United Therapeutics Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. Financial statements are unaudited; amounts are in millions except per-share data. The company develops and sells therapies principally for pulmonary arterial hypertension, alongside oncology products and research programs.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $444.5 | $444.6 | $833.7 | $815.1 |
| Operating income | $217.4 | $88.5 | $524.3 | $352.1 |
| Net income (loss) | $172.9 | $(56.0) | $417.4 | $122.6 |
| Diluted EPS | $3.98 | $(1.25) | $9.51 | $2.68 |
| Operating cash flow | Not presented by quarter | $455.5 | $301.5 |
Margins: Gross margin was approximately 86.1% in Q2 2018 versus 95.7% a year earlier, and 86.2% for the first half versus 95.9%. The decline primarily reflects higher Adcirca royalties and milestone costs. Operating margin was approximately 48.9% in Q2 and 62.9% for the first half; comparisons with 2017 are affected by the prior-year $210.0 million loss contingency.
Revenue mix and changes: Q2 sales were nearly flat year over year. Remodulin was $159.5, Tyvaso $105.9, Adcirca $109.8, Orenitram $49.5 and Unituxin $19.8. For the first half, sales rose 2%: growth in Orenitram (19%), Unituxin (11%) and Tyvaso (5%) was partly offset by a 6% decline in Remodulin. Q2 Adcirca sales fell 9%; first-half Adcirca sales increased 3% despite lower bottle volumes, reflecting Lilly price increases.
Cash, liquidity and debt: At June 30, cash and cash equivalents were $745.9 and marketable investments were $1,045.4, for combined liquidity of $1,791.3 (up 25% from year-end 2017). Current assets were $1,624.2 and current liabilities $350.0. The company generated $455.5 of operating cash flow and spent $91.1 on property, plant and equipment in the first half. It reported $250.0 outstanding under a new unsecured revolving credit agreement with total capacity of up to $1.5 billion, maturing in 2023; the filing states it was in covenant compliance. No debt repayment schedule beyond the facility terms is provided here.
Outlook, material developments and risks
- Management expected 2018 revenue to decline from 2017, citing anticipated generic Adcirca competition and reimbursement challenges for oral therapies that could increase patient-assistance use. It expected longer-term growth from new products, delivery systems and expanded indications; no quantified revenue or earnings guidance was provided.
- Generic competition is a major exposure. Adcirca regulatory exclusivity expired in May 2018, and generic launch was anticipated during 2018. Generic Remodulin launches were possible in the United States and parts of Europe during 2018. Tyvaso patent litigation with Watson and related patent reviews remained pending. Adcirca returns could rise if distributor inventory expires unsold.
- Cost of product sales rose sharply, chiefly because the Adcirca royalty rate under the amended Lilly agreement increased from 5% to an effective rate of approximately 42.5% beginning December 2017. Lilly also sets Adcirca pricing and manufactures and distributes the product.
- Research and development spending increased, supporting multiple late-stage studies and programs including FREEDOM-EV, BEAT, Tyvaso-ILD and delivery-device development. Management anticipated FREEDOM-EV results in Q4 2018. Trial outcomes, regulatory decisions and execution remain uncertain.
- On July 30, 2018, after quarter-end, the FDA approved Remodulin use with the Implantable System. Management anticipated an initial, limited launch in late 2018 or early 2019, dependent on Medtronic supply and launch preparation; broader rollout was tied to a next-generation system expected in late 2019, potentially later.
- The proposed SteadyMed acquisition contemplated approximately $141.0 million cash consideration and up to $75.0 million contingent consideration tied to a Trevyent commercialization milestone. Shareholder approval and termination of the antitrust waiting period occurred after quarter-end; closing was expected in Q3 2018, subject to remaining conditions. Trevyent’s FDA application had previously received a refuse-to-file letter.
- Reported earnings comparisons are affected by unusual items. Q2 2017 included a $210.0 million DOJ-related loss contingency and a $46.5 million investment impairment; the settlement was paid after the accrual. First-half 2018 included an $80.6 million share-based compensation benefit, largely from remeasurement of cash-settled STAP awards. STAP expense can vary materially with the share price.
- The first-half effective tax rate was 21%, compared with 60% in 2017, reflecting tax reform and the effect of the 2017 contingency and impairment. Management expected the lower tax rate to continue, subject to tax-law effects and estimates.
- Other risks include payer pricing and reimbursement pressure, dependence on a small number of products and distributors, manufacturing and third-party supply risks, clinical and regulatory uncertainty, patent challenges, and obligations under a five-year Corporate Integrity Agreement.
Key facts for investors to verify
- Timing and commercial impact of generic Adcirca and Remodulin launches, and any resulting inventory-return liabilities.
- Adcirca profitability after the higher Lilly royalty and milestone terms, alongside changes in sales volume.
- Progress and results of FREEDOM-EV and other late-stage trials, plus the actual launch capacity and commercial terms for the Implantable System.
- Completion and terms of the SteadyMed acquisition, including Trevyent’s regulatory path and milestone conditions.
- Cash generation, planned capital expenditure (approximately $220 million budgeted over three years), and cash needs for debt, acquisitions and STAP settlements.
- Movement in STAP-related compensation and liabilities, which can materially affect reported operating expenses and cash requirements.