United Therapeutics Corporation
UNITED THERAPEUTICS CORP (Form: 10-Q, Received: 05/04/2007 06:05:20)

 

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 March 31, 2007

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 April 27, 2007 was 20,782,575.

 




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

 

 

13

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

28

 

 

Item 4.

 

Controls and Procedures

 

 

29

 

 

Part II.

 

OTHER INFORMATION

 

 

 

 

 

Item 1A.

 

Risk Factors

 

 

30

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

47

 

 

Item 6.

 

Exhibits

 

 

48

 

 

SIGNATURES

 

 

49

 

 

 




PART I.    FINANCIAL INFORMATION

Item 1.                         Consolidated Financial Statements

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

 

 

March 31,
2007

 

December 31,
2006

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

67,851

 

 

 

$

91,067

 

 

Marketable investments

 

 

103,364

 

 

 

136,682

 

 

Accounts receivable, net of allowance of $1 for 2007 and $1 for 2006

 

 

19,009

 

 

 

22,453

 

 

Inventories, net

 

 

12,323

 

 

 

12,047

 

 

Other receivable

 

 

2,009

 

 

 

1,581

 

 

Interest receivable

 

 

2,000

 

 

 

1,545

 

 

Due from affiliate

 

 

48

 

 

 

66

 

 

Prepaid expenses

 

 

8,181

 

 

 

9,242

 

 

Deferred tax assets

 

 

4,136

 

 

 

2,691

 

 

Total current assets

 

 

218,921

 

 

 

277,374

 

 

Marketable investments

 

 

42,963

 

 

 

36,414

 

 

Marketable investments and cash—restricted

 

 

38,232

 

 

 

38,988

 

 

Goodwill, net

 

 

7,465

 

 

 

7,465

 

 

Other intangible assets, net

 

 

2,985

 

 

 

3,140

 

 

Property, plant, and equipment, net

 

 

42,071

 

 

 

34,681

 

 

Investments in affiliates

 

 

5,091

 

 

 

4,700

 

 

Notes receivable from affiliate and employee

 

 

39

 

 

 

27

 

 

Deferred tax assets

 

 

69,216

 

 

 

65,308

 

 

Other assets

 

 

9,283

 

 

 

8,874

 

 

Total assets

 

 

$

436,266

 

 

 

$

476,971

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable

 

 

$

4,961

 

 

 

$

2,843

 

 

Accounts payable to affiliates and related parties

 

 

6

 

 

 

250

 

 

Accrued expenses

 

 

13,814

 

 

 

15,265

 

 

Current portion of notes and leases payable

 

 

11

 

 

 

10

 

 

Other current liabilities

 

 

436

 

 

 

882

 

 

Total current liabilities

 

 

19,228

 

 

 

19,250

 

 

Notes and leases payable, excluding current portion

 

 

250,011

 

 

 

250,015

 

 

Other liabilities

 

 

4,675

 

 

 

3,100

 

 

Total liabilities

 

 

273,914

 

 

 

272,365

 

 

Common stock subject to repurchase

 

 

10,882

 

 

 

 

 

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, 100,000,000 authorized, no shares issued

 

 

 

 

 

 

 

Common stock, par value $.01, 100,000,000 shares authorized, 25,126,356 and 24,632,153 shares issued at March 31, 2007 and December 31, 2006, respectively, and 20,744,759 and 21,475,078 outstanding at March 31, 2007 and December 31, 2006, respectively

 

 

251

 

 

 

246

 

 

Additional paid-in capital

 

 

425,799

 

 

 

408,804

 

 

Accumulated other comprehensive income

 

 

1,180

 

 

 

1,476

 

 

Treasury stock at cost, 4,381,597 and 3,157,075 shares at March 31, 2007 and December 31, 2006, respectively

 

 

(231,619

)

 

 

(164,560

)

 

Accumulated deficit

 

 

(44,141

)

 

 

(41,360

)

 

Total stockholders’ equity

 

 

162,352

 

 

 

204,606

 

 

Total liabilities and stockholders’ equity

 

 

$

436,266

 

 

 

$

476,971

 

 

 

See accompanying notes to consolidated financial statements.

1




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

 

 

Three Months Ended
March 31,

 

 

 

2007

 

2006

 

 

 

(Unaudited)

 

Revenues:

 

 

 

 

 

Net product sales

 

$

38,407

 

$

31,620

 

Service sales

 

1,762

 

1,544

 

Total revenues

 

40,169

 

33,164

 

Operating expenses:

 

 

 

 

 

Research and development,

 

17,101

 

14,700

 

Research and development expense related to issuance of stock

 

11,013

 

 

Selling, general and administrative

 

15,164

 

10,079

 

Impairment of HeartBar ®  tradename

 

 

2,024

 

Cost of product sales

 

3,815

 

3,346

 

Cost of service sales

 

581

 

531

 

Total operating expenses

 

47,674

 

30,680

 

Income (loss) from operations

 

(7,505

)

2,484

 

Other income (expense):

 

 

 

 

 

Interest income

 

4,100

 

1,898

 

Interest expense

 

(711

)

 

Equity loss in affiliate

 

(114

)

(207

)

Other, net

 

4

 

10

 

Total other income, net

 

3,279

 

1,701

 

Income (loss) before income tax

 

(4,226

)

4,185

 

Income tax benefit (expense)

 

1,445

 

(1,878

)

Net income (loss)

 

$

(2,781

)

$

2,307

 

Net income (loss) per common share:

 

 

 

 

 

Basic

 

$

(0.13

)

$

0.10

 

Diluted

 

$

(0.13

)

$

0.09

 

Weighted average number of common shares outstanding:

 

 

 

 

 

Basic

 

21,303

 

23,374

 

Diluted

 

21,303

 

25,609

 

 

See accompanying notes to consolidated financial statements.

2




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

 

 

Three Months Ended
March 31,

 

 

 

2007

 

2006

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

Net (loss) income

 

$

(2,781

)

$

2,307

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

825

 

568

 

Provision for bad debt and inventory obsolescence

 

(23

)

322

 

Deferred tax expense (benefit)

 

(1,567

)

1,783

 

Gain (loss) on disposals of equipment

 

(77

)

57

 

Options issued in exchange for services

 

5,353

 

4,649

 

Write down of intangible asset

 

 

2,024

 

Amortization of deferred offering costs

 

399

 

 

Amortization of discount or premium on investments

 

(1,053

)

(31

)

Equity loss in affiliate and unrealized foreign translation loss

 

120

 

206

 

Excess tax benefits from stock-based compensation

 

(2,364

)

 

Issuance of stock for license

 

11,013

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

3,440

 

(719

)

Interest receivable

 

(456

)

210

 

Inventories

 

(1,142

)

387

 

Prepaid expenses

 

1,289

 

1,851

 

Other assets

 

(443

)

(115

)

Accounts payable

 

2,120

 

656

 

Accrued expenses

 

(1,449

)

2,511

 

Due to (from) affiliates

 

(238

)

(154

)

Other liabilities

 

173

 

(29

)

Net cash provided by operating activities

 

13,139

 

16,483

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(8,041

)

(1,107

)

Purchases of held-to-maturity investments

 

(32,923

)

(1,468

)

Purchases of available-for-sale investments

 

(28,349

)

 

Sales of available-for-sale investments

 

56,750

 

1,000

 

Maturities of held-to-maturity investments

 

32,933

 

 

Net cash provided (used) by investing activities

 

20,370

 

(1,575

)

Cash flows from financing activities:

 

 

 

 

 

Payments to repurchase common stock

 

(67,059

)

 

Proceeds from the exercise of stock options

 

7,972

 

3,492

 

Excess tax benefits from stock-based compensation

 

2,364

 

44

 

Principal payments on notes payable and capital lease obligations

 

(2

)

(5

)

Net cash provided (used) by financing activities

 

(56,725

)

3,531

 

Net increase (decrease) in cash and cash equivalents

 

(23,216

)

18,439

 

Cash and cash equivalents, beginning of period

 

91,067

 

69,180

 

Cash and cash equivalents, end of period

 

$

67,851

 

$

87,619

 

Supplemental schedule of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

4

 

$

 

Cash paid for income taxes

 

$

654

 

$

156

 

 

See accompanying notes to consolidated financial statements.

3




UNITED THERAPEUTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007
(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. We were incorporated on June 26, 1996, under the laws of the State of Delaware and we have 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.

Our lead product is Remodulin ®  (treprostinil sodium). 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 (PAH) 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 intravenous bioequivalence with subcutaneous 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. In addition to the United States, Remodulin is approved for subcutaneous infusion in most of Europe, Canada, Israel, Australia and several countries in South America. It is approved for intravenous infusion in Canada, Israel, Mexico, Argentina and Peru. Other international applications for the approval of Remodulin are pending.

We have generated pharmaceutical revenues from sales of Remodulin and arginine products in the United States, Canada, Europe, South America and Asia. In addition, we have 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 our Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission.

In the opinion of our 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 March 31, 2007, and results of operations and cash flows for the three-month periods ended March 31, 2007 and 2006. Interim results are not necessarily indicative of results for an entire year.

4




3. INVENTORIES

We manufacture certain compounds, such as the treprostinil-based compounds, and purchase medical supplies, for use in our product sales and ongoing clinical trials. We subcontract the manufacture of cardiac monitoring equipment. We contract with a third-party manufacturer to make arginine products and for the formulation of Remodulin and for clinical trial materials for the inhaled and oral treprostinil clinical trials. Clinical trial materials are expensed as incurred as research and development expense. 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 $486,000 and $440,000 at March 31, 2007 and December 31, 2006, respectively (in thousands):

 

 

March 31,
2007

 

December 31,
2006

 

Remodulin:

 

 

 

 

 

 

 

 

 

Raw materials

 

 

$

351

 

 

 

$

149

 

 

Work-in-progress

 

 

7,144

 

 

 

7,807

 

 

Finished goods

 

 

4,080

 

 

 

3,355

 

 

Remodulin delivery pumps and other medical supplies

 

 

559

 

 

 

661

 

 

Cardiac monitoring equipment components

 

 

85

 

 

 

38

 

 

Arginine products

 

 

104

 

 

 

37

 

 

Total inventories

 

 

$

12,323

 

 

 

$

12,047

 

 

 

4. GOODWILL AND OTHER INTANGIBLE ASSETS

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

 

 

As of March 31, 2007

 

As of December 31, 2006

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

 

Goodwill

 

$

7,465

 

 

$

 

 

$

7,465

 

$

7,465

 

 

$

 

 

$

7,465

 

Intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology and patents

 

$

6,164

 

 

$

(3,179

)

 

$

2,985

 

$

6,164

 

 

$

(3,024

)

 

$

3,140

 

 

The HeartBar product was discontinued in January 2006 and is no longer sold. As a result, an impairment related to the HeartBar product tradename totaling approximately $2.0 million was recorded during the three months ended March 31, 2006.

Total amortization expense for the three-month periods ended March 31, 2007 and 2006 was approximately $155,000 and $81,000, 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,

 

 

 

 

 

2007

 

$

620

 

2008

 

620

 

2009

 

620

 

2010

 

620

 

2011

 

620

 

 

5. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

In May 2006, the Compensation Committee of our Board of Directors 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

5




highly compensated employees” within the meaning of ERISA section 201(2) may be eligible to participate in the SERP. During the three months ending March 31, 2007, a normal revaluation of the SERP was performed as a result of finalization of the 2007 salary levels for the SERP participants. The revaluation process includes updating any assumptions and inputs into the actuarial calculations. During the revaluation process, the discount rate changed to 5.7% from 6.2% used in 2006. For the three months ending March 31, 2007, we recognized approximately $612,200 and $37,000, respectively, in service and interest costs for the SERP.

In accordance with SFAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans , we record as part of the projected benefit obligation the unfunded actuarial loss and unamortized prior period service costs. These amounts are recorded net of tax in other comprehensive income (loss). See footnote No. 8 Comprehensive Income (loss) for the details.

The reconciliation of the beginning and ending balances in benefit obligations and fair value of plan assets, as well as the funded status of our plans, is as follows (in thousands):

 

 

Three months ended
March 31, 2007

 

Projected benefit obligation at December 31, 2006

 

 

$

1,572

 

 

Service cost

 

 

612

 

 

Interest cost

 

 

37

 

 

Actuarial loss

 

 

254

 

 

Prior period service costs

 

 

758

 

 

Projected benefit obligation at March 31, 2007

 

 

$

3,233

 

 

 

6. STOCKHOLDERS’ EQUITY

Earnings (Loss) per Common Share

Basic earnings (loss) per common share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the respective periods. Diluted earnings per common share are computed by dividing net income by the weighted average number of shares of common stock outstanding during the period plus the number of shares issuable upon the exercise of outstanding stock options and warrants using the treasury stock method. The effects of outstanding stock options and other potential stock issuances were not included in the computation of diluted loss per share for the three months ended March 31, 2007, because to do so would have been antidilutive for the period presented.

At March 31, 2007, the holders of the components of basic and dilutive earnings (loss) per share were as follows (in thousands, except per share amounts):

 

 

Three Months Ended
March 31,

 

 

 

2007

 

2006

 

Net income (loss) (numerator)

 

$

(2,781

)

$

2,307

 

Shares (denominator):

 

 

 

 

 

Weighted average outstanding shares for basic EPS

 

21,303

 

23,374

 

0.50% Senior Convertible Note

 

 

 

Dilutive effect of stock options

 

 

2,235

 

Adjusted weighted average shares for diluted EPS

 

21,303

 

25,609

 

Earnings (loss) per share

 

 

 

 

 

Basic

 

$

(0.13

)

$

0.10

 

Diluted

 

$

(0.13

)

$

0.09

 

 

6




Stock options and warrants to purchase approximately 5.3 million weighted-average shares of our common stock were also outstanding during the three-month period ended March 31, 2007, but were not included in the computation of earnings (loss) per share because the exercise prices of these options and warrants were greater than the average market price of our common stock during this period; therefore their effect was antidilutive. Due to our net loss for the three month period ended March 31, 2007, outstanding options to purchase approximately 1.1 million weighted-average shares of our common stock were not included in the computation of diluted net loss per share because their inclusion would have been antidilutive.

Stock Option Plan

Effective January 1, 2006, we 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). We utilize the Black-Scholes-Merton valuation model for estimating the fair value of stock options granted. Option valuation models, including Black-Scholes-Merton, require the input of highly subjective assumptions. 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, and the expected life of the award.

The following are the weighted-average assumptions used in valuing the stock options granted to employees during the three-month periods ended March 31, 2007 and 2006:

 

 

Three Months Ended
March 31,

 

 

 

2007

 

2006

 

Expected volatility

 

40.13%

 

47.43%

 

Risk-free interest rate

 

4.5%

 

4.5%

 

Expected term of options

 

6.0 years

 

6.0 years

 

Expected dividend yield

 

0.0%

 

0.0%

 

Forfeiture rate

 

7.1%

 

11.7%

 

 

A summary of the status of our employee stock options as of March 31, 2007, and changes during the three months ended is presented below:

All Employee Options

 

 

 

Number of
Shares

 

Weighted
Average
Exercise
Price

 

Weighted Average
Remaining
Contractual
Term

 

Aggregate
Intrinsic
Value
($ in 000s)

 

Outstanding at January 1, 2007

 

5,503,765

 

 

$

43.83

 

 

 

 

 

 

 

 

Granted

 

613,112

 

 

55.80

 

 

 

 

 

 

 

 

Exercised

 

(291,203

)

 

27.28

 

 

 

 

 

 

 

 

Forfeited

 

(13,155

)

 

52.93

 

 

 

 

 

 

 

 

Outstanding at March 31, 2007

 

5,812,519

 

 

$

45.90

 

 

 

7.2

 

 

$

266,808

 

Expected to vest at March 31, 2007

 

2,039,753

 

 

$

56.53

 

 

 

9.2

 

 

$

125,958

 

Exercisable at March 31, 2007

 

3,584,255

 

 

$

39.30

 

 

 

6.0

 

 

$

140,850

 

 

The weighted-average grant-date fair value of options granted during the three months ended March 31, 2007 and 2006, was $25.77 and $33.33, respectively.

7




Total employee share-based compensation expense recognized for the three months ended March 31, 2007 and 2006, is as follows (in thousands):

 

 

Three Months Ended
March 31,

 

 

 

2007

 

2006

 

Cost of service sales

 

$

32

 

$

27

 

Research and development

 

2,139

 

1,624

 

Selling, general and administrative

 

2,823

 

2,141

 

Share-based compensation expense before taxes

 

4,994

 

3,792

 

Related income tax benefits

 

(1,708

)

(1,653

)

Share-based compensation expense, net of taxes

 

$

3,286

 

$

2,139

 

 

Equity-based compensation costs capitalized as part of inventory during the three months ended March 31, 2007 and 2006, were approximately $78,000 and $158,000, respectively.

A summary of option exercises under all share-based payment is as follows (dollars in thousands):

 

 

Three Months Ended
March 31,

 

 

 

2007

 

2006

 

Number of options exercised

 

294,203

 

200,780

 

Cash received

 

$

7,972

 

$

3,492

 

 

Stock Repurchases

On October 17, 2006, our Board of Directors approved a stock repurchase program to repurchase up to 4.0 million shares of our common stock over a two-year period. As of December 31, 2006, a total of approximately 1.9 million shares had been repurchased at a cost of approximately $115.5 million in the stock repurchase program. Approximately 1.2 million shares of our common stock were repurchased at cost of approximately $67.1 million during the three months ended March 31, 2007. As of March 31, 2007, 911,669 shares remained eligible for repurchase under this program.

7. NOTES PAYABLE

Convertible Senior Notes

On October 30, 2006, we issued $250.0 million of 0.50% Convertible Senior Notes due October 2011 (the Convertible Senior Notes). In connection with the issuance of the Convertible Senior Notes, we also entered into a call spread option. The Convertible Senior Notes were issued at par value and pay interest in cash semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2007. The Convertible Senior Notes are unsecured unsubordinated obligations and rank equally with all other unsecured and unsubordinated indebtedness. The Convertible Senior Notes have an initial conversion price of $75.2257 per share. The Convertible Senior Notes may only be converted: (i) anytime after July 15, 2011; (ii) during any calendar quarter commencing after the date of original issuance of the notes, if the closing sale price of our common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter preceding the quarter in which the conversion occurs is more than 120% of the conversion price of the notes in effect on that last trading day; (iii) during the ten consecutive trading-day period following any five consecutive trading-day period in which the trading price for the notes for each such trading day was less than 95% of the closing sale price of our common stock on such date multiplied by the then current conversion rate; or (iv) if specified significant distributions to holders of our common stock are made, specified corporate transactions occur, or our

8




common stock ceases to be approved for listing on The NASDAQ Global Select Market and is not listed for trading on another U.S. national or regional securities exchange. Upon conversion, a holder will receive: (i) cash equal to the lesser of the principal amount of the note or the conversion value; and (ii) to the extent the conversion value exceeds the principal amount of the note, shares of our common stock. In addition, upon a change in control, as defined in the indenture under which the Convertible Senior Notes have been issued, the holders may require us to purchase all or a portion of their Convertible Senior Notes for 100% of the principal amount plus accrued and unpaid interest, if any, plus a number of additional shares of our common stock  As of March 31, 2007, the fair value of the $250.0 million Convertible Senior Notes outstanding was approximately $242.6 million, based on the quoted market price.

8. COMPREHENSIVE INCOME (LOSS)

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, certain unrecognized and unfunded pension costs and foreign currency translation adjustments be included in other comprehensive income (loss). The following statement presents comprehensive income (loss) for the three months ended March 31, 2007 and 2006 (in thousands):

 

 

Three Months Ended
March 31,

 

 

 

2007

 

2006

 

Net income (loss)

 

$

(2,781

)

$

2,307

 

Other comprehensive income (loss):

 

 

 

 

 

Foreign currency translation gain adjustment

 

15

 

4

 

Unrecognized prior period pension service cost, net of tax

 

(484

)

 

Unrecognized actuarial pension loss, net of tax

 

(167

)

 

Unrealized gain (loss) on available-for-sale securities

 

341

 

(336

)

Comprehensive income (loss)

 

$

(3,076

)

$

1,975

 

 

9. INCOME TAXES

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

 

 

Three Months Ended
March 31,

 

 

 

2007

 

2006

 

Current:

 

 

 

 

 

Federal

 

$

(1,199

)

$

40

 

State

 

(246

)

55

 

Total current

 

(1,445

)

95

 

Deferred

 

 

 

 

 

Federal

 

 

1,674

 

State

 

 

109

 

Total deferred

 

 

1,783

 

Total provision (benefit) for income taxes

 

$

(1,445

)

$

1,878

 

 

We recognized a benefit for income taxes as a result of incurring a loss for the three months ended March 31, 2007.

The income tax provision (benefit) for the three months ended March 31, 2007 and 2006, respectively, is based on the estimated annual effective tax rate for the entire year. The estimated effective tax rate is

9




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 months ended March 31, 2007 and 2006, was approximately 34 percent and 44 percent, respectively. Until legislation to retroactively reinstate federal tax credits for qualified research expenditures was enacted in October 2006, no benefit from the federal research credit generated during the three months ended March 31, 2006, was included in estimating the 2006 effective tax rate.

As of March 31, 2007, we had available approximately $48.3 million in net operating loss carryforwards and approximately $48.3 million in business tax credit carryforwards for federal income tax purposes, which expire at various dates through 2024. We have conducted a study to determine whether any limitations under Section 382 of the Internal Revenue Code have been triggered through December 31, 2006. 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. We do not believe that these potential limitations will cause the net operating loss and general business credit carryforwards to expire unused.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109 (FIN 48). This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Effective January 1, 2007, we adopted the provisions of FIN 48 and there was no material effect on the financial statements. As a result, there was no cumulative effect related to adopting FIN 48.

We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. All of our U.S. federal tax returns remain open for examination since we have not utilized any of our business credits. State jurisdictions that remain subject to examination range from 2001 to 2005. We do not believe there will be any material changes in our unrecognized tax positions over the next 12 months.

Our policy is that we recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, we did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the quarter.

10. LICENSE AGREEMENT

In March 2007, Lung Rx entered into an agreement with Toray Industries, Inc. (Toray) to assume and amend the rights and obligations of the agreement entered into between Toray and us in June 2000 concerning the commercialization of modified release formulations of beraprost (beraprost-MR). Under our original agreement with Toray, we had exclusive North American rights to commercialize beraprost-MR in the United States for cardiovascular disease. Under the amended agreement, we received additional exclusive rights to commercialize beraprost-MR in Europe, broadens the indication to vascular disease (excluding renal disease) and includes other revisions. While an earlier clinical trial of an immediate release form of beraprost in PAH demonstrated efficacy at 12 weeks but not at 36 weeks, a number of patients did respond positively to the drug. We feel that the development of beraprost-MR as combination therapy with drugs featuring different mechanisms of action presents a desirable clinical opportunity given what we understand about how the human body interacts with beraprost and how beraprost, in turn, affects the body. Since there is considerable variability in how PAH patients respond to the same class of molecules, we believe it is beneficial to offer a variety of treatments within that family of molecules. In addition, we are in the early stages of exploring the development of beraprost-MR for the treatment of congestive heart failure.

10




In accordance with the terms of the agreement, in March 2007, we issued 200,000 shares of our common stock to Toray in exchange for the cancellation of Toray’s existing right to receive an option grant to purchase 500,000 shares of our common stock (the Option Grant). Under the June 2000 Agreement, Toray’s right to receive the Option Grant was conditioned on Toray’s delivery to us of adequate documentation of beraprost-MR in humans and its transfer of clinical trial material to us, neither of which has yet to occur. Had the Option Grant been made, the exercise price of the options would have been set at the average closing price of our common stock for the period one month prior to the delivery date. Under the terms of the assumed and amended agreement, Toray has the right to request that we repurchase the newly-issued 200,000 shares of common stock upon 30 days prior written notice at the price of $54.41 per share, which was the average closing price of our stock between January 11, 2007, and February 23, 2007. Based on the average closing price of our stock for the two trading days prior to and the two trading days after March 16, 2007, we recognized a research and development expense of approximately $11.0 million in March relating to the issuance of the 200,000 shares, since beraprost-MR has not yet obtained regulatory approval for commercial sales. In accordance with the provision of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock , and EITF Topic No. D-98, Classification and Measurement of Redeemable Securities , these shares of stock are reflected in mezzanine equity as common stock subject to repurchase valued at the repurchase price. If Toray requests that we repurchase these shares, then the value of these shares will be transferred to a liability account until the repurchase is completed.

The amended license agreement also specifies that we make certain milestone payments to Toray during the development period and upon U.S. or European Union approval. Upon execution of the amended agreement, we made a $3.0 million payment to Toray in addition to the issuance of the 200,000 shares of our common stock discussed above. Additional annual milestone payments are specified in the agreement of $2.0 million commencing in 2008 and increasing by $1.0 million per year through 2011. These payments will be expensed when incurred. These payments are contingent upon the receipt of clinical trial material and commercial drug from Toray that meet all of the regulatory standards and requirements, including those relating to chemistry, manufacturing and controls, and are characterized and documented to the satisfaction of the U.S. and European Union regulatory authorities. In addition, if Toray elects to terminate production of beraprost-MR, no further payments would be due under the amended agreement. Conversely, if we elect to terminate development of beraprost-MR, then all remaining milestone payments would be due to Toray, unless certain regulatory standards and requirements have not been met, or material problems have been identified with respect to manufacture and regulatory compliance.

11. SEGMENT INFORMATION

We have two reportable business segments, pharmaceutical and telemedicine. 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, manufacturing and marketing strategies than therapeutic products require.

11




Segment information as of and for the three months ended March 31, 2007 and 2006, was as follows (in thousands):

 

 

Three Months Ended March 31,

 

 

 

2007

 

2006

 

 

 

Pharmaceutical

 

Telemedicine

 

Consolidated
Totals

 

Pharmaceutical

 

Telemedicine

 

Consolidated
Totals

 

Revenues from external customers

 

 

$

38,283

 

 

 

$

1,886

 

 

 

$

40,169

 

 

 

$

31,414

 

 

 

$

1,750

 

 

 

$

33,164

 

 

Income (loss) before income tax

 

 

(4,278

)

 

 

52

 

 

 

(4,226

)

 

 

4,343

 

 

 

(158

)

 

 

4,185

 

 

Interest income

 

 

4,040

 

 

 

60

 

 

 

4,100

 

 

 

1,894

 

 

 

4

 

 

 

1,898

 

 

Interest expense

 

 

(711

)

 

 

 

 

 

(711

)

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

(736

)

 

 

(89

)

 

 

(825

)

 

 

(446

)

 

 

(122

)

 

 

(568

)

 

Equity loss in affiliate

 

 

(114

)

 

 

 

 

 

(114

)

 

 

(207

)

 

 

 

 

 

(207

)

 

Total investment in equity method investees

 

 

1,454

 

 

 

 

 

 

1,454

 

 

 

1,852

 

 

 

 

 

 

1,852

 

 

Expenditures for long-lived assets

 

 

(8,025

)

 

 

(16

)

 

 

(8,041

)

 

 

(845

)

 

 

(262

)

 

 

(1,107

)

 

Goodwill, net

 

 

1,287

 

 

 

6,178

 

 

 

7,465

 

 

 

1,287

 

 

 

6,178

 

 

 

7,465

 

 

Total assets

 

 

418,511

 

 

 

17,755

 

 

 

436,266

 

 

 

294,641

 

 

 

10,110

 

 

 

304,751

 

 

 

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

For the three-month periods ended March 31, 2007 and 2006, approximately 85 percent and 87 percent, respectively, of our revenues were earned from customers located in the United States.

12




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, 2006. 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 the section entitled “ Part II, Item 1A—Risk Factors” below. 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, 2006, under the section entitled “Part II, 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, a prostacyclin analog. Our prostacyclin analog acts as 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) for the treatment of 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. In November 2004, the FDA approved intravenous (through a vein or artery) infusion of Remodulin for patients who are not able to tolerate subcutaneous infusion. This approval was based on data establishing the bioequivalence of intravenous with subcutaneous Remodulin. On March 21, 2006, the FDA expanded its approval of Remodulin to include patients requiring transition from Flolan.

Remodulin is approved for subcutaneous use in 33 countries throughout the world. 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. We anticipate resubmitting these applications following intravenous Remodulin approval in Europe. Licenses and pricing approvals have been received in most European Union countries, with the remainder expected during 2007. We have filed a variation to our license for approval of intravenous Remodulin through the mutual recognition process. Currently, our application is under review in France, our reference member state in the mutual recognition process. Remodulin has been approved for intravenous use in Canada, Israel, Mexico, Argentina and Peru. Marketing authorization applications are currently under review in other countries.

We have generated revenues from sales of Remodulin and arginine royalties and 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 in the United States with abnormal heart rhythms, called cardiac

13




arrhythmias, and ischemic heart disease, a condition that causes poor blood flow to the heart. We currently fund our operations from revenues generated from the sales of our products and services.

Remodulin Marketing and Sales

Remodulin is currently marketed by our own staff of approximately 24 employees who market directly to physicians specialized in treating PAH, comprised mainly of cardiologists and pulmonologists. Our staff is augmented by the marketing resources of our distributors. 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, Inc. (a wholly owned subsidiary of Express Scripts, Inc.), and Caremark, Inc., (a wholly-owned subsidiary of CVS Corp.), and outside of the United States by various international distributors. We sell Remodulin in bulk shipments to our distributors. Our U.S.-based distributors typically place one order per month, usually in the first half of the month. The timing and magnitude of our sales of Remodulin are impacted by the timing and volume of these bulk orders from distributors. Bulk orders placed by our distributors are based on their estimates of the amount of drug required for existing and newly starting patients, as well as maintaining an inventory that can meet approximately thirty days’ demand as a contingent supply. Effective January 1, 2007, Curascript’s minimum inventory requirement was reduced from 60 days to 30 days to make their agreement consistent with our two other U.S. distributors. This inventory reduction resulted in a decrease in our first quarter 2007 revenues of approximately $2 million. Because discontinuation of therapy can be life-threatening to patients, we require our distributors to maintain inventory levels as specified in our distribution agreements. Due to these contractual requirements, sales of Remodulin to distributors in any given quarter may not be indicative of patient demand during that quarter. In addition, inventory levels reported by distributors are impacted by the timing of their sales around the end of each reporting period. Sales of Remodulin and associated pumps and supplies are recognized as revenue when delivered to our distributors.

On March 27, 2007, we entered into an exclusive agreement with Mochida Pharmaceutical Co., Ltd. (Mochida), for subcutaneous and intravenous Remodulin distribution in Japan. Mochida will be responsible for obtaining Japanese marketing authorization for Remodulin with our assistance, including conducting necessary bridging studies. We will supply study drug at no charge to Mochida. Due to these bridging studies and required Japanese regulatory reviews, commercial activities in Japan are not expected to commence until 2010 or later. Upon receipt of marketing authorization and pricing approval, Mochida will purchase Remodulin from us for at an agreed-upon transfer price. In addition, Mochida has agreed to pay us certain exclusive distribution rights payments. The first payment of $4.0 million will be paid within fifteen days following their receipt of a tax certificate from the U.S. Treasury Department, which is expected during the 2 nd  quarter of 2007. Certain other distribution rights payments are due as follows:  (1) upon Remodulin receiving orphan drug status in Japan or February 1, 2008, whichever first occurs, $4.0 million; (2) upon filing a New Drug Application (NDA) in Japan, $2.0 million; and (3) upon marketing approval in Japan, $2.0 million. Payments for distribution rights received through the filing of the NDA will be recognized ratably over a three-year period representing the estimated period of time until marketing authorization is received.

Effective July 1, 2006, we increased the selling price of Remodulin to our U.S.-based distributors. The price was increased approximately 3.5% to $67.25 per milligram, and applies to sales of Remodulin made on or after July 1, 2006.

14




Future Prospects

We believe it is likely that many patients now being treated with non-prostacyclin therapies for PAH will require prostacyclin therapy in the near future due to disease progression. As they do, we believe our subcutaneous and intravenous formulations of Remodulin will capture a significant number of these patients. We have two Phase III trials, VIVETA and OvaRex, the results of which should be known during the later half of 2007. If either or both of these trials are successful, we will be working on obtaining regulatory approvals for these products and developing our commercial strategy and foundation. Future profitability will depend on many factors, including the price, level of sales, level of reimbursement by public and private insurance payers, the impact 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, as discussed in the section entitled “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” under Part II—Items 1.A. “Risk Factors” below.

Major Research and Development Projects

Our major research and development projects are focused on the use of Remodulin 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 the hepatitis C virus.

Cardiovascular Disease Projects

Subcutaneous use of Remodulin was approved by the FDA in May 2002. Material net cash inflows from the sales of Remodulin for PAH commenced in May 2002 after FDA approval was received. In November 2004, the FDA approved intravenous (through a vein or artery) infusion of Remodulin for patients who are not able to tolerate subcutaneous infusion. This approval was based on data establishing the bioequivalence of intravenous with subcutaneous Remodulin.

TRIUMPH-1, Tr eprostinil In halation U sed in the M anagement of P ulmonary H ypertension, a clinical trial, is currently being conducted at approximately 42 centers in the United States and Europe. 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 assessment of efficacy after 150 patients have completed the trial. We did not conduct this interim efficacy assessment. As a result, the TRIUMPH-1 trial is expected to conclude when 200 evaluable patients have completed the study, when approximately 215 patients have been enrolled. As of March 31, 2007, approximately 175 patients had been enrolled in this trial. As of April 30, 2007, approximately 190 patients have been enrolled in this trial.

We are developing an oral formulation of treprostinil, treprostinil diethanolamine. Two multi-national placebo-controlled clinical trials of oral treprostinil in patients with PAH commenced in October 2006. These trials are a combination of Phase II and Phase III trials, in which both dosing and efficacy are being studied. One trial, FREEDOM-C, is a 16-week study of up to 300 patients, with an interim assessment at 150 patients, currently on background therapy using a PDE5-inhibitor, such as Revatio ® , or an endothelin antagonist, such as Tracleer ® , or a combination of both. The second trial, FREEDOM-M, is a 12-week study of up to 150 patients, who are not on any background therapy, with an interim assessment at 90 patients. Both trials will be conducted at approximately 50 centers in the United States and the rest of the world. As of March 31, 2007, there were 70 and 35 patients enrolled in FREEDOM-C and FREEDOM-M, respectively. As of April 30, 2007, there were 85 and 40 patients enrolled in FREEDOM-C and FREEDOM-M, respectively.

15




We are also developing beraprost-MR for PAH. Beraprost-MR is an oral analog of prostacyclin. In March 2007, Lung Rx entered into an agreement with Toray Industries, Inc. (Toray) to assume and amend the rights and obligations of the agreement entered into between Toray and us in June 2000 concerning the commercialization of a modified release formulation of beraprost. This agreement is discussed in greater detail in the section entitled “ License Agreement” below. In accordance with the terms of the agreement, we paid Toray $3.0 million in cash and issued 200,000 shares of our stock in March 2007. As a result, we recognized a $14.0 million expense during the first quarter of 2007 for these transactions. We are currently awaiting delivery of beraprost-MR clinical trial material from Toray.

We incurred expenses of approximately $6.8 million and $8.9 million during the three months ended March 31, 2007 and 2006, respectively, on Remodulin development. Approximately $200.7 million from inception to date has been incurred on Remodulin development.

Cancer Disease Projects

We licensed our monoclonal antibody immunotherapies in April 2002 from AltaRex Medical Corp. OvaRex ®  is our lead product and is currently being studied in two identical Phase III clinical trials in advanced ovarian cancer (Stage III and IV) patients. In January 2003, we initiated these Phase III pivotal clinical trials of OvaRex called IMPACT I and II. Patients enrolled in these studies have successfully completed front-line therapy, consisting of surgery and chemotherapy. We are conducting these studies at approximately 60 centers throughout the United States. In June 2006, these trials were fully enrolled with 367 patients. The primary endpoint for these trials is the difference in time to disease relapse between patients treated with OvaRex and patients receiving a placebo. The trials will be analyzed when each study has reached at least 118 relapse events. Following relapse, patients will also be followed to assess survival rate. As of March 31, 2007, the reported number of relapse events was 127 and 104, respectively, in each of the trials. We are also developing the manufacturing processes to manufacture OvaRex ourselves. OvaRex had previously been supplied by a contract manufacturer. We incurred expenses of approximately $2.9 million and $2.1 million during the three months ended March 31, 2007 and 2006, respectively, on OvaRex development. Approximately $45.8 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 a wide variety of viruses. We completed acute and chronic Phase I clinical dosing studies using UT-231B, for the treatment of hepatitis C, to assess safety in healthy volunteers in early 2003. We initiated Phase II clinical studies in patients infected with hepatitis C 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 had previously failed conventional treatments. We are now conducting preclinical testing of new glycobiology drug candidates. We incurred expenses of approximately $145,000 and $200,000 during the three months ended March 31, 2007 and 2006, respectively, for our infectious disease programs. Approximately $35.9 million from inception to date has been incurred for infectious disease programs.

16




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;

·        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 or ourselves may reduce the number of patients available for our studies;

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

·        The FDA, international regulatory authorities or local internal review boards may delay or withhold approvals to commence clinical trials or to manufacture drugs;

·        The FDA or 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 could be delayed and our operations, liquidity and financial position could suffer. Without regulatory approvals, we cannot commercialize and sell these products and, therefore, potential revenues and profits from these products could be delayed or impossible to achieve.

License Agreement

In March 2007, Lung Rx entered into an agreement with Toray to assume and amend the rights and obligations of the agreement entered into between Toray and us in June 2000 concerning the commercialization of modified release formulation of beraprost (beraprost-MR). Under our original agreement with Toray, we had exclusive North American rights to commercialize beraprost-MR in the United States for all cardiovascular disease. The amended agreement provides, among other things, that we also have the exclusive rights to commercialize beraprost-MR in Europe, broadens the indication to vascular disease (excluding renal disease) and includes other revisions. While an earlier clinical trial of an immediate release form of beraprost as monotherapy in PAH demonstrated efficacy at 12 weeks but not at 36 weeks, a number of patients did respond positively to the drug. We feel that the development of beraprost-MR as combination therapy with drugs featuring different mechanisms of action presents a

17




desirable clinical opportunity given what we understand about how the human body interacts with beraprost and how beraprost, in turn, affects the body. Since there is considerable variability in how PAH patients respond to the same class of molecules, we believe it is beneficial to offer a variety of treatments within that family of molecules. In addition, we are in the early stages of exploring the development of beraprost-MR for the treatment of congestive heart failure.

In accordance with the terms of the amended license agreement, in March 2007, we issued 200,000 shares of our common stock to Toray in exchange for the cancellation of Toray’s existing right to receive an option grant to purchase 500,000 shares of our common stock (the Option Grant). Under the June 2000 Agreement, Toray’s right to receive the Option Grant was conditioned on Toray’s delivery to us of adequate documentation of beraprost-MR in humans and its transfer of clinical trial material to us, neither which had yet to occur. Had the Option Grant been made, the exercise price of the options would have been set at the average closing price of our common stock for the period one month prior to the delivery date. Under the terms of the assumed and amended agreement, Toray has the right to request that we repurchase the newly-issued 200,000 shares of common stock upon 30 days’ prior written notice at the price of $54.41 per share, which is the average closing price of our stock between January 11, 2007, and February 23, 2007. Based on the average closing price of our stock for the two trading days prior to and the two trading days after March 16, 2007, we recognized a research and development expense of approximately $11.0 million in March relating to the issuance of the 200,000 shares, since beraprost-MR has not yet obtained regulatory approval for commercial sales. In accordance with the provision of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , and EITF Topic No. D-98, Classification and Measurement of Redeemable Securities , these shares of stock are reflected in mezzanine equity as common stock subject to repurchase valued at the repurchase price. If Toray requests that we repurchase these shares, then the value of these shares will be transferred to a liability account until the repurchase is completed.

The new amended license agreement also specifies that we make certain milestone payments to Toray during the development period and upon U.S. or European Union approval. Upon execution of the amended agreement, we made a $3.0 million milestone payment to Toray in addition to the issuance of the 200,000 shares of our common stock discussed above. The amended license agreement  provides for additional milestone payments of $2.0 million commencing in 2008 and increasing by $1.0 million per year through 2011. These payments will be expensed when incurred. These payments are contingent upon the receipt of clinical trial material and commercial drug from Toray that meets all the regulatory standards and requirements, including chemistry, manufacturing and controls, and that are characterized and documented to the satisfaction of the U.S. and European Union regulatory authorities. In addition, if Toray elects to terminate production of beraprost-MR, no further payments will become be due under the amended license agreement. Conversely, if we elect to terminate development of beraprost-MR, then all remaining milestone payments would be due to Toray, unless certain regulatory standards and requirements have not been met, and material problems have been identified with respect to manufacture and regulatory compliance. In addition to these milestone payments, the amended agreement provides that we will become obligated to make additional payments to Toray if certain specified events occur. Please see the section entitled “Certain license and assignment agreements relating to our products may restrict our ability to develop products in certain countries and/or for particular diseases and impose other restrictions on our freedom to develop and market our products” under Part II—Item 1.A. “Risk Factors” below for more information about the license agreement with Toray.

Financial Position

Cash, cash equivalents and marketable investments (including all unrestricted and restricted amounts) at March 31, 2007, were approximately $252.4 million, as compared to approximately $303.2 million at December 31, 2006. The decrease of approximately $50.8 million is due primarily to the repurchase of

18




approximately $67.1 million worth of our common stock which was offset by cash provided by operating activities and investing activities of approximately $13.1 million and $20.4 million, respectively. Restricted cash and marketable investments pledged to secure our obligations under the synthetic operating lease discussed in the section entitled “ Off Balance Sheet Arrangement” at March 31, 2007, totaled approximately $38.2 million, as compared with approximately $39.0 million at December 31, 2006.

Property, plant and equipment at March 31, 2007, were approximately $42.1 million, as compared to approximately $34.7 million at December 31, 2006. The increase was primarily due the acquisition of an office building adjacent to our legal and governmental affairs office that we lease in Washington, DC for $5.7 million.

Investments in affiliates at March 31, 2007, were approximately $5.1 million, as compared to approximately $4.7 million at December 31, 2006. The increase was due primarily to an increase in the fair value of our investment in ViRexx Medical Corp., based on quoted market prices.

Accounts payable at March 31, 2007, were approximately $5.0 million, as compared to approximately $2.8 million at December 31, 2006. The increase was due generally to the timing of payments to vendors.

Accrued expenses at March 31, 2007, was approximately $13.8 million, as compared to approximately $15.3 million at December 31, 2006. The decrease was due primarily to the payout of employee year-end bonuses in March of 2007.

Total stockholders’ equity at March 31, 2007, were approximately $162.4 million, as compared to approximately $204.6 million at December 31, 2006. For the three-month period ended March 31, 2007, we repurchased approximately 1.2 million shares of our common stock for $67.1 million which was offset by $8.0 million from the proceeds from stock option exercises, $5.5 million from the recognition of stock option expense and $3.4 million in tax benefits recognized.

Results Of Operations

Three months ended March 31, 2007 and 2006

Revenues for the three months ended March 31, 2007, were approximately $40.2 million, as compared to approximately $33.2 million for the three months ended March 31, 2006.

19




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

 

 

Revenues for the
Three Months Ended
March 31,

 

 

 

2007

 

2006

 

% Change

 

Remodulin

 

$

38,150

 

$

31,304

 

 

21.9

%

 

Telemedicine services and products

 

1,886

 

1,749

 

 

7.8

%

 

Other products

 

133

 

111

 

 

19.8

%

 

Total revenues

 

$

40,169

 

$

33,164

 

 

21.1

%

 

 

Effective January 1, 2007, CuraScript’s minimum inventory requirement was reduced from 60 days to 30 days to make their agreement consistent with our other two U.S. distributors. This inventory reduction resulted in a reduction in our first quarter 2007 revenues of approximately $2 million.

For the three months ended March 31, 2007 and, 2006, approximately 85 percent and 87 percent of our revenues, respectively, were earned from our three distributors located in the United States.

Total revenues are reported net of estimated government rebates, prompt pay discounts and fees due to distributors for services. We pay government rebates to state Medicaid agencies that pay for Remodulin. We estimate our liability for such rebates based on the historical level of government rebates invoiced by state Medicaid agencies relative to U.S. sales of 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. Fees paid to distributors for services are estimated based on contractual rates for specific services applied to estimated units of service provided by the distributors for the period.

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

 

 

Three Months Ended
March 31,

 

 

 

2007

 

2006

 

Liability accounts, at beginning of period

 

$

2,366

 

$

1,590

 

Additions to liability attributed to sales in:

 

 

 

 

 

Current period

 

2,463

 

2,034

 

Prior period

 

264

 

 

Payments or reductions attributed to sales in:

 

 

 

 

 

Current period

 

(432

)

(361

)

Prior period

 

(2,352

)

(1,503

)

Liability accounts, at end of period

 

$

2,309

 

$

1,760

 

Net reductions to revenues

 

$

2,727

 

$

2,034

 

 

20




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. The table below summarizes research and development by major project and non-project components (dollars in thousands):

 

 

Three Months Ended March 31,

 

 

 

 

 

2007

 

2006

 

Percentage
Change

 

Program:

 

 

 

 

 

 

 

 

 

Cardiovascular

 

$

9,781

 

$

8,931

 

 

9.5

%

 

Cancer

 

2,891

 

2,055

 

 

40.7

%

 

Infectious disease

 

145

 

188

 

 

(22.9

)%

 

Stock option

 

2,572

 

2,321

 

 

10.8

%

 

Other

 

1,712

 

1,205

 

 

42.1

%

 

Subtotal

 

17,101

 

14,700

 

 

16.3

%

 

R&D expense from issuance of common stock

 

11,013

 

 

 

N/A

 

 

Total research and development expense

 

$

28,114

 

$

14,700

 

 

91.3

%

 

 

The increase in cardiovascular expenses was primarily due to expensing a $3.0 million milestone payment to Toray in connection with the amended beraprost-MR license, offset by a reduction in spending in the oral treprostinil program . D uring the first quarter of 2006, we purchased and expensed advanced chemical intermediates for the manufacture of oral treprostinil. There were no such purchases in the first quarter of 2007. The increase in expenses for the cancer program is related to the development of our OvaRex manufacturing processes.

The research and development expense from issuance of common stock pertains to the 200,000 shares of our common stock issued to Toray in connection with the amended beraprost-MR license.

Selling, general and administrative expenses consist primarily of salaries, travel, office expenses, insurance, professional fees, provision for doubtful accounts receivable, depreciation and amortization. The table below summarizes selling, general and administrative expenses by major categories (dollars in thousands):

 

 

Three Months Ended
March 31,

 

 

 

 

 

2007

 

2006

 

Percentage
Change

 

Category:

 

 

 

 

 

 

 

 

 

General and administrative

 

$

7,640

 

$

5,064

 

 

50.9

%

 

Sales and marketing

 

4,702

 

2,874

 

 

63.6

%

 

Stock option

 

2,822

 

2,141

 

 

31.8

%

 

Total selling, general and administrative expense

 

$

15,164

 

$

10,079

 

 

50.5

%

 

 

The increase in general and administrative expenses was due primarily to increased expenses of approximately (1) $817,000 of salaries and related expenses from headcount growth to support expanding operations; (2) $432,400 of rent expense due to rent on our laboratory facility in Silver Spring, Maryland, which began operations in May 2006; and (3) $458,300 of other operating expenses supporting the growth in our operations. The increase in sales and marketing related expenses is the result of an increase in salaries and related expenses of $1.3 million due to an increase in headcount and travel expenses of approximately $382,000.

21




A write down of intangible assets related to the HeartBar product tradename totaling approximately $2.0 million was recorded during the three months ended March 31, 2006. This write down was required since the HeartBar product was discontinued in January 2006 and is no longer sold.

Cost of 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 March 31, 2007, which is consistent with approximately 11% for the three months ended March 31, 2006. Cost of service sales was approximately 33% of service sales for the three months ended March 31, 2007, which is consistent with approximately 34% for the three months ended March 31, 2006.

Interest income for the three months ended March 31, 2007, was approximately $4.1 million, as compared to interest income of approximately $1.9 million for the three months ended March 31, 2006. The increase was due primarily to an increase in cash invested during 2007 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 $114,000 for the three months ended March 31, 2007, as compared to approximately $207,000 for the three months ended March 31, 2006. Northern Therapeutics, Inc.’s loss was due primarily to expenditures for its autologous (non-viral vector) gene therapy research for PAH.

An income tax benefit of approximately $1.4 million was recognized for the three months ended March 31, 2007, as compared to an expense of approximately $1.9 million recognized for the three months ended March 31, 2006. We recognized a benefit for income taxes as a result of incurring a loss for the three months ended March 31, 2007.

The income tax provision (benefit) 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 pre-tax income for the year are increased or decreased. The effective tax rate for the three months ended March 31, 2007 and 2006, was approximately 34 percent and 44 percent, respectively. Until legislation to retroactively reinstate federal tax credits for qualified research expenditures was enacted in October 2006, no benefit from the federal research credit generated during the three months ended March 31, 2006, was included in estimating the 2006 effective tax rate. The cumulative effect of the legislation was recorded in the fourth quarter 2006.

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 of our operations from such net proceeds of equity. Since 2004, we funded the majority of our operations from revenues, mainly Remodulin-related, and this is expected to continue.

Our working capital at March 31, 2007 was approximately $199.7 million, as compared to approximately $258.1 million at December 31, 2006. The decrease is primarily due to our purchase of approximately $67.1 million worth of our common stock during the three months ended March 31, 2007.

At March 31, 2007, restricted cash and marketable investments pledged to secure our obligations under the synthetic operating lease (discussed below under Off Balance Sheet Arrangement ) totaled approximately $38.2 million, as compared with approximately $39.0 million at December 31, 2006.

22




Net cash provided by operating activities was approximately $13.1 million for the three months ended March 31, 2007, as compared to approximately $16.5 million for the three months ended March 31, 2006. The decrease in cash provided by operating activities is due primarily to the $3.0 million milestone payment to Toray under the amended license agreement. During the three months ended March 31, 2007, we paid approximately $2.0 million for year-end 2006 incentive bonus payments and recognized an excess tax benefit on stock-based compensation of approximately $2.4 million which were not present during the three-month period ending March 31, 2006. For the three months ended March 31, 2007, we invested approximately $8.0 million in cash for property, plant and equipment, as compared to approximately $1.1 million in the three months ended March 31, 2006. In January 2007, we purchased an office building adjacent to our legal and governmental affairs office which we lease in Washington, DC for $5.7 million. For the three months ended March 31, 2007, we also received approximately $8.0 million in stock option exercise proceeds as compared to $3.5 million in the three months ended March 31, 2006. In addition, during the three months ended March 31, 2007, we repurchased approximately 1.2 million shares of our common stock for $67.1 million, as compared to no shares for the three months ended March 31, 2006.

We are currently in the planning phase for building an approximately 200,000 square foot facility in Research Triangle Park, North Carolina, which will consist of a manufacturing operation and offices. The manufacturing operation will primarily be for oral treprostinil, although it is expected to support other programs, and the offices will be used by our clinical development and sales and marketing staff, which currently occupy a leased facility in the area. Construction of this facility is expected to begin during the second quarter of 2007 and may take up to two years to complete. The project may cost up to $100 million, and we expect to fund the construction of this facility from our working capital or other financing arrangements.

Effective March 9, 2007, we entered into a construction management agreement with DPR Construction, Inc. (DPR) based in Falls Church, Virginia. DPR will manage the construction of our manufacturing and office facility in Research Triangle Park, North Carolina. The agreement has a guaranteed maximum price clause in which DPR agrees that the construction cost of the facility will not exceed approximately $78.0 million, which amount is subject to change based on agreed-upon changes to the scope of work. DPR will be responsible for covering any costs in excess of the guaranteed maximum price. If the ultimate cost of the project is less than the guaranteed maximum, we will share a portion of these savings with DPR. In addition, DPR must pay us penalties if the construction is not completed by February 2009, which date is subject to change based on agreed-upon changes to the scope of work. DPR has no material relationship with us or any of our affiliates.

In addition, we are in the planning phase for a new office and laboratory building which will connect to our current laboratory facility in Silver Spring, Maryland. The building of this facility is anticipated to begin in the latter half of 2007. The costs are still being estimated due to continuing design and related estimation work. We anticipate that the construction of this facility will be financed though a synthetic operating lease.

We made milestone payments totaling $20,000 pursuant to existing license agreements during each of the three months ended March 31, 2007 and 2006. We are obligated to make royalty payments on sales of Remodulin that 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 the section entitled “Part II, 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” below .

23




At March 31, 2007, we had, for federal income tax purposes, net operating loss carryforwards of approximately $48.3 million and business tax credit carryforwards of approximately $48.3 million which expire at various dates from 2012 through 2025. The remaining net operating loss carryforwards are 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.

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 through December 31, 2006 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 carryforwards 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 March 31, 2007.

Convertible Senior Notes

On October 30, 2006, we issued $250.0 million of 0.50% Convertible Senior Notes due October 2011 (the Convertible Senior Notes). Proceeds from the offering, after deducting the initial purchaser’s, Deutsche Bank Securities Inc. (Deutsche Bank), discount and commission and estimated expenses were approximately $242.0 million. The Convertible Senior Notes were issued at par value and pay interest in cash semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2007. The Convertible Senior Notes are unsecured unsubordinated obligations and rank equally with all other unsecured and unsubordinated indebtedness. The Convertible Senior Notes have an initial conversion price of $75.2257 per share. The Convertible Senior Notes may only be converted: (i) anytime after July 15, 2011; (ii) during any calendar quarter commencing after the date of original issuance of the notes, if the closing sale price of our common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter preceding the quarter in which the conversion occurs is more than 120% of the conversion price of the notes in effect on that last trading day; (iii) during the ten consecutive trading-day period following any five consecutive trading-day period in which the trading price for the notes for each such trading day was less than 95% of the closing sale price of our common stock on such date multiplied by the then current conversion rate; or (iv) if specified significant distributions to holders of our common stock are made, specified corporate transactions occur, or our common stock ceases to be approved for listing on The NASDAQ Global Select Market and is not listed for trading on another U.S. national or regional securities exchange. Upon conversion, a holder will receive: (i) cash equal to the lesser of the principal amount of the note or the conversion value; and (ii) to the extent the conversion value exceeds the principal amount of the note, shares of our common stock. In addition, upon a change in control, as defined in the indenture under which the Convertible Senior Notes have been issued, the holders may require us to purchase all or a portion of their Convertible Senior Notes for 100% of the principal amount plus accrued and unpaid interest, if any, plus a number of additional shares of our common stock, as set forth in the related indenture. The indenture under which the Convertible Senior Notes were issued contains customary covenants.

Concurrent with the issuance of the Convertible Senior Notes, we purchased call options on our common stock in a private transaction. The call options allow us to receive up to approximately 3.3 million shares of our common stock from counterparties, equal to the amount of common stock related to the excess conversion value that we would pay to the holders of the Convertible Senior Notes upon conversion. These call options will terminate upon the earlier of the maturity dates of the related Convertible Senior Notes or the first day all of the related Convertible Senior Notes are no longer outstanding due to conversion or otherwise. The call options, which cost approximately $80.8 million, were recorded as a

24




reduction of shareholders’ equity. The cost of call options for tax purposes creates a tax deduction since it is classified as an Original Issue Discount (OID). The deduction is considered a permanent difference and, as such, does not create a deferred tax asset. The benefit of the deduction is recorded as an increase to additional paid-in-capital.

In a separate transaction, we sold warrants to issue shares of our common stock at an exercise price of $105.689 per share. Pursuant to this transaction, warrants for approximately 3.3 million shares of our common stock were issued. If the average price of our common stock during a defined period, ending on or about the respective settlement dates, exceeds the exercise price of the warrants, the warrants will be settled in shares of our common stock. Proceeds received from the issuance of the warrants totaled approximately $45.4 million and were recorded as an increase to additional paid-in-capital.

We also used approximately $112.4 million of the proceeds from the issuance of the Convertible Senior Notes to repurchase approximately 1.8 million outstanding shares of our common stock as part of this transaction. We intend to use the remainder of the net proceeds for working capital or other general corporate purposes, which may include acquisitions, strategic investments or joint venture arrangements. Including the shares of common stock repurchased as part of the Convertible Senior Note transaction, we have repurchased a total of approximately 3.1 million shares of our common stock for approximately $182.5 million through March 31, 2007.

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 land 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 rent 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. This monthly rent 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% of the amount it funded towards the construction.

We pledged a portion of our marketable investments as collateral to secure our lease obligations. At March 31, 2007, approximately $38.2 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 rent to be paid. Similarly, if this rate decreases, so will the amount of rent to be paid to Wachovia.

Rent payments under the laboratory lease commenced in May 2006 and will continue through termination of the lease in May 2011. Upon the completion of the building in May 2006, Wachovia

25




advanced to us approximately $5.2 million, which constituted the remaining funds available for construction due to the lengthy process involved in finalizing construction costs. At March 31, 2007, the remaining construction advance totaled approximately $436,000 and is classified as other current liability in our balance sheet. When the final construction costs have been agreed upon, any remaining funds that were advanced will be returned to Wachovia. Upon the return of unspent funds, the remaining rent payments will be based on the actual funded costs of the building.

Based on construction costs of approximately $32.0 million and the current effective rate of approximately 5.9% (equivalent to the current 30-day LIBOR rate plus approximately 55 basis points at March 31, 2007), the rents to be paid are approximately $1.9 million annually. In addition, Wachovia paid us ground rent of approximately $307,000 in June 2004 covering the period through May 2011. 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% 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% of total expected 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 $692,000, net of accumulated amortization at March 31, 2007.

The laboratory lease and other agreements require, among other things, that we maintain a consolidated net worth of at least $70.0 million. The agreements contain other covenants and conditions with which we must comply throughout the lease periods and upon termination of the lease. If we were unable to comply with these covenants and conditions, if the noncompliance went uncured, and if the parties could not agree otherwise, the agreements could terminate. A termination of these agreements could result in our acquisition of the improvements from Wachovia or the loss of our liquid collateral.

Contractual Obligations

At March 31, 2007, we had contractual obligations coming due approximately as follows (in thousands):

 

 

Payment Due In

 

 

 

Total

 


2007

 

2008
to
2009

 

2010
to
2011

 

2012
and
Later

 

Notes payable and capital lease obligations(1)

 

$

256,237

 

$

1,215

 

$

2,522

 

$

252,500

 

$

 

Operating lease obligations

 

11,530

 

2,333

 

5,828

 

3,264

 

105

 

Construction agreement(2)

 

436

 

436

 

 

 

 

Purchase obligations(3)

 

4,566

 

566

 

2,000

 

2,000

 

 

Other long-term liabilities reflected in the
statement of financial position(4)

 

692

 

 

 

692

 

 

Milestone payments(5)

 

25,545

 

2,170

 

10,340

 

10,015

 

3,020

 

 

 

$

299,006

 

$

6,720

 

$

20,690

 

$

268,471

 

$

3,125

 


(1)           In October 2006, we issued $250.0 million aggregate principal amount of Convertible Senior Notes. The principal balance of the notes is repaid in cash with any increase of our stock price above $75.22 paid in our stock. While the notes can be redeemed by the bondholder once our stock price exceeds $75.22, we have assumed that the bondholders will hold the bonds until maturity.

26




(2)           Upon the completion of our laboratory 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 upon, any remaining funds that were advanced will be returned to Wachovia. At March 31, 2007, the remaining construction advance totaled approximately $436,000 and is classified as other current liability in our balance sheet .

(3)           Includes specified payments to Toray for clinical trial material.

(4)           Upon termination of the lease with Wachovia for the laboratory facility, we will generally have the option of renewing the lease, purchasing the laboratory or selling it and repaying Wachovia the cost of its construction. We guaranteed that if the laboratory is sold, Wachovia will receive at least 86% of the amount it funded towards the construction. We estimate that the laboratory will cost approximately $32.0 million to construct and the guarantee is estimated at approximately $27.5 million. The estimated fair value of the guarantee is included in other long-term liabilities reflected in the statement of financial position. See the section entitled “ Off Balance Sheet Arrangement” above for additional information.

(5)           We licensed certain products from other companies under certain license agreements. These agreements generally include milestone payments to be paid in cash by us upon the achievement of certain product development and commercialization goals set forth in each license agreement. Total milestone payments under these license agreements have been estimated based on the assumption that the products will be successfully developed and on the estimated timing of these development and commercialization goals.

Summary of Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and judgments, which are based on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumption as to future events. By their nature, estimates are subject to an inherent degree of uncertainty and, as such, actual results may differ from our estimates. We discuss accounting policies and assumptions that involve a higher degree of judgment and complexity than others in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report to shareholders on Form 10-K for the year ended December 31, 2006.

Recent Accounting Pronouncements

Fair Value Measurements

In September 2006, the FASB issued SFAS 157, Fair Value Measurements . SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact the adoption of this statement could have on our financial condition, results of operations or cash flows.

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Uncertain Tax Positions

In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes . FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The interpretation applies to all tax positions related to income taxes subject to SFAS 109. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted this interpretation without a significant impact on our financial condition, results of operations or cash flows.

Hybrid Financial Instruments

In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments which amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities and SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities . SFAS 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring in fiscal years beginning after September 15, 2006. We do not believe the adoption of this statement will have a material impact on our financial condition, results of operations or cash flows.

Item 3.                      Quantitative and Qualitative Disclosures about Market Risk

At March 31, 2007, a substantial portion of our assets consisted of federally-sponsored agencies and corporate debt securities. 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 March 31, 2007, we had approximately $166.0 million in debt securities issued by federally-sponsored agencies and corporate issuers with a weighted average stated interest rate of approximately 4.7 percent maturing through March 2012 and callable annually. The fair market value of this held-to-maturity portfolio at March 31, 2007 was approximately $164.4 million.

At March 31, 2007, 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 March 31, 2007, we had approximately $15.8 million in these debt securities with a weighted average stated interest rate of approximately 5.3 percent. The fair market value of these available-for-sale debt securities as of March 31, 2007, was approximately $15.8 million.

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. Under these agreements, we pay rent 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. This rent, therefore, is subject to the risk that the LIBOR rate will increase or decrease during the period until termination in May 2011. At March 31, 2007, the 30-day LIBOR rate was approximately 5.3%. For every movement of 100 basis points (1%) in the

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30-day LIBOR rate, the rent under this lease could increase or decrease by approximately $320,000 on an annualized basis.

Item 4.                      Controls and Procedures

Based on their evaluation, as of March 31, 2007, 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, summarized, processed 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 (the Exchange Act) 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 availability of drug product;

·        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 expectation of reimbursement by third-party payers for intravenous Remodulin and the impact of any regulatory changes to the level of reimbursement;

·        The expected levels and timing of bulk purchases of chemicals used to manufacture the various forms of treprostinil, the active ingredient of Remodulin and our inhaled and oral formulations;

·        The expected impact of CuraScript’s inventory reduction from 60 days to 30 days;

·        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 expectation of future repurchases of our common stock, including those shares subject to repurchase from Toray;

·        The funding of operations from future revenues;

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·        The expectation of continued profits or losses;

·        Expectations concerning milestone and royalty payments in 2007 and beyond;

·        Expectations of receiving clinical trial matter and related documentation from Toray prior to the end of 2007;

·        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, the tax impact of our hedging contracts entered into in connection with the convertible debt offering 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 Remodulin;

·        The expectation, outcome and timing of marketing approvals in European Union countries for intravenous Remodulin;

·        The expected timing of milestone payments from Mochida and commercial activities in Japan;

·        The expected revenue recognition of milestone payments from Mochida;

·        The expected levels and timing of Remodulin sales;

·        The adequacy of our resources to fund operations;

·        The expectation, outcome and timing of validation of, and level of spending to validate, our newly-constructed laboratory production facility in Silver Spring, Maryland;

·        The potential amount of the minimum residual value guarantee under our synthetic lease agreement with Wachovia Bank, N.A. and Wachovia Development Corporation relating to our facility in Silver Spring, Maryland;

·        The expected amounts and timing of resources for the construction of facility projects in Research Triangle Park, North Carolina and the expectation to finance the construction of our new facility in Silver Spring, Maryland;

·        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.

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The statements identified as forward-looking statements may exist in the section entitled “ Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” above 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 differences 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 (loss) 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 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 were profitable for every quarter ended after March 31, 2004, during the three months ending March 31, 2007, we paid Toray approximately $14.0 million in cash and stock for a license fee. These amounts were expensed since the licensed product does not have economical viability. If it were not for the expensing of these payments, we would have been profitable for the quarter. At March 31, 2007, our accumulated deficit was approximately $44.1 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, their compliance with contractual inventory requirements 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;

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

·        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;

·        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 license 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.

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. On

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November 17, 2006, Myogen was acquired by Gilead Sciences, Inc., which is regarded as a large and successful biotechnology company in the United States. Generic formulations of Flolan could be available for commercial sale as early as May 2007. Flolan is delivered by intravenous infusion and considered to be an effective treatment by most PAH experts.

·        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 was initially marketed by CoTherix, Inc. in the United States and Schering AG in Europe. In January 2007, CoTherix was acquired by Actelion Ltd, the manufacturer and distributor of Tracleer, which is regarded as a successful biotechnology company.

·        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, Inc. 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 they give 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. Finally, as a result of Actelion’s recent acquisition of CoTherix, Actelion now controls two of the five therapies approved for PAH in the United States. In addition to reducing competition through this consolidation, because Actelion is dominant in the sales and marketing of oral PAH therapies, it may bring its considerable influence with prescribers to the sales and marketing of Ventavis.

Many companies are marketing and developing products containing arginine that compete with our 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 that 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 they give to their patients. This could result in less Remodulin being used by such patients and, hence, reduced sales of Remodulin.

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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. (Encysive) 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 FDA in the United States. In July 2006, Encysive announced that the FDA determined that Thelin was approvable with one substantive item remaining unresolved. In December 2006, Encysive announced that the FDA had accepted for review its complete response to its FDA’s July 2006 approvable letter. In August 2006, Encysive announced that Thelin received marketing authorization in all nations in the European Union. If approved in the United States, Thelin would become the second drug available in the class known as endothelin receptor antagonists;

·        Ambrisentan is being developed by Gilead Sciences, Inc. for the treatment of PAH. Ambrisentan, an oral tablet, has completed pivotal clinical testing and is also an endothelin receptor antagonist. In February 2007, Gilead Sciences announced that its New Dug Application for ambrisentan was accepted by the FDA for six-month priority review. Gilead Sciences is regarded as a large and successful biotechnology company in the United States;

·        Cialis is an approved oral treatment for erectile dysfunction and is currently marketed by Lilly ICOS LLC, a joint venture of Eli Lilly and Company and ICOS Corporation. Cialis is currently being studied in patients with PAH, and is in the same class of drugs as Revatio. On October 17, 2006, ICOS Corporation announced that it signed a merger agreement to be acquired by Eli Lilly and Company, which is a large and successful pharmaceutical company in the United States;

·        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;

·        Aviptadil, an inhaled formulation of vasoactive intestinal peptide, is being developed by mondoBIOTECH Holding SA, for the treatment of PAH. In September 2006, mondoBIOTECH announced that it had outlicensed Aviptadil for the treatment of PAH to Biogen-Idec Inc., which is regarded as a large and successful biotechnology company in the United States;

·        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 therapy which contains a metabolite of estradiol and has been shown in animal and cell models to address certain processes associated with PAH;

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

·        Sorafenib, marketed by Bayer AG as Nexavar ®  for advanced renal cell cancer, is a small molecule which inhibits Raf kinase and which may interfere with the thickening of blood vessel walls associated with PAH. A Phase 1 clinical trial in PAH has been proposed; and

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·        Recombinant Elafin, being developed by PROTEO Biotech AG, is a protein that is produced naturally in the body that may inhibit inflammatory reactions. In February 2007, Elafin recently was granted orphan product status in the European Union for the treatment of PAH and chronic thromboembolic pulmonary hypertension.

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 distributors selling Remodulin to obtain reimbursement from these payers. 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 could 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, products in our arginine formulations platform, and CardioPAL ®  cardiac event monitors and Holter monitors in our telemedicine platform. We do not have the 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.

Until November 14, 2006, Medtronic MiniMed was our exclusive partner for the subcutaneous delivery of Remodulin using the MiniMed microinfusion device for PAH. Medtronic had advised us that it intended to discontinue making infusion pumps for subcutaneous delivery of Remodulin after first giving us and our distributors the opportunity to purchase desired quantities. On November 14, 2006, we mutually agreed with MiniMed to terminate our contract. We relied on Medtronic MiniMed’s experience, expertise and performance in supplying the infusion pumps. Any disruption in the supply to PAH patients of infusion devices could delay or prevent patients from initiating or continuing Remodulin therapy, which could adversely affect our revenues. Doctors and patients may not be able to obtain acceptable substitute delivery devices to replace the MiniMed microinfusion devises when the available supply held by our distributors has been depleted.

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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. (which has merged with CVS Corporation) 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 distribution partners and contractors do not achieve acceptable profit margins, they may not continue to distribute our products. If our distribution partners in the United States and internationally are unsuccessful in their efforts, our revenues will suffer.

During 2005 and early 2007, all of our Remodulin distributors in the United States were sold to larger companies. When these distributors were independently managed, the Remodulin franchise was a more significant business to them, because they were much smaller. As divisions or subsidiaries of much larger companies, however, Remodulin could be much less significant to these distributors. There can be no assurance that a merger among our distributors will not adversely affect Remodulin distribution. In addition, we have been informed that, effective January 1, 2007, Accredo is the exclusive U.S. distributor for Flolan. It is possible that our 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 three months ended March 31, 2007, our Remodulin sales accounted for 95% of our total revenues. If approvals are withdrawn for 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.

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

Even if regulatory authorities approve our products, they 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 risk of line infections or sepsis associated with the use of intravenous Remodulin.

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Reports of side effects, such as sepsis, associated with intravenous Remodulin could cause physicians and patients to not accept Remodulin or to cease to use Remodulin in favor of alternative treatments.

Sepsis is a serious and potentially life-threatening infection of the bloodstream caused by a wide variety of bacteria. Intravenous prostacyclins are infused continuously through a catheter placed in patients’ chests, and sepsis is an expected consequence of this type of delivery. As a result, sepsis is included as a risk in both the Remodulin and Flolan package inserts. The Flolan package insert specifically documents the risk rate of sepsis at 0.32 events per patient per year, meaning one patient out of every three taking the drug is expected to have a sepsis infection each year. Or, each patient on Flolan is expected to have one sepsis infection every three years. The Remodulin package insert notes that two out of 38 patients experienced catheter-related infections in an open-label 12-week study, but does not provide any data relating to expected risk rate. Historical data on intravenous prostacyclin administration does not identify the specific types of bacteria responsible for these infections.

In February 2007, the Scientific Leadership Committee (SLC) of the Pulmonary Hypertension Association announced new guidance relating to the treatment of PAH patients on long-term intravenous therapy. The SLC guidance was issued in response to the release of a slide presentation prepared by researchers with the U.S. Centers for Disease Control and Prevention (CDC) entitled “ Bloodstream infections among patients treated with intravenous epoprostenol and intravenous treprostinil for pulmonary arterial hypertension, United States 2004–2006 ”. These slides accompanied a presentation to the SLC and were subsequently published as a report in the CDC’s Morbidity and Mortality Weekly Report on March 2, 2007. The slides and report were prepared in connection with a CDC retrospective inquiry at seven centers regarding a report of increased blood stream infections, particularly gram-negative blood stream infections, among PAH patients treated with intravenous Remodulin as compared to intravenous Flolan. The SLC guidance statement noted that the CDC observations were hypothesis-generating and did not permit definitive or specific conclusions. The SLC reminded physicians of the need to be aware of the range of possible gram negative and gram positive infectious organisms in patients with long-term central catheters and to treat them appropriately. In response to the SLC guidance statement, we are planning to commence a multi-center, multi-national, multi-year and multi-agent prospective study to scientifically test the hypothesis of whether there are differences in the risk of sepsis and sepsis sub-types among parenterally-delivered prostanoids. We anticipate this study to enroll several hundred patients, which enrollment could commence later this year. We also plan to coordinate a working group with the Pulmonary Hypertension Association and physicians and nurses, along with its network of specialty distributors and home health care providers, to develop unified best practice recommendations related to the chronic administration of IV prostanoids via central venous catheters. Finally, we have submitted revised Remodulin package labeling to more fully describe the known infection risk and appropriate technique that should be practiced when preparing and administering Remodulin intravenously.

Although the risk of sepsis is currently included in the Remodulin label, and the occurrence of sepsis is familiar to physicians who treat PAH patients, concern about bloodstream infections may adversely impact physicians’ prescribing practices in regard to Remodulin. If that occurs, Remodulin sales could suffer and our profitability could be adversely impacted.

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.

The OvaRex material that is currently being used in our studies was made by a contract manufacturer and will expire in early 2008. In 2007, we plan to make the OvaRex antibody for the first time ourselves, in

38




our new Silver Spring laboratory. Biological drugs are generally the most complex drugs to manufacture, and we have never attempted to manufacture them in-house before. After we manufacture our own OvaRex, 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. Although our laboratory is completed and is occupied by our personnel, we are still performing test runs and finalizing procedures for our developmental production runs prior to our process scale-up and validation production runs of OvaRex. In addition, we are working with our builders to complete or repair certain aspects of our laboratory. We have commenced process scale-up and are pursuing FDA validation production of this facility.

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 conducting stability studies on Remodulin, formulating treprostinil for inhalation use, formulating tablets for the oral clinical trials, and analyzing 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 and devices for use in trials.

Although there are few 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.

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 and process validation 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 and formulators 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 and formulators 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 and formulated may be deficient. If this occurred, such products would not be available for sale or use;

·        If we have to change to another manufacturing or formulation contractor for any reason 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 validation and production of the affected product. We were recently notified that Cardinal Health intends to sell its formulation business and there can be no assurances that a purchaser of this business will continue formulating treprostinil for both our inhalation and oral clinical trials;

39




·        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 transferring our entire drug laboratory operations to the Silver Spring, Maryland facility we 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 for approval of the facility, and this could result in delays;

·        The supply of raw and advanced intermediate materials and components used in the manufacture and packaging of treprostinil, Remodulin and other products may be interrupted, which could delay the manufacture and subsequent sale of such products. Any proposed substitute materials and components are subject to approval by the FDA and international drug regulators before any manufactured product can be sold. The timing of such FDA and international drug regulatory approval is difficult to predict and approvals may not be timely obtained;

·        Without substantial experience in operating our new production facility, we may not be able to successfully produce treprostinil without a third-party manufacturer; and

·        We may not have intellectual property rights, or may have to share intellectual property rights, to many of the improvements in the manufacturing processes or new manufacturing processes for our new products.

Any of these factors could delay clinical studies or commercialization of our products, entail higher costs, and result in our inability to effectively sell our products.

If our products fail in clinical studies, we will not be able to obtain or maintain FDA and international approvals and will not be able to sell those products.

In order to sell our pharmaceutical products, we must receive regulatory approvals. To obtain those approvals, we must conduct clinical studies demonstrating that the drug product, including its delivery mechanism, is safe and effective. If we cannot obtain approval from the FDA and international drug regulators for a product, that product cannot be sold, and our revenues will suffer.

We are conducting a Phase III clinical study of Viveta, an inhaled formulation of treprostinil, and Phase II/III clinical studies of an oral formulation of treprostinil. Our lead glycobiology antiviral agent, UT-231B, completed a Phase II, proof-of-concept study in late 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 are also currently conducting two identical Phase III pivotal studies of OvaRex for the treatment of advanced ovarian cancer. We are still completing or planning pre-clinical studies for our other products.

In the past, several of our product candidates have failed or been discontinued at various stages in the product development process, including, but not limited to: immediate release beraprost, which failed in Phase III testing for early stage peripheral vascular disease; Ketotop, which failed in Phase III testing for osteoarthritis of the knee; and UT-77, which failed in Phase II testing for chronic obstructive pulmonary disease. Also, the length of time that it takes for us to complete clinical trials and obtain regulatory approval for product marketing has in the past varied by product and by the intended use of a product. We expect that this will likely be the case with future product candidates and we cannot predict the length of time to complete necessary clinical trials and obtain regulatory approval.

Our ongoing and planned clinical studies might be delayed or halted for various reasons, including:

·        The drug is not effective, or physicians think that the drug is not effective;

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

40




·        Patients experience severe side effects during treatment;

·        Other investigational or approved therapies are viewed as more effective or convenient by physicians or patients;

·        Patients 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;

·        Drug supplies are not available or suitable for use in the studies; and

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

In addition, the FDA and international regulatory authorities have substantial discretion in the approval process. The FDA and international regulatory authorities may not agree that we have demonstrated that our products are safe and effective.

Our corporate compliance program cannot guarantee that we are in compliance with all potentially applicable federal, state and international regulations.

The development, manufacture, distribution, pricing, sales, marketing, and reimbursement of our products, together with our general operations, are subject to extensive federal, state and international regulation. While we have developed and instituted corporate compliance programs, we cannot ensure that we or our employees are or will be in compliance with all potentially applicable federal, state and international regulations. If we fail to comply with any of these regulations, a range of actions could result, including, but not limited to, the termination of clinical trials, the failure to approve a product candidate, restrictions on our products or manufacturing processes, including withdrawal of our products from the market, significant fines, exclusion from government healthcare programs, or other sanctions or litigation.

If the licenses, assignments and alliance agreements we depend on are breached or terminated, we would lose our right to develop and sell the products covered by the licenses, assignments and alliance agreements.

Our business depends upon the acquisition, assignment and license of drugs and other products which have been discovered and initially developed by others, including Remodulin and all of the other products in the prostacyclin platform, all of the products in the immunotherapeutic monoclonal antibody platform, all of the products in the glycobiology antiviral agents platform, and all arginine based products. Under our product license agreements, we are granted certain rights to existing intellectual property owned by third parties subject to the terms of each license agreement, whereas assignment agreements transfer all right, title and ownership of the intellectual property to us, subject to the terms of each assignment agreement. We have also obtained licenses to other third-party technology to conduct our business. In addition, we may be required to obtain licenses to other third-party technology to commercialize our early-stage products. This dependence has the following risks:

·        We may not be able to obtain future licenses, assignments and agreements at a reasonable cost or at all;

·        If any of our licenses or assignments are terminated, we will lose our rights to develop and market the products covered by such licenses or assignments;

·        The licenses and assignments that we hold generally provide for termination by the licensor or assignor in the event we breach the license or assignment agreement, including failing to pay royalties and other fees on a timely basis;

·        In the event that GlaxoSmithKline terminates its assignment agreement or Pfizer terminates its license agreement, we will have no further rights to utilize the assigned patents or trade secrets to develop and commercialize Remodulin. For the three months ended March 31, 2007, sales of

41




Remodulin accounted for approximately 95% of our total revenues. GlaxoSmithKline or Pfizer could seek to terminate the assignment or license, respectively, in the event that we fail to pay royalties based on sales of Remodulin; and

·        If licensors fail to maintain the intellectual property licensed or assigned to us as required by most of our license and assignment agreements, we may lose our rights to develop and market some or all of our products and may be forced to incur substantial additional costs to maintain the intellectual property ourselves or force the licensor or assignor to do so.

Certain license and assignment agreements relating to our products may restrict our ability to develop products in certain countries and/or for particular diseases and impose other restrictions on our freedom to develop and market our products.

When we acquire, license or receive assignments of drugs and other products that have been discovered and initially developed by others, we may receive rights only to develop such drugs or products in certain territories and not throughout the world. For example, we do not have the right to market OvaRex and all our other monoclonal antibody immunotherapies for sale in most of Europe and the Middle East, and we only have the rights to market beraprost-MR for sale in North America and Europe.

In addition, provisions in our license and assignment agreements impose other restrictions on our freedom to develop and market our products. For example, in assigning Remodulin to us, GlaxoSmithKline retained an exclusive option and right of first refusal to negotiate a license agreement with us if we ever decide to license any aspect of the commercialization of Remodulin anywhere in the world. Similarly, in connection with its licenses of beraprost-MR to us, Toray obtained a right of first refusal from us to develop and sell in Japan up to two compounds that we develop. We also agreed to provisions establishing a conditional restricted non-competition clause in Toray’s favor, giving them the right to be our exclusive provider of beraprost-MR and requiring that we make certain minimum annual sales in order to maintain our exclusive rights to beraprost-MR. The restrictions that we have accepted in our license and assignment agreements affect our freedom to develop and market our products in the future.

If our, or our suppliers’, patent and other intellectual property protection is inadequate, our sales and profits could suffer or competitors could force our products completely out of the market.

Our United States patent for the method of treating PAH with Remodulin is currently set to expire in October 2014. The patent for OvaRex and its method of use are the subject of a combination of issued patents and pending applications in the United States and around the world. The issued patents for OvaRex have expiration dates ranging from 2016 to 2022. We believe that some of the patents to which we have rights may be eligible for extensions of up to five years based upon patent term restoration procedures in Europe and under the Hatch-Waxman Act in the United States. Competitors may develop products based on the same active ingredients as our products, including Remodulin, and market those products after the patents expire, or may design around our existing patents. If this happens, our sales would suffer and our profits could be severely impacted. In addition, if our suppliers’ intellectual property protection is inadequate, our sales and profits could be adversely affected.

Patents may be issued to others that prevent the manufacture or sale of our products. We may have to license those patents and pay significant fees or royalties to the owners of the patents in order to keep marketing our products. This would cause profits to suffer. We have been granted patents in the United States for the synthesis of Remodulin, but patent applications that have been or may be filed by us may not result in the issuance of additional patents. The scope of any patent issued may not be sufficient to protect our technology. The laws of international jurisdictions in which we intend to sell our products may not protect our rights to the same extent as the laws of the United States.

42




In addition to patent protection, we also rely on trade secrets, proprietary know-how and technology advances. We enter into confidentiality agreements with our employees and others, but these agreements may not be effective in protecting our proprietary information. Others may independently develop substantially equivalent proprietary information or obtain access to our know-how.

Litigation, which is very expensive, may be necessary to enforce or defend our patents or proprietary rights and may not end favorably for us. While we have recently settled pending litigation against two parties related to our arginine patents, we may in the future choose to initiate litigation against other parties who we come to believe have violated our patents or other proprietary rights. If such litigation is unsuccessful or if the patents are invalidated or canceled, we may have to write off the related intangible assets which could significantly reduce our earnings. Any of our licenses, patents or other intellectual property may be challenged, invalidated, canceled, infringed or circumvented and may not provide any competitive advantage to us.

If our highly qualified management and technical personnel leave us, our business may suffer.

We are dependent on our current management, particularly our founder and Chief Executive Officer, Martine Rothblatt, Ph.D.; our President and Chief Operating Officer, Roger Jeffs, Ph.D.; our Chief Financial Officer and Treasurer, John Ferrari; and our Executive Vice President for Strategic Planning, General Counsel and Corporate Secretary, Paul Mahon. While these individuals are employed by us pursuant to multi-year employment agreements, employment agreements do not ensure the continued retention of employees. We do not maintain key person life insurance on these officers, although we do incentivize them to remain employed by us until at least age 60 through our Supplemental Executive Retirement Plan. Our success will depend in part on retaining the services of our existing management and key personnel and attracting and retaining new highly qualified personnel. Few individuals possess expertise in the field of cardiovascular medicine, infectious disease and oncology, and competition for qualified management and personnel is intense.

We may not have adequate insurance and may have substantial exposure to payment of product liability claims.

The testing, manufacture, marketing, and sale of human drugs involve product liability risks. Although we currently have product liability insurance covering claims up to $20 million per occurrence and in the aggregate for our products, we may not be able to maintain this product liability insurance at an acceptable cost, if at all. In addition, this insurance may not provide adequate coverage against potential losses. If claims or losses exceed our liability insurance coverage, we may go out of business.

We may not have, or may have to share rights to, future inventions arising from our license, assignment and alliance agreements and may lose potential profits or savings.

Pursuant to our agreements with certain business partners, any new inventions or intellectual properties that arise from our activities will be owned jointly by us and these partners. If we do not have rights to new developments or inventions that arise during the terms of these agreements, or we have to share the rights with others, we may lose some or all of the benefit of these new rights, which may mean a loss of future profits or savings generated from improved technology.

If we need additional financing and cannot obtain it, product development and sales may be limited.

We may need to spend more money than currently expected because we may need to change our product development plans or product offerings to address difficulties with clinical studies, to prepare for commercial sales or to continue sales of Remodulin. We may not be able to obtain additional funds on commercially reasonable terms or at all. If additional funds are not available, we may be compelled to

43




delay clinical studies, curtail operations or obtain funds through collaborative arrangements that may require us to relinquish rights to certain products or potential markets.

Our activities involve hazardous materials, and improper handling of these materials could expose us to significant liabilities.

Our research and development and manufacturing activities involve the controlled use of chemicals and hazardous materials and we are expanding these activities to new locations. As a consequence, we are subject to numerous federal, state, and local environmental and safety laws and regulations, including those governing the management, storage and disposal of hazardous materials. We may be required to incur significant costs in order to comply with current or future environmental laws and regulations, and substantial fines and penalties for failure to comply with those laws and regulations. While we believe that we are currently in substantial compliance with laws and regulations governing these materials, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, we could be liable for civil damages that result or for costs associated with the cleanup of any release of hazardous materials, which could be substantial. Any such liability could exceed our resources and could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Common Stock

Our stock price could be volatile and could decline.

The market prices for securities of drug and biotechnology companies are highly volatile, and there are significant price and volume fluctuations in the market that may be unrelated to particular companies’ operating performances. The table below sets forth the high and low closing prices for our common stock for the periods indicated:

 

 

High

 

Low

 

January 1, 2005 – December 31, 2005

 

$

77.82

 

$

41.37

 

January 1, 2006 – December 31, 2006

 

$

71.33

 

$

47.96

 

January 1, 2007 – March 31, 2007

 

$

59.13

 

$

47.87

 

 

Our stock price could decline suddenly due to the following factors, among others:

·        Quarterly and annual financial and operating results;

·        Failure to meet estimates or expectations of securities analysts or our projections;

·        The pace of enrollment in and the results of clinical trials;

·        Physician, patient, investor or public concerns as to the efficacy and/or safety of products marketed or being developed by us or by others;

·        Changes in or new legislation and regulations affecting reimbursement of Remodulin by Medicare or Medicaid and changes in reimbursement policies of private health insurance companies;

·        Announcements by us or others of technological innovations or new products or announcements regarding our existing products;

·        Developments in patent or other proprietary rights;

·        Future sales of substantial amounts of common stock by us or our existing stockholders;

·        Future sales of common stock by our directors and officers;

·        Failure to maintain approvals to sell Remodulin;

44




·        The adoption of significant short positions in our common stock by hedge funds or other significant investors or the accumulation of our stock by hedge funds or other institutional investors with investment strategies that may lead to short-term holdings;

·        Timing and outcome of additional regulatory approvals; and

·        General market conditions.

Future sales of shares of our common stock may depress our stock price.

If we issue common stock to raise capital, or our stockholders transfer their ownership of our common stock or sell a substantial number of shares of common stock in the public market, or investors become concerned that substantial sales might occur, the market price of our common stock could decrease. Three of our four executive officers have announced their adoption of 10b5-1 prearranged trading plans. In accordance with these plans, these executives periodically sell a specified number of our shares of common stock either owned by them or acquired through the exercise of stock options. However, our executives and directors may choose to sell additional shares outside of 10b5-1 trading plans and one executive and five directors have done so. A decrease in our common stock price could make it difficult for us to raise capital by selling stock or to pay for acquisitions using stock. To the extent outstanding options are exercised or additional shares of capital stock are issued, existing stockholders may incur additional dilution.

Furthermore, the conversion of some or all of our 0.50% convertible secured notes due 2011 (Convertible Notes) after our stock price reaches $105.67 per share will dilute the ownership interests of our existing stockholders. We have filed a resale registration statement covering sales of such shares. The Convertible Notes initially are convertible into an aggregate of 3.3 million shares of our common stock. Any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Convertible Notes may encourage short selling by market participants because the conversion of the Convertible Notes could depress the price of our common stock.

The Convertible Note Purchase Call Option and call warrant transactions we entered into in connection with the sale of the Convertible Notes may affect the trading price of our common stock.

In connection with the issuance of the Convertible Notes, we entered into a privately-negotiated convertible note hedge transaction with Deutsche Bank AG London, which is expected to reduce the potential dilution to our common stock upon any conversion of the Convertible Notes. We also entered into a warrant transaction with Deutsche Bank AG London with respect to our common stock pursuant to which we may issue shares of our common stock. In connection with hedging these transactions, Deutsche Bank AG London or its affiliates were expected to enter into various over-the-counter derivative transactions with respect to our common stock at, and possibly after, the pricing of the Convertible Notes and may have purchased or may purchase shares of our common stock in secondary market transactions following the pricing of the Convertible Notes. These activities could have had, or could have, the effect of increasing the price of our common stock. Deutsche Bank AG London or its affiliates are likely to modify their hedge positions from time to time prior to conversion or maturity of the Convertible Notes by purchasing and selling shares of our common stock, other of our securities or other instruments it may wish to use in connection with such hedging. The effect, if any, of any of these transactions and activities on the market price of our common stock or the Convertible Notes will depend in part on market conditions and cannot be ascertained at this time, but any of these activities could adversely affect the value of our common stock (including during any period used to determine the amount of consideration deliverable upon conversion of the Convertible Notes).

45




The fundamental change purchase feature of the Convertible Notes may delay or prevent an otherwise beneficial attempt to take over our company.

The terms of the Convertible Notes require us to purchase the Convertible Notes for cash in the event of a fundamental change. A takeover of our company would trigger the requirement that we purchase the Convertible Notes. This may have the effect of delaying or preventing a takeover of our company that would otherwise be beneficial to investors.

Provisions of Delaware law and our certificate of incorporation, by-laws and shareholder rights plan could prevent or delay a change of control or change in management that could be beneficial to us and our public stockholders.

Certain provisions of Delaware law and our certificate of incorporation, by-laws and shareholder rights plan may prevent, delay or discourage:

·        A merger, tender offer or proxy contest;

·        The assumption of control by a holder of a large block of our securities; and

·        The replacement or removal of current management by our stockholders.

For example, our certificate of incorporation divides the board of directors into three classes, with members of each class to be elected for staggered three-year terms. This provision may make it more difficult for stockholders to change the majority of directors and may hinder accumulations of large blocks of common stock by limiting the voting power of such blocks. This may further result in discouraging a change of control or change in current management.

We will need cash to pay at least a portion of the conversion value of the Convertible Notes, as required by the indenture governing the notes.

At least a portion of the repayment of the Convertible Notes will be required to be made in cash. Our product development plans and product offerings could be negatively impacted if we do not have sufficient financial resources, or are not able to arrange suitable financing, to pay required amounts upon conversion or tender of the notes and fund our operations.

Our existing directors and executive officers own a substantial block of our stock and might be able to influence the outcome of matters requiring stockholder approval.

Our directors and named executive officers beneficially owned approximately 10.6% of our outstanding common stock as of March 31, 2007, including stock options that could be exercised by those directors and executive officers within 60 days of that date. Accordingly, these stockholders as a group might be able to influence the outcome of matters requiring approval by our stockholders, including the election of our directors. Such stockholder influence could delay or prevent a change of control with respect to us.

If stockholders do not receive dividends, stockholders must rely on stock appreciation for any return on their investment in us.

We have never declared or paid cash dividends on any of our capital stock. We currently intend to retain our earnings for future growth and therefore do not anticipate paying cash dividends in the future.

46




Item 2.                      Unregistered Sales of Equity Securities and use of Proceeds

Sales of Unregistered Equity Securities

On March 17, 2007, we issued in a private placement in reliance on the exemption from registration provided under Regulation D  under the Securities Act of 1933, 200,000 shares of our common stock to Toray in exchange for the cancellation of Toray’s then-existing option to purchase 500,000 shares of our common stock. Toray has the right to request that we repurchase the newly-issued 200,000 shares of common stock upon thirty-days prior notice at the price of $54.41 per share, which is the average closing price of our stock between January 11, 2007 and February 23, 2007. Based on the average closing price of our stock for the two trading days prior to and the two trading days after March 16, 2007, we recognized a research and development expense of approximately $11.0 million in March 2007 relating to the issuance of the 200,000 shares, since beraprost-MR has not yet obtained regulatory approval for commercial sales. In accordance with the provision of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , and EITF Topic No. D-98, Classification and Measurement of Redeemable Securities , these shares of stock are reflected in mezzanine equity as common stock subject to repurchase valued at the repurchase price. If Toray request that we repurchase these shares, then the value of these shares will retransferred to a liability account until the repurchase is completed.

Stock Repurchases

Period

 

 

 

Total Number
of Shares
Purchased(1)

 

Average Price
Paid per Share

 

Total Number of Shares
Purchased as Part of
Publicly Announced
Program

 

Maximum Number of
Shares That May yet be
Purchased Under the
Program(1)

 

January 1 – January 31

 

 

99,100

 

 

 

$

55.71

 

 

 

99,100

 

 

 

2,037,091

 

 

February 1 – February 28

 

 

147,282

 

 

 

$

52.03

 

 

 

147,282

 

 

 

1,889,809

 

 

March 1 – March 31

 

 

978,140

 

 

 

$

55.04

 

 

 

978,140

 

 

 

911,669

 

 

Total

 

 

1,224,522

 

 

 

$

54.73

 

 

 

1,224,522

 

 

 

N/A

 

 


(1)           On October 17, 2006, our Board of Directors authorized the repurchase up to 4.0 million shares prior to October 17, 2008. As of March 31, 2007, 911,669 shares remained eligible for repurchase under the program.

47




Item 6.                         Exhibits

Exhibit No.

 

Description

 

 

12.1

 

Ratio of Earnings to Fixed Charges (unaudited)

  3.1

 

Amended and Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 of the Registrant’s Registration Statement on Form S-1 (Registration No. 333-76409)

  3.2

 

Amended and Restated Bylaws of the Registrant, incorporated by reference to Exhibit 3.2 of the Registrant’s Registration Statement on Form S-1 (Registration No. 333-76409)

10.1

 

Standard Form of Agreement between the Registrant and DPR Construction, Inc., dated March 9, 2007, as amended by Amendment No. 1, dated April 19, 2007 **

12.1

 

Ratio of Earnings to Fixed Charges

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

32.1

 

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

 

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


**              Confidential treatment has been requested for portions of this document. The omitted portions of this document have been filed with the Securities and Exchange Commission.

 

48




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

UNITED THERAPEUTICS CORPORATION

 

Date: May 3, 2007

 

/s/ MARTINE A. ROTHBLATT

 

 

By:

 

Martine A. Rothblatt

 

 

Title:

 

Chairman and Chief Executive Officer

 

 

/s/ JOHN M. FERRARI

 

 

By:

 

John M. Ferrari

 

 

Title:

 

Chief Financial Office and Treasurer

 

49




Exhibit 10.1

 

Pursuant to 17 C.F.R §240.24b-2, confidential information (indicated as *) has been omitted and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.

 

AIA ® Document A111 TM – 1997

 

Standard Form of Agreement Between Owner and Contractor where the basis for payment is the COST OF THE WORK PLUS A FEE with a negotiated Guaranteed Maximum Price

 

 

AGREEMENT made as of the fourth day of March in the year 2007

(In words, indicate day, month and year)

 

BETWEEN the Owner:

(Name, address and other information)

 

United Therapeutics Corporation

1110 Spring Street

Silver Spring, MD 20910

 

and the Contractor:

(Name, address and other information)

 

DPR Construction, Inc.

2941 Fairview Park Drive, Suite 600

Falls Church, VA 22042

The Project is:

(Name and location)

 

Administration/Laboratory/Manufacturing Facility located in Research Triangle Park, NC, as more fully described on Exhibit A attached hereto.

 

The Architect is:

(Name, address and other information)

 

O’Neal, Inc., d/b/a O’Neal Engineering, Inc.

3000 RDU Center Drive, Suite 200

Morrisville, NC 27560

 

The Owner and Contractor agree as follows.

 

 

ADDITIONS AND DELETIONS: The author of this document has added information needed for its completion. The author may also have revised the text of the original AIA standard form. An Additions and Deletions Report that notes added information as well as revisions to the standard form text is available from the author and should be reviewed. A vertical line in the left margin of this document indicates where the author has added necessary information and where the author has added to or deleted from the original AIA text.

 

This document has important legal consequences. Consultation with an attorney is encouraged with respect to its completion or modification.

 

This document is not intended for use in competitive bidding.

 

AIA Document A201-1997, General Conditions of the Contract for Construction, is adopted in this document by reference. Do not use with other general conditions unless this document is modified.

 

This document has been approved and endorsed by the Associated General Contractors of America.

 

AIA Document A111 TM – 1997. Copyright © 1920, 1925, 1951, 1958, 1961, 1963, 1967, 1974, 1978, 1987 and 1997 by The American Institute of Architects. All rights reserved. WARNING: This AIA ® Document is protected by U.S. Copyright Law and International Treaties. Unauthorized reproduction or distribution of this AIA ® Document, or any portion of it, may result in severe civil and criminal penalties, and will be prosecuted to the maximum extent possible under the law. This document was produced by AIA software at 10:34:02 on 03/05/07 under Order No. 1000239947-1 which expires on 5/23/2007, and is not for resale.

User Notes:

 

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ARTICLE 1    THE CONTRACT DOCUMENTS

The Contract Documents consist of this Agreement, the General Conditions attached hereto as Exhibit B (the “General Conditions”) other Conditions of the Contract to the extent set forth or referred to in Exhibits to this Agreement, Drawings, Specifications, Addenda issued prior to execution of this Agreement, other documents listed in this Agreement and Modifications issued after execution of this Agreement; these form the Contract, and are as fully a part of the Contract as if attached to this Agreement or repeated herein. The Contract represents the entire and integrated agreement between the parties hereto and supersedes prior negotiations, representations or agreements, either written or oral. An enumeration of the Contract Documents, other than Modifications, appears in Article 15. If anything in the other Contract Documents is inconsistent with this Agreement, this Agreement shall govern, except that Modifications executed after the date of this Agreement shall govern in the event of an inconsistency between such Modifications and this Agreement.

 

ARTICLE 2    THE WORK OF THIS CONTRACT

The Contractor shall fully execute the Work described in the Contract Documents, except to the extent specifically indicated in the Contract Documents to be the responsibility of others.

 

ARTICLE 3    RELATIONSHIP OF THE PARTIES

§ 3.1 The Contractor accepts the relationship of trust and confidence established by this Agreement and covenants with the Owner to cooperate with the Architect and exercise the Contractor’s skill and judgment in furthering the interests of the Owner; to furnish efficient business administration and supervision; to furnish at all times an adequate supply of workers and materials; and to perform the Work in an expeditious and economical manner consistent with the Owner’s interests. The Owner agrees to furnish and approve, in a timely manner, information required by the Contractor and to make payments to the Contractor in accordance with the requirements of the Contract Documents. The Owner and Contractor hereby acknowledge that Owner may engage a “Project Manager” for the Project. If a Project Manager is engaged, the Owner shall notify the Contractor in writing about such engagement, and shall specify the scope of authority of the Project Manager to act on behalf of the Owner.

 

§3.2 The Contractor has provided the Owner with a list setting forth the names, resumes, relevant experience, type of services to be performed and term of assignment of all personnel who shall perform the Work, and who are at a level of superintendent or above, which is attached hereto as Exhibit C. None of such personnel shall be removed from the Project without the Owner’s prior written consent (except in the case of the termination, resignation or other departure of such personnel from the employ of the Contractor), which consent shall not be unreasonably withheld, or unless the Owner so directs, and the Owner shall have the authority to approve any replacement. Exhibit C shall be updated to reflect approved changes.

 

ARTICLE 4    DATE OF COMMENCEMENT AND SUBSTANTIAL COMPLETION

 

(Paragraphs deleted)

 

§ 4.1 The date of commencement of the Work shall be the date to be fixed in a notice to proceed issued by the Owner.

 

§ 4.2 The Contract Time shall be measured from the date of commencement.

 

§ 4.3 The Contractor shall achieve Substantial Completion of the entire Work not later than the date of Substantial Completion set forth in the Project Schedule attached hereto as Exhibit I, subject to adjustment as provided in the Contract Documents.

 

(Paragraph deleted)

 

§ 4.4 The parties acknowledge that it is extremely difficult to ascertain with accuracy at the time of execution of this Contract the extent of the actual damages that the Owner would suffer as a result of any delay in achieving the date of Substantial Completion of the Work set forth in this Contract, as such date may be adjusted in accordance with the provisions of this Contract. Therefore, in the event the Contractor does not achieve Substantial Completion of the Work within the Contract Time, as adjusted pursuant to the provisions of the Contract Documents, the Contractor shall pay the Owner, as liquidated damages and not as a penalty, following sums for each day the actual date of Substantial Completion of the Work exceeds the authorized Contract Time:

 

First 30 days of delay:

 

$7,500 per day

Each day thereafter:

 

$10,000 per day

 

AIA Document A111 TM – 1997. Copyright © 1920, 1925, 1951, 1958, 1961, 1963, 1967, 1974, 1978, 1987 and 1997 by The American Institute of Architects. All rights reserved. WARNING: This AIA ® Document is protected by U.S. Copyright Law and International Treaties. Unauthorized reproduction or distribution of this AIA ® Document, or any portion of it, may result in severe civil and criminal penalties, and will be prosecuted to the maximum extent possible under the law. This document was produced by AIA software at 10:34:02 on 03/05/07 under Order No. 1000239947-1 which expires on 5/23/2007, and is not for resale.

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Such liquidated damages are hereby agreed to be a reasonable pre-estimate of damages the Owner will incur as a result of a delay in Substantial Completion of the Work due to the fault of the Contractor.

 

§ 4.3 In the event the Contractor achieves Substantial Completion of the Work prior to the date of Substantial Completion of the Work set forth in the Project Schedule attached hereto as Exhibit I, as such date may be adjusted pursuant to the provisions of the Contract Documents, the Contractor shall be entitled to a bonus for each day the actual date of Substantial Completion of the Work is earlier than the authorized Contract Time as follows:

 

(Paragraph deleted)

 

First 30 days of early completion

 

$7,500 per day

All days of early completion thereafter:

 

$10,000 per day

 

Such amounts shall only be paid to the extent there are Savings (defined in Section 5.2.7). In such case, the Contractor shall be entitled to 100% of the Savings on account of amounts earned under this Section 4.3 prior to the allocation of Savings as provided in Section 5.2.7. To the extent the total amount of Savings is less than the total amount payable to the Contractor under this Section 4.3, the Owner shall not be liable for such deficiency.

 

ARTICLE 5  BASIS FOR PAYMENT

§ 5.1 CONTRACT SUM

§ 5.1.1 The Owner shall pay the Contractor the Contract Sum in current funds for the Contractor’s performance of the Contract. The Contract Sum is the Cost of the Work as defined in Article 7 plus the Contractor’s Fee.

 

§ 5.1.2 The Contractor’s Fee is: See Exhibit D

 

(Paragraph deleted)

 

§ 5.2 GUARANTEED MAXIMUM PRICE

§ 5.2.1 The sum of the Cost of the Work and the Contractor’s Fee is guaranteed by the Contractor not to exceed the “Guaranteed Maximum Price” set forth on Exhibit D, subject to additions and deductions by Change Order as provided in the Contract Documents. Costs which would cause the Guaranteed Maximum Price to be exceeded shall be paid by the Contractor without reimbursement by the Owner. The Cost of the Work portion of the Guaranteed Maximum Price contains a line item entitled “General Conditions Costs” and Annex 1 to Exhibit D contains a list of the categories of costs to be reimbursed from this line item. The Contractor acknowledges and agrees that funds from other line items in the Cost of the Work portion of the Guaranteed Maximum Price (including but not limited to the line item for Contingency, described in Section 5.2.8) may not be transferred to the General Conditions Costs line item.

 

(Paragraph deleted)

 

§ 5.2.2 The Guaranteed Maximum Price is based on the following alternates, if any, which are described in the Contract Documents and are hereby accepted by the Owner: See Exhibit D

 

(Paragraph deleted)

 

§ 5.2.3 Unit prices, if any, are as follows: See Exhibit D

 

(Paragraphs & rows deleted)

 

§ 5.2.4 Allowances, if any, are as follows: See Exhibit D

 

(Rows deleted)

 

§ 5.2.5 Assumptions, if any, on which the Guaranteed Maximum Price is based are as follows: See Exhibits A and D

 

(Paragraph deleted)

 

§ 5.2.6 The Cost of the Work portion of the Guaranteed Maximum Price will contain a line item entitled “Contingency”. It is understood that the Contingency line item is to cover costs and expenses of the Contractor incurred as a result of unforeseen or unanticipated events or circumstances; provided, however, any such cost or expense must otherwise be reimbursable as Cost of the Work (other than General Conditions Costs, for which Contingency shall not be used). The Construction Manager may transfer amounts from the Contingency to other line items (other than the Contractor’s Fee or General Conditions Costs) without the prior written consent of the Owner, to the extent the Contractor has provided the Owner with evidence that any such adjustments and increased costs are reasonably necessary. The Contingency is not available for use by the Owner for Change Orders.

 

§ 5.2.7 In the event the actual Cost of the Work plus the Contractor’s Fee is less than the Guaranteed Maximum Price, as adjusted, the difference (“Savings”) shall be shared sixty five percent (65%) to the Owner and thirty five percent (35%) to the Contractor except to the extent provided otherwise in Section 4.5 hereof. Savings shall be calculated and paid as part of final payment hereunder.

 

AIA Document A111 TM – 1997. Copyright © 1920, 1925, 1951, 1958, 1961, 1963, 1967, 1974, 1978, 1987 and 1997 by The American Institute of Architects. All rights reserved. WARNING: This AIA ® Document is protected by U.S. Copyright Law and International Treaties. Unauthorized reproduction or distribution of this AIA ® Document, or any portion of it, may result in severe civil and criminal penalties, and will be prosecuted to the maximum extent possible under the law. This document was produced by AIA software at 10:34:02 on 03/05/07 under Order No. 1000239947-1 which expires on 5/23/2007, and is not for resale.

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ARTICLE 6  CHANGES IN THE WORK

§ 6.1 Adjustments to the Guaranteed Maximum Price on account of changes in the Work may be determined by any of the methods listed in Section 7.3.3 of the General Conditions.

 

§ 6.2 In calculating adjustments to subcontracts (except those awarded with the Owner’s prior consent on the basis of cost plus a fee), the terms “cost” and “fee” as used in Section 7.3.3.3 of the General Conditions and the terms “costs” and “a reasonable allowance for overhead and profit” as used in Section 7.3.6 of the General Conditions shall have the meanings assigned to them in the General Conditions and shall not be modified by Articles 5, 7 and 8 of this Agreement. Adjustments to subcontracts awarded with the Owner’s prior consent on the basis of cost plus a fee shall be calculated in accordance with the terms of those subcontracts. The Contractor hereby agrees that for changes in the Work performed by a Subcontractor, (A) the payment to the Subcontractor shall be equal to (i) the actual cost incurred in performing such changed work; (ii) a markup of ten percent (10%) of such actual cost for overhead; and (iii) fee of ten percent (10%) of actual cost. Notwithstanding the foregoing, the total amount payable to Subcontractors of every tier on account of overhead and fee for a change to the Work shall not exceed thirty percent (30%). In addition, the Contractor shall be entitled to Contractor’s Fee equal to the percentage stated in Exhibit D, based on the total amount payable to the Subcontractors; provided, however, that the Contractor shall not be entitled to additional General Conditions costs or Contractor’s Fee on the first $400,000 of additive Change Orders that do not extend the date of Substantial Completion of the Work. There shall be no reduction in Contractor’s Fee for deductive Change Orders. Additional General Conditions Costs incurred by the Contractor on account of changes in the Work shall be reimbursable to the extent permitted by Article 7 and not excluded by Article 8.

 

§ 6.3 In calculating adjustments to the Guaranteed Maximum Price, the terms “cost” and “costs” as used in the above-referenced provisions of the General Conditions shall mean the Cost of the Work as defined in Article 7 of this Agreement and the terms “fee” and “a reasonable allowance for overhead and profit” shall mean the Contractor’s Fee as set forth in Section 6.2 above and Exhibit D.

 

ARTICLE 7  COSTS TO BE REIMBURSED

§ 7.1 COST OF THE WORK

The term Cost of the Work shall mean costs necessarily incurred by the Contractor in the proper performance of the Work. Such costs shall be at rates not higher than the standard paid at the place of the Project except with prior written consent of the Owner. The Cost of the Work shall include only the items set fort