United Therapeutics Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited consolidated results. The company develops and sells therapies for chronic and life-threatening conditions, including pulmonary arterial hypertension (PAH) treatments. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $373.6 | $444.5 | $736.2 | $833.7 |
| Operating income (loss) | $221.4 | $217.4 | $(434.5) | $524.3 |
| Net income (loss) | $205.1 | $172.9 | $(289.5) | $417.4 |
| Diluted EPS | $4.66 | $3.98 | $(6.61) | $9.51 |
- Q2 revenue fell 16%; six-month revenue fell 12%. Q2 operating margin was approximately 59% versus 49% a year earlier. The six-month loss chiefly reflects the $800.0 Arena ralinepag license payment expensed in Q1.
- Q2 product gross profit was $346.9 (approximately 93% of revenue), versus $382.8 (86%) in Q2 2018. Lower Adcirca royalty costs reduced cost of sales.
- Q2 net income included $29.5 of net unrealized gains on publicly traded equity securities. Six-month other income included $32.5 of such gains.
- Operating cash flow was $(494.5) for the first half, versus $455.5 provided in 2018; it included the Arena payment, lower receipts, and higher tax and interest payments. Investing cash use was $102.9; financing provided $809.5, including $800.0 of credit-facility borrowings. Cash and cash equivalents ended at $881.3.
- Cash, cash equivalents and marketable investments totaled $2,206.9 at June 30, 2019, versus $1,858.5 at year-end 2018. Total current assets were $2,139.8 and current liabilities $463.5.
- Credit-facility debt was $1,050.0: $250.0 classified as current and $800.0 non-current. The facility’s maturity was extended to June 2024; the company reported compliance with its covenants.
Material changes and unusual items
- Adcirca sales declined 73% in Q2 and 76% for the first half, following generic launches. Q2 Adcirca revenue was $29.1 versus $109.8; first-half revenue was $49.1 versus $207.4.
- Q2 sales increased for Tyvaso (3%), Orenitram (9%) and Unituxin (27%), but Remodulin fell 2%. First-half sales rose for Remodulin (9%), Tyvaso (6%), Orenitram (11%) and Unituxin (32%).
- Research and development expense was $983.3 for the first half versus $118.0, largely because of the $800.0 Arena payment; Q2 R&D was $85.9 versus $82.3. An $8.8 impairment followed termination of a license agreement with a variable-interest entity.
- Q2 selling, general and administrative expense was $39.6 versus $83.1, substantially affected by a $59.4 share-based compensation benefit from remeasurement of cash-settled share tracking awards as the stock price declined.
- The company terminated its Toray license agreement; the related put right ended and $10.8 was reclassified from temporary to permanent equity.
Outlook, commentary and risks
- Management expected 2019 revenue to decline versus 2018, primarily because generic Adcirca would compete for a full year and generic Remodulin competition could intensify in the second half. It anticipated a possible return to revenue growth as soon as 2020, dependent on pipeline, regulatory, launch and market factors. No specific numerical earnings or revenue guidance was provided.
- Management said current liquidity was sufficient for operations and business plans, while noting that cash-flow projections are uncertain and additional financing may be sought.
- Key development milestones included the ongoing Phase III ralinepag studies; FDA review of an Orenitram label supplement; Trevyent NDA resubmission in June 2019; RemUnity’s additional FDA filing; and planned 2020 launch preparations for the implantable Remodulin system, subject to Medtronic meeting regulatory conditions. Results of the fully enrolled Unituxin DISTINCT study were expected by Q1 2020.
- Risks include generic competition and pricing/reimbursement pressure; dependence on a small number of distributors and manufacturers; clinical and regulatory uncertainty; and patent challenges. Two U.S. distributors represented 54% and 22% of Q2 revenue.
- Sandoz and RareGen sued the company and Smiths Medical alleging anticompetitive conduct involving Remodulin delivery cartridges. The company disputed the claims; the case was at an early stage and potential losses could not be reasonably estimated.
- Under the Arena agreement, further contingent payments include $250.0 upon specified U.S. approval for inhaled ralinepag, $150.0 upon specified overseas approval for oral ralinepag, and tiered royalties. The company also flagged MannKind’s disclosed funding concerns as a risk to the Treprostinil Technosphere program.
Important facts for investors to verify
- Whether the sharp first-half loss and operating cash outflow are understood as primarily reflecting the one-time Arena payment, and how future contingent payments and royalties may affect cash needs.
- How quickly generic Adcirca and Remodulin competition affects sales, pricing, returns and distributor inventories.
- Progress and timing of key pipeline and device milestones, particularly ralinepag trials, Trevyent, RemUnity and the implantable Remodulin system.
- Debt repayment plans, interest costs, covenant headroom and the adequacy of liquidity under different revenue scenarios.
- Developments in the Sandoz/RareGen litigation and any resulting financial or commercial impact.