UNITED THERAPEUTICS Corp quarterly report, Q1 FY2018

United Therapeutics Corporation: Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018. Unaudited consolidated results; amounts below are in millions of dollars except per-share data. United Therapeutics develops and sells therapies for chronic and life-threatening conditions, with principal products for pulmonary arterial hypertension (PAH).

Financial performance

Cash and cash equivalents were $932.7 at March 31, 2018; marketable investments totaled $738.9, for combined cash and investments of $1,671.6. Total current assets were $1,633.6 versus current liabilities of $318.4. Total liabilities were $631.6. The company had $250.0 outstanding under its $1.0 billion unsecured revolving facility, due January 2023, and reported compliance with its covenants.

Revenue, margins and material changes

• Sales by product: Remodulin $126.8, down 13%; Tyvaso $94.6, up 8%; Adcirca $97.6, up 22%; Orenitram $52.2, up 33%; and Unituxin $18.0, unchanged.
• Revenue growth reflected higher Adcirca sales, primarily from price increases set by Lilly, and higher Orenitram sales from increased patient use and distributor inventory effects. Tyvaso also grew, partly due to price increases.
• Remodulin sales fell $19.0, reflecting distributor order timing and inventory changes, a $7.3 reduction in international pricing, and other distributor inventory effects. A distributor inventory-agreement change reduced total Q1 sales by $4.3 on a one-time basis.
• Gross margin declined substantially as product costs rose to $53.2 from $14.3. The main driver was Adcirca’s amended Lilly economics, which increased the royalty and milestone cost rate to approximately 42.5% of sales from 5%, effective December 1, 2017.
• Operating expenses included a $101.1 share-based compensation benefit, compared with a $19.1 benefit a year earlier. The benefit chiefly reflected a $90.4 decrease in the cash-settled share tracking awards liability as the share price fell. This non-cash valuation effect materially boosted reported operating income; cash paid to settle exercised awards was $43.6.
• Research and development expense was $35.7, nearly flat year over year, despite a 41% rise in underlying project spending to $58.2, offset by a larger share-based compensation benefit. SG&A was a reported benefit of $6.6, largely because of the share-based compensation benefit.
• The effective tax rate was 21%, versus 32% in Q1 2017, reflecting the lower U.S. federal corporate tax rate under 2017 tax reform, partly offset by other tax changes. The company recorded no Q1 adjustment to its provisional 2017 tax-reform accounting, which included $71.0 of additional tax expense.

Cash flow and liquidity

Operating cash flow increased to $275.7, primarily due to collections of accounts receivable; the filing attributes much of the year-over-year increase to collection timing. Investing cash outflow was $58.7, including $37.6 of property and equipment purchases and a $5.0 private-company investment. Financing cash inflow was $10.6. Cash and cash equivalents increased $227.6 during the quarter. Management stated that current liquidity is sufficient for operations and planned business needs, while noting that future cash-flow projections are uncertain. The company budgeted approximately $250.0 of capital expenditures over the next three years.

Outlook, risks and unusual items

• Management expects 2018 revenue to decline from 2017, citing anticipated generic Adcirca competition after regulatory exclusivity ends in May 2018 and reimbursement challenges for oral therapies that may increase patient-assistance use. It expects a return to revenue growth beginning in 2019, supported by new products, label expansions, formulations and delivery devices. This is forward-looking and not assured.
• Generic Remodulin launches were expected as early as June 2018 for Sandoz and December 2018 for Teva, Par and Dr. Reddy’s, subject to possible earlier entry. Actavis may launch generic Orenitram from June 2027, subject to specified circumstances. Watson’s Tyvaso patent litigation is ongoing, with PTAB review instituted for two patents; the court case is stayed pending the PTAB process.
• The company withdrew its Supreme Court petition concerning the ‘393 treprostinil patent on April 27, 2018; that patent is no longer valid. The company said it holds other treprostinil-related patents, but patent challenges and generic competition remain material risks.
• Following Adcirca’s loss of exclusivity, rapid generic substitution could reduce sales and increase product-return liabilities. The filing also describes the higher Adcirca royalty and milestone burden under the Lilly agreement.
• On April 29, 2018, after quarter-end, the company agreed to acquire SteadyMed for approximately $141.0 in cash plus contingent value rights of up to $75.0 tied to a Trevyent commercialization milestone. Closing was expected in Q3 2018, subject to conditions. Trevyent’s earlier FDA filing was refused, and SteadyMed planned to resubmit its application.
• The company entered a 2017 civil settlement with the DOJ and an OIG Corporate Integrity Agreement requiring compliance obligations for five years; future compliance costs may be significant.
• Key pipeline milestones included an FDA action deadline of July 30, 2018 for the implantable Remodulin NDA resubmission and anticipated Q4 2018 FREEDOM-EV results. Development, clinical and regulatory outcomes are uncertain. Management also cited competition from established PAH therapies, reimbursement pressure, manufacturing and third-party supply dependence, and clinical, regulatory and intellectual-property risks.
• Revenue recognition standard Topic 606 was adopted January 1, 2018 using the modified retrospective method, with no material overall financial-statement impact. The company changed the timing for Adcirca recognition to shipment from a Lilly distribution center; prior shipments had reached distributors by year-end 2017.

Important facts for investors to verify

• Whether Adcirca and Remodulin generic launches occur as anticipated, and their effect on sales, pricing, inventory and returns.
• Underlying earnings and margins excluding the unusually large, stock-price-sensitive share-tracking-award benefit; also assess the recurring impact of the revised Lilly economics on Adcirca.
• Progress and outcomes in the Watson Tyvaso patent proceedings and other patent challenges, including implications of the invalidated ‘393 patent.
• Execution and financing of the SteadyMed acquisition, its closing conditions, and Trevyent’s regulatory and commercial prospects.
• Clinical and regulatory milestones, reimbursement trends, cash generation, capital spending and the company’s ability to fund growth while maintaining liquidity.