##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended March 31, 2007ORo
    
    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
March 31, 2007
 TABLE OF CONTENTS
 ITEM
    
    
    
    PAGEPART I  FINANCIAL INFORMATION1.
    
    FINANCIAL STATEMENTS
    
    
    1Unaudited Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006
    
    
    1Unaudited Condensed Consolidated Statements of Income for the three months ended March 31, 2007 and March 31, 2006
    
    
    2Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and March 31, 2006
    
    
    3Unaudited Condensed Consolidated Statement of Changes in Shareholders Equity and Comprehensive Income for the three months ended March 31, 2007
    
    
    4Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    52.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    193.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    274.
    
    CONTROLS AND PROCEDURES
    
    
    27PART II  OTHER INFORMATION1.
    
    LEGAL PROCEEDINGS
    
    
    281A.
    
    RISK FACTORS
    
    
    286.
    
    EXHIBITS
    
    
    28




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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)
    
    March 31, 2007
    
    December 31, 2006ASSETSCurrent assetsCash and cash equivalents
    
    $
    267,586
    
    
    $
    299,053Short-term investment securities
    
    
    
    
    
    
    75,163Restricted cash
    
    
    2,227
    
    
    
    3,916Accounts receivable
    
    
    30,775
    
    
    
    38,872Income taxes receivable
    
    
    3,056
    
    
    
    4,049Inventories (Note 3)
    
    
    36,966
    
    
    
    34,268Current portion of deferred income tax assets
    
    
    8,660
    
    
    
    8,657Other (Note 4)
    
    
    16,709
    
    
    
    14,031365,979
    
    
    
    478,009Property, plant and equipment
    
    
    50,318
    
    
    
    50,497Deferred income tax assets
    
    
    10,878
    
    
    
    9,838Goodwill
    
    
    97,225
    
    
    
    98,641Other long-term assets
    
    
    1,865
    
    
    
    2,121$
    526,265
    
    
    $
    639,106LIABILITIESCurrent liabilitiesAccounts payable
    
    $
    14,898
    
    
    $
    15,255Income taxes payable
    
    
    40
    
    
    
    29Accrued restructuring charge (Note 7)
    
    
    1,325
    
    
    
    2,383Accrued liabilities (Note 5)
    
    
    6,815
    
    
    
    125,805Deferred revenue
    
    
    9,514
    
    
    
    11,50832,592
    
    
    
    154,980Deferred income tax liabilities
    
    
    5,835
    
    
    
    5,483Uncertain tax position liabilities (Note 2)
    
    
    1,842
    
    
    
    Deferred revenue
    
    
    2,685
    
    
    
    2,929Long-term debt
    
    
    172,500
    
    
    
    172,500215,454
    
    
    
    335,892CONTINGENCIES (Note 12)SHAREHOLDERS 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
    
    
    710,046
    
    
    
    708,206March 31, 200775,314,397 sharesDecember 31, 2006 75,188,980 sharesAdditional paid in-capital
    
    
    114,782
    
    
    
    114,724Accumulated deficit
    
    
    (599,587
    )
    
    
    (603,251
    )Accumulated other comprehensive income
    
    
    85,570
    
    
    
    83,535310,811
    
    
    
    303,214$
    526,265
    
    
    $
    639,106
 1




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##### 



QLT Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME  (Unaudited)
 Three months endedMarch 31,(In thousands of U.S. dollars except share and per share information)
    
    2007
    
    2006RevenuesNet product revenue (Note 9)
    
    $
    25,116
    
    
    $
    46,805Net royalties
    
    
    7,054
    
    
    
    2,962Contract research and development
    
    
    248
    
    
    
    401Licensing and milestones
    
    
    285
    
    
    
    24432,703
    
    
    
    50,412Costs and expensesCost of sales
    
    
    8,719
    
    
    
    10,181Research and development
    
    
    11,083
    
    
    
    14,373Selling, general and administrative
    
    
    6,842
    
    
    
    7,818Depreciation
    
    
    1,584
    
    
    
    1,512Restructuring (Note 7)
    
    
    576
    
    
    
    5228,804
    
    
    
    33,936Operating income
    
    
    3,899
    
    
    
    16,476Investment and other income (expense)Net foreign exchange gains (losses)
    
    
    25
    
    
    
    (1,362
    )Interest income
    
    
    3,904
    
    
    
    4,617Interest expense
    
    
    (1,582
    )
    
    
    (1,594
    )Other gains
    
    
    1,152
    
    
    
    3,499
    
    
    
    1,661Income from continuing operations before income taxes
    
    
    7,398
    
    
    
    18,137Provision for income taxes
    
    
    (2,535
    )
    
    
    (5,483
    )Income from continuing operations
    
    
    4,863
    
    
    
    12,654Loss from discontinued operations, net of income taxes (Note 10)
    
    
    
    
    
    
    (521
    )Net income
    
    $
    4,863
    
    
    $
    12,133Basic net income per common shareContinuing operations
    
    $
    0.06
    
    
    $
    0.14Discontinued operations
    
    
    
    
    
    
    (0.01
    )Net income
    
    $
    0.06
    
    
    $
    0.13Diluted net income per common shareContinuing operations
    
    $
    0.06
    
    
    $
    0.14Discontinued operations
    
    
    
    
    
    
    (0.01
    )Net income
    
    $
    0.06
    
    
    $
    0.13Weighted average number of common shares outstanding (thousands)Basic
    
    
    75,283
    
    
    
    90,620Diluted
    
    
    75,375
    
    
    
    90,659
 2




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##### 



QLT Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited)
 Three months endedMarch 31,(In thousands of U.S. dollars)
    
    2007
    
    2006Cash flows (used in) provided by operating activitiesNet income
    
    $
    4,863
    
    
    $
    12,133Adjustments to reconcile net income to net cashfrom operating activitiesAmortization of intangibles
    
    
    
    
    
    
    78Depreciation
    
    
    1,584
    
    
    
    1,917Share based compensation
    
    
    889
    
    
    
    1,152Amortization of deferred financing expenses
    
    
    294
    
    
    
    299Unrealized foreign exchange (gain) loss
    
    
    1,097
    
    
    
    (4,463
    )Tax loss utilization
    
    
    1,360
    
    
    
    Deferred income taxes
    
    
    93
    
    
    
    (2,170
    )Trading securities
    
    
    58,357
    
    
    
    Changes in non-cash operating assets and liabilitiesAccounts receivable
    
    
    8,151
    
    
    
    (3,667
    )Inventories
    
    
    (2,337
    )
    
    
    3,312Other current assets
    
    
    (2,501
    )
    
    
    358Accounts payable
    
    
    (379
    )
    
    
    (1,008
    )Income taxes payable
    
    
    1,012
    
    
    
    (14,566
    )Accrued restructuring charge
    
    
    (1,061
    )
    
    
    (2,236
    )Other accrued liabilities
    
    
    (119,034
    )
    
    
    (8,530
    )Deferred revenue
    
    
    (2,313
    )
    
    
    (1,976
    )(49,925
    )
    
    
    (19,367
    )Cash provided by (used in) investing activitiesShort-term investment securities
    
    
    16,435
    
    
    
    (49,560
    )Restricted cash
    
    
    1,689
    
    
    
    Purchase of property, plant and equipment
    
    
    (871
    )
    
    
    (1,556
    )Purchase costs related to Atrix Laboratories, Inc.
    
    
    
    
    
    
    (2
    )17,253
    
    
    
    (51,118
    )Cash provided by (used in) financing activitiesCommon shares repurchased
    
    
    
    
    
    
    (12,963
    )Issuance of common shares
    
    
    919
    
    
    
    173919
    
    
    
    (12,790
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    286
    
    
    
    (1,275
    )Net decrease in cash and cash equivalents
    
    
    (31,467
    )
    
    
    (84,550
    )Cash and cash equivalents, beginning of period
    
    
    299,053
    
    
    
    345,799Cash and cash equivalents, end of period
    
    $
    267,586
    
    
    $
    261,249Supplementary cash flow information:Interest paid
    
    $
    2,753
    
    
    $
    2,792Income taxes paid
    
    
    
    
    
    
    22,154
 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (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
    )
    
    
    
    
    
    $
    310,811
 4




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##### 



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




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##### 



Segmented Information
 Long-lived Assets
 Accounting
for the Impairment or Disposal of Long-lived Assets.
 Goodwill Impairment  Goodwill and Other
Intangibles
 Contingencies
  Discontinued Operations
 Revenue Recognition
 Net Product Revenues
   6




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##### 



Net Royalties
  Contract Research and Development
  Licensing and Milestones
  Research and Development
 7




---



##### 



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
 Net Income Per Common Share
  8




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##### 



Three months ended(In thousands of U.S. dollars, except share and per share data)
    
    March 31, 2007
    
    March 31, 2006Numerator:Income from continuing operations
    
    $
    4,863
    
    
    $
    12,654Loss from discontinued operations, net of income taxes
    
    
    
    
    
    
    (521
    )Net income
    
    $
    4,863
    
    
    $
    12,133Effect of dilutive securities:Convertible senior notes  interest expense
    
    
    
    
    
    
    Adjusted income
    
    $
    4,863
    
    
    $
    12,133Denominator:(thousands)Weighted average common shares outstanding
    
    
    75,283
    
    
    
    90,620Effect of dilutive securities:Stock options
    
    
    92
    
    
    
    39Convertible senior notes
    
    
    
    
    
    
    Diluted potential common shares
    
    
    92
    
    
    
    39Diluted weighted average common shares outstanding
    
    
    75,375
    
    
    
    90,659Basic net income per common shareContinuing operations
    
    $
    0.06
    
    
    $
    0.14Discontinued operations
    
    
    
    
    
    
    (0.01
    )Net income
    
    $
    0.06
    
    
    $
    0.13Diluted net income per common shareContinuing operations
    
    $
    0.06
    
    
    $
    0.14Discontinued operations
    
    
    
    
    
    
    (0.01
    )Net income
    
    $
    0.06
    
    
    $
    0.13
  Recently Issued Accounting Standards
   9




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##### 



2. INCOME TAXES
 Accounting for Uncertainty in Income Taxes
    3. INVENTORIES
 (In thousands of U.S. dollars)
    
    March 31, 2007
    
    December 31, 2006Raw materials and supplies
    
    $
    9,840
    
    
    $
    10,723Work-in-process
    
    
    27,796
    
    
    
    27,981Finished goods
    
    
    5,043
    
    
    
    676Provision for non-completion of product inventory
    
    
    (5,713
    )
    
    
    (5,112
    )$
    36,966
    
    
    $
    34,268
 10




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##### 



4. OTHER CURRENT ASSETS
 (In thousands of U.S. dollars)
    
    March 31, 2007
    
    December 31, 2006Visudyne inventory in transit held by Novartis Ophthalmics
    
    $
    12,391
    
    
    $
    10,677Prepaid expenses and other
    
    
    4,318
    
    
    
    3,354$
    16,709
    
    
    $
    14,031
  5. ACCRUED LIABILITIES
 (In thousands of U.S. dollars)
    
    March 31, 2007
    
    December 31, 2006Royalties
    
    $
    1,303
    
    
    $
    1,723Compensation
    
    
    2,717
    
    
    
    4,683Separation costs
    
    
    774
    
    
    
    1,107Foreign exchange contracts
    
    
    
    
    
    
    2,011Interest
    
    
    652
    
    
    
    1,936Litigation settlement
    
    
    
    
    
    
    112,500Other
    
    
    1,369
    
    
    
    1,845$
    6,815
    
    
    $
    125,805
 6. FOREIGN EXCHANGE FACILITIES
   7. RESTRUCTURING CHARGE
   11




---



##### 



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
    
    
    $
    1,213
 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
    
    
    $
    112
 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
    
    
    $
    1,325
 12




---



##### 



8. SHARE CAPITAL
   AggregateExercise Price
    
    intrinsic value(In Canadian dollars)
    
    Number of Options
    
    Per Share Range
    
    (in millions)Outstanding at December 31, 2006
    
    
    4,066,022
    
    
    $
    7.79 - 32.85
    
    
    $
    3.0Granted
    
    
    
    
    
    
    Exercised
    
    
    28,808
    
    
    
    7.79 - 9.84Cancelled
    
    
    165,586
    
    
    
    7.79 - 32.85Outstanding at March 31, 2007
    
    
    3,871,628
    
    
    $
    7.79 - 32.85
    
    
    $
    1.3
   AggregateExercise Price
    
    intrinsic value(In U.S. dollars)
    
    Number of Options
    
    Per Share Range
    
    (in millions)Outstanding at December 31, 2006
    
    
    3,000,156
    
    
    $
    2.89 - 17.82
    
    
    $
    0.6Granted
    
    
    
    
    
    
    Exercised
    
    
    96,609
    
    
    
    2.89 - 9.29Cancelled
    
    
    1,018,470
    
    
    
    6.54 - 17.82Outstanding at March 31, 2007
    
    
    1,885,077
    
    
    $
    4.73 - 17.26
    
    
    $
    0.2
   Three months endedMarch 31,
    
    March 31,2007
    
    2006Annualized volatility
    
    
    
    
    
    
    45.9
    %Risk-free interest rate
    
    
    
    
    
    
    4.1
    %Expected life (years)
    
    
    
    
    
    
    2.7
  13




---



##### 



(In thousands of U.S. dollars, except share information)
    
    Three months ended,March 31,
    
    March 31,2007
    
    2006Cost of sales
    
    $
    
    
    
    $
    75Research and development
    
    
    600
    
    
    
    708Selling, general and administrative
    
    
    289
    
    
    
    369Discontinued operations
    
    
    
    
    
    
    Share based compensation expense before income taxes
    
    
    889
    
    
    
    1,152Related income tax benefits
    
    
    
    
    
    
    Share based compensation, net of income taxes
    
    $
    889
    
    
    $
    1,152
  9. NET PRODUCT REVENUE
  For the three months endedMarch 31,(In thousands of U.S. dollars)
    
    2007
    
    2006Visudyne® sales by Novartis Ophthalmics
    
    $
    61,235
    
    
    $
    106,782Less:       Marketing and distribution costs
    
    
    (26,833
    )
    
    
    (31,447
    )Less:       Inventory costs
    
    
    (3,086
    )
    
    
    (5,480
    )Less:       Royalties to third parties
    
    
    (1,283
    )
    
    
    (2,330
    )$
    30,033
    
    
    $
    67,525QLTs 50% share of Novartis Ophthalmics net proceeds from Visudyne sales
    
    $
    15,017
    
    
    $
    33,762Add:       Advance on inventory costs from Novartis Opthalmics
    
    
    2,082
    
    
    
    4,704Add:       Royalties reimbursed to QLT
    
    
    1,285
    
    
    
    2,346Add:       Other costs reimbursed to QLT
    
    
    2,176
    
    
    
    734Revenue from Visudyne® sales
    
    $
    20,560
    
    
    $
    41,546Net product revenue from Eligard®
    
    
    4,556
    
    
    
    5,259$
    25,116
    
    
    $
    46,805
  14




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##### 



10. DISCONTINUED OPERATIONS
   For the three months endedMarch 31,(In thousands of U.S. dollars)
    
    2007
    
    2006Net revenue
    
    $
    
    
    
    $
    3,533Pretax losses
    
    $
    
    
    
    $
    (585
    )Income taxes
    
    
    
    
    
    
    64Net loss from discontinued operations
    
    $
    
    
    
    $
    (521
    )
 11. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
 .
 Maturity Period
    
    Quantity (millions)
    
    Average PriceSwiss franc / Canadian dollar option-dated
forward contracts to sell CHF
    
    2007
    
    CHF 14.7
    
    0.95513 per CHF
  12. CONTINGENCIES
 Litigation and Legal Matters
   15




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##### 



(a) Eligard Patent Litigation
 ®
   Germany Patent Litigation
      (b) Patent Litigation with MEEI
 The First MEEI Lawsuit
  16




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##### 



®
    The Second MEEI Lawsuit
 ®
      17




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##### 



(c) Effect of the German Eligard Patent Litigation and MEEI Litigation
  18




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##### 



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  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 patent related litigation commenced by
Massachusetts Eye and Ear Infirmary against QLT;
    
    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 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;
    
    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.
  OVERVIEW
 ® ® ®
  19




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##### 



® Eligard 7.5-mg
    RECENT DEVELOPMENTS
  20




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##### 



®
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Recently Issued and Recently Adopted Accounting Standards
    21




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##### 



RESULTS OF OPERATIONS
  Revenues
 Net Product Revenue
  For the three months endedMarch 31,(In thousands of U.S. dollars)
    
    2007
    
    2006(Unaudited)Visudyne® sales by Novartis Ophthalmics
    
    $
    61,235
    
    
    $
    106,782Less:       Marketing and distribution costs(1)
    
    
    (26,833
    )
    
    
    (31,447
    )Less:       Inventory costs(2)
    
    
    (3,086
    )
    
    
    (5,480
    )Less:       Royalties to third parties(3)
    
    
    (1,283
    )
    
    
    (2,330
    )$
    30,033
    
    
    $
    67,525QLTs 50% share of Novartis Ophthalmics net proceeds from Visudyne® sales
    
    $
    15,017
    
    
    $
    33,762Add:      Advance on inventory costs from Novartis
Ophthalmics(4)
    
    
    2,082
    
    
    
    4,704Add:      Royalties reimbursed to QLT(5)
    
    
    1,285
    
    
    
    2,346Add:      Other costs reimbursed to QLT(6)
    
    
    2,176
    
    
    
    734Revenue from Visudyne® sales
    
    $
    20,560
    
    
    $
    41,546Net product revenue from Eligard®
    
    
    4,556
    
    
    
    5,259$
    25,116
    
    
    $
    46,805
 (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.
 22




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##### 



(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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
  Research and Development
  23




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##### 




    
    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
 
    
    other factors that we described in the Risk Factors section
  Three months endedMarch 31,(In thousands of U.S. dollars)
    
    2007
    
    2006Ocular
    
    $
    5,689
    
    
    $
    3,932Dermatology
    
    
    2,527
    
    
    
    4,388Urology and Oncology
    
    
    749
    
    
    
    1,981Other (including Atrigel programs not in the above therapeutic areas)
    
    
    2,118
    
    
    
    4,072$
    11,083
    
    
    $
    14,373
 Selling, General and Administrative Expenses
  Restructuring Charge
  Investment and Other Income
 Net Foreign Exchange Gains (Losses)
  24




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##### 



For the three months endedMarch 31,2007
    
    2006(In thousands of U.S. dollars)Cash and cash equivalents and short-term investments
    
    $
    (1,552
    )
    
    $
    870U.S. dollar long-term debt
    
    
    1,752
    
    
    
    (1,076
    )Foreign exchange contracts
    
    
    414
    
    
    
    (1,248
    )Foreign currency receivables and payables
    
    
    (589
    )
    
    
    92Net foreign exchange gains (losses)
    
    $
    25
    
    
    $
    (1,362
    )
 Interest Income
  Interest Expense
  Other Gains
  Discontinued Operations
  LIQUIDITY AND CAPITAL RESOURCES
     25




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##### 



Interest and Foreign Exchange Rates
     Maturity Period
    
    Quantity (millions)
    
    Average PriceSwiss franc / Canadian dollar option-dated
forward contracts to sell CHF
    
    2007
    
    CHF 14.7
    
    0.95513 per CHF
 Contractual Obligations
  Off-Balance Sheet Arrangements
   General
  26




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##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  ITEM 4. CONTROLS AND PROCEDURES
        27




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##### 



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  ITEM 1A. RISK FACTORS
  ITEM 6. EXHIBITS
  28




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##### 



SIGNATURES
  QLT Inc.
(Registrant)Date:
    May 9, 2007
    
    By:
    /s/ Robert L. ButchofskyRobert L. ButchofskyPresident and  Chief Executive Officer
(Principal Executive Officer) Date:
    May 9, 2007
    
   By:
    /s/ Cameron R. NelsonCameron R. NelsonVice President, Finance and Chief Financial
Officer
(Principal Financial and Accounting Officer) 29




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##### 



EXHIBIT INDEX
 ExhibitNumber
    
    Description10.1
    
    Collaboration, License and Supply Agreement dated as of December 8,
2000 between Atrix Laboratories, Inc. and Sanofi-Synthelabo Inc., as
amended through February 15, 2007 (incorporated by reference to
Exhibit 10.19 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2006 (Commission File No. 0-17082)).(1)10.2
    
    Settlement, Release and Patent
License Agreement dated February 9, 2007, by and
among Takeda Pharmaceutical Company Limited, Wako Pure Chemical
Industries, Ltd., TAP Pharmaceutical Products Inc., Abbot
Laboratories, LimitedLaboratories Abbot, Limitee, QLT USA, Inc. and
Sanofi-Synthelabo, Inc. (incorporated by reference to Exhibit 10.35
to the Companys Annual Report on Form 10-K for the year ended
December 31, 2006 (Commission File No. 0-17082)).10.3
    
    Amended and Restated Contribution Agreement dated February 9, 2007,
between Sanofi-Synthelabo, Inc. and QLT USA, Inc. (incorporated by
reference to Exhibit 10.37 to the Companys Annual Report on Form
10-K for the year ended December 31, 2006 (Commission File No.
0-17082)). (1)10.4
    
    Settlement Agreement dated
March 2, 2007, by and between the Company
and Massachusetts Eye and Ear Infirmary.(1)10.5
    
    QLT Inc. 2007 Cash Incentive Bonus Plan (incorporated by reference to
Item 1.01 of the Companys Current Report on Form 8-K dated February
27, 2007 and filed with the Commission on March 5, 2007 (Commission
File No. 0-17082)).31.1
    
    Rule 13a-14 (a) Certification of the Chief Executive Officer.31.2
    
    Rule 13a-14(a) Certification of the Chief Financial Officer.32.1
    
    Section 1350 Certification of the Chief Executive Officer.32.2
    
    Section 1350 Certification of the Chief Financial Officer.
 
 (1)
    
    Certain portions of this exhibit have been omitted and filed separately
with the Commission pursuant to a request for confidential treatment
under Rule 24b-2
promulgated under the Securities Exchange Act of 1934. 30