| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| British Columbia, Canada | N/A | |
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 887 Great Northern Way, Vancouver, B.C., Canada | V5T 4T5 | |
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| (Address of principal executive offices) | (Zip code) |
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1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
(Unaudited)
(Unaudited)
Three months ended
Six months ended
June 30,
June 30,
(In thousands of U.S. dollars except per share information)
2005
2004
2005
2004
$
52,382
$
43,136
$
109,528
$
83,655
5,648
—
9,356
—
5,180
1,263
8,216
2,055
188
—
313
—
63,398
44,399
127,413
85,710
11,480
7,450
25,970
14,372
20,085
11,257
36,521
20,667
4,344
3,607
9,733
8,388
1,994
916
3,728
1,725
1,911
—
3,782
—
873
—
3,388
—
40,687
23,230
83,122
45,152
22,711
21,169
44,291
40,558
2,603
338
3,187
614
2,999
2,268
5,548
4,750
(1,562
)
(1,548
)
(3,160
)
(3,076
)
4,040
1,058
5,575
2,288
26,751
22,227
49,866
42,846
(9,925
)
(7,543
)
(17,784
)
(14,533
)
16,826
14,684
32,082
28,313
—
—
—
10,393
$
16,826
$
14,684
$
32,082
$
38,706
$
0.18
$
0.21
$
0.34
$
0.41
—
—
—
0.15
$
0.18
$
0.21
$
0.34
$
0.56
$
0.17
$
0.20
$
0.34
$
0.40
—
—
—
0.13
$
0.17
$
0.20
$
0.34
$
0.53
92,975
69,574
93,150
69,425
103,243
80,045
103,741
79,794
(Unaudited)
Three months ended
Six months ended
June 30,
June 30,
(In thousands of U.S. dollars except per share information)
2005
2004
2005
2004
$
16,826
$
14,684
$
32,082
$
38,706
1,911
—
3,782
—
1,994
916
3,728
1,725
277
264
558
503
2,095
5,863
3,638
7,951
—
—
—
(10,393
)
(4,807
)
5,835
499
12,825
5,159
(4,211
)
(2,032
)
(8,081
)
(1,909
)
4,210
2,448
2,564
(4,679
)
(2,904
)
(5,670
)
2,739
(3,141
)
(2,405
)
(2,647
)
(3,316
)
11,771
1,708
11,771
1,708
391
—
809
—
(4,135
)
5,021
(7,974
)
(3,872
)
66
(188
)
6,464
(1,916
)
21,819
28,793
47,456
41,143
(93,166
)
(85,537
)
(203,774
)
(94,757
)
(1,098
)
(3,736
)
(3,173
)
(6,905
)
326
(718
)
(884
)
(718
)
—
—
—
(2,316
)
(93,938
)
(89,991
)
(207,831
)
(104,696
)
(15,537
)
—
(15,537
)
—
—
(34
)
—
(105
)
4,024
2,076
11,041
13,772
(11,513
)
2,042
(4,496
)
13,667
(2,169
)
(5,402
)
(5,853
)
(7,582
)
(85,801
)
(64,558
)
(170,724
)
(57,468
)
192,164
269,498
277,087
262,408
$
106,363
$
204,940
$
106,363
$
204,940
$
127
$
137
$
2,871
$
3,156
1,471
—
4,038
—
(Unaudited)
Accumulated
Common Shares
Additional
Other
Total
Paid-in
Comprehensive
Accumulated
Comprehensive
Shareholders’
Shares
Amount
Capital
Income
Deficit
Income (loss)
Equity
(All amounts except share and per share information are expressed in thousands of U.S. dollars)
68,892,027
$
395,627
$
—
$
45,828
$
(8,084
)
—
$
433,371
22,283,826
436,094
—
—
—
—
436,094
—
—
93,896
—
—
—
93,896
845,719
16,777
(1,703
)
—
—
—
15,074
—
—
—
44,168
—
$
44,168
44,168
—
—
—
(114
)
—
(114
)
(114
)
—
—
—
—
(165,709
)
(165,709
)
(165,709
)
—
—
—
—
—
$
(121,655
)
—
92,021,572
$
848,498
$
92,193
$
89,882
(1)
$
(173,794
)
—
$
856,779
381,787
7,747
(4,146
)
—
—
—
3,601
1,000,000
19,594
(16,204
)
—
—
—
3,390
—
—
—
(1,348
)
—
$
(1,348
)
(1,348
)
—
—
—
(26
)
—
(26
)
(26
)
—
—
—
—
15,256
15,256
15,256
—
—
—
—
—
$
13,882
—
93,403,359
$
875,839
$
71,843
$
88,508
(1)
$
(158,538
)
—
$
877,652
532,603
10,491
(6,447
)
—
—
—
4,044
(1,355,600
)
(13,095
)
—
—
(2,442
)
—
(15,537
)
Accumulated
Common Shares
Additional
Other
Total
Paid-in
Comprehensive
Accumulated
Comprehensive
Shareholders’
Shares
Amount
Capital
Income
Deficit
Income (loss)
Equity
(All amounts except share and per share information are expressed in thousands of U.S. dollars)
—
—
—
(2,933
)
—
$
(2,933
)
(2,933
)
—
—
—
(84
)
—
(84
)
(84
)
—
—
—
—
16,826
16,826
16,826
—
—
—
—
—
$
13,809
—
92,580,362
$
873,235
$
65,396
$
85,491
(1)
$
(144,154
)
—
$
879,968
(1)
At December 31, 2004, March 31 and June 30, 2005, our accumulated other comprehensive
income is related almost entirely to cumulative translation adjustments from the application of
U.S. dollar reporting with an insignificant amount due to unrealized loss on available for sale
securities.
(Unaudited)
Three months ended
Six months ended
June 30,
June 30,
June 30,
June 30,
2005
2004
2005
2004
$
16,826
$
14,684
$
32,082
$
38,706
—
—
—
—
(1,841
)
(2,969
)
(4,055
)
(6,239
)
$
14,985
$
11,715
$
28,027
$
32,467
$
0.18
$
0.21
$
0.34
$
0.56
$
0.16
$
0.17
$
0.30
$
0.47
$
0.17
$
0.20
$
0.34
$
0.53
$
0.16
$
0.16
$
0.29
$
0.45
Three months ended
Six months ended
June 30,
June 30,
June 30,
June 30,
2005
2004
2005
2004
n/a
52.6
%
46.7
%
56.3
%
n/a
3.4
%
3.4
%
2.9
%
n/a
2.5
2.5
2.5
(Unaudited)
Three months ended
Six months ended
June 30,
June 30,
June 30,
June 30,
2005
2004
2005
2004
$
16,826
$
14,684
$
32,082
$
28,313
—
—
—
10,393
$
16,826
$
14,684
$
32,082
$
38,706
1,141
1,130
2,980
3,191
$
17,967
$
15,814
$
35,062
$
41,897
92,975
69,574
93,150
69,425
575
778
898
676
9,693
9,693
9,693
9,693
10,268
10,471
10,591
10,369
103,243
80,045
103,741
79,794
$
0.18
$
0.21
$
0.34
$
0.41
—
—
—
0.15
$
0.18
$
0.21
$
0.34
$
0.56
$
0.17
$
0.20
$
0.34
$
0.40
—
—
—
0.13
$
0.17
$
0.20
$
0.34
$
0.53
(In thousands of U.S. dollars)
June 30, 2005
December 31, 2004
(Unaudited)
$
19,191
$
14,340
24,282
30,864
2,265
2,152
(560
)
—
(2,335
)
(1,457
)
$
42,843
$
45,899
(In thousands of U.S. dollars)
June 30, 2005
December 31, 2004
(Unaudited)
$
10,586
$
8,981
4,508
1,874
4,368
2,666
$
19,462
$
13,521
June 30, 2005
December 31, 2004
Accumulated
(In thousands of U.S. dollars)
Cost
Amortization
Net Book Value
Net Book Value
(Unaudited)
$
116,718
$
4,346
$
112,372
$
111,653
8,000
289
7,711
7,947
$
124,718
$
4,635
$
120,083
$
119,600
(In thousands of U.S. dollars)
June 30, 2005
December 31, 2004
(Unaudited)
$
3,080
$
3,158
5,447
7,633
2,397
2,992
307
2,222
238
714
1,700
1,745
1,459
1,064
$
14,628
$
19,528
Restructuring
Remaining accrual at
(In thousands of U. S. dollars)
charge
Cash paid
June 30, 2005
(Unaudited)
$
3,217
$
(2,506
)
$
711
171
(66
)
105
$
3,388
$
(2,572
)
$
816
(a)
Share Buy-Back Program
On April 28, 2005, we announced a share buy-back program pursuant to which we may purchase up to
$50 million of our common shares over a two-year period. The share purchases would be made as a
normal course issuer bid. All purchases would be effected in the open market through the
facilities of The Toronto Stock Exchange and the NASDAQ Stock Market, and in accordance with all
regulatory requirements. During the one-year period commencing May 4, 2005, we may purchase for
cancellation up to 4,690,752 common shares, being 5% of the number of common shares outstanding.
The actual number of common shares which may be purchased and the timing of any such purchases
are determined by management. As of June 30, 2005, we have repurchased and cancelled 1.4 million
common shares at an aggregate cost of $15.5 million.
(b)
Directors’ Deferred Share Unit Plan
In March 2005, our Board of Directors approved a Directors’ Deferred Share Unit Plan (“DDSU
Plan”) for non-employee directors. Under the DDSU Plan, at the discretion of the Board of
Directors, non-employee directors can receive all or a percentage of their equity-based
compensation in the form of Deferred Share Units (“DSU”), each of which has a value equal to the
closing price of QLT’s common shares on the Toronto Stock Exchange on the date of grant. A DSU is
convertible into cash only (no shares are issued), and is automatically converted after the
non-employee director ceases to be a member of the Board. The DSU’s will vest monthly over 36
months from the date of grant. The value of a DSU, when converted to cash, will be equivalent to
the market value of a QLT common share at the time the conversion takes place. Under the DDSU
Plan, in March 2005, non-employee directors of the Board were granted a total of 67,500 DSU’s.
The grant of DSU’s in 2005 was made in lieu of the annual stock option grant to non-employee
directors.
(c)
Stock Options
Stock option activity with respect to our 1998 Plan and 2000 Plan is presented below:
Exercise Price
(In Canadian dollars)
Number of Options
Per Share Range
(Unaudited)
6,430,398
$
12.10-108.60
804,200
15.02 - 20.75
(16,944
)
12.10 - 13.35
(1,418,880
)
12.10 - 108.60
5,798,774
$
12.10-108.60
Exercise Price
(In U.S. dollars)
Number of Options
Per Share Range
(Unaudited)
5,970,865
$
2.63-17.82
332,500
12.37 - 12.37
(897,446
)
2.63 - 16.22
(61,050
)
11.82 - 16.29
5,344,869
$
2.63-17.82
(In Canadian dollars)
(Unaudited)
Options Outstanding
Options Exercisable
Weighted
Average
Weighted
Remaining
Weighted
Number of
Average
Contractual
Number of
Average Exercise
Price Range
Options
Exercise Price
Life (Years)
Options
Price
1,481,887
$
14.28
3.74
620,770
$
13.74
720,497
22.13
2.10
663,705
22.24
1,476,863
32.26
2.51
1,028,264
32.07
1,552,990
39.37
0.93
1,552,990
39.37
566,537
107.81
0.12
566,537
107.81
5,798,774
4,432,266
(In U.S. dollars)
Options Outstanding
Options Exercisable
(Unaudited)
Weighted
Average
Weighted
Remaining
Weighted
Number of
Average
Contractual
Number of
Average Exercise
Price Range
Options
Exercise Price
Life (Years)
Options
Price
228,883
$
3.94
5.14
228,883
$
3.94
456,486
5.68
4.73
456,486
5.68
915,389
8.66
6.63
915,389
8.66
1,157,329
11.80
6.61
860,721
11.60
673,677
13.53
7.10
673,677
13.53
1,913,105
16.28
8.85
1,913,105
16.28
5,344,869
5,048,261
(d)
Warrant
For the three months ended
For the six months ended
June 30,
June 30,
(In thousands of U.S. dollars)
2005
2004
2005
2004
$
129,044
$
109,340
$
252,788
$
210,396
(39,573
)
(33,357
)
(72,156
)
(62,636
)
(7,185
)
(7,221
)
(13,497
)
(12,482
)
(2,860
)
(2,462
)
(5,614
)
(4,724
)
$
79,426
$
66,300
$
161,521
$
130,554
$
39,713
$
33,150
$
80,760
$
65,277
5,070
5,768
10,142
10,323
2,748
2,458
5,447
4,697
1,222
1,760
2,354
3,358
$
48,752
$
43,136
$
98,703
$
83,655
3,630
—
10,825
—
$
52,382
$
43,136
$
109,528
$
83,655
For the three months ended
For the six months ended
June 30,
June 30,
(In thousands of U.S. dollars)
2005
2004
2005
2004
(Unaudited)
$
2,768
$
1,263
$
3,235
$
2,055
174
—
660
—
1,453
—
2,666
—
785
—
1,655
—
$
5,180
$
1,263
$
8,216
$
2,055
(Unaudited)
Maturity Period
Quantity (millions)
Average Price
2005 - 2006
USD 60.0
1.21194 per USD
2005 - 2006
CHF 86.6
1.04970 per CHF
2005
CAD 9.0
1.04644 per CHF
(Unaudited)
Maturity Period
Quantity (millions)
Average Price
2005
CAD 79.4
1.21249 per USD
2005
AUD 3.9
0.86630 per AUD
2005
EUR 22.9
1.52950 per EUR
2005
USD 2.1
1.15720 per USD
2005
GBP1.9
2.14845 per GBP
2005
JPY 269.3
0.01136 per JPY
For the three months
For the six months ended
ended June 30,
June 30,
(In thousands of U.S. dollars)
2005
2004
2005
2004
(Unaudited)
$
48,752
$
43,136
$
98,703
$
83,655
5,518
—
14,476
—
2,385
—
3,554
—
1,061
—
1,729
—
314
—
423
—
5,180
1,263
8,216
2,055
188
—
313
—
$
63,398
$
44,399
$
127,414
$
85,710
For the three months ended
For the six months ended
Revenues
1
June 30,
June 30,
(In thousands of U.S. dollars)
2005
2004
2005
2004
(Unaudited)
$
29,977
$
24,949
$
64,678
$
46,752
24,020
16,225
44,712
31,986
4,122
2,262
7,692
4,382
5,279
963
10,332
2,590
$
63,398
$
44,399
$
127,414
$
85,710
Property, plant and equipment
June 30,
Dec. 31,
(In thousands of U.S. dollars)
2005
2004
(Unaudited)
$
52,339
$
54,152
26,915
27,523
$
79,255
$
81,674
(1)
Revenues are attributable to a geographic segment based on the location of: (a) the customer,
for net product revenue and royalties; and (b) the head office of the collaborative partner, in
the case of revenues from contract research and development and collaborative arrangements.
For the three months ended
For the six months ended
June 30,
June 30,
(In thousands of U.S. dollars, except per share amounts)
2005
2004
2005
2004
$
16,826
$
14,684
$
32,082
$
38,706
(1,840
)
(2,968
)
(4,054
)
(6,238
)
(3,471
)
—
(6,942
)
—
(1,827
)
(1,635
)
(3,609
)
(3,276
)
476
610
807
825
1,234
(592
)
2,494
19
$
11,398
$
10,099
$
20,778
$
30,036
$
0.12
$
0.15
$
0.22
$
0.28
—
—
—
0.15
$
0.12
$
0.15
$
0.22
$
0.43
$
0.12
$
0.14
$
0.22
$
0.28
—
—
—
0.15
$
0.12
$
0.14
$
0.22
$
0.43
92,975
69,574
93,150
69,425
93,537
70,185
93,981
69,888
(In thousands of United States dollars)
June 30, 2005
December 31, 2004
$
1,150,671
$
1,116,249
13
11
—
—
227,477
234,419
89,680
89,680
218
133
$
1,468,059
$
1,440,492
$
270,702
259,470
85,952
88,433
(21,143
)
(24,439
)
$
335,511
$
323,464
$
879,969
$
856,779
(2,453
)
(2,518
)
55,902
51,917
33,500
33,500
160,892
172,194
4,738
5,156
$
1,132,548
$
1,117,028
(a)
Effective January 1, 2004, we adopted the fair value method of accounting for all employee
and non-employee stock-based compensation for Canadian GAAP purposes. We adopted this new
Canadian GAAP accounting standard on a retroactive basis, without restatement of prior
periods. Compensation expense is recorded for stock options issued to employees using the
fair value method. We calculate the fair value of stock options issued and amortize the fair
value to stock compensation expense over the vesting period, and adjust the amortization for
stock option forfeitures and cancellations. Under U.S. GAAP, we have adopted the disclosure
only provision of SFAS 123 for stock options granted to employees and directors.
(b)
Under Canadian GAAP, acquired in-process research and development (“IPR&D”) projects are
recorded as an intangible asset and amortized over their useful life. On November 19, 2004,
we acquired IPR&D of $236.0 million through the acquisition of Atrix Laboratories, Inc.
Accordingly, this amount was capitalized for Canadian GAAP purposes and is being amortized
using the straight-line method over its useful life of seventeen years. As a result of
book-tax basis differences attributable to IPR&D, an additional deferred tax liability of
$89.7 million has been recorded. During the quarter ended June 30, 2004, the future income
tax liability was adjusted by $1.3 million for Canadian GAAP purposes to reflect the reduction
in the temporary difference due to the amortization of the IPR&D. Under U.S. GAAP, IPR&D are
expensed at time of acquisition.
(c)
In 2003, we completed a private placement of $172.5 million aggregate principal amount of
convertible senior notes. Under Canadian GAAP, an amount of $33.5 million, representing the
estimated value of the right of conversion, was allocated to the shareholders’ equity as the
equity component of the convertible debt. Furthermore, with bifurcation, accretion expense is
recorded as interest expense under Canadian GAAP. Under U.S. GAAP, bifurcation of debt is not
required. In addition, foreign exchange gains/losses are calculated for the full face value of
the debt under U.S. GAAP, and calculated only on the liability component under Canadian GAAP.
(d)
The differences between Canadian GAAP and U.S. GAAP assets and liabilities resulted in
different deferred tax assets and deferred tax liabilities under the respective GAAP’s.
Furthermore, investment tax credits are calculated using different formulas for Canadian and
U.S. GAAP purposes due to different forecasted earnings under the respective GAAP’s.
(e)
We hold certain investments which under Canadian GAAP are recorded at historical costs
adjusted for permanent impairment. Under U.S. GAAP they are recorded as available-for-sale
securities. Such securities are required to be marked to market, with unrealized holding
gains and losses recorded in other comprehensive income.
(f)
Under Canadian GAAP, beneficial conversion features attached to certain historical preferred
shares were not included in share capital. Under U.S. GAAP, in prior years, a beneficial
conversion feature attached to certain
preferred shares was accreted as a return to the preferred shareholders. This resulted in an
increase in the stated amount of historical share capital.
(g)
In 2000 and 2001, we accelerated the vesting of certain employee stock options as part of
their severance. Under U.S. GAAP we recorded compensation expense and additional paid in
capital in shareholders’ equity equal to the intrinsic value of the options and under Canadian
GAAP there was no charge recorded.
(h)
Certain adjustments to retained earnings are required to account for the accumulated
historical differences between Canadian GAAP and U.S. GAAP.
(i)
The cumulative translation adjustment resulting from the translation of our Canadian
functional currency financial statements into U.S. dollar for reporting purposes differs
between Canadian GAAP and U.S. GAAP due to the difference in the value of our assets and
liabilities under the respective GAAPs.
(j)
Recent accounting policy developments include the following:
(i) Comprehensive Income
Commencing with our 2007 fiscal year, the new recommendations of the Canadian Institute of
Chartered Accountants (“CICA”) for accounting for comprehensive income (CICA Handbook Section
1530), for the recognition and measurement of financial instruments (CICA Handbook Section 3855)
and for hedges (CICA Handbook Section 3865) will apply. The transitional rules for these
sections require implementation at the beginning of a fiscal year; and we have not implemented
these sections in our 2005 fiscal year. The concept of comprehensive income for purposes of
Canadian GAAP will be to include changes in shareholders’ equity arising from unrealized changes
in the values of financial instruments.
(ii) Non-Monetary Transactions
The new recommendation of CICA Handbook Section 3831 is applicable commencing in fiscal 2006.
The amended recommendations will result in non-monetary transactions normally being measured at
fair values, and at carrying values when certain criteria are met. We do not believe the
adoption of CICA Handbook Section 3831 will have a material impact on our results of operations.
(Unaudited)
(Unaudited)
(In thousands of U.S. dollars except per share information)
Three months ended June 30
Six months ended June 30
2005
2004
2004
2005
2004
2004
(US
(US
Comparatives
(US
(US
Comparatives
GAAP)
GAAP)
as previously
GAAP)
GAAP)
as previously
reported
reported
(Canadian
(Canadian
GAAP)
GAAP)
$
52,382
$
43,136
$
43,136
$
109,528
$
83,655
$
83,655
5,648
—
—
9,356
—
—
5,180
1,263
1,263
8,216
2,055
2,055
188
—
—
313
—
—
63,398
44,399
44,399
127,413
85,710
85,710
11,480
7,450
7,450
25,970
14,372
14,372
20,085
11,257
13,492
36,521
20,667
24,989
4,344
3,607
4,013
9,733
8,388
9,267
1,994
916
916
3,728
1,725
1,725
1,911
—
—
3,782
—
—
873
—
—
3,388
—
—
40,687
23,230
25,871
83,122
45,152
50,353
22,711
21,169
18,528
44,291
40,558
35,357
2,603
338
948
3,187
614
1,439
2,999
2,268
2,268
5,548
4,750
4,750
(1,562
)
(1,548
)
(3,183
)
(3,160
)
(3,076
)
(6,352
)
4,040
1,058
33
5,575
2,288
(163
)
26,751
22,227
18,561
49,866
42,846
35,194
(9,925
)
(7,543
)
(8,462
)
(17,784
)
(14,533
)
(15,551
)
16,826
14,684
10,099
32,082
28,313
19,643
—
—
—
—
10,393
10,393
$
16,826
$
14,684
$
10,099
$
32,082
$
38,706
$
30,036
$
0.18
$
0.21
$
0.15
$
0.34
$
0.41
$
0.28
—
—
—
—
0.15
0.15
$
0.18
$
0.21
$
0.15
$
0.34
$
0.56
$
0.43
$
0.17
$
0.20
$
0.14
$
0.34
$
0.40
$
0.28
—
—
—
—
0.13
0.15
$
0.17
$
0.20
$
0.14
$
0.34
$
0.53
$
0.43
92,975
69,574
69,574
93,150
69,425
69,425
103,243
80,045
70,185
103,741
79,794
69,888
(Unaudited)
(In thousands of U.S. dollars except per share information)
Three months ended June 30
Six months ended June 30
2005
2004
2004
2005
2004
2004
(US
(US
Comparatives
(US
(US
Comparatives
GAAP)
GAAP)
as previously
GAAP)
GAAP)
as previously
reported
reported
(Canadian
(Canadian
GAAP)
GAAP)
$
16,826
$
14,684
$
10,099
$
32,082
$
38,706
$
30,036
1,911
—
—
3,782
—
—
1,994
916
916
3,728
1,725
1,725
—
—
2,969
—
—
6,239
277
264
264
558
503
503
—
—
1,635
—
—
3,276
2,095
5,863
5,252
3,638
7,951
7,124
—
—
—
—
(10,393
)
(10,393
)
(4,807
)
5,835
6,753
499
12,825
13,843
—
—
(326
)
—
—
(1,036
)
5,159
(4,211
)
(4,211
)
(2,032
)
(8,081
)
(8,081
)
(1,909
)
4,210
4,210
2,448
2,564
2,564
(4,679
)
(2,904
)
(2,904
)
(5,670
)
2,739
2,739
(3,141
)
(2,405
)
(2,405
)
(2,647
)
(3,316
)
(3,316
)
11,771
1,708
1,708
11,771
1,708
1,708
391
—
—
809
—
—
(4,135
)
5,021
5,021
(7,974
)
(3,872
)
(3,872
)
66
(188
)
(188
)
6,464
(1,916
)
(1,916
)
21,819
28,793
28,793
47,456
41,143
41,143
(93,166
)
(85,537
)
(85,537
)
(203,774
)
(94,757
)
(94,757
)
(1,098
)
(3,736
)
(3,736
)
(3,173
)
(6,905
)
(6,905
)
326
(718
)
(718
)
(884
)
(718
)
(718
)
—
—
—
—
(2,316
)
(2,316
)
(93,938
)
(89,991
)
(89,991
)
(207,831
)
(104,696
)
(104,696
)
(15,537
)
—
—
(15,537
)
—
—
—
(34
)
(34
)
—
(105
)
(105
)
4,024
2,076
2,076
11,041
13,772
13,772
(11,513
)
2,042
2,042
(4,496
)
13,667
13,667
(2,169
)
(5,402
)
(5,402
)
(5,853
)
(7,582
)
(7,582
)
(85,801
)
(64,558
)
(64,558
)
(170,724
)
(57,468
)
(57,468
)
192,164
269,498
269,498
277,087
262,408
262,408
$
106,363
$
204,940
$
204,940
$
106,363
$
204,940
$
204,940
$
127
$
137
$
137
$
2,871
$
3,156
$
3,156
$
1,471
—
—
$
4,038
—
—
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
•
projections as to whether we will have adequate resources to fund our future product
development programs and our other operating and capital requirements;
•
our expectation as to our tax position in 2005;
•
our expectations regarding the pending patent-related litigation against us;
For the three months
For the six months ended
ended June 30,
June 30,
(In thousands of U.S. dollars)
2005
2004
2005
2004
(Unaudited)
$
129,044
$
109,340
$
252,788
$
210,396
(39,573
)
(33,357
)
(72,156
)
(62,636
)
(7,185
)
(7,221
)
(13,497
)
(12,482
)
(2,860
)
(2,462
)
(5,614
)
(4,724
)
$
79,426
$
66,300
$
161,521
$
130,554
$
39,713
$
33,150
$
80,760
$
65,277
5,070
5,768
10,142
10,323
2,748
2,458
5,447
4,697
1,222
1,760
2,354
3,358
$
48,752
$
43,136
$
98,703
$
83,655
3,630
—
10,825
—
$
52,382
$
43,136
$
109,528
$
83,655
For the three months ended
For the six months ended
June 30,
June 30,
2005
2004
2005
2004
(In thousands of U.S. dollars)
$
2,395
$
3,325
$
3,652
$
5,170
(2,052
)
(2,996
)
(3,291
)
(4,633
)
3,061
(1,965
)
4,268
(1,423
)
(801
)
1,974
(1,442
)
1,500
$
2,603
$
338
$
3,187
$
614
39
40
41
42
43
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Issuer Purchases of Equity Securities
Total Number of
Shares Purchased as
Maximum Number of
Part of Publicly
Shares that May Yet Be
Total Number of
Average Price Paid
Announced Plans or
Purchased Under the Plans
Period
Shares Purchased
per Share
Programs
or Programs
—
—
—
—
1,355,600
$
11.46
1,355,600
3,335,152
—
—
—
3,335,152
1,355,600
$
11.46
1,355,600
3,335,152
(i)
to appoint Deloitte & Touche LLP as independent auditors for the Company for
the ensuing year and to authorize the Directors to fix the remuneration to be paid to
the auditors
.
The proxies received by us for the Meeting were voted as follows on
the foregoing resolution, and the resolution was declared passed:
Shares For
Shares Against
Abstentions
and
Broker Non-Votes
50,190,934
52,291
45,778
(ii)
to fix the number of Directors for the ensuing year at ten.
The proxies received by us for the Meeting were voted as follows on
the foregoing resolution, and the resolution was declared passed:
Shares For
Shares Against
Abstentions
and
Broker Non-Votes
49,767,261
494,237
27,506
(iii)
to elect Directors for the ensuing year
.
The proxies received us for the Meeting and votes cast at the Meeting were voted as
follows on the resolution to elect ten directors, and each of the directors was
declared elected:
Directors
Shares For
Shares Withheld
Abstentions
and
Broker Non-Votes
49,638,366
650,691
0
47,130,373
3,158,684
0
49,646,625
642,432
0
49,644,877
644,180
0
49,647,560
641,497
0
46,843,777
3,445,280
0
49,120,145
1,168,912
0
49,647,906
641,151
0
49,651,670
637,387
0
49,644,608
644,449
0
(iv)
to confirm and approve amended and restated shareholder rights plan agreement.
The proxies received by us for the Meeting and votes cast at the
Meeting were voted as follows on the foregoing resolution, and the
resolution was declared passed:
Shares For
Shares Against
Abstentions
and
Broker Non-Votes
27,874,885
6,283,319
15,635,636
(v)
to remove application of pre-existing company provisions.
The proxies received by us for the Meeting and votes cast at the
Meeting were voted as follows on the foregoing resolution, and the
resolution was declared passed:
Shares For
Shares Against
Abstentions
and
Broker Non-Votes
34,516,049
96,975
15,635,636
(vi)
to delete series “A”, “B”, “C” and “D” First Preference Shares.
The proxies received by us for the Meeting and votes cast at the
Meeting were voted as follows on the foregoing resolution, and the
resolution was declared passed:
Shares For
Shares Against
Abstentions
and
Broker Non-Votes
34,507,223
99,021
15,634,586
(vii)
to approve new articles.
The proxies received by us for the Meeting and votes cast at the
Meeting were voted as follows on the foregoing resolution, and the
resolution was declared passed:
Shares For
Shares Against
Abstentions
and
Broker Non-Votes
33,102,267
505,881
16,635,636
(viii)
to reduce approval threshold for special resolutions from 3/4 of votes cast to 2/3
of votes cast.
The proxies received by us for the Meeting and votes cast at the
Meeting were voted as follows on the foregoing resolution, and the
resolution was declared passed:
Shares For
Shares Against
Abstentions
and
Broker Non-Votes
32,489,985
1,130,816
16,635,635
Exhibit
Number
Description
Deferred Share Unit Plan for Non-employee Directors;
Change of Control Agreement for Cameron Nelson;
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002: Paul J.
Hastings, President and Chief Executive Officer;
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002: Cameron
Nelson, Vice President, Finance and Chief Financial Officer;
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002: Paul J.
Hastings, President and Chief Executive Officer;
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002: Cameron
Nelson, Vice President, Finance and Chief Financial Officer;
Risk Factors.
44
QLT Inc.
(Registrant)
August 9, 2005
By:
/s/ Paul J. Hastings
Paul J. Hastings
President and Chief Executive Officer
(Principal Executive Officer)
August 9, 2005
By:
/s/ Cameron Nelson
Cameron Nelson
Vice President, Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
45
Exhibit
Number
Description
Deferred Share Unit Plan for Non-employee Directors;
Change of Control Agreement for Cameron Nelson;
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002: Paul J.
Hastings, President and Chief Executive Officer;
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002: Cameron
Nelson, Vice President, Finance and Chief Financial Officer;
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002: Paul J.
Hastings, President and Chief Executive Officer;
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002: Cameron
Nelson, Vice President, Finance and Chief Financial Officer;
Risk Factors.
EXHIBIT 10.32
THE DIRECTORS' DEFERRED SHARE UNIT PLAN
FOR NON-EMPLOYEE DIRECTORS
OF QLT INC.
SECTION 1. PURPOSE
The purpose of the Directors' Deferred Share Unit Plan for Non-Employee Directors of QLT Inc. is to significantly strengthen the link between Director and shareholder interests by tying a portion of Director compensation to the long term performance of the Shares.
SECTION 2. DEFINITIONS
For the purposes of the Plan:
(a) "Affiliate" means an affiliate of the Corporation as that term is defined in paragraph 3 of the Canada Customs and Revenue Agency's interpretation bulletin IT-337R4, Retiring Allowances;
(b) "Award Notice" means the notice, as it may be amended from time to time, provided by the Corporation to the Director pursuant to Section 5 in connection with the grant of DSUs hereunder to said Director;
(c) "Beneficiary" means an individual who, on the date of a Director's death, is the person who has been designated in accordance with Section 13 and the laws applying to the Plan, or where no such individual has been validly designated by the Director, or where the individual does not survive the Director, the Director's executor or legal representative.
(d) "Board" means the Board of Directors of the Corporation;
(e) "Change of Control" means any of the following events:
(i) Merger. A merger, consolidation, reorganization or arrangement involving the Corporation other than a merger, consolidation, reorganization or arrangement in which stockholders of the Corporation immediately prior to such merger, consolidation, reorganization or arrangement own, directly or indirectly, securities possessing at least 65% of the total combined voting power of the outstanding voting securities of the corporation resulting from such merger, consolidation, reorganization or arrangement in substantially the same proportion as their ownership of such voting securities immediately prior to such merger, consolidation, reorganization or arrangement,
(ii) Tender Offer. The acquisition, directly or indirectly, by any person or related group of persons acting jointly or in concert (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership of securities possessing more than 35% of the total combined voting power of the Corporation's outstanding securities pursuant to a tender offer made directly to the Corporation's stockholders,
(iii) Sale. The sale, transfer or other disposition of all or
substantially all of the assets of the Corporation other than
to an affiliate of the Corporation as part of a corporate
reorganization of the Corporation (for purposes of clause
2(e), "affiliate" means, with respect to any entity, any
corporation, partnership, association, trust or other entity
or organization directly or indirectly controlled by,
controlling or under common control with such entity, and, for
the purposes of this definition, "control" will mean (1) the
possession, directly or indirectly, of the power to direct the
management or policies of any such entity or to veto any
material decision relating to the management or policies of
such entity, in each case whether through the ownership of
voting securities, by contract or otherwise, or (ii) direct or
indirect beneficial ownership of 40% or more of the voting
stock or other securities of, or a 40% or greater interest in
the income of, such entity, or such other relationship as, in
fact constitutes actual control), or
(iv) Board Change. A change in the composition of the Board over a period of 24 consecutive months or less such that a two-thirds majority of the Board members ceases to be comprised of individuals who either:
A. have been Board members continuously since the beginning of such period, or
B. have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination.
(f) "Committee" means the committee of directors of the Corporation generally responsible for matters relating to Directors' compensation and which is currently named the Executive Compensation Committee. The Committee shall be comprised of not less than such number of Directors as shall be required to permit DSUs granted under the Plan to qualify under Rule 16b-3 under the Securities Exchange Act of 1934, as amended ("Rule 16b-3"), and Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), and each member of the Committee shall be a "non-employee director" within the meaning of Rule 16b-3 and an "outside director" within the meaning of Section 162(m) of the Code;
(g) "Controlled Group" shall mean all members of the Corporation's controlled group (as defined under Sections 414(b) and 414(c) of the Internal Revenue Code) for the purposes of Section 409A of the Internal Revenue Code;
(h) "Corporation" means QLT Inc.;
(i) "Director" means a member of the Board who is not otherwise an employee of the Corporation or of an Affiliate;
(j) "Disability" means, with respect to a participant, when a participant (i) is unable to engage is any substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) is by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the participant's employer;
(k) "DSU" means a unit credited by means of a bookkeeping entry on the books of the Corporation to a Participant's account in accordance with the terms and conditions of the Plan, the value of which, on a particular date, shall be equal to the Market Value on such date;
(l) "Grant Date" means the date of approval of the grant of DSUs by the Board;
(m) "Key Employee" means an employee defined as a "key employee" in section
4.16(i) of the Internal Revenue Code without regard to paragraph 5 of such
Section 416(i);
(n) "Market Value" on any particular day means the closing price of the Shares on The Toronto Stock Exchange, or if the Shares are not listed on The Toronto Stock Exchange, on such other stock exchange approved by the Committee and agreed upon by the Board on which the Shares are listed, or if the Shares are not listed on any stock exchange, then on the over-the-counter market, on the trading day prior to the particular day on which at least one board lot of the Shares was traded. The Market Value shall always depend on the fair market value of a Share or a share of a corporation related to the Corporation;
(o) "Participant" means a Director who has been granted DSUs under the Plan;
(p) "Plan" means the Directors' Deferred Share Unit Plan for Non-Employee Directors of QLT Inc. as amended from time to time;
(q) "Share" means a common share, without nominal or par value, of the Corporation; and
(r) "Termination Date" shall mean the date on which both the following conditions are met: the Director (1) has ceased to be a Director as defined above for any reason whatsoever, including the death of the Director, and (2) is neither an employee of the Corporation, an Affiliate, or any member of the Controlled Group, nor a member of the board of an Affiliate or any member of the Controlled Group.
SECTION 3. CONSTRUCTION AND INTERPRETATION
In this Plan, all references to the masculine include the feminine; reference to the singular shall include the plural and vice versa, as the context shall require.
The Plan shall be governed and interpreted in accordance with the laws of the Province of British Columbia and the applicable laws of Canada.
If any provision of the Plan or part hereof is determined to be void or unenforceable in whole or in part, such determination shall not affect the validity or enforcement of any other provision or part thereof.
Headings wherever used herein are for reference purposes only and do not limit or extend the meaning of the provisions contained herein.
The Plan shall be effective with respect to the 2005 calendar year and all subsequent calendar years until amended, suspended or terminated.
SECTION 4. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Committee, subject to applicable corporate and securities law requirements.
The Committee is authorized, subject to the provisions of this Plan, to establish from time to time such rules and regulations, make such determinations and to take such steps in connection with this Plan as in the opinion of the Committee are necessary or desirable for the proper administration of this Plan. For greater certainty, without limiting the generality of the foregoing, the Committee will have the power, where consistent with the general purpose and intent of this Plan and subject to the specific provisions of this Plan and any approval of The Toronto Stock Exchange or any other exchange or trading facilities through which the Shares are traded or quoted from time to time, if applicable:
(a) to interpret and construe this Plan and to determine all questions arising out of this Plan and any DSU granted pursuant to this Plan;
(b) to determine to which Directors DSUs are granted, and to grant, DSUs subject to Board approval;
(c) to determine the number of DSUs granted, subject to Board approval;
(d) to prescribe the form of instrument relating to the grant of DSUs;
(e) to enter into such grant notice with respect to each grant;
(f) to adopt such modifications, procedures and subplans as may be necessary or desirable to comply with the laws of Canada, the United States and other countries in which the Corporation or its Affiliates may operate to ensure the viability and maximization of the DSUs granted to Participants residing in such countries and to meet the objectives of the Plan; and
(g) to determine other matters as provided herein.
All actions taken and decisions made by the Committee shall be final, conclusive and binding on all parties concerned, including, but not limited to, the Participants and their beneficiaries and legal representatives, the Corporation, its employees and shareholders. All expenses of administration of the Plan shall be borne by the Corporation.
Notwithstanding anything to the contrary contained herein, the Board may, at any time and from time to time, exercise the powers and duties of the Committee under the Plan without any further action of the Committee.
SECTION 5. GRANT OF DSUs
DSUs may be granted pursuant to this Plan from time to time by the Corporation in accordance with the following procedure. The Committee shall recommend to the Board the terms of the DSU grants as set forth in Section 4. The Board may approve, modify or reject the recommendations of the Committee in its discretion. Notwithstanding anything to the contrary contained herein, the Board may, at any time and from time to time, exercise the powers and duties of the Committee under the Plan without any further action of the Committee.
The Corporation shall provide to the Director an Award Notice with respect to grant of DSUs.
The DSUs shall be credited to the account of the Participant as of the Grant Date.
SECTION 6. VESTING OF DSUs
The DSUs will vest monthly in equal amounts over 36 months beginning on the first day of the first month after the Grant Date.
If the Participant ceases to be a Director due to death or Disability, all DSUs shall be immediately vested. Upon the occurrence of a Change of Control, all DSUs shall be immediately vested. If the Participant is removed as a Director for cause, all vested and unvested DSUs shall be cancelled.
If the Participant ceases to be a Director due to retirement unrelated to death, Disability or a Change of Control, the Board may in its sole discretion accelerate the vesting of the DSUs prior to such retirement to be effective upon such retirement.
Participant's entitlement to payment of DSUs at the Termination Date shall only apply to vested DSUs and all unvested DSUs as of the Termination Date shall be cancelled.
SECTION 7. DIVIDENDLIKE AMOUNTS
A Participant's account shall, from time to time during the term of the Participant's participation in the Plan, up to and including the Participant's Termination Date, be credited with additional DSUs, the number of which shall be equal to the quotient determined by dividing one hundred percent (100%) of the dividends declared that would have been paid to the Participant if the DSUs in his or her account on the relevant record date for dividends on the Shares had been Shares (excluding stock dividends, but including dividends which may be paid in cash or in shares at the option of the shareholder), by the Market Value on the payment date of such dividend, with fractions computed to four decimal places.
SECTION 8. PAYMENT OF DSUs
The Market Value of the DSUs credited to a Participant's account as at such Participant's Termination Date, to the extent vested in accordance with Section 6, shall be paid by the Corporation to the Participant (or if the Participant has died, to the Participant's Beneficiary) in the form of a lump sum cash payment within 30 days following the Termination Date, less any applicable taxes and other source deductions required to be withheld by the Corporation; provided, however, if the Participant is a Key Employee as of the Termination Date, the payment shall be made on the date six months following the Termination Date. If a payment date pursuant to this Section 8 falls on a Saturday, Sunday or banking holiday, then payment shall be made on the next business day.
In the event that, at a Participant's Termination Date, there is no public market for the Shares, the obligations of the Corporation under the Plan shall be met by a payment in cash in such amount as is reasonably determined by the Committee to be equitable in the circumstances based on the value of the Shares at the time of payment, less applicable withholdings, such determination to be final and binding for all purposes.
In the event that a Participant's Termination Date would otherwise fall between
the record date for a dividend on the Shares and the related dividend payment
date then, notwithstanding the foregoing provisions of this Section 8, such
Participant's Termination Date shall be deemed to be the day immediately
following the date of payment of such dividend for purposes of recording in the
Participant's account under the Plan amounts referred to in Section 7 hereof and
making the calculation of the value of a Participant's DSUs contemplated by this
Section 8. In the event that the Corporation is unable, by a Participant's
Termination Date, to compute the final value of the DSUs recorded in such
Participant's account under the Plan by reason of the fact that any data
required to compute the Market Value has not been made available to the
Corporation, then, notwithstanding the foregoing provisions of this Section 8,
the Termination Date shall be the next following trading day on which such data
is made available to the Corporation.
SECTION 9. PARTICIPANTS' ACCOUNTS/ADJUSTMENTS TO DSUs CREDITED TO ACCOUNTS
The Corporation shall maintain in its books an account for each Participant recording at all times the number of DSUs standing to the credit of the Participant. Upon payment in satisfaction of DSUs credited to a Participant in the manner described herein, such DSUs shall be cancelled. A written confirmation of the balance in a Participant's account hereunder shall be mailed by the Corporation to the Participant at least annually.
In the event of any stock dividend, reorganization, recapitalization, stock split, consolidation or similar event affecting the number of Shares, the DSUs credited to a Participant's account under the Plan will be adjusted in the same manner as if each DSU were a Share. In the event of any exchange of shares or other change in the Shares into a different number or kind of shares of the Corporation or of any corporation related thereto, or of any other change in the Shares or shares into which Shares have been changed or for which they have been exchanged, such equitable adjustments, as the Committee may reasonably determine, shall be made with respect to the number of DSUs then recorded in the Participant's account under the Plan. However, no amount
will be paid to, or in respect of, a Participant under the Plan or pursuant to any other arrangement, and no DSUs will be granted nor will any credit be made to such Participant's DSU account under the Plan to compensate for a downward fluctuation in the price of Shares, nor will any other form of benefit be conferred upon, or in respect of, a Participant for such purpose.
SECTION 10. AMENDMENTS TO, SUSPENSION OR TERMINATION OF, THE PLAN
The Board may from time to time amend, suspend or terminate the Plan in whole or in part. However, any such amendment, suspension or termination shall not adversely affect the rights accrued to any Participant under any DSUs outstanding at the time of such amendment, suspension or termination without the consent of the affected Participant. Notwithstanding the foregoing, any amendment, suspension or termination of the Plan shall be such that the Plan continuously meets the requirements of paragraph 6801(d) of the regulations under the Income Tax Act (Canada) or any successor provision thereto.
SECTION 11. RIGHTS OF PARTICIPANTS
Except as specifically set out in the Plan, no Director, Participant or other person shall have any claim or right to any Shares or any other benefit in respect of DSUs granted pursuant to the Plan.
Neither the Plan nor any grant thereunder shall be construed as granting a Participant a right to be retained as a Director of the Corporation or a claim or right to any future grants of DSUs.
Under no circumstances shall DSUs be considered Shares nor shall they entitle any Participant to exercise voting rights or any other rights attaching to the ownership of Shares, nor shall any Participant be considered the owner of Shares by virtue of this Plan.
SECTION 12. DESIGNATION OF BENEFICIARY AND DEATH OF PARTICIPANT
Subject to the requirements of applicable laws, a Director may designate in writing a person who is a dependant or relation of the Director as a beneficiary to receive any benefits that are payable under the Plan upon the death of such Director. The Director may, subject to applicable laws, change such designation from time to time. Such designation or change shall be in such form and executed and filed in such manner as the Committee may from time to time determine.
In the event of a Participant's death, any and all DSUs then credited to the Participant's account shall become payable to the Participant's Beneficiary in accordance with Section 8 hereof.
SECTION 13. COMPLIANCE WITH APPLICABLE LAWS
Any obligation of the Corporation pursuant to the terms of the Plan is subject to compliance with all applicable laws and the rules of any stock exchange on which shares of the Corporation are listed. The Participant shall comply with all such laws and furnish the Corporation with any and all information and undertakings as may be required to ensure compliance therewith.
SECTION 14. WITHHOLDING TAXES
The Corporation shall be entitled to deduct any amount of applicable taxes and other applicable withholdings from any amount paid or credited hereunder.
SECTION 15. TRANSFERABILITY
In no event may the rights or interests of a Participant under the Plan be assigned, encumbered, pledged, transferred or alienated in any way, except to the extent that certain rights may pass to a beneficiary or legal representative upon death of a Participant, by will or by the laws of succession and distribution.
EXHIBIT 10.34
CHANGE OF CONTROL AGREEMENT FOR CAMERON NELSON
August 8, 2005
STRICTLY PERSONAL AND CONFIDENTIAL
Mr. Cameron Nelson
Vice President, Finance and Acting Chief Financial Officer
QLT Inc.
Dear Cam:
INTRODUCTION
A dedicated executive management team is essential to protecting and enhancing the best interests of QLT Inc. (the "Company" or "QLT") and its shareholders. The Company wishes to provide its executives with compensation and benefits arrangements which would come into effect in circumstances related to a change in control which are competitive with those of other corporations, in order to ensure the Company receives the benefit of the full attention and dedication of the executives at all times, and notwithstanding any threatened or pending change in control of the Company.
The purpose of this Letter Agreement is to document the terms of the severance package to which you as a Company executive shall be entitled if material changes in the terms of your employment with the Company occur without your consent, or if your employment with the Company is terminated, in connection with a change in control of the Company.
NOW THEREFORE in consideration of $10.00, the promises made by each party to the other as set out in this Letter Agreement and other good and valuable consideration, the receipt and sufficiency of which each of the parties acknowledges, QLT and you agree as follows:
PART I
DEFINITIONS
1.1 DEFINITIONS. In this Letter Agreement:
(a) "AFFILIATE" has the meaning given to it in the Business Corporations Act (British Columbia);
(b) "BENEFIT PLANS" means the coverage under the Company's group benefit plan for employees which the Company provides to you and your eligible dependants, including all medical, dental, life and other benefit plans but excluding short and long term disability coverage, out-of-province medical coverage and the RRSP contribution benefit;
(c) "BOARD" means the Company's Board of Directors;
(d) "CHANGE OF CONTROL" means any of the following events:
(i) MERGER. A merger, consolidation, reorganization or arrangement involving the Company other than a merger, consolidation, reorganization or arrangement in which stockholders of the Company immediately prior to such merger, consolidation, reorganization or arrangement own, directly or indirectly, securities possessing at least 65% of the total combined voting power of the outstanding voting securities of the corporation resulting from such merger, consolidation, reorganization or arrangement in substantially the same proportion as their ownership of such voting securities immediately prior to such merger, consolidation, reorganization or arrangement;
(ii) TENDER OFFER. The acquisition, directly or indirectly, by any person or related group of persons acting jointly or in concert (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership of securities possessing more than 35% of the total combined voting power of the Company's outstanding securities pursuant to a tender offer made directly to the Company's stockholders;
(iii) SALE. The sale, transfer or other disposition of all or substantially all of the assets of the Company other than a sale, transfer or other disposition to an Affiliate of the Company or to an entity in which stockholders of the Company immediately prior to such sale, transfer or other disposition own, directly or indirectly, securities possessing at least 65% of the total combined voting power of the outstanding voting securities of the purchasing entity in substantially the same proportion as their ownership of such voting securities immediately prior to sale, transfer or other disposition; or
(iv) BOARD CHANGE. A change in the composition of the Board over a period of 24 consecutive months or less such that a majority of the Board members ceases to be comprised of individuals who either have been:
(A) Board members continuously since the beginning of such period, or
(B) appointed or nominated for election as Board members during such period by at least a majority of the Board members described in subsection (A) above who were still in office at the time the Board approved such appointment or nomination.
(e) "INVOLUNTARY TERMINATION" means any one of the following:
(i) the termination of your employment by the Company or the giving of written notice to you by the Company of the intended termination of your employment, in either case for reasons other than cause, permanent disability or death, within the 24 month period following the occurrence of a Change of Control, or
(ii) your giving written notice to the Company, within 24 months after a Triggering Event, in which you advise that a Triggering Event has occurred and tender your resignation from employment with the Company;
(f) "SUCCESSOR" shall mean any corporation which is the legal successor to the Company, or which acquires substantially all of the assets of the Company, pursuant to a Change of Control;
(g) "TRIGGERING EVENT" shall mean, without your express written consent, the occurrence of any one or more of the following circumstances after a Change of Control:
(i) the assignment to you of any duties which are materially inconsistent, in an adverse respect, with your position, authority, duties or responsibilities prior to the Change of Control, or any other action by the Company or its Successor which results in a material diminution in such position, authority or responsibilities, except an isolated and inadvertent action not taken in bad faith and which is remedied by the Company or its Successor promptly after receipt of notice thereof from you;
(ii) any reduction by the Company or a Successor in your base salary;
(iii) a reduction by the Company or a Successor of 25% or more of your annual cash incentive compensation opportunity;
(iv) the Company or a Successor's requiring you to, or notifying you that you will be required to, relocate to or be based at, or situate one day or more per week in, a location which is 100 kilometers or more from the location where you were based immediately prior to the Change of Control;
(v) the failure by the Company or a Successor to continue, substantially as in effect immediately prior to the Change of Control, all of the Company's Benefit Plans, in which you participate (or substantially equivalent successor plans, programs, policies, practices or arrangements) or the failure by the Company or a Successor to continue your participation therein on substantially the same basis as existed immediately prior to the Change of Control;
(vi) the failure of the Company to obtain an agreement from any Successor to assume and agree to perform this Letter Agreement, as contemplated in Section 3.5 of this Letter Agreement, and your Employment Agreement with the Company (the "Employment Agreement"); or
(vii) any purported termination by the Company or a Successor of your employment other than for cause, permanent disability or death.
PART II
CHANGE OF CONTROL BENEFITS
2.1 SEVERANCE PAYMENT. Upon the occurrence of an Involuntary Termination, you shall receive a severance payment from the Company equal to the base salary, maximum bonus entitlement, and maximum RRSP contribution to which you would have been entitled in an 18 MONTH PERIOD (the "Severance Period"), calculated as follows:
(a) the rate of base salary will be that in effect at the time of the Involuntary Termination or as was in effect immediately prior to the occurrence of a Triggering Event, whichever rate is greater; and
(b) the maximum bonus entitlement will be calculated as the maximum amount available to you under the Company's cash incentive compensation plan at the time of the Involuntary Termination as if 100% of your individual goals and the corporate goals were met but not exceeded or the entitlement which was available to you immediately prior to the occurrence of a Triggering Event, whichever amount is greater, pro-rated for any portion of the Severance Period of less than a year; and
(c) a contribution to your RRSP, equal to that to which you would have been entitled had you been employed by the Company throughout the Severance Period, pro-rated for any period of less than a year, and subject to terms of the RRSP contribution provisions set out in your Employment Agreement with the Company.
2.2 OTHER COMPENSATION. In addition to the amounts paid under Section 2.1, upon the occurrence of an Involuntary Termination, the Company shall:
(a) EXPENSES - reimburse you for all reasonable business related promotion, entertainment and/or travel expenses incurred by you during the course of your employment with the Company, subject to the expense reimbursement provisions set out in your Employment Agreement with the Company and the Company's Policy and Procedures Manual, as amended from time to time;
(b) VACATION - make a payment to you in respect of your accrued but unpaid vacation pay up to and including your last day of employment with the Company;
(c) RRSP - make a prorated contribution to your RRSP, the pro-ration to be with respect to the portion of the then current calendar year worked by you up to and including the last day of your employment with the Company and subject to the RRSP contribution provisions set out in your Employment Agreement with the Company;
(d) CASH INCENTIVE COMPENSATION EARNED PRIOR TO INVOLUNTARY TERMINATION - in addition to the payments under Section 2.1(b) above, the Company shall make a payment to you in respect of your entitlement to participate in the Company's cash incentive compensation plan in respect of the current calendar year, and the prior year if such payment has not yet been made, to be pro-rated with respect to the portion of the current calendar year worked by you up to and including your last day of employment with the Company and, in respect of the current calendar year, shall be calculated at the maximum annual bonus entitlement available to you under the Company's cash incentive compensation plan at the time of the Involuntary Termination as if 100% of your individual goals and the corporate goals were met but not exceeded or the entitlement which was available to you immediately prior to the occurrence of any prior Triggering Event, whichever amount is greater;
(e) BENEFITS - continue to provide you and your eligible dependants with coverage under the Company's Benefit Plans for a period of 30 days after your last day of employment with the Company and, at your request, for such further period (the aggregate of which shall not exceed the Severance Period) as the insurer shall permit, and for any period of the Severance Period during which such coverage is not maintained, the Company shall pay to you compensation in the amount of 10% of your base salary, calculated in accordance with Section 2.1(a), provided that the Company's obligation to maintain coverage for you and
your eligible dependants under this subsection will be conditional upon your and your eligible dependants remaining in Canada;
(f) MOVING EXPENSES - pay such moving expenses as may be reasonably incurred by you to relocate you and your family to a new location for future employment purposes or the location from which you traveled to Vancouver, as the case may be, including, in the event that you are unable to sell your home in Vancouver before you are required to pay costs of accommodation at your new location, the costs of such accommodation until you derive proceeds from the sale of you home in Vancouver, or six months, whichever period is longer, together with any additional relocation reimbursement to which you may then be entitled under the terms of your Employment Agreement with the Company, such expenses to be calculated and paid in accordance with terms of your Employment Agreement, provided that there is no duplication of payments pursuant to the Employment Agreement and this clause;
(g) OUT-PLACEMENT COUNSELLING - reimburse you for out-placement counselling services from a qualified counsellor to be agreed to by you and the Company to a maximum of CAD5,000 for services rendered to you in seeking alternative employment.
2.3 TIMING OF PAYMENT. The amounts set out in Sections 2.1 and 2.2 shall be paid to you in a lump sum payment within 30 days of your Involuntary Termination, except for the RRSP payments described in Section 2.1(c) and 2.2(d), which will be payable in accordance with the terms of your Employment Agreement in the same manner as if you were employed throughout the Severance Period.
2.4 NO DUPLICATION. The Company agrees that an Involuntary Termination by you, as defined in subsection 1.1(e)(ii), shall constitute a termination of your employment by the Company without cause pursuant to your Employment Agreement and any other agreement in effect between you and the Company. In the event that the severance payment and other compensation provisions set out in Sections 2.1 and 2.2 of this Letter Agreement and the severance payment provisions in your Employment Agreement with the Company are both applicable, you agree that, upon the Company's request, you shall give written notice to the Company with respect to which agreement you wish to be paid out under and that you shall not be entitled to severance pay under both agreements.
2.5 OPTIONS. Upon the occurrence of an Involuntary Termination, the provisions of your Stock Option Agreement(s) with the Company shall govern all stock option issues, including, without limitation, acceleration of vesting and the time period remaining to exercise any vested options.
2.6 ACKNOWLEDGEMENT. In the event of an Involuntary Termination, payment by the Company of the amounts set out in Sections 2.1 and 2.2 or, if you elect to receive severance under your Employment Agreement payment of the amounts set out therein, in lieu of receiving a duplicative payment hereunder, shall be in full and final satisfaction of all amounts that might otherwise be payable by the Company to you by way of compensation for length of service, damages in lieu of notice of termination or any other obligations arising under your employment with the Company and the Company shall have no further obligations, statutory or otherwise, arising out of or in respect of your employment and you shall execute a complete and general release in the form set out in Schedule A as an express condition of your right to receive the payments and benefits referred to in Sections 2.1 and 2.2 or under your Employment Agreement, as the case may be.
2.7 TERMINATION FOR CAUSE, PERMANENT DISABILITY OR DEATH. For greater certainty, if your employment is terminated for cause, permanent disability or death or you terminate your employment other than as an Involuntary Termination, you shall not be entitled to payment of the amounts under this Letter Agreement and the terms of your Employment Agreement with the Company shall govern.
2.8 WAIVER OF NON-COMPETITION COVENANT. Effective upon your Involuntary Termination, the Company hereby waives any and all rights it has to insist upon compliance with or to enforce any covenant, undertaking or agreement by you under your Employment Agreement or otherwise, pursuant to which you have agreed not to compete with the Company in your future employment or otherwise limit your future employment opportunities. Your obligations of confidentiality to the Company contained in your Employment Agreement shall remain in full force and effect and are not altered by this Letter Agreement.
2.9 RIGHT TO WAIVE ANY AND ALL CONSIDERATION. In your discretion, upon your written request to the Company made within 15 days of your Involuntary Termination, you may elect to irrevocably waive your right to any of the consideration payable by the Company pursuant to this Letter Agreement.
PART III
MISCELLANEOUS PROVISIONS
3.1 TERM OF AGREEMENT. This Letter Agreement shall remain in effect for the term of your employment with the Company and for a further six month period thereafter, unless the parties mutually agree to an earlier termination, provided that the expiry or termination of this Letter Agreement shall not affect the rights and obligations of the parties arising under this Letter Agreement prior to its termination or expiry.
3.2 LEGAL FEES. The Company shall pay, to the full extent permitted by law, all legal fees and expenses which you may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company or its successors or Affiliates, you or others of the validity or enforceability of, or liability under, any provision of this Letter Agreement or any guarantee of performance thereof (including as a result of any contest by you about the amount of any payment pursuant to this Letter Agreement).
3.3 WITHHOLDING TAXES. The Company may withhold from any amounts payable under this Letter Agreement such federal, provincial, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.
3.4 GENERAL CREDITOR STATUS. The benefits to which you may become entitled under this Letter Agreement shall be paid, when due, from the general assets of the Company. Your right (or the right of the executors or administrators of your estate) to receive any such payments shall at all times be that of a general creditor of the Company and shall have no priority over the claims of other general creditors of the Company.
3.5 SUCCESSORS; BINDING AGREEMENT. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of its business and/or assets to assume and agree to perform this Letter Agreement by express written agreement in the same manner and to the same extent that it would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement within 30 days of any such succession
shall be a breach of this Letter Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled under this Letter Agreement, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date of the Involuntary Termination.
3.6 DEATH. Notwithstanding anything else in this Letter Agreement, should you die after becoming entitled to benefits under this Letter Agreement but before receipt of all benefits to which you became entitled under this Letter Agreement, then the payment of such benefits shall be made, on the due date or dates hereunder had you survived, to the executors or administrators of your estate.
3.7 GOVERNING LAW. The provisions of this Letter Agreement shall be governed by and interpreted in accordance with the laws of the Province of British Columbia and the laws of Canada applicable to this Letter Agreement. All disputes arising under this Letter Agreement shall be referred to the Courts of the Province of British Columbia, which shall have exclusive jurisdiction, unless there is mutual agreement to the contrary.
3.8 NOTICE. The parties agree that any notice or other communication required to be given under this Letter Agreement will be in writing and will be delivered personally to the addresses set forth on page 1 of this Letter Agreement (or, in your case, to the most recent address for you which the Company has on record), or to such other addresses and persons as may from time to time be notified in writing by the parties.
3.9 ENTIRE AGREEMENT. This Letter Agreement, the Employment Agreement and any Stock Option Agreements you have with the Company constitute the entire agreement between the Company and you with respect to the subject matter hereof, and supersede all previous communications, understandings and agreements (whether verbal or written) between the Company and you regarding the subject matter hereof. To the extent that there is any conflict between the provisions of this Letter Agreement, the Employment Agreement and any Stock Option Agreements between you and the Company, the following provisions shall apply:
(i) If the conflict is with respect to an event, entitlement or obligation in the event of a Change of Control, the provisions of this Letter Agreement shall govern (unless you and the Company otherwise mutually agree).
(ii) If the conflict is with respect to an entitlement or obligation with respect to stock options of the Company, the provisions of the Stock Option Agreements shall govern (unless you and the Company otherwise mutually agree).
(iii) In the event of any other conflict, the provisions of the Employment Agreement shall govern (unless you and the Company otherwise mutually agree).
3.10 SEVERABILITY OF PROVISIONS. If any provision of this Letter Agreement as applied to either party or to any circumstance should be adjudged by a court of competent jurisdiction to be void or unenforceable for any reason, the invalidity of that provision shall in no way affect (to the maximum extent permissible by law):
(i) The application of that provision under circumstances different from those adjudicated by the court;
(ii) The application of any other provision of this Letter Agreement; or
(iii) The enforceability or invalidity of this Letter Agreement as a whole.
If any provision of this Letter Agreement becomes or is deemed invalid, illegal or unenforceable in any jurisdiction by reason of the scope, extent or duration of its coverage, then the provision shall be deemed amended to the extent necessary to conform to applicable law so as to be valid and enforceable or, if the provision cannot be so amended without materially altering the intention of the parties, then such provision shall be stricken and the remainder of this Letter Agreement shall continue in full force and effect.
3.11 CAPTIONS. The captions appearing in this Letter Agreement have been inserted for reference and as a matter of convenience and in no way define, limit or enlarge the scope or meaning of this Letter Agreement or any provision.
3.12 AMENDMENTS. Any amendment to this Letter Agreement shall only be effective if the amendment is in writing and is signed by the Company and by you.
3.13 REMEDIES. All rights and remedies provided pursuant to this Letter Agreement or by law shall be cumulative, and no such right or remedy shall be exclusive of any other. A party may pursue any one or more rights or remedies hereunder or may seek damages or specific performance in the event of another party's breach hereunder or may pursue any other remedy by law or equity, whether or not stated in this Letter Agreement.
3.14 NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Letter Agreement shall confer upon you any right to continue in the employment of the Company for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company or you, which rights are hereby expressly reserved by each, to terminate your employment at any time in accordance with the terms of your Employment Agreement.
Please indicate your acceptance of the foregoing provisions of this Letter Agreement by signing the enclosed copy of this Letter Agreement and returning it to the Company.
QLT INC.
By: /s/ LINDA LUPINI
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Linda Lupini, Senior Vice President, Human Resources and
Organizational Development
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ACCEPTED AND AGREED TO this 8th day of August, 2005 by:
Signature: /s/ CAMERON NELSON
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Cameron Nelson
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SCHEDULE A
FINAL RELEASE
IN CONSIDERATION OF the payments made to me by QLT INC. (hereinafter called "QLT") pursuant to that letter dated _______ day of _______, 20___ from QLT to me, effective the date of this Release, I, _________________ of __________________ do hereby remise, release and forever discharge QLT, having a place of business at 887 Great Northern Way, in the City of Vancouver, Province of British Columbia, V5T 4T5, its officers, directors, servants, employees and agents, and their heirs, executors, administrators, successors and assigns, as the case may be, of and from any and all manner of actions, causes of action, suits, contracts, claims, damages, costs and expenses of any nature or kind whatsoever, whether in law or in equity, which as against QLT or such persons as aforesaid or any of them, I have ever had, now have, or at any time hereafter I or my personal representatives can, shall or may have, by reason of or arising out of my employment with QLT and/or the subsequent termination of my employment with QLT on or about _______________, 20___, or in any other way connected with my employment with QLT and more specifically, without limiting the generality of the foregoing, any and all claims for damages for termination of my employment, constructive termination of my employment, loss of position, loss of status, loss of future job opportunity, loss of opportunity to enhance my reputation, the timing of the termination and the manner in which it was effected, loss of bonuses, loss of shares and/or share options, loss of benefits, including life insurance and short and long-term disability benefit coverage, and any other type of damages arising from the above. Notwithstanding the foregoing, nothing in this Release will act to remise, release or discharge QLT from obligations, if any, which QLT may have pursuant to any indemnity agreements previously entered into between me and QLT or from any rights I may have to claim coverage under QLT's past, current or future director and/or officer insurance policies, in either case with respect to existing or future claims that may be brought by third parties.
IT IS UNDERSTOOD AND AGREED that this Release includes any and all claims arising under the Employment Standards Act, Human Rights Code, or other applicable legislation and that the consideration provided includes any amount that I may be entitled to under such legislation.
IT IS FURTHER UNDERSTOOD AND AGREED that this Release is subject to compliance by QLT with the said conditions as stipulated in the aforementioned letter from QLT.
IT IS FURTHER UNDERSTOOD AND AGREED THAT QLT will withhold and remit income tax and other statutory deductions from the aforesaid consideration and I agree to indemnify and hold harmless QLT from any further assessments for income tax, repayment of any employment insurance benefits received by me, or other statutory deductions which may be made under statutory authority.
IT IS FURTHER UNDERSTOOD AND AGREED that this is a compromise and is not to be construed as an admission of liability on the part of QLT. The terms of this Release set out the entire agreement between QLT and me with respect to the matters described herein and are intended to be contractual and not a mere recital.
IT IS FURTHER UNDERSTOOD AND AGREED that I will keep the contents of this settlement and all communication relating thereto confidential except to Revenue Canada or as is required to obtain legal and tax advice, or to enforce my rights hereunder in a court of law, as is required by law.
IT IS FURTHER UNDERSTOOD AND AGREED that the consideration described herein was voluntarily accepted by me for the purpose of making a full and final settlement of all claims described above and that prior to agreeing to the settlement, I was advised by QLT of my right to receive independent legal advice.
IN WITNESS WHEREOF this Release has been executed effective the ______ day of __________, 20___.
SIGNED, SEALED AND DELIVERED )
By _____________ in the presence of: )
)
) _____________________________
(SEAL)__________________________________ ) [INSERT NAME]
Name )
________________________________________ )
Address )
________________________________________ )
)
________________________________________ )
Occupation )
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EXHIBIT 31.1
CERTIFICATION
I, Paul J. Hastings, President and Chief Executive Officer of QLT Inc. ("registrant"), certify that:
1. I have reviewed this quarterly report of Form 10-Q of QLT Inc. ("registrant");
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15(f) and 15d - 15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 9, 2005 /s/ Paul J. Hastings ------------------------ Paul J. Hastings President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION
I, Cameron Nelson, Vice-President, Finance and Chief Financial Officer of QLT Inc. ("registrant"), certify that:
1. I have reviewed this quarterly report of Form 10-Q of QLT Inc. ("registrant");
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15(f) and 15d - 15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 9, 2005 /s/ Cameron Nelson ------------------------ Cameron Nelson Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of QLT Inc. (the "COMPANY") on Form 10-Q for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "FORM 10-Q"), I, Paul J. Hastings, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: August 9, 2005
/s/ Paul J. Hastings
---------------------------------------
Paul J. Hastings
President & Chief Executive Officer
QLT Inc.
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EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of QLT Inc. (the "COMPANY") on Form 10-Q for the period ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "FORM 10-Q"), I, Cameron Nelson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: August 9, 2005
/s/ Cameron Nelson
--------------------------------------------
Cameron Nelson
Vice President, Finance &
Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT 99.1
RISK FACTORS
You should consider carefully the following factors, which describe the risks, uncertainties and other factors that may materially and adversely affect our business, financial condition and operating results.
OUR FUTURE OPERATING RESULTS ARE UNCERTAIN AND LIKELY TO FLUCTUATE.
Until the fourth quarter of 2000, we had a history of operating losses. Although we were profitable for the years 2000-2003 and the first quarter of 2005 (2004 was impacted by a charge of $236.0 million for purchase of in-process research and development related to the Atrix acquisition -- see Note 4 to the Financial Statements in our Form 10-K dated March 16, 2005), future operating performance and profitability are not certain. Our accumulated deficit at March 31, 2005 was approximately $158.5 million.
Our operating results may fluctuate from period to period for a number of reasons. In budgeting our operating expenses, some of which are fixed in the short term, we assume that revenues will continue to grow. Even a relatively small revenue shortfall or a small increase in operating expenses may cause a period's results to be below expectations. A revenue shortfall or increase in operating expenses could arise from any number of factors, such as:
- lower than expected revenues from sales of Visudyne(R), Eligard(R) or our other products;
- changes in pricing strategies or reimbursement levels for Visudyne, Eligard or our other products;
- seasonal fluctuations, particularly in the third quarter due to decreased demand for Visudyne in the summer months;
- high levels of marketing expenses for Visudyne, such as may occur upon the launch of Visudyne in a new market;
- fluctuations in currency exchange rates;
- unfavorable outcome of pending patent-related litigation against the Company;
- higher than expected operating expenses as a result of increased costs associated with the development or commercialization of Visudyne, Eligard and our other products and candidates, including increased costs associated with the further development and marketing of Aczone(TM); and
- increased operating expenses as a result of product, technology or other acquisitions or business combinations.
FUTURE SALES OF VISUDYNE(R), ELIGARD(R) AND OUR OTHER PRODUCTS MAY BE LESS
THAN EXPECTED.
Our prospects are dependent on the sales of our primary commercial product, Visudyne, and to a lesser extent those of Eligard and our other products. Our revenues to date have consisted largely of revenue from product sales of Visudyne. If sales of Visudyne, Eligard or our other products decline or fail to increase, it would have a material adverse effect on our business, financial condition and results of operations.
A number of factors may affect the rate and breadth of market acceptance and continued use of our commercial products, including:
- perceptions of physicians and patients regarding the safety and efficacy of our products;
- patient and physician demand;
- the results of product development efforts for new indications or additional market opportunities for Visudyne, Eligard, and our other products;
- availability of sufficient commercial quantities of Visudyne, Eligard and our other products;
- price changes for our products, and the price of our products relative to other drugs or competing treatments;
- retreatment rates for Visudyne throughout the treatment process varying from the retreatment rates during clinical development;
- the scope and timing of additional marketing approvals and favorable reimbursement programs for Visudyne, Eligard, and our other products;
- adverse side effects or unfavorable publicity concerning Visudyne, Eligard or our other products;
- a decline in the market for Visudyne, or incidence rates of wet AMD, such as might occur if preventative treatments currently in development are successful;
- a decline in the markets for Eligard or our other products; or
- a decline in reimbursement levels for our products;
as well as the other factors which are described in this section.
WE MAY NOT BE SUCCESSFUL IN ADDRESSING COMPETITION FOR VISUDYNE(R),
ELIGARD(R) OR OUR OTHER PRODUCTS.
We may be unable to contend successfully with current or future competitors. The pharmaceutical and biotechnology industries are characterized by rapidly evolving technology and intense competition. Our competitors include major pharmaceutical and biopharmaceutical companies, many of which have 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.
We are aware of a number of competitors or potential competitors to Visudyne.
Eyetech Pharmaceuticals, Inc., in partnership with Pfizer Inc. commercially launched its product Macugen(R) in January of 2005. Macugen has been approved by the FDA for the treatment of all forms of wet AMD. Macugen now competes with Visudyne. In June of 2005 Eyetech Pharmaceuticals announced its forecast of net product revenues from the sale of Macugen for 2005 of $175-190 million. The impact of sales of Macugen on sales of Visudyne is not presently estimable but may be material.
In May of 2005 Alcon, Inc. announced that it received an approvable letter from the FDA, in response to its submission of an NDA for its product Retaane(R), for the treatment of wet AMD. Alcon has also submitted European Marketing Authorization Applications for this product. Alcon has recently announced that it will be meeting with the FDA to discuss the approvable letter and the steps which may be necessary to gain final approval. It is possible that final approval could be obtained in time to allow Retaane to be competing with Visudyne as early as during 2005.
Genentech, Inc., in collaboration with Novartis Pharma AG, is currently conducting two Phase III studies of its product Lucentis, for the treatment of AMD, as well as a Phase I/II trial studying Lucentis in combination with Visudyne therapy. In May of 2005 Genentech announced preliminary data from its MARINA Phase III study evaluating Lucentis in the treatment of wet AMD. Genentech has announced that this study met its primary endpoint at one year, with vision maintained or improved in roughly 95% of patients, compared to 62% in the control arm. In late May of 2005 Genentech announced preliminary data from its phase I/II study of Lucentis and Visudyne in combination, which showed that 90% of patients maintained or improved vision in combination therapy compared to 68% using Visudyne alone. Data from the other Phase III trial is expected in the fourth quarter of 2005. It is
possible that Genentech could receive FDA approval for Lucentis for the treatment of AMD in time to allow the product to be commercially launched and competing with Visudyne as early during 2006.
We are aware of a number of other competitors developing treatments for AMD including Iridex Corporation, Genaera Corporation and GenVec, Inc. Some of these treatments are in late-stage clinical development. We also believe that Visudyne could be competing against surgical or other treatments for AMD, including macular translocation, submacular surgery and laser photocoagulation, among others. If competing treatments for AMD are introduced to the market, Visudyne's market share could be eroded or retreatment rates reduced. The terms of our agreement with Novartis Pharma AG, or Novartis, do not restrict Novartis from developing or commercializing, whether by itself or in collaboration with third parties, non-PDT products that could be competitive with our products that utilize PDT for ophthalmological indications, including Visudyne.
There are a number of approved products on the market with which our Eligard products compete. These include AstraZeneca's Zoladex(R) product, Bayer Pharmaceuticals Corporation's Viadur(R) product, Watson Pharmaceuticals, Inc.'s Trelstar(R) product and TAP Pharmaceuticals, Inc.'s Lupron(R) product.
Upon commercialization, our Aczone(TM) product will directly compete against several other prescription topical products for the treatment of acne. These include, but are not limited to, erythromycin/benzoyl peroxide, clindamycin/benzoyl peroxide, tretinoin, and adapalene products. Aczone(TM) will also compete indirectly with systemic prescription products and topical over-the-counter therapies.
Competitors of our dental products include OraPharma, Inc., whose Arestin(TM) product is used for the treatment of periodontal disease.
We believe that certain competitors are conducting preclinical studies and clinical testing on their own or with certain third parties in various countries for a variety of diseases and medical conditions for which we have ongoing development programs. These companies may also be involved in competitive activities of which we are not aware.
Each of our approved products faces competition and our products under regulatory review and in development will also face competition. Our industry is characterized by intense competition and new product innovation, which may limit our commercial opportunities, render our products obsolete or reduce our revenue.
The pharmaceutical and biotechnology industries are highly competitive. We face intense competition from academic institutions, government agencies, research institutions and other biotechnology and pharmaceutical companies, including other drug delivery companies. Some of these competitors are also our collaborators. Our competitors are working to develop and market other drug delivery systems, vaccines, antibody therapies and other methods of preventing or reducing disease, and new small-molecule and other classes of drugs that can be used without a drug delivery system.
We are aware of other products manufactured or under development by competitors that are used for the prevention and treatment of certain diseases that we have targeted for product development. The existence of these products, or other products or treatments of which we are not aware, or products or treatments that may be developed in the future, may adversely affect the marketability of our products.
Many of our competitors have much greater capital resources, manufacturing and marketing experience, research and development resources and production facilities than we do. Many of them also have much more experience than we do in preclinical testing and clinical trials of new drugs and in obtaining FDA and foreign approvals. In addition, they may succeed in obtaining patents that would make it difficult or impossible for us to compete with their products.
Because new product innovation can emerge unexpectedly in the biotechnology and pharmaceutical industries, the development by competitors of technologically improved or different products may make our products or product candidates obsolete or non-competitive.
THE INCIDENCE OF WET AMD MIGHT BE REDUCED IF THERAPIES CURRENTLY IN DEVELOPMENT OR CURRENTLY AVAILABLE PREVENT OR REDUCE THE RISK OF DEVELOPMENT OF WET AMD.
We are aware of reports that a trial has been or is about to be initiated of a treatment for patients with the dry form of AMD who are at high risk of developing wet AMD, with the objective of preventing the occurrence of wet AMD. We are also aware of published reports of studies showing that supplemental vitamin therapies reduce the risk of development of wet AMD. If these studies show that new therapies are effective or if supplemental vitamin usage becomes common place in patients with dry AMD, the incidence of wet AMD, which often develops in patients initially diagnosed with dry AMD, might be reduced, and Visudyne sales and the Company's revenues could be materially reduced.
IF WE ARE UNABLE TO PRESERVE THE COMMERCIAL RELATIONSHIPS WHICH WERE FORMED BY ATRIX, WE MAY NOT REALIZE ALL OF THE ANTICIPATED BENEFITS OF THE ACQUISITION.
The former Atrix established a number of commercial relationships with third parties that are individually or collectively important to the success of what is now QLT USA. For example, Atrix formed strategic relationships with collaborators to help it commercialize and market its products, such as its relationship with Sanofi-Aventis for the United States and Canadian commercialization and marketing of the Eligard products. If our relationship with those collaborators, such as MediGene AG (or MediGene), Sandoz Inc. (or Sandoz), or Sanofi-Aventis was impaired, it could delay the applicable collaboration program or result in expensive arbitration or litigation and QLT USA's revenue may significantly decrease and our ability to develop and commercialize our technologies may be hindered.
WE ARE DEPENDENT ON THIRD PARTIES TO MARKET VISUDYNE(R) AND ELIGARD(R).
A significant portion of our revenue depends on the efforts of Novartis to market and sell Visudyne. If Novartis does not dedicate sufficient resources to the promotion and sale of Visudyne, or if Novartis fails in its marketing efforts, or if marketing and distribution expenses are excessive, the revenues we receive from the sale of Visudyne would decrease and our business and operating results would be adversely affected. The agreement between us and Novartis pursuant to which Novartis markets and sells Visudyne has a term extending to 2014 and may be terminated by Novartis upon a default of the agreement by us or on 60 days' notice.
We have formed strategic relationships with a number of other collaborators to help us commercialize and market Eligard. Our revenues from Eligard and our dermatology and dental products are dependent on the efforts of our marketing partners in promoting and selling those products. If those partners do not dedicate sufficient resources to the promotion and sale of our products, the revenues we receive from sales of those products would decrease and our business and operating results would be adversely affected.
WE ARE DEPENDENT ON OTHER THIRD PARTIES FOR THE RESEARCH, DEVELOPMENT, AND
COMMERCIALIZATION OF OUR PRODUCTS.
Our strategy for the development and commercialization of our products includes entering into various arrangements with third parties and therefore is dependent on the subsequent success of these third parties in performing their responsibilities under such arrangements.
Although we believe that parties to our collaborative arrangements have an economic incentive to succeed in performing their contractual responsibilities, the amount and timing of resources to be devoted to these activities generally are not under our control. We cannot predict whether such parties will perform their obligations as expected or whether significant revenue will be derived or sustained from such arrangements. To the extent such parties do not perform adequately under our various agreements with them, the development and commercialization of our products may be delayed, may become more costly to us or may be terminated, and may require us to expend significant amounts of time and money to find new collaborators and structure alternative arrangements. Disputes with a collaborator could delay a program on which we are working with the collaborator and could result in expensive arbitration or litigation, which may not be resolved in our favor.
IN THE FIELD OF PHOTODYNAMIC THERAPY, OR PDT, WE ARE DEPENDENT ON THE SUCCESS AND CONTINUED SUPPLY OF THIRD-PARTY MEDICAL DEVICE COMPANIES WITH COMPLEMENTARY LIGHT SOURCE AND LIGHT DELIVERY DEVICES BY THIRD PARTY SUPPLIERS.
We currently depend on two third-party suppliers, Carl Zeiss-Meditic and Lumenis, to provide the laser light delivery devices for Visudyne therapy and to service such devices. Because PDT requires a light source, and in some instances a light delivery system, to be used in conjunction with our photosensitizers, we are dependent on the success of these medical device companies in placing and maintaining light sources with the appropriate medical facilities, in distributing the light delivery systems and servicing such systems as required. Carl Zeiss-Meditic and Lumenis supply such lasers to treating physicians directly, and neither QLT nor Novartis has a supply or distribution agreement with either Carl Zeiss-Meditic or Lumenis for the supply of such devices. The relationship between our Company and Novartis and such suppliers, under which we and Novartis provides support and assistance to such suppliers, is an informal collaboration only. If one or both of the medical device companies with whom we and Novartis have such collaborations cease to carry on business, or if, as a result of industry consolidation, financial down-turn or for other reasons, they no longer supply complementary light sources or light delivery systems or if they are unable to achieve the appropriate placements of light sources and ensure an uninterrupted supply and ongoing maintenance of light delivery systems to treating physicians, sales of Visudyne and our revenues from the sale of Visudyne may be adversely affected. We may not be able to secure additional or replacement arrangements with other satisfactory medical device companies to complement or replace the activities of our current providers.
The expected lifecycle of the laser light delivery devices for Visudyne therapy is approximately five to eight years. Therefore, in the coming years, we expect that many of these lasers will need significant upgrades or will need to be replaced. Customers may decide not to invest in purchasing a new laser in light of emerging competitive therapies and this could negatively impact our future sales, possibly materially.
WE MAY BE UNABLE TO HAVE MANUFACTURED OR CONTINUE TO HAVE MANUFACTURED EFFICIENTLY COMMERCIAL QUANTITIES OF VISUDYNE(R) OR OUR OTHER PRODUCTS IN COMPLIANCE WITH FDA AND OTHER REGULATORY REQUIREMENTS OR OUR PRODUCT SPECIFICATIONS.
We depend on several third parties in the U.S., Canada, Europe and Japan to manufacture Visudyne, and if such third parties fail to meet their respective contract commitments, we may not be able to supply or continue to supply commercial quantities of the product or conduct certain future clinical testing. We are dependent upon Raylo Chemicals Inc., Nippon Fine Chemicals and Parkedale Pharmaceuticals Inc. to manufacture Visudyne or components thereof. The agreement between us and Raylo Chemicals is in effect for a term ending January 1, 2008, after which it will renew for a further two years unless one party provides the other with 24 months advance notice of its intention not to renew. Our agreement with Nippon Fine Chemicals is in effect for a term ending on January 1, 2007. Our agreement with Parkedale Pharmaceuticals Inc. is in effect for a term expiring December 31, 2009. Although none of these agreements is terminable by the other party for convenience, if we were to commit a default under or breach of any of such agreements, the other party could terminate such agreement. We may be unable to renew such agreements after their expiry on terms which are commercially acceptable to us.
Our ability to conduct clinical trials and commercialize Visudyne and our other products, either directly or in conjunction with others, depends, in large part, on our ability to have such products manufactured at a competitive cost and in accordance with FDA and other regulatory requirements as well as our product specifications. Our contract manufacturers' manufacturing and quality procedures may not achieve or maintain compliance with applicable FDA and other regulatory standards or product specifications, and, even if they do, we may be unable to produce or continue to produce commercial quantities of Visudyne and our other products at an acceptable cost or margin.
If current manufacturing processes are modified, or the source or location of our product supply is changed (voluntarily or involuntarily), regulatory authorities will require us to demonstrate that the material produced from the modified or new process or facility is equivalent to the material used in the clinical trials or products previously approved. Any such modifications to the manufacturing process or supply may not achieve or maintain compliance with the applicable regulatory requirements or our product specifications. In many cases, prior approval by regulatory authorities may be required before any changes can be instituted.
If our manufacturers produce one or more product batches which do not conform to FDA or other regulatory requirements, or our product specifications, or if they introduce changes to their manufacturing processes, our manufacturing expenses may increase materially, our product inventories may be reduced to unacceptable levels and/or our ability to meet demand for Visudyne may be detrimentally impacted, possibly materially. For example, during November 2003 two Visudyne batches did not pass quality inspection and product inventories and our results were negatively impacted by the associated accounting charge, although not materially. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Note 6" in "Notes to the Consolidated Financial Statements" in our Form 10-K dated March 16, 2005.)
WE HAVE LIMITED EXPERIENCE IN MANUFACTURING PRODUCTS ON A COMMERCIAL SCALE, AND IF WE ARE UNABLE TO PRODUCE ENOUGH ELIGARD(R) OR THE OTHER PRODUCTS WHICH WE MANUFACTURE TO MEET MARKET DEMANDS, THIS COULD CAUSE A DECREASE IN REVENUE.
QLT USA completed the expansion of our manufacturing facility in the second quarter of 2003. Validation of the plant and equipment was completed during the third quarter of 2003. Certain areas of the plant were qualified by the FDA in 2004. We manufacture Eligard at this facility. Even though we have obtained FDA and other regulatory approval to do so, our manufacturing processes are subject to further review by other regulatory authorities, and continued review by the FDA and other regulatory authorities. If we modify our current manufacturing processes, the FDA and other regulatory authorities will require us to demonstrate that the material produced from the modified or new process or facility is equivalent to the material used in the clinical trials or products previously approved. Any such modifications to the manufacturing process or supply may not achieve or maintain compliance with the applicable regulatory requirements or our product specifications. In many cases, prior approval by regulatory authorities may be required before any changes can be instituted.
In addition, later discovery of problems with our products or manufacturing processes could result in restrictions on such products or processes, including potential withdrawal of Eligard or other products from the market. If regulatory authorities determine that we have violated regulations or if they restrict, suspend or revoke our prior approvals, they could prohibit us from manufacturing or selling Eligard or other products until we comply, or indefinitely. In addition, if regulatory authorities determine that we have not complied with regulations in the research and development of a product candidate, then they may not approve the product candidate and we will not be able to market and sell it. If we were unable to market and sell our products or product candidates, our business and results of operations would be materially and adversely affected.
There is also a risk that our manufacturing capabilities may not be sufficient to meet market demands for Eligard or that we may experience a disruption in our manufacturing processes. If we produce one more Eligard product batches which do not conform to FDA or other regulatory requirements, or our product specifications, our manufacturing expenses may increase materially, our Eligard product inventories may be reduced to unacceptable levels, or we may be unable to meet demand for Eligard. If we are unable to meet demand for Eligard for a significant period of time our business would be harmed materially.
WE HAVE A DEPENDENCE ON ONE CONTRACT MANUFACTURER INVOLVED IN THE
PRODUCTION OF OUR ELIGARD(R) PRODUCTS.
We currently outsource the sterile filling and "lyophilization," also known as freeze drying, process of our Eligard products to Chesapeake Biological Laboratories, Inc., an approved contract manufacturer, and rely on this manufacturer for this highly specialized service. Our contract with Chesapeake Biological Laboratories is for a period of two years commencing January 23, 2004, and automatically renews for additional one-year terms unless either party provides notice on non-renewal more than 90 days prior to termination. If this vendor was to deteriorate or terminate, production of our Eligard products may be temporarily discontinued for several months. We currently have one other contract manufacturer as a back-up source for the sterile filling and lyophilization process should there be a disruption in our Eligard product supply chain. However, the FDA would need to approve the change in the manufacturer of the sterile filling and lyophilization process for our Eligard products, which could take several months. Additionally, we and our partners have at least three months of inventory safety stock of Eligard products to meet near term future demands, should a disruption in the sterile filling and lyophilization process occur. To help address this risk, we have built our own sterile filling and lyophilization facility which received FDA approval to manufacture commercial product in December 2004.
THE SUCCESS OF VISUDYNE(R), ELIGARD(R) AND OUR OTHER PRODUCTS MAY BE
LIMITED BY GOVERNMENTAL AND OTHER THIRD-PARTY PAYERS.
The continuing efforts of governmental and third-party payers to contain or reduce the costs of health care may negatively affect the sale of Visudyne, Eligard and our other products. Our ability to commercialize Visudyne and our other products successfully will depend in part on the timeliness of and the extent to which adequate reimbursement for the cost of such products and related treatments is obtained from government health administration authorities, private health insurers and other organizations in the U.S. and foreign markets. Product sales, attempts to gain market share or introductory pricing programs of our competitors could require us to lower our prices, which could adversely affect our results of operations. We may be unable to set or maintain price levels sufficient to realize an appropriate return on our investment in product development. Significant uncertainty exists as to the reimbursement status of newly approved therapeutic products or newly approved product indications.
Third-party payers are challenging the price and cost-effectiveness of medical products and services, and the adoption of new legislation and regulations affecting the pricing of pharmaceuticals could further limit reimbursement for medical products and services. To the extent such governmental or private third-party payers introduce reimbursement changes which affect Visudyne or our current or future product candidates, sales of such products could be negatively affected. For example, the U.S. Congress recently introduced legislation that has changed the methodologies under which the Medicare program reimburses for office-administered therapies such as Visudyne. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 reduced the rate of reimbursement for Visudyne and certain other drugs by allowing reimbursement based on 85% of the average wholesale price, down from 95%. We obtained an exemption from this rate adjustment for 2004 only.
There can be no assurance that any of our applications or re-applications for reimbursement for any of our products will result in approvals or that our current reimbursement approvals will not be reduced or reversed in whole or in part.
OUR PRODUCT SALES ARE WORLDWIDE, AND CURRENCY FLUCTUATIONS MAY IMPAIR OUR
REPORTED FINANCIAL RESULTS.
Our products are marketed worldwide. For the three months ended March 31, 2005, approximately 41% of total Visudyne sales were in the U.S., with Europe and other markets responsible for the remaining 59%. We expect that international revenues will continue to account for a significant percentage of our revenues for the foreseeable future. A significant portion of our business is conducted in currencies other than the U.S. dollar, which is our reporting currency. The Canadian dollar is our functional currency and the U.S. dollar is the functional currency of our subsidiary, QLT USA. We recognize foreign currency gains or losses arising from our operations in the period incurred. As a result, currency fluctuations between the currencies in which we do business, particularly the U.S. dollar, the Euro, the Canadian dollar and the Swiss franc, have caused and could continue to cause significant foreign currency transaction gains and losses. We cannot predict the effects of exchange rate fluctuations on our future operating results because of the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates. We engage from time to time in currency hedging techniques to mitigate the impact of currency fluctuations on our financial results and cash flows, but we cannot be assured that our strategies will adequately protect our operating results or balance sheet from the full effects of exchange rate fluctuation.
WE DO NOT YET HAVE A COMMERCIAL INFRASTRUCTURE TO MARKET OR SELL PHARMACEUTICAL PRODUCTS AND HAVE LIMITED EXPERIENCE DIRECTLY SELLING PRODUCTS, WHICH MAY ADVERSELY AFFECT OUR ABILITY TO COMMERCIALIZE ACZONE(TM).
QLT has not previously sold or marketed pharmaceutical products and does not currently have a sales force or any agreement with any provider of contract sales forces to market our products. We now hold worldwide commercialization rights to Aczone. Aczone was recently approved by the FDA for the treatment of acne vulgaris. The FDA approved label for Aczone requires that patients be pre-screened for a specific enzyme deficiency. Patients who have this enzyme deficiency will need to be monitored with regular blood counts. QLT has also agreed with the FDA to undertake a post-approval Phase IV study pertaining to this enzyme deficiency. That label restriction and the results of the Phase IV study, if and when completed, may limit the market potential for Aczone. We are presently considering our strategy as to how we wish to commercialize and further develop Aczone. If we decide to market Aczone ourselves, we will need to either hire a sales force or contract with a third party to provide a sales force to
meet our needs. If we decide to market Aczone with or through a marketing partner, we will need to reach an agreement with that partner with respect to the commercialization of Aczone. We may be unable to establish marketing, sales and distribution capabilities or relationships necessary to commercialize and gain market acceptance for Aczone. Any of the above occurrences could harm or prevent sales of Aczone or could increase the costs and expenses of commercializing and marketing this product.
OUR PRODUCTS IN DEVELOPMENT MAY NOT ACHIEVE FAVORABLE RESULTS, MAY FAIL TO ACHIEVE REGULATORY APPROVALS OR MARKET ACCEPTANCE, OR MAY ENCOUNTER DIFFICULTIES WITH PROPRIETARY RIGHTS OR MANUFACTURING.
Our success depends on our ability to successfully develop and obtain regulatory approval to market new pharmaceutical products. Development of a product requires substantial technical, financial and human resources even if such product development is not successfully completed. The outcome of the lengthy and complex process of new product development is inherently uncertain.
Our potential products may appear to be promising at various stages of development yet fail to reach the market for a number of reasons, including:
- lack of sufficient treatment benefit or unacceptable safety issues during preclinical studies or clinical trials;
- lack of commercial market opportunity;
- results from preclinical and early clinical studies not predictive of results obtained in large-scale clinical trials;
- unfavorable data during a clinical trial causing us to determine that continuation of the trial is not warranted. For example, in May 2003, we halted our two Phase III studies of tariquidar in non-small cell lung cancer after a review of safety and efficacy data by the Independent Data Safety Monitoring Committee;
- the FDA or other regulatory authorities suspending our clinical trials at any time if, among other reasons, it concludes that patients participating in such trials are being exposed to unacceptable health risks;
- failure to receive necessary regulatory approvals after completion of clinical trials;
- existence of conflicting proprietary rights of third parties;
- inability to develop manufacturing methods that are efficient, cost-effective and capable of meeting stringent regulatory standards; and
- other business imperatives causing us to curtail a particular development program.
We might fail to obtain the additional regulatory approvals we are seeking to expand our product line and the indications for which our products are approved. Those approvals may be delayed, may not be obtained or may be more limited than anticipated. We may lose market opportunities resulting from delays and uncertainties in the regulatory approval process.
IF WE DO NOT ACHIEVE OUR PROJECTED DEVELOPMENT GOALS IN THE TIME FRAMES WE ANNOUNCE AND EXPECT, THE COMMERCIALIZATION OF OUR PRODUCTS MAY BE DELAYED AND, AS A RESULT, OUR BUSINESS COULD BE HARMED.
From time to time, we estimate the timing of the accomplishment of various scientific, clinical, regulatory and other product development goals, which we sometimes refer to as milestones. These milestones may include the commencement or completion of scientific studies and clinical trials and the submission of regulatory filings. From time to time, we publicly announce the expected timing of some of these milestones. All of these milestones are based on a variety of assumptions. The actual timing of these milestones can vary dramatically compared to our estimates, or they might not be achieved, in some cases for reasons beyond our control. If we do not meet these milestones as publicly announced, the commercialization of our products may be delayed and, as a result, our
business could be harmed. Factors which could cause us to fail to achieve milestones in accordance with our projections include:
- study results may vary from what had been predicted;
- studies may take longer to enroll or conclude than projected;
- unfavorable data during a clinical trial might cause us to determine that continuation of the trial is not warranted;
- the FDA or other regulatory authorities might suspend our clinical trials at any time if, for example, it concludes that patients participating in such trials are being exposed to unacceptable health risks;
- failure to receive necessary regulatory approvals after completion of clinical trials in a timely manner or at all; and
- other business imperatives might cause us to delay or discontinue certain development activities.
PATIENT ENROLLMENT MAY NOT BE ADEQUATE FOR OUR CURRENT TRIALS OR FUTURE
CLINICAL TRIALS.
Our future prospects could suffer if we fail to develop and maintain sufficient levels of patient enrollment in our current or future clinical trials. Our willingness and ability to complete clinical trials is dependent on, among other factors, the rate of patient enrollment, which is a function of many factors, including:
- the nature of our clinical trial protocols or products;
- the inability to secure regulatory approval to modify previously approved clinical trial protocols;
- the existence of competing protocols;
- the size and longevity of the target patient population;
- the proximity of patients to clinical sites;
- the eligibility criteria for the trials; and
- the patient dropout rates for the trials.
Delays in planned patient enrollment may result in increased costs, delays or termination of clinical trials, which could materially harm our future prospects.
VISUDYNE(R), ELIGARD(R), OR OUR OTHER PRODUCTS MAY EXHIBIT ADVERSE SIDE EFFECTS THAT PREVENT THEIR WIDESPREAD ADOPTION OR THAT NECESSITATE WITHDRAWAL FROM THE MARKET.
Even after approval by the FDA and other regulatory authorities, Visudyne, Eligard, or our other products may later exhibit adverse side effects that prevent widespread use or necessitate withdrawal from the market. Undesirable side effects not previously observed during clinical trials could emerge in the future. The manifestation of such side effects could cause our business to suffer. In some cases, regulatory authorities may require labeling changes that could add warnings or restrict usage based on adverse side effects seen after marketing a drug.
WE MAY FACE FUTURE PRODUCT LIABILITY CLAIMS THAT MAY RESULT FROM THE SALE
OF VISUDYNE(R), ELIGARD(R) AND OUR OTHER PRODUCTS.
The testing, manufacture, marketing and sale of human pharmaceutical products entail significant inherent risks of allegations of product liability. Our use of such products in clinical trials and our sale of Visudyne, Eligard and our other product candidates may expose us to liability claims allegedly resulting from the use of these products.
These claims might be made directly by consumers, healthcare providers or others selling our products. We carry clinical trials and product liability insurance to cover certain claims that could arise during the clinical trials for our product candidates or during the commercial use of Visudyne, Eligard or our other products. Such coverage, and any coverage obtained in the future, may be inadequate to protect us in the event of a successful product liability claim, and we may not be able to increase the amount of such insurance or even renew it. A successful product liability claim could materially harm our business. In addition, substantial, complex or extended litigation could cause us to incur large expenditures and distract our management.
WE MAY BE UNABLE TO COMPLY WITH ONGOING REGULATORY REQUIREMENTS.
Our commercial products and our products under development are subject to extensive and rigorous regulation for safety, efficacy and quality by the U.S. federal government, principally the FDA, and by state and local governments. To the extent Visudyne, Eligard, our other commercial products or products under development are marketed abroad; they are also subject to export requirements and to regulation by foreign governments. The regulatory clearance process is lengthy, expensive and uncertain. We may not be able to obtain, or continue to obtain, necessary regulatory clearances or approvals on a timely basis, or at all, for any of our commercial products or any of our products under development, and delays in receipt or failure to receive such clearances or approvals, the loss of previously received clearances or approvals, or failure to comply with existing or future regulatory requirements could materially harm our business.
Drugs manufactured or distributed pursuant to the FDA's approval are subject to pervasive and continuing regulation by the FDA, certain state agencies and various foreign governmental regulatory agencies such as the EMEA Manufacturers are subject to inspection by the FDA and those state agencies, and they must comply with the host of regulatory requirements that usually apply to drugs marketed in the U.S., including but not limited to the FDA's labeling regulations, Good Manufacturing Practice requirements, adverse event reporting and the FDA's general prohibitions against promoting products for unapproved or "off-label" uses. Our failure to comply with applicable requirements could result in sanctions being imposed on us. These sanctions could include warning letters, fines, product recalls or seizures, injunctions, refusals to permit products to be imported into or exported out of the U.S., FDA refusal to grant approval of drugs or to allow us to enter into governmental supply contracts, withdrawals of previously approved marketing applications and criminal prosecutions.
We, our contract manufacturers, all of our subsuppliers, as well as the suppliers of the medical lasers required for Visudyne and other PDT therapy, are subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. In addition, advertising and promotional materials relating to medical devices and drugs are, in certain instances, subject to regulation by the Federal Trade Commission or the FDA. We, our contract manufacturers, subsuppliers and laser suppliers may be required to incur significant costs to comply with such laws and regulations in the future, and such laws or regulations may materially harm our business. Unanticipated changes in existing regulatory requirements, the failure of us, our any of these manufacturers, subsuppliers or suppliers to comply with such requirements or the adoption of new requirements could materially harm our business.
OUR BUSINESS COULD SUFFER IF WE ARE UNSUCCESSFUL IN IDENTIFYING, NEGOTIATING OR INTEGRATING FUTURE ACQUISITIONS, BUSINESS COMBINATIONS OR STRATEGIC ALLIANCES.
From time to time, we may engage in negotiations to expand our operations and market presence by future product, technology or other acquisitions and business combinations, joint ventures or other strategic alliances with other companies. We may not be successful in identifying, initiating or completing such negotiations. Competition for attractive product acquisition or alliance targets can be intense, and there can be no guarantee that we will succeed in completing such transactions on terms which are acceptable to us. Even if we are successful in these negotiations, these transactions create risks, such as the difficulties in assimilating the operations and personnel of an acquired business; the potential disruption to our ongoing business, and the potential negative impact on our earnings. We may not succeed in addressing these risks. If we are not successful, our business could suffer.
WE ARE A DEFENDANT IN PENDING INTELLECTUAL PROPERTY AND PATENT LAWSUITS THAT MAY REQUIRE US TO PAY SUBSTANTIAL ROYALTIES OR DAMAGES, MAY SUBJECT US TO OTHER EQUITABLE RELIEF OR MAY OTHERWISE SERIOUSLY HARM OUR BUSINESS.
We are a defendant in four lawsuits filed against us (see "Item 3. Legal Proceedings" in our Form 10-K dated March 16, 2005 and "Item 1. Legal Proceedings" in our Form 10-Q dated May 10, 2005). Although we believe that the claims of the plaintiffs in these lawsuits are without merit, these lawsuits may not ultimately be resolved in our favor. If they are not resolved in our favor, we may be obligated to pay damages, may be obligated to pay an additional royalty or damages for access to the inventions covered by claims in issued U.S. patents, may be subject to such equitable relief as a court may determine (which could include an injunction) or may be subject to a remedy combining some or all of the foregoing.
WE MAY NOT BE ABLE TO OBTAIN AND ENFORCE EFFECTIVE PATENTS TO PROTECT OUR PROPRIETARY RIGHTS FROM USE BY COMPETITORS, AND PATENTS OF OTHER COMPANIES COULD REQUIRE US TO STOP USING OR PAY TO USE REQUIRED TECHNOLOGY.
We may not be able to obtain and enforce patents, to maintain trade secret protection for our technology and to operate without infringing on the proprietary rights of third parties. The extent to which we are unable to do so could materially harm our business.
We have applied for and will continue to apply for patents for certain aspects of Visudyne and our other products and technology. 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. It is possible that patents issued or licensed to us may be challenged successfully. In that event, to the extent a preferred position is conferred by such patents, any preferred position held by us would be lost. If we are unable to secure or to continue to maintain a preferred position, Visudyne and our other products could become subject to competition from the sale of generic products. In addition, we have an exclusive worldwide license from the University of British Columbia, or UBC, (see "Patents, Trademarks and Proprietary Rights" in our Form 10-K dated March 16, 2005) for all of the patents and know-how owned by UBC relating to verteporfin, QLT0074 and certain additional photosensitizers and their use as therapeutics or diagnostics. Under our license agreement with UBC, if we fail to make any required payments to UBC, UBC would have the right to terminate these licenses. Under our license agreement with Massachusetts General Hospital, or MGH (see "Patents, Trademarks and Proprietary Rights" in our Form 10-K dated March 16, 2005), MGH would have the right to terminate the license if we defaulted under the agreement and failed to cure such default within 60 days.
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.
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 corporate partners, collaborators, employees and consultants and other appropriate means, these measures may not effectively prevent disclosure of our proprietary information, and, in any event, others may develop independently, or obtain access to, the same or similar information.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE, AND OUR PROSPECTS FOR
OBTAINING IT ARE UNCERTAIN.
Our business may not generate the cash necessary to fund our operations and anticipated growth. We expect that the funding requirements for our operating activities will continue to increase substantially in the future, primarily due to the expanded clinical testing of our other products. The amount required to fund additional operating expenses will also depend on other factors, including the status of competitive products, the success of our research
and development programs, the extent and success of any collaborative research arrangements and the results of product, technology or other acquisitions or business combinations. We could seek additional funds in the future from a combination of sources, including product licensing, joint development and other financing arrangements. In addition, we may issue debt or equity securities if we determine that additional cash resources could be obtained under favorable conditions or if future development funding requirements cannot be satisfied with available cash resources. Additional capital may not be available on terms favorable to us, or at all. If adequate capital is unavailable, we may not be able to engage in desirable acquisition or in-licensing opportunities and may have to reduce substantially or eliminate expenditures for research, development, clinical testing, manufacturing and marketing for Visudyne and our other products. In March 2005, QLT announced the establishment of a share buyback program having certain parameters. As of July 14, 2005, QLT has purchased approximately 1.355 million of our common shares under the share buyback program on the open market. The price paid by QLT for the repurchase of its shares varied according to the market price at the time of purchase.
WE ARE SUBJECT TO ENVIRONMENTAL COMPLIANCE RISKS.
Our research, development and manufacturing areas involve the controlled use of hazardous chemicals, primarily flammable solvents, corrosives, and toxins. The biologic materials include microbiological cultures, animal tissue and serum samples. Some experimental and clinical materials include human source tissue or fluid samples. We are subject to federal, state/provincial and local government regulation in the conduct of business, including regulations on employee safety and handling and disposal of hazardous and radioactive materials. Any new regulation or change to an existing regulation could require it to implement costly capital or operating improvements for which we have not budgeted. If we do not comply with these regulations, we may be subject to fines and other liabilities.
VARIOUS PROVISIONS OF OUR CHARTER AND OUR SHAREHOLDER RIGHTS PLAN MAY HAVE THE EFFECT OF IMPEDING A CHANGE IN CONTROL, MAKING REMOVAL OF THE PRESENT MANAGEMENT MORE DIFFICULT OR RESULTING IN RESTRICTIONS ON THE PAYMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS TO THE SHAREHOLDERS.
With shareholder approval, we have adopted a shareholder rights plan that will be in effect for six years commencing March 17, 2002. The general effect of the plan is to require anyone who seeks to acquire 20% or more of our outstanding common shares to make a bid complying with specific provisions included in the plan. In certain circumstances, holders of common shares may acquire additional shares of QLT (or those of the acquirer) at a 50% discount from the then-prevailing market price. The provisions of the plan could prevent or delay the acquisition of our company by means of a tender offer, a proxy contest or otherwise, making it more difficult for shareholders to receive any premium over the current market price that might be offered.
Our authorized preference share capital is available for issuance from time to time at the discretion of our board of directors, without shareholder approval. Our charter grants the board of directors the authority, subject to the corporate laws of British Columbia, to determine or alter the rights, preferences, privileges and restrictions granted to or imposed on any wholly unissued series of preference shares, including any dividend rate, voting rights, conversion privileges or redemption or liquidation rights. The rights of any future series of preference shares could have an adverse effect on the holders of our common shares by delaying or preventing a change of control, making removal of the present management more difficult or resulting in restrictions on the payment of dividends and other distributions to the holders of common shares.
THE MARKET PRICE OF OUR COMMON SHARES IS EXTREMELY VOLATILE.
The stock prices of pharmaceutical and biopharmaceutical companies, including QLT, are extremely volatile, and it is likely that the market price of our common shares will continue to be highly volatile. Thus far during 2005, the closing market price of our common shares on NASDAQ has ranged from a high of $17.15 in January to a low of $8.53 in July. Our stock price could be subject to wide fluctuations in response to a number of factors, including:
- announcements by us or our competitors of favorable product sales, significant acquisitions, strategic relationships, joint ventures or capital commitments;
- announcements by us or our competitors of technological innovations or new commercial products;
- results of clinical trials for our products under development;
- developments relating to patents, proprietary rights and potential infringement;
- expense and time associated with obtaining government approvals for marketing of Visudyne and our other products under development;
- reimbursement policies of various government and third-party payers;
- public concern over the safety of Visudyne, Eligard and our other products or those of our competitors;
- changes in estimates of our revenue and operating results;
- variances in our revenue or operating results from forecasts or projections;
- recommendations of securities analysts regarding investment in our stock;
- governmental reimbursement discussions, adverse developments in the litigation to which we are a party; and
- factors beyond our control which affect the stock markets generally and which might materially and adversely affect our stock price, regardless of our operating performance, including, but not limited to, current political and economic events, market and industry trends and broad market fluctuations.