United Therapeutics Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; financial amounts are in millions of dollars unless noted. The company develops and sells therapies primarily for pulmonary arterial hypertension (PAH), including Remodulin, Tyvaso, Orenitram, Unituxin and Adcirca.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $401.5 | $412.7 | $1,137.7 | $1,246.4 |
| Gross profit | $368.5 | $360.8 | $1,048.9 | $1,079.6 |
| Operating income (loss) | $183.4 | $149.6 | $(251.1) | $673.9 |
| Net income (loss) | $132.4 | $106.5 | $(157.1) | $523.9 |
| Diluted earnings (loss) per share | $3.01 | $2.42 | $(3.59) | $11.91 |
- Approximate gross margin was 91.8% in Q3 and 92.2% for the nine-month period. Operating margin was 45.7% in Q3; the nine-month operating margin was negative 22.1%.
- For the first nine months, operating cash flow was $(309.1), versus $693.0 provided in 2018. Investing cash flow was $(401.6), and financing cash flow was $761.2.
- At September 30, cash and equivalents were $719.7; marketable investments totaled $1,580.7, including current and non-current holdings. Combined cash and investments were $2,300.4, up 24% from year-end 2018.
- Credit-facility borrowings were $1.0 billion, of which $250.0 was classified as current because management intended to repay it within one year. The facility provides up to $1.5 billion; the company reported covenant compliance.
- Current assets were $1,933.4 and current liabilities $469.9. Stockholders’ equity was $2,715.8.
Changes versus the comparable periods
- Q3 revenue fell 3%; nine-month revenue fell 9%. Adcirca declines from generic competition were the sole driver of the aggregate decrease, outweighing growth in the other four products.
- Q3 product sales: Remodulin $168.3 (+10%), Tyvaso $110.8 (+3%), Orenitram $62.0 (+15%), Unituxin $30.1 (+31%), and Adcirca $30.3 (−59%). For the first nine months, Adcirca sales declined 72% to $79.4.
- Q3 gross profit increased despite lower revenue, largely as product costs fell with sharply reduced Adcirca royalty expense. Nine-month product costs declined 47% to $88.8.
- Nine-month R&D expense rose to $1,069.0 from $219.1, principally reflecting the $800.0 Arena payment for ralinepag rights, expensed as acquired in-process R&D. The payment drove the reported nine-month operating and net losses.
- Other income for the first nine months included $19.5 of unrealized gains on publicly traded equity securities; Q3 included $13.0 of unrealized losses.
Outlook, developments and risks
- Management expected 2019 revenue to decrease versus 2018, mainly because generic Adcirca would compete for a full year and generic Remodulin competition was emerging. It anticipated possible renewed revenue growth potentially as soon as 2020, dependent on development, regulatory and commercial outcomes. No specific numerical revenue or earnings guidance is provided.
- Remodulin, Tyvaso and Orenitram remained the core revenue base. Two U.S. specialty distributors represented 74% of Q3 revenue combined, creating distributor concentration and order-timing exposure.
- Pipeline milestones cited included expected 2020 launch preparation for the Remodulin implantable system, subject to Medtronic meeting regulatory conditions; an FDA action date of April 27, 2020 for Trevyent; and anticipated DISTINCT study results by Q1 2020. The FDA approved an Orenitram label supplement on October 18, 2019, after quarter-end.
- Competition is a material risk: generic Adcirca had materially reduced sales, and generic Remodulin launches in the U.S. and parts of Europe were expected to add pressure. Management also cited reimbursement and pricing pressure, clinical and regulatory uncertainty, manufacturing and third-party supplier dependence, and patent challenges.
- Sandoz and RareGen sued the company and Smiths Medical, alleging anticompetitive conduct related to cartridges used to deliver subcutaneous Remodulin. The company disputed the claims; it could not reasonably estimate potential losses at this early stage. An adverse outcome could involve damages or injunctive relief.
- Management stated that existing liquidity was sufficient for ongoing operations and plans, while noting uncertainty in cash-flow projections and the possibility of seeking other financing. The company recorded an $8.8 impairment of an in-process R&D asset after terminating a license and a $2.0 deconsolidation loss related to a variable-interest entity.
Key facts for investors to verify
- How generic Remodulin competition, distributor purchasing patterns and generic Adcirca returns affect sales and gross-to-net estimates.
- Whether ralinepag and other pipeline programs progress on schedule, and the associated future milestone, royalty and development costs.
- Timing and conditions for the implantable Remodulin system and Trevyent, including third-party manufacturing and regulatory dependencies.
- Cash generation, the intended repayment of the $250.0 million current debt portion, and compliance with credit-facility covenants.
- Developments in the Sandoz/RareGen litigation and any change in the company’s ability to estimate potential exposure.