##### 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 June 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.
  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(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 Yes o No þ




---



##### 



QLT INC.
 QUARTERLY REPORT ON FORM 10-Q
June 30, 2010
 TABLE OF CONTENTS
 ITEM
    
    
    
    PAGEPART I  FINANCIAL INFORMATION1.
    
    FINANCIAL STATEMENTS
    
    
    1Unaudited Condensed Consolidated Balance Sheets as of
June 30, 2010 and December 31, 2009
    
    
    1Unaudited Condensed Consolidated Statements of Operations for the three and six
months ended June 30, 2010 and June 30, 2009
    
    
    2Unaudited Condensed Consolidated Statements of Cash Flows for the three and six
months ended June 30, 2010 and June 30, 2009
    
    
    3Unaudited Condensed Consolidated Statement of Changes in Shareholders Equity
for the three and six months ended June 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
    
    
    264.
    
    CONTROLS AND PROCEDURES
    
    
    26PART II  OTHER INFORMATION1.
    
    LEGAL PROCEEDINGS
    
    
    271A.
    
    RISK FACTORS
    
    
    272.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    276.
    
    EXHIBITS
    
    
    29Exhibit 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)
    
    June 30, 2010
    
    
    December 31, 2009ASSETSCurrent assetsCash and cash equivalents
    
    $
    186,293
    
    
    $
    188,114Accounts receivable
    
    
    13,068
    
    
    
    9,465Note receivable (Note 13)
    
    
    9,750
    
    
    
    9,259Current portion of contingent consideration (Note 11)
    
    
    33,705
    
    
    
    33,587Income taxes receivable
    
    
    4,954
    
    
    
    4,879Inventories (Note 2)
    
    
    2,829
    
    
    
    2,874Current portion of deferred income tax assets
    
    
    4,020
    
    
    
    5,608Mortgage receivable (Note 3)
    
    
    11,281
    
    
    
    11,466Other (Note 4)
    
    
    2,059
    
    
    
    6,052267,959
    
    
    
    271,304Property, plant and equipment
    
    
    2,781
    
    
    
    2,597Deferred income tax assets
    
    
    20,135
    
    
    
    13,320Long-term inventories and other assets (Note 2 and 5)
    
    
    14,386
    
    
    
    14,925Contingent consideration (Note 11)
    
    
    104,050
    
    
    
    117,491$
    409,311
    
    
    $
    419,637LIABILITIESCurrent liabilitiesAccounts payable
    
    $
    3,126
    
    
    $
    3,876Accrued liabilities (Note 6)
    
    
    4,850
    
    
    
    5,574Deferred revenue
    
    
    
    
    
    
    4,2447,976
    
    
    
    13,694Uncertain tax position liabilities
    
    
    1,498
    
    
    
    1,4899,474
    
    
    
    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
    
    
    493,125
    
    
    
    506,023June 30, 2010  52,461,406 sharesDecember 31, 2009  53,789,289 sharesAdditional paid-in capital
    
    
    281,485
    
    
    
    275,592Accumulated deficit
    
    
    (477,742
    )
    
    
    (480,130
    )Accumulated other comprehensive income
    
    
    102,969
    
    
    
    102,969399,837
    
    
    
    404,454$
    409,311
    
    
    $
    419,637
   1




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##### Table of Contents



QLT Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(In thousands of U.S. dollars except share and per share information)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009RevenuesNet product revenue (Note 9)
    
    $
    8,780
    
    
    $
    10,728
    
    
    $
    19,250
    
    
    $
    22,511Royalties
    
    
    3,596
    
    
    
    
    
    
    
    6,842
    
    
    
    12,376
    
    
    
    10,728
    
    
    
    26,092
    
    
    
    22,511Costs and expensesCost of sales
    
    
    3,392
    
    
    
    7,140
    
    
    
    9,944
    
    
    
    10,491Research and development
    
    
    7,329
    
    
    
    7,225
    
    
    
    14,676
    
    
    
    13,111Selling, general and administrative
    
    
    5,034
    
    
    
    4,284
    
    
    
    9,884
    
    
    
    7,985Depreciation
    
    
    303
    
    
    
    349
    
    
    
    614
    
    
    
    690Litigation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    334Restructuring charges (recovery)
    
    
    
    
    
    
    (33
    )
    
    
    
    
    
    
    (147
    )16,058
    
    
    
    18,965
    
    
    
    35,118
    
    
    
    32,464Operating loss
    
    
    (3,682
    )
    
    
    (8,237
    )
    
    
    (9,026
    )
    
    
    (9,953
    )Investment and other income (expense)Net foreign exchange (loss) gains
    
    
    (972
    )
    
    
    6,726
    
    
    
    (331
    )
    
    
    6,775Interest income
    
    
    515
    
    
    
    588
    
    
    
    997
    
    
    
    1,965Interest expense
    
    
    
    
    
    
    (345
    )
    
    
    
    
    
    
    (1,848
    )Fair value change in contingent consideration (Note 13)
    
    
    2,519
    
    
    
    
    
    
    
    4,961
    
    
    
    Other gains (losses)
    
    
    366
    
    
    
    (40
    )
    
    
    366
    
    
    
    252,428
    
    
    
    6,929
    
    
    
    5,993
    
    
    
    6,917Loss from continuing operations before income taxes
    
    
    (1,254
    )
    
    
    (1,308
    )
    
    
    (3,033
    )
    
    
    (3,036
    )Recovery of income taxes (Note 12)
    
    
    239
    
    
    
    2,203
    
    
    
    5,421
    
    
    
    671(Loss) income from continuing operations
    
    
    (1,015
    )
    
    
    895
    
    
    
    2,388
    
    
    
    (2,365
    )Income from discontinued operations, net of income taxes (Note 10)
    
    
    
    
    
    
    7,734
    
    
    
    
    
    
    
    12,296Net (loss) income
    
    $
    (1,015
    )
    
    $
    8,629
    
    
    $
    2,388
    
    
    $
    9,931Basic net (loss) income per common share (Note 1)Continuing operations
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    (0.04
    )Discontinued operations
    
    
    
    
    
    
    0.14
    
    
    
    
    
    
    
    0.21Net (loss) income
    
    $
    (0.02
    )
    
    $
    0.16
    
    
    $
    0.04
    
    
    $
    0.17Diluted net (loss) income per common share (Note 1)Continuing operations
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    (0.04
    )Discontinued operations
    
    
    
    
    
    
    0.14
    
    
    
    
    
    
    
    0.21Net (loss) income
    
    $
    (0.02
    )
    
    $
    0.16
    
    
    $
    0.04
    
    
    $
    0.17Weighted average number of common shares outstanding (thousands)Basic
    
    
    53,009
    
    
    
    54,620
    
    
    
    53,363
    
    
    
    57,954Diluted
    
    
    53,009
    
    
    
    54,620
    
    
    
    54,259
    
    
    
    57,954
  2




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##### Table of Contents



QLT Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(In thousands of U.S. dollars)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Cash used in operating activitiesNet (loss) income
    
    $
    (1,015
    )
    
    $
    8,629
    
    
    $
    2,388
    
    
    $
    9,931Adjustments to reconcile net income to net cash from
operating activitiesDepreciation
    
    
    303
    
    
    
    354
    
    
    
    614
    
    
    
    697Write-down of inventory
    
    
    
    
    
    
    4,638
    
    
    
    
    
    
    
    4,638Write-down of investment
    
    
    
    
    
    
    128
    
    
    
    
    
    
    
    128Gain on sale of long-lived assets
    
    
    (317
    )
    
    
    
    
    
    
    (317
    )
    
    
    Share-based compensation
    
    
    574
    
    
    
    553
    
    
    
    1,254
    
    
    
    1,035Unrealized foreign exchange loss (gain)
    
    
    1,019
    
    
    
    (7,192
    )
    
    
    313
    
    
    
    (5,150
    )Interest earned on restricted cash
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    (295
    )Interest earned on note receivable
    
    
    (247
    )
    
    
    
    
    
    
    (491
    )
    
    
    Deferred income taxes
    
    
    2,807
    
    
    
    29
    
    
    
    (5,279
    )
    
    
    2,701Changes in non-cash operating assets and liabilitiesAppeal bond collateral
    
    
    
    
    
    
    124,622
    
    
    
    
    
    
    
    124,622Accounts receivable
    
    
    (4,027
    )
    
    
    (1,117
    )
    
    
    (3,682
    )
    
    
    5,159Inventories
    
    
    1,067
    
    
    
    (5,685
    )
    
    
    484
    
    
    
    (4,557
    )Long term deposits and other assets
    
    
    (305
    )
    
    
    2,459
    
    
    
    3,977
    
    
    
    4,794Accounts payable
    
    
    (95
    )
    
    
    (732
    )
    
    
    (310
    )
    
    
    (1,271
    )Income taxes receivable
    
    
    (2,823
    )
    
    
    2,085
    
    
    
    (76
    )
    
    
    4,701Accrued restructuring charge
    
    
    
    
    
    
    (51
    )
    
    
    
    
    
    
    (591
    )Other accrued liabilities
    
    
    1,363
    
    
    
    (125,739
    )
    
    
    (672
    )
    
    
    (125,342
    )Deferred revenue
    
    
    
    
    
    
    119
    
    
    
    (4,244
    )
    
    
    (547
    )(1,696
    )
    
    
    3,072
    
    
    
    (6,041
    )
    
    
    20,653Cash provided by investing activitiesNet proceeds from sale of long-lived assets
    
    
    317
    
    
    
    39
    
    
    
    317
    
    
    
    102Purchase of property, plant and equipment
    
    
    (650
    )
    
    
    (70
    )
    
    
    (1,199
    )
    
    
    (126
    )Proceeds from contingent consideration(1)
    
    
    5,479
    
    
    
    
    
    
    
    13,323
    
    
    
    5,146
    
    
    
    (31
    )
    
    
    12,441
    
    
    
    (24
    )Cash provided by financing activitiesCommon shares repurchased, including fees
    
    
    (7,237
    )
    
    
    
    
    
    
    (8,414
    )
    
    
    (51,889
    )Issuance of common shares
    
    
    231
    
    
    
    
    
    
    
    274
    
    
    
    (7,006
    )
    
    
    
    
    
    
    (8,140
    )
    
    
    (51,889
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (236
    )
    
    
    1,737
    
    
    
    (81
    )
    
    
    792Net (decrease) increase in cash and cash equivalents
    
    
    (3,792
    )
    
    
    4,778
    
    
    
    (1,821
    )
    
    
    (30,468
    )Cash and cash equivalents, beginning of period
    
    
    190,085
    
    
    
    130,149
    
    
    
    188,114
    
    
    
    165,395Cash and cash equivalents, end of period
    
    $
    186,293
    
    
    $
    134,927
    
    
    $
    186,293
    
    
    $
    134,927Supplementary cash flow information:Interest paid
    
    $
    
    
    
    $
    1,832
    (2)
    
    $
    
    
    
    $
    1,832
    (2)Income taxes paid
    
    
    
    
    
    
    577
    
    
    
    10
    
    
    
    2,336
 (1)
    
    During the three and six months ended June 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. totaled $8.0 million and $18.3 million, respectively. For
the three months ended June 30, 2010, approximately $2.5 million of the proceeds related
to the fair value change in contingent consideration and were included in cash provided by
operating activities and the remaining proceeds of $5.5 million were included in cash
provided by investing activities. For the six months ended June 30, 2010, approximately
$5.0 million of the proceeds related to the fair value change in contingent consideration
and were included in cash provided by
operating activities and the remaining proceeds of $13.3 million were included in cash provided
by investing activities.(2)
    
    At June 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)
 (All amounts except share
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulatedand per share information
    
    
    
    
    
    
    
    
    
    Additional
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    Totalare expressed in
    
    Common Shares
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Shareholdersthousands of U.S. dollars)
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Income
    
    
    Deficit
    
    
    Income (Loss)
    
    
    EquityBalance at December 31, 2008
    
    
    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
    )Other comprehensive income: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
    )Other comprehensive income: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
    )Other comprehensive income: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
    (1)
    
    $
    (477,742
    )
    
    $
    
    
    
    $
    399,837
 (1)
    
    At June 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




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##### 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




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##### Table of Contents



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




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##### Table of Contents



Discontinued Operations
   Income Taxes
  Contingent Consideration
  Net Income (Loss) Per Common Share
   Three months ended
    
    
    Six months ended(In thousands of U.S. dollars, except
    
    June 30,
    
    
    June 30,share and per share data)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Numerator:(Loss) income from continuing operations
    
    $
    (1,015
    )
    
    $
    895
    
    
    $
    2,388
    
    
    $
    (2,365
    )Income from discontinued operations, net
of income taxes
    
    
    
    
    
    
    7,734
    
    
    
    
    
    
    
    12,296Net (loss) income
    
    $
    (1,015
    )
    
    $
    8,629
    
    
    $
    2,388
    
    
    $
    9,931Denominator: (thousands)Weighted average common shares outstanding
    
    
    53,009
    
    
    
    54,620
    
    
    
    53,363
    
    
    
    57,954Effect of dilutive securities:Stock options
    
    
    
    
    
    
    
    
    
    
    896
    
    
    
    Diluted weighted average common shares
outstanding (thousands)
    
    
    53,009
    
    
    
    54,620
    
    
    
    54,259
    
    
    
    57,954Basic net (loss) income per common shareContinuing operations
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    (0.04
    )Discontinued operations
    
    
    
    
    
    
    0.14
    
    
    
    
    
    
    
    0.21Net (loss) income
    
    $
    (0.02
    )
    
    $
    0.16
    
    
    $
    0.04
    
    
    $
    0.17Diluted net (loss) income per common shareContinuing operations
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    (0.04
    )Discontinued operations
    
    
    
    
    
    
    0.14
    
    
    
    
    
    
    
    0.21Net (loss) income
    
    $
    (0.02
    )
    
    $
    0.16
    
    
    $
    0.04
    
    
    $
    0.17
   7




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Fair Value of Financial Assets and Liabilities
  Recently Issued Accounting Standards
 Revenue Arrangements with Multiple Deliverables
 Milestone Method of
Revenue Recognition
 Recently Adopted Accounting Standards
 Accounting for Transfers of Financial Assets, an
amendment of FASB Statement No. 140
 Amending FASB interpretation No. 46(R)
 Amendments to Certain Recognition and Disclosure
Requirements
  8




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2. INVENTORIES
 (In thousands of U.S. dollars)
    
    June 30, 2010
    
    
    December 31, 2009Raw materials and supplies
    
    $
    250
    
    
    $
    231Work-in-process
    
    
    28,042
    
    
    
    29,782Finished goods
    
    
    817
    
    
    
    Provision for excess inventory
    
    
    (11,259
    )
    
    
    (11,560
    )Provision for non-completion of inventory
    
    
    (2,185
    )
    
    
    (2,185
    )15,665
    
    
    
    16,268Long-term inventory, net of provisions
    
    
    (12,836
    )
    
    
    (13,394
    )$
    2,829
    
    
    $
    2,874
    3. MORTGAGE RECEIVABLE
  4. OTHER CURRENT ASSETS
 (In thousands of U.S. dollars)
    
    June 30, 2010
    
    
    December 31, 2009Inventory in transit previously held by Novartis
    
    $
    
    
    
    $
    5,030Prepaid expenses and other
    
    
    2,059
    
    
    
    1,022$
    2,059
    
    
    $
    6,052
   9




---



##### Table of Contents



5. LONG-TERM INVENTORIES AND OTHER ASSETS
 (In thousands of U.S. dollars)
    
    June 30, 2010
    
    
    December 31, 2009Inventory, net of provisions
    
    $
    12,836
    
    
    $
    13,394Other
    
    
    1,550
    
    
    
    1,531$
    14,386
    
    
    $
    14,925
 6. ACCRUED LIABILITIES
 (In thousands of U.S. dollars)
    
    June 30, 2010
    
    
    December 31, 2009Royalties
    
    $
    1,216
    
    
    $
    1,273Compensation
    
    
    3,138
    
    
    
    3,715Interest
    
    
    
    
    
    
    10Other
    
    
    496
    
    
    
    576$
    4,850
    
    
    $
    5,574
 7. FOREIGN EXCHANGE FACILITY
  8. SHARE CAPITAL
     Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Annualized volatility
    
    
    53.8
    %
    
    
    53.6
    %
    
    
    53.8
    %
    
    
    53.6
    %Risk-free interest rate
    
    
    2.3
    %
    
    
    1.7
    %
    
    
    2.3
    %
    
    
    1.7
    %Expected life (years)
    
    
    3.7
    
    
    
    3.6
    
    
    
    3.7
    
    
    
    3.6
  10




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##### Table of Contents



Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(In thousands of U.S. dollars)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Cost of sales
    
    $
    33
    
    
    $
    9
    
    
    $
    153
    
    
    $
    13Research and development
    
    
    310
    
    
    
    260
    
    
    
    619
    
    
    
    487Selling, general and administrative
    
    
    231
    
    
    
    263
    
    
    
    482
    
    
    
    552Discontinued operations
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    (17
    )Stock-based compensation expense before income taxes
    
    
    574
    
    
    
    553
    
    
    
    1,254
    
    
    
    1,035Related income tax benefits
    
    
    (11
    )
    
    
    (9
    )
    
    
    (19
    )
    
    
    (22
    )Stock-based compensation, net of income taxes
    
    $
    563
    
    
    $
    544
    
    
    $
    1,235
    
    
    $
    1,013
  9. NET PRODUCT REVENUE
   Three months
    
    
    Six monthsended June 30,
    
    
    ended June 30,(In thousands of U.S. dollars)
    
    2010
    
    
    2010U.S. Visudyne sales by QLT
    
    $
    6,405
    
    
    $
    11,450Visudyne sales to Novartis
    
    
    2,000
    
    
    
    6,988Add: Royalties reimbursed to QLT
    
    
    364
    
    
    
    691Add: Other costs reimbursed to QLT
    
    
    11
    
    
    
    121Net product revenue from Visudyne sales
    
    $
    8,780
    
    
    $
    19,250
  11




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Three months
    
    
    Six monthsended June 30,
    
    
    ended June 30,(In thousands of U.S. dollars)
    
    2009
    
    
    2009Worldwide Visudyne sales by Novartis
    
    $
    28,985
    
    
    $
    56,739Less: Marketing and distribution costs
    
    
    (8,786
    )
    
    
    (17,473
    )Less: Inventory costs
    
    
    (1,476
    )
    
    
    (3,132
    )Less: Royalties to third parties
    
    
    (626
    )
    
    
    (1,228
    )$
    18,097
    
    
    $
    34,906QLTs 50% share of Novartis net proceeds
from Visudyne sales
    
    $
    9,049
    
    
    $
    17,453Add: Advance on inventory costs from Novartis
    
    
    941
    
    
    
    2,884Add: Royalties reimbursed to QLT
    
    
    625
    
    
    
    1,236Add: Other costs reimbursed to QLT
    
    
    113
    
    
    
    938Net product revenue from Visudyne sales
    
    $
    10,728
    
    
    $
    22,511
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(In thousands of U.S. dollars)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009U.S.
    
    $
    6,405
    
    
    $
    8,574
    
    
    $
    11,450
    
    
    $
    17,307Europe
    
    
    6,938
    
    
    
    8,277
    
    
    
    14,145
    
    
    
    15,191Rest of World
    
    
    11,040
    
    
    
    12,134
    
    
    
    20,064
    
    
    
    24,241Worldwide
    
    $
    24,383
    
    
    $
    28,985
    
    
    $
    45,659
    
    
    $
    56,739
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009U.S.
    
    
    26
    %
    
    
    30
    %
    
    
    25
    %
    
    
    31
    %Europe
    
    
    29
    %
    
    
    29
    %
    
    
    31
    %
    
    
    27
    %Rest of World
    
    
    45
    %
    
    
    41
    %
    
    
    44
    %
    
    
    42
    %Worldwide
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 10. DISCONTINUED OPERATIONS
   12




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Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(In thousands of U.S. dollars)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Product revenue and other
    
    $
    
    
    
    $
    9,598
    
    
    $
    
    
    
    $
    19,000Royalty revenue
    
    
    
    
    
    
    12,678
    
    
    
    
    
    
    
    21,585Net revenue
    
    
    
    
    
    
    22,276
    
    
    
    
    
    
    
    40,585Operating pre-tax income
    
    
    
    
    
    
    12,517
    
    
    
    
    
    
    
    19,683Pre-tax income
    
    
    
    
    
    
    12,517
    
    
    
    
    
    
    
    19,683Provision for income taxes
    
    
    
    
    
    
    (4,783
    )
    
    
    
    
    
    
    (7,387
    )Net income from discontinued operations
    
    $
    
    
    
    $
    7,734
    
    
    $
    
    
    
    $
    12,296
 11. CONTINGENT CONSIDERATION
  12. INCOME TAXES
    13. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
   13




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##### Table of Contents



Carrying Value
    
    
    Fair Value Measurements at June 30, 2010(In thousands of U.S. dollars)
    
    June 30, 2010
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Assets:Cash and cash equivalents
    
    $
    186,293
    
    
    $
    186,293
    
    
    $
    
    
    
    $
    Contingent consideration(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    137,755Total
    
    $
    186,293
    
    
    $
    186,293
    
    
    $
    
    
    
    $
    137,755
 (1)
    
    To estimate the fair value of contingent consideration at June 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 10.5% determined by management after considering all
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 $2.7 million, from $137.8 million to $135.1
million. If estimated future revenues were to decrease by 10%, the contingent
consideration would decrease by $3.3 million, from $137.8 million to $134.5 million.The following table represents a reconciliation of our asset (contingent consideration)
measured and recorded at fair value on a recurring basis, using significant unobservable
inputs (Level 3): (In thousands of U.S. dollars)
    
    Level 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
    
    $
    137,755
  .
   14




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15




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   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.
 
    
    Lucentis® is a registered trademark of Genentech, 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




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##### 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. cis
 QLT091568 for the treatment of glaucoma and ocular hypertension.
 ®
 RESULTS OF OPERATIONS
   17




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##### Table of Contents



Revenues
   Three months
    
    
    Six monthsended June 30,
    
    
    ended June 30,(In thousands of U.S. dollars)
    
    2010
    
    
    2010U.S. Visudyne sales by QLT
    
    $
    6,405
    
    
    $
    11,450Visudyne sales to Novartis
    
    
    2,000
    
    
    
    6,988Add: Royalties reimbursed to QLT(1)
    
    
    364
    
    
    
    691Add: Other costs reimbursed to QLT(2)
    
    
    11
    
    
    
    121Net product revenue from Visudyne sales
    
    $
    8,780
    
    
    $
    19,250
  Three months
    
    
    Six monthsended June 30,
    
    
    ended June 30,(In thousands of U.S. dollars)
    
    2009
    
    
    2009Worldwide Visudyne sales by Novartis
    
    $
    28,985
    
    
    $
    56,739Less: Marketing and distribution costs(3)
    
    
    (8,786
    )
    
    
    (17,473
    )Less: Inventory costs(4)
    
    
    (1,476
    )
    
    
    (3,132
    )Less: Royalties to third parties(5)
    
    
    (626
    )
    
    
    (1,228
    )$
    18,097
    
    
    $
    34,906QLTs 50% share of Novartis net proceeds from Visudyne sales
    
    $
    9,049
    
    
    $
    17,453Add: Advance on inventory costs from Novartis(6)
    
    
    941
    
    
    
    2,884Add: Royalties reimbursed to QLT(1)
    
    
    625
    
    
    
    1,236Add: Other costs reimbursed to QLT(2)
    
    
    113
    
    
    
    938Net product revenue from Visudyne sales
    
    $
    10,728
    
    
    $
    22,511
 (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 (1) above. 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
    
    
    Six months endedJune 30,
    
    
    June 30,(In thousands of U.S. dollars)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009U.S.
    
    $
    6,405
    
    
    $
    8,574
    
    
    $
    11,450
    
    
    $
    17,307Europe
    
    
    6,938
    
    
    
    8,277
    
    
    
    14,145
    
    
    
    15,191Rest of World
    
    
    11,040
    
    
    
    12,134
    
    
    
    20,064
    
    
    
    24,241Worldwide
    
    $
    24,383
    
    
    $
    28,985
    
    
    $
    45,659
    
    
    $
    56,739
  19




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##### Table of Contents



Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009U.S.
    
    
    26
    %
    
    
    30
    %
    
    
    25
    %
    
    
    31
    %Europe
    
    
    29
    %
    
    
    29
    %
    
    
    31
    %
    
    
    27
    %Rest of World
    
    
    45
    %
    
    
    41
    %
    
    
    44
    %
    
    
    42
    %Worldwide
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Royalties
  Costs and Expenses
 Cost of Sales
  Research and Development
   
    
    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,
  20




---



##### Table of Contents




    
    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
    
    
    Six months endedJune 30,
    
    
    June 30,(In thousands of U.S. dollars)
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009Ocular
    
    $
    7,263
    
    
    $
    7,069
    
    
    $
    14,428
    
    
    $
    12,781Other
    
    
    66
    
    
    
    156
    
    
    
    248
    
    
    
    330$
    7,329
    
    
    $
    7,225
    
    
    $
    14,676
    
    
    $
    13,111
 Selling, General and Administrative Expenses
  Investment and Other Income (Expense)
 Net Foreign Exchange Losses
  Interest Income
  Interest Expense
  Other Income
  Income from Discontinued Operations
   21




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##### Table of Contents



Income Taxes
    LIQUIDITY AND CAPITAL RESOURCES
 General
   Sources and Uses of Cash
   
    
    A negative operating cash flow variance from lower cash receipts from product sales and
royalties of $23.9 million due to the divestiture of the Eligard product line as part of
the sale of QLT USA;
 
    
    A positive operating cash flow variance from lower operating and inventory related
expenditures of $13.8 million due to the divestiture of the Eligard product line as part of
the sale of QLT USA;
 
    
    A positive operating cash flow variance from proceeds related to the fair value change
in contingent consideration of $2.5 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; and
 
    
    A positive operating cash flow variance from lower tax instalments of $0.6 million.
   22




---



##### Table of Contents




    
    A negative operating cash flow variance from lower cash receipts from product sales and
royalties of $49.8 million 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 foreign exchange gains of $5.0
million;
 
    
    A negative operating cash flow variance from lower net tax refunds of $0.6 million;
 
    
    A negative operating cash flow variance from lower investment and other income of $0.2
million;
 
    
    A positive operating cash flow variance from lower operating and inventory related
expenditures of $21.2 million due to the divestiture of the Eligard product line as part of
the sale of QLT USA;
 
    
    A positive operating cash flow variance from proceeds related to the fair value change
in contingent consideration of $5.0 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; and
 
    
    A positive operating cash flow variance from lower restructuring costs of $0.5 million.
   Interest and Foreign Exchange Rates
    Contractual Obligations
   23




---



##### Table of Contents



Off-Balance Sheet Arrangements
   Recently Issued and Recently Adopted Accounting Standards
  Outstanding Share Data
   24




---



##### Table of Contents



CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
   
    
    levels of future sales of Visudyne, including the impact of competition;
 
    
    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.
  25




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
    26




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##### Table of Contents



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
    
    
    
    
    
    
    Shares Purchased as
    
    
    of Shares that MayNumber of
    
    
    Average
    
    
    Part of Publicly
    
    
    Yet Be PurchasedShares
    
    
    Price Paid
    
    
    Announced Plans or
    
    
    Under the Plans orPeriod
    
    Purchased
    
    
    per Share
    
    
    Programs
    
    
    ProgramsApril 1, 2010 through April 30, 2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,635,644May 1, 2010 through May 31, 2010
    
    
    638,300
    
    
    $
    6.14
    
    
    
    638,300
    
    
    
    2,965,870
    (1)June 1, 2010 through June 30, 2010
    
    
    543,988
    
    
    $
    6.01
    
    
    
    543,988
    
    
    
    2,421,882
    (1)Total
    
    
    1,182,288
    
    
    $
    6.08
    
    
    
    1,182,288
    
    
    
    2,421,882
    (1)
 (1)
    
    On May 20, 2010, we increased the normal course issuer bid by 1,968,526 common shares. 
 ITEM 6. EXHIBITS
   27




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##### Table of Contents



SIGNATURES
  QLT Inc.
(Registrant)Date:      July 27, 2010
    By:
    /s/ Robert L. ButchofskyRobert L. ButchofskyPresident and Chief Executive Officer
(Principal Executive Officer)Date:      July 27, 2010
    By:
    /s/ Cameron R. NelsonCameron R. NelsonVice President, Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)  28




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##### Table of Contents



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.
  29