United Therapeutics Corporation
UNITED THERAPEUTICS CORP (Form: 10-Q, Received: 08/04/2006 09:59:44)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2006

OR

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                to              

 

Commission file number 0-26301

United Therapeutics Corporation

(Exact Name of Registrant as Specified in Its Charter)

Delaware

52-1984749

(State or Other Jurisdiction of

(I.R.S. Employer

Incorporation or Organization)

Identification No.)

1110 Spring Street, Silver Spring, MD

20910

(Address of Principal Executive Offices)

(Zip Code)

 

(301) 608-9292

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer  x       Accelerated filer  o       Non-accelerated filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o     No  x

The number of shares outstanding of the issuer’s common stock, par value $.01 per share, as of July 31, 2006 was 22,937,972.

 




INDEX

 

 

 

Page

 

Part I.

 

FINANCIAL INFORMATION (UNAUDITED)

 

 

 

 

 

Item 1.

 

Consolidated Financial Statements

 

 

1

 

 

 

 

Consolidated Balance Sheets

 

 

1

 

 

 

 

Consolidated Statements of Operations

 

 

2

 

 

 

 

Consolidated Statements of Cash Flows

 

 

3

 

 

 

 

Notes to Consolidated Financial Statements

 

 

4

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

14

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

29

 

 

Item 4.

 

Controls and Procedures

 

 

30

 

 

Part II.

 

OTHER INFORMATION

 

 

 

 

 

Item 1A.

 

Risk Factors

 

 

31

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

 

45

 

 

Item 6.

 

Exhibits

 

 

46

 

 

SIGNATURES

 

 

47

 

 

 




PART I.    FINANCIAL INFORMATION

Item 1.                         Consolidated Financial Statements

UNITED THERAPEUTICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

 

 

June 30,
2006

 

December 31,
2005

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

71,322

 

 

 

$

69,180

 

 

Marketable investments

 

 

95,034

 

 

 

56,304

 

 

Accounts receivable, net of allowance of none for 2006 and $15 for 2005

 

 

17,945

 

 

 

13,873

 

 

Other receivable

 

 

3,546

 

 

 

4,201

 

 

Interest receivable

 

 

886

 

 

 

733

 

 

Due from affiliate

 

 

187

 

 

 

179

 

 

Inventories, net

 

 

11,017

 

 

 

11,263

 

 

Deferred tax assets

 

 

2,060

 

 

 

4,611

 

 

Prepaid expenses and other current assets

 

 

5,266

 

 

 

6,413

 

 

Total current assets

 

 

207,263

 

 

 

166,757

 

 

Marketable investments

 

 

21,642

 

 

 

44,863

 

 

Marketable investments and cash—restricted

 

 

38,326

 

 

 

20,666

 

 

Goodwill, net

 

 

7,465

 

 

 

7,465

 

 

Other intangible assets, net

 

 

3,302

 

 

 

5,487

 

 

Property, plant, and equipment, net

 

 

29,638

 

 

 

21,802

 

 

Investments in affiliates

 

 

6,231

 

 

 

8,259

 

 

Notes receivable from affiliate and employee

 

 

27

 

 

 

26

 

 

Deferred tax assets

 

 

10,534

 

 

 

15,100

 

 

Other assets

 

 

1,005

 

 

 

988

 

 

Total assets

 

 

$

325,433

 

 

 

$

291,413

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable

 

 

$

4,359

 

 

 

$

3,974

 

 

Accounts payable to affiliates and related parties

 

 

41

 

 

 

6

 

 

Accrued expenses

 

 

16,189

 

 

 

10,394

 

 

Due to affiliates and related parties

 

 

40

 

 

 

134

 

 

Current portion of notes and leases payable

 

 

9

 

 

 

15

 

 

Other current liability

 

 

3,216

 

 

 

 

 

Total current liabilities

 

 

23,854

 

 

 

14,523

 

 

Notes and leases payable, excluding current portion

 

 

5

 

 

 

8

 

 

Other liabilities

 

 

2,055

 

 

 

1,780

 

 

Total liabilities

 

 

25,914

 

 

 

16,311

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

Preferred stock, par value $.01, 10,000,000 shares authorized, no shares issued

 

 

 

 

 

 

 

Series A junior participating preferred stock, par value $.01, 100,000 authorized, no shares issued

 

 

 

 

 

 

 

Common stock, par value $.01, 100,000,000 shares authorized, 24,175,847 and 23,845,004 shares issued at June 30, 2006 and December 31, 2005, respectively, and 23,649,247 and 23,318,404 outstanding at June 30, 2006 and December 31, 2005, respectively

 

 

242

 

 

 

239

 

 

Additional paid-in capital

 

 

408,605

 

 

 

393,469

 

 

Accumulated other comprehensive income

 

 

2,891

 

 

 

3,593

 

 

Treasury stock at cost, 526,600 shares

 

 

(6,874

)

 

 

(6,874

)

 

Accumulated deficit

 

 

(105,345

)

 

 

(115,325

)

 

Total stockholders’ equity

 

 

299,519

 

 

 

275,102

 

 

Total liabilities and stockholders’ equity

 

 

$

325,433

 

 

 

$

291,413

 

 

 

See accompanying notes to consolidated financial statements.

1




UNITED THERAPEUTICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(Unaudited)

 

(Unaudited)

 

Revenues:

 

 

 

 

 

 

 

 

 

Net product sales

 

$

38,750

 

$

28,713

 

$

70,370

 

$

50,580

 

Service sales

 

1,495

 

1,279

 

3,039

 

2,487

 

License fees

 

 

65

 

 

197

 

Total revenues

 

40,245

 

30,057

 

73,409

 

53,264

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development, including stock option expense totaling $2.2 million and $150,000 for the three-month periods in 2006 and 2005, and $4.5 million and $332,000 for the six-month periods in 2006 and 2005

 

12,614

 

8,694

 

27,314

 

17,166

 

Selling, general and administrative, including stock option expense totaling $2.0 million and none for the three-month periods in 2006 and 2005, and $4.2 million and none for the six-month periods in 2006 and 2005

 

11,871

 

7,025

 

21,950

 

12,365

 

Write down of HeartBar ®  tradename

 

 

 

2,024

 

 

Cost of product sales

 

3,745

 

2,653

 

7,091

 

4,673

 

Cost of service sales, including stock option expense totaling $29,000 and none for the three-month periods in 2006 and 2005, and $57,000 and none for the six-month periods in 2006 and 2005

 

499

 

522

 

1,030

 

1,057

 

Total operating expenses

 

28,729

 

18,894

 

59,409

 

35,261

 

Income from operations

 

11,516

 

11,163

 

14,000

 

18,003

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

2,485

 

1,201

 

4,383

 

2,182

 

Interest expense

 

(1

)

(1

)

(1

)

(1

)

Equity loss in affiliate

 

(171

)

(195

)

(378

)

(375

)

Other, net

 

5

 

13

 

15

 

34

 

Total other income, net

 

2,318

 

1,018

 

4,019

 

1,840

 

Income before income tax

 

13,834

 

12,181

 

18,019

 

19,843

 

Income tax expense

 

(6,161

)

 

(8,039

)

 

Net income

 

$

7,673

 

$

12,181

 

$

9,980

 

$

19,843

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.33

 

$

0.54

 

$

0.42

 

$

0.88

 

Diluted

 

$

0.30

 

$

0.49

 

$

0.39

 

$

0.80

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

23,591

 

22,694

 

23,483

 

22,593

 

Diluted

 

25,344

 

24,997

 

25,577

 

24,849

 

 

See accompanying notes to consolidated financial statements.

2




UNITED THERAPEUTICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

 

 

Six Months Ended
June 30,

 

 

 

2006

 

2005

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

9,980

 

$

19,843

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

1,220

 

1,260

 

Provision for bad debt

 

(66

)

39

 

Deferred tax expense

 

7,423

 

 

Provision for inventory obsolescence

 

352

 

(55

)

Loss on disposals of equipment

 

57

 

5

 

Stock-based compensation expense

 

8,737

 

332

 

Write down of intangible asset

 

2,024

 

 

Amortization of discount or premium on investments

 

(181

)

(56

)

Unrealized foreign currency translation gain

 

206

 

 

Equity loss in affiliate

 

378

 

375

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(3,778

)

(1,744

)

Interest receivable

 

(153

)

(119

)

Inventories

 

151

 

(1,743

)

Prepaid expenses

 

1,118

 

650

 

Other assets

 

444

 

96

 

Accounts payable

 

434

 

(2,281

)

Accrued expenses

 

5,590

 

3,319

 

Due to (from) affiliates

 

(67

)

507

 

Other liabilities

 

3,491

 

(22

)

Net cash provided by operating activities

 

37,360

 

20,406

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(8,960

)

(3,650

)

Purchases of held-to-maturity investments

 

(20,850

)

(11,138

)

Purchases of available-for-sale investments

 

(20,600

)

(37,700

)

Maturities of held-to-maturity investments

 

1,000

 

 

Sales of available-for-sale investments

 

8,200

 

200

 

Net cash used in investing activities

 

(41,210

)

(52,288

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from the exercise of stock options

 

5,804

 

5,839

 

Excess tax benefits from stock-based compensation

 

197

 

 

Principal payments on notes payable and capital lease obligations

 

(9

)

(10

)

Net cash provided by financing activities

 

5,992

 

5,829

 

Net increase (decrease) in cash and cash equivalents

 

2,142

 

(26,053

)

Cash and cash equivalents, beginning of period

 

69,180

 

82,586

 

Cash and cash equivalents, end of period

 

$

71,322

 

$

56,533

 

Supplemental schedule of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

1

 

$

1

 

Cash paid for income taxes

 

$

138

 

$

61

 

 

See accompanying notes to consolidated financial statements.

3




UNITED THERAPEUTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(UNAUDITED)

1. ORGANIZATION AND BUSINESS DESCRIPTION

United Therapeutics Corporation (United Therapeutics) is a biotechnology company focused on the development and commercialization of innovative therapeutic products for patients with chronic and life-threatening cardiovascular, cancer and infectious diseases. United Therapeutics was incorporated on June 26, 1996 under the laws of the State of Delaware and has the following wholly owned subsidiaries: Lung Rx, Inc. (Lung Rx), Unither Pharmaceuticals, Inc. (UPI), Unither Telmed, Ltd. (Unither Telmed and formerly Unither Telemedicine Services Corporation), Unither.com, Inc., United Therapeutics Europe, Ltd., Unither Pharma, Inc., Medicomp, Inc., Unither Nutriceuticals, Inc., Lung Rx, Ltd. and Unither Biotech Inc.

United Therapeutics’ lead product is Remodulin ® . Remodulin was first approved for use on May 21, 2002 by the United States Food and Drug Administration (FDA) as a continuous subcutaneous infusion for the treatment of pulmonary arterial hypertension in patients with NYHA class II-IV symptoms to diminish symptoms associated with exercise. On November 24, 2004, the FDA approved intravenous infusion of Remodulin, based on data establishing its bioequivalence with the subcutaneous administration of Remodulin, for patients who are not able to tolerate a subcutaneous infusion. On March 21, 2006, the FDA expanded its approval of Remodulin to include patients requiring transition from Flolan ® , the only other FDA-approved intravenous prostacyclin. The FDA also agreed that United Therapeutics fulfilled its Subpart H accelerated approval requirement for a Phase IV post-marketing study to confirm the clinical benefit of Remodulin. In addition to the United States, Remodulin is approved as a subcutaneous infusion in most of Europe, Canada, Israel, Australia and several countries in South America. It is also approved as an intravenous infusion in Canada and Israel. Other international applications for the approval of Remodulin are pending.

United Therapeutics has generated pharmaceutical revenues from sales of Remodulin and arginine products in the United States, Europe and Asia. In addition, United Therapeutics has generated non-pharmaceutical revenues from telemedicine products and services in the United States.

2. BASIS OF PRESENTATION

The consolidated financial statements included herein have been prepared, without audit, pursuant to Regulation S-X of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto contained in United Therapeutics’ Annual Report on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission.

In the opinion of United Therapeutics’ management, any adjustments contained in the accompanying unaudited consolidated financial statements are of a normal recurring nature, necessary to present fairly the financial position as of June 30, 2006, results of operations for the three and six-month periods ended June 30, 2006 and 2005 and cash flows for the six-month periods ended June 30, 2006 and 2005. Interim results are not necessarily indicative of results for an entire year.

4




3. STOCKHOLDERS’ EQUITY

Earnings per Common Share (EPS)

Basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the respective periods. Diluted earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period plus the effects of outstanding stock options that could potentially dilute earnings per share in the future. The effects of potentially dilutive stock options were calculated using the treasury stock method. The components of basic and dilutive earnings per share are as follows (in thousands, except per share amounts):

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Net income (Numerator)

 

$

7,673

 

$

12,181

 

$

9,980

 

$

19,843

 

Shares (Denominator):

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares for basic EPS

 

23,591

 

22,694

 

23,483

 

22,593

 

Dilutive effect of stock options

 

1,753

 

2,303

 

2,094

 

2,256

 

Adjusted weighted average shares for diluted EPS

 

25,344

 

24,997

 

25,577

 

24,849

 

Earnings per share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.33

 

$

0.54

 

$

0.42

 

$

0.88

 

Diluted

 

$

0.30

 

$

0.49

 

$

0.39

 

$

0.80

 

 

Stock Option Plan

United Therapeutics’ Board of Directors adopted an equity incentive plan (the Plan) effective in November 1997. In April 1999, the Board of Directors and stockholders approved an amendment and restatement of the Plan to increase the total number of shares of common stock that may be issued pursuant to the Plan to 14,939,517 shares, including 7,939,517 shares reserved for issuance to the CEO under her employment agreement. The Plan provides for the grant of awards, including options (qualified and nonqualified), stock appreciation rights, restricted stock awards and other rights as defined in the Plan, to eligible participants. Options granted under the Plan generally vest over a period of up to three years, are not transferable and must generally be exercised within 10 years. The price of all options granted under the Plan must be at least equal to the fair market value of the common stock on the date of grant. With respect to any participant who owns 10 percent or more of United Therapeutics’ outstanding common stock on the date of grant, the exercise price of any incentive stock option granted to that participant must equal or exceed 110 percent of the fair market value of the common stock on the date of grant and the option must not be exercisable for longer than five years. United Therapeutics has historically issued new shares to satisfy share option exercises.

Prior to January 1, 2006, United Therapeutics accounted for its employee equity-based compensation plans under the recognition and measurement provisions of APB 25, Accounting for Stock Issued to Employees , and related interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation . Effective January 1, 2006, United Therapeutics adopted the provisions of FASB Statement No. 123 (revised 2004), Share-Based Payment , (SFAS 123(R)) and interpretative literature within SEC Staff Accounting Bulletin No. 107, Share-Based Payment , (SAB 107), using the modified prospective transition method. Under the modified prospective transition method, compensation cost recognized in 2006 includes compensation cost for all equity-based payments granted prior to but not yet vested as of January 1, 2006, based on the original grant date fair value estimated in accordance with the provisions of SFAS 123 and compensation cost for all equity-based payments granted subsequent to January 1, 2006,

5




based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated.

United Therapeutics utilizes the Black-Scholes-Merton valuation model for estimating the fair value of its stock options granted. Option valuation models, including Black-Scholes-Merton, require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the grant date fair value of an award. These assumptions include the risk free rate of interest, expected dividend yield, expected volatility, expected forfeiture rate and the expected life of the award.

Expected Volatility— Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. United Therapeutics uses the historical volatility based on the weekly price observations of its common stock during the period immediately preceding the share-based award grant that is equal in length to the award’s expected term (up to a maximum of five years). United Therapeutics believes that historical volatility within the last five years represents the best estimate of future long term volatility. Since 2001, United Therapeutics’ annual volatility has ranged from 76.75 percent in 2001 to 42.36 percent in 2005 with an average of 48.84 percent during the five year period.

Risk-Free Interest Rate— This is the average interest rate consistent with the yield available on a U.S. Treasury note (with a term equal to the expected term of the underlying grants) at the date the option was granted.

Expected Term of Options— This is the period of time that the options granted are expected to remain outstanding. United Therapeutics adopted SAB 107’s simplified method for estimating the expected term of share-based awards granted during the six months ended June 30, 2006.

Expected Dividend Yield— United Therapeutics has never declared or paid dividends on its common stock and does not anticipate paying any dividends in the foreseeable future. As such, the dividend yield percentage is assumed to be zero.

Forfeiture Rate— This is the estimated percentage of options granted that are expected to be forfeited or cancelled on an annual basis before becoming fully vested. United Therapeutics estimates the forfeiture rate based on historical forfeiture experience for similar levels of employees to whom options were granted.

Following are the weighted-average assumptions used in valuing the stock options granted to employees during the three and six-month periods ended June 30, 2006 and 2005:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Expected volatility

 

42.67 percent

 

42.49 percent

 

43.49 percent

 

44.39 percent

 

Risk-free interest rate

 

5.1 percent

 

3.8 percent

 

5.0 percent

 

3.2 percent

 

Expected term of options

 

5.8 years    

 

3.2 years    

 

5.8 years    

 

2.0 years    

 

Expected dividend yield

 

0.0 percent

 

0.0 percent

 

0.0 percent

 

0.0 percent

 

Forfeiture rate

 

11.7 percent

 

0.0 percent

 

11.7 percent

 

0.0 percent

 

 

6




A summary of the status of United Therapeutics’ employee stock options as of June 30, 2006 and changes during the six months then ended is presented below:

All Employee Options

 

 

 

Number of
Shares

 

Weighted
Average
Exercise Price
Per Share

 

Weighted Average
Remaining
Contractual
Term (in years)

 

Aggregate
Intrinsic
Value
($ in 000s)

 

Outstanding at January 1, 2006

 

5,398,859

 

 

$

38.16

 

 

 

 

 

 

 

 

Granted

 

257,800

 

 

55.75

 

 

 

 

 

 

 

 

Exercised

 

(315,715

)

 

17.84

 

 

 

 

 

 

 

 

Forfeited

 

(48,515

)

 

56.26

 

 

 

 

 

 

 

 

Outstanding at June 30, 2006

 

5,292,429

 

 

$

40.08

 

 

 

7.0

 

 

$

106,861

 

Expected to vest at June 30, 2006

 

1,435,644

 

 

$

55.16

 

 

 

9.1

 

 

$

11,336

 

Exercisable at June 30, 2006

 

3,666,558

 

 

$

33.39

 

 

 

6.1

 

 

$

94,023

 

 

The weighted-average grant-date fair value of options granted during the six months ended June 30, 2006 and 2005 was $27.31 per share and $12.06 per share, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2006 and 2005 was $13.8 million and $10.6 million, respectively.

As of June 30, 2006, there was approximately $33.2 million of total unrecognized compensation cost related to nonvested employee stock options. That cost is expected to be recognized over a weighted-average period of 2.0 years. The total fair value of shares vested during the six months ended June 30, 2006 and 2005 was $7.2 million and $11.3 million, respectively.

Approximately $5.8 million in cash was received from option exercises under all share-based payment arrangements for each of the six months ended June 30, 2006 and 2005. Due to the availability of net operating loss carryforwards and research tax credits, the tax benefit attributable to deductions for option exercises were not recognized in the six months ended June 30, 2006.

Total employee share-based compensation expense recognized for the three and six-month periods ended June 30, 2006 are as follows (in thousands, except per share data):

 

 

Three Months Ended
June 30, 2006

 

Six Months Ended
June 30, 2006

 

Cost of service sales

 

 

$

29

 

 

 

$

57

 

 

Research and development

 

 

1,430

 

 

 

3,054

 

 

Selling, general and administrative

 

 

2,045

 

 

 

4,186

 

 

Share-based compensation expense before taxes

 

 

3,504

 

 

 

7,297

 

 

Related income tax benefits

 

 

(1,554

)

 

 

(3,236

)

 

Share-based compensation expense, net of taxes

 

 

$

1,950

 

 

 

$

4,061

 

 

 

Equity-based compensation cost capitalized as part of inventory during the three and six months ended June 30, 2006 was approximately $133,000 and $291,000, respectively. United Therapeutics recorded approximately $109,000 in share-based compensation expense during the three months ended June 30, 2006 related to the grant of options to purchase 213,300 shares of common stock to employees. In addition, approximately $485,000 in share-based compensation expense was recorded during the six months ended June 30, 2006 related to the grant of options to purchase 257,800 shares of common stock to employees.

7




The following table (in thousands, except per share amounts) illustrates the effect on net income and net income per share if United Therapeutics had applied the fair value recognition provisions of SFAS 123(R) to equity-based compensation for the three and six-month periods ended June 30, 2005. Information for the three and six-month periods ended June 30, 2006 is presented for comparative purposes only and is consistent with the presented statement of operations.

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Net income as reported

 

$

7,673

 

$

12,181

 

$

9,980

 

$

19,843

 

Less—total employee equity-based compensation expense determined under fair value-based methods for all awards

 

 

(3,279

)

 

(6,558

)

Pro forma net income

 

$

7,673

 

$

8,902

 

$

9,980

 

$

13,285

 

Basic net income per common share

 

 

 

 

 

 

 

 

 

As reported

 

$

0.33

 

$

0.54

 

$

0.42

 

$

0.88

 

Pro forma

 

 

 

$

0.39

 

 

 

$

0.59

 

Diluted net income per common share

 

 

 

 

 

 

 

 

 

As reported

 

$

0.30

 

$

0.49

 

$

0.39

 

$

0.80

 

Pro forma

 

 

 

$

0.36

 

 

 

$

0.53

 

 

For the six months ended June 30, 2006 and 2005, options to purchase 330,843 and 362,322 shares, respectively, were exercised.

As of June 30, 2006 there were 8,682,243 options available for grant under the plan.

4. INVENTORIES

United Therapeutics manufactures certain compounds, such as treprostinil, and purchases medical supplies, such as external pumps, for use in its product sales and ongoing clinical trials. United Therapeutics subcontracts the manufacture of cardiac monitoring equipment. United Therapeutics contracts with a third-party manufacturer to make arginine products. These inventories are accounted for under the first-in, first-out method and are carried at the lower of cost or market. Inventories consisted of the following, net of reserves of approximately $728,000 and $570,000 at June 30, 2006 and December 31, 2005, respectively (in thousands):

 

 

June 30,
2006

 

December 31,
2005

 

Remodulin:

 

 

 

 

 

 

 

Raw materials

 

$

193

 

 

$

814

 

 

Work-in-progress

 

6,547

 

 

7,582

 

 

Finished goods

 

3,324

 

 

2,052

 

 

Remodulin delivery pumps and other medical supplies

 

725

 

 

673

 

 

Cardiac monitoring equipment components

 

152

 

 

59

 

 

Arginine products

 

76

 

 

83

 

 

Total inventories

 

$

11,017

 

 

$

11,263

 

 

 

8




5. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets were comprised as follows (in thousands):

 

 

As of June 30, 2006

 

As of December 31, 2005

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

 

Goodwill

 

$

9,072

 

 

$

(1,607

)

 

$

7,465

 

$

9,072

 

 

$

(1,607

)

 

$

7,465

 

Intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncompete agreements

 

$

273

 

 

$

(273

)

 

$

 

$

273

 

 

$

(273

)

 

$

 

Trademarks

 

 

 

 

 

 

2,802

 

 

(1,230

)

 

1,572

 

Technology and patents

 

6,164

 

 

(2,862

)

 

3,302

 

6,164

 

 

(2,249

)

 

3,915

 

Total intangible assets

 

$

6,437

 

 

$

(3,135

)

 

$

3,302

 

$

9,239

 

 

$

(3,752

)

 

$

5,487

 

 

The HeartBar product was discontinued in January 2006 and is no longer sold. As a result, a write down of intangible assets related to the HeartBar product tradename totaling approximately $2.0 million was recorded in January 2006. The decision to discontinue HeartBar did not impact other aspects of United Therapeutics’ arginine business, which include sales of non-HeartBar arginine products and license royalties from third parties selling arginine-based products.

Total amortization expense for the three-month periods ended June 30, 2006 and 2005 was approximately   $81,000 and $120,000, respectively.  The total amortization expense for the six-month periods ended June 30, 2006 and 2005 was approximately $162,000 and $240,000, respectively.  The aggregate amortization expense related to these intangible assets for each of the five succeeding years is estimated as follows (in thousands):

Years ending December 31,

 

 

 

 

 

2006

 

$

324

 

2007

 

276

 

2008

 

276

 

2009

 

276

 

2010

 

276

 

 

6. SEGMENT INFORMATION

United Therapeutics has two reportable business segments. The pharmaceutical segment includes all activities associated with the research, development, manufacture and commercialization of therapeutic products. The telemedicine segment includes all activities associated with the development and manufacture of patient monitoring products and the delivery of patient monitoring services. The telemedicine segment is managed separately because diagnostic services require different technology and marketing strategies.

9




Segment information as of and for the three and six-month periods ended June 30, 2006 and 2005 was as follows (in thousands):

 

 

Three Months Ended June 30,

 

 

 

2006

 

2005

 

 

 

Pharmaceutical

 

Telemedicine

 

Consolidated
Totals

 

Pharmaceutical

 

Telemedicine

 

Consolidated
Totals

 

Revenues from external customers

 

 

$

38,682

 

 

 

$

1,563

 

 

 

$

40,245

 

 

 

$

28,672

 

 

 

$

1,385

 

 

 

$

30,057

 

 

Income (loss) before income tax

 

 

14,001

 

 

 

(167

)

 

 

13,834

 

 

 

12,606

 

 

 

(425

)

 

 

12,181

 

 

Interest income

 

 

2,480

 

 

 

5

 

 

 

2,485

 

 

 

1,198

 

 

 

3

 

 

 

1,201

 

 

Interest expense

 

 

(1

)

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

 

 

(1

)

 

Depreciation and amortization

 

 

(539

)

 

 

(113

)

 

 

(652

)

 

 

(420

)

 

 

(208

)

 

 

(628

)

 

Equity loss in affiliate

 

 

(171

)

 

 

 

 

 

(171

)

 

 

(195

)

 

 

 

 

 

(195

)

 

Total investment in equity method investees

 

 

1,681

 

 

 

 

 

 

1,681

 

 

 

2,438

 

 

 

 

 

 

2,438

 

 

Expenditures for long-lived assets

 

 

(7,802

)

 

 

(48

)

 

 

(7,850

)

 

 

(3,097

)

 

 

(89

)

 

 

(3,186

)

 

Goodwill, net

 

 

1,287

 

 

 

6,178

 

 

 

7,465

 

 

 

1,287

 

 

 

6,178

 

 

 

7,465

 

 

Total assets

 

 

313,695

 

 

 

11,738

 

 

 

325,433

 

 

 

224,664

 

 

 

9,560

 

 

 

234,224

 

 

 

 

 

Six Months Ended June 30,

 

 

 

2006

 

2005

 

 

 

Pharmaceutical

 

Telemedicine

 

Consolidated
Totals

 

Pharmaceutical

 

Telemedicine

 

Consolidated
Totals

 

Revenues from external customers

 

 

$

70,097

 

 

 

$

3,312

 

 

 

$

73,409

 

 

 

$

50,499

 

 

 

$

2,765

 

 

 

$

53,264

 

 

Income (loss) before income tax

 

 

18,344

 

 

 

(325

)

 

 

18,019

 

 

 

20,496

 

 

 

(653

)

 

 

19,843

 

 

Interest income

 

 

4,374

 

 

 

9

 

 

 

4,383

 

 

 

2,176

 

 

 

6

 

 

 

2,182

 

 

Interest expense

 

 

(1

)

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

 

 

(1

)

 

Depreciation and amortization

 

 

(985

)

 

 

(235

)

 

 

(1,220

)

 

 

(832

)

 

 

(428

)

 

 

(1,260

)

 

Equity loss in affiliate

 

 

(378

)

 

 

 

 

 

(378

)

 

 

(375

)

 

 

 

 

 

(375

)

 

Total investment in equity method investees

 

 

1,681

 

 

 

 

 

 

1,681

 

 

 

2,438

 

 

 

 

 

 

2,438

 

 

Expenditures for long-lived assets

 

 

(8,650

)

 

 

(310

)

 

 

(8,960

)

 

 

(3,403

)

 

 

(247

)

 

 

(3,650

)

 

Goodwill, net

 

 

1,287

 

 

 

6,178

 

 

 

7,465

 

 

 

1,287

 

 

 

6,178

 

 

 

7,465

 

 

Total assets

 

 

313,695

 

 

 

11,738

 

 

 

325,433

 

 

 

224,664

 

 

 

9,560

 

 

 

234,224

 

 

 

The segment information shown above equals the consolidated totals when combined. These consolidated totals equal the amounts reported in the consolidated financial statements without further reconciliation for those categories which are reported in the consolidated financial statements. There are no inter-segment transactions.

For the three-month periods ended June 30, 2006 and 2005 approximately 89 percent and 91 percent, respectively, of United Therapeutics revenues were earned from customers located in the United States. For the six-month periods ended June 30, 2006 and 2005 approximately 89 percent and 90 percent, respectively, of United Therapeutics revenues were earned from customers located in the United States.

10




7. COMPREHENSIVE INCOME

SFAS No. 130, Reporting Comprehensive Income, establishes standards for the reporting and display of comprehensive income and its components. SFAS No. 130 requires, among other things, that unrealized gains and losses on available-for-sale securities and foreign currency translation adjustments be included in other comprehensive income (loss). The following statement presents comprehensive income for the three and six-month periods ended June 30, 2006 and 2005 (in thousands):

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Net income

 

$

7,673

 

$

12,181

 

$

9,980

 

$

19,843

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss) adjustment

 

206

 

(50

)

210

 

(61

)

Unrealized (loss) on available-for-sale securities

 

(576

)

(2,165

)

(914

)

(790

)

Comprehensive income

 

$

7,303

 

$

9,966

 

$

9,276

 

$

18,992

 

 

8. INCOME TAXES

Significant components of the provision for income taxes attributable to operations consist of the following (in thousands):

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

    2006    

 

    2005    

 

    2006    

 

    2005    

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

$

(40

)

 

 

$

 

 

 

$

 

 

 

$

 

 

State

 

 

264

 

 

 

 

 

 

319

 

 

 

 

 

Total current

 

 

224

 

 

 

 

 

 

319

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

5,538

 

 

 

 

 

 

7,212

 

 

 

 

 

State

 

 

399

 

 

 

 

 

 

508

 

 

 

 

 

Total deferred

 

 

5,937

 

 

 

 

 

 

7,720

 

 

 

 

 

Total provision for income taxes

 

 

$

6,161

 

 

 

$

 

 

 

$

8,039

 

 

 

$

 

 

 

No income tax expense was reported for the three and six-month periods ended June 30, 2005 due to the availability of deductions for tax purposes and net operating loss carry forwards and a full reserve on all of its deferred tax assets.

The income tax provision for the three and six-month periods ended June 30, 2006 is based on the estimated annual effective tax rate for the entire year. The estimated effective tax rate is subject to adjustment in subsequent quarterly periods as the estimates of pretax income for the year are increased or decreased. The effective tax rate for the three and six-month periods ended June 30, 2006 was approximately 44 percent. The federal program enabling companies to accumulate tax credits for qualified research expenditures expired on December 31, 2005. Legislation to retroactively reinstate the credit is pending in the U.S. Congress, but had not been enacted as of June 30, 2006. Accordingly, no benefit from the federal research credit generated during the three and six-months ended June 30, 2006 has been included in estimating the 2006 effective tax rate. If Congress retroactively reinstates the research credit the effect of the credit will be reflected in the computation of the annual effective tax rate beginning as of the first period that includes the enactment date of the legislation.

11




As of June 30, 2006, United Therapeutics had available approximately $83.5 million in net operating loss carryforwards and approximately $31.0 million in business tax credit carryforwards for federal income tax purposes that expire at various dates through 2024. United Therapeutics has conducted a study to determine whether any limitations under Section 382 of the Internal Revenue Code have been triggered. Results of this study indicate that multiple limitations occurred through November 2004. As a result, portions of these carryforward items that were generated prior to November 2004 will be subject to certain limitations on their use. United Therapeutics does not believe that these potential limitations will cause the net operating loss and general business credit carryforwards to expire unused.

9. LICENSE AGREEMENT

In June 2006, United Therapeutics entered into an exclusive license agreement with Supernus Pharmaceuticals, Inc. (“Supernus”) for use of certain technologies developed by Supernus in formulation of United Therapeutics’ sustained release oral treprostinil. Under the agreement, in return for the license, United Therapeutics will pay Supernus certain amounts upon the achievement of specified milestones based on the development of oral treprostinil and commercial launch of the initial product. In addition, the agreement provides that United Therapeutics pay to Supernus a royalty based on net worldwide sales on the initial product. Any such royalty will be paid for approximately twelve years commencing with product approval and is subject to adjustments as specified in the agreement. Additional milestone payments and royalty payments may be due for the development and the commercialization of other products developed using the technology granted in this license.

10. PENSION PLANS

In May 2006, the Compensation Committee approved the United Therapeutics Corporation Supplemental Executive Retirement Plan (the “SERP”). The SERP is administered by the Compensation Committee. Only a member of a “select group of management or highly compensated employees” within the meaning of ERISA section 201(2) may be eligible to participate in the SERP, and if a participant terminates employment with us for any reason prior to age 60, no benefit will be earned. United Therapeutics’ Chief Executive Officer, three other executive officers and two other officers have been designated to participate in the SERP. Each of these participants is eligible, upon retirement after the age of 60, to receive monthly payments equal to the monthly average of the total gross base salary received by the participant over his or her last 36 months of active employment (the “Final Average Compensation”), reduced by the participant’s Social Security benefit (determined as provided under the SERP), for the remainder of the participant’s life (the aggregate amount of such payments, the “Normal Retirement Benefit”), commencing on the first day of the sixth month after retirement.

Future participants will be recommended for participation in the SERP by the Chief Executive Officer and will become participants on the first day of the month coinciding with or next following the date of designation by the Compensation Committee of eligibility to participate in the SERP. Upon retirement after the age of 60, such participants will be eligible to receive a Normal Retirement Benefit, made in monthly payments equal to (1) the participant’s Final Average Compensation, reduced by the participant’s Social Security benefit (determined as provided under the SERP), multiplied by (2) a fraction (no greater than one), the numerator of which equals the participant’s years of service and the denominator of which equals 15, for the remainder of the participant’s life commencing on the first day of the sixth month of retirement. In the event of termination of employment due to disability prior to the age of 60 or death prior to retirement, a participant or the participant’s beneficiary, as applicable, will be entitled to a Disability Retirement Benefit equal to a percentage of the Normal Retirement Benefit such participant would have been eligible to receive, as determined under the SERP, commencing on the first day of the sixth month after termination of employment. The Compensation Committee expects the number of participants to remain small during the life of this program.

12




In the event of a transfer of control of United Therapeutics by acquisition, merger, hostile takeover or for any other reason whatsoever which also qualifies as a “change in the ownership or effective control of the corporation, or in the ownership of a substantial portion of the assets of the corporation” under Internal Revenue Code section 409A(a)(2)(A)(v) (a “Change in Control”), a participant who is actively employed on the date of the Change in Control will be entitled to a lump sum payment equal to the actuarial equivalent present value of a monthly single life annuity equal to (1) the participant’s Final Average Compensation, reduced by the participant’s estimated future Social Security benefit (determined as provided under the SERP), multiplied by (2) a fraction (no greater than one), the numerator of which equals the participant’s years of service and the denominator of which equals 15, to be paid as soon as administratively practicable following the Change in Control. In the event that a participant is entitled to a Normal Retirement Benefit or Disability Retirement Benefit at the time of a Change in Control, all such payments (or any remaining payments, with respect to any participant who is receiving payments under the SERP at the time of the Change in Control) will be made in a lump sum as soon as administratively practicable following such Change in Control (without regard to whether the participant otherwise is in pay status at the time of the Change in Control).

Participants in the SERP will be prohibited from competing with United Therapeutics or soliciting United Therapeutics’ employees for a period of twelve months following his or her termination of employment (or, if earlier, upon attainment of age 65). Violation of this covenant will result in forfeiture of all benefits under the SERP.

The SERP is entirely unfunded. No assets of United Therapeutics have been designated to secure benefits under the plan. Benefits will be funded as they are paid to participants upon or after retirement, death or disability. United Therapeutics accounts for the SERP in accordance with SFAS No. 87, Employers Accounting for Pensions , and related standards and interpretations. For the six months ended June 30, 2006, United Therapeutics recorded approximately $358,000 of expense related to the SERP, which was reported in selling, general and administrative and research and development expenses in the accompanying consolidated statements of operations. The expense is based on an expected service cost of approximately $1.4 million through December 31, 2006 using a discount rate of 6.4% on the expected future benefits. Since there are no plan assets, no interest on assets is assumed earned. In addition, since the plan was recently adopted, there are no prior period service costs or interest charges. Benefit payments are not expected to be paid over the next five years since no current participants will reach age 60 in the next five years.

11. REPURCHASE OF UNITED THERAPEUTICS COMMON STOCK

Under a series of agreements entered into between 1998 and 2000, United Therapeutics licensed from Toray Industries, Inc. (“Toray”) certain exclusive rights to develop and market immediate-release and sustainged-release formulations of beraprost, Toray’s oral prostacyclin for the treatment of certain vascular and cardiovascular indications. United Therapeutics issued 866,666 shares of its common stock to Toray under such agreements. In July 2006, United Therapeutics repurchased an aggregate of 766,666 shares of its common stock, par value $0.01 per share, from Toray for an aggregate cash purchase price of $42.2 million (or $55.08 per share) pursuant to a stock purchase agreement between United Therapeutics and Toray. The purchase price was the average of the closing prices of United Therapeutics’ common stock for the 30 consecutive trading days through July 26, 2006. Toray retains ownership of 100,000 shares of Untied Therapeutics common stock and, as discussed in United Therapeutics’ Annual Report on Form 10-K for the fiscal  year ended December 31, 2005, upon Toray’s achievement of certain clinical milestones, United Therapeutics will grant options to Toray to purchase an additional 500,000 shares of United Therapeutics’ common stock at the then-current market price.

13




Item 2.                         Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and related notes appearing in our Annual Report on Form 10-K for the year ended December 31, 2005. The following discussion contains forward-looking statements made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995 including the statements listed under “Item 1A—Risk Factors” . These statements are based on our beliefs and expectations as to future outcomes and are subject to risks and uncertainties that could cause our results to differ materially from anticipated results. Factors that could cause or contribute to such differences include those discussed below and as described in our Annual Report on Form 10-K for the year ended December 31, 2005 under “Item 1A—Risk Factors—Forward-Looking Statements”, and the other cautionary statements, cautionary language and risk factors set forth in other reports and documents filed with the Securities and Exchange Commission. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are a biotechnology company focused on the development and commercialization of innovative therapeutic products for patients with chronic and life-threatening cardiovascular, cancer and infectious diseases. We commenced operations in June 1996 and, since our inception, have devoted substantially all of our resources to acquisitions and research and development programs.

United Therapeutics Products and Services

Our lead product is Remodulin, which is a prostacyclin analog, or a stable synthetic form of prostacyclin, an important molecule produced by the body that has powerful effects on blood-vessel health and function. On May 21, 2002, the United States Food and Drug Administration (FDA) approved subcutaneous (injection under the skin) use of Remodulin (treprostinil sodium) Injection for the treatment of pulmonary arterial hypertension, or PAH, in patients with NYHA class II-IV symptoms to diminish symptoms associated with exercise. PAH is a life-threatening condition characterized by elevated blood pressures between the heart and lungs.

As a condition of Remodulin’s Subpart H accelerated approval, we were required to perform a post-marketing Phase IV clinical study to confirm the clinical benefits of Remodulin. In August 2005, we performed an interim assessment after 22 patients completed the study. The results of the interim assessment, as analyzed by an independent statistician, were positive. The p value was 0.0002, meaning that the likelihood that the achieved result was incorrect is two out of ten thousand. Specifically, 13 of 14 patients (93%) in the Remodulin arm were able to successfully transition from Flolan, which they had previously been using to treat their condition, and complete the study without the need to institute rescue therapy, compared to only 1 of 8 patients (13%) in the placebo arm. Based on this positive outcome, we submitted the interim study results to the FDA in July 2005 with a supplement filed in October 2005. In March 2006, the FDA agreed that we had satisfied our obligation to perform the post-marketing Phase IV clinical study and that the study confirmed the clinical benefits of Remodulin.

In November 2004, the FDA approved intravenous infusion (through a vein or artery) of Remodulin, based on data establishing its bioequivalence with the previously approved subcutaneous administration of Remodulin, for patients who are not able to tolerate a subcutaneous infusion. In March 2006, the FDA also approved the use of Remodulin for patients requiring transition from Flolan, the only other FDA-approved intravenous prostacyclin. Remodulin is also approved for subcutaneous use in most of Europe, Canada, Israel, Australia and several countries in South America. It is also approved for intravenous use in Canada and Israel. Marketing authorization applications are currently under review in other countries.

14




The mutual recognition process to obtain approvals from European Union member countries for subcutaneous use of Remodulin was completed in August 2005, with positive decisions received from most European Union countries. We withdrew applications in Ireland, Spain and the United Kingdom and are engaged in regulatory discussions concerning the timing of resubmission in these three countries. Although these decisions were made in August 2005, the approving European countries may not provide formal action letters and pricing approvals required for the commercial sales of Remodulin for as long as up to one to two years, or longer. We can give no assurances as to the timing and receipt of the formal action letters and pricing approvals from European countries, or the outcome of applications in other countries. To date, we have received formal action letters and pricing approvals from France and Portugal. Formal action letters have also been received from Austria, Belgium, Czech Republic, Denmark, Estonia, Germany, Greece, Iceland, Luxembourg, Netherlands and Slovakia.

We have generated revenues from sales of Remodulin and arginine products (which deliver an amino acid that is necessary for maintaining cardiovascular function) in the United States and other countries. In addition, we have generated revenues from telemedicine products and services, primarily designed for patients with abnormal heart rhythms called cardiac arrhythmias and poor blood flow to the heart, a condition known as ischemic heart disease, in the United States. We have funded our operations from the proceeds of sales of our common stock and from revenues from the sales of our products and services.

Remodulin Marketing and Sales

Remodulin is currently marketed by our own staff of approximately 20 employees who market directly to physicians specialized in treating pulmonary arterial hypertension, comprised mainly of pulmonologists and cardiologists. We face stiff competition from several other companies that market and sell competing therapies and expect the competition to continue growing.

Remodulin is sold to patients in the United States by Accredo Therapeutics, Inc. (a wholly owned subsidiary of Medco Health Solutions, Inc.), CuraScript (a wholly owned subsidiary of Express Scripts, Inc. and formerly Priority Healthcare Corporation), and Caremark, Inc., and outside of the United States by various international distributors. We sell Remodulin in bulk shipments to these distributors. The timing and extent of our sales of Remodulin are impacted by the timing and extent of these bulk orders from our distributors. Bulk orders placed by our distributors are determined by them, based on their estimates of the amount of drug required for current and newly starting patients, as well as an inventory equivalent to approximately thirty to sixty days demand as a contingent supply, since discontinuation of therapy can be life-threatening to patients. Therefore, sales of Remodulin to distributors in any given quarter may not be indicative of patient demand in that quarter. Sales of Remodulin and Remodulin delivery pumps and supplies are recognized as revenue when delivered to our distributors.

Effective July 1, 2006, United Therapeutics increased the selling price of Remodulin to its United States based distributors. The price was increased approximately 3.5 percent and applies to sales of Remodulin made on July 1, 2006 or later.

Future Prospects

While we have been profitable in each quarter since April 1, 2004, we incurred net losses for all quarters from inception through March 31, 2004. At June 30, 2006, we had an accumulated deficit of approximately $105.3 million. Future profitability will depend on many factors, including the price, level of sales, level of reimbursement by public and private insurance payers, the impacts of competitive products and the number of patients using Remodulin and other currently commercialized products and services, as well as the results and costs of research and development projects.

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Major Research and Development Projects

Our major research and development projects are focused on the use of treprostinil to treat cardiovascular diseases, immunotherapeutic monoclonal antibodies (antibodies that activate a patient’s immune response) to treat a variety of cancers and glycobiology antiviral agents (a novel class of small molecules that may be effective as oral therapies) to treat infectious diseases, such as hepatitis, dengue and Japanese encephalitis.

Cardiovascular Disease Projects

Subcutaneous use of Remodulin was approved by the FDA in May 2002 for the treatment of PAH in NYHA Class II-IV patients to diminish symptoms associated with exercise. Material net cash inflows from the sales of Remodulin for PAH commenced in May 2002 after FDA approval was received.

Remodulin was also approved in most of Europe, Canada, Israel, Australia and several countries in South America for similar uses. Marketing authorization applications are currently under review in other countries.

In March 2005, we commenced a 12-week placebo-controlled trial of intravenous Remodulin in patients with PAH to further assess the clinical benefits of Remodulin. The trial was conducted in India and was designed to enroll up to 126 patients. Interim results of this trial were to be analyzed after 33, 66 and 99 patients completed the 12-week trial. In August 2005, after enrolling approximately 45 patients, we suspended enrollment of new patients, per the recommendation of the trial’s independent Data Safety Monitoring Board, which is a panel of independent experts. Preliminary results from the 45 patients were positive (p=0.008). After 12 weeks, patients who took Remodulin walked, on average, 83 meters further in a six-minute time period than patients who took a placebo.

We are in an early stage of developing oral and a later stage of developing inhaled formulations of treprostinil, which is the active pharmaceutical ingredient in Remodulin. During 2004, we completed dosage studies of oral formulations of treprostinil in healthy volunteers. We filed an Investigational New Drug Application on January 28, 2005 to perform an additional Phase I healthy volunteer study. On July 21, 2005, the European Medicines Agency announced that oral treprostinil had been granted orphan product status in the European Union. Drugs with orphan status generally receive prioritized reviews when approval applications are filed and may have longer periods of protection against competition from generic drugs than non-orphan drugs. Multi-national placebo-controlled trials of oral treprostinil in patients with pulmonary arterial hypertension commenced in mid-2006. However, such trials have been delayed as a result of difficulties encountered in the manufacture of the oral tablets.

During 2004 and 2005, independent clinical investigators in Europe and the United States performed small uncontrolled trials of inhaled formulations of treprostinil in patients with PAH. On April 14, 2004, the European Medicines Agency granted an orphan designation of inhaled tresprostinil for the treatment of pulmonary arterial hypertension and chronic thromboembolic pulmonary hypertension. In June 2005, Lung Rx, Inc., a subsidiary of United Therapeutics, commenced a 12-week placebo-controlled trial of inhaled treprostinil in at least 150 patients with PAH who are also being treated with Tracleer ® . The trial is known as TRIUMPH-1, Tr eprostinil I nhalation U sed in the M anagement of P ulmonary H ypertension, and is currently being conducted at approximately 22 centers in the United States and in Europe. Additional centers are expected to be added during 2006. In May 2006, the FDA agreed to permit the inclusion of patients with PAH who are also being treated with Revatio®, to expand the trial size to at least 200 patients and to permit the opportunity to assess efficacy after 150 patients have completed the trial. As of June 30, 2006, approximately 90 patients had been enrolled in this trial. As of August 1, 2006, approximately 90 patients have been enrolled in this trial.

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United Therapeutics is also developing beraprost for PAH. Beraprost is an oral analog of prostacyclin. We are currently awaiting a sustained release formulation from our license partner, Toray Industries, Inc.

We incurred expenses of approximately $6.6 million and $4.6 million during the three months ended June 30, 2006 and 2005, respectively, on Remodulin development. We incurred expenses of approximately $15.5 million and $9.0 million during the six months ended June 30, 2006 and 2005, respectively, on Remodulin development. Approximately $176.4 million from inception to date has been incurred on Remodulin development.

Cancer Disease Projects

Our monoclonal antibody immunotherapies were licensed in April 2002 from AltaRex Medical Corp. OvaRex ®  MAb is the lead product and is currently being studied in two identical Phase III clinical trials in advanced ovarian cancer (Stage III and IV) patients. These studies, which commenced in January 2003, are being conducted at approximately 60 centers throughout the United States and together will enroll at least 354 patients. As of June 30, 2006 these trials were fully enrolled. These studies could take up to an additional year or longer to complete, depending on how long it takes for each study to reach at least 118 relapse events. We incurred expenses of approximately $2.4 million and $1.9 million during the three months ended June 30, 2006 and 2005, respectively, on OvaRex development. We incurred expenses of approximately $4.5 million and $3.7 million during the six months ended June 30, 2006 and 2005, respectively, on OvaRex development. Approximately $36.9 million from inception to date has been incurred on OvaRex development.

Infectious Disease Projects

Our infectious disease program includes glycobiology antiviral drug candidates in the preclinical and clinical stages of testing. The drugs in this program are being developed for hepatitis C, hepatitis B, dengue and Japanese encephalitis virus. We completed acute and chronic Phase I clinical dosing studies for our first candidate for the treatment of hepatitis C, UT-231B, to assess safety in healthy volunteers in early 2003. We initiated Phase II clinical studies in patients infected with hepatitis C in July 2003 and completed those studies in October 2004. In that trial, UT-231B did not demonstrate efficacy against hepatitis C in a population of patients that previously failed conventional treatments. We are now conducting preclinical testing of additional glycobiology drug candidates. We incurred expenses of approximately $180,000 and $1.4 million during the three months ended June 30, 2006 and 2005, respectively, for our infectious disease programs. We incurred expenses of approximately $370,000 and $2.6 million during the six months ended June 30, 2006 and 2005, respectively, for our infectious disease programs. Approximately $35.3 million from inception to date has been incurred for infectious disease programs.

Project Risks

Due to the inherent uncertainties involved in the drug development, regulatory review and approval processes, the anticipated completion dates, the cost of completing the research and development and the period in which material net cash inflows from these projects are expected to commence are not known or estimable. There are many risks and uncertainties associated with completing the development of the unapproved products discussed above, including the following:

·        Products may fail in clinical studies;

·        Hospitals, physicians and patients may not be willing to participate in clinical studies;

·        Hospitals, physicians and patients may not properly adhere to clinical study procedures;

·        The drugs may not be safe and effective or may not be perceived as safe and effective;

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·        Other approved or investigational therapies may be viewed as safer, more effective or more convenient;

·        Patients may experience severe side effects during treatment;

·        Patients may die during the clinical study because their disease is too advanced or because they experience medical problems that are not related to the drug being studied;

·        Other ongoing or new clinical trials sponsored by other drug companies may reduce the number of patients available for our studies;

·        Patients may not enroll in the studies at the rate we expect;

·        The FDA and international regulatory authorities may delay or withhold approvals to commence clinical trials or to manufacture drugs;

·        The FDA and international regulatory authorities may request that additional studies be performed;

·        Higher than anticipated costs may be incurred due to the high cost of contractors for drug manufacture, research and clinical trials;

·        Drug supplies may not be sufficient to treat the patients in the studies; and

·        The results of preclinical testing may cause delays in clinical trials.

If these projects are not completed in a timely manner, regulatory approvals would be delayed and our operations, liquidity and financial position could suffer. Without regulatory approvals, we could not commercialize and sell these products and, therefore, potential revenues and profits from these products would be delayed or impossible to achieve.

Financial Position

Cash, cash equivalents and marketable investments (including all unrestricted and restricted amounts and all amounts classified as current and non-current) at June 30, 2006 were approximately $226.3 million, as compared to approximately $191.0 million at December 31, 2005. The increase of approximately $35.3 million was due primarily to cash provided by operating activities and proceeds from the exercise of stock options. Restricted marketable investments and cash pledged to secure our obligations under the synthetic operating lease discussed below under Off Balance Sheet Arrangement at June 30, 2006 totaled approximately $38.3 million, as compared with approximately $20.7 million at December 31, 2005.

Accounts receivable, net of allowances at June 30, 2006 were approximately $17.9 million, as compared to approximately $13.9 million at December 31, 2005. The increase was due primarily to increased sales of Remodulin.

Prepaid expenses at June 30, 2006 were approximately $5.3 million, as compared to approximately $6.4 million at December 31, 2005. The decrease was primarily due to the expensing of a portion of those assets used in operations during 2006.

Property, plant and equipment at June 30, 2006 were approximately $29.6 million as compared to $21.8 million at December 31, 2005. The increase was due to the purchase of land and a building adjacent to our Silver Spring, Maryland headquarters in May 2006 for approximately $1.8 million, the purchase of land in the Research Triangle Park, North Carolina in June 2006 for approximately $3.2 million, and the purchase of laboratory equipment for the new laboratory facility in Silver Spring, Maryland of approximately $2.3 million.

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Other intangible assets, net, at June 30, 2006 were approximately $3.3 million, as compared to approximately $5.5 million at December 31, 2005. The decrease was due primarily to the write down of the HeartBar tradename, as that product was discontinued in January 2006.

Investments in affiliates at June 30, 2006 were approximately $6.2 million, as compared to approximately $8.3 million at December 31, 2005. The decrease was due primarily to a decrease in the fair value of our investment in ViRexx Medical Corp., based on quoted market prices.

Deferred tax assets (including amounts classified as current and non-current) at June 30, 2006 were approximately $12.6 million, as compared to approximately $19.7 million at December 31, 2005. The decrease was due to the recognition of deferred tax expense during the six month period ended June 30, 2006.

Accrued expenses at June 30, 2006 were approximately $16.2 million, as compared to approximately $10.4 million at December 31, 2005. The increase was due primarily to accrued expenses for royalty fees, Medicaid rebates and bonuses.

The other current liability at June 30, 2006 was approximately $3.2 million, as compared to none at December 31, 2005. A final draw was received in May 2006 from Wachovia Development Corporation under the synthetic operating lease agreements to fund the remaining cost of constructing the laboratory facility in Silver Spring, Maryland. This draw will be paid to the construction related companies once final invoices from them are agreed to.

Total stockholders’ equity at June 30, 2006 was approximately $299.5 million, as compared to $275.1 million at December 31, 2005. The increase in stockholders’ equity of approximately $24.4 million was due primarily to net income earned and the proceeds collected from exercises of stock options during the six months ended June 30, 2006.

Results Of Operations

Three months ended June 30, 2006 and 2005

Revenues for the three months ended June 30, 2006 were approximately $40.2 million, as compared to approximately $30.1 million for the three months ended June 30, 2005. The increase of approximately $10.1 million was due primarily to growth in sales of Remodulin to our distributors.

The following sets forth our revenues by source for the periods presented (in thousands).

 

 

Revenues for the
Three Months Ended
June 30,

 

 

 

2006

 

2005

 

Remodulin

 

$

38,530

 

$

28,456

 

Telemedicine services and products

 

1,563

 

1,385

 

Other products

 

152

 

151

 

License fees

 

 

65

 

Total revenues

 

$

40,245

 

$

30,057

 

 

For the three months ended June 30, 2006 and, 2005, approximately 89 percent and 91 percent of our revenues, respectively, were earned from three customers located in the United States.

Total revenues are reported net of estimated government rebates and prompt pay discounts. We pay government rebates to state Medicaid agencies that pay for Remodulin. Historically, we estimated our liability for such rebates based on the volume of Remodulin dispensed to Medicaid patients as reported to us by our distributors and the expected rebate per unit of Remodulin as determined by us in accordance with federal guidelines. Since April 1, 2005, we have estimated our liability for such rebates based on the historical level of government rebates invoiced by state Medicaid agencies relative to U.S. sales of

19




Remodulin. Prompt pay discounts are offered on sales of Remodulin if the related invoices are paid in full generally within 60 days from the date of sale. We estimated our liability for prompt pay discounts based on historical payment patterns.

A roll forward of the liability accounts associated with estimated government rebates and prompt pay discounts as well as the net amount of reductions to revenues for these items are presented as follows (in thousands):

 

 

Three Months Ended
June 30,

 

 

 

2006

 

2005

 

Liability accounts, at beginning of period

 

$

1,760

 

$

1,980

 

Additions to liability attributed to sales in:

 

 

 

 

 

Current period

 

2,555

 

1,638

 

Prior period

 

 

 

Payments or reductions attributed to sales in:

 

 

 

 

 

Current period

 

(458

)

(302

)

Prior period

 

(1,606

)

(1,491

)

Liability accounts, at end of period

 

$

2,251

 

$

1,825

 

Net reductions to revenues

 

$

2,555

 

$

1,638

 

 

There were no product returns during the three months ended June 30, 2006 and 2005, respectively.

Research and development expenses consist primarily of salaries and related expenses, costs to acquire pharmaceutical products and product rights for development and amounts paid to contract research organizations, hospitals and laboratories for the provision of services and materials for drug development and clinical trials. Research and development expenses were approximately $12.6 million for the three months ended June 30, 2006, as compared to approximately $8.7 million for the three months ended June 30, 2005. The increase was due primarily to increased expenses for treprostinil-related programs of approximately $2.0 million, implementation of SFAS No. 123(R) effective January 1, 2006 which resulted in employee stock option expense of approximately $1.4 million and increased expenses of approximately $594,000 related to stock option expense for option grants to scientific advisory board members during 2006. See Major Research and Development Projects above, for additional information regarding our research programs.

Selling, general and administrative expenses consist primarily of salaries, travel, advertising, conferences and meetings, office expenses, insurance, professional fees, provision for doubtful accounts receivable, depreciation and amortization. Selling, general and administrative expenses were approximately $11.9 million for the three months ended June 30, 2006, as compared to approximately $7.0 million for the three months ended June 30, 2005. The increase in selling, general and administrative expenses was due primarily to approximately $2.0 million of employee stock option expense related to our adoption of SFAS No. 123(R), effective January 1, 2006, and increased expenses of approximately $1.1 million of salaries and related expenses and approximately $888,000 of professional fees.

Cost of product sales consists of the cost to manufacture or acquire products that are sold to customers. Cost of service sales consists of the salaries and related overhead necessary to provide telemedicine services to customers. Cost of product sales was approximately 10% of net product sales for the three months ended June 30, 2006, which is comparable to approximately 9% for the three months ended June 30, 2005. Cost of service sales was approximately 33% of service sales for the three months ended June 30, 2006, as compared to approximately 41% for the three months ended June 30, 2005. The improvement in the cost of service sales as a percentage of service revenues was due to the growth in telemedicine service sales during 2006 as compared to the same period in 2005 with no corresponding increase in costs.

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Interest income for the three months ended June 30, 2006 was approximately $2.5 million, as compared to interest income of approximately $1.2 million for the three months ended June 30, 2005. The increase was due primarily to an increase in cash available for investing during 2006 and increased market interest rates.

Equity loss in affiliate represents our share of Northern Therapeutics, Inc.’s losses. The equity loss in affiliate was approximately $171,000 for the three months ended June 30, 2006, as compared to approximately $195,000 for the three months ended June 30, 2005. Northern Therapeutics, Inc.’s loss was due primarily to expenditures for its autologous (non-viral vector) gene therapy research for pulmonary hypertension.

An income tax expense of approximately $6.2 million was recognized for the three months ended June 30, 2006, as compared to none for the three months ended June 30, 2005. For the three months ended June 30, 2005, we did not report tax expense due to our limited history of profitability resulting in a full valuation allowance on our deferred tax assets and the availability of net operating loss deductions at that time.

Six months ended June 30, 2006 and 2005

Revenues for the six months ended June 30, 2006 were approximately $73.4 million, as compared to approximately $53.3 million for the six months ended June 30, 2005. The increase of approximately $20.1 million was due primarily to growth in sales of Remodulin to our distributors.

The following sets forth our revenues by source for the periods presented (in thousands):

 

 

Revenues for the
Six Months Ended
June 30,

 

 

 

2006

 

2005

 

Remodulin

 

$

69,835

 

$

49,921

 

Telemedicine services and products

 

3,312

 

2,765

 

Other products

 

262

 

381

 

License fees

 

 

197

 

Total revenues

 

$

73,409

 

$

53,264

 

 

For the six months ended June 30, 2006 and, 2005, approximately 89 percent and 90 percent of our revenues, respectively, were earned from three customers located in the United States.

A roll forward of the liability accounts associated with estimated government rebates and prompt pay discounts as well as the net amount of reductions to revenues for these items are presented as follows (in thousands):

 

 

Six months Ended
June 30,

 

 

 

2006

 

2005

 

Liability accounts, at beginning of period

 

$

1,590

 

$

2,121

 

Additions to liability attributed to sales in:

 

 

 

 

 

Current period

 

4,589

 

3,005

 

Prior period

 

 

 

Payments or reductions attributed to sales in:

 

 

 

 

 

Current period

 

(2,426

)

(1,683

)

Prior period

 

(1,502

)

(1,618

)

Liability accounts, at end of period

 

$

2,251

 

$

1,825

 

Net reductions to revenues

 

$

4,589

 

$

3,005

 

 

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Product returns were due to arginine products and totaled none and approximately $2,000 during the six months ended June 30, 2006 and 2005, respectively.

Research and development expenses were approximately $27.3 million for the six months ended June 30, 2006, as compared to approximately $17.2 million for the six months ended June 30, 2005. The increase was due primarily to increased expenses for treprostinil-related programs of approximately $6.6 million, implementation of SFAS No. 123(R) effective January 1, 2006 which resulted in employee stock option expense of approximately $3.1 million and increased expenses of approximately $1.1 million related to stock option expense for option grants to scientific advisory board members during 2006. See Major Research and Development Projects above, for additional information regarding our research programs.

Selling, general and administrative expenses were approximately $22.0 million for the six months ended June 30, 2006, as compared to approximately $12.4 million for the six months ended June 30, 2005. The increase in selling, general and administrative expenses was due primarily to approximately $4.2 million of employee stock option expense related to our adoption of SFAS No. 123(R), effective January 1, 2006 and increased expenses of approximately $2.2 million of salaries and related expenses, approximately $1.6 million of professional fees and approximately $851,000 in marketing expenses.

A write down of intangible assets related to the HeartBar product tradename totaling approximately $2.0 million was recorded during the six months ended June 30, 2006. This write down was required since the HeartBar product was discontinued in January 2006 and is no longer sold. The decision to discontinue HeartBar did not impact other aspects of our arginine business, which includes sales of non-HeartBar arginine products and license royalties from third parties selling arginine based products. This decision was made by us after evaluating recent clinical trial results and market potential, among other considerations.

Cost of product sales was approximately 10% of net product sales for the six months ended June 30, 2006, which is comparable to approximately 9% for the six months ended June 30, 2005. Cost of service sales was approximately 34% of service sales for the six months ended June 30, 2006, as compared to approximately 43% for the six months ended June 30, 2005. The improvement in the cost of service sales as a percentage of service revenues was due to the growth in telemedicine service sales during 2006 as compared to the same period in 2005 with no corresponding increase in costs.

Interest income for the six months ended June 30, 2006 was approximately $4.4 million, as compared to interest income of approximately $2.2 million for the six months ended June 30, 2005. The increase was due primarily to an increase in cash available for investing during 2006 and increased market interest rates.

Equity loss in affiliate represents our share of Northern Therapeutics, Inc.’s losses. The equity loss in affiliate was approximately $378,000 for the six months ended June 30, 2006, as compared to approximately $375,000 for the six months ended June 30, 2005. Northern Therapeutics, Inc.’s loss was due primarily to expenditures for its autologous (non-viral vector) gene therapy research for pulmonary hypertension.

An income tax expense of approximately $8.0 million was recognized for the six months ended June 30, 2006, as compared to none for the six months ended June 30, 2005. For the six months ended June 30, 2005, we did not report tax expense due to our limited history of profitability resulting in a full valuation allowance on our deferred tax assets and the availability of net operating loss deductions at that time.

Liquidity and Capital Resources

Until June 1999, we financed our operations principally through private placements of common stock. On June 17, 1999, we completed our initial public offering. Our net proceeds from the initial public offering and sale of the over-allotment shares, after deducting underwriting commissions and offering expenses, were approximately $56.4 million. In 2000, we issued common stock in two private placements and received aggregate net proceeds of approximately $209.0 million. Until 2002, we funded the majority

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of our operations from such net proceeds of equity. Since May 2002, we have funded our operations from revenues, mainly Remodulin-related, and this is expected to continue.

In February 2005, we filed a primary shelf registration statement with the SEC to enable us to offer and sell up to five million shares of our common stock from time to time in one or more offerings. The shelf registration statement was withdrawn in March 2006 and is no longer effective.

Our working capital at June 30, 2006 was approximately $183.4 million, as compared to approximately $152.2 million at December 31, 2005. The increase is primarily due to a net increase in cash and current marketable investments of approximately $40.9 million.

Restricted cash and marketable investments pledged to secure our obligations under the synthetic operating lease discussed below under Off Balance Sheet Arrangement at June 30, 2006 totaled approximately $38.3 million, as compared with approximately $20.7 million at December 31, 2005. The increase in restricted cash and marketable investments was due to additional funds placed in these accounts to provide adequate collateral under the lease.

Net cash provided by operating activities was approximately $37.4 million for the six months ended June 30, 2006 as compared to approximately $20.4 million for the six months ended June 30, 2005. The increase in cash provided by operating activities was due primarily to growth in sales and collections of Remodulin. For the six months ended June 30, 2006, we invested approximately $9.0 million in cash for property, plant and equipment (mainly for new properties), as compared to approximately $3.7 million in the six months ended June 30, 2005. For each of the six-month periods ended June 30, 2006 and 2005 we also received approximately $5.8 million in stock option exercise proceeds.

We made milestone payments totalling $20,000 pursuant to existing license agreements during each of the six months ended June 30, 2006 and 2005. We are obligated to make royalty payments on sales of Remodulin which exceed annual net sales of $25.0 million and on all arginine products. Royalties on sales of all products currently marketed range up to 10 percent of sales of those products.

We believe that our existing revenues, together with existing capital resources (comprised primarily of unrestricted cash, cash equivalents and marketable investments), will be adequate to fund our operations. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. See “Item 1A—Risk Factors—Actual consolidated revenues and net income may be different from published securities analyst projections. In addition, we have a history of losses and may not continue to be profitable”.

We recognized income tax expense of approximately $6.2 million and none for the three-month periods ended June 30, 2006 and 2005 due primarily to our expectation of incurring taxable income during 2006. We also recognized income tax expense of approximately $8.0 million and none for the six-month periods ended June 30, 2006 and 2005 due primarily to our expectation of incurring taxable income during 2006.

At June 30, 2006, we had for federal income tax purposes net operating loss carryforwards of approximately $83.5 million and business tax credit carryforwards of approximately $31.0 million which expire at various dates from 2012 through 2024. Approximately, $63.5 million of the net operating loss carryforwards is attributable to exercised stock options, the benefit of which, when realized, directly increases additional paid-in-capital. Business tax credits can offset future tax liabilities and arise from qualified research expenditures. We have been and may continue to be subject to federal alternative minimum tax and state income taxes, even though we have significant net operating loss and credit carryforwards.

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Section 382 of the Internal Revenue Code limits the utilization of net operating losses when ownership changes occur as defined by that section. We have reviewed our ownership change position pursuant to Section 382 and have determined that ownership changes occurred in December 1997, June 1999, and November 2004 and, as a result, the utilization of certain of our net operating loss carryforwards may be limited. However, we do not expect any significant portion of our net operating loss carry forwards or business tax credits will expire unused. A portion of the net operating loss carryforwards continues to be reserved through a valuation allowance as of June 30, 2006.

Off Balance Sheet Arrangement

In June 2004, we entered into a synthetic operating lease and related agreements with Wachovia Development Corporation and its affiliates (Wachovia) to fund the construction of a laboratory facility in Silver Spring, Maryland. Under these agreements, Wachovia funded $32.0 million towards the construction of the laboratory facility on ground owned by us. The construction phase commenced in 2004 and was completed in May 2006. Following construction, Wachovia  leased the laboratory facility to us with a term ending in May 2011. Under the 99-year ground lease, Wachovia will pay fair value rent to us for use of the land both during the construction phase and after the laboratory lease is terminated. During the term of the laboratory lease, Wachovia will pay $1 per year to us for use of the land.

Wachovia receives rents from us, generally based on applying the 30-day LIBOR rate plus approximately 55 basis points to the amount funded by Wachovia towards the construction of the laboratory. These monthly rents commenced when the laboratory construction was completed and will continue until the termination of the lease in May 2011. Upon termination of the lease, we will generally have the option of renewing the lease (subject to approval of both parties), purchasing the laboratory at a price approximately equal to the funded construction cost or selling it and repaying Wachovia the cost of its construction. We have guaranteed that if the laboratory is sold, Wachovia will receive at least 86 percent of the amount it funded towards the construction.

In addition, we pledged, as collateral, a portion of our marketable investments to secure our lease obligations. At June 30, 2006, approximately $38.3 million of marketable investments and cash were pledged as collateral and are reported as restricted marketable investments and cash in our consolidated balance sheet.

This arrangement enabled us to construct our laboratory facility without using our own working capital. There will not be any depreciation expense associated with the laboratory facility, since these improvements are owned by Wachovia. The amount of rent to be paid to Wachovia during the term of the laboratory lease will vary as it is tied to the then current 30-day LIBOR rate plus approximately 55 basis points. As this rate increases, so will the rents to be paid. Similarly, if this rate decreases, then the amount of rent to be paid to Wachovia will also decrease.

Rent payments under the laboratory lease commenced in May 2006, after completion of construction, and will continue through termination of the lease in May 2011. Upon the completion of the building in May 2006, Wachovia advanced to us the remaining funds available for construction due to the lengthy process involved in finalizing construction costs. When the final construction costs have been agreed to, any remaining funds that were advanced will be returned to Wachovia. It is anticipated that the finalization of construction costs will be completed in late 2006. Until then, the rent payments will be based on the full $32.0 million lease facility. Upon the return of unspent funds, the remaining rent payments will be based on the actual funded costs of the building.   At June 30, 2006, the remaining construction advance totaled approximately $3.2 million and is classified as an other current liability in the balance sheet.

Based on construction costs of approximately $32.0 million and the current effective rate of approximately 5.9 percent (equivalent to the current 30-day LIBOR rate plus approximately 55 basis points at June 30, 2006), the rents to be paid approximate $1.9 million annually. In addition, Wachovia paid us

24




ground rent in June 2004 covering the period through May 2011 and totalling an aggregate of approximately $307,000. This amount is being recognized as income ratably through May 2011.

We guaranteed a minimum residual value of the laboratory facility. This guaranteed residual is generally equal to 86 percent of the amount funded by Wachovia towards construction. If, at the end of the lease term, we do not renew the lease or purchase the improvements, then the building will be sold to a third party. In that event, we have guaranteed that Wachovia will receive at least this residual value amount. The maximum potential amount of this guarantee is approximately $27.5 million, equivalent to 86 percent of expected total construction costs of $32.0 million. We have reported this guarantee as a non-current asset (prepaid rent) and non-current liability (other liability). We have estimated the fair value of this guarantee liability and the corresponding asset at approximately $818,000, net of accumulated amortization at June 30, 2006.

The laboratory lease and other agreements with Wachovia require that, among other things, we maintain a consolidated current ratio of not less than 1.2:1.0 and a consolidated net worth of at least $70.0 million. The agreements contain other covenants and conditions with which we must comply throughout the construction and lease periods and upon termination of the lease. If we were unable to comply with these covenants and conditions, the agreements could terminate if the noncompliance was uncured and the parties could not agree otherwise. A termination of these agreements could result in our acquisition of the improvements from Wachovia or the loss of our liquid collateral. If the agreements were terminated during the construction period due to our default, then we could have been required to purchase the improvements. During construction, the amount we would have been required to pay was limited to 89.9 percent of the construction costs.

In March 2005, we entered into a construction management agreement with Turner Construction Company (Turner) under which Turner became responsible for the construction of the facility. The agreement has a guaranteed maximum price clause in which Turner agrees that the construction cost of the facility will not exceed approximately $27.0 million, which amount is subject to change based on agreed-upon changes to the scope of work. Turner is responsible for covering any costs in excess of the guaranteed maximum price guarantee. If the ultimate cost of the project is less than the guaranteed maximum price of $27.0 million, then a portion of the cost savings will be shared with Turner. In addition, Turner is required to pay us penalties if the construction is not completed by April 2006, which date is subject to change based on agreed-upon changes to the scope of work. Agreement will be reached with Turner on such changes and penalties.

Summary of Critical Accounting Policies

Income Taxes

We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes . Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the tax rates and laws that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A net deferred tax asset or liability is reported in the balance sheet.

At each reporting date, we consider whether it is more-likely-than-not that some portion or all of the net deferred tax asset is realizable. If the net deferred tax asset is not fully realizable, then a valuation allowance is established to reduce the amount of net deferred tax asset reported in the balance sheet. Based on the weight of available evidence at June 30, 2006, it was determined that a partial valuation allowance totalling approximately $64.5 million was necessary at June 30, 2006.

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Remodulin Revenue Recognition

Product sales of Remodulin are recognized when delivered to distributors, which are our customers for Remodulin. Product sales of Remodulin delivery pumps and related supplies are recognized when delivered to distributors on a gross basis in accordance with Emerging Issues Task Force Issue (EITF) No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent . Title to these products passes upon delivery. Had the net basis been applied, the amounts of revenues and cost of product sales reported in the consolidated financial statements would have been lower, but there would have been no impact on net income or losses. Prompt payment discounts and government rebates are estimated and recognized as reductions of revenue in the same period that revenues are recognized. Had these discounts and rebates not been reported as reductions of revenue, the amounts reported as revenues and selling expenses would have been higher, but there would have been no impact on net income or losses. Return policies provide that product that has expired or become damaged in shipment may be replaced, but not returned. Therefore, reserves for exchanges are not recorded unless product expiration or damage occurs. The shelf life of Remodulin is two and one-half years from the date of its manufacture. We rely on our distributors to report damage in shipment or expirations of Remodulin product.

Intangible Assets

We adopted the provisions of SFAS No. 142 , Goodwill and Other Intangible Assets , on January 1, 2002, which eliminated the amortization of goodwill. Rather, goodwill is subject to at least an annual assessment for impairment by applying a fair value-based test that is performed on October 1 of each year. We continually evaluate whether events and circumstances have occurred that indicate that the remaining value of goodwill may not be recoverable. At December 31, 2005, we believed that goodwill was not impaired and therefore no impairment losses have been recorded. This conclusion is based on our judgment, taking into consideration expectations regarding future profitability and the status of the reporting units which have reported goodwill. However, changes in strategy or adverse changes in market conditions could impact this judgment and require an impairment loss to be recognized for the amount that the carrying value of goodwill exceeds its fair value.

On January 19, 2006, we decided to discontinue the sales, marketing and production of our HeartBar line of products, which are arginine-enriched dietary supplements. This discontinuance was effective immediately. The decision to discontinue HeartBar is not meant to impact other aspects of our arginine business, which include sales of non-HeartBar arginine products and license royalties from third parties selling arginine based products. This decision was made by us after evaluating recent clinical trial results and market potential, among other considerations.

In connection with this discontinuance, we recognized a non-cash impairment charge totalling approximately $2.0 million from the write-off of the HeartBar trademark intangible in the quarter ended March 31, 2006. The other intangible assets related to the arginine line of business, primarily patents, are not affected by this discontinuance.

Marketable Investments

Currently, we invest portions of our cash in marketable debt securities issued primarily by federally-sponsored agencies. Due to our intent and ability to hold these marketable debt investments until their maturities, these investments are reported at their amortized cost. We believe that we are able to hold these investments to maturity, due to the significant level of cash and cash equivalents that we have. If we did not have the ability and intent to hold these investments to maturity, we would have reported them in the consolidated balance sheets at their fair market values. At June 30, 2006, the amortized cost of these debt securities was approximately $93.3 million and their fair values were approximately $90.2 million.

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Earnings per Share

In accordance with SFAS No. 128, Earnings Per Share , for the periods with net income, the dilutive effect of outstanding stock options is included in the calculation of dilutive earnings per share using the treasury stock method.

Stock Options

Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment , using the modified prospective transition method. Under the modified prospective transition method, compensation cost recognized in 2006 includes compensation cost for all equity-based payments granted prior to but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and compensation cost for all equity-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated.

We have utilized the Black-Scholes-Merton valuation model for estimating the fair value of the stock options granted during the six months ended June 30, 2006, as well as for option grants during all prior periods. The Black-Sholes-Merton valuation model includes many assumptions that are subject to substantial judgments, such as risk free rate of interest, expected dividend yield, expected volatility, expected life of options and forfeiture rate. The weighted-average assumptions used in valuing the stock options granted during the six months ended June 30, 2006, and a discussion of our methodology for developing each of the assumptions used is included in Note 3 to the consolidated financial statements included in this Quarterly Report on Form 10-Q.

Investments in Affiliates

The equity method of accounting is used to account for some of our investments in affiliates, including Northern Therapeutics. The equity method of accounting generally requires that we report our share of our affiliates’ net losses or profits in our financial statements, but does not require that assets, liabilities, revenues and expenses of the affiliates be consolidated with our consolidated financial statements. The equity method of accounting is being applied generally due to the lack of control over these affiliates and the levels of ownership held by us. Although our investment in Northern Therapeutics exceeds 50 percent, minority shareholders possess substantive participating rights that preclude Northern Therapeutics’ financial statements from being consolidated.

Other investments in affiliates are accounted for on the cost method generally due to the lack of significant influence over these affiliates and a less than 20 percent ownership by us. The cost method of accounting does not require that we report our share of the affiliates’ net losses or profits in our financial statements, nor are affiliates’ assets, liabilities, revenues and expenses consolidated with our consolidated financial statements.

Our investment in ViRexx Medical Corp. (formerly AltaRex Medical Corp.) is accounted for as an available-for-sale security because its stock is publicly traded. We own less than 10 percent of ViRexx. Available-for-sale securities are reported at their fair values in the balance sheet. Changes in their fair values are reported as other comprehensive income or loss. Declines in values that are considered other-than-temporary are reported as losses in the statement of operations. The fair value of the investment was approximately $4.5 million and $6.2 million at June 30, 2006 and December 31, 2005, respectively, based on quoted market prices. These changes in fair market value were reported as other comprehensive income or loss.

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Options Issued in Exchange for License

In June 2000, in connection with our license from Toray of the sustained release formulation of beraprost (an oral prostacyclin analog), we agreed to grant options to purchase 500,000 shares of our common stock to Toray upon Toray’s adequate documentation of sustained release beraprost in humans and its transfer of clinical trial material for use in clinical trials in the United States. These options will not be priced until Toray has met this milestone. If and when the milestone is met, the exercise price of the options would be set at the fair market value of our common stock at that time. Due to the uncertainties in drug development, it is not yet known if Toray will provide the appropriate clinical trial material. Therefore, in accordance with EITF Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees , these options are measured at their lowest aggregate fair value at each interim reporting date, which amount has been zero. As a result, no expense related to these options has been recorded in the consolidated financial statements.

Lease of Laboratory Facility

In June 2004, we entered into a synthetic operating lease and related agreements with Wachovia to fund the construction of a laboratory facility in Silver Spring, Maryland. The construction of the laboratory facility was completed in May 2006. The total amount of the construction is expected to be $32.0 million. The laboratory facility is owned by Wachovia, which acts as the lessor, and we became the lessee and pay rents to Wachovia now that the facility is completed. This arrangement is a form of off-balance sheet financing under which Wachovia funded 100 percent of the costs for the construction of the property and now leases the laboratory facility to us. We have provided a residual value guarantee to Wachovia that the residual value of the leased assets will be at least equal to a specified amount at lease termination.

In accordance with the guidance in SFAS No. 13, Accounting for Leases, EITF Issue No. 97-1, Implementation Issues in Accounting for Lease Transactions, Including Those Involving Special-Purpose Entities, EITF Issue No. 97-10, The Effect of Lessee Involvement in Asset Construction , and Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of Variable Interest Entities , we determined that the lease is properly classified as an operating lease for accounting purposes. Furthermore, we determined that Wachovia has sufficient substance such that it can be treated as an unrelated entity and, accordingly, does not require consolidation into our financial statements.

Operating leases of assets do not require that the leased asset and the related rent obligation be reported in the lessee’s balance sheet, but rather be disclosed as future commitments. In contrast, capital leases do require that the leased asset and rent obligations be reported in the lessee’s balance sheet as assets and debt. Changes in the levels of investment made by Wachovia and its affiliates in the laboratory could affect the classification of the lease from operating to capital. In that event, we would include both the assets and debt associated with the laboratory facility on our balance sheet.

Recent Accounting Pronouncements

Stock-Based Compensation

On December 16, 2004, the FASB issued a revision of SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) . SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (Opinion 25), and amends SFAS No. 95 , Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. SFAS No. 123(R) was initially required to be implemented by July 1, 2005, but its effective date was delayed until January 1, 2006 by the Securities and Exchange Commission. Accordingly, we adopted SFAS No. 123(R) on January 1, 2006.

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As permitted by SFAS No. 123, we previously accounted for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognized no compensation cost for employee stock options prior to 2006. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values over the expected period of service. Accordingly, the adoption of SFAS No. 123(R)’s fair value method had a significant impact on our results of operations.

The impact of SFAS No. 123(R) is described in Note 3 to the consolidated financial statements contained in this Quarterly Report on Form 10-Q.

Inventory Costs

In December 2004, the FASB issued SFAS No. 151 Inventory Cost, which is an amendment to Accounting Research Bulletin No. 43, Restatement and Revision of Accounting Research Bulletins. SFAS No. 151 clarifies the accounting treatment of certain expenses for inventory costing. The new standard is effective for the first fiscal year beginning after June 15, 2005. We adopted this standard effective January 1, 2006 and it did not have a significant impact on our results of operations and financial condition.

Item 3.                         Quantitative and Qualitative Disclosures about Market Risk

At June 30, 2006, a substantial portion of our assets was comprised of debt securities issued by federally-sponsored agencies. The market value of these investments fluctuates with changes in current market interest rates. In general, as rates increase, the market value of a debt investment would be expected to decrease. Likewise, as rates decrease, the market value of a debt investment would be expected to increase. To minimize such market risk, we hold such instruments to maturity at which time these instruments will be redeemed at their stated or face value. At June 30, 2006, we had approximately $93.3 million in debt securities issued by federally-sponsored agencies with a weighted average stated interest rate of approximately 4.0 percent maturing through March 2012 and callable annually. The fair market value based on quoted market prices of this held-to-maturity portfolio at June 30, 2006 was approximately $90.2 million.

At June 30, 2006, a portion of our assets was comprised of auction rate debt securities issued by state-sponsored agencies. While these securities have long term maturities, their interest rates are reset approximately every 7-28 days through an auction process. As a result, the interest income from these securities is subject to market risk since the rate is adjusted to accommodate market conditions on each reset date. However, since the interest rates are reflective of current market conditions, the fair value of these securities typically does not fluctuate from par or cost. At June 30, 2006, we had approximately $60.8 million in these debt securities with a weighted average stated interest rate of approximately 5.0 percent. The fair market value based on quoted market prices of these available-for-sale debt securities as of June 30, 2006 was approximately $60.8 million.

In June 2004, we entered into a synthetic operating lease and related agreements with Wachovia Development Corporation and its affiliates (Wachovia) to fund the construction of a laboratory facility in Silver Spring, Maryland. Under these agreements, we pay rents to Wachovia generally based on applying the 30-day LIBOR rate plus approximately 55 basis points to the amount funded by Wachovia towards the construction of the laboratory. The total amount of construction is estimated to be approximately $32.0 million. These rents, therefore, are subject to the risk that the LIBOR rate will increase or decrease during the period until termination in May 2011. At June 30, 2006, the 30-day LIBOR rate was approximately 5.4 percent. For every movement of 100 basis points (1 percent) in the 30-day LIBOR rate, the rents under this lease could increase or decrease by approximately $320,000 on an annualized basis.

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Item 4.                         Controls and Procedures

Based on their evaluation, as of June 30, 2006, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.

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Part II.    OTHER INFORMATION

Item 1A.                 Risk Factors

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995 which are based on our beliefs and expectations as to future outcomes. These statements include, among others, statements relating to the following:

·        Expectations of revenues and profitability;

·        The timing and outcome of clinical studies and regulatory filings;

·        The achievement and maintenance of regulatory approvals;

·        The ability to find alternate sources of supply and manufacturing for our products;

·        The existence and activities of competitors;

·        The expectation not to pay dividends on common stock in the foreseeable future;

·        The pricing of Remodulin;

·        The dosing and rate of patient consumption of Remodulin;

·        The impacts of price changes and changes in patient consumption of Remodulin on future revenues;

·        The expectation of reimbursement by third-party payers for intravenous Remodulin;

·        The timing, impact, materiality and outcome of under-reimbursement by third-party payers, such as Medicare;

·        The outcome of potential future regulatory actions from the FDA and other international regulatory agencies and any actions that may or may not be taken by the FDA and other international regulatory agencies as a result of any such regulatory actions;

·        The rate of physician and patient acceptance of our products as safe and effective;

·        The development and sale of products covered by licenses and assignments;

·        The adequacy of our intellectual property protections and their expiration dates;

·        The outcome of any litigation in which we are or become involved;

·        The ability of third parties to develop, market, distribute and sell our products;

·        The composition of our management team;

·        The adequacy of our insurance coverage;

·        The ability to obtain financing in the future;

·        The value of our common stock;

·        The funding of operations from future revenues;

·        The expectation of continued profits or losses;

·        The expected impact of the discontinuance of the HeartBar line of products in January 2006;

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·        Expectations concerning milestone and royalty payments in 2006 and beyond;

·        Expectations concerning payments of contractual obligations in all future years and their amounts;

·        The use of net operating loss carryforwards and business tax credit carryforwards and the impact of Section 382 of the Internal Revenue Code on their use;

·        Income tax expenses and benefits in current and future periods;

·        The completion of in-process research and development projects and their impact on our business;

·        The pace and timing of enrollment in clinical trials;

·        The expectation, outcome and timing of new and continuing regulatory approvals;

·        The timing, resubmission, completion and outcome of the applications for approval of subcutaneous Remodulin in Ireland, Spain and the United Kingdom;

·        The timing, completion and outcome of pricing approvals in European Union countries that approve subcutaneous and intravenous Remodulin;

·        The expected levels and timing of Remodulin sales;

·        The adequacy of our resources to fund operations;

·        The timing and level of spending to construct a laboratory production facility in Silver Spring, Maryland;

·        The potential amount of the minimum residual value guarantee to Wachovia under the synthetic lease;

·        Events that could occur upon termination of the Wachovia synthetic lease and related agreements;

·        The potential impacts of new accounting standards;

·        Our intent and ability to hold certain marketable investments until maturity;

·        Any statements preceded by, followed by or that include the words “believes,” “expects,” “predicts,” “anticipates,” “intends,” “estimates,” “should,” “may” or similar expressions; and

·        Other statements contained or incorporated by reference in this Quarterly Report on Form 10-Q that are not historical facts.

The statements identified as forward-looking statements may exist in “Part I, Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” or elsewhere in this Quarterly Report on Form 10-Q. These statements are subject to risks and uncertainties and our actual results may differ materially from anticipated results. Factors that may cause such a difference include, but are not limited to, those discussed below. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.

Unless the context requires otherwise or unless otherwise noted, all references in this section to “United Therapeutics” and to the “company”, “we”, “us” or “our” are to United Therapeutics Corporation and its subsidiaries.

Actual consolidated revenues and net income may be different from published securities analyst projections. In addition, we have a history of losses and may not continue to be profitable.

Many independent securities analysts have published quarterly and annual projections of our revenues and profits. These projections were made independently by the securities analysts based on their own

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analysis. Such estimates are inherently subject to a degree of uncertainty. As a result, the actual revenues and net income may be greater or less than projected by such securities analysts. Even small variations in reported revenues and profits as compared to securities analysts’ expectations can lead to significant changes in our stock price.

Although we have been profitable for every quarter ended after March 31, 2004, we lost money from the date of our inception in 1996 through March 31, 2004. At June 30, 2006, our accumulated deficit was approximately $105.3 million.

Factors that could affect consolidated revenues and profitability and cause our quarterly and annual operating results to fluctuate include the following:

·        Extent and timing of sales of Remodulin to distributors;

·        Levels of Remodulin inventory held by our distributors and changes to those levels from quarter to quarter;

·        Level of patient demand for Remodulin and other products;

·        Status and impact of other approved competitive products such as Ventavis ® , Revatio, Tracleer and Flolan and investigational competitive products such as ambrisentan™, Thelin™, Cialis ® , Gleevec ®  and other potential investigational competitive products;

·        Changes in prescribers’ opinions about Remodulin;

·        Impact of medical and scientific opinion about our products;

·        Levels of research and development, selling, general and administrative expenses;

·        Timing of payments to licensors and corporate partners;

·        Retention and growth of patients treated with Remodulin;

·        Remodulin side effects, including impact of infusion site pain and reaction from subcutaneous use of Remodulin;

·        Changes in the current pricing and dosing of Remodulin;

·        Changes in the length of time that Remodulin vials may be used by patients;

·        Changes in the pricing of other therapies approved for PAH, including possible generic formulations of other approved therapies, such as Flolan, which may be sold in generic form beginning in May 2007;

·        The timing of Medtronic’s discontinuance of the 407C infusion pumps and the ability of our distributors to transition to the use of other infusion pumps currently available on the market;

·        Willingness of private insurance companies, Medicare and Medicaid to reimburse Remodulin at current pricing levels;

·        Impacts of new legislation and regulations and changes to the Medicare and Medicaid programs;

·        Our ability to maintain regulatory approval of Remodulin in the United States and other countries;

·        Additional regulatory approvals for Remodulin in countries other than where it is currently sold;

·        Continued performance by current Remodulin distributors under existing agreements;

·        Size, scope and outcome of development efforts for existing and additional products;

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·        Future milestone and royalty payments under license and other agreements;

·        Cost, timing and outcomes of regulatory reviews;

·        Rate of technological advances;

·        Our ability to establish, defend and enforce intellectual property rights;

·        Development of manufacturing resources or the establishment, continuation or termination of third-party manufacturing arrangements;

·        Establishment, continuation or termination of third-party clinical trial arrangements;

·        Development of sales and marketing resources or the establishment, continuation or termination of third-party sales and marketing arrangements;

·        Impact of any regulatory restrictions on our marketing and promotional activities;

·        Recovery of goodwill, intangible assets and investments in affiliates;

·        Collection of accounts receivable and realization of inventories;

·        Risks associated with acquisitions, including the ability to integrate acquired businesses;

·        Unforeseen expenses;

·        Actual growth in sales of telemedicine and arginine products;

·        Actual expenses incurred in future periods; and

·        Completion of additional acquisitions and execution of licensing agreements.

Most of our pharmaceutical products are in clinical studies. We might not maintain or obtain regulatory approvals for our pharmaceutical products and may not be able to sell our pharmaceutical products commercially. Even if we sell our products, we may not be profitable and may not be able to sustain any profitability we achieve.

We may not successfully compete with established drugs and the companies that develop and market them.

We compete with established drug companies during product development for, among other things, funding, access to licenses, expertise, personnel, clinical trial patients, and third-party collaborators. We also compete with these companies following approval of our products. Almost all of these competitors have substantially greater financial, marketing, sales, distribution and technical resources, and more experience in research and development, clinical trials and regulatory matters, than we do.

We are aware of existing treatments that compete with our products, especially in the field of PAH. Patients and doctors may perceive these competing products to be safer, more effective, more convenient or less expensive than Remodulin. Accordingly, sales of Remodulin may not increase or may even decrease if doctors prescribe less Remodulin than they are prescribing at present.

For the treatment of PAH, we compete with many approved products in the United States and worldwide, including the following:

·        Flolan was the first product approved by the FDA for treating PAH and has been marketed by GlaxoSmithKline PLC since 1996 and, beginning in the second quarter of 2006, by Myogen, Inc. Generic formulations of Flolan could be available for commercial sale as early as 2007. Flolan is delivered by intravenous infusion and considered to be an effective treatment by most PAH experts;

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·        Ventavis was approved in December 2004 in the United States and in September 2003 in Europe. Ventavis is the only prostacyclin that has been approved for inhalation, whereas Remodulin is only currently approved to be delivered through intravenous or subcutaneous infusion. Ventavis is marketed by CoTherix, Inc. in the United States and Schering AG in Europe;

·        Tracleer, the first oral drug to be approved for PAH, is also the first drug in its class, known as endothelin receptor antagonists. Tracleer was approved in December 2001 in the United States and May 2002 in Europe. Tracleer is marketed by Actelion, Ltd. worldwide. As an oral therapy, Tracleer is a very convenient therapy; and

·        Revatio was approved in June 2005 in the United States. Revatio is also an oral therapy and is marketed by Pfizer. Revatio is a different formulation of the very successful drug Viagra ®  and is the first drug in its class, known as PDE-5 inhibitors, to be approved for PAH.

Doctors may reduce the dose of Remodulin given to their patients if they prescribe our competitors’ products in combination with Remodulin. In addition, certain of our competitors’ products are less invasive than Remodulin and the use of these products may delay or prevent initiation of Remodulin therapy.

Many companies are marketing and developing products containing arginine that compete with our arginine product line. Many local and regional competitors and a few national competitors provide cardiac Holter and event monitoring services and systems that compete with our telemedicine products. A number of drug companies are pursuing treatments for ovarian and other cancers and hepatitis that will compete with any products we may develop from our immunotherapeutic monoclonal antibody platform and glycobiology antiviral agents platform.

Discoveries or developments of new technologies by others may make our products obsolete or less useful.

Other companies may make discoveries or introduce new products that render all or some of our technologies and products obsolete or not commercially viable. Researchers are continually making new discoveries that may lead to new technologies to treat the diseases for which our products are intended. In addition, alternative approaches to treating chronic diseases, such as gene therapy, may make our products obsolete or noncompetitive. Other investigational therapies for PAH could be used in combination with Remodulin. If this happens, doctors may reduce the dose of Remodulin given to their patients. This could result in less Remodulin being used by such patients and, hence, reduced sales of Remodulin.

We are aware of investigational products being developed for the treatment of PAH with which our products may have to compete.

Remodulin and our other treprostinil-based products may have to compete with investigational products currently being developed by other companies, including:

·        Sitaxsentan (Thelin) is being developed by Encysive Pharmaceuticals, Inc. worldwide for the treatment of PAH. Encysive has completed testing of Thelin, an oral tablet, and, based on favorable results, has filed for approval with the Food and Drug Administration in the United States. This application is currently being reviewed. In March 2006, Encysive announced that the FDA completed its initial review of the application for approval and determined that Thelin was approvable. If approved, Thelin would become the second drug available in the class known as endothelin receptor antagonists;

·        Ambrisentan is being developed by Myogen, Inc. for the treatment of PAH. Ambrisentan, an oral tablet, has completed pivotal clinical testing and is also an endothelin receptor antagonist;

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·        Cialis is an approved oral treatment for erectile dysfunction and is currently marketed by Lilly ICOS LLC, a joint venture of Eli Lilly & Company and ICOS Corporation. Cialis is currently being studied in patients with PAH; and is in the same class of drugs as Revatio;

·        Gleevec is an approved oral treatment for chronic myeloid leukemia (a cancer of the blood and bone marrow) and is currently marketed by Novartis Pharmaceuticals Corporation. Recently, researchers experienced in PAH have conducted studies of Gleevec and believe that it may be effective in treating PAH;

·        PRX-08066, a serotonin receptor 5-HT2B antagonist, is being developed by Predix Pharmaceuticals Holdings, Inc., as an oral tablet for the treatment of PAH. Two Phase I clinical trials of PRX-08066 are being conducted in healthy volunteers;

·        PulmoLAR™ is being developed by PR Pharmaceuticals, Inc. It is a once-a-month injectible which contains a metabolite of estradiol and has been shown in animal and cell models to address the key pathological processes associated with PAH; and

·        Aviptadil™, an inhaled formulation of vasoactive intestinal peptide, is being developed by mondoBIOTECH Holding SA, for the treatment of PAH.

·        Oral and inhaled formulations of Fasudil, a rho-kinase inhibitor, are being developed by CoTherix, Inc. for the treatment of PAH. Fasudil is currently approved in Japan as an intravenous drug to treat a disease unrelated to PAH.

There may be additional drugs in development for PAH and there may also be currently approved drugs that may be effective in treating the disease. If any of these drugs in development or other currently approved drugs are used to treat PAH, sales of Remodulin may fall.

If third-party payers will not reimburse patients for our drug products or if third-party payers limit the amount of reimbursement, our sales will suffer.

Our commercial success depends heavily on third-party payers, such as Medicare, Medicaid and private insurance companies, agreeing to reimburse patients for the costs of our pharmaceutical products. These third-party payers frequently challenge the pricing of new and expensive drugs, and it may be difficult for pharmacies selling Remodulin to convince these payers to reimburse patients for the cost of Remodulin. Remodulin and the associated infusion pump and supplies are very expensive. We believe our investigational products, if approved, will also be very expensive. Presently, most third-party payers, including Medicare and Medicaid, reimburse patients for the cost of Remodulin therapy. In the past, Medicare has not reimbursed the full cost of the therapy for some patients. Beginning on January 1, 2007, the Medicare Modernization Act requires that we and the Centers for Medicare and Medicaid Services negotiate a new price for Remodulin. Third-party payers may not approve our new products for reimbursement or may not continue to approve Remodulin for reimbursement, or may seek to reduce the amount of reimbursement for Remodulin based on changes in pricing of other therapies for PAH, including possible generic formulations of other approved therapies, such as Flolan, which may be sold in generic form beginning in May 2007. If third-party payers do not approve a product of ours for reimbursement or limit the amount of reimbursement, sales will suffer, as patients will opt for a competing product that is approved for reimbursement.

We rely on third parties to develop, market, distribute and sell most of our products and those third parties may not perform.

We are currently marketing products in three of our five therapeutic platforms: Remodulin in our prostacyclin analog platform, the products containing arginine in our arginine formulations platform, and CardioPAL cardiac event monitors and Holter monitors in our telemedicine platform. We do not have the

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ability to independently conduct clinical studies, obtain regulatory approvals, market, distribute or sell most of our products and intend to rely substantially on experienced third parties to perform all of those functions. We may not locate acceptable contractors or enter into favorable agreements with them. If third parties do not successfully carry out their contractual duties or meet expected deadlines, we might not be able to obtain marketing approvals and sell our products.

Medtronic MiniMed is our exclusive partner for the subcutaneous delivery of Remodulin using the MiniMed microinfusion device for PAH. We rely on Medtronic MiniMed’s experience, expertise and performance. Any disruption in the supply to PAH patients of MiniMed’s microinfusion device could delay or prevent patients from initiating or continuing Remodulin therapy, which could adversely affect our revenues. Medtronic has advised us that it intends to discontinue making infusion pumps for subcutaneous delivery of Remodulin after first giving our distributors and us the opportunity to purchase desired quantities. We may not be able to obtain acceptable substitute delivery devices to replace the Medtronic pumps when the available supply has been depleted. Similarly, we rely on Accredo Therapeutics, Inc. (a wholly owned subsidiary of Medco Health Solutions, Inc.), CuraScript (a wholly owned subsidiary of Express Scripts, Inc. and formerly Priority Healthcare Corporation) and Caremark, Inc. to market, distribute, and sell Remodulin in the United States. Accredo, CuraScript and Caremark are also responsible for convincing third-party payers to reimburse patients for the cost of Remodulin, which is very expensive. If our partners and contractors do not achieve acceptable profit margins, they may not continue to distribute our products. If our partners in the United States and internationally are unsuccessful in their efforts, our revenues will suffer.

During 2005, two of our Remodulin distributors in the United States were sold to larger companies. These distributors continue to purchase Remodulin from us and distribute it. Together, they account for most of the Remodulin sales we have made thus far. When these distributors were independently managed, distribution of Remodulin was more significant to the distributors, because they were much smaller. Now, Remodulin is much less significant to the distributors because they are divisions or subsidiaries of multi-billion dollar companies. It is possible, therefore, that these distributors may devote fewer resources to the distribution of Remodulin. If so, this may negatively impact our sales.

If we cannot maintain regulatory approvals for our products, we cannot sell those products and our revenues will suffer.

The process of obtaining and maintaining regulatory approvals for new drugs is lengthy, expensive and uncertain. The manufacture, distribution, advertising and marketing of these products are subject to extensive regulation. Any new product approvals we receive in the future could include significant restrictions on the use or marketing of the product. Product approvals, if granted, can be withdrawn for failure to comply with regulatory requirements, including those relating to misleading advertising or upon the occurrence of adverse events following commercial introduction of the products. We received one warning letter from the FDA related to advertising in 2005 which was resolved satisfactorily.

We rely heavily on sales of Remodulin. During the six months ended June 30, 2006, our Remodulin sales accounted for 95 percent of our total revenues. If approvals are withdrawn for a Remodulin or any other product, we cannot sell that product and our revenues will suffer. In addition, if product approvals are withdrawn, governmental authorities could seize our products or force us to recall our products.

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Our products may not be commercially successful because physicians and patients may not accept them.

Even if regulatory authorities approve our products, these products may not be commercially successful. We expect that most of our products, including Remodulin, which is already approved by the FDA, will be very expensive. Patient acceptance of and demand for our products will depend largely on the following factors:

·        Acceptance by physicians and patients of our products as safe and effective therapies;

·        Willingness of payers to reimburse and the level of reimbursement of drug and treatment costs by third-party payers such as Medicare, Medicaid and private insurance companies;

·        Safety, efficacy, pricing and convenience of alternative products;

·        Convenience and ease of administration of our products; and

·        Prevalence and severity of side effects associated with our products, including the infusion site pain and reaction associated with the use of subcutaneous Remodulin and the potential for infections associated with intravenous Remodulin.

We have limited experience with production and  manufacturing and depend on third parties, who may not perform, to synthesize and manufacture many of our products.

Prior to our 1999 acquisition of SynQuest, Inc., a company that manufactured treprostinil, the bulk active ingredient in Remodulin, we had no experience with manufacturing. Presently, commercial treprostinil is being manufactured only by us with reliance on third parties for certain raw and advanced intermediate materials. We are currently planning on producing the antibody for our biological drug, OvaRex, internally for the first time in 2006. Biological drugs are generally the most complex drugs to manufacture and we have never done it before.

The OvaRex drug that is currently being used in our studies was made by a contract manufacturer and will expire in early 2008. We plan to make the OvaRex antibody for the first time ourselves in our new Silver Spring laboratory.  After we make it, we must then demonstrate that it is comparable to the drug used in the Phase III clinical trials. Even if our OvaRex trials are successful, we will not be able to obtain approval for OvaRex unless we can demonstrate that the OvaRex antibody we manufacture is comparable to the drug used in the trials. If we cannot demonstrate the comparability prior to the expiration date, then we may have to repeat the OvaRex trials with the new drug that we manufacture internally. Although the laboratory is completed and we occupy it now, we are still readying the equipment and finalizing procedures for our first production run of OvaRex. In addition, we are working with our builders to complete or repair certain aspects of the laboratory. We hope to commence production of the OvaRex antibody later this year.

We rely on third parties for the manufacture of all our products other than treprostinil. We rely on Baxter Healthcare Corporation for the formulation of Remodulin from treprostinil. We rely on Cardinal Health, Inc. for stability studies on Remodulin, the formulation of treprostinil for inhalation use, and analyses of other products that we are developing. We rely on MSI of Central Florida, Inc. to manufacture our telemedicine devices. We rely on other manufacturers to make our investigational drugs for use in trials.

Although there are a limited number of companies that could replace each of these suppliers, we believe that other suppliers could provide similar services and materials. A change in suppliers, however, could cause a delay in distribution of Remodulin and other products, and in the conduct of clinical trials and commercial launch, which would adversely affect our research and development efforts and future sales efforts.

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Our manufacturing strategy presents the following risks:

·        The manufacturing processes for some of our products have not been tested in quantities needed for commercial sales;

·        Delays in scale-up to commercial quantities could delay clinical studies, regulatory submissions and commercialization of our products;

·        A long lead time is needed to manufacture treprostinil and Remodulin, and the manufacturing process is complex;

·        We and the manufacturers of our products are subject to the FDA’s and international  drug regulatory authorities’ good manufacturing practices regulations and similar international standards, and although we control compliance issues with respect to synthesis and manufacturing conducted internally, we do not have control over compliance with these regulations by our third-party manufacturers;

·        Even if we and the manufacturers of our products comply with the FDA’s and international drug regulatory authorities’ good manufacturing practices regulations and similar international standards, the sterility and quality of the products being manufactured may be deficient. If this occurred, such products would not be available for sale or use;

·        If we have to change to another manufacturing contractor or abandon our own manufacturing operations, the FDA and international drug regulators would require new testing and compliance inspections, and the new manufacturer would have to be educated in the processes necessary for the production of the affected product;

·        We may not be able to develop or commercialize our products, other than Remodulin, as planned or at all and may have to rely solely on internal manufacturing capacity;

·        We are transfering all of our drug laboratory operations to the Silver Spring, Maryland facility recently built, and such transfer could result in manufacturing inefficiencies or delays because the building, equipment and many of the employees being deployed there will be new to the process of making our products. Additionally, the FDA and international drug regulators will require new testing and compliance inspections and this could result in delays;

·        The supply of raw and advanced materials and components used in the manufacture