United Therapeutics Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; unaudited. Financial amounts below are in millions of dollars unless noted.
Business context
United Therapeutics is a biotechnology company focused on pulmonary arterial hypertension (PAH) and other serious conditions. Remodulin, Tyvaso and Adcirca are its principal commercial products. The company reports one operating segment; its former telemedicine subsidiary was sold in 2011.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $242.5 | $201.7 | $672.3 | $548.0 |
| Operating income | $80.7 | $103.0 | $293.0 | $254.3 |
| Net income | $78.1 | $84.4 | $221.2 | $174.7 |
| Diluted EPS | $1.46 | $1.38 | $4.11 | $2.81 |
| Operating cash flow | — | — | $218.4 | $198.6 |
Q3 operating margin was approximately 33.3%, versus 51.0% a year earlier; nine-month operating margin was 43.6%, versus 46.4%. Nine-month product gross margin was approximately 87.7%, compared with 88.4% in 2011. Cash flow data are reported for nine months only.
- Q3 product revenue: Remodulin $120.8 million (+5.1% year over year), Tyvaso $88.3 million (+33.1%) and Adcirca $31.8 million (+60.9%). Nine-month revenue grew 22.7%; growth was primarily attributed to more patients treated.
- At September 30, cash and cash equivalents were $263.4 million, with marketable investments of $488.9 million and working capital of $490.6 million. Management said liquidity was sufficient for ongoing operations, while noting cash-flow projections are uncertain.
- Nine-month capital expenditures were $90.7 million. The company generated $218.4 million of operating cash flow and used $130.9 million for share repurchases; cash increased by $100.7 million during the period.
- Balance-sheet debt included $202.0 million carrying value of convertible notes and $71.4 million of noncurrent mortgage payables. Convertible notes have $250.0 million principal, mature in 2016 and bear a 1% coupon. The company reported compliance with mortgage covenants.
Material changes and unusual items
- Revenue rose 20.2% in Q3, but operating income declined 21.6% and net income declined 7.4%. Higher operating expenses, particularly share-based compensation, weighed on Q3 results.
- Q3 share-based compensation was $27.1 million expense before tax, compared with a $47.6 million benefit in Q3 2011, reflecting the change in the company’s share price. This contributed to a large year-over-year increase in reported SG&A.
- Other income included a $31.0 million gain from a settlement with Lexington Insurance over damaged Remodulin inventory. The company received the settlement payment in October 2012.
- Nine-month SG&A included a $6.8 million impairment of an acquired licensing-related intangible after the counterparty terminated the underlying arrangement. Other revenue also included $3.8 million from an NIAID contract and $2.0 million of recognized deferred revenue related to a terminated license.
- The company repurchased approximately 2.8 million shares for $130.9 million during the first nine months. The newer $100 million repurchase authorization had $57.1 million remaining at September 30.
Outlook, commentary and principal risks
- No numerical revenue or earnings guidance is provided in the filing text. Management’s stated priorities include continued growth in marketed products, advancing PAH candidates and longer-term development of transplantable cells, tissues and organs.
- The FDA issued a complete response letter on October 23, 2012, declining to approve the oral treprostinil application. The FDA questioned clinical benefit and trial evidence. The company said it was assessing its next clinical and regulatory steps and aimed to seek approval before the end of 2016. FREEDOM-EV began enrolling in Q3; its target is up to 858 patients and 349 clinical-worsening events.
- The company expected to begin commercial release of a modified Tyvaso inhalation system in early 2013. The Tyvaso post-marketing safety study remained ongoing, with results due to FDA by December 15, 2014.
- Sandoz challenged patents covering Remodulin in a generic-drug application. Litigation was pending; FDA approval of the application was generally barred for up to 30 months after the company’s timely lawsuit, unless an earlier adverse court decision occurred.
- Key business risks include reliance on three PAH products, generic and other competition, reimbursement and pricing pressure, clinical and regulatory uncertainty, manufacturing and third-party supplier dependence, and concentration among U.S. distributors. Sales in a quarter may also differ from patient demand because distributors manage inventory.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Progress, design and regulatory implications of FREEDOM-EV following the oral treprostinil complete response letter.
- Developments in Sandoz’s Remodulin patent litigation and the potential timing and impact of generic entry.
- Whether product growth, reimbursement and distributor ordering sustain revenue trends, and the effect of distributor concentration.
- Cash requirements for construction, share repurchases, cash-settled share tracking awards and future debt obligations.
- Execution of the Tyvaso device launch, completion of post-marketing commitments and the company’s ability to maintain reliable product supply.