United Therapeutics Corporation
UNITED THERAPEUTICS Corp (Form: 10-Q, Received: 07/28/2016 06:09:31)

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, 2016

 

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, 2016 was 43,467,794.

 

 

 



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 (Loss)

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

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

 

 

 

Item 4.

Controls and Procedures

34

 

 

 

Part II.

OTHER INFORMATION

35

 

 

 

Item 1.

Legal Proceedings

35

 

 

 

Item 1A.

Risk Factors

35

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

 

 

 

Item 6.

Exhibits

52

 

 

 

SIGNATURES

 

53

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  CONSOLIDATED FINANCIAL STATEMENTS

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

 

 

 

June 30,
2016

 

December 31,
2015

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

837.5

 

$

831.8

 

Marketable investments

 

107.2

 

122.0

 

Accounts receivable, net of allowance of none for 2016 and 2015

 

238.1

 

192.8

 

Inventories, net

 

89.1

 

81.3

 

Other current assets

 

43.5

 

47.4

 

Total current assets

 

1,315.4

 

1,275.3

 

Marketable investments

 

3.9

 

38.0

 

Goodwill and other intangible assets, net

 

34.1

 

28.4

 

Property, plant, and equipment, net

 

490.6

 

495.8

 

Deferred tax assets, net

 

188.1

 

192.7

 

Other assets

 

169.4

 

154.2

 

Total assets

 

$

2,201.5

 

$

2,184.4

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

124.0

 

$

103.4

 

Convertible notes

 

0.9

 

5.4

 

Share tracking awards plan

 

120.9

 

274.5

 

Other current liabilities

 

46.6

 

57.4

 

Total current liabilities

 

292.4

 

440.7

 

Other liabilities

 

92.0

 

144.0

 

Total liabilities

 

384.4

 

584.7

 

Commitments and contingencies

 

 

 

 

 

Temporary equity

 

10.9

 

11.1

 

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, 69,220,268 and 68,987,919 shares issued, and 43,732,565 and 45,760,845 shares outstanding at June 30, 2016 and December 31, 2015, respectively

 

0.7

 

0.7

 

Additional paid-in capital

 

1,826.7

 

1,790.6

 

Accumulated other comprehensive loss

 

(14.7

)

(20.4

)

Treasury stock, 25,487,703 and 23,227,074 shares at June 30, 2016 and December 31, 2015, respectively

 

(2,167.9

)

(1,902.1

)

Retained earnings

 

2,161.4

 

1,719.8

 

Total stockholders’ equity

 

1,806.2

 

1,588.6

 

Total liabilities and stockholders’ equity

 

$

2,201.5

 

$

2,184.4

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(Unaudited)

 

(Unaudited)

 

Revenues:

 

 

 

 

 

 

 

 

 

Net product sales

 

$

412.6

 

$

345.8

 

$

781.6

 

$

671.7

 

Other

 

 

1.4

 

 

3.0

 

Total revenues

 

412.6

 

347.2

 

781.6

 

674.7

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of product sales

 

20.0

 

16.0

 

20.7

 

36.8

 

Research and development

 

35.2

 

49.4

 

34.8

 

159.6

 

Selling, general and administrative

 

72.2

 

110.0

 

77.2

 

321.3

 

Total operating expenses

 

127.4

 

175.4

 

132.7

 

517.7

 

Operating income

 

285.2

 

171.8

 

648.9

 

157.0

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

(0.6

)

(1.3

)

(1.2

)

(3.4

)

Other, net

 

1.1

 

(2.1

)

1.9

 

(2.0

)

Total other income (expense), net

 

0.5

 

(3.4

)

0.7

 

(5.4

)

Income before income taxes

 

285.7

 

168.4

 

649.6

 

151.6

 

Income tax expense

 

(79.6

)

(69.2

)

(208.0

)

(69.0

)

Net income

 

$

206.1

 

$

99.2

 

$

441.6

 

$

82.6

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

4.65

 

$

2.15

 

$

9.86

 

$

1.78

 

Diluted

 

$

4.39

 

$

1.91

 

$

9.24

 

$

1.57

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

44.3

 

46.1

 

44.8

 

46.4

 

Diluted

 

46.9

 

51.9

 

47.8

 

52.5

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

(Unaudited)

 

(Unaudited)

 

Net income

 

$

206.1

 

$

99.2

 

$

441.6

 

$

82.6

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation (loss) gain

 

(2.2

)

1.5

 

(1.8

)

(1.6

)

Defined benefit pension plan:

 

 

 

 

 

 

 

 

 

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

 

7.1

 

 

7.1

 

(2.1

)

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

 

0.2

 

0.2

 

0.4

 

0.5

 

Total defined benefit pension plan, net

 

7.3

 

0.2

 

7.5

 

(1.6

)

Other comprehensive income (loss), net of tax

 

5.1

 

1.7

 

5.7

 

(3.2

)

Comprehensive income

 

$

211.2

 

$

100.9

 

$

447.3

 

$

79.4

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

 

 

Six Months Ended
June 30,

 

 

 

2016

 

2015

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

441.6

 

$

82.6

 

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

 

 

 

 

 

Depreciation and amortization

 

15.6

 

16.7

 

Share-based compensation (benefit) expense

 

(143.1

)

281.8

 

Amortization of debt discount and debt issue costs

 

0.1

 

5.1

 

Amortization of discount or premium on investments

 

0.3

 

1.4

 

Other

 

1.1

 

(4.5

)

Excess tax benefits from share-based compensation

 

(3.5

)

(23.5

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(45.3

)

(6.9

)

Inventories

 

(8.8

)

(1.9

)

Accounts payable and accrued expenses

 

19.8

 

23.3

 

Other assets and liabilities

 

(26.3

)

(224.0

)

Net cash provided by operating activities

 

251.5

 

150.1

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(14.2

)

(7.8

)

Purchases of held-to-maturity investments

 

(0.8

)

(61.3

)

Maturities of held-to-maturity investments

 

49.6

 

172.8

 

Purchase of investments under the cost method, net

 

(7.6

)

(4.2

)

Purchase of investments under the equity method

 

(2.1

)

 

Intangible assets acquired

 

(5.2

)

 

Net cash provided by investing activities

 

19.7

 

99.5

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Principal payments of debt

 

(7.9

)

(104.3

)

Payments of debt issuance costs

 

(6.8

)

 

Payments to repurchase common stock

 

(259.7

)

(336.8

)

Proceeds from the exercise of stock options

 

5.0

 

24.4

 

Issuance of stock under employee stock purchase plan

 

2.2

 

1.9

 

Excess tax benefits from share-based compensation

 

3.5

 

23.5

 

Net cash used in financing activities

 

(263.7

)

(391.3

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(1.8

)

(1.6

)

Net increase (decrease) in cash and cash equivalents

 

5.7

 

(143.3

)

Cash and cash equivalents, beginning of period

 

831.8

 

397.7

 

Cash and cash equivalents, end of period

 

$

837.5

 

$

254.4

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

0.1

 

$

0.7

 

Cash paid for income taxes

 

$

222.0

 

$

110.1

 

Non-cash investing and financing activities:

 

 

 

 

 

Non-cash additions to property, plant and equipment

 

$

3.4

 

$

1.4

 

Issuance of common stock upon conversion of convertible notes

 

$

6.1

 

$

263.3

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

UNITED THERAPEUTICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(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 diseases.

 

We have approval from the U.S. 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 ®  (dinutuximab) Injection (Unituxin). We commenced commercial sales of Unituxin in the United States during the third quarter of 2015. Remodulin has also been approved in various countries outside the United States, and Unituxin was granted marketing authorization by the European Medicines Agency in August 2015. Tyvaso is also approved in Israel.

 

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.

 

2.               Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information required by U.S. 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, 2015, as filed with the SEC on February 25, 2016.

 

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, 2016, statements of operations and comprehensive income (loss) for the three-and six-month periods ended June 30, 2016 and June 30, 2015 and cash flows for the six-month periods ended June 30, 2016 and June 30, 2015. Interim results are not necessarily indicative of results for an entire year.

 

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. On July 9, 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606); Deferral of the Effective Date , which (1) delays the effective date of ASU 2014-09 by one year to annual periods beginning after December 15, 2017; and (2) allows early adoption of the ASU by all entities as of the original effective date for public entities. We are evaluating the transition method we will elect and the effects of the adoption of this ASU on our financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11), which requires that inventory be measured at the lower of cost or net realizable value for entities using first-in, first-out or average cost methods. ASU 2015-11 should be applied prospectively and will be effective for fiscal years beginning after December 15,

 

7



Table of Contents

 

2016, and for interim periods within those fiscal years, with early adoption permitted. We are evaluating the effect of adoption on our financial statements.

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities , which requires equity investments to be measured at fair value through net income. Equity investments that are accounted for under the equity method are not impacted. ASU 2016-01 provides that equity investments without readily determinable fair values can be valued at cost minus impairment with a simplified impairment assessment using qualitative assessments. ASU 2016-01 requires separate presentation of the financial assets and liabilities by category and form. ASU 2016-01 should be applied prospectively and will be effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption is not permitted except in limited circumstances. We are evaluating the effect of adoption on our financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU 2016-02), which requires that organizations recognize lease assets and lease liabilities on the balance sheet. ASU 2016-02 also requires additional quantitative and qualitative disclosures that provide the amount, timing, and uncertainty of cash flows relating to lease arrangements. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018 using a modified retrospective approach. The modified retrospective approach requires retrospective application to the earliest period presented in the respective financial statements, provides certain practical expedients related to leases that commenced prior to the effective date and allows the use of hindsight when evaluating lease options. Early adoption is permitted. We are evaluating the effect of adoption on our financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (ASU 2016-09), which serves to simplify the accounting for share-based payment transactions. ASU 2016-09 includes guidance on several aspects of the accounting for share-based payments, including the income tax consequences, forfeitures and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. Early adoption is permitted. We are evaluating the effect of adoption on our financial statements.

 

3.               Investments

 

Marketable Investments

 

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

 

As of June 30, 2016

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Government-sponsored enterprises

 

$

44.2

 

$

0.1

 

$

 

$

44.3

 

Corporate notes and bonds

 

66.9

 

 

 

66.9

 

Total

 

$

111.1

 

$

0.1

 

$

 

$

111.2

 

Reported under the following captions on the consolidated balance sheet:

 

 

 

 

 

 

 

 

 

Current marketable investments

 

$

107.2

 

 

 

 

 

 

 

Noncurrent marketable investments

 

3.9

 

 

 

 

 

 

 

 

 

$

111.1

 

 

 

 

 

 

 

 

8



Table of Contents

 

As of December 31, 2015

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Government-sponsored enterprises

 

$

53.3

 

$

 

$

(0.2

)

$

53.1

 

Corporate notes and bonds

 

106.7

 

 

 

106.7

 

Total

 

$

160.0

 

$

 

$

(0.2

)

$

159.8

 

Reported under the following captions on the consolidated balance sheet:

 

 

 

 

 

 

 

 

 

Current marketable investments

 

$

122.0

 

 

 

 

 

 

 

Noncurrent marketable investments

 

38.0

 

 

 

 

 

 

 

 

 

$

160.0

 

 

 

 

 

 

 

 

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

 

 

 

As of June 30, 2016

 

As of December 31, 2015

 

 

 

Fair
Value

 

Gross
Unrealized
Loss

 

Fair
Value

 

Gross
Unrealized
Loss

 

Government-sponsored enterprises:

 

 

 

 

 

 

 

 

 

Continuous unrealized loss position less than one year

 

$

 

$

 

$

48.1

 

$

(0.2

)

Continuous unrealized loss position greater than one year

 

 

 

 

 

 

 

 

 

48.1

 

(0.2

)

Corporate notes and bonds:

 

 

 

 

 

 

 

 

 

Continuous unrealized loss position less than one year

 

3.0

 

 

63.8

 

 

Continuous unrealized loss position greater than one year

 

 

 

 

 

 

 

3.0

 

 

63.8

 

 

Total

 

$

3.0

 

$

 

$

111.9

 

$

(0.2

)

 

We attribute gross unrealized losses pertaining to our held-to-maturity securities as of December 31, 2015 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.

 

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

 

 

 

June 30, 2016

 

 

 

Amortized
Cost

 

Fair
Value

 

Due in less than one year

 

$

107.2

 

$

107.3

 

Due in one to two years

 

3.9

 

3.9

 

Total

 

$

111.1

 

$

111.2

 

 

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Table of Contents

 

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 millions):

 

 

 

As of June 30, 2016

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

669.0

 

$

 

$

 

$

669.0

 

Federally-sponsored and corporate debt securities (2)

 

 

111.2

 

 

111.2

 

Total assets

 

$

669.0

 

$

111.2

 

$

 

$

780.2

 

Liabilities

 

 

 

 

 

 

 

 

 

Convertible notes (3)

 

$

2.6

 

$

 

$

 

$

2.6

 

Contingent consideration (4)

 

 

 

10.3

 

10.3

 

Total liabilities

 

$

2.6

 

$

 

$

10.3

 

$

12.9

 

 

 

 

As of December 31, 2015

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

496.4

 

$

 

$

 

$

496.4

 

Federally-sponsored and corporate debt securities (2)

 

 

159.8

 

 

159.8

 

Total assets

 

$

496.4

 

$

159.8

 

$

 

$

656.2

 

Liabilities

 

 

 

 

 

 

 

 

 

Convertible notes (3)

 

$

16.0

 

$

 

$

 

$

16.0

 

Contingent consideration (4)

 

 

 

9.4

 

9.4

 

Total liabilities

 

$

16.0

 

$

 

$

9.4

 

$

25.4

 

 


(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.

 

(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, 2016 and December 31, 2015, the fair value of the Convertible Notes was substantially higher than their book value. This was 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.

 

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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 3 —Investments—Marketable Investments and Note 8 —Debt—Convertible Notes .

 

5.               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 millions):

 

 

 

June 30,
2016

 

December 31,
2015

 

Raw materials

 

$

24.8

 

$

23.1

 

Work-in-progress

 

27.0

 

22.5

 

Finished goods

 

37.3

 

35.7

 

Total inventories

 

$

89.1

 

$

81.3

 

 

6.               Goodwill and Other Intangible Assets

 

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

 

 

 

As of June 30, 2016

 

As of December 31, 2015

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

 

Goodwill

 

$

10.3

 

$

 

$

10.3

 

$

10.3

 

$

 

$

10.3

 

Other intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology, patents and trade names

 

6.5

 

(4.7

)

1.8

 

6.5

 

(4.7

)

1.8

 

In-process, research and development

 

21.5

 

 

21.5

 

15.5

 

 

15.5

 

Customer relationships and non-compete agreements

 

4.3

 

(3.8

)

0.5

 

4.3

 

(3.5

)

0.8

 

Contract-based

 

1.3

 

(1.3

)

 

1.3

 

(1.3

)

 

Total

 

$

43.9

 

$

(9.8

)

$

34.1

 

$

37.9

 

$

(9.5

)

$

28.4

 

 

7.               Share Tracking Awards 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 expire on the tenth anniversary of the grant date, and in most cases they vest in equal increments on each anniversary of the grant date over a four-year period. The STAP liability includes vested awards and awards that are expected to vest. We recognize expense for awards that are expected to vest during the vesting period. We discontinued the issuance of STAP awards in June 2015, when our shareholders approved the United Therapeutics Corporation 2015 Stock Incentive Plan (the 2015 Plan), a broad-based stock incentive plan enabling us to grant stock options and other forms of equity compensation to our employees. See Note 9 —Stockholders’ Equity to these consolidated financial statements for information on the 2015 Plan.

 

The aggregate STAP liability balance was $161.3 million and $354.7 million at June 30, 2016 and December 31, 2015, respectively, of which $40.4 million and $80.2 million, respectively, has 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 (benefit) expense 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

 

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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 weighted-average assumptions used to measure the fair value of the outstanding STAP awards:

 

 

 

June 30,
2016

 

June 30,
2015

 

Expected volatility

 

36.9

%

34.4

%

Risk-free interest rate

 

0.7

%

1.4

%

Expected term of awards (in years)

 

3.0

 

4.3

 

Expected forfeiture rate

 

10.4

%

9.6

%

Expected dividend yield

 

0.0

%

0.0

%

 

The closing price of our common stock was $105.92 and $173.95 on June 30, 2016 and June 30, 2015, respectively.

 

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 millions)

 

Outstanding at January 1, 2016

 

6,845,163

 

$

86.86

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

(542,555

)

61.77

 

 

 

 

 

Forfeited

 

(401,962

)

86.38

 

 

 

 

 

Outstanding at June 30, 2016

 

5,900,646

 

$

89.20

 

6.9

 

$

179.4

 

Exercisable at June 30, 2016

 

3,185,621

 

$

84.33

 

6.5

 

$

103.5

 

Expected to vest as of June 30, 2016

 

2,422,909

 

$

94.49

 

7.4

 

$

68.4

 

 

The weighted average grant-date fair value of STAP awards granted during the six-month period ended June 30, 2015 was $58.52. No STAP awards were granted during the six-month period ended June 30, 2016.

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Cost of product sales

 

$

(0.2

)

$

1.3

 

$

(12.2

)

$

10.9

 

Research and development

 

(2.3

)

13.3

 

(39.7

)

88.2

 

Selling, general and administrative

 

(11.9

)

32.4

 

(110.4

)

182.1

 

Share-based compensation (benefit) expense before taxes

 

$

(14.4

)

$

47.0

 

$

(162.3

)

$

281.2

 

Related income tax benefit (expense)

 

7.4

 

(19.5

)

59.7

 

(116.7

)

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

 

$

(7.0

)

$

27.5

 

$

(102.6

)

$

164.5

 

 

Cash paid to settle STAP awards exercised during the six-month periods ended June 30, 2016 and June 30, 2015 was $30.4 million and $178.3 million, respectively.

 

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8.               Debt

 

Unsecured Revolving Credit Facility

 

In January 2016, we entered into a Credit Agreement (the 2016 Credit Agreement) with Wells Fargo Bank, National Association (Wells Fargo), as administrative agent and a swingline lender, and various other lender parties, providing for an unsecured revolving credit facility of up to $1.0 billion (the Revolving Facility), which is available to refinance certain of our existing indebtedness and/or for working capital and other general corporate purposes. The Revolving Facility will mature in January 2021, subject to the lenders’ ability to extend the maturity date by one year if we request such an extension in accordance with the terms of the 2016 Credit Agreement.

 

At our option, amounts borrowed under the Revolving Facility will bear interest at either the LIBOR rate or a fluctuating base rate, in each case, plus an applicable margin determined on a quarterly basis based on our consolidated ratio of total indebtedness to EBITDA (as calculated in accordance with the 2016 Credit Agreement).

 

The 2016 Credit Agreement contains customary events of default and customary affirmative and negative covenants. As of June 30, 2016, we were in compliance with such covenants and we had not drawn any amounts on the Revolving Facility. Lung Biotechnology PBC is our only subsidiary that guarantees our obligations under the 2016 Credit Agreement though, from time to time, one or more of our other subsidiaries may be required to guarantee such obligations.

 

Convertible Notes

 

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 was $47.69 per share and the number of underlying shares used to determine the aggregate consideration upon conversion was approximately 5.2 million shares.

 

At June 30, 2016, the principal value of our remaining convertible notes was $0.9 million. During the three-month period ended June 30, 2016, we settled conversion requests representing $4.6 million in principal value of our Convertible Notes. We issued approximately 56,000 shares of our common stock during the settlement process.

 

We also sold to DB London warrants to acquire up to approximately 5.2 million shares of our common stock at a strike price of $67.56 per share. The warrants will expire incrementally on a series of expiration dates subsequent to the maturity date of our Convertible Notes beginning in December 2016 and ending in January 2017.

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

206.1

 

$

99.2

 

$

441.6

 

$

82.6

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares — basic

 

44.3

 

46.1

 

44.8

 

46.4

 

Effect of dilutive securities (1) :

 

 

 

 

 

 

 

 

 

Convertible notes

 

 

1.0

 

0.1

 

1.5

 

Stock options, restricted stock units and employee stock purchase plan

 

0.5

 

1.5

 

0.6

 

1.5

 

Warrants

 

2.1

 

3.3

 

2.3

 

3.1

 

Weighted average shares — diluted (2)

 

46.9

 

51.9

 

47.8

 

52.5

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

4.65

 

$

2.15

 

$

9.86

 

$

1.78

 

Diluted

 

$

4.39

 

$

1.91

 

$

9.24

 

$

1.57

 

 

 

 

 

 

 

 

 

 

 

Stock options and warrants excluded from calculation (2)

 

6.5

 

3.7

 

5.3

 

4.7

 

 


(1)                      Calculated using the treasury stock method.

 

(2)                      Certain convertible notes, stock options and warrants have been 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.

 

Equity Incentive Plans

 

As of June 30, 2016, 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 in June 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. As a result of the approval of 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, through May 2016, all awards granted under these plans were in the form of stock options. In June 2016, we began issuing awards under the 2015 Plan to non-employee directors in the form of restricted stock units because the non-employee director compensation program had been amended to permit directors to elect to receive initial and annual equity grants in the form of stock options, restricted stock units, or a combination of both. Each restricted stock unit entitles the director to receive one share of our common stock upon vesting, subject to the director’s election to defer receipt of shares to a later date.

 

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. The assumptions used to estimate fair value include the price of our common stock, 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 measure the fair value of restricted stock units using the stock price on the date of grant. We did not grant any awards under the 1999 Plan during the six-month periods ended June 30, 2016 and June 30, 2015. During the six-months ended June 30, 2016, we granted 1.6 million stock

 

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options and 20,960 restricted stock units under the 2015 Plan. These awards had a weighted average grant date fair value of $42.48 per stock option and $101.80 per restricted stock unit, respectively. For the six months ended June 30, 2016, the stock options and restricted stock units have an aggregate grant date fair value of $67.7 million and $2.1 million, respectively. Share-based compensation expense is recorded ratably over the vesting period of the stock option or restricted stock unit.

 

The table below includes the weighted-average assumptions used to measure the fair value of the stock options granted during the six-month period ended June 30, 2016:

 

Expected volatility

 

34.8

%

Risk-free interest rate

 

1.6

%

Expected term of awards (in years)

 

5.8

 

Expected forfeiture rate

 

5.2

%

Expected dividend yield

 

0.0

%

 

A summary of the activity and status of stock options under our equity incentive plans during the six-month period ended June 30, 2016 is presented below:

 

 

 

Number of
Options

 

Weighted-
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Term (Years)

 

Aggregate
Intrinsic
Value 
(in millions)

 

Outstanding at January 1, 2016

 

3,247,438

 

$

93.09

 

 

 

 

 

Granted

 

1,592,552

 

119.24

 

 

 

 

 

Exercised

 

(154,541

)

32.13

 

 

 

 

 

Forfeited

 

(123,126

)

120.26

 

 

 

 

 

Outstanding at June 30, 2016

 

4,562,323

 

$

103.55

 

7.4

 

$

66.4

 

Exercisable at June 30, 2016

 

3,320,647

 

$

97.62

 

6.5

 

$

66.1

 

Expected to vest as of June 30, 2016

 

1,160,247

 

$

119.28

 

9.7

 

$

0.3

 

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Number of options exercised

 

73,436

 

345,664

 

154,541

 

597,499

 

Cash received

 

$

2.4

 

$

14.3

 

$

5.0

 

$

24.4

 

 

Total share-based compensation expense relating to stock options and restricted stock units is as follows (in millions):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Cost of product sales

 

$

0.1

 

$

 

$

0.2

 

$

 

Research and development

 

0.4

 

 

0.5

 

 

Selling, general and administrative

 

14.9

 

 

17.8

 

 

Share-based compensation expense before taxes

 

15.4

 

 

18.5

 

 

Related income tax benefit

 

(5.7

)

 

(6.8

)

 

Share-based compensation expense, net of taxes

 

$

9.7

 

$

 

$

11.7

 

$

 

 

Selling, general and administrative expense for the three-and six-month periods ended June 30, 2016 includes approximately $9.8 million of costs related to the accelerated vesting of stock options associated with the departure of a company officer during the second quarter of 2016.

 

As of June 30, 2016, unrecognized compensation cost was $48.0 million, which includes $3.1 million related to the grant of stock options and restricted stock units to non-employee directors in June 2016 and $44.9 million related to unvested stock options awarded to employees. Unvested outstanding stock options and restricted stock units as of June 30, 2016 had a weighted average remaining vesting period of 3.5 years. As of June 30, 2015, there was $9.3 million of unrecognized compensation cost, all of which related to the grant of stock options in June 2015 to non-employee directors. As of June 30, 2015, all employee

 

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stock options granted under the 1999 Plan were fully vested and there were no employee stock options granted under the 2015 Plan; consequently, there were no amounts of unrecognized compensation cost remaining with respect to stock options granted to employees.

 

Share Repurchases

 

In October 2015, our Board of Directors authorized the repurchase of up to $500.0 million of our common stock in open market or privately negotiated transactions, or otherwise, at our discretion. This repurchase program is effective from January 1, 2016 through December 31, 2016. The specific timing, amount and other terms of any repurchases will depend on market conditions, corporate and regulatory requirements and other factors. During the three- and six- months ended June 30, 2016 we acquired approximately 1.2 million and 2.2 million shares, respectively, of our common stock at an aggregate cost of $136.5 million and $259.7 million, respectively, under this repurchase program.

 

10.        Accumulated Other Comprehensive Loss

 

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

 

 

 

Defined Benefit 
Pension Plan

 

Foreign 
Currency 
Translation 
Losses

 

Total

 

Balance, January 1, 2016

 

$

(5.3

)

$

(15.1

)

$

(20.4

)

Other comprehensive income (loss) before reclassifications

 

7.5

 

(1.8

)

5.7

 

Current-period other comprehensive gain (loss)

 

7.5

 

(1.8

)

5.7

 

Balance, June 30, 2016

 

$

2.2

 

$

(16.9

)

$

(14.7

)

 

11.        Income Taxes

 

The effective income tax rate (ETR) for the six-months ended June 30, 2016 and 2015 was 32% and 46%, respectively. Our 2016 ETR decreased compared to 2015 primarily due to a decrease in non-deductible share-based compensation, which was driven largely by a decrease in our stock price during 2016.

 

We are subject to federal and state taxation in the United States, as well as various foreign jurisdictions. We are no longer subject to income tax examinations by the Internal Revenue Service and substantially all other major jurisdictions for tax years prior to 2011.

 

As of June 30, 2016 and 2015, our uncertain tax positions are approximately $0.5 million and $1.5 million, respectively, and we are unaware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change within the next twelve months.

 

12.        Employee Benefit Plans

 

Supplemental Executive Retirement Plan

 

During the second quarter of 2016, certain participants in the United Therapeutics Corporation Supplemental Executive Retirement Plan (SERP) departed prior to reaching retirement age under the terms of the SERP. As a result, we remeasured the benefit obligation under the SERP as of June 30, 2016 and recorded a reduction to the benefit obligation with a corresponding increase to “Actuarial gain arising during period, net of tax” within “Accumulated other comprehensive loss” of $7.1 million. As part of the re-measurement of the benefit obligation, we updated the discount rate assumed at December 31, 2015 from 3.82 percent to 3.36 percent.

 

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13.        Segment Information

 

We currently operate as one operating segment. Our chief operating decision maker regularly reviews net product sales, cost of product sales and gross profit data as a primary measure of performance for each of our five commercial products.

 

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

 

 

 

Three Months Ended June 30,

 

 

 

Remodulin

 

Tyvaso

 

Adcirca

 

Orenitram

 

Unituxin

 

Total

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product sales

 

$

158.9

 

$

107.0

 

$

90.9

 

$

38.0

 

$

17.8

 

$

412.6

 

Cost of product sales

 

3.0

 

6.3

 

5.2

 

3.1

 

2.4

 

20.0

 

Gross profit

 

$

155.9

 

$

100.7

 

$

85.7

 

$

34.9

 

$

15.4

 

$

392.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product sales (1)

 

$

135.9

 

$

115.8

 

$

68.2

 

$

25.9

 

$

 

$

345.8

 

Cost of product sales

 

3.3

 

4.5

 

3.9

 

1.8

 

2.5

 

16.0

 

Gross profit

 

$

132.6

 

$

111.3

 

$

64.3

 

$

24.1

 

$

(2.5

)

$

329.8

 

 

 

 

Six Months Ended June 30,

 

 

 

Remodulin

 

Tyvaso

 

Adcirca

 

Orenitram

 

Unituxin

 

Total

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product sales

 

$

298.7

 

$

209.2

 

$

163.5

 

$

78.2

 

$

32.0

 

$

781.6

 

Cost of product sales

 

0.6

 

7.1

 

9.5

 

2.7

 

0.8

 

20.7

 

Gross profit

 

$

298.1

 

$

202.1

 

$

154.0

 

$

75.5

 

$

31.2

 

$

760.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product sales (1)

 

$

282.2

 

$

229.2

 

$

113.5

 

$

46.8

 

$

 

$

671.7

 

Cost of product sales

 

9.3

 

12.4

 

6.7

 

5.5

 

2.9

 

36.8

 

Gross profit

 

$

272.9

 

$

216.8

 

$

106.8

 

$

41.3

 

$

(2.9

)

$

634.9

 

 


(1)                      Unituxin was approved by the FDA in March 2015 and we commenced sales of Unituxin in the third quarter of 2015.

 

For the three-month periods ended June 30, 2016 and June 30, 2015, net product sales from our U.S.-based distributors represented 69 percent and 73 percent, respectively, of total revenues. For the six-month periods ended June 30, 2016 and June 30, 2015, net product sales from our U.S.-based distributors represented 71 percent and 75 percent, respectively, of total revenues. Remaining revenues were derived primarily from net product sales of Adcirca and net product sales of Remodulin, Tyvaso, and Unituxin to our international distributors.

 

14.        Litigation

 

Watson Laboratories, Inc.

 

In June 2015, we received a Paragraph IV certification notice letter from Watson Laboratories, Inc. (Watson) indicating that Watson has submitted an abbreviated new drug application (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’s ANDA submission. We responded to the Watson notice letter by filing a lawsuit in July 2015 against Watson in the U.S. District Court for the District of New Jersey alleging infringement of each of the patents noted above. 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 with respect to all patents noted

 

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above, whichever occurs first. In September 2015, Watson filed (1) a motion to dismiss some, but not all, counts of the complaint; (2) its answer to the complaint; and (3) certain counterclaims against us. The Court granted Watson’s motion to dismiss certain counts of our complaint. In September 2015, we filed our answer to Watson’s counterclaims.

 

The U.S. Patent and Trademark Office issued to us U.S. Patent Nos. 9,339,507 (the ‘507 patent) and 9,358,240 (the ‘240 patent) in May 2016 and June 2016, respectively. The ‘507 patent is directed to a kit for treating pulmonary hypertension and expires in March 2028. The ‘240 patent is directed to a method of treating pulmonary hypertension and expires in May 2028. Both patents have been listed in FDA’s Approved Drug Products with Therapeutic Equivalents publication (also known as the Orange Book) in connection with Tyvaso. On June 21, 2016, we filed an amended complaint against Watson asserting infringement of both of these patents. On June 30, 2016, we received a second Paragraph IV certification notice letter from Watson relating to the previously submitted ANDA, which addresses the ‘507 and ‘240 patents.

 

The parties are currently engaged in discovery, and trial on all patent infringement claims is scheduled to take place in September 2017.

 

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

 

Actavis Laboratories FL, Inc.

 

In February 2016, we received a Paragraph IV certification notice letter (the First Actavis Notice Letter) from Actavis Laboratories FL, Inc. (Actavis) indicating that Actavis has submitted an ANDA to the FDA to market a generic version of the 2.5 mg strength of Orenitram. The First Actavis Notice Letter states that Actavis intends to market a generic version of the 2.5 mg strength of Orenitram before the expiration of the following patents, all of which are listed in the Orange Book:

 

U.S. Patent No.

 

Expiration Date

8,252,839

 

May 2024

9,050,311

 

May 2024

7,544,713

 

July 2024

7,417,070

 

July 2026

8,497,393

 

December 2028

8,747,897

 

October 2029

8,410,169

 

February 2030

8,349,892

 

January 2031

 

The First Actavis 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 Actavis’ ANDA submission. We responded to the First Actavis Notice Letter by filing a lawsuit (the First Actavis Action) against Actavis in March 2016 in the U.S. District Court for the District of New Jersey alleging infringement of each of the patents noted above and one additional patent, U.S. Patent No. 9,278,901 (the ‘901 patent), which expires in May 2024 and is also now listed in the Orange Book. Under the Hatch-Waxman Act, the FDA is automatically precluded from approving Actavis’ ANDA with respect to the 2.5 mg strength of Orenitram for up to 30 months from receipt of Actavis’ notice letter or until the issuance of a U.S. District Court decision that is adverse to us with respect to all of the eight patents listed in the table above, whichever occurs first. In June 2016, we filed an amended complaint against Actavis, Actavis filed its answer and counterclaims to that amended complaint, and we filed our answer to those counterclaims. The Court has set a scheduling conference in the First Actavis Action for August 2, 2016.

 

In May 2016, we received a second Paragraph IV certification notice letter from Actavis (the Second Actavis Notice Letter) indicating that Actavis has amended its ANDA to include its generic version of the 0.25 mg and 1.0 mg strengths of Orenitram, in addition to the 2.5 mg strength identified in the First Actavis Notice Letter. We responded to the Second Actavis Notice Letter by filing an additional lawsuit against Actavis (the Second Actavis Action) on June 17, 2016 in the U.S. District Court for the District of New Jersey alleging infringement of the same patents asserted in the First Actavis Action. The Second Actavis Action triggered an additional 30-month stay with respect to the 0.25 mg and 1.0 mg strengths. Specifically, the FDA is

 

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automatically precluded from approving Actavis’ ANDA with respect to the 0.25 mg and 1.0 mg strengths of Orenitram for up to 30 months from receipt of the Second Actavis Notice Letter or until the issuance of a U.S. District Court decision that is adverse to us with respect to all of the eight patents listed in the table above and the ‘901 patent, whichever occurs first.

 

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

 

SteadyMed Ltd.

 

On October 1, 2015, SteadyMed Ltd. (SteadyMed) filed a petition with the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office for inter partes review (the IPR Petition) of U.S. Patent No. 8,497,393 (the ‘393 Patent), which we own. In its IPR Petition, SteadyMed seeks to invalidate the claims of the ‘393 Patent, which expires in December 2028 and describes a method of making treprostinil, which is the active pharmaceutical ingredient in our Remodulin, Tyvaso and Orenitram products. We filed a response to the IPR Petition in January 2016. In April 2016, the PTAB instituted an inter partes review of the ‘393 Patent on the basis of SteadyMed’s IPR Petition. The PTAB has preliminarily agreed with SteadyMed’s arguments concerning invalidity, and has initially found that there is a reasonable likelihood that SteadyMed would prevail in challenging the ‘393 patent. The ‘393 Patent was also the subject of the recently-settled litigation with Sandoz, Inc. and Teva Pharmaceuticals USA, Inc. regarding their ANDAs relating to generic forms of Remodulin, and remains the subject of our pending litigation with Watson and Actavis, described above. We intend to vigorously defend the ‘393 Patent. SteadyMed has announced that it is developing a product called Trevyent ® , which is a single-use, pre-filled pump for which it plans to seek FDA approval for delivery of a two-day supply of treprostinil subcutaneously using its PatchPump ®  technology.

 

Department of Justice Subpoena

 

In May 2016, we received a subpoena from the U.S. Department of Justice requesting documents regarding our support of 501(c)(3) organizations that provide financial assistance to patients taking our medicines. Other companies have received similar inquiries. We are cooperating with this inquiry.

 

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, 2015, 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, 2015, 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 ® , RemoSynch™ , RemUnity , Tyvaso ® , Tyvaso-ILD ™, Orenitram ® , OreniPlus and Tysuberprost ): 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;

 

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·                   Monoclonal antibody for oncologic applications (Unituxin ® ): an antibody that binds to cancerous tumors and destroys the cancer cells through a mechanism called antibody-dependent cell mediated cytotoxicity; and

 

·                   Organ transplantation products and technologies: 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. Although our primary focus is on engineered lungs, we are also developing technology for other engineered organs, such as kidneys and hearts. Through our wholly-owned subsidiary, Lung Biotechnology PBC, we are also developing technologies to improve outcomes for lung transplant recipients and to increase the supply of donor lungs through ex-vivo lung perfusion.

 

We concentrate substantially all of our research and development efforts on the preceding key therapeutic products and product candidates.

 

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 U.S. 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 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.

 

·                   Adcirca (tadalafil) Tablets (Adcirca) . We acquired exclusive commercialization rights to Adcirca, an oral PDE-5 inhibitor therapy for PAH, in the United States 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 received European Medicines Agency (EMA) approval during the third quarter of 2015.

 

Revenues

 

Our net product sales consist entirely of sales of our five commercial products: Remodulin, Tyvaso, Adcirca, Orenitram and Unituxin.

 

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. We have not increased the price of Remodulin since 2010, and we have never increased the price of Orenitram. We have generally increased the price of Tyvaso by 4.9 percent annually; the last such price increase became effective on May 2, 2016. We sell Adcirca through Lilly’s pharmaceutical wholesaler network at a wholesale price determined by Lilly, which Lilly generally increases twice per year. Most recently, Lilly increased the price of Adcirca by 12.9 percent effective June 7, 2016. In the second quarter of 2015, we entered into an exclusive distribution agreement with ASD Specialty Healthcare, Inc. (ASD), an affiliate of AmerisourceBergen Corporation, to distribute Unituxin in the United States. We also sell Unituxin to distributors internationally.

 

We require our specialty pharmaceutical distributors to maintain reasonable levels of inventory reserves because the interruption of Remodulin, Tyvaso or Orenitram can be life threatening. Our specialty pharmaceutical distributors typically place monthly orders based on current utilization trends and contractual minimum inventory requirements. As a result, sales of

 

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Remodulin, Tyvaso and Orenitram can vary depending on the timing and magnitude of these orders and may not precisely reflect changes in patient demand.

 

We recognize revenues net of: (1) estimated rebates; (2) prompt pay discounts; (3) allowances for sales returns; and (4) distributor fees. We estimate our liability for rebates based on an analysis of historical levels of rebates to both Medicaid and commercial third-party payers after considering the impact of sales trends, changes in government and commercial rebate programs and any anticipated changes in our products’ pricing. In addition, we determine our obligation for prescription drug rebates required for Medicare Part D patients within the coverage gap based on estimates of the number of Medicare Part D patients and the period such patients will remain within the coverage gap. We provide prompt pay discounts to customers that pay amounts due within a specific time period and base related estimates on observed historical customer payment behavior. We derive estimates relating to our allowance for returns of Adcirca based on actual return data accumulated since the drug’s launch in 2009. We also compare patient prescription data for Adcirca to product sales on a quarterly basis to ensure a reasonable relationship between prescription and sales trends. To date, we have not identified any unusual patterns in the volume of prescriptions relative to sales that would warrant reconsideration of our methodology for estimating Adcirca returns. Remodulin, Tyvaso and Orenitram are distributed in the United States under separate contracts with substantially similar terms, which include exchange rights in the event that product is damaged during shipment or expires. The allowance for exchanges for Remodulin, Tyvaso and Orenitram has been negligible and immaterial. Furthermore, we anticipate minimal exchange activity in the future for Remodulin, Tyvaso and Orenitram since we typically sell these products with a remaining shelf life in excess of one year and our distributors generally carry a thirty- to sixty-day supply of our products at any given time. As a result, we do not record reserves for exchanges for Remodulin, Tyvaso and Orenitram at the time of sale. Lastly, we pay our distributors for contractual services rendered and accrue for related fees based on contractual rates applied to the estimated units of service provided by distributors for a given financial reporting period.

 

Generic Competition

 

We have settled litigation with Sandoz, Inc. (Sandoz) and Teva Pharmaceuticals USA, Inc. (Teva) relating to abbreviated new drug applications (ANDAs) seeking FDA approval to market generic versions of Remodulin before the expiration of certain of our U.S. patents. Under the terms of our settlement agreements, Sandoz and Teva will be permitted to market their generic versions of Remodulin in the United States beginning in June 2018 and December 2018, respectively, although they may be permitted to enter the market earlier under certain circumstances.

 

We are engaged in litigation with Watson Laboratories, Inc. (Watson), contesting its ANDA to market a generic version of Tyvaso before the expiration of certain of our U.S. patents expiring at various dates from November 2018 through December 2028. The U.S. Patent and Trademark Office recently issued two new patents covering Tyvaso to us, U.S. Patent Nos. 9,339,507 (the ‘507 patent) and 9,358,240 (the ‘240 patent). The ‘507 patent is directed to a kit for treating pulmonary hypertension and expires in March 2028, and the ‘240 patent is directed to a method of treating pulmonary hypertension and expires in May 2028. Both patents are now listed in the Orange Book for Tyvaso. In addition, we have filed an amended complaint against Watson asserting infringement of these two new patents.

 

We are also engaged in litigation with Actavis Laboratories FL, Inc. (Actavis), contesting its ANDA to market a generic version of the 0.25 mg, 1.0 mg and 2.5 mg strengths of Orenitram before the expiration of certain of our U.S. patents expiring at various dates from 2024 through 2031.

 

Finally, SteadyMed Ltd. (SteadyMed) has filed a petition for inter partes review seeking to invalidate the claims of one of our patents that expires in December 2028 and relates to treprostinil (U.S. Patent No. 8,497,393, which we refer to as the ‘393 Patent), which is the active ingredient in Remodulin, Tyvaso and Orenitram. In April 2016, the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office instituted an inter partes review of the ‘393 Patent on the basis of SteadyMed’s petition. The PTAB has preliminarily agreed with SteadyMed’s arguments concerning invalidity, and has initially found that there is a reasonable likelihood that SteadyMed would prevail in challenging the ‘393 patent. SteadyMed has announced that it is developing a product called Trevyent ® , which is a single-use, pre-filled pump being developed to deliver a two-day supply of treprostinil subcutaneously using its PatchPump ®  technology. In January 2016, SteadyMed announced that Trevyent has been granted orphan drug designation by the FDA for the treatment of PAH. As a result, if Trevyent obtains FDA approval prior to FDA approval of our RemUnity pre-filled, semi-disposable treprostinil pump or RemoSych, our implantable

 

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intravenous treprostinil delivery system, SteadyMed could have seven years of exclusivity during which the FDA may be prevented from approving these products except in limited circumstances such as a showing of clinical superiority.

 

For further details regarding the Watson, Actavis and SteadyMed matters, please see Note 14— Litigation , to our consolidated financial statements.

 

As a result of our settlements with Sandoz and Teva, we expect to see generic competition for Remodulin from these companies beginning in the United States in June 2018 and December 2018, respectively (or earlier under certain circumstances). This increased competition could reduce our net product sales and profits. In addition, while we intend to vigorously enforce our intellectual property rights relating to our products, 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 our products. Our 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 net product sales and profits.

 

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 pressure from payers to use generic products within the same class of therapy initially, which could erode Adcirca’s market share and limit its potential sales. Although we believe Adcirca’s once-daily dosing regimen provides a significant advantage over generic sildenafil’s multiple dosing regimen, 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, following which we expect to see generic competition for Adcirca.

 

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

 

Operating Expenses

 

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

 

Our operating expenses include the following costs:

 

Cost of Product Sales

 

Our cost of product sales primarily include costs to produce and acquire products sold to customers, royalty payments under license agreements granting us rights to sell related products, direct and indirect distribution costs incurred in the sale of products, and the costs of inventory reserves for current and projected obsolescence. These costs generally include share-based compensation and salary-related expenses for direct manufacturing and indirect support personnel, quality review and release for commercial distribution, direct materials and supplies, depreciation, facilities-related expenses and other overhead 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, regulatory costs and costs associated with pre-FDA approval payments to

 

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third-party contract manufacturers. Expenses also include costs for third-party arrangements, including upfront fees and milestone payments required under 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, external costs such as insurance premiums, legal fees, grants to non-affiliated, not-profit organizations, and other professional service fees.

 

Share-Based Compensation

 

Historically, we granted stock options under our Amended and Restated Equity Incentive Plan (the 1999 Plan) and awards under our Share Tracking Awards Plan (STAP). In June 2015, our shareholders approved the United Therapeutics Corporation 2015 Stock Incentive Plan (the 2015 Plan), which authorizes the issuance of up to 6,150,000 shares of our common stock. Following approval of the 2015 Plan, we ceased granting awards under the STAP and the 1999 Plan, and we have modified our equity compensation programs to grant stock options to employees who previously received STAP awards, and to grant stock options and restricted stock units to non-employee directors. The grant date fair value of stock options and restricted stock units are recognized as share-based compensation expense ratably over their vesting period.

 

Although we have ceased granting STAP awards, we still have a significant number of STAP awards outstanding. Our operating expenses and net income are often materially impacted by the recognition of share-based compensation (benefit) expense associated with outstanding STAP awards as the fair value of these awards varies with the changes in our stock price. The fair values of STAP awards and stock option grants are measured using inputs and assumptions under the Black-Scholes-Merton model that can materially impact the amount of share-based compensation expense (benefit) for a given period. The fair value of restricted stock units is measured using our stock price on the date of grant.

 

We account for STAP awards as liabilities because they are settled in cash. As such, we must re-measure the fair value of 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 (benefit) expense and can create substantial volatility within our operating expenses from financial reporting period to period. The following factors, among others, have a significant impact on the amount of share-based compensation (benefit) expense  recognized in connection with the STAP from period to period: (1) volatility in the price of our common stock (specifically, increases in the price of our common stock will generally result in an increase in our STAP liability and related compensation expense, while decreases in our stock price will generally result in a reduction in our STAP liability and related compensation expense); (2) changes in the number of outstanding awards; and (3) changes in the number of vested and unvested awards.

 

Major Research and Development Projects

 

Our major research and development projects focus on: (1) the use of prostacyclin analogues and other therapies to treat cardiopulmonary diseases; (2) monoclonal antibodies to treat cancer; and (3) organ transplantation technologies.

 

Cardiopulmonary Disease Projects

 

RemoSynch

 

In 2009, we entered into an agreement with Medtronic, Inc. (Medtronic) providing us exclusive rights in the United States, the United Kingdom, Canada, France, Germany, Italy and 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, or RemoSynch) 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

 

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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 order to launch the Remodulin Implantable System in the United States, Medtronic and we are pursuing parallel regulatory filings relating to the device and the drug, respectively. In December 2014, Medtronic submitted a premarket approval application (PMA) seeking FDA approval for the Remodulin Implantable System and labeling changes for the SynchroMed II pump. Medtronic is entirely responsible for responding to any FDA requests for additional information concerning the use of the Remodulin Implantable System with Remodulin. In March 2015, the FDA requested that Medtronic amend its PMA to reflect an amendment to the SynchroMed II PMA separately submitted by Medtronic’s neuromodulation business unit. Medtronic submitted an amendment to its PMA, which was accepted for review by FDA in January 2016. In March 2016, the FDA issued a response letter to Medtronic’s PMA, indicating that the PMA was not approvable and noted various measures that Medtronic should take to make the PMA approvable. Until the FDA receives a complete response to the not approvable letter, the PMA will remain on hold. We are collaborating with Medtronic to submit a response to address the agency’s concerns. When the FDA receives a complete response to a not approvable letter, the agency tries to complete its review within 180 days of receipt, but approval, within a specific timeframe or at all, is not assured.

 

In January 2015, we submitted a supplemental NDA with new labeling requesting FDA approval to allow the use of Remodulin with the Remodulin Implantable System. The FDA issued a refuse-to-file letter in March 2015, which meant we would need to address FDA comments on our supplemental NDA and resubmit our filing. The FDA also indicated that our submission will be treated as a new NDA. We resubmitted our filing as a new NDA in December 2015. Our filing has been accepted by the FDA for review, and we expect a ten-month review period (ending in October 2016), although we do not expect FDA to approve our NDA until such time as the Medtronic PMA is approved.

 

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. It is unclear how this consent decree will impact our program to develop and commercialize the Remodulin Implantable System.

 

RemUnity

 

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 treprostinil, which we call the RemUnity system. Under the terms of the agreement, we will fund the development costs related to the RemUnity system and will pay product fees and a single-digit royalty to DEKA based on commercial sales of the system and the treprostinil drug product sold for use with the system. Currently, we are undertaking engineering, design and development work to optimize the RemUnity pump to deliver a preservative-free formulation of treprostinil in pre-filled reservoirs, and intend to conduct human factor studies in healthy volunteers before submitting an application to the FDA to approve the pre-filled RemUnity pump.

 

Tyvaso and Tyvaso-ILD

 

We are developing further enhancements intended to make the Tyvaso Inhalation System easier to use. In addition, we have commenced a phase III registration study called INCREASE, which is a study of inhaled treprostinil as a new product called Tyvaso-ILD in patients with WHO Group 3 pulmonary hypertension associated with interstitial lung disease (specifically associated with idiopathic pulmonary fibrosis or emphysema).

 

Orenitram and OreniPlus

 

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 PAH therapy.

 

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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, at which time we plan to re-brand Orenitram as OreniPlus. As such, we are enrolling at least 610 patients in a phase III registration study called FREEDOM-EV.

 

We are also planning studies of oral treprostinil in patients with WHO Group 2 pulmonary hypertension (specifically associated with left ventricular diastolic dysfunction) and WHO Group 5 pulmonary hypertension (specifically associated with sickle cell disease).

 

Tysuberprost

 

In July 2012, we completed a phase I safety trial of esuberaprost, a single-isomer orally bioavailable prostacyclin analogue, 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 registration 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 refer to the resulting combination product as Tysuberprost. We intend to enroll 240 patients in the study, which has a primary endpoint of time to clinical worsening.

 

Cancer-Related Projects

 

Unituxin

 

In March 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 U.S. sales of Unituxin in the third quarter of 2015. We received European Commission approval during the third quarter of 2015, and 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 such as a showing of clinical superiority. In lieu of a royalty payment to the National Cancer Institute (NCI), we have an ongoing obligation to provide the NCI with Unituxin for its studies free of charge.

 

Under our BLA approval for Unituxin, the FDA has imposed certain post-marketing requirements and post-marketing commitments on us. We are conducting additional clinical and non-clinical studies to satisfy these requirements and commitments. While we believe we will be able to complete these studies, any failure to satisfy these requirements or commitments could result in penalties, including fines or withdrawal of Unituxin from the market, unless we are able to demonstrate good cause for the failure.

 

In addition, we are planning studies of Unituxin in patients with additional forms of cancer.

 

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Exosome Related Projects

 

In 2016, we discovered derivatives of certain types of stem cells that demonstrated regenerative properties in animal models of different diseases. We have selected a product candidate for broncho-pulmonary dysplasia from these derivatives, called Unexisome ™, which we are planning to advance into clinical development.

 

Organ Transplantation

 

We are engaged in research and development into a variety of technologies designed to increase the supply of transplantable organs and tissues and improve outcomes for transplant recipients. These programs include preclinical research and development of alternative tissue sources through tissue and organ xenotransplantation, as well as regenerative medicine to create engineered organs and organ tissues.

 

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; and (2) in the medium term, augmenting our near-term product growth through further development of our pharmaceutical pipeline for cardiopulmonary and oncologic indications.

 

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 preclinical research, 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) the price of our products and the 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; and (8) the risks identified in Part II, Item 1A—Risk Factors , included in this Quarterly Report on Form 10-Q.

 

We will need to construct additional facilities to support the development and commercialization of our products and services. We have budgeted for capital expenditures of approximately $275 million over the next three years.

 

We operate in a highly competitive market in which a small number of pharmaceutical companies control a majority 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

 

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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.

 

Financial Position

 

Cash and cash equivalents and marketable investments (both current and long-term) at June 30, 2016 and December 31, 2015 were $948.6 million and $991.8 million, respectively. The decrease of $43.2 million resulted primarily from the use of $259.7 million to repurchase shares of our common stock and the use of $29.1 million in other investing activities, including the purchase of property, plant and equipment, cost method investments, and intangible assets, partially offset by $251.5 million of cash generated from operations.

 

Accounts receivable at June 30, 2016 and December 31, 2015 were $238.1 million and $192.8 million, respectively. The increase of $45.3 million was primarily due to the timing of sales and cash receipts.

 

STAP liabilities classified as current liabilities at June 30, 2016 and December 31, 2015 were $120.9 million and $274.5 million, respectively. The decrease of $153.6 million corresponded to a 32 percent decrease in the price of our common stock during the six months ended June 30, 2016 and to a lesser extent, exercises and forfeitures of STAP awards during the six months ended June 30, 2016.

 

Other liabilities at June 30, 2016 and December 31, 2015 were $92.0 million and $144.0 million, respectively. The decrease of $52.0 million was primarily due to (1) a decrease of $39.8 million in our STAP liability classified as non-current, which corresponded to a 32 percent decrease in the price of our common stock during the six months ended June 30, 2016 and to a lesser extent, forfeitures of STAP awards during the six months ended June 30, 2016; and (2) a $9.1 million decrease in our SERP liability primarily as a result of the re-measurement of our SERP following the departure of certain SERP participants before retirement age. STAP liabilities classified as non-current liabilities at June 30, 2016 and December 31, 2015 were $40.4 million and $80.2 million, respectively. Refer to Note 7— Share Tracking Award Plans and Note 12— Employee Benefit Plans—Supplemental Executive Retirement Plan to our consolidated financial statements.

 

Additional paid-in capital at June 30, 2016 and December 31, 2015 was $1,826.7 million and $1,790.6 million, respectively. The increase of $36.1 million primarily consisted of $18.5 million in share-based compensation expense, $8.5 million in proceeds from stock option exercises, and $6.1 million related to the conversion of our Convertible Notes. Refer to Note 9— Stockholders’ Equity—Equity Incentive Plan and Note 8— Debt—Convertible Notes to our consolidated financial statements.

 

Treasury stock at June 30, 2016 and December 31, 2015 was $2,167.9 million and $1,902.1 million, respectively. The increase of $265.8 million primarily consisted of $259.7 million in expenditures to repurchase approximately 2.2 million shares of our common stock. Refer to Note 9— Stockholders’ Equity—Share Repurchases to our consolidated financial statements.

 

Three Months Ended June 30, 2016 and June 30, 2015

 

Revenues

 

The following table presents the components of total revenues (dollars in millions):

 

 

 

Three Months Ended
June 30,

 

Percentage

 

 

 

2016

 

2015

 

Change

 

Net product sales:

 

 

 

 

 

 

 

Remodulin

 

$

158.9

 

$

135.9

 

16.9

%

Tyvaso

 

107.0

 

115.8

 

(7.6

)%

Adcirca

 

90.9

 

68.2

 

33.3

%

Orenitram

 

38.0

 

25.9

 

46.7

%

Unituxin

 

17.8

 

 

NM

(1)

Other

 

 

1.4

 

(100.0

)%

Total revenues

 

$

412.6

 

$

347.2

 

18.8

%

 


(1)  Calculation is not meaningful.

 

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Revenues for the three months ended June 30, 2016 increased by $65.4 million compared to the same period in 2015. The growth in revenues primarily resulted from the following: (1) a $23.0 million increase in Remodulin net product sales due to an increase in the number of patients being treated with Remodulin; (2) a $22.7 million increase in Adcirca net product sales due to an increase in the number of Adcirca bottles sold and price increases, which were determined by Lilly; (3) $17.8 million in net product sales of Unituxin, which we launched in the third quarter of 2015; and (4) a $12.1 million increase in Orenitram net product sales due to an increase in the number of patients being treated with Orenitram and an increase in patients’ average dose. These increases were partially offset by an $8.8 million decrease in Tyvaso net product sales.

 

We recognize revenues net of: (1) estimated rebates; (2) prompt pay discounts; (3) allowances for sales returns; and (4) distributor fees. These are referred to as gross-to-net deductions and are based on historical experiences and contractual and statutory requirements. The tables below include a reconciliation of the accounts associated with these deductions (in millions):

 

 

 

Three Months Ended June 30, 2016

 

 

 

Rebates

 

Prompt Pay
Discounts

 

Allowance for
Sales Returns

 

Distributor
Fees

 

Total

 

Balance, April 1, 2016

 

$

47.4

 

$

4.0

 

$

5.4

 

$

2.1

 

$

58.9

 

Provisions attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

48.9

 

9.5

 

1.1

 

3.1

 

62.6

 

Prior periods

 

3.0

 

 

 

(0.1

)

2.9

 

Payments or credits attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

(9.0

)

(4.9

)

 

(0.4

)

(14.3

)

Prior periods

 

(44.3

)

(3.7

)

(0.2

)

(1.9

)

(50.1

)

Balance, June 30, 2016

 

$

46.0

 

$

4.9

 

$

6.3

 

$

2.8

 

$

60.0

 

 

 

 

Three Months Ended June 30, 2015

 

 

 

Rebates

 

Prompt Pay
Discounts

 

Allowance for
Sales Returns

 

Distributor
Fees

 

Total

 

Balance, April 1, 2015

 

$

34.8

 

$

3.2

 

$

4.2

 

$

0.3

 

$

42.5

 

Provisions attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

44.4

 

8.1

 

0.6

 

1.3

 

54.4

 

Prior periods

 

(1.7

)

 

0.4

 

0.1

 

(1.2

)

Payments or credits attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

(8.3

)

(4.5

)

 

(0.9

)

(13.7

)

Prior periods

 

(28.2

)

(3.1

)

(0.5

)

0.5

 

(31.3

)

Balance, June 30, 2015

 

$

41.0

 

$

3.7

 

$

4.7

 

$

1.3

 

$

50.7

 

 

Cost of Product Sales

 

The table below summarizes cost of product sales by major category (dollars in millions):

 

 

 

Three Months Ended

 

 

 

 

 

June 30,

 

Percentage

 

 

 

2016

 

2015

 

Change

 

Category:

 

 

 

 

 

 

 

Cost of product sales

 

$

20.0

 

$

14.7

 

36.1

%

Share-based compensation expense

 

 

1.3

 

(100.0

)%

Total cost of product sales

 

$

20.0

 

$

16.0

 

25.0

%

 

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Cost of product sales. The increase in cost of product sales of $5.3 million for the three months ended June 30, 2016, as compared to the same period in 2015, was attributable to increased sales volume.

 

Research and Development Expense

 

The table below summarizes research and development expense by major category (dollars in millions):

 

 

 

Three Months Ended

 

 

 

 

 

June 30,

 

Percentage

 

 

 

2016

 

2015

 

Change

 

Category:

 

 

 

 

 

 

 

Research and development expense

 

$

37.0

 

$

36.0

 

2.8

%

Share-based compensation (benefit) expense

 

(1.8

)

13.4

 

(113.4

)%

Total research and development expense

 

$

35.2

 

$

49.4

 

(28.7

)%

 

Share-based compensation. The decrease in share-based compensation of $15.2 million for the three months ended June 30, 2016, as compared to the same period in 2015, corresponded to a 5 percent decrease in the price of our common stock during the three months ended June 30, 2016, compared to a 1 percent increase in the price of our common stock during the same period in 2015.