United Therapeutics Corporation
UNITED THERAPEUTICS Corp (Form: 10-Q, Received: 07/28/2015 06:09:27)

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, 2015

 

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, 2015 was 45,540,492.

 

 

 



Table of Contents

 

INDEX

 

 

 

 

Page

 

 

 

 

Part I.

FINANCIAL INFORMATION (UNAUDITED)

 

3

 

 

 

 

Item 1.

Consolidated Financial Statements

 

3

 

 

 

 

 

Consolidated Balance Sheets

 

3

 

 

 

 

 

Consolidated Statements of Operations

 

4

 

 

 

 

 

Consolidated Statements of Comprehensive Income

 

5

 

 

 

 

 

Consolidated Statements of Cash Flows

 

6

 

 

 

 

 

Notes to Consolidated Financial Statements

 

7

 

 

 

 

Item 2.

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

 

20

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

34

 

 

 

 

Item 4.

Controls and Procedures

 

35

 

 

 

 

Part II.

OTHER INFORMATION

 

36

 

 

 

 

Item 1.

Legal Proceedings

 

36

 

 

 

 

Item 1A.

Risk Factors

 

36

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

51

 

 

 

 

Item 6.

Exhibits

 

51

 

 

 

 

SIGNATURES

 

 

52

 

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,
2015

 

December 31,
2014

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

254,359

 

$

397,697

 

Marketable investments

 

185,774

 

297,842

 

Accounts receivable, net of allowance of none for 2015 and 2014

 

169,214

 

162,287

 

Inventories, net

 

77,249

 

66,927

 

Other current assets

 

142,443

 

49,444

 

Total current assets

 

829,039

 

974,197

 

Marketable investments

 

121,467

 

122,658

 

Goodwill and other intangibles, net

 

28,805

 

29,465

 

Property, plant and equipment, net

 

471,862

 

478,421

 

Deferred tax assets, net

 

182,719

 

181,721

 

Other assets

 

102,930

 

97,948

 

Total assets

 

$

1,736,822

 

$

1,884,410

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

110,110

 

$

85,382

 

Convertible notes

 

32,282

 

126,414

 

Share tracking awards plan

 

354,779

 

282,101

 

Other current liabilities

 

45,243

 

10,413

 

Total current liabilities

 

542,414

 

504,310

 

Other liabilities

 

140,851

 

114,526

 

Total liabilities

 

683,265

 

618,836

 

Commitments and contingencies:

 

 

 

 

 

Temporary equity

 

13,084

 

23,218

 

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, 68,191,038 and 65,988,561 shares issued, and 45,693,395 and 47,107,709 shares outstanding at June 30, 2015 and December 31, 2014, respectively

 

682

 

660

 

Additional paid-in capital

 

1,694,973

 

1,376,141

 

Accumulated other comprehensive loss

 

(19,930

)

(16,734

)

Treasury stock, 22,497,643 and 18,880,852 shares at June 30, 2015 and December 31, 2014, respectively

 

(1,785,936

)

(1,185,825

)

Retained earnings

 

1,150,684

 

1,068,114

 

Total stockholders’ equity

 

1,040,473

 

1,242,356

 

Total liabilities and stockholders’ equity

 

$

1,736,822

 

$

1,884,410

 

 

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,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(Unaudited)

 

(Unaudited)

 

Revenues:

 

 

 

 

 

 

 

 

 

Net product sales

 

$

345,749

 

$

321,329

 

$

671,666

 

$

605,882

 

Other

 

1,412

 

1,473

 

2,999

 

6,323

 

Total revenues

 

347,161

 

322,802

 

674,665

 

612,205

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

49,411

 

39,742

 

159,623

 

52,190

 

Selling, general and administrative

 

109,987

 

68,031

 

321,327

 

98,246

 

Cost of product sales

 

16,058

 

38,709

 

36,836

 

69,309

 

Total operating expenses

 

175,456

 

146,482

 

517,786

 

219,745

 

Operating income

 

171,705

 

176,320

 

156,879

 

392,460

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

Interest expense

 

(1,296

)

(4,746

)

(3,355

)

(9,356

)

Other, net

 

(2,075

)

1,459

 

(1,982

)

3,145

 

Total other expense, net

 

(3,371

)

(3,287

)

(5,337

)

(6,211

)

Income before income taxes

 

168,334

 

173,033

 

151,542

 

386,249

 

Income tax expense

 

(69,123

)

(61,181

)

(68,972

)

(136,873

)

Net income

 

$

99,211

 

$

111,852

 

$

82,570

 

$

249,376

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

2.15

 

$

2.35

 

$

1.78

 

$

5.09

 

Diluted

 

$

1.91

 

$

2.10

 

$

1.57

 

$

4.54

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

46,091

 

47,617

 

46,397

 

49,002

 

Diluted

 

51,905

 

53,252

 

52,457

 

54,948

 

 

See accompanying notes to consolidated financial statements.

 

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UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(Unaudited)

 

(Unaudited)

 

Net income

 

$

99,211

 

$

111,852

 

$

82,570

 

$

249,376

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

1,564

 

859

 

(1,553

)

382

 

Defined benefit pension plan:

 

 

 

 

 

 

 

 

 

Prior service cost arising during period, net of tax

 

 

 

 

(2,415

)

Actuarial (loss) gain arising during period, net of tax

 

 

 

(2,110

)

221

 

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

 

148

 

226

 

481

 

452

 

Total defined benefit pension plan, net

 

148

 

226

 

(1,629

)

(1,742

)

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

 

1

 

(70

)

(14

)

(84

)

Other comprehensive income (loss), net of tax

 

1,713

 

1,015

 

(3,196

)

(1,444

)

Comprehensive income

 

$

100,924

 

$

112,867

 

$

79,374

 

$

247,932

 

 

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,

 

 

 

2015

 

2014

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

82,570

 

$

249,376

 

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

 

 

 

 

 

Depreciation and amortization

 

16,712

 

15,206

 

Share-based compensation expense (benefit)

 

281,814

 

(62,596

)

Amortization of debt discount and debt issue costs

 

5,053

 

6,532

 

Amortization of discount or premium on investments

 

1,434

 

2,988

 

Other

 

(4,504

)

1,039

 

Excess tax benefits from share-based compensation

 

(23,492

)

(14,040

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(6,927

)

(86,473

)

Inventories

 

(1,887

)

(11,266

)

Accounts payable and accrued expenses

 

23,326

 

20,017

 

Other assets and liabilities

 

(224,166

)

(64,666

)

Net cash provided by operating activities

 

149,933

 

56,117

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(7,814

)

(31,512

)

Purchases of held-to-maturity investments

 

(61,265

)

(110,095

)

Maturities of held-to-maturity investments

 

172,818

 

375,164

 

Purchase of investments under the cost method, net

 

(4,217

)

(45,000

)

Net cash provided by investing activities

 

99,522

 

188,557

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Principal payments of debt

 

(104,266

)

 

Payments to repurchase common stock

 

(336,838

)

(377,562

)

Proceeds from line of credit

 

 

120,000

 

Payments on the line of credit

 

 

(45,000

)

Proceeds from the exercise of stock options

 

24,445

 

22,171

 

Issuance of stock under employee stock purchase plan

 

1,927

 

1,672

 

Excess tax benefits from share-based compensation

 

23,492

 

14,040

 

Net cash used in financing activities

 

(391,240

)

(264,679

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(1,553

)

162

 

Net decrease in cash and cash equivalents

 

(143,338

)

(19,843

)

Cash and cash equivalents, beginning of period

 

397,697

 

278,889

 

Cash and cash equivalents, end of period

 

$

254,359

 

$

259,046

 

 

 

 

 

 

 

Supplemental schedule of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

741

 

$

2,727

 

Cash paid for income taxes

 

$

110,088

 

$

140,366

 

Non-cash investing activities and financing activities:

 

 

 

 

 

Non-cash additions to property, plant and equipment

 

$

1,402

 

$

4,429

 

Issuance of common stock upon conversion of convertible notes

 

$

263,272

 

$

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

UNITED THERAPEUTICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2015

(UNAUDITED)

 

1. Organization and Business Description

 

United Therapeutics Corporation is a biotechnology company focused on the development and commercialization of innovative 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), Orenitram ®  (treprostinil) Extended-Release Tablets (Orenitram) and Unituxin TM  (dinutuximab) Injection (formerly called ch14.18) (Unituxin). Remodulin has also been approved for distribution in various countries outside the United States, and Unituxin was granted marketing authorization by the European Medicines Agency in July 2015. We commenced commercial sales of Orenitram during the second quarter of 2014. We commenced commercial sales of Unituxin in the U.S. during the third quarter of 2015.

 

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, 2014, as filed with the SEC on February 24, 2015.

 

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, 2015, statements of operations and comprehensive income for the three- and six-month periods ended June 30, 2015 and June 30, 2014 and cash flows for the six-month periods ended June 30, 2015 and June 30, 2014. Interim results are not necessarily indicative of results for an entire year. In the operating section of our statement of cash flows, we reclassified the prior period amount within “current and deferred income tax expense” to “other assets and liabilities” to conform with the current period presentation.

 

Recently Issued Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 will eliminate transaction-specific and industry-specific revenue recognition guidance under current GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. ASU 2014-09 also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. ASU 2014-09 allows for either full retrospective or modified retrospective adoption. We are evaluating the transition method we will elect and the effects of the adoption of this ASU on our financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 requires retrospective adoption and will be effective for us beginning in our first quarter of 2016. Early adoption is permitted. We do not expect the adoption of ASU 2015-03 to have a material impact on our financial statements.

 

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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,
2015

 

December 31,
2014

 

Raw materials

 

$

22,017

 

$

21,317

 

Work-in-progress

 

22,261

 

15,994

 

Finished goods

 

32,971

 

29,616

 

Total inventories

 

$

77,249

 

$

66,927

 

 

4. Fair Value Measurements

 

We account for certain assets and liabilities at fair value and rank these assets within a fair value hierarchy (Level 1, Level 2 or Level 3). Our other current assets and our current liabilities have fair values that approximate their carrying values. Assets and liabilities subject to fair value measurements are as follows (in thousands):

 

 

 

As of June 30, 2015

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

91,799

 

$

 

$

 

$

91,799

 

Federally-sponsored and corporate debt securities (2)

 

 

307,513

 

 

307,513

 

Total assets

 

$

91,799

 

$

307,513

 

$

 

$

399,312

 

Liabilities

 

 

 

 

 

 

 

 

 

Convertible notes due 2016 (3)

 

$

124,012

 

$

 

$

 

$

124,012

 

Contingent consideration (4)

 

 

 

10,255

 

10,255

 

Total liabilities

 

$

124,012

 

$

 

$

10,255

 

$

134,267

 

 

 

 

As of December 31, 2014

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

298,416

 

$

 

$

 

$

298,416

 

Federally-sponsored and corporate debt securities (2)

 

 

420,731

 

 

420,731

 

Total assets

 

$

298,416

 

$

420,731

 

$

 

$

719,147

 

Liabilities

 

 

 

 

 

 

 

 

 

Convertible notes due 2016 (3)

 

$

388,153

 

$

 

$

 

$

388,153

 

Contingent consideration (4)

 

 

 

11,502

 

11,502

 

Total liabilities

 

$

388,153

 

$

 

$

11,502

 

$

399,655

 

 


(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 in which related trading activity is not sufficiently frequent to be considered a Level 1 input or comparable securities that are more actively traded. 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. The fair value of our Convertible Notes is estimated using Level 1 observable inputs since our Convertible Notes are trading with sufficient frequency such that we believe related pricing can be used as the primary basis for measuring their fair value. As of June 30, 2015 and December 31, 2014, the fair value of the Convertible Notes was substantially higher than their book value. This was

 

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primarily due to the excess conversion value of the notes compared to the notes’ par value, and the fact that any such excess would be paid in shares of our common stock.

 

(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 June 30, 2015 and December 31, 2014, the cost of debt and weighted average cost of capital used to discount projected cash flows relating to our contingent consideration ranged from 6.1 percent to 15.5 percent.

 

A reconciliation of the beginning and ending balances of Level 3 liabilities for the six-month period ended June 30, 2015 is presented below (in thousands):

 

 

 

Contingent
Consideration

 

Balance, January 1, 2015—Asset (Liability)

 

$

(11,502

)

Transfers into Level 3

 

 

Transfers out of Level 3

 

 

Total gains/(losses) realized/unrealized:

 

 

 

Included in earnings

 

541

 

Included in other comprehensive income

 

155

 

Purchases

 

 

Sales

 

 

Issuances

 

 

Settlements

 

551

 

Balance June 30, 2015—Asset (Liability)

 

$

(10,255

)

Amount of total gains/(losses) for the six-month period ended June 30, 2015 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 Convertible Notes are reported above within the fair value hierarchy. Refer to Note 9— Debt .

 

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5. Investments

 

Marketable Investments

 

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

 

As of June 30, 2015

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Government-sponsored enterprises

 

$

87,632

 

$

61

 

$

(30

)

$

87,663

 

Corporate notes and bonds

 

219,609

 

251

 

(10

)

219,850

 

Total

 

$

307,241

 

$

312

 

$

(40

)

$

307,513

 

Reported under the following captions on the consolidated balance sheet:

 

 

 

 

 

 

 

 

 

Current marketable investments

 

$

185,774

 

 

 

 

 

 

 

Noncurrent marketable investments

 

121,467

 

 

 

 

 

 

 

 

 

$

307,241

 

 

 

 

 

 

 

 

As of December 31, 2014

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Government-sponsored enterprises

 

$

127,212

 

$

118

 

$

(39

)

$

127,291

 

Corporate notes and bonds

 

293,288

 

260

 

(108

)

293,440

 

Total

 

$

420,500

 

$

378

 

$

(147

)

$

420,731

 

Reported under the following captions on the consolidated balance sheet:

 

 

 

 

 

 

 

 

 

Current marketable investments

 

$

297,842

 

 

 

 

 

 

 

Noncurrent marketable investments

 

122,658

 

 

 

 

 

 

 

 

 

$

420,500

 

 

 

 

 

 

 

 

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, 2015

 

As of December 31, 2014

 

 

 

Fair
Value

 

Gross
Unrealized
Loss

 

Fair
Value

 

Gross
Unrealized
Loss

 

Government-sponsored enterprises:

 

 

 

 

 

 

 

 

 

Continuous unrealized loss position less than one year

 

$

25,288

 

$

(30

)

$

15,293

 

$

(39

)

Continuous unrealized loss position greater than one year

 

 

 

 

 

 

 

25,288

 

(30

)

15,293

 

(39

)

Corporate notes and bonds:

 

 

 

 

 

 

 

 

 

Continuous unrealized loss position less than one year

 

14,493

 

(10

)

86,824

 

(97

)

Continuous unrealized loss position greater than one year

 

 

 

3,443

 

(11

)

 

 

14,493

 

(10

)

90,267

 

(108

)

Total

 

$

39,781

 

$

(40

)

$

105,560

 

$

(147

)

 

We attribute gross unrealized losses pertaining to our held-to-maturity securities as of June 30, 2015 and December 31, 2014 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 do not believe that these securities expose us to undue market risk or counterparty credit risk. As such, we do not consider these securities to be other than temporarily impaired.

 

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Table of Contents

 

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

 

 

 

June 30, 2015

 

 

 

Amortized
Cost

 

Fair
Value

 

Due in less than one year

 

$

185,774

 

$

185,916

 

Due in one to two years

 

121,467

 

121,597

 

Due in three to five years

 

 

 

Due after five years

 

 

 

Total

 

$

307,241

 

$

307,513

 

 

Investments Held at Cost

 

As of June 30, 2015, we maintain in the aggregate, non-controlling equity investments of $87.2 million in privately-held corporations, including a $50.0 million investment in the preferred stock of Synthetic Genomics Inc. (SGI), which we purchased in May 2014. We account for these investments under the cost method 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, 2015, 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 June 30, 2015

 

As of December 31, 2014

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

 

Goodwill

 

$

10,264

 

$

 

$

10,264

 

$

10,264

 

$

 

$

10,264

 

Other intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology, patents and trade names

 

6,494

 

(4,513

)

1,981

 

6,494

 

(4,100

)

2,394

 

In-process, research and development

 

15,500

 

 

15,500

 

15,500

 

 

15,500

 

Customer relationships and non-compete agreements

 

4,369

 

(3,309

)

1,060

 

4,369

 

(3,062

)

1,307

 

Contract-based

 

1,270

 

(1,270

)

 

1,270

 

(1,270

)

 

Total

 

$

37,897

 

$

(9,092

)

$

28,805

 

$

37,897

 

$

(8,432

)

$

29,465

 

 

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, 2015 and December 31, 2014 and is included under “Cash and cash equivalents” on our consolidated balance sheets. 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.

 

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8. Share Tracking Award Plans

 

We previously issued awards under 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 grant date over a four-year period and expire on the tenth anniversary of the date of grant. We discontinued the issuance of STAP awards on June 26, 2015, when our shareholders approved a broad-based stock incentive plan enabling us to grant stock options and other forms of equity compensation to our employees.

 

The aggregate STAP liability balance was $430.4 million and $322.7 million at June 30, 2015 and December 31, 2014, respectively, of which $75.7 million and $40.6 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,
2015

 

June 30,
2014

 

Expected volatility

 

34.4

%

33.4

%

Risk-free interest rate

 

1.4

%

1.1

%

Expected term of awards (in years)

 

4.3

 

4.0

 

Expected forfeiture rate

 

9.6

%

9.9

%

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, 2015

 

7,716,424

 

$

62.59

 

 

 

 

 

Granted

 

1,655,388

 

159.68

 

 

 

 

 

Exercised

 

(1,592,673

)

55.40

 

 

 

 

 

Forfeited

 

(152,963

)

85.78

 

 

 

 

 

Outstanding at June 30, 2015

 

7,626,176

 

$

84.70

 

7.7

 

$

680,746

 

Exercisable at June 30, 2015

 

2,740,339

 

$

65.33

 

6.5

 

$

297,651

 

Expected to vest at June 30, 2015

 

4,406,481

 

$

95.94

 

8.4

 

$

343,857

 

 

The weighted average grant-date fair value of STAP awards granted during the six-month periods ended June 30, 2015 and June 30, 2014 was $58.52 and $33.57, respectively.

 

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Table of Contents

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Research and development

 

$

13,313

 

$

928

 

$

88,221

 

$

(25,745

)

Selling, general and administrative

 

32,323

 

(2,039

)

182,038

 

(34,011

)

Cost of product sales

 

1,296

 

(1,038

)

10,891

 

(3,347

)

Share-based compensation expense (benefit) before taxes

 

46,932

 

(2,149

)

281,150

 

(63,103

)

Related income tax (expense) benefit

 

(19,477

)

752

 

(116,677

)

22,086

 

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

 

$

27,455

 

$

(1,397

)

$

164,473

 

$

(41,017

)

Share-based compensation expense capitalized as part of inventory

 

$

1,599

 

$

826

 

$

3,914

 

$

562

 

 

Cash paid to settle STAP awards exercised during the six-month periods ended June 30, 2015 and June 30, 2014 was $178.3 million and $61.7 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. At our option, amounts borrowed under this 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. In July 2015, we extended the term of this credit agreement to September 30, 2017. Amounts borrowed under the credit agreement are secured by certain of our marketable investments. As of June 30, 2015, we had no outstanding balance on the facility. This credit agreement does not contain any financial covenants.

 

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.

 

At June 30, 2015, the aggregate conversion value of the Convertible Notes exceeded their par value by $91.3 million using a conversion price of $173.95, the closing price of our common stock on June 30, 2015.

 

During the three-month period ended June 30, 2015, we settled conversion requests representing $90.3 million in principal value of our Convertible Notes. We paid $90.3 million in principal and issued 1.4 million shares of our common stock during the settlement process. We received 1.4 million shares of our common stock under our note hedge from Deutsche Bank AG London (DB London) which we placed into our treasury stock account. We recognized a $2.8 million extinguishment loss with the settlement of these conversions. As of June 30, 2015, there were 723,000 shares of our common stock that could be issued upon future conversions of our outstanding Convertible Notes.

 

We have received additional conversion requests representing $2.9 million in principal value of our Convertible Notes, which will settle in the third quarter of 2015. Based on our stock price as of June 30, 2015, we expect that the full $2.9 million of principal will be paid in cash to the converting note holders, and that we will be required to issue shares of our common stock. We expect to receive an equal number of shares of our common stock under our note hedge with DB London and to recognize an estimated $66,000 extinguishment loss upon settlement of these conversions.

 

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Table of Contents

 

Interest expense incurred in connection with our Convertible Notes consisted of the following (in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Contractual coupon rate of interest

 

$

83

 

$

625

 

$

327

 

$

1,250

 

Discount amortization

 

824

 

2,973

 

2,422

 

5,867

 

Interest expense—convertible notes

 

$

907

 

$

3,598

 

$

2,749

 

$

7,117

 

 

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

 

 

 

June 30,
2015

 

December 31,
2014

 

Principal balance

 

$

34,484

 

$

138,750

 

Discount, net of accumulated amortization of $5,789 and $19,819

 

(2,202

)

(12,336

)

Carrying amount

 

$

32,282

 

$

126,414

 

 

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,
2015

 

December 31,
2014

 

Reclassification of Equity Component (1)

 

$

2,202

 

$

12,336

 

Common stock subject to repurchase (2)

 

10,882

 

10,882

 

Total

 

$

13,084

 

$

23,218

 

 


(1)          Represents the reclassification of the Equity Component equal to the unamortized debt discount of our Convertible Notes as of June 30, 2015 and December 31, 2014, respectively, 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 require us to 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.

 

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Table of Contents

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net income (numerator)

 

$

99,211

 

$

111,852

 

$

82,570

 

$

249,376

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares — basic

 

46,091

 

47,617

 

46,397

 

49,002

 

Effect of dilutive securities (1) :

 

 

 

 

 

 

 

 

 

Convertible notes (2)

 

1,059

 

2,643

 

1,471

 

2,721

 

Warrants

 

3,274

 

1,560

 

3,096

 

1,671

 

Stock options and employee stock purchase plan

 

1,481

 

1,432

 

1,493

 

1,554

 

Weighted average shares — diluted

 

51,905

 

53,252

 

52,457

 

54,948

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

2.15

 

$

2.35

 

$

1.78

 

$

5.09

 

Diluted

 

$

1.91

 

$

2.10

 

$

1.57

 

$

4.54

 

 

 

 

 

 

 

 

 

 

 

Stock options, warrants, and shares of our common stock issued under our Convertible Notes excluded from calculation (2)

 

3,699

 

9,925

 

4,655

 

9,814

 

 


(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 Options

 

As of June 30, 2015, we have two shareholder-approved equity incentive plans: the United Therapeutics Corporation Amended and Restated Equity Incentive Plan (the 1999 Plan) and the United Therapeutics Corporation 2015 Stock Incentive Plan (the 2015 Plan). The 2015 Plan was approved by our shareholders on June 26, 2015 and provides for the issuance of up to 6,150,000 shares of our common stock pursuant to awards granted under the 2015 Plan. No further awards will be granted under the 1999 Plan.

 

Although the terms of the 1999 Plan and the 2015 Plan contemplate a variety of awards, to date all awards granted under these plans have been in the form of stock options. 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 under the 1999 Plan during the six-month periods ended June 30, 2015 and June 30, 2014. On June 26, 2015, we granted 155,000 stock options under the 2015 Plan to our non-employee directors, representing the only awards granted under the 2015 Plan during the six-month period ended June 30, 2015. These stock options had a weighted average grant-date fair value of $60.80. We recorded $103,300 in share-based compensation expense for the six-months ended June 30, 2015 related to awards granted under the 2015 Plan. The share-based compensation expense related to awards granted under the 2015 Plan is reflected in selling, general and administrative within the statement of operations.

 

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Table of Contents

 

The table below includes the assumptions used to measure the fair value of the stock options granted to non-employee directors on June 26, 2015:

 

 

 

June 30,
2015

 

Expected volatility

 

33.1

%

Risk-free interest rate

 

2.0

%

Expected term of awards (in years)

 

5.7

 

Expected forfeiture rate

 

0.0

%

Expected dividend yield

 

0.0

%

 

A summary of the activity and status of stock options under both the 1999 Plan and the 2015 Plan during the six-month period ended June 30, 2015 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, 2015

 

4,054,771

 

$

76.83

 

 

 

 

 

Granted

 

155,000

 

175.43

 

 

 

 

 

Exercised

 

(596,499

)

40.94

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

Outstanding at June 30, 2015

 

3,613,272

 

$

86.99

 

6.6

 

$

314,438

 

Exercisable at June 30, 2015

 

3,458,272

 

$

83.03

 

6.4

 

$

314,438

 

Expected to vest at June 30, 2015

 

155,000

 

$

175.43

 

10.0

 

$

 

 

Stock option exercise data is summarized below (dollars in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Number of options exercised

 

345,664

 

445,955

 

597,499

 

717,197

 

Cash received

 

$

14,314

 

$

13,736

 

$

24,445

 

$

22,171

 

 

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 ending in March 2015, we issued 20,214 shares of our common stock for $1.9 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, 2015 and June 30, 2014 was $249,900 and $276,500 respectively, and for the six-month periods ended June 30, 2015 and June 30, 2014 was $560,600 and $507,500, respectively.

 

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Table of Contents

 

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 and stock options.

 

Share Repurchases

 

In June 2014, our Board of Directors authorized the repurchase of up to $500.0 million of our common stock in open market or privately negotiated transactions, at our discretion. This program became effective on August 1, 2014, and will remain open for up to one year. During the quarter ended June 30, 2015 we acquired 1,022,327 shares of our common stock at an aggregate cost of $184.6 million under this repurchase program.

 

12. Accumulated Other Comprehensive Loss

 

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

 

 

 

Defined
Benefit
Pension Plan

 

Foreign
Currency
Translation
Losses

 

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

 

Total

 

Balance, January 1, 2015

 

$

(6,957

)

$

(9,858

)

$

81

 

$

(16,734

)

Other comprehensive loss before reclassifications

 

(2,110

)

(1,553

)

(14

)

(3,677

)

Amounts reclassified from accumulated other comprehensive loss

 

481

 

 

 

481

 

Net current-period other comprehensive loss

 

(1,629

)

(1,553

)

(14

)

(3,196

)

Balance, June 30, 2015

 

$

(8,586

)

$

(11,411

)

$

67

 

$

(19,930

)

 

13. Income Taxes

 

Income tax expense for the three- and six-month periods ended June 30, 2015 and June 30, 2014 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, 2015 and June 30, 2014 were approximately 42 percent and approximately 35 percent, respectively. Our 2015 estimated annual effective tax rate increased as of June 30, 2015 primarily due to an increase in estimated non-deductible share-based compensation expense as compared to the prior year, which was driven largely by an increase in our stock price.

 

We are subject to federal and state taxation in the United States and various foreign jurisdictions. Currently, our 2011 to 2014 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 twelve months.

 

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Table of Contents

 

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 a primary measure of performance for each of our four commercial products.

 

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,

 

 

 

Remodulin

 

Tyvaso

 

Adcirca

 

Orenitram

 

Total

 

2015

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

135,957

 

$

115,841

 

$

68,081

 

$

25,870

 

$

345,749

 

Cost of product sales (1)

 

3,372

 

4,548

 

3,906

 

1,784

 

13,610

 

Gross profit

 

$

132,585

 

$

111,293

 

$

64,175

 

$

24,086

 

$

332,139

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

Six Months Ended June 30,

 

 

 

Remodulin

 

Tyvaso

 

Adcirca

 

Orenitram

 

Total

 

2015

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

282,238

 

$

229,221

 

$

113,451

 

$

46,756

 

$

671,666

 

Cost of product sales (1)

 

9,346

 

12,419

 

6,687

 

5,472

 

33,924

 

Gross profit

 

$

272,892

 

$

216,802

 

$

106,764

 

$

41,284

 

$

637,742

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

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

 

 


(1)          Cost of product sales for the three and six months ended June 30, 2015 excludes costs related to the production of inventory for Unituxin, as this product was not approved by the FDA until March 2015. Sales of Unituxin commenced in the third quarter of 2015.

 

For the three-month periods ended June 30, 2015 and June 30, 2014, net revenues from our U.S.-based distributors represented 73 percent and 75 percent, respectively, of our total net operating revenues.

 

For each of the six-month periods ended June 30, 2015 and June 30, 2014, net revenues from our U.S.-based distributors represented 75 percent of our total net operating revenues.

 

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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 expired 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 FDA’s Orange Book, which contains a listing of patents covering a drug or biologic or its method of use, and which have been submitted to the FDA by the filer of a New Drug Application or Biologics License Application.

 

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 received the Court’s decision in August 2014. In that decision, with respect to U.S. Patent No. 6,765,117 the Court both ruled that the patent is valid and enforceable against Sandoz, and enjoined Sandoz from marketing its generic product until the expiration of that patent in October 2017. With respect to U.S. Patent No. 7,999,007, the Court ruled that the patent is valid, but that it would not be infringed by Sandoz’s generic product.

 

Sandoz has appealed the ruling that U.S. Patent No. 6,765,117 is valid and would be infringed, and that U.S. Patent No. 7,999,007 is valid. We have filed a cross-appeal challenging the Court’s ruling that U.S. Patent No. 7,999,007 would not be infringed by Sandoz’s generic version of Remodulin.

 

In July 2014, we received an additional Paragraph IV certification notice letter (Third Notice Letter) from Sandoz, seeking permission to market and sell its generic version of Remodulin before the expiration of U.S. Patent No. 8,497,393, which expires in December 2028 and is also listed in the Orange Book. We responded to Sandoz’s Third Notice Letter by filing a lawsuit in September 2014 in the U.S. District Court for the District of New Jersey for patent infringement with respect to U.S. Patent No. 8,497,393. The parties are conducting discovery in this lawsuit, and trial is scheduled to commence in 2016.

 

We intend to vigorously enforce our intellectual property rights relating to Remodulin.

 

Teva Pharmaceuticals USA, Inc.

 

On July 21, 2014, we received a Paragraph IV certification notice letter from Teva Pharmaceuticals USA, Inc. (Teva) advising that Teva had submitted an ANDA to the FDA requesting approval to market a generic version of Remodulin.

 

In its notice letter, Teva states that it intends to market a generic version of Remodulin before the expiration of U.S. Patent Nos. 6,765,117 and 8,497,393, both of which are also the subject of Paragraph IV certifications by Sandoz, as discussed above. Teva’s notice letter states that the ANDA contains a Paragraph IV certification alleging that these patents are not valid, not enforceable and/or will not be infringed by the commercial manufacture, use or sale of the proposed product described in Teva’s ANDA submission.

 

We responded to Teva’s notice letter by filing a lawsuit in September 2014 against Teva in the U.S. District Court for the District of New Jersey alleging infringement of U.S. Patent Nos. 6,765,117, 7,999,007 and 8,497,393, as well as infringement of U.S. Patent Nos. 8,653,137 and 8,658,694, both of which expire in September 2028. Teva has filed its answer to our complaint, and has also filed a counterclaim 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 Teva’s ANDA submission. We have filed an answer to the counterclaim. The parties are conducting discovery in this lawsuit, and trial is scheduled to commence in 2016.

 

Under the Hatch-Waxman Act, the FDA is automatically precluded from approving Teva’s ANDA for up to 30 months from receipt of Teva’s notice letter or until the issuance of a U.S. District Court decision that is adverse to us, whichever occurs first.

 

We intend to vigorously enforce our intellectual property rights relating to Remodulin.

 

Watson Laboratories, Inc.

 

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In June 2015, we received a Paragraph IV certification notice letter from Watson Laboratories, Inc. (Watson) indicating that Watson has submitted an ANDA to the FDA to market a generic version of Tyvaso. In its notice letter, Watson states that it intends to market a generic version of Tyvaso before the expiration of U.S. Patent Nos. 6,521,212 and 6,756,033, each of which expires in November 2018; and U.S. Patent No. 8,497,393, which expires in December 2028. Watson’s notice letter states that the ANDA contains a Paragraph IV certification alleging that these patents are not valid, not enforceable, and/or will not be infringed by the commercial manufacture, use or sale of the proposed product described in Watson ANDA submission. We responded to the Watson notice letter by filing a lawsuit on July 22, 2015 against Watson in the U.S. District Court for the District of New Jersey alleging infringement of U.S. Patent Nos. 6,521,212, 6,756,033, and 8,497,393. Under the Hatch-Waxman Act, the FDA is automatically precluded from approving Watson’s ANDA for up to 30 months from receipt of Watson’s notice letter or until the issuance of a U.S. District Court decision that is adverse to us, whichever occurs first. We intend to vigorously enforce our intellectual property rights relating to Tyvaso.

 

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, 2014, 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, 2014, 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 esuberaprost, formally called 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 (Unituxin TM , formerly called ch14.18) : an antibody that binds to cancerous tumors and destroys the cancer cells by a mechanism called antibody-dependent cell mediated toxicity;

 

·                   Glycobiology antiviral agents : a novel class of small, sugar-like molecules that have shown antiviral activity in a range of preclinical 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. Through our wholly-owned subsidiary, Lung Biotechnology PBC, we are also developing technologies aimed at improving outcomes for lung transplant recipients and increasing the supply of donor lungs through ex-vivo lung perfusion.

 

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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 by the United States Food and Drug Administration (FDA) 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 has also been approved in various countries outside of the United States.

 

·                   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. 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.

 

·                   Unituxin (dinutuximab) Injection (Unituxin). In March 2015, the FDA approved Unituxin in combination with granulocyte-macrophage colony-stimulating factor (GM-CSF), interleukin-2 (IL-2), and 13-cis-retinoic acid (RA), for the treatment of pediatric patients with high-risk neuroblastoma who achieve at least a partial response to prior first-line multiagent, multimodality therapy. We commenced U.S. sales of Unituxin in the third quarter of 2015. We expect European Medicines Agency (EMA) approval during the third quarter of 2015.

 

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 also sell Remodulin and Tyvaso to distributors internationally. Under our distribution agreements, we sell each of our treprostinil-based products to these distributors at a transfer price that we establish. We also pay Accredo and Caremark fees for services provided in connection with the distribution and support of these products. We have generally increased the price of Tyvaso by 4.9 percent annually, and the last price increase became effective on January 1, 2015. We have not increased the price of Remodulin since 2010.

 

We sell Adcirca through Lilly’s pharmaceutical wholesaler network at a price determined by Lilly, which Lilly generally increases two or three times per year. Most recently, Lilly increased the price of Adcirca by 9.9 percent effective May 14, 2015.

 

We recognize revenues for the sale of Remodulin, Tyvaso, Orenitram and Adcirca net of estimated rebates, prompt pay discounts, allowances for sales exchanges and returns, and distributor fees.

 

In the second quarter of 2015, we entered into an exclusive distribution agreement with ASD Specialty Healthcare, Inc., an affiliate of AmerisourceBergen Corporation (Amerisource), to distribute Unituxin in the United States. Under this Agreement, we sell Unituxin to Amerisource at a transfer price that we establish, and we pay Amerisource fees for services provided in connection with the distribution and support of Unituxin.

 

Generic Competition

 

We disclose in Part II, Item 1.—Legal Proceedings of this Quarterly Report on Form 10-Q (and in Note 15 —Litigation , to our consolidated financial statements included with this Quarterly Report on Form 10-Q), that we are engaged in litigation with Sandoz Inc. (Sandoz) and Teva Pharmaceuticals USA, Inc. (Teva), contesting their abbreviated new drug applications (ANDAs) seeking FDA approval to market generic versions of Remodulin before the expiration of certain of our U.S. patents in October 2017, September 2028, December 2028 and March 2029, and against Watson Laboratories, Inc. (Watson), contesting its ANDA seeking FDA approval to market a generic version of Tyvaso before the expiration of certain of our U.S. patents in November 2018 and December 2028.

 

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We intend to vigorously enforce our intellectual property rights relating to Remodulin and Tyvaso. However, there can be no assurance that we will prevail in defending our patent rights, or that additional challenges from other ANDA filers or other challengers will not surface with respect to Remodulin, Tyvaso or our other treprostinil-based product, Orenitram. 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 PAH 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.

 

Operating Expenses

 

Our operating expenses include the following costs:

 

Research and Development

 

Our research and development expenses primarily include costs associated with the research and development of products and post-marketing research commitments. These costs generally include share-based compensation and salary-related expenses for research and development functions, professional fees for preclinical and clinical studies, costs associated with clinical manufacturing, facilities-related expenses and regulatory costs. Expenses also include costs for third-party arrangements, including upfront fees and milestones paid in connection with license arrangements for therapies under development.

 

Selling, General and Administrative

 

Our selling, general and administrative expenses primarily include costs associated with the commercialization of approved products and general and administrative costs to support our operations. Selling expenses generally include share-based compensation, salary-related expenses, product marketing and sales operations costs, and other costs incurred to support our sales efforts. General and administrative expenses include our core corporate support functions such as human resources, finance and legal, as well as external costs such as insurance premiums, legal fees and other professional service fees.

 

Cost of Product Sales

 

Our cost of product sales primarily include costs to manufacture and acquire products sold. These costs generally include share-based compensation and salary-related expenses for manufacturing personnel, commercial distribution and support functions, direct materials and supplies, depreciation, building and overhead expenses and royalty payments under licensing agreements. Expenses also include the cost to warehouse, transfer and distribute products to customers.

 

We began selling Orenitram during 2014. Typical of the initial commercial activities of a newly-launched product, Orenitram’s cost of product sales as a percentage of its 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 similar to our other treprostinil-based commercial products.

 

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Share-Based Compensation

 

As discussed above, our operating expenses, and thus 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), as the fair value of these awards varies with the changes in our stock price. The fair values of STAP awards and potential stock option 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.

 

In June 2015, our shareholders approved the United Therapeutics Corporation 2015 Stock Incentive Plan (the 2015 Plan). With the approval of the 2015 Plan, which authorizes the grant of up to 6,150,000 shares of our common stock, we have ceased granting STAP awards and have modified our equity compensation programs to grant stock options going forward to employees and non-employee directors who previously received STAP awards. No further awards will be granted under the 1999 Plan.

 

Through December 31, 2014, we were contractually obligated to award stock options each year to our Chairman and Co-Chief Executive Officer, Dr. Rothblatt, based on a formula tied to the growth (if any) in our market capitalization. These awards were granted at year-end under our Amended and Restated Equity Incentive Plan (the 1999 Plan), and vested immediately upon grant. We accrued compensation expense for Dr. Rothblatt’s estimated stock option grant when we determined that it was probable that the performance criteria would be met. Beginning in 2015, Dr. Rothblatt’s long term incentive compensation will be similar to other employees in that she will be eligible for an annual grant of performance-based stock options based on the achievement of our annual corporate milestones, which will vest over a four-year period from the grant date. Accordingly, there will be no share-based compensation expense recorded in calendar year 2015 for Dr. Rothblatt as the annual grant of performance-based stock options will be granted in calendar year 2016, if earned, based upon 2015 performance.

 

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 lung transplantation technologies, to treat cardiopulmonary diseases; (2) monoclonal antibodies to treat cancer; and (3) glycobiology antiviral agents to treat infectious diseases.

 

Cardiopulmonary Disease Projects

 

Remodulin Implantable System

 

In 2009, we entered into an agreement with Medtronic, Inc. (Medtronic) providing us exclusive rights in the United States, Canada, France, Germany, Italy, Japan to develop Medtronic’s proprietary intravascular infusion catheter to be used with its SynchroMed® II implantable infusion pump and related infusion system components (together referred to as the Remodulin Implantable System) in order to deliver Remodulin for the treatment of PAH. If the Remodulin Implantable System is successful, it could reduce many of the patient burdens and other complications associated with the use of external pumps to administer prostacyclin analogues. With our funding, Medtronic completed the DelIVery clinical trial, in order to study the safety of the Remodulin Implantable 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 Remodulin Implantable System to deliver Remodulin. In September 2013, Medtronic informed us that this primary objective was met (p<0.0001). In December 2014, Medtronic completed other stability, compatibility and technical assessments of the Remodulin Implantable System, including modifications to its hardware and software, and submitted a premarket approval application (PMA) seeking FDA approval for the catheter and labeling changes. Medtronic received notification that the PMA was accepted for review in January 2015. Medtronic is responsible for responding to any FDA requests for additional information concerning the use of the Remodulin Implantable System with Remodulin.

 

In January 2015, we submitted a supplemental New Drug Application (NDA) with new labeling requesting FDA approval to allow the use of Remodulin with the Remodulin Implantable System. The FDA has indicated that our submission will be treated as a new NDA and asked us to resubmit the supplement as a new NDA.

 

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In March 2015, the FDA requested that Medtronic amend its PMA for the Remodulin Implantable System to reflect an amendment to the SynchroMed II PMA separately submitted by Medtronic’s neuromodulation business unit, and issued a refuse-to-file letter with respect to our NDA for the Remodulin Implantable System. FDA has asked Medtronic to amend its PMA to include additional information. Once Medtronic’s amended PMA has been submitted and accepted by FDA, and our resubmission has been submitted and accepted, we anticipate a ten-month review process by FDA.

 

In April 2015, the FDA filed a consent decree requiring Medtronic to stop manufacturing, designing and distributing SynchroMed II implantable infusion pump systems, except in limited circumstances, citing violations of the quality system regulation for medical devices. The consent decree will remain in effect until the FDA has determined that Medtronic has met all the provisions listed in the consent decree. We are currently assessing the impact of this consent decree on our program to develop the Remodulin Implantable System.

 

Subcutaneous Remodulin Administered via Pre-Filled, Semi-Disposable Pump

 

In December 2014, we entered into an exclusive agreement with DEKA Research & Development Corp. (DEKA) to develop a pre-filled, semi-disposable pump system for subcutaneous delivery of Remodulin. Under the terms of the agreement, we will fund the development costs related to the semi-disposable pump system and will pay product fees and a single-digit royalty to DEKA based on commercial sales of the system and the Remodulin sold for use with the system. Our goal is to be in a position to receive FDA approval for this delivery system by the end of 2018.

 

Tyvaso

 

In connection with Tyvaso’s approval by 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 our PMR, we were required to complete 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, to evaluate the potential association between Tyvaso and oropharyngeal and pulmonary toxicity. We completed this study and submitted the results of the study to the FDA in June 2015. In addition, we are developing further enhancements intended to make the Tyvaso Inhalation System easier to use.

 

Orenitram

 

In December 2013, the FDA approved Orenitram for the treatment of PAH in WHO Group 1 patients to improve exercise capacity. The primary study that supported efficacy of Orenitram was a 12-week monotherapy study (FREEDOM-M) in which PAH patients were not on any approved background therapy.

 

We believe that in order for Orenitram to reach its full commercial potential, we need to complete further studies to support an amendment to Orenitram’s label to indicate that Orenitram delays morbidity and mortality (also known as “time to clinical worsening”) in patients who are on an approved oral background therapy. As such, we are enrolling up to 610 patients in a phase IV clinical trial called FREEDOM-EV, which began in 2012. FREEDOM-EV is a placebo-controlled study of patients who enter the study on an approved background therapy, and one of the two primary endpoints of the study is the time to clinical worsening.

 

We expect to seek approval of Orenitram in Europe upon completion of the FREEDOM-EV study. In 2005, the EMA announced that Orenitram had been designated an orphan medicinal product for the treatment of PAH. A request for orphan drug designation for Orenitram is pending before the FDA.

 

Esuberaprost (formally called 314d)

 

We have been studying various formulations of beraprost since 2000, under a license agreement with Toray Industries, Inc. (Toray). In July 2012, we completed a phase I safety trial of esuberaprost, a reformulated, single-isomer version of beraprost, and the data suggested that dosing esuberaprost four times a day was safe. We believe that esuberaprost and treprostinil have differing prostacyclin receptor-binding profiles and thus could provide benefits to certain groups of patients with differing sets of safety and efficacy profiles. We also believe that inhaled treprostinil and esuberaprost have complimentary pharmacokinetic and pharmacodynamic profiles, which indicate that they should provide greater efficacy in combination. As a result, in 2013 we began enrolling a phase III study called BEAT ( BE raprost 314d A dd-on to T yvaso) to evaluate the clinical benefit and safety of esuberaprost in combination with Tyvaso for patients with PAH who show signs of deterioration on inhaled treprostinil or have a less than optimal response to inhaled treprostinil treatment. We intend to enroll 240 patients in the study, which will have a primary endpoint of time to clinical worsening. If we are not successful in securing FDA approval of esuberaprost in combination with Tyvaso following the BEAT study, we expect to terminate our license agreement with Toray.

 

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Cell-Based Therapy

 

In 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 in 2013.

 

Lung Transplantation

 

The only reported cure for PAH is a lung transplant. We believe that fewer than 100 PAH patients receive a lung transplant each year due to the shortage of available lungs for transplant and the demand for transplantable lungs in patients with other end-stage pulmonary diseases, such as chronic obstructive pulmonary disease and idiopathic pulmonary fibrosis.

 

In 2011, we acquired all of the outstanding stock of Revivicor, Inc., a company focused on developing genetic biotechnology platforms to provide alternative tissue sources for the treatment of human degenerative disease through tissue and organ xenotransplantation. We are focused on this platform with the goal of providing transplantable lungs for human patients.

 

In May 2014, we completed a $50.0 million preferred stock investment in Synthetic Genomics Inc. (SGI). We also entered into a separate multi-year research and development collaboration agreement with SGI 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 development and commercialization of organs.

 

We are also engaged in preclinical development of several regenerative technologies for creating transplantable lung tissue and whole lungs for patients with end-stage lung disease, as well as other technologies intended to improve outcomes for lung transplant recipients. We have commenced a clinical trial in the United States to study the use of ex-vivo lung perfusion technology originally developed in Canada (where it is already used commercially) to provide extended preservation and assessment of donated lungs that are initially rejected for transplantation.

 

In 2014, we completed the construction of the only laboratory facility in the United States devoted to performing ex-vivo lung perfusion on a fee-for-service basis.  In June 2015, we entered into a collaboration agreement with the Mayo Clinic in Jacksonville, Florida (Mayo) to build and operate a second such facility. We are responsible for nearly all costs associated with the construction of the facility on Mayo’s campus, as well as the ongoing operating expenses for the facility. Construction of the facility is expected to be completed in late 2017.

 

Cancer-Related Projects

 

Unituxin (formerly called ch14.18)

 

In 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 (NIH) to collaborate on the late-stage development and regulatory approval process for Unituxin for children with high-risk neuroblastoma and patients with other forms of cancer. Unituxin 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, the NCI completed necessary studies and we developed the ability to produce Unituxin on a commercial scale.

 

On March 10, 2015, the FDA approved our Biologics License Application (BLA) for Unituxin, in combination with granulocyte-macrophage colony-stimulating factor (GM-CSF), interleukin-2 (IL-2), and 13-cis-retinoic acid (RA), for the treatment of pediatric patients with high-risk neuroblastoma who achieve at least a partial response to prior first-line multiagent, multimodality therapy. We commenced sales of Unituxin in the third quarter of 2015. In May 2015, the EMA’s Committee for Medicinal Products for Human Use issued a positive opinion recommending approval of our marketing authorization application for Unituxin. We expect to receive European Commission approval during the third quarter of 2015, and thereafter plan to commence commercial sales in individual European countries following pricing and reimbursement approvals on a country-by-country basis.

 

We previously received orphan drug designation for Unituxin from both the FDA and the EMA. Orphan designation, coupled with FDA approval of our BLA, confers an exclusivity period through March 2022, during which the FDA may not approve any application to market the same drug for the same indication, except in limited circumstances. In lieu of a royalty payment to the NCI, we have an ongoing obligation to provide the NCI with Unituxin for its studies free of charge.

 

In conjunction with the BLA approval for Unituxin, the FDA awarded us a Rare Pediatric Priority Review Voucher. The voucher can be sold (without limitation), and the holder of the voucher can redeem it with a subsequently filed NDA or BLA,

 

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which would require the FDA to meet the review goals for a priority review (a six-month review process), as opposed to a standard review (generally, a ten- to twelve-month review process).

 

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 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 we continue to synthesize new agents that we may elect to test.

 

In 2011, we were awarded a cost plus fixed fee contract under a Broad Agency Announcement from the National Institute of Allergy and Infectious Diseases (NIAID) of the NIH 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. The award consists of a base award and eight milestone-based options to expand the project and funding under the contract. To date, we have received contract modifications exercising five of these options, increasing total committed contract funding to $28.1 million. The aggregate value of the contract assuming the exercise of all eight options is $45.6 million. We recognize revenue under this contract to the extent of allowable costs incurred, plus a proportionate amount of fees earned. Related revenues are included under the caption Other Revenues on our consolidated statements of operations.

 

We began enrolling a phase I clinical trial of our lead antiviral candidate, an alpha-glucosidase inhibitor called UV-4B, for the treatment of dengue in the third quarter of 2014. In November 2014, the FDA granted orphan drug designation for UV-4B for the treatment of acute dengue illness. We are also performing preclinical studies of UV-4B for the treatment of patients with influenza.

 

Future Prospects

 

The extent of our future success is dependent on, among other things, how well we achieve the following objectives: (1) in the near term, continued sales growth of our current commercial products by increasing our market share and launching enhancements designed to improve patient care, such as new delivery systems for Remodulin, and growing sales of Orenitram; (2) in the medium term, augmenting our near-term product growth through: (a) the successful launch of Orenitram for use in combination with other oral therapies following positive FREEDOM-EV results, and (b) the launch of esuberaprost in combination with Tyvaso following positive results of the BEAT study; and (3) in the long term, supplementing our oral, inhaled and infused PAH therapy revenues by introducing transplantable cells, tissues and organs that may prove effective in treating PAH and other end-stage 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 and the degree of success related to the commercial launch of new products; (3) the demand for our products; (4) pricing and reimbursement of our products by public and private health insurance organizations; (5) the competition we face within our industry; (6) our ability to effectively manage our business in an increasingly complex legal and regulatory environment; (7) our ability to defend against generic competition and challenges to our patents, including the ongoing challenges to our Remodulin patents by two generic drug companies; and (8) the risks identified in Part II, Item 1A—Risk Factors , included in this Quarterly Report on Form 10-Q.

 

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, some of which have not yet been developed or adopted by the relevant government agencies. The extent to which we fully develop any of these facilities will depend on the progress of our pre-clinical and clinical development in various earlier stage programs.

 

We operate in a highly competitive market in which a small number of pharmaceutical companies control a majority share of available PAH therapies. These pharmaceutical companies are well 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 attempt to market in the future.

 

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Financial Position

 

Cash, cash equivalents and marketable securities at June 30, 2015 and December 31, 2014 (excluding restricted amounts of $5.4 million) were $556.2 million and $812.8 million, respectively. The decrease of $256.6 million in unrestricted cash, cash equivalents and marketable securities resulted primarily from the use of $336.8 million to repurchase shares of our common stock and use of $104.3 million to settle early conversions of our Convertible Notes, offset by $149.9 million of cash generated from operating activities.

 

Other current assets increased by $93.0 million from $49.4 million at December 31, 2014 to $142.4 million at June 30, 2015. The increase is primarily due to an increase in current deferred tax assets and federal and state tax payments that we will apply against our 2015 annual tax liabilities.

 

Convertible Notes decreased $94.1 million from $126.4 million at December 31, 2014, to $32.3 million at June 30, 2015, as a result of the early conversions of $104.3 million of our Convertible Notes in the six months ended June 30, 2015, net of amortization of $2.4 million and $7.7 million for the unamortized discount written off for the early conversions of our Convertible Notes.  Refer to Note 9 —Debt—Convertible Notes Due 2016 to our consolidated financial statements.

 

The STAP liability (current) increased by $72.7 million, from $282.1 million at December 31, 2014, to $354.8 million at June 30, 2015. The increase of the liability resulted from a 34 percent increase in the price of our common stock during the six-month period ending June 30, 2015, offset partially by exercises and forfeitures of STAP awards.

 

Additional paid-in capital was $1,695.0 million at June 30, 2015, compared to $1,376.1 million at December 31, 2014. The $318.8 million increase in additional paid-in capital primarily consisted of the following components: (1) $47.9 million in proceeds from stock option exercises and related tax benefits; (2) $265.9 million related to the common stock issued in connection with the early conversion of $104.3 million of our Convertible Notes based on the value of the closing price of our common stock on the date the shares were issued; and (3) $1.9 million in proceeds from the issuance of 20,214 shares of our common stock under our employee stock purchase plan.

 

The $600.1 million increase in treasury stock from $1,185.8 million at December 31, 2014 to $1,785.9 million at June 30, 2015, was driven by: (1) our repurchase of approximately 2.0 million shares of our common stock at a cost of $336.8 million during the six months ended June 30, 2015; and (2) $263.3 million reflecting the value of the receipt of approximately 1.6 million shares from our note hedge in connection with the early conversion of $104.3 million of our Convertible Notes based on the closing price of our common stock on the date the shares were received during the six months ended June 30, 2015. Refer to Note 11— Stockholders’ Equity—Share Repurchases and Note 9 —Debt—Convertible Notes Due 2016 to our consolidated financial statements.

 

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Three Months Ended June 30, 2015 and June 30, 2014

 

Revenues

 

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

 

 

 

Three Months Ended
June 30,

 

Percentage

 

 

 

2015

 

2014

 

Change

 

Cardiopulmonary products:

 

 

 

 

 

 

 

Remodulin

 

$

135,957

 

$

138,152

 

(1.6

)%

Tyvaso

 

115,841

 

121,227

 

(4.4

)%

Adcirca

 

68,081

 

55,318

 

23.1

%

Orenitram

 

25,870

 

6,632

 

290.1

%

Other

 

1,412

 

1,473

 

(4.1

)%

Total net revenues

 

$

347,161

 

$

322,802

 

7.5

%

 

Revenues for the three months ended June 30, 2015 increased by $24.4 million, compared to the three months ended June 30, 2014. The growth in revenues for the quarter ended June 30, 2015, compared to the same quarter in 2014, resulted from a $19.2 million increase in Orenitram revenues due to an increase in the number of patients being treated and a $12.8 million increase in Adcirca revenues, primarily due to price increases.  For the three months ended June 30, 2015 and June 30, 2014, approximately 73 percent and 75 percent, respectively, of total net revenues were derived from our 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 June 30, 2015

 

 

 

Rebates

 

Prompt Pay
Discounts

 

Allowance
for Sales
Returns

 

Distributor
Fees

 

Total

 

Balance, April 1, 2015

 

$

34,753

 

$

3,136

 

$

4,204

 

$

336

 

$

42,429

 

Provisions attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

44,393

 

8,130

 

570

 

1,314

 

54,407

 

Prior periods

 

(1,731

)

 

375

 

121

 

(1,235

)

Payments or credits attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

(8,287

)

(4,522

)

 

(896

)

(13,705

)

Prior periods

 

(28,175

)

(3,144

)

(475

)

543

 

(31,251

)

Balance, June 30, 2015

 

$

40,953

 

$

3,600

 

$

4,674

 

$

1,418

 

$

50,645

 

 

 

 

Three Months Ended June 30, 2014

 

 

 

Rebates

 

Prompt Pay
Discounts

 

Allowance
for Sales
Returns

 

Distributor
Fees

 

Total

 

Balance, April 1, 2014

 

$

26,902

 

$

2,637

 

$

3,060

 

$

1,910

 

$

34,509

 

Provisions attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

25,144

 

5,766

 

383

 

1,652

 

32,945

 

Prior periods

 

557

 

 

247

 

(66

)

738

 

Payments or credits attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

(3,424

)

(2,748

)

 

(710

)

(6,882

)

Prior periods

 

(22,863

)

(2,637

)

(324

)

(2,047

)

(27,871

)

Balance, June 30, 2014

 

$

26,316

 

$

3,018

 

$

3,366

 

$

739

 

$

33,439

 

 

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Research and Development Expense

 

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

 

 

 

Three Months Ended
June 30,

 

Percentage

 

 

 

2015

 

2014

 

Change

 

Project and non-project component:

 

 

 

 

 

 

 

Cardiopulmonary

 

$

30,886

 

$

28,274

 

9.2

%

Share-based compensation expense

 

13,400

 

1,047

 

1,179.8

%

Other

 

5,125

 

10,421

 

(50.8

)%

Total research and development expense

 

$

49,411

 

$

39,742

 

24.3

%

 

Share-based compensation. The increase in share-based compensation of $12.4 million for the three months ended June 30, 2015, compared to the same three-month period in 2014, was primarily due to a 1 percent increase in our stock price during the quarter ended June 30, 2015, compared to a 6 percent decrease during the same quarter in 2014.