United Therapeutics Corporation — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Financial statements are unaudited; figures below are in U.S. dollars, with financial amounts generally shown in millions.
Business context and performance
United Therapeutics develops and commercializes therapies for chronic and life-threatening conditions, with its business concentrated in pulmonary arterial hypertension (PAH). Its principal products are Remodulin, Tyvaso and Adcirca; it also operates a smaller telemedicine business. Tyvaso and Adcirca launched in 2009.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $137.5 | $84.0 | $266.4 | $163.7 |
| Operating income (loss) | $60.8 | $(4.1) | $93.1 | $16.4 |
| Net income (loss) | $37.7 | $(2.3) | $56.6 | $10.9 |
| Diluted earnings (loss) per share | $0.62 | $(0.04) | $0.95 | $0.20 |
Q2 operating margin was approximately 44% and net margin approximately 27%; six-month operating and net margins were approximately 35% and 21%, respectively. Q2 revenue increased 63.7% year over year. Product sales were $134.5 million in the quarter: Remodulin $96.4 million, Tyvaso $29.5 million and Adcirca $8.6 million. Six-month revenue growth was 62.7%; Remodulin sales rose 21.8% and Tyvaso and Adcirca contributed $54.4 million and $13.6 million, respectively.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $69.5 million, compared with $57.4 million in 2009. Investing activities provided $45.2 million, while financing activities provided $71.0 million, primarily from stock-option exercises and related tax benefits. Cash increased by $185.1 million to $285.4 million.
- At June 30, cash and unrestricted marketable investments totaled $514.8 million, versus $378.1 million at December 31, 2009. Working capital was $150.6 million, compared with a $5.7 million deficit at year-end. Management cited approximately $378.5 million of working capital available after considering its expectation that convertible notes would remain outstanding until maturity.
- Total assets were $1.188 billion and total liabilities $394.5 million. Current assets were $516.3 million and current liabilities $365.7 million. Restricted cash and investments were $40.2 million, including $35.1 million pledged for the laboratory lease.
- Convertible senior notes had a $250.0 million principal balance and $228.0 million carrying value. They were classified as current because holders could elect conversion; they mature in October 2011. The company expected holders to retain them until maturity, but that outcome is not assured. The laboratory lease obligation was $30.9 million current.
- Capital expenditures were $9.1 million in the first half, down from $49.8 million in the prior-year period, following completion of the Silver Spring facility. Accounts receivable rose to $83.5 million from $50.6 million at year-end, reflecting sales growth and collection timing.
Material changes and unusual items
- Higher sales of the newly launched Tyvaso and Adcirca, growth in Remodulin prescriptions, and Remodulin price increases drove revenue growth. U.S. and international Remodulin prices increased 9.6% and 13.3%, respectively, in March and April; management attributed about $7.3 million of revenue to the increases during the first half.
- Q2 SG&A fell 37.1% year over year, principally because share-based compensation fell sharply with the company’s stock price. General and administrative and sales and marketing costs increased, including costs associated with new facilities and commercialization of Tyvaso and Adcirca. First-half R&D rose 28.7%, including higher cardiovascular-program spending and a $3.0 million milestone payment related to ImmuneWorks.
- The effective tax rate estimate was 35% for 2010 versus 25% in 2009. Six-month income tax expense was $29.0 million, compared with $3.6 million, reducing the benefit of improved operating performance in reported net income.
- The company exercised its option on June 30 to sell its remaining illiquid auction-rate securities for $19.0 million par value; the transaction closed July 1. Q2 results included a $5.6 million gain on the securities and a $5.5 million loss from writing off the related put option.
Outlook, risks and contingencies
Management expects continued PAH market growth and believes Remodulin, Tyvaso and Adcirca can reach more patients. It provided no specific numerical revenue or earnings guidance in the supplied filing text. Management said existing revenue and working capital should fund operations, while noting that future cash-flow projections are uncertain.
- Oral treprostinil remains a key development program. The earlier FREEDOM-C Phase III trial did not meet its primary endpoint; FREEDOM-M and FREEDOM-C2 are ongoing with revised lower-dose titration. The company did not anticipate filing an NDA before 2012 and acknowledged trials may fail or require additional work.
- Tyvaso is approved in the U.S., but the company withdrew its European marketing authorization application in February 2010 after the EMA identified Good Clinical Practice deficiencies at certain clinical sites. Required post-marketing studies and device-related commitments remain, with possible timeline extensions; failure to meet requirements could result in penalties or withdrawal of U.S. approval.
- Sales are concentrated: three U.S. distributors accounted for 82% of Q2 revenue and 83% for the first half. Remodulin and Tyvaso supply depends substantially on third parties, including Baxter, Catalent and the sole currently approved Tyvaso inhalation-system manufacturing facility. Manufacturing interruptions, regulatory approvals for process changes, or distributor performance could affect sales.
- Competition, reimbursement and pricing changes are significant risks. The 2010 health-care acts increased Medicaid rebate rates for the company’s products; management estimated the effect would reduce 2010 net revenue by less than 1%, while effects beyond 2010 remained uncertain.
- The $250.0 million notes may require cash settlement of principal upon conversion or at October 2011 maturity. Cash-settled Share Tracking Awards also create potential future cash outflows; their liability was $73.1 million at June 30.
- A shareholder derivative lawsuit settlement was agreed in principle on July 26, after quarter-end, subject to final documentation and court approval. Proposed terms include cancellation of 165,214 CEO options, restrictions on repricing awards without shareholder approval, and governance measures. Management did not expect a material financial-statement impact.
Important facts for investors to verify
- Whether Tyvaso and Adcirca adoption continues and whether Remodulin growth offsets pricing, reimbursement or competitive pressures.
- Progress, enrollment, results and regulatory timelines for FREEDOM-M, FREEDOM-C2, and Tyvaso post-marketing commitments; also the status of the withdrawn European Tyvaso application.
- Manufacturing capacity, regulatory approval of production changes, and continuity of supply for Remodulin, Tyvaso and the inhalation system.
- Cash generation and working-capital trends, including collections, the timing and settlement of the convertible notes, and cash requirements from Share Tracking Awards.
- Final court approval and implementation of the derivative-action settlement, and any resulting changes to compensation or governance.