##### 



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, 2006
 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, 2006
 TABLE OF CONTENTS
  
 ITEM
    
    PAGEPART I  FINANCIAL INFORMATION1. FINANCIAL STATEMENTS
    
    1Unaudited Consolidated Balance Sheets as of
September 30, 2006 and December 31, 2005
    
    1Unaudited Consolidated Statements of (Loss) Income for the three
and nine months ended September 30, 2006 and September 30, 2005
    
    2Unaudited Consolidated Statements of Cash Flows for the three
and nine months ended September 30, 2006 and September 30, 2005
    
    3Unaudited Consolidated Statement of Changes in Shareholders Equity and Comprehensive
Income for the three and nine months ended September 30, 2006
    
    4Notes to the Consolidated Financial Statements
    
    62. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    263. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    384. CONTROLS AND PROCEDURES
    
    38PART II  OTHER INFORMATION1. LEGAL PROCEEDINGS
    
    391A. RISK FACTORS
    
    392. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS
AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    393. DEFAULTS UPON SENIOR SECURITIES
    
    404. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    405. OTHER INFORMATION
    
    406. EXHIBITS
    
    40Section 302 C.E.O. CertificationSection 302 C.F.O. CertificationSection 906 C.E.O. CertificationSection 302 C.F.O. Certification




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##### 



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 QLT Inc.
 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 (In thousands of U.S. dollars)
    
    September 30, 2006
    
    December 31, 2005ASSETSCurrent assetsCash and cash equivalents
    
    $
    210,275
    
    
    $
    345,799Short-term investment securities
    
    
    144,752
    
    
    
    119,816Restricted cash (Note 12)
    
    
    1,695
    
    
    
    Accounts receivable
    
    
    35,081
    
    
    
    43,986Income taxes receivable
    
    
    7,010
    
    
    
    Inventories (Note 2)
    
    
    35,452
    
    
    
    46,239Current portion of deferred income tax assets
    
    
    568
    
    
    
    2,480Other (Note 3)
    
    
    17,755
    
    
    
    20,728452,588
    
    
    
    579,048Property, plant and equipment
    
    
    52,495
    
    
    
    52,797Assets held for sale (Note 9)
    
    
    21,929
    
    
    
    29,626Deferred income tax assets
    
    
    14,773
    
    
    
    7,593Goodwill
    
    
    103,958
    
    
    
    103,958Other
    
    
    2,573
    
    
    
    3,472$
    648,316
    
    
    $
    776,494LIABILITIESCurrent liabilitiesAccounts payable
    
    $
    12,962
    
    
    $
    14,519Accrued liabilities (Note 4)
    
    
    9,983
    
    
    
    17,901Income taxes payable
    
    
    
    
    
    
    17,253Accrued restructuring charge (Note 6)
    
    
    1,255
    
    
    
    5,205Current portion of deferred revenue
    
    
    11,319
    
    
    
    9,45735,519
    
    
    
    64,335Deferred income tax liabilities
    
    
    9,519
    
    
    
    9,800Deferred revenue
    
    
    3,173
    
    
    
    3,748Long-term debt
    
    
    172,500
    
    
    
    172,500220,711
    
    
    
    250,383CONTINGENCIES (Note 12)SHAREHOLDERS EQUITYShare capital (Note 7)Authorized

500,000,000 common shares without par value

5,000,000 first preference shares without par value,
issuable
in seriesIssued and outstanding

Common shares
    
    
    707,885
    
    
    
    861,676September 30, 2006 75,170,300 sharesDecember 31, 200591,184,681 sharesAdditional paid in-capital
    
    
    113,686
    
    
    
    66,565Accumulated deficit
    
    
    (485,774
    )
    
    
    (501,645
    )Accumulated other comprehensive income
    
    
    91,808
    
    
    
    99,515427,605
    
    
    
    526,111$
    648,316
    
    
    $
    776,494
 1




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##### 



QLT Inc.
 
 CONSOLIDATED STATEMENTS OF (LOSS) INCOME
 (Unaudited)
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,(In thousands of U.S. dollars except share and per share information)
    
    2006
    
    2005
    
    2006
    
    2005RevenuesNet product revenue (Note 8)
    
    $
    31,609
    
    
    $
    55,892
    
    
    $
    119,828
    
    
    $
    161,874Net royalties
    
    
    6,118
    
    
    
    3,879
    
    
    
    14,948
    
    
    
    11,492Contract research and development
    
    
    275
    
    
    
    1,170
    
    
    
    946
    
    
    
    8,583Licensing and milestones
    
    
    244
    
    
    
    189
    
    
    
    732
    
    
    
    50238,246
    
    
    
    61,130
    
    
    
    136,454
    
    
    
    182,451Costs and expensesCost of sales
    
    
    10,466
    
    
    
    12,894
    
    
    
    32,198
    
    
    
    36,231Research and development
    
    
    13,564
    
    
    
    15,701
    
    
    
    43,704
    
    
    
    47,030Selling, general and administrative
    
    
    10,040
    
    
    
    8,016
    
    
    
    27,614
    
    
    
    17,450Depreciation
    
    
    1,622
    
    
    
    1,804
    
    
    
    4,727
    
    
    
    4,901Amortization of intangibles
    
    
    
    
    
    
    983
    
    
    
    
    
    
    
    4,078Restructuring charge (recovery)
    
    
    4
    
    
    
    (3
    )
    
    
    (190
    )
    
    
    3,38535,696
    
    
    
    39,395
    
    
    
    108,053
    
    
    
    113,075Operating income
    
    
    2,550
    
    
    
    21,735
    
    
    
    28,401
    
    
    
    69,376Investment and other income (expense)Net foreign exchange gains (losses)
    
    
    581
    
    
    
    506
    
    
    
    (2,886
    )
    
    
    3,696Interest income
    
    
    5,492
    
    
    
    3,508
    
    
    
    15,327
    
    
    
    9,056Interest expense
    
    
    (1,636
    )
    
    
    (1,603
    )
    
    
    (4,854
    )
    
    
    (4,763
    )Other gains
    
    
    979
    
    
    
    7
    
    
    
    2,771
    
    
    
    45,416
    
    
    
    2,418
    
    
    
    10,358
    
    
    
    7,993Income from continuing operations before income taxes
    
    
    7,966
    
    
    
    24,153
    
    
    
    38,759
    
    
    
    77,369Provision for income taxes
    
    
    (1,771
    )
    
    
    (9,863
    )
    
    
    (11,669
    )
    
    
    (28,024
    )Income from continuing operations
    
    
    6,195
    
    
    
    14,290
    
    
    
    27,090
    
    
    
    49,345Loss from discontinued operations, net of income taxes (Note 9)
    
    
    (9,941
    )
    
    
    (1,391
    )
    
    
    (11,219
    )
    
    
    (4,364
    )Net (loss) income
    
    $
    (3,746
    )
    
    $
    12,899
    
    
    $
    15,871
    
    
    $
    44,981Basic net (loss) income per common shareContinuing operations
    
    $
    0.07
    
    
    $
    0.15
    
    
    $
    0.31
    
    
    $
    0.53Discontinued operations
    
    
    (0.12
    )
    
    
    (0.02
    )
    
    
    (0.13
    )
    
    
    (0.05
    )Net (loss) income
    
    $
    (0.04
    )
    
    $
    0.14
    
    
    $
    0.18
    
    
    $
    0.48Diluted net (loss) income per common shareContinuing operations
    
    $
    0.07
    
    
    $
    0.15
    
    
    $
    0.31
    
    
    $
    0.52Discontinued operations
    
    
    (0.12
    )
    
    
    (0.02
    )
    
    
    (0.13
    )
    
    
    (0.04
    )Net (loss) income
    
    $
    (0.04
    )
    
    $
    0.14
    
    
    $
    0.18
    
    
    $
    0.47Weighted average number of common shares outstanding (thousands)Basic
    
    
    83,831
    
    
    
    92,637
    
    
    
    87,734
    
    
    
    92,979Diluted
    
    
    83,831
    
    
    
    92,919
    
    
    
    87,785
    
    
    
    103,293
 2




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##### 



QLT Inc.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,(In thousands of U.S. dollars)
    
    2006
    
    2005
    
    2006
    
    2005Cash flows provided by (used in) operating activitiesNet (loss) income
    
    $
    (3,746
    )
    
    $
    12,899
    
    
    $
    15,871
    
    
    $
    44,981Adjustments to reconcile net (loss) income to net cashFrom operating activitiesAmortization of intangibles
    
    
    
    
    
    
    1,327
    
    
    
    78
    
    
    
    5,109Depreciation
    
    
    1,768
    
    
    
    2,139
    
    
    
    5,438
    
    
    
    5,867Writedown on investments
    
    
    
    
    
    
    
    
    
    
    432
    
    
    
    Writedown of inventory
    
    
    1,761
    
    
    
    
    
    
    
    1,761
    
    
    
    Share based compensation
    
    
    1,033
    
    
    
    
    
    
    
    3,141
    
    
    
    Impairment of goodwill and other intangibles (Note 9)
    
    
    1,928
    
    
    
    
    
    
    
    1,928
    
    
    
    Impairment of fixed assets (Note 9)
    
    
    6,664
    
    
    
    
    
    
    
    6,664
    
    
    
    Amortization of deferred financing expenses
    
    
    308
    
    
    
    287
    
    
    
    915
    
    
    
    845Unrealized foreign exchange (gain) loss
    
    
    867
    
    
    
    (3,718
    )
    
    
    (8,767
    )
    
    
    (79
    )Interest earned on restricted cash
    
    
    (20
    )
    
    
    
    
    
    
    (20
    )
    
    
    Deferred income taxes
    
    
    (890
    )
    
    
    877
    
    
    
    (5,303
    )
    
    
    1,375Loss on disposal of equipment
    
    
    4
    
    
    
    
    
    
    
    23
    
    
    
    Changes in non-cash operating assets and liabilitiesAccounts receivable
    
    
    8,793
    
    
    
    1,829
    
    
    
    13,048
    
    
    
    (203
    )Inventories
    
    
    2,517
    
    
    
    651
    
    
    
    10,167
    
    
    
    3,099Other current assets
    
    
    1,149
    
    
    
    (1,472
    )
    
    
    3,663
    
    
    
    (7,142
    )Accounts payable
    
    
    1,202
    
    
    
    (2,298
    )
    
    
    (4,282
    )
    
    
    (4,945
    )Income taxes payable
    
    
    (6,486
    )
    
    
    7,294
    
    
    
    (24,450
    )
    
    
    19,065Accrued restructuring charge
    
    
    (343
    )
    
    
    (219
    )
    
    
    (4,014
    )
    
    
    590Other accrued liabilities
    
    
    (5,301
    )
    
    
    (596
    )
    
    
    (9,750
    )
    
    
    (8,570
    )Deferred revenue
    
    
    466
    
    
    
    3,886
    
    
    
    1,011
    
    
    
    10,35011,674
    
    
    
    22,886
    
    
    
    7,554
    
    
    
    70,342Cash provided by (used in) investing activitiesShort-term investment securities
    
    
    56,574
    
    
    
    71,471
    
    
    
    (18,940
    )
    
    
    (132,303
    )Restricted cash
    
    
    
    
    
    
    
    
    
    
    (1,675
    )
    
    
    Purchase of property, plant and equipment
    
    
    (1,254
    )
    
    
    (1,551
    )
    
    
    (4,848
    )
    
    
    (4,724
    )Proceeds on disposal of property and equipment
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    Purchase costs related to Atrix Laboratories, Inc.
    
    
    
    
    
    
    (84
    )
    
    
    (14
    )
    
    
    (968
    )55,320
    
    
    
    69,836
    
    
    
    (25,464
    )
    
    
    (137,995
    )Cash (used in) provided by financing activitiesCommon shares repurchased
    
    
    (104,250
    )
    
    
    
    
    
    
    (127,812
    )
    
    
    (15,537
    )Issuance of common shares
    
    
    92
    
    
    
    225
    
    
    
    691
    
    
    
    11,266(104,158
    )
    
    
    225
    
    
    
    (127,121
    )
    
    
    (4,271
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (419
    )
    
    
    7,388
    
    
    
    9,505
    
    
    
    1,535Net (decrease) increase in cash and cash equivalents
    
    
    (37,583
    )
    
    
    100,335
    
    
    
    (135,526
    )
    
    
    (70,389
    )Cash and cash equivalents, beginning of period
    
    
    247,858
    
    
    
    106,363
    
    
    
    345,801
    
    
    
    277,087Cash and cash equivalents, end of period
    
    $
    210,275
    
    
    $
    206,698
    
    
    $
    210,275
    
    
    $
    206,698Supplementary cash flow information:Interest paid
    
    $
    2,729
    
    
    $
    2,742
    
    
    $
    5,603
    
    
    $
    5,613Income taxes paid
    
    
    8,095
    
    
    
    1,522
    
    
    
    40,306
    
    
    
    5,560
 3




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##### 



QLT Inc.
 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
 (Unaudited)
 AccumulatedCommon Shares
    
    Additional
    
    Other
    
    
    
    
    
    
    
    
    
    TotalPaid-in
    
    Comprehensive
    
    Accumulated
    
    Comprehensive
    
    ShareholdersShares
    
    Amount
    
    Capital
    
    Income
    
    Deficit
    
    Income (loss)
    
    Equity(All amounts except share and per share information are expressed in thousands of U.S. dollars)Balance at December 31,
2004
    
    
    92,021,572
    
    
    $
    848,498
    
    
    $
    92,193
    
    
    $
    89,882
    (1)
    
    $
    (173,794
    )
    
    
    
    
    
    $
    856,779Exercise of stock
options at prices
ranging from CAD $12.10
to CAD $13.35 per share
and U.S. $2.63 to U.S.
$16.22 per share
    
    
    1,304,509
    
    
    
    25,068
    
    
    
    (15,593
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,475Exercise of warrant at
U.S. $3.39 per share
    
    
    1,000,000
    
    
    
    19,594
    
    
    
    (16,204
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,390Common share repurchase
    
    
    (3,141,400
    )
    
    
    (31,484
    )
    
    
    6,169
    
    
    
    
    
    
    
    (2,439
    )
    
    
    
    
    
    
    (27,754
    )Other comprehensive
income:Cumulative translation
adjustment from
application of U.S.
dollar reporting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,792
    
    
    
    
    
    
    
    $     9,792
    
    
    
    9,792Unrealized (loss) on
available for sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (159
    )
    
    
    
    
    
    
    (159
    )
    
    
    (159
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (325,412
    )
    
    
    (325,412
    )
    
    
    (325,412
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $(315,779
    )
    
    
    Balance at December 31,
2005
    
    
    91,184,681
    
    
    $
    861,676
    
    
    $
    66,565
    
    
    $
    99,515
    (1)
    
    $
    (501,645
    )
    
    
    
    
    
    $
    526,111Exercise of stock
options at prices
ranging from U.S. $4.73
to U.S. $6.54 per share.
    
    
    30,359
    
    
    
    559
    
    
    
    (386
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173Stock based compensation
    
    
    
    
    
    
    
    
    
    
    1,244
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,244Common share repurchase
    
    
    (1,726,000
    )
    
    
    (18,155
    )
    
    
    5,193
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,962
    )Other comprehensive
income:Cumulative translation
adjustment from
application of U.S.
dollar reporting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,785
    )
    
    
    
    
    
    
    $    (1,785
    )
    
    
    (1,785
    )Unrealized gain on
available for sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    25
    
    
    
    25Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,133
    
    
    
    12,133
    
    
    
    12,133Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $   10,373
    
    
    
    Balance at March 31, 2006
    
    
    89,489,040
    
    
    $
    844,081
    
    
    $
    72,614
    
    
    $
    97,755
    (1)
    
    $
    (489,512
    )
    
    
    
    
    
    $
    524,938Exercise of stock
options at prices
ranging from U.S. $5.22
to U.S. $7.88 per share.
    
    
    60,631
    
    
    
    1,229
    
    
    
    (805
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    424Stock based compensation
    
    
    
    
    
    
    
    
    
    
    1,058
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,058Common share repurchase
    
    
    (1,397,000
    )
    
    
    (15,280
    )
    
    
    4,683
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,597
    )Other comprehensive
income:Cumulative translation
adjustment from
application of U.S.
dollar reporting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,325
    
    
    
    
    
    
    
    $   13,325
    
    
    
    13,325Unrealized gain on
available for sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198
    
    
    
    
    
    
    
    198
    
    
    
    198Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,484
    
    
    
    7,484
    
    
    
    7,484Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $   21,007
    
    
    
    Balance at June 30, 2006
    
    
    88,152,671
    
    
    $
    830,030
    
    
    $
    77,550
    
    
    $
    111,278
    (1)
    
    $
    (482,028
    )
    
    
    
    
    
    $
    536,830
 4




---



##### 



AccumulatedCommon Shares
    
    Additional
    
    Other
    
    
    
    
    
    
    
    
    
    TotalPaid-in
    
    Comprehensive
    
    Accumulated
    
    Comprehensive
    
    ShareholdersShares
    
    Amount
    
    Capital
    
    Income
    
    Deficit
    
    Income (loss)
    
    Equity(All amounts except share and per share information are expressed in thousands of U.S. dollars)Exercise of stock
options at prices
ranging from U.S. $2.89
to U.S. $7.88 per share.
    
    
    17,629
    
    
    
    279
    
    
    
    (187
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92Stock based compensation
    
    
    
    
    
    
    
    
    
    
    1,061
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,061Common share repurchase
    
    
    (13,000,000
    )
    
    
    (122,423
    )
    
    
    35,261
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (87,162
    )Other comprehensive
income:Cumulative translation
adjustment from
application of U.S.
dollar reporting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,468
    )
    
    
    
    
    
    
    $(19,468
    )
    
    
    (19,468
    )Unrealized loss on
available for sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,746
    )
    
    
    (3,746
    )
    
    
    (3,746
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $(23,217
    )
    
    
    Balance at September 30,
2006
    
    
    75,170,300
    
    
    $
    707,886
    
    
    $
    113,686
    
    
    $
    91,808
    (1)
    
    $
    (485,774
    )
    
    
    
    
    
    $
    427,605
 (1)
    
    At December 31, 2005, March 31, June 30, and September 30, 2006 our accumulated other
comprehensive income is related almost entirely to cumulative translation adjustments from the
application of U.S. dollar reporting with an insignificant amount due to unrealized gain (loss) on
available for sale securities.
 5




---



##### 



NOTES TO THE 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
  6




---



##### 



Segmented Information
  Long-lived and Intangible Assets
   Accounting
for the Impairment or Disposal of Long-lived Assets.
  Goodwill Impairment
 Goodwill and Other
Intangibles
 Assets Held for Sale and Discontinued Operations
   7




---



##### 



Revenue Recognition
 Net Product Revenue
 ® ®
    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
 Impact of the Adoption of SFAS 123R
    9




---



##### 



Three months ended
    
    Nine months endedSeptember 30,
2006
    
    September 30, 
2005
    
    September 30, 
2006
    
    September 30, 
2005Annualized volatility
    
    
    44.1
    %
    
    
    47.7
    %
    
    
    45.5
    %
    
    
    46.9
    %Risk-free interest rate
    
    
    3.8
    %
    
    
    3.4
    
    
    
    4.2
    %
    
    
    3.4
    %Expected life (years)
    
    
    3.3
    
    
    
    2.5
    
    
    
    3.0
    
    
    
    2.5
  (In thousands of U.S. dollars, except share information)
    
    Three months ended
    
    Nine months ended(Unaudited)
    
    September 30, 2006
    
    September 30, 2006Cost of sales
    
    $
    15
    
    
    $
    38Research and development
    
    
    598
    
    
    
    1,866Selling, general and administrative
    
    
    335
    
    
    
    1,003Discontinued operations
    
    
    85
    
    
    
    233Share based compensation expense before income taxes
    
    
    1,033
    
    
    
    3,140Related income tax benefits
    
    
    
    
    
    
    Share based compensation, net of income taxes
    
    $
    1,033
    
    
    $
    3,140Net share based compensation, per common share:Basic
    
    $
    0.01
    
    
    $
    0.04Diluted
    
    $
    0.01
    
    
    $
    0.04
 Pro forma Information for Periods Prior to the Adoption of SFAS 123R
 Accounting for Stock Issued to Employees
  (In thousands of U.S. dollars except per share information)
    
    Three months ended
    
    Nine months ended(Unaudited)
    
    September 30, 2005
    
    September 30, 2005Net incomeAs reportedLess: Additional stock-based compensation expense under
    
    $
    12,899
    
    
    $
    44,981the fair value method
    
    
    (1,818
    )
    
    
    (5,873
    )Pro forma
    
    $
    11,081
    
    
    $
    39,108Basic net income per common shareAs reported
    
    $
    0.14
    
    
    $
    0.48Pro forma
    
    
    0.12
    
    
    
    0.42Diluted net income per shareAs reported
    
    $
    0.14
    
    
    $
    0.47Pro forma
    
    
    0.12
    
    
    
    0.42
 Net Income Per Common Share
  10




---



##### 



Three months ended
    
    Nine months ended(In thousands of U.S. dollars, except share and per share data)
    
    September
    
    September
    
    September
    
    September(Unaudited)
    
    30, 2006
    
    30, 2005
    
    30, 2006
    
    30, 2005Numerator:Income from continuing operations
    
    $
    6,195
    
    
    $
    14,290
    
    
    $
    27,090
    
    
    $
    49,345Loss from discontinued operations, net of income taxes
    
    
    (9,941
    )
    
    
    (1,391
    )
    
    
    (11,219
    )
    
    
    (4,364
    )Net (loss) income
    
    $
    (3,746
    )
    
    $
    12,899
    
    
    $
    15,871
    
    
    $
    44,981Effect of dilutive securities:Convertible senior notes  interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,020Adjusted (loss) income
    
    $
    (3,746
    )
    
    $
    12,899
    
    
    $
    15,871
    
    
    $
    49,001Denominator:(thousands)Weighted average common shares outstanding
    
    
    83,831
    
    
    
    92,637
    
    
    
    87,734
    
    
    
    92,979Effect of dilutive securities:Stock options
    
    
    
    
    
    
    282
    
    
    
    51
    
    
    
    621Convertible senior notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,693Diluted potential common shares
    
    
    
    
    
    
    282
    
    
    
    51
    
    
    
    10,314Diluted weighted average common shares outstanding
    
    
    83,831
    
    
    
    92,919
    
    
    
    87,785
    
    
    
    103,293Basic net (loss) income per common shareContinuing operations
    
    $
    0.07
    
    
    $
    0.15
    
    
    $
    0.31
    
    
    $
    0.53Discontinued operations
    
    
    (0.12
    )
    
    
    (0.02
    )
    
    
    (0.13
    )
    
    
    (0.05
    )Net (loss) income
    
    $
    (0.04
    )
    
    $
    0.14
    
    
    $
    0.18
    
    
    $
    0.48Diluted net (loss) income per common shareContinuing operations
    
    $
    0.07
    
    
    $
    0.15
    
    
    $
    0.31
    
    
    $
    0.52Discontinued operations
    
    
    (0.12
    )
    
    
    (0.02
    )
    
    
    (0.13
    )
    
    
    (0.04
    )Net (loss) income
    
    $
    (0.04
    )
    
    $
    0.14
    
    
    $
    0.18
    
    
    $
    0.47
  Recently Issued Accounting Standards
 . conditional asset retirement obligation Accounting for
Asset Retirement Obligations,
  11




---



##### 



2. INVENTORIES
 (In thousands of U.S. dollars)
    
    September 30, 2006
    
    December 31, 2005(Unaudited)Raw materials and supplies
    
    $
    13,812
    
    
    $
    22,046Work-in-process
    
    
    26,625
    
    
    
    29,083Finished goods
    
    
    954
    
    
    
    390Provision for obsolete inventory
    
    
    (404
    )
    
    
    (1,452
    )Provision for non-completion of product inventory
    
    
    (5,535
    )
    
    
    (3,828
    )$
    35,452
    
    
    $
    46,239
  3. OTHER CURRENT ASSETS
 (In thousands of U.S. dollars)
    
    September 30, 2006
    
    December 31, 2005(Unaudited)Visudyne inventory in transit held by Novartis Ophthalmics
    
    $
    13,813
    
    
    $
    10,725Foreign exchange contracts
    
    
    
    
    
    
    5,015Prepaid expenses and other
    
    
    3,942
    
    
    
    4,988$
    17,755
    
    
    $
    20,728
  12




---



##### 



4. ACCRUED LIABILITIES
 (In thousands of U.S. dollars)
    
    September 30, 2006
    
    December 31, 2005(Unaudited)Royalties
    
    $
    1,557
    
    
    $
    2,654Compensation
    
    
    4,492
    
    
    
    5,432Separation costs
    
    
    1,528
    
    
    
    2,540Foreign exchange contracts
    
    
    1,284
    
    
    
    2,172Interest
    
    
    408
    
    
    
    1,740Other
    
    
    714
    
    
    
    3,363$
    9,983
    
    
    $
    17,901
 5. CREDIT AND FOREIGN EXCHANGE FACILITIES
    6. RESTRUCTURING CHARGE
    13




---



##### 



Severance and termination benefits accrued
 (In thousands of U. S. dollars)
    
    First
 Restructuring
    
    Second 
Restructuring
    
    Total(Unaudited)Balance at December 31, 2005
    
    $
    227
    
    
    $
    4,499
    
    
    $
    4,726Cash payments
    
    
    (140
    )
    
    
    (1,914
    )
    
    
    (2,054
    )Balance at March 31, 2006
    
    $
    87
    
    
    $
    2,585
    
    
    $
    2,672Adjustments
    
    
    (20
    )
    
    
    (253
    )
    
    
    (273
    )Cash payments
    
    
    (67
    )
    
    
    (892
    )
    
    
    (959
    )Balance at June 30, 2006
    
    $
    
    
    
    $
    1,440
    
    
    $
    1,440Adjustments
    
    
    
    
    
    
    24
    
    
    
    24Cash payments
    
    
    
    
    
    
    (336
    )
    
    
    (336
    )Balance at September 30, 2006
    
    $
    
    
    
    $
    1,128
    
    
    $
    1,128Other related expenses accrued(In thousands of U. S. dollars)
    
    First 
Restructuring
    
    Second 
Restructuring
    
    Total(Unaudited)Balance at December 31, 2005
    
    $
    
    
    
    $
    479
    
    
    $
    479Adjustments
    
    
    
    
    
    
    52
    
    
    
    52Cash payments
    
    
    
    
    
    
    (233
    )
    
    
    (233
    )Balance at March 31, 2006
    
    $
    
    
    
    $
    298
    
    
    $
    298Adjustments
    
    
    
    
    
    
    27
    
    
    
    27Cash payments
    
    
    
    
    
    
    (164
    )
    
    
    (164
    )Balance at June 30, 2006
    
    $
    
    
    
    $
    161
    
    
    $
    161Adjustments
    
    
    
    
    
    
    (20
    )
    
    
    (20
    )Cash payments
    
    
    
    
    
    
    (14
    )
    
    
    (14
    )Balance at September 30, 2006
    
    $
    
    
    
    $
    127
    
    
    $
    127
 Combined Total
 (In thousands of U. S. dollars)
    
    First 
Restructuring
    
    Second 
Restructuring
    
    Total(Unaudited)Balance at December 31, 2005
    
    $
    227
    
    
    $
    4,978
    
    
    $
    5,205Adjustments
    
    
    
    
    
    
    52
    
    
    
    52Cash payments
    
    
    (140
    )
    
    
    (2,147
    )
    
    
    (2,287
    )Balance at March 31, 2006
    
    $
    87
    
    
    $
    2,883
    
    
    $
    2,970Adjustments
    
    
    (20
    )
    
    
    (226
    )
    
    
    (246
    )Cash payments
    
    
    (67
    )
    
    
    (1,056
    )
    
    
    (1,123
    )Balance at June 30, 2006
    
    $
    
    
    
    $
    1,601
    
    
    $
    1,601Adjustments
    
    
    
    
    
    
    4
    
    
    
    4Cash payments
    
    
    
    
    
    
    (350
    )
    
    
    (350
    )Balance at September 30, 2006
    
    $
    
    
    
    $
    1,255
    
    
    $
    1,255
 14




---



##### 



7. SHARE CAPITAL
 (a)
    
    Share RepurchaseOn April 28, 2005, we announced a share buy-back program pursuant to which we could purchase up
to $50.0 million of our common shares over a two-year period. In December 2005 we increased the
amount that could be purchased to $100.0 million of our common shares over a two-year period
ending May 2007. The share purchases were made as a normal course issuer bid and were effected in
the open market through the facilities of The Toronto Stock Exchange and the NASDAQ Stock Market,
and in accordance with all regulatory requirements. Cumulative purchases under this program
since May 2005 were 6,264,400 common shares at an average price of $8.20, for a total cost of
$51.3 million. On July 27, 2006, we terminated this normal course issuer bid as a result of our
decision to proceed with an offer to purchase up to 13 million common shares in a modified Dutch
Auction tender offer. Under this Dutch Auction tender offer, shareholders were invited to
tender all or a portion of their shares at a price per share that was not less than US$7.00 and
not greater than US$8.00. Based on the number of shares tendered and the prices specified by the
tendering shareholders, we determined the lowest price per share within the range that allowed us
to buy 13 million shares properly tendered. The tender offer commenced on August 3, 2006 and
expired on September 8, 2006. As a result of this tender offer, we accepted for purchase and
cancellation 13 million common shares at a price of $8.00 per share, totaling $104 million.
These shares represented approximately 14.7% of the shares outstanding as of September 8, 2006.
Our total outstanding common shares on September 30, 2006 were 75,170,300 shares.In repurchasing our common shares under the normal course issuer bid described above, the prices
we paid for the shares we repurchased were different than our carrying value for these shares.
We had previously recorded this difference between purchase price and carrying value in the
accumulated deficit section of our shareholders equity. We have made adjustments to prior
periods to record the amounts representing the excess of carrying value over the purchase price
of the shares as additional paid-in capital. As a result, our December 31, 2005 additional
paid-in capital increased by $6.2 million and correspondingly, our accumulated deficit increased
by $6.2 million. This adjustment had no impact on previously reported results of operations or
cashflows and was not material to the balance sheet.(b)
    
    Stock OptionsStock option activity with respect to our 1998 Plan and 2000 Plan is presented below:
 AggregateExercise Price
    
    intrinsic value(In Canadian dollars)
    
    Number of Options
    
    Per Share Range
    
    (in millions)(Unaudited)Outstanding at December 31, 2005
    
    
    5,469,850
    
    
    $
    7.79 - $108.60Granted
    
    
    1,479,876
    
    
    $
    7.79 -     $    9.22Exercised
    
    
    1,778
    
    
    
    $    7.79Cancelled
    
    
    3,164,551
    
    
    $
    7.79 - $108.60Outstanding at September 30, 2006
    
    
    3,783,397
    
    
    $
    7.79 - $37.15
    
    
    $
    0.4Exerciseable at September 30, 2006
    
    
    
    
    
    
    
    
    
    $
    0.1
 15




---



##### 



Stock option activity with respect to all our other option plans is presented below:
 AggregateExercise Price
    
    intrinsic value(In U.S. dollars)
    

    Number of Options
    

    Per Share Range
    
    (in millions)(Unaudited)Outstanding at December 31, 2005
    
    
    4,184,499
    
    
    $
    2.89 - $17.82Granted
    
    
    222,625
    
    
    $
    7.27 -  $  8.31Exercised
    
    
    106,841
    
    
    $
    2.89 -  $  7.88Cancelled
    
    
    1,097,586
    
    
    $
    5.85 - $17.82Outstanding at September 30, 2006
    
    
    3,202,697
    
    
    $
    2.89 - $17.82
    
    
    $
    0.5Exercisable at September 30, 2006
    
    
    
    
    
    
    
    
    
    $
    0.3
 Additional information relating to stock options outstanding under the 1998 Plan and the 2000
Plan as of September 30, 2006, is presented below:
 (In Canadian dollars)
    
    Options Outstanding
    
    Options Exercisable(Unaudited)
    
    
    
    
    
    
    
    
    
    WeightedAverageWeighted
    
    Remaining
    
    
    
    
    
    WeightedAverage
    
    Contractual
    
    Number of
    
    Average ExercisePrice Range
    
    Number of Options
    
    Exercise Price
    
    Life (Years)
    
    Options
    
    PriceUnder $12.50
    
    
    2,080,905
    
    
    $
    8.52
    
    
    
    4.26
    
    
    
    519,860
    
    
    $
    8.92$12.51 - $17.50
    
    
    866,093
    
    
    
    14.45
    
    
    
    2.61
    
    
    
    620,353
    
    
    
    14.22$17.51 - $30.00
    
    
    359,757
    
    
    
    23.14
    
    
    
    0.85
    
    
    
    346,759
    
    
    
    23.22$30.01 - $37.15
    
    
    476,642
    
    
    
    32.85
    
    
    
    2.43
    
    
    
    396,157
    
    
    
    32.873,783,397
    
    
    
    
    
    
    
    
    
    
    
    1,883,129
 Additional information relating to stock options outstanding under all other stock option plans
as of September 30, 2006, is presented below:
 (In U.S. dollars)
    
    Options Outstanding
    
    Options Exercisable(Unaudited)
    
    
    
    
    
    
    
    
    
    WeightedAverageWeighted
    
    Remaining
    
    
    
    
    
    WeightedNumber of
    
    Average
    
    Contractual
    
    Number of
    
    Average ExercisePrice Range
    
    Options
    
    Exercise Price
    
    Life (Years)
    
    Options
    
    PriceUnder $7.50
    
    
    337,947
    
    
    $
    6.22
    
    
    
    3.80
    
    
    
    178,548
    
    
    $
    5.65$7.51 - $10.00
    
    
    677,951
    
    
    
    8.60
    
    
    
    5.03
    
    
    
    548,235
    
    
    
    8.67$10.01 - $12.50
    
    
    808,062
    
    
    
    11.79
    
    
    
    5.30
    
    
    
    683,562
    
    
    
    11.68$12.51 - $16.00
    
    
    410,637
    
    
    
    13.85
    
    
    
    6.07
    
    
    
    410,637
    
    
    
    13.85$16.01 - $17.82
    
    
    968,100
    
    
    
    16.33
    
    
    
    7.69
    
    
    
    968,100
    
    
    
    16.333,202,697
    
    
    
    
    
    
    
    
    
    
    
    2,789,082
 At September 30, 2006, total unrecognized estimated compensation cost related to non-vested stock
options granted prior to that date was $7.3 million, which is expected to be recognized over 36
months with a weighted-average period of 2.0 years. The total share-based compensation cost of
stock options capitalized as part of inventory was $0.1 million and $0.3 million during the three
and nine month periods ended September 30, 2006. The total intrinsic value of stock options
exercised during the three months and nine month periods ended September 30, 2006 was $0.1
million and $0.2 million, respectively. For the three and nine month periods ended September 30,
2006, we recorded cash received from the exercise of stock options of $0.1 million and $0.7
million, respectively and there were no related tax benefits recorded during these same periods.
Upon option exercise, we issue new shares of stock.
 16




---



##### 



8.
    
    NET PRODUCT REVENUE
  For the three months ended
    
    For the nine months endedSeptember 30,
    
    September 30,(In thousands of U.S. dollars)
    
    2006
    
    2005
    
    2006
    
    2005(Unaudited)Visudyne® sales by Novartis Ophthalmics
    
    $
    75,137
    
    
    $
    123,733
    
    
    $
    277,259
    
    
    $
    376,521Less: Marketing and distribution costs
    
    
    (32,289
    )
    
    
    (32,497
    )
    
    
    (96,796
    )
    
    
    (104,653
    )Less: Inventory costs
    
    
    (3,963
    )
    
    
    (5,104
    )
    
    
    (14,669
    )
    
    
    (18,601
    )Less: Royalties to third parties
    
    
    (1,581
    )
    
    
    (2,757
    )
    
    
    (5,942
    )
    
    
    (8,371
    )$
    37,304
    
    
    $
    83,375
    
    
    $
    159,852
    
    
    $
    244,896QLTs 50% share of Novartis
Ophthalmics net proceeds from
Visudyne sales
    
    $
    18,652
    
    
    $
    41,688
    
    
    $
    79,926
    
    
    $
    122,448Add: Advance on inventory costs from
Novartis Opthalmics
    
    
    3,153
    
    
    
    4,353
    
    
    
    11,922
    
    
    
    14,495Add: Royalties reimbursed to QLT
    
    
    1,552
    
    
    
    2,656
    
    
    
    5,944
    
    
    
    8,103Add: Other costs reimbursed to QLT
    
    
    2,406
    
    
    
    1,242
    
    
    
    4,393
    
    
    
    3,597Revenue from Visudyne® sales
    
    $
    25,763
    
    
    $
    49,939
    
    
    $
    102,185
    
    
    $
    148,643Net product revenue from Eligard® and
other products (see Note 12)
    
    
    5,846
    
    
    
    5,953
    
    
    
    17,643
    
    
    
    13,231$
    31,609
    
    
    $
    55,892
    
    
    $
    119,828
    
    
    $
    161,874
   9. DISCONTINUED OPERATIONS
   17




---



##### 



(In thousands of U.S. dollars)
    
    September 30, 
2006
    
    December 31, 
2005(Unaudited)Property, plant and equipment
    
    $
    17,009
    
    
    $
    22,700Intangible assets
    
    
    4,920
    
    
    
    6,926$
    21,929
    
    
    $
    29,626
  For the three months ended
    
    For the nine months endedSeptember 30,
    
    September 30,(In thousands of U.S. dollars)
    
    2006
    
    2005
    
    2006
    
    2005(Unaudited)Net revenue
    
    $
    2,600
    
    
    $
    3,045
    
    
    $
    10,505
    
    
    $
    9,137Impairment of assets held for sale
    
    
    (8,592
    )
    
    
    
    
    
    
    (8,592
    )
    
    
    Pretax losses
    
    
    (10,970
    )
    
    
    (1,563
    )
    
    
    (12,312
    )
    
    
    (4,911
    )Income taxes
    
    
    1,029
    
    
    
    172
    
    
    
    1,093
    
    
    
    549Net loss from discontinued operations
    
    $
    (9,941
    )
    
    $
    (1,391
    )
    
    $
    (11,219
    )
    
    $
    (4,362
    )
 10. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
   .
 (Unaudited)
    
    Maturity Period

    
    Quantity (millions)
    
    Average PriceU.S. / Canadian dollar option-dated
forward contracts
    
    
    2006- 2007
    
    
    USD 7.6
    
    1.18514 per USDSwiss franc / Canadian dollar option-dated
forward contracts
    
    
    2006 - 2007
    
    
    CHF 59.4
    
    0.90296 per CHFCanadian dollar / Swiss franc average rate
forward contract
    
    
    2006
    
    
    CAD 3.8
    
    0.90590 per CHF
 18




---



##### 



(Unaudited)
    
    Maturity Period
    
    Quantity (millions)
    
    Average PriceCanadian / U.S. dollar average rate
forward contract
    
    
    2006
    
    
    CAD 18.2
    
    1.15973 per USDAustralian dollar (AUD) / Swiss franc
average rate forward contract
    
    
    2006
    
    
    AUD 2.1
    
    0.93180 per AUDEuro / Swiss franc average rate
forward contract
    
    
    2006
    
    
    EUR 10.7
    
    1.53121 per EURU.S. dollar / Swiss franc average rate
forward contract
    
    
    2006
    
    
    USD 0.4
    
    1.26880 per USDGreat Britain pound (GBP) / Swiss franc
average rate forward contract
    
    
    2006
    
    
    GBP 1.1
    
    2.22280 per GBPJapanese yen (JPY) / Swiss franc
average rate forward contract
    
    
    2006
    
    
    JPY 185.6
    
    0.01112 per JPY
 11. SEGMENTED INFORMATION
   For the three months ended
    
    For the nine months endedSeptember 30,
    
    September 30,(In thousands of U.S. dollars)
    
    2006
    
    2005
    
    2006
    
    2005(Unaudited)Net product revenue and royaltiesVisudyne®
    
    $
    25,763
    
    
    $
    49,938
    
    
    $
    102,184
    
    
    $
    148,642Eligard®
    
    
    11,645
    
    
    
    9,539
    
    
    
    31,629
    
    
    
    24,014Other
    
    
    319
    
    
    
    294
    
    
    
    963
    
    
    
    710Contract research and development
    
    
    275
    
    
    
    1,170
    
    
    
    946
    
    
    
    8,583Licensing and milestones
    
    
    244
    
    
    
    189
    
    
    
    732
    
    
    
    502$
    38,246
    
    
    $
    61,130
    
    
    $
    136,454
    
    
    $
    182,451
 19




---



##### 



For the three months ended
    
    For the nine months endedRevenues
    
    September 30,
    
    September 30,(In thousands of U.S. dollars)
    
    2006
    
    2005
    
    2006
    
    2005(Unaudited)United States
    
    $
    11,232
    
    
    $
    27,783
    
    
    $
    43,264
    
    
    $
    86,684Europe
    
    
    19,820
    
    
    
    23,462
    
    
    
    64,481
    
    
    
    67,105Canada
    
    
    3,581
    
    
    
    4,122
    
    
    
    13,555
    
    
    
    11,904Other
    
    
    3,613
    
    
    
    5,763
    
    
    
    15,154
    
    
    
    16,758$
    38,246
    
    
    $
    61,130
    
    
    $
    136,454
    
    
    $
    182,451Property, plant and equipment
    
    September
    
    December(In thousands of U.S. dollars)
    
    30, 2006
    
    31,2005(Unaudited)Canada
    
    $
    48,412
    
    
    $
    48,378United States
    
    
    4,083
    
    
    
    4,419$
    52,495
    
    
    $
    52,797
  12. CONTINGENCIES
 (a) TAP Litigation
 United States
 ®
    20




---



##### 



Germany
      (b) Patent Litigation with MEEI
 The First MEEI Lawsuit
 ®
   21




---



##### 



The Second MEEI Lawsuit
 ®
     (c) Effect of the TAP Litigation and MEEI Litigation
  13. RECONCILIATION FROM U.S. GAAP TO CANADIAN GAAP
  22




---



##### 



For the three months ended
    
    For the nine months endedSeptember 30,
    
    September 30,(In thousands of U.S. dollars, except per share amounts)
    
    2006
    
    2005
    
    2006
    
    2005Net income, U.S. GAAP
    
    $
    (3,746
    )
    
    $
    12,899
    
    
    $
    15,871
    
    
    $
    44,981Stock based compensation charge (a)
    
    
    
    
    
    
    (1,818
    )
    
    
    
    
    
    
    (5,873
    )Amortization of in-process research and development (b)
    
    
    (1,320
    )
    
    
    (3,471
    )
    
    
    (3,960
    )
    
    
    (10,412
    )FIT recovery on amortization of in-process research and
development (b)
    
    
    502
    
    
    
    1,319
    
    
    
    1,505
    
    
    
    3,956Imputed interest on convertible debt (c)
    
    
    (2,027
    )
    
    
    (1,892
    )
    
    
    (6,023
    )
    
    
    (5,501
    )Unrealized foreign exchange gain (loss) on convertible debt (c)
    
    
    405
    
    
    
    (795
    )
    
    
    449
    
    
    
    12License and option fees (d)
    
    
    
    
    
    
    
    
    
    
    1,910
    
    
    
    Amortization of license and option fees (d)
    
    
    (27
    )
    
    
    
    
    
    
    (49
    )
    
    
    Goodwill impairment charge
    
    
    
    
    
    
    (230,000
    )
    
    
    
    
    
    
    (230,000
    )Provision for (recovery of) income taxes on above items (b), (f)
    
    
    (163
    )
    
    
    327
    
    
    
    (452
    )
    
    
    184Net (loss) income, Canadian GAAP
    
    $
    (6,377
    )
    
    $
    (223,431
    )
    
    $
    9,251
    
    
    $
    (202,653
    )Basic net (loss) income per common share, Canadian GAAP
    
    $
    (0.08
    )
    
    $
    (2.41
    )
    
    $
    0.11
    
    
    $
    (2.18
    )Diluted net (loss) income per common share
    
    $
    (0.08
    )
    
    $
    (2.41
    )
    
    $
    0.11
    
    
    $
    (2.18
    )Weighted average number of common shares outstanding (in thousands)Basic
    
    
    83,831
    
    
    
    92,637
    
    
    
    87,734
    
    
    
    92,979Diluted
    
    
    83,831
    
    
    
    92,637
    
    
    
    87,785
    
    
    
    92,979
  23




---



##### 



(In thousands of U.S. dollars)
    
    September 30, 2006
    
    December 31, 2005(Unaudited)Total assets under U.S. GAAP
    
    $
    648,316
    
    
    $
    776,494Short-term investments (g)
    
    
    
    
    
    
    137Intangibles, net (b), (d), (e)
    
    
    81,788
    
    
    
    83,880Goodwill (b), (e)
    
    
    41,923
    
    
    
    41,923Other long-term assets (g)
    
    
    
    
    
    
    313Total assets under Canadian GAAP
    
    $
    772,027
    
    
    $
    902,747Total liabilities under U.S. GAAP
    
    $
    220,711
    
    
    $
    250,383Future income tax liabilities (b), (f)
    
    
    30,218
    
    
    
    31,289Long-term debt (c)
    
    
    (12,906
    )
    
    
    (17,848
    )Total liabilities under Canadian GAAP
    
    $
    238,023
    
    
    $
    263,824Total shareholders equity under U.S. GAAP
    
    $
    427,605
    
    
    $
    526,111Common shares (a), (g), (h), (i)
    
    
    (2,434
    )
    
    
    (2,434
    )Contributed surplus (a)
    
    
    59,000
    
    
    
    59,000Equity component of convertible debt (c)
    
    
    33,500
    
    
    
    33,500(Deficit) Retained earnings (j)
    
    
    10,140
    
    
    
    16,758Cumulative translation adjustment(k)
    
    
    6,193
    
    
    
    5,988Total shareholders equity under Canadian GAAP
    
    $
    534,004
    
    
    $
    638,923
 
 (a)
    
    Effective January 1, 2004, we adopted the fair value method of accounting for all employee
and non-employee stock-based compensation for Canadian GAAP purposes on a retroactive basis,
without restatement of prior periods. Compensation expense is recorded for stock options
issued to employees using the fair value method. Under U.S. GAAP, we adopted SFAS 123R for
stock options granted to employees and directors on January 1, 2006, using the modified
prospective method, resulting in no difference in net income between U.S. GAAP and Canadian
GAAP for the three and nine months ended September 30, 2006.(b)
    
    Under Canadian GAAP, acquired in-process research and development (IPR&D) projects are
recorded as an intangible asset and amortized over their useful life. On November 19, 2004,
we acquired IPR&D of $236.0 million through the acquisition of Atrix Laboratories, Inc.
Accordingly, this amount was capitalized for Canadian GAAP purposes and is being amortized
using the straight-line method over its useful life of seventeen years. As a
result of book-tax basis differences attributable to IPR&D, an additional deferred tax liability
of $89.7 million was recorded. During the quarter ended September 30, 2006, the future income
tax liability was adjusted by $0.5 million for Canadian GAAP purposes to reflect the reduction
in the temporary difference due to the amortization of the IPR&D. Under U.S. GAAP, IPR&D is
expensed at time of acquisition. As a result of the impairment charge during 2005, amortization
of IPR&D was lower for the three and nine months ended September 30, 2006. In addition, the
future income tax liability was reduced by $91.8 million under Canadian GAAP ($39.9 million
under U.S. GAAP). See note (e) for further discussion on the impairment charge.(c)
    
    In 2003, we completed a private placement of $172.5 million aggregate principal amount of
convertible senior notes. Under Canadian GAAP, an amount of $33.5 million, representing the
estimated value of the right of conversion, was allocated to the shareholders equity as the
equity component of the convertible debt. Furthermore, with bifurcation, accretion expense is
recorded as interest expense under Canadian GAAP. Under U.S. GAAP, bifurcation of debt is not
required. In addition, foreign exchange gains/losses are calculated for the full face value of
the debt under U.S. GAAP, and calculated only on the liability component under Canadian GAAP.(d)
    
    During the nine months ended September 30, 2006, we acquired certain license and option
rights. Under U.S. GAAP, technology licenses and options may not have alternative future uses
and were therefore expensed as research and development costs. Under Canadian GAAP, the
license and option rights were capitalized as intangibles and are amortized over their useful
lives of 17  18 years.(e)
    
    During 2005, we performed impairment tests for goodwill and other intangibles and recorded,
under U.S. and Canadian GAAP, non-cash impairment charges of $410.5 million and $594.9
million, respectively. The charge reduced the Canadian GAAP carrying amount of goodwill to
$145.9 million. Under U.S. GAAP, as explained in (b) above, we expensed IPR&D at the time of
acquisition which had the effect of lowering the carrying value of the assets we acquired from
Atrix as compared to Canadian GAAP. Under Canadian GAAP, as explained in (b) 24




---



##### 



above, we
capitalized IPR&D at the time of acquisition, which increased the carrying value of the assets
we acquired from Atrix as compared to US GAAP. With the higher carrying value, impairment of
goodwill and other intangibles was higher under Canadian GAAP than under US GAAP.(f)
    
    The differences between Canadian GAAP and U.S. GAAP assets and liabilities resulted in
different deferred tax assets and deferred tax liabilities under the respective GAAPs.
Furthermore, investment tax credits are calculated using different formulas for Canadian and
U.S. GAAP purposes due to different forecasted earnings under the respective GAAPs. Under
U.S. GAAP, the benefits of investment tax credits are recorded as part of the tax provision.
Under Canadian GAAP, such tax credits are classified against the expenditure to which they
relate, which is research and development.(g)
    
    We hold certain investments which under Canadian GAAP are recorded at historical costs
adjusted for permanent impairment. Under U.S. GAAP they are recorded as available-for-sale
securities. Such securities are required to be marked to market, with unrealized holding
gains and losses recorded in other comprehensive income.(h)
    
    Under Canadian GAAP, beneficial conversion features attached to certain historical preferred
shares were not included in share capital. Under U.S. GAAP, in prior years, a beneficial
conversion feature attached to certain preferred shares was accreted as a return to the
preferred shareholders. This resulted in an increase in the stated amount of historical share
capital.(i)
    
    In 2000 and 2001, we accelerated the vesting of certain employee stock options as part of
their severance. Under U.S. GAAP we recorded compensation expense and additional paid in
capital in shareholders equity equal to the intrinsic value of the options and under Canadian
GAAP there was no charge recorded.(j)
    
    Certain adjustments to retained earnings are required to account for the accumulated
historical differences between Canadian GAAP and U.S. GAAP as discussed in the other parts of
this note.(k)
    
    The cumulative translation adjustment resulting from the translation of our Canadian
functional currency financial statements into U.S. dollar for reporting purposes differs
between Canadian GAAP and U.S. GAAP due to the difference in the value of our assets and
liabilities under the respective GAAPs.(l)
    
    Recent accounting policy developments include the following:     14.
    
    SUBSEQUENT EVENTSOn November 6, 2006, a federal jury hearing claims
brought against QLT by Massachusetts Eye and Ear Infirmary
(MEEI) found QLT liable under Massachusetts state law for
unjust enrichment and unfair trade practices and determined that QLT
should pay to MEEI a royalty of 3.01% on net sales of Visudyne
worldwide. It remains for the court to determine whether this relates
to future sales or past and future sales of Visudyne. The jury
determined that the unfair trade practices were not committed
knowingly or willfully and therefore declined to award enhanced
damages. Any award may include interest at court imposed rates and
MEEIs attorneys fees. QLT expects to present post-trial
motions addressing the effect of the jurys verdict and to
continue to vigorously pursue the defense of this case. It is
uncertain when final judgment will be entered. (See Note 12
Contingencies in the consolidated financial statements.)On October 26, 2006, as a result of declining Visudyne sales, we announced plans to restructure
our operations in order to reduce our overall cost basis going forward. The cost control
efforts include a reduction of our workforce by approximately 80 employees and reduction in R&D
and other expenses. We will provide affected employees with severance and human resource
support to assist with outplacement. We expect there will be an associated restructuring charge
of approximately $5 million in the fourth quarter of 2006.
 25




---



##### 



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;
    
    anticipated future operating results;
    
    our expectations as to the outcome of the patent litigation commenced against QLT USA,
Inc., a subsidiary of QLT Inc., and Sanofi-Synthelabo, Inc. by TAP Pharmaceuticals, Inc.
and its co-plaintiffs;
    
    our expectations as to the outcome of the patent related litigation commenced by
Massachusetts Eye and Ear Infirmary against QLT;
    
    our plans to divest our non-core generic dermatology and dental business and related
manufacturing facilities;
    
    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;
    
    the anticipated timing for, receipt of and our ability to maintain reimbursement
approvals for our products in development; and
    
    our expectation as to our eligibility for certain tax benefits resulting from new tax
legislation in effect in the Province of British Columbia.
  OVERVIEW
 ® ®
   26




---



##### 



®
    RECENT DEVELOPMENTS
     27




---



##### 



CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Reporting Currency and Foreign Currency Translation
  Revenue Recognition
 Net Product Revenue
 ® ®
    28




---



##### 



Net Royalties
  Contract Research and Development
  Licensing and milestones
  Cost of Sales
  Stock-Based Compensation
 Accounting for
Stock Issued to Employees
 29




---



##### 



Share-Based Payment,
  Research and Development
  Income Taxes
  Legal Proceedings
  30




---



##### 



Long-Lived and Intangible assets
  Accounting
for the Impairment or Disposal of Long-lived Assets.
   Impairment of Goodwill
 Goodwill and Other
Intangibles
 Recently Issued and Recently Adopted Accounting Standards
 . conditional asset retirement obligation Accounting for
Asset Retirement Obligations,
 31




---



##### 



32




---



##### 



RESULTS OF OPERATIONS
  Revenues
 Net Product Revenue
  For the three months ended
    
    For the nine months endedSeptember 30,
    
    September 30,(In thousands of U.S. dollars)
    
    2006
    
    2005
    
    2006
    
    2005(Unaudited)Visudyne® sales by Novartis Ophthalmics
    
    $
    75,137
    
    
    $
    123,733
    
    
    $
    277,259
    
    
    $
    376,521Less: Marketing and distribution costs
    
    
    (32,289
    )
    
    
    (32,497
    )
    
    
    (96,796
    )
    
    
    (104,653
    )Less: Inventory costs
    
    
    (3,963
    )
    
    
    (5,104
    )
    
    
    (14,669
    )
    
    
    (18,601
    )Less: Royalties to third parties
    
    
    (1,581
    )
    
    
    (2,757
    )
    
    
    (5,942
    )
    
    
    (8,371
    )$
    37,304
    
    
    $
    83,375
    
    
    $
    159,852
    
    
    $
    244,896QLTs (50%) share of Novartis
Ophthalmics net proceeds from
Visudyne sales
    
    $
    18,652
    
    
    $
    41,688
    
    
    $
    79,926
    
    
    $
    122,448Add: Advance on inventory costs from
Novartis Opthalmics
    
    
    3,153
    
    
    
    4,353
    
    
    
    11,922
    
    
    
    14,495Add: Royalties reimbursed to QLT
    
    
    1,552
    
    
    
    2,656
    
    
    
    5,944
    
    
    
    8,103Add: Other costs reimbursed to QLT
    
    
    2,406
    
    
    
    1,242
    
    
    
    4,393
    
    
    
    3,597Revenue from Visudyne® sales
    
    $
    25,763
    
    
    $
    49,939
    
    
    $
    102,185
    
    
    $
    148,643Net product revenue from Eligard® and
other products
    
    
    5,846
    
    
    
    5,953
    
    
    
    17,643
    
    
    
    13,231$
    31,609
    
    
    $
    55,892
    
    
    $
    119,828
    
    
    $
    161,874
    33




---



##### 



Net Royalties
  Contract Research and Development Revenue
  Costs and Expenses
 Cost of Sales
  Research and Development
  Selling, General and Administrative Expenses
  Restructuring (Recovery) Charge
  34




---



##### 



Investment and Other Income
 Net Foreign Exchange (Losses) Gains
   For the three months ended
    
    For the nine months endedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005(In thousands of U.S. dollars)Cash and cash equivalents and
short-term investments
    
    $
    328
    
    
    $
    (8,892
    )
    
    $
    (6,711
    )
    
    $
    (5,242
    )U.S. dollar long-term debt
    
    
    (246
    )
    
    
    8,913
    
    
    
    6,723
    
    
    
    5,622Foreign exchange contracts
    
    
    702
    
    
    
    2,729
    
    
    
    (2,738
    )
    
    
    6,997Foreign currency receivables and payables
    
    
    (203
    )
    
    
    (2,244
    )
    
    
    (160
    )
    
    
    (3,681
    )Net foreign exchange (losses) gains
    
    $
    581
    
    
    $
    506
    
    
    $
    (2,886
    )
    
    $
    3,696
 Interest Income
  Interest Expense
  Other Gains
  Discontinued Operations
  35




---



##### 



LIQUIDITY AND CAPITAL RESOURCES
         Interest and Foreign Exchange Rates
   36




---



##### 



Contractual Obligations
  Off-Balance Sheet Arrangements
   General
    37




---



##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
      38




---



##### 



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
  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
    
    ProgramsJuly 1, 2006 through July 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    August 1, 2006 through August 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    September 1, 2006 through September 30, 2006
    
    
    13,000,000
    
    
    $
    8.00
    
    
    
    13,000,000
    
    
    
    Total
    
    
    13,000,000
    
    
    $
    8.00
    
    
    
    13,000,000
    
    
    
    
   39




---



##### 



ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description31.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002: Robert L.
Butchofsky, President and Chief Executive Officer;31.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002: Cameron R. Nelson,
Vice President, Finance and Chief Financial Officer;32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002: Robert L.
Butchofsky, President and Chief Executive Officer; and32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002: Cameron R. Nelson,
Vice President, Finance and Chief Financial Officer;
 40




---



##### 



SIGNATURES
  QLT Inc.(Registrant)Date: November 9, 2006
    
    By:
    
    /s/ Robert L. ButchofskyRobert L. ButchofskyPresident and Chief Executive Officer(Principal Executive Officer)Date: November 9, 2006
    
    By:
    
    /s/ Cameron R. NelsonCameron R. NelsonVice President, Finance and Chief Financial
Officer(Principal Financial and Accounting Officer)
 41




---



##### 



EXHIBIT INDEX
 ExhibitNumber
    
    Description31.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002: Robert L.
Butchofsky, President and Chief Executive Officer;31.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002: Cameron R. Nelson,
Vice President, Finance and Chief Financial Officer;32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002: Robert L.
Butchofsky, President and Chief Executive Officer; and32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002: Cameron R. Nelson,
Vice President, Finance and Chief Financial Officer;
 42