United Therapeutics Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Comparisons are with Q1 2013 unless stated otherwise. Amounts are in millions of dollars except per-share data.
Business context
United Therapeutics is a biotechnology company focused on treatments for pulmonary arterial hypertension (PAH) and other serious conditions. Remodulin, Tyvaso and Adcirca generated substantially all quarterly revenue. Orenitram was FDA-approved in December 2013, with U.S. commercial sales beginning in April 2014, after the quarter.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / prior balance |
|---|---|---|
| Total revenue | $289.4 | $245.1; up 18.1% |
| Operating income | $216.1 | $94.0 |
| Net income | $137.5 | $62.3 |
| Diluted EPS | $2.43 | $1.19 |
| Operating cash flow | $110.6 | $97.7 |
| Cash and cash equivalents | $413.8 | $278.9 at Dec. 31, 2013 |
| Marketable investments | $730.8 | $857.8 at Dec. 31, 2013 |
| Working capital | $331.7 | $221.3 at Dec. 31, 2013 |
Product sales were Remodulin $136.1 million (up 18.7%), Tyvaso $107.1 million (up 13.1%) and Adcirca $41.4 million (up 22.3%). Management attributed product growth primarily to more patients receiving treatment. Other revenue was $4.9 million, compared with $2.0 million.
Reported operating margin was approximately 74.7%, compared with 38.4%; net margin was approximately 47.5%, compared with 25.4%. These comparisons are significantly affected by share-based compensation: Q1 2014 included a $61.0 million STAP compensation benefit, versus $29.5 million of STAP expense in Q1 2013. The benefit followed a 17% decline in the company’s share price during Q1 2014, while the share price rose 14% in Q1 2013. Thus, the increase in reported profit does not solely reflect operating performance.
Net cash provided by investing activities was $106.4 million, mainly reflecting investment maturities exceeding purchases; capital expenditures were $18.7 million. Financing activities used $81.9 million, including $97.6 million for repurchases of approximately 1.0 million shares. Cash increased by $134.9 million during the quarter. Cash, cash equivalents and marketable investments together increased about $8.0 million from year-end, although their mix shifted toward cash.
At March 31, total liabilities were $757.2 million. The $250.0 million principal amount of 1.0% convertible notes due 2016 had a net carrying value of $218.7 million and was classified as current because holders could elect conversion after the share-price trigger was met. The mortgage had a stated principal balance of approximately $66.5 million, due in December 2014; the company reported covenant compliance. A $75.0 million revolving credit facility was undrawn.
Material changes and unusual items
- Reported R&D expense fell to $12.4 million from $50.4 million, and SG&A expense to $30.2 million from $71.4 million, primarily because of the STAP fair-value benefit. General and administrative costs increased, including legal and consulting expenses.
- A $4.8 million state Medicaid rebate invoice for incorrectly coded claims from 2011–2013 reduced Q1 2014 revenue: $2.5 million for Remodulin, $1.7 million for Tyvaso and $0.6 million for Adcirca.
- The company repurchased $97.6 million of shares in Q1. The $420.0 million repurchase authorization was extended through March 3, 2015; $279.9 million remained at March 31. Management expected to complete the program during Q2 at the then-current pace.
Outlook, commentary and risks
- Management said current liquidity was sufficient for ongoing operations and business plans, while noting that cash-flow projections are uncertain and additional financing might be sought.
- The company expected active U.S. Orenitram marketing later in Q2 2014 and anticipated commercial sales of Remodulin in Japan during 2014, subject to pricing approval. Orenitram’s potential use with background PAH therapies depends on the FREEDOM-EV trial; earlier combination studies did not meet their primary endpoints.
- Management cited the expected expiration in October 2014 of royalty obligations for Remodulin and Tyvaso, which it expected to improve gross margins on those products.
- The company was cooperating with a Department of Health and Human Services Inspector General/Department of Justice civil investigation seeking documents on its products and marketing practices. It reported no asserted claim, litigation or assessment related to the subpoena and said the outcome could not be predicted.
- Sandoz was challenging Remodulin patents in litigation, with trial expected to begin in May 2014. Generic competition, including generic sildenafil affecting Adcirca, reimbursement and pricing pressure, clinical-trial and regulatory outcomes, and reliance on manufacturing and distribution partners are material risks.
- Other development milestones included the planned second-half 2014 IND filing for TransCon treprostinil and planned Q2 enrollment in a Phase I trial of antiviral candidate UV-4B. These are forward-looking plans, not assured outcomes.
Important facts for investors to verify
- How much of the earnings increase reflects underlying product and operating trends versus the noncash STAP remeasurement benefit.
- Progress and outcomes of the Sandoz Remodulin patent litigation and the government investigation, including any later disclosures of claims or financial exposure.
- Orenitram launch performance and FREEDOM-EV trial progress, alongside the commercial outlook for the established products.
- Repurchase-program completion and its effect on cash, share count and liquidity, as well as repayment or conversion developments for the 2016 notes and December 2014 mortgage maturity.
- Whether rebate estimates, distributor ordering patterns, product supply and reimbursement conditions materially change reported revenue or future cash flows.