United Therapeutics Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Amounts are in millions of dollars except per-share data. The company develops and sells therapies for pulmonary arterial hypertension (PAH), oncology, and other serious diseases.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior period |
|---|---|---|
| Total revenue | $369.0 | $327.5; up 12.7% |
| Operating income (loss) | $363.7 | $(14.8) |
| Net income (loss) | $235.5; diluted EPS $4.84 | $(16.6); diluted EPS $(0.36) |
| Operating cash flow | $125.8 | $109.1 |
| Cash and cash equivalents | $846.8 | $831.8 at Dec. 31, 2015 |
| Marketable investments | $139.0 | $160.0 at Dec. 31, 2015 |
| Total assets / liabilities | $2,192.1 / $469.3 | $2,184.4 / $584.7 at Dec. 31, 2015 |
- Revenue by product: Remodulin $139.8 (down 4.4%); Tyvaso $102.2 (down 9.9%); Adcirca $72.6 (up 60.3%); Orenitram $40.2 (up 92.3%); Unituxin $14.2, launched in the U.S. in Q3 2015.
- Reported operating expenses fell to $5.3 from $342.3, but this comparison is heavily distorted by share-based compensation: Q1 2016 included a $147.9 compensation benefit, versus $234.2 expense in Q1 2015. The filing attributes the reversal mainly to a 29% decline in the company’s share price in Q1 2016, compared with a 33% increase in Q1 2015. Reported operating income and profit therefore do not represent an ordinary-period expense comparison.
- Income tax expense was $128.4, with an estimated annual effective tax rate of approximately 35%, versus a $0.2 tax benefit in Q1 2015.
- Investing activities provided $12.0, including $21.0 of investment maturities; financing activities used $123.2, principally for share repurchases. Cash increased $15.0 during the quarter.
- Liquidity was substantial: cash, cash equivalents, and marketable investments totaled $985.8 at quarter-end. Current assets were $1,299.6 and current liabilities $357.1.
- The company had $5.5 of convertible notes outstanding, due September 15, 2016. It entered into a new unsecured revolving facility of up to $1.0 billion, maturing in January 2021; no amounts had been drawn at March 31, 2016, and the company reported compliance with its covenants.
Material changes and capital allocation
- Revenue growth was led by Adcirca, Orenitram, and the launch of Unituxin; lower Remodulin and Tyvaso sales partly offset those gains. Management cited more Adcirca bottles sold and price increases, and more Orenitram patients and higher average doses.
- General and administrative expense before share-based compensation increased $40.5, primarily reflecting $37.0 in first-quarter charitable donations to a PAH patient-assistance nonprofit. The company said this represented its full funding to that organization for 2016.
- Operating cash flow increased $16.7 year over year. The main drivers were $84.7 less cash paid to settle share tracking awards (STAP), partly offset by $72.4 more cash paid for income taxes.
- The company repurchased approximately 978,000 shares for $123.2 under its $500.0 million 2016 authorization; approximately $376.8 million remained available at March 31. Stockholders’ equity increased to $1,711.8 from $1,588.6 at year-end.
- STAP liabilities totaled $193.4, including $135.4 for vested awards. These cash-settled obligations can require significant future payments and fluctuate with the share price.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management said current liquidity was sufficient for operations and planned activities, while acknowledging that future cash-flow projections are uncertain.
- Management’s stated priorities include continued growth of existing products, potential Orenitram label expansion after the FREEDOM-EV study, and esuberaprost development with Tyvaso through the BEAT study. The filing does not provide a clear expected completion date or outcome for these trials.
- The company budgeted approximately $200 million of capital expenditures over the next three years, with most expected in 2017, largely for facility expansion.
- Patent and generic risks are material. Settlements permit Sandoz and Teva to launch generic Remodulin in the U.S. beginning in June and December 2018, respectively, potentially earlier in certain circumstances. Watson’s Tyvaso and Actavis’s Orenitram generic challenges remain in litigation. In April 2016, after quarter-end, the PTAB instituted review of a treprostinil patent and preliminarily found a reasonable likelihood SteadyMed would prevail.
- The Remodulin implantable-system application received an FDA “not approvable” response in March 2016 and remained on hold pending Medtronic’s response. The company expected FDA review of its resubmitted Remodulin labeling application to conclude in October 2016, but approval was not assured. Medtronic’s FDA consent decree adds uncertainty to the program.
- Adcirca’s U.S. PAH patent expires in November 2017; management expects generic competition afterward. Other risks include reimbursement and pricing pressure, clinical-trial or regulatory setbacks, reliance on manufacturing and distribution partners, and possible production interruptions.
- The filing identifies no material changes to critical accounting policies. The 2016 operating results are unusual because of the large non-cash share-based compensation benefit.
Important facts for investors to verify
- Whether revenue growth in Adcirca, Orenitram, and Unituxin can offset continuing declines in Remodulin and Tyvaso.
- The magnitude and cash implications of future STAP settlements, and the effect of share-price movements on reported earnings.
- Progress and results from FREEDOM-EV and BEAT, and the regulatory outlook for the Remodulin delivery-system programs.
- Developments in the SteadyMed patent review and the Watson and Actavis litigation, as well as timing and commercial effects of expected generic competition.
- Use of the $1.0 billion revolver, remaining share-repurchase authorization, and execution of the planned capital spending program.