Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - NOVELION THERAPEUTICS INC. | c23808exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - NOVELION THERAPEUTICS INC. | c23808exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - NOVELION THERAPEUTICS INC. | c23808exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - NOVELION THERAPEUTICS INC. | c23808exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 0-17082
QLT INC.
(Exact name of registrant as specified in its charter)
British Columbia, Canada | N/A | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
101 887 Great Northern Way, Vancouver, B.C., Canada | V5T 4T5 | |
(Address of principal executive offices) | (Zip code) |
Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of November 1, 2011, the registrant had 49,363,310 outstanding shares of common stock.
QLT INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 2011
September 30, 2011
TABLE OF CONTENTS
ITEM | PAGE | |||||||
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2 | ||||||||
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5 | ||||||||
13 | ||||||||
22 | ||||||||
22 | ||||||||
23 | ||||||||
23 | ||||||||
25 | ||||||||
26 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QLT Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands of U.S. dollars) | September 30, 2011 | December 31, 2010 | ||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 203,955 | $ | 209,478 | ||||
Accounts receivable |
10,244 | 10,720 | ||||||
Current portion of contingent consideration (Notes 9 and 11) |
37,908 | 36,520 | ||||||
Inventories (Note 2) |
2,681 | 3,324 | ||||||
Current portion of deferred income tax assets |
1,557 | 3,643 | ||||||
Current portion of mortgage receivable (Note 3) |
5,713 | 2,004 | ||||||
Prepaid and other |
2,043 | 2,958 | ||||||
264,101 | 268,647 | |||||||
Property, plant and equipment |
4,024 | 3,035 | ||||||
Deferred income tax assets |
1,550 | 2,700 | ||||||
Mortgage receivable (Note 3) |
| 6,013 | ||||||
Long-term inventories and other assets (Note 4) |
12,233 | 13,319 | ||||||
Contingent consideration (Notes 9 and 11) |
70,966 | 94,069 | ||||||
$ | 352,874 | $ | 387,783 | |||||
LIABILITIES |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 5,652 | $ | 6,031 | ||||
Income taxes payable |
11 | 716 | ||||||
Accrued liabilities (Note 5) |
7,363 | 6,323 | ||||||
Deferred income tax liability |
82 | 82 | ||||||
13,108 | 13,152 | |||||||
Uncertain tax position liabilities |
1,664 | 1,687 | ||||||
14,772 | 14,839 | |||||||
SHAREHOLDERS EQUITY |
||||||||
Share capital (Note 7) |
||||||||
Authorized |
||||||||
500,000,000 common shares without par value |
||||||||
5,000,000 first preference shares without par value,
issuable
in series |
||||||||
Issued and outstanding |
||||||||
Common shares |
462,429 | 479,998 | ||||||
September 30, 2011 49,363,310 shares |
||||||||
December 31, 2010 51,154,392 shares |
||||||||
Additional paid-in capital |
294,173 | 287,646 | ||||||
Accumulated deficit |
(521,469 | ) | (497,669 | ) | ||||
Accumulated other comprehensive income |
102,969 | 102,969 | ||||||
338,102 | 372,944 | |||||||
$ | 352,874 | $ | 387,783 | |||||
See the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
1
Table of Contents
QLT Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands of U.S. dollars except share and per share information) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Revenues |
||||||||||||||||
Net product revenue (Note 8) |
$ | 6,226 | $ | 5,535 | $ | 20,724 | $ | 24,786 | ||||||||
Royalties |
3,355 | 3,050 | 10,441 | 9,891 | ||||||||||||
9,581 | 8,585 | 31,165 | 34,677 | |||||||||||||
Costs and expenses |
||||||||||||||||
Cost of sales |
2,673 | 1,869 | 7,422 | 11,813 | ||||||||||||
Research and development |
11,282 | 8,101 | 32,334 | 22,776 | ||||||||||||
Selling, general and administrative |
5,842 | 5,354 | 19,198 | 15,238 | ||||||||||||
Depreciation |
328 | 306 | 1,040 | 922 | ||||||||||||
20,125 | 15,630 | 59,994 | 50,749 | |||||||||||||
Operating loss |
(10,544 | ) | (7,045 | ) | (28,829 | ) | (16,072 | ) | ||||||||
Investment and other income |
||||||||||||||||
Net foreign exchange (losses) gains |
(298 | ) | 409 | 39 | 78 | |||||||||||
Interest income |
146 | 602 | 534 | 1,599 | ||||||||||||
Fair value change in contingent consideration (Note 11) |
1,828 | 5,206 | 6,864 | 10,167 | ||||||||||||
Other gains |
9 | 24 | 18 | 392 | ||||||||||||
1,685 | 6,241 | 7,455 | 12,236 | |||||||||||||
Loss before income taxes |
(8,859 | ) | (804 | ) | (21,374 | ) | (3,836 | ) | ||||||||
(Provision for) recovery of income taxes (Note 10) |
(247 | ) | 107 | (2,426 | ) | 5,527 | ||||||||||
Net (loss) income |
$ | (9,106 | ) | $ | (697 | ) | $ | (23,800 | ) | $ | 1,691 | |||||
Basic and diluted net (loss) income per common share |
$ | (0.18 | ) | $ | (0.01 | ) | $ | (0.47 | ) | $ | 0.03 | |||||
Weighted average number of common shares outstanding (thousands) |
||||||||||||||||
Basic |
49,732 | 51,656 | 50,425 | 52,794 | ||||||||||||
Diluted |
49,732 | 51,656 | 50,425 | 53,789 |
See the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
2
Table of Contents
QLT Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands of U.S. dollars) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Cash (used in) generated by operating activities |
||||||||||||||||
Net (loss) income |
$ | (9,106 | ) | $ | (697 | ) | $ | (23,800 | ) | $ | 1,691 | |||||
Adjustments to reconcile net (loss) income to net cash
used in operating activities |
||||||||||||||||
Depreciation |
328 | 306 | 1,040 | 922 | ||||||||||||
Gain on sales of long-lived assets |
(8 | ) | | (17 | ) | (317 | ) | |||||||||
Share-based compensation |
690 | 618 | 2,283 | 1,872 | ||||||||||||
Unrealized foreign exchange gains (losses) |
206 | (425 | ) | 102 | (113 | ) | ||||||||||
Interest earned on note receivable |
| (250 | ) | | (741 | ) | ||||||||||
Deferred income taxes |
395 | 942 | 3,276 | (4,337 | ) | |||||||||||
Changes in non-cash operating assets and liabilities |
||||||||||||||||
Accounts receivable |
3,101 | 3,952 | 815 | 270 | ||||||||||||
Inventories |
309 | 273 | 1,323 | 757 | ||||||||||||
Long-term deposits and other assets |
319 | 592 | 1,365 | 4,569 | ||||||||||||
Accounts payable |
476 | 383 | (256 | ) | 73 | |||||||||||
Income taxes receivable / payable |
1,945 | 6,027 | (940 | ) | 5,951 | |||||||||||
Other accrued liabilities |
881 | 684 | 401 | 12 | ||||||||||||
Deferred revenue |
| | | (4,244 | ) | |||||||||||
(464 | ) | 12,405 | (14,408 | ) | 6,365 | |||||||||||
Cash provided by investing activities |
||||||||||||||||
Net proceeds from sale of property, plant and equipment |
8 | | 17 | | ||||||||||||
Purchase of property, plant and equipment |
(530 | ) | (231 | ) | (2,069 | ) | (1,430 | ) | ||||||||
Net proceeds from sale of long-lived assets |
| | | 317 | ||||||||||||
Proceeds from mortgage receivable |
| 3,822 | 2,004 | 3,822 | ||||||||||||
Proceeds from contingent consideration(1) |
8,192 | 4,321 | 21,715 | 17,644 | ||||||||||||
7,670 | 7,912 | 21,667 | 20,353 | |||||||||||||
Cash used in financing activities |
||||||||||||||||
Common shares repurchased, including fees |
(4,155 | ) | (8,668 | ) | (14,583 | ) | (17,082 | ) | ||||||||
Issuance of common shares |
66 | 490 | 1,838 | 763 | ||||||||||||
(4,089 | ) | (8,178 | ) | (12,745 | ) | (16,319 | ) | |||||||||
Effect of exchange rate changes on cash and cash equivalents |
(262 | ) | 152 | (37 | ) | 71 | ||||||||||
Net increase (decrease) in cash and cash equivalents |
2,855 | 12,291 | (5,523 | ) | 10,470 | |||||||||||
Cash and cash equivalents, beginning of period |
201,100 | 186,293 | 209,478 | 188,114 | ||||||||||||
Cash and cash equivalents, end of period |
$ | 203,955 | $ | 198,584 | $ | 203,955 | $ | 198,584 | ||||||||
Supplementary cash flow information: |
||||||||||||||||
Interest paid |
$ | | $ | | $ | | $ | | ||||||||
Income taxes paid |
2 | | 938 | 10 |
(1) | On October 1, 2009, all of the shares of QLT USA, Inc. (QLT USA) were sold to TOLMAR
Holding, Inc. (Tolmar) for up to an aggregate $230.0 million, plus cash on hand of $118.3
million. The purchase price included contingent consideration of $200.0 million which had a
fair value of $156.2 million on October 1, 2009, representing a non-cash investing activity. |
|
During the three months ended September 30, 2011, proceeds received on collection of the
contingent consideration totalled $10.0 million (2010 $9.5 million). Approximately $8.2 million
(2010 $4.3 million) of the proceeds were included within cash provided by investing activities.
The remaining $1.8 million (2010 $5.2 million) of the proceeds were recorded in the Statement
of Operations as the fair value change in contingent
consideration and were therefore reflected in the net (loss) income line item within cash used in
operating activities. |
||
During the nine months ended September 30, 2011, proceeds received on collection of the
contingent consideration totalled $28.6 million (2010 $27.8 million). Approximately $21.7
million (2010 $17.6 million) of the proceeds were included within cash provided by investing
activities. The remaining $6.9 million (2010 $10.2 million) of the proceeds were recorded in
the Statement of Operations as the fair value change in contingent consideration and were
therefore reflected in the net (loss) income line item within cash used in operating activities. |
See the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
3
Table of Contents
QLT Inc.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||
share information are expressed in | Additional | Other | Total | |||||||||||||||||||||||||
share information are expressed in | Common Shares | Paid-in | Comprehensive | Accumulated | Comprehensive | Shareholders | ||||||||||||||||||||||
thousands of U.S. dollars) | Shares | Amount | Capital | Income | Deficit | Loss | Equity | |||||||||||||||||||||
Balance at January 1, 2010 |
53,789,289 | $ | 506,023 | $ | 275,592 | $ | 102,969 | $ | (480,130 | ) | $ | | $ | 404,454 | ||||||||||||||
Exercise of stock
options, for cash, at
prices ranging from CAD
$2.44 to CAD $6.27 per
share |
265,585 | 1,243 | (333 | ) | | | | 910 | ||||||||||||||||||||
Stock-based compensation |
| | 2,365 | | | | 2,365 | |||||||||||||||||||||
Common share repurchase |
(2,900,482 | ) | (27,268 | ) | 10,022 | | | | (17,246 | ) | ||||||||||||||||||
Net loss |
| | | | (17,539 | ) | (17,539 | ) | (17,539 | ) | ||||||||||||||||||
Comprehensive loss |
| | | | | (17,539 | ) | | ||||||||||||||||||||
Balance at December 31,
2010 |
51,154,392 | $ | 479,998 | $ | 287,646 | $ | 102,969 | $ | (497,669 | ) | $ | | $ | 372,944 | ||||||||||||||
Exercise of stock
options, for cash, at
prices ranging from CAD
$2.44 to CAD $6.27 per
share |
138,883 | 1,002 | (288 | ) | | | | 714 | ||||||||||||||||||||
Stock-based compensation |
| | 955 | | | | 955 | |||||||||||||||||||||
Common share repurchase |
(533,500 | ) | (5,006 | ) | 1,331 | | | | (3,675 | ) | ||||||||||||||||||
Net loss |
| | | | (8,549 | ) | (8,549 | ) | (8,549 | ) | ||||||||||||||||||
Comprehensive loss |
| | | | | (8,549 | ) | | ||||||||||||||||||||
Balance at March 31, 2011 |
50,759,775 | $ | 475,994 | $ | 289,644 | $ | 102,969 | $ | (506,218 | ) | $ | | $ | 362,389 | ||||||||||||||
Exercise of stock
options, for cash, at
prices ranging from CAD
$2.44 to CAD $6.27 per
share |
196,996 | 1,504 | (438 | ) | | | | 1,066 | ||||||||||||||||||||
Stock-based compensation |
| | 688 | | | | 688 | |||||||||||||||||||||
Common share repurchase |
(1,006,572 | ) | (9,436 | ) | 2,300 | | | | (7,136 | ) | ||||||||||||||||||
Net loss |
| | | | (6,145 | ) | (6,145 | ) | (6,145 | ) | ||||||||||||||||||
Comprehensive loss |
| | | | | (6,145 | ) | | ||||||||||||||||||||
Balance at June 30, 2011 |
49,950,199 | $ | 468,062 | $ | 292,194 | $ | 102,969 | $ | (512,363 | ) | $ | | $ | 350,862 | ||||||||||||||
Exercise of stock
options, for cash, at
prices ranging from CAD
$2.44 to CAD $6.27 per
share |
42,556 | 264 | (76 | ) | | | | 188 | ||||||||||||||||||||
Stock-based compensation |
| | 681 | | | | 681 | |||||||||||||||||||||
Common share repurchase |
(629,445 | ) | (5,897 | ) | 1,374 | | | | (4,523 | ) | ||||||||||||||||||
Net loss |
| | | | (9,106 | ) | (9,106 | ) | (9,106 | ) | ||||||||||||||||||
Comprehensive loss |
| | | | | (9,106 | ) | | ||||||||||||||||||||
Balance at September 30,
2011 |
49,363,310 | $ | 462,429 | $ | 294,173 | $ | 102,969 | (1) | $ | (521,469 | ) | $ | | $ | 338,102 | |||||||||||||
(1) | At September 30, 2011 our accumulated other comprehensive income is entirely related to
historical cumulative translation adjustments from the application of U.S. dollar reporting when
the functional currency of QLT Inc. was the Canadian dollar. |
See the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
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Table of Contents
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Throughout this Quarterly Report on Form 10-Q (this Report), the words we, us, our, the
Company and QLT refer to QLT Inc. and its wholly owned subsidiaries, QLT Plug Delivery, Inc.,
QLT Therapeutics, Inc. and QLT Ophthalmics, Inc., unless stated otherwise.
1. CONDENSED SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
QLT is an ocular-focused company dedicated to the development and commercialization of innovative
ocular products that address the unmet medical needs of patients and clinicians worldwide. We are
focused on developing our synthetic retinoid program for the treatment of certain inherited retinal
diseases, developing our proprietary punctal plug drug delivery system, as well as U.S. marketing
of our commercial product, Visudyne®, for the treatment of wet age related macular
degeneration (wet AMD).
Basis of Presentation
These unaudited condensed consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and pursuant to the rules and
regulations of the United States Securities and Exchange Commission (the SEC) for the
presentation of interim financial information. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance with United States
generally accepted accounting principles have been condensed, or omitted, pursuant to such rules
and regulations. These financial statements do not include all disclosures required for annual
financial statements and should be read in conjunction with our audited consolidated financial
statements and notes thereto included as part of our Annual Report on Form 10-K for the year ended
December 31, 2010 (our 2010 Annual Report). All amounts are expressed in United States dollars
unless otherwise noted.
In the opinion of management, the condensed consolidated financial statements reflect all
adjustments (including reclassifications and normal recurring adjustments) necessary to present
fairly the financial position, results of operations and cash flows at September 30, 2011, and for
all periods presented. The interim results presented are not necessarily indicative of results
that can be expected for a full year.
Principles of Consolidation
These consolidated financial statements include the accounts of QLT and its subsidiaries, all of
which are wholly owned. The principal subsidiaries included in our consolidated financial
statements are QLT Plug Delivery, Inc., QLT Therapeutics, Inc. and QLT Ophthalmics, Inc., each of
which is incorporated in the State of Delaware in the United States of America. All intercompany
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the reporting periods
presented. Significant estimates are used for, but not limited to, provisions for non-completion
of inventory, provision for excess inventory, assessment of the recoverability of long-lived
assets, the fair value of the mortgage receivable, the fair value of contingent consideration,
allocation of costs to manufacturing under a standard costing system, allocation of overhead
expenses to research and development, sales rebates and return accruals, determination of the fair
value of assets and liabilities acquired in net asset acquisitions or purchase business
combinations, stock-based compensation, provisions for taxes, tax assets and liabilities. Actual
results may differ from estimates made by management.
Segment Information
We operate in one industry segment, which is the business of developing, manufacturing, and
commercializing opportunities in ophthalmology. Our chief operating decision maker reviews our
operating results on an aggregate basis and manages our operations as a single operating segment.
Revenue Recognition
Net Product Revenue
Net product revenue is derived from sales of Visudyne to distributors in the U.S. and to Novartis
Pharma AG (Novartis) outside the U.S., plus reimbursement of certain costs from Novartis. We
recognize revenue from the sale of Visudyne when persuasive evidence of an arrangement exists,
delivery has occurred, the end selling price of Visudyne is fixed or determinable, and
collectibility is reasonably assured. For U.S. Visudyne sales, provisions for
certain vendor charge-backs, discounts, Medicaid rebates, distributor fees and product returns are
accounted for as a reduction of revenue in the same period the related revenue is recorded.
Rebates, vendor charge-backs, and discounts are estimated based on contractual terms, historical
experience, and projected market conditions. Product returns are estimated based on historical
experience and business trends. We recognize revenue upon delivery, when title and risk of loss
passes to Novartis and other distributors.
5
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Royalties
We recognize royalties when product is sold by Novartis to end customers based on royalty rates
specified in the Amended and Restated PDT Product Development, Manufacturing and Distribution
Agreement (Amended PDT Agreement) with Novartis. Royalties are based on net product sales (gross
sales less discounts, allowances and other items) and calculated based on information supplied to
us by Novartis.
Income Taxes
Income taxes are reported using the asset and liability method, whereby deferred tax assets and
liabilities are recognized for the future tax consequences attributable to: (i) differences between
the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases, and (ii) operating loss and tax credit carry forwards using applicable enacted tax
rates. An increase or decrease in these tax rates will increase or decrease the carrying value of
future net tax assets resulting in an increase or decrease to net income. Income tax credits, such
as investment tax credits, are included as part of the provision for income taxes. The realization
of our deferred tax assets is primarily dependent on generating sufficient taxable income prior to
expiration of any loss carry forward balance. A valuation allowance is provided when it is more
likely than not that a deferred tax asset may not be realized. Changes in valuation allowances are
included in our tax provision in the period of change.
Contingent Consideration
Contingent consideration arising from the sale of all of the shares of our then wholly-owned
subsidiary, QLT USA, on October 1, 2009 is measured at fair value. The contingent consideration is
revalued at each reporting period and changes are included in continuing operations.
Net (Loss) Income Per Common Share
Basic net (loss) income per common share is computed using the weighted average number of common
shares outstanding during the period. Diluted net (loss) 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 out the computation of basic and diluted net (loss) income per common
share:
Three months ended | Nine months ended | |||||||||||||||
(In thousands of U.S. dollars, except share and per share | September 30, | September 30, | ||||||||||||||
data) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Numerator: |
||||||||||||||||
Net (loss) income |
$ | (9,106 | ) | $ | (697 | ) | $ | (23,800 | ) | $ | 1,691 | |||||
Denominator: (thousands) |
||||||||||||||||
Weighted average common shares outstanding |
49,732 | 51,656 | 50,425 | 52,794 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Stock options |
| | | 995 | ||||||||||||
Diluted weighted average common shares outstanding |
49,732 | 51,656 | 50,425 | 53,789 | ||||||||||||
Basic and diluted net (loss) income per common share |
$ | (0.18 | ) | $ | (0.01 | ) | $ | (0.47 | ) | $ | 0.03 |
Excluded from the calculation of diluted net loss per common share for the three and nine months
ended September 30, 2011 were 6,365,176 shares related to stock options because their effect was
anti-dilutive. For the three and nine months ended September 30, 2010, 6,394,907 and 3,564,189
shares, respectively, were excluded from the calculation of diluted net (loss) income per common
share because their effect was anti-dilutive.
Fair Value of Financial Assets and Liabilities
The carrying values of cash and cash equivalents, trade receivables and payables, contingent
consideration and the mortgage receivable approximate fair value. We estimate the fair value of our
financial instruments using the market approach. The fair values of our financial instruments
reflect the amounts that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date (exit price).
6
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Recently Issued Accounting Standards
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and IFRSs. ASU No. 2011-04 generally provides a uniform
framework for fair value measurements and related disclosures between U.S. GAAP and International
Financial Reporting Standards (IFRS). Additional disclosure requirements in the update include:
(1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a
description of the valuation processes used by the entity, and a qualitative discussion about the
sensitivity of the measurements to changes in the unobservable inputs; (2) for an entitys use of a
nonfinancial asset that is different from the assets highest and best use, the reason for the
difference; (3) for financial instruments not measured at fair value but for which disclosure of
fair value is required, the fair value hierarchy level in which the fair value measurements were
determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value
hierarchy. ASU 2011-04 will be effective for interim and annual periods beginning on or after
December 15, 2011, which for us will be our 2012 first quarter. We are currently evaluating the
impact that ASU 2011-04 will have on our financial statements.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which amends
existing guidance by allowing only two options for presenting the components of net income and
other comprehensive income: (1) in a single continuous financial statement, statement of
comprehensive income or (2) in two separate but consecutive financial statements, consisting of an
income statement followed by a separate statement of other comprehensive income. Also, items that
are reclassified from other comprehensive income to net income must be presented on the face of the
financial statements. ASU No. 2011-05 requires retrospective application, and it is effective for
fiscal years, and interim periods within those years, beginning after December 15, 2011 (for us
this will be our 2012 first quarter), with early adoption permitted. We believe the adoption of
this update will change the way in which comprehensive income is presented and provide additional
detail on the face of certain financial statements when applicable, rather than as disclosed
currently. It will not have any other impact on our financial statements.
Recently Adopted Accounting Standards
In October 2009, the FASB issued EITF 08-01, Revenue Arrangements with Multiple Deliverables
(currently within the scope of FASB Accounting Standards Codification (ASC) Subtopic 605-25). This
statement provides principles for allocation of consideration among its multiple-elements, allowing
more flexibility in identifying and accounting for separate deliverables under an arrangement. The
EITF introduces an estimated selling price method for valuing the elements of a bundled arrangement
if vendor-specific objective evidence or third-party evidence of selling price is not available,
and significantly expands related disclosure requirements. This standard is effective on a
prospective basis for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Alternatively, adoption may be on a retrospective basis, and
early application is permitted. The prospective adoption of this standard on January 1, 2011, did
not have a material impact on our financial condition, results of operations or cash flows.
In March 2010, the FASB ratified the EITF final consensus on Issue ASC 2010-17, Milestone Method of
Revenue Recognition. The guidance in this consensus allows the milestone method as an acceptable
revenue recognition methodology when an arrangement includes substantive milestones. The guidance
provides a definition of a substantive milestone and should be applied regardless of whether the
arrangement includes single or multiple deliverables or units of accounting. The scope of this
consensus is limited to transactions involving milestones relating to research and development
deliverables. The guidance includes enhanced disclosure requirements about each arrangement,
individual milestones and related contingent consideration, information about substantive
milestones and factors considered in the determination. The consensus is effective prospectively to
milestones achieved in fiscal years, and interim periods within those years, after June 15, 2010.
Early application and retrospective application are permitted. The prospective adoption of this
standard on January 1, 2011, did not have a material impact on our financial condition, results of
operations or cash flows.
In December 2010, the FASB issued ASU 2010-27, Fees Paid to the Federal Government by
Pharmaceutical Manufacturers. ASU 2010-27 provides guidance on the recognition and classification
of the annual fee imposed by the Patient Protection and Affordable Care Act as amended by the
Health Care and Education Affordability Reconciliation Act on pharmaceutical companies that sell
branded prescription drugs or biologics to specified government programs in the United States.
Under this guidance, the annual fee should be estimated and recognized in full as a liability upon
the first qualifying sale with a corresponding deferred cost that is amortized to operating expense
using a straight-line method of allocation unless another method better allocates the fee over the
calendar year in which it is payable. The annual fee is not deductible for federal income tax
purposes. This guidance became effective for calendar years beginning after December 31, 2010. The
prospective adoption of this standard on January 1, 2011, did not have a material impact on our
financial condition, results of operations or cash flows.
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2. INVENTORIES
(In thousands of U.S. dollars) | September 30, 2011 | December 31, 2010 | ||||||
Raw materials and supplies |
$ | 56 | $ | 74 | ||||
Work-in-process |
26,653 | 28,045 | ||||||
Finished goods |
416 | 274 | ||||||
Provision for excess inventory |
(11,085 | ) | (11,077 | ) | ||||
Provision for non-completion of inventory |
(2,185 | ) | (2,185 | ) | ||||
$ | 13,855 | $ | 15,131 | |||||
Long-term inventory, net of provisions |
(11,174 | ) | (11,807 | ) | ||||
Current inventory |
$ | 2,681 | $ | 3,324 | ||||
We review our inventory quantities against our forecast of future demand and market conditions and,
if necessary, provide a reserve for potential excess or obsolete inventory. Our provision for
excess inventory of $11.1 million as of September 30, 2011, which was applied against our long-term
inventory, has been determined based on our forecast of future Visudyne demand.
We record a provision for non-completion of inventory to provide for the potential failure of
inventory batches in production to pass quality inspection. During the three and nine months ended
September 30, 2011, there were no charges against the provision for non-completion of product
inventory.
We classify inventories that we do not expect to convert or consume in the next year as non-current
based upon an analysis of market conditions such as sales trends, sales forecasts, sales price, and
other factors. See Note 4 Long-Term Inventories and Other Assets.
3. MORTGAGE RECEIVABLE
Under the terms of the original mortgage agreement, our mortgage receivable was due on August 29,
2010 and comprised a two-year, 6.5% interest-only, second mortgage in the amount of CAD $12.0
million related to the sale of our land and building to Discovery Parks Holdings Ltd., an affiliate
of Discovery Parks Trust (Discovery Parks) in 2008. Effective August 29, 2010, we entered into
an amended mortgage agreement with Discovery Parks, pursuant to which we received payment of CAD
$4.0 million on August 30, 2010. The remaining mortgage receivable of CAD $8.0 million comprised a
7.5% interest-only second mortgage, of which CAD $2.0 million was due on or before May 1, 2011, and
CAD $6.0 million is due on August 29, 2012. We have received the CAD $2.0 million that was due on
or before May 1, 2011.
4. LONG-TERM INVENTORIES AND OTHER ASSETS
(In thousands of U.S. dollars) | September 30, 2011 | December 31, 2010 | ||||||
Inventory, net of provisions |
$ | 11,174 | $ | 11,807 | ||||
Deposits and other |
1,059 | 1,512 | ||||||
$ | 12,233 | $ | 13,319 | |||||
5. ACCRUED LIABILITIES
(In thousands of U.S. dollars) | September 30, 2011 | December 31, 2010 | ||||||
Royalties |
$ | 1,033 | $ | 1,225 | ||||
Compensation |
3,836 | 3,698 | ||||||
Directors Deferred Share Units compensation |
1,710 | 1,400 | ||||||
Other |
784 | | ||||||
$ | 7,363 | $ | 6,323 | |||||
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6. FOREIGN EXCHANGE FACILITY
We have a foreign exchange facility for the sole purpose of entering into foreign exchange
contracts. The facility allows us to enter into a maximum of $100.0 million in forward foreign
exchange contracts for terms up to 15 months, or in the case of spot foreign exchange transactions,
a maximum of $70.0 million. The facility requires security in the form of cash or money market
instruments based on the contingent credit exposure for any outstanding foreign exchange
transactions. At September 30, 2011, there was no collateral pledged as security for this facility,
as we had no outstanding foreign exchange transactions.
7. SHARE CAPITAL
(a) Share Buy-Back Programs
On December 8, 2010, we announced that our Board of Directors authorized the repurchase of up to
3,615,285 of our issued and outstanding common shares, being 10% of our public float as of December
9, 2010, over a 12-month period commencing December 16, 2010 under a normal course issuer bid. All
purchases are to be effected in the open market through the facilities of the TSX or NASDAQ, and in
accordance with regulatory requirements. The actual number of common shares which are purchased and
the timing of such purchases will be determined by management, subject to compliance with
applicable law. All common shares repurchased will be cancelled. Cumulative purchases under this
program through September 30, 2011, were 2,191,817 shares at an average price of $7.02, for a total
cost of $15.4 million.
On October 27, 2009, we announced that our Board of Directors authorized the repurchase of up to
2,731,534 of our common shares, being 5% of our issued and outstanding common shares, over a
12-month period commencing November 3, 2009 under a normal course issuer bid. In May 2010, the
normal course issuer bid was increased to repurchase up to 4,700,060 shares, representing 10% of
our public float. All purchases under the bid were effected in the open market through the
facilities of the NASDAQ, and in accordance with all regulatory requirements. Total purchases under
this program were 3,744,972 shares at an average price of $5.59 per share, for a total cost of
$20.9 million.
(b) Stock Options
We use the Black-Scholes option pricing model to estimate the value of the options at each grant
date, using the following weighted average assumptions (no dividends are assumed):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Annualized volatility |
| 55.4 | % | 48.8 | % | 53.8 | % | |||||||||
Risk-free interest rate |
| 2.1 | % | 2.1 | % | 2.3 | % | |||||||||
Expected life (years) |
| 3.7 | 3.7 | 3.7 |
The Black-Scholes option pricing model was developed for use in estimating the value of traded
options that have no vesting restrictions and are fully transferable. In addition, option pricing
models require the input of highly subjective assumptions, including the expected stock price
volatility. We project expected volatility and expected life of our stock options based upon
historical and other economic data trended into future years. The risk-free interest rate
assumption is based upon observed interest rates appropriate for the terms of our stock options.
There were no stock options granted during the three months ended September 30, 2011. The weighted
average grant date fair value of stock options granted during the three months ended September 30,
2010 was CAD $2.79. The weighted average grant date fair value of stock options granted during the
nine months ended September 30, 2011 and 2010 was CAD $2.79 and CAD $2.61, respectively.
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The impact on our results of operations of recording stock-based compensation for the three and
nine months ended September 30, 2011 and 2010 was as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands of U.S. dollars) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Cost of sales |
$ | 58 | $ | 5 | $ | 69 | $ | 158 | ||||||||
Research and development |
369 | 338 | 1,100 | 957 | ||||||||||||
Selling, general and administrative |
263 | 275 | 1,114 | 757 | ||||||||||||
Stock-based compensation expense before
income taxes |
690 | 618 | 2,283 | 1,872 | ||||||||||||
Related income tax benefits |
(22 | ) | (13 | ) | (58 | ) | (32 | ) | ||||||||
Stock-based compensation, net of income taxes |
$ | 668 | $ | 605 | $ | 2,225 | $ | 1,840 | ||||||||
At September 30, 2011, total unrecognized estimated compensation cost related to non-vested stock
options was $4.8 million, which is expected to be recognized over 36 months with a weighted average
period of 2.1 years.
The intrinsic value of stock options exercised and the related cash from exercise of stock options
during the three and nine months ended September 30, 2011 and 2010 was as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands of U.S. dollars) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Intrinsic value of stock options exercised |
$ | 113 | $ | 342 | $ | 841 | $ | 558 | ||||||||
Cash from exercise of stock options |
$ | 188 | $ | 490 | $ | 1,968 | $ | 763 |
Upon option exercise, we issue new shares of stock. The share-based compensation capitalized as
part of inventory and the related tax benefits recorded were negligible for all periods presented
above.
8. NET PRODUCT REVENUE
Under the terms of the Amended PDT Agreement with Novartis, on January 1, 2010, we received from
Novartis the exclusive U.S. rights to the Visudyne patents to sell and market Visudyne in the U.S.
In the nine months ended September 30, 2010, $5.0 million of previously deferred revenue related to
inventory previously shipped to Novartis for sales outside the U.S. was recognized as revenue.
Details of our revenue recognition accounting policy are described in Note 1 Condensed Summary
of Significant Accounting Policies.
Net product revenue for the three and nine months ended September 30, 2011 and 2010, was determined
as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands of U.S. dollars) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
U.S. Visudyne sales by QLT |
$ | 3,853 | $ | 5,218 | $ | 15,631 | $ | 16,668 | ||||||||
Visudyne sales to Novartis |
2,026 | | 4,011 | 6,988 | ||||||||||||
Add: Royalties reimbursed to QLT |
337 | 308 | 1,051 | 999 | ||||||||||||
Add: Other costs reimbursed to QLT |
10 | 9 | 31 | 131 | ||||||||||||
Net product revenue from Visudyne sales |
$ | 6,226 | $ | 5,535 | $ | 20,724 | $ | 24,786 | ||||||||
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The tables below summarize end-user Visudyne sales for the three and nine months ended September
30, 2011 and 2010. Under the Amended PDT Agreement with Novartis, Visudyne is sold by QLT in the
U.S., and by Novartis outside the U.S. (for which we earn a 20% royalty on net sales). See Note 1 -
Condensed Summary of Significant Accounting Policies.
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands of U.S. dollars) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
U.S. |
$ | 3,853 | $ | 5,218 | $ | 15,631 | $ | 16,668 | ||||||||
Europe |
5,729 | 5,303 | 19,856 | 19,447 | ||||||||||||
Rest of World |
11,044 | 9,945 | 32,350 | 30,010 | ||||||||||||
Worldwide |
$ | 20,626 | $ | 20,466 | $ | 67,837 | $ | 66,125 | ||||||||
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
U.S. |
19 | % | 25 | % | 23 | % | 25 | % | ||||||||
Europe |
28 | % | 26 | % | 29 | % | 29 | % | ||||||||
Rest of World |
53 | % | 49 | % | 48 | % | 46 | % | ||||||||
Worldwide |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
9. CONTINGENT CONSIDERATION
On October 1, 2009, we divested the Eligard® product line as part of the sale of all of
the shares of our U.S. subsidiary, QLT USA, to Tolmar for up to an aggregate $230.0 million plus
cash on hand of $118.3 million. Pursuant to the stock purchase agreement, we received $20.0 million
on closing and $10.0 million on October 1, 2010 and expect to receive up to an additional $200.0
million payable on a quarterly basis in amounts equal to 80% of the royalties paid under the
license agreement with Sanofi Synthelabo Inc. (Sanofi) for the commercial marketing of Eligard in
the U.S. and Canada, and the license agreement with MediGene Aktiengesellschaft (MediGene) which,
effective March 1, 2011, has been assigned to Astellas Pharma Europe Ltd. (Astellas) for the
commercial marketing of Eligard in Europe. The estimated fair value of these expected future
quarterly payments is reflected as Contingent Consideration on our Condensed Consolidated Balance
Sheet. We are entitled to these payments until the earlier of our receipt of the additional $200.0
million or October 1, 2024. As of September 30, 2011, we had received an aggregate $74.0 million of
contingent consideration. We expect to receive the remaining $126.0 million on a quarterly basis,
over the next three to four years. The contingent consideration payments are not generated from a
migration or continuation of activities and therefore are not direct cash flows of the divested
business. We have not had any continuing involvement with this business following its sale. See
Note 11 Financial Instruments and Concentration of Credit Risk.
10. INCOME TAXES
The change in the effective tax rate was primarily due to changes in the overall mix of income
(loss) in the jurisdictions in which we operate, including changes in our valuation allowance in
such jurisdictions. In 2010, we completed an intra-entity transfer of intellectual property and,
as a result, shifted certain related future development expenditures to the acquiring entity.
During 2011, as insufficient evidence exists to support current or future realization of the tax
benefits associated with such development expenditures as well as certain other current period
expenditures, the benefit of certain tax assets has not been recognized in the current periods. The
tax recovery for the nine months ended September 30, 2010 reflected a benefit of $5.6 million which
was recorded as a result of the restructuring of our arrangement with Novartis under the Amended
PDT Agreement.
11. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
We have various financial instruments that must be measured under the fair value standard including
cash and cash equivalents, the mortgage receivable and, from time to time, forward currency
contracts. The mortgage owed to us is recorded as a receivable and is carried at amortized cost.
Based on market information, the book value of our mortgage receivable approximates fair value. Our
financial assets and liabilities are measured using inputs from the three levels of the fair value
hierarchy.
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The following table provides information about our assets and liabilities that are measured at fair
value on a recurring basis as of September 30, 2011 and indicates the fair value hierarchy of the
valuation techniques we utilized to determine such fair value:
Carrying Value | Fair Value Measurements at September 30, 2011 | |||||||||||||||
(In thousands of U.S. dollars) | September 30, 2011 | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 203,955 | $ | 203,955 | $ | | $ | | ||||||||
Contingent consideration(1) |
108,874 | | | 108,874 | ||||||||||||
Total |
$ | 312,829 | $ | 203,955 | $ | | $ | 108,874 | ||||||||
(1) | To estimate the fair value of contingent consideration at September 30, 2011, we used a
discounted cash flow model based on estimated timing and amount of future cash flows,
discounted using a cost of capital of 10% determined by management after considering
available market and industry information. Future cash flows were estimated by utilizing
external market research to estimate market size, to which we applied market share,
pricing, and foreign exchange assumptions based on historical sales data, expected future
competition and current exchange rates. If the discount rate were to increase by 1%, the
contingent consideration would decrease by $1.5 million, from $108.9 million to $107.4
million. If estimated future revenues were to decrease by 10%, the contingent
consideration would decrease by $1.7 million, from $108.9 million to $107.2 million. |
The following table represents a reconciliation of our asset (contingent consideration)
measured and recorded at fair value on a recurring basis, using significant unobservable
inputs (Level 3):
(In thousands of U.S. dollars) | Level 3 | |||
Balance at January 1, 2010 |
$ | 151,078 | ||
Transfers to Level 3 |
| |||
Settlements |
(36,982 | ) | ||
Fair value change in contingent consideration |
16,493 | |||
Balance at December 31, 2010 |
$ | 130,589 | ||
Transfers to Level 3 |
| |||
Settlements |
(11,172 | ) | ||
Fair value change in contingent consideration |
2,282 | |||
Balance at March 31, 2011 |
$ | 121,699 | ||
Transfers to Level 3 |
| |||
Settlements |
(7,386 | ) | ||
Fair value change in contingent consideration |
2,753 | |||
Balance at June 30, 2011 |
$ | 117,066 | ||
Transfers to Level 3 |
| |||
Settlements |
(10,020 | ) | ||
Fair value change in contingent consideration |
1,828 | |||
Balance at September 30, 2011 |
$ | 108,874 | ||
We purchase goods and services primarily in U.S. dollars and Canadian dollars, and earn most of our
revenues in U.S. dollars. As at each of September 30, 2011 and 2010, we had no outstanding forward
foreign currency contracts.
Other financial instruments that potentially subject us to concentration of credit risk include our
cash, cash equivalents, accounts receivable, contingent consideration, and mortgage receivable. To
limit our credit exposure in regards to cash and cash equivalents, we deposit our cash with high
quality financial institutions and the primary goals of our treasury policy are capital
preservation and liquidity. Our treasury policy limits investments to certain money market
securities issued by governments, financial institutions and corporations with investment-grade
credit ratings, and places restrictions on maturities and concentration by issuer.
Our accounts receivable, as at September 30, 2011 and December 31, 2010, comprised amounts
primarily owing from Novartis, ASD Specialty Healthcare, Inc. d/b/a Besse Medical (our principal
U.S. wholesale distributor of Visudyne) and Priority Healthcare Distribution, Inc. d/b/a CuraScript
SD Specialty Distribution.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following information should be read in conjunction with the accompanying unaudited interim
condensed consolidated financial statements and notes thereto, which are prepared in accordance
with generally accepted accounting principles (GAAP) in the United States (U.S.) and our
audited consolidated financial statements and notes thereto included as part of our Annual Report
on Form 10-K for the year ended December 31, 2010 (our 2010 Annual Report).
All of the following amounts are expressed in U.S. dollars unless otherwise indicated.
Note regarding Trademarks
The following words used in this Report are trademarks:
| Avastin® is a registered trademark of Genentech, Inc. |
| Eligard® is a registered trademark of Sanofi S.A. |
| Lucentis® is a registered trademark of Genentech, Inc. |
| Visudyne® is a registered trademark of Novartis AG. |
| Xalatan® is a registered trademark of Pfizer Health AB. |
Any words used in this Report that are trademarks but are not referred to above are the property of
their respective owners.
OVERVIEW
QLT is an ocular-focused company dedicated to the development and commercialization of innovative
ocular products that address the unmet medical needs of patients and clinicians worldwide. We are
focused on developing our synthetic retinoid program for the treatment of certain inherited retinal
diseases, developing our proprietary punctal plug drug delivery system, as well as U.S. marketing
of our commercial product, Visudyne®, for the treatment of wet age related macular
degeneration (wet AMD).
Products, Revenues and Other Sources of Funds
We have one commercial product, Visudyne, which utilizes light-activated photodynamic therapy
(PDT) to treat the eye disease known as wet AMD, the leading cause of blindness in people over
the age of 50 in North America and Europe. Visudyne is also used for the treatment of subfoveal
choroidal neovascularization secondary to pathologic myopia, or severe near-sightedness, and
presumed ocular histoplasmosis. Visudyne was co-developed by QLT and Novartis Pharma AG
(Novartis) of Switzerland and is marketed and sold in over 80 countries worldwide.
On January 1, 2010, we received from Novartis the exclusive U.S. rights to the Visudyne patents to
sell and market Visudyne in the U.S. As a result, we operate a direct marketing and sales force
through our U.S. subsidiary, QLT Ophthalmics, Inc., and have rights to all end-user revenue derived
from Visudyne sales in the U.S. Novartis continues to market and sell Visudyne for ophthalmic use
outside the U.S. and pays us a royalty on net sales of the product.
On October 1, 2009, we divested the Eligard® line of products to TOLMAR Holding, Inc.
(Tolmar) as part of the sale of all of the shares of our U.S. subsidiary, QLT USA, Inc. (QLT
USA). Pursuant to the stock purchase agreement, we are entitled to future consideration payable
quarterly in amounts equal to 80% of the royalties paid under the license agreement with Sanofi
Synthelabo Inc. (Sanofi) for the commercial marketing of Eligard in the U.S. and Canada, and the
license agreement with MediGene Aktiengesellschaft (MediGene), which, effective March 1, 2011,
has been assigned to Astellas Pharma Europe Ltd. (Astellas) for the commercial marketing of
Eligard in Europe. The estimated fair value of the expected future quarterly payments is reflected
as Contingent Consideration on our Condensed Consolidated Balance Sheet. We are entitled to these
quarterly payments until the earlier of our receipt of $200.0 million or October 1, 2024. As of
September 30, 2011, we had received an aggregate $74.0 million of contingent consideration.
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Research and Development
Our current research and development efforts are focused on:
QLT091001 orphan drug program for
the treatment of Leber Congenital Amaurosis and Retinitis Pigmentosa. We
are currently conducting a Phase Ib clinical proof-of-concept study of
QLT091001, a synthetic retinoid therapy for 11-cis-retinal,
a key biochemical component of the visual retinoid cycle, in patients with
Leber Congenital Amaurosis (“LCA”) and Retinitis Pigmentosa
(“RP”). On October 21, 2011, results for the full cohort of 14
LCA subjects and updated longer term visual function data on previously
reported subjects were presented at the 2011 American Academy of Ophthalmology
Annual Meeting. We continue to monitor and analyze LCA subject follow up and
intend to initiate retreatment in subjects as needed. We are also continuing our
dialogue with the U.S. Food and Drug Administration (“FDA”) and the
European Medicines Agency (“EMA”) in Europe, with regards to the
design and protocol requirements for a pivotal trial for this indication.
Enrolment of up to 14 patients in
the RP cohort is ongoing and has been expanded outside of Canada to the U.S.
and Europe. We recently received clearance from the FDA for our Investigational
New Drug Application (“IND”), and also clearances from the U.K.
Medicines and Healthcare Products Regulatory Agency, the Centrale Commissie
Mensgebonden Onderzoek (CCMO) (The Netherlands) and the Federal Institute for
Drugs and Medical Devices (Germany) for our Clinical Trial Applications,
allowing us to proceed with the expansion of investigator sites in the U.S,
U.K, The Netherlands, and Germany. Our goal is to complete enrolment of RP
patients by year end.
QLT091001 has received orphan drug
designations for the treatment of LCA and RP by the EMA, and for the treatment
of LCA and RP due to inherited mutations in the LRAT and RPE65 genes by the
FDA. These designations provide market exclusivity in the applicable
jurisdiction for ten years and seven years, respectively, after a product is
approved. QLT091001 has also been granted two Fast Track designations by the
FDA for the treatment of the LRAT and RPE65 genetic mutations in both LCA and
RP. The FDA’s Fast Track is a process designed to facilitate the
development and expedite the review of drugs that are intended for the
treatment of serious diseases and fill an unmet medical need. In October 2011,
we held a Scientific Advice meeting with the EMA to discuss our pivotal trial
program for the treatment of LCA.
On May 31, 2011, the United
States Patent and Trademark Office issued a key patent related to this program,
covering various methods of use of QLT091001 in the treatment of diseases
associated with an endogenous 11-cis-retinal deficiency, expiring in
2027. The molecule in QLT091001 is not eligible for composition of matter
protection per se, as it was previously known in the scientific community. To
further strengthen the patent protection for this program, we continue to
pursue additional patent protection in the U.S. and elsewhere covering various
aspects of our program. If QLT091001 is approved by the FDA and the EMA for
marketing in the U.S. and EU, we plan to apply for any patent term extensions
and regulatory exclusivities that are available to us under applicable law.
Punctal Plug
Drug Delivery System for the treatment of Glaucoma. We are developing a
minimally invasive, proprietary punctal plug drug delivery system with the goal
of delivering a variety of drugs topically to the eye through controlled
sustained release to the tear film. We are currently targeting the treatment of
glaucoma and ocular hypertension with this system. On August 29, 2011, we
announced the results of our Phase II clinical study on the safety and efficacy
of the latanoprost punctal plug drug delivery program (“L-PPDS”) in
subjects with glaucoma and ocular hypertension after four weeks of treatment
with the L-PPDS. The trial featured simultaneous placement of
latanoprost-eluting punctal plugs in both the upper and lower puncta for
delivery of a daily drug load with a goal of enabling comparable clinical
outcomes to that of daily administered Xalatan® eye drops. More
recently, our ongoing device development work with our new proprietary upper
lid punctal plug showed a retention rate of 81% at one month in volunteers (27
eyes). A device study in volunteers to further study the longer term handling,
comfort and retention of the new upper plug, as well as other plug iterations,
is underway. Additional near term development goals for this program include
commencing further Phase II trials in glaucoma to evaluate single versus double
plug approaches as well as duration of sustained release. If these trials are
successful, our goal is to commence Phase III clinical development activities
in 2013.
We believe this platform technology
may be suited for delivery of other types of molecules to the tear film of the
eye in order to treat anterior segment diseases of the eye. This could include
other medications for glaucoma, or other diseases or conditions of the eye
including allergy, dry eye, and ocular inflammation. Further development work
with our punctal plug delivery system program is ongoing with additional
formulation development work for several new product candidates in the
prostaglandin and anti-inflammatory areas.
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RESULTS OF OPERATIONS
The following table sets out our net (loss) income from operations for the three and nine months
ended September 30, 2011 and 2010.
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands of U.S. dollars, except per share data) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Net (loss) income |
$ | (9,106 | ) | $ | (697 | ) | $ | (23,800 | ) | $ | 1,691 | |||||
Basic and diluted net (loss) income per common share |
$ | (0.18 | ) | $ | (0.01 | ) | $ | (0.47 | ) | $ | 0.03 |
Detailed discussion and analysis of our results of operations are as follows:
Revenues
Net product revenue for the three and nine months ended September 30, 2011 and 2010 was determined
as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands of U.S. dollars) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
U.S. Visudyne sales by QLT |
$ | 3,853 | $ | 5,218 | $ | 15,631 | $ | 16,668 | ||||||||
Visudyne sales to Novartis |
2,026 | | 4,011 | 6,988 | ||||||||||||
Add: Royalties reimbursed to QLT(1) |
337 | 308 | 1,051 | 999 | ||||||||||||
Add: Other costs reimbursed to QLT(2) |
10 | 9 | 31 | 131 | ||||||||||||
Net product revenue from Visudyne sales |
$ | 6,226 | $ | 5,535 | $ | 20,724 | $ | 24,786 | ||||||||
Under the terms of the Amended and Restated PDT Product Development, Manufacturing and Distribution
Agreement (Amended PDT Agreement) with Novartis, on January 1, 2010, we received from Novartis
the exclusive U.S. rights to the Visudyne patents to sell and market Visudyne in the U.S. We
utilize contract manufacturers for Visudyne production and are responsible for product supply to
Novartis and other distributors. Details of our revenue recognition accounting policy are described
in Note 1 Condensed Summary of Significant Accounting Policies in the Notes to the Unaudited
Condensed Consolidated Financial Statements.
(1) | Royalties reimbursed to QLT |
This represents amounts we receive from Novartis in reimbursement for actual royalty expenses
we incur with third party licensors for sales of Visudyne outside of the U.S. |
(2) | Other costs reimbursed to QLT |
This represents certain administrative expenses we incur on behalf of Novartis under the
Amended PDT Agreement. |
For the three months ended September 30, 2011, net product revenue from Visudyne increased by $0.7
million, or 13%, to $6.2 million compared to $5.5 million for the same period in 2010. The increase
was primarily due to the sale of a batch of Visudyne to Novartis, partially offset by lower
Visudyne sales in the U.S.
For the nine months ended September 30, 2011, net product revenue from Visudyne decreased by $4.1
million, or 16%, to $20.7 million compared to $24.8 million for the nine months ended September 30,
2010. The decrease was primarily due to the recognition of $5.0 million of previously deferred
revenue in the prior period, following the commencement of the Amended PDT Agreement on January 1,
2010. The deferred revenue related to inventory previously shipped to Novartis for sales outside
the U.S.
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The tables below summarize end-user Visudyne sales for the three and nine months ended September
30, 2011 and 2010. Under the Amended PDT Agreement with Novartis, Visudyne is sold by QLT in the
U.S., and by Novartis outside the U.S. (for which we earn a 20% royalty on net sales). See Note 1 -
Condensed Summary of Significant Accounting Policies in the Notes to the Unaudited Condensed
Consolidated Financial Statements.
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands of U.S. dollars) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
U.S. |
$ | 3,853 | $ | 5,218 | $ | 15,631 | $ | 16,668 | ||||||||
Europe |
5,729 | 5,303 | 19,856 | 19,447 | ||||||||||||
Rest of World |
11,044 | 9,945 | 32,350 | 30,010 | ||||||||||||
Worldwide |
$ | 20,626 | $ | 20,466 | $ | 67,837 | $ | 66,125 | ||||||||
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
U.S. |
19 | % | 25 | % | 23 | % | 25 | % | ||||||||
Europe |
28 | % | 26 | % | 29 | % | 29 | % | ||||||||
Rest of World |
53 | % | 49 | % | 48 | % | 46 | % | ||||||||
Worldwide |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
The worldwide sale of Visudyne and related royalties are our only sources of revenue. While we
have sought to protect our proprietary Visudyne technology by, among other things, obtaining and
licensing patents in the U.S., Europe, Japan, and other jurisdictions, because Visudyne is a mature
pharmaceutical product, some of the key U.S. patents protecting it have expired or will expire in
the near future. For example, one of the U.S. patents (U.S. Patent No. 5,214,036) covering
lipid-based formulations of the compound verteporfin (the active ingredient in Visudyne) expired on
May 25, 2010, and the U.S. patent (U.S. Patent No. 5,095,030) covering the compound verteporfin
expired on September 9, 2011. See Item 1. Business Patents, Trademarks and Proprietary Rights
in our 2010 Annual Report for a more detailed discussion of our Visudyne patent portfolio.
Generally, once all patent protection expires, market exclusivity is lost. As is inherent in the
biopharmaceutical industry, the loss of market exclusivity can result in significant competition
from market entry of generic versions of products, which can have a significant adverse effect on
product revenues. However, the effect of the expiration of one or more patents covering a
biopharmaceutical product will depend upon a number of factors, such as the extent to which the
product is protected by other patents in a relevant jurisdiction, the nature of the market and the
position of the product in it, the growth or decline of the market and the complexities and
economics of the process for manufacture of the product. Based upon our consideration of these and
other factors as they relate specifically to Visudyne, we believe that the expiration of the U.S.
patent covering lipid-based formulations of verteporfin in 2010 and the expiration of the U.S.
patent covering the compound verteporfin in 2011 are unlikely to have a material adverse effect on
our revenues over the next several years since, among other things:
| we own and license additional U.S. patents covering lipid-based formulations of verteporfin
and approved uses of Visudyne that provide additional patent protection for Visudyne and do
not expire until, at the latest, 2015 and 2016, respectively; |
| in Europe and Japan, the basic patents covering the verteporfin compound do not expire
until 2014 and additional patents and patent applications relating to lipid-based formulations
of verteporfin and approved uses of Visudyne do not expire until, at the latest, 2016 and
2017, respectively; and |
| relative to the sale of many other biopharmaceutical products, Visudyne does not generate
significant revenue and the manufacturing process is complex, which may make Visudyne a less
desirable generic target. |
Royalties
Under the Amended PDT Agreement, Novartis continues to market and sell Visudyne outside the U.S.
and pays us a 20% royalty on net sales of the product outside the U.S. For the three months ended
September 30, 2011, royalty revenues increased by $0.3 million, or 10%, to $3.4 million, compared
to $3.1 million for the same period in 2010 and for the nine months ended September 30, 2011,
royalty revenues increased by $0.6 million, or 6%, to $10.4 million compared to $9.9 million for
the same period in 2010. In each period, royalty revenues increased in line with the increase in
Visudyne sales outside the U.S.
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Costs and Expenses
Cost of Sales
For the three months ended September 30, 2011, cost of sales increased $0.8 million, or 43%, to
$2.7 million compared to $1.9 million in 2010. The increase was primarily due to the sale of a
batch of Visudyne to Novartis, offset by lower Visudyne sales in the U.S. For the nine months ended
September 30, 2011, cost of sales decreased $4.4 million, or 37%, to $7.4 million compared to $11.8
million for the same period in 2010. The decrease was primarily due to inclusion in the prior
period of $4.0 million of cost of sales associated with the recognition of revenue that related to
inventory previously shipped to Novartis for sales outside the U.S.
Research and Development
Research and development, or R&D, expenditures increased 39% to $11.3 million for the three months
ended September 30, 2011 compared to $8.1 million in the same period in 2010. For the nine months
ended September 30, 2011, R&D expenditures increased 42% to $32.3 million compared to $22.8 million
in the same period in 2010. For each period, the increase was primarily due to higher spending on
our synthetic retinoid program, partially offset by no spending on QLT091568 (Beta Blocker Glaucoma
Program) in the three and nine months ended September 30, 2011.
The magnitude of future R&D expenses is highly variable. Numerous events can happen to an R&D
project prior to it reaching any particular milestone that can significantly affect future spending
and activities related to the project. These events include:
| inability to design devices to function as expected; |
| delays or inability to formulate an active ingredient in an appropriate concentration to
deliver effective doses of a drug; |
| changes in the regulatory environment; |
| introduction of competing technologies and treatments; |
| unexpected safety issues; |
| patent application, maintenance and enforcement issues; |
| inability to operate without infringing the proprietary rights of others; |
| changes in the commercial marketplace; |
| difficulty enrolling patients in, or keeping them in, our clinical studies; |
| inadequate trial design to demonstrate safety and/or efficacy; |
| delays in study progression, including study site, Institutional Review Board and
regulatory delays; |
| positive trial results that may result in increased spending; |
| failure to meet favorable study endpoints; |
| inability to develop cost effective manufacturing methods that comply with regulatory
standards; |
| inability to attract personnel or retain personnel with appropriate expertise; |
| inability to manufacture sterile supplies necessary for composition of products; |
| uncertainties related to collaborative arrangements; |
| environmental risks; and |
| other factors referenced under Part II, Item 1A, Risk Factors. |
We may also undertake new R&D projects that may significantly affect our future spending and
activities.
R&D expenditures by therapeutic area were as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In thousands of U.S. dollars) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Ocular |
$ | 11,282 | $ | 8,101 | $ | 32,334 | $ | 22,530 | ||||||||
Other |
| | | 246 | ||||||||||||
$ | 11,282 | $ | 8,101 | $ | 32,334 | $ | 22,776 | |||||||||
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Selling, General and Administrative Expenses
For the three months ended September 30, 2011, selling, general and administrative, or SG&A,
expenses increased 9% to $5.8 million compared to $5.4 million for the three months ended September
30, 2010. The increase was primarily due to increased spending on commercial operations. For the
nine months ended September 30, 2011, SG&A expenses increased 26% to $19.2 million compared to
$15.2 million for the same period in 2010. The increase was primarily due to increased spending on
commercial operations and separation costs related to the departure of our former Chief Medical
Officer.
Investment and Other Income
Net Foreign Exchange (Losses) Gains
For the three and nine months ended September 30, 2011 and 2010, net foreign exchange (losses)
gains comprise gains and losses from the impact of foreign exchange fluctuations on our monetary
assets and liabilities that are denominated in currencies other than the U.S. dollar (principally
the Canadian dollar). See the section entitled Liquidity and Capital Resources Interest and
Foreign Exchange Rates below.
Interest Income
For the three months ended September 30, 2011, interest income decreased 76% to $0.1 million
compared to $0.6 million for the same period in 2010. For the nine months ended September 30, 2011,
interest income decreased 67% to $0.5 million compared to $1.6 million for the same period in 2010.
For each period the decrease occurred primarily because the prior year included $0.3 million and
$0.7 million, respectively, of interest earned on the note receivable from Tolmar which was
collected on October 1, 2010 in connection with the sale of QLT USA to Tolmar on October 1, 2009,
$0.1 million of interest earned on tax refunds and higher interest earned on the mortgage receivable
from Discovery Parks Holdings Ltd.
Fair Value Change in Contingent Consideration
As part of the sale of all of the shares of QLT USA to Tolmar, we are entitled to receive up to
$200.0 million in consideration payable on a quarterly basis in amounts equal to 80% of the
royalties paid under the license agreements with each of Sanofi and Astellas (formerly with
MediGene) for the commercial marketing of Eligard in the U.S., Canada, and Europe. At September 30,
2011, there was $126.0 million remaining to be paid to us by Tolmar. The fair value of this amount,
$108.9 million, is reported as Contingent Consideration on our Condensed Consolidated Balance
Sheet, and is estimated using a discounted cash flow model. Contingent consideration is revalued at
each reporting period and is positively impacted each period by the passage of time, since all
remaining expected cash flows move closer to collection, thereby increasing their present value.
The fair value change in contingent consideration is also impacted by the projected amount and
timing of expected future cash flows and by the cost of capital used to discount these cash flows.
For the three months ended
September 30, 2011, the fair value change in contingent consideration
decreased to $1.8 million compared to $5.2 million for the same period in
2010. The decrease occurred primarily because the prior period included a
favorable impact due to a decrease in the cost of capital used to discount
these cash flows, and because of an increase in cash flow projections. In
addition, the positive impact on the fair value change in contingent
consideration decreases each period as the outstanding balance remaining to be
paid to us decreases. For the nine months ended September 30, 2011, the
fair value change in contingent consideration decreased to $6.9 million
compared to $10.2 million for the same period in 2010. The decrease
occurred because of the reduced positive impact due to a lower outstanding
balance and also because the prior period included a more favorable increase in
cash flow projections.
Income Taxes
The change in the effective tax rate was primarily due to changes in the overall mix of income
(loss) in the jurisdictions in which we operate including changes in our valuation allowance in
such jurisdictions. In 2010, we completed an intra-entity transfer of intellectual property and,
as a result, shifted certain related future development expenditures to the acquiring entity.
During 2011, as insufficient evidence exists to support current or future realization of the tax
benefits associated with such development expenditures as well as certain other current period
expenditures, the benefit of certain tax assets has not been recognized in the current periods. The
tax recovery for the nine months ended September 30, 2010 reflected a benefit of $5.6 million which
was recorded as a result of the restructuring of our arrangement with Novartis under the Amended
PDT Agreement.
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LIQUIDITY AND CAPITAL RESOURCES
General
In 2011 and the foreseeable future periods, we expect our cash resources and working capital, cash
flow from operations, cash from the collection of the contingent consideration, and other available
financing resources to be sufficient to fund current product research and development, operating
requirements, liability requirements, acquisition and licensing activities, milestone payments, and
repurchases of our common shares.
If adequate capital is not available, our business could be materially and adversely affected.
Factors that may affect our future capital requirements include: the status of competitors and
their intellectual property rights; levels of future sales of Eligard and our receipt of contingent
consideration under the QLT USA stock purchase agreement with Tolmar; levels of future sales of
Visudyne; the progress of our R&D programs, including preclinical and clinical testing; future
share repurchases; fluctuating or increasing manufacturing requirements; the timing and cost of
obtaining regulatory approvals; the levels of resources that we devote to the development of
manufacturing, and other support capabilities; technological advances; the cost of filing,
prosecuting and enforcing our patent claims and other intellectual property rights; the expiration
of our Visudyne patents and potential loss of market exclusivity for Visudyne; pre-launch costs
related to commercializing one of our products in development; acquisition and licensing
activities; milestone payments; and our ability to establish collaborative arrangements with other
organizations.
Sources and Uses of Cash
We finance operations, product development and capital expenditures primarily through existing
cash, proceeds from our commercial operations, sales of assets and interest income.
For the three months ended September 30, 2011, we used $0.5 million of cash in operations as
compared to generating $12.4 million for the same period in 2010. The $12.9 million negative cash
flow variance was primarily attributable to:
| A negative operating cash flow variance from lower net tax refunds of $5.1 million; |
| A negative operating cash flow variance from higher operating and inventory related
expenditures of $3.9 million; |
| A negative operating cash flow variance from proceeds related to the fair value change
in contingent consideration of $3.4 million; and |
| A negative operating cash flow variance from lower investment and other income of $0.5
million. |
During the three months ended September 30, 2011, cash flows provided by investing activities
consisted of proceeds on collection of the contingent consideration of $8.2 million, offset by
capital expenditures of $0.5 million.
For the three months ended September 30, 2011, cash flows used in financing activities consisted
primarily of common shares repurchased for $4.2 million, including share repurchase costs, offset
by $0.1 million received for the issuance of common shares related to the exercise of stock
options.
For the nine months ended September 30, 2011, we used $14.4 million of cash in operations as
compared to generating $6.4 million for the same period in 2010. The $20.8 million negative cash
flow variance was primarily attributable to:
| A negative operating cash flow variance from higher operating and inventory related
expenditures of $12.1 million; |
| A negative operating cash flow variance from lower net tax refunds of $6.1 million; |
| A negative operating cash flow variance from proceeds related to the fair value change
in contingent consideration of $3.3 million; |
| A negative operating cash flow variance from lower investment and other income of $1.1
million; |
| A positive operating cash flow variance from higher foreign exchange gains of $0.5
million; and |
| A positive operating cash flow variance from higher cash receipts from product sales and
royalties of $1.3 million. |
During the nine months ended September 30, 2011, cash flows provided by investing activities
consisted of proceeds on collection of the contingent consideration of $21.7 million, and proceeds
from the collection of the mortgage receivable of $2.0 million, offset by capital expenditures of
$2.0 million.
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For the nine months ended September 30, 2011, cash flows used in financing activities consisted
primarily of common shares repurchased for $14.6 million, including share repurchase costs, offset
by $1.8 million received for the issuance of common shares related to the exercise of stock
options.
Interest and Foreign Exchange Rates
We are exposed to market risk related to changes in interest and foreign currency exchange rates,
each of which could adversely affect the value of our current assets and liabilities. At September
30, 2011, we had $204.0 million in cash and cash equivalents and our cash equivalents had an
average remaining maturity of 17 days. If market interest rates were to increase immediately and
uniformly by one hundred basis points from levels at September 30, 2011, the fair value of the cash
equivalents would decline by an immaterial amount due to the short remaining maturity period.
The functional currency of QLT Inc. and its U.S. subsidiaries is the U.S. dollar, therefore our
U.S. dollar-denominated cash and cash equivalents holdings do not result in foreign currency gains
or losses in operations. To the extent that QLT Inc. holds a portion of its monetary assets and
liabilities in Canadian dollars, we are subject to translation gains and losses. These translation
gains and losses are included in operations for the period.
At September 30, 2011, we had no outstanding forward foreign currency contracts.
Contractual Obligations
Our material contractual obligations as of September 30, 2011 comprised our supply agreements with
contract manufacturers, and clinical and development agreements. We also have operating lease
commitments for office space, office equipment and vehicles. Details of these contractual
obligations are described in our 2010 Annual Report.
Off-Balance Sheet Arrangements
In connection with the sale of assets and businesses, we provide indemnities with respect to
certain matters, including product liability, patent infringement, and contractual breaches and
misrepresentations, and we provide other indemnities to parties under the clinical trial, license,
service, manufacturing, supply, distribution and other agreements that we enter into in the normal
course of our business. If the indemnified party were to make a successful claim pursuant to the
terms of the indemnification, we would be required to reimburse the loss. These indemnities are
generally subject to threshold amounts, specified claims periods and other restrictions and
limitations.
Except as described above and the contractual arrangements described in the Contractual Obligations
section above, we do not have any off-balance sheet arrangements that have, or are reasonably
likely to have, a current or future material effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources that is material to investors.
Recently Issued and Recently Adopted Accounting Standards
Refer to Note 1 Summary of Significant Accounting Policies in the Notes to Unaudited Condensed
Consolidated Financial Statements for a discussion of recently issued and adopted accounting
standards.
Outstanding Share Data
As of November 1, 2011, there were 49,363,310 common shares issued and outstanding for a total of
$462.4 million in share capital. As of November 1, 2011, we
had 6,339,065 stock options
outstanding under the QLT 2000 Incentive Stock Option Plan (of which
4,302,085 were exercisable) at
a weighted average exercise price of CAD $5.57 per share. Each stock option is exercisable for one
common share.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the reporting periods
presented. Significant estimates are used for, but not limited to, provisions for non-completion
of inventory, provision for excess inventory, assessment of the recoverability of long-lived
assets, the fair value of the mortgage receivable, the fair value of contingent consideration,
allocation of costs to manufacturing under a standard costing system, allocation of overhead
expenses to research and development, sales rebates and return accruals, determination of fair
value of assets and liabilities acquired in net asset acquisitions or
purchase business combinations, stock-based compensation, and provisions for taxes, tax assets and
tax liabilities. Actual results may differ from estimates made by management. Please refer to our
Critical Accounting Policies and Estimates included as part of our 2010 Annual Report.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements within the meaning of the United States Private
Securities Litigation Reform Act of 1995 and forward looking information within the meaning of
the Canadian securities legislation which are based on our current expectations and projections.
Words such as anticipate, project, believe, expect, forecast, outlook, plan,
intend, estimate, should, may, assume, continue and variations of such words or similar
expressions are intended to identify our forward-looking statements and forward-looking
information. Such statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of QLT to be materially different
from the results of operations or plans expressed or implied by such forward-looking statements and
forward-looking information. Many such risks, uncertainties and other factors are taken into
account as part of our assumptions underlying the forward-looking statements and forward-looking
information.
The following factors, among others, including those described under Item 1A. Risk Factors in this
Report and Item 1A. Risk Factors in our 2010 Annual Report could cause our future results to differ
materially from those expressed in the forward-looking statements and forward-looking information:
| levels of future sales of Visudyne, including the impact of competition, loss of patent
protection and limited commercial supply and technical support for laser devices required
for Visudyne therapy; |
| our ability to effectively market and sell Visudyne in the U.S.; |
| the ability of Novartis to effectively market and sell Visudyne in countries outside the
U.S.; |
| our continued ability to supply Visudyne to our customers; |
| our expectations regarding Visudyne label changes and reimbursement; |
| receipt of all or part of the contingent consideration pursuant to the stock purchase
agreement entered into with Tolmar, which is based on anticipated levels of future sales of
Eligard; |
| unanticipated future operating results; |
| our reliance on contract manufacturers and suppliers to manufacture Visudyne at
competitive prices and in accordance with the U.S. Food and Drug Administration and other
local and foreign regulatory requirements as well as our product specifications; |
| our reliance on our specialty wholesale distributors to distribute Visudyne in
accordance with regulatory requirements and the terms of our agreements; |
| our expectations regarding future tax liabilities as a result of our recent
restructuring transactions, changes in estimates of prior years tax items and results of
tax audits by tax authorities; |
| the scope, validity and enforceability of our and third party intellectual property
rights; |
| our ability to successfully develop our programs, including our punctal plug drug
delivery system and synthetic retinoid program; |
| the anticipated timing, cost and progress of the development of our technology and
clinical trials; |
| the anticipated timing of regulatory submissions for products and product candidates; |
| the anticipated timing for receipt of, and our ability to maintain, regulatory approvals
for products and product candidates; |
| the anticipated timing for receipt of, and our ability to maintain, reimbursement
approvals for our products and product candidates, including reimbursement under U.S.
governmental and private insurance programs; and |
| existing governmental laws and regulations and changes in, or the failure to comply
with, governmental laws and regulations. |
Although we believe that the assumptions underlying the forward-looking statements and
forward-looking information contained herein are reasonable, any of the assumptions could be
inaccurate, and therefore such statements and information included in this Report may not prove to
be accurate. In light of the significant uncertainties inherent in the forward-looking statements
and forward-looking information included herein, the inclusion of such statements and information
should not be regarded as a representation by us or any other person that the results or conditions
described in such statements and information or our objectives and plans will be achieved. Any
forward-looking statement and forward-looking information speaks only as of the date on which it is
made. Except to fulfill our
obligations under the applicable securities laws, we undertake no obligation to update any such
statement or information to reflect events or circumstances occurring after the date on which it is
made.
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Financial guidance for 2011 is contained in our press release issued on November 3, 2011 which can
be found on SEDAR at www.sedar.com and EDGAR at www.sec.gov. Information contained in the press
release and related Material Change Report and Current Report on Form 8-K filed therewith shall not
be deemed filed for purposes of Section 18 of the Exchange Act, and is not incorporated by
reference herein.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
See Managements Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources in this Report as well as Item 7A. Quantitative and Qualitative
Disclosures about Market Risk of our 2010 Annual Report.
ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures designed to ensure that information
required to be disclosed in filings made pursuant to the Exchange Act is recorded, processed,
summarized and reported within the time periods specified and in accordance with the SECs rules
and forms and is accumulated and communicated to management, including the Chief Executive Officer
and Chief Financial Officer. Our principal executive and financial officers have evaluated our
disclosure controls and procedures as of the end of the period covered by this Report and concluded
that our disclosure controls and procedures were effective in timely alerting them to material
information required to be included in our periodic SEC reports.
It should be noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions, regardless of how
remote. However, our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are effective under circumstances where our disclosure controls
and procedures should reasonably be expected to operate effectively.
Changes in Internal Control over Financial Reporting
Our internal control over financial reporting is designed with the objective of providing
reasonable assurance regarding the reliability of our financial reporting and preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles.
No change was made to our internal controls over financial reporting during the fiscal quarter
ended September 30, 2011 that has materially affected, or is reasonably likely to materially
affect, such internal controls over financial reporting.
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PART II OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
There are currently no material pending legal proceedings. For information regarding litigation and
other risks, uncertainties and other factors that may materially and adversely affect our business,
products, financial condition and operating results, refer to Item 1A. Risk Factors in this Report
and Item 1A. Risk Factors in our 2010 Annual Report.
ITEM 1A. | RISK FACTORS |
In addition to the risk factors set forth below and other information set forth in this Report, you
should carefully consider the factors discussed in Part 1A. Risk Factors of our 2010 Annual
Report, which could materially affect our business, products, financial condition and operating
results.
The risks described below and in our 2010 Annual Report are not the only risks facing us.
Additional risks and uncertainties not currently known to us or that we currently deem not to be
material also may materially adversely affect our business, products, financial condition and
operating results.
Visudyne is currently our only commercial product. Accordingly, any decrease in sales of Visudyne
would harm our business.
Visudyne is our only commercial product and, accordingly, any decrease in Visudyne product sales
would harm our business and cause our financial results to be below expectations. In 2009,
worldwide sales of Visudyne decreased 25.5% from the prior year, primarily due to the approval and
reimbursement in Europe of alternative therapeutics for AMD. In 2010, worldwide sales of Visudyne
decreased 14.2% from 2009. We cannot assure you that Visudyne product sales will not continue to
decrease. Visudyne may be rendered obsolete or uneconomical by competitive changes, including
generic competition. Visudyne sales could also be adversely affected by other factors, including:
| product manufacturing or supply interruptions or recalls; |
| the development of competitive products by other companies; |
| developing and maintaining effective sales and marketing capabilities; |
| marketing or pricing actions by our competitors or regulatory authorities; |
| changes in the reimbursement by third-party payors; |
| changes in or withdrawal of regulatory approval for or the labelling of Visudyne; |
| the majority of the laser devices used in Visudyne therapy have reached, or are nearing,
the end of their lifecycle; |
| declining commercial supply and technical support for laser devices used in Visudyne
therapy; |
| disputes relating to patents or other intellectual property rights; |
| disputes with our licensees; and |
| changes in laws and regulations that adversely affect our ability to market Visudyne. |
We face intense competition, which may limit our commercial opportunities and our ability to
generate revenues.
The biopharmaceutical industry is highly competitive and is characterized by rapidly evolving
technology. Competition in our industry occurs on many fronts, including developing and bringing
new products to market before others, developing new technologies to improve existing products,
developing new products to provide the same benefits as existing products at less cost, developing
new products to provide benefits superior to those of existing products, and acquiring or licensing
complementary or novel technologies from other pharmaceutical companies or individuals.
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We face intense competition against Visudyne, as well as our technology under clinical development.
We may be unable to contend successfully with current or future competitors. Our competitors
include major pharmaceutical and biopharmaceutical companies, many of which are large,
well-established companies with access to financial, technical and marketing resources
significantly greater than ours and substantially greater experience in developing and
manufacturing products, conducting preclinical and clinical testing and obtaining regulatory
approvals. Our competitors may develop or acquire new or improved products to treat the same
conditions that our products treat, or may make technological advances that reduce their cost of
production so that they may engage in price competition through aggressive pricing policies to
secure a greater market share to our detriment. Our commercial opportunities will be reduced or
eliminated if our competitors develop or acquire and market products that are more effective, have
fewer or less severe adverse side effects, or are less expensive than our products. Competitors
also may develop or acquire products that make our current or future products obsolete.
In connection with Visudyne, we face significant competition from Lucentis®, an
anti-VEGF antibody approved for the treatment of neovascular wet AMD, and diluted Avastin®
(bevacizumab), which is also used off-label extensively by physicians to treat wet AMD. In
addition, we are aware of other competitive therapies for wet AMD under development. For instance,
in April 2011, the FDA granted priority review for Regeneron Pharmaceuticals, Inc.s Biologics
License Application (BLA) for VEGF Trap-Eye for the treatment of neovascular wet AMD. The FDA
review deadline for this product is November 18, 2011, which means that, if approved, the VEGF
Trap-Eye could launch as early as the fourth quarter of 2011. In addition, EpiRad90, a
product under development by NeoVista Inc., has been CE marked in the EU for marketing and is in
Phase III clinical trials in the U.S. for the treatment of wet AMD. Further, one of our Visudyne
competitors is also our collaborator. Novartis, which, pursuant to the Amended PDT Agreement, has
the marketing and sales rights to our Visudyne product outside of the U.S., also has rights to
market Lucentis® outside of the U.S.
In connection with our technology under clinical development, including our punctal plug drug
delivery technology and synthetic retinoid, our competitors may develop or obtain patent protection
for products earlier than us, design around patented technology developed by us, obtain regulatory
approval for such products before us, or develop more effective or less expensive products than us.
Any of these competitive products or events could have a significant negative impact on our
business and financial results, including reductions in our market share, revenues and gross
margins.
Product development is a long, expensive and uncertain process, and we may terminate one or more of
our development programs. If we terminate a development program or product candidate, or
alternately, if we decide to modify a development program, our prospects may suffer and we may
incur significant expenses that could adversely affect our financial condition or results of
operations.
We may determine that certain product candidates or programs do not have sufficient potential to
warrant the continued allocation of resources to them. Accordingly, we may elect to terminate or
modify one or more of our programs, which could include changing our clinical or business model for
further development, including by attempting to extract or monetize value from the program by
either selling, out-licensing or potentially partnering part or all of the program. If we
terminate and seek to monetize part or all of a program in which we have invested significant
resources, or we modify a program and expend further resources on it, and subsequently fail to
achieve our intended goals, our prospects may suffer, as we will have expended resources on a
program that may not provide a suitable return, if any, on our investment and we may have missed
the opportunity to allocate those resources to potentially more productive uses. In addition, in
the event of a termination of a product candidate or program, we may incur significant expenses and
costs, including separation costs, associated with the termination of the program, which could
adversely affect our financial condition or results of operations.
Our commercial success depends in part on our ability and the ability of our licensors to obtain
and maintain patent protection and/or orphan drug designation and resulting marketing exclusivity
on our products and technologies, to preserve trade secrets, and to operate without infringing the
proprietary rights of others.
We have applied for and will continue to apply for patents for certain aspects of Visudyne and our
product candidates and technology. We have patents and patent applications covering, among other
things, compositions, pharmaceutical formulations, processes for manufacturing compounds and/or
methods of treating diseases by administering therapeutic compounds. Such applications may not
result in the issuance of any patents, and any patents now held or that may be issued may not
provide us with a preferred position with respect to any product or technology.
We may not be able to obtain patent protection on aspects of our product candidates and technology.
For example, while U.S. Patent No. 7,951,841 was issued on May 31, 2011 covering various methods
of use of QLT091001 in the treatment of diseases associated with an endogenous 11-cis-retinal
deficiency until 2027, the molecule in QLT091001 is not eligible for composition of matter
protection in the U.S. or elsewhere because it was previously known in the scientific community.
Therefore, we may not be able to prevent competitors from commercializing the molecule in QLT091001
for the treatment of diseases that fall outside of the scope of our patents protecting this
program.
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The FDA and EMA have granted QLT091001 orphan drug designations for the treatment of LCA and RP,
which gives us seven years and 10 years, respectively, of market exclusivity for the use of
QLT091001 for the treatment of LCA and RP from the date that QLT091001 is approved, if it is
approved. However, this market exclusivity does not pertain to indications outside of the scope of
our patents, nor does it prevent other types of drugs from receiving orphan designations or
approvals in these same indications.
Patents issued or licensed to us may be challenged, invalidated or circumvented successfully, or
may have expired or expire in the near future. For example, some of the key U.S patents protecting
Visudyne have expired or will expire in the near future, with the remaining unexpired patents
having varying strengths and duration. To the extent a preferred position is conferred by patents
we own or license, upon expiry of such patents, or if such patents are successfully challenged,
invalidated or circumvented, our preferred position may be lost. We may not be able to develop and
successfully launch more advanced replacement products and/or technologies before our patents
expire. If we fail to develop and successfully launch new products prior to the expiry of patents
for our products, our revenue from those products could decline significantly.
Further, upon the expiry of, or successful challenge to, our patents covering a product, including
Visudyne, generic competitors may introduce a generic version of that product, thereby adversely
affecting our revenue and profitability. Generic competitors typically sell their products at
prices much lower than those charged by the innovative pharmaceutical or biotechnology companies
who have incurred substantial expenses associated with the research and development of the drug
product. As a result of this possible increase in competition, we may need to lower our prices in
order to maintain sales of our products or we may lose a competitive advantage and marketability of
our products and technologies. In the case of Visudyne, the loss of a preferred position may have
a material adverse effect on our business, cash flow, results of operations and financial position.
Patents issued or licensed to us may be infringed by the products or processes of other parties.
The cost of enforcing our patent rights against infringers, if such enforcement is required, could
be significant, and the time demands could interfere with our normal operations.
It is also possible that a court may find us to be infringing validly issued patents of third
parties. In that event, in addition to the cost of defending the underlying suit for infringement,
we may have to pay license fees and/or damages and may be enjoined from conducting certain
activities. Obtaining licenses under third-party patents can be costly, and such licenses may not
be available at all. Under such circumstances, we may need to materially alter our products or
processes, may be unable to launch a product or may lose the right to continue to manufacture and
sell a product entirely or for a period of time.
Unpatented trade secrets, improvements, confidential know-how and continuing technological
innovation are important to our scientific and commercial success. Although we attempt to, and will
continue to attempt to, protect our proprietary information through reliance on trade secret laws
and the use of confidentiality agreements with our collaborators, contract manufacturers,
licensees, employees and consultants and other appropriate means, these measures may not
effectively prevent disclosure of or access to our proprietary information, and, in any event,
others may develop independently, or obtain access to, the same or similar information.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
On December 8, 2010, we announced that our Board of Directors authorized the repurchase of up to
3.6 million of our issued and outstanding common shares, being 10% of our public float as of
December 9, 2010, over a 12 month period commencing December 16, 2010 under a normal course issuer
bid. All purchases are to be effected in the open market through the facilities of the TSX or
NASDAQ, and in accordance with regulatory requirements. The actual number of common shares which
are purchased and the timing of such purchases are determined by management, subject to compliance
with applicable law. All common shares repurchased will be cancelled. In accordance with TSX
rules, daily purchases made by us on the TSX will not exceed 3,604 common shares (25% of our
average daily trading volume of 14,414 common shares on the TSX for the six completed calendar
months prior to TSX approval of the normal course issue bid) subject to certain prescribed
exemptions. Rule 10b-18 of the U.S. Securities Exchange Act of 1934, as amended, contains similar
restrictions on daily purchases that may be made by us on the NASDAQ based on 25% of the average
daily trading volume of our common shares on NASDAQ for the most recently completed four calendar
weeks on a rolling basis, subject to certain exemptions for block purchases. The price that we
will pay for any such shares will be the market price on the TSX or the NASDAQ, as the case may be,
at the time of acquisition. Since initiating this normal course issuer bid, to November 3, 2011,
we have repurchased through the facilities of the NASDAQ, and immediately cancelled, an aggregate
2,191,817 common shares at an average price of $7.02 per share, for a total cost of $15.4 million.
Shareholders may obtain a copy of our TSX Form 12 Notice of Intention to Make a
Normal Course Issuer Bid, without charge, by request directed to the attention of our Secretary, at
our offices located at 887 Great Northern Way, Suite 101, Vancouver, B.C., Canada V5T 4T5.
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The following table sets forth information regarding our purchases of common shares on a monthly
basis during the three months ended September 30, 2011:
Issuer Purchases of Equity Securities | ||||||||||||||||
Total Number of | Maximum Number | |||||||||||||||
Total | Shares Purchased as | of Shares that May | ||||||||||||||
Number of | Average | Part of Publicly | Yet Be Purchased | |||||||||||||
Shares | Price Paid | Announced Plans or | Under the Plans or | |||||||||||||
Period | Purchased | per Share | Programs | Programs | ||||||||||||
July 1, 2011 through
July 31, 2011 |
| | | 2,052,913 | ||||||||||||
August 1, 2011
through August 31,
2011 |
82,300 | $ | 7.19 | 82,300 | 1,970,613 | |||||||||||
September 1, 2011
through September
30, 2011 |
547,145 | $ | 7.14 | 547,145 | 1,423,468 | |||||||||||
Total |
629,445 | $ | 7.15 | 629,445 | 1,423,468 | |||||||||||
ITEM 6. | EXHIBITS |
The exhibits filed or furnished with this Report are set forth in the Exhibit Index.
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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 3, 2011 | By: | /s/ Robert L. Butchofsky | ||
Robert L. Butchofsky | ||||
President and Chief Executive Officer (Principal Executive Officer) |
Date: November 3, 2011 | By: | /s/ Cameron R. Nelson | ||
Cameron R. Nelson | ||||
Senior Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) |
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EXHIBIT INDEX
Exhibit | ||||
Number | Description | |||
31.1 | Rule 13a-14(a) Certification of the Chief Executive Officer. |
|||
31.2 | Rule 13a-14(a) Certification of the Chief Financial Officer. |
|||
32.1 | Section 1350 Certification of the Chief Executive Officer. |
|||
32.2 | Section 1350 Certification of the Chief Financial Officer. |
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