United Therapeutics Corporation — Q2 2013 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2013. The biotechnology company’s three marketed pulmonary arterial hypertension products are Remodulin, Tyvaso and Adcirca; they account for virtually all revenue. Unless otherwise stated, financial amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $280.6 | $225.6 | $525.7 | $429.8 |
| Operating income | $122.3 | $105.6 | $216.3 | $212.3 |
| Net income | $79.9 | $72.3 | $142.2 | $143.1 |
| Diluted EPS | $1.52 | $1.34 | $2.71 | $2.63 |
| Operating cash flow | Not separately presented for quarter | $181.5 | $125.0 |
- Q2 revenue increased 24.4%; product sales rose 25.1% to $277.5 million. By product, Q2 revenue was Remodulin $124.3 million (+12.6%), Tyvaso $109.5 million (+34.8%) and Adcirca $43.7 million (+44.7%).
- Six-month revenue increased 22.3%, while net income decreased slightly. Operating expenses increased 42.3% to $309.4 million, including R&D of $105.0 million (+48.5%) and SG&A of $142.7 million (+53.4%). Management attributed much of the expense growth to higher share-based compensation, driven by the stock price, as well as development spending, business expansion and patient-assistance grants.
- Q2 operating margin was approximately 43.6% versus 46.8%; net margin was approximately 28.5% versus 32.1%. Six-month operating margin was approximately 41.1% versus 49.4%; net margin was approximately 27.0% versus 33.3%. Product gross margin, using product sales less cost of product sales, was approximately 88.3% in Q2 versus 86.6%.
- At June 30, cash and cash equivalents were $343.6 million and marketable investments totaled $551.1 million, including $5.4 million restricted. Management reported $894.7 million of cash and investments excluding restricted amounts. Working capital was $491.4 million, roughly unchanged from year-end.
- Six-month operating cash flow was $181.5 million. Cash rose by $189.5 million to $343.6 million; investing activities provided $37.2 million and financing activities used $28.4 million. Operating cash flow included substantial noncash share-based compensation ($68.2 million) and a $106.6 million decrease in other liabilities.
- Total liabilities were $561.5 million. Debt included $210.2 million carrying value of 1.0% convertible notes, classified as current because holders had a conversion right at quarter-end, and $70.3 million of noncurrent mortgages. The mortgage loan matures in December 2014; the company reported compliance with its covenants.
Material changes, outlook and risks
- Growth was led by Tyvaso and Adcirca. Management attributed product-sales growth primarily to an increasing number of patients treated; it also cited a 4.9% Tyvaso price increase effective January 1, 2013 and Adcirca wholesale-price increases set by Lilly.
- The $250 million principal amount of 2016 convertible notes became convertible at holders’ election after the share-price conversion condition was met. Conversion and balance-sheet classification are reassessed quarterly and may change with the share price. The company said it had sufficient cash for potential conversions and expected most or all notes to remain outstanding until maturity.
- The board authorized up to $420 million of share repurchases over one year beginning March 4, 2013. By June 30, the company had repurchased approximately 709,000 shares for $42.4 million; approximately $377.6 million of authorization remained.
- Management stated that liquidity was sufficient for ongoing operations, while noting that future cash-flow projections are uncertain. It identified continued growth in marketed products, new PAH therapies, antiviral candidates and regenerative medicine/xenotransplantation programs as longer-term objectives; the filing gives no clear numerical revenue or earnings guidance.
- Oral treprostinil’s NDA received a second FDA complete response letter in March 2013. The company planned to continue the FREEDOM-EV Phase III study, targeting completion by the end of 2016 and FDA approval no later than 2017; these are forward-looking goals, not assured outcomes. The filing notes that two earlier combination-therapy trials missed their primary endpoint.
- Other development milestones included expected Medtronic implantable-pump trial results in the second half of 2013, anticipated Ch14.18 regulatory applications in the first half of 2014, and a planned UV-4B Phase I trial in Q4 2013. Enrollment in the company’s PLX cell-therapy study was suspended pending clearance of an FDA clinical hold affecting a Pluristem study in another indication.
- Key risks include dependence on three PAH products and three U.S. distributors (77% of net revenue in Q2), reimbursement and pricing pressure, manufacturing and third-party supply reliance, and competition. Generic sildenafil could pressure Adcirca, though management had not detected a measurable effect at the time. Sandoz was litigating to market generic Remodulin; patent validity and infringement were disputed, and the FDA approval stay is subject to statutory limits and court outcomes.
- Other notable items: share-based compensation expense rose sharply; the STAP liability reached $109.7 million and may create significant future cash payments. The company invested $30.8 million in two private companies. Held-to-maturity investments had $129,000 of unrealized losses attributed to interest-rate movements; management said it did not expect to sell them before maturity.
Important facts for investors to verify
- Whether product growth, particularly Tyvaso and Adcirca, continued and how patient demand compares with distributor ordering and inventory levels.
- Developments in the Sandoz Remodulin patent cases, including rulings, patent coverage and potential timing of generic entry.
- Progress and results of FREEDOM-EV and the FDA’s requirements following the oral treprostinil complete response letters.
- Quarter-to-quarter effects of stock-price-driven STAP compensation on reported expenses, liabilities and cash requirements.
- Convertible-note conversion status, possible cash settlement needs, the 2014 mortgage maturity and remaining repurchase authorization.
- Whether supply, reimbursement, distributor concentration and development-program risks have changed; confirm subsequent regulatory decisions and clinical milestones against later filings.