Business context and reporting period
United Therapeutics Corporation is a biotechnology company focused on pulmonary arterial hypertension (PAH) and other serious diseases. This Form 10-K covers the fiscal year ended December 31, 2012; the fourth-quarter figures below are unaudited. The company’s principal commercial products are Remodulin, Tyvaso and Adcirca. Nearly all revenue came from these products, and the company reported one operating segment.
Financial performance and position
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Total revenue | $916.1 million | $743.2 million | +23.3% |
| Operating income | $421.6 million | $317.8 million | +32.7% |
| Net income | $304.4 million | $217.9 million | +39.7% |
| Diluted EPS | $5.71 | $3.67 | +55.6% |
| Operating cash flow | $323.6 million | $250.2 million | +29.4% |
Net product sales were $906.1 million. Gross profit was $786.8 million, implying an approximately 86.8% gross margin on product sales; operating margin was approximately 46.0% of total revenue and net margin approximately 33.2%. Cost of product sales increased to 13.0% of product revenue from 12.2%.
Product revenue: Remodulin $458.0 million (+6.5%; 50% of net revenue), Tyvaso $325.6 million (+35.5%; 36%), and Adcirca $122.5 million (+73.6%; 13%). U.S. revenue was $846.6 million; rest-of-world revenue was $69.5 million. Accredo accounted for 56% of total revenue, underscoring customer concentration.
At year-end, cash, cash equivalents and marketable investments totaled $784.9 million, excluding restricted balances; working capital was $491.7 million. Total assets were $1.63 billion and stockholders’ equity $1.08 billion. Debt carried on the balance sheet was $276.3 million: convertible notes of $204.7 million and mortgage debt of $70.3 million. The notes have $250 million principal due in 2016; mortgage maturities include approximately $66.6 million due in 2014. The company reported compliance with its credit covenants and no off-balance-sheet arrangements.
Investing cash use was $163.4 million, including $111.9 million of property and equipment purchases; financing cash use was $169.1 million, including $188.0 million of share repurchases. Cash ended the year at $154.0 million. The board later authorized a further $420 million repurchase program, effective March 4, 2013.
Fourth-quarter results and changes versus prior period
Q4 2012 net sales were $243.8 million versus $195.2 million in Q4 2011, up approximately 24.9%. Gross profit was $202.8 million versus $169.0 million; net income was $83.3 million versus $43.2 million. Sequentially, Q4 sales were slightly above Q3 2012 sales of $242.5 million, while gross profit and net income were also higher than Q3.
FY 2012 growth reflected increased patient use of the commercial products. Tyvaso and Adcirca grew substantially faster than Remodulin, reducing Remodulin’s share of revenue. Research and development expense declined 3.7% to $173.4 million, while selling, general and administrative expense rose 28.9% to $201.7 million. The latter included higher share-based compensation, which is sensitive to the company’s stock price.
Outlook, management commentary, risks and unusual items
- Outlook: The filing provides no specific numerical revenue or earnings guidance. Management cited continued growth of marketed products and development of new PAH therapies as priorities. It expected to launch the FDA-approved modified Tyvaso inhalation system (TD-100) commercially in 2013, and expected a response by March 31, 2013 to its resubmitted oral treprostinil NDA. Management stated an aim to obtain FDA approval of oral treprostinil before the end of 2016, subject to clinical and regulatory outcomes.
- Pipeline uncertainty: The FDA declined to approve oral treprostinil in October 2012. Two combination-therapy Phase III trials did not meet their primary endpoints; the monotherapy trial did. A new Phase III study, FREEDOM-EV, was underway. The company also planned a Phase I study of PLX cells in 2013 and continued development of an implantable pump for Remodulin, Ch14.18 and other early-stage programs.
- Generic and competitive exposure: Sandoz challenged patents covering Remodulin and sought approval for generic versions in several strengths. United Therapeutics filed patent-infringement suits; the litigation outcome could materially affect Remodulin revenue. Generic sildenafil citrate launched in Q4 2012 and could constrain Adcirca growth. Remodulin’s U.S. method-of-use patent expires in October 2014; other relevant patents have later stated expirations.
- Revenue and supply concentration: Three U.S. distributors accounted for 78% of revenue, and Accredo alone accounted for 56%. Baxter’s Remodulin contract was set to expire at year-end 2013; the company expected to negotiate a replacement. Manufacturing, supplier, distributor and reimbursement disruptions could affect sales.
- Unusual items: FY 2012 included a $31.0 million insurance settlement gain related to damaged Remodulin inventory and a $6.8 million impairment of a Revivicor contract-based intangible asset. The company also recorded an $8.9 million reserve for Tyvaso inhalation-system inventory expected to become obsolete with the TD-100 launch. A $50 million non-refundable Toray payment obligation, payable over five years through 2015, remained; its undiscounted balance was $30 million at year-end.
- Other risks: Tyvaso had a required post-marketing observational study due to be submitted to the FDA by December 15, 2014. Risks also include clinical-trial failure, adverse events (including catheter-related bloodstream infection with intravenous therapies), pricing and reimbursement pressure, patent challenges, and reliance on third parties. The company reported audited financial statements with an unqualified opinion and effective internal control over financial reporting.
Important facts for investors to verify
- Progress and outcome of the Sandoz Remodulin patent litigation, including any regulatory path or timing for generic entry.
- FDA action on the resubmitted oral treprostinil NDA and FREEDOM-EV enrollment, endpoints and results.
- TD-100 commercial launch timing, adoption, and the ultimate impact of the $8.9 million inventory reserve.
- Remodulin supply continuity and the outcome of Baxter contract negotiations before the existing contract expires.
- Revenue concentration and distributor dynamics, especially Accredo’s 56% revenue share and the effects of generic sildenafil on Adcirca.
- Cash deployment under the new $420 million repurchase authorization, debt maturities and potential cash obligations under the STAP and SERP.