United Therapeutics Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated financial statements. United Therapeutics is a biotechnology company focused on therapies for pulmonary arterial hypertension and other serious conditions.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $330.0 | $302.2 | $942.2 | $828.0 |
| Operating income (loss) | $(32.2) | $104.6 | $360.2 | $321.0 |
| Net income (loss) | $(25.2) | $62.7 | $224.1 | $204.9 |
| Diluted EPS | $(0.53) | $1.17 | $4.12 | $3.90 |
| Operating cash flow | Not separately stated | Not separately stated | $264.7 | $320.8 |
- Q3 gross profit was $289.1 million, approximately 87.6% of revenue; operating margin was approximately negative 9.8%. For the nine-month period, gross profit was $832.0 million, approximately 88.3% of revenue, and operating margin was approximately 38.2%.
- Q3 product sales were Remodulin $142.9 million, Tyvaso $119.7 million, Adcirca $51.2 million and Orenitram $14.5 million. Orenitram sales began in Q2 2014.
- Revenue grew 9.2% year over year in Q3 and 13.8% for the first nine months. Q3 Remodulin and Adcirca sales rose 8.0% and 8.2%, respectively; Tyvaso was down 0.5%. Nine-month sales increased across the three established products.
- Q3 operating expenses increased substantially, including R&D of $118.9 million and SG&A of $202.5 million. Management attributed significant expense volatility to cash-settled share tracking awards, whose fair value changes with the stock price. The filing reports $191.7 million of Q3 STAP compensation expense before tax.
- Nine-month capital expenditures were $45.2 million. Investing cash flow was positive $286.5 million, largely reflecting net maturities of held-to-maturity investments, rather than operating cash generation.
Financial position, liquidity and debt
- At September 30, cash and cash equivalents were $497.3 million and marketable investments were $476.3 million. Management reported unrestricted cash, cash equivalents and marketable securities of $968.2 million, down $168.5 million from year-end 2013.
- Total assets were $2.07 billion; total liabilities were $855.5 million. Current liabilities included $224.7 million carrying value of convertible notes and $66.6 million of current line-of-credit and mortgage obligations.
- The $250 million principal amount of 1.0% convertible notes due 2016 became convertible at holders’ election based on the share-price test. The company received conversion requests for $101.3 million principal, expected to settle in October 2014; it expected to pay the principal in cash, issue shares for conversion value above principal, and receive an equivalent number of shares under its note hedge. An estimated $4.0 million extinguishment loss was expected.
- A $66.5 million mortgage loan was due in December 2014. Management said it had sufficient resources to repay it and was in compliance with the loan’s financial covenants. The $75 million revolving credit facility had no outstanding balance at quarter-end and was extended to September 2015.
- The company repurchased $403.2 million of shares during the first nine months. A new $500 million repurchase authorization became effective August 1; $25.6 million had been used by quarter-end, leaving approximately $474.4 million authorized.
Changes, outlook and material risks
- The Q3 net loss, versus year-earlier income, primarily coincided with sharply higher operating expenses and share-based compensation. Management linked the increased share-based expense to the higher stock price and remeasurement of cash-settled awards. Nine-month net income nevertheless increased 9.4% year over year.
- Management said it believed liquidity was sufficient for ongoing operations, business plans, the expected note conversion settlement, the mortgage maturity and authorized repurchases. It gave no specific revenue or earnings guidance. It expected gross margins on Remodulin, Tyvaso and Orenitram to improve after the 10% GlaxoSmithKline royalty expired in October 2014; Orenitram’s launch-phase cost ratio was higher than that of established products.
- Key development priorities included the Orenitram FREEDOM-EV Phase IV study, the 314d BEAT Phase III study, an implantable Remodulin pump program, and regulatory review of the ch14.18 cancer antibody. The company also described early-stage antiviral, cell-therapy and lung-transplantation programs. These projects depend on clinical results, regulatory decisions and successful commercialization.
- Remodulin generic competition is a significant risk. In August 2014, a court upheld one Sandoz-challenged patent and enjoined marketing until its October 2017 expiration, but found another patent would not be infringed; both sides appealed relevant rulings. The company also sued Sandoz and Teva over additional patent challenges. Management cautioned that adverse outcomes could reduce sales.
- The company was cooperating with a Department of Health and Human Services Inspector General subpoena in a Department of Justice civil investigation concerning marketing practices for Remodulin, Tyvaso and Adcirca. It reported no claim, litigation or assessment asserted in connection with the subpoena and said the outcome and potential effects could not be predicted.
- Other disclosed risks include dependence on a small number of PAH products and distributors, reimbursement and pricing pressure, generic sildenafil competition for Adcirca, clinical and regulatory uncertainty, manufacturing and supply risks, and volatility in cash requirements for STAP awards.
Important facts for investors to verify
- October 2014 settlement of the $101.3 million convertible-note requests, including cash paid, shares issued, hedge shares received and any extinguishment loss.
- Post-royalty-expiration gross margins and whether Orenitram sales growth improves its launch-phase cost ratio.
- Quarterly share-based compensation, STAP liabilities and related cash settlements, which can materially affect reported earnings and liquidity.
- Developments in Sandoz and Teva Remodulin patent litigation and the government marketing-practices investigation.
- Clinical and regulatory progress for FREEDOM-EV, BEAT, ch14.18 and the implantable-pump program, along with any resulting changes to spending or outlook.