United Therapeutics Corporation
UNITED THERAPEUTICS Corp (Form: 10-Q, Received: 07/29/2014 06:03:29)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2014

 

OR

 

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

 

For the transition period from                to               

 

Commission file number 0-26301

 

United Therapeutics Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

52-1984749

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

1040 Spring Street, Silver Spring, MD

 

20910

(Address of Principal Executive Offices)

 

(Zip Code)

 

(301) 608-9292

(Registrant’s Telephone Number, Including Area Code)

 

 

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

 

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

 

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

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(do not check if a smaller reporting company)

 

 

 

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

 

The number of shares outstanding of the issuer’s common stock, par value $.01 per share, as of July 21, 2014 was 47,269,381 .

 

 

 



Table of Contents

 

INDEX

 

 

 

Page

Part I.

FINANCIAL INFORMATION (UNAUDITED)

 

 

 

 

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

36

 

 

 

Item 4.

Controls and Procedures

36

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

37

 

 

 

Item 1A.

Risk Factors

37

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

 

 

 

Item 4.

Mine Safety Disclosures

52

 

 

 

Item 6.

Exhibits

53

 

 

 

SIGNATURES

 

54

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

June 30,
2014

 

December 31,
2013

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

259,046

 

$

278,889

 

Marketable investments

 

308,534

 

409,645

 

Accounts receivable, net of allowance of none for 2014 and 2013

 

212,902

 

126,297

 

Inventories, net

 

58,033

 

47,758

 

Other current assets

 

43,093

 

46,424

 

Total current assets

 

881,608

 

909,013

 

Marketable investments

 

280,887

 

448,134

 

Goodwill and other intangibles, net

 

15,336

 

14,115

 

Property, plant and equipment, net

 

477,534

 

464,950

 

Deferred tax assets, net

 

193,808

 

192,718

 

Other assets

 

103,699

 

58,637

 

Total assets

 

$

1,952,872

 

$

2,087,567

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

112,246

 

$

92,244

 

Convertible notes

 

221,712

 

215,845

 

Share tracking awards plan

 

164,427

 

287,956

 

Line of credit and mortgages payable—current

 

141,614

 

66,614

 

Other current liabilities

 

19,074

 

25,015

 

Total current liabilities

 

659,073

 

687,674

 

Other liabilities

 

80,724

 

95,582

 

Total liabilities

 

739,797

 

783,256

 

Commitments and contingencies:

 

 

 

 

 

Temporary equity

 

39,170

 

45,037

 

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, 63,756,923 and 63,013,192 shares issued, and 47,230,528 and 50,388,140 shares outstanding at June 30, 2014 and December 31, 2013, respectively

 

638

 

630

 

Additional paid-in capital

 

1,101,476

 

1,057,224

 

Accumulated other comprehensive loss

 

(14,627

)

(13,183

)

Treasury stock at cost, 16,526,395 and 12,625,052 shares at June 30, 2014 and December 31, 2013, respectively

 

(890,998

)

(513,437

)

Retained earnings

 

977,416

 

728,040

 

Total stockholders’ equity

 

1,173,905

 

1,259,274

 

Total liabilities and stockholders’ equity

 

$

1,952,872

 

$

2,087,567

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(Unaudited)

 

(Unaudited)

 

Revenues:

 

 

 

 

 

 

 

 

 

Net product sales

 

$

321,329

 

$

277,495

 

$

605,882

 

$

520,641

 

Other

 

1,473

 

3,111

 

6,323

 

5,101

 

Total revenues

 

322,802

 

280,606

 

612,205

 

525,742

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

39,742

 

54,617

 

52,190

 

105,047

 

Selling, general and administrative

 

68,031

 

71,365

 

98,246

 

142,721

 

Cost of product sales

 

38,709

 

32,320

 

69,309

 

61,633

 

Total operating expenses

 

146,482

 

158,302

 

219,745

 

309,401

 

Operating income

 

176,320

 

122,304

 

392,460

 

216,341

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

Interest income

 

1,110

 

869

 

2,343

 

1,848

 

Interest expense

 

(4,746

)

(4,520

)

(9,356

)

(8,956

)

Other, net

 

349

 

(134

)

802

 

121

 

Total other (expense) income, net

 

(3,287

)

(3,785

)

(6,211

)

(6,987

)

Income before income taxes

 

173,033

 

118,519

 

386,249

 

209,354

 

Income tax expense

 

(61,181

)

(38,655

)

(136,873

)

(67,165

)

Net income

 

$

111,852

 

$

79,864

 

$

249,376

 

$

142,189

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

2.35

 

$

1.60

 

$

5.09

 

$

2.84

 

Diluted

 

$

2.10

 

$

1.52

 

$

4.54

 

$

2.71

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

47,617

 

49,800

 

49,002

 

50,003

 

Diluted

 

53,252

 

52,648

 

54,948

 

52,386

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(Unaudited)

 

(Unaudited)

 

Net income

 

$

111,852

 

$

79,864

 

$

249,376

 

$

142,189

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

859

 

(373

)

382

 

(2,663

)

Defined benefit pension plan:

 

 

 

 

 

 

 

 

 

Prior service cost arising during period, net of tax

 

 

 

(2,415

)

 

Actuarial gain arising during period, net of tax

 

 

 

221

 

51

 

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

 

226

 

256

 

452

 

512

 

Total defined benefit pension plan, net

 

226

 

256

 

(1,742

)

563

 

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

 

(70

)

(35

)

(84

)

(58

)

Other comprehensive gain (loss), net of tax

 

1,015

 

(152

)

(1,444

)

(2,158

)

Comprehensive income

 

$

112,867

 

$

79,712

 

$

247,932

 

$

140,031

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

249,376

 

$

142,189

 

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

 

 

 

 

 

Depreciation and amortization

 

15,206

 

15,845

 

Provision for inventory obsolescence

 

1,453

 

142

 

Current and deferred income tax expense

 

136,873

 

67,165

 

Share-based compensation (benefit) expense

 

(62,596

)

68,199

 

Amortization of debt discount and debt issue costs

 

6,532

 

6,240

 

Amortization of discount or premium on investments

 

2,988

 

2,038

 

Other

 

(414

)

1,313

 

Excess tax benefits from share-based compensation

 

(14,040

)

(2,634

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(86,473

)

(15,455

)

Inventories

 

(11,266

)

(7,705

)

Other assets

 

731

 

4,085

 

Accounts payable and accrued expenses

 

20,017

 

6,763

 

Other liabilities

 

(202,270

)

(106,639

)

Net cash provided by operating activities

 

56,117

 

181,546

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(31,512

)

(9,080

)

Purchases of held-to-maturity investments

 

(110,095

)

(162,461

)

Maturities of held-to-maturity investments

 

375,164

 

239,511

 

Cost-method investments

 

(45,000

)

(30,766

)

Net cash provided by investing activities

 

188,557

 

37,204

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payments to repurchase common stock

 

(377,562

)

(42,438

)

Proceeds from line of credit

 

75,000

 

 

Proceeds from the exercise of stock options

 

22,171

 

10,097

 

Issuance of stock under employee stock purchase plan

 

1,672

 

1,318

 

Excess tax benefits from share-based compensation

 

14,040

 

2,634

 

Net cash used in financing activities

 

(264,679

)

(28,389

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

162

 

(841

)

Net increase in cash and cash equivalents

 

(19,843

)

189,520

 

Cash and cash equivalents, beginning of period

 

278,889

 

154,030

 

Cash and cash equivalents, end of period

 

$

259,046

 

$

343,550

 

 

 

 

 

 

 

Supplemental schedule of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

2,727

 

$

2,775

 

Cash paid for income taxes

 

$

140,366

 

$

85,649

 

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

 

$

4,429

 

$

2,685

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

UNITED THERAPEUTICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(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 approval from the United States Food and Drug Administration (FDA) to market the following therapies: Remodulin ®  (treprostinil) Injection (Remodulin), Tyvaso ®  (treprostinil) Inhalation Solution (Tyvaso), Adcirca ®  (tadalafil) Tablets (Adcirca) and Orenitram ®  (treprostinil) Extended-Release Tablets (Orenitram). We commenced commercial sales of Orenitram during the second quarter of 2014. Remodulin has also been approved in various countries outside the United States.

 

2. Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information required by United States generally accepted accounting principles (GAAP) for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC on February 25, 2014.

 

In our management’s opinion, the accompanying consolidated financial statements contain all adjustments, including normal, recurring adjustments, necessary to fairly present our financial position as of June 30, 2014, results of operations and comprehensive income for the three- and six-month periods ended June 30, 2014 and 2013, and cash flows for the six-month periods ended June 30, 2014 and 2013. Interim results are not necessarily indicative of results for an entire year.

 

3. Inventories

 

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

 

 

 

June 30,
2014

 

December 31,
2013

 

Raw materials

 

$

23,651

 

$

18,377

 

Work-in-progress

 

12,027

 

11,802

 

Finished goods

 

22,355

 

17,579

 

Total inventories

 

$

58,033

 

$

47,758

 

 

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.

 

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Table of Contents

 

Level 2—Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets. Related inputs can also include those used in valuation or other pricing models such as interest rates and yield curves that can be corroborated by observable market data.

 

Level 3—Fair value is determined by using inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgment.

 

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

 

 

 

As of June 30, 2014

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

153,410

 

$

 

$

 

$

153,410

 

Federally-sponsored and corporate debt securities (2)

 

 

590,104

 

 

590,104

 

Total assets

 

$

153,410

 

$

590,104

 

$

 

$

743,514

 

Liabilities

 

 

 

 

 

 

 

 

 

Convertible notes due 2016

 

$

456,905

 

$

 

$

 

$

456,905

 

Contingent consideration (3)

 

 

 

4,777

 

4,777

 

Total liabilities

 

$

456,905

 

$

 

$

4,777

 

$

461,682

 

 

 

 

As of December 31, 2013

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

145,194

 

$

 

$

 

$

145,194

 

Federally-sponsored and corporate debt securities (2)

 

 

857,711

 

 

857,711

 

Total assets

 

$

145,194

 

$

857,711

 

$

 

$

1,002,905

 

Liabilities

 

 

 

 

 

 

 

 

 

Convertible notes due 2016

 

$

593,750

 

$

 

$

 

$

593,750

 

Contingent consideration (3)

 

 

 

6,616

 

6,616

 

Total liabilities

 

$

593,750

 

$

 

$

6,616

 

$

600,366

 

 


(1)          Included in cash and cash equivalents 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 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 June 30, 2014 and December 31, 2013, the cost of debt and weighted average cost of capital used to discount projected cash flows relating to our contingent consideration ranged from 8.7 percent to 16.5 percent, respectively.

 

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Table of Contents

 

A reconciliation of the beginning and ending balances of Level 3 liabilities for the three- and six-month periods ended June 30, 2014 is presented below (in thousands):

 

 

 

Contingent
Consideration

 

Balance, April 1, 2014—Asset (Liability)

 

$

(5,943

)

Transfers into Level 3

 

 

Transfers out of Level 3

 

 

Total gains/(losses) realized/unrealized:

 

 

 

Included in earnings

 

1,149

 

Included in other comprehensive income

 

17

 

Purchases

 

 

Sales

 

 

Issuances

 

 

Settlements

 

 

Balance June 30, 2014—Asset (Liability)

 

$

(4,777

)

Amount of total gains/(losses) for the three-month period ended June 30, 2014 included in earnings that are attributable to the change in unrealized gains or losses related to outstanding liabilities

 

$

1,149

 

 

 

 

Contingent
Consideration

 

Balance January 1, 2014—Asset (Liability)

 

$

(6,616

)

Transfers into Level 3

 

 

Transfers out of Level 3

 

 

Total gains/(losses) realized/unrealized:

 

 

 

Included in earnings

 

1,132

 

Included in other comprehensive income

 

23

 

Purchases

 

 

Sales

 

 

Issuances

 

 

Settlements

 

684

 

Balance June 30, 2014—Asset (Liability)

 

$

(4,777

)

Amount of total gains/(losses) for the six-month period ended June 30, 2014 included in earnings that are attributable to the change in unrealized gains or losses related to outstanding liabilities

 

$

1,132

 

 

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 Convertible Notes are reported above within the fair value hierarchy. The carrying value of our Wells Fargo mortgage loan and line of credit approximate fair value as both of these debt instruments bear a variable rate of interest that we believe approximates the market rate of interest for these instruments with similar credit risk profiles, terms and maturities (Level 2 in the fair value hierarchy). Refer to Note 9— Debt .

 

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5. Investments

 

Marketable Investments

 

Held-to-Maturity Investments

 

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

 

As of June 30, 2014

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Government-sponsored enterprises

 

$

243,013

 

$

253

 

$

(7

)

$

243,259

 

Corporate notes and bonds

 

346,105

 

753

 

(13

)

346,845

 

Total

 

$

589,118

 

$

1,006

 

$

(20

)

$

590,104

 

Reported under the following captions on the consolidated balance sheet (1):

 

 

 

 

 

 

 

 

 

Current marketable investments

 

$

308,534

 

 

 

 

 

 

 

Noncurrent marketable investments

 

280,584

 

 

 

 

 

 

 

 

 

$

589,118

 

 

 

 

 

 

 

 


(1)          Marketable investments include certain restricted current and non-current marketable investments of $46.8 million and $41.7 million, respectively, reflecting amounts pledged to secure the outstanding balance on our line of credit. Refer to Note 9— Debt—Line of Credit .

 

As of December 31, 2013

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Government-sponsored enterprises

 

$

445,939

 

$

257

 

$

(77

)

$

446,119

 

Corporate notes and bonds

 

411,455

 

300

 

(163

)

411,592

 

Total

 

$

857,394

 

$

557

 

$

(240

)

$

857,711

 

Reported under the following captions on the consolidated balance sheet (2):

 

 

 

 

 

 

 

 

 

Current marketable investments

 

$

409,645

 

 

 

 

 

 

 

Noncurrent marketable investments

 

447,749

 

 

 

 

 

 

 

 

 

$

857,394

 

 

 

 

 

 

 

 


(2)          At December 31, 2013, none of our marketable investments were restricted.

 

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Table of Contents

 

The following table summarizes gross unrealized losses and the length of time marketable investments have been in a continuous unrealized loss position (in thousands):

 

 

 

As of June 30, 2014

 

As of December 31, 2013

 

 

 

Fair
Value

 

Gross
Unrealized
Loss

 

Fair
Value

 

Gross
Unrealized
Loss

 

Government-sponsored enterprises:

 

 

 

 

 

 

 

 

 

Continuous unrealized loss position less than one year

 

$

13,258

 

$

(7

)

$

76,651

 

$

(77

)

Continuous unrealized loss position greater than one year

 

 

 

 

 

 

 

13,258

 

(7

)

76,651

 

(77

)

Corporate notes and bonds:

 

 

 

 

 

 

 

 

 

Continuous unrealized loss position less than one year

 

21,700

 

(13

)

168,669

 

(163

)

Continuous unrealized loss position greater than one year

 

 

 

 

 

 

 

21,700

 

(13

)

168,669

 

(163

)

Total

 

$

34,958

 

$

(20

)

$

245,320

 

$

(240

)

 

We attribute gross unrealized losses pertaining to our held-to-maturity securities as of June 30, 2014 and December 31, 2013 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.

 

The following table summarizes the contractual maturities of held-to-maturity marketable investments (in thousands):

 

 

 

June 30, 2014

 

 

 

Amortized
Cost

 

Fair
Value

 

Due in less than one year

 

$

308,534

 

$

308,792

 

Due in one to two years

 

197,078

 

197,563

 

Due in three to five years

 

83,506

 

83,749

 

Due after five years

 

 

 

Total

 

$

589,118

 

$

590,104

 

 

Investments Held at Cost

 

As of June 30, 2014, we maintain in the aggregate, non-controlling equity investments of $83.0 million in privately-held corporations, including a $50.0 million investment in preferred stock of Synthetic Genomics Inc. (SGI), which we purchased in May 2014. 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 June 30, 2014, 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.

 

In addition to the investment noted above, we entered into a separate multi-year research and development collaboration agreement whereby SGI will develop engineered primary pig cells with modified genomes for use in our xenotransplantation program, which is principally focused on lungs.  Under this agreement, each party will assume its own research and development costs and SGI may receive royalties and milestone payments from the development and commercialization of organs.

 

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Table of Contents

 

6. Goodwill and Other Intangible Assets

 

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

 

 

 

As of June 30, 2014

 

As of December 31, 2013

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

 

Goodwill (1)

 

$

10,666

 

$

 

$

10,666

 

$

10,703

 

$

 

$

10,703

 

Other intangible assets (1):

 

 

 

 

 

 

 

 

 

 

 

 

Technology, patents and trade names

 

7,008

 

(4,102

)

2,906

 

5,049

 

(3,730

)

1,319

 

Customer relationships and non-compete agreements

 

4,905

 

(3,141

)

1,764

 

4,947

 

(2,886

)

2,061

 

Contract-based

 

2,020

 

(2,020

)

 

2,020

 

(1,988

)

32

 

Total

 

$

24,599

 

$

(9,263

)

$

15,336

 

$

22,719

 

$

(8,604

)

$

14,115

 

 


(1)          Includes foreign currency translation adjustments.

 

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 June 30, 2014 and December 31, 2013. 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.

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Service cost

 

$

1,379

 

$

1,352

 

$

2,758

 

$

2,703

 

Interest cost

 

592

 

396

 

1,184

 

792

 

Amortization of prior service cost

 

309

 

207

 

617

 

414

 

Amortization of net actuarial loss

 

52

 

199

 

105

 

397

 

Net pension expense

 

$

2,332

 

$

2,154

 

$

4,664

 

$

4,306

 

 

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

 

12



Table of Contents

 

Component Reclassified from Accumulated Other

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

Comprehensive Loss (1)

 

2014

 

2013

 

2014

 

2013

 

Amortization of prior service cost:

 

 

 

 

 

 

 

 

 

Research and development

 

$

102

 

$

79

 

$

204

 

$

155

 

Selling, general and administrative

 

207

 

128

 

413

 

259

 

Total

 

309

 

207

 

617

 

414

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss:

 

 

 

 

 

 

 

 

 

Research and development

 

17

 

75

 

35

 

149

 

Selling, general and administrative

 

35

 

124

 

70

 

248

 

Total

 

52

 

199

 

105

 

397

 

 

 

 

 

 

 

 

 

 

 

Total amortization of prior service cost and net actuarial loss:

 

361

 

406

 

722

 

811

 

Tax benefit

 

(126

)

(134

)

(253

)

(270

)

Total, net of tax

 

$

235

 

$

272

 

$

469

 

$

541

 

 


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

 

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 measured as the increase in the closing price of our common stock between the dates of grant and exercise. 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 aggregate STAP liability balance was $181.2 million and $305.2 million at June 30, 2014 and December 31, 2013, respectively, of which $16.7 million and $17.2 million, respectively, have been classified as non-current liabilities under the caption “other liabilities” on our consolidated balance sheets based on their vesting terms.

 

Estimating the fair value of STAP awards requires the use of certain inputs that can materially impact the determination of fair value and the amount of compensation expense (benefit) we recognize. Inputs used in estimating fair value 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 fair value of the STAP awards is measured each financial reporting period because the awards are settled in cash.

 

The table below includes the assumptions used to measure the fair value of STAP awards:

 

 

 

June 30,
 2014

 

June 30,
 2013

 

Expected volatility

 

33.4

%

34.1

%

Risk-free interest rate

 

1.1

%

1.1

%

Expected term of awards (in years)

 

4.0

 

4.3

 

Expected forfeiture rate

 

9.9

%

9.4

%

Expected dividend yield

 

0.0

%

0.0

%

 

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Table of Contents

 

A summary of the activity and status of STAP awards is presented below:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted-

 

Remaining

 

Aggregate

 

 

 

 

 

Average

 

Contractual

 

Intrinsic

 

 

 

Number of

 

Exercise

 

Term

 

Value

 

 

 

Awards

 

Price

 

(in Years)

 

(in Thousands)

 

Outstanding at January 1, 2014

 

8,734,901

 

$

52.75

 

 

 

 

 

Granted

 

1,548,050

 

94.61

 

 

 

 

 

Exercised

 

(1,187,854

)

49.27

 

 

 

 

 

Forfeited

 

(130,664

)

62.63

 

 

 

 

 

Outstanding at June 30, 2014

 

8,964,433

 

$

60.30

 

7.7

 

$

262,159

 

Exercisable at June 30, 2014

 

3,514,810

 

$

50.85

 

6.2

 

$

132,292

 

Expected to vest at June 30, 2014

 

4,903,029

 

$

66.63

 

8.6

 

$

115,775

 

 

The weighted average grant-date fair value of STAP awards granted during the six-month periods ended June 30, 2014 and June 30, 2013 was $33.57 and $24.58, respectively.

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Research and development

 

$

928

 

$

14,069

 

$

(25,745

)

$

27,564

 

Selling, general and administrative

 

(2,039

)

14,831

 

(34,011

)

29,761

 

Cost of product sales

 

(1,038

)

239

 

(3,347

)

1,317

 

Share-based compensation (benefit) expense before taxes

 

(2,149

)

29,139

 

(63,103

)

58,642

 

Related income tax benefit (expense)

 

752

 

(9,674

)

22,086

 

(19,469

)

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

 

$

(1,397

)

$

19,465

 

$

(41,017

)

$

39,173

 

Share-based compensation capitalized as part of inventory

 

$

826

 

$

53

 

$

562

 

$

323

 

 

Cash paid to settle STAP awards exercised during the six-month periods ended June 30, 2014 and June 30, 2013 was $61.7 million and $24.5 million, respectively.

 

9. Debt

 

Line of Credit

 

In September 2013, we entered into a Credit Agreement with Wells Fargo Bank, National Association (Wells Fargo) providing us 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 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 are 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 June 30, 2014, we had an outstanding principal balance of $75.0 million under the 2013 Credit Agreement, which has been included under the caption “line of credit and mortgages payable—current” on our consolidated balance sheet. The outstanding balance is secured by $88.5 million in current and non-current marketable investments as noted in Note 5— Investments—Marketable Investments . We drew on the revolving loan facility, in part, to fund share repurchases during the second quarter of 2014. The 2013 Credit Agreement does not subject us to any financial covenants.  On July 24, 2014, we amended the 2013 Credit Agreement to extend its maturity date from September 26, 2014 to September 30, 2015.

 

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Table of Contents

 

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 (Convertible Notes). The 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 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 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 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 Convertible Notes for more than 20 trading days during the 30 consecutive trading day period ended June 30, 2014. Consequently, the Convertible Notes are convertible at the election of their holders. As this conversion right is outside of our control, the Convertible Notes are classified as a current liability on our consolidated balance sheet at June 30, 2014. We are required to calculate this contingent conversion provision at the end of each quarterly reporting period. Therefore, the convertibility and classification of our Convertible Notes may change depending on the price of our common stock.

 

At June 30, 2014, the aggregate conversion value of the Convertible Notes exceeded their par value by $213.9 million using a conversion price of $88.49, the closing price of our common stock on June 30, 2014.

 

Upon conversion, holders of our 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 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 Convertible Notes have been issued, holders can require us to purchase all or a portion of their Convertible Notes for 100 percent of the notes’ par value plus any accrued and unpaid interest.

 

The terms of the 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 Convertible Notes without consideration of the conversion option as of the date of issuance (Liability Component). We recorded the excess of the proceeds received over the estimated fair value of the Liability Component totaling $57.9 million as the conversion option (Equity Component) and recognized a corresponding offset as a discount to the Convertible Notes to reduce their net carrying value. We reclassified a portion of the Equity Component equal to the unamortized discount as of June 30, 2014 to temporary equity because one of the contingent conversion criteria had been met at June 30, 2014, as disclosed above. Refer to Note 10— Temporary Equity . We are amortizing the debt 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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Contractual coupon rate of interest

 

$

625

 

$

625

 

$

1,250

 

$

1,250

 

Discount amortization

 

2,973

 

2,786

 

5,867

 

5,499

 

Interest expense—convertible notes

 

$

3,598

 

$

3,411

 

$

7,117

 

$

6,749

 

 

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Table of Contents

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

Principal balance

 

$

250,000

 

$

250,000

 

Discount, net of accumulated amortization of $29,650 and $23,783

 

(28,288

)

(34,155

)

Carrying amount

 

$

221,712

 

$

215,845

 

 

Convertible Note Hedge and Warrant Transactions

 

In connection with the issuance of our 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 Convertible Notes, and will terminate upon the maturity of the Convertible Notes or the first day the 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 Convertible Notes. Both the convertible note hedge and warrant transactions will be settled on a net-share basis. If the conversion price of our Convertible Notes is between the strike prices of the call options and warrants on the expiration dates of the warrants, our shareholders will not experience any dilution in connection with the conversion of our 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 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 3.91 percent as of June 30, 2014. 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 June 30, 2014, the principal balance under the 2010 Credit Agreement was $66.5 million and is included within line of credit and mortgages payable—current as the outstanding balance will be due in December 2014. The 2010 Credit Agreement contains financial covenants, and as of June 30, 2014, we were in compliance with these covenants.

 

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.

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

Reclassification of Equity Component (1)

 

$

28,288

 

$

34,155

 

Common stock subject to repurchase (2)

 

10,882

 

10,882

 

Total

 

$

39,170

 

$

45,037

 

 


(1)          Represents the reclassification of the Equity Component equal to the unamortized debt discount of our Convertible Notes as of June 30, 2014 and December 31, 2013 from additional paid-in capital to temporary equity as our 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.

 

16



Table of Contents

 

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 comprised the following (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net income (numerator)

 

$

111,852

 

$

79,864

 

$

249,376

 

$

142,189

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares — basic

 

47,617

 

49,800

 

49,002

 

50,003

 

Effect of dilutive securities (1):

 

 

 

 

 

 

 

 

 

Convertible notes (2)

 

2,643

 

1,362

 

2,721

 

1,120

 

Warrants

 

1,560

 

 

1,671

 

 

Stock options and employee stock purchase plan

 

1,432

 

1,486

 

1,554

 

1,263

 

Weighted average shares — diluted

 

53,252

 

52,648

 

54,948

 

52,386

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

2.35

 

$

1.60

 

$

5.09

 

$

2.84

 

Diluted

 

$

2.10

 

$

1.52

 

$

4.54

 

$

2.71

 

 

 

 

 

 

 

 

 

 

 

Stock options and warrants excluded from calculation (2)

 

9,925

 

10,485

 

9,814

 

11,026

 

 


(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. Under our convertible note hedge agreement, we are entitled to receive shares required to be issued to investors upon conversion of our Convertible Notes. Since related shares used to compute dilutive earnings per share would be anti-dilutive, they have been excluded from the calculation above.

 

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 certain assumptions that can materially impact the estimation of fair value and related compensation expense. These assumptions used to estimate fair value include the expected volatility of our common stock, the risk-free interest rate, the expected term of stock option awards and the expected dividend yield. We did not grant any stock options during the three- and six-month periods ended June 30, 2014 and 2013.

 

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Table of Contents

 

A summary of the activity and status of employee stock options during the six-month period ended June 30, 2014 is presented below:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted-

 

Remaining

 

Aggregate

 

 

 

 

 

Average

 

Contractual

 

Intrinsic

 

 

 

Number of

 

Exercise

 

Term

 

Value

 

 

 

Options

 

Price

 

(Years)

 

(in thousands)

 

Outstanding at January 1, 2014

 

4,749,449

 

$

56.06

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

(688,697

)

30.60

 

 

 

 

 

Forfeited

 

(218

)

11.35

 

 

 

 

 

Outstanding and exercisable at June 30, 2014

 

4,060,534

 

$

60.38

 

5.7

 

$

138,715

 

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Selling, general and administrative

 

$

 

$

3,643

 

$

 

$

9,166

 

Related income tax benefit

 

 

(1,209

)

 

(3,043

)

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense, net of taxes

 

$

 

$

2,434

 

$

 

$

6,123

 

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Number of options exercised

 

445,955

 

205,323

 

717,197

 

354,690

 

Cash received

 

$

13,736

 

$

5,838

 

$

22,171

 

$

10,097

 

 

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. The ESPP provides eligible employees the right to purchase shares of our common stock at a discount through elective accumulated payroll deductions at the end of each offering period. Offering periods occur in consecutive six-month periods commencing in September and March of each year. For the offering period ended in March 2014, we issued 26,534 shares of our common stock for $1.7 million in employee contributions. 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 June 30, 2014 and 2013 was $276,500 and $202,600, respectively, and for the six-month periods ended June 30, 2014 and 2013 was $507,500 and $390,100, 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.

 

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Share Repurchases

 

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. We completed this repurchase program during the quarter ended June 30, 2014 and acquired 4.6 million shares of our common stock in the aggregate under the program.

 

In addition, in June 2014, our Board of Directors authorized the repurchase of up to an additional $500.0 million of our common stock in open market or privately negotiated transactions, at our discretion.  This new program will become effective on August 1, 2014, and will remain open for up to one year.

 

12. Accumulated Other Comprehensive Loss

 

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

 

 

 

Defined

 

Foreign

 

Unrealized

 

 

 

 

 

Benefit

 

Currency

 

Losses on

 

 

 

 

 

Pension

 

Translation

 

Available-for-

 

 

 

 

 

Plan(1)

 

Gains

 

Sale Securities

 

Total

 

Balance, January 1, 2014

 

$

(8,445

)

$

(5,069

)

$

331

 

$

(13,183

)

Other comprehensive income (loss) before reclassifications

 

(2,194

)

382

 

(84

)

(1,896

)

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive loss

 

452

 

 

 

452

 

Net current-period other comprehensive income (loss)

 

(1,742

)

382

 

(84

)

(1,444

)

Balance, June 30, 2014

 

$

(10,187

)

$

(4,687

)

$

247

 

$

(14,627

)

 


(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 six-month periods ended June 30, 2014 and 2013 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 updated or revised. The estimated annual effective tax rates as of June 30, 2014 and 2013 were 35 percent and 33 percent, respectively.  Our 2014 estimated annual effective tax rate increased as of June 30, 2014 primarily due to a reduction in the amount of business tax credits we expect to generate during 2014 versus our estimate at June 30, 2013 for the 2013 tax year.

 

We are subject to federal and state taxation in the United States and various foreign jurisdictions. Currently, our 2010 to 2012 tax years are subject to examination by the Internal Revenue Service and 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.

 

In September 2013, the Internal Revenue Service issued final regulations regarding the deduction and capitalization of expenditures related to tangible property. These final regulations apply to amounts paid to acquire, produce, or improve tangible property as well as dispositions of such property and are generally effective for tax years beginning on or after January 1, 2014. We have evaluated these regulations and determined they will not have a material impact on our consolidated results of operations, cash flows or financial position.

 

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14. Segment Information

 

We currently operate as one operating segment. However, our chief operating decision makers regularly review revenues, cost of product sales and gross profit data as the primary measures of performance for each of our four commercial products. We commenced sales of Orenitram during the second quarter of 2014.

 

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

 

 

 

Three Months Ended June 30,

 

2014

 

Remodulin

 

Tyvaso

 

Adcirca

 

Orenitram

 

Total

 

Net revenues

 

$

138,152

 

$

121,227

 

$

55,318

 

$

6,632

 

$

321,329

 

Cost of product sales

 

14,381

 

18,744

 

3,389

 

2,195

 

38,709

 

Gross profit

 

$

123,771

 

$

102,483

 

$

51,929

 

$

4,437

 

$

282,620

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

124,311

 

$

109,458

 

$

43,726

 

$

 

$

277,495

 

Cost of product sales

 

13,484

 

16,097

 

2,739

 

 

32,320

 

Gross profit

 

$

110,827

 

$

93,361

 

$

40,987

 

$

 

$

245,175

 

 

 

 

Six Months Ended June 30,

 

2014

 

Remodulin

 

Tyvaso

 

Adcirca

 

Orenitram

 

Total

 

Net revenues

 

$

274,259

 

$

228,313

 

$

96,678

 

$

6,632

 

$

605,882

 

Cost of product sales

 

27,607

 

33,198

 

5,982

 

2,522

 

69,309

 

Gross profit

 

$

246,652

 

$

195,115

 

$

90,696

 

$

4,110

 

$

536,573

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

238,992

 

$

204,103

 

$

77,546

 

$

 

$

520,641

 

Cost of product sales

 

26,890

 

29,880

 

4,863

 

 

61,633

 

Gross profit

 

$

212,102

 

$

174,223

 

$

72,683

 

$

 

$

459,008

 

 

For the three-month periods ended June 30, 2014 and 2013, net revenues from our U.S.-based distributors represented 75 percent and 77 percent, respectively, of our total net operating revenues.

 

For the six-month periods ended June 30, 2014 and 2013, net revenues from our U.S.-based distributors represented 75 percent and 77 percent, respectively, of our total net operating revenues.

 

15. Litigation

 

Department of Health and Human Services Subpoena

 

In December 2013, we received a subpoena from the Office of the Inspector General (OIG) of the Department of Health and Human Services reflecting a civil investigation by the United States Department of Justice, principally represented by the United States Attorney’s Office for the District of Maryland. The subpoena requests documents regarding Remodulin, Tyvaso and Adcirca, including our marketing practices relating to these products. We are cooperating with the investigation. We are not aware that a claim, litigation or assessment has been asserted in connection with the subpoena. However, we cannot predict what actions, if any, may be taken by the OIG, the Department of Justice, other governmental entities, or any third parties in connection with such investigation.

 

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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 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.  Shortly before trial, Sandoz withdrew its request to market a generic version of Remodulin before the expiration of U.S. Patent No. 5,153,222, but maintained its request to market a generic version of Remodulin before the expiration of the other two patents.  The trial for both lawsuits, limited to U.S. Patent Nos. 6,765,117 and 7,999,007, occurred in May and June 2014 and we are awaiting the Court’s decision.

 

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.

 

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, 2013, 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, 2013, 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 ® , Orenitram ®  and 314d) : 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 (cyclic GMP) in cells. Cyclic GMP 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;

 

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

 

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

 

·                   Lung 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 are also developing technologies aimed at improving outcomes for lung transplant recipients.

 

We concentrate substantially all of our research and development efforts on the preceding key therapeutic programs.  We currently market and sell the following commercial products:

 

·                   Remodulin (treprostinil) Injection (Remodulin). Remodulin, a continuously-infused formulation of the prostacyclin analogue treprostinil, is approved in the United States for subcutaneous (under the skin) and intravenous (in the vein) administration.  Remodulin is indicated to diminish symptoms associated with exercise in World Health Organization (WHO) Group 1 PAH patients.  Remodulin is also approved for the treatment of patients requiring transition from Flolan ®  (epoprostenol sodium) for Injection, the first prostacyclin analogue therapy for PAH approved by the United States Food and Drug Administration (FDA). Remodulin has also been approved in various countries outside of the United States.  Most recently, in March 2014, Japan’s Ministry of Health, Labor and Welfare approved Remodulin for the treatment of PAH by subcutaneous and intravenous administration.  Remodulin will be sold in Japan under the brand name Treprost™ by Mochida Pharmaceutical Co., Ltd.  We expect commercial sales to Mochida will commence in 2014 following government pricing approval of Treprost.

 

·                   Tyvaso (treprostinil) Inhalation Solution (Tyvaso).  Tyvaso, an inhaled formulation of treprostinil, is approved by the FDA to improve exercise ability in WHO Group 1 PAH patients.

 

·                   Orenitram (treprostinil) Extended-Release Tablets (Orenitram) . In December 2013, the FDA approved Orenitram, a tablet dosage form of treprostinil, for the treatment of PAH in WHO Group 1 PAH patients to improve exercise capacity. Orenitram’s label contemplates dosing either twice per day (BID) or three times per day (TID), and we anticipate that TID dosing may lead to a more favorable pharmacokinetic profile than BID, although TID dosing was not studied in our pivotal trial.  We commenced sales of Orenitram during the second quarter of 2014.

 

·                   Adcirca (tadalafil) Tablets (Adcirca) .  We acquired exclusive commercialization rights to Adcirca, an oral PAH therapy, in the United States and Puerto Rico from Eli Lilly and Company (Lilly). Adcirca is approved by the FDA to improve exercise ability in WHO Group 1 PAH patients.

 

Revenues

 

Sales of Remodulin, Tyvaso and Adcirca comprise substantially all of our revenues. Despite commencing Orenitram sales during the second quarter of 2014, we remain substantially reliant on sales of Remodulin, Tyvaso and Adcirca as our principal sources of revenue. We have entered into separate, non-exclusive distribution agreements with Accredo Health Group, Inc. (Accredo) and CVS Caremark (Caremark) to distribute Remodulin, Tyvaso and Orenitram in the United States. We sell these products to Accredo and Caremark under terms and conditions that are materially similar to one another. We also sell Remodulin to various distributors internationally. We sell Adcirca through Lilly’s pharmaceutical wholesaler network at a wholesale price determined by Lilly, which Lilly generally increases twice per year.  Most recently, Lilly increased the wholesale price of Adcirca by 9.1 percent effective on July 2, 2014.

 

We require our specialty pharmaceutical distributors to maintain reasonable levels of inventory reserves as the interruption of Remodulin, Tyvaso or Orenitram 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 of Remodulin and Tyvaso, our most significant sources of revenue, can vary depending on the timing and magnitude of these orders and may not precisely reflect patient demand.

 

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We recognize 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 to both Medicaid and commercial third-party payers and consider the impact of sales trends, changes in government and commercial rebate programs and any anticipated changes in our products’ pricing. 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 our allowance for returns of Adcirca from actual return data accumulated since the drug’s launch in 2009. 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 necessitate an alternative method to estimate our reserve for returns. Tyvaso, Remodulin and Orenitram are distributed under separate contracts with substantially similar terms, which include exchange rights in the event that product is damaged during shipment or expires. The allowance for exchanges for Remodulin and Tyvaso is based on the historical rate of product exchanges, which has been immaterial. Furthermore, we anticipate minimal exchange activity in the future for Tyvaso, Remodulin and Orenitram since we typically sell these products with a remaining shelf life in excess of one year and our distributors generally carry a thirty- to sixty-day supply of our products at any given time. As a result, we do not record reserves for exchanges for Tyvaso, Remodulin and Orenitram at the time of sale. Lastly, we pay our distributors for contractual services rendered and accrue for related fees based on contractual rates applied to the estimated units of service provided by distributors for a given financial reporting period.

 

Generic Competition

 

We disclose in Part II, Item 1.—Legal Proceedings of this Quarterly Report on Form 10-Q that we are engaged in litigation with Sandoz Inc. (Sandoz) contesting 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 2017 and March 2029. In July 2014, we received notice that another generic company, Teva Pharmaceuticals USA, Inc. (Teva), also filed an ANDA seeking FDA approval to market a generic version of Remodulin.  For further details, please see Part II, Item 5.—Other Information—Paragraph IV Notice Letter for Remodulin.

 

We intend to vigorously enforce our intellectual property rights relating to Remodulin.  However, there can be no assurance that we will prevail in defending our patent rights, or that additional challenges from other ANDA filers will not surface with respect to Remodulin or our other treprostinil-based products. Our existing patents could be invalidated, found unenforceable or found not to cover one or more generic forms of Remodulin, Tyvaso or Orenitram. If any ANDA filer were to receive approval to sell a generic version of Remodulin, Tyvaso or Orenitram and/or prevail in any patent litigation, the affected product(s) would become subject to increased competition which could reduce our sales.

 

Certain patents for Revatio ® , a PDE-5 inhibitor marketed by Pfizer, Inc. for treatment of PAH, expired in 2012, leading several manufacturers to launch generic formulations of sildenafil citrate, the active ingredient in Revatio. Generic sildenafil’s lower price relative to Adcirca could lead to an erosion of Adcirca’s market share and limit 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 sales of Adcirca; however, circumstances could change over time and our revenues could be adversely impacted. The U.S. patent for Adcirca for the treatment of pulmonary hypertension will expire in November 2017.

 

Patent expiration and generic competition for any of our commercial products could have a significant, adverse impact on the magnitude of our revenues, which is inherently difficult to predict. For additional discussion, 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 , contained 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 specified percentages of our net revenues from the related products. Currently, we pay GlaxoSmithKline PLC a royalty of ten percent of net sales of our treprostinil-based products (Remodulin, Tyvaso and Orenitram).  This royalty obligation will expire in October 2014.  As a result, we anticipate gross margins will increase on all three of our treprostinil-based products.  Going forward, we will have no royalty obligations for Remodulin or Tyvaso, and our only remaining royalty obligation on Orenitram sales will be a single-digit royalty relating to technology used in its formulation.  We pay a five percent royalty to Lilly on net sales of Adcirca.

 

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We synthesize treprostinil, the active ingredient in Remodulin and Tyvaso, and treprostinil diolamine, the active ingredient in Orenitram, and produce Remodulin and Tyvaso, at our facility in Silver Spring, Maryland.  We produce Orenitram in our Research Triangle Park, North Carolina facility.  We currently use our own facilities to produce our primary supply of Remodulin and Tyvaso, and our entire supply of Orenitram. We plan to continue to contract with third party contract manufacturers to supplement our Remodulin and Tyvaso production capacity and mitigate the risk of shortages and supply interruptions, and we are pursuing similar arrangements for Orenitram.

 

We began selling Orenitram during the second quarter of 2014, and typical of the initial commercial activities of a newly-launched product, Orenitram’s cost of product sales as a percentage of net revenue is significantly higher than that of our other commercial products. We expect that as Orenitram’s revenues increase, its cost of product sales as a percentage of net revenue will decrease to levels more comparable to our other commercial products.

 

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 we have 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.

 

Share-Based Compensation

 

Our operating expenses and net income are often materially impacted by the recognition of share-based compensation expense (benefit) associated with awards granted under our share tracking award plans (STAP) and potential stock option grants containing a market or performance condition, as the fair value of these varies with the changes in our stock price. The fair values of STAP awards and potential stock options grants are 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.

 

We account for STAP awards as liabilities because they are settled in cash. As such, we must re-measure the fair value of outstanding STAP awards at the end of each financial reporting period until the awards are no longer outstanding. Changes in our STAP-related liability resulting from such re-measurements are recorded as adjustments to share-based compensation expense (benefit) and can create substantial volatility within our operating expenses from financial reporting period to period. The following factors, among others, have a significant impact on 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 generally 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; (3) changes in the number of vested and partially vested awards; and (4) the probability of meeting the relevant performance criteria.

 

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 compensation expense for our Chief Executive Officer’s estimated stock option grant when we determine that it is probable that the performance criteria will be met.

 

Major Research and Development Projects

 

Our major research and development projects focus on: (1) the use of prostacyclin analogues, lung transplantation technologies and other therapies, to treat cardiopulmonary diseases; (2) a monoclonal antibody to treat high-risk neuroblastoma; and (3) glycobiology antiviral agents to treat infectious diseases.

 

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Cardiopulmonary Disease Projects

 

Remodulin

 

In 2009, we entered into an agreement with exclusive rights in the United States, United Kingdom, France, Germany, Italy and Japan, with Medtronic, Inc. (Medtronic) to develop its proprietary intravascular infusion catheter to be used with Medtronic’s SynchroMed ®  II implantable infusion pump and related infusion system components (collectively referred to as the “Medtronic System”) in order to deliver Remodulin for the treatment of PAH. If the Medtronic System is successful, it could reduce many of the patient burdens and other complications associated with infused prostacyclin analogues. With our funding, Medtronic conducted the DelIVery clinical trial in order to study the safety of the Medtronic System while administering Remodulin. The primary objective of this study was to demonstrate a rate of catheter-related complications below 2.5 per 1,000 patient-days while using the Medtronic System to deliver Remodulin. In September 2013, Medtronic informed us that it met this primary objective (p<0.0001). In addition to the clinical study, Medtronic must complete other stability, compatibility and technical assessments of the Medtronic System, including modifications to its hardware and software, and address any outstanding regulatory issues.  Upon completion of these activities by Medtronic, we anticipate Medtronic will make preparations to file a premarket approval application seeking FDA clearance for the catheter and labeling changes to enable the use of the Medtronic 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 Medtronic System.

 

Tyvaso

 

In connection with Tyvaso’s approval from the FDA, we agreed to a post-marketing requirement (PMR) obligating us to conduct an additional study to continue to assess the safety of Tyvaso. In accordance with this PMR, we recently completed enrollment of patients in a long-term observational study the United States that will include 1,000 patient years of follow-up in patients treated with Tyvaso and 1,000 patient years of follow-up in control patients receiving other PAH treatments. We are required to update the FDA annually on our PMR and to submit the results of the study by June 30, 2015.