United Therapeutics Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; financial statements are unaudited. The company develops and commercializes therapies for chronic and life-threatening conditions, with its principal business in pulmonary arterial hypertension (PAH). Its commercial products include Remodulin, Tyvaso and Adcirca.
Financial performance and position
Amounts in millions of dollars, except per-share data and percentages.
| Metric | Q1 2011 | Q1 2010 / prior date | Change |
|---|---|---|---|
| Total revenue | $165.6 | $128.9 | +28.5% |
| Operating income | $36.9 | $32.2 | +14.4% |
| Operating margin | 22.3% | 25.0% | Down 2.7 percentage points |
| Net income | $16.4 | $18.9 | Down 13.4% |
| Diluted EPS | $0.26 | $0.32 | Down 18.8% |
| Operating cash flow | $53.4 | $34.2 | Up $19.2 |
| Cash and cash equivalents | $289.0 | $252.2 at Dec. 31, 2010 | Up $36.8 |
| Cash and marketable investments, excluding restricted amounts | $824.6 | $759.9 at Dec. 31, 2010 | Up $64.7 |
| Working capital | $368.9 | $335.8 at Dec. 31, 2010 | Up $33.1 |
| Total liabilities | $550.3 | $536.9 at Dec. 31, 2010 | Up $13.4 |
- Revenue mix: Remodulin sales were $103.2 million, up 7.8%; Tyvaso sales were $47.7 million, up 91.7%; and Adcirca sales were $11.3 million, up 127.3%. Growth reflected more patients prescribed the products and prior price increases. Remodulin and Tyvaso together represented approximately 91% of revenue.
- Margins and expenses: Commercial pharmaceutical product gross profit was $142.5 million on $162.2 million of product revenue, an approximately 87.9% gross margin. R&D rose 37.7% to $48.0 million, and SG&A rose 26.4% to $59.2 million. Total operating expenses increased 33.2% to $128.7 million.
- Profit and unusual items: Net income declined despite higher operating income, principally reflecting a $5.3 million loss on the Medicomp sale included in “Other, net,” and higher operating expenses and interest costs. The estimated annual effective tax rate was 39%, versus 34% a year earlier; the increase included a $6.6 million valuation allowance against a tax asset from the Medicomp-related capital loss.
- Cash flow: Operating cash flow was $53.4 million. Investing activities used $35.3 million, including net purchases of held-to-maturity investments and $6.3 million of property and equipment purchases. Financing activities provided $18.0 million, primarily from stock-option exercises and related tax benefits.
- Debt and liquidity: Current convertible notes had a $240.1 million carrying value and approximately $250.0 million principal, due October 2011. The notes were convertible at holders’ election at March 31. The company said it believed available liquidity was sufficient to meet repayment or conversion obligations. Mortgage debt was $68.9 million noncurrent, secured by facilities, and matures in December 2014; the company reported covenant compliance. The mortgage bears a floating rate of approximately 4.0% at quarter-end, with alternative rate provisions.
- Share-based awards: Cash-settled share tracking awards (STAP) liability rose to $145.7 million from $125.6 million at year-end. The company cautioned that future cash needs from these awards could be significant as share value and vesting increase.
Material changes and transactions
- On March 31, 2011, the company sold all of Medicomp, its telemedicine subsidiary, for 42,004 company shares valued at $2.8 million and a ten-year, 5% promissory note. It retained a 19.9% Medicomp interest after a subsequent capital contribution and obtained royalty-free rights to use Medicomp technology for a smartphone arrhythmia application. The sale generated a $5.3 million book loss; the note’s reported net balance was $6.7 million.
- The board approved a 2011 Share Tracking Awards Plan authorizing up to 2 million awards, with provisions substantially similar to the existing plan.
- Medicomp was not presented as a discontinued operation because management expected continuing cash flows from telemedicine activities, including planned smartphone application development.
Outlook, management commentary and risks
- Management expected continued PAH product demand and stated that current liquidity, together with expected collections and revenues, should fund operations and the October 2011 convertible-note obligation. It gave no numerical revenue or earnings guidance.
- Management expected preliminary FREEDOM-M oral treprostinil trial results in June 2011 and FREEDOM-C2 results in September 2011. It did not anticipate filing an NDA for oral treprostinil before 2012. Both trials carry execution and efficacy risk; an earlier oral treprostinil Phase III trial failed its primary endpoint.
- The company planned to submit a Tyvaso inhalation-system supplement in Q2 2011. Its required long-term Tyvaso safety study was due to report by December 15, 2013, and the company had requested an extension.
- The company estimated the 2011 impact of Medicare Part D coverage-gap discounts at less than 1% of revenue, while noting uncertainty about the longer-term effects of healthcare reform.
- Planned construction included an approximately 180,000-square-foot Research Triangle Park expansion, expected to cost about $74 million and be completed by mid-2012, and a Silver Spring office project with anticipated total costs of about $58 million, expected to be completed in Q4 2011.
- Key risks include dependence on Remodulin and Tyvaso, clinical and regulatory uncertainty, reimbursement and pricing pressure, competition, patent expiration, reliance on third-party manufacturers and distributors, manufacturing scale-up, product safety and regulatory compliance. Three U.S.-based distributors accounted for 82% of Q1 2011 net revenue.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the October 2011 convertible notes were repaid, converted or refinanced, and the resulting cash and dilution effects.
- FREEDOM-M and FREEDOM-C2 results, and any subsequent oral treprostinil regulatory filing or additional study requirements.
- Product-level sales, pricing, patient demand and distributor ordering patterns, which can vary with inventory timing and may not directly track patient demand.
- Future STAP liability and cash settlements, including sensitivity to the company’s share price.
- Progress, total spending and timing for facility expansion and Tyvaso and Remodulin manufacturing approvals.
- Medicomp note collectability, the value and future role of the retained investment, and development progress for the smartphone application.