United Therapeutics Corporation — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also provides unaudited fourth-quarter results. United Therapeutics is a biotechnology company whose commercial business is centered on treatments for pulmonary arterial hypertension (PAH), principally Remodulin, Tyvaso and Adcirca.
Financial performance
| Metric | FY 2011 | FY 2010 | Change / context |
|---|---|---|---|
| Revenue | $743.2 million | $592.9 million | Up 25.3% |
| Operating income | $317.8 million | $171.3 million | Operating margin 42.8%, versus 28.9% |
| Net income | $217.9 million | $105.9 million | Net margin 29.3%, versus 17.9% |
| Diluted EPS | $3.67 | $1.78 | Up from prior year |
| Operating cash flow | $250.2 million | $211.5 million | Up $38.7 million |
| Cash, cash equivalents and marketable investments | $747.4 million | $759.9 million | Excludes restricted amounts |
| Working capital | $349.9 million | $335.8 million | Up $14.1 million |
| Debt | $266.8 million | $306.0 million | Selected financial data; balance-sheet carrying amounts were $194.2 million of convertible notes and $71.5 million of mortgages |
Product revenue was led by Remodulin at $430.1 million (+6.6%), followed by Tyvaso at $240.4 million (+58.4%) and Adcirca at $70.6 million (+94.4%). Together, the three products generated $741.1 million in net product sales. Product gross profit was $652.2 million, an 88.0% gross margin, compared with $524.0 million and 88.6% in 2010.
Fourth-quarter net sales were $195.2 million versus $163.7 million a year earlier; net income was $43.2 million versus $9.5 million. Quarterly sales may be affected by distributor ordering and inventory timing, so they may not directly track patient demand.
Material changes and notable items
- Tyvaso and Adcirca continued to expand rapidly, while Remodulin remained the largest product but grew more slowly. The company attributed overall sales growth primarily to more patients being prescribed its products.
- R&D expense increased 8.9% to $180.0 million. It included a $46.3 million charge for the Toray royalty-rate reduction agreement and a $5.0 million Pluristem license fee. SG&A fell 17.0% to $156.5 million, largely because STAP share-based compensation shifted from substantial expense in 2010 to a benefit in 2011 as the share price declined. These items make year-over-year expense comparisons less representative of underlying operating trends.
- The company reported a $16.4 million pre-tax STAP share-based compensation benefit in 2011, compared with $90.7 million of expense in 2010. This non-cash, share-price-sensitive item materially affected reported operating expenses.
- Cash and investments declined modestly despite higher operating cash flow, primarily following repayment of $250.0 million principal on the 2011 convertible notes. The company issued $250.0 million of 1.0% convertible notes due 2016 and used proceeds principally for a $212.0 million accelerated share repurchase and related hedge and warrant transactions.
- Capital spending and construction expanded: property, plant and equipment rose to $366.0 million. The company reported $43.1 million spent on construction projects during 2011 and expected the North Carolina expansion and Maryland office building to be completed in 2012.
- Medicomp was sold in March 2011 and its results were reported as discontinued operations. The company also acquired Revivicor for lung-tissue and transplantation research and acquired development rights for NEBU-TEC’s SIM-Neb inhalation device.
Outlook, risks and contingencies
- Management expected continued PAH product demand and growth, but the filing gives no specific quantitative revenue or earnings guidance. Its outlook depends on product demand, reimbursement, competition, manufacturing capacity, clinical outcomes and regulatory decisions.
- The FDA accepted the oral treprostinil NDA filed December 27, 2011, for standard review. FREEDOM-M met its primary endpoint; FREEDOM-C and FREEDOM-C 2 did not. Approval and any permitted label, especially use alongside other PAH therapies, remain uncertain. Management planned a further Phase III combination-therapy study in 2012.
- Tyvaso still had a required U.S. post-marketing safety study, with results due by December 15, 2014. The company planned a new European trial, with enrollment expected in the second half of 2012, after withdrawing its prior European application following GCP compliance concerns at two study sites.
- On February 3, 2012, after year-end, the company received Sandoz’s Paragraph IV notice challenging patents covering Remodulin and seeking approval for a generic 10 mg/mL product. The company said it intended to enforce its patents. The challenge creates potential litigation costs and generic-competition risk; the filing states that a timely lawsuit could delay FDA approval for up to 30 months, subject to the legal process.
- Remodulin and Tyvaso represented about 90% of 2011 revenue. Accredo alone accounted for 61% of total revenue; approximately 81% of revenue came through the three U.S. distributors. The proposed Express Scripts–Medco combination could reduce the number of those distributors to two.
- Other material risks include reimbursement and pricing pressure, competition from established and investigational PAH therapies, dependence on third-party manufacturers and distributors, product safety and regulatory compliance, and patent protection. Subcutaneous Remodulin commonly causes infusion-site pain; intravenous use carries catheter-infection and sepsis risks.
- The Toray agreement requires $50.0 million of non-refundable payments through 2015; $40.0 million remained outstanding at year-end. The company reported compliance with its mortgage covenants and no legal proceedings that management expected to materially affect financial position or results.
Most important facts for investors to verify
- FDA review outcome and eventual label for oral treprostinil, including whether combination therapy is supported.
- Progress and cost of the planned FREEDOM-C 3 and European Tyvaso studies, and fulfillment of Tyvaso’s post-marketing requirement.
- Status and potential impact of Sandoz’s Remodulin patent challenge, including any litigation and generic entry timeline.
- Revenue and customer concentration, distributor consolidation, and the durability of Tyvaso and Adcirca growth.
- Cash generation versus construction, repurchases, debt service and the scheduled Toray payments; distinguish reported earnings from the significant non-cash STAP effect.
- Manufacturing approvals, supply resilience, reimbursement levels and any new safety or regulatory developments.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting as of December 31, 2011.