Japanese Ministry of Health, Labor and Welfare in
October 2003 for the "wet" form of AMD with all types of subfoveal choroidal
neovascularization.
On April 1, 2004, the Centers for Medicare and Medicaid Services ("CMS")
implemented its decision to expand the national coverage policy for Visudyne
therapy to include reimbursement for patients with occult only subfoveal
choroidal neovascularization ("CNV") and minimally classic CNV secondary to AMD,
with lesion sizes of up to 4 disc areas and which have shown evidence of
progression. CMS had announced its decision to expand coverage during January of
2004, after determining that the evidence presented to the Medicare Coverage
Advisory Committee in September of 2003 supported reimbursement of Visudyne
therapy for such patients.
On March 31, 2004, the Company acquired Kinetek Pharmaceuticals, Inc., a
Vancouver-based privately held pharmaceutical company, for approximately $2.4
million in cash. Kinetek has a unique proprietary position on Integrin-linked
kinase ("ILK"). Inhibition of the kinase activity of ILK has the potential of a
broad range of clinical applications including cancer, inflammation, kidney, and
eye diseases. In cancer, small molecule ILK inhibitors discovered by Kinetek
have recently shown to block tumor angiogenesis and cause tumor shrinkage in
animal models. Inhibition of angiogenesis by targeting ILK through a small
molecule may represent a potential advantage over current anti-angiogenic drugs
in development. Since June of 2001, QLT and Kinetek have collaborated on a
research and early development program to develop signal transduction inhibitors
for the treatment of eye, immune system and kidney diseases. The Company's
primary interest in this acquisition is to gain the rights to develop ILK and
ILK targeted molecules in the area of oncology, an area of research that the
Company did not have rights to in its previous collaborative agreement with
Kinetek. This acquisition allows the Company to gain access not only to the ILK
target, but the proprietary ILK inhibitor small molecules in development. The
net result of this acquisition transaction, which included the recognition of a
tax asset valued at $12.5 million, was an extraordinary gain of $10.4 million as
the estimated fair value of net assets acquired exceeded the total consideration
paid.
On March 16, 2004, the Centers for Medicare and Medicaid Services raised the
Medicare allowable reimbursement rate for Visudyne. Effective April 1, 2004, the
rate increased from approximately $1,304 to $1,404, as part of the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003.
On February 1st, 2004 the Company discontinued the Phase III multiple basal cell
carcinoma ("MBCC") study that had been enrolling patients since October 2002.
The Company had previously announced that enrollment in this study had been
slow. The Company decided to halt the MBCC trial study due to the length of time
which would have been required to complete the study and the relatively small
market potential for this indication.
On January 19th, 2004 the Company's alliance partner, Novartis Ophthalmics,
announced a temporary price discount on Visudyne to physician customers, in
response to a reduction in the Medicare reimbursement rate of Visudyne resulting
from implementation of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003. The Company and Novartis Ophthalmics have made a
request to the Centers for Medicare and Medicaid Services ("CMS") for an
exception from the reimbursement reduction for Visudyne, in respect of which a
response is expected by April 1, 2004.
16
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, determination of fair value of assets and
liabilities acquired in purchase business combinations, 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 those which follow:
REPORTING CURRENCY AND FOREIGN CURRENCY TRANSLATION
The Company uses the U.S. dollar as its reporting currency while retaining its
functional currency in 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 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). Fluctuations in the exchange rate between the
Canadian and U.S dollars can affect the reported value of Canadian dollar
denominated assets and liabilities on the balance sheet. The movement of the
Canadian dollar in relation to the U.S. dollar between March 31, 2004 and
December 31, 2003 was a 1.0% decline. The impact on the Company's Canadian
dollar denominated cash and short-term investments' reported value was
approximately $3.1 million lower.
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 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
Ophthalmics has occurred, the end selling price of Visudyne is fixed or
determinable, and collectibility is reasonably assured. The Company is able to
determine the final pricing of Visudyne only upon sell through by Novartis
Ophthalmics to the end customers. The Company's revenue from Visudyne is
impacted by the cost of producing Visudyne, the selling price of Visudyne to end
customers, Visudyne related costs incurred by Novartis Ophthalmics, and
reimbursable costs incurred by the Company.
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. Variances from standard can occur due
to changes in actual pricing and production volumes. While the Company believes
its standards are reliable, actual production costs and volume changes may
impact inventory, cost of sales, and the absorption of production overheads. The
Company records a provision for the non-completion of product inventory based on
its history of batch completion to provide for the potential failure of
inventory batches to pass quality inspection. The provision is calculated at
each stage of the manufacturing process. The Company estimates its
non-completion rate based on past production and adjusts its provision quarterly
based on actual production volume. A single batch failure may
17
utilize a significant portion of the provision as one completed batch currently
costs between $0.8 million and $1.7 million, depending on the stage of
production.
STOCK-BASED COMPENSATION
As allowed by the provisions of SFAS No. 123 "Accounting for Stock-based
Compensation" ("SFAS 123"), the Company applies Accounting Principles Board
("APB") Opinion No. 25 and related interpretations in the accounting for
employee stock option plans. SFAS 123 requires that all stock-based awards made
to non-employees be measured and recognized using a fair value based method. The
standard encourages the use of a fair value based method for all awards granted
to employees, but only requires the use of a fair value based method for direct
awards of stock, stock appreciation rights, and awards that call for settlement
in cash or other assets. Estimates of fair value are determined using the
Black-Scholes model. The use of this model requires certain assumptions
regarding the volatility, term, and risk free interest rate experienced by the
holder. Awards that a company has the ability to settle in stock are recorded as
equity, whereas awards that the entity is required to or has a practice of
settling in cash are recorded as liabilities. The Company has adopted the
disclosure only provision for stock options granted to employees and directors,
consistent with SFAS 123. Had the Company adopted a fair value based method for
stock-based compensation, the impact on the Company's net income and net income
per common share is as described in Note 4 in "Notes to the Consolidated
Financial Statements".
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 the provision for (recovery
of) income taxes. The realization of the Company's deferred tax assets is
primarily dependent on generating sufficient taxable income prior to expiration
of any loss carry forward balance. Based on the Company's current development,
operations and anticipated results (see "Outlook for 2004"), the Company
believes it is more likely than not to realize its deferred tax assets. A
valuation allowance is provided when it is more likely than not that a deferred
tax asset may not be realized.
RESULTS OF OPERATIONS
For the three months ended March 31, 2004, the Company recorded net income of
$24.0 million, or $0.34 diluted net income per common share. These results
compare to net income of $11.5 million, or $0.17 per common share for the three
months ended March 31, 2003. The increase in net income was due to the
extraordinary gain resulting from the Kinetek acquisition and strong Visudyne
sales performance.
REVENUES
REVENUE FROM VISUDYNE(R)
The Company's revenue from the sales of Visudyne was determined as follows:
18
Three months ended
March 31,
------------------------
(In thousands of United States dollars) 2004 2003
- ------------------------------------------------- --------- ---------
(Unaudited)
Visudyne(R) sales by Novartis Ophthalmics $ 101,056 $ 82,054
Less: Marketing and distribution costs (29,279) (27,091)
Less: Inventory costs (5,261) (4,407)
Less: Royalties (2,262) (1,859)
--------- ---------
$ 64,254 $ 48,697
========= =========
QLT share of remaining revenue on final sales by
Novartis Ophthalmics (50%) $ 32,127 $ 24,349
Add: Inventory costs reimbursed to QLT 4,555 3,840
Add: Royalties reimbursed to QLT 2,240 1,821
Add: Other costs reimbursed to QLT 1,597 1,436
--------- ---------
Revenue from Visudyne(R) as reported by QLT $ 40,519 $ 31,445
========= =========
For the three months ended March 31, 2004, approximately 45% of total Visudyne
sales by Novartis Ophthalmics were in the United States, compared to
approximately 51% in the three months ended March 31, 2003.
For the three months ended March 31, 2004, revenue from Visudyne increased by
29% over the three months ended March 31, 2003. This increase was primarily due
to a 23% increase in Visudyne sales, which resulted from higher market
penetration in markets outside the U.S. (10%), favorable exchange rates (9%) and
initial stocking by specialty distributors (3%). Sales outside the U.S. are
primarily denominated in Euros, and the strengthening of the Euro relative to
the Company's U.S. dollar reporting currency contributed to approximately 9% of
the 23% growth in sales. During the first quarter of 2004, Novartis Ophthalmics
began utilizing specialty distributors in the U.S. to complement its sales and
marketing effort.
CONTRACT RESEARCH AND DEVELOPMENT REVENUE
The Company received non-refundable research and development funding from
Novartis Ophthalmics and other strategic partners which was recorded as contract
research and development revenue. For the three months ended March 31, 2004,
contract research and development revenue totaled $0.8 million, a decrease of
48% as compared to the same period in 2003. The decrease is primarily due to the
cessation of the MBCC program which was previously funded by Novartis
Ophthalmics, and the elimination of reimbursements related to the tariquidar
program.
COSTS AND EXPENSES
COST OF SALES
For the three months ended March 31, 2004, cost of sales increased 28% to $6.9
million compared to $5.4 million for the three months ended March 31, 2003. The
increase is due to the increase in Visudyne sale and foreign exchange effects.
RESEARCH AND DEVELOPMENT COSTS
Research and development ("R&D") expenditures decreased 13% to $9.4 million for
the three months ended March 31, 2004, compared to $10.9 million for the three
months ended March 31, 2003. The decrease was primarily due to the halting of
the 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
March 31, 2004, SG&A expenses increased 58% to $4.8 million compared to $3.0
million for the three months ended March 31, 2003. The increase was primarily
due to an unfavorable foreign exchange impact, severance payments, and increased
compensation expenses.
19
DEPRECIATION EXPENSE
Depreciation expense relates to the depreciation of property and equipment. For
the three months ended March 31, 2004, depreciation expense of $0.8 million was
flat in comparison to the three months ended March 31, 2003 after adjusting for
foreign exchange impact.
INVESTMENT AND OTHER INCOME
NET FOREIGN EXCHANGE GAINS
Net foreign exchange gains comprise gains from the impact of foreign exchange
fluctuation on the Company's cash and short-term investments, derivative
financial instruments, foreign currency receivables, foreign currency payables
and U.S. dollar denominated long term debt. For the three months ended March 31,
2004, the Company recorded net foreign exchange gains of $0.3 million versus net
foreign exchange gains of $2.5 million in the same period of 2003. With the
issuance of $172.5 million of U.S. dollar denominated convertible senior notes
in August 2003, the Company has been targeting to hold an equivalent amount of
U.S. cash to offset the impact of fluctuations in foreign exchange rates. More
stable foreign exchange rates during the first quarter of 2004 resulted in less
gains on foreign exchange contracts as compared to the first quarter of 2003.
(See Liquidity and Capital Resources - Interest and Foreign Exchange Rates)
Details of the Company's net foreign exchange gains (losses) are as follows:
For the three months ended
March 31,
--------------------------
(In thousands of United States dollars) 2004 2003
- ---------------------------------------------------- ---------- ------------
Cash and cash equivalents and short-term investments $ 1,845 $ (636)
U.S. dollar long term debt (1,637) --
Foreign exchange contracts 542 4,122
Foreign currency receivables and payables (474) (953)
------- -------
Net foreign exchange gains (losses) $ 276 $ 2,533
======= =======
INTEREST INCOME
For the three months ended March 31, 2004 interest income increased 55% to $2.5
million compared to $1.6 million for the same period in 2003. This increase was
a result of higher cash reserves from the convertible senior notes and internal
cash generation. The Company's treasury policy is focused on minimizing risk of
loss of principal.
INTEREST EXPENSE
Interest expense of $1.5 million for the three months ended March 31, 2004
comprised the interest payment and accrual on the 3% convertible senior notes
issued on August 15, 2003 and amortization of deferred financing expenses
related to this placement.
EXTRAORDINARY GAIN
On March 31, 2004, the Company acquired all the outstanding shares of Kinetek
Pharmaceuticals, Inc. ("Kinetek"), a privately held bio-pharmaceutical company
based in Vancouver, British Columbia, which focused on discovery and development
of new therapies. The extraordinary gain of $10.4 million resulting from this
acquisition relates to the estimated fair value of net assets acquired,
including the recognition of certain tax assets, in excess of the total
consideration paid by the Company. (See Note 3).
OUTLOOK FOR 2004
Based on recent events and current trends in Visudyne sales, the Company
announced on April 27, 2004 that it has updated its forecast range of 2004
Visudyne sales from $420-$455 million to a new range of $430-$455 million, which
represents projected growth of 20% to 27% over 2003. The Company has also
updated its forecast for 2004 diluted earnings per common share, including the
potential dilutive effect of the convertible senior notes, to range from $0.81
20
to $0.91. Excluding the potential dilutive effect of the convertible senior
notes, the 2004 diluted earnings per common share is forecasted to range from
$0.86 to $0.96. This update in diluted earnings per common share forecast
reflects the new sales forecast and the extraordinary gain recognized on the
acquisition of Kinetek.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed operations, product development and capital
expenditures primarily through the Company's proceeds from the commercialization
of Visudyne, public and private sales of equity securities, licensing and
collaborative funding arrangements with strategic partners, and interest income.
At March 31, 2004, the Company had $509.2 million of available cash resources,
comprising cash, cash equivalents and short-term investment securities, all of
which were invested in liquid, investment-grade securities.
For the three months ended March 31, 2004, the Company generated $12.4 million
of cash from operations, $11.7 million from stock option exercises, and used
$3.2 million in purchases of property and equipment and $2.3 million for the
purchase of Kinetek Pharmaceuticals Inc. This compared with $10.3 million
generated from operations, $1.0 million from stock option exercises, and $2.0
million used in purchases of property and equipment in the same period in 2003.
Cash flow from operations for the three months ended March 31, 2004 increased
from the same period in 2003 as a result of increased net income ($12.5
million), the utilization of previously benefited tax losses ($1.5 million), a
reduction in other assets ($9.6 million) due to lower levels of inventory held
by Novartis Ophthalmics and realized gains from foreign exchange contracts, and
restructuring related payment of severance and benefits in the prior year ($1.7
million). These increases were offset by the recognition of tax losses for
future utilization ($10.4 million extraordinary gain), an increase in accounts
receivable as a result of Visudyne sales growth ($6.2 million), an increase in
inventory level during the period as compared to a decrease in inventory in the
same period in 2003 ($2.3 million), a lower level of accrued liabilities ($5.2
million) as compared to 2003 due to payout of interest on the convertible senior
notes, and foreign exchange contracts, and by a reduction in deferred revenue
($1.2 million) on lower levels of inventory held by Novartis Ophthalmics for
sale. In aggregate, cash, cash equivalents and short-term investment securities
increased by $13.7 million during the three months ended March 31, 2004.
INTEREST AND FOREIGN EXCHANGE RATES
The Company is exposed to market risk related to changes in interest and foreign
currency exchange rates, each of which could adversely affect the value of the
Company's current assets and liabilities. At March 31, 2004, the Company had an
investment portfolio consisting of fixed interest rate securities with an
average remaining maturity of approximately 29 days. If market interest rates
were to increase immediately and uniformly by 10% of levels at March 31, 2004,
the fair value of the portfolio would decline by an immaterial amount.
At March 31, 2004 the Company had $509.2 million in cash and short-term
investments (approximately $170.8 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 $172.5 million
U.S. dollar denominated long-term 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 income and cash
flows. The net unrealized loss in respect of such foreign currency contracts, as
at March 31, 2004, was approximately $0.4 million and was included in the
Company's results of operations.
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.
CONTRACTUAL OBLIGATIONS
The Company's material contractual obligations as of March 31, 2004 comprised
the Company's long term debt, Visudyne supply agreements with contract
manufacturers, clinical and development agreements, and operating lease
commitments for office space and office equipment. Details of these contractual
obligations are described in the Company's 2003 Annual Report on Form 10-K under
the section "Liquidity and Capital Resources - Contractual Obligations".
21
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, including the in-licensing or acquisition of products and
technologies for the reasonably foreseeable future. The nature and form of any
future in-licensing or acquisition may have a material impact on the financial
position and results of operations of the Company. 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.
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 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms. The Company's principal executive and financial officers have
evaluated the Company's disclosure controls and procedures as of the end of the
period covered by this report.
No change was made to our internal controls over financial reporting in
connection with this evaluation that has materially affected, or is reasonably
likely to materially affect, such internal controls over financial reporting.
22
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
Certain of the Company's legal proceedings are discussed below and in Note 13 to
the unaudited consolidated financial statements, "Contingencies". While the
Company believes these proceedings are without merit and intends to vigorously
defend against these claims, it is impossible to predict accurately or determine
the eventual outcome of these proceedings.
(a) PATENT 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.
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. (now Novartis Ophthalmics, a
division of Novartis Pharma AG) in the United States District Court for the
District of Massachusetts alleging infringement of the '303 Patent (Civil Action
No. 01-10747-EFH). The suit seeks
23
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 claim 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 late 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 estimable 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) SECURITIES CLASS ACTION
In January and February of 2001 seven proposed securities class actions were
filed in the United States District Court for the Southern District of New York
on behalf of purchasers of the Company's common shares between August 1, 2000
and December 14, 2000. On May 3, 2001, the court ordered consolidation of the
seven actions.
The complaints name as defendants: the Company; Julia Levy, former President,
Chief Executive Officer and a current Director of the Company; and Kenneth
Galbraith, the Company's former Executive Vice President, Chief Financial
Officer and Corporate Secretary. The plaintiffs allege that the defendants
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.
The plaintiffs allege that on December 14, 2000 the Company announced that it
expected to miss its Visudyne sales estimates for the fourth-quarter 2000, and
that in response, the Company's common share price dropped approximately 31%.
The plaintiffs claim that the Company's December 14, 2000 statements
contradicted prior information issued by the defendants concerning the demand
for Visudyne and the Company's prospects. The plaintiffs allege that the
defendants overstated the demand for Visudyne, did not properly disclose
reimbursement issues relating to Visudyne and that the defendants had no basis
in the months preceding the December announcement for their projections of
fourth-quarter sales. The plaintiffs further allege that the intent of the
individual defendants to mislead investors can be inferred from their sale of a
substantial amount of the Company's common shares during the months of August
and September 2000. The plaintiffs sought injunctive relief, fees and expenses
and compensatory damages in an unspecified amount.
On March 31, 2004 the United States District Court of the Southern District of
New York issued an Opinion and Order dismissing the class action complaint with
prejudice. The court also found that the plaintiffs failed to state a valid
claim for securities fraud. On April 14, 2004, the plaintiffs filed a motion
with the same court for reconsideration of the Opinion and Order dismissing the
class action complaint.
The Company believes that the plaintiffs' claims are without merit and intends
to continue to vigorously defend against such claims, the plaintiffs' motion for
reconsideration and any other avenues of appeal which the plaintiffs may
attempt. However, although the complaint was dismissed with prejudice on March
31, 2004, since the plaintiffs have filed a motion for reconsideration the
outcome of this litigation is not presently determinable or estimable and there
can be no assurance
24
that the matters will continue to 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, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002: Paul J. Hastings, President and Chief Executive
Officer;
31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002: Michael J. Doty, Senior Vice President and Chief
Financial Officer;
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002: Paul J. Hastings, President and Chief Executive
Officer;
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002: Michael J. Doty, Senior Vice President and Chief
Financial Officer;
(b) Reports on Form 8-K
(i) On January 19, 2004, the Company reported, under "Item 5 -
Other Events", that its alliance partner, Novartis
Ophthalmics, would offer a temporary discount on Visudyne to
physician customers, in response to a reduction in the
Medicare reimbursement rate of Visudyne resulting from
implementation of the Medicare Prescription Drug Improvement
and Modernization Act of 2003. The Company also reported that
they and Novartis had made a request to the Centers for
Medicare and Medicaid Services requesting an exception from
the reimbursement reduction for Visudyne.
(ii) On January 22, 2004, the Company reported, under "Item 5 -
Other Events", that its alliance partner, Novartis, announced
global Visudyne sales of approximately US$95.9 million for the
quarter and
25
US$357 million for the year ended December 31, 2003. This
represented an increase of 24% over sales in the fourth
quarter of 2002 and 24% over annual sales in 2002.
(iii) On January 29, 2004 the Company reported under "Item 5 - Other
Events", that the Centers for Medicare & Medicaid Services
determined that evidence supported reimbursement of Visudyne
therapy for patients with age-related macular degeneration
with occult and minimally classic lesions that are four disc
areas or less in size and which have shown evidence of
progression.
(iv) On February 11, 2004, 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 and year ended December 31, 2003.
(v) On March 16, 2004, the Company reported under "Item 5 - Other
Events", that the Centers for Medicare and Medicaid Services
raised the Medicare allowable reimbursement rate for Visudyne.
Effective April 1, 2004, the rate moved from approximately
$1,304 to $1,404, as part of the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003.
(vi) On March 29, 2004, the Company reported under "Item 5 - Other
Events" that it would be acquiring Kinetek Pharmaceuticals,
Inc., a Vancouver-based privately-held pharmaceutical company,
for approximately USD $2.7 million.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QLT INC.
-----------------------------------------------------
(Registrant)
Date: May 7, 2004 By: /s/ Paul J. Hastings
-----------------------------------------------------
Paul J. Hastings
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 7, 2004 By: /s/ Michael J. Doty
-----------------------------------------------------
Michael J. Doty
Senior Vice-President and Chief Financial Officer
(Principal Financial and Accounting Officer)
26
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: Paul J. Hastings, President and Chief Executive Officer;
31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002: Michael J. Doty, Senior Vice President and Chief Financial
Officer;
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002: Paul J. Hastings, President and Chief Executive Officer;
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002: Michael J. Doty, Senior Vice President and Chief Financial
Officer;
27