United Therapeutics Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; interim financial statements are unaudited. United Therapeutics is a biotechnology company focused principally on pulmonary arterial hypertension (PAH) therapies. Its commercial products are Remodulin, Tyvaso and Adcirca.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Total revenue | $204.2 million | $162.5 million; +25.7% |
| Net product sales | $202.9 million | $162.2 million |
| Operating income | $106.7 million | $36.8 million |
| Net income | $70.8 million | $16.4 million |
| Diluted EPS | $1.29 | $0.26 |
| Operating cash flow | $37.6 million | $53.4 million |
| Cash and cash equivalents | $156.7 million | $162.7 million at Dec. 31, 2011 |
| Marketable investments | $589.3 million | $584.7 million at Dec. 31, 2011 |
| Working capital | $398.4 million | $349.9 million at Dec. 31, 2011 |
| Total assets | $1.561 billion | $1.518 billion at Dec. 31, 2011 |
| Total liabilities | $525.9 million | $558.7 million at Dec. 31, 2011 |
Product gross profit was $178.9 million, or approximately 88.2% of product sales; operating margin was approximately 52.3% and net margin approximately 34.7%. Cash flow from operations was below net income. Investing activities used $46.0 million, including $40.3 million of cash purchases of property and equipment; the company also reported $9.1 million of non-cash property additions.
Debt included $250.0 million principal of 1.0% convertible notes due 2016, carried at $196.7 million, and approximately $71.4 million of noncurrent mortgage debt. The mortgage loan is secured by facilities, matures in December 2014, and the company reported compliance with its covenants.
Material changes versus the prior comparable period
- Revenue growth was led by Tyvaso, up 46.9% to $70.1 million, and Adcirca, up 97.3% to $22.3 million. Remodulin rose 7.1% to $110.5 million.
- Operating income and earnings increased substantially. Research and development expense fell 29.5% to $33.7 million and selling, general and administrative expense fell 31.7% to $39.8 million. Management attributed much of these declines to lower share-based compensation, which was affected by the share price; the prior-year period included much higher compensation expense.
- Operating cash flow declined $15.8 million, despite higher net income, with changes in share-based compensation and liabilities among the cited drivers.
- Q1 2011 included a $3.2 million after-tax loss from discontinued operations following the sale of Medicomp; there was no discontinued-operations result in Q1 2012.
- Accounts payable decreased $38.9 million from year-end, primarily reflecting timing of invoices and payments, particularly construction-related items. Property and equipment increased $35.5 million as construction continued and the Silver Spring project was completed.
Outlook, commentary and significant risks
- Management expects continued demand growth for its PAH products and stated that current liquidity is sufficient for ongoing operations. It did not provide a specific numeric revenue or earnings forecast in the supplied filing text.
- The company planned to begin enrollment in the FREEDOM-EV oral treprostinil study and a new event-driven Phase III Tyvaso study in the second half of 2012. The FDA had accepted the oral treprostinil NDA for review; management described a standard 10-month review period from submission, while emphasizing approval was not assured.
- Tyvaso’s U.S. distributor price increased 4.9% effective April 1, 2012. Management expected to use the remaining $88 million authorization under its $300 million repurchase program for open-market repurchases beginning in Q2 2012.
- Oral treprostinil’s development carries material uncertainty: FREEDOM-M met its primary endpoint, but FREEDOM-C and FREEDOM-C 2 did not. The filing notes possible limitations on the product’s label and commercial opportunity even if approved. A prior Phase II beraprost-MR study also failed its primary and secondary endpoints.
- Remodulin is a major revenue source and faces a generic patent challenge. Sandoz filed an ANDA for a generic 10 mg/mL version; United Therapeutics sued, triggering a potential FDA approval stay of up to 30 months, unless an earlier adverse court decision occurs.
- The company sued Lexington Insurance over damaged Remodulin inventory with an estimated net commercial value of approximately $65 million. The amount and timing of any recovery are uncertain; the filing does not establish a recovery.
- Revenue concentration and execution risks include reliance on three U.S. distributors, which represented 82% of Q1 2012 net revenues, third-party manufacturing and supply, reimbursement and pricing pressures, regulatory requirements, and potential competition. The distributor parents’ merger could affect product support or negotiating leverage.
- Tyvaso has an FDA-required long-term safety study due by December 15, 2014. Failure to meet the requirement or timetable could result in penalties, including possible withdrawal, absent an acceptable justification.
Most important facts for investors to verify
- Whether revenue growth and product-level trends continue, particularly for Tyvaso and Adcirca, and how distributor orders compare with patient demand.
- FDA review progress and outcome for oral treprostinil, and the design, enrollment and results of planned clinical studies.
- Developments in Sandoz’s Remodulin patent litigation and any implications for product exclusivity and sales.
- Outcome and potential recovery in the Lexington Insurance litigation concerning the damaged inventory.
- Cash generation relative to capital spending, construction commitments, repurchases and future cash obligations, including cash-settled share tracking awards.
- Changes in distributor concentration, reimbursement, manufacturing capacity and regulatory status, including completion of the Tyvaso post-marketing study.