United Therapeutics Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results; dollar amounts are in millions except per-share data. The company develops and commercializes therapies, principally for pulmonary arterial hypertension (PAH), and reported sales of five marketed products.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $408.2 | $386.2 | $1,189.8 | $1,060.9 |
| Operating income | $238.6 | $387.0 | $887.5 | $544.0 |
| Net income | $161.8 | $464.4 | $603.4 | $547.0 |
| Diluted EPS | $3.50 | $9.24 | $12.76 | $10.58 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $480.2 | $357.3 |
Q3 product sales rose 5.7%; nine-month sales rose 12.2%. Q3 gross profit was $384.6, approximately 94.2% of product sales; nine-month gross profit was $1,145.5, approximately 96.3% of product sales. Reported operating margins were approximately 58.5% for Q3 and 74.6% for the nine-month period.
- Q3 sales by product: Remodulin $152.4 (+1.5% year over year); Tyvaso $101.8 (−16.4%); Adcirca $96.0 (+30.1%); Orenitram $40.7 (+18.3%); Unituxin $17.3 (+268.1%).
- Nine-month sales by product: Remodulin $451.1 (+4.3%); Tyvaso $311.0 (−11.4%); Adcirca $259.5 (+38.5%); Orenitram $118.9 (+46.4%); Unituxin $49.3, compared with $4.7 in the prior-year period.
- At September 30, cash and cash equivalents were $953.0; marketable investments were $81.9. Combined, these totaled $1,034.9, up from $991.8 at year-end 2015. Current assets were $1,386.0 and current liabilities $314.6.
- Nine-month operating cash flow of $480.2 exceeded net income, while investing activities provided $39.8 and financing activities used $396.0. Repurchases used $395.5, for approximately 3.3 million shares.
- The $250.0 million 1.0% convertible notes matured in September 2016, and the company says it fulfilled the remaining settlement and repayment obligations. A $1.0 billion unsecured revolving facility, maturing in January 2021, was undrawn; the company reported covenant compliance.
Changes, unusual items, and management outlook
- Q3 net income fell substantially from 2015, when results included a $350.0 gain from selling a Rare Pediatric Priority Review Voucher. The prior-year quarter also included large share-based compensation benefits. In 2016, STAP remeasurement instead produced $45.8 of pre-tax compensation expense in Q3; the stock-price-sensitive awards make expenses and earnings volatile.
- For the first nine months, 2016 operating income increased despite lower reported R&D and SG&A expenses. The company recorded a $116.5 pre-tax STAP compensation benefit versus $159.6 of expense in the comparable 2015 period. The 2015 period also included the $350.0 voucher gain. Nine-month effective tax rates were 32% in 2016 and 38% in 2015.
- Management said available liquidity was sufficient for ongoing operations and plans, while noting cash-flow projections are uncertain. It budgeted approximately $275 million of capital expenditures over the next three years. No specific revenue or earnings guidance was provided. Its stated priorities were continued sales growth and advancing the development pipeline.
- Pipeline and regulatory timing remains uncertain. The FDA had issued a complete response letter on the RemoSynch drug application pending approval of Medtronic’s device application; management anticipated resubmitting the drug application in early 2017. The filing lists development objectives and target approval years, but these are goals, not assured outcomes.
Risks and contingencies
- Generic and patent challenges threaten key products. Sandoz and Teva were expected to launch generic Remodulin in the U.S. in June and December 2018, respectively, potentially earlier in certain circumstances. Watson’s Tyvaso and Actavis’s Orenitram cases were in litigation; SteadyMed’s challenge to a treprostinil patent had received a preliminary PTAB finding of a reasonable likelihood of success. The company also disclosed receiving a Remodulin generic notice from Par in October 2016.
- Adcirca’s U.S. PAH patent was expected to expire in November 2017. The company cited generic competition, pricing and reimbursement pressure, competing PAH therapies, and dependence on distributors and third-party manufacturers as business risks.
- The Department of Justice subpoenaed documents in May 2016 concerning company support of 501(c)(3) organizations that assist patients taking its medicines. The company said it was cooperating; the outcome was uncertain.
- Other material uncertainties include clinical-trial and regulatory outcomes, production and supply continuity, Unituxin post-marketing commitments, and potential adverse effects or restrictions on marketed products.
Investor verification points
- Assess the underlying earnings trend apart from the $350.0 million 2015 voucher gain and large, stock-price-driven STAP compensation swings.
- Track Tyvaso sales weakness and growth drivers for Adcirca, Orenitram, and Unituxin, including distributor ordering effects and payer reimbursement.
- Monitor decisions and timing in the Remodulin, Tyvaso, and Orenitram patent matters, including the SteadyMed review and the subsequent Par notice.
- Verify progress on RemoSynch regulatory filings and other pipeline trials; target dates and approval objectives are subject to change.
- Follow the DOJ inquiry, capital spending plans, share repurchases, and cash obligations related to outstanding STAP awards.