United Therapeutics Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing was signed February 26, 2020. Although the request identifies 2019 Q4, this is an annual report; quarterly figures are noted where available. Amounts are in U.S. dollars.
Business context
United Therapeutics develops and sells therapies primarily for pulmonary arterial hypertension (PAH), with additional oncology and organ-manufacturing programs. Its commercial products are Remodulin, Tyvaso, Orenitram, Adcirca and Unituxin. Treprostinil-based products (Remodulin, Tyvaso and Orenitram) remain central to the business; management noted that the company relies heavily on these sales.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Total revenue | $1,448.8 million | $1,627.8 million | Down 11% |
| Gross profit | $1,331.2 million | $1,429.1 million | Down $97.9 million |
| Gross margin | 91.9% | 87.8% | Up 4.1 percentage points |
| Operating income (loss) | $(187.6) million | $805.4 million | Turned to loss |
| Net income (loss) | $(104.5) million | $589.2 million | Turned to loss |
| Operating cash flow | $(206.6) million | $778.4 million | Turned to use of cash |
| Cash, cash equivalents and marketable investments | $2,253.4 million | $1,858.5 million | Up 21% |
| Revolving credit facility debt | $850.0 million | $250.0 million | Up $600.0 million |
- FY 2019 operating margin was approximately negative 13.0%; net margin was approximately negative 7.2%. The $800.0 million upfront ralinepag license payment to Arena was expensed as research and development and was the principal reason for the reported operating and net losses.
- Research and development expense rose to $1,182.6 million from $357.9 million, including the Arena payment. Selling, general and administrative expense was $336.2 million, up 26%. Cost of product sales fell to $117.6 million, primarily because lower Adcirca sales reduced related royalties.
- Cash and current marketable investments totaled $1,485.9 million; including non-current marketable investments, total cash and investments were $2,253.4 million. Current assets were $1,864.5 million and current liabilities $463.0 million, or a current ratio of about 4.0.
- Debt was $850.0 million under an unsecured revolving facility with a stated maturity in June 2024. The company classified $250.0 million as current because it intended to repay that amount within one year. Management reported compliance with debt covenants.
- Q4 2019 revenue was $311.1 million and net income was $52.6 million. Revenue was affected by a distributor reducing orders to normalize inventory after placing excess orders in Q3.
Revenue mix and material changes
| Product | FY 2019 sales | FY 2018 sales | Change |
|---|---|---|---|
| Remodulin | $587.0 million | $599.0 million | Down 2% |
| Tyvaso | $415.6 million | $415.2 million | Essentially flat |
| Orenitram | $225.3 million | $205.1 million | Up 10% |
| Unituxin | $113.7 million | $84.8 million | Up 34% |
| Adcirca | $107.2 million | $323.7 million | Down 67% |
- Adcirca’s sharp decline followed generic entry beginning in 2018, with additional generic launches in 2019. Its U.S. license expires December 31, 2020; absent an extension, the company expects no Adcirca sales thereafter, while remaining liable for eligible expired-product returns.
- Remodulin faced U.S. generic competition from March 2019 and generic launches in parts of Europe. Management reported limited U.S. erosion through year-end, but expected greater international pricing and competitive pressure.
- Orenitram sales benefited from patient growth and a January 2019 price increase. The FDA updated its label in October 2019 to include delaying disease progression, based on the FREEDOM-EV study.
- Unituxin sales increased with higher vial volume and a price increase; Canadian commercial sales began in late 2019.
- A U.S. distributor’s utilization-data error led to estimated excess Q3 orders of $31.4 million for Remodulin, Tyvaso and Orenitram, followed by an estimated $43.6 million reduction in Q4 orders. The company said the full-year effect was negligible and distributor inventory had returned to normal.
Outlook, commentary and key risks
- Management expected 2020 revenue growth versus 2019, driven by patient growth in treprostinil therapies, the expanded Orenitram label and modest price increases, partly offset by Adcirca erosion and additional European Remodulin generics. It anticipated a possible return to revenue growth as early as 2021, dependent on pipeline development and launch timing.
- Near-term catalysts included Remunity, for which FDA clearance was announced in February 2020 and launch was expected by July 2020; a Tyvaso supplemental filing based on positive INCREASE Phase III results; and Trevyent, whose FDA review could be extended or result in a complete response letter. The Implantable System for Remodulin launch was delayed to 2021, subject to Medtronic satisfying FDA conditions.
- Ralinepag is in Phase III development. The $800.0 million Arena upfront payment was expensed in 2019; additional milestone payments and royalties may be due. Other programs include Tyvaso studies in Group 3 pulmonary hypertension, organ manufacturing and transplantation technologies, and oncology research. The DISTINCT Unituxin study in adult small-cell lung cancer failed its primary endpoint, announced in February 2020.
- Important risks include dependence on a concentrated PAH product portfolio and two U.S. specialty distributors; generic competition and pricing or reimbursement pressure; clinical, regulatory and launch uncertainty; manufacturing and sole-supplier disruptions; adverse effects and product safety; and the ability to maintain patent protection.
- The company had paid $210.0 million plus interest in 2017 to resolve a DOJ investigation concerning patient-assistance support and remained subject to a Corporate Integrity Agreement through December 2022. Separately, Sandoz and RareGen litigation concerning subcutaneous infusion cartridges remained pending; a preliminary injunction was denied in January 2020, but the case was not dismissed and potential losses were not estimable.
- Management said current liquidity was sufficient for operations and plans, but operating cash flow was negative in 2019. Variable-rate debt exposed the company to interest-rate risk; a 100-basis-point rate increase was estimated to add about $8.5 million in annual interest expense at the year-end debt level.
Most important facts for investors to verify
- Whether growth in Remodulin, Tyvaso and Orenitram can offset Adcirca’s loss of sales after its license expires and further generic pressure.
- Whether 2020 revenue growth materialized, including the effect of distributor ordering normalization and the timing of Adcirca returns.
- Clinical and regulatory milestones, launch timing and commercial uptake for Remunity, Tyvaso’s Group 3 indication, Trevyent and the implantable system.
- Cash generation, repayment of the intended $250.0 million debt portion, and the company’s capacity to fund substantial R&D and contingent license obligations.
- Developments in the Sandoz/RareGen litigation, the Corporate Integrity Agreement, and compliance with post-marketing requirements for Unituxin.