United Therapeutics Corporation — Q1 2017 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2017, compared with Q1 2016. United Therapeutics is a biotechnology company focused on chronic and life-threatening conditions; its five marketed products are Remodulin, Tyvaso, Adcirca, Orenitram and Unituxin. The company reports one operating segment.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $370.5 million | $369.0 million |
| Operating income | $263.6 million | $363.7 million |
| Net income | $178.6 million | $235.5 million |
| Diluted EPS | $3.89 | $4.84 |
| Cash from operations | $230.8 million | $125.8 million |
- Revenue was up 0.4%; operating income fell 27.5% and net income fell 24.2%. Reported gross profit was $356.2 million versus $368.3 million; gross margin was approximately 96.1% versus 99.8%. Operating margin was approximately 71.1% versus 98.6%, and net margin approximately 48.2% versus 63.8%.
- Cash and cash equivalents were $1,122.6 million at March 31, 2017; marketable investments were $178.2 million on the balance sheet, bringing cash and investments to $1,300.8 million. Current assets were $1,504.1 million and current liabilities $427.7 million.
- Operating cash flow rose by $105.0 million, principally due to $88.6 million less cash paid for income taxes because of payment timing and improved receivable collections, partly offset by higher cash payments settling share-tracking awards. Investing cash flow was negative $165.6 million, including purchases of available-for-sale investments; financing cash flow was positive $34.4 million.
- The company reported no borrowing under its $1.0 billion unsecured revolving credit facility, extended to January 2022, and was in compliance with its covenants. The filing says the prior convertible notes were fully settled at maturity in September 2016.
Material changes and operating drivers
- Product sales were: Remodulin $145.8 million, up 4%; Tyvaso $87.4 million, down 14%; Adcirca $80.0 million, up 10%; Orenitram $39.3 million, down 2%; and Unituxin $18.0 million, up 27%.
- Management attributed growth to Adcirca price increases set by Lilly, more Remodulin patients, and Unituxin pricing and vial volume. Tyvaso’s decline was attributed to earlier use of oral prostacyclin-class and other oral therapies.
- Reported operating expenses were heavily affected by cash-settled share-tracking awards (STAP). The share-based compensation benefit was $19.1 million in Q1 2017 versus $144.6 million in Q1 2016, primarily reflecting a smaller decline in the company’s share price in 2017. This unusual comparison materially contributes to the lower reported operating income and earnings year over year.
- R&D expense excluding share-based compensation increased 12% to $41.3 million. SG&A excluding share-based compensation decreased, including a $32.0 million reduction in charitable donations to patient-assistance organizations.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided. Management expects higher clinical-trial expenses in 2017, citing studies of Orenitram, Tyvaso and Unituxin, and has budgeted approximately $300 million of capital expenditures over the next three years. Management believes available liquidity is sufficient for ongoing operations and plans.
- Key pipeline and product-development milestones include the phase III INCREASE study of Tyvaso in pulmonary hypertension associated with interstitial lung disease, the FREEDOM-EV study of Orenitram, and a new Tyvaso inhalation-device supplement for which FDA action was anticipated in late 2017. RemoSynch’s anticipated 2018 launch depends on regulatory approvals; Medtronic’s FDA consent decree creates uncertainty for the device program.
- Adcirca’s U.S. patent was due to expire in November 2017, with generic competition expected afterward. Settlements permit Remodulin generics to launch from June 2018 and December 2018, subject to possible earlier entry. Generic challenges to Tyvaso and Orenitram are in litigation.
- On March 31, 2017, the PTAB found all claims of the company’s treprostinil-related ’393 patent unpatentable. The company was evaluating rehearing or appeal; the patent remained valid and enforceable pending exhaustion of appeals. The decision may affect its defenses against generic challengers, although the company cited additional patents.
- A DOJ inquiry concerning support for charitable organizations that assist patients remained ongoing; the company was cooperating and noted potential civil penalties, injunctive relief, reputational harm and effects on product coverage.
- ASU 2016-09 adoption changed share-based-payment accounting, including recognizing excess tax benefits in income tax expense and removing forfeiture estimates. The company recorded a cumulative retained-earnings adjustment; the filing reports a 32% effective tax rate for Q1 2017 versus 35% in Q1 2016.
- Other significant risks include reimbursement and pricing pressure, competition, clinical-trial and regulatory uncertainty, manufacturing and third-party supply dependence, and Unituxin’s serious adverse effects and post-marketing obligations.
Important facts for investors to verify
- Whether sales trends—particularly Tyvaso and Orenitram—continue, and whether Adcirca sales withstand generic entry after November 2017.
- The timing and commercial impact of Remodulin generic entry, Tyvaso/Orenitram patent litigation, and the ’393 patent appeal or rehearing.
- How much of the year-over-year earnings and operating-cash-flow movement reflects STAP remeasurement, tax-payment timing and working-capital changes rather than recurring performance.
- Progress, enrollment and outcomes for major clinical trials, as well as regulatory and manufacturing milestones for RemoSynch and other pipeline programs.
- Any material developments in the DOJ inquiry, product reimbursement, or manufacturing and supply arrangements.