United Therapeutics Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited interim results; dollars in millions except per-share data.
Business context and key financial metrics
The company develops and commercializes therapies for chronic and life-threatening conditions, with its business concentrated in pulmonary arterial hypertension (PAH). Its five marketed products are Remodulin, Tyvaso, Adcirca, Orenitram and Unituxin.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $412.7 | $445.5 | $1,246.4 | $1,260.6 |
| Gross profit / margin | $360.8 / 87.4% | $426.0 / 95.6% | $1,079.6 / 86.6% | $1,207.9 / 95.8% |
| Operating income / margin | $149.6 / 36.2% | $323.8 / 72.7% | $673.9 / 54.1% | $675.9 / 53.6% |
| Net income | $106.5 | $276.3 | $523.9 | $398.9 |
| Diluted EPS | $2.42 | $6.27 | $11.91 | $8.83 |
| Operating cash flow | Not separately presented | Not separately presented | $660.0 | $560.0 |
For the nine months, cash used in investing activities was $715.4, including $132.6 of property, plant and equipment purchases and $124.1 paid for the SteadyMed acquisition, net of cash acquired. Financing activities provided $6.2. Cash and cash equivalents were $656.0 at quarter-end; current and non-current marketable investments were $581.6 and $595.9. Combined cash and investments totaled $1,833.5, up 28% from year-end 2017.
Total assets were $3,412.1 and stockholders’ equity was $2,692.8. The company had $250.0 outstanding under its unsecured revolving credit facility, which has total capacity of up to $1.5 billion and matures in June 2023. Management reported compliance with the facility’s covenants. The company stated current liquidity was sufficient for ongoing operations and plans.
Material changes versus the prior comparable period
- Q3 revenue fell 7%; nine-month revenue fell 1%. Q3 net income declined 61%, while nine-month net income rose 31%, partly reflecting lower taxes and the absence of the prior-year loss-contingency expense.
- Adcirca sales declined 25% in Q3 and 6% for nine months. A generic launched in August 2018; bottle sales to distributors fell more than 40% in September versus August. The product-return allowance rose to $23.0 from $7.2 at year-end.
- Remodulin sales fell 18% in Q3 and 10% for nine months, mainly due to lower international sales and a reduced transfer price to an international distributor. Tyvaso sales increased 21% and 10%, respectively; Orenitram rose 2% and 13%, and Unituxin rose 35% and 19%.
- Cost of product sales increased substantially, primarily because the Adcirca royalty rate under the amended Lilly agreement rose from 5% to an effective approximately 42.5% beginning December 2017. Overall gross margin declined compared with 2017.
- Research and development expense rose 84% in Q3 and 45% for nine months, reflecting pipeline investment and licensing/research payments. SG&A rose 133% in Q3, substantially affected by share-based compensation: Q3 STAP expense was $32.2, compared with a $38.0 benefit a year earlier, largely reflecting the change in the share price.
- Operating cash flow increased 18% to $660.0, supported in part by lower income-tax payments and increased receivable collections. Cash and investments grew despite capital spending, acquisition costs and investment purchases.
Outlook, commentary, risks and unusual items
- Management expected 2018 revenue to decline versus 2017, citing generic Adcirca, lower international Remodulin pricing and reimbursement challenges that increased use of patient-assistance programs. It expected longer-term growth from new products, delivery systems and label expansions.
- Generic competition is a material risk. Remodulin generics could enter the U.S. market in 2018 under settlements; a generic Remodulin was approved in Germany, Italy and France. Watson may launch generic Tyvaso from January 2026, and Actavis may launch generic Orenitram from June 2027, subject to earlier-entry circumstances.
- The FDA approved the Implantable System for Remodulin in July 2018. A launch was expected in late 2018 or early 2019 at limited clinical-trial sites, but initial supply was fewer than 100 pumps and broader launch depended on a next-generation system and Medtronic’s manufacturing readiness. Medtronic’s consent decree and ongoing quality obligations add execution risk.
- The SteadyMed acquisition closed August 30 for approximately $141.2, plus a contingent value right that could require up to $75.0 if Trevyent reaches a specified patient milestone by August 2023. Trevyent NDA resubmission was anticipated in the first half of 2019; the purchase-price allocation remained preliminary.
- After quarter-end, the MannKind license became effective October 15. The company paid $45.0 for Treprostinil Technosphere rights and $10.0 under a separate research agreement; further development milestones, royalties and optional license payments may apply. Up to $50.0 in development milestones and low-double-digit sales royalties are specified.
- The company recorded a $12.4 impairment charge on a private-company investment in Q3. It had recorded a $49.6 impairment for private-company investments in the first nine months of 2017. The 2017 DOJ settlement also included a $210.0 loss-contingency accrual, paid with interest; no such expense was recorded in the 2018 period.
- Other key risks include clinical and regulatory outcomes, payer reimbursement and pricing pressure, reliance on third-party manufacturers and distributors, product safety, patent challenges, and the ability to execute acquisitions and development programs. The company also reported a five-year Corporate Integrity Agreement with the HHS Office of Inspector General.
Important facts for investors to verify
- Whether Adcirca sales and returns stabilize following generic entry, and the resulting effect on revenue and margins.
- Timing and scale of Remodulin generic competition in the United States and Europe, and the effect on international sales.
- Progress on the Implantable System launch, Medtronic pump availability and quality obligations, and Trevyent’s anticipated NDA resubmission.
- Pipeline milestones and spending, including the Orenitram FREEDOM-EV label supplement and the MannKind and Samumed programs.
- Future STAP cash settlements and share-based compensation volatility, alongside the company’s capital spending and acquisition-related commitments.
- Performance against management’s stated expectation of lower 2018 revenue and longer-term return to growth.