United Therapeutics Corporation — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; unaudited. The company develops and commercializes therapies principally for pulmonary arterial hypertension (PAH), alongside a smaller telemedicine business. Its marketed products include Remodulin, Tyvaso and Adcirca. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Key financial results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $171.0 | $97.2 | $437.4 | $260.9 |
| Operating income | $61.9 | $11.7 | $155.0 | $28.2 |
| Net income | $39.7 | $11.9 | $96.4 | $22.8 |
| Diluted EPS | $0.66 | $0.21 | $1.62 | $0.41 |
| Operating margin | 36.2% | 12.1% | 35.4% | 10.8% |
| Net margin | 23.2% | 12.3% | 22.0% | 8.7% |
| Operating cash flow | — | — | $172.3 | $73.4 |
Q3 revenue grew 75.9% year over year, led by product sales: Remodulin revenue was $109.6 million, Tyvaso $48.7 million and Adcirca $9.9 million. For the first nine months, those products generated $301.7 million, $103.1 million and $23.5 million, respectively. Telemedicine revenue was $8.1 million for the nine-month period, nearly flat year over year. The company attributed growth to more patients receiving its products and 2010 Remodulin price increases, which added approximately $16.4 million to nine-month revenue.
Research and development expense rose 28.8% to $104.5 million for the nine months; selling, general and administrative expense rose 4.0% to $124.6 million. Nine-month income tax expense was $47.0 million, versus $0.7 million in 2009; management cited higher projected pretax earnings and fewer expected business tax credits. The estimated annual effective tax rate was 36%, compared with 19% in 2009.
Financial position, liquidity and debt
- At September 30, cash and cash equivalents were $210.2 million; marketable investments were $415.7 million, including $251.6 million current and $164.2 million noncurrent. Management reported $625.9 million in cash and marketable investments excluding restricted amounts. Restricted cash and investments totaled about $40.2 million.
- Working capital was $201.0 million, versus a $5.7 million deficit at December 31, 2009. Current assets were $598.5 million and current liabilities $397.5 million. The current classification includes convertible notes and a lease obligation due as the lease’s initial term ends in May 2011.
- Operating cash flow was $172.3 million; purchases of property, plant and equipment were $13.2 million. Cash increased $109.8 million to $210.2 million. Financing cash flow included $64.4 million from stock-option exercises and $18.7 million in related tax benefits.
- Convertible notes had a $231.9 million carrying amount and approximately $250 million principal, with maturity in October 2011. They were classified as current because holders could convert at September 30. Management expected most holders to retain the notes until maturity, but that outcome is uncertain.
- The $31.2 million Phase I Laboratory lease obligation was classified as current; the company said it intended to purchase the facility for approximately $32 million when the initial lease term expires. About $35.1 million of investments were pledged as lease collateral.
- The cash-settled Share Tracking Awards Plan liability was $98.4 million, up from $64.2 million at year-end. Future cash needs depend partly on the company’s share price and award exercises.
Material changes and business developments
- Revenue growth materially improved operating results: nine-month operating income increased to $155.0 million from $28.2 million, while net income rose to $96.4 million from $22.8 million. Higher product revenue was partly offset by greater R&D spending and a higher tax provision.
- Remodulin prices rose 9.6% in the United States and 13.3% internationally in March and April 2010. The company planned a 4.9% Tyvaso price increase in November 2010.
- Cash and investments increased substantially from year-end, driven by operating receipts and option exercises, while construction spending fell after completion of the Silver Spring facility.
- Three U.S.-based distributors represented 83% of total revenue in both the quarter and nine-month period. All Tyvaso revenue came through these distributors.
- The company planned to add approximately 50 sales and marketing employees beginning in Q4 2010.
Outlook, risks and unusual items
- Management expected continued demand growth for its PAH products and sought to sustain strong revenue growth, but provided no specific numerical revenue or earnings guidance in the supplied filing text. It identified product demand, pricing and reimbursement, competition, clinical outcomes and regulatory approvals as important uncertainties.
- Oral treprostinil remains a significant development risk: the FREEDOM-C Phase III trial missed its primary endpoint, and the company did not anticipate filing an NDA before 2012. Ongoing FREEDOM-M and FREEDOM-C2 trials could be delayed or unsuccessful.
- Tyvaso has required post-marketing studies and inhalation-system modifications. The FDA requested further device changes and a follow-up usability study; the company sought an extension to the original October 2010 commitment timeline. It planned to begin a long-term safety study in late 2010 or early 2011.
- The company withdrew its European Tyvaso marketing application in February 2010 after the EMA found that certain clinical sites had not complied with Good Clinical Practices. This is a material regulatory and commercialization risk.
- Production depends on third parties, including Baxter for Remodulin, Catalent for Tyvaso, and NEBU-TEC for the Tyvaso inhalation system. Supply disruption, manufacturing approval requirements or quality issues could affect product availability. The company reported inventory equivalent to about three years of expected Remodulin and Tyvaso demand.
- Remodulin and Tyvaso together represented 93% of nine-month revenue, according to the filing. Competition, reimbursement changes, safety concerns and distributor concentration could therefore materially affect results.
- The company recorded a $5.6 million gain on the sale of auction-rate securities and a $5.5 million loss on writing off the related put option after exercising it in June 2010. It also remeasured its executive retirement obligation, increasing the estimated obligation by $5.2 million.
- A derivative shareholder lawsuit was subject to an October 25, 2010 settlement stipulation, after quarter-end. Terms included canceling 165,214 CEO options, restricting future award repricing without shareholder approval and adopting governance practices. Court approval and any plaintiffs’ attorneys’ fee remained unresolved; management did not expect a material financial impact.
Important facts for investors to verify
- Whether growth in Tyvaso, Adcirca and Remodulin patient demand continues, and how much future growth reflects pricing versus volume.
- Progress and results of the oral treprostinil trials, Tyvaso post-marketing obligations and requested device changes, and any further regulatory developments in Europe.
- Distributor and manufacturing continuity, including approval and implementation of expanded Remodulin production and alternative Tyvaso inhalation-system supply.
- Cash requirements for the approximately $250 million note principal due in October 2011, the laboratory lease purchase decision, and the cash-settled STAP awards.
- The effect of the higher effective tax rate, Medicaid rebates and evolving healthcare reimbursement rules on future net income and cash generation.
- Final court approval and any fee award in the derivative lawsuit settlement.