United Therapeutics Corporation — FY2017 Form 10-K
Reporting period: Year ended December 31, 2017. This is an annual filing; it also reports fourth-quarter results. United Therapeutics develops and sells therapies principally for pulmonary arterial hypertension (PAH), alongside Unituxin for high-risk neuroblastoma, and invests in organ-transplantation technologies.
Financial results and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $1,725.3 million | $1,598.8 million | +7.9% |
| Operating income | $814.9 million | $1,061.7 million | -23.2% |
| Net income | $417.9 million | $713.7 million | -41.4% |
| Diluted EPS | $9.31 | $15.25 | -39.0% |
| Operating cash flow | $474.2 million | $643.6 million | -26.3% |
- Gross profit was $1,619.6 million, or approximately 93.9% of revenue; operating margin was approximately 47.2%, versus 66.4% in 2016. Net margin was approximately 24.2%, versus 44.6%.
- Cash, cash equivalents and marketable investments totaled $1,430.1 million at year-end, up from $1,053.1 million. Current assets were $1,447.9 million and current liabilities $444.7 million.
- Debt consisted of $250.0 million drawn on a $1.0 billion unsecured revolving credit facility, extended to mature in January 2023. Stockholders’ equity was $2,101.8 million.
- Cash flow: investing activities used $835.6 million, primarily reflecting purchases of marketable investments; financing activities provided $43.3 million. Capital expenditures were $86.3 million.
Material changes and drivers
- Revenue growth was led by Remodulin (+11.4%), Adcirca (+12.8%), Orenitram (+18.2%) and Unituxin (+21.6%). Tyvaso sales declined 7.8%, continuing a multi-year decline that management attributed partly to oral therapies delaying use of inhaled treatment.
- Remodulin revenue included a $47.4 million one-time international distributor inventory purchase. Adcirca growth reflected Lilly-set price increases; Unituxin growth reflected more vials sold and price increases.
- Operating income and net income fell despite higher revenue. Key items included a $210.0 million DOJ settlement expense, R&D expense rising to $264.6 million from $147.6 million, a $49.6 million impairment of private-company investments, and higher share-based compensation. A $71.0 million provisional tax-reform charge contributed to total income tax expense of $351.6 million.
- The Adcirca license amendment raised the royalty and added sales-based milestone payments, increasing its effective cost of sales to approximately 42.5% beginning December 1, 2017, subject to pending patent appeals.
- Fourth-quarter 2017 revenue was $464.7 million and net income was $19.0 million; fourth-quarter 2016 revenue was $409.0 million and net income was $110.3 million. Fourth-quarter 2017 results included $66.2 million of after-tax STAP compensation expense.
Outlook, risks and contingencies
- Management expected 2018 revenue to decline versus 2017, citing anticipated generic Adcirca competition from mid-2018, patient-assistance use amid reimbursement challenges, and expected generic Remodulin entries in June and December 2018. Management anticipated revenue growth to resume in 2019, supported by product development and label expansions; these are forward-looking expectations, not guarantees.
- Pipeline milestones included anticipated FREEDOM-EV results in the second half of 2018, the phase III Tyvaso-ILD study, and regulatory review of Remodulin for an implantable pump. The device received FDA approval in December 2017; the company resubmitted its drug application in January 2018. Clinical and regulatory outcomes remain uncertain.
- Generic competition and patent disputes are significant risks. Watson challenged Tyvaso patents and IPR proceedings were instituted; an adverse PTAB decision on a treprostinil patent was under appeal to the Supreme Court. The filing warns that generic entry or adverse patent outcomes could materially reduce revenue and profit.
- In December 2017, the company paid $210.0 million to settle a DOJ/OIG inquiry concerning support for patient-assistance organizations. The settlement was not an admission of liability. A Corporate Integrity Agreement requires defined compliance obligations through December 2022 and may entail additional costs.
- Other material risks include reliance on a small number of distributors and manufacturers, product safety and regulatory requirements, reimbursement and pricing pressure, concentrated product revenue, and potential manufacturing interruptions. The company reported no off-balance-sheet arrangements and stated its disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Timing and commercial impact of generic Adcirca and Remodulin launches, and the related effect on 2018 revenue, margins and product returns.
- Adcirca’s post-amendment royalty and milestone economics, and the outcome of Lilly patent appeals that could change those terms.
- Tyvaso patent litigation and IPR outcomes, including their implications for generic competition.
- Whether management’s expected return to revenue growth in 2019 is supported by clinical results, regulatory approvals and product uptake.
- Cash requirements for the pipeline, construction and organ-manufacturing programs, alongside the $250.0 million revolver balance and substantial contractual commitments.
- Costs and compliance performance under the five-year Corporate Integrity Agreement, and whether the provisional $71.0 million tax-reform charge changes as the accounting is finalized.