United Therapeutics Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; unaudited. The company develops and markets therapies primarily for pulmonary arterial hypertension (PAH). Commercial products are Remodulin, Tyvaso and Adcirca. Comparisons below are with 2011; dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $225.6 | $183.8 | $429.8 | $346.3 |
| Operating income | $105.6 | $114.5 | $212.3 | $151.3 |
| Net income | $72.3 | $73.9 | $143.1 | $90.3 |
| Diluted EPS | $1.34 | $1.18 | $2.63 | $1.44 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $125.0 | $117.9 |
- Q2 revenue rose 22.8%; product sales growth reflected more patients prescribed the products. Q2 product sales were Remodulin $110.4 million (+5.2%), Tyvaso $81.2 million (+31.4%) and Adcirca $30.2 million (+79.4%).
- Q2 operating income fell 7.8% and net income fell 2.1%, despite sales growth. Six-month operating income increased 40.4% and net income increased 58.5%.
- Q2 gross margin was approximately 85.7% of total revenue (product gross profit divided by total revenue); six-month gross margin was approximately 86.4%. Operating margin was 46.8% in Q2 and 49.4% for six months.
- Cash, cash equivalents and unrestricted marketable investments totaled $701.3 million at June 30, down from $747.4 million at year-end. Working capital was $382.9 million. Current assets were $570.6 million and current liabilities $187.7 million.
- Six-month investing cash outflow was $46.3 million, including $83.9 million of property, plant and equipment purchases; financing cash outflow was $84.2 million, including $88.0 million of share repurchases. Cash and cash equivalents ended the period at $157.0 million.
- Debt included $250.0 million principal of 1.0% convertible notes due 2016, with a $199.3 million carrying amount, and mortgage debt with a $71.4 million noncurrent carrying amount. The mortgage loan matures in December 2014; the company reported covenant compliance.
Material changes and notable items
- Q2 R&D expense increased 53.0% to $37.1 million, largely reflecting a $13.8 million year-over-year swing in share-based compensation. Six-month R&D declined 1.7% to $70.8 million.
- Q2 SG&A rose 123.2% to $53.3 million. It included a $6.8 million impairment of a Revivicor-related contract intangible after the counterparty terminated the licensing arrangement, as well as higher share-based compensation. Six-month SG&A increased 13.3% to $93.0 million.
- Other revenue included approximately $2.0 million of deferred revenue recognized after termination of the Revivicor license agreement. The impairment and revenue recognition are related to the terminated arrangement.
- The company repurchased approximately 2.0 million shares in May for $88.0 million, completing its prior $300 million authorization. A further authorization of up to $100 million was to become effective July 31, 2012.
- Property, plant and equipment increased to $435.8 million, reflecting completed facility projects and a $16.9 million North Carolina property acquisition.
Outlook, management commentary and risks
- Management said current liquidity was sufficient to fund operations and expected continued growth in demand for commercial products, while noting that cash-flow projections are uncertain. No specific revenue or earnings guidance figures are provided in the supplied filing text.
- The oral treprostinil NDA was under FDA review. Management expected to begin enrolling the FREEDOM-EV Phase III study in Q3 2012; the filing notes earlier Phase III trials had mixed results, and approval and commercial prospects remain uncertain. A Phase III trial for L-314d QID was planned for 2013.
- Tyvaso’s required long-term observational post-marketing study was ongoing, with results due December 15, 2014. Management was also evaluating alternative inhalation devices.
- Sandoz challenged three Remodulin patents in connection with a generic application. United Therapeutics filed suit; FDA approval of the application is generally stayed for up to 30 months unless an adverse court decision occurs sooner. The company’s patent outcome and related sales impact are uncertain.
- The company sued Lexington Insurance over damaged Remodulin inventory with an estimated net commercial value of approximately $65 million. Recovery, if any, and timing are uncertain.
- Key risks include dependence on three PAH products, generic and other competition, reimbursement and pricing pressure, clinical and regulatory outcomes, manufacturing and supplier reliability, and reliance on three U.S. distributors. Those distributors generated 78% of Q2 net revenue and 80% for the six-month period.
- Cash-settled share tracking awards create potential future cash requirements tied to stock appreciation. The filing also notes convertible-note repayment and change-of-control obligations.
Important facts for investors to verify
- Revenue growth and product-level trends, especially the contribution from Tyvaso and Adcirca and the durability of patient growth.
- Drivers of Q2 expense growth, including share-based compensation volatility and the $6.8 million intangible impairment.
- FDA review progress for oral treprostinil, planned FREEDOM-EV enrollment, and the implications of prior trial results for labeling and demand.
- Developments in the Sandoz Remodulin patent litigation and the Lexington Insurance recovery claim.
- Cash deployment, construction commitments, the new $100 million repurchase authorization, and the company’s ability to meet future debt and share-tracking award cash obligations.