United Therapeutics Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Although the request identifies 2013 Q4, this is an annual filing; it also reports fourth-quarter results. United Therapeutics is a biotechnology company whose commercial business is focused primarily on pulmonary arterial hypertension (PAH) therapies.
Financial performance and position
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Total revenue | $1,117.0 million | $916.1 million | +21.9% |
| Operating income | $292.5 million | $421.6 million | -30.6% |
| Net income | $174.6 million | $304.4 million | -42.6% |
| Diluted EPS | $3.28 | $5.71 | Lower |
| Operating cash flow | $425.3 million | $323.6 million | +$101.6 million |
| Cash, cash equivalents and marketable investments | $1,136.7 million | $784.9 million | +$351.8 million |
| Working capital | $221.3 million | $491.7 million | -$270.4 million |
| Debt, carrying amount | $286.2 million | $276.3 million | +$9.9 million |
Net product sales were $1,106.9 million; product gross profit was $975.8 million, an approximately 88.2% gross margin. Operating margin was approximately 26.2% and net margin approximately 15.6%, both down from 2012. R&D expense rose to $299.3 million from $173.4 million; SG&A increased to $394.0 million from $201.7 million.
Product revenue: Remodulin $491.2 million (+7.3%); Tyvaso $438.8 million (+34.8%); Adcirca $177.0 million (+44.4%). The products represented approximately 44%, 39% and 16% of total revenue, respectively. The filing attributes growth to more patients treated.
Cash flow from investing was negative $295.0 million, including purchases of investments and $30.8 million invested in privately held lung-perfusion companies. Financing cash flow was negative $5.1 million, including $42.4 million of share repurchases. Year-end balance-sheet debt included $250 million principal of 1.0% convertible notes, carried at $215.8 million, and mortgage debt of approximately $70.3 million. The notes became convertible at holders’ election and were reclassified as current; $66.5 million of mortgage principal was due in December 2014. A $75 million revolving credit facility was undrawn at year-end.
Changes versus the prior year
- Revenue increased 21.9%, with particularly strong growth in Tyvaso and Adcirca.
- Operating income and net income fell despite higher revenue, largely because share-based compensation expense rose sharply with the 112% increase in the company’s stock price. FY2013 share-based compensation expense was $320.8 million in the cash-flow reconciliation.
- Fourth-quarter 2013 included a $111.2 million after-tax share-based compensation charge and a $30.3 million net loss, compared with $83.3 million net income in Q4 2012.
- Operating cash flow increased, while cash and investments rose substantially. Working capital declined mainly because convertible notes and mortgage debt were classified as current and the STAP liability increased.
- 2012 results included a $31.0 million insurance-settlement gain; 2013 other income was only $0.6 million.
Outlook, risks and notable matters
- Outlook: Management expected to launch FDA-approved oral PAH therapy Orenitram in mid-2014. The company said Remodulin, Tyvaso and Adcirca would remain its primary revenue sources for several years. No consolidated revenue or earnings guidance was provided in the filing.
- Pipeline: Planned near-term work included the FREEDOM-EV Orenitram Phase III study, the BEAT study of beraprost 314d, a planned first-half 2014 Phase I UV-4B trial, and an anticipated first-half 2014 FDA filing for Ch14.18. The Remodulin implantable-pump trial met its primary catheter-complication objective, but further technical and regulatory work remained.
- Regulatory and legal: In December 2013, the company received a federal subpoena seeking information about Remodulin, Tyvaso and Adcirca, including marketing practices. The company was cooperating and said no claim or assessment had been asserted; outcome and potential exposure were not estimable. Sandoz challenged Remodulin patents in litigation, seeking approval for generic versions.
- Commercial risks: Revenue remains concentrated in three PAH products and a small distributor base; Accredo represented 57% of total revenue in 2013. Risks include generic competition, payer pricing and reimbursement pressure, regulatory compliance, dependence on third-party suppliers and distributors, and clinical-trial or approval delays.
- Unusual earnings volatility: Cash-settled Share Tracking Award Plan compensation is remeasured with the stock price and can materially affect reported expenses, earnings and future cash requirements. The filing estimated $217.9 million of STAP awards potentially exercisable during 2014.
- Patent economics: Royalties on Remodulin and Tyvaso were expected to expire in October 2014, which management anticipated would improve their gross margins; generic litigation and other patent challenges remain material uncertainties.
Key facts investors should verify
- Whether Orenitram launched on schedule and achieved commercial uptake, and the results and timing of FREEDOM-EV.
- Resolution and potential consequences of the federal marketing-practices investigation, including any reimbursement or compliance effects.
- Developments in Sandoz patent litigation and the timing or likelihood of generic Remodulin competition.
- Whether growth in Tyvaso and Adcirca offsets Remodulin concentration and emerging competitive or reimbursement pressure.
- Cash needs and liquidity implications of convertible-note conversion or repayment, the December 2014 mortgage maturity, and STAP settlements.
- Whether share-based compensation continues to materially distort reported operating performance; compare earnings with cash generation and results excluding this volatile expense.