Revenues
Net Product Revenue
Net product revenue was determined as follows:

                                                             Three months ended
                                                                  March 31,
  (In thousands of U.S. dollars)                             2009           2008

  Visudyne sales by Novartis                              $   27,754      $  36,480
  Less: Marketing and distribution costs(1)                   (8,687 )      (18,032 )
  Less: Inventory costs(2)                                    (1,656 )       (1,989 )
  Less: Royalties to third parties(3)                           (602 )         (779 )

                                                          $   16,809      $  15,680


  QLT's 50% share of Novartis' net proceeds from
  Visudyne sales                                          $    8,404      $   7,840
  Add: Advance on inventory costs from Novartis(4)             1,943          1,355
  Add: Royalties reimbursed to QLT(5)                            612            797
  Add: Other costs reimbursed to QLT(6)                          820          1,912

  Revenue from Visudyne sales                             $   11,779      $  11,904

  Net product revenue from Eligard                             9,038          8,112

                                                          $   20,817      $  20,016

(1) "Less:
Marketing and
distribution
costs"

This
represents
Novartis' cost
of marketing,
promoting, and
distributing
Visudyne, as
well as
certain
specified
costs incurred
and paid for
by QLT,
determined in
accordance
with the PDT
Product
Development,
Manufacturing,
and
Distribution
Agreement
between QLT
and Novartis.
The costs
incurred by
Novartis are
related to its
sales force,
advertising
expenses,
marketing, and
certain
administrative
overhead
costs. The
costs incurred
by us include
marketing
support, legal
and
administrative
expenses that
we incur in
support of
Visudyne
sales.

(2) "Less:
Inventory
costs"

This
represents
Novartis' cost
of goods sold
related to
Visudyne. It
includes the
cost of bulk
Visudyne we
ship to
Novartis and
our provisions
for excess or
obsolete
inventory,
losses on
manufacturing
purchase
commitments,
plus Novartis'
packaging and
labelling
costs,
freight,
custom duties
and inventory
obsolescence.

(3) "Less:
Royalties to
third parties"

This
represents the
royalty
expenses we
incur and
charge to
Novartis
pursuant to
the PDT
Product
Development,
Manufacturing
and
Distribution
Agreement
between QLT
and Novartis.
The amounts
are calculated
by us based on
specified
royalty rates
from existing
license
agreements
with our
licensors of
certain
Visudyne
patent rights.

(4) "Add: Advance on inventory costs from Novartis"

This
represents the
amount that
Novartis
advances to us
for shipments
of bulk
Visudyne and
reimbursement
for inventory
obsolescence.
The price of
the Visudyne
shipments is
determined
based on the
existing
agreement
between QLT
and Novartis
and represents
our actual
costs of
producing
Visudyne.

(5) "Add:
Royalties
reimbursed to
QLT"

This is
related to
item (3) above
and represents
the amounts we
receive from
Novartis in
reimbursement
for the actual
royalty
expenses we
owe to third
party
licensors.

(6) "Add: Other costs reimbursed to QLT"

This
represents
reimbursement
by Novartis to
us of our
portion of the
marketing and
distribution
costs
described in
(1) above. Our marketing and distribution costs include marketing support, legal and administrative expenses that we incur in support of Visudyne sales.

For the three months ended March 31, 2009, revenue from Visudyne declined by $0.1 million, or 1%, to $11.8 million compared to $11.9 million for the three months ended March 31, 2008. The decrease was due to a 24% decline in Visudyne sales by Novartis over the same period in the prior year as a result of decreased end user demand due to competing therapies, offset by a 52% reduction in marketing and distribution costs. For the three months ended March 31, 2009, approximately 31% of the total Visudyne sales by Novartis were in the U.S., 25% were in Europe, and 44% were in other markets worldwide. For the three months ended March 31, 2008, approximately 25% of the total Visudyne sales by Novartis were in the United States, 36% were in Europe, and 39% were in other markets worldwide. Overall, the ratio of our 50% share of Novartis' net proceeds from Visudyne sales compared to total worldwide Visudyne sales was 30.3% for the three months ended March 31, 2009, up from 21.5% for the three months ended March 31, 2008.
For the three months ended March 31, 2009, net product revenue from Eligard increased by $0.9 million, or 11%, to $9.0 million, from $8.1 million for the three months ended March 31, 2008. The increase was due to increased shipments of Eligard to commercial licensees, which was driven by Eligard's continued growth in Europe and the U.S.
Royalties
For the three months ended March 31, 2009, royalty revenue was $8.9 million, which was $2.6 million, or 41% higher than royalty revenue of $5.7 million for the same period in 2008. The increase is partially a result of a $1.8 million provision for a potential retroactive pricing rebate on certain sales of Eligard recorded in the three months ended March 31, 2008. The remaining increase is a result of Eligard's continued growth in Europe and the U.S.. Costs and Expenses
Cost of Sales
For the three months ended March 31, 2009, cost of sales increased by 11% to $13.0 million compared to $11.8 million for the same period in 2008. The increase was mainly due to higher shipments of Eligard to our commercial licensees. Cost of sales related to Eligard increased from $8.5 million to $9.6 million in the three months ended March 31, 2009 compared to the same period in 2008. The increase was due to continued growth of the product in Europe and the U.S..
Costs of sales related to Visudyne increased from $3.3 million to $3.4 million in the quarter ended March 31, 2009 compared to the same period in 2008. The current period cost of sales related to Visudyne includes a $0.4 million charge for a loss on a minimum manufacturing purchase commitment and $0.6 million charge for an inventory write-down. Cost of sales related to Visudyne for both periods included 3.01% of worldwide Visudyne sales, pursuant to damages awarded in the judgment against us in the MEEI litigation. See Note 12(b) Contingencies in the "Notes to Condensed Consolidated Financial Statements" in this report. Unless the judgment is reversed or altered upon further appellate review, QLT will be required to continue to pay MEEI 3.01% of worldwide Visudyne net sales, and this amount will be reported in cost of sales. We are in communication with Novartis about sharing in the cost of the judgment and the ongoing obligation. However, there is no guarantee that they will agree to participate. Research and Development
Research and development, or R&D, expenditures decreased 27% to $5.9 million for the three months ended March 31, 2009 compared to $8.0 million in the same period in 2008. The decrease was a result of lower overhead expenses due to cost savings from restructuring and lower spending on Visudyne combination studies, partially offset by higher spending on punctal plug development. The magnitude of future R&D expenses is highly variable and depends on many factors over which we have limited visibility and control. Numerous events can happen to an R&D project prior to it reaching any particular milestone which can significantly affect future spending and activities related to the project. These events include:
• inability to design punctal plugs to function as expected,

• delays or inability to formulate active ingredient in right concentration to deliver effective doses of drug,

• changes in the regulatory environment,

• introduction of competing technologies and treatments,

• unexpected safety issues,

• patent application, maintenance and enforcement issues,

• inability to operate without infringing the proprietary rights of others,

• changes in the commercial marketplace,

• difficulties in enrolling patients into or keeping them in our clinical studies,

• delays in study progression, including study site, Institutional Review Board and regulatory delays,

• failure to meet favorable study endpoints,

• inability to develop cost effective manufacturing methods that comply with regulatory standards,

• inability to attract personnel or retain personnel with expertise required by our development program,

• inability to manufacture sterile supplies necessary for composition of products,

• uncertainties related to collaborative arrangements,

• environmental risks, and

• other factors referenced under Item 1A, Risk Factors.

R&D expenditures by therapeutic area were as follows:

                                                  Three months ended
                                                       March 31,
               (In thousands of U.S. dollars)      2009          2008

               Ocular                           $    5,712      $ 6,708
               Dermatology                              10        1,274
               Other                                   164           66


                                                $    5,886      $ 8,048

Selling, General and Administrative Expenses For the three months ended March 31, 2009, selling, general and administrative, or SG&A, expenses decreased 27% to $5.2 million compared to $7.2 million for the three months ended March 31, 2008. The decrease was primarily due to cost savings from restructuring and higher Visudyne production in the three months ended March 31, 2009 compared to the same period in 2008, which resulted in an increased allocation of costs to manufacturing under our standard costing system.
Litigation
During the three months ended March 31, 2009, we incurred a charge of approximately $0.3 million in connection with the reimbursement of legal fees, accounting fees and other amounts to resolve legal issues not material to QLT or its business.
Restructuring Charge
During the three months ended March 31, 2008, we restructured our operations and during the three months ended March 31, 2009, we recorded a $0.1 million adjustment to our restructuring accrual related to severance, termination benefits and other costs as we complete final activities associated with this restructuring. For the three months ended March 31, 2008, we provided most of the approximately 115 affected employees with severance and support to assist with outplacement and recorded $7.6 million of restructuring charges which included a property, plant, and equipment impairment charge of $1.5 million. Annualized operating savings as a result of the 2008 restructuring, which was substantially completed by June 30, 2008, are approximately $11.0 million. Investment and Other Income (Expense)
Net Foreign Exchange Gains
Net foreign exchange gains comprise gains from the impact of foreign exchange fluctuations on our cash and cash equivalents, restricted cash, derivative financial instruments, foreign currency receivables, foreign currency payables and, prior to its redemption in September 2008, U.S. dollar denominated convertible debt. See "Liquidity and Capital Resources - Interest and Foreign Exchange Rates."

Details of our net foreign exchange gains were as follows:

                                                       Three months ended
                                                            March 31,
         (In thousands of U.S. dollars)                 2009          2008

         Cash and cash equivalents                   $    2,501     $  1,902
         Restricted cash                                  2,622        3,246
         U.S. dollar convertible debt                         -       (4,585 )
         Foreign exchange contracts                       1,108        2,059
         Foreign currency receivables and payables       (6,182 )     (2,368 )


         Net foreign exchange gains                  $       49     $    254

Interest Income
For the three months ended March 31, 2009, interest income decreased 41% to $1.4 million compared to $2.3 million for the same period in 2008. The decrease was primarily due to a substantial decline in interest rates partially offset by $0.7 million of interest earned on tax refunds, $0.2 million of interest earned on our second mortgage financing and a higher average cash balance compared to the same period in the prior year.
Interest Expense
Interest expense of $1.5 million for the three month period ended March 31, 2009 is entirely related to interest expense on the post judgment accrued liability associated with the MEEI patent litigation damage award. For the three months ended March 31, 2008, $3.0 million of interest expense comprised $1.3 million of interest accrued on the 3% convertible senior notes due in 2023 (which were redeemed on September 15, 2008), $0.3 million of amortization of deferred financing expenses related to the placement of these notes and interest expense of $1.4 million on the post judgment accrued liability associated with the MEEI patent litigation damage award.
Loss from Discontinued Operations
During the third quarter of 2008, we completed the sale of Aczone and out-license of certain Atrigel rights. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, the results of operations from the Aczone and Atrigel products were excluded from continuing operations and reported as discontinued operations for the prior period. Income Taxes
The effective income tax rate for the three month period ended March 31, 2009 was 76.1% compared to 1.8% for the same period in the prior year. The increase in the effective tax rate was primarily due to an increased valuation allowance against the tax benefit of losses associated with punctal plug development expenditures and changes in the overall mix of income (loss) in the jurisdictions in which we operate and it reflects the impact of a corporate reorganization and the outcome of items currently outstanding with tax authorities.
LIQUIDITY AND CAPITAL RESOURCES
General
Our cash resources and working capital, cash flow from operations, and other available financing resources will be utilized to fund current product development programs, operating requirements, and liability requirements. We are continuing to pursue the sale of QLT USA or its remaining assets, principally the Eligard product line and related assets, but such a transaction will not be completed if we are unable to sell it on terms, including price that are satisfactory to us. If adequate capital is not available, our business could be materially and adversely affected. Other factors that may affect our future capital requirements include: the status of competitors and their intellectual property rights; the outcome of legal proceedings and damage awards; the progress of our R&D programs, including preclinical and clinical testing; potential future share repurchases; fluctuating or increasing manufacturing requirements; 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; and our ability to establish collaborative arrangements with other organizations. On April 15, 2009, the District Court issued an order releasing the appeal bond that we had posted in August 2007 and directed the bonding company to pay out the bond amount to MEEI. The District Court order also entered a judgment ordering us to pay MEEI $14.1 million in attorneys' fees and costs to MEEI, to which a reduction of $3.0 million previously agreed to by MEEI was applied. On April 23, 2009, the appeal bond amount of $124.8 million was released to MEEI, and we paid MEEI an additional $2.2 million to satisfy the difference between the District Court judgment, plus attorneys' fees and interest, and the amount held by the bonding company. We are in communication with Novartis about sharing in the cost of the judgment and the ongoing obligation. However, there is no guarantee that they will agree to participate. Sources and Uses of Cash
We have financed operations, product development and capital expenditures primarily through proceeds from our commercial operations, public and private sales of equity securities, private placement of convertible senior notes, licensing and collaborative funding arrangements, sale of non-core assets and interest income.
The primary drivers of our operating cash flows during the three month period ended March 31, 2009 were cash payments related to the following: R&D activities, SG&A expenses, raw material purchases, manufacturing costs related to the production of Eligard, tax installments, and interest expense, offset by cash receipts from product revenues, royalties and milestone payment, interest income and a tax refund.

For the three month period ended March 31, 2009, we generated $17.6 million of cash from operations as compared to using $6.2 million for the same period in 2008. The $23.8 million positive cash flow variance is primarily attributable to:
• A positive cash flow variance from higher cash receipts from product sales, royalties and milestones of $7.5 million;

• A positive cash flow variance from lower operating and inventory related expenditures of $7.2 million;

• A positive cash flow variance from lower restructuring costs of $3.9 million;

• A positive cash flow variance from a tax refund of $2.9 million;

• A positive cash flow variance from higher foreign exchange gains of $2.6 million;

• A positive cash flow variance from higher investment and other income of $2.3 million; and

• A negative cash flow variance from tax installments of $1.7 million.

During the three month period ended March 31, 2009, the disposal of fixed assets of $0.1 million accounted for the most significant cash flows provided by investing activities offset by capital expenditures of $0.1 million. For the three month period ended March 31, 2009, our cash flows used in financing activities consisted primarily of common shares repurchased, including share repurchase costs, of $51.9 million. 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, 2009, we had $130.1 million in cash and cash equivalents. Approximately $106.1 million, or 82%, of the cash and cash equivalents was held in two U.S. Government money market funds that have maintained their net asset values and applied for coverage under the U.S. Treasury Department's Temporary Guarantee Program for Money Market Funds (Guarantee Program). The remaining balance was held in cash and term deposits. At March 31, 2009, our term deposits had an average remaining maturity of 15 days. If market interest rates were to increase immediately and uniformly by one hundred basis points from levels at March 31, 2009, the fair value of the term deposits would decline by an immaterial amount due to the short remaining maturity period. Since the remaining cash and cash equivalents were all held in money market funds and cash, changes in market interest rates do not impact their fair value.
To offset the foreign exchange impact of our U.S. dollar-denominated liabilities, we held approximately the equivalent amount in U.S. dollar-denominated cash, restricted cash, cash equivalents, accounts receivables and foreign currency contracts such that if the U.S. dollar were to increase in value by 10% against the Canadian dollar, the increase in the fair value of our U.S. dollar denominated liabilities would be approximately offset by the increase in fair value of our U.S. dollar-denominated cash, restricted cash, cash equivalents, accounts receivables and foreign currency contracts, resulting in an immaterial amount of unrealized foreign currency translation loss. As the functional currency of our U.S. subsidiaries is the U.S. dollar, the U.S. dollar-denominated cash and cash equivalents holdings of our U.S. subsidiaries do not result in foreign currency gains or losses in operations. The Canadian dollar is the functional currency of QLT Inc., while the U.S. dollar is our reporting currency. Since QLT Inc. holds a portion of its cash and cash equivalents in its functional currency, the Canadian dollar, we are subject to translation gains and losses. These translation gains and losses are included as part of the cumulative foreign currency translation adjustment, which is reported as a component of shareholders' equity under accumulated other comprehensive income.
We enter into foreign exchange contracts to manage exposures to currency rate fluctuations related to our U.S. dollar-denominated liabilities. The net unrealized gain in respect of such foreign currency contracts for the three months ended March 31, 2009 was $0.8 million, and was included as part of the net foreign exchange gains in our results of operations.
At March 31, 2009, we had outstanding forward foreign currency contracts as noted below.

                                                  Maturity Period        Quantity (millions)        Average Price
CAD / USD
forward contracts to buy USD                                  2009                   USD 73.0      1.24615 per USD

Contractual Obligations
Our material contractual obligations as of March 31, 2009 comprised our supply agreements with contract manufacturers, and clinical and development agreements. We also have operating lease commitments for office space and office equipment. Details of these contractual obligations are described in our Annual Report on Form 10-K for the year ended December 31, 2008.

Off-Balance Sheet Arrangements . . .