United Therapeutics Corporation
UNITED THERAPEUTICS Corp (Form: 10-Q, Received: 10/29/2013 06:06:59)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

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

 

For the quarterly period ended September 30, 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
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

1040 Spring Street, Silver Spring, MD

 

20910

(Address of Principal Executive Offices)

 

(Zip Code)

 

(301) 608-9292

(Registrant’s Telephone Number, Including Area Code)

 

 

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  x

 

The number of shares outstanding of the issuer’s common stock, par value $.01 per share, as of October 22, 2013 was 50,226,603.

 

 

 



Table of Contents

 

INDEX

 

 

 

Page

 

 

 

Part I.

FINANCIAL INFORMATION (UNAUDITED)

3

 

 

 

Item 1.

Consolidated Financial Statements

3

 

 

 

 

Consolidated Balance Sheets

3

 

 

 

 

Consolidated Statements of Operations

4

 

 

 

 

Consolidated Statements of Comprehensive Income

5

 

 

 

 

Consolidated Statements of Cash Flows

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2.

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

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

Part II.

OTHER INFORMATION

36

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 4.

Mine Safety Disclosures

50

 

 

 

Item 6.

Exhibits

50

 

 

 

SIGNATURES

 

51

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

September 30,
2013

 

December 31,
2012

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

322,230

 

$

154,030

 

Marketable investments

 

394,612

 

325,175

 

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

 

130,642

 

116,626

 

Other current assets

 

35,641

 

35,385

 

Inventories, net

 

49,617

 

37,254

 

Total current assets

 

932,742

 

668,470

 

Marketable investments

 

321,940

 

305,726

 

Marketable investments and cash—restricted

 

5,355

 

5,377

 

Goodwill and other intangibles, net

 

14,614

 

16,408

 

Property, plant and equipment, net

 

449,942

 

453,685

 

Deferred tax assets, net

 

149,648

 

150,147

 

Other assets

 

53,416

 

26,782

 

Total assets

 

$

1,927,657

 

$

1,626,595

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

97,510

 

$

83,188

 

Convertible notes

 

212,967

 

 

Other current liabilities

 

158,432

 

93,567

 

Total current liabilities

 

468,909

 

176,755

 

Convertible notes

 

 

204,667

 

Mortgages payable—noncurrent

 

70,298

 

70,343

 

Other liabilities

 

80,335

 

79,967

 

Total liabilities

 

619,542

 

531,732

 

Commitments and contingencies:

 

 

 

 

 

Temporary equity

 

47,915

 

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, 62,802,440 and 62,082,007 shares issued, and 50,177,388 and 50,165,953 shares outstanding at September 30, 2013 and December 31, 2012, respectively

 

628

 

621

 

Additional paid-in capital

 

1,029,718

 

1,015,835

 

Accumulated other comprehensive loss

 

(15,063

)

(14,957

)

Treasury stock at cost, 12,625,052 and 11,916,054 shares at September 30, 2013 and December 31, 2012, respectively

 

(513,437

)

(470,998

)

Retained earnings

 

758,354

 

553,480

 

Total stockholders’ equity

 

1,260,200

 

1,083,981

 

Total liabilities and stockholders’ equity

 

$

1,927,657

 

$

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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(Unaudited)

 

(Unaudited)

 

Revenues:

 

 

 

 

 

 

 

 

 

Net product sales

 

$

300,006

 

$

240,917

 

$

820,647

 

$

665,692

 

Other

 

2,219

 

1,551

 

7,320

 

6,567

 

Total revenues

 

302,225

 

242,468

 

827,967

 

672,259

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

72,749

 

65,155

 

177,796

 

135,911

 

Selling, general and administrative

 

94,111

 

68,626

 

236,832

 

161,673

 

Cost of product sales

 

30,716

 

27,968

 

92,349

 

81,632

 

Total operating expenses

 

197,576

 

161,749

 

506,977

 

379,216

 

Operating income

 

104,649

 

80,719

 

320,990

 

293,043

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

Interest income

 

868

 

1,138

 

2,716

 

3,225

 

Interest expense

 

(4,540

)

(4,384

)

(13,496

)

(12,149

)

Other, net

 

202

 

31,020

 

323

 

31,600

 

Total other (expense) income, net

 

(3,470

)

27,774

 

(10,457

)

22,676

 

Income before income taxes

 

101,179

 

108,493

 

310,533

 

315,719

 

Income tax expense

 

(38,494

)

(30,382

)

(105,659

)

(94,532

)

Net income

 

$

62,685

 

$

78,111

 

$

204,874

 

$

221,187

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.25

 

$

1.52

 

$

4.10

 

$

4.20

 

Diluted

 

$

1.17

 

$

1.46

 

$

3.90

 

$

4.11

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

50,014

 

51,514

 

50,007

 

52,626

 

Diluted

 

53,688

 

53,590

 

52,570

 

53,849

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(Unaudited)

 

(Unaudited)

 

Net income

 

$

62,685

 

$

78,111

 

$

204,874

 

$

221,187

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

1,809

 

1,185

 

(854

)

797

 

Defined benefit pension plan:

 

 

 

 

 

 

 

 

 

Prior service cost arising during period, net of tax

 

 

 

 

 

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

 

255

 

131

 

767

 

391

 

Total defined benefit pension plan, net

 

255

 

131

 

818

 

455

 

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

 

(12

)

72

 

(70

)

109

 

Other comprehensive income (loss), net of tax

 

2,052

 

1,388

 

(106

)

1,361

 

Comprehensive income

 

$

64,737

 

$

79,499

 

$

204,768

 

$

222,548

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

204,874

 

$

221,187

 

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

 

 

 

 

 

Depreciation and amortization

 

23,506

 

19,855

 

Provision for inventory obsolescence

 

(75

)

1,455

 

Current and deferred income tax expense

 

105,659

 

94,532

 

Share-based compensation expense

 

142,584

 

40,568

 

Amortization of debt discount and debt issue costs

 

9,412

 

8,902

 

Amortization of discount or premium on investments

 

3,066

 

3,303

 

Other

 

1,183

 

8,823

 

Excess tax benefits from share-based compensation

 

(5,807

)

(2,084

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(15,244

)

(19,516

)

Insurance proceeds receivable

 

 

(31,000

)

Inventories

 

(11,634

)

(4,790

)

Other assets

 

4,554

 

(6,385

)

Accounts payable and accrued expenses

 

12,633

 

(7,120

)

Other liabilities

 

(153,865

)

(109,311

)

Net cash provided by operating activities

 

320,846

 

218,419

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(18,497

)

(90,650

)

Purchases of held-to-maturity investments

 

(438,633

)

(348,001

)

Investments in privately-owned companies

 

(30,766

)

 

Maturities of held-to-maturity investments

 

349,275

 

439,987

 

Net cash (used in) provided by investing activities

 

(138,621

)

1,336

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payments to repurchase common stock

 

(42,438

)

(130,925

)

Proceeds from the exercise of stock options

 

19,896

 

9,689

 

Issuance of stock under employee stock purchase plan

 

2,734

 

 

Excess tax benefits from share-based compensation

 

5,807

 

2,084

 

Net cash used in financing activities

 

(14,001

)

(119,152

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(24

)

146

 

Net increase in cash and cash equivalents

 

168,200

 

100,749

 

Cash and cash equivalents, beginning of period

 

154,030

 

162,676

 

Cash and cash equivalents, end of period

 

$

322,230

 

$

263,425

 

 

 

 

 

 

 

Supplemental schedule of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

4,782

 

$

4,563

 

Cash paid for income taxes

 

$

119,632

 

$

75,046

 

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

 

$

3,054

 

$

4,775

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

UNITED THERAPEUTICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 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 ®  (tadalafil) tablets (Adcirca). Remodulin has also been approved in various other countries.

 

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 as of 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 September 30, 2013, results of operations and comprehensive income for the three- and nine-month periods ended September 30, 2013 and 2012, and cash flows for the nine-month periods ended September 30, 2013 and 2012. Interim results are not necessarily indicative of results for an entire year. Certain prior year amounts have been reclassified to conform to current period presentation.

 

3. Inventories

 

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

 

 

 

September 30,
2013

 

December 31,
2012

 

Raw materials

 

$

18,709

 

$

13,603

 

Work-in-progress

 

13,738

 

11,708

 

Finished goods

 

17,170

 

11,943

 

Total inventories

 

$

49,617

 

$

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 in measuring fair value:

 

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 September 30, 2013

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

123,688

 

$

 

$

 

$

123,688

 

Federally-sponsored and corporate debt securities (2)

 

 

716,530

 

 

716,530

 

Available-for-sale equity investment

 

378

 

 

 

378

 

Total assets

 

$

124,066

 

$

716,530

 

$

 

$

840,596

 

Liabilities

 

 

 

 

 

 

 

 

 

Convertible notes due 2016 (3)

 

$

425,250

 

$

 

$

 

$

425,250

 

Contingent consideration (4)

 

 

 

6,784

 

6,784

 

Total liabilities

 

$

425,250

 

$

 

$

6,784

 

$

432,034

 

 

 

 

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 due 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”, “marketable investments” 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 securities or comparable securities in which related trading activity is not sufficiently frequent to be considered a Level 1 input. See also Note 5— Investments 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. As of December 31, 2012, the fair value of our 1.0 percent Convertible Senior Notes due September 15, 2016 (2016 Convertible Notes) was estimated using other than Level 1 observable inputs.  A market has developed for our 2016 Convertible Notes and we believe the level of trading activity is now sufficiently active to become the principal basis for measuring their fair value. As a result, our 2016 Convertible Notes have been transferred from Level 2 to Level 1.

 

(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 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 corresponding fair value, while increases or decreases in expected cash flows would result in corresponding increases or decreases in fair value. As of both September 30, 2013 and December 31, 2012, the cost of

 

8



Table of Contents

 

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.

 

Reconciliations of the beginning and ending balances of Level 3 liabilities for the three-and nine-month periods ended September 30, 2013 are presented below (in thousands):

 

 

 

Contingent
Consideration

 

Balance July 1, 2013—Asset (Liability)

 

$

(6,693

)

Transfers into Level 3

 

 

Transfers out of Level 3

 

 

Total gains/(losses) realized/unrealized:

 

 

 

Included in earnings

 

 

Included in other comprehensive income

 

(91

)

Purchases

 

 

Sales

 

 

Issuances

 

 

Settlements

 

 

Balance September 30, 2013—Asset (Liability)

 

$

(6,784

)

Amount of total gains/(losses) for the three-month period ended September 30, 2013 included in earnings that are attributable to the change in unrealized gains or losses related to outstanding liabilities

 

$

 

 

 

 

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

 

(54

)

Purchases

 

 

Sales

 

 

Issuances

 

 

Settlements

 

 

Balance September 30, 2013—Asset (Liability)

 

$

(6,784

)

Amount of total gains/(losses) for the nine-month period ended September 30, 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 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. Investments

 

Marketable Investments

 

Held-to-Maturity Investments

 

Marketable investments classified as held-to-maturity consist of the following (in thousands):

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Government-sponsored enterprises at September 30, 2013

 

$

421,890

 

$

342

 

$

(10

)

$

422,222

 

Corporate notes and bonds at September 30, 2013

 

294,284

 

125

 

(101

)

294,308

 

Total

 

$

716,174

 

$

467

 

$

(111

)

$

716,530

 

Reported under the following captions on the consolidated balance sheet at September 30, 2013:

 

 

 

 

 

 

 

 

 

Current marketable investments

 

$

394,612

 

 

 

 

 

 

 

Noncurrent marketable investments

 

321,562

 

 

 

 

 

 

 

 

 

$

716,174

 

 

 

 

 

 

 

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Government-sponsored enterprises at December 31, 2012

 

$

350,043

 

$

261

 

$

(35

)

$

350,269

 

Corporate notes and bonds at December 31, 2012

 

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 September 30, 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

 

$

52,522

 

$

(10

)

$

72,727

 

$

(35

)

Continuous unrealized loss position greater than one year

 

 

 

 

 

 

 

52,522

 

(10

)

72,727

 

(35

)

Corporate notes and bonds:

 

 

 

 

 

 

 

 

 

Continuous unrealized loss position less than one year

 

$

99,131

 

$

(101

)

$

90,960

 

$

(140

)

Continuous unrealized loss position greater than one year

 

 

 

 

 

 

 

99,131

 

(101

)

90,960

 

(140

)

Total

 

$

151,653

 

$

(111

)

$

163,687

 

$

(175

)

 

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

 

 

 

September 30, 2013

 

 

 

Amortized
Cost

 

Fair
Value

 

Due in less than one year

 

$

394,612

 

$

394,863

 

Due in one to two years

 

321,562

 

321,667

 

Due in three to five years

 

 

 

Due after five years

 

 

 

Total

 

$

716,174

 

$

716,530

 

 

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.

 

Cost Method Investments

 

As of September 30, 2013, we maintain in the aggregate, non-controlling equity investments of approximately $38.0 million in privately-held corporations. We account for these investments at cost since we do not have the ability to exercise significant influence over these companies and their fair values are not readily determinable. The fair value of these investments has not been estimated at September 30, 2013, as we have not identified any events or developments indicating that their carrying amounts may be impaired. We include these investments within other assets on our accompanying consolidated balance sheets.

 

6. Goodwill and Other Intangible Assets

 

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

 

 

 

As of September 30, 2013

 

As of December 31, 2012

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

 

Goodwill (1)

 

$

10,626

 

$

 

$

10,626

 

$

10,530

 

$

 

$

10,530

 

Other intangible assets (1):

 

 

 

 

 

 

 

 

 

 

 

 

Technology, patents and trade names

 

4,965

 

(3,475

)

1,490

 

4,859

 

(2,825

)

2,034

 

Customer relationships and non-compete agreements

 

4,860

 

(2,698

)

2,162

 

4,749

 

(2,232

)

2,517

 

Contract-based

 

2,020

 

(1,684

)

336

 

2,020

 

(693

)

1,327

 

Total

 

$

22,471

 

$

(7,857

)

$

14,614

 

$

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

 

$

1,362

 

2015

 

1,070

 

2016

 

552

 

2017

 

368

 

2018

 

 

Thereafter

 

 

 

 

$

3,352

 

 

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 $5.1 million as of September 30, 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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Service cost

 

$

1,352

 

$

1,078

 

$

4,055

 

$

3,236

 

Interest cost

 

396

 

369

 

1,188

 

1,106

 

Amortization of prior service cost

 

207

 

207

 

621

 

620

 

Amortization of net actuarial loss

 

199

 

 

596

 

 

Net pension expense

 

$

2,154

 

$

1,654

 

$

6,460

 

$

4,962

 

 

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)

 

Three Months
Ended September
30, 2013

 

Nine Months Ended
September 30, 2013

 

Amortization of prior service cost:

 

 

 

 

 

Research and development

 

$

79

 

$

234

 

Selling, general and administrative

 

128

 

387

 

Total

 

207

 

621

 

 

 

 

 

 

 

Amortization of net actuarial loss:

 

 

 

 

 

Research and development

 

75

 

224

 

Selling, general and administrative

 

124

 

372

 

Total

 

199

 

596

 

 

 

 

 

 

 

Total amortization of prior service cost and net actuarial loss:

 

406

 

1,217

 

Tax benefit

 

(134

)

(404

)

Total, net of tax

 

$

272

 

$

813

 

 


(1)          Refer to Note 12— Accumulated Other Comprehensive Income .

 

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. STAP awards generally vest in equal increments on each anniversary of the date of grant over a four-year period and expire on the tenth anniversary of the date of grant.

 

The STAP liability balance was $156.8 million and $75.4 million at September 30, 2013 and December 31, 2012, respectively, and has been included within other current liabilities on our consolidated balance sheets.

 

12



Table of Contents

 

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 price of our common stock, 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 includes the assumptions used to measure the fair value of STAP awards:

 

 

 

September 30,
2013

 

September 30,
2012

 

Expected volatility

 

34.2

%

35.8

%

Risk-free interest rate

 

1.1

%

0.5

%

Expected term of awards (in years)

 

4.1

 

3.9

 

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

 

3,347,544

 

57.34

 

 

 

 

 

Exercised

 

(1,705,088

)

43.44

 

 

 

 

 

Forfeited

 

(147,197

)

55.28

 

 

 

 

 

Outstanding at September 30, 2013

 

9,457,634

 

$

52.86

 

7.6

 

$

245,837

 

Exercisable at September 30, 2013

 

3,612,863

 

$

47.17

 

6.4

 

$

114,459

 

Expected to vest at September 30, 2013

 

4,968,749

 

$

55.80

 

8.8

 

$

114,553

 

 

The weighted average fair value of STAP awards granted during the nine-month periods ended September 30, 2013 and 2012 was $24.70 and $21.26, respectively.

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Research and development

 

$

30,463

 

$

11,790

 

$

58,027

 

$

14,932

 

Selling, general and administrative

 

29,945

 

14,404

 

59,706

 

18,061

 

Cost of product sales

 

1,064

 

865

 

2,381

 

1,143

 

Share-based compensation expense before taxes

 

61,472

 

27,059

 

120,114

 

34,136

 

Related income tax (benefit)

 

(20,593

)

(9,909

)

(40,238

)

(12,501

)

Share-based compensation expense, net of taxes

 

$

40,879

 

$

17,150

 

$

79,876

 

$

21,635

 

Share-based compensation capitalized as part of inventory

 

$

358

 

$

462

 

$

681

 

$

608

 

 

Cash paid to settle STAP awards exercised during the nine-month periods ended September 30, 2013 and 2012, was $31.2 million and $25.7 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

 

13



Table of Contents

 

and September 15 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.

 

The closing price of our common stock exceeded 130 percent of the conversion price of the 2016 Convertible Notes for more than 20 trading days during the 30 consecutive trading day period ended September 30, 2013. Consequently, the 2016 Convertible Notes are convertible at the election of their holders. As this conversion right is outside of our control, the 2016 Convertible Notes have been classified as a current liability on our consolidated balance sheet at September 30, 2013. We are required to calculate this contingent conversion provision at the end of each quarterly reporting period. Therefore, the convertibility and classification of our 2016 Convertible Notes may change depending on the price of our common stock.

 

At September 30, 2013, the aggregate conversion value of the 2016 Convertible Notes exceeded their par value by $163.3 million using a conversion price of $78.85, the closing price of our common stock on September 30, 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.

 

The terms of the 2016 Convertible Notes provide for settlement wholly or partially in cash. Consequently, 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. A portion of the Equity Component equal to the unamortized discount as of September 30, 2013 has been reclassified to temporary equity because one of the contingent conversion criteria had been met at September 30, 2013, as disclosed above. Refer to Note 10— Temporary Equity . We are amortizing the discount over the five-year period ending September 15, 2016 (the expected life of the Liability Component) using the interest method and an effective rate of interest of 6.7 percent, which corresponded to our estimated non-convertible borrowing rate at the date of issuance.

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Contractual coupon rate of interest

 

$

625

 

$

625

 

$

1,875

 

$

1,875

 

Discount amortization

 

2,801

 

2,626

 

8,300

 

7,790

 

Interest expense—convertible notes

 

$

3,426

 

$

3,251

 

$

10,175

 

$

9,665

 

 

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

 

 

 

September 30,
2013

 

December 31,
2012

 

Principal balance

 

$

250,000

 

$

250,000

 

Discount, net of accumulated amortization of $20,905 and $12,605

 

(37,033

)

(45,333

)

Carrying amount

 

$

212,967

 

$

204,667

 

 

14



Table of Contents

 

Convertible Note Hedge and Warrant Transactions

 

In connection with the issuance of our 2016 Convertible Notes, we entered into separate convertible note hedge and warrant transactions with Deutsche Bank AG London (DB London) to reduce the potentially dilutive impact of 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 a $70.0 million mortgage loan (the 2010 Credit Agreement). The 2010 Credit Agreement matures 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 LIBOR, plus a credit spread of 3.75 percent, or approximately 3.9 percent as of September 30, 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.  We can prepay the loan balance without being subject to a prepayment premium or penalty. As of September 30, 2013, the principal balance under the 2010 Credit Agreement was $67.8 million. The 2010 Credit Agreement contains financial covenants, and as of September 30, 2013, we were in compliance with these covenants.

 

Line of Credit

 

On September 26, 2013, we entered into a Credit Agreement with Wells Fargo providing for a $75.0 million revolving loan facility, which may be increased by up to an additional $75.0 million provided certain conditions are met (the 2013 Credit Agreement). At our option, amounts borrowed under the 2013 Credit Agreement will bear interest at either the one-month LIBOR rate plus a 0.50 percent margin, or a fluctuating base rate excluding any margin. In addition, we will be subject to a monthly commitment fee of 0.06 percent per annum on the average daily unused balance of the facility. Amounts borrowed under the 2013 Credit Agreement are secured by certain of our marketable investments. As of September 30, 2013, we have not drawn on the facility, which has a one-year term. The 2013 Credit Agreement does not contain any financial covenants.

 

Interest Expense

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Interest expense

 

$

4,540

 

$

4,384

 

$

13,496

 

$

13,054

 

Less: interest capitalized

 

 

 

 

(905

)

Total interest expense

 

$

4,540

 

$

4,384

 

$

13,496

 

$

12,149

 

 

10. Temporary Equity

 

Temporary equity includes securities that: (1) have redemption features that are outside our control; (2) are not classified as an asset or liability; (3) are excluded from permanent stockholders’ equity; and (4) are not mandatorily redeemable. Amounts included in temporary equity relate to securities that are redeemable at a fixed or determinable price.

 

15



Table of Contents

 

Components comprising the carrying value of temporary equity include the following (in thousands):

 

 

 

September 30,
2013

 

December 31,
2012

 

Reclassification of Equity Component (1)

 

$

37,033

 

$

 

Common stock subject to repurchase (2)

 

10,882

 

10,882

 

Total

 

$

47,915

 

$

10,882

 

 


(1)          Represents the reclassification of the Equity Component equal to the unamortized discount of our 2016 Convertible Notes as of September 30, 2013 from additional paid-in capital to temporary equity. As of September 30, 2013, our 2016 Convertible Notes were convertible at the election of their holders as noted above in Note 9— Debt Convertible Notes Due 2016 .

 

(2)          In connection with our amended 2007 agreement with Toray Industries Inc. (Toray), we issued 400,000 shares of our common stock and provided Toray the right to request that we repurchase the shares at a price of $27.21 per share.

 

11. Stockholders’ Equity

 

Earnings Per Common Share

 

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period, adjusted for the potential dilutive effect of other securities if such securities were converted or exercised.

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income (numerator)

 

$

62,685

 

$

78,111

 

$

204,874

 

$

221,187

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares — basic

 

50,014

 

51,514

 

50,007

 

52,626

 

Effect of dilutive securities (1):

 

 

 

 

 

 

 

 

 

Convertible notes

 

1,822

 

662

 

1,389

 

136

 

Warrants

 

397

 

 

 

 

Stock options and employee stock purchase plan

 

1,455

 

1,414

 

1,174

 

1,087

 

Weighted average shares — diluted

 

53,688

 

53,590

 

52,570

 

53,849

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.25

 

$

1.52

 

$

4.10

 

$

4.20

 

Diluted

 

$

1.17

 

$

1.46

 

$

3.90

 

$

4.11

 

 

 

 

 

 

 

 

 

 

 

Stock options and warrants excluded from calculation (2)

 

10,088

 

11,026

 

10,485

 

11,761

 

 


(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

 

16



Table of Contents

 

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 nine-month periods ended September 30, 2013 and 2012.

 

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

 

(609,361

)

30.00

 

 

 

 

 

Forfeited

 

(3,528

)

10.51

 

 

 

 

 

Outstanding and exercisable at September 30, 2013

 

3,938,161

 

$

40.36

 

4.7

 

$

151,583

 

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Selling, general and administrative

 

$

12,709

 

$

4,042

 

$

21,875

 

$

6,371

 

Related income tax benefit

 

(4,258

)

(1,480

)

(7,328

)

(2,333

)

Share-based compensation expense net of taxes

 

$

8,451

 

$

2,562

 

$

14,547

 

$

4,038

 

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Number of options exercised

 

310,673

 

246,401

 

665,363

 

386,515

 

Cash received

 

$

9,799

 

$

6,575

 

$

19,896

 

$

9,689

 

 

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, which began in September 2012, occur in consecutive six-month periods commencing on September 5th and March 5th of each year. During the nine-month period ending September 30, 2013, we issued 55,070 shares of our common stock for $2.7 million. Eligible employees may contribute up to 15 percent of their base salary, subject to certain annual limitations as defined in the ESPP. The purchase price of the shares is equal to the lower of 85 percent of the closing price of our common stock on either the first or last trading day of a given offering period. In addition, the ESPP provides that no eligible employee may purchase more than 4,000 shares 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.

 

Share-based compensation expense related to the ESPP for the three-month periods ended September 30, 2013 and September 30, 2012 was $204,100 and $63,900, respectively. For the nine-month periods ended September 30, 2013 and September 30, 2012 compensation expense was $594,300 and $63,900, 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. Our approach in determining and estimating inputs for the ESPP is similar to the methodology we employ in valuing our STAP awards.

 

17



Table of Contents

 

Share Repurchases

 

Periodically, 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 one-year repurchase period began on March 4, 2013. As of September 30, 2013, we have acquired 708,998 shares of our common stock at an aggregate cost of $42.4 million.

 

12. Accumulated Other Comprehensive Income

 

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

 

 

 

Defined Benefit
Pension Plan(1)

 

Foreign
Currency
Translation
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

 

(854

)

(70

)

(873

)

Amounts reclassified from accumulated other comprehensive income

 

767

 

 

 

767

 

Net current-period other comprehensive income (loss)

 

818

 

(854

)

(70

)

(106

)

Balance, September 30, 2013

 

$

(10,722

)

$

(4,730

)

$

389

 

$

(15,063

)

 


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

 

13. Income Taxes

 

Income tax expense for the three- and nine-month periods ended September 30, 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 rates as of September 30, 2013 and 2012 were 34 percent and 31 percent, respectively.

 

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.

 

14. 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.

 

18



Table of Contents

 

Revenues, cost of revenues and gross profit for each of our commercial products were as follows (in thousands):

 

 

 

Three Months Ended September 30,

 

2013

 

Remodulin

 

Tyvaso

 

Adcirca

 

Total

 

Revenues

 

$

132,322

 

$

120,306

 

$

47,378

 

$

300,006

 

Cost of revenues

 

13,549

 

14,245

 

2,922

 

30,716

 

Gross profit

 

$

118,773

 

$

106,061

 

$

44,456

 

$

269,290

 

 

2012

 

 

 

 

 

 

 

 

 

Revenues

 

$

120,811

 

$

88,302

 

$

31,804

 

$

240,917

 

Cost of revenues

 

13,963

 

11,796

 

2,209

 

27,968

 

Gross profit

 

$

106,848

 

$

76,506

 

$

29,595

 

$

212,949

 

 

 

 

Nine Months Ended September 30,

 

2013

 

Remodulin

 

Tyvaso

 

Adcirca

 

Total

 

Revenues

 

$

371,314

 

$

324,409

 

$

124,924

 

$

820,647

 

Cost of revenues

 

40,439

 

44,125

 

7,785

 

92,349

 

Gross profit

 

$

330,875

 

$

280,284

 

$

117,139

 

$

728,298

 

 

2012

 

 

 

 

 

 

 

 

 

Revenues

 

$

341,755

 

$

239,578

 

$

84,359

 

$

665,692

 

Cost of revenues

 

43,956

 

32,073

 

5,603

 

81,632

 

Gross profit

 

$

297,799

 

$

207,505

 

$

78,756

 

$

584,060

 

 

For the three-month periods ended September 30, 2013 and 2012, net revenues from our three U.S.-based distributors represented 76 percent and 79 percent, respectively, of our total net operating revenues.

 

For the nine-month periods ended September 30, 2013 and 2012, net revenues from our three U.S.-based distributors represented 77 percent and 79 percent, respectively, of our total net operating revenues.

 

15. 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.  We have filed answers to the counterclaims in both lawsuits.

 

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 each 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.

 

19



Table of Contents

 

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

 

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 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 antibody for oncologic applications (Ch14.18 MAb) : an antibody that treats cancer by activating the immune system;

 

·                   Cell-based therapy: a cell-based product known as PLacental eXpanded (PLX) cells we are researching 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 in patients suffering from pulmonary arterial hypertension (PAH) and other lung diseases.

 

We concentrate substantially all of our research and development efforts on the preceding key therapeutic programs.  Our commercial products include Remodulin (treprostinil) Injection (Remodulin), Tyvaso (treprostinil) Inhalation Solution (Tyvaso) and Adcirca (tadalafil) tablets (Adcirca), each for the treatment of PAH. The United States Food and Drug Administration (FDA) has approved Remodulin for subcutaneous (under the skin) and intravenous (in the vein) administration, including for the treatment of patients requiring transition from Flolan ® (epoprostenol sodium) for Injection. Remodulin has also been approved in various countries outside of the United States.

 

Tyvaso is an inhaled treatment for PAH using the same active ingredient as Remodulin. Adcirca is an orally-administered therapy. We acquired exclusive commercialization rights to Adcirca in the United States from Eli Lilly and Company (Lilly). Compared to Remodulin, these two products offer therapeutically more convenient routes of administration, and are capable of reaching a broader range of patients who suffer from PAH in various stages of the disease. In addition, we are developing the following products for the treatment of PAH: an oral, extended-release treprostinil tablet (oral treprostinil), an implantable pump delivery system for Remodulin, an extended release, once-daily injectable form of treprostinil (TransCon treprostinil), an oral formulation of the prostacyclin analogue beraprost (314d) and an extended release, once-daily injection of beraprost(TransCon beraprost).

 

20



Table of Contents

 

Revenues

 

Sales of Remodulin, Tyvaso and Adcirca comprise substantially all 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). In addition to marketing in the United States, we also sell Remodulin to distributors internationally. Adcirca is sold through Lilly’s pharmaceutical wholesaler network on our behalf. Furthermore, Lilly determines the wholesale price at which we sell Adcirca.

 

We require our specialty pharmaceutical distributors to maintain reasonable levels of inventory reserves 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 volume 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), contain 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 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.

 

Certain effective provisions of the Acts address the coverage gap in the Medicare Part D prescription drug program (commonly known as the “donut hole”). 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. We estimate that the Medicare Part D coverage gap covers approximately 35 percent of Adcirca patients. The vast majority of our Remodulin and Tyvaso Medicare patients are covered under Medicare Part B, which does not contain a similar coverage gap.

 

We disclose total revenues 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 estimates 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 related estimates on observed historical customer payment behavior. We derive estimates relating to the allowance for returns of Adcirca from both published industry data specific to specialty pharmaceuticals and, more recently, from actual return data accumulated since launch.  The revision in the methodology for estimating returns of Adcirca to include actual return data resulted in a $1.8 million reduction of our allowance for returns associated with Adcirca for the nine-month period ending September 30, 2013. We also compare patient prescription data for Adcirca to sales 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 the methodology we currently employ to estimate our allowance for returns. Tyvaso is distributed under similar contractual terms as Remodulin. The allowance for exchanges for Remodulin and Tyvaso are based on the historical rate of product exchanges, which has been negligible. 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 services provided for a given financial reporting period.

 

Generic Competition

 

We disclose in Part II, Item I—Legal Proceedings of this Quarterly Report on Form 10-Q that we are engaged in litigation with Sandoz Inc. (Sandoz) regarding its abbreviated new drug applications (ANDAs) seeking FDA approval to market generic versions of Remodulin before the expiration of certain U.S. patents in October 2014, October 2017 and March 2029.  There can be no assurance that we will prevail in our defense of our patent rights. Our existing patents could be invalidated, found unenforceable or found not to cover a generic form of Remodulin. If Sandoz or another ANDA filer were to receive approval to sell a generic version of Remodulin and/or prevail in any patent litigation, Remodulin would become subject to increased competition and our revenue could be materially adversely impacted.

 

Certain patents for Revatio ® , a PDE-5 inhibitor marketed by Pfizer, Inc., expired in 2012, leading several manufacturers to launch generic formulations of sildenafil citrate, the active ingredient in Revatio, for the treatment of PAH. Generic sildenafil’s lower price relative to Adcirca could lead to an erosion of Adcirca’s market share and limit

 

21



Table of Contents

 

its potential sales. Although we believe Adcirca’s once-daily dosing regimen provides a significant competitive advantage over generic sildenafil’s multiple dosing regimen, we believe that government payers and private insurance companies may favor the use of less expensive generic sildenafil over Adcirca.  Thus far we have not observed any measurable impact of generic sildenafil on Adcirca revenues; however, this could change over time and our revenues may be adversely impacted. The patent for Adcirca for the treatment of pulmonary hypertension will expire in 2017.

 

Our patents for Tyvaso will expire in the United States and in various countries throughout the European Union in 2018 and 2020, respectively.

 

Patent expiration and generic competition for any of our commercial products could have a significant, adverse impact on our revenues, the magnitude of which is inherently difficult to predict. For additional discussion, please refer to the risk factor entitled, “ Our intellectual property rights may not effectively deter competitors from developing competing products that, if successful, could have a material adverse effect on our revenues and profits ”, which can be found in Part II Item 1A—Risk Factors  included in this Quarterly Report on Form 10-Q.

 

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. All royalty obligations pertaining to Remodulin and Tyvaso will expire in October 2014.

 

We produce Remodulin, Tyvaso and treprostinil in our Silver Spring, Maryland facility. 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 produce the Tyvaso nebulizer and components using a combination of a leased manufacturing facility in Germany and third-party contract manufacturers.

 

Lilly manufactures Adcirca. We take title to Adcirca upon its manufacture and bear any losses related to the storage, 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 re-measured at fair value at the end of each financial reporting period until the awards are no longer outstanding. Changes resulting from these re-measurements are recorded as adjustments 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 generally 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 vesting when we determine that it is probable that the performance criteria will be met. Each of these factors may cause significant fluctuations in operating expenses from quarter-to-quarter.

 

22



Table of Contents

 

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.

 

Cardiopulmonary Disease Projects

 

Remodulin

 

In 2009, we entered into an agreement with exclusive rights in the United States with Medtronic, Inc. (Medtronic) to develop its SynchroMed ®  II implantable system (consisting of the SynchroMed II pump and a new catheter) to deliver Remodulin. If the SynchroMed II program is successful, it could reduce many of the patient burdens associated with infused prostacyclin analogues. Medtronic recently completed the DelIVery clinical trial, which we funded, in order to study the safety of the SynchroMed II system while administering Remodulin. The primary objective was to demonstrate a rate of catheter-related complications below 2.5 per 1,000 patient-days while using the SynchroMed II system to deliver Remodulin. In September 2013, Medtronic informed us that this primary objective was met (p<0.0001).  Medtronic has not yet completed its analysis of numerous secondary endpoints, which will also have a bearing on the FDA device premarketing approval application (PMA) review process. In addition to the clinical study, Medtronic must complete other stability, compatibility and technical assessments of the SynchroMed II system, including modifications to its hardware and software, and address any outstanding regulatory issues.

 

Medtronic will make preparations to file a PMA seeking FDA clearance for the catheter and labeling changes, and will address any FDA feedback, to enable the use of the SynchroMed II system with Remodulin. In tandem, we plan to seek FDA approval of a supplement to Remodulin’s label to allow the use of Remodulin with the SynchroMed II system.

 

Tyvaso

 

We launched commercial sales of Tyvaso in 2009 following its approval by the FDA. 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 2012, the FDA acknowledged we had satisfied our PMCs and approved modifications to the Tyvaso Inhalation System.  The Tyvaso Inhalation System now includes a nebulizer called “TD-100,” which incorporates these modifications.  In addition, we are working to further improve the Tyvaso Inhalation System to make its use easier for patients.

 

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.

 

23



Table of Contents

 

We believe that patients participating in the FREEDOM-C and FREEDOM-C 2  trials needed longer-term treatment with oral treprostinil to provide a statistically significant clinical trial outcome.  We are therefore enrolling patients in a new phase III clinical trial called FREEDOM-EV. FREEDOM-EV is a placebo-controlled study of patients who enter the study on an approved background therapy within one year prior to enrollment (either an ETRA or a PDE-5 inhibitor, but not both). One of the co-primary endpoints of the study is the time to clinical worsening, generally defined as (1) death; (2) an unplanned hospitalization due to PAH; (3) initiation of a prostacyclin analogue therapy 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 the change in six minute-walk distance at week 24. We plan to enroll up to 858 patients 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. We filed a second resubmission of our NDA, and in September 2013 the FDA acknowledged that our second resubmission was a complete, class 2 response to its March 2013 complete response letter, and set a user fee goal date of February 16, 2014.  Despite the FDA’s two complete response letters, we continue to pursue our development of oral treprostinil and remain 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.

 

TransCon Treprostinil

 

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 to administering 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 the risk of sepsis, due to the use of an indwelling catheter, which is associated with intravenous Remodulin.

 

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.

 

We have been studying various formulations of beraprost since 2000. We completed a phase I safety trial of a reformulated, single-isomer version of beraprost (314d) 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 with differing sets of safety and efficacy profiles. We also believe treprostinil and 314d have complimentary pharmacokinetic profiles, which could mean they will provide greater efficacy in combination.  As such, we are enrolling a phase III study called BEAT ( BE raprost 314d A dd-on to T yvaso) to evaluate the clinical benefit of 314d in combination with Tyvaso for patients with PAH.

 

In addition, 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 under TransCon Treprostinil 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 commenced a phase I clinical study in Australia during the second quarter of 2013.  In June 2013, the FDA issued a clinical hold on a phase II study of PLX being conducted by Pluristem in another indication and as a result we suspended enrollment in our study.  In September 2013, the FDA released the clinical hold and we have re-commenced enrollment in our study.

 

24



Table of Contents

 

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.

 

We are also engaged in preclinical development of several regenerative medicine technologies for creating transplantable lung tissue and whole lungs for patients with end-stage lung disease, as well as other technologies that could increase the supply of transplantable lungs for patients.

 

From inception to September 30, 2013, we have spent $958.4 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 neuroblastoma 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 with high-risk neuroblastoma, 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 underway, having completed enrollment in August 2013. The NCI studies include a previously conducted randomized, phase III clinical trial and all other necessary studies supported by NCI. Collectively, these NCI studies will be used as the basis for a marketing authorization application (MAA) we expect to file during the fourth quarter of 2013 seeking EMA approval of Ch14.18 immunotherapy for the treatment of neuroblastoma, as well as a biologics license application (BLA) we expect to file in the first half of 2014 seeking FDA approval.  We received orphan drug designation for Ch14.18 from both the FDA and the EMA.

 

We have spent $102.1 million from inception to September 30, 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 toward the development of a broad spectrum antiviral drug with a primary indication for dengue and a secondary indication for influenza, 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. To date, we have received contract modifications exercising four of these options, increasing total committed contract funding to approximately $25.7 million. We recognize revenue under this contract to the extent of allowable costs incurred, plus a proportionate amount of fees earned.

 

We plan to begin enrolling a phase I clinical trial of our lead antiviral candidate, an alpha-glucosidase inhibitor called UV-4B, during the fourth quarter of 2013 or the first quarter of 2014.

 

We have spent $72.3 million from inception to September 30, 2013, on all of our current and former infectious disease programs.

 

25



Table of Contents

 

Future Prospects

 

The extent of our future success is dependent on how well we achieve the following objectives: (1) in the near term, continued growth in sales of our current commercial products by increasing our market share and launching enhancements designed to improve patient care, such as implantable pumps for Remodulin and a once-daily self-injectable form of treprostinil and/or beraprost; (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 effective 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 against 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 stringent regulatory requirements related to these programs. In 2013, we commenced construction of additional 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 our pre-clinical and clinical development in our virology, cell biology, regenerative medicine and xenotransplantation programs.

 

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.

 

26



Table of Contents

 

Financial Position

 

Cash and cash equivalents and current and non-current marketable investments, excluding restricted amounts (cash and investments) at September 30, 2013 totaled $1,038.8 million, compared to $784.9 million as of December 31, 2012. The increase in cash and cash equivalents and marketable investments of $253.9 million resulted primarily from an approximately 23 percent increase in revenues during the nine-month period ended September 30, 2013, as compared to the same period in 2012.

 

Accounts receivable at September 30, 2013 was $130.6 million, compared to $116.6 million at December 31, 2012.  The increase in accounts receivable of $14.0 million reflects the normal timing of invoices and collections.

 

Other assets at September 30, 2013 was $53.4 million, compared to $26.8 million at December 31, 2012.  The increase of $26.6 million was driven by $30.8 million of investments in two privately-held companies.

 

Current convertible notes increased by $213.0 million due to the reclassification of our 2016 Convertible Notes from their long-term status at December 31, 2012. Refer to Note 9— Debt—Convertible Notes Due 2016 included in this Quarterly Report on Form 10-Q for further details.

 

Other current liabilities increased by $64.9 million, from $93.6 million at December 31, 2012, to $158.4 million at September 30, 2013. The increase primarily resulted from the following components: (1) an $81.4 million increase in the STAP liability as a result of the appreciation in our common stock price; and (2) a $2.0 million increase in accruals relating to construction projects that have either commenced or are in the planning stage. These aforementioned increases were offset by a $20.1 million decrease in taxes payable as a result of estimated federal and state tax payments made during 2013.

 

Temporary equity at September 30, 2013 was $47.9 million, compared to $10.9 million at December 31, 2012. The $37.0 million increase in temporary equity corresponded to the reclassification of $37.0 million (equal to the unamortized discount of our 2016 Convertible Notes as of September 30, 2013) from additional paid-in capital, as our 2016 Convertible Notes were convertible at the election of their holders as of September 30, 2013. For further details refer to Note 9— Debt—Convertible Notes Due 2016 and Note 10— Temporary Equity to the consolidated financial statements contained in this Quarterly Report on Form 10-Q.

 

Additional paid-in capital was $1,029.7 million at September 30, 2013 compared to $1,015.8 million at December 31, 2012. The $13.9 million increase primarily consisted of the following components: (1) a $21.9 million increase in share-based compensation recognized in connection with our Chief Executive Officer’s potential year-end stock option award; (2) a $25.7 million increase in proceeds from the exercise of stock options and related tax benefits; and (3) a $2.7 million increase in proceeds from the issuance of shares under our employee stock purchase plan.  These increases were offset by a $37.0 million reclassification discussed above to temporary equity.

 

The $42.4 million increase in treasury stock reflects the cost to repurchase of approximately 709,000 shares of our common stock.

 

Three Months Ended September 30, 2013 and September 30, 2012

 

Revenues

 

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

 

 

 

Three Months Ended
September 30,

 

Percentage

 

 

 

2013

 

2012

 

Change

 

Cardiopulmonary products:

 

 

 

 

 

 

 

Remodulin

 

$

132,322

 

$

120,811

 

9.5

%

Tyvaso

 

120,306

 

88,302

 

36.2

%

Adcirca

 

47,378

 

31,804

 

49.0

%

Other

 

2,219

 

1,551

 

43.1

%

Total net revenues

 

$

302,225

 

$

242,468

 

24.6

%

 

27



Table of Contents

 

The growth in product revenues for the three months ended September 30, 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 September 30, 2013 and 2012, approximately 76 and 79 percent, respectively, of total net revenues were derived from our three U.S.-based specialty pharmaceutical 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 September 30, 2013

 

 

 

Rebates

 

Prompt Pay
Discounts