United Therapeutics Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; unaudited. The company develops and commercializes therapies primarily for pulmonary arterial hypertension (PAH). Its three principal marketed products are Remodulin, Tyvaso, and Adcirca.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $302.2 million | $242.5 million | $828.0 million | $672.3 million |
| Operating income | $104.6 million | $80.7 million | $321.0 million | $293.0 million |
| Net income | $62.7 million | $78.1 million | $204.9 million | $221.2 million |
| Diluted EPS | $1.17 | $1.46 | $3.90 | $4.11 |
| Operating cash flow | Not presented by quarter | $320.8 million | $218.4 million |
- Revenue rose 24.6% in Q3 and 23.2% for the first nine months. Product revenue growth was broad: Q3 Remodulin +9.5%, Tyvaso +36.2%, and Adcirca +49.0%; nine-month growth was +8.6%, +35.4%, and +48.1%, respectively.
- Q3 product gross profit was $269.3 million, a product gross margin of approximately 89.8%, versus $212.9 million and 88.4% a year earlier. Operating margin was approximately 34.6%, versus 33.3%. Nine-month operating margin was approximately 38.8%, compared with 43.6% in 2012.
- Despite higher operating income, net income declined 19.7% in Q3 and 7.4% year to date. The prior-year periods included a $31.0 million insurance-proceeds gain in other income; 2013 also had higher share-based compensation and a higher estimated effective tax rate (34%, versus 31%).
- Nine-month operating cash flow increased $102.4 million. Share-based compensation expense was $142.6 million, versus $40.6 million, and was a substantial noncash reconciliation item. Investing activities used $138.6 million, including $30.8 million invested in private companies; financing activities used $14.0 million, including $42.4 million of share repurchases.
- At September 30, cash and cash equivalents were $322.2 million; marketable investments totaled $716.6 million, excluding restricted amounts. Cash and investments available excluding restricted amounts were reported as $1,038.8 million. Working capital was $463.8 million, down from $491.7 million at year-end 2012.
- Debt included $250.0 million principal of 1.0% convertible notes (carrying value $213.0 million, classified current because holders could elect conversion) and $67.8 million of mortgage principal. The $75.0 million one-year revolving facility, expandable by up to $75.0 million subject to conditions, was undrawn. The company reported compliance with mortgage covenants.
Material changes and notable items
- Higher product sales were attributed primarily to growth in the number of patients treated. Three U.S. specialty distributors accounted for 76% of Q3 revenue and 77% of nine-month revenue.
- Share-based compensation increased materially as the company’s stock price rose. The STAP liability increased to $156.8 million from $75.4 million at December 31, 2012; awards are cash-settled and future cash needs may vary with the stock price and vesting.
- The notes became contingently convertible after the stock-price conversion threshold was met. Their classification and convertibility are reassessed quarterly and may change with the share price. The company said it expected most or all holders to retain notes to maturity and believed it had liquidity to fund conversions.
- The company repurchased 708,998 shares for $42.4 million under a $420.0 million authorization effective for one year beginning March 4, 2013.
Outlook, development programs, and risks
- Management stated that current liquidity was sufficient for ongoing operations and planned business needs, while noting that future cash-flow projections are uncertain and additional financing may be sought. No quantified revenue or earnings forecast is provided in the filing text.
- The FDA accepted a second oral treprostinil NDA resubmission and set a February 16, 2014 user-fee goal date. The company was conducting the FREEDOM-EV Phase III study, aimed for completion by the end of 2016, and targeted U.S. approval no later than 2017; approval remains uncertain after two prior complete response letters.
- Medtronic reported that the implantable-pump Remodulin trial met its primary catheter-complication objective; secondary-endpoint analysis and additional technical and regulatory work remained. The FDA had released a clinical hold on the PLX study and enrollment had resumed.
- The company expected to file a European marketing application for Ch14.18 in Q4 2013 and an FDA application in the first half of 2014. It planned to begin a Phase I trial of antiviral candidate UV-4B in Q4 2013 or Q1 2014. These are management plans, not assured outcomes.
- Key risks include Sandoz litigation challenging Remodulin patents and seeking generic entry; patent expirations; potential generic and other PAH competition, including generic sildenafil; dependence on three products, distributors, and third-party suppliers; reimbursement and pricing pressure; clinical-trial and regulatory uncertainty; and manufacturing, safety, and compliance risks. Sandoz alleges the challenged patents are invalid or not infringed; the company is defending them.
Important facts for investors to verify
- Subsequent developments in Sandoz litigation and the timing and potential impact of generic Remodulin competition.
- Oral treprostinil FDA review outcome, the February 2014 goal date, and FREEDOM-EV enrollment, results, and timing.
- Whether product growth continues and how distributor concentration, reimbursement, and generic sildenafil affect Adcirca and other sales.
- The cash and dilution consequences of convertible-note conversion, STAP settlements, and remaining share-repurchase activity.
- Whether operating cash generation remains strong after accounting for noncash share-based compensation and working-capital movements.