United Therapeutics Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated results; amounts below are USD millions except per-share data.
Business context
United Therapeutics is a biotechnology company whose established sales principally come from therapies for pulmonary arterial hypertension (PAH): Remodulin, Tyvaso, Adcirca and the newer Orenitram. FDA-approved Unituxin had not yet generated commercial sales in the reported period; U.S. sales began in Q3 2015. The company also invests in earlier-stage drug, cell-therapy and lung-transplantation programs.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $347.2 | $322.8 | $674.7 | $612.2 |
| Operating income | $171.7 | $176.3 | $156.9 | $392.5 |
| Net income | $99.2 | $111.9 | $82.6 | $249.4 |
| Diluted EPS | $1.91 | $2.10 | $1.57 | $4.54 |
| Operating cash flow | Not reported by quarter | $149.9 | $56.1 |
Q2 revenue grew 7.5%, while net income declined about 11%. Six-month revenue grew 10.2%, but net income fell about 67%; operating income margin was approximately 23% versus 64% a year earlier. The six-month decline reflects, in significant part, higher share-based compensation expense tied to the rise in the company’s stock price. The filing reports an estimated annual effective tax rate of approximately 42%, up from 35%, primarily due to nondeductible share-based compensation.
Product sales were $345.7 in Q2 and $671.7 for six months. Q2 product revenue by product: Remodulin $136.0, Tyvaso $115.8, Adcirca $68.1 and Orenitram $25.9. Orenitram and Adcirca drove reported growth; Remodulin and Tyvaso sales declined year over year in Q2. Reported cost of product sales fell to $16.1 in Q2 from $38.7, and to $36.8 for six months from $69.3, chiefly because the GlaxoSmithKline royalty obligation expired in October 2014. Approximate revenue less cost-of-product-sales margins were 95% in Q2 2015 and 88% in Q2 2014; this comparison is affected by the royalty change and share-based compensation.
At June 30, cash and cash equivalents were $254.4 and marketable investments totaled $307.2. Management reported $556.2 of unrestricted cash, cash equivalents and marketable securities, excluding $5.4 of restricted amounts, versus $812.8 at year-end. Total assets were $1,736.8; current assets were $829.0 and current liabilities $542.4. Operating cash flow was $149.9, including $281.8 of share-based compensation add-backs and a $224.2 cash outflow from changes in other assets and liabilities. Investing activities provided $99.5; financing activities used $391.2, including $336.8 for share repurchases and $104.3 of convertible-note principal payments. Cash declined $143.3 during the six months.
Convertible notes had $34.5 principal outstanding ($32.3 carrying value) at June 30, 2015; the company had no borrowings under its $75.0 million revolving credit facility. The facility maturity was extended in July 2015 to September 30, 2017. Total liabilities were $683.3. Current STAP liabilities were $354.8, with an additional $75.7 classified as non-current.
Material changes and unusual items
- Share-based compensation expense was $281.2 for six months, compared with a $63.1 benefit in the prior-year period. The cash-settled STAP awards are remeasured with the stock price, making reported expenses and earnings volatile. The company stopped issuing STAP awards in June and adopted a stock incentive plan authorizing up to 6.15 million shares.
- The company repurchased approximately 2.0 million shares for $336.8 in the first half. The $500 million authorization had $57.6 remaining at June 30 and was expected to be substantially exhausted by its August 1, 2015 expiration.
- During Q2, $90.3 of notes converted: the company paid principal in cash and issued shares, while receiving shares under its note hedge. It recorded a $2.8 million extinguishment loss. Further $2.9 million conversions were expected to settle in Q3.
- Orenitram sales rose substantially from its 2014 launch base. Adcirca growth was attributed primarily to price increases. The filing also notes Lilly raised Adcirca’s price 9.9% effective May 14, 2015.
Outlook, commentary and risks
Management said current liquidity was sufficient to fund ongoing operations and business plans, but gave no specific numerical revenue or earnings guidance. Its stated growth priorities include expanding current product sales, growing Orenitram, pursuing Orenitram combination-therapy evidence through the FREEDOM-EV study, and developing esuberaprost with Tyvaso through the BEAT study. Unituxin European authorization was granted in July 2015; the company expected European commercial sales to follow country-level pricing and reimbursement approvals.
Material uncertainties include generic challenges to Remodulin and Tyvaso patents, competition and reimbursement/pricing pressure, clinical-trial and regulatory outcomes, and manufacturing and third-party supply risks. Sandoz and Teva litigation concerns generic Remodulin; Watson filed a generic Tyvaso challenge and the company sued in July 2015. The Remodulin implantable-system program also faces uncertainty after FDA filing issues and an FDA consent decree restricting Medtronic’s SynchroMed II activities; the company said it was assessing the impact. The filing describes a prior U.S. government investigation into marketing practices; the government had closed its investigation, but the company could not predict whether a private plaintiff would act.
Important facts for investors to verify
- Whether Orenitram growth continues and whether FREEDOM-EV supports broader use and future labeling.
- Progress and outcomes of Remodulin and Tyvaso generic-patent litigation, including the appeals and scheduled trials.
- Unituxin launch, European reimbursement approvals and resulting commercial contribution.
- Cash demands and earnings volatility from remaining STAP awards, alongside the effects of the shift to equity awards.
- Liquidity and capital allocation after the share-repurchase authorization expires, and settlement of remaining convertible-note conversions.