United Therapeutics Corporation: Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The filing is unaudited. United Therapeutics is a biotechnology company whose marketed products include Remodulin, Tyvaso, Orenitram, Unituxin and Adcirca.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $362.0 | $373.6 | $718.3 | $736.2 |
| Gross profit | $336.1 | $346.9 | $669.0 | $680.4 |
| Operating income (loss) | $140.5 | $221.4 | $307.2 | ($434.5) |
| Net income (loss) | $107.1 | $205.1 | $244.8 | ($289.5) |
| Diluted EPS | $2.41 | $4.66 | $5.53 | ($6.61) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $378.6 | ($494.5) |
- Q2 revenue fell 3% year over year. Gross margin was approximately 92.8%, versus 92.9%; operating margin was approximately 38.8%, versus 59.2%.
- For the first half, revenue declined 2%. Operating income and net income returned to positive results, largely because the prior-year period included an $800.0 million upfront ralinepag license payment to Arena, recorded as R&D expense.
- Cash and cash equivalents were $685.4; current and non-current marketable investments totaled $1,884.7. Together, these were $2,570.1, up 14% from year-end 2019. Debt under the revolving credit facility was $800.0, all classified as non-current. The company had $1,894.4 of current assets and $255.0 of current liabilities.
- First-half investing cash outflow was $403.0, primarily reflecting purchases of marketable investments; financing cash outflow was $28.6, including a $50.0 debt repayment. Cash and cash equivalents declined by $53.0 to $685.4.
Material changes versus comparable periods
- Q2 sales varied by product: Remodulin fell 24% to $119.0; Tyvaso rose 9% to $119.2; Orenitram rose 40% to $75.4; Unituxin rose 16% to $29.0; and Adcirca fell 33% to $19.4.
- Management attributed lower Remodulin sales to generic competition and pandemic-related reductions in new patient starts. Adcirca continued to decline amid generic competition. Orenitram growth reflected increased sales volumes and expanded labeling following the FREEDOM-EV study.
- Q2 R&D expense increased 4% to $89.7. SG&A increased 167% to $105.9, including the effect of share-based compensation. Total share-based compensation was $51.8, compared with a $37.2 benefit in Q2 2019; the change was primarily driven by the stock-price-sensitive cash-settled share tracking awards plan (STAP).
- First-half operating cash flow improved by $873.1 year over year, primarily because the prior-year period included the Arena upfront payment. This comparison should not be read as a like-for-like change in underlying operating cash generation.
Outlook, commentary and key risks
- Management said COVID-19 makes 2020 revenue growth difficult to project and creates uncertainty around near-term commercial and development plans. It stated that cash, cash equivalents and marketable securities could fund operations at then-current levels for at least two years regardless of future revenues.
- Management reported sufficient treprostinil finished-product inventory for about two years at current demand and about three years of treprostinil API; it did not anticipate near-term product supply shortages. New patient starts weakened in April and were approaching pre-pandemic levels by quarter-end, according to the company.
- COVID-19 delayed Remunity Pump commercial launch because DEKA faced component and raw-material supply constraints. The company said it was working toward a near-term launch but could not predict precise timing. Clinical enrollment had paused at many sites; some studies resumed at selected sites, and management expected delays to study completion and data readouts.
- Pipeline catalysts include the Tyvaso supplemental application for pulmonary hypertension associated with interstitial lung disease, submitted in June 2020 after positive INCREASE results; Trevyent NDA resubmission, expected in 2021 after an FDA complete response letter; and development programs for ralinepag and other products. These timelines and outcomes remain uncertain. The Implantable System for Remodulin launch was previously shifted to 2021, subject to Medtronic satisfying FDA requirements.
- Major risks include dependence on treprostinil products, generic competition and pricing/reimbursement pressure; clinical, regulatory and manufacturing execution; COVID-19 impacts; reliance on third parties; and investment valuation risk. Remodulin sales face generic pressure in Europe and the U.S.; generic Adcirca has materially reduced sales, with increased product returns expected beginning in 2021.
- Legal matters include Sandoz/RareGen antitrust and contract litigation, for which loss estimates were not reasonably estimable, and Liquidia patent challenges and infringement litigation concerning LIQ861. The court denied the plaintiffs’ preliminary injunction request in the Sandoz matter; litigation continued. These cases and patent outcomes could affect competition, costs or product rights.
- Other unusual items include a $5.6 million first-half impairment of privately held investments and a $1.5 million first-quarter impairment of a note receivable associated with economic uncertainty. The Trevyent-related in-process R&D asset, carrying value $107.3 million, was not impaired as of June 30 based on a third-party valuation, but remains subject to future impairment analysis.
Important facts for investors to verify
- Whether new patient starts and product demand recovered or weakened after the quarter, particularly for Remodulin and other treprostinil therapies.
- Remunity supply readiness and commercial launch timing, along with progress on Medtronic’s FDA conditions for the implantable system.
- FDA review of the Tyvaso supplemental application, Trevyent resubmission, and clinical-trial timelines affected by COVID-19.
- Subsequent generic competition, Adcirca return exposure, and outcomes of the Sandoz/RareGen and Liquidia proceedings.
- Cash generation, investment valuations and impairments, and the company’s $800.0 million revolving-credit balance and covenant compliance.