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ITEM 2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The following information should be read in conjunction with the accompanying unaudited interim condensed consolidated financial statements and
notes thereto, which are prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and our audited consolidated financial statements and notes thereto included as part of our Annual Report on
Form 10-K for the year ended December 31, 2015 (our “2015 Annual Report”).
All of the following amounts are expressed in U.S. dollars
unless otherwise indicated.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and
“forward looking information” within the meaning of the Canadian securities legislation which are based on our current expectations and projections. Words such as “anticipate,” “project,” “potential,”
“goal,” “believe,” “expect,” “forecast,” “outlook,” “plan,” “intend,” “estimate,” “should,” “may,” “assume,” “continue” and
variations of such words or similar expressions are intended to identify our forward-looking statements and forward-looking information. Such statements involve known and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of QLT to be materially different from the results of operations or plans expressed or implied by such forward-looking statements and forward-looking information. Many such risks, uncertainties and other factors
are taken into account as part of our assumptions underlying the forward-looking statements and forward-looking information.
The following
factors, among others, including those described under Item 1 A.
Risk Factors
in our 2015 Annual Report, as amended under Item A1. Risk Factors in Part II of this Report, could cause our future results to differ materially from those
expressed in the forward-looking statements and forward-looking information:
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•
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our continued pursuit of strategic alternatives, any decision to discontinue such pursuit, and the uncertainty
of whether we will be successful in our efforts;
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•
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our ability to retain or attract key employees and executives;
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•
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the anticipated timing, cost and progress of the development of our technology and clinical trials including
the anticipated timing to commence and obtain results from pivotal clinical trials of QLT091001;
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•
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the anticipated timing of regulatory submissions for QLT091001, including the timing and outcome of our
evaluation of a potential submission to the EMA for conditional approval;
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•
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the anticipated timing for receipt of, and our ability to maintain, regulatory approvals for product
candidates, including QLT091001;
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•
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our ability to successfully develop and commercialize QLT091001, including the impact of competition and
pricing;
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•
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existing governmental laws and regulations and changes in, or the failure to comply with, governmental laws
and regulations;
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•
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the scope, validity and enforceability of our and third party intellectual property rights;
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•
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the anticipated timing for receipt of, and our ability to obtain and, if applicable, maintain, orphan drug
designations and/or qualification as a new chemical entity for our synthetic retinoid;
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•
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receipt of the Laser Earn-Out Payment (as defined and described under Note 4 —
Contingent
Consideration
of the consolidated unaudited financial statements for the period ended March 31, 2016), which is currently subject to a lawsuit against Valeant Pharmaceuticals International, Inc. (“Valeant”), and receipt of all or
part of the other contingent consideration pursuant to the asset purchase agreement with Valeant, which is based on future sales of Visudyne
®
outside of the United States and sales
attributable to any new indications for Visudyne approved by the FDA;
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•
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receipt of all or part of the contingent consideration pursuant to the asset purchase agreement with Mati
Therapeutics. Inc. (“Mati”) based on Mati’s successful development and sales of products based on our punctal plug delivery technology (the “PPDS Technology”);
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•
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our ability to effectively market and sell any future products;
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•
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changes in estimates of prior years’ tax items and results of tax audits by tax authorities; and
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•
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unanticipated future operating results.
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17
Although we believe that the assumptions underlying the forward-looking statements and
forward-looking information contained herein are reasonable, any of the assumptions could be inaccurate and therefore such statements and information included in this Quarterly Report may not prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements and forward-looking information included herein, the inclusion of such statements and information should not be regarded as a representation by us or any other person that the results or
conditions described in such statements and information or our objectives and plans will be achieved. Any forward-looking statement and forward-looking information speaks only as of the date on which it is made. Except to fulfill our obligations
under the applicable securities laws, we undertake no obligation to update any such statement or information to reflect events or circumstances occurring after the date on which it is made.
Note regarding Trademarks
The following words used in
this Report are trademarks:
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•
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Eligard
®
is a registered trademark of TOLMAR
Therapeutics, Inc.
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•
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Visudyne
®
is a registered trademark of Novartis AG.
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•
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Qcellus™ is a trademark of Valeant Pharmaceuticals International, Inc.
|
Any words used in this Report that are trademarks but are not referred to above are the property of their respective owners.
Business Overview
QLT is a biotechnology
company dedicated to the development and commercialization of innovative ocular products that address the unmet medical needs of patients and clinicians worldwide. Our core operations currently consist of clinical development programs focused on our
synthetic retinoid, QLT091001, for the treatment of certain age-related and inherited retinal diseases.
From 2009 to 2013, we divested our
Eligard product line, Visudyne business, and PPDS Technology. Following these divestitures, we significantly streamlined and restructured our operations to focus our resources on the development of QLT091001.
Strategic Transactions
Aralez Investment and
Distribution
On June 8, 2015, we entered into a Share Subscription Agreement (as amended on December 7, 2015, the
“Amended and Restated Subscription Agreement”) with Tribute Pharmaceuticals Canada Inc. (“Tribute”), POZEN Inc. (“POZEN”), Aralez Pharmaceuticals plc (formally known as Aguono Limited), Aralez Pharmaceuticals Inc.
(“Aralez Canada”), and certain other investors (referred to as the “Co-Investors”). Pursuant to the Amended and Restated Subscription Agreement, immediately prior to and contingent on the consummation of the merger of Tribute and
POZEN (the “Aralez Merger”), Tribute agreed to sell to QLT and the other Co-Investors $75.0 million common shares of Tribute (the “Tribute Shares”) in a private placement at a purchase price per share equal to: (a) the
lesser of (i) US$7.20, and (ii) a five percent discount off the five day volume weighted average price (“VWAP”) per share of POZEN common stock calculated over the five trading days immediately preceding the date of closing
of the Aralez Merger, not to be less than US$6.25 per share; multiplied by (b) the Aralez Merger exchange ratio of 0.1455. On consummation of the Aralez Merger, the Tribute Shares would be exchanged for common shares of Aralez Canada (the
“Aralez Shares”). The transaction contemplated by the Amended and Restated Subscription Agreement was entered into by us for the purpose of returning capital to our shareholders pursuant to a special election distribution that was payable,
at the election of each shareholder, in either Aralez Shares (approximately 0.13629 of an Aralez Share for each QLT share) or cash, subject to pro-ration (the “Aralez Distribution”) for a $15.0 million maximum cash component that was
funded pursuant to the terms of the Backstop Agreement (as defined and described below).
On February 5, 2016, the Aralez Merger was
consummated and QLT invested $45.0 million in exchange for 7,200,000 Aralez Shares (representing 10.1% of the issued and outstanding Aralez Shares) at a price of US$6.25 per share (the “Aralez Investment”). The Aralez Shares are listed on
the Nasdaq Stock Market and Toronto Stock Exchange.
18
Also on June 8, 2015, QLT entered into a share purchase agreement (as amended, the
“Backstop Agreement”) under which Broadfin Healthcare Master Fund, Ltd. (“Broadfin”), JW Partners, LP, JW Opportunities Fund, LLC and J.W. Opportunities Master Fund, Ltd. (together, the “JW Parties”) (the “Backstop
Purchasers”) agreed to purchase up to $15.0 million of the Aralez Shares from QLT at US$6.25 per share. This arrangement provided QLT shareholders the opportunity to elect to receive, in lieu of Aralez Shares, up to an aggregate of US$15.0
million in cash, subject to proration. Pursuant to the terms of the Backstop Agreement, on March 17, 2016, QLT sold 2,400,000 Aralez Shares to the Backstop Purchasers and received $15.0 million of cash proceeds. These funds were transferred to
QLT’s transfer agent on March 18, 2016 until such time as the Aralez Distribution was effected by the Board.
On March 18,
2016, QLT obtained shareholder approval to reorganize its share capital (the “Share Reorganization”) pursuant to a court-approved statutory Plan of Arrangement under Section 288 of the
Business Corporations Act
(British
Columbia). The Share Reorganization enabled QLT to effect the Aralez Distribution to our shareholders in a tax efficient manner. Notwithstanding shareholder approval of the Share Reorganization, the decision to complete the Aralez Distribution was
contingent on the effectiveness of the Aralez’s Form S-1 filed with the SEC and the Board’s discretion to effect the Aralez Distribution.
Following the effectiveness of Aralez’s Form S-1 on April 1, 2016, the Aralez Distribution was effected on April 5, 2016 (the
“Distribution Date”) and QLT distributed, based on the results of the shareholder election, 4,799,619 Aralez Shares and $15.0 million of cash to our shareholders of record on February 16, 2016.
As at March 31, 2016, QLT continued to hold 4,800,000 Aralez Shares, which were marked-to-market at period end. As a result, the Company
recognized a $13.0 million loss during the three months ended March 31, 2016 to reflect the change in value from the acquisition date to March 31, 2016.
Pursuant to the terms of QLT’s financial advisory services agreement with Greenhill & Co, LLC., on February 5, 2016 QLT paid
Greenhill a $4.0 million advisory fee in connection with the completion of the Aralez Investment and exploration of certain other strategic initiatives. This advisory fee has been recorded as part of Selling, General and Administrative expense.
Private Placement
On June 8, 2015,
QLT entered into a Share Purchase and Registration Rights Agreement (as amended, the “Share Purchase and Registration Rights Agreement”) with Broadfin, JW Partners, LP, JW Opportunities Fund, LLC, EcoR1 Capital Fund Qualified, L.P. and
EcoR1 Capital Fund, LP (the “QLT Investors”). The Share Purchase and Registration Rights Agreement contemplated that QLT would, following the completion of the InSite Merger (as defined below) and the Aralez Distribution but no later than
April 30, 2016, issue and sell to the QLT Investors a certain number of QLT common shares for an aggregate purchase price of $20.0 million (the “Private Placement”), reflecting a per share purchase price of U.S.$1.87. In light of the
termination of the InSite Merger and the Board’s determination that our cash requirements at that time did not justify the dilution that would be caused by the Private Placement, on April 28, 2016, QLT and the QLT Investors mutually agreed
to terminate the Share Purchase and Registration Rights Agreement.
19
Research and Development
Our research and development efforts are currently focused solely on QLT091001. QLT091001 is an orally administered synthetic retinoid
replacement for 11-cis-retinal, which is a key biochemical component of the visual retinoid cycle. The following table sets forth the stage of development of our technology:
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Indications
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Status/Development Stage
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QLT091001
|
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Inherited Retinal Disease caused by
RPE65
and
LRAT
gene mutations (includes LCA and
RP)
|
|
Natural history study enrollment and preliminary analysis completed in Q1 2016; final data analysis ongoing.
Phase III pivotal trial start-up activities ongoing; trial initiation planned for the
third quarter of 2016.
Phase Ib study in LCA and RP completed in 2012.
Phase Ib retreatment study in LCA and RP completed in 2014.
Phase Ib study in RP with autosomal dominant mutation in
RPE65
completed
in 2014.
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Impaired Dark Adaptation (IDA)
|
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Phase IIa study completed in 2014.
|
QLT091001 orphan drug program for the treatment of Inherited Retinal Disease.
We are currently
developing QLT091001 for the treatment of Inherited Retinal Disease caused by retinal pigment epithelium protein 65 (“
RPE65
”) and lecithin:retinol acyltransferase (“
LRAT
”) gene mutations, which include Leber
Congenital Amaurosis (“LCA”) and Retinitis Pigmentosa (“RP”). As indicated above, we have completed an initial Phase Ib clinical proof of concept study and a follow-up retreatment study in LCA and RP patients with autosomal
recessive mutations in
RPE65
or
LRAT
. A Phase 1b study in 5 RP patients with autosomal dominant mutations in
RPE65
was also completed. The trial suggested that QLT091001 can improve visual function in patients with autosomal
dominant RP due to
RPE65
mutations with a safety profile similar to that seen in the IRD01 Phase 1b clinical trials in LCA and RP patients (IRD) with autosomal recessive mutations in
RPE65
or
LRAT.
QLT091001 has received orphan drug designations for the treatment of LCA (due to inherited mutations in the
LRAT
and
RPE65
genes)
and RP (all mutations) by the U.S. Food and Drug Administration (the “FDA”), and for the treatment of LCA and RP (all mutations) by the European Medicines Agency (the “EMA”). These designations provide market exclusivity in the
applicable jurisdiction after a product is approved for 10 years (possibly subject to reduction) in the EU and seven years in the U.S. Orphan drug designation in the EU can also provide an additional two years of market exclusivity for pediatric
orphan drug designated drug products. The FDA has also formally acknowledged that the orphan drug designations granted by the FDA on QLT091001 for the treatment of LCA (due to inherited mutations
in
LRAT
or
RPE65
genes) and RP (all mutations) also cover QLT091001 for the treatment of Inherited Retinal Disease caused by
LRAT
or
RPE65
mutations, including severe early childhood
onset retinal dystrophy, which disease/condition we believe subsumes both LCA due to inherited mutations in
LRAT
or
RPE65
genes and RP. The EMA also formally acknowledged that a therapeutic indication of QLT091001
for the treatment of patients with Inherited Retinal Disease, who have been phenotypically diagnosed as LCA or RP caused by mutations in RPE65 or LRAT, would fall under the orphan drug designations of treatment of LCA and treatment of RP.
QLT091001 has also been granted two Fast Track designations by the FDA for the treatment of LCA and autosomal recessive RP due to mutations in
LRAT
and
RPE65
genes. The FDA has also acknowledged that our two Fast Track designations encompass the treatment of Inherited Retinal Disease caused by
LRAT
or
RPE65
mutations. The FDA’s Fast Track is
a process designed to facilitate the development and expedite the review of drugs that are intended for the treatment of serious diseases and fill an unmet medical need.
Over the course of 2013 and 2014, the Company met with the FDA and the EMA, including an end-of-phase II meeting with the FDA, in order to
progress QLT091001 for the treatment of certain inherited retinal diseases toward pivotal trials. Following meetings with the FDA and EMA, in 2014 we amended and finalized our proposed Phase III pivotal trial protocol to test the safety and efficacy
of QLT091001 in subjects with Inherited Retinal Disease phenotypically diagnosed as LCA or RP caused by
RPE65
or
LRAT
gene mutations.
20
In an effort to accelerate the commercial availability of QLT091001 as a treatment option, we are
currently exploring with the EMA an MAA submission in the second half of 2016 for conditional approval of QLT091001 for the treatment of Inherited Retinal Disease based on the existing clinical data. During the first quarter of 2015, advisory
meetings were conducted with certain national European agencies and we are continuing our discussions with the European agencies regarding the MAA for conditional approval. Conditional approval, if granted, would be made subject to specified
conditions, including among other things, that we complete and have favorable safety and efficacy data from additional studies, including one or more pivotal trials of QLT091001 for IRD. In this regard, we have continued our pivotal trial start-up
activities with the goal of initiating a Phase III pivotal trial in the third quarter of 2016. In conjunction with our ongoing start-up activities around our Phase III study, we amended our pivotal trial protocol study design to further optimize and
improve trial execution and protocol performance. Our amended pivotal trial protocol study design was submitted to the FDA on March 18, 2016 for review. We are currently awaiting feedback and comments.
During the second half of 2015, we initiated a retrospective, uncontrolled, multicenter, case history study to determine the natural history of
visual function in subjects with Inherited Retinal Disease phenotypically diagnosed as LCA or RP caused by autosomal recessive mutations in
RPE65
or
LRAT
. The goal of the natural history study is to compare visual outcomes in patients
treated with QLT091001, relative to naïve patients, in order to assess the extent to which QLT091001 may improve or prolong visual function, which information may be used to support our potential application for conditional approval. At the end
of the first quarter of 2016, we completed enrollment of subjects and data collection, and conducted a preliminary analysis of the study data, the results of which suggested that these IRD subjects, without therapeutic intervention, demonstrate a
continuing decline in visual field and eventually visual acuity over time. We are continuing to review the data for further discussion with select national European agencies during the second quarter of 2016. Following those discussions, we intend
to publicly report the final results of the natural history study.
Given the ultra orphan nature of LCA and RP, we will continue to seek
to establish a patient registry either independently or in conjunction with one or more third parties to identify and characterize patient status and then follow disease progression to track the natural history of the disease. As part of these
ongoing efforts, we initiated our multi-center, retrospective natural history study to assess visual outcomes over time in patients with Inherited Retinal Disease caused by autosomal recessive mutations in
RPE65
or
LRAT
and it is
believed that this may further support enrollment in the planned Phase III pivotal trial.
In addition, we are administering a
compassionate use program for QLT091001 on a named-patient basis. Under the compassionate use program, QLT091001 may be made available to patients who participated in our completed Phase Ib clinical trial of QLT091001 for the treatment of LCA
and RP. The program commenced in Ireland and participation for other patients will be determined on a case-by-case basis in accordance with applicable regulatory laws. Compassionate use programs provide experimental therapeutics to
patients with serious or life-threatening diseases that cannot be treated satisfactorily with authorized therapies prior to final FDA, EMA or other applicable regulatory approval.
In May 2011, the United States Patent and Trademark Office issued Patent No. 7,951,841, a key patent related to this program, covering
various methods of use of QLT091001 in the treatment of diseases associated with an endogenous 11-cis-retinal deficiency, expiring on July 27, 2027, including the period of patent term adjustment. Outside of the U.S., counterpart patents and
patent applications to U.S. Patent No. 7,951,841 with varying scope of protection are pending or have been granted, including European Patent No. 1765322 which was granted on November 6, 2013. All of the national patents in the
European jurisdictions where European Patent No. 1765322 is validated will be set to expire in 2025.
In 2015, six additional patents
owned by us or exclusively licensed to us pursuant to our Co-Development Agreement with Retinagenix, LLC (“Retinagenix”), were granted by the USPTO, covering methods of using various synthetic retinal derivatives for the treatment of
certain age-related and inherited retinal diseases, four of which are key patents relating to QLT091001 in the treatment of IRD.
On
October 20, 2015, the USPTO issued U.S. Patent No. 9,162,978, relating to methods of use of various synthetic retinal esters, including QLT091001, for the treatment of RP due to a deficiency in endogenous 11-cis retinal in the eye, and
which is projected to expire on June 20, 2025 This patent is owned by the University of Washington and is exclusively sub-licensed to us through our Co-Development Agreement with Retinagenix.
On October 27, 2015, the USPTO issued U.S. Patent No. 9,169,204, relating to pharmaceutical ophthalmological compositions comprising
various synthetic retinal esters, including QLT091001, for the treatment of a deficiency in endogenous 11-cis retinal in the eye due to inherited mutations in LRAT or RPE65, and which is projected to expire on June 20, 2025. This patent is
owned by the University of Washington and is exclusively sub-licensed to us through our Co-Development Agreement with Retinagenix.
21
On November 3, 2015, the USPTO issued U.S. Patent No. 9,174,936, relating to various
methods of use of various synthetic retinal esters, including QLT091001, for the treatment of LCA and RP due to inherited mutations in LRAT or RPE65, and which is projected to expire on June 20, 2025, This patent is owned by the University of
Washington and is exclusively sub-licensed to us through our Co-Development Agreement with Retinagenix.
On November 3, 2015, the
USPTO issued U.S. Patent No. 9,173,856, relating to various regimens for dosing certain synthetic retinal esters, including QLT091001, for treating a subject suffering from loss or impairment of vision due to inherited mutations in LRAT or
RPE65 associated with LCA, and which is currently projected to expire on May 12, 2032, including the current period of patent term adjustment granted to us by the USPTO. Subsequent to grant of the patent, a petition was filed for
reconsideration by the USPTO to further lengthen the period of patent term adjustment, and as such, the projected expiry date may be subject to further adjustment. Also, this patent is subject to terminal disclaimer, which could potentially shorten
the projected expiry date.
Additional patents and patent applications exclusively sub-licensed to us through our Co-Development Agreement
with Retinagenix will expire between 2024 and 2030, not including any possible patent term extensions or adjustments that may be available. These patents and patent applications include additional methods of use patents and patent applications,
directed to uses of synthetic retinoids, including QLT091001.
The molecule in QLT091001 is not eligible for composition of matter
protection per se, as it was previously known in the scientific community. However, upon FDA approval, we believe that the active pharmaceutical ingredient in QLT091001 may qualify as a new chemical entity, or NCE, which provides for five years of
exclusivity following approval. We intend to seek New Chemical Entity exclusivity; however, there is no assurance that QLT091001 will qualify and gain the additional five-year exclusivity period, even if QLT091001 is approved. We also plan to secure
regulatory exclusivity for QLT091001 in the EU; however, there can be no assurance that we will be successful in securing approval or regulatory exclusivity in the EU.
RESULTS OF OPERATIONS
The following
table sets out our net losses from operations for the three months ended March 31, 2016 and 2015:
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|
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Three months ended
March 31,
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(In thousands of U.S. dollars, except per share data)
|
|
2016
|
|
|
2015
|
|
|
Net loss and comprehensive loss
|
|
$
|
(21,894
|
)
|
|
$
|
(5,896
|
)
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.41
|
)
|
|
$
|
(0.12
|
)
|
A detailed discussion and analysis of our results of operations are as follows:
Costs and Expenses
Research and Development
During the three months ended March 31, 2016, research and development (“R&D”) expenditures were
$3.0 million compared to $2.2 million for the same period in 2015. The $0.8 million (36%) increase was primarily due to higher costs incurred in 2016 related to our ongoing preparatory activities for our QLT091001 pivotal trial and conduct
of our natural history study. These cost increases were partially offset by lower salary and overhead costs resulting from R&D headcount attrition, the foreign exchange impact of the weakened Canadian dollar, downsizing of our lease space and
the absence of stock compensation expense during the period. No stock compensation expense was recorded during the three months ended March 31, 2016 given that the vesting provisions and associated expense applicable to all outstanding options
was accelerated in June 2015 by the Board of Directors in connection with certain strategic transactions (refer to the
Strategic Transactions
section above for more information).
22
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
(In thousands of U.S. dollars)
|
|
2016
|
|
|
2015
|
|
|
Operating - selling, general and administration expense
|
|
$
|
1,041
|
|
|
$
|
1,679
|
|
|
|
|
|
|
Strategic consulting and advisory fees
|
|
|
4,857
|
|
|
|
1,940
|
|
|
Total selling, general and
administration expense
|
|
$
|
5,898
|
|
|
$
|
3,619
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2016, we incurred $4.9 million of consulting and advisory fees
related to our exploration and pursuit of strategic options, as compared to $1.9 million incurred for the same period in the prior year. Approximately $4.0 million of the $4.9 million amount for the three months ended March 31, 2016 consists of
a $4.0 million advisory fee paid to our financial advisors on February 5, 2016 (refer to the
Strategic Transactions
section above for more information).
Excluding the strategy related consulting and advisory fees discussed above, during the three months ended March 31, 2016, selling,
general and administrative (“SG&A”) expenditures were $1.0 million compared to $1.7 million for the same period in 2015. The $0.7 million (41%) decrease in SG&A expenses was primarily due to a decrease in directors’ fees,
general operating costs that were affected by the foreign exchange impact of the weakened Canadian dollar, downsizing of our lease space and the absence of stock compensation expense for the same reason described above.
Other (Expense) Income
Net Foreign Exchange Gains
(Losses)
For the three months ended March 31, 2016 and 2015, net foreign exchange losses comprised gains and losses from the
impact of foreign exchange fluctuations on our monetary assets and liabilities that are denominated in currencies other than the U.S. dollar (principally the Canadian dollar). See
Liquidity and Capital Resources – Interest and Foreign
Exchange Rates
below.
Fair Value Loss on Investment
As at March 31, 2016, QLT continued to hold 4,800,000 of Aralez Shares, which were marked-to-market at period end. As a result, during the
three months ended March 31, 2016, we recognized a fair value impairment loss totaling $13.0 million. This loss reflects the change in the fair value of the 4,800,000 of Aralez Shares reserved to complete the Aralez Distribution, from the date
of acquisition to March 31, 2016.
On April 5, 2016, we completed the Aralez Distribution and distributed to our shareholders
4,799,619 Aralez Shares, with a total fair value of $19.3 million, and $15.0 million of cash.
Income Taxes
During the three months ended March 31, 2016 and 2015, the provision for income taxes was insignificant for both periods and primarily
relates to the accrual of interest on uncertain tax positions. As insufficient evidence exists to support the current or future realization of the tax benefits associated with the vast majority of our current and prior period operating expenditures,
the benefit of certain tax assets was not recognized during the three months ended March 31, 2016 and 2015.
The realization of
deferred income tax assets is dependent on the generation of sufficient taxable income during future periods in which temporary differences are expected to reverse. Where the realization of such assets does not meet the
more likely than not
criterion, the Company applies a valuation allowance against the deferred income tax asset under consideration. The valuation allowance is reviewed periodically and if the assessment of the
more likely than not
criterion changes, the
valuation allowance is adjusted accordingly. As at March 31, 2016, we have a full valuation allowance applied against all of our identified tax assets.
LIQUIDITY AND CAPITAL RESOURCES
General
As at March 31, 2016, our cash resources, working capital, cash from divestitures, and other available financing resources are sufficient
to service current product research and development needs, operating requirements, liability requirements, milestone payments, change of control obligations, and consulting and advisory fees we may incur in connection with the exploration of
strategic alternatives.
23
On February 5, 2016, we completed our Aralez Investment and our cash and cash equivalents
decreased by $45.0 million. In connection with the funding of the cash portion of the Aralez Distribution (see the
Strategic Transactions – Aralez Investment and Distribution
section above), we entered into the Backstop Agreement on
June 8, 2015 to sell up to $15.0 million of the Aralez Shares to the Backstop Purchasers. On March 17, 2016, pursuant to the terms of the Backstop Agreement, we sold 2,400,000 Aralez Shares to the Backstop Purchasers for $6.25 per share
and received $15.0 million of cash. On March 18, 2016 we transferred these funds to our transfer agent for the completion of the Aralez Distribution.
On April 5, 2016, the Aralez Distribution was effected by the Board and we distributed to our shareholders 4,799,619 Aralez Shares and
$15.0 million of cash, which was funded through the Backstop Agreement
As described under the
Strategic Transactions – Private
Placement
section above, on April 28, 2016, the Share Purchase and Registration Rights Agreement was terminated.
As described
under the
Business Overview – Research and Development
section above, we are currently progressing pivotal trial start-up activities with the goal of initiating our Phase III pivotal trial in the third quarter of 2016 and we are
currently exploring with the EMA the submission of a MAA in the second half of 2016 for the conditional approval of QLT091001. If we are successful in initiating our Phase III pivotal trial and completing our submission of the MAA, we expect that
the following milestone payments will become due and payable in 2016 to Retinagenix pursuant to the terms of our Co-Development Agreement:
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|
(i)
|
$1.0 million upon initiation of the first pivotal trial; and
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(ii)
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$1.5 million upon completion of a filing seeking EU approval or Japan approval for the use of certain
intellectual property rights, owned and controlled by Retinagenix, in our first indication for QLT091001.
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Additional
factors that may affect our future capital availability or requirements may include: expenses incurred in connection with the exploration, pursuit and completion of future financial and/or strategic alternatives, return of capital to shareholders,
including any future distributions and/or share repurchases; potential legal costs related to the litigation and dispute with Valeant regarding the Laser Earn-Out Payment; the status of competitors and their intellectual property rights; levels of
future sales of Visudyne and receipt of certain earn-out payments and future contingent consideration under the 2012 asset purchase agreement with Valeant (the “Valeant Agreement”); levels of any future payments related to the PPDS
Technology we sold under the 2013 asset purchase agreement with Mati; the progress of our R&D programs, including preclinical and clinical testing; the timing and cost of obtaining regulatory approvals; the levels of resources that we devote to
the development of manufacturing and other support capabilities; technological advances; the cost of filing, prosecuting and enforcing our patent claims and other intellectual property rights; pre-launch costs related to commercializing our products
in development; acquisition and licensing activities; milestone payments and receipts; and our ability to establish collaborative arrangements with other organizations.
There is no guarantee that our future liquidity and capital resources will be sufficient to service our operating needs and financial
obligations. In this event, our business could be materially and adversely affected and the Company would be required to seek other financing alternatives.
Sources and Uses of Cash
We currently do
not generate any revenue from product sales. We fund operations, product development and capital expenditures through existing cash resources.
Cash
Used in Operating Activities
During the three months ended March 31, 2016, we used $8.9 million of cash in operations
compared to $4.8 million for the same period in 2015. The $4.1 million increase in operating cash outflows was primarily attributable to the following:
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A net $3.5 million negative cash flow variance primarily associated with the $4.0 million advisory fee paid to
our investment bankers on February 5, 2016 (refer to the
Strategic Transactions – Aralez Investment and Distribution
section above), which was offset by a decline in the level of other general consulting and advisory fees paid
during the period in connection our exploration of strategic alternatives; and
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A net $0.6 million negative cash flow variance associated with certain retention bonuses paid out during the
three months ended March 31, 2016, which was partially offset by the foreign exchange impact of the weakened Canadian dollar.
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Cash Used in Investing Activities
During the three months ended March 31, 2016, cash flows used in investing activities was $0.1 million and consisted of certain property,
plant and equipment purchases.
During the three months ended March 31, 2015, there were no cash flows related to investing activities.
Cash Provided by Financing Activities
During the three months ended March 31, 2016, cash flows from financing activities included $45.0 million of cash used to fund our
investment in Aralez and $15.0 million of cash received from the March 17, 2016 sale of 2,400,000 Aralez Shares to the Backstop Purchasers pursuant to the terms of the Backstop Agreement. This $15.0 million of cash was transferred to our
transfer agent on March 18, 2016 for the Aralez Distribution.
During the three months ended March 31, 2015, cash flows from
financing activities consisted of $0.2 million of proceeds received in connection with the issuance of common shares for stock options exercised.
Interest and Foreign Exchange Rates
We
are exposed to market risk related to changes in interest and foreign currency exchange rates, each of which could adversely affect the value of our current assets and liabilities. At March 31, 2016, we had $102.9 million in cash and cash
equivalents and our cash equivalents had an average remaining maturity of approximately 28 days. If market interest rates were to increase immediately and uniformly by one hundred basis points from levels at March 31, 2016, the fair value of
the cash equivalents would decline by an immaterial amount due to the short remaining maturity period.
The functional currency of QLT Inc.
and its U.S. subsidiaries is the U.S. dollar and, therefore, our U.S. dollar-denominated cash and cash equivalents holdings do not result in foreign currency gains or losses in operations. To the extent that QLT Inc. holds a portion of its monetary
assets and liabilities in Canadian dollars, we are subject to translation gains and losses. These translation gains and losses are included in operations for the period.
At March 31, 2016, we had no outstanding forward foreign currency contracts and no collateral was pledged for security.
Contractual Obligations
As of
March 31, 2016, our material contractual obligations consist of our clinical and development agreements, including our recently executed agreement with a contract research organization for the global management of our Phase III pivotal trial
for QLT091001. There have been no material changes to QLT’s contractual obligations. See the 2015 Annual Report –
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual
Obligations
.
Off-Balance Sheet Arrangements
In connection with the sale of assets, shares and businesses, we provide indemnities related to certain matters, including product liability,
patent infringement, and contract breach and misrepresentation. We also provide other indemnities to parties under the clinical trial, license, service, manufacturing, supply and other agreements that we enter into in the normal course of our
business. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These indemnities are generally subject to certain threshold amounts, specified claims
periods and other restrictions and limitations. As at March 31, 2016, no amounts have been accrued in connection with such indemnities.
Except as described above and the contractual arrangements described in the
Contractual Obligations
section above, we do not have any
off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future impact on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources.
Outstanding Share Data
As of April 29, 2016, QLT had 52,829,398 common shares issued and outstanding, which totaled $475.3 million in share capital. As of
April 29, 2016, we had 428,152 stock options outstanding and exercisable at a weighted average exercise price of CAD $5.07 per share. Each stock option is exercisable for one common share. As of April 29, 2016, we had nil RSUs outstanding.
As of April 29, 2016, we had 154,000 deferred stock units (“DSUs”) outstanding of which 147,583 are vested. The cash value of the DSUs outstanding as at April 29, 2016 is approximately $0.2 million.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the periods presented. Significant estimates include but
are not limited to accounts receivable valuation provisions and fair value adjustments, allocation of overhead expenses to research and development, stock-based compensation, and provisions for taxes, uncertain tax positions, tax assets and tax
liabilities. Actual results may differ from estimates made by management. Please refer to our Critical Accounting Policies and Estimates included as part of our 2015 Annual Report.
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