United Therapeutics Corporation
UNITED THERAPEUTICS Corp (Form: 10-Q, Received: 04/26/2012 06:14:01)

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 March 31, 2012

 

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 April 20, 2012 was 53,685,360.

 

 

 



Table of Contents

 

INDEX

 

 

 

Page

 

 

 

Part I.

FINANCIAL INFORMATION (UNAUDITED)

3

 

 

 

Item 1.

Consolidated Financial Statements

3

 

 

 

 

Consolidated Balance Sheets

3

 

 

 

 

Consolidated Statements of Operations

4

 

 

 

 

Consolidated Statements of Comprehensive Income

5

 

 

 

 

Consolidated Statements of Cash Flows

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2.

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

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

Item 4.

Controls and Procedures

31

 

 

 

Part II.

OTHER INFORMATION

32

 

 

 

Item 1.

Legal Proceedings

32

 

 

 

Item 1A.

Risk Factors

33

 

 

 

Item 4.

Mine Safety Disclosures

47

 

 

 

Item 6.

Exhibits

47

 

 

 

SIGNATURES

 

48

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

March 31,
2012

 

December 31,
2011

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

156,666

 

$

162,676

 

Marketable investments

 

252,300

 

240,803

 

Accounts receivable, net of allowance of none for 2012 and 2011

 

89,150

 

88,680

 

Other current assets

 

21,844

 

16,116

 

Inventories, net

 

45,760

 

45,981

 

Deferred tax assets

 

8,199

 

8,199

 

Total current assets

 

573,919

 

562,455

 

Marketable investments

 

336,961

 

343,899

 

Marketable investments and cash—restricted

 

5,369

 

5,123

 

Goodwill and other intangibles, net

 

24,915

 

22,087

 

Property, plant and equipment, net

 

401,587

 

366,046

 

Deferred tax assets, net

 

190,634

 

190,745

 

Other assets

 

28,050

 

27,724

 

Total assets

 

$

1,561,435

 

$

1,518,079

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

8,335

 

$

47,257

 

Accrued expenses

 

58,590

 

57,227

 

Other current liabilities

 

108,617

 

108,093

 

Total current liabilities

 

175,542

 

212,577

 

Convertible notes

 

196,733

 

194,180

 

Mortgages payable—noncurrent

 

71,431

 

71,452

 

Other liabilities

 

82,198

 

80,500

 

Total liabilities

 

525,904

 

558,709

 

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, 61,578,978 and 61,506,063 shares issued, and 53,682,560 and 53,609,645 shares outstanding at March 31, 2012 and December 31, 2011, respectively

 

616

 

615

 

Additional paid-in capital

 

996,773

 

992,718

 

Accumulated other comprehensive loss

 

(9,540

)

(10,885

)

Treasury stock at cost, 7,896,418 shares at March 31, 2012 and December 31, 2011, respectively

 

(282,998

)

(282,998

)

Retained earnings

 

319,798

 

249,038

 

Total stockholders’ equity

 

1,024,649

 

948,488

 

Total liabilities and stockholders’ equity

 

$

1,561,435

 

$

1,518,079

 

 

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
March 31,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

Revenues:

 

 

 

 

 

Net product sales

 

$

202,943

 

$

162,218

 

Other

 

1,271

 

294

 

Total revenues

 

204,214

 

162,512

 

Operating expenses:

 

 

 

 

 

Research and development

 

33,657

 

47,707

 

Selling, general and administrative

 

39,789

 

58,263

 

Cost of product sales

 

24,031

 

19,739

 

Total operating expenses

 

97,477

 

125,709

 

Operating income

 

106,737

 

36,803

 

Other (expense) income:

 

 

 

 

 

Interest income

 

1,033

 

666

 

Interest expense

 

(3,886

)

(5,410

)

Equity loss in affiliate

 

(20

)

(37

)

Other, net

 

72

 

41

 

Total other (expense) income, net

 

(2,801

)

(4,740

)

Income from continuing operations before income taxes

 

103,936

 

32,063

 

Income tax expense

 

(33,176

)

(12,446

)

Income from continuing operations

 

70,760

 

19,617

 

Discontinued operations:

 

 

 

 

 

Income from discontinued operations, net of tax

 

 

29

 

Loss on disposal of discontinued operations, net of tax

 

 

(3,256

)

Loss from discontinued operations

 

 

(3,227

)

Net income

 

$

70,760

 

$

16,390

 

Net income per common share:

 

 

 

 

 

Basic

 

 

 

 

 

Continuing operations

 

$

1.32

 

$

0.34

 

Discontinued operations

 

$

0.00

 

$

(0.06

)

Net income per basic common share

 

$

1.32

 

$

0.28

 

Diluted

 

 

 

 

 

Continuing operations

 

$

1.29

 

$

0.31

 

Discontinued operations

 

$

0.00

 

$

(0.05

)

Net income per diluted common share

 

$

1.29

 

$

0.26

 

Weighted average number of common shares outstanding:

 

 

 

 

 

Basic

 

53,631

 

57,753

 

Diluted

 

55,009

 

62,623

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

Net income

 

$

70,760

 

$

16,390

 

Other comprehensive income:

 

 

 

 

 

Foreign currency translation gain

 

1,099

 

1,348

 

Defined benefit pension plan:

 

 

 

 

 

Actuarial gain arising during period, net of tax

 

64

 

186

 

Less: amortization of actuarial gain and prior service cost included in net periodic pension cost

 

130

 

123

 

Defined benefit pension plan, net

 

194

 

309

 

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

 

52

 

183

 

Other comprehensive income, net of tax

 

1,345

 

1,840

 

Comprehensive income

 

$

72,105

 

$

18,230

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

70,760

 

$

16,390

 

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

 

 

 

 

 

Depreciation and amortization

 

6,648

 

5,809

 

Provision for inventory obsolescence

 

347

 

1,265

 

Current and deferred income tax expense

 

33,176

 

10,436

 

Share-based compensation (benefit) expense

 

(24

)

36,856

 

Amortization of debt discount and debt issue costs

 

2,924

 

4,471

 

Amortization of discount or premium on investments

 

1,134

 

1,165

 

Equity loss in affiliate and other

 

26

 

6,767

 

Excess tax benefits from share-based compensation

 

(318

)

(3,976

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

63

 

7,928

 

Inventories

 

575

 

(1,977

)

Prepaid expenses

 

(5,254

)

(4,101

)

Other assets

 

(1,642

)

(4,270

)

Accounts payable

 

(38,971

)

(6,150

)

Accrued expenses

 

915

 

1,409

 

Other liabilities

 

(32,774

)

(18,671

)

Net cash provided by operating activities

 

37,585

 

53,351

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(40,282

)

(6,336

)

Purchases of held-to-maturity investments

 

(183,423

)

(173,249

)

Maturities of held-to-maturity investments

 

177,714

 

144,250

 

Net cash used in investing activities

 

(45,991

)

(35,335

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from the exercise of stock options

 

1,810

 

13,976

 

Excess tax benefits from share-based compensation

 

318

 

3,976

 

Net cash provided by financing activities

 

2,128

 

17,952

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

268

 

833

 

Net (decrease) increase in cash and cash equivalents

 

(6,010

)

36,801

 

Cash and cash equivalents, beginning of period

 

162,676

 

252,162

 

Cash and cash equivalents, end of period

 

$

156,666

 

$

288,963

 

 

 

 

 

 

 

Supplemental schedule of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

1,803

 

$

733

 

Cash paid for income taxes

 

$

28,676

 

$

5,193

 

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

 

$

9,083

 

$

2,332

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

UNITED THERAPEUTICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(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 various 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 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, 2011, as filed with the SEC on February 28, 2012.

 

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 March 31, 2012, results of operations and comprehensive income for the three-months ended March 31, 2012 and 2011, and cash flows for the three months ended March 31, 2012 and 2011. Interim results are not necessarily indicative of results for an entire year. On March 31, 2011, we sold our wholly-owned telemedicine subsidiary, Medicomp, Inc. Accordingly, the operating results of Medicomp, Inc., for the three-months ended March 31, 2011 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 recast our consolidated statement of cash flows for the three months ended March 31, 2011 to reflect the classification of Medicomp, Inc. as a discontinued operation as the impact was not significant to that statement. For details regarding the sale of Medicomp, Inc. refer to Note 18— Sale of Medicomp, Inc. to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

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):

 

 

 

March 31,
2012

 

December 31,
2011

 

Raw materials

 

$

9,960

 

$

9,171

 

Work-in-progress

 

13,060

 

14,222

 

Finished goods

 

22,740

 

22,588

 

Total inventories

 

$

45,760

 

$

45,981

 

 

7



Table of Contents

 

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.

 

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 March 31, 2012

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

59,397

 

$

 

$

 

$

59,397

 

Federally-sponsored and corporate debt securities (2)

 

 

588,932

 

 

588,932

 

Available-for-sale equity investment

 

453

 

 

 

453

 

Total assets

 

$

59,850

 

$

588,932

 

$

 

$

648,782

 

Liabilities

 

 

 

 

 

 

 

 

 

Convertible notes maturing in 2016 (3)

 

$

 

$

289,375

 

$

 

$

289,375

 

Contingent consideration (4)

 

 

 

8,110

 

8,110

 

Total liabilities

 

$

 

$

289,375

 

$

8,110

 

$

297,485

 

 

 

 

As of December 31, 2011

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

72,905

 

$

 

$

 

$

72,905

 

Federally-sponsored and corporate debt securities (2)

 

 

583,976

 

 

583,976

 

Available-for-sale equity investment

 

382

 

 

 

382

 

Total assets

 

$

73,287

 

$

583,976

 

$

 

$

657,263

 

Liabilities

 

 

 

 

 

 

 

 

 

Convertible notes maturing in 2016 (3)

 

$

 

$

292,500

 

$

 

$

292,500

 

Contingent consideration (4)

 

 

 

7,973

 

7,973

 

Total liabilities

 

$

 

$

292,500

 

$

7,973

 

$

300,473

 

 


(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 principally measured or corroborated by trade data for identical issues or that of comparable securities in which related trading activity is not sufficiently frequent to be considered as a Level 1 input. See also Note 5— Marketable Investments—Held-to-Maturity Investments to these consolidated financial statements.

 

8



Table of Contents

 

(3)           Included in convertible notes on the accompanying consolidated balance sheets. Refer to Note 9— Debt Convertible Notes Due 2016 for details. The fair value of our 1.0% Convertible Senior Notes due September 15, 2016 (2016 Convertible Notes) has been estimated using other observable inputs including the price of our common stock, implied volatility, interest rates and credit spreads among others. Over time, we expect a market for the 2016 Convertible Notes to develop. At that time, we intend to use trade data as the principal basis for measuring fair value.

 

(4)           Included in non-current liabilities on the accompanying consolidated balance sheets. The fair value of contingent consideration has been estimated using probability weighted discounted cash flow models (DCF). The DCF incorporates Level 3 inputs including estimated discount rates that we believe market participants would consider relevant in pricing and the projected timing and amount of cash flows, which are estimated and developed, in part, based on the requirements specific to each acquisition agreement. We analyze and evaluate these fair value measurements quarterly to determine whether valuation inputs continue to be relevant and appropriate or whether current period developments warrant adjustments to valuation inputs and related measurements. Any increases or decreases in discount rates would have an inverse impact on the value of related fair value measurements, while increases or decreases in expected cash flows would result in corresponding increases or decreases in fair value. As of both March 31, 2012 and December 31, 2011, the cost of debt and weighted average cost of capital used to discount projected cash flows relating to contingent consideration ranged from 8.6 percent to 17.9 percent.

 

A reconciliation of the beginning and ending balance of the Level 3 liabilities for the three-month period ended March 31, 2012, is presented below (in thousands):

 

 

 

Contingent
Consideration

 

Balance January 1, 2012—Asset (Liability)

 

$

(7,973

)

Transfers into Level 3

 

 

Transfers out of Level 3

 

 

Total gains/(losses) realized/unrealized

 

 

 

Included in earnings

 

 

Included in other comprehensive income

 

(137

)

Purchases

 

 

Sales

 

 

Issuances

 

 

Settlements

 

 

Balance March 31, 2012—Asset (Liability)

 

$

(8,110

)

Amount of total gains/(losses) for the three-month period ended March 31, 2012 included in earnings under the caption “selling, general and administrative expenses”, that are attributable to the change in unrealized gains or losses related to outstanding liabilities

 

$

 

 

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 2016 Convertible Notes are reported above within the fair value hierarchy. The recorded value of our $70.0 million 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.

 

9



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 March 31, 2012

 

$

308,397

 

$

192

 

$

(119

)

$

308,470

 

Corporate notes and bonds at March 31, 2012

 

280,411

 

232

 

(181

)

280,462

 

Total

 

$

588,808

 

$

424

 

$

(300

)

$

588,932

 

Reported under the following captions on the consolidated balance sheet at March 31, 2012:

 

 

 

 

 

 

 

 

 

Current marketable investments

 

$

252,300

 

 

 

 

 

 

 

Noncurrent marketable investments

 

336,508

 

 

 

 

 

 

 

 

 

$

588,808

 

 

 

 

 

 

 

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Government-sponsored enterprises at December 31, 2011

 

$

308,202

 

$

155

 

$

(170

)

$

308,187

 

Corporate notes and bonds at December 31, 2011

 

276,118

 

113

 

(442

)

275,789

 

Total

 

$

584,320

 

$

268

 

$

(612

)

$

583,976

 

Reported under the following captions on the consolidated balance sheet at December 31, 2011:

 

 

 

 

 

 

 

 

 

Current marketable investments

 

$

240,803

 

 

 

 

 

 

 

Noncurrent marketable investments

 

343,517

 

 

 

 

 

 

 

 

 

$

584,320

 

 

 

 

 

 

 

 

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 March 31, 2012

 

As of December 31, 2011

 

 

 

Fair
Value

 

Gross
Unrealized
Loss

 

Fair
Value

 

Gross
Unrealized
Loss

 

Government-sponsored enterprises:

 

 

 

 

 

 

 

 

 

Continuous unrealized loss position less than one year

 

$

134,670

 

$

(119

)

$

170,018

 

$

(170

)

Continuous unrealized loss position greater than one year

 

 

 

 

 

 

 

134,670

 

(119

)

170,018

 

(170

)

Corporate notes and bonds:

 

 

 

 

 

 

 

 

 

Continuous unrealized loss position less than one year

 

$

101,057

 

$

(181

)

$

149,383

 

$

(442

)

Continuous unrealized loss position greater than one year

 

 

 

 

 

 

 

101,057

 

(181

)

149,383

 

(442

)

Total

 

$

235,727

 

$

(300

)

$

319,401

 

$

(612

)

 

We attribute the unrealized losses on held-to-maturity securities as of March 31, 2012, 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.

 

10



Table of Contents

 

The following table summarizes the contractual maturities of held-to-maturity marketable investments at March 31, 2012 (in thousands):

 

 

 

March 31, 2012

 

 

 

Amortized
Cost

 

Fair
Value

 

Due in less than one year

 

$

252,300

 

$

252,394

 

Due in one to two years

 

336,508

 

336,538

 

Due in three to five years

 

 

 

Due after five years

 

 

 

Total

 

$

588,808

 

$

588,932

 

 

Equity Investments

 

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

 

As of March 31, 2012, we maintain equity investments totaling approximately $8.0 million in privately-held corporations. We account for these investments at cost since we do not have the ability to exercise significant influence over these companies and their fair values are not readily determinable. The fair value of these investments has not been estimated at March 31, 2012, as there have been no events or developments indicating the related carrying amounts 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 March 31, 2012

 

As of December 31, 2011

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

 

Goodwill (1)

 

$

10,918

 

$

 

$

10,918

 

$

8,123

 

$

 

$

8,123

 

Other intangible assets (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology, patents and tradenames

 

5,321

 

(2,269

)

3,052

 

4,766

 

(1,999

)

2,767

 

Customer relationships and non-compete agreements

 

4,793

 

(1,844

)

2,949

 

4,653

 

(1,658

)

2,995

 

Contract-based

 

8,350

 

(354

)

7,996

 

8,350

 

(148

)

8,202

 

Total

 

$

29,382

 

$

(4,467

)

$

24,915

 

$

25,892

 

$

(3,805

)

$

22,087

 

 


(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):

 

Year ending December 31,

 

 

 

2013

 

$

1,981

 

2014

 

1,917

 

2015

 

1,591

 

2016

 

1,058

 

2017

 

850

 

Thereafter

 

5,122

 

 

 

$

12,519

 

 

11



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 March 31, 2012 and December 31, 2011. The Rabbi Trust is irrevocable and SERP participants 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
March 31,

 

 

 

2012

 

2011

 

Service cost

 

$

1,079

 

$

1,033

 

Interest cost

 

369

 

314

 

Amortization of prior service costs

 

207

 

166

 

Amortization of net actuarial loss

 

 

28

 

Net pension expense

 

$

1,655

 

$

1,541

 

 

8. Share Tracking Award Plans

 

We maintain the United Therapeutics Corporation Share Tracking Awards Plan, originally adopted in June 2008 (2008 STAP) and the United Therapeutics Corporation 2011 Share Tracking Awards Plan, adopted in March 2011 (2011 STAP).  In February 2012, our Board of Directors amended the 2011 STAP to increase the total number of awards available for grant under the 2011 STAP by 2.0 million and concurrently amended the 2008 STAP to cancel the approximately 400,000 remaining awards available for future grants thereunder.  We refer to the 2008 STAP and the 2011 STAP collectively as the “STAP,” and awards granted and/or outstanding under either of these plans as “STAP awards.”

 

Under the STAP, we grant long-term, equity-based compensation to eligible participants. STAP 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. STAP awards generally vest in equal increments on each anniversary of the date of grant over a four-year period and expire on the tenth anniversary of the date of grant.

 

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 outstanding 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 $72.9 million and $79.9 million at March 31, 2012 and December 31, 2011, 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.

 

12



Table of Contents

 

The table below presents the assumptions used to measure the fair value of STAP awards at March 31, 2012 and 2011:

 

 

 

March 31,
2012

 

March 31,
2011

 

Expected volatility

 

37.0

%

46.2

%

Risk-free interest rate

 

0.8

%

2.0

%

Expected term of awards (in years)

 

4.2

 

4.6

 

Expected forfeiture rate

 

7.0

%

6.6

%

Expected dividend yield

 

0.0

%

0.0

%

 

A summary of the activity and status of STAP awards for the three-month period ended March 31, 2012 is presented below:

 

 

 

Number of
Awards

 

Weighted-
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Term
(in Years)

 

Aggregate
Intrinsic
Value
(in Thousands)

 

Outstanding at January 1, 2012

 

7,795,000

 

$

45.90

 

 

 

 

 

Granted

 

1,610,353

 

47.52

 

 

 

 

 

Exercised

 

(392,963

)

27.80

 

 

 

 

 

Forfeited

 

(28,930

)

55.08

 

 

 

 

 

Outstanding at March 31, 2012

 

8,983,460

 

$

46.95

 

7.8

 

$

48,126

 

Exercisable at March 31, 2012

 

4,423,997

 

$

39.40

 

7.2

 

$

47,540

 

Expected to vest at March 31, 2012

 

3,915,882

 

$

53.29

 

9.0

 

$

531

 

 

The weighted average fair value of awards granted during the three-month periods ended March 31, 2012 and 2011 was $21.16 and $28.48, respectively.

 

Share-based compensation (benefit) expense recognized in connection with the STAP is as follows (in thousands):

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Research and development

 

$

(1,078

)

$

14,741

 

Selling, general and administrative

 

(907

)

15,005

 

Cost of product sales

 

(46

)

 

Share-based compensation (benefit) expense before taxes

 

(2,031

)

29,746

 

Related income tax expense (benefit)

 

749

 

(10,932

)

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

 

$

(1,282

)

$

18,814

 

Share-based compensation capitalized as part of inventory

 

$

(7

)

$

809

 

 

Cash paid to settle STAP awards exercised during the three-month periods ended March 31, 2012 and 2011, was $5.1 million and $10.7 million, respectively.

 

9. Debt

 

Convertible Notes Due 2016

 

In October 2011, we issued $250.0 million in aggregate principal value 2016 Convertible Notes. The 2016 Convertible Notes are unsecured, unsubordinated debt obligations that rank equally with all of our other unsecured and unsubordinated indebtedness. We pay interest semi-annually on March 15 th  and September 15 th  of each year. The initial conversion price is $47.69 per share and the number of underlying shares used to determine the aggregate consideration upon conversion is approximately 5.2 million shares.

 

13



Table of Contents

 

Conversion can occur: (1) any time after June 15, 2016; (2) during any calendar quarter that follows a calendar quarter in which the price of our common stock exceeds 130 percent 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 2016 Convertible Notes is less than 95 percent of the closing price of our common stock multiplied by the then current number of shares underlying the 2016 Convertible 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, the NASDAQ Global Market, or the New York Stock Exchange, or any of their respective successors.  As of March 31, 2012, none of the contingent conversion thresholds described above were met in order for the 2016 Convertible Notes to be convertible at the option of the note holders.  As a result, the 2016 Convertible Notes have been classified as a non-current liability on our consolidated balance sheet at March 31, 2012. In future financial reporting periods, the classification of the 2016 Convertible Notes may change depending on whether any of the above contingent criteria have been subsequently satisfied.

 

At March 31, 2012, the aggregate conversion value of the 2016 Convertible Notes did not exceed their par value using a conversion price of $47.13, the closing price of our common stock on March 31, 2012.

 

Upon conversion, holders of our 2016 Convertible Notes are entitled to receive: (1) cash equal to the lesser of the par value of the notes or the conversion value (the number of shares underlying the 2016 Convertible Notes multiplied by the then current conversion price per share); and (2) to the extent the conversion value exceeds the par value of the notes, shares of our common stock. In the event of a change in control, as defined in the indenture under which the 2016 Convertible Notes have been issued, holders can require us to purchase all or a portion of their 2016 Convertible Notes for 100 percent of the notes’ par value plus any accrued and unpaid interest.

 

Because the terms of the 2016 Convertible Notes provide for settlement wholly or partially in cash, we are required to account for their liability and equity components separately so that the subsequent recognition of interest expense reflects our non-convertible borrowing rate. Accordingly, we estimated the fair value of the 2016 Convertible Notes without consideration of the conversion option as of the date of issuance (Liability Component). The excess of the proceeds received over the estimated fair value of the Liability Component totaling $57.9 million has been recorded as the conversion option (Equity Component) and a corresponding offset has been recognized as a discount to the 2016 Convertible Notes to reduce their net carrying value. We are amortizing the discount over the five-year period ending September 15, 2016 (the expected life of the Liability Component) using the interest method and an effective rate of interest of 6.7 percent, which corresponds to our estimated non-convertible borrowing rate at the date of issuance.

 

Interest expense incurred in connection with our convertible notes consisted of the following (in thousands):

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Contractual coupon rate of interest

 

$

625

 

$

312

 

Discount amortization

 

2,553

 

4,112

 

Interest expense—convertible notes (1)

 

$

3,178

 

$

4,424

 

 


(1)           Interest expense recognized in connection with our convertible notes for the three-month period ended March 31, 2011 consisted solely of the effective interest relating to a prior issue of convertible notes that matured in October 2011 (2011 Convertible Notes). We accounted for the 2011 Convertible Notes in a manner similar to that of the 2016 Convertible Notes using an effective interest rate of 7.5 percent.

 

Amounts comprising the carrying value of the 2016 Convertible Notes include the following (in thousands):

 

 

 

March 31,
2012

 

December 31,
2011

 

Principal balance

 

$

250,000

 

$

250,000

 

Discount, net of accumulated amortization of $4,671 and $2,118

 

(53,267

)

(55,820

)

Carrying amount

 

$

196,733

 

$

194,180

 

 

14



Table of Contents

 

Convertible Note Hedge and Warrant Transactions

 

In connection with the issuance of our 2016 Convertible Notes, we entered into separate convertible note hedge and warrant transactions with Deutsche Bank AG London (DB London) to reduce the potential dilutive impact upon the conversion of our convertible notes. Pursuant to the convertible note hedge, we purchased call options to acquire up to approximately 5.2 million shares of our common stock with a strike price of $47.69. The call options become exercisable upon conversion of the 2016 Convertible Notes, and will terminate upon the maturity of the 2016 Convertible Notes or the first day the 2016 Convertible Notes are no longer outstanding, whichever occurs first. We also sold DB London warrants to acquire up to approximately 5.2 million shares of our common stock with a strike price of $67.56. The warrants will expire incrementally on a series of expiration dates subsequent to the maturity date of our 2016 Convertible Notes. Both the convertible note hedge and warrant transactions will be settled on a net-share basis. If the conversion price of our 2016 Convertible Notes remains between the strike prices of the call options and warrants, our shareholders will not experience any dilution in connection with the conversion of our 2016 Convertible Notes; however, to the extent that the price of our common stock exceeds the strike price of the warrants on any or all of the series of related incremental expiration dates, we will be required to issue shares of our common stock to DB London.

 

The warrants we sold to DB London in connection with the issuance of our 2011 Convertible Notes expired in March 2012. Since the price or our common stock over the series of expiration dates did not exceed the strike price of the warrants, we were not required to issue any shares of our common stock to DB London upon expiration of the warrants.

 

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 are based on a twenty-five year amortization schedule using a fixed rate of interest of 7.0 percent and the outstanding debt bears 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 4.0 percent as of March 31, 2012. 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 permits prepayment of the outstanding loan balance in its entirety, subject to a prepayment premium which was initially 1.5 percent during 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 June 2012. The Credit Agreement subjects us to various financial and negative covenants.  As of March 31, 2012, we were in compliance with these covenants.

 

Interest Expense

 

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

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Interest expense

 

$

4,309

 

$

5,492

 

Less: interest capitalized

 

(423

)

(82

)

Total interest expense

 

$

3,886

 

$

5,410

 

 

15



Table of Contents

 

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.

 

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

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Numerator:

 

 

 

 

 

Income from continuing operations

 

$

70,760

 

$

19,617

 

Loss from discontinued operations

 

 

(3,227

)

Net income

 

$

70,760

 

$

16,390

 

Denominator:

 

 

 

 

 

Weighted average outstanding shares — basic

 

53,631

 

57,753

 

Effect of dilutive securities (1):

 

 

 

 

 

Convertible notes

 

49

 

2,913

 

Warrants

 

 

 

Stock options

 

1,329

 

1,957

 

Weighted average shares — diluted

 

55,009

 

62,623

 

Earnings per common share:

 

 

 

 

 

Basic

 

 

 

 

 

Continuing operations

 

$

1.32

 

$

0.34

 

Discontinued operations

 

$

0.00

 

$

(0.06

)

Net income per basic common share

 

$

1.32

 

$

0.28

 

Diluted

 

 

 

 

 

Continuing operations

 

$

1.29

 

$

0.31

 

Discontinued operations

 

$

0.00

 

$

(0.05

)

Net income per diluted common share

 

$

1.29

 

$

0.26

 

 

 

 

 

 

 

Stock options and warrants excluded from calculation (2)

 

11,711

 

5,245

 

 


(1)          Calculated using the treasury stock method.

 

(2)          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 may 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, the expected forfeiture rate and the expected dividend yield. We did not grant any stock options during the three-month periods ended March 31, 2012 and 2011.

 

16



Table of Contents

 

A summary of the activity and status of employee stock options during the three-month period ended March 31, 2012 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, 2012

 

4,923,377

 

$

36.98

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

(69,581

)

25.72

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

Outstanding and exercisable at March 31, 2012

 

4,853,796

 

$

37.14

 

5.6

 

$

60,947

 

 

Total share-based compensation expense related to employee stock options for the three-month periods ended March 31, 2012 and 2011, is as follows (in thousands):

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Research and development

 

$

 

$

99

 

Selling, general and administrative

 

2,004

 

6,901

 

Share-based compensation expense before taxes

 

2,004

 

7,000

 

Related income tax benefit

 

(739

)

(2,573

)

Share-based compensation expense, net of taxes

 

$

1,265

 

$

4,427

 

Share-based compensation capitalized as part of inventory

 

$

 

$

7

 

 

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

 

 

 

Three Months Ended
March 31,

 

 

 

2012

 

2011

 

Number of options exercised

 

72,915

 

476,680

 

Cash received

 

$

1,810

 

$

13,976

 

 

Share Repurchase

 

In October 2011, our Board of Directors approved a share repurchase program authorizing up to $300.0 million in aggregate repurchases of our common stock, at our discretion, over a two-year period ending in October 2013 (Repurchase Program). In connection with the Repurchase Program, we paid $212.0 million for an accelerated share repurchase agreement (ASR) entered into with DB London in October 2011. Pursuant to the terms of the ASR, DB London delivered to us approximately 4.7 million shares of our common stock in October 2011 representing the minimum number of shares we were entitled to repurchase under the ASR. The ASR was originally scheduled to terminate during the second quarter of 2012; however, in March 2012, we received notification from DB London of its election to accelerate the termination date of the contract to March 22, 2012. Based on the average of the daily volume weighted average price of our common stock over a specified period beginning in October 2011 and ending on the termination date, we did not receive additional shares upon final settlement of the ASR.

 

11. Income Taxes

 

Income tax expense for the three-month periods ended March 31, 2012 and 2011 is based on the estimated 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 March 31, 2012 and 2011 were 34 percent and 39 percent, respectively. The decrease in the annual effective tax rate as of March 31, 2012 reflects a reduction in projections of non-deductible compensation for 2012.

 

As of March 31, 2012, we had available for federal income tax purposes $28.6 million in business tax credit carryforwards that will expire at various dates through 2032. Certain business tax credit carryforwards that were generated at various dates

 

17



Table of Contents

 

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 these business tax credits to expire unused.

 

We are subject to federal and state taxation in the United States and various foreign jurisdictions. Currently, our 2010 tax year is subject to examination by the Internal Revenue Service and our tax years from 2008 to 2010 are subject to examination by state taxing authorities.

 

We are unaware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next 12 months.

 

12. Segment Information

 

With the sale of our telemedicine subsidiary, Medicomp, Inc. and the discontinuation of further telemedicine-related business in 2011, we currently operate as one operating segment. However, we use and regularly review revenues, cost of revenues and gross profit data as a primary measure of performance for each of our three commercial products.

 

Revenues, cost of revenues and gross profit for each of our commercial products for the three-month periods ended March 31, 2012 and 2011 were as follows (in thousands):

 

Three Months Ended March 31, 2012

 

Remodulin

 

Tyvaso

 

Adcirca

 

Total

 

Revenues

 

$

110,546

 

$

70,067

 

$

22,330

 

$

202,943

 

Cost of revenues

 

13,348

 

9,198

 

1,485

 

24,031

 

Gross profit

 

$

97,198

 

$

60,869

 

$

20,845

 

$

178,912

 

 

Three Months Ended March 31, 2011

 

 

 

 

 

 

 

 

 

Revenues

 

$

103,205

 

$

47,695

 

$

11,318

 

$

162,218

 

Cost of revenues

 

12,534

 

6,440

 

765

 

19,739

 

Gross profit

 

$

90,671

 

$

41,255

 

$

10,553

 

$

142,479

 

 

For the three-month periods ended March 31, 2012 and 2011, net revenues from our three U.S.-based distributors represented 82 percent and 84 percent, respectively, of our total net operating revenues.

 

13. Litigation

 

Sandoz Inc.

 

In February 2012, we announced receipt of a Paragraph IV Certification Notice Letter (Notice Letter) from Sandoz Inc. (Sandoz) advising that Sandoz has submitted an abbreviated new drug application (ANDA) to the FDA requesting approval to market a generic version of the 10 mg/mL strength of Remodulin.

 

In the Notice Letter, Sandoz stated that it intends to market a generic version of Remodulin before the expiration of the following patents relating to Remodulin: U.S. Patent No. 5,153,222, which expires in October 2014; U.S. Patent No. 6,765,117, which expires in October 2017; and U.S. Patent No. 7,999,007, which expires in March 2029. Sandoz’s Notice Letter stated that the ANDA contains a Paragraph IV Certification alleging that these patents are not valid, not enforceable and/or will not be infringed by the commercial manufacture, use or sale of the proposed product described in Sandoz’s ANDA submission.

 

In response to the Notice Letter, we filed a lawsuit for patent infringement on March 14, 2012 against Sandoz in the U.S. District Court for the District of New Jersey. We intend to vigorously enforce our intellectual property rights relating to Remodulin, including the three patents mentioned in the Notice Letter which are listed in the FDA’s Approved Drug Products List (the Orange Book).

 

We filed our patent-infringement lawsuit within forty-five days from the receipt of the Notice Letter. Therefore, under the Hatch-Waxman Act, the FDA is automatically precluded from approving Sandoz’s ANDA for up to 30 months or until the issuance of a district court decision that is adverse to us, whichever occurs first.

 

Lexington Insurance Company

 

During the third quarter of 2011, we reported a claim to our insurance provider regarding damage to certain Remodulin inventory that occurred as the result of a warehouse accident. The estimated net commercial value of the damaged inventory

 

18



Table of Contents

 

was approximately $65.0 million. Because we did not reach a satisfactory agreement on the amount to settle the claim, we filed a lawsuit against Lexington Insurance Company on April 9, 2012 in the North Carolina Business Court, a specialized division of North Carolina’s Superior Court, seeking to recover the full net commercial value of the damaged inventory.  Although we believe we are entitled to recover the full net commercial value of the damaged inventory, any litigation is inherently uncertain and we cannot predict the timing or outcome of the litigation, including the ultimate level of recovery (if any).

 

19



Table of Contents

 

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

 

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011, 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, 2011, 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

 

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;

 

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

 

·                   Cell-based therapy: a cell-based product known as PLacental eXpanded (PLX) cells being studied for the treatment of pulmonary hypertension.

 

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.  Remodulin has also been approved in various countries outside of the United States, but approval in most countries was initially limited to subcutaneous use. More recently, we announced in December 2011 that we received regulatory approval by the French regulatory agency, Agence Française de Sécurité Sanitaire des Produits de Santé (AFSSAPS) for the intravenous use of Remodulin to treat PAH. The AFSSAPS approval follows a review period during which 22 European Economic Area member nations, each of which had previously approved subcutaneous Remodulin through the mutual recognition process, reviewed and endorsed the final variation assessment report issued by AFSSAPS, which will allow the marketing of intravenous Remodulin in those nations. Our other commercial products include Adcirca (tadalafil) tablets (Adcirca) and Tyvaso (treprostinil) Inhalation Solution (Tyvaso). In May 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 July 2009, we received FDA approval of Tyvaso, an inhaled therapy for the treatment of PAH. We launched both of these products for commercial sale during the third quarter of 2009. As compared with Remodulin, these two products enable us to offer treatments to a broader range of patients who suffer from PAH. In addition, in December 2011 we filed a new drug application (NDA) with the FDA seeking marketing approval of an oral formulation of treprostinil for the treatment of PAH.  We are also continuing to develop an oral formulation of another prostacyclin analogue, beraprost-MR, for the treatment of PAH.

 

On March 31, 2011, we sold our former telemedicine subsidiary, Medicomp, Inc., and have no intentions to pursue future development and/or commercialization of telemedicine-based products and services.  Accordingly, the results of Medicomp,

 

20



Table of Contents

 

Inc. have been included in discontinued operations for the three months ended March 31, 2011 on our consolidated statements of operations.

 

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. Effective April 1, 2012, we increased the price at which we sell Tyvaso to our specialty pharmaceutical distributors by 4.9 percent. We also sell Remodulin to distributors outside of the United States. In April 2011, Express Scripts, Inc., the parent company of CuraScript, closed on its acquisition of Medco Health Solutions, Inc., the parent company of Accredo. Presently, we do not expect the merger to materially affect our business.

 

We require our distributors to maintain reasonable levels of inventory reserves 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, sales volumes 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 continue to evaluate 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.

 

In January 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 remain 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 does not contain a similar coverage gap.

 

We were not materially impacted by the Acts during 2011, and we have not yet identified any provisions that could materially impact our business in the future. However, the potential long-term impact of the Acts on our business is inherently difficult to predict, as many details regarding the implementation of this legislation have not yet been determined.

 

Total revenues are reported net of: (1) estimated rebates; (2) prompt pay discounts; (3) allowances for product returns or exchanges; and (4) distributor fees. We estimate our liability for rebates based on an analysis of historical levels of rebates by product to both state Medicaid agencies and commercial third-party payers relative to sales of each product. In addition, 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 will 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 historical customer payment behavior. We derive estimates relating to the allowance for returns of Adcirca from published industry data specific 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 immaterial. In addition, because Tyvaso is distributed under similar contractual terms as Remodulin, the level of product exchanges for Tyvaso has been comparable to that of Remodulin. As such, we do not record reserves for exchanges of either Remodulin or Tyvaso. Furthermore, we anticipate minimal exchange activity in the future for both products. Lastly, we estimate distributor fees based on contractual rates for specific services applied to the estimated units of service provided for the period.

 

Cost of Product Sales

 

Cost of product sales is comprised of (1) costs to produce and acquire products sold to customers; (2) royalty payments under license agreements granting us rights to sell related products; and (3) direct and indirect distribution costs incurred in the sale of products. We acquired the rights to sell our commercial products through license and assignment agreements with the

 

21



Table of Contents

 

original developers of these products. These agreements obligate us to pay royalties based on our net revenues from related products. While the royalties vary by agreement, we pay royalties on each of our current commercial products ranging from 1 percent to 10 percent of net revenues.

 

We synthesize 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 synthesis 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. We maintain inventories of Remodulin and Tyvaso equivalent to at least two years of expected demand to ensure sufficient availability of these products at all times. We have reduced our target inventory levels from three years to two years in light of the approval of additional production sites for Remodulin and Tyvaso, including our own facilities which we expect will become our primary sources of supply, as these developments have helped mitigate the risk of shortages.

 

In 2009, we amended our contract with our Remodulin producer, Baxter Pharmaceutical Solutions, LLC (Baxter), to extend the contract term through 2013. As part of that contract amendment, we agreed that Baxter will formulate Remodulin in greater quantities using larger capacity equipment. This new process and related equipment will require FDA and international regulatory approval. We are currently conducting validation testing for the new equipment and process. Until FDA approval of the new process and equipment, Baxter will continue to formulate Remodulin using previously approved processes and equipment. In January 2011, we received FDA approval of Jubilant Hollister-Stier Contract Manufacturing and Services as an additional producer for Remodulin in the larger quantities discussed above. In addition, in July 2011, we received FDA approval to use our Silver Spring, Maryland facility for the formulation of Remodulin. Catalent Pharma Solutions, Inc. formulates Tyvaso for us and in March 2011, we received FDA approval to formulate Tyvaso in our Silver Spring, Maryland facility. We intend to use our own facilities to produce our primary supply of Remodulin, Tyvaso and oral treprostinil tablets, and we will contract with third parties to supplement our production capacity.

 

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.

 

Under the terms of our manufacturing and supply agreement with Lilly, Lilly manufactures and distributes Adcirca on our behalf via its pharmaceutical wholesaler network, in the same manner that it distributes its own pharmaceutical products. Under the terms of this agreement, we take title to Adcirca upon its manufacture by Lilly.

 

Operating 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 other research and development efforts, which are conducted both internally and through third parties, on a variety of projects to develop pharmaceutical products. From time-to-time, we also license or acquire additional technologies and compounds to be incorporated into our development pipeline.

 

Our operating expenses can be materially impacted by the recognition of share-based compensation expense (benefit) in connection with our share tracking award plans (STAP) and any stock option grants. 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 volatility 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 with only a service condition are measured at fair value at the date of grant and related compensation is recognized ratably over the requisite service period, which typically coincides with the vesting period. However, in the case of options granted to our Chief Executive Officer, which vest immediately upon issuance in accordance with her employment contract, we recognize all associated compensation expense immediately at the date of grant. Furthermore, we accrue for estimated compensation expense associated with STAP awards or stock option grants containing performance-based conditions affecting vesting when we determine that it is probable that performance criteria will be met.

 

22



Table of Contents

 

Major Research and Development Projects

 

Our major research and development projects focus on the use of prostacyclin analogues and other therapies 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. In September 2011, the FDA notified us that we had fulfilled the requirements of the PMCs. We are required to provide the FDA with annual updates on our PMR. 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 assessing the safety of Tyvaso. We are currently required to submit the results of the study by December 15, 2014.

 

We recently decided not to conduct a new clinical trial aimed at securing European Medicines Agency (EMA) approval of Tyvaso for the treatment of PAH.  We made this decision after reviewing the cost of the trial, the length of time required to conduct the trial and obtain marketing authorization and pricing approval, and the current, as well as the expected, commercial environment in Europe.  We expect to make Tyvaso available in certain European countries on a named patient basis through country-specific arrangements with our distributors, to the extent physicians prescribe Tyvaso in those countries.

 

Oral treprostinil

 

In December 2006, we commenced two phase III multi-national, placebo-controlled clinical trials of oral treprostinil in patients with PAH to study both safety and efficacy. The FREEDOM-C trial was a 16-week study of patients on approved background therapy using a PDE-5 inhibitor, such as Revatio ® , or an endothelin receptor antagonist (ETRA), such as Tracleer ® , or a combination of both. The FREEDOM-M trial was a 12-week study of patients who are not on any background therapy.

 

We commenced both trials using a 1.0 mg tablet, but during the open-label extension trial (and an associated pharmacokinetic substudy) we discovered that treprostinil concentrations were higher in PAH patients than in healthy individuals due to the difference in overall absorption, metabolism and excretion of the drug between these two populations. These differences led to a number of discontinuations by patients randomized to receive the drug due to tolerability-related side effects, including nausea, jaw-pain and headaches. As a result, we introduced a 0.5 mg tablet in July 2007 and a 0.25 mg tablet in April 2008 to enable more gradual dose titration in order to increase dosing to a tolerable level.

 

In November 2008, we announced that the FREEDOM-C trial did not meet statistical significance for its primary endpoint.  Analysis suggested that the inability to dose titrate was a limiting factor that suppressed the overall treatment effect. Of the 174 patients who received the active drug, 25 patients discontinued due to an adverse event and 33 patients who completed the trial were unable to titrate their doses above 1.0 mg twice-daily.

 

In June 2009, we began enrollment of our FREEDOM-C 2  trial, which was a 16-week study of PAH patients on an approved background therapy. In this trial, patients were provided access to a 0.25 mg tablet and doses were 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. In August 2011, we announced the completion of FREEDOM-C 2  and that the trial did not achieve statistical significance for the primary endpoint of improvement in six-minute walk distance at week 16.

 

Enrollment in FREEDOM-M was initially closed in October 2008, with 171 patients enrolled in the trial. In March 2009, the FDA approved a protocol amendment 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 week 12. 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,

 

23



Table of Contents

 

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 at week 12 was 25 meters for patients receiving oral treprostinil and -5 meters for patients receiving placebo. This clinical treatment effect is supported by other secondary efficacy endpoints including the change in six-minute walk distance observed at week 8 (Hodges-Lehmann estimate of +17 meters; p=0.0307) and combined six-minute walk distance and Borg Dyspnea Score rating (shortness of breath test) at week 12 (p=0.0497).

 

Based on the positive results achieved in the FREEDOM-M trial, we submitted to the FDA an NDA in December 2011. The FDA has accepted the NDA for review and has indicated the filing will be subjected to the standard 10-month review period commencing from the submission date. We have also applied to the FDA for orphan drug designation for oral treprostinil.

 

Although we believe oral treprostinil is approvable on the basis of the FREEDOM-M study, there can be no guarantee that our NDA will be approved, particularly in light of the FREEDOM-C and FREEDOM-C 2  studies.  Furthermore, if our NDA is approved, the results of the FREEDOM-C and FREEDOM-C 2  studies may nonetheless limit our ability to market oral treprostinil in combination with other therapies, and reduce its commercial potential.  Therefore, in an effort to provide clinical support for the efficacy of oral treprostinil in combination with other PAH therapies and improve the labeling for oral treprostinil if it is approved, we are designing additional studies. Because we believe that patients in both the FREEDOM-C and FREEDOM-C 2  trials were not provided sufficient amounts of oral treprostinil over an adequate period of time, we are finalizing the protocol of a new phase III clinical trial, FREEDOM-EV (formerly referred to as FREEDOM-C 3 ), which is intended to study the effects of oral treprostinil over a longer period of time than our previous studies and hopefully will enable patients to achieve a higher dose. FREEDOM-EV is anticipated to be a placebo-controlled study in newly diagnosed patients who have recently initiated an approved background therapy (an ETRA or PDE-5 inhibitor), with one co-primary endpoint being the time to clinical worsening, generally defined as (1) death; (2) an unplanned hospitalization due to PAH; (3) initiation of prostacyclin for the treatment of PAH; (4) a decrease in six-minute walk distance of at least fifteen percent from baseline (or too ill to walk) as a result of the progression of PAH; or (5) unsatisfactory long-term clinical response. We currently have no plans to apply for the approval of oral treprostinil in Europe.

 

Beraprost-MR

 

In July 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 an orally-administered, modified release formulation of the prostacyclin analogue beraprost (beraprost-MR), for the treatment of PAH. 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. In November 2011, we announced that a phase II trial of beraprost-MR failed to meet its primary and secondary endpoints. We and Toray continue to assess the results of the phase II trial and are in the process of designing new trials and dosing regimens for beraprost-MR.

 

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 known as PLacental eXpanded (PLX) cells. We are currently conducting preclinical toxicology and pharmacology studies to support a potential investigational new drug application for the treatment of PAH.

 

From inception to March 31, 2012, we have spent $777.7 million on all of our current and former cardiopulmonary disease programs.

 

24



Table of Contents

 

Cancer-Related 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 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 is conducting a clinical trial in approximately 100 patients to define more clearly the safety and toxicity profile of Ch14.18 immunotherapy in children, and we are developing the commercial production capability for the antibody. As part of developing our commercial production 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 we expect to file seeking FDA approval of Ch14.18 immunotherapy for the treatment of neuroblastoma and a marketing authorization application with the EMA for approval in Europe. We have received orphan drug designation for Ch14.18 from the FDA and the EMA.

 

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 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 $77.3 million from inception to March 31, 2012, on all of our current and former 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.

 

In September 2011, we were awarded a cost plus fixed fee contract with an aggregate value of up to $45.0 million under a Broad Agency Announcement from the U.S. National Institute of Allergy and Infectious Diseases for studies directed at the development of a broad spectrum antiviral drug based on our glycobiology antiviral platform. Under the contract’s base period of forty-two months, we will receive $10.6 million in funding and there are eight milestone-based options to expand the project and funding under the contract, up to an aggregate of $45.0 million. We recognize revenue on this contract to the extent of costs incurred, plus a proportionate amount of fee earned.

 

We have spent $55.3 million from inception to March 31, 2012, on all of our current and former infectious disease programs.

 

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 therapies. Furthermore, the commercial introduction of Tyvaso and Adcirca has enabled us to offer products to more patients along the full range of disease classifications. 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 submitted to the FDA an NDA for oral treprostinil in December 2011, plan to initiate enrollment in the FREEDOM-EV study of oral treprostinil and a new event-driven phase III Tyvaso study during the second half of 2012 and continue to develop beraprost-MR. In addition, we 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 filing and approval of our NDA for oral treprostinil, and the 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) the reimbursement of our products by public and private insurance organizations; (5) the competition we face within our industry; (6) our ability to effectively manage our growth in an increasingly complex regulatory environment; and (7) our ability to defend against generic competition, including the recent challenge to our Remodulin patents by a generic drug company.

 

25



Table of Contents

 

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 late-stage 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

 

Other current assets were $21.8 million at March 31, 2012 compared to $16.1 million at December 31, 2011. The $5.7 million increase was driven largely by a $4.5 million payment to an unaffiliated, not-for-profit organization that will provide therapy-related financial assistance to patients suffering from PAH during 2012.

 

The increase in property, plant and equipment of $35.5 million, from $366.0 million at December 31, 2011 to $401.6 million at March 31, 2012, corresponded to our ongoing construction project in North Carolina and the completion of the construction project in Maryland during March 2012.

 

Accounts payable decreased by $38.9 million, from $47.3 million at December 31, 2011 to $8.3 million at March 31, 2012. The decrease reflects customary variances in the timing, magnitude and volume of invoice and payment activity, more notably with respect to construction-related invoices.

 

Results of Operations

 

Three Months Ended March 31, 2012 and 2011

 

Revenues

 

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

 

 

 

Three Months Ended
March 31,

 

Percentage

 

 

 

2012

 

2011

 

Change

 

Cardiopulmonary products:

 

 

 

 

 

 

 

Remodulin

 

$

110,546

 

$

103,205

 

7.1

%

Tyvaso

 

70,067

 

47,695

 

46.9

%

Adcirca

 

22,330

 

11,318

 

97.3

%

Other

 

1,271

 

294

 

332.3

%

Total net revenues

 

$

204,214

 

$

162,512

 

25.7

%

 

The increase in revenues of $41.7 million for the three months ended March 31, 2012 compared to the same quarter in 2011, corresponded primarily to the continued increase in the number of patients being prescribed our products. For the three months ended March 31, 2012 and 2011, approximately 82 percent and 84 percent, respectively, of total net revenues were derived from our three U.S.-based distributors.

 

The tables below include a reconciliation of the accounts associated with estimated rebates, prompt-pay discounts, sales allowances and distributor fees (in thousands):

 

 

 

Three Months Ended March 31, 2012

 

 

 

Rebates

 

Prompt Pay
Discounts

 

Allowance for
Sales Returns

 

Distributor
Fees

 

Total

 

Balance, January 1, 2012

 

$

13,993

 

$

1,679

 

$

1,402

 

$

732

 

$

17,806

 

Provisions attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

11,498

 

4,256

 

431

 

1,037

 

17,222

 

Prior periods

 

1,129

 

 

 

 

1,129

 

Payments or credits attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

(364

)

(2,567

)

 

(510

)

(3,441

)

Prior periods

 

(11,068

)

(1,684

)

(27

)

(762

)

(13,541

)

Balance, March 31, 2012

 

$

15,188

 

$

1,684

 

$

1,806

 

$

497

 

$

19,175

 

 

26



Table of Contents

 

 

 

Three Months Ended March 31, 2011

 

 

 

Rebates

 

Prompt Pay
Discounts

 

Allowance for
Sales Returns

 

Distributor
Fees

 

Total

 

Balance, January 1, 2011

 

$

10,503

 

$

1,466

 

$

482

 

$

724

 

$

13,175

 

Provisions attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

11,085

 

3,537

 

188

 

1,141

 

15,951

 

Prior periods

 

462

 

 

 

 

462

 

Payments or credits attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

(200

)

(2,477

)

 

(596

)

(3,273

)

Prior periods

 

(10,939

)

(1,222

)

 

(662

)

(12,823

)

Balance, March 31, 2011

 

$

10,911

 

$

1,304

 

$

670

 

$

607

 

$

13,492

 

 

Research and Development Expenses

 

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

 

 

 

Three Months Ended 
March 31,

 

Percentage

 

 

 

2012

 

2011

 

Change

 

Project and non-project component:

 

 

 

 

 

 

 

Cardiopulmonary

 

$

25,577

 

$

23,744

 

7.7

%

Share-based compensation

 

(1,078

)

14,841

 

(107.3

)%

Other

 

9,158

 

9,122

 

0.4

%

Total research and development expense

 

$

33,657

 

$

47,707

 

(29.5

)%

 

Share-based compensation. The decrease in share-based compensation of $15.9 million for the quarter ended March 31, 2012, compared to the same quarter in 2011, corresponded to the decline in the price of our common stock.

 

Selling, General and Administrative Expenses

 

The table below summarizes selling, general and administrative expense by major category (dollars in thousands):

 

 

 

Three Months Ended
March 31,

 

Percentage

 

 

 

2012

 

2011

 

Change

 

Category:

 

 

 

 

 

 

 

General and administrative

 

$

21,624

 

$

21,937

 

(1.4

)%

Sales and marketing

 

17,067

 

14,420

 

18.4

%

Share-based compensation

 

1,098

 

21,906

 

(95.0

)%

Total selling, general and administrative expense

 

$

39,789

 

$

58,263

 

(31.7

)%

 

Sales and marketing. The increase in sales and marketing expense of $2.6 million for the quarter ended March 31, 2012, compared to the quarter ended March 31, 2011, was attributable primarily to an increase of $1.7 million in professional fees and expenses incurred in connection with our marketing and advertising activities.

 

Share-based compensation. The decrease in share-based compensation of $20.8 million for the quarter ended March 31, 2012, compared to the same quarter in 2011, corresponded to the decline in the price of our common stock.

 

27



Table of Contents

 

Income Taxes

 

The provision for income taxes was $33.2 million for the quarter ended March 31, 2012, compared to $12.4 million for the same quarter in 2011. The increase in the provision for income taxes reflects higher pre-tax earnings for the quarter ended March 31, 2012, compared to the same quarter in 2011, partially offset by a decrease in the estimated annual effective tax rate to 34 percent as of March 31, 2012 from 39 percent as of March 31, 2011. The decrease in the annual effective tax rate as of March 31, 2012 largely reflects a reduction in projections of non-deductible compensation for 2012.

 

Liquidity and Capital Resources

 

We have funded our operations principally through sales of our commercial products and, from time-to-time, third-party financing arrangements. We believe that our current liquidity is sufficient to fund ongoing operations as demand for our commercial products is expected to grow. Furthermore, our customer base remains stable and, we believe, presents minimal credit risk. However, any projections of future cash flows are inherently subject to uncertainty. To compensate for such uncertainty, we may seek other sources of funding in the future and believe we have the ability to do so. See Part II, Item 1A—Risk Factors—We have had periods in which we incurred losses and may not maintain profitability and Part II, Item 1A—Risk Factors—We may fail to meet our own projected revenues, as well as third-party projections for our revenues or profits .

 

Operating Cash Flows and Working Capital

 

Net cash provided by operating activities was $37.6 million for the three months ended March 31, 2012, compared to $53.4 million for the three months ended March 31, 2011. The decrease of $15.8 million in net operating cash flows for the three months ended March 31, 2012 corresponded primarily to a $60.9 million decrease in share-based compensation and a $14.1 million increase in other liabilities, offset in part by an increase of $55.0 million in net income.

 

At March 31, 2012, we had working capital of $398.4 million, compared to $349.9 million at December 31, 2011.  The increase in working capital at March 31, 2012 of $48.5 million was driven by a net increase in cash and cash equivalents and short-term marketable investments of $5.5 million and the decrease in accounts payable of $38.9 million.

 

We have not entered into any short-term borrowing arrangements to fund our ongoing working capital requirements and have no current plans to do so. Debt that has been classified as current relates to the principal balance of long-term financing arrangements that will be paid within one year.

 

At March 31, 2012, we had $336.5 million of long-term marketable securities that could be liquidated, if necessary, to fund our operations. In addition, we had 5.0 million vested stock options outstanding at March 31, 2012, with a weighted average exercise price of $36.96. If exercised, these vested stock options would provide us with additional liquidity.

 

Construction Projects

 

During the second quarter of 2011, we began construction to expand our facility in Research Triangle Park, North Carolina (RTP Facility). The expansion of our RTP Facility is intended to provide additional warehousing, packaging and office space to accommodate projected growth. We expect to complete the approximately 180,000 square-foot expansion by mid-2012 at an anticipated cost of $76.0 million, which includes construction, equipment and other related costs. In January 2011, we entered into an agreement with DPR Construction (DPR) to manage the expansion project. In June 2011, we amended this agreement to provide that construction costs cannot exceed a guaranteed maximum price, which is currently set at $51.1 million. DPR will be responsible for any cost overruns that are in excess of the guaranteed maximum price. If the ultimate cost of the project is less than the guaranteed maximum, we will share a portion of the savings with DPR. In addition, DPR must pay us liquidated damages in the event that construction has not been substantially completed by June 2012. Both the guaranteed maximum price and the substantial completion date are subject to change in the event of any agreed-upon changes to the scope of work.

 

In March 2012, we completed the construction of an office building to serve as an extension of our Silver Spring facilities at an approximate cost of $66.0 million, which included costs of construction and other costs necessary to place the building into operation. To manage this construction project, we entered into an agreement with DPR in March 2011. Terms of the agreement included that construction costs could not exceed a guaranteed maximum price of $45.3 million, except upon any agreed-upon changes to the scope of work. As of March 31, 2012, our remaining obligation under this contract was approximately $7.5 million.

 

Our construction projects have been funded entirely by cash flows generated from our operations.

 

28



Table of Contents

 

Share Tracking Awards Plans

 

Awards granted under the STAP entitle participants to receive in cash the appreciation in our common stock, which is calculated as the increase in the closing price of our common stock between the date of grant and the date of exercise. Depending on the future price movements of our common stock, cash requirements associated with the exercise of awards could be significant. We incorporate anticipated cash requirements under the STAP into our operating budgets and have modified the metrics used in determining the number of awards to be granted in order to decrease the size of individual grants. In February 2012, we increased the aggregate number of available STAP awards by approximately 1.6 million, primarily to accommodate anticipated grants under our long-term incentive bonus and compensation plan during 2012.

 

Convertible Senior Notes

 

On October 17, 2011, we issued $250.0 million in aggregate principal value of 1.0% Convertible Senior Notes due September 15, 2016 (2016 Convertible Notes). The 2016 Convertible Notes are unsecured, unsubordinated debt obligations that rank equally with all of our other unsecured and unsubordinated indebtedness. We pay interest semi-annually on March 15th and September 15th of each year. The initial conversion price is $47.69 per share and the number of underlying shares used to determine the aggregate consideration upon conversion is approximately 5.2 million shares.

 

Conversion can occur: (1) any time after June 15, 2016; (2) during any calendar quarter that follows a calendar quarter in which the price of our common stock exceeds 130 percent 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 2016 Convertible Notes is less than 95 percent of the closing price of our common stock multiplied by the then current number of shares underlying the 2016 Convertible 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, the NASDAQ Global Market, or the New York Stock Exchange, or any of their respective successors.

 

Upon conversion, holders of our 2016 Convertible Notes are entitled to receive: (1) cash equal to the lesser of the principal amount of the notes or the conversion value (the number of shares underlying the 2016 Convertible Notes multiplied by the then-current conversion price per share); and (2) to the extent the conversion value exceeds the principal amount of the notes, shares of our common stock. In the event of a change in control, as defined in the indenture under which the 2016 Convertible Notes have been issued, holders can require us to purchase all or a portion of their 2016 Convertible Notes for 100 percent of the principal amount plus any accrued and unpaid interest.

 

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 loan provided under the Credit Agreement matures in December 2014 and is secured by a first mortgage lien on our facilities located in Research Triangle Park, North Carolina and Silver Spring, Maryland. Annual principal payments are based on a twenty-five year amortization schedule using a fixed rate of interest of 7.0 percent; accordingly, we will owe a principal balance of $66.6 million at maturity. Outstanding debt bears 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 (approximately 4.0 percent as of March 31, 2012). 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; (2) the federal funds effective rate plus 0.05 percent; or (3) LIBOR plus 1.0 percent. The Credit Agreement permits prepayment of the outstanding loan balance in its entirety, subject to a prepayment premium. The Credit Agreement also requires us to comply with various financial and negative covenants. As of March 31, 2012, we were in compliance with these covenants.

 

Share Repurchase

 

In October 2011, our Board of Directors approved a share repurchase program authorizing up to $300.0 million in aggregate repurchases of our common stock, at our discretion, over a two-year period ending in October 2013 (Repurchase Program). In connection with the Repurchase Program, we paid $212.0 million for an accelerated share repurchase agreement (ASR) entered into with DB London in October 2011 under which we repurchased approximately 4.7 million shares of our common stock. Refer to Note 10— Stockholders’ Equity—Share Repurchase for further details . Currently, we expect to use the remaining authorized funds under the Repurchase Program of $88.0 million to begin repurchasing additional shares of our common stock from the open market beginning during the second quarter of 2012.

 

29



Table of Contents

 

Summary of Critical Accounting Policies

 

The preparation of our consolidated financial statements in conformity with United States generally accepted accounting principles (GAAP) requires our management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We continually evaluate our estimates and judgments to determine whether they are reasonable, relevant and appropriate. These assumptions are frequently developed from historical data or experience, currently available information and anticipated developments. By their nature, our estimates are subject to an inherent degree of uncertainty; consequently, actual results may differ. We discuss critical accounting policies and estimates that involve a higher degree of judgment and complexity in Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no material changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Recently Issued Accounting Standards

 

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08,  Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment (ASU 2011-08). ASU 2011-08 gives reporting entities the option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If the “more likely than not” threshold is not met, then the two-step impairment test would not be required. ASU 2011-08 also includes examples of factors that entities should consider when performing qualitative assessments that supersede previous examples included under Accounting Standards Codification Topic 350 of circumstances entities should consider when testing goodwill for impairment between annual tests. ASU 2011-08 is effective for annual impairment tests performed for fiscal years beginning after December 15, 2011. Adoption of ASU 2011-08 is not expected to have any impact on our consolidated financial statements.

 

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. Instead, ASU 2011-05 requires entities to report all non-owner changes in stockholders’ equity in either a single continuous statement of comprehensive income, or in two separate, but consecutive statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income, or when an item must be reclassified to net income. In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Presentation of Comprehensive Income—Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05  (ASU 2011-12). ASU 2011-12 defers indefinitely provisions contained in ASU 2011-05 that revise existing presentation requirements for reclassification adjustments from comprehensive income as the FASB further deliberates this issue. During the deferral period, reporting entities will continue to follow existing guidance prior to ASU 2011-05 under ASC Topic 220, Comprehensive Income , with respect to the disclosure of reclassifications adjustments. Both ASU 2011-12 and ASU 2011-05 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and ASU 2011-05 requires retrospective application. Other than the presentational changes to our basic consolidated financial statements required under ASU 2011-05 (as amended by ASU 2011-12), adoption of ASU 2011-05 did not have any impact on our consolidated financial statements.

 

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820)—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04).  ASU 2011-04 amends certain fair value principles to improve comparability between GAAP and International Financial Reporting Standards regarding fair value measurements and disclosures. In addition, ASU 2011-04 requires entities to disclose, among others: (1) quantitative information about the significant unobservable inputs used for Level 3 measurements; (2) qualitative information regarding the sensitivity of Level 3 measurements to changes in related unobservable inputs; and (3) the amounts of any transfers between Levels 1 and 2 of the fair value hierarchy and the reasons for those transfers. ASU 2011-04 is effective for all interim and annual periods ending after December 15, 2011. Adoption of ASU 2011-04 resulted in additional disclosures with respect to fair value measurements.

 

30



Table of Contents

 

Item 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As of March 31, 2012, we have invested $588.8 million in debt securities issued by corporations and federally-sponsored agencies. The market value of these investments varies inversely with changes in current market interest rates. In general, as interest rates increase, the market value of these debt securities would be expected to decrease. Similarly, as interest rates decrease, the market value of these debt securities would be expected to increase. To address market risk, we invest in debt securities that mature within two years and hold these investments to maturity so that they can be redeemed at their stated or face value. At March 31, 2012, our investments in debt securities issued by corporations and federally-sponsored agencies had a weighted average stated interest rate of approximately 0.47 percent and a weighted average maturity of 1.09 years. Many of our investments are callable prior to maturity.

 

During sustained periods of instability and uncertainty in the financial markets, we could be exposed to additional investment-related risks that could materially affect the value and liquidity of our investments. In light of these risks, we actively monitor market conditions and developments specific to the securities and security classes in which we invest. We believe that we maintain a conservative investment approach in that we invest exclusively in highly rated securities with relatively short maturities. While we believe we take prudent measures to mitigate investment related risks, such risks cannot be fully eliminated, as circumstances can occur that are beyond our control.

 

Item 4.    CONTROLS AND PROCEDURES

 

Based on their evaluation, as of March 31, 2012, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, summarized, processed and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.

 

31



Table of Contents

 

Part II.  OTHER INFORMATION

 

Item 1.  LEGAL PROCEEDINGS

 

Sandoz Inc.

 

In February 2012, we announced receipt of a Paragraph IV Certification Notice Letter (Notice Letter) from Sandoz Inc. (Sandoz) advising that Sandoz has submitted an abbreviated new drug application (ANDA) to the FDA requesting approval to market a generic version of the 10 mg/mL strength of Remodulin.

 

In the Notice Letter, Sandoz stated that it intends to market a generic version of Remodulin before the expiration of the following patents relating to Remodulin: U.S. Patent No. 5,153,222, which expires in October 2014; U.S. Patent No. 6,765,117, which expires in October 2017; and U.S. Patent No. 7,999,007, which expires in March 2029. Sandoz’s Notice Letter stated that the ANDA contains a Paragraph IV Certification alleging that these patents are not valid, not enforceable and/or will not be infringed by the commercial manufacture, use or sale of the proposed product described in Sandoz’s ANDA submission.

 

In response to the Notice Letter, we filed a lawsuit for patent infringement on March 14, 2012 against Sandoz in the U.S. District Court for the District of New Jersey. We intend to vigorously enforce our intellectual property rights relating to Remodulin, including the three patents mentioned in the Notice Letter which are listed in the FDA’s Approved Drug Products List (the Orange Book).

 

We filed our patent-infringement lawsuit within forty-five days from the receipt of the Notice Letter. Therefore, under the Hatch-Waxman Act, the FDA is automatically precluded from approving Sandoz’s ANDA for up to 30 months or until the issuance of a district court decision that is adverse to us, whichever occurs first.

 

Lexington Insurance Company

 

During the third quarter of 2011, we reported a claim to our insurance provider regarding damage to certain Remodulin inventory that occurred as the result of a warehouse accident. The estimated net commercial value of the damaged inventory was approximately $65.0 million. Because we did not reach a satisfactory agreement on the amount to settle the claim, we filed a lawsuit against Lexington Insurance Company on April 9, 2012 in the North Carolina Business Court, a specialized division of North Carolina’s Superior Court, seeking to recover the full net commercial value of the damaged inventory.  Although we believe we are entitled to recover the full net commercial value of the damaged inventory, any litigation is inherently uncertain and we cannot predict the timing or outcome of the litigation, including the ultimate level of recovery (if any).

 

32



Table of Contents

 

Item 1A.  RISK FACTORS

 

Forward-Looking Statements

 

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

 

·                   Expectations of revenues, profitability, and cash flows;

 

·                   The sufficiency of current and future working capital for planned and unplanned needs;

 

·                   Our ability to obtain future financing;

 

·                   The value of our common stock and our ability and plans to complete future common stock repurchases;

 

·                   The maintenance of domestic and international regulatory approvals;

 

·                   The timing and outcome of clinical studies, including our future anticipated studies of oral treprostinil, and regulatory filings;

 

·                   The expected volume and timing of sales of Remodulin ®  (treprostinil) Injection (Remodulin), Adcirca ®  (tadalafil) tablets (Adcirca) and Tyvaso ®  (treprostinil) Inhalation Solution (Tyvaso);

 

·                   Our expectation to make Tyvaso available in certain European countries and have physicians prescribe Tyvaso on a named patient basis in those countries;

 

·                   The expected likelihood and timing of regulatory submissions and approvals for drug candidates under development and the timing of related sales, including the expected United States Food and Drug Administration (FDA) review period for our new drug application (NDA) for oral treprostinil and the approvability of our NDA, our anticipated application for approval of Remodulin in Japan, our pending application for approval of Remodulin in China, and our expected filing of a biologics license application with the FDA and a marketing authorization application with the European Medicines Agency (EMA) for Ch14.18;

 

·                   The outcome of potential future regulatory actions, including audits and inspections, from the FDA and international regulatory agencies;

 

·                   The impact of competing therapies, including generic products and newly-developed therapies, on sales of our commercial products;

 

·                   The expectation that we will be able to produce sufficient quantities and maintain adequate inventories of our commercial products, through both our in-house production capabilities and third-party production sites for our products, and our ability to obtain and maintain related approvals by the FDA and other regulatory agencies;

 

·                   The adequacy of our intellectual property protections and the expiration dates of our patents and licensed patents and products;

 

·                   Our expectations regarding our ability to defend our intellectual property relating to Remodulin against generic challenges, including the recent abbreviated new drug application filed by Sandoz Inc. (Sandoz), and our expectations regarding other litigation matters, including our lawsuit against Lexington Insurance Company;

 

·                   The potential impact of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 on our business;

 

·                   The potential impact of the business combination between Express Scripts, Inc. (the parent company of CuraScript, Inc.) and Medco Health Solutions, Inc. (the parent company of Accredo Therapeutics, Inc.) on our business;

 

33



Table of Contents

 

·                   Any statements that include the words “believe,” “seek,” “expect,” “anticipate,” “forecast,” “project,” “intend,” “estimate,” “should,” “could,” “may,” “will,” “plan,” or similar expressions; and

 

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

 

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

 

Risks Related to Our Business

 

We rely heavily on sales of Remodulin, Tyvaso and Adcirca to produce revenues.

 

Sales of Remodulin, Tyvaso and Adcirca comprise a substantial majority of our total revenues. A wide variety of events, many of which are described in other risk factors below, could cause sales of Remodulin, Tyvaso and/or Adcirca to decline. For instance, if regulatory approvals for any of these products were withdrawn, we would be unable to sell the product and our business could be jeopardized. Any substantial change in the prescribing practices or dosing patterns of patients using Remodulin, Tyvaso or Adcirca due to combination therapy, side effects, adverse events, death or any other reasons, could decrease related revenues. In addition, we rely on third parties to produce, market, distribute and sell Remodulin, Tyvaso and Adcirca. The inability of any one of these third parties to perform these functions, or the failure of these parties to perform successfully, could negatively affect our revenues. We are also increasingly internalizing elements of our production process for Remodulin and Tyvaso, and any failure to manage our internal production processes could result in an inability to meet demand. Because we are highly dependent on sales of Remodulin, Tyvaso and Adcirca, any reduction in sales of any one of these products would have a negative and material adverse impact on our operations.

 

We have had periods in which we incurred losses and may not maintain profitability.

 

We have experienced financial reporting periods in which we incurred net losses. While we believe we develop our annual cash-based operating budgets using reasonable assumptions and targets, unanticipated factors, including those outside of our control, could affect our profitability and cause uneven quarterly and/or annual operating results.

 

If our products fail in clinical trials, we will be unable to obtain or maintain FDA and international regulatory approvals and will be unable to sell those products.

 

To obtain regulatory approvals from the FDA and international regulatory agencies such as the EMA, we must conduct clinical trials demonstrating that our products are safe and effective. In the past, several of our product candidates failed or were discontinued at various stages in the development process. In addition, we may need to amend ongoing trials or the FDA and international regulatory agencies may require us to perform additional trials beyond those we planned. Such occurrences could result in significant delays and additional costs, and related clinical trials may be unsuccessful. In addition, approval of an NDA may be subject to delays if the FDA determines that it cannot review or approve the NDA as submitted. In such a case, the FDA would issue a refuse-to-file letter or a complete response letter outlining the deficiencies in the submission, and the FDA may require substantial additional studies, testing or information in order to complete its review of the application. We may fail to address any such deficiencies adequately, in which case we would be unable to obtain FDA approval to market the product candidate.

 

In addition, we are planning a new phase III clinical trial, FREEDOM-EV, which will study oral treprostinil in combination with other approved PAH therapies.  One of the co-primary end points of the study is time to clinical worsening.  We have not previously conducted a study with a time to clinical worsening primary endpoint.  Our inexperience with this type of trial design may impact our ability to achieve positive results, and failure to prove the efficacy of oral treprostinil in combination with other PAH therapies could limit the potential revenues for oral treprostinil, if it is approved.

 

The length of time that it takes for us to complete clinical trials and obtain regulatory approval for marketing varies by product, product use and country. Furthermore, we cannot predict with certainty the length of time it will take to complete necessary clinical trials or obtain regulatory approval of our future products.

 

34



Table of Contents

 

Our clinical trials may be discontinued, delayed or disqualified for various reasons. These reasons include:

 

·                   The drug is ineffective, or physicians believe that the drug is ineffective;

 

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

 

·                   Ongoing or new clinical trials conducted by drug companies in addition to our own clinical trials reduce the number of patients available for our trials;

 

·                   Patients experience severe side effects during treatment;

 

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

 

·                   Our clinical trial sites, contracted clinical trial administrators or clinical studies conducted entirely by third parties do not adhere to trial protocols and required quality controls under good clinical practice (GCP) under FDA regulations and similar regulations outside the United States;

 

·                   Our trials do not comply with applicable regulations or guidelines;

 

·                   We do not pass inspections by regulatory agencies;

 

·                   Patients die during our trials because of an adverse event related to the trial drug, their disease is too advanced, or they experience medical problems unrelated to the drug being studied;

 

·                   Drug supplies are unavailable or unsuitable for use in our studies;

 

·                   The results of preclinical testing raise concerns regarding product safety or efficacy; and

 

·                   The results of our clinical trials conducted in countries outside of the United States are not acceptable to the United States or other countries, and the results of our clinical trials conducted in the United States are not acceptable to regulators in other countries.

 

In addition, the FDA and its international equivalents have substantial discretion over the approval process for pharmaceutical products. As such, these regulatory agencies may not agree that we have demonstrated the requisite level of product safety and efficacy to grant approval.

 

Our future growth depends, in part, on our plans to commercialize and further develop oral treprostinil. If the FDA delays or denies approval of our NDA for oral treprostinil, and/or we are unsuccessful in further clinical studies of oral treprostinil, our business, financial condition and results of operations could be materially adversely affected.

 

In November 2008, we reported that our FREEDOM-C phase III clinical trial of oral treprostinil in patients with pulmonary arterial hypertension (PAH) did not achieve statistical significance for its primary endpoint (p=0.072). These results prompted us to amend the protocol for our FREEDOM-M phase III clinical trial of oral treprostinil and initiate an additional phase III clinical trial of oral treprostinil, FREEDOM-C 2 . In June 2011, we announced the completion of the FREEDOM-M trial, which achieved statistical significance for its primary endpoint (p=0.0125). However, our FREEDOM-C 2  trial did not achieve statistical significance for its primary endpoint (p=0.089), as we announced in August 2011. Although we have filed an NDA for oral treprostinil and believe the NDA should be approvable on the basis of the FREEDOM-M results alone in accordance with published FDA guidance we believe to be applicable, we may face delays in obtaining FDA approval of our NDA for oral treprostinil, or we may not be able to obtain FDA approval at all, for the reasons described above under “ If our products fail in clinical trials, we will be unable to obtain or maintain FDA and international regulatory approvals and will be unable to sell those products”, among others. Furthermore, even if the FDA approves our NDA, the FREEDOM-M results may support only a monotherapy label indication, and not an indicated use in conjunction with a PAH background therapy, which would impose limits on the permitted marketing of oral treprostinil. In addition, if oral treprostinil is approved by the FDA, the results of both the FREEDOM-C and FREEDOM-C 2  would likely be listed in the oral treprostinil labeling and may negatively impact the timing and magnitude of oral treprostinil’s commercial opportunity by impacting patient demand, physician prescribing patterns or reimbursement rates.

 

We are currently planning additional trials intended to demonstrate oral treprostinil’s efficacy in combination with other therapies.  If we are unsuccessful in these efforts, this may further dampen our prospects for revenue growth from oral treprostinil.

 

35



Table of Contents

 

We may not compete successfully with established and newly developed drugs or products, or the companies that develop and market them.

 

We compete with well-established drug companies for, among other things, funding, licenses, expertise, personnel, clinical trial patients and investigators, consultants and third-party collaborators. We also compete with these companies for market share. Most of these competitors have substantially greater financial, marketing, manufacturing, sales, distribution and technical resources than we do. These competitors also have more experience in areas such as research and development, clinical trials, sales and marketing and regulatory matters than we do. There are several treatments that compete with our commercial therapies, as well as several other therapies under development, including various late-stage investigational products that have recently completed or are undergoing phase III pivotal trials. For the treatment of PAH, we compete with a number of approved products in the United States and worldwide, including the following: Flolan ® , Ventavis ® , Ilomedin ® , Tracleer ® , Revatio ® , Letairis ® , Veletri ®  and generic epoprostenol.