United Therapeutics Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited. The company develops and sells therapies for pulmonary arterial hypertension and other serious conditions; its five marketed products are Remodulin, Tyvaso, Adcirca, Orenitram and Unituxin. Amounts below are in millions of dollars except per-share data.
Financial results and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $445.5 | $408.2 | $1,260.6 | $1,189.8 |
| Operating income | $323.8 | $238.6 | $675.9 | $887.5 |
| Net income | $276.3 | $161.8 | $398.9 | $603.4 |
| Diluted EPS | $6.27 | $3.50 | $8.83 | $12.76 |
| Operating cash flow | Not separately presented | Not separately presented | $560.0 | $480.2 |
- Revenue grew 9% in Q3 and 6% for the nine-month period. Q3 gross profit was $426.0, approximately 95.6% of revenue; nine-month gross profit was $1,207.9, approximately 95.8% of revenue.
- Q3 operating margin was approximately 72.7%, versus 58.5% a year earlier. Nine-month operating margin was approximately 53.6%, versus 74.6%; the 2017 period includes a $210.0 DOJ-related accrual.
- Cash and cash equivalents were $1,067.5 at September 30; marketable investments totaled $481.7, for combined cash and investments of $1,549.2. Total assets were $2,936.0 and total liabilities $846.9.
- The company had $250.0 outstanding under its $1.0 billion unsecured revolving facility, classified as current because management intends to repay it within one year. The facility matures in January 2022; the company reported compliance with its covenants.
- Nine-month investing cash outflow was $557.2, largely reflecting investment purchases and $58.5 of property and equipment purchases. Financing cash flow was $41.5, including $250.0 borrowed and a $250.0 accelerated share repurchase. Cash increased by $44.5 during the period.
Changes versus prior comparable periods
- Product trends were mixed. Q3 Remodulin sales increased 23% to $187.3 and Orenitram increased 29% to $52.5; Tyvaso declined 13% to $88.9. For nine months, Adcirca rose 16% to $300.4, while Tyvaso fell 10% to $280.5.
- Q3 Remodulin sales included $23.7 from a one-time $47.4 international distributor purchase; another $23.7 was expected in Q4 under the payment terms. Tyvaso Q3 sales included an additional $12.2 Medicaid rebate liability related to pre-July 2017 sales.
- Research and development expense rose 20% in Q3 to $55.0 and 87% for nine months to $151.0, reflecting expanded clinical, cancer and organ-manufacturing programs. Nine-month SG&A decreased 4% to $171.0.
- Net income increased in Q3 but fell 34% for nine months. The comparisons are affected by volatile cash-settled share-tracking award expense, the 2017 DOJ accrual, and $49.6 of nine-month investment impairment charges. The nine-month effective tax rate rose to 37% from 32%.
Outlook, commentary and principal risks
- Management said current liquidity was sufficient for ongoing operations and business plans, while noting cash-flow projections are uncertain. No specific revenue or earnings guidance was provided. Planned capital expenditures were approximately $250.0 over the next three years.
- The company expects generic Adcirca competition following the November 2017 patent expiry, potentially after a six-month pediatric exclusivity period if granted. Its amended Lilly agreement raises the royalty rate from 5% to 10% beginning December 1, 2017, with additional sales-based milestone payments; generic entry and higher product costs could pressure Adcirca economics.
- Generic Remodulin launches were expected beginning June 2018 for Sandoz and December 2018 for Teva, Par and Dr. Reddy’s, potentially earlier in specified circumstances. Patent litigation concerning generic Tyvaso and Orenitram remains ongoing; outcomes could affect sales and profits.
- The DOJ is investigating company support for patient-assistance charities. The company accrued $210.0, received information supporting a $57.0 tax benefit on part of the accrual, and is negotiating a settlement. The ultimate amount and terms remain uncertain; a settlement could include a corporate integrity agreement and related costs. Management could not estimate reasonably possible losses above the accrual.
- Other notable risks include reimbursement and pricing pressure, clinical and regulatory uncertainty, manufacturing and third-party supply dependence, and adverse events. The filing specifically notes uncertainty over Medtronic’s consent decree and its possible effect on the RemoSynch program, and a hurricane-related shutdown at Lilly’s sole Adcirca manufacturing site in Puerto Rico.
- Pipeline milestones include anticipated FREEDOM-EV results in the second half of 2018; the filing reported that its interim review found no new safety concerns and recommended continuing the study. FDA approval of a new Tyvaso inhalation device was received in October 2017, with launch planned for 2018.
Important facts for investors to verify
- Resolution, payment timing and potential additional exposure from the DOJ investigation and $210.0 accrual.
- Actual timing and commercial impact of Adcirca and Remodulin generic launches, plus developments in Tyvaso and Orenitram patent proceedings.
- Whether Tyvaso’s sales decline persists and whether the one-time Remodulin distributor purchase is followed by sustained patient-driven demand.
- Pipeline trial results, regulatory milestones and the effect of increased R&D spending on future growth and cash needs.
- Repayment of the $250.0 credit-facility draw and the scale and timing of planned capital expenditures.