United Therapeutics Corporation
UNITED THERAPEUTICS Corp (Form: 10-Q, Received: 10/28/2010 07:03:23)

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 September 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 October 22, 2010 was 56,917,094.

 

 

 



Table of Contents

 

INDEX

 

 

 

Page

 

 

 

Part I.

FINANCIAL INFORMATION (UNAUDITED)

 

 

 

 

Item 1.

Consolidated Financial Statements

 

 

 

 

 

Consolidated Balance Sheets

 

 

 

 

 

Consolidated Statements of Operations

 

 

 

 

 

Consolidated Statements of Cash Flows

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

Item 2.

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

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 1A.

Risk Factors

 

 

 

 

Item 6.

Exhibits

 

 

 

 

SIGNATURES

 

 

 

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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)

 

 

 

September 30,
2010

 

December 31,
2009

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

210,186

 

$

100,352

 

Marketable investments

 

251,553

 

129,140

 

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

 

75,569

 

50,626

 

Other current assets

 

8,285

 

2,638

 

Prepaid expenses

 

7,692

 

8,199

 

Inventories, net

 

33,422

 

26,360

 

Deferred tax assets

 

11,777

 

7,192

 

Total current assets

 

598,484

 

324,507

 

Marketable investments

 

164,167

 

148,628

 

Marketable investments and cash—restricted

 

40,271

 

39,976

 

Goodwill and other intangibles, net

 

16,667

 

18,418

 

Property, plant and equipment, net

 

303,188

 

303,859

 

Deferred tax assets

 

151,872

 

200,969

 

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

 

8,135

 

15,187

 

Total assets

 

$

1,282,784

 

$

1,051,544

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

11,296

 

$

18,750

 

Accrued expenses

 

45,542

 

29,764

 

Convertible notes

 

231,932

 

220,272

 

Lease obligation—current

 

31,152

 

 

Other current liabilities

 

77,543

 

61,401

 

Total current liabilities

 

397,465

 

330,187

 

Lease obligation—noncurrent

 

 

30,327

 

Other liabilities

 

33,706

 

27,139

 

Total liabilities

 

431,171

 

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 September 30, 2010 and December 31, 2009, respectively, 59,239,731 and 56,682,369 shares issued at September 30, 2010, and December 31, 2009, respectively, and 56,778,078 and 54,220,779 shares outstanding at September 30, 2010, and December 31, 2009, respectively

 

592

 

567

 

Additional paid-in capital

 

892,105

 

798,897

 

Accumulated other comprehensive loss

 

(6,193

)

(4,314

)

Treasury stock at cost, 2,461,653 and 2,461,590 shares at September 30, 2010 and December 31, 2009, respectively

 

(67,399

)

(67,395

)

Retained earnings (deficit)

 

21,626

 

(74,746

)

Total stockholders’ equity

 

840,731

 

653,009

 

Total liabilities and stockholders’ equity

 

$

1,282,784

 

$

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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(Unaudited)

 

(Unaudited)

 

Revenues:

 

 

 

 

 

 

 

 

 

Net product sales

 

$

168,302

 

$

94,058

 

$

428,436

 

$

251,925

 

Service sales

 

2,342

 

2,876

 

8,015

 

8,054

 

License fees

 

339

 

281

 

903

 

946

 

Total revenues

 

170,983

 

97,215

 

437,354

 

260,925

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

40,691

 

31,551

 

104,506

 

81,156

 

Selling, general and administrative

 

46,689

 

41,172

 

124,602

 

119,761

 

Cost of product sales

 

20,169

 

11,576

 

49,180

 

28,657

 

Cost of service sales

 

1,553

 

1,179

 

4,112

 

3,168

 

Total operating expenses

 

109,102

 

85,478

 

282,400

 

232,742

 

Income from operations

 

61,881

 

11,737

 

154,954

 

28,183

 

 

 

 

 

 

 

 

 

 

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

Interest income

 

564

 

1,085

 

2,310

 

4,141

 

Interest expense

 

(4,809

)

(3,331

)

(14,255

)

(9,216

)

Equity loss in affiliate

 

(39

)

(42

)

(130

)

(99

)

Other, net

 

137

 

(403

)

455

 

491

 

Total other (expense) income, net

 

(4,147

)

(2,691

)

(11,620

)

(4,683

)

Income before income tax

 

57,734

 

9,046

 

143,334

 

23,500

 

Income tax (expense) benefit

 

(17,998

)

2,891

 

(46,962

)

(708

)

Net income

 

$

39,736

 

$

11,937

 

$

96,372

 

$

22,792

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.70

 

$

0.22

 

$

1.73

 

$

0.43

 

Diluted

 

$

0.66

 

$

0.21

 

$

1.62

 

$

0.41

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

56,536

 

53,455

 

55,790

 

53,108

 

Diluted

 

60,216

 

57,653

 

59,545

 

55,297

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

 

96,372

 

$

22,792

 

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

 

 

 

 

 

Depreciation and amortization

 

14,181

 

6,673

 

Provisions for bad debt and inventory obsolescence

 

1,844

 

985

 

Deferred tax expense

 

46,962

 

708

 

Share-based compensation

 

61,127

 

73,712

 

Amortization of debt discount and debt issue costs

 

12,520

 

11,685

 

Amortization of discount or premium on investments

 

1,465

 

1,132

 

Equity loss in affiliate and other

 

548

 

(3,488

)

Excess tax benefits from share-based compensation

 

(18,726

)

(2,710

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(25,313

)

(17,345

)

Inventories

 

(7,751

)

(8,965

)

Prepaid expenses

 

507

 

3,478

 

Other assets

 

(2,971

)

(5,889

)

Accounts payable

 

(7,451

)

(2,723

)

Accrued expenses

 

15,327

 

6,182

 

Other liabilities

 

(16,361

)

(12,826

)

Net cash provided by operating activities

 

172,280

 

73,401

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(13,199

)

(73,893

)

Acquisition of Tyvaso Inhalation System business

 

 

(3,378

)

Purchases of held-to-maturity investments

 

(458,526

)

(212,230

)

Maturities of held-to-maturity investments

 

310,348

 

183,099

 

Sales of trading investments

 

36,200

 

225

 

Restrictions on cash

 

(20,747

)

11,591

 

Net cash used in investing activities

 

(145,924

)

(94,586

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from the exercise of stock options

 

64,425

 

23,036

 

Excess tax benefits from share-based compensation

 

18,726

 

2,710

 

Net cash provided by financing activities

 

83,151

 

25,746

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

327

 

489

 

Net increase in cash and cash equivalents

 

109,834

 

5,050

 

Cash and cash equivalents, beginning of period

 

100,352

 

129,452

 

Cash and cash equivalents, end of period

 

$

 

210,186

 

$

134,502

 

 

 

 

 

 

 

Supplemental schedule of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

 

625

 

$

625

 

Cash paid for income taxes

 

$

 

2,335

 

$

11,304

 

 

 

 

 

 

 

 

 

Non cash investing activities:

 

 

 

 

 

 

 

Non-cash additions to property, plant and equipment

 

$

 

1,362

 

$

3,935

 

Acquisition of Tyvaso Inhalation System business

 

$

 

 

$

5,063

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

UNITED THERAPEUTICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 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). Tyvaso is approved for marketing in the United States and our commercialization rights to Adcirca are limited to the United States and Puerto Rico. We have generated pharmaceutical revenues and license fees in the United States, Canada, the European Union, 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 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 September 30, 2010, our results of operations for the three- and nine-month periods ended September 30, 2010 and 2009, and our cash flows for the nine-month periods ended September 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):

 

 

 

September 30,
2010

 

December 31,
2009

 

Pharmaceutical products:

 

 

 

 

 

Raw materials

 

$

3,896

 

$

4,751

 

Work-in-progress

 

17,563

 

12,101

 

Finished goods

 

10,793

 

8,899

 

Delivery pumps, cardiac monitoring equipment and medical supplies

 

1,170

 

609

 

Total inventories

 

$

33,422

 

$

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.

 

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.

 

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Level 3—Fair value is determined by using inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgment.

 

The fair value of the major categories of assets and liabilities subject to fair value measurements is as follows (in thousands):

 

 

 

As of September 30, 2010

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

122,354

 

$

 

$

 

$

122,354

 

Federally-sponsored and corporate debt securities(2)

 

 

416,139

 

 

416,139

 

Available-for-sale equity investment

 

261

 

 

 

261

 

Total assets

 

$

122,615

 

$

416,139

 

$

 

$

538,754

 

Liabilities

 

 

 

 

 

 

 

 

 

Convertible senior notes

 

$

379,101

 

$

 

$

 

$

379,101

 

Contingent consideration—Tyvaso Inhalation System acquisition(3)

 

 

 

1,629

 

1,629

 

Total liabilities

 

$

379,101

 

$

 

$

1,629

 

$

380,730

 

 

 

 

As of December 31, 2009

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Auction-rate securities(4)

 

$

 

$

 

$

29,332

 

$

29,332

 

Auction-rate securities put option(5)

 

 

 

6,741

 

6,741

 

Money market funds(1)

 

48,220

 

 

 

48,220

 

Federally-sponsored and corporate debt securities(2)

 

 

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(3)

 

 

 

5,602

 

5,602

 

Total liabilities

 

$

361,843

 

$

 

$

5,602

 

$

367,445

 

 


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

 

(2)                    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.

 

(3)                    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. The terms of the acquisition require us to 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 SIMNeb. If we exercise this option, we could no longer be required to make future contingent payments. The fair value of the contingent consideration has been measured using a probability weighted discounted cash flow (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 incorporates the probability and impact of exercising our option to acquire the SIMNeb and the potential introduction of new therapies.

 

(4)                    Included in non-current marketable investments on the accompanying consolidated balance sheet at December 31, 2009. On June 30, 2010, we exercised our right to sell our auction-rate securities (ARS) to the investment firm that maintained our ARS account for their par value ($19.0 million) pursuant to the terms of the ARS put option that we acquired in November 2008. In connection with the transaction, we recognized a gain of $5.6 million, which has been included under the caption “Other, net” on the accompanying consolidated statements of operations for the nine-month period ended September 30, 2010. The sale was completed on July 1, 2010 and related proceeds from the sale were invested in other marketable investments in accordance with our investment policy.

 

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(5)                    Included within other non-current assets on the accompanying consolidated balance sheet at December 31, 2009. On June 30, 2010, we exercised the auction-rate securities put option to initiate the sale of our ARS. Consequently, we recognized a loss of $5.5 million to write off the value of this financial instrument as of the date of exercise. The loss has been included under the caption “Other, net” on our consolidated statement of operations for the nine-month period ended September 30, 2010.

 

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 nine-month periods ended September 30, 2010, is presented below (in thousands):

 

 

 

Auction-rate
Securities

 

Contingent
Consideration—
Tyvaso
Inhalation
System
Acquisition

 

Total

 

Balance July 1, 2010 - asset (liability)

 

$

 

19,025

 

$

 

(1,461

)

$

 

17,564

 

Transfers to (from) Level 3

 

 

 

 

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

 

 

(168

)

(168

)

Total gains/(losses) included in other comprehensive income

 

 

 

 

Purchases/sales/issuances/settlements, net

 

(19,025

)

 

(19,025

)

Balance September 30, 2010 - asset (liability)

 

$

 

 

$

 

(1,629

)

$

 

(1,629

)

 

 

 

Auction-rate
Securities

 

Auction-Rate
Securities Put
Option

 

Contingent
Consideration—
Tyvaso
Inhalation
System
Acquisition

 

Total

 

Balance January 1, 2010 - asset (liability)

 

$

29,332

 

$

6,741

 

$

(5,602

)

$

30,471

 

Transfers to (from) Level 3

 

 

 

 

 

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

 

6,868

 

(6,741

)

2,752

 

2,879

 

Total gains/(losses) included in other comprehensive income

 

 

 

 

 

Purchases/sales/issuances/settlements, net

 

(36,200

)

 

1,221

 

(34,979

)

Balance September 30, 2010 - asset (liability)

 

$

 

$

 

$

(1,629

)

$

(1,629

)

 


(1)                    Includes a loss of $168,000 for the three month period ended September 30, 2010, attributable to the change in unrealized gains or losses from liabilities still held at September 30, 2010 and a net gain of $2.8 million for the nine-month period ended September 30, 2010 related to unrealized gains and losses on assets and liabilities held at September 30, 2010. Unrealized gains or losses have been included within selling, general and administrative expenses on our consolidated statements of operations.

 

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 within the fair value hierarchy above.

 

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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 September 30, 2010

 

$

213,648

 

$

108

 

$

(38

)

$

213,718

 

Corporate notes and bonds at September 30, 2010

 

202,311

 

185

 

(75

)

202,421

 

Total

 

$

415,959

 

$

293

 

$

(113

)

$

416,139

 

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

 

 

 

 

 

 

 

 

 

Current marketable securities

 

$

251,553

 

 

 

 

 

 

 

Noncurrent marketable securities

 

164,406

 

 

 

 

 

 

 

 

 

$

415,959

 

 

 

 

 

 

 

 

 

 

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.

 

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 September 30, 2010

 

As of December 31, 2009

 

 

 

Fair
Value

 

Gross
Unrealized
Loss

 

Fair
Value

 

Gross
Unrealized
Loss

 

Government-sponsored enterprises:

 

 

 

 

 

 

 

 

 

Continuous unrealized loss position less than one year

 

$

56,742

 

$

(38

)

$

54,299

 

$

(247

)

Continuous unrealized loss position greater than one year

 

 

 

 

 

 

 

56,742

 

(38

)

54,299

 

(247

)

Corporate notes and bonds:

 

 

 

 

 

 

 

 

 

Continuous unrealized loss position less than one year

 

$

98,401

 

$

(75

)

$

64,499

 

$

(49

)

Continuous unrealized loss position greater than one year

 

 

 

 

 

 

 

98,401

 

(75

)

64,499

 

(49

)

Total

 

$

155,143

 

$

(113

)

$

118,798

 

$

(296

)

 

We attribute the unrealized losses on held-to-maturity securities as of September 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.

 

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Table of Contents

 

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

 

 

 

September 30, 2010

 

 

 

Amortized
Cost

 

Fair
Value

 

Due in less than one year

 

$

252,053

 

$

252,152

 

Due in one to two years

 

163,906

 

163,987

 

Due in three to five years

 

 

 

Due after five years

 

 

 

Total

 

$

415,959

 

$

416,139

 

 

Equity Investments

 

We own less than 1% of the common stock of Twin Butte Energy Ltd. Our investment in this company 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 September 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 September 30, 2010

 

As of December 31, 2009

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill(1)

 

$

8,697

 

$

 

$

8,697

 

$

8,763

 

$

 

$

8,763

 

Other intangible assets(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology, patents and tradenames

 

9,115

 

(5,193

)

3,922

 

9,364

 

(4,586

)

4,778

 

Customer relationships and non-compete agreements

 

4,892

 

(844

)

4,048

 

5,150

 

(273

)

4,877

 

Total

 

$

22,704

 

$

(6,037

)

$

16,667

 

$

23,277

 

$

(4,859

)

$

18,418

 

 


(1)                    Includes foreign currency translation adjustments as of September 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

 

$

1,517

 

2012

 

1,368

 

2013

 

1,346

 

2014

 

1,338

 

2015

 

1,077

 

Thereafter

 

926

 

 

 

$

7,572

 

 

10



Table of Contents

 

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. To help fund our expected obligations under 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 September 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.

 

The components of the periodic benefit cost consist of the following (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Service cost

 

$

988

 

$

661

 

$

2,700

 

$

1,983

 

Interest cost

 

248

 

140

 

635

 

420

 

Amortization of prior period service costs

 

90

 

36

 

163

 

108

 

Amortization of net actuarial loss

 

32

 

 

87

 

 

Net pension expense

 

$

1,358

 

$

837

 

$

3,585

 

$

2,511

 

 

We remeasured our expected obligation under the SERP as of July 1, 2010 to reflect the addition of a participant. The remeasurement resulted in an increase of $5.2 million in the estimated pension benefit obligation.

 

8 . Share Tracking Awards Plan

 

We maintain the United Therapeutics Corporation Share Tracking Awards Plan (STAP) under which we grant long-term, equity-based compensation to eligible participants. Awards granted under the STAP (Awards) are non-dilutive as they are not settled in shares of our common stock. Rather, Awards 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. 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.

 

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. Changes in the fair value of outstanding Awards are recognized as an adjustment to compensation expense on our consolidated statements of operations. The STAP liability balance was $98.4 million and $64.2 million at September 30, 2010 and December 31, 2009, respectively, and has been included within other current liabilities on our consolidated balance sheets.

 

In estimating the fair value of Awards, we are required to use inputs that materially impact the determination of fair value and the amount of 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 yield.

 

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

 

 

 

September 30,
2010

 

September 30,
2009

 

Expected volatility

 

45.7

%

48.6

%

Risk-free interest rate

 

1.2

%

2.5

%

Expected term of Awards (in years)

 

4.7

 

5.9

 

Expected forfeiture rate

 

5.5

%

5.4

%

Expected dividend yield

 

0.0

%

0.0

%

 

11



Table of Contents

 

A summary of the activity and status of Awards for the nine-month period ended September 30, 2010 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

 

2,420,779

 

54.46

 

 

 

 

 

Exercised

 

(729,319

)

27.47

 

 

 

 

 

Forfeited

 

(181,140

)

37.11

 

 

 

 

 

Outstanding at September 30, 2010

 

7,874,040

 

$

39.36

 

8.7

 

$

131,143

 

Awards exercisable at September 30, 2010

 

2,352,250

 

$

31.26

 

8.1

 

$

58,223

 

Awards expected to vest at September 30, 2010

 

5,091,013

 

$

42.81

 

8.9

 

$

67,209

 

 

The weighted average fair value of Awards granted during the nine-month periods ended September 30, 2010 and 2009, was $26.23 and $19.38, respectively.

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Cost of service sales

 

$

177

 

$

125

 

$

291

 

$

194

 

Research and development

 

13,449

 

9,200

 

23,173

 

17,801

 

Selling, general and administrative

 

15,558

 

10,555

 

25,899

 

23,044

 

Share-based compensation expense before taxes

 

29,184

 

19,880

 

49,363

 

41,039

 

Related income tax benefits

 

(10,725

)

(3,678

)

(18,141

)

(7,592

)

Share-based compensation expense, net of taxes

 

$

18,459

 

$

16,202

 

$

31,222

 

$

33,447

 

Share-based compensation capitalized as part of inventory

 

$

1,171

 

$

514

 

$

1,710

 

$

1,364

 

 

During the nine-month periods ended September 30, 2010 and 2009, we paid $16.9 million and $6.4 million, 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 of common stock used to determine the aggregate consideration 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 certain 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 September 30, 2010, the aggregate conversion value of the Convertible Senior Notes exceeded their principal value by $122.3 million using a conversion price of $56.01, the closing price of our common stock on September 30, 2010. We have reserved sufficient shares of our common stock to satisfy the conversion requirements related to the Convertible Senior Notes.

 

12



Table of Contents

 

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 September 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.

 

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 expected life of the Liability Component) using the interest method and an effective rate of interest of 7.5%, which corresponds to our estimated 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 September 30,

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Contractual coupon rate of interest

 

$

312

 

$

312

 

$

937

 

$

937

 

Discount amortization

 

3,962

 

3,679

 

11,670

 

10,834

 

Interest expense—Convertible Senior Notes

 

$

4,274

 

$

3,991

 

$

12,607

 

$

11,771

 

 

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

 

 

 

September 30,
2010

 

December 31,
2009

 

Principal balance

 

$

249,968

 

$

249,978

 

Discount, net of accumulated amortization of $54,367 and $42,697

 

(18,036

)

(29,706

)

Carrying amount

 

$

231,932

 

$

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 September 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.

 

13



Table of Contents

 

Interest Expense

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Interest expense

 

$

4,836

 

$

4,543

 

$

14,282

 

$

13,420

 

Capitalized interest(1)

 

(27

)

(1,212

)

(27

)

(4,204

)

Total interest expense

 

$

4,809

 

$

3,331

 

$

14,255

 

$

9,216

 

 


(1)                    Interest associated with the construction of our facilities.

 

10. Lease Obligation

 

We lease our laboratory facility in Silver Spring, Maryland (Phase I Laboratory) pursuant to a synthetic lease arrangement entered into in September 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 30-day LIBOR plus 55 basis points (0.81% as of September 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 following options: (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 reimburse Wachovia’s construction costs using related proceeds. In the event that proceeds from such a sale are insufficient to reimburse Wachovia’s construction costs, we must fund any shortfall up to the maximum residual value guarantee of $27.5 million. We intend to purchase the Phase I Laboratory at the end of the initial term. As of September 30, 2010, we pledged $35.1 million of our marketable securities as collateral for our obligations under the lease. Related amounts have been included in restricted marketable investments and cash on our consolidated balance sheet.

 

Prior to 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) adjacent to the Phase I Laboratory with internally generated funds.  Architectural plans included the structural modification of the existing Phase I Laboratory in order to connect it to the Phase II Facility. We received Wachovia’s acknowledgement of our plan to make structural modifications to the Phase I Laboratory as of September 30, 2008 and therefore, could no longer consider the Phase I Laboratory a standalone structure which was required to maintain off-balance sheet accounting for the lease. Since we were considered the owners of the Phase I Laboratory for accounting purposes as of September 30, 2008, we began accounting for the lease as a financing obligation. Accordingly, 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 September 30, 2010.

 

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.

 

14



Table of Contents

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net income (numerator)

 

$

39,736

 

$

11,937

 

$

96,372

 

$

22,792

 

Shares (denominator):

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares — basic

 

56,536

 

53,455

 

55,790

 

53,108

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Convertible Senior Notes(1)

 

1,661

 

1,158

 

1,998

 

83

 

Stock options(2)

 

2,019

 

3,040

 

1,757

 

2,106

 

Weighted average shares — diluted

 

60,216

 

57,653

 

59,545

 

55,297

 

Earnings per share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.70

 

$

0.22

 

$

1.73

 

$

0.43

 

Diluted

 

$

0.66

 

$

0.21

 

$

1.62

 

$

0.41

 

 

 

 

 

 

 

 

 

 

 

Stock options and warrants excluded from calculation(3)

 

7,329

 

6,714

 

6,531

 

6,774

 

 


(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 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.

 

We did not grant any stock options during the three-month periods ended September 30, 2010 and 2009.  Presented below are the weighted average assumptions used to estimate the grant date fair value of stock options granted during the nine-month periods ended September 30, 2010 and 2009:

 

 

 

Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

Expected volatility

 

47.3

%

49.1

%

Risk-free interest rate

 

2.2

%

2.4

%

Expected term of options (years)

 

5.5

 

5.5

 

Expected dividend yield

 

0.0

%

0.0

%

Forfeiture rate

 

0.0

%

0.0

%

 

15



Table of Contents

 

A summary of the activity and status of employee stock options during the nine-month period ended September 30, 2010 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

 

(2,476,703

)

25.04

 

 

 

 

 

Forfeited

 

(28,227

)

28.38

 

 

 

 

 

Outstanding at September 30, 2010

 

6,131,358

 

$

32.12

 

6.4

 

$

146,461

 

Options exercisable at September 30, 2010

 

5,980,030

 

$

32.02

 

6.4

 

$

143,464

 

Expected to vest at September 30, 2010

 

142,796

 

$

36.67

 

7.3

 

$

2,761

 

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Cost of service sales

 

$

4

 

$

12

 

$

14

 

$

37

 

Research and development

 

700

 

2,377

 

2,931

 

7,364

 

Selling, general and administrative

 

1,613

 

3,024

 

8,743

 

25,272

 

Share-based compensation expense before taxes

 

2,317

 

5,413

 

11,688

 

32,673

 

Related income tax expense benefits

 

(851

)

(1,001

)

(4,295

)

(6,045

)

Share-based compensation expense, net of taxes

 

$

1,466

 

$

4,412

 

$

7,393

 

$

26,628

 

Share-based compensation capitalized as part of inventory

 

$

82

 

$

170

 

$

275

 

$

669

 

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Number of options exercised

 

384,303

 

648,518

 

2,557,299

 

938,506

 

Cash received

 

$

9,820

 

$

16,925

 

$

64,425

 

$

23,036

 

 

12. Comprehensive Income

 

Comprehensive income consists of the following (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net income

 

$

39,736

 

$

11,937

 

$

96,372

 

$

22,792

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation (loss) gain

 

2,829

 

(935

)

(24

)

2,176

 

Unrecognized prior period pension service cost, net of tax

 

(1,344

)

25

 

(1,298

)

71

 

Unrecognized actuarial pension loss, net of tax

 

(478

)

 

(620

)

 

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

 

17

 

7

 

63

 

36

 

Comprehensive income

 

$

40,760

 

$

11,034

 

$

94,493

 

$

25,075

 

 

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13. Income Taxes

 

Income tax expense for the three- and nine-month periods ended September 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 September 30, 2010 and 2009 were 36 percent and 19 percent, respectively. For the three- and nine-month periods ended September 30, 2010, we had a higher projection of pre-tax earnings, as well as a lower estimate of business tax credits expected to be generated compared to the same periods in 2009. These factors increased the estimated annual effective tax rate for the three- and nine-month periods ended September 30, 2010 when compared to the same periods in 2009.

 

As of September 30, 2010, we had available for federal income tax purposes $76 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.

 

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

 

 

 

As of and for the three months ended September 30,

 

 

 

2010

 

2009

 

 

 

Pharmaceutical

 

Telemedicine

 

Consolidated
Totals

 

Pharmaceutical

 

Telemedicine

 

Consolidated
Totals

 

Revenues from external customers

 

$

168,575

 

$

2,408

 

$

170,983

 

$

94,311

 

$

2,904

 

$

97,215

 

Income (loss) before income tax

 

58,360

 

(626

)

57,734

 

9,026

 

20

 

9,046

 

Total assets

 

1,262,478

 

20,306

 

1,282,784

 

985,369

 

19,358

 

1,004,727

 

 

 

 

As of and for the nine months ended September 30,

 

 

 

2010

 

2009

 

 

 

Pharmaceutical

 

Telemedicine

 

Consolidated
Totals

 

Pharmaceutical

 

Telemedicine

 

Consolidated
Totals

 

Revenues from external customers

 

$

429,209

 

$

8,145

 

$

437,354

 

$

252,752

 

$

8,173

 

$

260,925

 

Income (loss) before income tax

 

144,403

 

(1,069

)

143,334

 

23,538

 

(38

)

23,500

 

Total assets

 

1,262,478

 

20,306

 

1,282,784

 

985,369

 

19,358

 

1,004,727

 

 

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 September 30, 2010 and 2009, revenues from our three U.S.-based distributors represented 83 percent and 84 percent, respectively, of our total net revenues. For the nine-month periods ended September 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

 

As previously disclosed in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2010 and June 30, 2010, purported shareholders Jeffrey Benison IRA, the Retirement Board of Allegheny County and the Police & Fire Retirement System of the City of Detroit jointly filed a consolidated amended derivative complaint on May 4, 2010 against certain of our directors and named executive officers and us as a nominal defendant. The complaint alleged, among other things, that the individual defendants breached their fiduciary duties to the Company in connection with the adoption of the STAP, the 2008 modification of awards granted under the STAP and the exchange of certain stock options granted under our Amended and Restated Equity Incentive Plan. The plaintiffs sought unspecified monetary damages, purportedly for United Therapeutics Corporation, as well as attorneys’ fees and costs and injunctive relief.

 

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On October 25, 2010, the parties entered into a stipulation of settlement. The stipulation provides among other things that, in consideration for the full settlement and release of all of the plaintiffs’ claims, we will: (i) not reprice awards granted under our Amended and Restated Equity Incentive Plan or the STAP in the future without shareholder approval, (ii) cancel 165,214 options granted to our Chief Executive Officer, and (iii) adopt certain corporate governance practices. In connection with the settlement, plaintiffs’ counsel will seek an award of attorneys’ fees from us. The parties have not agreed on the amount of fees, if any, to be awarded to plaintiffs’ counsel, but resolution of this issue is not a condition to settling the claims. The parties will continue to negotiate over attorneys’ fees and, if they do not reach an agreement, will seek a decision from the court on this issue. The stipulation of settlement and any proposed award of fees to the plaintiffs’ counsel will be subject to court approval. The court has scheduled a hearing for January 21, 2011 to consider whether to approve the settlement and any proposed fee award. There can be no assurance that the stipulation of settlement or the fee award, if any, agreed upon by the parties, will be approved by the court. The contemplated settlement is not expected to have a 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 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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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 treat cancer by activating the immune system; 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 concentrate almost all of our research and development efforts on these key therapeutic platforms.

 

Our lead product is Remodulin® (treprostinil) Injection (Remodulin) for the treatment of pulmonary arterial hypertension (PAH). The United States Food and Drug Administration (FDA) initially 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 now offer treatments to a broader range of patients who suffer from PAH. In addition, we are continuing to develop oral formulations of treprostinil and beraprost, both for the treatment of PAH.

 

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 outside of the United States.

 

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, depending on the timing and magnitude of these orders.

 

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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 addition, we plan to increase the price of Tyvaso by 4.9 percent in November 2010 to offset the increasing cost of manufacture and distribution.

 

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (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 impact this legislation will have on insurance companies and their relationships with drug manufacturers. Based on our current assessments of the Acts, we do not believe we will be materially impacted in 2010. Potential impacts of the Acts on our business beyond 2010 are inherently difficult to predict as many of the details regarding the implementation of this legislation are yet to be determined. We have not yet identified any provisions that could materially impact our business, but will continue to monitor future developments of this legislation.

 

Effective January 1, 2010, the Acts increased the minimum rate for rebates pharmaceutical companies must provide to Medicaid on certain pharmaceutical products from 15.1 percent to 23.1 percent. 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 invoices and a review of such invoices for the first nine-months of 2010, we believe that the increase in the Medicaid rebates will decrease our net revenues by less than one percent in 2010 and thereafter.

 

Total revenues are reported net of: (1) estimated rebates and other reimbursements; (2) prompt pay discounts; (3) service fees to our distributors; and (4) allowances for product returns or exchanges. Estimates of our liability for rebates and reimbursements are derived from an analysis of historical levels of rebates/reimbursements to both state Medicaid agencies and third-party payers by product relative to sales of each product. Prompt pay discounts are provided on sales of our commercial products if the related invoices are paid in full within a specific time period. We estimate our liability for prompt pay discounts based on observed customer payment behavior. 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 estimated 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, because 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.

 

Beginning in the fourth quarter of 2010, we plan to increase the size of our sales and marketing staff by approximately fifty individuals. This initiative is designed to increase demand for our products through further market penetration and greater interaction with current prescribers.

 

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.

 

Major Research and Development Projects

 

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

 

Cardiopulmonary Disease Projects

 

Tyvaso

 

Upon receiving FDA approval of Tyvaso for the treatment of PAH in July 2009, we launched the product 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 obligate sponsors to conduct studies after FDA approval to gather additional information about a product’s safety, efficacy, or optimal use. PMRs are required studies, whereas PMCs are voluntary commitments. We are required to provide the FDA annual updates on our PMR and PMCs. Failure to complete or adhere to the timelines set forth 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.

 

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 patients treated with Tyvaso, and 1,000 patient years of follow up in control patients receiving other PAH treatments. This study will allow us to continue to assess the safety of Tyvaso. The FDA has accepted our final protocol for the PMR, and we expect to commence the study in late 2010 or early 2011.  We are currently required to submit the results of the study by December 15, 2013, but we have requested an extension of this timeline.

 

The PMCs require us to modify particular aspects of the Tyvaso Inhalation System. As part of these 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, after the FDA accepts the changes to the Tyvaso Inhalation System, we have agreed to conduct a study in healthy volunteers to collect pharmacokinetic data to verify expected dosing with the modified device. We submitted proposed modifications

 

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to the device to the FDA in accordance with the PMC and completed the related human factors study. The FDA has requested further modifications to the device and a follow-up usability study once these additional modifications are complete, before we collect pharmacokinetic data.  As a result of the further modifications and follow-up usability study, we have requested an extension to the original October 31, 2010 timeline for completion of the PMCs.

 

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), prevented the attainment of optimal dosing levels and led to higher dropout rates than we anticipated. 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 with a lower strength tablet (0.25 mg) when beginning the trial, and doses are being 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, we submitted an amendment to our statistical analysis plan, specifying 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: (1) assess more accurately the effectiveness of oral treprostinil; (2) improve patient tolerability of oral treprostinil so that an effective maintenance dose can be attained; and (3) 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 have also introduced a 0.125 mg tablet, which allows us to start patients on an even lower strength tablet, and titrate doses in 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 have begun a second Phase II clinical trial. In September 2010, we entered into a supplement to our license agreement with Toray under which we agreed to pay the $4.0 million and $5.0 million milestone payments specified in the license agreement in December 2010 and in March 2011, respectively, contingent upon, among other conditions, Toray’s completion and delivery of certain clinical trial material by October 31, 2010.

 

In October 2007, the modified-release formulation of beraprost received regulatory approval in Japan for the treatment of PAH.

 

Collagen Type V

 

Pursuant to our February 2010 development agreement with ImmuneWorks, Inc., we are developing 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 during the fourth quarter of 2010.

 

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Aviptadil

 

In February 2010, we entered into an agreement with Mondobiotech Holdings AG (Mondobiotech) for the exclusive right to develop and market aviptadil, a synthetically produced version of the naturally occurring hormone Vasoactive Intestinal Peptide (VIP), for the treatment of PAH and other pulmonary diseases.  A Phase II clinical trial of Aviptadil in PAH was recently completed by Mondobiotech and the European Medicines Agency has designated aviptadil an orphan medicinal product for the treatment of acute lung injury and sarcoidosis.

 

From inception to September 30, 2010, we have spent approximately $569.0 million on these and other cardiopulmonary programs.

 

Cancer Disease Projects

 

In July 2010, we entered into a cooperative research and development agreement with the National Cancer Institute to develop ch14.18, an antibody that has shown potential in the treatment of neuroblastoma by targeting GD2, a glycolipid on the surface of tumor cells.  In September 2010, the New England Journal of Medicine published the results of a Phase III trial showing that administration of immunotherapy consisting ch14.18 in combination with other agents increased the percentage of children with neuroblastoma who were alive and free of disease progression after two years from 46% for children receiving a standard therapy to 66% for children receiving immunotherapy plus standard therapy.

 

In December 2007, we entered into two agreements with Memorial Sloan-Kettering Cancer Center (MSK) to license certain rights to two investigational monoclonal antibodies — 3F8 for the treatment of neuroblastoma and 8H9 for the treatment of metastatic brain cancer. We recently sent a notice to MSK terminating our license to 3F8 effective November 2010, given the overlap between this program and ch14.18. We are currently evaluating indications for the clinical development of ch14.18, and are developing a plan for formulating clinical trial material.

 

We have spent approximately $65.0 million from inception to September 30, 2010, on programs within 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 compounds that we may elect to test.

 

We have spent approximately $45.5 million from inception to September 30, 2010, on our infectious disease programs.

 

Cost of Product Sales

 

We manufacture treprostinil using advanced intermediate compounds purchased 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 the forms of treprostinil used in our oral tablet, Tyvaso and Remodulin efficiently, based on forecasted demand for each of these products. To ensure sufficient availability of Remodulin and Tyvaso at all times, we maintain inventories of these products equivalent to approximately 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 expect continued growth in the demand for our commercial products as viable alternatives or complements to other existing approved therapies. Furthermore, the commercial introduction of Tyvaso and Adcirca allows us to offer products to more patients along the full continuum of the disease. Since 2002, we have experienced annual revenue growth in excess of 30 percent and it is among our principal objectives to sustain industry-leading

 

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revenue growth. The continued achievement of this objective will depend in large part upon the successful commercial development of products within our pipeline. 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 progression.

 

We believe the outcome of our FREEDOM-M and FREEDOM-C 2  Phase III clinical trials of oral treprostinil will be successful and 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 an increasingly 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 September 30, 2010, were $625.9 million compared to $378.1 million at December 31, 2009.  The increase in cash and marketable investments of $247.8 million was driven in large part by: (1) the growth in sales of Remodulin and Tyvaso and related cash receipts; (2) $64.4 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 September 30, 2010 and included $35.1 million pledged as security for our obligations under the lease of our Phase I Laboratory and $5.1 million placed in the United Therapeutics Corporation Supplemental Executive Retirement Plan Rabbi Trust.

 

Accounts receivable at September 30, 2010 was $75.6 million compared to $50.6 million at December 31, 2009. The increase of $25.0 million paralleled closely the increase in sales of our commercial products, particularly sales during the month ended September 30, 2010, as compared to sales for the month ended December 31, 2009.

 

The $7.0 million increase in inventory, from $26.4 million at December 31, 2009 to $33.4 million at September 30, 2010, coincided in large part with our efforts to maintain a three-year inventory supply of Remodulin and Tyvaso in light of recent sales trends and growth expectations.

 

The decrease in other non-current assets of $7.1 million from $15.2 million at December 31, 2009 to $8.1 million at September 30, 2010 primarily reflects the write off of the auction-rate securities put option which we exercised on June 30, 2010.

 

Accounts payable decreased by $7.5 million, from $18.8 million at December 31, 2009 to $11.3 million at September 30, 2010. The decrease was largely attributable to customary variances in the magnitude, timing and volume of vendor invoices and a decrease in construction-related invoices.

 

Accrued expenses were $45.5 million at September 30, 2010 compared to $29.8 million at December 31, 2009. The increase of $15.7 million corresponded largely to increases of approximately $12.3 million for accrued royalties and rebates and $1.6 million in other accrued expenses relating to vendor invoices not yet processed into accounts payable as of September 30, 2010.

 

Other current liabilities were $77.5 million at September 30, 2010 compared to $61.4 million at December 31, 2009. The increase of $16.1 million resulted principally from a $34.2 million increase in the liability relating to the Share Tracking Awards Plan (STAP), which was driven by increases in the price of our common stock and the number of outstanding awards. This increase was partially offset by a decrease of $19.9 million in income taxes payable, largely the result of the recognition of excess tax benefits relating to stock option exercises.

 

Notes payable increased by $11.6 million, from $220.3 million at December 31, 2009, to $231.9 million at September 30, 2010 as a result of amortization of the debt discount on our Convertible Senior Notes for the nine months ended September 30, 2010.

 

Additional paid in capital was $892.1 million at September 30, 2010 compared to $798.9 million at December 31, 2009.  The increase of $93.2 million consisted of the following: (1) $64.4 million in proceeds received from the exercise of stock options and $18.7 million in related tax benefits from the exercises; and (2) the recognition of approximately $10.1 million in share-based compensation.

 

23



Table of Contents

 

Results of Operations

 

Three months ended September 30, 2010 and 2009

 

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

 

 

 

Three Months Ended
September 30,

 

Percentage

 

 

 

2010

 

2009

 

Change

 

Cardiopulmonary products:

 

 

 

 

 

 

 

Remodulin

 

$

109,584

 

$

87,400

 

25.4

%

Tyvaso

 

48,717

 

5,113

 

852.8

%

Adcirca

 

9,935

 

1,514

 

556.2

%

Telemedicine services and products

 

2,408

 

2,904

 

(17.1

)%

Other

 

339

 

284

 

19.4

%

Total net revenues

 

$

170,983

 

$

97,215

 

75.9

%

 

The growth in revenues for the three months ended September 30, 2010 compared to the same period in 2009, corresponded to (1) the continued increase in the number of patients being prescribed our products and (2) the impact of the price increases for Remodulin in the U.S. and internationally that became effective during March and April of 2010, respectively, and resulted in an increase of approximately $9.1 million in related revenues for the period. For the three months ended September 30, 2010 and 2009, approximately 83 percent and 88 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
September 30,

 

 

 

2010

 

2009

 

Liability accounts, at beginning of period

 

$

11,524

 

$

3,633

 

Additions to liability attributed to sales in:

 

 

 

 

 

Current period

 

13,686

 

7,251

 

Prior period

 

 

 

Payments or reductions attributed to sales in:

 

 

 

 

 

Current period

 

(2,733

)

(1,431

)

Prior period

 

(8,419

)

(4,587

)

Liability accounts, at end of period

 

$

14,058

 

$

4,866

 

Net reductions to revenues

 

$

13,686

 

$

7,251

 

 

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

 

 

 

Three Months Ended
September 30,

 

Percentage

 

 

 

2010

 

2009

 

Change

 

Project and non-project component:

 

 

 

 

 

 

 

Cardiopulmonary

 

$

17,510

 

$

14,145

 

23.8

%