United Therapeutics Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Financial figures are in U.S. dollars unless noted.
Business context
United Therapeutics develops and sells therapies primarily for pulmonary arterial hypertension (PAH). Its commercial products are Remodulin, Tyvaso, Orenitram, Adcirca and Unituxin. Revenue remains concentrated in the U.S. and in PAH medicines; the company also invests in clinical-stage programs and early organ-transplantation research.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $1,598.8 million | $1,465.8 million | +9.1% |
| Operating income | $1,061.7 million | $699.0 million | +51.9% |
| Net income | $713.7 million | $651.6 million | +9.5% |
| Diluted EPS | $15.25 | $12.72 | +19.9% |
| Operating cash flow | $643.6 million | $382.8 million | +68.1% |
| Cash, cash equivalents and marketable investments | $1,053.1 million | $991.8 million | +6.2% |
FY 2016 gross profit was $1,526.1 million, or approximately 95.5% of revenue; operating margin was approximately 66.4% and net margin approximately 44.6%. The effective tax rate was approximately 33%, versus 38% in 2015.
Product sales: Remodulin $602.3 million (+5.2%); Tyvaso $404.6 million (-13.9%); Adcirca $372.2 million (+33.5%); Orenitram $157.2 million (+32.8%); and Unituxin $62.5 million (up from $20.5 million in its partial 2015 launch year). Tyvaso’s decline was attributed to fewer treated patients and earlier use of oral therapies delaying inhaled treatment.
Fourth-quarter 2016 revenue was $409.0 million and net income was $110.3 million, compared with $404.9 million and $104.6 million, respectively, in Q4 2015. FY 2016 net income included substantial volatility from cash-settled share-tracking awards (STAP): the company recorded a $15.2 million STAP compensation benefit for the year, versus $274.2 million of expense in 2015. Q4 2016 included $64.2 million of after-tax STAP expense.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1,023.0 million at year-end; marketable investments were $30.1 million. Current assets were $1,424.8 million against current liabilities of $332.5 million.
- The company generated $643.6 million of operating cash flow. Investing activities provided $48.3 million and financing activities used $497.7 million, including $500.0 million for share repurchases.
- The $250 million, 1.0% convertible notes matured and were settled in September 2016. No borrowings were outstanding under the $1.0 billion unsecured revolving facility at year-end; its maturity was extended to January 2022 in January 2017. Total liabilities were $463.4 million.
- Management stated that available liquidity was sufficient for operations and business plans. It budgeted approximately $275 million in capital expenditures over the next three years. No specific revenue or earnings guidance was provided in the supplied filing text.
Material changes, outlook and risks
- Revenue growth was led by Adcirca, Unituxin, Orenitram and Remodulin, offset in part by the Tyvaso sales decline. The reduction in operating expenses reflected a sharp reversal in STAP expense; this makes reported operating profit comparisons less representative of underlying cost trends.
- FY 2015 net income included a one-time $350 million gain from selling the Unituxin-related Rare Pediatric Priority Review Voucher. No comparable gain occurred in 2016.
- Management expected higher 2017 clinical-trial spending, citing large studies of Orenitram and Tyvaso and further Unituxin indication research. Key development milestones included pending FDA decisions on the RemoSynch implantable system and drug filings, anticipated in April and June 2017, respectively; timing and approval were uncertain.
- Patent and generic exposure is significant: Adcirca’s U.S. treatment patent was due to expire in November 2017, with generic entry expected thereafter; settled agreements permit generic Remodulin entry from June 2018 and December 2018, potentially earlier in specified circumstances. Tyvaso and Orenitram patent challenges and a pending review of a treprostinil patent also create risk.
- Other principal risks include dependence on a small product portfolio and specialty distributors, reimbursement and pricing pressure, manufacturing and supplier concentration, clinical and regulatory uncertainty, and adverse events. The filing notes a Department of Justice subpoena received in May 2016 concerning support for patient-assistance organizations; the company said it was cooperating and could not predict the outcome.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Whether Adcirca generic competition began after the November 2017 patent expiry and its effect on sales, pricing and the Lilly license arrangement.
- Actual timing and commercial impact of generic Remodulin entry, plus outcomes of the Tyvaso, Orenitram and treprostinil patent proceedings.
- Tyvaso’s sales trajectory and whether growth in Adcirca, Orenitram and Unituxin can offset pressure on established products.
- Results, enrollment and regulatory progress of FREEDOM-EV, BEAT, INCREASE and RemoSynch, as well as the disclosed manufacturing and device-partner risks.
- Cash requirements from the $279.9 million estimated STAP obligation, the unfunded SERP, planned capital spending and clinical programs; STAP values can change with the share price.
- Developments in the DOJ inquiry and any resulting legal, compliance or patient-assistance program changes.