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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-17082
QLT INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BRITISH COLUMBIA, CANADA N/A
-------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 [ ] No [X]
As of November 5, 2002 the registrant had 68,298,119 outstanding Common Shares.
QLT INC.
QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 2002
TABLE OF CONTENTS
ITEM PART I - FINANCIAL INFORMATION PAGE
- ---- ----
1. FINANCIAL STATEMENTS............................................................................. 1
Consolidated Balance Sheets as of
September 30, 2002 and December 31, 2001....................................................... 1
Consolidated Statements of Operations and Deficit for the three months and nine months ended
September 30, 2002 and September 30, 2001...................................................... 2
Consolidated Statements of Cash Flows for the three months and nine months ended
September 30, 2002 and September 30, 2001...................................................... 3
Notes to the Consolidated Financial Statements................................................. 5
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................................................. 17
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................... 25
4. CONTROLS AND PROCEDURES.......................................................................... 25
PART II - OTHER INFORMATION
1. LEGAL PROCEEDINGS................................................................................ 26
2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................................................ 28
3. DEFAULTS UPON SENIOR SECURITIES.................................................................. 28
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................. 28
5. OTHER INFORMATION................................................................................ 28
6. EXHIBITS AND REPORTS ON FORM 8-K................................................................. 28
- -------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
QLT INC.
CONSOLIDATED BALANCE SHEETS
=============================================================================================================
(In thousands of Canadian dollars) SEPTEMBER 30, 2002 December 31, 2001
- -------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 152,931 $ 112,073
Short-term investment securities 151,535 148,307
Accounts receivable (Note 4) 40,519 41,390
Inventories (Note 5) 57,713 61,509
Current portion of future income tax assets 21,011 30,111
Other 1,728 4,020
- -------------------------------------------------------------------------------------------------------------
425,437 397,410
LONG-TERM INVESTMENTS AND ADVANCES 16,755 14,696
PROPERTY AND EQUIPMENT 55,847 57,662
INTANGIBLE ASSETS 13,623 15,948
FUTURE INCOME TAX ASSETS 28,314 30,595
- -------------------------------------------------------------------------------------------------------------
$ 539,976 $ 516,311
=============================================================================================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 8,886 $ 16,265
Accrued liabilities (Note 7) 7,708 11,967
Deferred revenue 21,425 11,977
- -------------------------------------------------------------------------------------------------------------
38,019 40,209
SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 8)
Authorized
5,000,000 first preference shares without par value,
issuable in series
500,000,000 common shares without par value
Issued and outstanding
Common shares 535,031 530,404
September 30, 2002 - 68,274,569
December 31, 2001 - 67,991,179
ACCUMULATED DEFICIT (33,074) (54,302)
- -------------------------------------------------------------------------------------------------------------
501,957 476,102
- -------------------------------------------------------------------------------------------------------------
$ 539,976 $ 516,311
=============================================================================================================
CONTINGENCIES (Note 13)
See accompanying notes to the consolidated financial statements.
QLT INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
=========================================================================================================================
Three months ended Nine months ended
September 30, September 30,
-------------------------------------------------------
(In thousands of Canadian dollars, except per share
information) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
REVENUES
Revenue from Visudyne(R)(Note 9) $ 41,360 $ 30,770 $113,435 $ 82,632
Contract research and development (Note 10) 3,492 432 8,165 2,770
- -------------------------------------------------------------------------------------------------------------------------
$ 44,852 $ 31,202 $121,600 $ 85,402
- -------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Manufacturing 7,366 6,313 20,858 17,211
Research and development 15,795 16,047 44,221 37,153
Selling, general and administrative 5,430 1,565 19,552 10,144
Depreciation and amortization 2,024 1,641 5,939 3,984
- -------------------------------------------------------------------------------------------------------------------------
30,615 25,566 90,570 68,492
- -------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 14,237 5,636 31,030 16,910
NET INVESTMENT AND OTHER INCOME
Net foreign exchange (losses) gains (1,540) 3,351 (864) 4,937
Net interest income 2,190 2,659 5,259 8,954
Other (580) 2 (267) 102
- -------------------------------------------------------------------------------------------------------------------------
70 6,012 4,128 13,993
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 14,307 11,648 35,158 30,903
PROVISION FOR INCOME TAXES 5,561 - 13,930 -
=========================================================================================================================
Net Income $ 8,746 $ 11,648 $ 21,228 $ 30,903
=========================================================================================================================
Deficit, beginning of period (41,820) (157,094) (54,302) (176,349)
- -------------------------------------------------------------------------------------------------------------------------
Deficit, end of period $(33,074) $(145,446) $(33,074) $(145,446)
- -------------------------------------------------------------------------------------------------------------------------
Net Income per common share
Basic $ 0.13 $ 0.17 $ 0.31 $ 0.46
Diluted $ 0.13 $ 0.17 $ 0.31 $ 0.45
- -------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding
(in thousands)
Basic 68,257 67,866 68,188 67,793
Diluted 68,406 68,543 68,507 68,486
- -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
2
QLT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
========================================================================================================================
Three months ended Nine months ended
September 30, September 30,
(In thousands of Canadian dollars) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
(Unaudited)
CASH PROVIDED BY OPERATING ACTIVITIES
Net income for the period $ 8,746 $ 11,648 $ 21,228 $ 30,903
Add (deduct) items not involving a current cash flow
Depreciation and amortization 2,024 1,641 5,939 3,984
Unrealized foreign exchange loss (gain) 877 (5,227) (518) (2,290)
Provision for future income taxes 5,561 - 13,930 -
Benefit of investment tax credits included
in operating expenses (921) - (2,551) -
Changes in non-cash operating assets and liabilities:
Accounts receivable and other current assets (889) (1,730) 2,422 (7,665)
Inventories 3,139 (3,570) 3,796 (10,611)
Accounts payable (1,318) 507 (7,423) (5,227)
Accrued liabilities 1,687 10,065 (4,271) 9,940
Deferred revenue 577 (1,470) 9,448 9,138
- ------------------------------------------------------------------------------------------------------------------------
19,483 11,864 42,000 28,172
- ------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Short-term investment securities (84,081) (19,436) (3,228) (150,725)
Purchase of property and equipment (715) (4,212) (2,416) (6,357)
Purchase of development and marketing rights from
Xenova Limited - (15,496) - (15,496)
Proceeds from sale of investment in Axcan Pharma Inc. - - - 6,532
Long term investment in Kinetek Pharmaceuticals, Inc. - - - (11,000)
Other long-term investments
- - - (200)
- ------------------------------------------------------------------------------------------------------------------------
(84,796) (39,144) (5,644) (177,246)
- ------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Issuance of common shares on exercise of stock options 580 1,372 4,626 2,791
Decrease in long-term debt - - - (13,645)
- ------------------------------------------------------------------------------------------------------------------------
580 1,372 4,626 (10,854)
- ------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (1,566) 3,033 (124) 903
- ------------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (66,299) (22,875) 40,858 (159,025)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 219,230 102,913 112,073 239,063
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $152,931 $ 80,038 $152,931 $ 80,038
========================================================================================================================
SUPPLEMENTARY CASH FLOW INFORMATION:
INTEREST PAID $ 290 - $ 1,232 $ 685
3
NON-CASH INVESTING ACTIVITY:
On February 1, 2002, the Company received 135,735 common shares of Diomed, Inc
and on August 5, 2002 received 696,059 preferred shares of Diomed Holdings, Inc.
as part of the consideration received by the Company from the sale of its
Optiguide(R) FiberOptics business to Diomed, Inc. on November 8, 2000. Under the
terms of the sale, Diomed elected to settle the amount owing in shares. The
Company recorded this investment at a carrying value of $1.1 million and
recorded a loss of $0.6 million in net investment income on settlement of
accounts receivable of $1.8 million. (Note 4)
See accompanying notes to the consolidated financial statements.
4
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information as at and for the three and nine month periods ended
September 30, 2002 and 2001 is unaudited.)
The Company is a bio-pharmaceutical corporation engaged in the
development and commercialization of proprietary pharmaceutical
products for the treatment of ocular, oncological, immunological and
other diseases. The Company is a pioneer in the field of photodynamic
therapy, a field of medicine that uses photosensitizers
(light-activated drugs) in the treatment of disease, and is now also
developing pharmaceutical products that do not employ photodynamic
therapy.
1. BASIS OF PRESENTATION
These unaudited consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting
principles ("Canadian GAAP") for interim financial statements. These
principles differ in certain respects from United States generally
accepted accounting principles ("U.S. GAAP") for interim financial
statements as described in Note 11. For a detailed explanation of
differences between Canadian and U.S. GAAP, as they relate to the
Company, refer to Note 20 of the Company's audited consolidated
financial statements included as part of the Company's 2001 Annual
Report on Form 10-K. 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 2001
Annual Report on Form 10-K. All amounts herein are expressed in
Canadian dollars unless otherwise noted.
In the opinion of management, all adjustments (including
reclassifications and normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash
flows at September 30, 2002 and for all periods presented, have been
made. Interim results are not necessarily indicative of results for a
full year.
2. PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany
transactions have been eliminated.
Long-term investments in which the Company exercises joint
control are recorded using the proportionate consolidation method
whereby the Company consolidates its proportionate share of the
investee's assets, liabilities, revenues, expenditures and cash flows.
3. SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the following are the most significant
accounting policies used in preparing these financial statements.
REVENUE RECOGNITION
Revenue from Visudyne(R) consists of the Company's 50% share
of pre-tax profits generated from the Company's collaborative
manufacturing, marketing and distribution arrangement with Novartis
Ophthalmics AG ("Novartis Ophthalmics"), revenue from the sale of
bulk manufactured Visudyne product to Novartis Ophthalmics, and
reimbursement from Novartis Ophthalmics of sales costs, third party
royalties, and specified other costs. Under the terms of the
collaborative arrangement with Novartis Ophthalmics, the Company is
responsible for manufacturing and product supply and Novartis
Ophthalmics is responsible for sales, marketing and distribution of
Visudyne. Pre-tax profits are determined by Novartis Ophthalmics and
the Company and are derived by taking net sales of Visudyne to third
parties as recorded by Novartis Ophthalmics less manufacturing,
selling, marketing and distribution costs, and third party royalties.
Revenue from bulk Visudyne sales to Novartis Ophthalmics is not
recognized until the period of the related product sale and delivery
by Novartis Ophthalmics to third parties where collection is
reasonably assured. Proceeds of the QLT-Novartis Ophthalmics Alliance
("Alliance") from Visudyne sales are received initially in trust by
Novartis Ophthalmics for the equal
5
benefit of Novartis Ophthalmics and the Company and are
held until distributed in accordance with the agreement between the
Company and Novartis Ophthalmics.
Contract research and development revenues consist of
non-refundable research and development funding under collaborative
agreements with the Company's various strategic partners, including
(but not limited to) Novartis Ophthalmics. Contract research and
development funding generally compensates the Company for discovery,
preclinical and clinical expenses related to the collaborative
development programs for certain products and product candidates of
the Company, and is recognized as revenue at the time research and
development activities are performed under the terms of the
collaborative agreements. Amounts received under the collaborative
agreements are nonrefundable even if the research and development
efforts performed by the Company do not eventually result in a
commercial product. Contract research and development revenues
earned in excess of payments received are classified as contract
research and development receivables. (Note 4 and Note 10)
MANUFACTURING COSTS
Manufacturing costs, 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 manufacturing costs 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 manufacturing
costs 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
The Company has adopted the recommendations of the new
Canadian Institute of Chartered Accountants ("CICA") Handbook section
3870, Stock-Based Compensation and Other Stock-Based Payments,
effective January 1, 2002. This section establishes standards for
the recognition, measurement and disclosure of stock-based
compensation and other stock-based payments made in exchange for
goods and services. The standard requires that all stock-based awards
made to non-employees be measured and recognized using a fair value
based method. The standard encourages the use of a fair value based
method for all awards granted to employees, but only requires the use
of a fair value based method for direct awards of stock, stock
appreciation rights, and awards that call for settlement in cash or
other assets. Awards that a company has the ability to settle in
stock are recorded as equity, whereas awards that the entity is
required to or has a practice of settling in cash are recorded as
liabilities. The Company has adopted the disclosure only provision
for stock options granted to employees and directors.
In October, 2002, the Accounting Standards Board ("AcSB") of the
CICA announced the activation of a project to require the recognition
of stock-based compensation expenses for all employee stock-based
compensation transactions to replace the current standard requiring
either the accounting for or disclosure of the effect of employee
stock-based compensation expense on earnings. The AcSB expects to
issue its proposals for comment by December 31, 2002. The Company
will evaluate the impact of these proposals on its financial position
and results of operations once they are issued.
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, net of related tax credits, unless they
meet generally accepted accounting criteria for deferral and
amortization. The Company reassesses whether it has met the relevant
criteria for deferral and amortization at each reporting date. To
date, no research and development costs have been deferred.
INCOME TAXES
Income taxes are reported using the asset and liability method,
whereby future tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying
6
amounts of existing assets and liabilities and their
respective tax bases, and operating loss and tax credit carry
forwards using applicable enacted or substantially 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.
NET INCOME PER COMMON SHARE
Net income per common share or basic earnings per share is
computed using the weighted average number of common shares
outstanding during the period. Diluted income per common share is
computed in accordance with the treasury stock method which uses the
weighted average number of common shares outstanding during the
period and also includes the dilutive effect of potentially issuable
common stock from outstanding stock options.
The following table sets forth the computation of basic and diluted net
income (loss) per common share:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
(In thousands, except per share data) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------
Numerator:
Net income 8,746 11,648 21,228 30,903
Denominator:
Weighted-average shares outstanding 68,257 67,866 68,188 67,793
Effect of dilutive securities:
Stock options 149 620 319 750
---------------------------------------------------
Diluted weighted-average common shares
outstanding 68,406 68,486 68,507 68,543
===================================================
Basic net income per common share 0.13 0.17 0.31 0.46
Diluted net income per common share 0.13 0.17 0.31 0.45
Excluded from the calculation of diluted net income per common
share for the three and nine months ended September 30, 2002 were
7,493,175 shares and 7,458,975 shares, respectively, of common stock
from stock options because their effect was anti-dilutive. Excluded
from the calculation of diluted net income per common share for the
three and nine months ended September 30, 2001 were 6,222,523 shares
and 6,113,733 shares, respectively, of common stock from stock
options because their effect was anti-dilutive.
4. ACCOUNTS RECEIVABLE
(In thousands of Canadian dollars) September 30, 2002 December 31, 2001
- ------------------------------------------------------------------------------------------------------------------
(Unaudited)
Visudyne(R) $37,188 $36,704
Contract research and development 3,063 2,131
Diomed, Inc. - 1,935
Trade and other 268 620
- ------------------------------------------------------------------------------------------------------------------
$40,519 $41,390
- ------------------------------------------------------------------------------------------------------------------
Accounts receivable - Visudyne is due from Novartis Ophthalmics
and consists of the Company's 50% share of pre-tax profit on sales of
Visudyne, amounts due from the sale of bulk Visudyne to Novartis
Ophthalmics and reimbursement of specified manufacturing, royalty and
other costs. The Company does not require an allowance for doubtful
accounts.
7
5. INVENTORIES
(In thousands of Canadian dollars) September 30, 2002 December 31, 2001
- -------------------------------------------------------------------------------------------------------------
(Unaudited)
Raw materials and supplies $ 2,744 $ 792
Work-in-process 32,322 41,225
Finished goods 25,199 23,390
Provision for non-completion of product inventory (2,552) (3,898)
- -------------------------------------------------------------------------------------------------------------
$57,713 $61,509
- -------------------------------------------------------------------------------------------------------------
Inventories at September 30, 2002, include finished goods with a
cost of $20.2 million (December 31, 2001 - $11.6 million) that have
been shipped to and are held by Novartis Ophthalmics. These finished
goods will be recognized as costs of manufacturing in the period of
the related product sale by Novartis Ophthalmics to third parties and
are included in deferred revenue at cost.
The Company records a provision for non-completion of product
inventory to provide for potential failure of inventory batches in
production to pass quality inspection.
6. INVESTMENT IN JOINT VENTURE
During the second quarter of 2002, the Company decided not to
continue the NS & QLT Technologies Ltd. ("NSQ") joint venture. As a
result, all property and equipment of NSQ has been written off. The
Company's proportionate share of the write-off was $0.3 million.
The following amounts, which represent the Company's
proportionate share of the assets, liabilities, revenues and
expenditures of NSQ, are included in these consolidated financial
statements:
(In thousands of Canadian Dollars) September 30, 2002 December 31, 2001
- ------------------------------------------------------------------------------------------------------------
(Unaudited)
Cash $ 775 $ 1,113
Property and equipment - 129
Liabilities (3) 19
Revenues 19 7
Expenses 395 27
Net loss (376) (20)
Cash (used in operations) (132) (20)
Cash (used in investing activities) (206) (129)
- ------------------------------------------------------------------------------------------------------------
7. ACCRUED LIABILITIES
(In thousands of Canadian dollars) September 30, 2002 December 31, 2001
- ------------------------------------------------------------------------------------------------------------
(Unaudited)
Royalties $2,576 $ 2,519
Compensation (employees and directors) 3,600 3,505
Manufacturing - 1,148
Clinical trials - 3,025
Interest 293 739
Other 1,239 1,031
- ------------------------------------------------------------------------------------------------------------
$7,708 $ 11,967
- ------------------------------------------------------------------------------------------------------------
8
8. SHARE CAPITAL
Effective March 17, 2002, the Company adopted a Shareholder
Rights Plan, which was then amended and restated effective April 8,
2002 (the "Rights Plan"), and approved, as amended, by the
shareholders of the Company on April 25, 2002. The Rights Plan
replaced the shareholder rights plan (the "Initial Rights Plan") that
was initially adopted by the Company on March 17, 1992, confirmed by
shareholders on April 28, 1992, amended March 31, 1997 and
re-confirmed, as amended, by shareholders on May 12, 1997. The
Initial Rights Plan expired on March 17, 2002. The Rights Plan will
remain in effect, unless earlier terminated pursuant to its terms,
until the 2005 annual meeting of shareholders, and, if reconfirmed at
the 2005 annual meeting, the Rights Plan will remain in effect until
the 2008 annual meeting of shareholders. Under the Rights Plan,
holders of common shares are entitled to one share purchase right for
each common share held. Generally, if any person or group makes a
take-over bid, other than a bid permitted under the Rights Plan (a
"Permitted Bid") or acquires beneficial ownership of 20% or more of
the Company's outstanding common shares without complying with the
Rights Plan, the Rights Plan will entitle these holders of share
purchase rights to purchase, in effect, common shares of the Company
at 50% of the prevailing market price. A take-over bid for the
Company can avoid the dilutive effects of the share purchase rights,
and therefore become a Permitted Bid, if it complies with provisions
of the Rights Plan or if it is expressly approved by the Board of
Directors.
On April 25, 2002, at the Annual General Meeting of the Company,
the shareholders passed a resolution approving an amendment to the
Company's 2000 Incentive Stock Option Plan by increasing the maximum
number of common shares issuable under the Plan by 2,000,000 common
shares from 5,000,000 common shares to 7,000,000 common shares.
Stock option activity with respect to all of the Company's stock
option plans is presented below:
Weighted
Number of Exercise Price Range Average
Shares Per Share Exercise Price
- -------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2001 8,152,396 $ 9.28 - $108.60 $ 53.37
From January 1 to September 30, 2002:
Granted 1,046,958 $12.93 - $ 39.23 $ 23.04
Exercised (283,390) $ 9.28 - $ 39.23 $ 16.33
Cancelled (815,393) $14.98 - $108.60 $ 58.79
-----------------------------------------------------------
Outstanding at September 30, 2002 8,100,571 $ 9.28 - $108.60 $ 50.20
=======================================================================================================
Additional information relating to stock options outstanding as of
September 30, 2002 is presented below:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Exercise Number of Exercise Contractual Number of Exercise
Price Range Shares Price Life (Years) Shares Price
- ---------------------------------------------------------------------------------------------------
Under $25 1,594,743 $ 18.06 3.00 764,729 $ 13.11
$25.00 - $37.50 1,802,325 $ 31.32 2.87 1,123,198 $ 31.08
$37.51 - $50.00 2,702,775 $ 47.64 3.19 1,617,597 $ 43.37
Over $50.00 2,000,728 $104.41 2.59 1,749,726 $104.32
- ---------------------------------------------------------------------------------------------------
8,100,571 5,255,250
- ---------------------------------------------------------------------------------------------------
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.
9
(In thousands of Canadian dollars except per Three months ended Nine months ended
share information) September 30, 2002 September 30, 2002
- ----------------------------------------------------------------------------------------------------
Net income
As reported $ 8,746 $21,228
Pro forma $ (817) $(8,781)
- ----------------------------------------------------------------------------------------------------
Basic net income per common share
As reported $ 0.13 $ 0.31
Pro forma $ (0.01) $ (0.13)
- ----------------------------------------------------------------------------------------------------
Diluted net income per share
As reported $ 0.13 $ 0.31
Pro forma $ (0.01) $ (0.13)
- ----------------------------------------------------------------------------------------------------
The pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense
over the vesting period and additional options may be granted in future
years. The weighted average fair value of stock options granted in the
three months ended September 30, 2002 was $5.07. The weighted average
fair value of stock options granted in the nine months ended September
30, 2002 was $11.18. The Company used the Black-Scholes option pricing
model to estimate the value of the options at each grant date, under
the following weighted average assumptions:
Three months ended Nine months ended
September 30, 2002 September 30, 2002
- -----------------------------------------------------------------------------------------------------------
Dividend Yield - -
Annualized Volatility 80.4% 83.1%
Risk-free Interest Rate 3.9% 4.4%
Expected Life (Years) 2.5 2.5
9. REVENUE FROM VISUDYNE(R)
Under the terms of the Company's development, marketing and
distribution agreement with Novartis Ophthalmics, the Company is
responsible for Visudyne manufacturing and product supply and
Novartis Ophthalmics is responsible for sales, marketing and
distribution of Visudyne. The Company and Novartis Ophthalmics share
equally the profits realized on revenues from product sales after
deductions for marketing costs and manufacturing costs (including
third party royalties). Proceeds of the Alliance from Visudyne sales
are received initially in trust by Novartis Ophthalmics for the equal
benefit of Novartis Ophthalmics and the Company and are held until
distributed in accordance with the agreement between the Company and
Novartis Ophthalmics.
The Company's revenue from the sales of Visudyne was determined as
follows:
Three months ended Nine months ended
September 30, September 30,
(In thousands of Canadian dollars) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------
(Unaudited)
Visudyne(R)sales by Novartis Ophthalmics $110,002 $ 88,852 $ 329,757 $ 248,914
Less: Manufacturing and other costs (8,540) (7,057) (26,785) (19,702)
Less: Sales, marketing and distribution
costs (37,626) (38,537) (134,395) (107,949)
------------------------------------------------------------
Net operating income from Visudyne(R) $ 63,836 $ 43,258 $ 168,577 $ 121,263
============================================================
The Company's 50% share $ 31,918 $ 21,629 $ 84,289 $ 60,632
Add: Manufacturing and other
reimbursements 9,442 9,141 29,146 22,000
------------------------------------------------------------
Revenue from Visudyne(R) $ 41,360 $ 30,770 $ 113,435 $ 82,632
============================================================
10
For the three months ended September 30, 2002, approximately 59%
of total Visudyne sales by Novartis Ophthalmics were in the United
States with Europe and other markets responsible for the remaining
41%. For the same period in 2001, approximately 63% of total Visudyne
sales by Novartis Ophthalmics were in the United States with Europe
and other markets responsible for the remaining 37%.
For the nine months ended September 30, 2002, approximately 60%
of total Visudyne sales by Novartis Ophthalmics were in the United
States with Europe and other markets responsible for the remaining
40%. For the same period in 2001, approximately 64% of total Visudyne
sales by Novartis Ophthalmics were in the United States with Europe
and other markets responsible for the remaining 36%.
10. CONTRACT RESEARCH AND DEVELOPMENT
The Company receives non-refundable research and development
funding from Novartis Ophthalmics and other strategic partners which
is recorded as contract research and development revenue. Details of
the Company's contract research and development revenue are as
follows:
Three months ended Nine months ended
September 30, September 30,
(In thousands of Canadian dollars) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------
(Unaudited)
Visudyne(R)ocular programs $1,593 $311 $3,323 $2,649
Visudyne(R)dermatology program 1,126 121 3,095 121
Others 773 - 1,747 -
------------------------------------------------------------
Contract research & development revenue $3,492 $432 $8,165 $2,770
============================================================
11
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The financial statements of the Company have been prepared in
accordance with generally accepted accounting principles ("GAAP") in
Canada which, as they apply to the Company, differ in certain material
respects from those applicable in the United States. Significant
differences between Canadian GAAP and U.S. GAAP are set forth below:
(i) Effect on the Consolidated Statements of Operations
Three months ended Nine months ended
September 30, September 30,
(In thousands of Canadian Dollars) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------
(Unaudited)
Net income under Canadian GAAP $8,746 $11,648 $21,228 $30,903
Adjustment for intrinsic value of employee stock
options amended as part of severance arrangements(a) - - - (4)
Adjustment for development option expensed (b) - - - (1,571)
Adjustment for development and marketing rights
expensed (c) 777 (15,085) 2,325 (15,085)
Adjustment to record increase tax provision relating
to amortization of development and market rights(c) (308) - (921) -
- ------------------------------------------------------------------------------------------------------------
Net income (loss) under U.S. GAAP $9,215 $(3,437) $22,632 $14,243
- ------------------------------------------------------------------------------------------------------------
The comprehensive income adjustment to unrealized
gains on "available for sale" securities - (289) - 770
- ------------------------------------------------------------------------------------------------------------
Comprehensive net income (loss) under U.S. GAAP $9,215 $(3,726) $22,632 $15,013
- ------------------------------------------------------------------------------------------------------------
Net income (loss) per common share under U.S.
GAAP:
Basic $ 0.14 ($ 0.05) $ 0.33 $ 0.28
Diluted $ 0.13 ($ 0.05) $ 0.33 $ 0.28
- ------------------------------------------------------------------------------------------------------------
(ii) Effect on selected items in the Consolidated Balance Sheets and
Consolidated Statements of Cash Flows
(In thousands of Canadian Dollars) September 30, 2002 December 31, 2001
- -----------------------------------------------------------------------------------------------------------
(Unaudited)
Total assets under Canadian GAAP $539,976 $516,311
Reduction for intangible assets expensed(b)(c) (13,623) (15,948)
Adjustment to future income tax assets relating to
intangible assets expensed(b)(c) 5,139 6,060
- -----------------------------------------------------------------------------------------------------------
Total assets under U.S. GAAP $531,492 $506,423
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Total liabilities under Canadian and U.S. GAAP $ 38,019 $ 40,209
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity under Canadian GAAP $501,957 $476,102
Reduction for intangible assets expensed (a)(b) (13,623) (15,948)
Increase to recognize future tax asset relating to
intangible assets expensed(a)(b) 5,139 6,060
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity under U.S. GAAP $493,473 $466,214
- -----------------------------------------------------------------------------------------------------------
12
Due to the non-cash nature of these GAAP differences as
disclosed, there is no effect on total cash flows from operating,
investing and financing activities in the Consolidated Statements
of Cash Flows.
(a) Acceleration of stock option vesting provisions in connection
with employee terminations.
During the second quarter of 2001, the Company accelerated the
vesting provisions of employee stock options for certain
employees as a part of their severance arrangements. As these
options would have expired unvested in the absence of this
acceleration, under U.S. GAAP the Company would have recorded a
compensation expense (offset by additional paid-in capital)
equal to the intrinsic value of the options on the date of
acceleration. The intrinsic value is calculated as the excess
of the trading price of the Company's common shares over the
exercise price of the options at the date of acceleration.
(b) Development option
In September 2001, the Company acquired an option to enter into a
collaborative arrangement with Kinetek Pharmaceuticals, Inc.
("Kinetek") for up to five compounds whereby the Company would
take over clinical development and commercialization in exchange
for milestone payments, royalties and equity investments in
Kinetek. Under Canadian GAAP this option was capitalized at its
estimated value of $1,571,429. Under U.S. GAAP this option is
considered a right to unproven technology which may not have
alternate future uses and therefore, has been expensed as
research and development costs.
(c) Development and marketing rights
In August 2001, the Company acquired exclusive development and
marketing rights from Xenova for XR9576, a Phase II P-gp inhibitor
for multi-drug resistance in oncology, in exchange for an initial
licensing fee of U.S.$10 million and future milestone payments
and royalties. Under Canadian GAAP, the rights were capitalized
at a value of $15,496,884 and are being amortized over the
expected period to commercialization of five years. Under U.S.
GAAP, the rights are considered rights to unproven technology
which may not have alternate future uses and therefore, have
been expensed as research and development costs. Amortization
expense for the three-month and nine-month periods ending
September 30, 2002 is $0.8 million and $2.3 million, respectively.
(d) Jointly controlled investee
Under Canadian GAAP, the Company consolidates its 50% share of
the assets and liabilities of the joint venture described in Note
6 using the proportionate consolidation method. Under U.S. GAAP,
proportionate consolidation is not permitted for the joint
venture and the equity method of accounting must be followed.
However, as permitted by the United States Securities and
Exchange Commission, the effect of this difference in accounting
principles is not reflected in the consolidated financial
statements restated for U.S. GAAP differences. Additional
information regarding the Company's interest in this joint
venture is presented in Note 6 to the consolidated financial
statements.
(e) Accounting for income taxes
Under U.S. GAAP, SFAS No. 109, Accounting for Income Taxes, the
Company would calculate its future income taxes using only
enacted tax rates. This differs from Canadian GAAP which uses
substantially enacted tax rates. In addition, under U.S. GAAP
investment tax credits are recorded as a reduction of tax
expense. This differs from Canadian GAAP which records investment
tax credits against the current expense or capital expenditure to
which it relates. At September 30, 2002 these differences between
Canadian and U.S. GAAP had no impact on the consolidated
financial position or results of operations of the Company.
(f) Recent pronouncements
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets, which is effective January 1, 2001. SFAS No.
142 requires, among other things, the discontinuance of goodwill
amortization.
13
In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as
goodwill, re-assessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles
out of previously reported goodwill and the identification of
reporting units for purposes of assessing potential future
inpairments of goodwill. SFAS No. 142 also requires the Company
to complete a transitional goodwill impairment test nine months
from the date of adoption. The adoption of SFAS No.142 did not
have a significant impact on the Company's consolidated financial
position or results of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. This statement
addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This statement supersedes FASB
Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions. This
statement also amends ARB No. 51, Consolidated Financial
Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. This
Statement requires that one accounting model be used for
long-lived assets to be disposed of by sale, whether previously
held and used or newly acquired. This Statement also broadens the
presentation of discontinued operations to include more disposal
transactions. The provisions of this Statement are required to be
adopted by the Company at the beginning of fiscal 2002. The
adoption of this statement did not have a significant impact on
the Company's consolidated financial position or results of
operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections. Among other things, SFAS No. 145
rescinds both SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and the amendment of SFAS No. 4, SFAS No.
64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. Through this rescission, SFAS No. 145 eliminates
the requirement (in both SFAS No. 4 and SFAS No. 64) that gains
and losses from the extinguishment of debt be aggregated and, if
material, classified as an extraordinary item, net of the related
income tax effect. Generally, SFAS No. 145 is effective for
transactions occurring after May 15, 2002. The Company does not
expect SFAS No. 145 to have a material impact on the Company's
results of operations or its financial position.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement
provides guidance on the recognition and measurement of
liabilities associated with exit and disposal activities. Under
SFAS No. 146, liabilities for costs associated with exit or
disposal activities should be recognized when the liabilities are
incurred and measured at fair value. This statement is effective
prospectively for exit or disposal activities initiated after
December 31, 2002. It is not anticipated that the financial
impact of this statement will have a material effect on the
Company's consolidated financial position or results of
operations.
12. SEGMENTED INFORMATION
The Company is a bio-pharmaceutical corporation engaged in the
development and commercialization of proprietary pharmaceutical
products for the treatment of ocular, oncology, immunological and other
diseases. The Company is a pioneer in the field of photodynamic
therapy, a field of medicine that uses photosensitizers
(light-activated drugs) in the treatment of disease, and is now
developing pharmaceutical products that do not employ photodynamic
therapy.
14
Details of revenues and property and equipment by geographic segments
are as follows:
Revenues(1) Three months ended Nine months ended
September 30, September 30,
(In thousands of Canadian dollars) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------
(Unaudited)
Canada $ 1,694 $ 264 $ 5,174 $ 2,644
United States 29,540 25,557 82,688 65,025
Europe 12,458 4,406 32,184 16,792
Other 1,160 975 1,554 941
- ------------------------------------------------------------------------------------------------
$44,852 $31,202 $121,600 $85,402
- ------------------------------------------------------------------------------------------------
Property and equipment September 30, December 31,
(In thousands of Canadian dollars) 2002 2001
- -------------------------------------------------------------------------------------------------
(Unaudited)
Canada $54,883 $56,482
United States 964 1,180
- -------------------------------------------------------------------------------------------------
$55,847 $57,662
- -------------------------------------------------------------------------------------------------
(1) Revenues are attributable to a geographic segment based on location of the
customer for revenue from Visudyne and royalties on product sales, and
location of the head office of the funding entity in the case of revenues
from contract research and development and collaborative arrangements.
13. CONTINGENCIES
(a) On April 24, 2000, Massachusetts Eye and Ear Infirmary
("MEEI") filed a civil suit against the Company in the United
States District Court for the District of Massachusetts seeking
to establish exclusive rights for MEEI as the owner of certain
inventions relating to the use of verteporfin as the photoactive
agent in the treatment of certain eye diseases including Age
Related Macular Degeneration ("AMD"). The lawsuit (Civil Action
No. 00-10783-JLT) relates, in part, to an ongoing dispute
involving U.S. Patent No. 5,798,349 (the " '349 Patent") which
was issued on August 25, 1998 to the Company, MEEI and
Massachusetts General Hospital ("MGH") as co-owners. The
complaint alleges breach of contract, misappropriation of trade
secrets, conversion, misrepresentation, unjust enrichment,
unfair trade practices and related claims and asks that the
Court: (i) declare MEEI the owner of certain inventions claimed
in the '349 Patent; (ii) enjoin the Company from infringement of
those claims or any action that would diminish the validity or
value of such claims; (iii) declare that the Company breached an
agreement with MEEI to share equitably in any proceeds derived
as a result of collaboration leading to the '349 Patent; (iv)
impose a constructive trust upon the Company for any benefit
that the Company has or will derive as a result of the '349
Patent; and (v) award MEEI monetary relief for misappropriation
of trade secrets in an amount equal to the greater of MEEI's
damages or the Company's profits from any such misappropriation,
and double or treble damages under Massachusetts law.
On June 30, 2000, the Company served an answer and counterclaim
denying the material allegations of the complaint and asserting
claims against MEEI and two employees of MEEI. The Company's
counterclaim seeks: (i) to correct inventorship on the '349
Patent by adding an additional MGH researcher as a joint
inventor; (ii) a declaration that the Company and MGH are joint
owners of the '349 Patent; (iii) a determination that MEEI is
liable to the Company for conversion and unfair trade practices
under Massachusetts law; (iv) an injunction to prohibit MEEI
from prosecuting any patent application claiming subject matter
already claimed in the '349 Patent; and (v) an award of damages
and attorneys' fees. MEEI served a reply to the Company's
counterclaim on September 5, 2000. QLT subsequently dismissed
voluntarily its counterclaim for conversion.
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
15
application which led to the issuance of the '303 patent was
filed and prosecuted by attorneys for MEEI and, in contrast to
the '349 patent, named only MEEI researchers as inventors.
The same day the '303 patent was issued, MEEI commenced a
second civil suit against the Company and Novartis Ophthalmics,
Inc. alleging infringement of the '303 Patent (Civil Action No.
01-10747-EFH). The suit seeks damages and injunctive relief. On
August 15, 2001, the Company served an answer to the complaint,
denying its material allegations and raising a number of
affirmative defenses. Subsequently, the Company amended its
answer to assert counterclaims against MEEI and the two MEEI
researchers who are named as inventors on the '303 patent. The
Company's counterclaim seeks to correct inventorship of the '303
patent by adding QLT and MGH researchers as joint inventors and
asks the court to declare that QLT and MGH are co-owners of the
'303 patent. The counterclaim also requests a declaration that
QLT does not infringe, induce infringement, or contribute to
infringement of the '303 patent, asserting, among other reasons,
that QLT and MGH are rightful co-owners of the patent and QLT
has a license from MGH of MGH's co-ownership rights under the
patent. In addition, the counterclaim seeks a declaratory
judgement that the '303 patent is invalid and unenforceable.
Finally, the Company's counterclaim seeks an award of monetary
damages for breach of material transfer agreements governing
MEEI's use of verteporfin, based upon MEEI's failure to notify
QLT of MEEI's intent to file the patent application that led to
the issuance of the '303 patent to MEEI.
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 2002, QLT moved for summary judgment against MEEI on all
counts of MEEI's complaint in the first suit (Civil Action No.
00-10783-JLT). The court has granted QLT's motions, thus
dismissing all of MEEI's claims in the first suit. QLT's
counterclaims against MEEI in that first suit remain
outstanding. No trial has been scheduled in either case, and
none is expected until 2003 at the earliest.
The Company believes MEEI's claims are without merit and
intends to vigorously defend against such actions and pursue its
counterclaims. The outcome of this dispute is not presently
determinable or estimatable and there can be no assurance that
the matter will be resolved in favour of the Company. If the
lawsuits are not resolved in the Company's favour, the Company
may be obliged to pay additional royalties or other reasonable
compensation for access to the inventions claimed in the patents
named in the suits.
(b) In January and February, 2001, seven proposed securities
class actions were filed in the United States District Court for
the Southern District of New York on behalf of purchasers of the
Company's common shares between August 1, 2000 and December 14,
2000. On May 3, 2001, the court ordered consolidation of the
seven actions.
The complaints name as defendants the Company; Julia Levy,
former President, Chief Executive Officer and a current Director
of the Company; and Kenneth Galbraith, the Company's former
Executive Vice President, Chief Financial Officer and Corporate
Secretary. The defendants are charged with violating Sections
10(b) and 20(a) of the Securities Exchange Act of 1934.
The plaintiffs allege that on December 14, 2000, the Company
announced that it expected to miss its Visudyne sales estimates
for the fourth-quarter 2000, and that in response, the Company's
common share price dropped approximately 31%. The plaintiffs
claim that the Company's December 14, 2000 statements
contradicted prior information issued by the defendants
concerning the demand for Visudyne and the Company's prospects.
The plaintiffs allege that the defendants overstated the demand
for Visudyne, did not properly disclose reimbursement issues
relating to Visudyne and that the defendants had no basis in the
months preceding the December announcement for their projections
of fourth-quarter sales. The plaintiffs further allege that the
intent of the individual defendants to mislead investors can be
inferred from their sale of a substantial amount of the
Company's common shares during the months of August and
September 2000. The plaintiffs seek injunctive relief, fees and
expenses and compensatory damages in an unspecified amount.
The Company believes that the plaintiffs' claims are without
merit and intends to vigorously defend against such actions.
However, the outcome of this claim is not presently determinable
or estimatable and there can be no assurance that the matter
will be resolved in favour of the Company and the other
defendants. If the lawsuit
16
is not resolved in the Company's favour, there can be no
guarantee that the Company's insurance will be sufficient to pay
for the damages awarded to the plaintiffs.
The effect of a negative judgement or likely loss with respect to one or both
of the above-mentioned claims, if any, will be recorded in the period it
becomes determinable.
ITEM 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 Canadian GAAP. These principles differ in certain
respects from U.S. GAAP. The differences as they affect the consolidated
financial statements of QLT Inc. ("the Company") are described in Note 11. For a
detailed explanation of differences between Canadian and U.S. GAAP refer to Note
20 to the Company's 2001 audited consolidated financial statements, contained
within the Company's 2001 Annual Report on Form 10-K. All amounts following are
expressed in Canadian dollars unless otherwise indicated.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion and analysis of financial conditions and results of
operations and other portions of this quarterly report 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,
including patient and physician demand for Visudyne therapy; anticipated future
operating results and future cash levels; anticipated timing for and receipt of
reimbursement approvals for Visudyne therapy; the ability and efforts of the
Company's strategic partner, Novartis Ophthalmics AG ("Novartis Ophthalmics"),
to commercialize and market Visudyne; the anticipated outcome of pending patent
and securities litigation against the Company; the Company's ability to maintain
and expand its intellectual property position; the timing and success of planned
or existing clinical trials for Visudyne and for the Company's other products,
including, without limitation, tariquidar; the timing of regulatory submissions
for expanded uses for Visudyne and for the Company's other products, including,
without limitation, tariquidar; the anticipated timing and receipt of regulatory
approvals for expanded uses for Visudyne and for the Company's other products,
including, without limitation, tariquidar; and the successful development or
acquisition of complementary or supplementary products or product candidates,
technologies or businesses as well as the risk factors described below under the
heading Liquidity and Capital Resources - General. These statements are
predictions only and actual events or our actual results may differ materially.
Factors that could cause such actual events or our actual results to differ
materially from any future results expressed or implied by such forward-looking
statements include, but are not limited to, the risks, uncertainties and other
factors discussed below and in the sections outlined in the Company's most
recent Annual Report on Form 10K under "Business - Risk Factors", "Legal
Proceedings", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the "Notes to Consolidated Financial Statements".
OVERVIEW
The Company is a bio-pharmaceutical company engaged in the development and
commercialization of proprietary pharmaceutical products for the treatment of
ocular, oncological, immunological and other diseases. The Company is a pioneer
in the field of photodynamic therapy, a field of medicine that uses
photosensitizers (light-activated drugs) in the treatment of disease, and is now
also developing pharmaceutical products that do not employ photodynamic therapy.
Visudyne, the Company's commercial product, is a photosensitizer used to treat
predominantly classic subfoveal choroidal neovascularization ("CNV") in patients
with wet age-related macular degeneration ("AMD"), the leading cause of severe
vision loss in people over the age of 50 in North America and Europe, and other
ocular conditions. Visudyne has been approved in 67 countries, including the
United States, Canada and the European Union, for the treatment of predominantly
classic subfoveal CNV in wet AMD. In addition, Visudyne has been approved in 48
countries for extended indications, including occult CNV in the European Union,
Australia and New Zealand, CNV
17
due to pathologic myopia in the United States and the European Union, and CNV
due to presumed ocular histoplasmosis in the United States.
Currently the Company is developing photosensitizers for the treatment of
certain forms of non-melanoma skin cancer, benign prostatic hyperplasia and
androgenetic alopecia (commonly known as male pattern baldness). In addition to
developing photodynamic therapy product candidates, the Company is developing
other products by itself and in collaboration with other companies for the
treatment of cancer, immune disorders, and other conditions, including
tariquidar for multi-drug resistance in cancer, and signal transduction
compounds for the treatment of ocular, immune system and kidney diseases. The
Company continues to seek growth opportunities and build its product pipeline by
developing new indications for Visudyne, progressing with both early and late
stage programs, and potential strategic acquisitions of products, product
candidates, technologies or other businesses.
The Company operates in a single reportable segment. The Company's profitability
depends upon the commercial success of Visudyne in major markets worldwide and
the achievement of product development objectives. As of September 30, 2002, the
Company had an accumulated deficit of $33.1 million and total shareholders'
equity of $502.0 million.
SIGNIFICANT 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. The significant accounting policies which
the Company believes are the most critical to aid in fully understanding and
evaluating its reported financial results include the following:
REVENUE RECOGNITION
Revenue from Visudyne(R) consists of the Company's 50% share of pre-tax profits
generated from the Company's collaborative manufacturing, marketing and
distribution arrangement with Novartis Ophthalmics AG ("Novartis Ophthalmics")
(formerly CIBA Vision), revenue from the sale of bulk manufactured Visudyne
product to Novartis Ophthalmics, and reimbursement from Novartis Ophthalmics of
sales costs, third party royalties, and specified other costs. Under the terms
of the collaborative arrangement with Novartis Ophthalmics, the Company is
responsible for manufacturing and product supply and Novartis Ophthalmics is
responsible for sales, marketing and distribution of Visudyne. Pre-tax profits
are determined by Novartis Ophthalmics and the Company and are derived by taking
net sales of Visudyne to third parties as recorded by Novartis Ophthalmics less
manufacturing, selling, marketing and distribution costs, and third party
royalties. Revenue from bulk Visudyne sales to Novartis Ophthalmics is not
recognized until the period of the related product sale and delivery by Novartis
Ophthalmics to third parties where collection is reasonably assured. Proceeds of
the QLT-Novartis Ophthalmics Alliance ("Alliance") from Visudyne sales are
received initially in trust by Novartis Ophthalmics for the equal benefit of
Novartis Ophthalmics and the Company and are held until distributed in
accordance with the agreement between the Company and Novartis Ophthalmics.
MANUFACTURING COSTS
Manufacturing costs, 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 manufacturing costs 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 manufacturing costs 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.
18
STOCK BASED COMPENSATION
The Company has adopted the recommendations of the new CICA Handbook section
3870, Stock-Based Compensation and Other Stock-Based Payments, effective January
1, 2002. This section establishes standards for the recognition, measurement and
disclosure of stock-based compensation and other stock-based payments made in
exchange for goods and services. The standard requires that all stock-based
awards made to non-employees be measured and recognized using a fair value based
method. The standard encourages the use of a fair value based method for all
awards granted to employees, but only requires the use of a fair value based
method for direct awards of stock, stock appreciation rights, and awards that
call for settlement in cash or other assets. Awards that a company has the
ability to settle in stock are recorded as equity, whereas awards that the
entity is required to or has a practice of settling in cash are recorded as
liabilities. The Company has adopted the disclosure only provision for stock
options granted to employees and directors.
In October, 2002, the Accounting Standards Board ("AcSB") of the CICA announced
the activation of a project to require the recognition of stock-based
compensation expenses for all employee stock-based compensation transactions to
replace the current standard requiring either the accounting for or disclosure
of the effect of employee stock-based compensation expense on earnings. The AcSB
expects to issue its proposals for comment by December 31, 2002. The Company
will evaluate the impact of these proposals on its financial position and
results of operations once they are issued.
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, net of related tax credits, unless they meet generally accepted
accounting criteria for deferral and amortization. The Company reassesses
whether it has met the relevant criteria for deferral and amortization at each
reporting date. To date, no research and development costs have been deferred.
Under U.S. GAAP, research and development expense also includes the cost to
purchase rights to unproven technology which may not have alternate future uses.
Under Canadian GAAP the purchase cost of such rights is generally capitalized as
an intangible asset. Details of how this difference between Canadian and U.S.
GAAP impacts the Company is described in Note 11 to the Company's consolidated
financial statements.
INCOME TAXES
Income taxes are reported using the asset and liability method, whereby future
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 or substantially
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.
RESULTS OF OPERATIONS
For the three months ended September 30, 2002, the Company recorded net income
of $8.7 million, or $0.13 per common share. These results compare with net
income of $11.6 million, or $0.17 per common share for the three months ended
September 30, 2001. The net income for the three months ended September 30, 2001
did not include a provision for income taxes.
For the nine months ended September 30, 2002, the Company recorded net income of
$21.2 million, or $0.31 per common share. These results compare with net income
of $30.9 million, or $0.46 per common share for the nine months ended September
30, 2001. The net income for the nine months ended September 30, 2001 did not
include a provision for income taxes.
19
REVENUES
REVENUE FROM VISUDYNE(R)
On February 6, 1995, the Company signed an agreement with Novartis Ophthalmics
to pursue worldwide joint development and commercialization of photodynamic
therapy products. Under the terms of that agreement, the Company is responsible
for Visudyne manufacturing and product supply and Novartis Ophthalmics is
responsible for sales, marketing and distribution of Visudyne. Global revenues
realized from product sales of Visudyne by Novartis Ophthalmics for the
treatment of ocular diseases are shared on an equal basis by the Company and
Novartis Ophthalmics after deductions for marketing and distribution costs, and
manufacturing costs (including third-party royalties). Proceeds of the Alliance
from Visudyne sales are received initially in trust by Novartis Ophthalmics and
for the equal benefit of Novartis Ophthalmics and the Company and are held until
distributed in accordance with the agreement between the Company and Novartis
Ophthalmics.
The Company's revenue from the sales of Visudyne was determined as follows:
For the three months ended For the nine months ended
September 30, September 30,
(In thousands of Canadian dollars) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------
Visudyne(R) sales by Novartis Ophthalmics $110,002 $ 88,852 $ 329,757 $ 248,914
Less: Manufacturing and other costs (8,540) (7,057) (26,785) (19,702)
Less: Sales, marketing and distribution costs (37,626) (38,537) (134,395) (107,949)
----------------------------------------------------
Net operating income from Visudyne(R) $ 63,836 $ 43,258 $ 168,177 $ 121,263
====================================================
The Company's 50% share $ 31,918 $ 21,629 $ 84,289 $ 60,632
Add: Manufacturing and other
Reimbursements 9,442 9,141 29,146 22,000
----------------------------------------------------
Revenue from Visudyne(R) $ 41,360 $ 30,770 $ 113,435 $ 82,632
====================================================
For the three months ended September 30, 2002, approximately 59% of total
Visudyne sales by Novartis Ophthalmics were in the United States with Europe and
other markets responsible for the remaining 41%. For the same period in 2001,
approximately 63% of total Visudyne sales by Novartis Ophthalmics were in the
United States with Europe and other markets responsible for the remaining 37%.
For the nine months ended September 30, 2002, approximately 60% of total
Visudyne sales by Novartis Ophthalmics were in the United States with Europe and
other markets responsible for the remaining 40%. For the same period in 2001,
approximately 64% of total Visudyne sales by Novartis Ophthalmics were in the
United States with Europe and other markets responsible for the remaining 36%.
The increase in Visudyne sales over the same periods in 2001 is due primarily to
increased market penetration in key markets, such as France, Germany and Italy,
and to ongoing geographic and label expansion throughout the world. Compared to
the three months period ending June 30, 2002, Visudyne sales for the quarter
ending September 30, 2002 declined by 1% due primarily to seasonality and to a
lesser degree, other factors.
For the three months ended September 30,2002, revenue from Visudyne increased by
34.4% compared to the same period in 2001. The increase in Visudyne revenue is
due to the increase in total Visudyne sales by Novartis Ophthalmics as discussed
above. For the nine months ended September 30, 2002, revenue from Visudyne
increased by 37.3% compared to the same period in 2001. This increase is due to
the increase in total Visudyne sales by Novartis Ophthalmics as discussed above
but partly offset by a 24.5% increase in sales, marketing and distribution costs
as the Alliance expanded its sales, marketing and distribution programs.
20
CONTRACT RESEARCH AND DEVELOPMENT REVENUE
The Company receives non-refundable research and development funding from
Novartis Ophthalmics and other strategic partners which is recorded as contract
research and development revenue. For the three months ended September 30, 2002,
contract research and development revenue of $3.5 million increased by 708.3%
compared to the same period in 2001. For the nine months ended September 30,
2002, contract research and development revenue of $8.2 million increased by
194.8% compared to the same period in 2001. These increases are due mainly to
increased activities by the Company on joint Visudyne programs with Novartis
Ophthalmics and on the tariquidar programs with Xenova Limited.
COSTS AND EXPENSES
MANUFACTURING COSTS
Under the terms of the Company's agreement with Novartis Ophthalmics, the
Company is responsible for Visudyne manufacturing and product supply, and
Novartis Ophthalmics is responsible for sales, marketing and distribution of
Visudyne. The Company's manufacturing costs comprise direct and indirect costs
incurred in the production of bulk Visudyne and related third party royalties,
and are charged against earnings in the period of the related product sale and
delivery by Novartis Ophthalmics to third parties. During the first half of 2002
the Company received approval for a secondary manufacturing site. As a result,
the Company reviewed its provision related to non-completion of product
inventory and reduced its provision by $1.9 million during the second quarter of
2002.
RESEARCH AND DEVELOPMENT COSTS
Research and development ("R&D") costs of $15.8 million for the three months
ended September 30, 2002 decreased by 1.6% compared to the same period in 2001.
R&D costs of $44.2 million for the nine months ended September 30, 2002
increased by 19.0% compared to the same period in 2001. Approximately $18.6
million of R&D costs were Visudyne related with the remaining $25.6 million
related to the rest of the Company's product pipeline. The Company expects to
continue incurring substantial R&D expenses due to additional clinical studies
of Visudyne, clinical studies related to tariquidar, the continuation and
expansion of other R&D programs, potential product in-licensing, regulatory
related expenses, preclinical and clinical testing of the Company's various
products under development, and manufacturing of future products to be used in
clinical trials.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses of $5.4 million for the
three months ended September 30, 2002 were 247.0% or $3.9 million higher
compared to the same period in 2001. The increase in SG&A over the comparable
period in 2001 is due to the absorption to inventory of overhead expenses
associated with high manufacturing rates in the second half of 2001 and lower
than planned manufacturing levels in 2002. For the nine months ended September
30, 2002, SG&A expenses of $19.6 million were 92.7% higher compared to the same
period in 2001. The contributors to this increase are insurance, legal, staffing
and consulting expenses as well as the absorption to inventory of overhead
expenses associated with high manufacturing rates in the second half of 2001 and
lower than planned manufacturing levels in 2002.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense relates mainly to the depreciation and
amortization of property, equipment and intangible assets. For the three months
ended September 30, 2002, depreciation and amortization expense of $2.0 million
was 23.3% higher than the amount recorded in the same period in 2001. For the
nine months ended September 30, 2002, depreciation and amortization expense of
$5.9 million was 49.1% higher than the amount recorded in the same period in
2001. The increase was due primarily to the amortization of the Company's
investment in the development and marketing rights of tariquidar acquired from
Xenova.
21
OTHER INCOME AND EXPENSES
NET FOREIGN EXCHANGE GAINS (LOSSES)
Net foreign exchange gains (losses) comprise gains (losses) from the impact of
foreign exchange fluctuation on the Company's cash and cash equivalents,
derivative financial instruments, foreign currency receivables and foreign
currency payables. For the three months ended September 30, 2002, the Company
recorded net foreign exchange losses of $1.5 million versus a net foreign
exchange gain of $3.4 million in the same period in 2001. The losses in the
current period were due to losses on the Company's foreign currency derivative
financial instruments. For the nine months ended September 30, 2002, the Company
recorded net foreign exchange losses of $0.9 million versus a net foreign
exchange gain of $4.9 million in the same period in 2001. The losses in the
current year were due to losses on the Company's foreign currency cash holdings
as well as losses on foreign currency derivative financial instruments. (See
Liquidity and Capital Resources - Interest and Foreign Exchange Rates)
Details of the Company's net foreign exchange gains (losses) are as follows:
For the three months ended For the nine months ended
September 30, September 30,
(In thousands of Canadian dollars) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 1,082 $ 3,849 $(1,665) $4,471
Foreign exchange contracts (3,848) (1,368) (557) (116)
Foreign currency receivables and
payables 1,225 872 1,357 582
----------------------------------------------------------------
Net foreign exchange gains (losses) $(1,541) $ 3,353 $ (865) $4,937
================================================================
NET INTEREST INCOME
Net interest income of $2.2 million and $5.3 million for the three months and
nine months ended September 30, 2002 were 17.6% and 41.3% lower compared to the
same periods in 2001. This decrease, despite rising cash reserves, was due to
reduced yields on the Company's short-term investments. The Company's treasury
policy is focused on minimizing risk of loss of principal.
OTHER NON-OPERATING INCOME (EXPENSE)
During the third quarter of 2002, the Company recorded a $0.6 million loss on
its investment in certain securities received from Diomed, Inc. pertaining to
the disposal in 2000 of the Company's Optiguide fiber optics business.
Due to a general decline in the equity market of the biotech industry, the
Company will continue to assess the implications of such a decline on the
Company's investments on an investment by investment basis, taking into account
events that may unfold to clarify the value of the investment.
PROVISION FOR INCOME TAXES
Provision for income taxes was $5.6 million for the three months ended September
30, 2002. Provision for income taxes was $13.9 million for the nine months ended
September 30, 2002. On December 31, 2001, the company reversed its valuation
allowances and recognized future income tax assets relating to prior years as
the Company's stage of development and operations suggested that it was more
likely than not that the benefit of the tax assets will be realized. As such,
beginning in 2002, the Company started providing for income tax expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed operations, product development and capital
expenditures primarily through the commercialization of Visudyne, public and
private sales of equity securities, licensing and collaborative funding
arrangements with strategic partners and interest income.
22
At September 30, 2002, the Company had $304.5 million of available cash
resources, comprised of cash, cash equivalents and short-term investment
securities, all of which were invested in liquid, investment-grade securities.
During the three months ended September 30, 2002, the Company generated $19.5
million of cash from operations, compared with $11.9 million generated from
operations in the same period in 2001. The higher amount of cash generated from
operations in the third quarter of 2002 was due to increased operating income
and fluctuations in working capital accounts. The Company's investing
activities, excluding net investment in short-term investment securities, used
$(0.7) million in 2002, compared with $(4.2) million used in the same period of
2001. Investing activities in the third quarter of 2002 consisted of capital
expenditures. Investing activities in the third quarter of 2001 consisted of
capital expenditures ($4.2 million) and the purchase of development and
marketing rights from Xenova Limited ($15.5 million). The Company's financing
activities provided $0.6 million in the third quarter of 2002 compared to $1.4
million in 2001. Financing activities in the third quarters of both 2001 and
2002 consisted of the issuance of common shares on exercise of stock options. In
the aggregate, cash, cash equivalents and short-term investment securities
increased by approximately $17.8 million during the three months ended September
30, 2002.
For the nine months ended September 30, 2002, the Company generated $42.0
million of cash from operations, compared with $28.2 million generated from
operations in the same period in 2001. The increase in 2002 was the result of
the continued growth of the Company's Visudyne business. The Company's investing
activities, excluding net investment in short-term investment securities, used
$(2.4) million in 2002, compared with $(26.5) million used in the same period of
2001. Investing activities in 2002 consisted of capital expenditures. Investing
activities in 2001 consisted of proceeds from sale of investment in Axcan Pharma
Inc. ($6.5 million) offset by capital expenditures ($6.4 million), investments
in Kinetek Pharmaceuticals, Inc. ($11.0 million), and the purchase of
development and marketing rights from Xenova Limited ($15.5 million). The
Company's financing activities provided $4.6 million in 2002 compared to the
$(10.9) million used in 2001. The high level of cash used in financing
activities in 2001 was the result of the repayment of long-term debt. In the
aggregate, cash, cash equivalents and short-term investment securities increased
by approximately $44.1 million during the nine months ended September 30, 2002.
INTEREST AND FOREIGN EXCHANGE RATES
The Company is exposed to market risk related to changes in interest and foreign
currency exchange rates, each of which could adversely affect the value of the
Company's current assets and liabilities. At September 30, 2002, the Company had
an investment portfolio consisting of fixed interest rate securities with an
average remaining maturity of approximately 38 days. If market interest rates
were to increase immediately and uniformly by 10% of levels at September 30,
2002, the fair value of the portfolio would decline by an immaterial amount. The
Company believes that its results of operations and cash flows would not be
affected to any significant degree by a sudden change in market interest rates
relative to its investment portfolio, given the Company's current ability to
hold its fixed income investments until maturity. The Company enters into
foreign exchange contracts to manage exposures to currency rate fluctuations
related to its expected future net earnings and cash flows denominated in U.S.
dollars and Swiss francs. At September 30, 2002, the Company has outstanding
forward foreign currency contracts as noted below. The net unrealized loss as at
September 30, 2002 was approximately $1.1 million.
- -------------------------------------------------------------------------------------------------------------
Maturity Period Quantity
(to the year) (millions) Average Price
- -------------------------------------------------------------------------------------------------------------
U.S. dollar option-dated forward contracts 2002 - 2003 U.S. $29.25 1.6020
- -------------------------------------------------------------------------------------------------------------
Swiss franc option-dated forward contracts 2002 - 2003 CHF 24.25 1.0246
- -------------------------------------------------------------------------------------------------------------
At September 30, 2002, the Company has U.S.$4.4 million in cash and short-term
investments. If the Canadian dollar were to increase in value by 5% against the
U.S. dollar, the Company's U.S. dollar denominated cash and short-term
investments will experience an unrealized foreign currency translation loss of
approximately $0.3 million. The Company purchases goods and services primarily
in Canadian dollars and earns a significant portion of its revenues in U.S.
dollars. Foreign exchange risk is also managed by satisfying foreign denominated
expenditures with cash flows or assets denominated in the same currency.
LONG TERM OBLIGATION
The Company's material long-term obligations as of September 30, 2002 comprised
the Visudyne supply agreements with contract manufacturers, clinical and
development agreements and operating lease commitments for office
23
equipment. Details of the Company's future rental commitments for these leases
are described in the Company's 2001 Annual Report on Form 10K under the section
"Liquidity and Capital Resources - Long Term Obligations".
The Company also has long-term obligations as part of its collaborative
arrangements with various strategic partners for research and development
purposes. The details of these collaborative arrangements are described in the
Company's 2001 Annual Report on Form 10K under the section "Cost and Expenses -
Research and Development Costs".
GENERAL
The Company believes that its available cash resources and working capital
should be sufficient to satisfy the funding of product development programs, and
other operating and capital requirements for the reasonably foreseeable future.
Depending on the overall structure of current and future strategic alliances,
the Company may have additional capital requirements related to the further
development, marketing and distribution of existing or future products.
The Company's working capital and capital requirements will depend upon numerous
factors, including: the progress of the Company's preclinical and clinical
testing; fluctuating or increasing manufacturing requirements and R&D programs;
the timing and cost of obtaining regulatory approvals; the levels of resources
that the Company devotes to the development of manufacturing, marketing and
support capabilities; technological advances; the status of competitors; the
cost of filing, prosecuting and enforcing the Company's patent claims and other
intellectual property rights; the ability of the Company to establish
collaborative arrangements with other organizations; and the outcome of legal
proceedings.
The Company may require additional capital in the future to fund clinical and
product development costs for certain product applications or other technology
opportunities, and strategic acquisitions of products, product candidates,
technologies or other businesses. Accordingly, the Company may seek funding from
a combination of sources, including product licensing, joint development and new
collaborative arrangements, additional equity and debt financings 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.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources'.
ITEM 4. CONTROLS AND PROCEDURES
The company maintains a set of disclosure controls and procedures and internal
controls designed to ensure that information required to be disclosed in filings
made pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms. Our principal
executive and financial officers have evaluated our disclosure controls and
procedures within 90 days prior to the filing of this Quarterly Report on Form
10-Q and have determined that such disclosure controls and procedures are
effective.
Subsequent to our evaluation, there were no significant changes in internal
controls or other factors that could significantly affect internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
25
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
Certain of the Company's legal proceedings are discussed below and in
Note 13 to the consolidated financial statements, "Contingencies".
While the Company believes these proceedings are without merit and
intends to vigorously defend against these claims, it is impossible to
predict accurately or determine the eventual outcome of these
proceedings.
MEEI LITIGATION
On April 24, 2000, Massachusetts Eye and Ear Infirmary ("MEEI") filed
a civil suit against the Company in the United States District Court
for the District of Massachusetts seeking to establish exclusive
rights for MEEI as the owner of certain inventions relating to the use
of verteporfin as the photoactive agent in the treatment of certain
eye diseases including Age Related Macular Degeneration ("AMD"). The
lawsuit (Civil Action No. 00-10783-JLT) relates, in part, to an
ongoing dispute involving U.S. Patent No. 5,798,349 (the " '349
Patent") which was issued on August 25, 1998 to the Company, MEEI and
Massachusetts General Hospital ("MGH") as co-owners. The complaint
alleges breach of contract, misappropriation of trade secrets,
conversion, misrepresentation, unjust enrichment, unfair trade
practices and related claims and asks that the Court: (i) declare MEEI
the owner of certain inventions claimed in the '349 Patent; (ii)
enjoin the Company from infringement of those claims or any action
that would diminish the validity or value of such claims; (iii)
declare that the Company breached an agreement with MEEI to share
equitably in any proceeds derived as a result of collaboration leading
to the '349 Patent; (iv) impose a constructive trust upon the Company
for any benefit that the Company has or will derive as a result of the
'349 Patent; and (v) award MEEI monetary relief for misappropriation
of trade secrets in an amount equal to the greater of MEEI's damages
or the Company's profits from any such misappropriation, and double or
treble damages under Massachusetts law.
On June 30, 2000, the Company served an answer and counterclaim
denying the material allegations of the complaint and asserting claims
against MEEI and two employees of MEEI. The Company's counterclaim
seeks: (i) to correct inventorship on the '349 Patent by adding an
additional MGH researcher as a joint inventor; (ii) a declaration
that the Company and MGH are joint owners of the '349 Patent; (iii) a
determination that MEEI is liable to the Company for conversion and
unfair trade practices under Massachusetts law; (iv) an injunction to
prohibit MEEI from prosecuting any patent application claiming subject
matter already claimed in the '349 Patent; and (v) an award of damages
and attorneys' fees. MEEI served a reply to the Company's counterclaim
on September 5, 2000. QLT subsequently dismissed voluntarily its
counterclaim for conversion.
On May 1, 2001, the United States Patent Office issued United States
Patent No. 6,225,303 (the "'303 Patent") to MEEI. The `303 Patent is
derived from the same patent family as the '349 Patent and claims a
method of treating unwanted choroidal neovasculature in a shortened
treatment time using verteporfin. The patent application which led to
the issuance of the '303 patent was filed and prosecuted by attorneys
for MEEI and, in contrast to the '349 patent, named only MEEI
researchers as inventors.
The same day the `303 patent was issued, MEEI commenced a second civil
suit against the Company and Novartis Ophthalmics, Inc. alleging
infringement of the `303 Patent (Civil Action No. 01-10747-EFH). The
suit seeks damages and injunctive relief. On August 15, 2001, the
Company served an answer to the complaint, denying its material
allegations and raising a number of affirmative defenses. Subsequently,
the Company amended its answer to assert 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
26
asks the court to declare that QLT and MGH are co-owners of the '303
patent. The counterclaim also requests a declaration that QLT does not
infringe, induce infringement, or contribute to infringement of the
'303 patent, asserting, among other reasons, that QLT and MGH are
rightful co-owners of the patent and QLT has a license from MGH of
MGH's co-ownership rights under the patent. In addition, the
counterclaim seeks a declaratory judgement that the '303 patent is
invalid and unenforceable. Finally, the Company's counterclaim seeks
an award of monetary damages for breach of material transfer agreements
governing MEEI's use of verteporfin, based upon MEEI's failure to
notify QLT of MEEI's intent to file the patent application that led to
the issuance of the '303 patent to MEEI.
In November 2001, MGH sought and was granted leave to intervene in the
action to protect its rights in the `303 patent. MGH's complaint in
intervention, like QLT's counterclaim, asks the court to correct
inventorship of the `303 patent by adding QLT and MGH researchers as
joint inventors of the inventions claimed in the patent and by
declaring that MGH is a joint owner of those inventions.
In 2002, QLT moved for summary judgment against MEEI on all counts of
MEEI's complaint in the first suit (Civil Action No. 00-10783-JLT).
The court has granted QLT's motions, thus dismissing all of MEEI's
claims in the first suit. QLT's counterclaims against MEEI in that
first suit remain outstanding. No trial has been scheduled in either
case, and none is expected until 2003 at the earliest.
The Company believes MEEI's claims are without merit and intends to
vigorously defend against such actions and pursue its counterclaims.
The outcome of this dispute is not presently determinable or
estimatable and there can be no assurance that the matter will be
resolved in favour of the Company. If the lawsuits are not resolved
in the Company's favour, the Company may be obliged to pay additional
royalties or other reasonable compensation for access to the inventions
claimed in the patents named in the suits.
SECURITIES LITIGATION
In January and February 2001, seven proposed securities class actions
were filed in the United States District Court for the Southern
District of New York on behalf of purchasers of the Company's common
shares between August 1, 2000 and December 14, 2000. On May 3, 2001,
the court ordered consolidation of the seven actions.
The complaints name as defendants the Company; Julia Levy, former
President, Chief Executive Officer and a current Director of the
Company; and Kenneth Galbraith, the Company's former Executive Vice
President, Chief Financial Officer and Corporate Secretary. The
defendants are charged with violating Sections 10(b) and 20(a) of the
Exchange Act.
The plaintiffs allege that on December 14, 2000, the Company
announced that it expected to miss its Visudyne sales estimates for
the fourth-quarter 2000, and that in response, the Company's common
share price dropped approximately 31%. The plaintiffs claim that the
Company's December 14, 2000 statements contradicted prior information
issued by the defendants concerning the demand for Visudyne and the
Company's prospects. The plaintiffs allege that the defendants
overstated the demand for Visudyne, did not properly disclose
reimbursement issues relating to Visudyne and that the defendants had
no basis in the months preceding the December announcement for their
projections of fourth-quarter sales. The plaintiffs further allege
that the intent of the individual defendants to mislead investors can
be inferred from their sale of a substantial amount of the Company's
common shares during the months of August and September 2000. The
plaintiffs seek injunctive relief, fees and expenses and compensatory
damages in an unspecified amount.
The Company believes that the plaintiffs' claims are without merit
and intends to vigorously defend against such actions. However, the
outcome of this claim is not presently determinable or estimatable
and there can be no assurance that the matter will be resolved in
favour of the Company and the other defendants. If the lawsuit is not
resolved in the Company's favour, there can be no guarantee that the
Company's insurance will be sufficient to pay for the damages awarded
to the plaintiffs.
The effect of a negative judgement or likely loss with respect to one
or both of the above-mentioned claims, if any, will be recorded in
the period it becomes determinable.
27
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
10.73 Research and Early Development Agreement dated as of June
7, 2001 between Kinetek Pharmaceuticals, Inc. and QLT Inc.
(1)
10.74 Amending Agreement to PDT Product Development,
Manufacturing and Distribution Agreement dated as of July
23, 2001 between Novartis Ophthalmics AG and QLT Inc.(1)
10.75 Development and Commercialization Agreement dated as of
August 13, 2001 between Xenova Limited and QLT Inc.(1)
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
99.3 Fully diluted earnings per share ("EPS") analysis for the
period ending September 30, 2002
(1) Certain portions of this agreement have been omitted pursuant
to a request for confidential treatment.
(b) Reports on Form 8-K
(i) QLT Inc. filed a current report on Form 8-K on August 28,
2002, announcing that Visudyne(R) (verteporfin) therapy was
granted marketing authorization from the European Commission
(EMEA) for the treatment of occult subfoveal choroidal
neovascularisation (CNV) secondary to age-related macular
degeneration (AMD). The European approval includes all
patients with subfoveal occult wet AMD with evidence of
recent or ongoing disease progression.
28
(ii) QLT Inc. filed a current report on Form 8-K on September
25, 2002, announcing that the United States
District Court for the District of Massachusetts entered
judgment in favor of QLT on all claims brought against it by
Massachusetts Eye and Ear Infirmary (MEEI) in a lawsuit
commenced by MEEI on April 23, 2000 (Civil Action No.
00-10783-JLT)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QLT INC.
---------------------------------------
(Registrant)
Date: November 12, 2002 By: /s/ Paul J. Hastings
--------------------------------------
Paul J. Hastings
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 2002 By: /s/ Michael J. Doty
--------------------------------------
Michael J. Doty
Senior Vice-President and Chief Financial Officer
(Principal Financial and Accounting Officer)
29
CERTIFICATION
I, Paul J. Hastings, President and Chief Executive Officer of QLT Inc.
("registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the registrant;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Paul J. Hastings
- -------------------------------------
Paul J. Hastings
President and Chief Executive Officer
30
CERTIFICATION
I, Michael J. Doty, Senior Vice-President and Chief Financial Officer of QLT
Inc. ("registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the registrant;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
6. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Michael J. Doty
- -------------------------------
Michael J. Doty
Senior Vice-President and Chief
Financial Officer
31
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.73 Research and Early Development Agreement dated as of June 7, 2001
between Kinetek Pharmaceuticals, Inc. and QLT Inc.(1)
10.74 Amending Agreement to PDT Product Development, Manufacturing and
Distribution Agreement dated as of July 23, 2001 between Novartis
Ophthalmics AG and QLT Inc.(1)
10.75 Development and Commercialization Agreement dated as of August 13, 2001
between Xenova Limited and QLT Inc.(1)
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002
99.3 Fully diluted earnings per share ("EPS") analysis for the period ending
September 30, 2002
(1) Certain portions of this agreement have been omitted pursuant to a request
for confidential treatment
32