United Therapeutics Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014; unaudited. Amounts below are in millions of dollars unless noted. The company develops and commercializes therapies primarily for pulmonary arterial hypertension (PAH). Its marketed products were Remodulin, Tyvaso, Adcirca and, newly in Q2, Orenitram.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $322.8 | $280.6 | $612.2 | $525.7 |
| Operating income | $176.3 | $122.3 | $392.5 | $216.3 |
| Net income | $111.9 | $79.9 | $249.4 | $142.2 |
| Diluted EPS | $2.10 | $1.52 | $4.54 | $2.71 |
| Operating cash flow | — | $56.1 | $181.5 |
- Q2 revenue rose 15.0% year over year; six-month revenue rose 16.4%. Product sales were the principal revenue source.
- Q2 operating margin was approximately 54.6% versus 43.6%; net margin was approximately 34.6% versus 28.5%. Six-month operating margin was approximately 64.1% versus 41.1%; net margin was approximately 40.7% versus 27.0%.
- Q2 product sales were $321.3 million, with product gross profit of $282.6 million (about 87.9% margin). Six-month product gross profit was $536.6 million (about 88.6% margin).
- By product, Q2 sales were Remodulin $138.2 million (+11.1%), Tyvaso $121.2 million (+10.8%), Adcirca $55.3 million (+26.5%) and Orenitram $6.6 million. Management attributed growth mainly to more patients receiving treatment and Orenitram’s launch.
Financial position, liquidity and debt
- At June 30, cash and cash equivalents were $259.0 million; marketable investments were $589.4 million on the balance sheet. Management reported $760.0 million of unrestricted cash, cash equivalents and marketable securities, excluding $88.5 million restricted to secure the credit line.
- Total assets were $1.953 billion, total liabilities $739.8 million and stockholders’ equity $1.174 billion. Accounts receivable increased to $212.9 million from $126.3 million at year-end, mainly due to sales growth and invoice/payment timing.
- Six-month operating cash flow fell to $56.1 million from $181.5 million. The filing cites lower collections, reduced other liabilities and share-based compensation/tax effects. Capital expenditures were $31.5 million; operating cash flow less capital expenditures was approximately $24.6 million.
- The company repurchased $377.6 million of stock during the first half, buying approximately 3.9 million shares; it also drew $75.0 million on its revolving credit facility to help fund repurchases. Cash and marketable investments declined, while $50.0 million was invested in Synthetic Genomics Inc.
- Debt included $250.0 million principal of 1.0% convertible notes due 2016 (carrying amount $221.7 million), a $75.0 million revolving loan and a $66.5 million mortgage due December 2014. The notes became convertible at holders’ option based on the share-price test and were classified as current at quarter-end. The credit line was extended on July 24, 2014, to September 30, 2015. Mortgage financial covenants were met.
Changes, outlook and material matters
- Reported earnings benefited from a large share-based compensation benefit tied to the stock price: $62.6 million for the first half, compared with $68.2 million of expense in the prior-year period. This accounting volatility materially reduced reported operating expenses and complicates period comparisons.
- Management said liquidity was sufficient for ongoing operations and business plans, while noting cash-flow projections are uncertain and additional financing could be sought. No numerical revenue or earnings guidance was provided.
- Management expects the 10% royalty on treprostinil-based products payable to GlaxoSmithKline to expire in October 2014, which it expects to improve gross margins. Orenitram’s launch-period cost of sales was relatively high; management expects its cost ratio to fall as sales grow.
- The board authorized a further $500 million repurchase program, effective August 1, 2014, for up to one year. The prior $420 million program was completed in Q2.
- Key development programs include Orenitram’s FREEDOM-EV study, the 314d BEAT study, an implantable Remodulin delivery system, and ch14.18 cancer therapy applications. The company also terminated its Ascendis TransCon license in June and expanded lung xenotransplantation work through its SGI investment and collaboration.
- Legal and commercial risks include a Department of Health and Human Services OIG/Department of Justice investigation seeking records on marketing practices for Remodulin, Tyvaso and Adcirca; the company said it was cooperating and was not aware of an asserted claim. Sandoz patent litigation over generic Remodulin was tried in May–June and a decision was pending. Teva notified the company in July of a separate generic application. Generic competition, reimbursement pressure, clinical and regulatory outcomes, and manufacturing or supply interruptions are significant risks.
- Adcirca’s wholesale price, set by Lilly, increased 9.1% effective July 2, 2014. The company also noted that Adcirca faces generic sildenafil competition, though it had not observed a measurable sales impact as of the filing.
Most important facts to verify
- Whether the strong earnings growth persists after separating stock-price-driven share-based compensation benefits from underlying operating performance.
- Whether operating cash generation recovers as receivables and other working-capital balances change.
- The outcome and potential financial or operational consequences of the OIG/DOJ investigation and Sandoz and Teva Remodulin patent challenges.
- Orenitram’s sales trajectory, launch economics and clinical evidence for use with background PAH therapies.
- Execution of the new $500 million repurchase authorization, related liquidity needs and the timing of repayment or refinancing of the mortgage and convertible notes.