United Therapeutics Corporation
UNITED THERAPEUTICS Corp (Form: 10-Q, Received: 07/28/2011 07:02:30)

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, 2011

 

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 22, 2011 was 58,316,599.

 

 

 



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 1A.

Risk Factors

 

 

 

 

Item 6.

Exhibits

 

 

 

 

SIGNATURES

 

 

2



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,
2011

 

December 31,
2010

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

321,121

 

$

252,162

 

Marketable investments

 

409,098

 

374,921

 

Accounts receivable, net of allowance of none for 2011 and 2010

 

82,527

 

73,707

 

Other current assets

 

11,037

 

6,840

 

Prepaid expenses

 

10,157

 

8,752

 

Inventories, net

 

41,260

 

35,520

 

Deferred tax assets

 

2,309

 

12,585

 

Total current assets

 

877,509

 

764,487

 

Marketable investments

 

157,198

 

132,849

 

Marketable investments and cash—restricted

 

5,122

 

5,122

 

Goodwill and other intangibles, net

 

9,751

 

9,861

 

Property, plant and equipment, net

 

314,945

 

306,044

 

Deferred tax assets

 

193,150

 

202,135

 

Other assets

 

21,065

 

11,137

 

Total assets

 

$

1,578,740

 

$

1,431,635

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

17,082

 

$

16,146

 

Accrued expenses

 

61,955

 

50,280

 

Convertible notes

 

244,269

 

235,968

 

Other current liabilities

 

130,235

 

126,292

 

Total current liabilities

 

453,541

 

428,686

 

Mortgage payable—noncurrent

 

68,929

 

68,929

 

Other liabilities

 

43,045

 

39,252

 

Total liabilities

 

565,515

 

536,867

 

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 shares authorized, 60,817,983 and 60,017,546 shares issued, and 58,314,326 and 57,555,893 shares outstanding at June 30, 2011 and December 31, 2010, respectively

 

608

 

600

 

Additional paid-in capital

 

958,957

 

928,690

 

Accumulated other comprehensive loss

 

(8,524

)

(9,175

)

Treasury stock at cost, 2,503,657 and 2,461,653 shares at June 30, 2011 and December 31, 2010, respectively

 

(70,149

)

(67,399

)

Retained earnings

 

121,451

 

31,170

 

Total stockholders’ equity

 

1,002,343

 

883,886

 

Total liabilities and stockholders’ equity

 

$

1,578,740

 

$

1,431,635

 

 

See accompanying notes to consolidated financial statements.

 

3



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,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(Unaudited)

 

(Unaudited)

 

Revenues:

 

 

 

 

 

 

 

 

 

Net product sales

 

$

183,546

 

$

134,439

 

$

345,764

 

$

260,071

 

License fees

 

205

 

282

 

499

 

564

 

Total revenues

 

183,751

 

134,721

 

346,263

 

260,635

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

24,240

 

28,587

 

71,947

 

63,055

 

Selling, general and administrative

 

23,856

 

29,654

 

82,118

 

75,106

 

Cost of product sales

 

21,162

 

15,261

 

40,900

 

28,984

 

Total operating expenses

 

69,258

 

73,502

 

194,965

 

167,145

 

Operating income

 

114,493

 

61,219

 

151,298

 

93,490

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

Interest income

 

839

 

802

 

1,504

 

1,746

 

Interest expense

 

(5,431

)

(4,759

)

(10,841

)

(9,446

)

Equity loss in affiliate

 

(30

)

(44

)

(67

)

(91

)

Other, net

 

(257

)

93

 

(1,023

)

318

 

Total other (expense) income, net

 

(4,879

)

(3,908

)

(10,427

)

(7,473

)

Income from continuing operations before income taxes

 

109,614

 

57,311

 

140,871

 

86,017

 

Income tax expense

 

(35,723

)

(19,345

)

(47,622

)

(29,106

)

Income from continuing operations

 

73,891

 

37,966

 

93,249

 

56,911

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

(Loss) income from discontinued operations, net of tax

 

 

(259

)

76

 

(275

)

Loss on disposal of discontinued operations, net of tax

 

 

 

(3,044

)

 

Loss from discontinued operations

 

 

(259

)

(2,968

)

(275

)

Net income

 

$

73,891

 

$

37,707

 

$

90,281

 

$

56,636

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

1.27

 

$

0.68

 

$

1.61

 

$

1.03

 

Discontinued operations

 

$

0.00

 

$

(0.01

)

$

(0.05

)

$

(0.01

)

Net income per basic common share

 

$

1.27

 

$

0.67

 

$

1.56

 

$

1.02

 

Diluted

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

1.18

 

$

0.63

 

$

1.49

 

$

0.96

 

Discontinued operations

 

$

0.00

 

$

(0.01

)

$

(0.05

)

$

(0.01

)

Net income per diluted common share

 

$

1.18

 

$

0.62

 

$

1.44

 

$

0.95

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

58,180

 

56,047

 

57,968

 

55,411

 

Diluted

 

62,756

 

60,393

 

62,525

 

59,548

 

 

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,

 

 

 

2011

 

2010

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

90,281

 

$

56,636

 

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

 

 

 

 

 

Depreciation and amortization

 

10,646

 

9,153

 

Provisions for bad debt and inventory obsolescence

 

2,846

 

828

 

Deferred tax expense

 

46,159

 

28,964

 

Share-based compensation

 

9,819

 

29,755

 

Amortization of debt discount and debt issue costs

 

9,020

 

8,273

 

Amortization of discount or premium on investments

 

2,437

 

876

 

Equity loss in affiliate and other

 

7,943

 

(56

)

Excess tax benefits from share-based compensation

 

(6,289

)

(16,355

)

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(9,486

)

(32,969

)

Inventories

 

(6,747

)

(4,757

)

Prepaid expenses

 

(2,338

)

(1,143

)

Other assets

 

(5,696

)

(481

)

Accounts payable

 

891

 

(9,329

)

Accrued expenses

 

10,158

 

11,685

 

Other liabilities

 

(41,756

)

(11,628

)

Net cash provided by operating activities

 

117,888

 

69,452

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(18,883

)

(9,117

)

Purchases of held-to-maturity investments

 

(366,976

)

(142,596

)

Maturities of held-to-maturity investments

 

306,312

 

196,848

 

Redemptions of trading investments

 

 

17,175

 

Restrictions on cash

 

 

(17,156

)

Net cash (used in) provided by investing activities

 

(79,547

)

45,154

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from the exercise of stock options

 

23,724

 

54,600

 

Excess tax benefits from share-based compensation

 

6,289

 

16,355

 

Net cash provided by financing activities

 

30,013

 

70,955

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

605

 

(504

)

Net increase in cash and cash equivalents

 

68,959

 

185,057

 

Cash and cash equivalents, beginning of period

 

252,162

 

100,352

 

Cash and cash equivalents, end of period

 

$

321,121

 

$

285,409

 

 

 

 

 

 

 

Supplemental schedule of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

2,060

 

$

625

 

Cash paid for income taxes

 

$

14,056

 

$

2,179

 

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

 

$

6,995

 

$

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

UNITED THERAPEUTICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

(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 first approved in 2002 by the United States Food and Drug Administration (FDA) and has also been approved for use in countries outside of the United States. We sell Remodulin in the United States and in many other countries around the world. In 2009, we received FDA approval for Tyvaso ®  (treprostinil) Inhalation Solution (Tyvaso) and Adcirca ®  (tadalafil) tablets (Adcirca), both of which we market 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, 2010, as filed with the SEC on February 24, 2011.

 

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, 2011, our results of operations for the three- and six-month periods ended June 30, 2011 and 2010, and our cash flows for the six months ended June 30, 2011 and 2010. Interim results are not necessarily indicative of results for an entire year. The operating results of Medicomp, Inc. for the three- and six-month periods ended June 30, 2010 have been reclassified and presented within discontinued operations on our consolidated statements of operations. This change in presentation had no impact on net income as previously reported. We did not reclassify our consolidated balance sheet at December 31, 2010 or our consolidated statements of cash flows for the six months ended June 30, 2011 and 2010 to reflect the classification of Medicomp, Inc. as a discontinued operation as the impact is not significant to those statements (refer to Note 14— Sale of Medicomp, Inc. ).

 

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,
2011

 

December 31,
2010

 

Pharmaceutical products:

 

 

 

 

 

Raw materials

 

$

4,686

 

$

2,788

 

Work-in-progress

 

17,091

 

18,598

 

Finished goods

 

19,479

 

13,098

 

Delivery pumps, supplies and equipment

 

4

 

1,036

 

Total inventories

 

$

41,260

 

$

35,520

 

 

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. Accordingly, assets and liabilities carried at, or permitted to be carried at, fair value are classified within the fair value hierarchy 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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Table of Contents

 

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 using inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgment.

 

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

 

 

 

As of June 30, 2011

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

208,711

 

$

 

$

 

$

208,711

 

Federally-sponsored and corporate debt securities (2)

 

 

566,092

 

 

566,092

 

Available-for-sale equity investment

 

455

 

 

 

455

 

Total assets

 

$

209,166

 

$

566,092

 

$

 

$

775,258

 

Liabilities

 

 

 

 

 

 

 

 

 

Convertible Senior Notes

 

$

367,278

 

$

 

$

 

$

367,278

 

Contingent consideration—Tyvaso Inhalation System acquisition (3)

 

 

 

618

 

618

 

Total liabilities

 

$

367,278

 

$

 

$

618

 

$

367,896

 

 

 

 

As of December 31, 2010

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

91,206

 

$

 

$

 

$

91,206

 

Federally-sponsored and corporate debt securities (2)

 

 

507,375

 

 

507,375

 

Available-for-sale equity investment

 

373

 

 

 

373

 

Total assets

 

$

91,579

 

$

507,375

 

$

 

$

598,954

 

Liabilities

 

 

 

 

 

 

 

 

 

Convertible Senior Notes

 

$

421,721

 

$

 

$

 

$

421,721

 

Contingent consideration—Tyvaso Inhalation System acquisition (3)

 

 

 

1,894

 

1,894

 

Total liabilities

 

$

421,721

 

$

 

$

1,894

 

$

423,615

 

 


(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— Marketable Investments—Held-to-Maturity Investments to these consolidated financial statements.

 

(3)           Included in non-current liabilities on the accompanying consolidated balance sheets. 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.

 

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Table of Contents

 

A reconciliation of the beginning and ending balance of the Level 3 liability for the three- and six-month periods ended June 30, 2011, is presented below (in thousands):

 

 

 

Contingent
Consideration—
Tyvaso
Inhalation
System
Acquisition

 

Balance April 1, 2011—Asset (Liability)

 

$

(605

)

Transfers into Level 3

 

 

Transfers out of Level 3

 

 

Total gains/(losses) realized/unrealized

 

 

 

Included in earnings

 

 

Included in other comprehensive income

 

(13

)

Purchases

 

 

Sales

 

 

Issuances

 

 

Settlements

 

 

Balance June 30, 2011—Asset (Liability)

 

$

(618

)

Amount of total gains/(losses) for the three-month period ended June 30, 2011 included in earnings that are attributable to the change in unrealized gains or losses related to the outstanding liability

 

$

 

 

 

 

Contingent
Consideration—
Tyvaso
Inhalation
System
Acquisition

 

Balance January 1, 2011—Asset (Liability)

 

$

(1,894

)

Transfers into Level 3

 

 

Transfers out of Level 3

 

 

Total gains/(losses) realized/unrealized

 

 

 

Included in earnings

 

 

Included in other comprehensive income

 

(85

)

Purchases

 

 

Sales

 

 

Issuances

 

 

 

Settlements

 

1,361

 

Balance June 30, 2011—Asset (Liability)

 

$

(618

)

Amount of total gains/(losses) for the six-month period ended June 30, 2011 included in earnings that are attributable to the change in unrealized gains or losses related to the outstanding liability

 

$

 

 

Fair Value of Financial Instruments

 

The carrying amounts of cash and cash equivalents, accounts receivables, accounts payable, and accrued expenses approximate fair value because of their short maturities. The fair values of our marketable investments and our 0.50% Convertible Senior Notes due October 2011 (Convertible Senior Notes) are reported above within the fair value hierarchy. The recorded value of our mortgage loan approximates its fair value as it bears a variable rate of interest that we believe approximates the market rate of interest for debt with similar credit risk profiles, terms and maturities. Refer to Note 9— Debt—Mortgage Financing for details.

 

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Table of Contents

 

5. Marketable 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, 2011

 

$

303,758

 

$

181

 

$

(45

)

$

303,894

 

Corporate notes and bonds at June 30, 2011

 

262,083

 

157

 

(42

)

262,198

 

Total

 

$

565,841

 

$

338

 

$

(87

)

$

566,092

 

As reported on the consolidated balance sheets at June 30, 2011:

 

 

 

 

 

 

 

 

 

Current marketable securities

 

$

409,098

 

 

 

 

 

 

 

Noncurrent marketable securities

 

156,743

 

 

 

 

 

 

 

 

 

$

565,841

 

 

 

 

 

 

 

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Government-sponsored enterprises at December 31, 2010

 

$

282,005

 

$

52

 

$

(152

)

$

281,905

 

Corporate notes and bonds at December 31, 2010

 

225,394

 

144

 

(68

)

225,470

 

Total

 

$

507,399

 

$

196

 

$

(220

)

$

507,375

 

As reported on the consolidated balance sheets at December 31, 2010:

 

 

 

 

 

 

 

 

 

Current marketable securities

 

$

374,921

 

 

 

 

 

 

 

Noncurrent marketable securities

 

132,478

 

 

 

 

 

 

 

 

 

$

507,399

 

 

 

 

 

 

 

 

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, 2011

 

As of December 31, 2010

 

 

 

Fair
Value

 

Gross
Unrealized
Loss

 

Fair
Value

 

Gross
Unrealized
Loss

 

Government-sponsored enterprises:

 

 

 

 

 

 

 

 

 

Continuous unrealized loss position less than one year

 

$

86,408

 

$

(45

)

$

152,844

 

$

(152

)

Continuous unrealized loss position greater than one year

 

 

 

 

 

 

 

86,408

 

(45

)

152,844

 

(152

)

Corporate notes and bonds:

 

 

 

 

 

 

 

 

 

Continuous unrealized loss position less than one year

 

$

74,334

 

$

(42

)

$

107,883

 

$

(68

)

Continuous unrealized loss position greater than one year

 

 

 

 

 

 

 

74,334

 

(42

)

107,883

 

(68

)

Total

 

$

160,742

 

$

(87

)

$

260,727

 

$

(220

)

 

We attribute the unrealized losses on held-to-maturity securities as of June 30, 2011, 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 expose 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 June 30, 2011 (in thousands):

 

 

 

June 30, 2011

 

 

 

Amortized
Cost

 

Fair
Value

 

Due in less than one year

 

$

409,098

 

$

409,276

 

Due in one to two years

 

156,743

 

156,816

 

Due in three to five years

 

 

 

Due after five years

 

 

 

Total

 

$

565,841

 

$

566,092

 

 

Equity Investments

 

We own less than 1 percent of the common stock of a public company. Our investment in this company is classified as available-for-sale and reported at fair value based on the quoted market price.

 

We have equity investments totaling $8.0 million in privately-held corporations. We account for these investments at cost, as their fair value is not readily determinable. The fair value of our investments has not been estimated as of June 30, 2011, as there have been no events or developments indicating that these investments may be impaired.  We include these investments 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, 2011

 

As of December 31, 2010

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

 

Goodwill (1)

 

$

2,589

 

$

 

$

2,589

 

$

2,487

 

$

 

$

2,487

 

Other intangible assets (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology, patents and tradenames

 

8,234

 

(4,734

)

3,500

 

8,991

 

(5,368

)

3,623

 

Customer relationships and non-compete agreements

 

5,171

 

(1,509

)

3,662

 

4,762

 

(1,011

)

3,751

 

Total

 

$

15,994

 

$

(6,243

)

$

9,751

 

$

16,240

 

$

(6,379

)

$

9,861

 

 


(1)           Includes foreign currency translation adjustments.

 

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

 

Years ending December 31,

 

 

 

2012

 

$

1,445

 

2013

 

1,422

 

2014

 

1,415

 

2015

 

1,139

 

2016

 

587

 

Thereafter

 

393

 

 

 

$

6,401

 

 

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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 senior 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). The balance in the Rabbi Trust was approximately $5.1 million as of June 30, 2011 and December 31, 2010. 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.

 

Net periodic pension cost consists of the following (in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended 
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Service cost

 

$

1,064

 

$

856

 

$

2,097

 

$

1,712

 

Interest cost

 

339

 

194

 

652

 

388

 

Amortization of prior service costs

 

193

 

36

 

359

 

72

 

Amortization of net actuarial loss

 

23

 

28

 

51

 

56

 

Net pension expense

 

$

1,619

 

$

1,114

 

$

3,159

 

$

2,228

 

 

8. Share Tracking Awards Plans

 

We maintain the United Therapeutics Corporation Share Tracking Awards Plan, adopted in June 2008 (the 2008 STAP), under which we grant long-term, equity-based compensation to eligible participants. Share tracking 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. On March 15, 2011, our Board of Directors approved the United Therapeutics Corporation 2011 Share Tracking Awards Plan (the 2011 STAP), pursuant to which up to 2,000,000 share tracking awards may be granted under provisions substantially similar to those of the 2008 STAP.  We refer to the 2008 STAP and the 2011 STAP collectively as the “STAP,” and awards granted under either of these plans as “STAP awards.”

 

We account for outstanding STAP awards as a liability because they are required to be settled in cash. Accordingly, we estimate the fair value of STAP 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 STAP awards are recognized as an adjustment to compensation expense on our consolidated statements of operations. The STAP liability balance was $110.5 million and $125.6 million at June 30, 2011 and December 31, 2010, respectively, and has been included within other current liabilities on our consolidated balance sheets.

 

In estimating the fair value of STAP 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 STAP awards, the expected forfeiture rate and the expected dividend yield.

 

The table below presents the assumptions used to measure the fair value of STAP awards at June 30, 2011 and 2010:

 

 

 

June 30,
2011

 

June 30,
2010

 

Expected volatility

 

46.1

%

47.3

%

Risk-free interest rate

 

1.5

%

1.6

%

Expected term of awards (in years)

 

4.4

 

4.8

 

Expected forfeiture rate

 

6.7

%

6.0

%

Expected dividend yield

 

0.0

%

0.0

%

 

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Table of Contents

 

A summary of the activity and status of the STAP awards for the six-month period ended June 30, 2011 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, 2011

 

7,380,480

 

$

39.91

 

 

 

 

 

Granted

 

1,569,131

 

65.12

 

 

 

 

 

Exercised

 

(726,425

)

30.21

 

 

 

 

 

Forfeited

 

(281,694

)

44.43

 

 

 

 

 

Outstanding at June 30, 2011

 

7,941,492

 

$

45.62

 

8.1

 

$

93,214

 

Exercisable at June 30, 2011

 

2,715,639

 

$

35.24

 

7.7

 

$

54,485

 

Expected to vest at June 30, 2011

 

4,550,871

 

$

49.92

 

8.7

 

$

36,084

 

 

The weighted average fair value of STAP awards granted during the six-month periods ended June 30, 2011 and 2010 was $28.06 and $27.71, respectively.

 

Share-based compensation (benefit) expense related to the STAP is as follows (in thousands):

 

 

 

Three Months Ended 
June 30,

 

Six Months Ended 
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Research and development

 

$

(9,649

)

$

501

 

$

5,092

 

$

9,725

 

Selling, general and administrative

 

(10,893

)

283

 

4,112

 

10,341

 

Share-based compensation (benefit) expense before taxes (1)

 

(20,542

)

784

 

9,204

 

20,066

 

Related income tax expense (benefit)

 

7,559

 

(290

)

(3,387

)

(7,424

)

Share-based compensation expense, net of taxes

 

$

(12,983

)

$

494

 

$

5,817

 

$

12,642

 

Share-based compensation capitalized as part of inventory

 

$

(456

)

$

45

 

$

354

 

$

539

 

 


(1)           Share-based compensation benefit for the three month period ended June 30, 2011 resulted from the decrease in the fair value of STAP awards as a result of the decline in the price of our common stock at June 30, 2011.

 

Cash paid to settle STAP awards exercised during the six-month periods ended June 30, 2011 and 2010, was $24.3 million and $10.6 million, respectively.

 

9. Debt

 

Convertible Senior Notes

 

On October 30, 2006, we issued at par value $250.0 million of 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 $37.61 per share and the number of shares of common stock used to determine the aggregate consideration upon conversion is approximately 6,646,000.

 

The closing price of our common stock exceeded 120 percent of the conversion price of the Convertible Senior Notes for more than 20 trading days during the 30 consecutive trading-day period ending on June 30, 2011. Consequently, the Convertible Senior Notes were convertible at the election of their holders. In addition, irrespective of whether the contingent conversion provisions have been satisfied, the Convertible Senior Notes can be converted at any time during the period beginning after July 15, 2011 and ending on the last business day preceding the maturity date, October 15, 2011.

 

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

 

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Table of Contents

 

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, holders can require us to purchase from them all or a portion of their Convertible Senior Notes for 100 percent of the principal value plus any accrued and unpaid interest. At June 30, 2011, the aggregate conversion value of the Convertible Senior Notes exceeded their principal value by $116.2 million using a conversion price of $55.10, the closing price of our common stock on June 30, 2011. We have reserved sufficient shares of our common stock to satisfy the conversion requirements related to the Convertible Senior Notes.

 

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 percent, which corresponds to our estimated non-convertible borrowing rate at the date of issuance.

 

The contractual coupon rate of interest and the discount amortization associated with the Convertible Senior Notes are as follows (in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Contractual coupon rate of interest

 

$

312

 

$

312

 

$

625

 

$

625

 

Discount amortization

 

4,189

 

3,889

 

8,301

 

7,707

 

Effective interest—Convertible Senior Notes

 

$

4,501

 

$

4,201

 

$

8,926

 

$

8,332

 

 

Amounts comprising the carrying value of the Convertible Senior Notes include the following (in thousands):

 

 

 

June 30, 
2011

 

December 31, 
2010

 

Principal balance

 

$

249,968

 

$

249,968

 

Discount, net of accumulated amortization of $66,703 and $58,402

 

(5,699

)

(14,000

)

Carrying amount

 

$

244,269

 

$

235,968

 

 

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 at a price of $37.61 per share. We will be required to issue shares of our common stock upon conversion if the price of our common stock exceeds $37.61 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. 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 $52.85 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, 2011, to effect such settlement.

 

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Table of Contents

 

The combination of the Call Option and Warrant effectively reduces the potential dilutive impact of the Convertible Senior Notes and 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.

 

Mortgage Financing

 

In December 2010, we entered into a Credit Agreement with Wells Fargo Bank, National Association (Wells Fargo) and Bank of America, N.A., pursuant to which we obtained $70.0 million in debt financing. The Credit Agreement has a forty-eight month term maturing in December 2014 and is secured by our facilities in Research Triangle Park, North Carolina and Silver Spring, Maryland. Annual principal payments will be based on a twenty-five year amortization schedule using a fixed rate of interest of 7.0 percent and the outstanding debt will bear a floating rate of interest per annum based on the one-month London Interbank Offer Rate (LIBOR), plus a credit spread of 3.75 percent, or approximately 3.9 percent as of June 30, 2011. Alternatively, we have the option to change the rate of interest charged on the loan to 2.75 percent plus the greater of: (1) Wells Fargo’s prime rate, or (2) the federal funds effective rate plus 0.05 percent, or (3) LIBOR plus 1.0 percent. The Credit Agreement also permits prepayment of the outstanding loan balance in its entirety, with varying declining prepayment premiums at specified intervals. The prepayment premium is initially 1.5 percent if the debt is prepaid within the first six months of the term and declines in 0.5 percent increments at each successive six-month interval, such that there is no premium if the loan is prepaid after December 2012. The Credit Agreement subjects us to various financial and negative covenants.  As of June 30, 2011, we were in compliance with these covenants.

 

Interest Expense

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Interest expense

 

$

5,565

 

$

4,759

 

$

11,057

 

$

9,446

 

Less: interest capitalized

 

(134

)

 

(216

)

 

Total interest expense

 

$

5,431

 

$

4,759

 

$

10,841

 

$

9,446

 

 

10. Stockholders’ Equity

 

Earnings per common 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 common share comprise the following (in thousands, except per share amounts):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Numerator:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

73,891

 

$

37,966

 

$

93,249

 

$

56,911

 

Loss from discontinued operations

 

 

(259

)

(2,968

)

(275

)

Net income

 

$

73,891

 

$

37,707

 

$

90,281

 

$

56,636

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares — basic

 

58,180

 

56,047

 

57,968

 

55,411

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Convertible Senior Notes (1)

 

2,698

 

2,020

 

2,807

 

2,155

 

Stock options (2)

 

1,878

 

2,326

 

1,750

 

1,982

 

Weighted average shares — diluted

 

62,756

 

60,393

 

62,525

 

59,548

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

1.27

 

$

0.68

 

$

1.61

 

$

1.03

 

Discontinued operations

 

$

0.00

 

$

(0.01

)

$

(0.05

)

$

(0.01

)

Net income per basic common share

 

$

1.27

 

$

0.67

 

$

1.56

 

$

1.02

 

Diluted

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

1.18

 

$

0.63

 

$

1.49

 

$

0.96

 

Discontinued operations

 

$

0.00

 

$

(0.01

)

$

(0.05

)

$

(0.01

)

Net income per diluted common share

 

$

1.18

 

$

0.62

 

$

1.44

 

$

0.95

 

 

 

 

 

 

 

 

 

 

 

Stock options and warrants excluded from calculation (3)

 

5,548

 

6,501

 

5,394

 

6,311

 

 


(1)           Shares that would be received under the terms of the Call Option (see Note 9 —Debt—Call Spread Option to these consolidated financial statements) have been excluded from the calculation of diluted earnings per share as their impact would be anti-dilutive.

 

(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

 

We grant stock option awards under our equity incentive plan. The fair value of stock options is estimated using the Black-Scholes-Merton valuation model. Option pricing models, including Black-Scholes-Merton, require the input of 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.

 

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Table of Contents

 

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. We did not grant any stock options during the three- and six-month periods ended June 30, 2011.

 

 

 

Three Months Ended
June 30, 2010

 

Six Months Ended June
30, 2010

 

Expected volatility

 

47.3

%

47.3

%

Risk-free interest rate

 

2.2

%

2.5

%

Expected term of options (years)

 

5.5

 

5.5

 

Expected dividend yield

 

0.0

%

0.0

%

Forfeiture rate

 

0.0

%

0.0

%

 

A summary of the activity and status of employee stock options during the six-month period ended June 30, 2011 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, 2011

 

5,925,968

 

$

35.64

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

(786,269

)

29.64

 

 

 

 

 

Forfeited

 

(173,734

)

29.57

 

 

 

 

 

Outstanding at June 30, 2011

 

4,965,965

 

$

36.80

 

6.3

 

$

95,263

 

Exercisable at June 30, 2011

 

4,963,966

 

$

36.80

 

6.3

 

$

95,215

 

Expected to vest at June 30, 2011

 

1,831

 

$

30.75

 

7.1

 

$

45

 

 

Total share-based compensation (benefit) expense related to employee stock options for the three- and six-month period ended June 30, 2011 and 2010, is as follows (in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Research and development

 

$

94

 

$

919

 

$

193

 

$

2,231

 

Selling, general and administrative

 

(6,591

)

(2,283

)

310

 

7,130

 

Share-based compensation expense before taxes

 

(6,497

)

(1,364

)

503

 

9,361

 

Related income tax expense (benefit)

 

2,391

 

505

 

(185

)

(3,464

)

Share-based compensation (benefit) expense, net of taxes

 

$

(4,106

)

$

(859

)

$

318

 

$

5,897

 

Share-based compensation capitalized as part of inventory

 

$

8

 

$

87

 

$

15

 

$

192

 

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Number of options exercised

 

323,757

 

746,627

 

800,437

 

2,172,996

 

Cash received

 

$

9,748

 

$

18,278

 

$

23,724

 

$

54,600

 

 

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Table of Contents

 

11. Comprehensive Income

 

Comprehensive income consists of the following (in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Net income

 

$

73,891

 

$

37,707

 

$

90,281

 

$

56,636

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation (loss) gain

 

(189

)

(1,324

)

1,159

 

(2,851

)

Unrecognized prior service cost, net of tax

 

(888

)

23

 

(783

)

46

 

Unrecognized actuarial pension gain (loss), net of tax

 

14

 

17

 

218

 

(144

)

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

 

(126

)

(1

)

57

 

46

 

Comprehensive income

 

$

72,702

 

$

36,422

 

$

90,932

 

$

53,733

 

 

12. Income Taxes

 

Income tax expense for the three- and six-month periods ended June 30, 2011 and 2010 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, 2011 and 2010 were 34 percent and 35 percent, respectively.

 

As of June 30, 2011, we had available for federal income tax purposes $88.1 million in business tax credit carryforwards that will expire at various dates through 2025.  Certain business tax credit carryforwards that were generated at various dates prior to December 2008 are subject to limitations on their use pursuant to Internal Revenue Code Section 382 (Section 382) as a result of ownership changes as defined by Section 382. However, we do not expect that these business tax credits will expire unused.

 

We are subject to federal and state taxation in the United States and various foreign jurisdictions. Our tax years from 2007 to 2009 are subject to examination by federal and state tax authorities. In addition, general business tax credits generated between 1998 and 2006 are subject to review as those credits were first utilized in 2008.

 

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.

 

13. Segment Information

 

Prior to June 30, 2011, we operated in two business segments: pharmaceutical and telemedicine. With the sale of our telemedicine subsidiary, Medicomp, Inc., in March 2011 and the subsequent discontinuation of our remaining telemedicine-related activities in June 2011, we no longer have a telemedicine segment. In light of these developments, we have presented the results of operations relating to Medicomp, Inc., including the loss recognized on its disposal, within discontinued operations on our consolidated statements of operations for the three- and six-month periods ended June 30, 2011 and 2010. Refer to Note 14— Sale of Medicomp, Inc . for further details.

 

As doctors and patients have become increasingly familiar with Tyvaso and Adcirca since these products received regulatory approval in 2009 and we have become more familiar with the market for these products, our chief operating decision makers regularly review revenue and cost of revenue data for our three commercial products.

 

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Revenues, cost of revenues and gross profit for each of our commercial products for the three- and six-month periods ended June 30, 2011 and 2010 were as follows (in thousands):

 

 

 

Three Months Ended June 30,

 

2011

 

Remodulin

 

Tyvaso

 

Adcirca

 

Total

 

Revenues

 

$

104,894

 

$

61,809

 

$

16,843

 

$

183,546

 

Cost of revenues

 

11,667

 

8,376

 

1,119

 

21,162

 

Gross profit

 

$

93,227

 

$

53,433

 

$

15,724

 

$

162,384

 

 

2010

 

 

 

 

 

 

 

 

 

Revenues

 

$

96,367

 

$

29,483

 

$

8,589

 

$

134,439

 

Cost of revenues

 

8,056

 

6,630

 

575

 

15,261

 

Gross profit

 

$

88,311

 

$

22,853

 

$

8,014

 

$

119,178

 

 

 

 

Six Months Ended June 30,

 

2011

 

Remodulin

 

Tyvaso

 

Adcirca

 

Total

 

Revenues

 

$

208,098

 

$

109,505

 

$

28,161

 

$

345,764

 

Cost of revenues

 

24,201

 

14,816

 

1,883

 

40,900

 

Gross profit

 

$

183,897

 

$

94,689

 

$

26,278

 

$

304,864

 

 

2010

 

 

 

 

 

 

 

 

 

Revenues

 

$

192,136

 

$

54,367

 

$

13,568

 

$

260,071

 

Cost of revenues

 

17,891

 

10,185

 

908

 

28,984

 

Gross profit

 

$

174,245

 

$

44,182

 

$

12,660

 

$

231,087

 

 

For the three-month periods ended June 30, 2011 and 2010, net revenues from our three U.S.-based distributors represented 82 percent and 84 percent, respectively, of our total net revenues. For the six-month periods ended June 30, 2011 and 2010, net revenues from our three U.S.-based distributors represented 83 percent and 85 percent, respectively, of our total net revenues.

 

14. Sale of Medicomp, Inc.

 

In February 2011, we entered into an agreement and plan of merger to sell our wholly owned telemedicine subsidiary, Medicomp, Inc. (Medicomp), to a group of private investors, including Medicomp’s current president. At closing on March 31, 2011, we sold 100 percent of the outstanding stock of Medicomp in exchange for 42,004 shares of United Therapeutics’ common stock held by the investors, with an aggregate value of $2.8 million, and a $12.1 million, ten-year promissory note bearing interest at 5.0 percent per annum. We recognized a loss of $4.5 million in connection with the sale of Medicomp which has been included in the results of discontinued operations for the six months ended June 30, 2011. Immediately after closing the sale, we purchased a 19.9 percent ownership interest in Medicomp in exchange for $1.0 million in cash and an approximately $2.0 million reduction in the face value of the promissory note. The carrying value of our investment in Medicomp was based on the consideration Medicomp received, which we believe approximated the fair value of our non-controlling interest.

 

We did not classify the operating results of Medicomp as a discontinued operation on our consolidated statements of operations for the three-month periods ended March 31, 2011 and 2010 because we expected to generate direct continuing cash flows from the development and commercialization of an arrhythmia detection application. However, in June 2011, we discontinued all activities related to the development of this application and do not expect to generate further direct cash flows from telemedicine-related activities. As such, we met the criteria for reporting discontinued operations during the one-year assessment period, which began on March 31, 2011. Accordingly, we have included the operating results of Medicomp, including the loss recognized on its disposal, within discontinued operations on our consolidated statements of operations for the three- and six-month periods ended June 30, 2011 and 2010.

 

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We sold the following assets and liabilities of Medicomp as of the closing date (in thousands):

 

 

 

March 31, 2011

 

Assets

 

 

 

Cash

 

$

1,221

 

Accounts receivable and inventory

 

1,028

 

Deferred tax assets

 

8,882

 

Equipment and other assets

 

7,089

 

Total assets

 

$

18,220

 

 

 

 

 

Other current liabilities

 

$

1,433

 

 

Medicomp’s revenues and loss before income tax reported in discontinued operations for the three- and six-month periods ended June 30, 2011 and 2010 are presented below (in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Revenues

 

$

 

$

2,770

 

$

3,107

 

$

5,736

 

Loss before income tax

 

$

 

$

(391

)

$

(4,431

)

$

(417

)

 

15. Subsequent Event

 

On July 11, 2011, we acquired 100 percent of the outstanding stock of Revivicor, Inc. (Revivicor), a company focused on developing genetic biotechnology platforms. We acquired Revivicor to pursue early stage product development in the field of tissue and organ transplantation.  Acquisition consideration consisted of (1) an initial payment in cash of approximately $3.5 million; (2) additional consideration of up to $25.0 million to be paid upon the achievement of specific developmental and regulatory milestones; and (3) future payments based on revenues from related products developed. We are currently in the process of gathering all necessary information to complete the acquisition-date measurements which we expect to finalize by the quarter ended September 30, 2011.

 

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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, 2010, 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 below entitled Part II, Item 1A—Risk Factors . 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, 2010, 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 products and product candidates include:

 

·                   Prostacyclin analogues (Remodulin ® , Tyvaso ® , oral treprostinil and beraprost-MR) : 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) inhibitor (Adcirca ® ) : a molecule that acts 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 for oncologic applications (Ch14.18 MAb and 8H9 MAb) : 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 substantially all of our research and development efforts on these key therapeutic programs. 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. The FDA subsequently broadened its approval of Remodulin in 2004 for intravenous (in the vein) use and for the treatment of patients requiring 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. Our other commercial products include Adcirca (tadalafil) tablets (Adcirca) and Tyvaso (treprostinil) Inhalation Solution (Tyvaso). In 2009, the FDA approved 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 2009, we also received FDA approval of Tyvaso, an inhaled therapy for the treatment of PAH. We launched both these products for commercial sale during the third quarter of 2009. These two therapies enable us to 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-MR, both for the treatment of PAH.

 

Pursuant to a February 2011 merger agreement, we sold Medicomp, Inc., our telemedicine subsidiary, to a group of private investors on March 31, 2011. In addition, in June 2011, we discontinued all of our continuing telemedicine-related activities. Accordingly, the results of Medicomp, Inc., including the loss recognized on its disposal, have been included in discontinued operations for the three- and six-month periods ended June 30, 2011 and 2010. See Note 14— Sale of Medicomp, Inc. to our consolidated financial statements included in this Quarterly Report on Form 10-Q for further details.

 

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Revenues

 

Sales of Remodulin comprise the largest share of our revenues. Other significant sources of revenues include sales of Tyvaso and Adcirca. Sales of Tyvaso and Adcirca have continued to grow since their commercial introduction in 2009, 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.  On July 21, 2011, Express Scripts, Inc., the parent company of CuraScript, announced the signing of a merger agreement with Medco Health Solutions, Inc., the parent company of Accredo.  The parties announced that the merger, which is subject to regulatory and shareholder approvals, is expected to close in the first half of 2012.  At this time, we do not expect that this merger will materially affect our business.

 

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 monthly orders 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.

 

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the Acts) contains broad provisions that will be implemented over the next several years. We are continually 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.

 

On January 1, 2011, certain provisions of the Acts that address the coverage gap in the Medicare Part D prescription drug program (commonly known as the “donut hole”) became effective. Under these provisions, drug manufacturers are required to provide a 50 percent discount on branded prescription drugs to patients receiving reimbursement under Medicare Part D while they are in this coverage gap. These provisions of the Acts apply to Adcirca, which is our only commercial pharmaceutical product covered by Medicare Part D. Approximately 35 percent of our Adcirca patients are covered under Medicare Part D.  The vast majority of our Remodulin and Tyvaso Medicare patients are covered under Medicare Part B which contains no similar coverage gap and thus no additional expenses for manufacturers.

 

We were not materially impacted by the Acts during 2010 and estimate that our revenues will be reduced by less than one percent in 2011 as a result of the Acts. However, the potential long-term impact of the Acts on our business is inherently difficult to predict as many of the details regarding the implementation of this legislation have not been determined. Presently, we have not identified any provisions that could materially impact our business, but will continue to monitor future developments of this legislation.

 

Total revenues are reported net of: (1) estimated rebates; (2) prompt pay discounts; (3) allowances for product returns or exchanges; and (4) service fees to our distributors. We estimate our liability for rebates from an analysis of historical levels of rebates to both state Medicaid agencies and commercial third-party payers by product relative to sales of each product. We determine our obligation for prescription drug discounts required for Medicare Part D patients within the coverage gap based on estimations of the number of Medicare Part D patients and the period such patients would remain within the coverage gap. We provide prompt pay discounts to customers that pay amounts due within a specific time period and base our estimates for prompt pay discounts on observed customer payment behavior. We estimate the allowance for sales returns for Adcirca based on published industry data related to specialty pharmaceuticals, and will continue to do so until we have sufficient historical data on which to base our allowance. In addition, we compare patient prescription data for Adcirca to sales of Adcirca on a quarterly basis to ensure a reasonable relationship between prescription and sales trends. To date, we have not identified any unusual patterns in the volume of prescriptions relative to sales that would warrant reconsideration of, or adjustment to, the methodology we currently employ to estimate our allowance for returns. 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, the level of product exchanges for Tyvaso has been comparable to that of Remodulin and we anticipate minimal exchange activity in the future for both products. Lastly, we estimate fees paid to our distributors for services based on contractual rates for specific services applied to the estimated units of service provided for the period.

 

Expenses

 

Since our inception, we have devoted substantial resources to our various research and development initiatives. Accordingly, we incur considerable costs related to our clinical trials and research, which we conduct both internally and

 

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through third parties, on a variety of projects to develop pharmaceutical products. We also seek to license or acquire promising technologies and/or compounds to be incorporated into our development pipeline.

 

Our operating expenses can be materially impacted by the recognition of share-based compensation in connection with any stock option grants which are generally contingent on a performance requirement and our share tracking awards plans (STAP). STAP awards are required to be measured at fair value at the end of each reporting period until the awards are no longer outstanding. The fair value of both STAP awards and stock option grants are measured using inputs and assumptions that can materially impact the amount of compensation expense for a given period. Additionally, some or all of the following factors, among others, can cause substantial variability in the amount of share-based compensation recognized in connection with the STAP from period to period: (1) changes in the price of our common stock; (2) changes in the number of outstanding awards; and (3) changes in both the number of vested awards and the period awards have accrued toward vesting. Generally, our stock option grants are measured at fair value at the date of grant and related compensation is recognized over the requisite service period, which typically coincides with the vesting period. In the case of options that vest upon issuance, we recognize all compensation expense immediately at the date of grant.  We accrue compensation expense for performance-related stock option grants when we determine it is probable that the performance criteria will be met.

 

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

 

The FDA approved Tyvaso for the treatment of PAH in July 2009, and 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 with 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 are enrolling patients in 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. We are currently required to submit the results of the study by December 15, 2014.

 

Under the PMCs, we are committed 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. The modifications and usability analysis have been completed, and we submitted a supplement to our New Drug Application (NDA) in May 2011, which we believe fulfills the PMC requirement.

 

Oral treprostinil

 

We have two Phase III clinical trials, FREEDOM-M (which was recently completed successfully) and FREEDOM-C 2  (which remains ongoing), to evaluate the safety and efficacy of oral treprostinil in patients with PAH.

 

In December 2006, we began our FREEDOM-M trial, which was a 12-week study of newly-diagnosed PAH patients not currently on any background therapy. In February 2009, we submitted a protocol amendment to the FDA to add patients to the ongoing FREEDOM-M trial. These additional patients were provided access to a 0.25 mg tablet when beginning the trial. We completed enrollment of FREEDOM-M in January 2011 with 349 patients, with the population for the primary analysis consisting of the 228 patients who had access to the 0.25 mg tablet at randomization. In June 2011, we announced the completion of the FREEDOM-M trial and that the trial met its primary endpoint of improvement in six-minute walk distance at

 

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week 12. Preliminary analysis of the FREEDOM-M results demonstrated that patients receiving oral treprostinil improved their median six-minute walk distance by approximately 23 meters (p=0.0125, Hodges-Lehmann estimate and non-parametric analysis of covariance in accordance with the trial’s pre-specified statistical analysis plan) as compared to patients receiving placebo.  The median change from baseline was 25 meters for patients receiving oral treprostinil and -5 meters for patients receiving placebo at week 12.

 

In June 2009, we began enrollment for our FREEDOM-C 2  trial, which is a 16-week study of PAH patients on an approved background therapy.  In this trial, patients are provided access to a 0.25 mg tablet and doses are titrated in 0.25 mg to 0.5 mg increments. In March 2011, we completed enrollment of FREEDOM-C 2  with 313 patients, compared to a target enrollment of 300 patients, and we expect to unblind and announce preliminary analysis of the results of the trial no later than September 2011.

 

Beraprost-MR

 

On July 25, 2011, we entered into an exclusive license agreement with Toray Industries, Inc. (Toray) to amend and replace our existing March 2007 license agreement regarding the development of a modified release formulation of beraprost-MR, an oral prostacyclin analogue for the treatment of PAH. The terms of the July 2011 license agreement did not materially change from the previous license agreement and license agreement supplements except for a reduction in royalty rates. In exchange for the reduction in royalty rates, we agreed to pay Toray $50.0 million in equal, non-refundable payments over the five-year period ending in 2015. Since these payments are non-refundable and have no contingencies attached to them, we will recognize a $50.0 million obligation and a corresponding charge to research and development expenses during the quarter ended September 30, 2011.

 

Collagen Type V

 

Pursuant to our February 2010 development agreement with ImmuneWorks, Inc., we are developing a purified bovine Type V Collagen oral solution called IW001 for the treatment of idiopathic pulmonary fibrosis (IPF), 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. Human clinical testing of IW001 has commenced, and a Phase I clinical trial in patients with IPF is ongoing.

 

Cell-based Therapy

 

In June 2011, we entered into a license agreement with Pluristem Ltd. (Pluristem) to develop and commercialize a cell-based product for the treatment of pulmonary hypertension using Pluristem’s proprietary cell technology. Consideration to be paid to Pluristem in exchange for the license rights includes a one-time, non-refundable payment of $5.0 million payable upon closing, which we anticipate will occur during the third quarter of 2011. Accordingly, we expect to expense the $5.0 million payment as research and development during the quarter ended September 30, 2011.

 

From inception to June 30, 2011, we have spent approximately $649.8 million on these and other cardiopulmonary programs.

 

Cancer Disease Projects

 

Ch14.18 Antibody

 

In July 2010, we entered into a Cooperative Research and Development Agreement (CRADA) with the National Cancer Institute (NCI) to collaborate on the late-stage development and regulatory agency submissions of Chimeric Monoclonal Antibody 14.18 (Ch14.18) for children with high-risk neuroblastoma and patients with other forms of cancer. Ch14.18 is an antibody that has shown potential in the treatment of certain types of cancer by targeting GD2, a glycolipid on the surface of tumor cells. Under the terms of the CRADA, NCI will conduct a clinical trial in approximately 100 patients to define more clearly the safety and toxicity profile of Ch14.18 immunotherapy in children, and we will develop the commercial manufacturing capability for the antibody. As part of developing our commercial manufacturing capability, we will need to demonstrate comparability of our Ch14.18 to the NCI-produced Ch14.18, which typically includes a series of analytical and bioanalytical assays and human pharmacokinetics. The NCI studies, including a previously conducted Phase III clinical trial and all other necessary studies supported by NCI, will be used as the basis for a Biologics License Application seeking FDA approval of Ch14.18 immunotherapy for the treatment of neuroblastoma. We have received orphan drug designation for Ch14.18 from the FDA and European Medicines Agency.

 

8H9 Antibody

 

Pursuant to a December 2007 agreement with Memorial Sloan-Kettering Cancer Center, we obtained certain license rights to an investigational monoclonal antibody, 8H9, for the treatment of metastatic brain cancer. 8H9 is a mouse IgG1 MAb that is highly reactive with a range of human solid tumors, including human brain cancers. The 8H9 antibody is in early investigational development for metastases that develop in the brain from the spread of cancers from other tissues in the body. Metastatic brain

 

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cancers are ten times more common than cancers that originate in the brain, and prognosis for patients with metastatic brain cancers is very poor. In the United States, more than 100,000 cases of metastatic brain cancer are diagnosed each year.

 

We have spent approximately $69.5 million from inception to June 30, 2011, on our cancer programs.

 

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 that we may elect to test.

 

We have spent approximately $48.9 million from inception to June 30, 2011, on our infectious disease programs.

 

Cost of Product Sales

 

Cost of product sales are comprised of costs to manufacture and acquire products sold to customers, and royalty payments under license agreements granting us rights to sell related products. We manufacture forms of treprostinil using advanced intermediate compounds purchased in bulk from several third-party vendors that 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 Remodulin, Tyvaso, and our oral tablet, based on forecasted demand for each of these products. The approved shelf life for both Remodulin and Tyvaso is 36 months. Correspondingly, we maintain inventories of these products equivalent to approximately three years of expected demand to ensure sufficient availability of Remodulin and Tyvaso at all times.

 

We acquired the rights to the Tyvaso Inhalation System from NEBU-TEC International Med Products Eike Kern GmbH (NEBU-TEC) in September 2009. We currently manufacture the Tyvaso Inhalation System in Germany using labor supplied by NEBU-TEC. In addition, we received FDA approval in December 2010 for Minnetronix, Inc. to manufacture the Tyvaso Inhalation System and for Quality Tech Services, Inc. to package daily supplies. Catalent Pharma Solutions, Inc. continues to manufacture Tyvaso for us and in March 2011, we received FDA approval to produce Tyvaso in our Silver Spring, Maryland facility.

 

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 capacity production equipment. This new manufacturing process and related equipment will require FDA and international regulatory approvals. We are currently conducting validation testing for the new equipment and process. Until FDA approval of the new process and equipment, Baxter continues to manufacture Remodulin using the approved process and equipment. In January 2011, we received FDA approval of Jubilant HollisterStier Contract Manufacturing and Services as an additional manufacturer for Remodulin in the larger quantities discussed above. In addition, we have submitted an NDA supplement to approve our Silver Spring, Maryland facility for the production of Remodulin.

 

Future Prospects

 

Because PAH remains a progressive disease without a cure, we expect continued growth in the demand for our commercial products as alternatives or complements to other existing approved therapies. Furthermore, the commercial introduction of Tyvaso and Adcirca has enabled us to offer products to more patients along the full continuum of the disease. The continued achievement of our growth objectives 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-MR and seek to expand the use of our therapies to treat patients at earlier stages in the PAH disease progression.

 

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

 

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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, 2011, were $887.4 million compared to $759.9 million at December 31, 2010.  The increase in cash and marketable investments of $127.5 million was driven by collections of accounts receivable outstanding as of December 31, 2010 as well as a reduction in the level of expenditures during the six-month period ended June 30, 2011.

 

Accounts receivable at June 30, 2011 was $82.5 million compared to $73.7 million at December 31, 2010. The increase of $8.8 million corresponded to the increase in sales of our commercial products for the quarter ended June 30, 2011, compared to sales for the quarter ended December 31, 2010.

 

The decrease in current deferred tax assets of $10.3 million from $12.6 million at December 31, 2010 to $2.3 million at June 30, 2011 and the increase in other non-current assets of $9.9 million from $11.1 million at December 31, 2010 to $21.1 million at June 30, 2011, resulted primarily from the sale of Medicomp, Inc., which closed on March 31, 2011. Refer to Note 14— Sale of Medicomp, Inc. to the consolidated financial statements included in this Quarterly Report on Form 10-Q for details.

 

Inventories were $41.3 million at June 30, 2011 compared to $35.5 million at December 31, 2010. The increase in inventories of $5.7 million reflects our expectations regarding future sales growth.

 

The increase in property, plant and equipment of $8.9 million, from $306.0 million at December 31, 2010 to $314.9 million at June 30, 2011, resulted principally from amounts capitalized in connection with our current construction projects in Maryland and North Carolina.

 

Accrued expenses increased by $11.7 million, from $50.3 million at December 31, 2010 to $62.0 million at June 30, 2011. The increase consisted primarily of a $4.9 million increase in accruals for rebates and royalties and a $5.5 million increase in accrued expenses relating to vendor invoices which had not yet been processed by accounts payable as of June 30, 2011.

 

Other current liabilities were $130.2 million at June 30, 2011 compared to $126.3 million at December 31, 2010. The increase of $3.9 million resulted largely from an increase of $17.7 million in taxes payable, offset by a $15.0 million decrease in the STAP liability, which was driven by the decline in the price of our common stock.

 

Convertible notes increased by $8.3 million, from $236.0 million at December 31, 2010, to $244.3 million at June 30, 2011, as a result of amortization of the debt discount on our Convertible Senior Notes for the six months ended June 30, 2011.

 

Additional paid-in capital was $959.0 million at June 30, 2011 compared to $928.7 million at December 31, 2010.  The increase of $30.3 million consisted of $23.7 million in proceeds and $6.3 million in tax benefits related to the exercise of stock options.

 

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Table of Contents

 

Results of Operations

 

Three Months Ended June 30, 2011 and 2010

 

Revenues

 

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

 

 

 

Three Months Ended
June 30,

 

Percentage

 

 

 

2011

 

2010

 

Change