##### 



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, 2007
 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.)887 Great Northern Way, Vancouver, B.C., Canada
    
    V5T 4T5(Address of principal executive offices)
    
    (Zip code)
 (604) 707-7000
 þ o
  þ o o
 o þ




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##### 



QLT INC.
 QUARTERLY REPORT ON FORM 10-Q
September 30, 2007
 TABLE OF CONTENTS
 ITEM
    
    

PAGEPART I  FINANCIAL INFORMATION1. FINANCIAL STATEMENTS
    
    
    1Unaudited Condensed Consolidated Balance Sheets as of
September 30, 2007 and December 31, 2006
    
    
    1Unaudited Condensed Consolidated Statements of Income for the three
and nine months ended September 30, 2007 and September 30, 2006
    
    
    2Unaudited Condensed Consolidated Statements of Cash Flows for the three
and nine months ended September 30, 2007 and September 30, 2006
    
    
    3Unaudited Condensed Consolidated Statement of Changes in Shareholders Equity and Comprehensive
Income for the three and nine months ended September 30, 2007
    
    
    4Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    62. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    203. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    304. CONTROLS AND PROCEDURES
    
    
    30PART II  OTHER INFORMATION1. LEGAL PROCEEDINGS
    
    
    311A. RISK FACTORS
    
    
    312. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    316. EXHIBITS
    
    
    31




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##### 



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 QLT Inc.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 (In thousands of U.S. dollars)
    
    September 30, 2007
    
    December 31, 2006ASSETSCurrent assetsCash and cash equivalents
    
    $
    172,175
    
    
    $
    299,053Short-term investment securities
    
    
    
    
    
    
    75,163Restricted cash (Note 14)
    
    
    122,037
    
    
    
    3,916Accounts receivable
    
    
    24,954
    
    
    
    38,872Income taxes receivable
    
    
    7,291
    
    
    
    4,049Inventories (Note 3)
    
    
    15,601
    
    
    
    34,268Current portion of deferred income tax assets
    
    
    57,686
    
    
    
    8,657Other (Note 4)
    
    
    17,100
    
    
    
    14,031416,844
    
    
    
    478,009Property, plant and equipment
    
    
    54,610
    
    
    
    50,497Deferred income tax assets
    
    
    7,391
    
    
    
    9,838Goodwill
    
    
    93,923
    
    
    
    98,641Long-term inventories and other assets (Note 5)
    
    
    24,299
    
    
    
    2,121$
    597,067
    
    
    $
    639,106LIABILITIESCurrent liabilitiesAccounts payable
    
    $
    9,543
    
    
    $
    15,255Income taxes payable
    
    
    9
    
    
    
    29Accrued restructuring charge (Note 9)
    
    
    300
    
    
    
    2,383Accrued liabilities (Note 6)
    
    
    118,932
    
    
    
    125,805Current portion of long-term debt (Note 7)
    
    
    172,500
    
    
    
    Deferred revenue
    
    
    13,508
    
    
    
    11,508Deferred income tax liabilities
    
    
    11,496
    
    
    
    326,288
    
    
    
    154,980Deferred income tax liabilities
    
    
    66
    
    
    
    5,483Uncertain tax position liabilities (Note 2)
    
    
    2,008
    
    
    
    Deferred revenue
    
    
    3,306
    
    
    
    2,929Long-term debt (Note 7)
    
    
    
    
    
    
    172,500331,668
    
    
    
    335,892CONTINGENCIES (Note 14)SHAREHOLDERS EQUITYShare capital (Note 10)Authorized500,000,000 common shares without par value5,000,000 first preference shares without
par value, issuable
in seriesIssued and outstandingCommon shares
    
    
    702,221
    
    
    
    708,206September 30,
2007  74,620,328 sharesDecember 31,
2006  75,188,980 sharesAdditional paid in-capital
    
    
    118,811
    
    
    
    114,724Accumulated deficit
    
    
    (667,907
    )
    
    
    (603,251
    )Accumulated other comprehensive income
    
    
    112,274
    
    
    
    83,535265,399
    
    
    
    303,214$
    597,067
    
    
    $
    639,106
 1




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##### 



QLT Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (Unaudited)
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,(In thousands of U.S. dollars except share and per share information)
    
    2007
    
    2006
    
    2007
    
    2006RevenuesNet product revenue (Note 11)
    
    $
    20,774
    
    
    $
    31,609
    
    
    $
    73,770
    
    
    $
    119,828Net royalties
    
    
    7,517
    
    
    
    6,118
    
    
    
    21,931
    
    
    
    14,948Contract research and development
    
    
    
    
    
    
    275
    
    
    
    299
    
    
    
    946Licensing and milestones
    
    
    367
    
    
    
    244
    
    
    
    1,020
    
    
    
    73228,658
    
    
    
    38,246
    
    
    
    97,020
    
    
    
    136,454Costs and expensesCost of sales
    
    
    9,912
    
    
    
    10,466
    
    
    
    30,873
    
    
    
    32,198Accrued cost
of sales re: MEEI (Note 14)
    
    
    1,461
    
    
    
    
    
    
    
    1,461
    
    
    
    Research and development
    
    
    10,718
    
    
    
    13,564
    
    
    
    32,876
    
    
    
    43,704Selling, general and administrative
    
    
    7,087
    
    
    
    10,040
    
    
    
    19,488
    
    
    
    27,614Depreciation
    
    
    1,632
    
    
    
    1,622
    
    
    
    4,795
    
    
    
    4,727Litigation (Note 14)
    
    
    265
    
    
    
    
    
    
    
    110,162
    
    
    
    Restructuring charge (recovery) (Note 9)
    
    
    177
    
    
    
    4
    
    
    
    1,035
    
    
    
    (190
    )31,252
    
    
    
    35,696
    
    
    
    200,690
    
    
    
    108,053Operating (loss) income
    
    
    (2,594
    )
    
    
    2,550
    
    
    
    (103,670
    )
    
    
    28,401Investment and other income (expense)Net foreign exchange gains (losses)
    
    
    (863
    )
    
    
    581
    
    
    
    (1,285
    )
    
    
    (2,886
    )Interest income
    
    
    3,818
    
    
    
    5,492
    
    
    
    11,163
    
    
    
    15,327Interest expense
    
    
    (2,735
    )
    
    
    (1,636
    )
    
    
    (5,965
    )
    
    
    (4,854
    )Other
    
    
    3,161
    
    
    
    979
    
    
    
    4,429
    
    
    
    2,7713,381
    
    
    
    5,416
    
    
    
    8,342
    
    
    
    10,358Income (loss) from continuing operations before income taxes
    
    
    787
    
    
    
    7,966
    
    
    
    (95,328
    )
    
    
    38,759(Provision) recovery for income taxes
    
    
    (176
    )
    
    
    (1,771
    )
    
    
    32,313
    
    
    
    (11,669
    )Income (loss) from continuing operations
    
    
    611
    
    
    
    6,195
    
    
    
    (63,015
    )
    
    
    27,090Loss from discontinued operations, net of income taxes (Note 12)
    
    
    (265
    )
    
    
    (9,941
    )
    
    
    (436
    )
    
    
    (11,219
    )Net income (loss)
    
    $
    346
    
    
    $
    (3,746
    )
    
    $
    (63,451
    )
    
    $
    15,871Basic net income (loss) per common shareContinuing operations
    
    $
    0.01
    
    
    $
    0.07
    
    
    $
    (0.84
    )
    
    $
    0.31Discontinued operations
    
    
    (0.00
    )
    
    
    (0.12
    )
    
    
    (0.01
    )
    
    
    (0.13
    )Net income (loss)
    
    $
    0.00
    
    
    $
    (0.04
    )
    
    $
    (0.85
    )
    
    $
    0.18Diluted net income (loss) per common shareContinuing operations
    
    $
    0.01
    
    
    $
    0.07
    
    
    $
    (0.84
    )
    
    $
    0.31Discontinued operations
    
    
    (0.00
    )
    
    
    (0.12
    )
    
    
    (0.01
    )
    
    
    (0.13
    )Net income (loss)
    
    $
    0.00
    
    
    $
    (0.04
    )
    
    $
    (0.85
    )
    
    $
    0.18Weighted average number of common shares outstanding (thousands)Basic
    
    
    74,618
    
    
    
    83,831
    
    
    
    75,003
    
    
    
    87,734Diluted
    
    
    74,624
    
    
    
    83,831
    
    
    
    75,003
    
    
    
    87,785
 2




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##### 



QLT Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,(In thousands of U.S. dollars)
    
    2007
    
    2006
    
    2007
    
    2006Cash flows (used in) provided by operating activitiesNet income
    
    $
    346
    
    
    $
    (3,746
    )
    
    $
    (63,451
    )
    
    $
    15,871Adjustments to reconcile net income to net cash
from operating activitiesDepreciation and amortization of intangibles
    
    
    1,697
    
    
    
    1,768
    
    
    
    4,927
    
    
    
    5,516Write down of investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    432Write down of inventory
    
    
    
    
    
    
    1,761
    
    
    
    
    
    
    
    1,761Write down of fixed assets
    
    
    
    
    
    
    6,664
    
    
    
    355
    
    
    
    6,664Share based compensation
    
    
    939
    
    
    
    1,033
    
    
    
    2,560
    
    
    
    3,141Impairment of goodwill and other intangibles
    
    
    
    
    
    
    1,928
    
    
    
    
    
    
    
    1,928Amortization of deferred financing expenses
    
    
    330
    
    
    
    308
    
    
    
    938
    
    
    
    915Unrealized foreign exchange (gain) loss
    
    
    (7,162
    )
    
    
    867
    
    
    
    (14,539
    )
    
    
    (8,767
    )Tax loss utilization
    
    
    2,166
    
    
    
    
    
    
    
    4,718
    
    
    
    Deferred income taxes (recovery)
    
    
    356
    
    
    
    (890
    )
    
    
    (34,851
    )
    
    
    (5,303
    )(Gain) loss on sale of asset
    
    
    (2,990
    )
    
    
    4
    
    
    
    (3,990
    )
    
    
    23Trading securities
    
    
    
    
    
    
    
    
    
    
    52,433
    
    
    
    Litigation
    
    
    265
    
    
    
    
    
    
    
    110,162
    
    
    
    Accrued cost
of sales re: MEEI
    
    
    1,461
    
    
    
    
    
    
    
    1,461
    
    
    
    Interest earned on restricted cash
    
    
    (1,010
    )
    
    
    (20
    )
    
    
    (1,036
    )
    
    
    (20
    )Changes in non-cash operating assets and liabilitiesAppeal bond collateral
    
    
    (118,781
    )
    
    
    
    
    
    
    (118,781
    )
    
    
    Accounts receivable
    
    
    5,382
    
    
    
    8,793
    
    
    
    15,945
    
    
    
    13,048Inventories
    
    
    1,225
    
    
    
    2,517
    
    
    
    (53
    )
    
    
    10,167Other current assets
    
    
    3,613
    
    
    
    1,149
    
    
    
    758
    
    
    
    3,663Accounts payable
    
    
    (2,175
    )
    
    
    1,202
    
    
    
    (4,773
    )
    
    
    (4,282
    )Income taxes payable
    
    
    (2,583
    )
    
    
    (6,486
    )
    
    
    (2,512
    )
    
    
    (24,450
    )Accrued restructuring charge
    
    
    (562
    )
    
    
    (343
    )
    
    
    (2,157
    )
    
    
    (4,014
    )Other accrued liabilities
    
    
    (1,546
    )
    
    
    (5,301
    )
    
    
    (119,229
    )
    
    
    (9,750
    )Deferred revenue
    
    
    (627
    )
    
    
    466
    
    
    
    693
    
    
    
    1,011(119,656
    )
    
    
    11,674
    
    
    
    (170,422
    )
    
    
    7,554Cash provided by (used in) investing activitiesShort-term investment securities
    
    
    6,068
    
    
    
    54,574
    
    
    
    22,503
    
    
    
    (18,940
    )Restricted cash
    
    
    
    
    
    
    
    
    
    
    1,689
    
    
    
    (1,675
    )Proceeds on sale of asset
    
    
    3,000
    
    
    
    
    
    
    
    4,000
    
    
    
    13Purchase of property, plant and equipment
    
    
    (322
    )
    
    
    (1,254
    )
    
    
    (1,901
    )
    
    
    (4,848
    )Other acquisition related costs
    
    
    (509
    )
    
    
    
    
    
    
    (524
    )
    
    
    (14
    )8,237
    
    
    
    55,320
    
    
    
    25,767
    
    
    
    (25,464
    )Cash provided by (used in) financing activitiesCommon shares repurchased, net of fees
    
    
    (16
    )
    
    
    (104,250
    )
    
    
    (5,878
    )
    
    
    (127,812
    )Issuance of common shares
    
    
    19
    
    
    
    92
    
    
    
    1,258
    
    
    
    6913
    
    
    
    (104,158
    )
    
    
    (4,620
    )
    
    
    (127,121
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    6,828
    
    
    
    (419
    )
    
    
    22,397
    
    
    
    9,505Net decrease in cash and cash equivalents
    
    
    (104,588
    )
    
    
    (37,583
    )
    
    
    (126,878
    )
    
    
    (135,526
    )Cash and cash equivalents, beginning of period
    
    
    276,763
    
    
    
    247,858
    
    
    
    299,053
    
    
    
    345,801Cash and cash equivalents, end of period
    
    $
    172,175
    
    
    $
    210,275
    
    
    $
    172,175
    
    
    $
    210,275Supplementary cash flow information:Interest paid
    
    $
    2,775
    
    
    $
    2,729
    
    
    $
    5,663
    
    
    $
    5,603Income taxes paid
    
    
    148
    
    
    
    8,095
    
    
    
    148
    
    
    
    40,306
 3




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##### 



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 (Loss)
    
    Deficit
    
    Income (Loss)
    
    Equity(All amounts except share and per share information are expressed in thousands of U.S. dollars)Balance at December 31,
2005
    
    
    91,184,681
    
    
    $
    861,676
    
    
    $
    66,565
    
    
    $
    99,515
    
    
    $
    (501,645
    )
    
    
    
    
    
    $
    526,111Exercise of stock
options at prices
ranging from CAD $7.79
to CAD $9.22 per share
and U.S. $2.89 - U.S.
$8.64 per share
    
    
    127,299
    
    
    
    2,387
    
    
    
    (1,574
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    813Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    4,586
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,586Common share repurchase
    
    
    (16,123,000
    )
    
    
    (155,857
    )
    
    
    45,147
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (110,710
    )Other comprehensive
income (loss):Cumulative translation
adjustment from
application of U.S.
dollar reporting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,187
    )
    
    
    
    
    
    $
    (16,187
    )
    
    
    (16,187
    )Unrealized gain on
available for sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    207
    
    
    
    
    
    
    
    207
    
    
    
    207Net Income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (101,605
    )
    
    
    (101,605
    )
    
    
    (101,605
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (117,585
    )
    
    
    Balance at December 31,
2006
    
    
    75,188,980
    
    
    $
    708,206
    
    
    $
    114,724
    
    
    $
    83,535
    (1)
    
    $
    (603,251
    )
    
    
    
    
    
    $
    303,214Adjustment for the
adoption of FASB
Interpretation No. 48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,199
    )
    
    
    
    
    
    
    (1,199
    )Exercise of stock
options at prices
ranging from CAD $7.79
to CAD $9.84 per share
and U.S. $2.89 - U.S.
$9.29 per share
    
    
    125,417
    
    
    
    1,840
    
    
    
    (921
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    919Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    979
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    979Other comprehensive
income (loss):Cumulative translation
adjustment from
application of U.S.
dollar reporting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,013
    
    
    
    
    
    
    $
    2,013
    
    
    
    2,013Unrealized gain on
available for sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    22
    
    
    
    22Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,863
    
    
    
    4,863
    
    
    
    4,863Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,898
    
    
    
    Balance at March 31, 2007
    
    
    75,314,397
    
    
    $
    710,046
    
    
    $
    114,782
    
    
    $
    85,570
    
    
    $
    (599,587
    )
    
    
    
    
    
    $
    310,811Exercise of stock
options at CAD $7.79 and
prices ranging from U.S.
$5.13 - U.S. $7.27 per
share
    
    
    52,296
    
    
    
    684
    
    
    
    (364
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    320Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    806
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    806Common share repurchase
    
    
    (750,000
    )
    
    
    (8,582
    )
    
    
    2,718
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,864
    )Other comprehensive
income (loss):Cumulative translation
adjustment from
application of U.S.
dollar reporting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,745
    
    
    
    
    
    
    $
    16,745
    
    
    
    16,745Unrealized gain on
available for sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    (14
    )
    
    
    (14
    )
 4




---



##### 



AccumulatedAdditional
    
    Other
    
    
    
    
    
    
    
    
    
    TotalCommon Shares
    
    Paid-in
    
    Comprehensive
    
    Accumulated
    
    Comprehensive
    
    ShareholdersShares
    
    Amount
    
    Capital
    
    Income (Loss)
    
    Deficit
    
    Income (Loss)
    
    Equity(All amounts except share and per share information are expressed in thousands of U.S. dollars)Net Income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68,667
    )
    
    
    (68,667
    )
    
    
    (68,667
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51,936
    )
    
    
    Balance at June 30, 2007
    
    
    74,616,693
    
    
    
    702,148
    
    
    
    117,942
    
    
    
    102,301
    
    
    
    (668,253
    )
    
    
    
    
    
    
    254,138Exercise of stock
options at prices
ranging from U.S. $5.29
- U.S. $5.39 per share
    
    
    3,635
    
    
    
    73
    
    
    
    (54
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    939
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    939Common share repurchase
costs
    
    
    
    
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16
    )Other comprehensive
income (loss):Cumulative translation
adjustment from
application of U.S.
dollar reporting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,966
    
    
    
    
    
    
    $
    9,966
    
    
    
    9,966Unrealized gain on
available for sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    7
    
    
    
    7Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    346
    
    
    
    346
    
    
    
    346Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,319
    
    
    
    Balance at September 30,
2007
    
    
    74,620,328
    
    
    
    702,221
    
    
    
    118,811
    
    
    
    112,274
    
    
    
    (667,907
    )
    
    
    
    
    
    
    265,399
 5




---



##### 



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Business
 ® ® ®
 Basis of Presentation
  Accounting for the Impairment or Disposal
of Long-lived Assets
  Principles of Consolidation
  Use of Estimates
  Reporting Currency and Foreign Currency Translation
  6




---



##### 



Segmented Information
  Inventories
  Long-lived Assets
  Accounting
for the Impairment or Disposal of Long-lived Assets.
 Goodwill Impairment
 Goodwill and Other
Intangibles
 Contingencies
   7




---



##### 



Discontinued Operations
  Revenue Recognition
 Net Product Revenues
     Net Royalties
  Contract Research and Development
  8




---



##### 



Licensing and Milestones
  Research and Development
  Stock-Based Compensation
 Share-Based Payment, Accounting for Stock Issued to Employees. Accounting for Stock-Based Payment
  Income Taxes
 Accounting
for Uncertainty in Income Taxes.
 9




---



##### 



Net Income Per Common Share
   Three months ended
    
    Nine months ended(In thousands of U.S. dollars, except
    
    September 30,
    
    September 30,
    
    September 30,
    
    September 30,share and per share data)
    
    2007
    
    2006
    
    2007
    
    2006Numerator:Income (loss) from continuing operations
    
    $
    611
    
    
    $
    6,195
    
    
    $
    (63,015
    )
    
    $
    27,090Loss from discontinued operations, net of
income taxes
    
    
    (265
    )
    
    
    (9,941
    )
    
    
    (436
    )
    
    
    (11,219
    )Net income (loss)
    
    $
    346
    
    
    $
    (3,746
    )
    
    $
    (63,451
    )
    
    $
    15,871Effect of dilutive securities:Convertible senior notes  interest
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjusted income (loss)
    
    $
    346
    
    
    $
    (3,746
    )
    
    $
    (63,451
    )
    
    $
    15,871Denominator:(thousands)Weighted average common shares outstanding
    
    
    74,618
    
    
    
    83,831
    
    
    
    75,003
    
    
    
    87,734Effect of dilutive securities:Stock options
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    51Convertible senior notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted potential common shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51Diluted weighted average common shares
outstanding
    
    
    74,624
    
    
    
    83,831
    
    
    
    75,003
    
    
    
    87,785Basic net income (loss) per common shareContinuing operations
    
    $
    0.01
    
    
    $
    0.07
    
    
    $
    (0.84
    )
    
    $
    0.31Discontinued operations
    
    
    (0.00
    )
    
    
    (0.12
    )
    
    
    (0.01
    )
    
    
    (0.13
    )Net income (loss)
    
    $
    0.00
    
    
    $
    (0.04
    )
    
    $
    (0.85
    )
    
    $
    0.18Diluted net income (loss) per common shareContinuing operations
    
    $
    0.01
    
    
    $
    0.07
    
    
    $
    (0.84
    )
    
    $
    0.31Discontinued operations
    
    
    (0.00
    )
    
    
    (0.12
    )
    
    
    (0.01
    )
    
    
    (0.13
    )Net income (loss)
    
    $
    0.00
    
    
    $
    (0.04
    )
    
    $
    (0.85
    )
    
    $
    0.18
  Recently Issued Accounting Standards
 Accounting for Uncertainty in Income Taxes
 an Interpretation of FASB Statement No. 109
 10




---



##### 



Accounting for Certain Hybrid Financial Instruments
- an amendment of FASB statement 133 and 140
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities  including an amendment of FASB Statement No. 115
 ,
Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research
and Development Activities.
 2. INCOME TAXES
 Accounting for Uncertainty in Income Taxes
    11




---



##### 



3. INVENTORIES
 (In thousands of U.S. dollars)
    
    September 30, 2007
    
    December 31, 2006Raw materials and supplies
    
    $
    8,691
    
    
    $
    10,723Work-in-process
    
    
    8,595
    
    
    
    27,981Finished goods
    
    
    481
    
    
    
    676Provision for non-completion of product inventory
    
    
    (2,166
    )
    
    
    (5,112
    )$
    15,601
    
    
    $
    34,268
  4. OTHER CURRENT ASSETS
 (In thousands of U.S. dollars)
    
    September 30, 2007
    
    December 31, 2006Visudyne inventory held by Novartis Ophthalmics
    
    $
    13,527
    
    
    $
    10,677Deferred financing expenses
    
    
    1,216
    
    
    
    Prepaid expenses and other
    
    
    2,357
    
    
    
    3,354$
    17,100
    
    
    $
    14,031
   5. OTHER LONG-TERM ASSETS
 (In thousands of U.S. dollars)
    
    2007
    
    2006Inventory
    
    $
    23,352
    
    
    $
    Deferred financing expenses
    
    
    
    
    
    
    1,922Other
    
    
    947
    
    
    
    199$
    24,299
    
    
    $
    2,121
  12




---



##### 



6. ACCRUED LIABILITIES
 (In thousands of U.S. dollars)
    
    September 30, 2007
    
    December 31, 2006Royalties
    
    $
    1,084
    
    
    $
    1,723Compensation
    
    
    4,231
    
    
    
    4,683Separation costs
    
    
    
    
    
    
    1,107Foreign exchange contracts
    
    
    
    
    
    
    2,011Interest
    
    
    741
    
    
    
    1,936Litigation
    
    
    112,254
    
    
    
    112,500Other
    
    
    622
    
    
    
    1,845$
    118,932
    
    
    $
    125,805
 7. CONVERTIBLE DEBT
  8. FOREIGN EXCHANGE FACILITIES
   9. RESTRUCTURING CHARGE
   13




---



##### 



Severance and termination benefits accrued
 December 2005
    
    October 2006(In thousands of U. S. dollars)
    
    Restructuring
    
    Restructuring
    
    TotalBalance at December 31, 2006
    
    $
    686
    
    
    $
    1,514
    
    
    $
    2,200Restructuring charge
    
    
    
    
    
    
    407
    
    
    
    407Adjustments
    
    
    (68
    )
    
    
    
    
    
    
    (68
    )Cash payments
    
    
    (246
    )
    
    
    (1,080
    )
    
    
    (1,326
    )Balance at March 31, 2007
    
    $
    372
    
    
    $
    841
    
    
    $
    1,213Restructuring charge
    
    
    
    
    
    
    253
    
    
    
    253Adjustments
    
    
    20
    
    
    
    10
    
    
    
    30Cash payments
    
    
    (178
    )
    
    
    (558
    )
    
    
    (736
    )Balance at June 30, 2007
    
    
    214
    
    
    
    546
    
    
    
    760Restructuring charge
    
    
    
    
    
    
    176
    
    
    
    176Adjustments
    
    
    2
    
    
    
    8
    
    
    
    10Cash payments
    
    
    (151
    )
    
    
    (549
    )
    
    
    (700
    )Balance at September 30, 2007
    
    
    65
    
    
    
    181
    
    
    
    246
 Other related expenses accrued
 December 2005
    
    October 2006(In thousands of U. S. dollars)
    
    Restructuring
    
    Restructuring
    
    TotalBalance at December 31, 2006
    
    $
    99
    
    
    $
    84
    
    
    $
    183Restructuring charge
    
    
    
    
    
    
    237
    
    
    
    237Cash payments
    
    
    (23
    )
    
    
    (285
    )
    
    
    (308
    )Balance at March 31, 2007
    
    $
    76
    
    
    $
    36
    
    
    $
    112Restructuring charge
    
    
    
    
    
    
    6
    
    
    
    6Adjustments
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )Cash payments
    
    
    (13
    )
    
    
    (18
    )
    
    
    (31
    )Balance at June 30, 2007
    
    
    57
    
    
    
    24
    
    
    
    81Restructuring charge
    
    
    
    
    
    
    3
    
    
    
    3Adjustments
    
    
    
    
    
    
    (12
    )
    
    
    (12
    )Cash payments
    
    
    (12
    )
    
    
    (6
    )
    
    
    (18
    )Balance at September 30, 2007
    
    
    45
    
    
    
    9
    
    
    
    54
 Combined Total
 December 2005
    
    October 2006(In thousands of U. S. dollars)
    
    Restructuring
    
    Restructuring
    
    TotalBalance at December 31, 2006
    
    $
    785
    
    
    $
    1,598
    
    
    $
    2,383Restructuring charge
    
    
    
    
    
    
    644
    
    
    
    644Adjustments
    
    
    (68
    )
    
    
    
    
    
    
    (68
    )Cash payments
    
    
    (269
    )
    
    
    (1,365
    )
    
    
    (1,634
    )Balance at March 31, 2007
    
    $
    448
    
    
    $
    877
    
    
    $
    1,325Restructuring charge
    
    
    
    
    
    
    259
    
    
    
    259Adjustments
    
    
    14
    
    
    
    10
    
    
    
    24Cash payments
    
    
    (191
    )
    
    
    (576
    )
    
    
    (767
    )Balance at June 30, 2007
    
    
    271
    
    
    
    570
    
    
    
    841Restructuring charge
    
    
    
    
    
    
    179
    
    
    
    179Adjustments
    
    
    2
    
    
    
    (4
    )
    
    
    (2
    )Cash payments
    
    
    (163
    )
    
    
    (555
    )
    
    
    (718
    )Balance at September 30, 2007
    
    
    110
    
    
    
    190
    
    
    
    300
 14




---



##### 



10. SHARE CAPITAL
      Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Annualized volatility
    
    
    36.7
    %
    
    
    44.1
    %
    
    
    37.0
    %
    
    
    45.5
    %Risk-free interest rate
    
    
    4.0
    %
    
    
    3.8
    %
    
    
    4.4
    %
    
    
    4.2
    %Expected life (years)
    
    
    3.3
    
    
    
    3.3
    
    
    
    3.3
    
    
    
    3.0
   Three months ended
    
    Nine months ended(In thousands of U.S. dollars,
    
    September 30,
    
    September 30,
    
    September 30,
    
    September 30,except share information)
    
    2007
    
    2006
    
    2007
    
    2006Cost of sales
    
    $
    17
    
    
    $
    15
    
    
    $
    21
    
    
    $
    38Research and development
    
    
    533
    
    
    
    598
    
    
    
    1,602
    
    
    
    1,866Selling, general and administrative
    
    
    349
    
    
    
    335
    
    
    
    897
    
    
    
    1,003Restructuring charge
    
    
    40
    
    
    
    
    
    
    
    40
    
    
    
    Discontinued operations
    
    
    
    
    
    
    85
    
    
    
    
    
    
    
    233Share based
compensation expense before income taxes
    
    
    939
    
    
    
    1,033
    
    
    
    2,560
    
    
    
    3,140Related income tax benefits
    
    
    (30
    )
    
    
    
    
    
    
    (110
    )
    
    
    Share based compensation, net of
income taxes
    
    $
    909
    
    
    $
    1,033
    
    
    $
    2,450
    
    
    $
    3,140
  15




---



##### 



11. NET PRODUCT REVENUE
  For the three months ended
    
    For the nine months endedSeptember 30,
    
    September 30,(In thousands of U.S. dollars)
    
    2007
    
    2006
    
    2007
    
    2006Visudyne® sales by Novartis Ophthalmics
    
    $
    48,735
    
    
    $
    75,137
    
    
    $
    169,315
    
    
    $
    277,259Less: Marketing and distribution costs
    
    
    (26,419
    )
    
    
    (32,289
    )
    
    
    (79,701
    )
    
    
    (96,796
    )Less: Inventory costs
    
    
    (2,909
    )
    
    
    (3,963
    )
    
    
    (8,863
    )
    
    
    (14,669
    )Less: Royalties to third parties
    
    
    (1,037
    )
    
    
    (1,581
    )
    
    
    (3,576
    )
    
    
    (5,942
    )$
    18,370
    
    
    $
    37,304
    
    
    $
    77,175
    
    
    $
    159,852QLTs 50% share of Novartis
Ophthalmics net proceeds from
Visudyne sales
    
    $
    9,185
    
    
    $
    18,652
    
    
    $
    38,587
    
    
    $
    79,926Add: Advance on inventory costs fromNovartis Ophthalmics
    
    
    2,198
    
    
    
    3,153
    
    
    
    6,372
    
    
    
    11,922Add: Royalties reimbursed to QLT
    
    
    991
    
    
    
    1,552
    
    
    
    3,533
    
    
    
    5,944Add: Other costs reimbursed to QLT
    
    
    2,232
    
    
    
    2,406
    
    
    
    5,663
    
    
    
    4,393Revenue from Visudyne® sales
    
    $
    14,606
    
    
    $
    25,763
    
    
    $
    54,155
    
    
    $
    102,185Net product revenue from Eligard®
    
    
    6,168
    
    
    
    5,846
    
    
    
    19,615
    
    
    
    17,643$
    20,774
    
    
    $
    31,609
    
    
    $
    73,770
    
    
    $
    119,828
   12. DISCONTINUED OPERATIONS
 Accounting for the Impairment or Disposal of
Long-lived Assets
  16




---



##### 



For the three months ended
    
    For the nine months endedSeptember 30,
    
    September 30,(In thousands of U.S. dollars)
    
    2007
    
    2006
    
    2007
    
    2006Net revenue
    
    $
    
    
    
    $
    2,600
    
    
    $
    
    
    
    $
    10,505Impairment of assets held for sale
    
    $
    
    
    
    $
    (8,592
    )
    
    $
    
    
    
    $
    (8,592
    )Pretax losses
    
    $
    
    
    
    $
    (10,970
    )
    
    $
    
    
    
    $
    (12,312
    )Income taxes
    
    
    
    
    
    
    1,029
    
    
    
    
    
    
    
    1,093Loss on disposal
    
    
    (421
    )
    
    
    
    
    
    
    (693
    )
    
    
    Income tax on disposal
    
    
    156
    
    
    
    
    
    
    
    257
    
    
    
    Net loss from discontinued operations
    
    $
    (265
    )
    
    $
    (9,941
    )
    
    $
    (436
    )
    
    $
    (11,219
    )
 13. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
  14. CONTINGENCIES
 Litigation and Legal Matters
   (a) Eligard Patent Litigation
     17




---



##### 



(b) Patent Litigation with MEEI
 ®
        18




---



##### 



(c) Litigation with Biolitec, Inc.
   15. SUBSEQUENT EVENT
   19




---



##### 



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  OVERVIEW
 ® ® ®
        20




---



##### 



RECENT DEVELOPMENTS
     ®
 RESULTS OF OPERATIONS
  21




---



##### 



Revenues
 Net Product Revenue
  For the three months ended
    
    For the nine months endedSeptember 30,
    
    September 30,(In thousands of U.S. dollars)
    
    2007
    
    2006
    
    2007
    
    2006Visudyne® sales by Novartis Ophthalmics
    
    $
    48,735
    
    
    $
    75,137
    
    
    $
    169,315
    
    
    $
    277,259Less:      Marketing and distribution
costs(1)
    
    
    (26,419
    )
    
    
    (32,289
    )
    
    
    (79,701
    )
    
    
    (96,796
    )Less:      Inventory costs(2)
    
    
    (2,909
    )
    
    
    (3,963
    )
    
    
    (8,863
    )
    
    
    (14,669
    )Less:      Royalties to third parties(3)
    
    
    (1,037
    )
    
    
    (1,581
    )
    
    
    (3,576
    )
    
    
    (5,942
    )$
    18,370
    
    
    $
    37,304
    
    
    $
    77,175
    
    
    $
    159,852QLTs 50% share of Novartis Ophthalmics net
proceeds from Visudyne® sales
    
    $
    9,185
    
    
    $
    18,652
    
    
    $
    38,587
    
    
    $
    79,926Add:      Advance on inventory costs from Novartis
Ophthalmics(4)
    
    
    2,198
    
    
    
    3,153
    
    
    
    6,372
    
    
    
    11,922Add:      Royalties reimbursed to QLT(5)
    
    
    991
    
    
    
    1,552
    
    
    
    3,533
    
    
    
    5,944Add:      Other costs reimbursed to QLT(6)
    
    
    2,232
    
    
    
    2,406
    
    
    
    5,663
    
    
    
    4,393Revenue from Visudyne® sales
    
    $
    14,606
    
    
    $
    25,763
    
    
    $
    54,155
    
    
    $
    102,185Net product revenue from Eligard®
    
    
    6,168
    
    
    
    5,846
    
    
    
    19,615
    
    
    
    17,643$
    20,774
    
    
    $
    31,609
    
    
    $
    73,770
    
    
    $
    119,828
 
 (1)
    
    Less: Marketing and distribution costsThis represents Novartis Ophthalmics 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 Product Development, Manufacturing, and Distribution Agreement between QLT and
Novartis Ophthalmics (a division of Novartis Pharma AG). The costs incurred by Novartis
Ophthalmics are related to its sales force, advertising expenses, marketing, and certain
administrative overhead costs. The costs incurred by us include marketing support, legal and
administrative expenses that we incur in support of Visudyne sales.(2)
    
    Less: Inventory costsThis represents Novartis Ophthalmics cost of goods sold related to Visudyne. It includes the
cost of bulk Visudyne we ship to Novartis Ophthalmics, plus Novartis Ophthalmics packaging
and labelling costs, freight and custom duties.(3)
    
    Less: Royalties to third partiesThis represents the royalty expenses we incur and charge to Novartis Ophthalmics pursuant to
the PDT Product Development, Manufacturing and Distribution Agreement between QLT and Novartis
Ophthalmics. The amounts are calculated by us based on specified royalty rates from existing
license agreements with our licensors of certain Visudyne patent rights.(4)
    
    Add: Advance on inventory costs from Novartis OphthalmicsThis represents the amount that Novartis Ophthalmics advances to us for shipments of bulk
Visudyne. The price of the Visudyne shipments is determined based on the existing agreement
between QLT and Novartis Ophthalmics and represents our actual costs of producing Visudyne.(5)
    
    Add: Royalties reimbursed to QLT 22




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##### 



This is related to item (3) above and represents the amounts we receive from Novartis
Ophthalmics in reimbursement for the actual royalty expenses we owe to third party licensors.(6)
    
    Add: Other costs reimbursed to QLTThis represents reimbursement by Novartis Ophthalmics to us of our portion of the marketing
and distribution costs described in (1) above. This expense includes marketing support, legal
and administrative expenses that we incur in support of Visudyne sales.    Net Royalties
  Costs and Expenses
 Cost of Sales
    23




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##### 



Accrued
Cost of Sales re: MEEI
  Research and Development
   
    
    changes in the regulatory environment,
    
    introduction of competing treatments,
    
    unexpected safety issues,
    
    patent maintenance and enforcement issues,
    
    changes in the commercial marketplace,
    
    difficulties in enrolling patients,
    
    delays in study progression,
    
    inability to develop cost effective manufacturing methods that comply with regulatory
standards,
    
    uncertainties related to collaborative arrangements,
    
    environmental risks, and
    
    other factors discussed under Item 1A, Risk Factors and Recent Developments in this
Report.
  For the three months
    
    For the nine monthsended September 30,
    
    ended September 30,(In thousands of U.S. dollars)
    
    2007
    
    2006
    
    2007
    
    2006Ocular
    
    $
    6,608
    
    
    $
    5,553
    
    
    $
    18,364
    
    
    $
    14,219Dermatology
    
    
    2,826
    
    
    
    3,550
    
    
    
    8,327
    
    
    
    12,233Urology and Oncology
    
    
    398
    
    
    
    1,663
    
    
    
    1,642
    
    
    
    5,298Other (including Atrigel
programs not in the above
therapeutic areas)
    
    
    886
    
    
    
    2,798
    
    
    
    4,543
    
    
    
    11,954$
    10,718
    
    
    $
    13,564
    
    
    $
    32,876
    
    
    $
    43,704
 Selling, General and Administrative Expenses
  24




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##### 



Litigation
   Restructuring Charge (Recovery)
  Investment
and Other Income (Expense)
 Net Foreign Exchange (Losses) Gains
   For the three months ended
    
    For the nine months endedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006(In thousands of U.S. dollars)Cash and cash equivalents and short-term
investments
    
    $
    (18,622
    )
    
    $
    328
    
    
    $
    (33,385
    )
    
    $
    (6,711
    )U.S. dollar long-term debt
    
    
    12,072
    
    
    
    (246
    )
    
    
    27,757
    
    
    
    6,723Foreign exchange contracts
    
    
    (76
    )
    
    
    702
    
    
    
    1,913
    
    
    
    (2,738
    )Foreign currency receivables and payables
    
    
    5,763
    
    
    
    (203
    )
    
    
    2,430
    
    
    
    (160
    )Net foreign exchange gains (losses)
    
    $
    (863
    )
    
    $
    581
    
    
    $
    (1,285
    )
    
    $
    (2,886
    )
 Interest Income
  25




---



##### 



Interest Expense
  Other
   Discontinued Operations
 Accounting for the Impairment or Disposal
of Long-lived Assets
 LIQUIDITY AND CAPITAL RESOURCES
       26




---



##### 



Interest and Foreign Exchange Rates
     Contractual Obligations
   Off-Balance Sheet Arrangements
  27




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##### 



General
    CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Recently Issued and Recently Adopted Accounting Standards
 Accounting for Uncertainty in Income Taxes
 an Interpretation of FASB Statement No. 109
 Accounting for Certain Hybrid Financial Instruments
- an amendment of FASB statement 133 and 140
 28




---



##### 



Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities  including an amendment of FASB Statement No. 115
 ,
Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research
and Development Activities.
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
   
    
    anticipated levels of future sales of our products;
    
    our expectations regarding European Visudyne label changes, reimbursement and sales;
    
    anticipated future operating results;
    
    our expectations as to the outcome of the appeal of the judgment in the Massachusetts
Eye and Ear Infirmary, or MEEI, litigation against us and
the effect of an adverse judgment on the MGH license agreement;
    
    our expectations as to the outcome of the German Eligard patent litigation commenced
against QLT USA, Inc.s German licensees by Takeda Chemical industries Ltd. and Takeda
Pharma Gmbh;
    
    our dependency on contract manufacturers and suppliers to manufacture our products at
competitive prices and in accordance with U.S. Food and Drug Administration, or FDA, and
other local and foreign regulatory requirements as well as our product specifications;
    
    our expectations regarding future tax liability as a result of changes in estimates of
prior years tax items and results of tax audits by tax authorities;
    
    our expectations regarding our annualized savings as a result of our R&D portfolio
reprioritization and reduction in costs and staffing levels;
    
    the anticipated timing and progress of clinical trials;
    
    the anticipated timing of regulatory submissions for our products;
    
    the anticipated timing for receipt of, and our ability to maintain, regulatory approvals
for our products; and
    
    the anticipated timing for receipt of, and our ability to maintain, reimbursement
approvals for our products in development.
 29




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##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
        30




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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 SecuritiesMaximum Numberof Shares (orTotal Number of
    
    Approximate DollarTotal
    
    
    
    
    
    Shares Purchased as
    
    Value) that May YetNumber of
    
    Average
    
    Part of Publicly
    
    Be Purchased UnderShares
    
    Price Paid
    
    Announced Plans or
    
    the Plans orPeriod
    
    Purchased
    
    per Share
    
    Programs
    
    ProgramsJuly 1, 2007
through July 31,
2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    August 1, 2007
through August 31,
2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    September 1, 2007
through September
30, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 ITEM 6. EXHIBITS
  31




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##### 



SIGNATURES
  QLT Inc.
(Registrant)Date: November 8, 2007
    By:
    /s/ Robert L. ButchofskyRobert L. ButchofskyPresident and  Chief Executive Officer
(Principal Executive Officer)Date: November 8, 2007
    By:
    /s/ Cameron R. NelsonCameron R. NelsonVice President, Finance and Chief
Financial Officer (Principal Financial and Accounting Officer) 32




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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.
 33