United Therapeutics Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated results; dollar amounts are in millions except per-share data. The company develops and commercializes therapies for chronic and life-threatening conditions, with significant revenue concentrated in five marketed products.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $444.6 | $412.6 | $815.1 | $781.6 |
| Operating income | $88.5 | $285.2 | $352.1 | $648.9 |
| Net income (loss) | $(56.0) | $206.1 | $122.6 | $441.6 |
| Diluted EPS | $(1.25) | $4.39 | $2.68 | $9.24 |
- Q2 gross profit was $425.7, or approximately 95.7% of revenue; operating margin was approximately 19.9%, down from 69.1% a year earlier. The $210.0 DOJ-related accrual was the principal operating expense item affecting comparability.
- First-half operating cash flow was $301.5, compared with $251.5 in 2016. Investing cash flow was $(357.0), largely reflecting purchases of marketable investments; financing cash flow was $38.0.
- Cash and cash equivalents were $1,005.9 at June 30. Cash plus marketable investments totaled $1,331.4, up from $1,053.1 at year-end 2016.
- The company drew $250.0 on its $1.0 billion unsecured revolving credit facility to fund an accelerated share repurchase. It classified the draw as current because it intends to repay it within one year; facility maturity is January 2022. The company reported compliance with facility covenants.
- Total assets were $2,691.5 and total liabilities were $896.2 at June 30, 2017.
Material changes versus the prior comparable period
- Revenue increased 8% in Q2 and 4% for the first half. Q2 Adcirca sales rose 33% to $120.6, primarily due to price increases set by Lilly; Orenitram rose 21% to $46.0 as treated patients increased.
- Tyvaso revenue declined 3% in Q2 and 8% in the first half. Management attributed the weakness to earlier use of oral therapies delaying initiation of inhaled treatment. Remodulin was down 1% in Q2; Unituxin was down 10%.
- First-half net income fell to $122.6 from $441.6. In addition to the DOJ accrual, results included a $46.5 impairment of a privately held investment. The six-month effective tax rate was approximately 60%, versus 32% in 2016; neither charge currently qualified for tax deductibility.
- Research and development expense was $59.8 in Q2 and $96.0 in the first half, rising substantially year over year as pipeline and organ-manufacturing work expanded. First-half SG&A was $123.8, compared with $77.2, partly reflecting a much smaller share-based compensation benefit than in 2016.
Outlook, management commentary, and risks
- Management stated that current liquidity was sufficient for ongoing operations and future plans, while noting that cash-flow projections are uncertain. It budgeted approximately $300 million of capital expenditures over the next three years and expected increased clinical-trial spending in 2017.
- The company expects generic Adcirca competition after the November 2017 patent expiration. Under its amended Lilly agreement, from December 1, 2017 its royalty rate is scheduled to increase from 5% to 10%, with additional sales-based milestone payments, subject to pending patent appeals. Management anticipates lower Adcirca sales and higher product costs after generic entry.
- Settlements permit generic Remodulin launches beginning June 2018 for Sandoz and December 2018 for Teva, Par, and Dr. Reddy’s, potentially earlier in specified circumstances. Tyvaso and Orenitram patent litigation and challenges remain pending.
- The DOJ is investigating support for charitable organizations providing patient assistance. The company recorded a $210.0 accrual and was negotiating a settlement; it could not estimate reasonably possible losses above the accrual. A settlement may also include a corporate integrity agreement and related compliance costs. The outcome could affect reputation, demand, and reimbursement coverage.
- Pipeline and regulatory milestones include FREEDOM-EV, INCREASE, and SOUTHPAW studies; proposed RemoSynch launch in 2018 is subject to approvals. Management noted uncertainty from Medtronic’s consent decree affecting the SynchroMed II device program.
- Other key risks include generic and other competition, reimbursement and pricing pressure, patent outcomes, clinical and regulatory uncertainty, product safety, and reliance on manufacturers and distributors. The filing also warns of serious adverse effects associated with Unituxin.
Important facts for investors to verify
- Progress, terms, and final amount of any DOJ resolution, including any obligations beyond the recorded $210.0 accrual.
- Adcirca generic-entry timing, Lilly royalty and milestone economics, and the outcomes of patent appeals.
- Remodulin generic-launch timing and the outcomes of Tyvaso and Orenitram patent proceedings.
- Clinical and regulatory progress for major pipeline programs, including FREEDOM-EV, INCREASE, and RemoSynch.
- Repayment timing for the $250.0 credit-facility draw and funding needs for planned capital investment and R&D.