ITEM 2.
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MANAGEMENTS 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 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). Our consolidated financial
statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP).
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 1A. Risk Factors in our 2015 Annual Report, and under Item 1A. Risk Factors in Part II of this Quarterly 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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the risk that the proposed Merger with Aegerion may not be consummated despite the parties efforts;
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the risk that a condition to closing of the Merger may not be satisfied;
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the risk that the consummation of the Merger may be unduly delayed thereby resulting in potential disruptions
to QLTs business and relationships, which may negatively impact QLTs share price and future business and financial results;
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the transactions contemplated by the Unit Subscription Agreement may not be consummated;
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the risk that the adjustment in the Exchange Ratio and distribution of the Warrants may not fully cover the
costs of Aegerions investigations and legal proceedings;
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QLTs ability to realize the expected synergies and other benefits of the proposed Merger, including tax,
financial, strategic and commercial benefits, growth potential, market profile, financial strength and enhanced cash flow management;
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QLT may not have sufficient cash flow or the ability to raise the funds necessary to settle conversions of, or
to repurchase, Aegerions $325.0 million 2% senior convertible notes (the Aegerion Notes) , which could adversely affect our business, financial condition and results of operations;
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the expected accounting treatment for the proposed Merger;
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the impact of legislative, regulatory, competitive and technological changes, including changes in tax laws or
interpretations that could increase QLTs consolidated tax liabilities, including if the proposed Merger is consummated;
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the risk that QLT is treated as a domestic corporation for U.S. federal income tax purposes after the Merger;
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the market price of QLTs common shares after the Merger may be affected by factors different from those
currently affecting the shares of QLT and Aegerion;
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our ability to retain or attract key employees and executives;
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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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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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the anticipated timing for receipt of, and our ability to maintain, regulatory approvals for product
candidates, including QLT091001;
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our ability to successfully develop and commercialize QLT091001, including the impact of competition and
pricing;
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17
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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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the scope, validity and enforceability of our and third party intellectual property rights;
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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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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 June 30, 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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receipt of all or part of the contingent consideration pursuant to the asset purchase agreement with Mati
Therapeutics. Inc. (Mati) based on Matis successful development and sales of products based on our punctal plug delivery technology (the PPDS Technology);
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our ability to effectively market and sell any future products;
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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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unanticipated future operating results.
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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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Eligard
®
is a registered trademark of TOLMAR
Therapeutics, Inc.
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JUXTAPID
®
is a registered trademark of Aegerion
Pharmaceuticals, Inc.
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MYALEPT
®
is a registered trademark of Aegerion
Pharmaceuticals, Inc.
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Qcellus is a trademark of Valeant Pharmaceuticals International, Inc.
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Visudyne
®
is a registered trademark of Novartis AG.
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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
Merger Transaction with
Aegerion Pharmaceuticals, Inc.
On June 14, 2016, QLT and Aegerion Pharmaceuticals, Inc. (Aegerion) entered into an
agreement and plan of merger (the Merger Agreement) pursuant to which a wholly owned indirect subsidiary of QLT will be merged with and into Aegerion, with Aegerion surviving as a wholly-owned subsidiary of QLT (the Merger).
Upon completion of the proposed Merger, each outstanding share of Aegerion common stock will be converted into a right to receive 1.0256 QLT common shares (the Exchange Ratio), subject to adjustment as described below. QLT plans to
change its name upon closing of the Merger to Novelion Therapeutics Inc. (Novelion) and its common shares will trade on the NASDAQ Global Select Market (NASDAQ) and the Toronto Stock Exchange (TSX). As at the date
of this filing, QLT is anticipated to be the accounting acquirer and the acquisition method of accounting under ASC No. 805
Business Combinations
is expected to apply. The purchase consideration will be allocated based on the fair
values of the identifiable tangible and intangible assets acquired and liabilities assumed by QLT at the closing of the Merger.
18
Under the Merger Agreement, the Exchange Ratio may be reduced if, prior to closing of the Merger,
Aegerion settles (i) the previously disclosed U.S. Department of Justice (DOJ) and SEC investigations into Aegerions sales activities and disclosure related to its
JUXTAPID
®
(lomitapide capsules) product for amounts in excess of negotiated thresholds set forth in Aegerions previously announced preliminary agreements in principle with the DOJ or SEC
(the DOJ/SEC Investigations) and/or (ii) the pending putative shareholder class action lawsuit (the Class Action Litigation) for an amount that exceeds the amounts, if any, available under Aegerions director and
officer insurance coverage in respect of that matter (together, the negotiated thresholds). The maximum aggregate excess settlement amount to be reflected in the Exchange Ratio adjustment is $25.0 million. If Aegerion does not settle the
DOJ/SEC Investigations and the Class Action Litigation prior to the closing of the Merger, QLT will issue certain warrants (the Warrants) to its existing shareholders and the Investors (as described below), exercisable to purchase a
certain number of QLT common shares at an exercise price of $0.01 per share if the DOJ/SEC Investigations and/or Class Action Litigation are settled for amounts over the negotiated thresholds.
While the proposed Merger has been approved by the boards of directors of both companies, the closing of the Merger is subject to various
conditions, including but not limited to (i) receipt of the required approvals of the shareholders of each of QLT and Aegerion and (ii) completion of the private placement (with an aggregate subscription price not less than $17.5 million)
contemplated by the unit subscription agreement (as described below, the Unit Subscription Agreement), that QLT entered into on June 14, 2016 with the investors party thereto (the Investors) in connection with the Merger.
Following the completion of the Merger and assuming no adjustment to the Exchange Ratio, QLT shareholders, including the Investors who will purchase QLT common shares immediately prior to the Merger under the Unit Subscription Agreement, are
expected to own approximately 67% of the outstanding Novelion common shares and Aegerion shareholders are expected to own approximately 33% of the outstanding Novelion common shares.
The Unit Subscription Agreement contemplates the issuance of 12,363,636 QLT common shares and an equal number of Warrants (as defined and
described above) to the Investors, immediately prior to the closing of the Merger, for an aggregate subscription price of $21.8 million. This investment is intended to provide Novelion with additional capital to support future operations and
business development initiatives.
Under the Merger Agreement, QLT and Aegerion have agreed to use commercially reasonable efforts to cause
the board of directors of Novelion following the Merger and until the 2017 annual meeting of Novelion to consist of four individuals designated by Aegerion, four individuals designated by QLT, one individual designated by Broadfin Capital, LLC
(Broadfin Capital) and one individual designated by Sarissa Capital Management LP (Sarissa Capital Management). For a specified period of time following the Merger, Sarissa Capital Management will also have the right to
designate one additional member of the board of directors of Novelion. Following the completion of the Merger, Mary Szela, Chief Executive Officer of Aegerion, will serve as Chief Executive Officer of Novelion.
On June 14, 2016, QLT entered into a loan and security agreement with Aegerion (the Loan Agreement) concurrently with the
execution of the Merger Agreement, pursuant to which QLT agreed to provide a term loan facility to Aegerion for an aggregate principal amount of up to $15.0 million. Aegerion borrowed $3.0 million in term loans (the QLT Loans) on
June 15, 2016 and may also borrow up to an additional $3 million per month (commencing July 2016) if and to the extent such amounts are necessary in order for Aegerion to maintain an unrestricted cash balance of $25 million, subject to the
satisfaction of certain terms and conditions. As at June 30, 2016, the $3.0 million outstanding under the Loan Agreement has been reflected as a short term loan receivable on the condensed consolidated balance sheet. The QLT Loans bear interest
at 8% per annum and are subject to certain increases under certain conditions. Pursuant to the Loan Agreement, accrued interest will be capitalized and added to the aggregate principle amount of the QLT Loans outstanding. The QLT Loans mature on the
earliest of (i) July 1, 2019, (ii) the maturity date of Aegerion 2% senior convertible notes, (iii) three business days after a termination of the Merger Agreement by Aegerion and (iv) 90 days after a termination of the
Merger Agreement by QLT. Aegerions obligations under the QLT Loan Agreement are secured by (i) a first priority security interest in Aegerions intellectual property related to its
MYALEPT
®
product and (ii) a second priority security interest in certain other assets, which secure Aegerions current loan obligations to another third party.
During the three and six months ended June 30, 2016, QLT incurred consulting and advisory fees of $3.2 million and $3.6 million respectively,
in connection with the pursuit of the Merger with Aegerion. These consulting and advisory fees are reflected as part of Selling, General and Administrative expenses (SG&A) on the consolidated statements of operations and
comprehensive (loss) income.
19
Aralez Investment and Distribution
On June 8, 2015, QLT 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 of 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 QLT for the purpose of returning capital to its shareholders pursuant to a special election distribution that was payable, at the
election of each QLT 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 purchased 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) for an aggregate total investment of $45.0 million. The Aralez Shares are
listed on the NASDAQ and TSX.
QLT entered into a share purchase agreement, dated June 8, 2015 (as amended, the Backstop
Agreement) with 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)
pursuant to which 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.
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 its shareholders in a tax efficient manner.
Following the effectiveness of Aralezs 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, with a fair value of $19.3 million, and $15.0 million of cash (received pursuant to the Backstop Agreement) to its shareholders of record on February 16, 2016.
QLT held the Aralez Shares from February 5, 2016 to the Date of Distribution and the Aralez Shares were marked-to-market. As a result, the
Company recognized a $2.3 million gain during the three months ended June 30, 2016 and a $10.7 million loss during the six months ended June 30, 2016, to reflect the changes in value from the acquisition date to the Distribution Date.
During the three and six months ended June 30, 2016, QLT incurred consulting and transaction fees of nil and $4.4 million respectively, in
connection with the Aralez Investment and Distribution. The $4.4 million for the six months ended June 30, 2016 includes a $4.0 million advisory fee paid to Greenhill & Co, LLC for financial advisory services performed in connection with the
completion of the Aralez Investment and exploration of certain other strategic initiatives. These consulting and advisory fees are reflected as part of SG&A on the consolidated statements of operations and comprehensive (loss) income.
20
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 active pharmaceutical ingredient in QLT091001 has been designated as zuretinol acetate as its International Nonproprietary Name
(INN). The following table sets forth the stage of development of our technology:
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Indications
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Status/Development Stage
|
QLT091001
|
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Inherited Retinal Disease caused by
RPE65
and
LRAT
gene mutations (comprises 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
second half 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.
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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 indication comprises
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.
We are currently conducting Phase III pivotal trial start-up activities 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, with a goal of initiating the pivotal trial in the second half of 2016.
In the second quarter of 2016, we attended an advisory meeting with a selected national European agency where we presented the results of our
natural history study. Feedback from the agency suggested that, in addition to the natural history data, availability of placebo-controlled data during the Marketing Authorization Application (MAA) review period would strengthen the chances for
conditional marketing approval by the EMA. We continue to explore the feasibility and timing for submitting an MAA for conditional approval in the future with the EMA.
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 FDAs 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.
21
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.
22
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. Subsequent to grant of the patent, a petition was filed for reconsideration by the USPTO to further lengthen the original period of patent term adjustment. In response to the petition, the USPTO advised us that the patent
was entitled to 500 days of patent term adjustment, and the patent is currently projected to expire on August 31, 2032, including the period of patent term adjustment. Also, this patent is subject to terminal disclaimer, which could potentially
shorten the current 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
summarizes our net losses from operations for the three and six months ended June 30, 2016 and 2015:
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|
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|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
(In thousands of U.S. dollars, except per share data)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net loss and comprehensive loss
|
|
$
|
(5,120
|
)
|
|
$
|
(10,751
|
)
|
|
$
|
(27,014
|
)
|
|
$
|
(16,647
|
)
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.10
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.32
|
)
|
A detailed discussion and analysis of our results of operations are as follows:
Costs and Expenses
Research and Development
During the three months ended June 30, 2016, research and development (R&D) expenditures were $2.9 million
compared to $3.4 million for the same period in 2015. The $0.5 million (15%) decrease was primarily due to lower stock based compensation, lower salary and overhead costs related to R&D headcount attrition, the foreign exchange impact of
the weak Canadian dollar and downsizing of our lease space. Stock based compensation expense was significantly lower in the current period relative to the prior period due to the impact of the June 2015 accelerated vesting of all outstanding stock
options in connection with the investment in and subsequent distribution of the Aralez Shares and execution of the InSite Merger Agreement. The cost decreases described above were partially offset by an increase in costs related to preparatory
activities for our upcoming Phase III pivotal trial for QLT091001.
During the six months ended June 30, 2016, R&D expenditures
were $5.9 million compared to $5.6 million for the same period in 2015. The $0.3 million (5%) increase was primarily due to higher costs incurred in 2016 related to preparatory activities for our upcoming Phase III pivotal trial for QLT091001,
and the advancement of our natural history study, which was substantially completed during the first quarter of 2016. These cost increases were partially offset by lower stock based compensation expense during the period and lower salaries and
overhead costs due to the same reasons described above.
23
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Three months ended
June 30,
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|
|
Six months ended
June 30,
|
|
(In thousands of U.S. dollars)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Operating - selling, general and administration expense
|
|
$
|
1,287
|
|
|
$
|
2,429
|
|
|
$
|
2,328
|
|
|
$
|
4,108
|
|
|
|
|
|
|
Strategic consulting and advisory fees
|
|
|
3,164
|
|
|
|
4,725
|
|
|
|
8,021
|
|
|
|
6,665
|
|
Total selling, general and
administration expense
|
|
$
|
4,451
|
|
|
$
|
7,154
|
|
|
$
|
10,349
|
|
|
$
|
10,773
|
|
|
|
During the three months ended June 30, 2016, we incurred $3.2 million of consulting and advisory fees related
to our exploration of strategic alternatives and pursuit of a merger transaction with Aegerion. In comparison, we incurred $4.7 million of similar costs in 2015 related to our pursuit of a merger transaction with InSite Vision Incorporated
(InSite) and other strategic options. The proposed merger transaction with InSite was terminated on September 15, 2015.
Excluding the strategy related consulting and advisory fees discussed above, during the three months ended June 30, 2016, SG&A expenditures
were $1.3 million compared to $2.4 million for the same period in 2015. The $1.1 million (46%) decrease was primarily related to lower stock based compensation expense during the period, due to the same reason described above, lower fees paid
for director compensation and lower general operating costs related to the downsizing of our lease space. These costs savings were partially offset by a lower amount of overhead being allocated to R&D expense due to R&D headcount attrition.
During the six months ended June 30, 2016, we incurred $8.0 million of consulting and advisory fees related to the execution of the Aralez
Investment and Distribution, our exploration of strategic alternatives and our pursuit of a merger transaction with Aegerion. Similarly, during the six months ended June 30, 2015, we incurred consulting and advisory fees of $6.7 million related to
our pursuit of a merger transaction with InSite and other strategic alternatives.
Excluding the strategy related consulting and advisory
fees discussed above, during the six months ended June 30, 2016, SG&A expenditures were $2.3 million compared to $4.1 million. The $1.8 million (44%) decrease was primarily related to lower stock based compensation expense during the period, due
to the same reason described above, lower fees paid for director compensation and lower general operating costs that were affected by downsizing of our lease space and the foreign exchange impact of the weak Canadian dollar. These costs savings
were partially offset by a lower amount of overhead being allocated to R&D expense due to R&D headcount attrition.
Other (Expense) Income
Net Foreign Exchange Gains (Losses)
For the three and six months ended June 30, 2016 and 2015, net foreign exchange losses was 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 Gain (Loss) on Investment
Following the effectiveness of Aralezs Form S-1 on April 1, 2016, the Aralez Distribution was effected on April 5, 2016. QLT distributed,
based on the results of the shareholder election, 4,799,619 Aralez Shares, with a fair value of $19.3 million, and $15.0 million of cash to its shareholders of record on February 16, 2016.
QLT held the Aralez Shares, from February 5, 2016 to the Date of Distribution, and the Aralez Shares were marked-to-market. As a result, the
Company recognized a $2.3 million gain during the three months ended June 30, 2016 and a $10.7 million loss during the six months ended June 30, 2016, to reflect the change in value from the acquisition date to the Distribution Date.
Income Taxes
During the three and
six months ended June 30, 2016, and June 30, 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 and six months ended June 30,
2016, and June 30, 2015.
24
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 June 30, 2016, we have a full
valuation allowance applied against all of our identified tax assets.
LIQUIDITY AND CAPITAL RESOURCES
General
As at June 30, 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.
In
connection with the proposed Merger transaction with Aegerion, our cash resources may be significantly affected by the following:
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Additional advances to Aegerion On June 14, 2016, QLT entered into a Loan Agreement with Aegerion,
pursuant to which QLT agreed to provide a term loan facility to Aegerion for an aggregate maximum amount of $15.0 million to fund working capital needs. As at June 30, 2016, $3.0 million is outstanding under the Loan Agreement and Aegerion is
permitted to borrow an additional $3.0 million per month (commencing in July 2016) if and to the extent that such amounts are required for Aegerion to maintain an unrestricted cash balance of $25.0 million, subject to the satisfaction of certain
terms and conditions. For more information, refer to the
Strategic Transactions Merger Transaction with Aegerion Pharmaceuticals, Inc.
section above.
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$21.8 million of capital is expected to be received by QLT pursuant to the terms of the Unit Subscription
Agreement described under the
Strategic Transactions Merger Transaction with Aegerion Pharmaceuticals, Inc.
section above.
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QLT may incur significant transaction costs to close the proposed Merger transaction with Aegerion, as well as
integration costs following the closing of the Merger.
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Furthermore, subject to the closing of the Merger with Aegerion,
our future cash flows may be subject to other risks and factors as described under Item 1A. Risk Factors of this Quarterly Report.
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 second half of 2016. If we are successful in initiating our Phase III pivotal trial, we expect that a $1.0 million milestone payment will concurrently become due and
payable to Retinagenix pursuant to the terms of our Co-Development Agreement with them.
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; 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.
25
Cash Used in Operating Activities
During the three months ended June 30, 2016, we used $4.9 million of cash in operations compared to $5.2 million for the same period in 2015.
The $0.3 million improvement in operating cash outflows was primarily attributable to the following:
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A positive cash flow variance of $1.1 million due to lower consulting and advisory fees paid during the three
months ended June 30, 2016 as compared to the same period in 2015; and
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A negative cash flow variance of $0.8 million resulting from higher operational spending on preparatory
activities for our Phase III QLT0910001 pivotal trial, which was partially offset by the foreign exchange impact of the weak Canadian dollar.
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During the six months ended June 30, 2016, we used $13.8 million of cash in operations compared to $10.0 million for the same period in
2015. The $3.8 million decrease in operating cash flows was primarily attributable to the following:
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A net $2.4 million negative cash flow variance primarily due to a $4.0 million advisory fee paid to our
investment bankers (refer to the
Strategic Transactions Aralez Investment and Distribution
section above), which was offset by a $1.6 million decline in other strategic consulting and advisory fees paid during the period;
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A net $0.6 million negative cash flow variance associated with certain retention bonuses paid our during the
six months ended June 30, 2016; and
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|
|
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A $0.8 million negative cash flow variance resulting from higher operational spending on preparatory
activities for our Phase III QLT091001 pivotal trial, which was partially offset by the foreign exchange impact of the weak Canadian dollar.
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Cash Used in Investing Activities
During the three and six months ended June 30, 2016, cash flows used in investing activities were $3.0 million and $3.1 million, respectively.
The cash flows for both periods consisted of a $3.0 million advance to Aergerion under the terms of the Loan Agreement and certain property, plant and equipment purchases.
During the three and six months ended June 30, 2015, cash flows used in investing activities consisted of the $3.5 million advanced to
InSite in connection with the proposed merger transaction, which was terminated on September 15, 2015.
Cash Provided by Financing Activities
During the three months ended June 30, 2016, cash flows from financing activities consisted of $15.0 million of cash distributed
to our shareholders on April 5, 2016 to effect the Aralez Distribution.
During the six months ended June 30, 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 pursuant to the terms of the Backstop Agreement. These proceeds were
subsequently distributed to our shareholders as part of the Aralez Distribution. For more information refer to the
Strategic Transactions Aralez Investment and Distribution
section above.
During the three and six months ended June 30, 2015, cash flows provided by financing activities consisted of $4.7 million and $5.0
million, respectively, 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. As at June 30, 2016, we had $80.0 million in cash and cash equivalents and our cash equivalents had an average remaining maturity of approximately 14 days. If market interest rates were to
increase immediately and uniformly by one hundred basis points from levels at June 30, 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 from 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 the consolidated statements of operations and comprehensive loss for the period.
At June 30,
2016, we had no outstanding forward foreign currency contracts and no collateral was pledged for security.
26
Contractual Obligations
As of June 30, 2016, our material contractual obligations primarily consist of our clinical and development agreements related to our
activities for our Phase III pivotal trial for QLT091001 as well as agreements signed in connection with our proposed Merger with Aegerion. For more information related to these agreements, refer to the
Strategic Transactions Merger
Transaction with Aegerion Pharmaceuticals Inc.
section above and
Managements Discussion and Analysis of Financial Condition and Results of Operations Contractual Obligations
in our 2015 Annual Report.
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 June 30, 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 August 5, 2016, QLT had 52,829,398 common shares issued and outstanding, which totaled $475.3 million in share capital. As of August
5, 2016, we had 2,559,052 stock options outstanding of which 519,149 were exercisable at a weighted average exercise price of $3.40
1
per share. Each stock option is exercisable for one common
share. As of August 5, 2016, we had 230,000 RSUs outstanding, none of which are vested. Upon vesting, each RSU represents the right to receive one common share of the Company. As of August 5, 2016, we had 198,800 deferred stock units
(DSUs) outstanding of which 156,489 are vested. The cash value of the DSUs outstanding as at August 5, 2016 is approximately $0.3 million.
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, tax
liabilities and uncertain tax positions. 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.
1
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Where the exercise price of QLTs stock option swere denominated in Canadian dollars, for the purposes of
this calculation, the exercise price of such stock options were converted into their U.S. dollar equivalents using the August 5, 2016 Bank of Canada foreign exchange rate of 1.3164.
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27