United Therapeutics Corporation
UNITED THERAPEUTICS Corp (Form: 10-Q, Received: 11/01/2012 06:06:07)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 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 October 25, 2012 was 50,800,693.

 

 

 



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

22

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

 

 

 

Item 4.

Controls and Procedures

37

 

 

 

Part II.

OTHER INFORMATION

38

 

 

 

Item 1.

Legal Proceedings

38

 

 

 

Item 1A.

Risk Factors

38

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53

 

 

 

Item 4.

Mine Safety Disclosures

54

 

 

 

Item 6.

Exhibits

54

 

 

 

SIGNATURES

 

55

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

September 30,
2012

 

December 31,
2011

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

263,425

 

$

162,676

 

Marketable investments

 

240,032

 

240,803

 

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

 

108,949

 

88,680

 

Other current assets

 

37,390

 

6,188

 

Prepaid expenses

 

13,342

 

9,928

 

Inventories, net

 

46,848

 

45,981

 

Deferred tax assets

 

8,199

 

8,199

 

Total current assets

 

718,185

 

562,455

 

Marketable investments

 

248,884

 

343,899

 

Marketable investments and cash—restricted

 

5,348

 

5,123

 

Goodwill and other intangibles, net

 

16,662

 

22,087

 

Property, plant and equipment, net

 

439,894

 

366,046

 

Deferred tax assets, net

 

190,448

 

190,745

 

Other assets

 

28,071

 

27,724

 

Total assets

 

$

1,647,492

 

$

1,518,079

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

10,130

 

$

47,257

 

Accrued expenses

 

87,635

 

57,227

 

Other current liabilities

 

129,850

 

108,093

 

Total current liabilities

 

227,615

 

212,577

 

Convertible notes

 

201,970

 

194,180

 

Mortgages payable—noncurrent

 

71,400

 

71,452

 

Other liabilities

 

74,794

 

80,500

 

Total liabilities

 

575,779

 

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, 61,892,578 and 61,506,063 shares issued, and 51,162,680 and 53,609,645 shares outstanding at September 30, 2012 and December 31, 2011, respectively

 

619

 

615

 

Additional paid-in capital

 

1,013,434

 

992,718

 

Accumulated other comprehensive loss

 

(9,524

)

(10,885

)

Treasury stock at cost, 10,729,898 and 7,896,418 shares at September 30, 2012 and December 31, 2011, respectively

 

(413,923

)

(282,998

)

Retained earnings

 

470,225

 

249,038

 

Total stockholders’ equity

 

1,060,831

 

948,488

 

Total liabilities and stockholders’ equity

 

$

1,647,492

 

$

1,518,079

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(Unaudited)

 

(Unaudited)

 

Revenues:

 

 

 

 

 

 

 

 

 

Net product sales

 

$

240,917

 

$

201,020

 

$

665,692

 

$

546,784

 

Other

 

1,551

 

722

 

6,567

 

1,221

 

Total revenues

 

242,468

 

201,742

 

672,259

 

548,005

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

65,155

 

59,433

 

135,911

 

131,379

 

Selling, general and administrative

 

68,626

 

16,656

 

161,673

 

98,775

 

Cost of product sales

 

27,968

 

22,676

 

81,632

 

63,577

 

Total operating expenses

 

161,749

 

98,765

 

379,216

 

293,731

 

Operating income

 

80,719

 

102,977

 

293,043

 

254,274

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

Interest income

 

1,138

 

1,016

 

3,225

 

2,520

 

Interest expense

 

(4,384

)

(5,416

)

(12,149

)

(16,256

)

Equity loss in affiliate

 

(48

)

(43

)

(110

)

(110

)

Other, net

 

31,068

 

(278

)

31,710

 

(1,301

)

Total other (expense) income, net

 

27,774

 

(4,721

)

22,676

 

(15,147

)

Income from continuing operations before income taxes

 

108,493

 

98,256

 

315,719

 

239,127

 

Income tax expense

 

(30,382

)

(17,641

)

(94,532

)

(65,073

)

Income from continuing operations

 

78,111

 

80,615

 

221,187

 

174,054

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income from discontinued operations, net of tax

 

 

 

 

7

 

Gain on disposal of discontinued operations, net of tax

 

 

3,783

 

 

618

 

Income from discontinued operations

 

 

3,783

 

 

625

 

Net income

 

$

78,111

 

$

84,398

 

$

221,187

 

$

174,679

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

1.52

 

$

1.38

 

$

4.20

 

$

3.00

 

Discontinued operations

 

0.00

 

0.07

 

0.00

 

0.01

 

Net income per basic common share

 

$

1.52

 

$

1.45

 

$

4.20

 

$

3.01

 

Diluted

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

1.46

 

$

1.32

 

$

4.11

 

$

2.80

 

Discontinued operations

 

0.00

 

0.06

 

0.00

 

0.01

 

Net income per diluted common share

 

$

1.46

 

$

1.38

 

$

4.11

 

$

2.81

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

51,514

 

58,321

 

52,626

 

58,087

 

Diluted

 

53,590

 

61,210

 

53,849

 

62,062

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(Unaudited)

 

(Unaudited)

 

Net income

 

$

78,111

 

$

84,398

 

$

221,187

 

$

174,679

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

1,185

 

(2,142

)

797

 

(983

)

Defined benefit pension plan:

 

 

 

 

 

 

 

 

 

Prior service cost arising during period, net of tax

 

 

 

 

(1,010

)

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

 

131

 

144

 

391

 

403

 

Defined benefit pension plan, net

 

131

 

144

 

455

 

(421

)

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

 

72

 

(119

)

109

 

(62

)

Other comprehensive income (loss), net of tax

 

1,388

 

(2,117

)

1,361

 

(1,466

)

Comprehensive income

 

$

79,499

 

$

82,281

 

$

222,548

 

$

173,213

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

221,187

 

$

174,679

 

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

 

 

 

 

 

Depreciation and amortization

 

19,855

 

15,637

 

Provision for inventory obsolescence

 

1,455

 

2,904

 

Current and deferred income tax expense

 

94,532

 

65,384

 

Share-based compensation expense (benefit)

 

40,568

 

(37,790

)

Expense associated with outstanding license fees

 

643

 

41,332

 

Amortization of debt discount and debt issue costs

 

8,902

 

13,647

 

Amortization of discount or premium on investments

 

3,303

 

3,406

 

Equity loss in affiliate and other

 

8,180

 

2,114

 

Excess tax benefits from share-based compensation

 

(2,084

)

(6,486

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(19,516

)

(14,651

)

Insurance proceeds receivable (Note 13)

 

(31,000

)

 

Inventories

 

(4,790

)

(13,996

)

Prepaid expenses

 

(3,643

)

(1,912

)

Other assets

 

(2,742

)

(722

)

Accounts payable

 

(37,225

)

1,040

 

Accrued expenses

 

30,105

 

(28,036

)

Other liabilities

 

(109,311

)

(17,984

)

Net cash provided by operating activities

 

218,419

 

198,566

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(90,650

)

(36,725

)

Purchases of held-to-maturity investments

 

(348,001

)

(616,571

)

Maturities of held-to-maturity investments

 

439,987

 

519,334

 

Acquisitions

 

 

(3,547

)

Net cash provided by (used in) investing activities

 

1,336

 

(137,509

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payments to repurchase common stock

 

(130,925

)

 

Proceeds from the exercise of stock options

 

9,689

 

23,948

 

Excess tax benefits from share-based compensation

 

2,084

 

6,486

 

Net cash (used in) provided by financing activities

 

(119,152

)

30,434

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

146

 

331

 

Net increase in cash and cash equivalents

 

100,749

 

91,822

 

Cash and cash equivalents, beginning of period

 

162,676

 

252,162

 

Cash and cash equivalents, end of period

 

$

263,425

 

$

343,984

 

 

 

 

 

 

 

Supplemental schedule of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

4,563

 

$

2,766

 

Cash paid for income taxes

 

$

75,046

 

$

25,050

 

Non-cash investing activities:

 

 

 

 

 

Non-cash additions to property, plant and equipment

 

$

4,775

 

$

14,290

 

Acquisitions—non cash consideration

 

$

 

$

3,400

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

UNITED THERAPEUTICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 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 September 30, 2012, results of operations and comprehensive income for the three- and nine-month periods ended September 30, 2012 and 2011, and cash flows for the nine months ended September 30, 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 nine-month period ended September 30, 2011 have been recast 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 nine months ended September 30, 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 the consolidated financial statements contained 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):

 

 

 

September 30,
2012

 

December 31,
2011

 

Raw materials

 

$

11,413

 

$

9,171

 

Work-in-progress

 

12,132

 

14,222

 

Finished goods

 

23,303

 

22,588

 

Total inventories

 

$

46,848

 

$

45,981

 

 

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:

 

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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 September 30, 2012

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

146,933

 

$

 

$

 

$

146,933

 

Federally-sponsored and corporate debt securities (2)

 

 

488,901

 

 

488,901

 

Available-for-sale equity investment

 

529

 

 

 

529

 

Total assets

 

$

147,462

 

$

488,901

 

$

 

$

636,363

 

Liabilities

 

 

 

 

 

 

 

 

 

Convertible notes maturing in 2016 (3)

 

$

 

$

329,950

 

$

 

$

329,950

 

Contingent consideration (4)

 

 

 

7,298

 

7,298

 

Total liabilities

 

$

 

$

329,950

 

$

7,298

 

$

337,248

 

 

 

 

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

 

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comparable securities in which related trading activity is not sufficiently frequent to be considered a Level 1 input. See also Note 5— Marketable Investments—Held-to-Maturity Investments to these consolidated financial statements.

 

(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 percent 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 other 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 September 30, 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 Level 3 liabilities for the three- and nine-month periods ended September 30, 2012, is presented below (in thousands):

 

 

 

Contingent
Consideration

 

Balance July 1, 2012—Asset (Liability)

 

$

(7,841

)

Transfers into Level 3

 

 

Transfers out of Level 3

 

 

Total gains/(losses) realized/unrealized

 

 

 

Included in earnings

 

 

Included in other comprehensive income

 

(71

)

Purchases

 

 

Sales

 

 

Issuances

 

 

Settlements

 

614

 

Balance September 30, 2012—Asset (Liability)

 

$

(7,298

)

Amount of total gains/(losses) for the three-month period ended September 30, 2012 included in earnings that are attributable to the change in unrealized gains or losses related to outstanding liabilities

 

$

 

 

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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

 

61

 

Purchases

 

 

Sales

 

 

Issuances

 

 

Settlements

 

614

 

Balance September 30, 2012—Asset (Liability)

 

$

(7,298

)

Amount of total gains/(losses) for the nine-month period ended September 30, 2012 included in earnings 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 receivable, 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.

 

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 September 30, 2012

 

$

285,999

 

$

266

 

$

(32

)

$

286,233

 

Corporate notes and bonds at September 30, 2012

 

202,388

 

300

 

(20

)

202,668

 

Total

 

$

488,387

 

$

566

 

$

(52

)

$

488,901

 

Reported under the following captions on the consolidated balance sheet at September 30, 2012:

 

 

 

 

 

 

 

 

 

Current marketable investments

 

$

240,032

 

 

 

 

 

 

 

Noncurrent marketable investments

 

248,355

 

 

 

 

 

 

 

 

 

$

488,387

 

 

 

 

 

 

 

 

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Table of Contents

 

 

 

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 September 30, 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

 

$

53,646

 

$

(32

)

$

170,018

 

$

(170

)

Continuous unrealized loss position greater than one year

 

 

 

 

 

 

 

53,646

 

(32

)

170,018

 

(170

)

Corporate notes and bonds:

 

 

 

 

 

 

 

 

 

Continuous unrealized loss position less than one year

 

$

32,327

 

$

(20

)

$

149,383

 

$

(442

)

Continuous unrealized loss position greater than one year

 

 

 

 

 

 

 

32,327

 

(20

)

149,383

 

(442

)

Total

 

$

85,973

 

$

(52

)

$

319,401

 

$

(612

)

 

We attribute the unrealized losses on held-to-maturity securities as of September 30, 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.

 

The following table summarizes the contractual maturities of held-to-maturity marketable investments at September 30, 2012 (in thousands):

 

 

 

September 30, 2012

 

 

 

Amortized
Cost

 

Fair
Value

 

Due in less than one year

 

$

240,032

 

$

240,342

 

Due in one to two years

 

248,355

 

248,559

 

Due in three to five years

 

 

 

Due after five years

 

 

 

Total

 

$

488,387

 

$

488,901

 

 

Equity Investments

 

We own less than one percent of the common stock of a public company. Our investment is classified as available-for-sale, reported at fair value based on the quoted market price, and included on the accompanying consolidated balance sheets in noncurrent marketable investments.

 

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Table of Contents

 

As of September 30, 2012, we maintain investments in equity 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 September 30, 2012, as there have been no events or developments indicating that their carrying amounts may be impaired. We include these investments within other assets on the accompanying consolidated balance sheets.

 

6. Goodwill and Other Intangible Assets

 

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

 

 

 

As of September 30, 2012

 

As of December 31, 2011

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

 

Goodwill (1)

 

$

10,416

 

$

 

$

10,416

 

$

8,123

 

$

 

$

8,123

 

Other intangible assets (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology, patents and trade names

 

4,735

 

(2,564

)

2,171

 

4,766

 

(1,999

)

2,767

 

Customer relationships and non-compete agreements

 

4,621

 

(2,040

)

2,581

 

4,653

 

(1,658

)

2,995

 

Contract-based (2)

 

2,020

 

(526

)

1,494

 

8,350

 

(148

)

8,202

 

Total

 

$

21,792

 

$

(5,130

)

$

16,662

 

$

25,892

 

$

(3,805

)

$

22,087

 

 


(1)          Includes foreign currency translation adjustments.

 

(2)         During the quarter ended June 30, 2012, we wrote off the net book value of a contract-based intangible asset we had recorded in connection with our acquisition of Revivicor, Inc. during July 2011, relating to a licensing arrangement to which Revivicor was a party. In April 2012, Revivicor received a termination notice from the counterparty to the licensing arrangement. The original counterparty was acquired in late 2011, and thereafter decided not to pursue development of products utilizing Revivicor’s technology. Accordingly, we recognized a corresponding impairment charge of $6.8 million, which has been included in selling, general and administrative expenses on our consolidated statement of operations for the nine-month period ended September 30, 2012.

 

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

 

Year ending December 31,

 

 

 

2013

 

$

1,922

 

2014

 

1,505

 

2015

 

1,156

 

2016

 

641

 

2017

 

440

 

Thereafter

 

90

 

 

 

$

5,754

 

 

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 September 30, 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.

 

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Table of Contents

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Service cost

 

$

1,078

 

$

1,079

 

$

3,236

 

$

3,176

 

Interest cost

 

369

 

352

 

1,106

 

1,004

 

Amortization of prior service costs

 

207

 

207

 

620

 

566

 

Amortization of net actuarial loss

 

 

20

 

 

71

 

Net pension expense

 

$

1,654

 

$

1,658

 

$

4,962

 

$

4,817

 

 

8. Share Tracking Award Plans

 

We maintain the United Therapeutics Corporation Share Tracking Awards Plan, 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. In October 2012, we amended the 2011 STAP again to increase the number of awards available for grant by 1.8 million. 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 adjustments to compensation expense on our consolidated statements of operations. The STAP liability balance was $88.7 million and $79.9 million at September 30, 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 (benefit) to be recognized. These inputs include the expected volatility of the price of our common stock, the risk-free interest rate, the expected term of STAP awards, the expected forfeiture rate and the expected dividend yield.

 

The table below presents the assumptions used to measure the fair value of STAP awards at September 30, 2012 and 2011:

 

 

 

September 30,
2012

 

September 30,
2011

 

Expected volatility

 

35.8

%

46.6

%

Risk-free interest rate

 

0.5

%

0.6

%

Expected term of awards (in years)

 

3.9

 

4.1

 

Expected forfeiture rate

 

7.0

%

6.8

%

Expected dividend yield

 

0.0

%

0.0

%

 

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Table of Contents

 

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

 

1,833,353

 

48.01

 

 

 

 

 

Exercised

 

(1,190,869

)

29.02

 

 

 

 

 

Forfeited

 

(246,961

)

53.89

 

 

 

 

 

Outstanding at September 30, 2012

 

8,190,523

 

$

48.59

 

7.5

 

$

75,018

 

Exercisable at September 30, 2012

 

4,278,314

 

$

42.96

 

6.9

 

$

58,512

 

Expected to vest at September 30, 2012

 

3,311,741

 

$

53.59

 

8.8

 

$

15,391

 

 

The weighted average fair value of STAP awards granted during the nine-month periods ended September 30, 2012 and 2011 was $21.26 and $28.03, respectively.

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Research and development

 

$

11,790

 

$

(22,969

)

$

14,932

 

$

(17,877

)

Selling, general and administrative

 

14,404

 

(24,143

)

18,061

 

(20,031

)

Cost of product sales

 

865

 

(529

)

1,143

 

(529

)

Share-based compensation expense (benefit) before taxes

 

27,059

 

(47,641

)

34,136

 

(38,437

)

Related income tax (benefit) expense

 

(9,909

)

17,613

 

(12,501

)

14,210

 

Share-based compensation expense (benefit), net of taxes (1)

 

$

17,150

 

$

(30,028

)

$

21,635

 

$

(24,227

)

Share-based compensation capitalized as part of inventory

 

$

462

 

$

(812

)

$

608

 

$

(458

)

 


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

 

Cash paid to settle STAP awards exercised during the nine-month periods ended September 30, 2012 and 2011, was $25.7 million and $27.9 million, respectively.

 

9. Debt

 

Convertible Notes Due 2016

 

In October 2011, we issued $250.0 million in aggregate principal value 1.0 percent 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 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.

 

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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 September 30, 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 September 30, 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 September 30, 2012, the aggregate conversion value of the 2016 Convertible Notes exceeded their par value by $42.9 million using a conversion price of $55.88, the closing price of our common stock on September 30, 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 corresponded 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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Contractual coupon rate of interest

 

$

625

 

$

312

 

$

1,875

 

$

937

 

Discount amortization

 

2,626

 

4,268

 

7,790

 

12,569

 

Interest expense—convertible notes (1)

 

$

3,251

 

$

4,580

 

$

9,665

 

$

13,506

 

 


(1)           Interest expense recognized in connection with our convertible notes for the three- and nine-month periods ended September 30, 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):

 

 

 

September 30,
2012

 

December 31,
2011

 

Principal balance

 

$

250,000

 

$

250,000

 

Discount, net of accumulated amortization of $9,908 and $2,118

 

(48,030

)

(55,820

)

Carrying amount

 

$

201,970

 

$

194,180

 

 

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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.

 

In addition, the warrants we sold to DB London in connection with our 2011 Convertible Notes expired in March 2012. Since the price of 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 certain of 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 September 30, 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. Subsequent to June 30, 2012, we can prepay the loan balance without being subject to a prepayment premium or penalty. The Credit Agreement subjects us to various financial and negative covenants. As of September 30, 2012, we were in compliance with these covenants.

 

Interest Expense

 

Details of interest expense presented on our consolidated statements of operations are as follows (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Interest expense

 

$

4,384

 

$

5,646

 

$

13,054

 

$

16,702

 

Less: interest capitalized

 

 

(230

)

(905

)

(446

)

Total interest expense

 

$

4,384

 

$

5,416

 

$

12,149

 

$

16,256

 

 

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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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Numerator:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

78,111

 

$

80,615

 

$

221,187

 

$

174,054

 

Income from discontinued operations

 

 

3,783

 

 

625

 

Net income

 

$

78,111

 

$

84,398

 

$

221,187

 

$

174,679

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares — basic

 

51,514

 

58,321

 

52,626

 

58,087

 

Effect of dilutive securities (1):

 

 

 

 

 

 

 

 

 

Convertible notes

 

662

 

1,489

 

136

 

2,444

 

Warrants

 

 

 

 

 

Stock options

 

1,414

 

1,400

 

1,087

 

1,531

 

Weighted average shares — diluted

 

53,590

 

61,210

 

53,849

 

62,062

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

1.52

 

$

1.38

 

$

4.20

 

$

3.00

 

Discontinued operations

 

0.00

 

0.07

 

0.00

 

0.01

 

Net income per basic common share

 

$

1.52

 

$

1.45

 

$

4.20

 

$

3.01

 

Diluted

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

1.46

 

$

1.32

 

$

4.11

 

$

2.80

 

Discontinued operations

 

0.00

 

0.06

 

0.00

 

0.01

 

Net income per diluted common share

 

$

1.46

 

$

1.38

 

$

4.11

 

$

2.81

 

 

 

 

 

 

 

 

 

 

 

Stock options and warrants excluded from calculation (2)

 

11,026

 

7,922

 

11,761

 

6,446

 

 


(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 options to employees and non-employees under our equity incentive plan. We estimate the fair value of stock options using the Black-Scholes-Merton valuation model, which requires us to make assumptions that can materially impact the estimation of fair value and related compensation expense. These assumptions include the expected volatility of our common stock, the risk-free interest rate, the expected term of stock option awards and the expected dividend yield. We did not grant any stock options during the three- and nine-month periods ended September 30, 2012 and 2011.

 

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Table of Contents

 

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

 

(373,457

)

25.31

 

 

 

 

 

Forfeited

 

(3,858

)

6.95

 

 

 

 

 

Outstanding and exercisable at September 30, 2012

 

4,546,062

 

$

37.96

 

5.2

 

$

85,436

 

 

Total share-based compensation expense (benefit) related to employee stock options for the three- and nine-month periods ended September 30, 2012 and 2011, is as follows (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Research and development

 

$

 

$

3

 

$

 

$

196

 

Selling, general and administrative

 

4,042

 

5

 

6,371

 

315

 

Share-based compensation expense before taxes

 

4,042

 

8

 

6,371

 

511

 

Related income tax benefit

 

(1,480

)

(3

)

(2,333

)

(189

)

Share-based compensation expense net of taxes

 

$

2,562

 

$

5

 

$

4,038

 

$

322

 

Share-based compensation capitalized as part of inventory

 

$

 

$

 

$

 

$

15

 

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Number of options exercised

 

246,401

 

20,135

 

386,515

 

820,572

 

Cash received

 

$

6,575

 

$

224

 

$

9,689

 

$

23,948

 

 

Employee Stock Purchase Plan

 

In June 2012, our shareholders approved the United Therapeutics Corporation Employee Stock Purchase Plan (ESPP), which has been structured to comply with Section 423 of the Internal Revenue Code (Section 423). The ESPP provides eligible employees the right to purchase shares of our common stock at a discount through elective accumulated payroll deductions at the end of each offering period. Offering periods occur in consecutive six-month periods commencing on September 5th and March 5th of each year. The initial six-month offering period began on September 5, 2012. Eligible employees may contribute up to 15 percent of their base salary, subject to certain annual limitations as defined in the ESPP, to purchase shares of our common stock. The purchase price of the shares is equal to 85 percent of the closing price of our common stock on either the first or last trading day of a given offering period, whichever is lower. In addition, the ESPP provides that no eligible employee may purchase more than 4,000 shares of our common stock during any offering period. The ESPP has a 20 year term and limits the aggregate number of shares that can be issued to 3.0 million.

 

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Related share-based compensation expense for the each of the three- and nine-month periods ended September 30, 2012 was $60,000. We recognized no share-based compensation expense related to the ESPP for the three- and nine-month periods ended September 30, 2011. We estimate the fair value of the shares of our common stock to be purchased under the ESPP using the Black-Scholes-Merton model, which requires us to make subjective judgments in developing inputs that could materially impact share-based compensation expense.

 

The weighted average assumptions used to estimate the fair value of the shares to be purchased under our ESPP are as follows:

 

 

 

Initial Offering Period
beginning September
5, 2012

 

Expected volatility

 

29.0

%

Risk-free interest rate

 

0.1

%

Expected term (in years)

 

0.5

 

Expected dividend yield

 

0.0

%

Expected forfeiture rate

 

4.6

%

 

Share Repurchases

 

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 in October 2011. In May 2012, we completed the Repurchase Program by acquiring approximately 2.0 million shares of our common stock at an aggregate cost of $88.0 million.

 

In June 2012, our Board of Directors authorized the repurchase of up to an additional $100.0 million of our common stock. This repurchase program became effective July 31, 2012 and will remain open for up to one year. Under this program, we repurchased 788,288 shares of our common stock at an aggregate cost of $42.9 million during the quarter ended September 30, 2012.

 

11. Income Taxes

 

Income tax expense for the three- and nine-month periods ended September 30, 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 September 30, 2012 and 2011 were 31 percent and 28 percent, respectively. The increase in the estimated annual effective tax rate for 2012 reflects primarily a decrease in estimated business tax credits to be generated from operations as compared to September 30, 2011.

 

As of September 30, 2012, we had available for federal income tax purposes approximately $30.7 million in business tax credit carryforwards that will expire at various dates through 2032.

 

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

 

Following 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.

 

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Revenues, cost of revenues and gross profit for each of our commercial products for the three- and nine-month periods ended September 30, 2012 and 2011 were as follows (in thousands):

 

 

 

Three Months Ended September 30,

 

2012

 

Remodulin

 

Tyvaso

 

Adcirca

 

Total

 

Revenues

 

$

120,811

 

$

88,302

 

$

31,804

 

$

240,917

 

Cost of revenues

 

13,963

 

11,796

 

2,209

 

27,968

 

Gross profit

 

$

106,848

 

$

76,506

 

$

29,595

 

$

212,949

 

 

 

 

 

 

 

 

 

 

 

2011

 

 

 

 

 

 

 

 

 

Revenues

 

$

114,918

 

$

66,330

 

$

19,772

 

$

201,020

 

Cost of revenues

 

12,659

 

8,735

 

1,282

 

22,676

 

Gross profit

 

$

102,259

 

$

57,595

 

$

18,490

 

$

178,344

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

2012

 

Remodulin

 

Tyvaso

 

Adcirca

 

Total

 

Revenues

 

$

341,755

 

$

239,578

 

$

84,359

 

$

665,692

 

Cost of revenues

 

43,956

 

32,073

 

5,603

 

81,632

 

Gross profit

 

$

297,799

 

$

207,505

 

$

78,756

 

$

584,060

 

 

 

 

 

 

 

 

 

 

 

2011

 

 

 

 

 

 

 

 

 

Revenues

 

$

323,016

 

$

175,835

 

$

47,933

 

$

546,784

 

Cost of revenues

 

36,860

 

23,551

 

3,166

 

63,577

 

Gross profit

 

$

286,156

 

$

152,284

 

$

44,767

 

$

483,207

 

 

For the three-month periods ended September 30, 2012 and 2011, net revenues from our three U.S.-based distributors represented 79 percent and 81 percent, respectively, of our total net operating revenues. For the nine-month periods ended September 30, 2012 and 2011, net revenues from our three U.S.-based distributors represented 79 percent and 82 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 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.

 

On May 4, 2012, Sandoz filed its answer to our complaint, and also filed counterclaims alleging that the patents at issue in the litigation are invalid or will not be infringed by the commercial manufacture, use or sale of the proposed product described in Sandoz’s ANDA submission.  On May 25, 2012, we filed our answer to Sandoz’s counterclaims.

 

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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).

 

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 (Lexington) in April 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.

 

On September 24, 2012, we entered into a final and binding settlement agreement and release with Lexington, under which Lexington agreed to pay us $31.0 million within thirty days.  We received payment in early October 2012. Terms of the settlement agreement provide that the parties will release and forever discharge each other from any future claims, demands, or causes of action of any kind in connection with the matter.  Since all contingencies have been resolved, we recognized a receivable for the settlement proceeds, which has been included within the caption “other current assets” on our consolidated balance sheet as of September 30, 2012. We recognized the corresponding gain under the caption “other, net” on our consolidated statements of operations for the three and nine months ended September 30, 2012.

 

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

 

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 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, L-314d and beraprost-XR) : 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 and on developing replacement lungs for transplantation. 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 ® (epoprostenol sodium) for Injection, 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. In December 2011, we received regulatory approval by the French regulatory agency, L’Agence Nationale de Sécurité du Médicament et des Produits de Santé (ANSM), for the intravenous use of Remodulin to treat PAH. The ANSM approval followed 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 ANSM, which will allow us to market intravenous Remodulin in those countries following pricing approval and approval of our risk management plan in each country.

 

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 exclusive U.S. 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, we are developing treprostinil extended release tablets for oral use (oral treprostinil) and an extended release injectable form of treprostinil, both for the treatment of PAH.  We are also developing an oral formulation of the prostacyclin analogue beraprost, which we refer to as L-314d, and an extended release injection we refer to as beraprost-XR, both for the treatment of PAH.

 

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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, Inc. have been included within discontinued operations for the nine months ended September 30, 2011 on our consolidated statements of operations.

 

Revenues

 

Sales of Remodulin comprise the largest share of our revenues. In addition, sales of both Tyvaso and Adcirca continue to become increasingly prominent sources of our revenues since their commercial introduction in 2009. We sell Remodulin and Tyvaso in the United States to our specialty pharmaceutical distributors: Accredo Health Group, Inc., CuraScript, Inc. and CVS Caremark. We also sell Remodulin to distributors outside of the United States. Adcirca is sold to pharmaceutical wholesalers that are part of Lilly’s pharmaceutical wholesaler network. Effective April 2012, we increased the price at which we sell Tyvaso to our specialty pharmaceutical distributors by 4.9 percent. In addition, since receiving FDA approval of Adcirca, Lilly has generally increased the net wholesale price of Adcirca twice annually. Most recently, Lilly increased the price of Adcirca by 8.9 percent effective in each of January 2012 and July 2012. Under our agreement with Lilly, Lilly has the right to determine the price at which we sell Adcirca. In April 2012, Express Scripts, Inc., the parent company of CuraScript, completed 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 specialty pharmaceutical 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 specialty pharmaceutical 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.

 

Since the enactment of this legislation, we have not been materially impacted and have not yet identified any provisions of the Acts 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 sales returns; 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. We also 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.

 

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Table of Contents

 

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 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 aggregate royalties on each of our current commercial products ranging from 5 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 oral treprostinil tablets, 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. Until FDA approval of the new process and equipment, Baxter will continue to formulate Remodulin through 2013 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 March 2011 and July 2011, we received FDA approval to use our Silver Spring, Maryland facility for the formulation of Tyvaso and Remodulin, respectively. In June 2012, we received a Good Manufacturing Practice certificate from the U.K. Medicines and Health Products Regulatory Agency to produce Remodulin and Tyvaso in our Silver Spring facility. Catalent Pharma Solutions, Inc. also formulates Tyvaso for us. We intend to use our own facilities to produce our primary supply of Remodulin and Tyvaso, and we intend to 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 Adcirca and distributes the product on our behalf via its pharmaceutical wholesaler network, in the same manner that it distributes its own pharmaceutical products. We take title to Adcirca upon its manufacture by Lilly and bear any losses related to the distribution and sale of Adcirca.

 

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) associated with our share tracking award plans (STAP) and stock option grants containing a performance requirement. STAP awards, which are classified as liabilities, must be measured at fair value at the end of each reporting period until the awards are no longer outstanding. Changes in the fair value of STAP awards are recorded as an adjustment to share-based compensation expense (benefit). The fair value of equity-based awards is measured using inputs and assumptions under the Black-Scholes-Merton model that can materially impact the amount of compensation expense (benefit) 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 expense (benefit) 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. In the case of stock 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 grant date. Furthermore, we accrue for estimated compensation expense associated with STAP awards and stock option grants containing performance-based conditions affecting vesting when we determine that it is probable that performance criteria will be met. All of these factors can cause significant volatility in our operating expenses from quarter-to-quarter.

 

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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

 

Remodulin

 

A majority of the patients who die of PAH in the United States each year have not initiated treatment with an infused prostacyclin analogue, which is a complex and burdensome form of medical therapy. In 2009, we entered into an agreement with Medtronic, Inc. to develop its Synchromed ® II implantable pump to deliver Remodulin, which, if successful, could eliminate many of the patient burdens associated with infused prostacyclins. Medtronic is currently enrolling a clinical study to support FDA approval for the use of the implantable pump with Remodulin. In certain countries in Europe, an implantable pump is distributed by OMT GmbH & Co. KG for the delivery of Remodulin.

 

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. In July 2012, we received FDA approval for a modified Tyvaso Inhalation System based on the results of the PMCs. As a result, we are currently manufacturing the modified inhalation system, which we expect to release commercially in early 2013.

 

In accordance with our PMR, we are enrolling patients in a long-term observational study in the United States 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 required to provide the FDA with annual updates on our PMR, and to submit the results of the study by December 15, 2014. Failure to complete the PMR in accordance with this timeline 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.

 

We 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 and Latin American countries on an unmarketed, named-patient basis through country-specific arrangements with our distributors, to the extent physicians prescribe Tyvaso in those countries. We are working to further improve the Tyvaso Inhalation System to make it easier for patients to use. If ultimately approved by the FDA, an improved Tyvaso Inhalation System could enhance patient convenience and potentially increase the number of patients using Tyvaso.

 

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 were 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. 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.

 

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In November 2008, we announced that the FREEDOM-C trial did not meet statistical significance (p=0.072) 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 (p=0.089) for the primary endpoint of improvement in six-minute walk distance at week 16.  We believe the inability to study patients on a therapeutic dose for a sufficient period of time was one factor that prevented us from observing a statistically significant treatment effect.

 

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, 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).

 

Because we believe that patients in both the FREEDOM-C and FREEDOM-C(2) trials needed additional time to reach plasma levels of oral treprostinil that would provide a meaningful benefit, in the third quarter of 2012 we began enrolling patients in 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 to enable patients to achieve a therapeutic dose for a longer period of time than in the previous studies. FREEDOM-EV is a placebo-controlled study of 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 15 percent from baseline (or too ill to walk) as a result of the progression of PAH; or (5) unsatisfactory long-term clinical response. Target enrollment is up to 858 patients, in order to observe 349 clinical worsening events. In addition, we currently expect to seek approval of oral treprostinil in Europe upon completion of the FREEDOM-EV study.

 

In December 2011, we submitted to the FDA an NDA for the approval of oral treprostinil for treatment of PAH.  On October 23, 2012, the FDA issued a complete response letter in which it declined to approve our NDA. The FDA letter questioned the clinical importance of the six-minute walk distance effect size shown in the FREEDOM-M study, and cited the inability to demonstrate an improvement in time to clinical worsening in all three phase III studies of oral treprostinil and the inability to demonstrate a statistically significant effect on six-minute walk distance in the FREEDOM-C and FREEDOM-C2 studies as reasons for declining approval of the NDA in its current form. The FDA noted that it was unsure whether an additional clinical study could alter these impressions, but if we did undertake an additional study we should consider, among other things, a fixed dose design and more frequent dosing.

 

Despite the complete response letter, we remain committed to further studying oral treprostinil and seeking FDA approval. We are currently assessing the complete response letter to determine our future clinical and regulatory approach, and aim to develop a clinical and regulatory approach whereby we can obtain approval for oral treprostinil before the end of 2016.

 

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Self-Injectable Prostacyclin Analogues

 

In September 2012, we announced that we signed an exclusive agreement with Ascendis Pharma A/S (Ascendis Pharma) to apply Ascendis Pharma’s proprietary TransCon technology platform to our treprostinil molecule. We believe that the TransCon technology platform may enable a sustained release of a novel, carrier-linked product, which will significantly enhance the delivery of treprostinil by establishing a once-daily, self-injectable alternative for patients who currently administer Remodulin through a continuous i