United Therapeutics Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited interim results; amounts below are in U.S. dollars unless noted. The company develops and commercializes therapies, principally for pulmonary arterial hypertension (PAH). Its marketed products are Remodulin, Tyvaso, and Adcirca.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $183.8 million | $134.7 million | $346.3 million | $260.6 million |
| Operating income | $114.5 million | $61.2 million | $151.3 million | $93.5 million |
| Net income | $73.9 million | $37.7 million | $90.3 million | $56.6 million |
| Diluted EPS | $1.18 | $0.62 | $1.44 | $0.95 |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $117.9 million | $69.5 million |
Q2 revenue increased 36.4% year over year; six-month revenue increased 32.9%. Q2 net product sales were $183.5 million. Product revenue growth was led by Tyvaso, up 109.6% in Q2, and Adcirca, up 96.1%; Remodulin rose 8.8%. Q2 gross profit was $162.4 million, or approximately 88.4% of product sales, versus $119.2 million, or approximately 88.6%, a year earlier. Operating margin was approximately 62.3% versus 45.4%.
For the six months, net cash provided by operations was $117.9 million, capital expenditures were $18.9 million, and net cash increased $69.0 million. Cash and cash equivalents were $321.1 million at June 30. Cash and marketable investments, excluding restricted amounts, totaled $887.4 million, compared with $759.9 million at year-end 2010. Working capital was $424.0 million.
Total assets were $1.579 billion and total liabilities were $565.5 million. Current liabilities included $244.3 million carrying value of convertible notes; the notes’ approximately $250 million principal was due October 15, 2011. The company also had a $68.9 million noncurrent mortgage payable, secured by facilities, maturing in December 2014. It reported compliance with mortgage covenants and said liquidity was sufficient to repay the notes.
Changes, outlook, and material items
- Profitability improved substantially year over year, supported by higher product sales. Six-month operating expenses rose to $195.0 million from $167.1 million; R&D increased 14.1% and SG&A increased 9.3%.
- Q2 reported expenses and earnings were materially affected by share-based compensation remeasurement as the stock price declined. The quarter included a $20.5 million pretax benefit related to share tracking awards and a $6.5 million pretax benefit related to stock options. These noncash valuation effects make quarterly expense comparisons less representative of underlying spending.
- Management cited continuing patient growth and expected demand for its commercial therapies, but emphasized that growth and profitability depend on clinical results, approvals, reimbursement, competition, pricing, and manufacturing. The filing does not provide a clear numerical revenue or earnings forecast.
- FREEDOM-M, a Phase III oral treprostinil study, met its primary endpoint; preliminary analysis reported a median six-minute-walk improvement of about 23 meters versus placebo. Results from the ongoing FREEDOM-C 2 trial were expected by September 2011. The company did not anticipate filing an oral treprostinil NDA before 2012.
- After quarter-end, the company acquired Revivicor for approximately $3.5 million upfront, with up to $25 million in developmental and regulatory milestone payments plus future revenue-based payments. It also disclosed a July 2011 amended Toray license requiring $50 million of nonrefundable payments over five years, with a $50 million R&D charge expected in Q3 2011, and a Pluristem license payment of $5 million expected to be expensed in Q3.
- The March 2011 sale of telemedicine subsidiary Medicomp resulted in discontinued operations and a six-month after-tax discontinued-operations loss of $3.0 million. Telemedicine activities were discontinued in June.
- Two U.S. specialty distributors generated 82% of Q2 revenue through the company’s three U.S. distributors overall. A proposed merger between the parent companies of two distributors was pending regulatory and shareholder approval; management did not then expect a material impact.
Key risks and contingencies
- Revenue is concentrated in Remodulin and Tyvaso, which together represented 92% of six-month revenue. Dependence on a limited number of distributors, manufacturers, and suppliers creates exposure to disruptions and reduced distribution or reimbursement support.
- Clinical and regulatory risk remains significant, particularly for oral treprostinil and Tyvaso post-marketing commitments. The filing notes possible trial delays or failures, regulatory restrictions, and product-safety concerns.
- Competition, pricing and payer reimbursement pressure, healthcare reform, and patent expiration or challenges could constrain sales. Management estimated the 2011 revenue reduction from the Medicare Part D coverage-gap discount provisions at less than 1%.
- Convertible notes were eligible for holder conversion and approaching maturity. Conversion could require cash repayment of principal and shares for excess conversion value; share issuance and cash-settled share tracking awards may also affect liquidity or dilution.
- Planned facility expansions were expected to cost approximately $74 million in North Carolina and $58 million in Maryland. The company expected to fund construction from cash and operating cash flows.
- Interest-rate movements could affect the market value of $565.8 million of held-to-maturity debt securities. The company stated it did not intend, and was not likely required, to sell them before maturity.
Investor verification priorities
- Confirm repayment or conversion of the approximately $250 million principal of convertible notes due October 2011 and the resulting cash and share impact.
- Track FREEDOM-C 2 results, subsequent oral treprostinil regulatory plans, and required Tyvaso post-marketing study progress.
- Assess whether product growth and margins persist after excluding volatile share-based compensation benefits, and monitor the rising R&D and commercial spending base.
- Verify the timing and full economics of Revivicor, Toray, and Pluristem commitments, including milestone and revenue-linked obligations.
- Monitor distributor consolidation, product supply and manufacturing approvals, reimbursement changes, and the concentration of revenue in Remodulin and Tyvaso.