United Therapeutics Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited consolidated results. Comparisons are with the three months ended March 31, 2012 unless noted.
Business context
United Therapeutics is a biotechnology company focused on chronic and life-threatening conditions. Its commercial portfolio is centered on pulmonary arterial hypertension (PAH) therapies Remodulin, Tyvaso and Adcirca. The company also invests in clinical and preclinical programs, including oral treprostinil, other prostacyclin therapies, cancer antibodies, antiviral candidates and engineered lungs.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $245.1 million | $204.2 million | +20.0% |
| Operating income | $94.0 million | $106.7 million | -11.9% |
| Net income | $62.3 million | $70.8 million | -11.9% |
| Diluted EPS | $1.19 | $1.29 | -7.8% |
| Operating cash flow | $97.7 million | $37.6 million | +$60.1 million |
- Product sales were $243.1 million. Remodulin revenue was $114.7 million (+3.7%); Tyvaso was $94.6 million (+35.1%); and Adcirca was $33.8 million (+51.5%). Management attributed growth principally to more patients treated.
- Product gross profit was $213.8 million, or approximately 87.2% of product revenue, compared with $178.9 million, or approximately 88.2%, a year earlier. Total operating expenses rose 55.0% to $151.1 million; R&D increased 49.8% to $50.4 million and SG&A increased 79.3% to $71.4 million.
- Operating margin was approximately 38.4%, versus 52.3%; net margin was approximately 25.4%, versus 34.6%. The filing identifies higher share-based compensation and higher general and administrative costs as important expense drivers.
- Cash and cash equivalents were $262.1 million at March 31, 2013. Cash and marketable investments, excluding restricted amounts, totaled $876.8 million, compared with $784.9 million at December 31, 2012.
- Working capital was $668.0 million, up from $491.7 million at year-end 2012. Current assets were $844.6 million and current liabilities $176.6 million.
- Cash flow from investing activities was $10.6 million provided, reflecting investment maturities exceeding purchases; capital expenditures were $4.2 million. Financing activities provided $0.7 million, including $5.9 million of share repurchases.
- Debt at carrying value comprised $207.4 million of convertible notes and $70.3 million of noncurrent mortgage debt. The notes have $250 million principal and mature in 2016; the mortgage financing matures in December 2014. The company reported compliance with mortgage covenants and no short-term borrowing for working capital.
Material changes and unusual items
- Net income declined despite higher revenue, reflecting a sharp rise in operating expenses. Share-based compensation expense was $35.2 million in Q1 2013, compared with a small benefit in Q1 2012, largely because the company’s share price appreciated 14% during the quarter. The liability for share tracking awards rose to $96.8 million from $75.4 million at year-end.
- SG&A also reflected a $4.0 million increase in grants to patient-assistance nonprofits, higher operating expenses, salaries and professional fees. R&D spending increased on TransCon injectable therapies and the Remodulin implantable-pump program, partly offset by lower oral-treprostinil costs.
- Operating cash flow increased substantially, but was affected by noncash share-based compensation, higher collections of receivables and lower payments of accounts payable; management described the receivable and payable movements as timing-related.
- The company authorized a share repurchase program of up to $420 million over one year beginning March 4, 2013. It had repurchased 99,100 shares for $5.9 million by March 31.
Outlook, commentary and risks
- Management said existing liquidity was sufficient for ongoing operations, while noting that future cash-flow projections are inherently uncertain. No specific numerical revenue or earnings guidance is provided in the filing text.
- Management expected commercial Remodulin sales in China to begin in 2014 following Chinese regulatory approval in March 2013. The modified Tyvaso inhalation system was expected to launch in Q2 2013.
- The FDA issued a second complete response letter in March 2013 declining to approve the oral treprostinil application. The company planned to pursue a Phase III FREEDOM-EV study, targeting completion by the end of 2016, and stated an aim to obtain U.S. approval by 2017; these are forward-looking goals, not assured outcomes.
- Other development milestones included anticipated completion of Medtronic’s Remodulin implantable-pump trial in the second half of 2013, a possible launch by 2016 subject to approval, and expected Ch14.18 regulatory filings in the first half of 2014.
- Significant risks include dependence on three PAH products for virtually all revenue; clinical and regulatory uncertainty, particularly after the oral treprostinil response letters; competition and reimbursement pressure; reliance on contract manufacturers, distributors and collaborators; and the possibility of production interruptions.
- Sandoz challenged patents covering Remodulin and sought approval to market generic versions at multiple strengths. United Therapeutics filed two patent-infringement lawsuits; Sandoz counterclaimed that the patents were invalid or not infringed. FDA approval is generally stayed for up to 30 months from the relevant notice, unless an adverse district-court decision occurs sooner.
- Investment securities totaled $614.2 million at amortized cost, primarily short-maturity debt securities. Their market value is sensitive to interest rates; management stated it holds them to maturity and did not consider the disclosed unrealized losses other-than-temporary.
Important facts for investors to verify
- Whether product growth continues, particularly for Tyvaso and Adcirca, and how much growth reflects patient demand versus pricing and distributor order timing.
- Whether operating expenses and share-based compensation normalize, and the resulting effect on margins and earnings.
- Progress, trial outcomes and regulatory requirements for oral treprostinil, the implantable-pump program and other pipeline candidates.
- Developments in the Sandoz litigation and potential effects of generic competition on Remodulin revenue.
- Execution of the share repurchase authorization, cash needs for development and facilities, and future cash settlement obligations under share tracking awards and debt.
- Manufacturing capacity, third-party supplier arrangements, reimbursement conditions and customer concentration: three U.S. distributors accounted for 78% of net operating revenue in Q1 2013.