United Therapeutics Corporation
UNITED THERAPEUTICS Corp (Form: 10-Q, Received: 04/25/2013 06:08:37)

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, 2013

 

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 18, 2013 was 49,707,574.

 

 

 



Table of Contents

 

INDEX

 

 

 

Page

 

 

 

Part I.

FINANCIAL INFORMATION (UNAUDITED)

 

 

 

 

Item 1.

Consolidated Financial Statements

 

 

 

 

 

Consolidated Balance Sheets

 

 

 

 

 

Consolidated Statements of Operations

 

 

 

 

 

Consolidated Statements of Comprehensive Income

 

 

 

 

 

Consolidated Statements of Cash Flows

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

Item 2.

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

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 1A.

Risk Factors

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

Item 4.

Mine Safety Disclosures

 

 

 

 

Item 6.

Exhibits

 

 

 

 

SIGNATURES

 

 

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

March 31,
2013

 

December 31,
2012

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

262,126

 

$

154,030

 

Marketable investments

 

408,516

 

325,175

 

Accounts receivable, net of allowance of none for 2013 and 2012

 

101,347

 

116,626

 

Other current assets

 

5,838

 

3,778

 

Prepaid expenses

 

12,443

 

17,053

 

Inventories, net

 

39,743

 

37,254

 

Deferred tax assets

 

14,554

 

14,554

 

Total current assets

 

844,567

 

668,470

 

Marketable investments

 

206,123

 

305,726

 

Marketable investments and cash—restricted

 

5,385

 

5,377

 

Goodwill and other intangibles, net

 

15,657

 

16,408

 

Property, plant and equipment, net

 

449,076

 

453,685

 

Deferred tax assets, net

 

149,951

 

150,147

 

Other assets

 

26,596

 

26,782

 

Total assets

 

$

1,697,355

 

$

1,626,595

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

10,194

 

$

10,203

 

Accrued expenses

 

67,338

 

72,985

 

Other current liabilities

 

99,072

 

93,567

 

Total current liabilities

 

176,604

 

176,755

 

Convertible notes

 

207,379

 

204,667

 

Mortgages payable—noncurrent

 

70,320

 

70,343

 

Other liabilities

 

81,466

 

79,967

 

Total liabilities

 

535,769

 

531,732

 

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 shares authorized, no shares issued

 

 

 

Common stock, par value $.01, 245,000,000 shares authorized, 62,260,446 and 62,082,007 shares issued, and 50,245,292 and 50,165,953 shares outstanding at March 31, 2013 and December 31, 2012, respectively

 

623

 

621

 

Additional paid-in capital

 

1,028,141

 

1,015,835

 

Accumulated other comprehensive loss

 

(16,963

)

(14,957

)

Treasury stock at cost, 12,015,154 and 11,916,054 shares at March 31, 2013 and December 31, 2012, respectively

 

(476,902

)

(470,998

)

Retained earnings

 

615,805

 

553,480

 

Total stockholders’ equity

 

1,150,704

 

1,083,981

 

Total liabilities and stockholders’ equity

 

$

1,697,355

 

$

1,626,595

 

 

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,

 

 

 

2013

 

2012

 

 

 

(Unaudited)

 

Revenues:

 

 

 

 

 

Net product sales

 

$

243,146

 

$

202,943

 

Other

 

1,990

 

1,271

 

Total revenues

 

245,136

 

204,214

 

Operating expenses:

 

 

 

 

 

Research and development

 

50,430

 

33,657

 

Selling, general and administrative

 

71,356

 

39,789

 

Cost of product sales

 

29,313

 

24,031

 

Total operating expenses

 

151,099

 

97,477

 

Operating income

 

94,037

 

106,737

 

Other (expense) income:

 

 

 

 

 

Interest income

 

979

 

1,033

 

Interest expense

 

(4,436

)

(3,886

)

Equity loss in affiliate

 

(47

)

(20

)

Other, net

 

302

 

72

 

Total other (expense) income, net

 

(3,202

)

(2,801

)

Income before income taxes

 

90,835

 

103,936

 

Income tax expense

 

(28,510

)

(33,176

)

Net income

 

$

62,325

 

$

70,760

 

Net income per common share:

 

 

 

 

 

Basic

 

$

1.24

 

$

1.32

 

Diluted

 

$

1.19

 

$

1.29

 

Weighted average number of common shares outstanding:

 

 

 

 

 

Basic

 

50,209

 

53,631

 

Diluted

 

52,376

 

55,009

 

 

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,

 

 

 

2013

 

2012

 

 

 

(Unaudited)

 

Net income

 

$

62,325

 

$

70,760

 

Other comprehensive income:

 

 

 

 

 

Foreign currency translation (loss) gain

 

(2,290

)

1,099

 

Defined benefit pension plan:

 

 

 

 

 

Actuarial gain arising during period, net of tax

 

51

 

64

 

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

 

256

 

130

 

Total defined benefit pension plan

 

307

 

194

 

 

 

 

 

 

 

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

 

(23

)

52

 

Other comprehensive (loss) income net of tax

 

(2,006

)

1,345

 

Comprehensive income

 

$

60,319

 

$

72,105

 

 

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,

 

 

 

2013

 

2012

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

62,325

 

$

70,760

 

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

 

 

 

 

 

Depreciation and amortization

 

8,165

 

6,648

 

Provision for inventory obsolescence

 

(188

)

347

 

Current and deferred income tax expense

 

28,510

 

33,176

 

Share-based compensation expense (benefit)

 

35,213

 

(24

)

Amortization of debt discount and debt issue costs

 

3,083

 

2,924

 

Amortization of discount or premium on investments

 

1,006

 

1,134

 

Equity loss in affiliate and other

 

311

 

26

 

Excess tax benefits from share-based compensation

 

(962

)

(318

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

15,030

 

63

 

Inventories

 

(2,559

)

575

 

Prepaid expenses

 

4,561

 

(5,254

)

Other assets

 

(1,399

)

(1,642

)

Accounts payable

 

119

 

(38,971

)

Accrued expenses

 

(4,034

)

915

 

Other liabilities

 

(51,483

)

(32,774

)

Net cash provided by operating activities

 

97,698

 

37,585

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(4,243

)

(40,282

)

Purchases of held-to-maturity investments

 

(111,745

)

(183,423

)

Maturities of held-to-maturity investments

 

126,623

 

177,714

 

Net cash provided by (used in) investing activities

 

10,635

 

(45,991

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payments to repurchase common stock

 

(5,904

)

 

Proceeds from the exercise of stock options

 

4,258

 

1,810

 

Issuance of stock under employee stock purchase plan

 

1,378

 

 

Excess tax benefits from share-based compensation

 

962

 

318

 

Net cash (used in) provided by financing activities

 

694

 

2,128

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(931

)

268

 

Net increase in cash and cash equivalents

 

108,096

 

(6,010

)

Cash and cash equivalents, beginning of period

 

154,030

 

162,676

 

Cash and cash equivalents, end of period

 

$

262,126

 

$

156,666

 

 

 

 

 

 

 

Supplemental schedule of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

2,031

 

$

1,803

 

Cash paid for income taxes

 

$

44,949

 

$

28,676

 

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

 

$

799

 

$

9,083

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

UNITED THERAPEUTICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(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.

 

We have three commercial products approved by the United States Food and Drug Administration (FDA): Remodulin ® (treprostinil) Injection (Remodulin), Tyvaso ®  (treprostinil) Inhalation Solution (Tyvaso) and Adcirca ®  and (tadalafil) tablets (Adcirca). Remodulin has also been approved in various other countries around the world.

 

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, 2012, as filed with the SEC on February 26, 2013.

 

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, 2013, results of operations and comprehensive income for the three-month periods ended March 31, 2013 and 2012, and cash flows for the three-month periods ended March 31, 2013 and 2012. Interim results are not necessarily indicative of results for an entire year.

 

3. Inventories

 

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

 

 

 

March 31,
2013

 

December 31,
2012

 

Raw materials

 

$

14,598

 

$

13,603

 

Work-in-progress

 

12,229

 

11,708

 

Finished goods

 

12,916

 

11,943

 

Total inventories

 

$

39,743

 

$

37,254

 

 

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.

 

7



Table of Contents

 

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, 2013

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

94,602

 

$

 

$

 

$

94,602

 

Federally-sponsored and corporate debt securities (2)

 

 

 

614,520

 

 

614,520

 

Available-for-sale equity investment

 

442

 

 

 

442

 

Total assets

 

$

95,044

 

$

614,520

 

$

 

$

709,564

 

Liabilities

 

 

 

 

 

 

 

 

 

Convertible notes maturing in 2016 (3)

 

$

 

$

344,250

 

$

 

$

344,250

 

Contingent consideration (4)

 

 

 

6,660

 

6,660

 

Total liabilities

 

$

 

$

344,250

 

$

6,660

 

$

350,910

 

 

 

 

As of December 31, 2012

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

77,436

 

$

 

$

 

$

77,436

 

Federally-sponsored and corporate debt securities (2)

 

 

630,698

 

 

630,698

 

Available-for-sale equity investment

 

473

 

 

 

473

 

Total assets

 

$

77,909

 

$

630,698

 

$

 

$

708,607

 

Liabilities

 

 

 

 

 

 

 

 

 

Convertible notes maturing in 2016 (3)

 

$

 

$

316,250

 

$

 

$

316,250

 

Contingent consideration (4)

 

 

 

6,730

 

6,730

 

Total liabilities

 

$

 

$

316,250

 

$

6,730

 

$

322,980

 

 


(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 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% 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. We are beginning to observe a market develop for the 2016 Convertible Notes. Presently, however, trading activity is too negligible to warrant a change in measurement methodology. If future trading activity becomes sufficiently active, as expected, we intend to use trade data as the principal basis for determining 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 DCFs incorporate Level 3 inputs including estimated discount rates that we believe market participants would consider

 

8



Table of Contents

 

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, 2013 and December 31, 2012, the cost of debt and weighted average cost of capital used to discount projected cash flows relating to our contingent consideration ranged from 6.6 percent to 17.2 percent, respectively.

 

A reconciliation of the beginning and ending balance of Level 3 liabilities is presented below (in thousands):

 

 

 

Contingent
Consideration

 

Balance January 1, 2013—Asset (Liability)

 

$

(6,730

)

Transfers into Level 3

 

 

Transfers out of Level 3

 

 

Total gains/(losses) realized/unrealized:

 

 

 

Included in earnings

 

 

Included in other comprehensive income

 

70

 

Purchases

 

 

Sales

 

 

Issuances

 

 

Settlements

 

 

Balance March 31, 2013—Asset (Liability)

 

$

(6,660

)

Amount of total gains/(losses) for the three-month period ended March 31, 2013 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.

 

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, 2013

 

$

340,020

 

$

260

 

$

(21

)

$

340,259

 

Corporate notes and bonds at March 31, 2013

 

274,178

 

152

 

(69

)

274,261

 

Total

 

$

614,198

 

$

412

 

$

(90

)

$

614,520

 

Reported under the following captions on the consolidated balance sheet at March 31, 2013:

 

 

 

 

 

 

 

 

 

Current marketable investments

 

$

408,516

 

 

 

 

 

 

 

Noncurrent marketable investments

 

205,682

 

 

 

 

 

 

 

 

 

$

614,198

 

 

 

 

 

 

 

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Government-sponsored enterprises at December 31, 2012

 

$

350,043

 

$

261

 

$

(35

)

$

350,269

 

 

 

280,385

 

184

 

(140

)

280,429

 

Total

 

$

630,428

 

$

445

 

$

(175

)

$

630,698

 

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

 

 

 

 

 

 

 

 

 

Current marketable investments

 

$

325,175

 

 

 

 

 

 

 

Noncurrent marketable investments

 

305,253

 

 

 

 

 

 

 

 

 

$

630,428

 

 

 

 

 

 

 

 

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, 2013

 

As of December 31, 2012

 

 

 

Fair
Value

 

Gross
Unrealized
Loss

 

Fair
Value

 

Gross
Unrealized
Loss

 

Government-sponsored enterprises:

 

 

 

 

 

 

 

 

 

Continuous unrealized loss position less than one year

 

$

67,218

 

$

(21

)

$

72,727

 

$

(35

)

Continuous unrealized loss position greater than one year

 

 

 

 

 

 

 

67,218

 

(21

)

72,727

 

(35

)

Corporate notes and bonds:

 

 

 

 

 

 

 

 

 

Continuous unrealized loss position less than one year

 

$

96,157

 

$

(69

)

$

90,960

 

$

(140

)

Continuous unrealized loss position greater than one year

 

 

 

 

 

 

 

96,157

 

(69

)

90,960

 

(140

)

Total

 

$

163,375

 

$

(90

)

$

163,687

 

$

(175

)

 

We attribute the unrealized losses on held-to-maturity securities as of March 31, 2013 and December 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 (in thousands):

 

 

 

March 31, 2013

 

 

 

Amortized
Cost

 

Fair
Value

 

Due in less than one year

 

$

408,516

 

$

408,838

 

Due in one to two years

 

205,682

 

205,682

 

Due in three to five years

 

 

 

Due after five years

 

 

 

Total

 

$

614,198

 

$

614,520

 

 

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.

 

As of March 31, 2013, 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 March 31, 2013, 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 March 31, 2013

 

As of December 31, 2012

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

 

Goodwill (1)

 

$

10,404

 

$

 

$

10,404

 

$

10,530

 

$

 

$

10,530

 

Other intangible assets (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology, patents and trade names

 

4,722

 

(2,941

)

1,781

 

4,859

 

(2,825

)

2,034

 

Customer relationships and non-compete agreements

 

4,607

 

(2,296

)

2,311

 

4,749

 

(2,232

)

2,517

 

Contract-based

 

2,020

 

(859

)

1,161

 

2,020

 

(693

)

1,327

 

Total

 

$

21,753

 

$

(6,096

)

$

15,657

 

$

22,158

 

$

(5,750

)

$

16,408

 

 


(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,

 

 

 

2014

 

$

1,501

 

2015

 

1,154

 

2016

 

640

 

2017

 

439

 

2018

 

90

 

Thereafter

 

 

 

 

$

3,824

 

 

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, 2013 and December 31, 2012. 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,

 

 

 

2013

 

2012

 

Service cost

 

$

1,351

 

$

1,079

 

Interest cost

 

396

 

369

 

Amortization of prior service cost

 

207

 

207

 

Amortization of net actuarial loss

 

199

 

 

Net pension expense

 

$

2,153

 

$

1,655

 

 

Reclassifications related to the SERP from accumulated other comprehensive income to the statement of operations by line item and the tax impact of these reclassifications is presented below (in thousands):

 

Component Reclassified from Accumulated Other Comprehensive Income (1)

 

March 31, 2013

 

Amortization of prior service cost:

 

 

 

Research and development

 

$

77

 

Selling, general and administrative

 

130

 

Total

 

207

 

 

 

 

 

Amortization of net actuarial loss:

 

 

 

Research and development

 

74

 

Selling, general and administrative

 

125

 

Total

 

199

 

 

 

 

 

Total amortization of prior service cost and net actuarial loss:

 

406

 

Tax benefit

 

(136

)

Total, net of tax

 

$

270

 

 


(1)          Refer to Note 11— Accumulated Other Comprehensive Income

 

12



Table of Contents

 

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). 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.” 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. 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. In February 2012, the 2008 STAP was amended to cancel any remaining awards available for future grants. In February 2013, our Board of Directors approved an additional 1.4 million STAP awards available for 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 $96.8 million and $75.4 million at March 31, 2013 and December 31, 2012, 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 discloses the assumptions used to measure the fair value of STAP awards:

 

 

 

March 31,
2013

 

March 31,
2012

 

Expected volatility

 

34.5

%

37.0

%

Risk-free interest rate

 

0.7

%

0.8

%

Expected term of awards (in years)

 

4.4

 

4.2

 

Expected forfeiture rate

 

9.4

%

7.0

%

Expected dividend yield

 

0.0

%

0.0

%

 

A summary of the activity and status of STAP awards 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, 2013

 

7,962,375

 

$

49.00

 

 

 

 

 

Granted

 

3,152,794

 

56.78

 

 

 

 

 

Exercised

 

(548,382

)

41.35

 

 

 

 

 

Forfeited

 

(53,711

)

55.02

 

 

 

 

 

Outstanding at March 31, 2013

 

10,513,076

 

$

51.70

 

7.9

 

$

103,571

 

Exercisable at March 31, 2013

 

4,377,147

 

$

46.09

 

6.8

 

$

67,107

 

Expected to vest at March 31, 2013

 

5,232,533

 

$

55.08

 

9.2

 

$

32,934

 

 

The weighted average fair value of STAP awards granted during the three-month periods ended March 31, 2013 and 2012 was $24.51 and $21.16, respectively.

 

13



Table of Contents

 

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

 

 

 

Three Months Ended
March 31,

 

 

 

2013

 

2012

 

Research and development

 

$

13,495

 

$

(1,078

)

Selling, general and administrative

 

14,930

 

(907

)

Cost of product sales

 

1,078

 

(46

)

Share-based compensation expense (benefit) before taxes

 

29,503

 

(2,031

)

Related income tax (benefit) expense

 

(9,884

)

749

 

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

 

$

19,619

 

$

(1,282

)

Share-based compensation capitalized as part of inventory

 

$

270

 

$

(7

)

 

Cash paid to settle STAP awards exercised during the three-month periods ended March 31, 2013 and 2012, was $8.3 million and $5.1 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.

 

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, 2013, 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, 2013. 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, 2013, the aggregate conversion value of the 2016 Convertible Notes exceeded their par value by $69.1 million using a conversion price of $60.87, the closing price of our common stock on March 31, 2013.

 

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.

 

14



Table of Contents

 

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

 

 

 

Three Months Ended
March 31,

 

 

 

2013

 

2012

 

Contractual coupon rate of interest

 

$

625

 

$

625

 

Discount amortization

 

2,712

 

2,553

 

Interest expense—convertible notes

 

$

3,337

 

$

3,178

 

 

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

 

 

 

March 31,
2013

 

December 31,
2012

 

Principal balance

 

$

250,000

 

$

250,000

 

Discount, net of accumulated amortization of $15,317 and $12,605

 

(42,621

)

(45,333

)

Carrying amount

 

$

207,379

 

$

204,667

 

 

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.

 

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 March 31, 2013. 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 March 31, 2013, we were in compliance with these covenants.

 

15



Table of Contents

 

Interest Expense

 

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

 

 

 

Three Months Ended
March 31,

 

 

 

2013

 

2012

 

Interest expense

 

$

4,436

 

$

4,309

 

Less: interest capitalized

 

 

(423

)

Total interest expense

 

$

4,436

 

$

3,886

 

 

16



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,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Net income (numerator)

 

$

62,325

 

$

70,760

 

Denominator:

 

 

 

 

 

Weighted average outstanding shares — basic

 

50,209

 

53,631

 

Effect of dilutive securities (1):

 

 

 

 

 

Convertible notes

 

826

 

49

 

Warrants

 

 

 

Stock options and employee stock purchase plan

 

1,341

 

1,329

 

Weighted average shares — diluted

 

52,376

 

55,009

 

Earnings per common share:

 

 

 

 

 

Basic

 

$

1.24

 

$

1.32

 

Diluted

 

$

1.19

 

$

1.29

 

 

 

 

 

 

 

Stock options and warrants excluded from calculation (2)

 

11,026

 

11,711

 

 


(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-month periods ended March 31, 2013 and 2012.

 

17



Table of Contents

 

A summary of the activity and status of employee stock options during the three-month period ended March 31, 2013 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, 2013

 

4,551,050

 

$

38.95

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

(149,367

)

28.51

 

 

 

 

 

Forfeited

 

(432

)

7.49

 

 

 

 

 

Outstanding and exercisable at March 31, 2013

 

4,401,251

 

$

39.31

 

5.0

 

$

96,181

 

 

Total share-based compensation expense related to employee stock options is as follows (in thousands):

 

 

 

Three Months Ended
March 31,

 

 

 

2013

 

2012

 

Selling, general and administrative

 

$

5,523

 

$

2,004

 

Related income tax benefit

 

(1,850

)

(739

)

Share-based compensation expense net of taxes

 

$

3,673

 

$

1,265

 

 

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

 

 

 

Three Months Ended
March 31,

 

 

 

2013

 

2012

 

Number of options exercised

 

149,367

 

72,915

 

Cash received

 

$

4,258

 

$

1,810

 

 

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 expired on March 4, 2013 at which time we issued 29,072 shares of our common stock. 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.

 

Related share-based compensation expense for the three-month periods ended March 31, 2013 and 2012 was $187,500 and none, respectively.

 

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.

 

18



Table of Contents

 

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

 

 

 

Six-Month
Offering Period
Ending
September 4,
2013

 

Six-Month
Offering Period
Ending March 4,
2013

 

Expected volatility

 

36.0

%

29.0

%

Risk-free interest rate

 

0.1

%

0.1

%

Expected term (in years)

 

0.5

 

0.5

 

Expected dividend yield

 

0.0

%

0.0

%

Expected forfeiture rate

 

4.6

%

4.6

%

 

Share Repurchases

 

From time to time our Board of Directors may authorize repurchases of our common stock. In February 2013 our Board of Directors authorized a share repurchase program for up to $420.0 million in aggregate repurchases of our common stock in open market or privately negotiated transactions, from time to time at our discretion. The repurchase authorization is effective for the one-year period beginning on March 4, 2013. As of March 31, 2013, we have acquired 99,100 shares of our common stock at an aggregate cost of $5.9 million under this repurchase program.

 

11. Accumulated Other Comprehensive Income

 

The following table presents changes in accumulated other comprehensive income by component, net of tax (in thousands):

 

As of March 31, 2013

 

Defined Benefit
Pension Plan(1)

 

Foreign
Currency
Translation
Gains (Losses)

 

Unrealized Gains
and (Losses) on
Available-for-
Sale Securities

 

Total

 

Balance, January 1, 2013

 

$

(11,540

)

$

(3,876

)

$

459

 

$

(14,957

)

Other comprehensive income (loss) before reclassifications

 

51

 

(2,290

)

(23

)

(2,262

)

Amounts reclassified from accumulated other comprehensive income

 

256

 

 

 

256

 

Net current-period other comprehensive income (loss)

 

307

 

(2,290

)

(23

)

(2,006

)

Balance, March 31, 2013

 

$

(11,233

)

$

(6,166

)

$

436

 

$

(16,963

)

 


(1)          Refer to Note 7— Supplemental Executive Retirement Plan which identifies the captions within our statement of operations where reclassification adjustments were recognized and their associated tax impact.

 

12. Income Taxes

 

Income tax expense for the three-month periods ended March 31, 2013 and 2012 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 rate as of March 31, 2013 and 2012 was  34 percent.

 

We expect to utilize all of our general business tax credits in 2013.

 

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 2009 to 2011 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.

 

19



Table of Contents

 

13. Segment Information

 

We currently operate as one operating segment. However, our chief operating decision makers 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 were as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

2013

 

Remodulin

 

Tyvaso

 

Adcirca

 

Total

 

Revenues

 

$

114,681

 

$

94,645

 

$

33,820

 

$

243,146

 

Cost of revenues

 

13,406

 

13,783

 

2,124

 

29,313

 

Gross profit

 

$

101,275

 

$

80,862

 

$

31,696

 

$

213,833

 

 

2012

 

 

 

 

 

 

 

 

 

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

 

 

For the three-month periods ended March 31, 2013 and 2012, net revenues from our three U.S.-based distributors represented 78 percent and 82 percent, respectively, of our total net operating revenues.

 

14. Litigation

 

Sandoz Inc.

 

In February 2012, we received a Paragraph IV Certification Notice Letter (the Original Notice Letter) from Sandoz Inc. (Sandoz) advising that Sandoz had 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 December 2012, we received notice (the Second Notice Letter) that Sandoz had amended its previously filed ANDA to request additional approval to market generic versions of the 1 mg/mL, 2.5 mg/mL, and 5 mg/mL strengths of Remodulin. In the Original Notice Letter and the Second 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.  Each of these patents is listed in the Orange Book.

 

We responded to the Original Notice Letter by filing a lawsuit in March 2012 against Sandoz in the U.S. District Court for the District of New Jersey alleging patent infringement.  We responded to the Second Notice Letter by filing an additional lawsuit in January 2013 for patent infringement in the U.S. District Court for the District of New Jersey.  Sandoz has filed its answer to our complaints in both lawsuits, and has also filed counterclaims in each action 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.

 

Under the Hatch-Waxman Act, the FDA is automatically precluded from approving Sandoz’s ANDA with respect to each concentration of Remodulin for up to 30 months from receipt of the Notice Letter corresponding to such concentration or until the issuance of a district court decision that is adverse to us, whichever occurs first.  We intend to vigorously enforce our intellectual property rights relating to Remodulin.

 

20



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, 2012, 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, 2012, 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, 314d, TransCon Treprostinil and TransCon Beraprost) : 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 (NO), 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;

 

·                   Cell-based therapy: a cell-based product known as PLacental eXpanded (PLX) cells we are studying for the treatment of pulmonary hypertension;

 

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

 

·                   Engineered lungs and lung tissue for transplantation : engineered lungs and lung tissue, which we are developing using xenotransplantation and regenerative medicine technologies, for transplantation to patients suffering from PAH and other lung diseases.

 

We concentrate substantially all of our research and development efforts on these key therapeutic programs.  Our lead products, measured by revenues, are Remodulin (treprostinil) Injection (Remodulin) and Tyvaso (treprostinil) Inhalation Solution (Tyvaso) for the treatment of pulmonary arterial hypertension (PAH), while our lead product in terms of prescriptions is Adcirca (tadalafil) tablets (Adcirca), also for treatment of PAH. The United States Food and Drug Administration (FDA) has approved Remodulin for subcutaneous (under the skin) administration, for intravenous (in the vein) use and for the treatment of patients requiring transition from Flolan ® (epoprostenol sodium) for Injection. Remodulin has also been approved largely for subcutaneous use in a variety of countries outside of the United States. Most recently, in March 2013, the China Food and Drug Administration approved both intravenous and subcutaneous Remodulin to treat PAH.  Remodulin will be sold in the People’s Republic of China through our distributor, Lee’s Pharmaceutical (HK) Limited, with commercial sales expected to begin in 2014.

 

Tyvaso is an inhaled treatment for PAH using the same active ingredient as Remodulin. Adcirca is an orally-administered therapy to which we acquired exclusive commercialization rights in the United States from Eli Lilly and Company (Lilly). As compared with Remodulin, these two products offer therapeutically unique and more convenient routes of administration, and are attractive to a broader range of patients who suffer from PAH. In addition, we are developing an oral, extended-release treprostinil tablet, which we refer to as oral treprostinil, and an extended release injectable form of treprostinil we refer to as TransCon Treprostinil, both for the treatment of PAH.  We are also developing an oral formulation of the prostacyclin analogue beraprost, which we refer to as 314d, and an extended release injection we refer to as TransCon Beraprost, both for the treatment of PAH.

 

21



Table of Contents

 

Revenues

 

Sales of Remodulin and Tyvaso comprise the largest share of our revenues. We sell Remodulin and Tyvaso in the United States to our specialty pharmaceutical distributors: Accredo Health Group, Inc. (Accredo), CuraScript, Inc. (CuraScript) and CVS Caremark (Caremark). Accredo and CuraScript are both owned by Express Scripts, Inc. In addition to marketing in the United States, we also sell Remodulin to distributors internationally. Adcirca is sold to pharmaceutical wholesalers that are part of Lilly’s pharmaceutical wholesaler network. We increased the price at which we sell Tyvaso to our specialty pharmaceutical distributors by 4.9 percent effective January 1, 2013. Lilly, which has the right to determine the wholesale price at which we sell Adcirca, generally increases the wholesale price of Adcirca twice per year. Most recently, Lilly increased the wholesale price of Adcirca by 9.5 percent effective January 1, 2013.

 

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. Our specialty pharmaceutical distributors typically place monthly orders based on estimates of future demand and contractual minimum inventory requirements. As a result, sales volumes of Remodulin and Tyvaso can vary, depending on the timing and magnitude of these orders, and may not precisely reflect patient demand.

 

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. Since the enactment of this legislation in 2010, 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. The impact of the Acts depends in part on the issuance of final regulations and the impact this legislation will have on insurance companies and their relationships with drug manufacturers.

 

In 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. 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.

 

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 negligible. Tyvaso is distributed under similar contractual terms as Remodulin and the level of product exchanges for Tyvaso has been comparable to that of Remodulin. As such, we do not record reserves for exchanges for either Remodulin or Tyvaso at the time of sale. 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 services provided for the period.

 

Cost of Product Sales

 

Cost of product sales comprise: (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 five percent to ten percent of net revenues.

 

We synthesize treprostinil using advanced intermediate compounds purchased in bulk from 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

 

22



Table of Contents

 

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 historically relied on Baxter Pharmaceutical Solutions, LLC (Baxter) to formulate Remodulin for us. During the fourth quarter of 2012, we notified Baxter that we will terminate our current contract when it expires at the end of 2013. However, we expect to negotiate and enter into a new contract with Baxter before the expiration of the current contract. In January 2011, we received FDA approval of Jubilant Hollister-Stier Contract Manufacturing and Services as an additional producer of Remodulin. In addition, we have historically outsourced the formulation of Tyvaso to Catalent Pharma Solutions, Inc. (Catalent).

 

In 2011, we received FDA approval to use our Silver Spring, Maryland facility to formulate Tyvaso and Remodulin. 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. In the future, we intend to use our own facilities to produce our primary supply of Remodulin and Tyvaso, and to continue to contract with third parties to supplement our production capacity and mitigate the risk of shortages.

 

We acquired all the assets used to manufacture the Tyvaso Inhalation System from NEBU-TEC International Med Products Eike Kern GmbH (NEBU-TEC) in 2009. 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. More recently, in July 2012, we received FDA approval for a modified inhalation device (TD-100) to be used in our Tyvaso Inhalation System following completion of certain post marketing commitments we agreed to in connection with FDA approval for Tyvaso. As a result, we are currently manufacturing the TD-100, which we expect to release commercially during the second quarter of 2013.

 

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 clinical trials and other research and development efforts, which are conducted both internally and through third parties. From time-to-time, we also license or acquire additional technologies and compounds to be incorporated into our development pipeline.

 

Our operating expenses are often 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. Compensation expense associated with our employee stock purchase plan has thus far been insignificant. 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) volatility in the price of our common stock (specifically, increases in the price of our common stock will result in an increase in our STAP liability and related compensation expense, while decreases in our stock price will result in a reduction in our STAP liability and related compensation expense); (2) changes in the number of outstanding awards; and (3) changes in both the number of vested and partially vested awards. If we meet annual contractual performance requirements tied to growth in our market capitalization, our Chief Executive Officer will be granted stock options at year-end, which vest immediately upon grant. We accrue for estimated compensation expense associated with STAP awards and stock option grants containing performance-based conditions affecting the grant’s vesting when we determine that it is probable that the performance criteria will be met. Each of these factors may cause significant fluctuations to operating expenses from quarter-to-quarter.

 

Major Research and Development Projects

 

Our major research and development projects focus on: (1) the use of prostacyclin analogues and other therapies, as well as regenerative and xenotransplantation technologies, to treat cardiopulmonary diseases; (2) monoclonal antibodies to treat a variety of cancers; and (3) glycobiology antiviral agents to treat infectious diseases.

 

23



Table of Contents

 

Cardiopulmonary Disease Projects

 

Remodulin

 

In 2009, we entered into an agreement with Medtronic, Inc. (Medtronic) to develop its SynchroMed ® implantable pump to deliver Remodulin. If the SynchroMed program proves to be successful, it could reduce many of the patient burdens associated with infused prostacyclin analogues. Medtronic commenced a clinical trial administering Remodulin using the SynchroMed in April 2011 to support FDA approval for the use of Remodulin with an implantable pump. Patient enrollment in the clinical trial was completed in late November 2012. Based on current projections of patient days and discontinuations, we expect that the clinical trial will be completed in the second half of 2013.  In addition to completion of the clinical study, Medtronic must complete other stability, compatibility and technical assessments of the SynchroMed system, including with respect to its hardware and software.  We are also collaborating with Medtronic on a specialized needle to help ensure safe pump refills.  Assuming a favorable FDA application and review process, we would expect a commercial launch by 2016.

 

Tyvaso

 

Upon FDA approval of Tyvaso for the treatment of PAH in 2009, we launched Tyvaso for commercial sale. In connection with Tyvaso’s 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 accordance with our PMR, we are enrolling patients in a long-term observational study in the United States that includes 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.

 

In July 2012, the FDA acknowledged we had satisfied our PMCs and approved a modified Tyvaso Inhalation System using the TD-100 based on the results of the PMCs. As a result, we are currently manufacturing the TD-100, which we expect to release commercially during the second quarter of 2013. In addition, 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

 

We are developing a novel salt form of treprostinil for oral administration, treprostinil diolamine tablets. In December 2011, we submitted to the FDA a new drug application (NDA) for the approval of oral treprostinil for treatment of PAH.  Our NDA included the results of three phase III studies:

 

·                   Combination Therapy Studies (FREEDOM-C and FREEDOM-C 2 ):  Two separate 16-week studies of patients on approved background therapy using a PDE-5 inhibitor, such as Revatio, or an ETRA, such as Tracleer, or a combination of both. The FREEDOM-C and FREEDOM-C 2  trials were completed in 2008 and 2011 respectively, and neither achieved statistical significance for its primary endpoint of improvement in six-minute walk distance at week 16 (p=0.072 and p=0.089, respectively).

 

·                   Monotherapy Study (FREEDOM - M) :  A 12-week study of PAH patients who were not on any approved background therapy. In June 2011, we announced that the FREEDOM-M 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 six-minute walk distance by a median of approximately 23 meters (p=0.0125), a greater improvement than was demonstrated for either Remodulin or Tyvaso in their phase III clinical trials.

 

We believe that patients in the FREEDOM-C and FREEDOM-C 2  trials needed longer-term treatment with oral treprostinil to provide a statistically significant clinical trial outcome.  As such, we began enrolling patients in a new phase III clinical trial (FREEDOM-EV) in the third quarter of 2012. FREEDOM-EV is a placebo-controlled study of patients who have initiated an approved background therapy within one year prior to enrollment (either an ETRA or a PDE-5 inhibitor, but not both), 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 a prostacyclin analogue 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. The other co-primary endpoint is change in six minute-walk distance at week 24. We plan to enroll up to 858 patients

 

24



Table of Contents

 

in order to observe 394 clinical worsening events.  We are aiming to complete this study by the end of 2016, based on our current projections of timing to enroll the study and to observe clinical worsening events, and to obtain FDA approval of oral treprostinil as a combination therapy against background ETRAs and PDE-5 inhibitors no later than 2017.

 

In October 2012, the FDA issued a complete response letter in which it declined to approve our NDA. In January 2013, we resubmitted our NDA to address the concerns raised in the FDA’s complete response letter.  In March 2013, we received a second complete response letter from the FDA declining to approve our NDA. Despite the FDA’s second complete response letter, we will continue to pursue our development of oral treprostinil and are committed to obtaining FDA approval as soon as possible, but no later than 2017. We expect to seek approval of oral treprostinil in Europe upon completion of the FREEDOM-EV study. In 2005, the European Medicines Agency (EMA) announced that oral treprostinil had been designated an orphan medicinal product for the treatment of PAH.

 

Self-Injectable Prostacyclin Analogues

 

In September 2012, 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 are administered Remodulin through a continuous infusion pump for the treatment of PAH. We expect that this self-injectable form of treprostinil could enable patients to avoid the infusion site pain associated with subcutaneous Remodulin and sepsis that is associated with intravenous Remodulin. Under this agreement, we also intend to pursue development of a TransCon technology-enabled sustained release formulation of beraprost, which is another prostacyclin analogue, as discussed below. Advances in these programs have recently been achieved via novel methods of chemical synthesis.

 

314d and TransCon Beraprost

 

In July 2011, we entered into an exclusive license agreement with Toray Industries, Inc. (Toray) to amend and replace our existing 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 a five-year period ending in 2015.

 

In November 2011, we announced that a phase II trial of beraprost-MR did not provide data supporting the initiation of a phase III study using a twice-daily dosing regimen. The results of this study suggested that the efficacy of beraprost may be improved by providing more stable and consistent plasma concentrations of beraprost. Therefore, we commenced studies of a reformulated, single-isomer version of the drug (314d), with a dosing regimen of four times per day. We completed a phase I safety trial in July 2012, and the preliminary data suggested that dosing 314d four times a day was safe. We believe that 314d and treprostinil bind selectively to different sets of prostacyclin receptors within the lung and thus could provide certain groups of patients a differing set of safety and efficacy profiles. Currently, we are developing a phase III study called BEAT ( BE raprost-314d in A ddition to T yvaso) to evaluate the clinical benefit of 314d plus Tyvaso as a new combination drug therapy for PAH.

 

During the third quarter of 2012, we initiated efforts to develop an extended-release injection we refer to as TransCon Beraprost, which incorporates the TransCon technology described above and is intended to be self-administered by PAH patients once daily.

 

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 PAH using Pluristem’s proprietary cell technology known as PLacental eXpanded (PLX) cells. We expect to commence a phase I clinical study in Australia during the second quarter of 2013.

 

Engineered Lungs and Lung Tissue for Transplantation

 

In July 2011, we acquired Revivicor, Inc. (Revivicor), a company focused on developing genetic biotechnology platforms to provide alternative tissue sources for treatment of human degenerative disease through tissue and organ xenotransplantation. We acquired Revivicor to pursue early-stage development of replacement lungs for transplantation. PAH has not been reported to reoccur in end-stage patients who have received a full lung transplant. Only a few hundred PAH patients receive a lung transplantation each year due to the shortage of available lungs for transplant and the demand for transplantable lungs by patients with end-stage pulmonary disease, such as chronic obstructive pulmonary disease and idiopathic pulmonary fibrosis.

 

25



Table of Contents

 

We are also engaged in preclinical development of several regenerative medicinal technologies for creating transplantable lung tissue and whole lungs for patients with end-stage lung disease.

 

From inception to March 31, 2013, we have spent $901.0 million on all of our current and former cardiopulmonary disease programs.

 

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) of the United States National Institutes for Health to collaborate on the late-stage development and regulatory approval process for 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 has completed a second phase III clinical trial in 105 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 human pharmacokinetics study is currently open for enrollment in the United States. 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 (BLA) we expect to file seeking FDA approval of Ch14.18 immunotherapy for the treatment of neuroblastoma and a marketing authorization application (MAA) we expect to file with the EMA for approval in Europe. We have received orphan drug designation for Ch14.18 from the FDA and the EMA. We currently expect to file the BLA and MAA during the first half of 2014.

 

8H9 Antibody

 

Pursuant to a 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.

 

We have spent $91.1 million from inception to March 31, 2013, 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 the research of 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 National Institute of Allergy and Infectious Diseases (NIAID) of the United States National Institutes for Health 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.  In addition, there are eight milestone-based options to expand the project and funding under the contract. In August 2012 and March 2013, we received contract modifications exercising three of the eight above-mentioned milestone-based options, increasing total committed contract funding by $10.1 million. We recognize revenue under this contract to the extent of costs incurred, plus a proportionate amount of fees earned.

 

We have spent $66.6 million from inception to March 31, 2013, on all of our current and former infectious disease programs.

 

Future Prospects

 

Our future success is dependent on achieving some or all of the following objectives: (1) in the near term, continued revenue growth of our current commercial products by increasing our market share and launching enhancements designed to improve patient care, such as implantable pumps for Remodulin, a once-daily self-injectable form of treprostinil and/or

 

26



Table of Contents

 

beraprost and continued enhancements to the Tyvaso Inhalation System; (2) in the medium term, augmenting our near-term product growth through: (a) the approval and launch of oral prostacyclin analogues for use in combination with Adcirca and other oral therapies at earlier stages of PAH, and (b) commercial launch and sales of one or more of our antiviral drug candidates to the government and private sectors; and (3) in the long term, supplementing our oral, inhaled and infused PAH therapy revenues by introducing transplantable cells, tissues and organs that may provide successful treatment for PAH and other end-stage lung diseases.

 

Our ability to achieve these objectives and sustain our growth and profitability will depend on many factors including among others: (1) the timing and outcome of clinical trials and regulatory approvals for products we develop; (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 ongoing challenge to our Remodulin patents by a generic drug company.

 

We may need to construct additional facilities to support the development and commercialization of our products.  For example, the development of broad-spectrum anti-viral drugs, cell therapies and transplantable lungs and lung tissues will require the design and construction of sophisticated facilities that will need to comply with certain regulatory requirements related to these programs.  In addition, if we are successful with the development of any or all of our other developmental products, we may need to build additional facilities to support our expanding operations.  In 2013, we expect to commence construction of research and development facilities and office space, including those needed for our regenerative medicine and xenotransplantation programs. The extent to which we fully develop any of these facilities will depend on the progress of pre-clinical and clinical development in our virology, cell biology, regenerative medicine and xenotransplantation programs.  During the first quarter of 2013, we commenced modification of an existing facility which will be used for the further development of our PLX program.

 

We operate in a highly competitive market in which a small number of pharmaceutical companies control a majority of the PAH business. These pharmaceutical companies are more established in the market and possess 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 may market in the future.

 

Financial Position

 

Cash and cash equivalents and current and non-current marketable investments, excluding restricted amounts (cash and investments) at March 31, 2013 totaled $876.8 million, compared to $784.9 million as of December 31, 2012. The increase in cash and cash equivalents and non-current marketable investments of $91.8 million resulted primarily from reductions in expenditures for the purchase of property, plant and equipment and repurchases of our common stock. As an illustration, net revenues for the quarter ended March 31, 2013 were comparable to net revenues for the quarter ended December 31, 2012.  However, expenditures for the purchase of property, plant and equipment and repurchases of our common stock, respectively, were $17.0 million and $51.2 million lower in the quarter ended March 31, 2013 when compared to the quarter ended December 31, 2012.

 

Accounts receivable at March 31, 2013 were $101.3 million compared to $116.6 million at December 31, 2012.  The decrease in accounts receivable of $15.3 million was attributable to ordinary timing fluctuations in invoicing and collections.

 

The $5.5 million increase in other current liabilities from $93.6 million at December 31, 2012 to $99.1 million at March 31, 2013 resulted primarily from a $21.4 million increase in the STAP liability as a result of the 14 percent appreciation in our stock price, partially offset by a net $16.7 million decrease in taxes payable relating to 2013 estimated tax payments.

 

Additional paid-in capital was $1,028.1 million at March 31, 2013 compared to $1,015.8 million at December 31, 2012. The $12.3 million increase consisted of (1) $5.7 million in share-based compensation, of which $5.5 million related to the compensation recognized in connection with our Chief Executive Officer’s potential year-end stock option award; (2) $5.2 million in proceeds from the exercise of stock options and related tax benefits; and (3) the aggregate purchase price of $1.4 million for the issuance of shares under our employee stock purchase plan.

 

27



Table of Contents

 

Results of Operations

 

Three Months Ended March 31, 2013 and 2012

 

Revenues

 

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

 

 

 

Three Months Ended
March 31,

 

Percentage

 

 

 

2013

 

2012

 

Change

 

Cardiopulmonary products:

 

 

 

 

 

 

 

Remodulin

 

$

114,681

 

$

110,546

 

3.7

%

Tyvaso

 

94,645

 

70,067

 

35.1

%

Adcirca

 

33,820

 

22,330

 

51.5

%

Other

 

1,990

 

1,271

 

56.6

%

Total net revenues

 

$

245,136

 

$

204,214

 

20.0

%

 

The growth in product revenues for the three months ended March 31, 2013 compared to the same quarter in 2012 corresponded primarily to the continued increase in the number of patients being treated with our products. For the three months ended March 31, 2013 and 2012, approximately 78 percent and 82 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, 2013

 

 

 

Rebates

 

Prompt Pay
Discounts

 

Allowance for
Sales Returns

 

Distributor Fees

 

Total

 

Balance, January 1, 2013

 

$

15,207

 

$

2,115

 

$

3,350

 

$

1,281

 

$

21,953

 

Provisions attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

15,970

 

5,314

 

158

 

1,696

 

23,138

 

Prior periods

 

850

 

 

 

3

 

853

 

Payments or credits attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

(1,670

)

(3,317

)

 

(1,280

)

(6,267

)

Prior periods

 

(14,281

)

(2,115

)

(9

)

(1,284

)

(17,689

)

Balance, March 31, 2013

 

$

16,076

 

$

1,997

 

$

3,499

 

$

416

 

$

21,988

 

 

 

 

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

 

 

28



Table of Contents

 

Research and Development Expense

 

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

 

 

 

Three Months Ended
March 31,

 

Percentage

 

 

 

2013

 

2012

 

Change

 

Project and non-project component:

 

 

 

 

 

 

 

Cardiopulmonary

 

$

26,582

 

$

25,577

 

3.9

%

Share-based compensation expense (benefit)

 

13,576

 

(1,078

)

1,359.4

%

Other

 

10,272

 

9,158

 

12.2

%

Total research and development expense

 

$

50,430

 

$

33,657

 

49.8

%

 

Cardiopulmonary. The $1.0 million increase in cardiopulmonary program expense for the quarter ended March 31, 2013, compared to the same quarter in 2012, was attributable to the following increases: (1) $2.3 million in expenses relating to work on our TransCon injectable prostacyclin analogues; and (2) $1.3 million in expenses associated with the development of an implantable pump for Remodulin. These increases were largely offset by a $2.9 million decrease in expenses incurred with respect to the development of oral treprostinil.

 

Share-based compensation. The increase in share-based compensation of $14.7 million for the quarter ended March 31, 2013, compared to the same quarter in 2012, resulted from the 14 percent increase in the price of our common stock during the quarter ended March 31, 2013, compared to a slight decline in our stock price during the same quarter in 2012.

 

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

 

 

 

2013

 

2012

 

Change

 

Category:

 

 

 

 

 

 

 

General and administrative

 

$

33,424

 

$

21,624

 

54.6

%

Sales and marketing

 

17,388

 

17,067

 

1.9

%

Share-based compensation expense (benefit)

 

20,544

 

1,098

 

1,771.0

%

Total selling, general and administrative expense

 

$

71,356

 

$

39,789

 

79.3

%

 

General and administrative. The $11.8 million increase in general and administrative expense for the quarter ended March 31, 2013 compared to the same quarter in 2012 consisted of the following main components: (1) a $4.0 million increase in grants to non-affiliated, non-profit organizations that provide financial assistance to patients with PAH; (2) a $3.0 million increase in general operating expenses relating to the completion of our Maryland and North Carolina facility expansion projects in 2012 and the general growth of our business; (3) a $1.8 million increase in salary-related expenses and; (4) a $1.9 million increase in consulting and professional fees.

 

Share-based compensation. The $19.4 million increase in share-based compensation for the quarter ended March 31, 2013, compared to the same quarter in 2012, resulted from the 14 percent increase in the price of our common stock during the quarter ended March 31, 2013, compared to a slight decline in our stock price during the same quarter in 2012.

 

Income Taxes

 

The provision for income tax expense is based on an estimated annual effective tax rate that is subject to adjustment in subsequent quarterly periods if components used to estimate the annual effective tax rate are revised. The estimated annual effective tax rate was 34 percent  as of  March 31, 2013 and 2012.

 

29



Table of Contents

 

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 we expect demand for our commercial products 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.

 

Cash Flows

 

2013 Compared to 2012

 

Operating Activities

 

Net cash provided by operating activities was $97.7 million for the three months ended March 31, 2013, compared to $37.6 million for the three months ended March 31, 2012. The increase of $60.1 million in net operating cash flows for the three months ended March 31, 2013 resulted from the following: (1) a 20 percent increase in revenues during the three months ended March 31, 2013 as compared to the same period in 2012; (2) a $35.2 million increase in share-based compensation due to the appreciation in our stock price at March 31, 2013 compared to March 31, 2012, which also contributed to an $8.4 million decrease in our net income; (3) a $15.0 million increase in collections of accounts receivable; and (4) a $39.1 million reduction in payments of accounts payable. The changes in accounts receivable and accounts payable were attributable to ordinary fluctuations in the timing of vendor invoicing and payment processing.  These increases in operating cash flows were offset by an $18.7 million increase in cash used for other liabilities due primarily to a $16.3 million increase in estimated tax payments for the three-month period ended March 31, 2013 as compared to the same period in 2012.

 

Investing Activities

 

Net cash provided by investing activities was $10.6 million for the three months ended March 31, 2013, compared to $46.0 million in cash used in investing activities for the three months ended March 31, 2012. The $56.6 million increase reflects a $20.6 million increase in redemptions of investments net of purchases, which reflects our efforts to increase our liquidity by maintaining a higher cash balance for the purpose of acquiring our common stock under our current stock repurchase program. In addition, expenditures related to our property, plant and equipment decreased by $36.0 million, which corresponded to the completion of the expansion of our Maryland and North Carolina facilities during 2012.

 

Financing Activities

 

Net cash provided by financing activities was $694,000 for the three months ended March 31, 2013, compared to $2.1 million for the three months ended March 31, 2012. The $1.4 million decrease resulted from $5.9 million in repurchases of stock, which was partially offset by a $4.5 million increase in proceeds and tax benefits from the exercise of stock options and from the issuance of common stock in connection with our employee stock purchase program during the quarter ended March 31, 2013.  We did not repurchase any stock during the comparable quarter in 2012.

 

Working Capital

 

At March 31, 2013, we had working capital of $668.0 million, compared to $491.7 million at December 31, 2012.  The $176.2 million increase in working capital at March 31, 2013 was provided by current operations and a $99.6 million reduction in long-term investments. Specifically, the $191.4 million increase in cash and cash equivalents and short-term investments reflects our plans to increase available liquidity to fund the acquisition of our common stock under our current stock repurchase program. This increase was offset in part by a decrease in accounts receivable of $15.3 million due to customary timing of invoicing and collections.

 

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 from the financial reporting date.

 

At March 31, 2013, we had $205.7 million of long-term marketable securities that could be liquidated, if necessary, to fund our operations. In addition, we had approximately 4.5 million vested stock options outstanding at March 31, 2013, with a weighted average exercise price of $39.19. If exercised, these vested stock options would provide us with additional liquidity.

 

30



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, but actual cash requirements could exceed our expectations. From time-to-time our Board of Directors may authorize increases in the number of awards available for grant. The latest increase in the number of available STAP awards occurred in February 2013, when our Board of Directors approved a 1.4 million increase to the number of available STAP awards.

 

Convertible Senior Notes

 

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 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 certain of 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, 2013). 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. Subsequent to June 30, 2012, we can prepay the loan balance without being subject to a prepayment premium or penalty. The Credit Agreement also requires us to comply with various financial and negative covenants. As of March 31, 2013, we were in compliance with these covenants.

 

Share Repurchases

 

From time to time, our Board of Directors may authorize plans to repurchase our common stock. In February 2013, we announced that our Board of Directors authorized a share repurchase program for up to $420.0 million in aggregate repurchases of our common stock in open market or privately negotiated transactions from time to time at our discretion. The repurchase authorization became effective over a one-year period beginning on March 4, 2013. As of March 31, 2013, we had acquired 99,100 shares of our common stock at a cost of $5.9 million under this repurchase plan.

 

31



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, 2012. 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, 2012.

 

Recently Issued Accounting Standards

 

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220)—Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02). ASU 2013-02 provides guidance about disclosing reclassification adjustments, which was previously deferred for further deliberation by ASU 2011-12. ASU 2013-02 provides financial statement issuers the option to disclose significant amounts reclassified from accumulated other comprehensive income separately by each component of accumulated other comprehensive income in either (1) a single note to the financial statements, or (2) parenthetically on the face of the income statement for each line item(s) affected by the reclassification adjustment(s). ASU 2013-02 became effective prospectively for all interim and annual financial statement reporting periods beginning after December 15, 2012, with early adoption permitted. Other than additional disclosures required by the adoption of ASU 2013-02, adoption had no impact on our consolidated financial statements.

 

Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As of March 31, 2013, we have invested $614.2 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, 2013, our investments in debt securities issued by corporations and federally-sponsored agencies had a weighted average stated interest rate of approximately 0.34 percent and a weighted average maturity of approximately one year. 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, 2013, our 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 our 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.

 

32



Table of Contents

 

Part II.  OTHER INFORMATION

 

Item 1.  LEGAL PROCEEDINGS

 

Sandoz Inc.

 

In February 2012, we received a Paragraph IV Certification Notice Letter (the Original Notice Letter) from Sandoz Inc. (Sandoz) advising that Sandoz had 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 December 2012, we received notice (the Second Notice Letter) that Sandoz had amended its previously filed ANDA to request additional approval to market generic versions of the 1 mg/mL, 2.5 mg/mL, and 5 mg/mL strengths of Remodulin.  In the Original Notice Letter and the Second 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.  Each of these patents is listed in the Orange Book.

 

We responded to the Original Notice Letter by filing a lawsuit in March 2012 against Sandoz in the U.S. District Court for the District of New Jersey alleging patent infringement.  We responded to the Second Notice Letter by filing an additional lawsuit in January 2013 for patent infringement in the U.S. District Court for the District of New Jersey.  Sandoz has filed its answer to our complaints in both lawsuits, and has also filed counterclaims in each action 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.

 

Under the Hatch-Waxman Act, the FDA is automatically precluded from approving Sandoz’s ANDA with respect to each concentration of Remodulin for up to 30 months from receipt of the Notice Letter corresponding to such concentration or until the issuance of a district court decision that is adverse to us, whichever occurs first.  We intend to vigorously enforce our intellectual property rights relating to Remodulin.

 

33



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 as to future outcomes. These statements include, among others, statements relating to the following:

 

·                   Expectations of revenues, expenses, profitability, and cash flows;

 

·                   The sufficiency of current and future working capital to support operations;

 

·                   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 expected volume and timing of sales of Remodulin ®  (treprostinil) Injection (Remodulin), Tyvaso ®  (treprostinil) Inhalation Solution (Tyvaso), and Adcirca ®  (tadalafil) tablets (Adcirca) including our expectation to commence commercial sales of Remodulin in China in early 2014;

 

·                   Our expectations regarding the potential to increase the number of patients using Tyvaso through the further improvement of the Tyvaso Inhalation System;

 

·                   Our expectation to make Tyvaso available in certain European and Latin American countries in 2013 on an unmarketed, named-patient basis based on physicians’ prescriptions in those countries;

 

·                   The timing and outcome of clinical studies and related regulatory filings, including: (1) our plans to complete our FREEDOM-EV study of oral treprostinil by the end of 2016; (2) our aim to obtain United States Food and Drug Administration (FDA) approval for oral treprostinil before the end of 2017; (3) our plan to file for approval for oral treprostinil in Europe upon the completion of the FREEDOM-EV study; and (4) the expectation that Medtronic Inc. (Medtronic) will complete its phase III study of Remodulin administered with the Synchro M ed implantable pump in the second half of 2013, and that a commercial launch may be possible by 2016;

 

·                   The timing and outcome of required pricing approvals and risk management plan approvals in individual European countries, in order to begin marketing intravenous Remodulin in those countries;

 

·                   The timing of our commercial launch of Remodulin in the People’s Republic of China;

 

·                   The expected likelihood and timing of regulatory submissions and approvals for drug candidates under development and the timing of related sales, including our anticipated application for approval of Remodulin in Japan 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 during the first half of 2014;

 

·                   Our expectation that we will enter into a new contract with Baxter Pharmaceutical Solutions, LLC (Baxter), relating to the production of Remodulin, by the end of 2013 when the current contract term expires;

 

·                   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;

 

34



Table of Contents

 

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

 

·                   Our expectations regarding our ability to defend our intellectual property relating to Remodulin against generic challenges, including the abbreviated new drug applications filed by Sandoz Inc. (Sandoz);

 

·                   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 generate revenues and support our operations.

 

Sales of Remodulin, Tyvaso and Adcirca comprise virtually all of our revenues. A wide variety of events, many of which are described in other risk factors below, could cause sales of these products 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 or competing therapies, side effects, adverse events, deaths or any other reasons could decrease related revenues.  For example, during the fourth quarter of 2012, generic sildenafil citrate became commercially available, which could result in a decrease in Adcirca’s market share, or limit its growth potential. 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 satisfactorily 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, a reduction in sales of any one of these products could have a negative and material adverse impact on our operations.

 

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. Moreover, 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. Approval of a new drug application (NDA) could 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 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 of these deficiencies adequately and consequently would be unable to obtain FDA approval to market the product candidate.