United Therapeutics Corporation
UNITED THERAPEUTICS Corp (Form: 10-Q, Received: 07/28/2010 07:02:03)

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2010

 

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.)

 

 

 

1040 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(do not check if a smaller reporting company)

 

 

 

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

 

The number of shares outstanding of the issuer’s common stock, par value $.01 per share, as of July 23, 2010 was 56,450,255.

 

 

 



Table of Contents

 

INDEX

 

 

 

 

Page

 

 

 

 

Part I.

FINANCIAL INFORMATION (UNAUDITED)

 

 

 

 

 

 

Item 1.

Consolidated Financial Statements

 

3

 

 

 

 

 

Consolidated Balance Sheets

 

3

 

 

 

 

 

Consolidated Statements of Operations

 

4

 

 

 

 

 

Consolidated Statements of Cash Flows

 

5

 

 

 

 

 

Notes to Consolidated Financial Statements

 

6

 

 

 

 

Item 2.

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

 

20

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

31

 

 

 

 

Item 4.

Controls and Procedures

 

31

 

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

32

 

 

 

 

Item 1A.

Risk Factors

 

33

 

 

 

 

Item 6.

Exhibits

 

45

 

 

 

 

SIGNATURES

 

 

46

 

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Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

June 30,
2010

 

December 31,
2009

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

285,409

 

$

100,352

 

Marketable investments

 

94,066

 

129,140

 

Accounts receivable, net of allowance of none for 2010 and 2009

 

83,514

 

50,626

 

Other current assets

 

2,985

 

2,638

 

Prepaid expenses

 

9,392

 

8,199

 

Inventories, net

 

30,243

 

26,360

 

Deferred tax assets

 

10,683

 

7,192

 

Total current assets

 

516,292

 

324,507

 

Marketable investments

 

135,285

 

148,628

 

Marketable investments and cash—restricted

 

40,188

 

39,976

 

Goodwill and other intangibles, net

 

16,083

 

18,418

 

Property, plant and equipment, net

 

302,544

 

303,859

 

Deferred tax assets

 

169,478

 

200,969

 

Other assets (None and $6,741, respectively, measured under the fair value option)

 

7,805

 

15,187

 

Total assets

 

$

1,187,675

 

$

1,051,544

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

9,349

 

$

18,750

 

Accrued expenses

 

41,889

 

29,764

 

Notes payable

 

227,979

 

220,272

 

Lease obligation—current

 

30,875

 

 

Other current liabilities

 

55,632

 

61,401

 

Total current liabilities

 

365,724

 

330,187

 

Lease obligation—noncurrent

 

 

30,327

 

Other liabilities

 

28,768

 

27,139

 

Total liabilities

 

394,492

 

387,653

 

Commitments and contingencies:

 

 

 

 

 

Common stock subject to repurchase

 

10,882

 

10,882

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

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

 

 

 

Common stock, par value $.01, 245,000,000 and 100,000,000 shares authorized at June 30, 2010 and December 31, 2009, respectively, 58,855,365 and 56,682,369 shares issued at June 30, 2010, and December 31, 2009, respectively, and 56,393,775 and 54,220,779 outstanding at June 30, 2010, and December 31, 2009, respectively

 

589

 

567

 

Additional paid-in capital

 

874,434

 

798,897

 

Accumulated other comprehensive loss

 

(7,217

)

(4,314

)

Treasury stock at cost, 2,461,590 shares at June 30, 2010 and December 31, 2009

 

(67,395

)

(67,395

)

Accumulated deficit

 

(18,110

)

(74,746

)

Total stockholders’ equity

 

782,301

 

653,009

 

Total liabilities and stockholders’ equity

 

$

1,187,675

 

$

1,051,544

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(Unaudited)

 

(Unaudited)

 

Revenues:

 

 

 

 

 

 

 

 

 

Net product sales

 

$

134,458

 

$

81,009

 

$

260,134

 

$

157,867

 

Service sales

 

2,751

 

2,648

 

5,673

 

5,178

 

License fees

 

282

 

323

 

564

 

665

 

Total revenues

 

137,491

 

83,980

 

266,371

 

163,710

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

28,944

 

28,646

 

63,815

 

49,605

 

Selling, general and administrative

 

31,036

 

49,371

 

77,913

 

78,589

 

Cost of product sales

 

15,275

 

9,015

 

29,011

 

17,081

 

Cost of service sales

 

1,409

 

1,069

 

2,559

 

1,989

 

Total operating expenses

 

76,664

 

88,101

 

173,298

 

147,264

 

Income (loss) from operations

 

60,827

 

(4,121

)

93,073

 

16,446

 

 

 

 

 

 

 

 

 

 

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

Interest income

 

802

 

1,335

 

1,746

 

3,056

 

Interest expense

 

(4,759

)

(3,248

)

(9,446

)

(5,885

)

Equity loss in affiliate

 

(44

)

(38

)

(91

)

(57

)

Other, net

 

93

 

529

 

318

 

894

 

Total other (expense) income, net

 

(3,908

)

(1,422

)

(7,473

)

(1,992

)

Income (loss) before income tax

 

56,919

 

(5,543

)

85,600

 

14,454

 

Income tax (expense) benefit

 

(19,212

)

3,199

 

(28,964

)

(3,599

)

Net income (loss)

 

$

37,707

 

$

(2,344

)

$

56,636

 

$

10,855

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.67

 

$

(0.04

)

$

1.02

 

$

0.21

 

Diluted

 

$

0.62

 

$

(0.04

)

$

0.95

 

$

0.20

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

56,047

 

52,982

 

55,411

 

52,932

 

Diluted

 

60,393

 

52,982

 

59,548

 

54,686

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

56,636

 

$

10,855

 

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

 

 

 

 

 

Depreciation and amortization

 

9,153

 

4,168

 

Provisions for bad debt and inventory obsolescence

 

828

 

705

 

Deferred tax expense

 

28,964

 

3,599

 

Share-based compensation

 

29,755

 

48,420

 

Amortization of debt discount and debt issue costs

 

8,273

 

7,722

 

Amortization of discount or premium on investments

 

876

 

680

 

Equity loss in affiliate and other

 

(56

)

(2,998

)

Excess tax benefits from share-based compensation

 

(16,355

)

(1,592

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(32,969

)

(5,943

)

Inventories

 

(4,757

)

(896

)

Prepaid expenses

 

(1,143

)

2,529

 

Other assets

 

(481

)

(608

)

Accounts payable

 

(9,329

)

(10,201

)

Accrued expenses

 

11,685

 

3,219

 

Other liabilities

 

(11,628

)

(2,246

)

Net cash provided by operating activities

 

69,452

 

57,413

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(9,117

)

(49,837

)

Purchases of held-to-maturity investments

 

(142,596

)

(116,986

)

Maturities of held-to-maturity investments

 

196,848

 

114,781

 

Redemptions of trading investments

 

17,175

 

50

 

Restrictions on cash

 

(17,156

)

(8,994

)

Net cash provided by (used in) investing activities

 

45,154

 

(60,986

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from the exercise of stock options

 

54,600

 

6,112

 

Excess tax benefits from share-based compensation

 

16,355

 

1,592

 

Net cash provided by financing activities

 

70,955

 

7,704

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(504

)

(59

)

Net increase in cash and cash equivalents

 

185,057

 

4,072

 

Cash and cash equivalents, beginning of period

 

100,352

 

129,452

 

Cash and cash equivalents, end of period

 

$

285,409

 

$

133,524

 

 

 

 

 

 

 

Supplemental schedule of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

625

 

$

625

 

Cash paid for income taxes

 

$

2,179

 

$

2,919

 

Non cash investing activity—Non-cash additions to property, plant and equipment

 

$

 

$

9,444

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

UNITED THERAPEUTICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(UNAUDITED)

 

1. Organization and Business Description

 

United Therapeutics Corporation is a biotechnology company focused on the development and commercialization of unique products to address the unmet medical needs of patients with chronic and life-threatening conditions. As used in these notes to the consolidated financial statements, unless the context otherwise requires, the terms “we,” “us,” “our,” and similar terms refer to United Therapeutics Corporation and its consolidated subsidiaries.

 

Our lead product, Remodulin ®  (treprostinil) Injection (Remodulin), was approved in 2002 by the United States Food and Drug Administration (FDA). Remodulin is also approved for use in countries outside of the United States, predominantly for subcutaneous administration. In 2009, we received FDA approval for Adcirca ®  (tadalafil) tablets (Adcirca) and for Tyvaso ®  (treprostinil) Inhalation Solution (Tyvaso). We have generated pharmaceutical revenues and license fees in the United States, Canada, the European Union, South America and Asia. Tyvaso is approved for marketing in the United States and our commercialization rights to Adcirca are limited to the United States and Puerto Rico.  In addition, we have generated non-pharmaceutical revenues from telemedicine products and services in the United States.

 

2. Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles (GAAP) for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC on February 26, 2010.

 

In our management’s opinion, the accompanying consolidated financial statements contain all adjustments, including normal, recurring adjustments, necessary to fairly present our financial position as of June 30, 2010, our results of operations for the three- and six-month periods ended June 30, 2010 and 2009, and our cash flows for the six months ended June 30, 2010 and 2009. Interim results are not necessarily indicative of results for an entire year.

 

3. Inventories

 

Inventories are stated at the lower of cost (first-in, first-out method) or market (current replacement cost) and consist of the following, net of reserves (in thousands):

 

 

 

June 30,
2010

 

December 31,
2009

 

Pharmaceutical products:

 

 

 

 

 

Raw materials

 

$

5,997

 

$

4,751

 

Work-in-progress

 

12,163

 

12,101

 

Finished goods

 

10,811

 

8,899

 

Delivery pumps, cardiac monitoring equipment and medical supplies

 

1,272

 

609

 

Total inventories

 

$

30,243

 

$

26,360

 

 

4. Fair Value Measurements

 

Assets and liabilities subject to fair value measurements are required to be disclosed within a fair value hierarchy. The fair value hierarchy ranks the quality and reliability of inputs used to determine fair value and classifies assets and liabilities carried at, or permitted to be carried at, fair value in one of the following categories based on the lowest level input that is significant to a fair value measurement:

 

Level 1—Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.

 

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Level 2—Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets. Related inputs can also include those used in valuation or other pricing models such as interest rates and yield curves that can be corroborated by observable market data.

 

Level 3—Fair value is determined by inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgment — e.g., an adjustment to a discount factor for illiquidity associated with a given security.

 

Assets and liabilities subject to fair value measurements are as follows (in thousands):

 

 

 

As of June 30, 2010

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Auction-rate securities(1)

 

$

 

$

 

$

19,025

 

$

19,025

 

Money market funds(3)

 

126,874

 

 

 

126,874

 

Federally-sponsored and corporate debt securities(4)

 

 

214,242

 

 

214,242

 

Available-for-sale equity investment

 

234

 

 

 

234

 

Total Assets

 

$

127,108

 

$

214,242

 

$

19,025

 

$

360,375

 

Liabilities

 

 

 

 

 

 

 

 

 

Convertible senior notes

 

$

332,471

 

$

 

$

 

$

332,471

 

Contingent consideration—Tyvaso Inhalation System acquisition(5)

 

 

 

1,461

 

1,461

 

Total liabilities

 

$

332,471

 

$

 

$

1,461

 

$

333,932

 

 

 

 

As of December 31, 2009

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Auction-rate securities(1)

 

$

 

$

 

$

29,332

 

$

29,332

 

Auction-rate securities put option(2)

 

 

 

6,741

 

6,741

 

Money market funds(3)

 

48,220

 

 

 

48,220

 

Federally-sponsored and corporate debt securities(4)

 

 

269,649

 

 

269,649

 

Available-for-sale equity investment

 

161

 

 

 

161

 

Total Assets

 

$

48,381

 

$

269,649

 

$

36,073

 

$

354,103

 

Liabilities

 

 

 

 

 

 

 

 

 

Convertible senior notes

 

$

361,843

 

$

 

$

 

$

361,843

 

Contingent consideration—Tyvaso Inhalation System acquisition(5)

 

 

 

5,602

 

5,602

 

Total liabilities

 

$

361,843

 

$

 

$

5,602

 

$

367,445

 

 


(1)                                  Included in current marketable investments and non-current marketable investments on the accompanying consolidated balance sheets at June 30, 2010 and December 31, 2009, respectively. The fair value of our auction-rate securities (ARS) has been estimated using both market and income approaches. The market comparables method includes consideration of pricing data to estimate discounts being applied to similar securities upon their sale in the secondary market. Although the volume of secondary market activity has been increasing, we do not believe it occurs with sufficient frequency to rely solely on such data to determine the fair value of our ARS. Therefore, we also utilize a discounted cash flow (DCF) model to estimate fair value. Key assumptions of the DCF model are subjective and include: a reference, or benchmark, rate of interest based on the London Interbank Offered Rate (LIBOR), expected amounts and timing of cash flows for a given security, and the weighted average expected life of a security and its underlying collateral. In addition, the model considers the risks associated with: (i) the creditworthiness of the issuer; (ii) the quality of the collateral underlying the investment; and (iii) illiquidity. The benchmark interest rate is adjusted depending on the degree of risk associated with each security within our auction-rate portfolio.

 

(2)                                  Included within other non-current assets on the accompanying consolidated balance sheet at December 31, 2009. We estimate the fair value of the auction-rate securities put option using a DCF approach. Key assumptions used in the DCF model require the use of significant judgment and include: (i) a discount factor equal to the rate of interest consistent with the expected term of the auction-rate securities put option and risk profile of the investment firm

 

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subject to the auction-rate securities put option; (ii) the amount and timing of expected cash flows; (iii) the expected life of the auction-rate securities put option prior to its exercise; and (iv) assumed loan amounts. See Note 4— Fair Value Measurements Auction-Rate Securities to these consolidated financial statements for further information.

 

(3)                                  Included in cash and cash equivalents and marketable investments and cash—restricted on the accompanying consolidated balance sheets.

 

(4)                                  Included in current and non-current marketable investments on the accompanying consolidated balance sheets. The fair value of these securities is derived using a market approach—i.e., from pricing models that rely on relevant observable market data including interest rates, yield curves, recently reported trades of comparable securities, credit spreads and benchmark securities. See also Note 5— Investments—Held -to-Maturity Investments to these consolidated financial statements.

 

(5)                                  Included in non-current liabilities on the accompanying consolidated balance sheets. The liability has been recognized in connection with our acquisition of the assets, properties and rights used to manufacture the Tyvaso Inhalation System from NEBU-TEC International Med Products Eike Kern GmbH (NEBU-TEC) in September 2009. Included in the terms of the acquisition is a requirement that we pay contingent consideration of up to €10.0 million in specified increments if the number of patients using the Tyvaso Inhalation System meets or exceeds certain thresholds measured at designated intervals. We also have the option to purchase NEBU-TEC’s next generation nebulizer, the SIM-Neb. If this option were to be exercised, we would no longer be required to make future contingent payments. The fair value of the contingent consideration has been measured using a probability weighted DCF model which incorporates a discount rate based on our estimated weighted average cost of capital and our projections regarding the timing and number of patients using the Tyvaso Inhalation System. The DCF model also considers the probability and impact of exercising our option to acquire the SIM-Neb and the potential introduction of new therapies.

 

A reconciliation of the beginning and ending balances of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) for the three- and six-month periods ended June 30, 2010, is presented below (in thousands):

 

 

 

Auction-rate
Securities

 

Auction-Rate
Securities Put
Option

 

Contingent
Consideration—
Tyvaso
Inhalation
System
Acquisition

 

Total

 

Balance March 31, 2010

 

$

30,375

 

$

5,518

 

$

5,346

 

$

41,239

 

Transfers to (from) Level 3

 

 

 

 

 

Total gains/losses realized/unrealized included in earnings(1)

 

5,575

 

(5,518

)

(2,664

)

(2,607

)

Total gains/losses included in other comprehensive income

 

 

 

 

 

Purchases/sales/issuances/settlements, net

 

(16,925

)

 

(1,221

)

(18,146

)

Balance June 30, 2010

 

$

19,025

 

$

 

$

1,461

 

$

20,486

 

 

 

 

Auction-rate
Securities

 

Auction-Rate
Securities Put
Option

 

Contingent
Consideration—
Tyvaso
Inhalation
System
Acquisition

 

Total

 

Balance January 1, 2010

 

$

29,332

 

$

6,741

 

$

5,602

 

$

41,675

 

Transfers to (from) Level 3

 

 

 

 

 

Total gains/losses realized/unrealized included in earnings(1)

 

6,868

 

(6,741

)

(2,920

)

(2,793

)

Total gains/losses included in other comprehensive income

 

 

 

 

 

Purchases/sales/issuances/settlements, net

 

(17,175

)

 

(1,221

)

(18,396

)

Balance June 30, 2010

 

$

19,025

 

$

 

$

1,461

 

$

20,486

 

 


(1)                    Includes net gains of $2.9 million and $3.9 million for the three- and six-month periods ended June 30, 2010, attributable to the change in unrealized gains or losses from assets and liabilities still held at June 30, 2010. Unrealized gains and losses relating to the ARS and the related put option have been recognized within other income on our consolidated statements of operations and unrealized gains associated with the contingent consideration have been included within selling, general and administrative expenses on our consolidated statements of operations.

 

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Table of Contents

 

Auction-Rate Securities

 

Our marketable investments include student loan backed ARS. Since 2008, our ARS have remained illiquid due to the failure of the auction-rate securities market. To mitigate the risks associated with our ARS, in November 2008, we accepted the terms of an Auction Rate Securities Rights Offer (Rights Offer) with the investment firm that maintains our ARS account. Pursuant to the Rights Offer, we could sell our ARS to the investment firm for a price equal to their par value at any time between June 30, 2010 and July 2, 2012 (Put Option). To help meet any immediate liquidity needs, the Rights Offer permitted us to borrow up to the par value of the ARS.

 

The Put Option is being accounted for under the fair value option . Accordingly, all changes in fair value are recognized within earnings under the caption “other income” on our consolidated statements of operations. For the three-month periods ended June 30, 2010 and 2009, related gains/(losses) recognized were $(5.5) million and $167,000, respectively. For the six-month periods ended June 30, 2010 and 2009, related gains/(losses) recognized were $(6.7) million and $659,000, respectively. Since there is not an observable market for the Put Option, its fair value has been estimated using significant unobservable inputs, as noted above.

 

On June 30, 2010, we exercised the Put Option to sell back all of our remaining ARS for their par value of $19.0 million, and the sale was completed on July 1, 2010. Consequently, we reclassified the ARS from non-current assets to current assets and wrote off the value of the Put Option as of June 30, 2010.

 

Fair Value of Financial Instruments

 

The carrying amounts of cash and cash equivalents, accounts receivables, accounts payable and accrued expenses approximate their fair value because of their short maturities. The fair value of marketable investments is presented in Note 5— Investments to these consolidated financial statements and the fair value of the 0.50% Convertible Senior Notes due October 2011 is reported above.

 

5. Investments

 

Held-to-Maturity Investments

 

Marketable investments classified as held-to-maturity consist of the following (in thousands):

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Government-sponsored enterprises at June 30, 2010

 

$

122,280

 

$

117

 

$

(23

)

$

122,374

 

Corporate notes and bonds at June 30, 2010

 

91,846

 

107

 

(85

)

91,868

 

Total

 

$

214,126

 

$

224

 

$

(108

)

$

214,242

 

As reported on the consolidated balance sheets at June 30, 2010:

 

 

 

 

 

 

 

 

 

Current marketable securities

 

$

94,066

 

 

 

 

 

 

 

Noncurrent marketable securities

 

120,060

 

 

 

 

 

 

 

 

 

$

214,126

 

 

 

 

 

 

 

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Government-sponsored enterprises at December 31, 2009

 

$

172,531

 

$

559

 

$

(247

)

$

172,843

 

Corporate notes and bonds at December 31, 2009

 

96,697

 

158

 

(49

)

96,806

 

Total

 

$

269,228

 

$

717

 

$

(296

)

$

269,649

 

As reported on the consolidated balance sheets at December 31, 2009:

 

 

 

 

 

 

 

 

 

Current marketable securities

 

$

129,140

 

 

 

 

 

 

 

Noncurrent marketable securities

 

140,088

 

 

 

 

 

 

 

 

 

$

269,228

 

 

 

 

 

 

 

 

Certain held-to-maturity investments have been pledged as collateral to Wachovia Development Corporation under the laboratory lease described in Note 10 —Lease Obligation to these consolidated financial statements and are classified as restricted marketable investments and cash on our consolidated balance sheets.

 

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Table of Contents

 

The following table summarizes gross unrealized losses and the length of time marketable investments have been in a continuous unrealized loss position (in thousands):

 

 

 

As of June 30, 2010

 

As of December 31, 2009

 

 

 

Fair
Value

 

Gross
Unrealized
Loss

 

Fair
Value

 

Gross
Unrealized
Loss

 

Government sponsored:

 

 

 

 

 

 

 

 

 

Continuous unrealized loss position less than one year

 

$

28,012

 

$

(23

)

$

54,299

 

$

(247

)

Continuous unrealized loss position greater than one year

 

 

 

 

 

 

 

28,012

 

(23

)

54,299

 

(247

)

Corporate notes:

 

 

 

 

 

 

 

 

 

Continuous unrealized loss position less than one year

 

$

56,412

 

$

(85

)

$

64,499

 

$

(49

)

Continuous unrealized loss position greater than one year

 

 

 

 

 

 

 

56,412

 

(85

)

64,499

 

(49

)

Total

 

$

84,424

 

$

(108

)

$

118,798

 

$

(296

)

 

We attribute the unrealized losses on held-to-maturity securities as of June 30, 2010, to the variability in related market interest rates. We do not intend to sell these securities, nor is it more likely than not that we will be required to sell them prior to the end of their contractual term. Furthermore, we believe these securities do not subject us to undue market risk or counterparty credit risk. As such, we do not consider these securities to be other than temporarily impaired.

 

The following table summarizes the contractual maturities of held-to-maturity marketable investments at June 30, 2010 (in thousands):

 

 

 

June 30, 2010

 

 

 

Amortized
Cost

 

Fair
Value

 

Due in less than one year

 

$

99,055

 

$

99,131

 

Due in one to two years

 

115,071

 

115,111

 

Due in three to five years

 

 

 

Due after five years

 

 

 

Total

 

$

214,126

 

$

214,242

 

 

Trading Investments

 

Trading securities consist of the following (in thousands):

 

 

 

Par Value

 

Cumulative Gross
Trading
Gains

 

Cumulative Gross
Trading
Losses

 

Other
Than
Temporary
Impairment(1)

 

Estimated Fair
Value

 

Municipal notes (ARS) at June 30, 2010

 

$

19,025

 

$

8,912

 

$

(2,604

)

$

(6,308

)

$

19,025

 

Municipal notes (ARS) at December 31, 2009

 

$

36,200

 

$

2,044

 

$

(2,604

)

$

(6,308

)

$

29,332

 

 


(1)                              Recognized during the year ended December 31, 2008.

 

For the three months ended June 30, 2010 and 2009, we recognized trading gains of $5.6 million and $212,000, respectively, related to trading securities still held at June 30, 2010 and 2009. For the six months ended June 30, 2010 and 2009, we recognized trading gains of $6.9 million and $74,000, respectively, related to trading securities still held at June 30, 2010 and 2009.

 

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Table of Contents

 

Equity Investments

 

We own less than 1% of the common stock of Twin Butte Energy Ltd. (Twin Butte). Our investment in Twin Butte is classified as available-for-sale and reported at fair value based on the quoted market price.

 

We have an investment totaling approximately $4.9 million in the preferred stock of a privately held corporation. We account for this investment at cost, as its fair value is not readily determinable. The fair value of our investment has not been estimated as of June 30, 2010, as there have been no events or developments indicating that the investment may be impaired. This investment is reported within non-current other assets on our consolidated balance sheets.

 

6. Goodwill and Other Intangible Assets

 

Goodwill and other intangible assets comprise the following (in thousands):

 

 

 

As of June 30, 2010

 

As of December 31, 2009

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill(1)

 

$

8,570

 

$

 

$

8,570

 

$

8,763

 

$

 

$

8,763

 

Other intangible assets(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology, patents and tradenames

 

8,631

 

(4,922

)

3,709

 

9,364

 

(4,586

)

4,778

 

Customer relationships and non-compete agreements

 

4,386

 

(582

)

3,804

 

5,150

 

(273

)

4,877

 

Total

 

$

21,587

 

$

(5,504

)

$

16,083

 

$

23,277

 

$

(4,859

)

$

18,418

 

 


(1)                              Includes adjustments for foreign currency translation as of June 30, 2010 and December 31, 2009.

 

Total amortization relating to other intangible assets for the five succeeding years and thereafter is presented below (in thousands):

 

Years ending December 31,

 

 

 

2011

 

$

1,363

 

2012

 

1,230

 

2013

 

1,208

 

2014

 

1,200

 

2015

 

966

 

Thereafter

 

830

 

 

 

$

6,797

 

 

7. Supplemental Executive Retirement Plan

 

We maintain the United Therapeutics Corporation Supplemental Executive Retirement Plan (SERP) to provide retirement benefits to certain members of our management team. In connection with the SERP, we maintain the United Therapeutics Corporation Supplemental Executive Retirement Plan Rabbi Trust Document (Rabbi Trust) that we entered into with the Wilmington Trust Company. The balance in the Rabbi Trust was approximately $5.1 million as of June 30, 2010, and December 31, 2009. The Rabbi Trust is irrevocable and SERP participants will have no preferred claim on, nor any beneficial ownership interest in, any assets of the Rabbi Trust. The investments in the Rabbi Trust are classified as restricted marketable investments and cash on our consolidated balance sheets.

 

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The table below discloses the components of the periodic benefit cost (in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Service cost

 

$

856

 

$

661

 

$

1,712

 

$

1,322

 

Interest cost

 

194

 

140

 

388

 

280

 

Amortization of prior period service costs

 

36

 

36

 

72

 

72

 

Recognized actuarial net loss

 

28

 

 

56

 

 

Net pension expense

 

$

1,114

 

$

837

 

$

2,228

 

$

1,674

 

 

8 . Share Tracking Awards Plan

 

We maintain the United Therapeutics Corporation Share Tracking Awards Plan (STAP). Awards granted under the STAP (Awards) are non-dilutive as they are not settled in shares of our common stock, but rather convey the right to receive in cash an amount equal to the appreciation of our common stock, which is calculated as the positive difference between the closing price of our common stock on the date of exercise and the date of grant. Outstanding Awards generally vest in equal increments on each anniversary of the date of grant over a three- or four-year period and expire on the tenth anniversary of the date of grant. The maximum number of Awards available for grant under the STAP is 9,000,000.

 

We account for outstanding Awards as a liability because they are required to be settled in cash. Accordingly, we estimate the fair value of Awards at each financial reporting date using the Black-Scholes-Merton valuation model until settlement occurs or Awards are otherwise no longer outstanding. The STAP liability balance was $73.1 million and $64.2 million at June 30, 2010 and December 31, 2009, respectively, and has been included in other current liabilities on our consolidated balance sheets. The change in the fair value of outstanding Awards at each reporting date is recognized as an adjustment to compensation expense on our consolidated statements of operations.

 

In estimating the fair value of Awards, we are required to use inputs that materially impact the determination of fair value and compensation expense to be recognized. These inputs include the expected volatility of the price of our common stock, the risk-free interest rate, the expected term of Awards, the expected forfeiture rate and the expected dividend.

 

The table below presents the assumptions used to measure the fair value of Awards at June 30, 2010 and 2009:

 

 

 

June 30, 2010

 

June 30, 2009

 

Expected volatility

 

47.3

%

49.2

%

Risk-free interest rate

 

1.6

%

2.6

%

Expected term of Awards (in years)

 

4.8

 

5.4

 

Expected forfeiture rate

 

6.0

%

5.9

%

Expected dividend yield

 

0.0

%

0.0

%

 

A summary of the activity and status of Awards is presented below:

 

 

 

Number of
Awards

 

Weighted-
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Term
(Years)

 

Aggregate
Intrinsic
Value
(in Thousands)

 

Outstanding at January 1, 2010

 

6,363,720

 

$

32.19

 

 

 

 

 

Granted

 

1,491,587

 

56.46

 

 

 

 

 

Exercised

 

(429,158

)

28.12

 

 

 

 

 

Forfeited

 

(145,207

)

36.45

 

 

 

 

 

Outstanding at June 30, 2010

 

7,280,942

 

$

37.31

 

8.7

 

$

83,718

 

Awards exercisable at June 30, 2010

 

1,646,976

 

$

28.76

 

8.3

 

$

33,017

 

Awards expected to vest at June 30, 2010

 

5,197,547

 

$

39.83

 

8.9

 

$

46,665

 

 

The weighted average fair value of Awards granted during the six-month periods ended June 30, 2010 and 2009, was $27.71 and $22.67, respectively.

 

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Table of Contents

 

Share-based compensation expense related to outstanding Awards is as follows (in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Cost of service sales

 

$

1

 

$

58

 

$

113

 

$

69

 

Research and development

 

501

 

6,615

 

9,725

 

8,602

 

Selling, general and administrative

 

283

 

9,921

 

10,341

 

12,489

 

Share-based compensation expense before taxes

 

785

 

16,594

 

20,179

 

21,160

 

Related income tax benefits

 

(290

)

(4,978

)

(7,466

)

(6,348

)

Share-based compensation expense, net of taxes

 

$

495

 

$

11,616

 

$

12,713

 

$

14,812

 

Share-based compensation capitalized as part of inventory

 

$

45

 

$

712

 

$

539

 

$

37

 

 

During the six-month periods ended June 30, 2010 and 2009, we paid $10.6 million and $418,000, respectively, in connection with the exercise of Awards.

 

9. Debt

 

Convertible Senior Notes

 

On October 30, 2006, we issued at par value $250.0 million of 0.50% Convertible Senior Notes due October 2011 (Convertible Senior Notes). We pay interest on the Convertible Senior Notes semi-annually on April 15 and October 15 of each year. The Convertible Senior Notes are unsecured, unsubordinated debt obligations that rank equally with all of our other unsecured and unsubordinated indebtedness. The conversion price is $37.6129 per share and the number of shares on which the aggregate consideration is to be determined upon conversion is approximately 6,646,000.

 

Conversion can occur: (1) anytime after July 15, 2011; (2) during any calendar quarter that follows a calendar quarter in which the price of our common stock exceeded 120% of the conversion price for at least 20 days during the 30 consecutive trading- day period ending on the last trading day of the quarter; (3) during the ten consecutive trading-day period following any five consecutive trading-day period in which the trading price of the Convertible Senior Notes was less than 95% of the closing price of our common stock multiplied by the then current number of shares underlying the Convertible Senior Notes; (4) upon specified distributions to our shareholders; (5) in connection with corporate transactions; or (6) in the event that our common stock ceases to be listed on the NASDAQ Global Select Market and is not listed for trading on another U.S. national or regional securities exchange.

 

Upon conversion, holders of our Convertible Senior Notes will receive: (1) cash equal to the lesser of the principal amount of the notes or the conversion value (the number of shares underlying the Convertible Senior Notes multiplied by the then current conversion price per share); and (2) to the extent the conversion value exceeds the principal amount of the Convertible Senior Notes, shares of our common stock.  In the event of a change in control, as defined in the indenture under which the Convertible Senior Notes have been issued, holders can require us to purchase from them all or a portion of their Convertible Senior Notes for 100% of the principal value plus any accrued and unpaid interest. At June 30, 2010, the aggregate conversion value of the Convertible Senior Notes exceeded their principal value by $74.4 million using a conversion price of $48.81, the closing price of our common stock on June 30, 2010. We have reserved sufficient shares of our common stock to satisfy the conversion requirements related to the Convertible Senior Notes.

 

The closing price of our common stock exceeded 120% of the conversion price of the Convertible Senior Notes for more than 20 trading days during the 30 consecutive trading-day periods ending on June 30, 2010 and December 31, 2009. Consequently, the Convertible Senior Notes were convertible at the election of their holders. As this conversion right is outside of our control, the Convertible Senior Notes have been classified as a current liability on the accompanying consolidated balance sheets. This contingent conversion measurement is calculated at the end of each quarterly reporting period. Therefore, the classification of the Convertible Senior Notes may be subject to change depending on the price of our common stock.

 

Because the terms of the Convertible Senior Notes provide for settlement wholly or partially in cash, we are required to account for the liability and equity components of these debt instruments separately in a manner that reflects our non-convertible borrowing rate.  Accordingly, we estimated the fair value of the Convertible Senior Notes without the conversion feature as of the date of issuance (Liability Component). The estimated fair value of the Liability Component was $177.6 million. The excess of the proceeds received over the estimated fair value of the Liability Component totaling $72.4 million was allocated to the conversion feature (Equity Component) and a corresponding offset was recognized as a discount to reduce the net carrying value of the Convertible Senior Notes. The discount is being amortized to interest expense over a five-year period ending October 2011 (the

 

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Table of Contents

 

expected life of the Liability Component) using the interest method and an effective rate of interest of 7.5%, which corresponds to our non-convertible borrowing rate at the date of issuance.

 

Interest expense associated with the Convertible Senior Notes consists of the following (in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Contractual coupon rate of interest

 

$

312

 

$

312

 

$

625

 

$

625

 

Discount amortization

 

3,889

 

3,611

 

7,707

 

7,155

 

Interest expense—Convertible Senior Notes

 

$

4,201

 

$

3,923

 

$

8,332

 

$

7,780

 

 

Amounts comprising the carrying amount of the Convertible Senior Notes are as follows (in thousands):

 

 

 

June 30,
2010

 

December 31,
2009

 

Principal balance

 

$

249,978

 

$

249,978

 

Discount, net of accumulated amortization of $50,404 and $42,697

 

(21,999

)

(29,706

)

Carrying amount

 

$

227,979

 

$

220,272

 

 

Call Spread Option

 

Concurrent with the issuance of the Convertible Senior Notes, we purchased call options on our common stock in a private transaction with Deutsche Bank AG London (Call Option). The Call Option allows us to purchase up to approximately 6.6 million shares of our common stock, which is equal to the maximum number of shares we could be required to issue upon conversion of the Convertible Senior Notes, at a price of $37.6129 per share.  We will be required to issue shares of our common stock upon conversion if the price of our common stock exceeds $37.6129 per share upon conversion. The Call Option will terminate upon the earlier of the maturity date of the Convertible Senior Notes or the first day all of the Convertible Senior Notes are no longer outstanding due to conversion or otherwise. We paid $80.8 million for the Call Option, which was recorded as a reduction to additional paid-in-capital.

 

In a separate transaction that took place simultaneously with the issuance of the Convertible Senior Notes, we sold a warrant to Deutsche Bank AG London under which Deutsche Bank AG London has the right to purchase approximately 6.6 million shares of our common stock at an exercise price of $52.845 per share (Warrant). Proceeds received from the Warrant totaled $45.4 million and were recorded as additional paid-in-capital.

 

The shares deliverable to us under the Call Option must be obtained from existing shareholders. Any shares that we may be required to deliver under the Warrant can consist of registered or unregistered shares, subject to potential adjustments to the settlement amount. The maximum number of shares of our common stock that we may be required to deliver in connection with the Warrant is approximately 6.6 million. We have reserved approximately 6.6 million shares for the settlement of the Warrant and had sufficient shares available as of June 30, 2010, to effect such settlement.

 

The combination of the Call Option and Warrant effectively reduces the potential dilutive impact of the Convertible Senior Notes. The Call Option has a strike price equal to the conversion price of the Convertible Senior Notes and the Warrant has a higher strike price per share that caps the amount of protection we could receive against dilution under these instruments. The Call Option and Warrant can be settled on a net share basis.

 

These instruments are considered both indexed to our common stock and classified as equity; therefore, the Call Option and Warrant are not accounted for as derivative instruments.

 

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Table of Contents

 

Interest Expense

 

Details of interest expense are presented below (in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Interest expense

 

$

4,759

 

$

4,164

 

$

9,446

 

$

8,877

 

Capitalized interest(1)

 

 

(916

)

 

(2,992

)

Total interest expense

 

$

4,759

 

$

3,248

 

$

9,446

 

$

5,885

 

 


(1)           Interest associated with the construction of our facilities in Maryland and North Carolina during 2009.

 

10.  Lease Obligation

 

We lease our laboratory facility in Silver Spring, Maryland (Phase I Laboratory), pursuant to a synthetic lease arrangement entered into in June 2004 with Wachovia Development Corporation and its affiliates (Wachovia). Under the lease, Wachovia funded $32.0 million toward the construction of the Phase I Laboratory on land we own. Since construction was completed in May 2006, Wachovia has leased the Phase I Laboratory to us. Monthly rent is equal to the 30-day LIBOR plus 55 basis points (0.90% as of June 30, 2010) applied to the amount Wachovia funded toward construction. The initial term of the Lease ends in May 2011. Upon the expiration of the initial term, we will have the right to exercise one of the following options under the lease: (1) renew the lease for an additional five-year term (subject to the approval of both parties); (2) purchase the Phase I Laboratory from Wachovia for approximately $32.0 million; or (3) sell the Phase I Laboratory and repay Wachovia’s construction costs with the proceeds from the sale. If the sale proceeds are insufficient to repay Wachovia’s construction costs, we must fund the shortfall up to the maximum residual value guarantee of approximately $27.5 million. Until September 30, 2008, we accounted for the lease as an operating lease.

 

In December 2007, we began constructing a combination office and laboratory facility (Phase II Facility) with funds generated from our operations. Architectural plans included the structural modification of the existing Phase I Laboratory in order to connect it to the Phase II Facility. As of September 30, 2008, we received Wachovia’s acknowledgement of our plan to make structural modifications to the Phase I Laboratory. As a result, we could no longer consider the Phase I Laboratory a standalone structure, which was required to maintain off-balance sheet accounting for the lease. Consequently, as of September 30, 2008, we were considered the owners of the Phase I Laboratory for accounting purposes and began accounting for the lease as a financing obligation. As such, in September 2008, we capitalized $29.0 million, the estimated fair value of the Phase I Laboratory, and are depreciating the Phase I Laboratory over the estimated useful lives of its various components. In addition, we recognized a corresponding lease obligation. We are accreting the lease obligation to $32.0 million, the purchase price of the Phase I Laboratory, through the recognition of periodic interest charges using the effective interest method. The accretion period runs through the end of the initial term of the lease. As the initial term expires May 2011, the lease obligation has been classified as a current liability on our consolidated balance sheet at June 30, 2010.

 

As of June 30, 2010, we pledged $35.1 million of our marketable securities as collateral for the lease. Related amounts have been included in restricted marketable investments and cash on our consolidated balance sheet.

 

11. Stockholders’ Equity

 

Authorized Shares of Common Stock

 

Effective June 28, 2010, we amended our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of our common stock from 100,000,000 shares to 245,000,000 shares.

 

Earnings per share

 

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period, adjusted for the potential dilutive effect of other securities if such securities were converted or exercised. Basic and diluted loss per share are computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period as the impact of potentially dilutive securities would be anti-dilutive.

 

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Table of Contents

 

The components of basic and diluted earnings (loss) per share comprise the following (in thousands, except per share amounts):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net income (loss) (numerator)

 

$

37,707

 

$

(2,344

)

$

56,636

 

$

10,855

 

Shares (denominator):

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares for basic EPS

 

56,047

 

52,982

 

55,411

 

52,932

 

Convertible Senior Notes(1)

 

2,020

 

 

2,155

 

 

Dilutive effect of stock options(2)

 

2,326

 

 

1,982

 

1,754

 

Adjusted weighted average shares for diluted EPS

 

60,393

 

52,982

 

59,548

 

54,686

 

Earnings (loss) per share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.67

 

$

(0.04

)

$

1.02

 

$

0.21

 

Diluted

 

$

0.62

 

$

(0.04

)

$

0.95

 

$

0.20

 

 

 

 

 

 

 

 

 

 

 

Stock options and warrants excluded from calculation(3)

 

6,501

 

15,934

 

6,311

 

7,624

 

 


(1)          We cannot consider the impact of shares that we would receive under the terms of the Call Option (see Note 9 —Debt—Call Spread Option to these consolidated financial statements) in the calculation of diluted earnings per share as their impact would be anti-dilutive. The effect of the Call Spread Option would offset the dilutive impact of the Convertible Senior Notes.

 

(2)          Calculated using the treasury stock method.

 

(3)          Certain stock options and warrants were excluded from the computation of diluted earnings per share because their impact would be anti-dilutive.

 

Stock Option Plan

 

Stock option awards may be granted under our equity incentive plan. We estimate the fair value of stock options using the Black-Scholes-Merton valuation model. Option valuation models, including Black-Scholes-Merton, require the input of highly subjective assumptions that can materially impact the estimation of fair value and related compensation expense. These assumptions include the expected volatility of our common stock, risk-free interest rate, the expected term of stock option awards, expected forfeiture rate and the expected dividend yield.

 

Presented below are the weighted average assumptions used to estimate the grant date fair value of stock options granted during the three- and six-month periods ended June 30, 2010 and 2009:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Expected volatility

 

47.3

%

49.1

%

47.3

%

49.1

%

Risk-free interest rate

 

2.2

%

2.2

%

2.5

%

2.2

%

Expected term of options (years)

 

5.5

 

5.5

 

5.5

 

5.5

 

Expected dividend yield

 

0.0

%

0.0

%

0.0

%

0.0

%

Forfeiture rate

 

0.0

%

0.0

%

0.0

%

0.0

%

 

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Table of Contents

 

A summary of the activity and status of employee stock options is presented below:

 

 

 

Number of
Options

 

Weighted-
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Term
(Years)

 

Aggregate
Intrinsic
Value
 (in thousands)

 

Outstanding at January 1, 2010

 

8,578,788

 

$

29.92

 

 

 

 

 

Granted

 

57,500

 

52.19

 

 

 

 

 

Exercised

 

(2,112,526

)

24.99

 

 

 

 

 

Forfeited

 

(28,227

)

28.38

 

 

 

 

 

Outstanding at June 30, 2010

 

6,495,535

 

$

31.73

 

6.6

 

$

110,934

 

Options exercisable at June 30, 2010

 

5,971,448

 

$

31.66

 

6.6

 

$

102,436

 

Expected to vest at June 30, 2010

 

500,944

 

$

32.72

 

7.3

 

$

8,059

 

 

Total share-based compensation related to employee stock options for the three- and six-month periods ended June 30, 2010 and 2009, is as follows (in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Cost of service sales

 

$

5

 

$

12

 

$

11

 

$

25

 

Research and development

 

919

 

2,318

 

2,231

 

4,987

 

Selling, general and administrative(1)

 

(2,283

)

15,441

 

7,130

 

22,248

 

Share-based compensation expense before taxes

 

(1,359

)

17,771

 

9,372

 

27,260

 

Related income tax expense (benefits)

 

503

 

(5,331

)

(3,468

)

(8,178

)

Share-based compensation expense, net of taxes

 

$

(856

)

$

12,440

 

$

5,904

 

$

19,082

 

Share-based compensation capitalized as part of inventory

 

$

87

 

$

273

 

$

192

 

$

499

 

 


(1)          For the three-and six-month periods ended June 30, 2010, share-based compensation includes a $4.0 million benefit corresponding to the reduction in the estimated fair value of a potential year-end stock option grant to our Chief Executive Officer, which is based on a formula set forth in her employment agreement. The reduction in the estimated fair value of this potential award resulted from the decline in the price of our common stock at June 30, 2010 when compared to March 31, 2010.

 

Employee and non-employee stock option exercise data is summarized below (dollars in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Number of options exercised

 

746,627

 

249,546

 

2,172,996

 

298,988

 

Cash received

 

$

18,278

 

$

5,255

 

$

54,600

 

$

6,112

 

 

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Table of Contents

 

12. Comprehensive Income

 

Comprehensive income consists of the following (in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net income (loss)

 

$

37,707

 

$

(2,344

)

$

56,636

 

$

10,855

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation (loss) gain

 

(1,324

)

4,015

 

(2,851

)

3,111

 

Unrecognized prior period pension service cost, net of tax

 

23

 

24

 

46

 

46

 

Unrecognized actuarial pension (loss) gain, net of tax

 

17

 

 

(144

)

 

Unrealized (loss) gain on available-for-sale securities, net of tax

 

(1

)

42

 

46

 

29

 

Comprehensive income

 

$

36,422

 

$

1,737

 

$

53,733

 

$

14,041

 

 

13. Income Taxes

 

Income tax expense for the three- and six-month periods ended June 30, 2010 and 2009 is based on the estimated annual effective tax rate for the entire year. The estimated annual effective tax rate can be subject to adjustment in subsequent quarterly periods if components used in its estimation are revised. The estimated annual effective tax rates as of June 30, 2010 and 2009 were 35 percent and 25 percent, respectively.

 

As of June 30, 2010, we had available for federal income tax purposes $81.4 million in business tax credit carryforwards that will expire at various dates through 2020. Certain business tax credit carryforwards that were generated prior to December 2008 may be subject to limitations on their use pursuant to Internal Revenue Code Section 382 as a result of ownership changes as defined therein. However, we do not expect that these business tax credits will expire unused.

 

We file U.S. federal income tax returns and various state and foreign income tax returns. Our tax years from 2006 through 2008 are subject to examination by federal and state tax authorities. We are unaware of any uncertain tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits would significantly increase or decrease within the next twelve months.

 

14. Segment Information

 

We have two reportable business segments: pharmaceutical and telemedicine.  The pharmaceutical segment includes all activities associated with the research, development, manufacturing and commercialization of our therapeutic products. The telemedicine segment includes all activities associated with the development and manufacturing of cardiac monitoring products and the delivery of cardiac monitoring services. The telemedicine segment is managed separately because diagnostic services require different technologies and marketing strategies than pharmaceutical products.

 

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Table of Contents

 

Segment information as of and for the three-month periods ended June 30, 2010 and 2009, is presented below (in thousands):

 

 

 

As of and for the three months ended June 30,

 

 

 

2010

 

2009

 

 

 

Pharmaceutical

 

Telemedicine

 

Consolidated
Totals

 

Pharmaceutical

 

Telemedicine

 

Consolidated
Totals

 

Revenues from external customers

 

$

134,721

 

$

2,770

 

$

137,491

 

$

81,281

 

$

2,699

 

$

83,980

 

Income (loss) before income tax

 

57,323

 

(404

)

56,919

 

(5,625

)

82

 

(5,543

)

Total assets

 

1,166,922

 

20,753

 

1,187,675

 

932,775

 

18,896

 

951,671

 

 

 

 

As of and for the six months ended June 30,

 

 

 

2010

 

2009

 

 

 

Pharmaceutical

 

Telemedicine

 

Consolidated
Totals

 

Pharmaceutical

 

Telemedicine

 

Consolidated
Totals

 

Revenues from external customers

 

$

260,635

 

$

5,736

 

$

266,371

 

$

158,441

 

$

5,269

 

$

163,710

 

Income (loss) before income tax

 

86,042

 

(442

)

85,600

 

14,512

 

(58

)

14,454

 

Total assets

 

1,166,922

 

20,753

 

1,187,675

 

932,775

 

18,896

 

951,671

 

 

When combined, the segment information above agrees with the totals reported in the consolidated financial statements.  There are no inter-segment transactions.

 

For the three-month periods ended June 30, 2010 and 2009, revenues from our three U.S.-based distributors represented 82 percent and 85 percent, respectively, of our total net revenues. For the six-month periods ended June 30, 2010 and 2009, revenues from our three U.S.-based distributors represented 83 percent and 85 percent, respectively, of our total net revenues.

 

15. Legal Proceedings

 

On May 7, 2009, purported shareholder Jeffrey Benison IRA (Benison) filed a derivative complaint in the Court of Chancery for the State of Delaware against those of our directors who were members of our Board of Directors as of December 31, 2008, and us as a nominal defendant. An amended complaint, which the plaintiff filed on August 27, 2009 (purportedly on our behalf), alleged, among other things, that the named director defendants breached their fiduciary duties of loyalty in connection with the 2008 modification of awards granted under the United Therapeutics Corporation Share Tracking Awards Plan (STAP) and the exchange of certain stock options granted under our Amended and Restated Equity Incentive Plan. The amended complaint also alleged that our Chief Executive Officer should not have been able to exchange certain of the stock options she exchanged pursuant to the same 2008 exchange. On October 2, 2009, a second plaintiff, the Retirement Board of Allegheny County (RBAC), filed a derivative complaint asserting similar challenges as the Benison complaint described above, also in the Court of Chancery for the State of Delaware. On November 9, 2009, the Court of Chancery entered an order consolidating these two derivative actions. On April 21, 2010, plaintiffs moved the court for an order permitting an additional plaintiff, the Police & Fire Retirement System of the City of Detroit (PFRSD), to join the consolidated action, and the court granted that motion. On May 4, 2010, Benison, RBAC and PFRSD jointly filed a consolidated amended derivative complaint. That complaint challenges substantially the same transactions and compensation that were challenged in the earlier complaints, and also claims that the STAP is invalid and that our Chief Executive Officer should not have received stock options that the Company granted to her at the end of 2009 pursuant to the terms of her employment contract.

 

The plaintiffs sought unspecified monetary damages, purportedly for United Therapeutics Corporation, as well as attorneys’ fees and costs and injunctive relief.

 

On July 26, 2010, the parties reached an agreement in principle to settle the consolidated derivative actions. The parties have agreed, among other things, that in the future we will not reprice awards granted under our Amended and Restated Equity Incentive Plan or the STAP without shareholder approval, that we will cancel 165,214 options granted to our Chief Executive Officer and we will adopt certain corporate governance practices. To finalize the terms of the settlement, the parties must negotiate, draft and enter into a stipulation of settlement, which will set forth the full terms of our agreement and will be subject to court approval. There can be no assurance that the parties will be able to finalize their agreement in principle or that it would be approved by the court. The contemplated settlement is not expected to have any material impact on our statements of financial position or operations.

 

From time to time, we may be involved in other lawsuits and proceedings incidental to the conduct of our business. We are not a party to any other lawsuit or proceeding that, in the opinion of our management, is likely to have a material adverse effect on our financial position or results of operations.

 

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Table of Contents

 

Item 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2009, and the consolidated financial statements and accompanying notes included in Part I, Item I of this Quarterly Report on Form 10-Q. 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 in the section entitled Part II, Item 1A—Risk Factors , below. These statements are based on our beliefs and expectations about future outcomes and are subject to risks and uncertainties that could cause our actual results to differ materially from anticipated results. Factors that could cause or contribute to such differences include those described in Part II, Item 1A—Risk Factors of this Quarterly Report on Form 10-Q; factors described in our Annual Report on Form 10-K for the year ended December 31, 2009, under the section entitled Part I, Item 1A—Risk Factors—Forward-Looking Statements ; and factors described in other cautionary statements, cautionary language and risk factors set forth in other filings with the Securities and Exchange Commission (SEC). We undertake no obligation to publicly update these 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 unique products to address the unmet medical needs of patients with chronic and life-threatening conditions.

 

Our key therapeutic platforms include:

 

·       Prostacyclin analogues : stable, synthetic forms of prostacyclin, an important molecule produced by the body that has powerful effects on blood vessel health and function;

 

·       Phosphodiesterase type 5 (PDE-5) inhibitors : molecules that act to inhibit the degradation of cyclic guanosine monophosphate (cGMP) in cells. cGMP is activated by nitric oxide, a naturally occurring substance in the body that mediates the relaxation of vascular smooth muscle;

 

·       Monoclonal antibodies : antibodies that activate patients’ immune systems to treat cancer; and

 

·       Glycobiology antiviral agents : a novel class of small, sugar-like molecules that have shown antiviral activity in a range of pre-clinical settings.

 

We focus most of our resources on these key therapeutic platforms. In addition, we devote resources to the commercialization and development of telemedicine products and services, principally for the detection of cardiac arrhythmias (abnormal heart rhythms).

 

Our lead product is Remodulin ®  (treprostinil) Injection (Remodulin) to be administered subcutaneously or intravenously for the treatment of pulmonary arterial hypertension (PAH). The United States Food and Drug Administration (FDA) approved Remodulin in 2002 for subcutaneous (under the skin) administration. Subsequently, the FDA broadened its approval of Remodulin for intravenous (in the vein) use and for the treatment of patients who require transition from Flolan ® , the first drug approved by the FDA for the treatment of PAH. In addition to the United States, Remodulin is approved in many other countries, primarily for subcutaneous use. In May 2009, the FDA approved Adcirca ®  (tadalafil) tablets (Adcirca), an orally administered therapy for the treatment of PAH to which we acquired certain exclusive commercialization rights from Eli Lilly and Company (Lilly). In July 2009, the FDA approved Tyvaso ®  (treprostinil) Inhalation Solution (Tyvaso), an inhaled therapy for the treatment of PAH.  We launched both Adcirca and Tyvaso for commercial sale during the third quarter of 2009. With the introduction of these two new therapies, we are now able to offer treatments to a broader range of patients who suffer from PAH. In addition, we are continuing to develop an oral formulation of treprostinil.

 

Revenues

 

Sales of Remodulin comprise the largest share of our revenues. Other sources of pharmaceutical revenues include sales of our recently approved therapies, Tyvaso and Adcirca. Since their commercial introduction in 2009, sales of Tyvaso and Adcirca have continued to grow, as each of these therapies has gained broader market acceptance. We sell Remodulin and Tyvaso in the United States to our specialty pharmaceutical distributors: Accredo Health Group, Inc., CuraScript, Inc., and CVS Caremark. Adcirca is sold to pharmaceutical wholesalers that are part of Lilly’s pharmaceutical wholesaler network. We also sell Remodulin to distributors in countries outside of the United States.

 

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Table of Contents

 

We require our distributors to maintain reasonable levels of contingent inventory at all times, as the interruption of Remodulin or Tyvaso therapy can be life threatening. Consequently, sales of these therapies in any given quarter may not precisely reflect patient demand. Our distributors typically place one bulk order per month based on estimates of future demand and considerations of contractual minimum inventory requirements. As a result, the sales volume of Remodulin and Tyvaso can vary by the timing and magnitude of these orders.

 

In March and April of 2010, we increased the price on all concentrations of Remodulin sold to our U.S.-based and international distributors by 9.6 percent and 13.3 percent, respectively.

 

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the Acts). The Acts contain broad provisions that will be implemented over the next several years.  We are currently evaluating the impact of the Acts on our business; however, our evaluation is dependent upon the issuance of final regulations and the Acts’ impact on insurance companies and their relationships with drug manufacturers.  Based on our preliminary evaluations of the Acts, we do not believe that the Acts will have a material impact on our business in 2010.  Potential impacts of the Acts on our business beyond 2010 are inherently difficult to predict, but thus far, we have not identified any provisions that could materially impact our business.

 

Beginning January 1, 2010, the Acts increased the minimum rate for rebates pharmaceutical companies must provide to Medicaid from 15.1 percent to 23.1 percent on certain pharmaceutical products. This increase applies to rebates for Remodulin, Tyvaso and Adcirca.  Over the last three years, less than ten percent of the prescriptions for our drugs have been reimbursed by Medicaid.  Based on a three-year historical review of our Medicaid rebates, we believe that the increase in the Medicaid rebates will decrease our net revenues by less than one percent in 2010.

 

Total revenues are reported net of: (1) estimated rebates and other reimbursements; (2) prompt pay discounts; (3) fees to our distributors for services; and (4) allowances for product returns or exchanges. In addition, we have contractual arrangements with third-party payers to provide rebates to these payers for the cost of therapy. We estimate our liability for these rebates based on the historical level of invoices received from state Medicaid agencies and third-party payers by product relative to the specific sales of each product in the United States. Prompt pay discounts are offered on sales of our commercial products if the related invoices are paid in full within a specific time period from the date of sale. We estimate our liability for prompt pay discounts based on historical payment patterns. Fees paid to our distributors for services are estimated based on contractual rates for specific services applied to the estimated units of service provided for the period. The allowance for sales returns for Adcirca is based on published industry data related to specialty pharmaceuticals, which is the segment most relevant to Adcirca. The allowance for exchanges for Remodulin is based on the historical rate of product exchanges, which has been too immaterial to record. In addition, since Tyvaso is distributed in the same manner and under similar contractual arrangements as Remodulin, we expect the level of product exchanges for Tyvaso to be comparable to that of Remodulin.

 

In addition to our pharmaceutical revenues, other sources of revenue consist primarily of sales of telemedicine products and services in the United States.  Our telemedicine products and services are designed to detect cardiac arrhythmias and ischemic heart disease, a condition that causes poor blood flow to the heart.

 

Major Research and Development Projects

 

Our major research and development projects focus on the use of prostacyclin analogues to treat cardiovascular diseases, monoclonal antibodies to treat a variety of cancers, and glycobiology antiviral agents to treat infectious diseases.

 

Cardiovascular Disease Projects

 

Tyvaso

 

Upon receiving FDA approval of Tyvaso for the treatment of PAH in July 2009, we launched Tyvaso for commercial sale in September 2009.  In connection with the Tyvaso approval, we agreed to a post-marketing requirement (PMR) and certain post-marketing commitments (PMCs). PMRs and PMCs often include studies conducted by sponsors after FDA approval to gather additional information about a product’s safety, efficacy, or optimal use. PMRs are required studies, whereas PMCs are agreed to voluntarily. We are required to provide the FDA annual updates on our PMR and PMCs. Failure to complete or adhere to the timelines set by the FDA for the PMR could result in penalties, including fines or withdrawal of Tyvaso from the market, unless we are able to demonstrate good cause for the failure or delay.

 

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Table of Contents

 

In accordance with our PMR, we will conduct a long-term observational study in the U.S. that will include 1,000 patient years of follow up in Tyvaso-treated patients, and 1,000 patient years of follow up in matched control patients receiving other PAH treatments. This study will allow us to continue to assess the safety of Tyvaso. We are working with the FDA to put a final protocol in place for the PMR, and are currently committed to submit the results of the study by December 15, 2013, although our timeline may need to be extended.

 

The PMCs require us to modify the Tyvaso Inhalation System in certain respects. As part of these required modifications, we agreed to perform a usability analysis incorporating the evaluation and prioritization of user-related risk followed by a human factors study. In addition, we will conduct a study in healthy volunteers to collect pharmacokinetic data to verify expected dosing with the modified device. We submitted protocols for the PMCs to the FDA for review, and have committed to add a Supplement to our Tyvaso New Drug Application describing the results no later than October 31, 2010, although our timeline may need to be extended. We completed a human factors study in March 2010, and are awaiting response from the FDA.

 

In June 2010, the FDA granted orphan-drug designation for Tyvaso. Such a designation confers an exclusivity period during which the FDA may not approve any application to market the same drug for the same indication, except in limited circumstances.

 

Oral treprostinil

 

In December 2006, we initiated two Phase III clinical trials, FREEDOM-C and FREEDOM-M, to evaluate the safety and efficacy of oral treprostinil in patients with PAH.

 

FREEDOM-C was a study of patients currently on approved background therapy using a PDE-5 inhibitor, such as Revatio, or an endothelin receptor antagonist, such as Tracleer, or a combination of both. We completed enrollment for FREEDOM-C in May 2008 and in November 2008 announced that FREEDOM-C failed to achieve statistical significance for the primary endpoint of six-minute walk distance. Preliminary analysis of the data revealed that the initial dose of 1.0 mg was too high, which contributed to an inability to dose titrate (increase the dose to tolerability) and prevented the attainment of optimal dosing levels. Consequently, the overall treatment effect of the therapy was muted. We believe, however, that the results of the FREEDOM-C clinical trial, particularly as they relate to treatment effect and dosing, warrant our continued development of oral treprostinil. Accordingly, we commenced an additional Phase III clinical trial, FREEDOM-C 2 , to continue studying dosage and efficacy of oral treprostinil in PAH patients on an approved background therapy. Enrollment in FREEDOM-C 2  began in June 2009. In FREEDOM-C 2 , patients are provided a lower strength tablet (0.25 mg) when beginning the trial and doses are titrated in 0.25 mg to 0.5 mg increments.

 

FREEDOM-M is a 12-week study of newly diagnosed PAH patients not currently on any background therapy. Based on our observations from the FREEDOM-C clinical trial relating to patient tolerability and tablet strength, we submitted a protocol amendment to the FDA in February 2009 to add patients to the ongoing FREEDOM-M trial. These additional patients will be provided a lower strength tablet (0.25 mg) when beginning the trial and doses will be titrated in 0.25 mg to 0.5 mg increments, which we believe will improve tolerability. In addition, our amendment to the FREEDOM-M protocol specifies that the primary statistical analysis of the trial will include only those patients who started the trial using the 0.25 mg tablet. By amending the protocol for FREEDOM-M we hope to achieve the following objectives: (1) to assess more accurately the effectiveness of oral treprostinil; (2) to improve patient tolerability of oral treprostinil so that an effective maintenance dose can be attained; and (3) to reduce the rate of premature discontinuation due to adverse events. The statistical assumptions of the amended protocol provide for 90% power (confidence rate) to observe a 45-meter treatment benefit in six-minute walk distance at the significance level of 0.01. In April 2009, we began enrolling patients in FREEDOM-M under the amended protocol.

 

We plan to introduce a 0.125 mg tablet in 2010, which will allow us to start patients on an even lower strength, and titrate doses in even smaller increments for both FREEDOM-C 2  and FREEDOM-M, if needed.

 

Beraprost-MR

 

Pursuant to our license agreement with Toray Industries, Inc. (Toray), we are developing a modified release formulation of beraprost, an oral prostacyclin analogue, for the treatment of PAH. We have completed enrollment of a Phase II clinical trial of beraprost to explore multiple-dose tolerability in patients with PAH, and we began a second Phase II clinical trial. In October 2007, the modified-release formulation of beraprost received regulatory approval in Japan for the treatment of PAH.

 

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Table of Contents

 

Collagen Type V

 

Pursuant to our February 2010 development agreement with ImmuneWorks, Inc., we are developing IW001, a purified bovine Type V Collagen oral solution for the treatment of idiopathic pulmonary fibrosis, a progressive lung disease characterized by abnormal and excessive fibrotic tissue in the lungs, and primary graft dysfunction, a type of organ rejection that can occur in lung transplants. We expect to commence human clinical trials in 2010.

 

From inception to June 30, 2010, we have spent approximately $551.5 million on these and other cardiovascular programs.

 

Cancer Disease Projects

 

In December 2007, we entered into two agreements with Memorial Sloan-Kettering Cancer Center to license certain rights to two investigational monoclonal antibodies (3F8 and 8H9) for the treatment of neuroblastoma and metastatic brain cancer, respectively. We have been granted orphan drug exclusivity in the United States and received a positive opinion from the committee on orphan medicinal products in the European Union for the use of 3F8 for the treatment of neuroblastoma. In August 2009, we began enrolling patients in a Phase II clinical trial of 3F8 for primary refractory neuroblastoma. We have spent approximately $63.9 million from inception to June 30, 2010, on this and earlier programs in our cancer platform.

 

Infectious Disease Projects

 

Pursuant to our research agreement with the University of Oxford (Oxford), we have the exclusive right to commercialize a platform of glycobiology antiviral drug candidates in various preclinical and clinical stages of testing for the treatment of a wide variety of viruses. Through our research agreement with Oxford, we are also supporting research into new glycobiology antiviral drug candidates and technologies. We are currently testing many of these compounds in preclinical studies and Oxford continues to synthesize new agents. We have spent approximately $44.0 million from inception to June 30, 2010, on our infectious disease programs.

 

Cost of Product Sales

 

We manufacture treprostinil using advanced intermediate compounds purchased in bulk from several third-party vendors who have the capacity to produce greater quantities of these compounds more cost effectively than we do.  Our manufacturing process has been designed to give us the flexibility to produce both treprostinil diethanolamine (used in our oral tablet) and treprostinil (used to produce Tyvaso and subcutaneous and intravenous Remodulin) efficiently based on forecasted demand for each of these substances. To ensure sufficient availability of Remodulin and Tyvaso at all times, we maintain inventories of these products equivalent to three years of expected demand. Correspondingly, the approved shelf lives of both Remodulin and Tyvaso are 36 months.

 

We engage contract manufacturers to produce all of our products for commercial use. In 2009, we amended our contract with our Remodulin manufacturer, Baxter Pharmaceutical Solutions, LLC (Baxter), to extend the contract term through 2013. As part of that contract amendment, we agreed that Baxter will manufacture Remodulin in greater quantities using larger production equipment than under its current manufacturing process. This new manufacturing process and related equipment will require FDA and international approvals.

 

We continue to evaluate alternative supply arrangements, including other third-party production arrangements and the manufacture of Remodulin and Tyvaso in our combination office and laboratory facility that we recently completed in Silver Spring, Maryland.

 

Future Prospects

 

Because PAH remains a progressive disease without a cure, we anticipate continued growth in the demand for Remodulin, Tyvaso and Adcirca as viable alternatives or complements to existing approved therapies. We also expect to reach more PAH patients along the full continuum of the disease with the recent commercial introduction of Tyvaso and Adcirca in 2009. Furthermore, we believe that the market for our commercial products will continue to expand as more patients are diagnosed each year with PAH. Since 2002, we have experienced annual revenue growth in excess of 30 percent and it is among our principal objectives to sustain industry-leading revenue growth.  The continued achievement of this objective will depend upon successful commercial development of products within our pipeline and our ability to treat a broader spectrum of PAH patients. To this end, we continue to develop oral treprostinil and beraprost and seek to expand the use of our therapies to treat patients at earlier stages in the PAH disease pathway.

 

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We believe the outcome of our FREEDOM-M and FREEDOM-C 2  Phase III clinical trials of oral treprostinil will be successful. Furthermore, we anticipate that the products developed under these clinical trials will generate future sources of revenue. However, prior to FDA approval of oral treprostinil, we could be required to perform additional studies. This could cause unexpected delays in the commercialization of oral treprostinil and could impede our projected revenue growth. Our future growth and profitability will depend on many factors including, but not limited to: (1) the timing and outcome of clinical trials and regulatory approvals, including the PMCs and PMR for Tyvaso; (2) the timing of the commercial launch of new products; (3) the pricing of and demand for our products and services; (4) reimbursement of our products by public and private insurance organizations; (5) the competition we face within our industry; and (6) our ability to effectively manage our growth in a complex regulatory environment.

 

We operate in a highly competitive market in which a small number of pharmaceutical companies control a majority of the currently approved PAH therapies. These pharmaceutical companies not only possess greater visibility in the market, but also greater financial, technical and marketing resources than we do. In addition, there are a number of investigational products in development that, if approved, may erode the market share of our existing commercial therapies and make market acceptance more difficult to achieve for any therapies we market in the future.

 

Financial Position

 

Cash, cash equivalents and marketable investments (excluding restricted amounts) at June 30, 2010, were $514.8 million compared to $378.1 million at December 31, 2009.  The increase in cash and marketable investments of $136.7 million was driven in large part by: (1) the growth in sales of Remodulin and Tyvaso and related cash receipts; (2) $54.6 million in net proceeds received from stock option exercises; and (3) reductions in construction-related expenditures as a result of the completion of our combination office and laboratory facility in Silver Spring, Maryland in December 2009.

 

Restricted cash and marketable investments were $40.2 million at June 30, 2010, and were composed of $35.1 million pledged as security for our Phase I Laboratory and $5.1 million placed in the United Therapeutics Corporation Supplemental Executive Retirement Plan Rabbi Trust.

 

Accounts receivable at June 30, 2010 was $83.5 million compared to $50.6 million at December 31, 2009. The increase of $32.9 million corresponded to the increase in sales of Remodulin and Tyvaso, particularly during the month ended June 30, 2010, as compared to the month ended December 31, 2009.

 

The $3.8 million increase in inventory, from $26.4 million at December 31, 2009 to $30.2 million at June 30, 2010, coincided in large part with our efforts to maintain a three-year supply of Remodulin and Tyvaso in light of recent sales trends and growth expectations.

 

Accounts payable decreased by $9.4 million, from $18.8 million at December 31, 2009 to $9.4 million at June 30, 2010. The decrease was largely attributable to customary variances in the timing and volume of vendor invoices and the decrease in construction-related invoices.

 

Accrued expenses were $41.9 million at June 30, 2010 compared to $29.8 million at December 31, 2009. The increase corresponded largely to the following: (1) an increase of approximately $7.8 million for accrued royalties and rebates; (2) an increase in other accrued expenses of $2.1 million primarily relating to vendor invoices not yet processed into accounts payable as of June 30, 2010; and (3) $1.1 million in accrued payroll-related costs.

 

Notes payable increased by $7.7 million, from $220.3 million at December 31, 2009, to $228.0 million at June 30, 2010 as a result of amortization of the debt discount on our Convertible Senior Notes for the six months ended June 30, 2010.

 

Additional paid in capital was $874.4 million at June 30, 2010 compared to $798.9 million at December 31, 2009.  The increase of $75.5 million is comprised of the following: (1) $54.6 million in net proceeds from the exercise of stock options and $16.4 million in related tax benefits; and (2) the recognition of approximately $4.5 million in share-based compensation.

 

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Results of Operations

 

Three months ended June 30, 2010 and 2009

 

The following table sets forth the components of net revenues (dollars in thousands):

 

 

 

Three Months Ended
June 30,

 

 

 

2010

 

2009

 

% Change

 

Cardiovascular products:

 

 

 

 

 

 

 

Remodulin

 

$

96,367

 

$

80,954

 

19.0

%

Tyvaso

 

29,483

 

 

100.0

%

Adcirca

 

8,589

 

 

100.0

%

Telemedicine services and products

 

2,770

 

2,699

 

2.6

%

Other

 

282

 

327

 

(13.8

)%

Total net revenues

 

$

137,491

 

$

83,980

 

63.7

%

 

The growth in revenues for the three months ended June 30, 2010, corresponded to: (1) the continued increase in the number of patients being prescribed Remodulin; (2) the impact of the price increases for Remodulin in the U.S. and internationally that went into effect during March and April of 2010, respectively, which resulted in an increase of approximately $7.3 million in related revenues for the period; and (3) sales of Tyvaso and Adcirca, which were commercially launched during the quarter ended September 30, 2009. For the three months ended June 30, 2010 and 2009, approximately 86 percent and 89 percent of net Remodulin revenues, respectively, were derived from our three U.S.-based distributors. In addition, all revenues relating to Tyvaso were earned from the same three distributors.

 

The table below presents a reconciliation of the liability accounts associated with estimated rebates and reimbursements, sales discounts, distributor fees and sales allowances and the net reductions to revenues related to these items (in thousands):

 

 

 

Three Months Ended
June 30,

 

 

 

2010

 

2009

 

Liability accounts, at beginning of period

 

$

7,718

 

$

4,178

 

Additions to liability attributed to sales in:

 

 

 

 

 

Current period

 

12,275

 

3,893