United Therapeutics Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Dollar amounts below are in millions unless stated otherwise. The company develops and commercializes therapies primarily for pulmonary arterial hypertension (PAH); its principal marketed products were Remodulin, Tyvaso, Adcirca and Orenitram.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Total revenue | $327.5 | $289.4; up 13.2% |
| Net product sales | $325.9 | $284.6 |
| Operating expenses | $342.3 | $73.3 |
| Operating income (loss) | $(14.8) | $216.1 |
| Net income (loss) | $(16.6) | $137.5 |
| Basic and diluted EPS | $(0.36) | $2.73 basic; $2.43 diluted |
| Cash from operations | $109.0 | $110.6 |
| Cash and cash equivalents | $426.5 | $397.7 at Dec. 31, 2014 |
| Marketable investments | $346.8 | $420.5 at Dec. 31, 2014 |
| Total assets / liabilities | $1,894.6 / $782.6 | $1,884.4 / $618.8 at Dec. 31, 2014 |
| Convertible notes, carrying amount | $115.2; $124.8 principal | $126.4 carrying amount at Dec. 31, 2014 |
Product revenue was Remodulin $146.3 million (+7.5%), Tyvaso $113.4 million (+5.9%), Adcirca $45.4 million (+9.7%) and Orenitram $20.9 million (launched in Q2 2014). Other revenue was $1.6 million, down from $4.9 million. Management attributed product growth mainly to more patients using the therapies and Orenitram sales.
Product gross profit reported by product totaled $305.6 million, compared with $254.0 million in Q1 2014. Cost of product sales fell 32.1% to $20.8 million, principally because the GlaxoSmithKline royalty obligation expired in October 2014; $20.0 million of royalties had been paid in Q1 2014. The filing does not provide a single consolidated gross-margin line.
Material changes and cash, debt and liquidity
- Net loss chiefly reflects a major swing in share-based compensation: Q1 2015 recorded $234.5 million of expense, versus a $60.7 million benefit in Q1 2014. The cash-settled share tracking awards are remeasured with the share price; the company cited a 33% stock-price increase in Q1 2015 versus a 17% decrease in Q1 2014. This makes reported operating results unusually volatile.
- Operating cash flow was broadly stable year over year. Higher product collections and lower tax payments were offset primarily by $98.5 million of cash paid to settle share tracking awards, versus $20.5 million a year earlier.
- Investing activities provided $68.5 million, mainly reflecting maturities of held-to-maturity investments; capital expenditures were $4.0 million. Financing activities used $145.5 million, including $152.3 million for repurchases of 1.01 million shares and $14.0 million of note principal payments.
- Unrestricted cash, cash equivalents and marketable securities were reported as $768.0 million at quarter-end, excluding $5.4 million of restricted amounts, versus $812.8 million at year-end. The company said the decrease primarily reflected repurchases, partly offset by operating cash generation.
- There were no borrowings on the $75 million revolving credit facility, which matures September 30, 2015. The company said liquidity was sufficient for operations and plans. It had $242.2 million remaining under its share repurchase authorization.
- After quarter-end, the company expected to settle $89.4 million principal of note conversions in Q2, largely in cash, and issue shares matched by shares received under its note hedge. It expected an approximately $2.9 million extinguishment loss. The note hedge remains subject to counterparty risk.
Outlook, commentary and key risks
- The FDA approved Unituxin on March 10, 2015 for certain pediatric patients with high-risk neuroblastoma. Management expected U.S. sales to begin in the second half of 2015. The FDA also awarded a Rare Pediatric Priority Review Voucher.
- Management’s stated priorities include growing existing product sales and Orenitram, pursuing broader Orenitram use through the FREEDOM-EV study, advancing esuberaprost with Tyvaso, and developing new delivery systems and lung-transplant technologies. No specific financial revenue or earnings guidance was provided.
- The Remodulin implantable-system application encountered regulatory setbacks: FDA issued a refuse-to-file letter in March and requested amendments to Medtronic’s application. On April 27, 2015, after the quarter, FDA filed a consent decree requiring Medtronic to stop manufacturing, designing and distributing SynchroMed II systems until specified requirements are met. The company was assessing the program impact.
- Generic competition is a material risk. Sandoz and Teva are challenging Remodulin patents; Sandoz appealed elements of a 2014 ruling, and the company cross-appealed. The company cautioned that adverse outcomes or future generic entry could reduce sales. It also cited potential Adcirca pressure from generic sildenafil and the Adcirca U.S. patent expiration in November 2017.
- The Department of Justice informed the company in April 2015 that its investigation concerning marketing practices for Remodulin, Tyvaso and Adcirca was closed and that the government planned no further action. The filing notes it cannot predict whether a private plaintiff may pursue a related matter.
- Other key risks include dependence on three established PAH products, reimbursement and pricing pressure, competition, clinical-trial and regulatory uncertainty, manufacturing and third-party supply/distribution dependencies, and potential cash demands from share tracking awards. The company estimated that $360.2 million of STAP award fair value could potentially be exercised during 2015.
Most important facts for investors to verify
- Whether revenue growth continues across the established PAH products and Orenitram, and whether Unituxin launches on the anticipated timetable.
- The scale and volatility of cash-settled share-based compensation and related STAP settlements, and their effect on earnings, liabilities and cash flow.
- Q2 settlement of the $89.4 million note conversions, the expected cash outlay and extinguishment loss, and the remaining debt profile.
- Developments in Sandoz and Teva patent litigation and any implications for Remodulin or other treprostinil products.
- The impact of the Medtronic consent decree and FDA application process on the Remodulin implantable-system program.
- Progress and results of FREEDOM-EV and the BEAT study, along with reimbursement, product supply and commercial-launch risks.