##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File No. 0-17082
 QLT INC.
 (Exact name of registrant as specified in its charter)
 British Columbia, Canada
    
    N/A(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)101  887 Great Northern Way, Vancouver, B.C., Canada
    
    V5T 4T5(Address of principal executive offices)
    
    (Zip code)
 (604) 707-7000
 Yes þ No o
 Yes o No o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 Yes o No þ




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##### 



QLT INC.
 QUARTERLY REPORT ON FORM 10-Q
September 30, 2010
 TABLE OF CONTENTS
 ITEM
    
    
    
    
    PAGEPART I  FINANCIAL INFORMATION1.
    
    FINANCIAL STATEMENTS
    
    
    1Unaudited Condensed Consolidated Balance Sheets as of
September 30, 2010 and December 31, 2009
    
    
    1Unaudited Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 2010 and September 30, 2009
    
    
    2Unaudited Condensed Consolidated Statements of Cash Flows for the three and nine
months ended September 30, 2010 and September 30, 2009
    
    
    3Unaudited Condensed Consolidated Statement of Changes in Shareholders Equity
for the three and nine months ended September 30, 2010 and year ended December 31, 2009
    
    
    4Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    52.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    163.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    274.
    
    CONTROLS AND PROCEDURES
    
    
    28PART II  OTHER INFORMATION1.
    
    LEGAL PROCEEDINGS
    
    
    291A.
    
    RISK FACTORS
    
    
    292.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    296.
    
    EXHIBITS
    
    
    30Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 QLT Inc.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 (In thousands of U.S. dollars)
    
    September 30, 2010
    
    
    December 31, 2009ASSETSCurrent assetsCash and cash equivalents
    
    $
    198,584
    
    
    $
    188,114Accounts receivable
    
    
    9,198
    
    
    
    9,465Note receivable (Note 13)
    
    
    10,000
    
    
    
    9,259Current portion of contingent consideration (Note 11)
    
    
    34,360
    
    
    
    33,587Income taxes receivable
    
    
    189
    
    
    
    4,879Inventories (Note 2)
    
    
    2,525
    
    
    
    2,874Current portion of deferred income tax assets
    
    
    3,909
    
    
    
    5,608Current portion of mortgage receivable (Note 3)
    
    
    1,944
    
    
    
    11,466Other (Note 4)
    
    
    1,827
    
    
    
    6,052262,536
    
    
    
    271,304Property, plant and equipment
    
    
    2,695
    
    
    
    2,597Deferred income tax assets
    
    
    19,436
    
    
    
    13,320Mortgage receivable (Note 3)
    
    
    5,831
    
    
    
    Long-term inventories and other assets (Note 2 and 5)
    
    
    14,048
    
    
    
    14,925Contingent consideration (Note 11)
    
    
    99,074
    
    
    
    117,491$
    403,620
    
    
    $
    419,637LIABILITIESCurrent liabilitiesAccounts payable
    
    $
    3,554
    
    
    $
    3,876Income taxes payable
    
    
    1,261
    
    
    
    Accrued liabilities (Note 6)
    
    
    5,608
    
    
    
    5,574Deferred revenue
    
    
    
    
    
    
    4,24410,423
    
    
    
    13,694Uncertain tax position liabilities
    
    
    1,622
    
    
    
    1,48912,045
    
    
    
    15,183SHAREHOLDERS EQUITYShare capital (Note 8)Authorized500,000,000 common shares without par value5,000,000 first preference shares without par
value, issuable
in seriesIssued and outstandingCommon shares
    
    
    479,159
    
    
    
    506,023September 30, 2010  51,134,427 sharesDecember 31, 2009  53,789,289 sharesAdditional paid-in capital
    
    
    287,886
    
    
    
    275,592Accumulated deficit
    
    
    (478,439
    )
    
    
    (480,130
    )Accumulated other comprehensive income
    
    
    102,969
    
    
    
    102,969391,575
    
    
    
    404,454$
    403,620
    
    
    $
    419,637
   1




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##### Table of Contents



QLT Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(In thousands of U.S. dollars except share and per share information)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009RevenuesNet product revenue (Note 9)
    
    $
    5,535
    
    
    $
    8,785
    
    
    $
    24,786
    
    
    $
    31,296Royalties
    
    
    3,050
    
    
    
    
    
    
    
    9,891
    
    
    
    8,585
    
    
    
    8,785
    
    
    
    34,677
    
    
    
    31,296Costs and expensesCost of sales
    
    
    1,869
    
    
    
    2,202
    
    
    
    11,813
    
    
    
    12,693Research and development
    
    
    8,101
    
    
    
    7,375
    
    
    
    22,776
    
    
    
    20,486Selling, general and administrative
    
    
    5,354
    
    
    
    4,500
    
    
    
    15,238
    
    
    
    12,484Depreciation
    
    
    306
    
    
    
    370
    
    
    
    922
    
    
    
    1,061Litigation
    
    
    
    
    
    
    316
    
    
    
    
    
    
    
    650Restructuring charges (recovery)
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    (144
    )15,630
    
    
    
    14,766
    
    
    
    50,749
    
    
    
    47,230Operating loss
    
    
    (7,045
    )
    
    
    (5,981
    )
    
    
    (16,072
    )
    
    
    (15,934
    )Investment and other income (expense)Net foreign exchange gains
    
    
    409
    
    
    
    7,517
    
    
    
    78
    
    
    
    14,292Interest income
    
    
    602
    
    
    
    1,853
    
    
    
    1,599
    
    
    
    3,818Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,848
    )Fair value change in contingent consideration (Note 13)
    
    
    5,206
    
    
    
    
    
    
    
    10,167
    
    
    
    Other gains (losses)
    
    
    24
    
    
    
    (9
    )
    
    
    392
    
    
    
    166,241
    
    
    
    9,361
    
    
    
    12,236
    
    
    
    16,278(Loss) income from continuing operations before income taxes
    
    
    (804
    )
    
    
    3,380
    
    
    
    (3,836
    )
    
    
    344Recovery of (provision for) income taxes (Note 12)
    
    
    107
    
    
    
    (1,144
    )
    
    
    5,527
    
    
    
    (472
    )(Loss) income from continuing operations
    
    
    (697
    )
    
    
    2,236
    
    
    
    1,691
    
    
    
    (128
    )Income
from discontinued operations, net of income taxes (Note 10)
    
    
    
    
    
    
    6,685
    
    
    
    
    
    
    
    18,980Net (loss) income
    
    $
    (697
    )
    
    $
    8,921
    
    
    $
    1,691
    
    
    $
    18,852Basic net (loss) income per common share (Note 1)Continuing operations
    
    $
    (0.01
    )
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    (0.00
    )Discontinued operations
    
    
    
    
    
    
    0.12
    
    
    
    
    
    
    
    0.33Net (loss) income
    
    $
    (0.01
    )
    
    $
    0.16
    
    
    $
    0.03
    
    
    $
    0.33Diluted net (loss) income per common share (Note 1)Continuing operations
    
    $
    (0.01
    )
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    (0.00
    )Discontinued operations
    
    
    
    
    
    
    0.12
    
    
    
    
    
    
    
    0.33Net (loss) income
    
    $
    (0.01
    )
    
    $
    0.16
    
    
    $
    0.03
    
    
    $
    0.33Weighted average number of common shares outstanding (thousands)Basic
    
    
    51,656
    
    
    
    54,624
    
    
    
    52,794
    
    
    
    56,844Diluted
    
    
    51,656
    
    
    
    54,765
    
    
    
    53,789
    
    
    
    56,844
  2




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##### Table of Contents



QLT Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(In thousands of U.S. dollars)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Cash provided by operating activitiesNet (loss) income
    
    $
    (697
    )
    
    $
    8,921
    
    
    $
    1,691
    
    
    $
    18,852Adjustments to reconcile net income to net cash
from operating activitiesDepreciation
    
    
    306
    
    
    
    373
    
    
    
    922
    
    
    
    1,072Write-down of inventory
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,638Write-down of investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128Gain on sale of long-lived assets
    
    
    
    
    
    
    
    
    
    
    (317
    )
    
    
    Share-based compensation
    
    
    618
    
    
    
    547
    
    
    
    1,872
    
    
    
    1,582Unrealized foreign exchange gain
    
    
    (425
    )
    
    
    (7,445
    )
    
    
    (113
    )
    
    
    (12,418
    )Interest earned on restricted cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (295
    )Interest earned on note receivable
    
    
    (250
    )
    
    
    
    
    
    
    (741
    )
    
    
    Deferred income taxes
    
    
    942
    
    
    
    2,399
    
    
    
    (4,337
    )
    
    
    5,100Changes in non-cash operating assets and liabilitiesAppeal bond collateral
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124,622Accounts receivable
    
    
    3,952
    
    
    
    3,851
    
    
    
    270
    
    
    
    9,010Inventories
    
    
    273
    
    
    
    2,255
    
    
    
    757
    
    
    
    (2,302
    )Long term deposits and other assets
    
    
    592
    
    
    
    (222
    )
    
    
    4,569
    
    
    
    4,394Accounts payable
    
    
    383
    
    
    
    349
    
    
    
    73
    
    
    
    (922
    )Income taxes receivable
    
    
    6,027
    
    
    
    47,100
    
    
    
    5,951
    
    
    
    51,801Accrued restructuring charge
    
    
    
    
    
    
    (27
    )
    
    
    
    
    
    
    (618
    )Other accrued liabilities
    
    
    684
    
    
    
    (298
    )
    
    
    12
    
    
    
    (125,640
    )Deferred revenue
    
    
    
    
    
    
    (1,023
    )
    
    
    (4,244
    )
    
    
    (1,570
    )12,405
    
    
    
    56,780
    
    
    
    6,365
    
    
    
    77,434Cash provided by (used in) investing activitiesNet proceeds from sale of long-lived assets
    
    
    
    
    
    
    
    
    
    
    317
    
    
    
    Purchase of property, plant and equipment
    
    
    (231
    )
    
    
    (469
    )
    
    
    (1,430
    )
    
    
    (492
    )Proceeds from mortgage receivable
    
    
    3,822
    
    
    
    
    
    
    
    3,822
    
    
    
    Proceeds from contingent consideration(1)
    
    
    4,321
    
    
    
    
    
    
    
    17,644
    
    
    
    7,912
    
    
    
    (469
    )
    
    
    20,353
    
    
    
    (492
    )Cash (used in) provided by financing activitiesCommon shares repurchased, including fees
    
    
    (8,668
    )
    
    
    
    
    
    
    (17,082
    )
    
    
    (51,889
    )Issuance of common shares
    
    
    490
    
    
    
    35
    
    
    
    763
    
    
    
    35(8,178
    )
    
    
    35
    
    
    
    (16,319
    )
    
    
    (51,854
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    152
    
    
    
    2,766
    
    
    
    71
    
    
    
    3,556Net increase in cash and cash equivalents
    
    
    12,291
    
    
    
    59,112
    
    
    
    10,470
    
    
    
    28,644Cash and cash equivalents, beginning of period
    
    
    186,293
    
    
    
    134,927
    
    
    
    188,114
    
    
    
    165,395Cash and cash equivalents, end of period
    
    $
    198,584
    
    
    $
    194,039
    
    
    $
    198,584
    
    
    $
    194,039Supplementary cash flow information:Interest paid
    
    $
    
    
    
    $
    112
    
    
    $
    
    
    
    $
    1,832
    (2)Income taxes paid
    
    
    
    
    
    
    572
    
    
    
    10
    
    
    
    2,908
 (1)
    
    During the three months ended September 30, 2010, proceeds received on collection of the
contingent consideration for the sale of all of the shares of QLT USA, Inc. to Tolmar
Holding, Inc. were $9.5 million. Approximately $4.3 million of the proceeds were included
within cash provided by investing activities. The remaining $5.2 million of the proceeds
were recorded in the Statements of Operations as the fair value change in
contingent consideration and were therefore reflected in the net (loss) income line item within
cash used in operating activities.During the nine months ended September 30, 2010, proceeds received on collection of the
contingent consideration were $27.8 million. Approximately $17.6 million of the proceeds were
included within cash provided by investing activities. The remaining $10.2 million of proceeds
were recorded in the Statements of Operations as the fair value change in contingent
consideration and were therefore reflected in the net (loss) income line item within cash used
in operating activities.(2)
    
    At September 30, 2009 interest paid related to the MEEI judgment.  3




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##### Table of Contents



QLT Inc.
 
 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
 (Unaudited)
 AccumulatedAdditional
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    TotalCommon Shares
    
    
    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)Balance at January 1, 2009
    
    
    74,620,328
    
    
    $
    702,221
    
    
    $
    123,367
    
    
    $
    97,206
    
    
    $
    (579,564
    )
    
    $
    
    
    
    $
    343,230Exercise of stock options,
for cash, at prices ranging
from CAD $2.44 to CAD $3.73
per share and U.S. $3.78
per share
    
    
    35,751
    
    
    
    170
    
    
    
    (45
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    2,266
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,266Common share repurchase
    
    
    (20,866,790
    )
    
    
    (196,368
    )
    
    
    150,004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (46,364
    )Cumulative translation
adjustment from application
of U.S. dollar reporting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,763
    
    
    
    
    
    
    
    5,763
    
    
    
    5,763Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99,434
    
    
    
    99,434
    
    
    
    99,434Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105,197
    
    
    
    Balance at December 31, 2009
    
    
    53,789,289
    
    
    $
    506,023
    
    
    $
    275,592
    
    
    $
    102,969
    
    
    $
    (480,130
    )
    
    $
    
    
    
    $
    404,454Exercise of stock options,
for cash, at CAD $3.73 per
share
    
    
    11,667
    
    
    
    58
    
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    561
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    561Common share repurchase
    
    
    (229,100
    )
    
    
    (2,155
    )
    
    
    978
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,177
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,403
    
    
    
    3,403
    
    
    
    3,403Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,403
    
    
    
    Balance at March 31, 2010
    
    
    53,571,856
    
    
    $
    503,926
    
    
    $
    277,116
    
    
    $
    102,969
    
    
    $
    (476,727
    )
    
    $
    
    
    
    $
    407,284Exercise of stock options,
for cash, at prices ranging
from CAD $2.44 to CAD $3.73
per share
    
    
    71,838
    
    
    
    317
    
    
    
    (86
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    231Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    574
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    574Common share repurchase
    
    
    (1,182,288
    )
    
    
    (11,118
    )
    
    
    3,881
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,237
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,015
    )
    
    
    (1,015
    )
    
    
    (1,015
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,015
    )Balance at June 30, 2010
    
    
    52,461,406
    
    
    $
    493,125
    
    
    $
    281,485
    
    
    $
    102,969
    
    
    $
    (477,742
    )
    
    $
    
    
    
    $
    399,837Exercise of stock options,
for cash, at prices ranging
from CAD $2.44 to CAD $6.27
per share
    
    
    139,815
    
    
    
    669
    
    
    
    (179
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    490Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    613
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    613Common share repurchase
    
    
    (1,466,794
    )
    
    
    (14,635
    )
    
    
    5,967
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,668
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (697
    )
    
    
    (697
    )
    
    
    (697
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (697
    )Balance at September 30,
2010
    
    
    51,134,427
    
    
    $
    479,159
    
    
    $
    287,886
    
    
    $
    102,969
    (1)
    
    $
    (478,439
    )
    
    $
    
    
    
    $
    391,575
 (1)
    
    At September 30, 2010 our accumulated other comprehensive income is entirely related to prior
years cumulative translation adjustments from the application of U.S. dollar reporting when the
functional currency of QLT Inc. was the Canadian dollar.   4




---



##### Table of Contents



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  1. CONDENSED SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Business
 ®
 Basis of Presentation
  ®
  Reporting Currency and Functional Currency Change
   Principles of Consolidation
   5




---



##### Table of Contents



Use of Estimates
  Segment Information
  Revenue Recognition
  Net Product Revenue
   Royalties
  Discontinued Operations
   6




---



##### Table of Contents



Discontinued Operations
   Income Taxes
  Contingent Consideration
  Net Income (Loss) Per Common Share
   Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(In thousands of U.S. dollars, except share and per share data)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Numerator:(Loss) income from continuing operations
    
    $
    (697
    )
    
    $
    2,236
    
    
    $
    1,691
    
    
    $
    (128
    )Income from discontinued operations,
net of income taxes
    
    
    
    
    
    
    6,685
    
    
    
    
    
    
    
    18,980Net (loss) income
    
    $
    (697
    )
    
    $
    8,921
    
    
    $
    1,691
    
    
    $
    18,852Denominator: (thousands)Weighted average common shares
outstanding
    
    
    51,656
    
    
    
    54,624
    
    
    
    52,794
    
    
    
    56,844Effect of dilutive securities:Stock options
    
    
    
    
    
    
    141
    
    
    
    995
    
    
    
    Diluted weighted average common shares
outstanding (thousands)
    
    
    51,656
    
    
    
    54,765
    
    
    
    53,789
    
    
    
    56,844Basic net (loss) income per common shareContinuing operations
    
    $
    (0.01
    )
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    (0.00
    )Discontinued operations
    
    
    
    
    
    
    0.12
    
    
    
    
    
    
    
    0.33Net (loss) income
    
    $
    (0.01
    )
    
    $
    0.16
    
    
    $
    0.03
    
    
    $
    0.33Diluted net (loss) income per common
shareContinuing operations
    
    $
    (0.01
    )
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    (0.00
    )Discontinued operations
    
    
    
    
    
    
    0.12
    
    
    
    
    
    
    
    0.33Net (loss) income
    
    $
    (0.01
    )
    
    $
    0.16
    
    
    $
    0.03
    
    
    $
    0.33
  7




---



##### Table of Contents



Fair Value of Financial Assets and Liabilities
  Recently Issued Accounting Standards
 Revenue Arrangements with Multiple Deliverables
 Milestone Method of
Revenue Recognition
 Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses,
 Recently Adopted Accounting Standards
 Accounting for Transfers of Financial Assets, an
amendment of FASB Statement No. 140
 Amending FASB interpretation No. 46(R)
  8




---



##### Table of Contents



Amendments to Certain Recognition and Disclosure
Requirements
 2. INVENTORIES
 (In thousands of U.S. dollars)
    
    September 30, 2010
    
    
    December 31, 2009Raw materials and supplies
    
    $
    236
    
    
    $
    231Work-in-process
    
    
    28,042
    
    
    
    29,782Finished goods
    
    
    553
    
    
    
    Provision for excess inventory
    
    
    (11,259
    )
    
    
    (11,560
    )Provision for non-completion of inventory
    
    
    (2,185
    )
    
    
    (2,185
    )15,387
    
    
    
    16,268Long-term inventory, net of provisions
    
    
    (12,862
    )
    
    
    (13,394
    )$
    2,525
    
    
    $
    2,874
    3. MORTGAGE RECEIVABLE
  4. OTHER CURRENT ASSETS
 (In thousands of U.S. dollars)
    
    September 30, 2010
    
    
    December 31, 2009Inventory in transit previously held by Novartis
    
    $
    
    
    
    $
    5,030Prepaid expenses and other
    
    
    1,827
    
    
    
    1,022$
    1,827
    
    
    $
    6,052
  9




---



##### Table of Contents



5. LONG-TERM INVENTORIES AND OTHER ASSETS
 (In thousands of U.S. dollars)
    
    September 30, 2010
    
    
    December 31, 2009Inventory, net of provisions
    
    $
    12,862
    
    
    $
    13,394Other
    
    
    1,186
    
    
    
    1,531$
    14,048
    
    
    $
    14,925
 6. ACCRUED LIABILITIES
 (In thousands of U.S. dollars)
    
    September 30, 2010
    
    
    December 31, 2009Royalties
    
    $
    1,026
    
    
    $
    1,273Compensation
    
    
    4,028
    
    
    
    3,715Interest
    
    
    
    
    
    
    10Other
    
    
    554
    
    
    
    576$
    5,608
    
    
    $
    5,574
 7. FOREIGN EXCHANGE FACILITY
  8. SHARE CAPITAL
    10




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##### Table of Contents



Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Annualized volatility
    
    
    55.4
    %
    
    
    53.6
    %
    
    
    53.8
    %
    
    
    53.6
    %Risk-free interest rate
    
    
    2.1
    %
    
    
    2.2
    %
    
    
    2.3
    %
    
    
    1.8
    %Expected life (years)
    
    
    3.7
    
    
    
    3.6
    
    
    
    3.7
    
    
    
    3.6
    Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(In thousands of U.S. dollars)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Cost of sales
    
    $
    5
    
    
    $
    8
    
    
    $
    158
    
    
    $
    21Research and development
    
    
    338
    
    
    
    218
    
    
    
    957
    
    
    
    706Selling, general and administrative
    
    
    275
    
    
    
    321
    
    
    
    757
    
    
    
    872Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17
    )Stock-based compensation expense before
income taxes
    
    
    618
    
    
    
    547
    
    
    
    1,872
    
    
    
    1,582Related income tax benefits
    
    
    (13
    )
    
    
    (13
    )
    
    
    (32
    )
    
    
    (35
    )Stock-based compensation, net of income taxes
    
    $
    605
    
    
    $
    534
    
    
    $
    1,840
    
    
    $
    1,547
  9. NET PRODUCT REVENUE
   11




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##### Table of Contents



Three months ended
    
    
    Nine months ended(In thousands of U.S. dollars)
    
    September 30, 2010
    
    
    September 30, 2010U.S. Visudyne sales by QLT
    
    $
    5,218
    
    
    $
    16,668Visudyne sales to Novartis
    
    
    
    
    
    
    6,988Add: Royalties reimbursed to QLT
    
    
    308
    
    
    
    999Add: Other costs reimbursed to QLT
    
    
    9
    
    
    
    131Net product revenue from Visudyne sales
    
    $
    5,535
    
    
    $
    24,786
  Three months ended
    
    
    Nine months ended(In thousands of U.S. dollars)
    
    September 30, 2009
    
    
    September 30, 2009Worldwide Visudyne sales by Novartis
    
    $
    23,497
    
    
    $
    80,236Less: Marketing and distribution costs
    
    
    (8,019
    )
    
    
    (25,492
    )Less: Inventory costs
    
    
    (1,379
    )
    
    
    (4,511
    )Less: Royalties to third parties
    
    
    (503
    )
    
    
    (1,731
    )$
    13,596
    
    
    $
    48,502QLTs 50% share of Novartis net proceeds
from Visudyne sales
    
    $
    6,798
    
    
    $
    24,251Add: Advance on inventory costs from Novartis
    
    
    762
    
    
    
    3,646Add: Royalties reimbursed to QLT
    
    
    494
    
    
    
    1,730Add: Other costs reimbursed to QLT
    
    
    731
    
    
    
    1,669Net product revenue from Visudyne sales
    
    $
    8,785
    
    
    $
    31,296
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(In thousands of U.S. dollars)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009U.S.
    
    $
    5,218
    
    
    $
    6,171
    
    
    $
    16,668
    
    
    $
    23,478Europe
    
    
    5,303
    
    
    
    6,534
    
    
    
    19,447
    
    
    
    21,724Rest of World
    
    
    9,945
    
    
    
    10,792
    
    
    
    30,010
    
    
    
    35,034Worldwide
    
    $
    20,466
    
    
    $
    23,497
    
    
    $
    66,125
    
    
    $
    80,236
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009U.S.
    
    
    25
    %
    
    
    26
    %
    
    
    25
    %
    
    
    29
    %Europe
    
    
    26
    %
    
    
    28
    %
    
    
    29
    %
    
    
    27
    %Rest of World
    
    
    49
    %
    
    
    46
    %
    
    
    46
    %
    
    
    44
    %Worldwide
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  12




---



##### Table of Contents



10. DISCONTINUED OPERATIONS
    Three months ended
    
    
    Nine months ended(In thousands of U.S. dollars)
    
    September 30, 2009
    
    
    September 30, 2009Product revenue and other
    
    $
    9,626
    
    
    $
    28,625Royalty revenue
    
    
    10,563
    
    
    
    32,148Net revenue
    
    
    20,189
    
    
    
    60,773Operating pre-tax income
    
    
    9,492
    
    
    
    29,174Other gains
    
    
    1,828
    
    
    
    1,828Pre-tax income
    
    
    11,320
    
    
    
    31,002Provision for income taxes
    
    
    (4,635
    )
    
    
    (12,022
    )Net income from discontinued operations
    
    $
    6,685
    
    
    $
    18,980
 11. CONTINGENT CONSIDERATION
  12. INCOME TAXES
     13




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##### Table of Contents



13. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
   Carrying ValueSeptember 30,
    
    
    Fair Value Measurements at September 30, 2010(In thousands of U.S. dollars)
    
    2010
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Assets:Cash and cash equivalents
    
    $
    198,584
    
    
    $
    198,584
    
    
    $
    
    
    
    $
    Contingent consideration(1)
    
    
    133,434
    
    
    
    
    
    
    
    
    
    
    
    133,434Total
    
    $
    332,018
    
    
    $
    198,584
    
    
    $
    
    
    
    $
    133,434
 (1)
    
    To estimate the fair value of contingent consideration at September 30, 2010, we used a
discounted cash flow model based on estimated timing and amount of future cash flows,
discounted using a cost of capital of 10.0% determined by management after considering
available market and industry information. Future cash flows were estimated by utilizing
external market research to estimate market size, to which we applied market share,
pricing, and foreign exchange assumptions based on historical sales data, expected future
competition and current exchange rates. If the discount rate were to increase by 1%, the
contingent consideration would decrease by $2.4 million, from $133.4 million to $131.0
million. If estimated future revenues were to decrease by 10%, the contingent
consideration would decrease by $2.8 million, from $133.4 million to $130.6 million.
Additionally, the fair value change in contingent consideration is positively impacted by
the passage of time since the remaining cash flows are closer to collection, therefore
increasing their present value.The following table represents a reconciliation of our asset (contingent consideration)
measured and recorded at fair value on a recurring basis, using significant unobservable
inputs (Level 3): (In thousands of U.S. dollars)
    
    Level 3Balance at December 31, 2008
    
    $
    Transfers to Level 3
    
    
    156,240Settlements
    
    
    (8,441
    )Fair value change in contingent consideration
    
    
    3,279Balance at December 31, 2009
    
    $
    151,078Transfers to Level 3
    
    
    Settlements
    
    
    (10,287
    )Fair value change in contingent consideration
    
    
    2,443Balance at March 31, 2010
    
    $
    143,234Transfers to Level 3
    
    
    Settlements
    
    
    (7,998
    )Fair value change in contingent consideration
    
    
    2,519Balance at June 30, 2010
    
    $
    137,755Transfers to Level 3
    
    
    Settlements
    
    
    (9,527
    )Fair value change in contingent consideration
    
    
    5,206Balance at September 30, 2010
    
    $
    133,434
  14




---



##### Table of Contents



.
       15




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Form 10-K
  Note regarding Trademarks
  
    
    Visudyne® is a registered trademark of Novartis AG.
 
    
    Eligard®  is a registered trademark of Sanofi-Aventis Corp.
 
    
    Aczone®  is a registered trademark of Allergan, Inc.
 
    
    Atrigel® is a registered trademark of TOLMAR Therapeutics, Inc.
 
    
    Xalatan®  is a registered trademark of Pfizer Health AB.
 OVERVIEW
 ®
 ® ® ®
 Products, Revenues and Other Sources of Funds
     16




---



##### Table of Contents



Research and Development
  Punctal Plug Drug Delivery System for the treatment of glaucoma and allergic conjunctivitis. ®
 QLT091001 for the treatment of Leber Congenital Amaurosis and Retinitis Pigmentosa. cis
  RESULTS OF OPERATIONS
  Revenues
   17




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##### Table of Contents



Three months ended
    
    
    Nine months ended(In thousands of U.S. dollars)
    
    September 30, 2010
    
    
    September 30, 2010U.S. Visudyne sales by QLT
    
    $
    5,218
    
    
    $
    16,668Visudyne sales to Novartis
    
    
    
    
    
    
    6,988Add: Royalties reimbursed to QLT(1)
    
    
    308
    
    
    
    999Add: Other costs reimbursed to QLT(2)
    
    
    9
    
    
    
    131Net product revenue from Visudyne sales
    
    $
    5,535
    
    
    $
    24,786
  Three months ended
    
    
    Nine months ended(In thousands of U.S. dollars)
    
    September 30, 2009
    
    
    September 30, 2009Worldwide Visudyne sales by Novartis
    
    $
    23,497
    
    
    $
    80,236Less: Marketing and distribution costs(3)
    
    
    (8,019
    )
    
    
    (25,492
    )Less: Inventory costs(4)
    
    
    (1,379
    )
    
    
    (4,511
    )Less: Royalties to third parties(5)
    
    
    (503
    )
    
    
    (1,731
    )$
    13,596
    
    
    $
    48,502QLTs 50% share of Novartis net proceeds from Visudyne
sales
    
    $
    6,798
    
    
    $
    24,251Add: Advance on inventory costs from Novartis(6)
    
    
    762
    
    
    
    3,646Add: Royalties reimbursed to QLT(1)
    
    
    494
    
    
    
    1,730Add: Other costs reimbursed to QLT(2)
    
    
    731
    
    
    
    1,669Net product revenue from Visudyne sales
    
    $
    8,785
    
    
    $
    31,296
 (1)
    
    Add: Royalties reimbursed to QLTFor previous periods, this represented the amounts we received from Novartis in reimbursement
for the actual royalty expenses we incurred with third party licensors on worldwide Visudyne
sales. For periods commencing after December 31, 2009, this represents amounts we receive from
Novartis in reimbursement for actual royalty expenses we incur with third party licensors for
sales of Visudyne outside of the U.S.(2)
    
    Add: Other costs reimbursed to QLTFor previous periods, this represented reimbursement by Novartis to us of our portion of the
marketing and distribution costs described in (3) below. Our marketing and distribution costs
included marketing support, legal and administrative expenses that we incurred in support of
Visudyne sales. For the periods commencing after December 31, 2009, this represents certain
administrative expenses we incur on behalf of Novartis under the Amended PDT Agreement.(3)
    
    Less: Marketing and distribution costsThis represented Novartis cost of marketing, promoting, and distributing Visudyne, as well as
certain specified costs incurred and paid for by QLT, determined in accordance with the PDT
Agreement between QLT and Novartis. The costs incurred by Novartis were related to its sales
force, advertising expenses, marketing, and certain administrative overhead costs. The costs
incurred by us included marketing support, legal and administrative expenses that we incurred
in support of Visudyne sales.  18




---



##### Table of Contents



(4)
    
    Less: Inventory costsThis represented Novartis cost of goods sold related to Visudyne. It included the cost of
bulk Visudyne we shipped to Novartis and our previous provisions for certain excess or
obsolete inventory, losses on manufacturing purchase commitments, plus Novartis packaging and
labelling costs, freight, custom duties and inventory obsolescence.(5)
    
    Less: Royalties to third partiesThis represented the royalty expenses we incurred and charged to Novartis pursuant to the PDT
Agreement between QLT and Novartis. The amounts were calculated by us based on specified
royalty rates from license agreements with our licensors of certain Visudyne patent rights.(6)
    
    Add: Advance on inventory costs from NovartisThis represented the amount that Novartis advanced to us for shipments of bulk Visudyne and
reimbursement for inventory obsolescence. The price of the Visudyne shipments was determined
based on the PDT Agreement between QLT and Novartis and represented our actual costs of
producing Visudyne.    Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(In thousands of U.S. dollars)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009U.S.
    
    $
    5,218
    
    
    $
    6,171
    
    
    $
    16,668
    
    
    $
    23,478Europe
    
    
    5,303
    
    
    
    6,534
    
    
    
    19,447
    
    
    
    21,724Rest of World
    
    
    9,945
    
    
    
    10,792
    
    
    
    30,010
    
    
    
    35,034Worldwide
    
    $
    20,466
    
    
    $
    23,497
    
    
    $
    66,125
    
    
    $
    80,236
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009U.S.
    
    
    25
    %
    
    
    26
    %
    
    
    25
    %
    
    
    29
    %Europe
    
    
    26
    %
    
    
    28
    %
    
    
    29
    %
    
    
    27
    %Rest of World
    
    
    49
    %
    
    
    46
    %
    
    
    46
    %
    
    
    44
    %Worldwide
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  19




---



##### Table of Contents




    
    we own and license additional U.S. patents covering lipid-based formulations of
verteporfin and approved uses of Visudyne that provide additional patent protection for
Visudyne and do not expire until, at the latest, 2015 and 2016, respectively;
 
    
    in Europe and Japan, the basic patents covering the verteporfin compound do not expire
until 2014 and additional patents and patent applications relating to lipid-based
formulations of verteporfin and approved uses of Visudyne do not expire until, at the
latest, 2016 and 2017, respectively; and
 
    
    relative to the sale of many other biopharmaceutical products, Visudyne does not
generate significant revenue and the manufacturing process is complex, which may make
Visudyne a less desirable generic target.
 Royalties
  Costs and Expenses
 Cost of Sales
  Research and Development
   20




---



##### Table of Contents




    
    inability to design devices to function as expected,
    
    delays or inability to formulate an active ingredient in an appropriate concentration to
deliver effective doses of a drug,
    
    changes in the regulatory environment,
    
    introduction of competing technologies and treatments,
    
    unexpected safety issues,
    
    patent application, maintenance and enforcement issues,
    
    inability to operate without infringing the proprietary rights of others,
    
    changes in the commercial marketplace,
    
    difficulty enrolling patients in, or keeping them in, our clinical studies,
    
    delays in study progression, including study site, Institutional Review Board and
regulatory delays,
    
    positive study progression and results,
    
    failure to meet favorable study endpoints,
    
    inability to develop cost effective manufacturing methods that comply with regulatory
standards,
    
    inability to attract personnel or retain personnel with expertise required by our
development program,
    
    inability to manufacture sterile supplies necessary for composition of products,
    
    uncertainties related to collaborative arrangements,
    
    environmental risks, and
    
    other factors referenced under Item 1A, Risk Factors.
   Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(In thousands of U.S. dollars)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Ocular
    
    $
    8,101
    
    
    $
    7,276
    
    
    $
    22,530
    
    
    $
    20,057Other
    
    
    
    
    
    
    99
    
    
    
    246
    
    
    
    429$
    8,101
    
    
    $
    7,375
    
    
    $
    22,776
    
    
    $
    20,486
 Selling, General and Administrative Expenses
  Investment and Other Income (Expense)
 Net Foreign Exchange Gains
  Interest Income
   21




---



##### Table of Contents



Interest Expense
  Fair Value Change Contingent Consideration
    Other Income
  Income from Discontinued Operations
  Income Taxes
    LIQUIDITY AND CAPITAL RESOURCES
 General
   22




---



##### Table of Contents



Sources and Uses of Cash
   
    
    A negative operating cash flow variance from lower net tax refunds of $36.5 million;
 
    
    A negative operating cash flow variance from lower cash receipts from product sales and
royalties of $19.3 million primarily due to the divestiture of the Eligard product line as
part of the sale of QLT USA;
 
    
    A negative operating cash flow variance from lower investment and other income of $1.2
million;
 
    
    A positive operating cash flow variance from proceeds related to the fair value change
in contingent consideration of $5.2 million; and
 
    
    A positive operating cash flow variance from lower operating and inventory related
expenditures of $7.4 million, primarily due to the divestiture of the Eligard product line
as part of the sale of QLT USA.
    
    
    A negative operating cash flow variance from lower cash receipts from product sales and
royalties of $68.8 million primarily due to the divestiture of the Eligard product line as
part of the sale of QLT USA;
 
    
    A negative operating cash flow variance from lower net tax refunds of $37.1 million;
 
    
    A negative operating cash flow variance from lower foreign exchange gains of $5.2
million;
 
    
    A negative operating cash flow variance from lower investment and other income of $1.4
million;
 
    
    A positive operating cash flow variance from lower restructuring costs of $0.5 million;
 
    
    A positive cash flow variance from settlement of the MEEI judgment resulting in the
release of the appeal bond and an additional $2.2 million payment in 2009;
 
    
    A positive operating cash flow variance from proceeds related to the fair value change
in contingent consideration of $10.2 million; and
 
    
    A positive operating cash flow variance from lower operating and inventory related
expenditures of $28.6 million primarily due to the divestiture of the Eligard product line
as part of the sale of QLT USA.
   23




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Interest and Foreign Exchange Rates
    Contractual Obligations
  Off-Balance Sheet Arrangements
   Recently Issued and Recently Adopted Accounting Standards
  Outstanding Share Data
   24




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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Revenue Recognition
  Net Product Revenue
    Vendor Charge-backs
   25




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Discounts
  Medicaid rebates
  Product returns
  Royalties
  Discontinued Operations
  Contingent Consideration
   SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
   26




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##### Table of Contents




    
    levels of future sales of Visudyne, including the impact of competition or loss of
patent protection;
 
    
    our ability to effectively market and sell Visudyne in the U.S.;
 
    
    the ability of Novartis to effectively market and sell Visudyne in countries outside the
U.S.;
 
    
    our continued ability to supply Visudyne to our customers;
 
    
    our expectations regarding Visudyne label changes, reimbursement and sales;
 
    
    receipt of all or part of the contingent consideration pursuant to the stock purchase
agreement entered into with Tolmar, which is based on anticipated levels of future sales of
Eligard;
 
    
    unanticipated future operating results;
 
    
    our reliance on contract manufacturers and suppliers to manufacture Visudyne at
competitive prices and in accordance with the U.S. Food and Drug Administration and other
local and foreign regulatory requirements as well as our product specifications;
 
    
    our reliance on our specialty wholesale distributors to distribute Visudyne in
accordance with regulatory requirements and the terms of our agreements;
 
    
    our expectations regarding future tax liabilities as a result of our recent
restructuring transactions, changes in estimates of prior years tax items and results of
tax audits by tax authorities;
 
    
    the scope, validity and enforceability of our and third party intellectual property
rights;
 
    
    our ability to successfully develop our programs, including our punctal plug drug
delivery system and synthetic retinoid compound;
 
    
    the anticipated timing, cost and progress of the development of our technology and
clinical trials;
 
    
    the anticipated timing of regulatory submissions for products and product candidates;
 
    
    the anticipated timing for receipt of, and our ability to maintain, regulatory approvals
for products and product candidates;
 
    
    the anticipated timing for receipt of, and our ability to maintain, reimbursement
approvals for our products and product candidates, including reimbursement under U.S.
governmental and private insurance programs; and
 
    
    existing governmental laws and regulations and changes in, or the failure to comply
with, governmental laws and regulations.
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   27




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ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
    28




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PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
   
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   Issuer Purchases of Equity SecuritiesTotal Number of
    
    
    Maximum NumberTotal
    
    
    Average
    
    
    Shares Purchased as
    
    
    of Shares that MayNumber of
    
    
    Price
    
    
    Part of Publicly
    
    
    Yet Be PurchasedShares
    
    
    Paid per
    
    
    Announced Plans or
    
    
    Under the Plans orPeriod
    
    Purchased
    
    
    Share
    
    
    Programs
    
    
    ProgramsJuly 1, 2010 through
July 31, 2010
    
    
    134,700
    
    
    $
    5.62
    
    
    
    134,700
    
    
    
    2,287,182August 1, 2010
through August 31,
2010
    
    
    883,906
    
    
    $
    5.72
    
    
    
    883,906
    
    
    
    1,403,276September 1, 2010
through September
30, 2010
    
    
    448,188
    
    
    $
    6.24
    
    
    
    448,188
    
    
    
    955,088Total
    
    
    1,466,794
    
    
    $
    5.87
    
    
    
    1,466,794
    
    
    
    955,088
    (1)
 (1)
    
    No purchases were made under the normal course issuer bid from October 1, 2010 through to its
expiry on November 2, 2010.  29




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ITEM 6. EXHIBITS
   30




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SIGNATURES
  QLT Inc.
(Registrant)Date: November 3, 2010
    By:
    /s/ Robert L. ButchofskyRobert L. ButchofskyPresident and Chief Executive Officer

(Principal Executive Officer)Date: November 3, 2010
    By:
    /s/ Cameron R. NelsonCameron R. NelsonVice President, Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)  31




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EXHIBIT INDEX
 ExhibitNumber
    
    Description31.1
    
    
    Rule 13a-14(a) Certification of the Chief Executive Officer.31.2
    
    
    Rule 13a-14(a) Certification of the Chief Financial Officer.32.1
    
    
    Section 1350 Certification of the Chief Executive Officer.32.2
    
    
    Section 1350 Certification of the Chief Financial Officer.
  32