United Therapeutics Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. United Therapeutics is a biotechnology company developing and commercializing therapies for chronic and life-threatening conditions, including pulmonary arterial hypertension (PAH). Figures are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $362.6 | $389.2 |
| Gross profit / gross margin | $333.5 / 92.0% | $336.0 / 86.3% |
| Operating income (loss) | $(655.9) | $306.9 |
| Net income (loss) | $(494.6) | $244.5 |
| Diluted earnings (loss) per share | $(11.32) | $5.57 |
| Operating cash flow | $(627.4) | $275.7 |
| Investing cash flow | $(60.3) | $(58.7) |
| Financing cash flow | $809.1 | $10.6 |
- Revenue declined 7% year over year. Remodulin sales rose 23% to $155.5; Tyvaso rose 10% to $103.8; Orenitram rose 12% to $58.4; and Unituxin rose 38% to $24.9. Adcirca fell 80% to $20.0 amid generic competition.
- The $800.0 Arena ralinepag license upfront payment was expensed as acquired in-process research and development, driving most of the operating loss. The company also recorded $29.2 of share-based compensation expense, versus a $101.1 benefit in Q1 2018, primarily because of changes in the share price affecting cash-settled STAP awards.
- The $156.0 income tax benefit partly offset the pretax loss; the reported effective tax rate was 24%, versus 21% in Q1 2018.
- Cash and cash equivalents were $790.6 at March 31, and current and non-current marketable investments totaled $1,225.8. Combined cash and investments were $2,016.4, up from $1,858.5 at year-end 2018.
- Outstanding revolving-credit-facility borrowings increased to $1,050.0 from $250.0, largely funding the Arena payment. The unsecured facility provides up to $1.5 billion and matures in June 2023; the company reported covenant compliance. Cash and investments exceeded reported debt by approximately $966.4.
Material changes versus the prior comparable period
- Adcirca’s generic competition sharply reduced sales and royalties. Growth in the other four marketed products did not offset the Adcirca decline.
- The Arena transaction added a one-time $800.0 research and development charge and associated borrowing. Operating cash use was also primarily driven by the payment, alongside lower collections and reduced cash flow from payables and accruals.
- Gross margin increased despite lower revenue, reflecting a substantial reduction in Adcirca-related royalty costs and a changed product mix.
- Under the new lease standard adopted January 1, 2019, the company recognized operating-lease right-of-use assets and liabilities of $8.2 at adoption. It also recorded a $5.1 after-tax cumulative adjustment reducing opening retained earnings; prior periods were not restated.
Outlook, commentary, and risks
- Management expected 2019 revenue to decline versus 2018, primarily because generic Adcirca would compete for the full year. Generic Remodulin launches in the U.S. and Europe were additional anticipated pressures. Management said pipeline products and label expansions could support a return to growth potentially as soon as 2020, while emphasizing timing uncertainty.
- Pipeline priorities include ralinepag, for which the company assumed ongoing Phase III work; the Orenitram FREEDOM-EV label supplement; Tyvaso Phase III studies; and potential delivery-system launches. The Remodulin implantable system launch depended on Medtronic satisfying remaining FDA conditions, and timing was outside United Therapeutics’ control.
- In April 2019, after quarter-end, the company announced that the Phase III BEAT study of esuberaprost failed its primary endpoint and that it discontinued development and terminated its Toray license.
- On April 16, 2019, Sandoz and RareGen sued the company and Smiths Medical, alleging anticompetitive conduct concerning cartridges for subcutaneous Remodulin. Plaintiffs sought injunctive relief and unspecified damages, including treble damages. The company disputed the claims and intended to defend itself; an adverse outcome could involve substantial damages or injunctive relief.
- Other significant risks include further generic competition, dependence on a small number of distributors and suppliers, clinical and regulatory uncertainty, pricing and reimbursement pressure, product safety and manufacturing risks, and the company’s ability to service its increased debt. The filing also notes that MannKind had disclosed substantial doubt about its ability to continue as a going concern, posing a potential supply risk to Treprostinil Technosphere.
Most important facts for investors to verify
- Whether generic competition for Adcirca and Remodulin continues to reduce sales, pricing, or product-return estimates.
- Progress and regulatory timing for ralinepag, the Orenitram label supplement, the Remodulin implantable system, and other key pipeline programs.
- Developments in the Sandoz/RareGen litigation and any resulting financial or operational impact.
- Cash generation after the one-time Arena payment, debt balances and interest costs, and continued compliance with credit-facility covenants.
- The potential effect of the failed esuberaprost study and the disclosed MannKind supply and financial risks.
- Distributor concentration: two U.S. specialty distributors represented 58% and 20% of Q1 2019 revenue, respectively.