Business context and reporting period
United Therapeutics Corporation is a biotechnology company focused on treatments for chronic and life-threatening conditions, with its commercial business centered on pulmonary arterial hypertension therapies. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods unless noted. Amounts below are in millions of dollars except per-share data.
Commercial products are Remodulin, Tyvaso and Adcirca. The company sold telemedicine subsidiary Medicomp in March 2011 and discontinued its remaining telemedicine activities in June; those results are reported as discontinued operations.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $201.7 | $168.6 | $548.0 | $429.2 |
| Operating income | $103.0 | $62.5 | $254.3 | $156.0 |
| Income from continuing operations | $80.6 | $40.1 | $174.1 | $97.0 |
| Net income | $84.4 | $39.7 | $174.7 | $96.4 |
| Diluted EPS | $1.38 | $0.66 | $2.81 | $1.62 |
| Operating cash flow | — | — | $198.6 | $172.3 |
Third-quarter revenue grew 19.7%; nine-month revenue grew 27.7%. Approximate gross margin was 88.4% for Q3 and 88.2% for the nine-month period, based on product sales less cost of product sales. Operating margin was approximately 51.0% and 46.4%, respectively. The filing does not provide a formal free-cash-flow measure; operating cash flow less property, plant and equipment purchases was approximately $161.8 million for the nine months.
At September 30, cash and cash equivalents were $344.0 million; current and noncurrent marketable investments totaled $600.6 million, and restricted cash and investments were $5.1 million. Unrestricted cash and investments were approximately $944.6 million. Working capital was $421.2 million, with current assets of $846.1 million and current liabilities of $425.0 million. Total liabilities were $571.2 million.
Debt at quarter-end included $248.5 million carrying value of 0.50% convertible notes due October 2011 and a $68.9 million noncurrent mortgage payable. The mortgage matures in December 2014, is secured by company facilities and bore an approximately 4.0% floating rate; the company reported compliance with its covenants. The 2011 notes were repaid at maturity in October, after the reporting date.
Material changes versus prior period
- Quarterly product sales rose 19.5% overall: Remodulin increased 4.9% to $114.9 million, Tyvaso increased 36.2% to $66.3 million, and Adcirca increased 99.0% to $19.8 million. For nine months, product sales increased 27.7%; growth was strongest in Adcirca (+103.9%) and Tyvaso (+70.6%).
- Q3 R&D rose 47.3% to $59.4 million, principally due to a $46.3 million nonrefundable Toray license-related charge recorded in R&D and a $5.0 million Pluristem license charge. Nine-month R&D increased 27.1% to $131.4 million.
- SG&A fell 63.5% in Q3 to $16.7 million and 18.2% for nine months to $98.8 million. The decrease reflects a substantial share-based compensation benefit as the share price declined—not a reduction in underlying spending. Excluding share-based compensation, reported SG&A categories increased, including sales and marketing costs associated with an expanded sales force.
- Q3 net income included $3.8 million of after-tax gain from discontinued operations. The nine-month discontinued-operations result was income of $0.6 million, compared with a loss of $0.7 million in 2010.
- Operating cash flow increased $26.3 million year over year. Cash and cash equivalents rose to $344.0 million from $252.2 million at year-end 2010; inventory increased to $45.8 million from $35.5 million, reflecting expected sales growth.
Outlook, commentary, risks and unusual items
- Management expects continued demand growth for commercial products, but provides no specific revenue or earnings guidance in the supplied filing text. Growth and profitability depend on product demand, reimbursement, competition, clinical outcomes, regulatory approvals and manufacturing capacity.
- Oral treprostinil: FREEDOM-M met its primary endpoint, with a reported 23-meter placebo-corrected median improvement in six-minute walk distance (p=0.0125). FREEDOM-C 2 failed to achieve statistical significance (10-meter placebo-corrected median change; p=0.089). The filing describes the anticipated NDA timing both as no later than Q1 2012 and during the first half of 2012; approval, labeling and commercial potential remain uncertain.
- Tyvaso has an ongoing FDA-required long-term observational safety study, with results due by December 15, 2014. The FDA notified the company in September 2011 that the Tyvaso device-related post-marketing commitments were fulfilled.
- The Toray agreement reduced royalty rates in exchange for $50.0 million of nonrefundable payments through 2015. The company recorded a $46.3 million present-value obligation and corresponding Q3 R&D expense. The Revivicor acquisition added $3.5 million cash consideration and $3.4 million estimated contingent consideration, with up to $25.0 million payable on milestones.
- Subsequent to quarter-end, the company issued $250.0 million of 1.0% convertible notes due 2016, receiving $241.4 million net proceeds. It also entered a $300.0 million share repurchase program and paid $212.0 million for an accelerated share repurchase; approximately 4.7 million shares were initially delivered, with final settlement dependent on a future price-averaging period. The filing gives inconsistent initial conversion-price figures for the 2016 notes ($47.96 in the note and $47.69 in MD&A); verify against the governing documents.
- Key risks include reliance on Remodulin and Tyvaso and a small number of U.S. distributors; potential distributor consolidation; third-party and internal manufacturing, supply and quality risks; reimbursement and pricing pressure; competition and patent expiry; and clinical, regulatory and post-marketing uncertainties. The company estimated the health-care reform impact would reduce 2011 revenue by less than 1%. It also cited potential investment-market risk, though it held short-maturity, highly rated securities and did not consider its unrealized investment losses other-than-temporary.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the 2016 convertible notes’ stated conversion price and review the effects of the note issuance, call spread hedge and accelerated repurchase on dilution, interest expense and cash.
- Track oral treprostinil NDA timing and review how the mixed FREEDOM trial results may affect approval, labeling, reimbursement and uptake.
- Assess recurring operating costs separately from volatile share-tracking award accounting; Q3 included a large compensation benefit tied to the stock-price decline.
- Monitor product growth and concentration, especially reliance on Remodulin and Tyvaso and on three U.S.-based distributors.
- Review execution and funding of the facility expansion projects, the Toray payment obligation, and any Revivicor milestone payments.