United Therapeutics Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited; amounts below are in U.S. dollars and generally in millions, except per-share data. The company develops and sells therapies principally for pulmonary arterial hypertension (PAH); Unituxin, for high-risk pediatric neuroblastoma, began U.S. commercial sales in Q3.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $386.2 | $330.0 | $1,060.9 | $942.2 |
| Operating income (loss) | $387.1 | $(32.2) | $544.0 | $360.2 |
| Net income (loss) | $464.4 | $(25.2) | $547.0 | $224.1 |
| Diluted EPS | $9.24 | $(0.53) | $10.58 | $4.12 |
| Operating cash flow | Not separately stated for the quarter | $357.2 | $264.7 |
Product sales were $384.7 million in Q3, up 17.2% from $328.3 million, and $1,056.4 million for nine months, up 13.1% from $934.2 million. Q3 growth was led by Adcirca (+44.0%) and Orenitram (+137.8%); nine-month growth was led by Orenitram (+284.7%) and Adcirca (+26.6%). Q3 product gross profit was $377.8 million (about 98.2% of product sales), versus $287.5 million (about 87.6%) a year earlier. These reported figures were affected by share-based compensation benefits and the prior-year royalty expense described below.
Q3 income includes a $350.0 million pretax gain from selling the Unituxin-related Rare Pediatric Priority Review Voucher. Reported operating expenses were negative $0.9 million, including a $121.6 million share-based compensation benefit, versus $362.2 million of expenses and $191.7 million of share-based compensation expense a year earlier. The company attributed the compensation swing primarily to a 25% quarterly stock-price decline in 2015 versus a 45% rise in 2014. Nine-month cost of product sales fell 60.3%, principally because a GlaxoSmithKline royalty obligation ended in October 2014; the prior-year nine-month period included $71.1 million of that royalty expense. Consequently, reported profit and margins are not directly indicative of underlying operating trends.
Cash, liquidity and debt
- Cash and cash equivalents were $765.2 million at September 30, 2015; marketable investments totaled $248.3 million. Management reported unrestricted cash, cash equivalents and marketable securities of $1,008.1 million, excluding $5.4 million of restricted amounts.
- Nine-month operating cash flow was $357.2 million. Investing cash flow was $447.2 million, including the $350.0 million voucher proceeds; financing cash flow was a $433.2 million outflow, including $394.5 million of share repurchases and $107.1 million of convertible-note principal payments. Capital spending was $18.3 million.
- Convertible notes had $31.6 million principal outstanding and a $30.0 million carrying value at period-end, down from $138.8 million principal at year-end 2014. The company expected to settle additional $26.0 million conversion requests in Q4, paying principal in cash and issuing shares, with an offsetting share receipt under its note hedge.
- No amounts were drawn on the $75 million revolving credit facility, which could be increased by up to a further $75 million subject to conditions; its maturity was extended to September 30, 2017. The company reported a $268.5 million aggregate STAP liability, including cash-settled awards.
Material changes, outlook and risks
- Unituxin received FDA approval in March 2015, began U.S. sales in Q3, and received European authorization in Q3. Unituxin generated $4.7 million of Q3 and nine-month sales. The company sold its priority review voucher to AbbVie for $350.0 million in September.
- Management said existing liquidity was sufficient for ongoing operations and business plans and expected continued demand growth, but provided no specific numerical revenue or earnings guidance in the supplied filing text. Its stated growth priorities include Orenitram sales, potential Orenitram use with background therapy subject to FREEDOM-EV results, and esuberaprost with Tyvaso subject to the BEAT study.
- Patent settlement with Sandoz permits U.S. generic Remodulin commercialization beginning June 2018, potentially earlier under certain circumstances. Remodulin litigation with Teva and Tyvaso litigation with Watson continued; SteadyMed also petitioned for inter partes review of a treprostinil-related patent. Outcomes could affect sales of Remodulin, Tyvaso and Orenitram.
- Development and supply risks include the Remodulin implantable-system program, affected by FDA action against Medtronic’s SynchroMed II system, and dependence on the CADD MS-3 pump for U.S. subcutaneous Remodulin while a DEKA replacement system is under development. Other principal risks include clinical-trial and regulatory uncertainty, reimbursement and pricing pressure, product competition, manufacturing and third-party distributor dependence, and possible patent challenges.
- The board authorized a new share-repurchase program of up to $500 million for calendar 2016. The previous $500 million program was completed. The company also discontinued new STAP awards after shareholder approval of a stock incentive plan; future awards were to be made through equity-based incentives.
Investor verification priorities
- Separate recurring product and operating performance from the $350 million voucher gain and the unusually volatile STAP compensation benefit.
- Confirm product-level sales, especially Orenitram and Unituxin growth, and assess Adcirca’s pricing contribution and exposure to competition.
- Track actual cash settlement and share issuance for the $26 million note conversions, remaining debt, STAP cash requirements, and execution of the 2016 repurchase authorization.
- Monitor the Sandoz launch terms and any earlier-entry conditions, the Teva and Watson cases, and the SteadyMed patent-review petition.
- Check progress and regulatory or supply developments for FREEDOM-EV, BEAT, and the Remodulin pump programs, including the effect of the Medtronic consent decree.