United Therapeutics Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; comparative results are for 2014 and 2013. The filing also presents unaudited quarterly data. United Therapeutics is a biotechnology company whose revenues are primarily from therapies for pulmonary arterial hypertension (PAH).
Financial performance and position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $1.466 billion | $1.289 billion | +13.8% |
| Operating income | $699.0 million | $538.8 million | +29.7% |
| Net income | $651.6 million | $340.1 million | +91.6% |
| Diluted EPS | $12.72 | $6.28 | +102.5% |
| Cash from operations | $382.8 million | $355.3 million | +$27.5 million |
- Revenue by product: Remodulin $572.8 million (+3.4%); Tyvaso $470.1 million (+1.5%); Adcirca $278.8 million (+25.9%); Orenitram $118.4 million (+187.0%); and Unituxin $20.4 million, its first year of sales.
- Operating margin was approximately 47.7%, compared with 41.8% in 2014. Net income included a $350 million gain from selling the Rare Pediatric Priority Review Voucher (PPRV); reported earnings growth therefore includes a material, nonrecurring item.
- Cost of product sales fell 45.2% to $69.0 million, primarily because the 10% royalty on treprostinil sales to Glaxo ended in October 2014; 2014 included $72.5 million of related royalty expense.
- Research and development expense was $245.1 million (+1.1%); selling, general and administrative expense was $452.6 million (+18.7%). Share-based compensation is sensitive to the company’s share price and contributed to expense volatility.
- Cash, cash equivalents and marketable investments totaled $991.8 million at year-end, versus $818.2 million a year earlier. Current assets were $1.275 billion and current liabilities $440.8 million. Total assets were $2.184 billion; stockholders’ equity was $1.589 billion.
- Operating cash flow was $382.8 million; investing activities provided $503.6 million, including PPRV proceeds; financing activities used $446.9 million, including $394.5 million for share repurchases and $133.2 million for convertible-note settlements.
- Convertible-note principal was $5.6 million at year-end and due September 2016. In January 2016, the company entered into a $1.0 billion unsecured revolving credit facility; it had drawn none as of January 29, 2016. The former $75 million secured line was terminated in January 2016.
Material changes and operating developments
- Growth reflected increased Orenitram use, Adcirca price increases set by Lilly, and Unituxin’s U.S. launch in the third quarter. Unituxin also received European approval, with commercial launches dependent on country-level pricing and reimbursement.
- In September 2015, the company sold its PPRV for $350 million in cash and recognized the proceeds as a gain. The voucher arose from Unituxin’s approval.
- 2015 quarterly revenue rose from $327.5 million in Q1 to $404.9 million in Q4. Q4 net income was $104.6 million, versus $115.9 million in Q4 2014; Q3 2015 net income of $464.4 million included the PPRV gain. Quarterly earnings were also affected by volatile cash-settled share-tracking award (STAP) compensation.
- The company repurchased approximately 2.4 million shares for $394.5 million during 2015. A new authorization allows up to $500 million of repurchases during 2016; approximately 280,000 shares were repurchased for $37.8 million in January 2016.
- Cash paid to settle STAP awards was $248.8 million in 2015. The year-end STAP liability was $354.8 million; the company stopped granting STAP awards in June 2015 and shifted future awards toward stock options.
Outlook, risks and contingencies
- Management’s stated priorities are continued growth of existing products, expanding Orenitram’s label through the FREEDOM-EV study, advancing esuberaprost in combination with Tyvaso in the BEAT study, and developing new Remodulin delivery systems. The filing provides no specific revenue or earnings guidance.
- FREEDOM-EV is a Phase IV Orenitram study of up to 610 patients; BEAT is a Phase III esuberaprost/ Tyvaso study intended to enroll 240 patients. Outcomes and regulatory timelines are uncertain. The company also targets FDA approval of a DEKA pre-filled Remodulin pump by the end of 2018.
- The Remodulin implantable-system program faces regulatory and manufacturing uncertainty: Medtronic’s device application was under FDA review, while a 2015 FDA consent decree restricted Medtronic’s SynchroMed II operations pending remediation. United Therapeutics’ new Remodulin application was resubmitted in December 2015, with a review expected through October 2016.
- Generic and patent risks include agreed U.S. Remodulin generic entry by Sandoz in June 2018 and Teva in December 2018, potentially earlier in specified circumstances; ongoing Tyvaso patent litigation with Watson; a SteadyMed petition challenging a treprostinil patent; and an Actavis ANDA notice for the 2.5 mg Orenitram strength received in February 2016. Adcirca’s U.S. patent was expected to expire in November 2017.
- Revenue is concentrated: Accredo accounted for 55% of 2015 total revenue, and Remodulin and Tyvaso together accounted for about 71%. The company also relies on third parties for distribution and certain products, including Adcirca manufacturing and the Tyvaso nebulizer.
- Other key risks include pricing and reimbursement pressure, competing PAH therapies, clinical or regulatory setbacks, product safety and manufacturing compliance, and sizable cash-settled STAP and pension commitments. The company reported no off-balance-sheet arrangements.
- The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective at year-end.
Most important facts for investors to verify
- How much of 2015 earnings growth is attributable to the one-time $350 million PPRV gain, and how reported results compare after accounting for that item and share-based compensation volatility.
- Product-level sales trends, particularly continued growth in Orenitram and whether Remodulin and Tyvaso growth can offset pricing, competition and future generic exposure.
- Progress, enrollment, endpoint results and regulatory timing for FREEDOM-EV, BEAT, and both Remodulin pump programs.
- Developments in patent proceedings and the actual timing and commercial impact of generic entry for Remodulin, Tyvaso, Orenitram and Adcirca.
- Cash requirements for STAP settlements, share repurchases and other commitments, alongside use of the revolving credit facility and remaining convertible-note repayment.
- Distributor concentration and the company’s ability to maintain reliable production, supply, reimbursement and patient access.