United Therapeutics Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Financial statements are unaudited. Amounts are in millions of dollars except per-share data.
Business context
United Therapeutics develops and sells therapies primarily for pulmonary arterial hypertension (PAH). Its marketed products are Remodulin, Tyvaso, Adcirca, Orenitram, and Unituxin. Unituxin sales began in the third quarter of 2015. The company also invests in clinical-stage therapies and organ-transplantation technologies.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $412.6 | $347.2 | $781.6 | $674.7 |
| Operating income | $285.2 | $171.8 | $648.9 | $157.0 |
| Net income | $206.1 | $99.2 | $441.6 | $82.6 |
| Diluted EPS | $4.39 | $1.91 | $9.24 | $1.57 |
| Operating cash flow | Not reported separately for the quarter | $251.5 | $150.1 |
Q2 revenue grew 18.8% year over year; six-month revenue grew 15.8%. Q2 operating margin was approximately 69.1% and net margin 50.0%; six-month operating margin was approximately 83.0% and net margin 56.5%. The unusually high operating profitability reflects substantial noncash share-based compensation benefits, particularly from cash-settled Share Tracking Awards Plan (STAP) awards, whose measured liability fell with the share price. Six-month share-based compensation was a net benefit of $143.1 in the cash-flow reconciliation, versus $281.8 of expense in 2015. Product gross margin was approximately 95.2% in Q2 and 97.3% for the first six months.
Cash and cash equivalents were $837.5 at June 30, 2016; marketable investments were $111.1, for combined cash and investments of $948.6. Current assets were $1,315.4 and current liabilities $292.4. Total liabilities were $384.4. Convertible-note principal remaining was $0.9, due September 15, 2016. The company had an undrawn unsecured revolving credit facility of up to $1.0 billion, maturing in January 2021; it was in compliance with its covenants.
Changes versus the prior comparable period
- Q2 product revenue growth was led by Adcirca, up 33.3% to $90.9; Orenitram, up 46.7% to $38.0; and Remodulin, up 16.9% to $158.9. Unituxin contributed $17.8. Tyvaso fell 7.6% to $107.0.
- For the first six months, Adcirca rose 44.1% to $163.5, Orenitram rose 67.1% to $78.2, and Remodulin rose 5.8% to $298.7; Tyvaso declined 8.7% to $209.2. Unituxin contributed $32.0.
- Net income and EPS increased sharply, but year-over-year comparisons were materially affected by volatile STAP expense and benefits. The company reported a 32% effective tax rate for the first half of 2016, compared with 46% in 2015, primarily due to lower nondeductible share-based compensation.
- Operating cash flow increased by $101.4 to $251.5, mainly due to $147.9 less cash paid to settle STAP awards, partly offset by $111.9 more cash paid for income taxes. Accounts receivable rose $45.3 from year-end, primarily reflecting the timing of sales and receipts.
- The company repurchased approximately 2.2 million shares for $259.7 in the first half, reducing shares outstanding. Cash and investments declined $43.2 from December 31, 2015.
Outlook, risks, and unusual items
- Management expects continued growth in current product sales and seeks medium-term growth from its development pipeline; it states current liquidity is sufficient for ongoing operations and planned business needs. No quantified revenue or earnings guidance is provided.
- The company budgeted approximately $275 million of capital expenditures over the next three years, including facilities to support development and commercialization.
- Key development programs include phase III studies of Orenitram (FREEDOM-EV) and Tysuberprost (BEAT), the Tyvaso-ILD study, and development of the RemUnity pump. RemoSynch faces significant regulatory uncertainty: the FDA found Medtronic’s pump application not approvable in March 2016, and a separate FDA consent decree restricts Medtronic’s pump operations.
- Generic competition is a major risk. Settlements permit generic Remodulin launches in the U.S. beginning June 2018 and December 2018, potentially earlier in certain circumstances. The company is litigating generic challenges to Tyvaso and Orenitram. In a separate patent review, the PTAB preliminarily found a reasonable likelihood that SteadyMed could prevail in its challenge to a treprostinil patent.
- The U.S. patent for Adcirca expires in November 2017. In July 2016, English health economics authorities declined to approve Unituxin reimbursement; the company cautioned that this could influence decisions in other European countries.
- In May 2016, the company received a Department of Justice subpoena seeking records concerning support for charitable organizations that assist patients taking its medicines. The company is cooperating and says the inquiry’s outcome is uncertain.
- Other notable items include $37.0 of patient-assistance charitable donations paid in Q1 2016, approximately $9.8 of accelerated stock-option vesting costs related to an officer’s departure in Q2, and a $7.1 pension actuarial gain after certain executives departed before retirement age.
Important facts for investors to verify
- How much reported earnings growth reflects product performance versus STAP remeasurement benefits, and how share-price movements could affect future reported expenses and cash settlements.
- Product-level sales trends, especially continuing Tyvaso declines, Adcirca growth and pricing, and the contribution and reimbursement outlook for Unituxin.
- Progress and outcomes in generic patent litigation and the PTAB review, including the expected timing and commercial impact of generic competition.
- Clinical and regulatory milestones for FREEDOM-EV, BEAT, Tyvaso-ILD, RemUnity, and RemoSynch, including the impact of Medtronic’s FDA issues.
- Cash requirements for the share-repurchase program, planned capital expenditures, STAP settlements, and repayment of the remaining convertible notes.
- Developments in the DOJ inquiry and European Unituxin pricing and reimbursement decisions.