Company Quick10K Filing
Quick10K
United Therapeutics
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$96.68 44 $4,240
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-07 Other Events, Exhibits
8-K 2019-05-01 Earnings, Exhibits
8-K 2019-04-08 Other Events, Exhibits
8-K 2019-01-31 Regulation FD, Exhibits
8-K 2019-01-24 M&A, Regulation FD, Exhibits
8-K 2019-01-24 M&A, Regulation FD, Exhibits
8-K 2018-11-15 Enter Agreement, Regulation FD, Exhibits
8-K 2018-10-31 Earnings, Exhibits
8-K 2018-10-31 Officers, Regulation FD, Exhibits
8-K 2018-10-15 Other Events, Exhibits
8-K 2018-09-17 Other Events, Exhibits
8-K 2018-09-04 Other Events, Exhibits
8-K 2018-08-30 Regulation FD, Exhibits
8-K 2018-08-08 Other Events, Exhibits
8-K 2018-08-08 Other Events, Exhibits
8-K 2018-08-01 Earnings, Exhibits
8-K 2018-07-30 Other Events, Exhibits
8-K 2018-07-20 Other Events, Exhibits
8-K 2018-06-26 Enter Agreement, Leave Agreement, Officers, Amend Bylaw, Shareholder Vote, Exhibits
8-K 2018-04-29 Enter Agreement, Other Events, Exhibits
8-K 2018-04-25 Amend Bylaw, Exhibits
8-K 2018-03-30 Other Events
8-K 2018-02-15 Other Events, Exhibits
8-K 2018-01-29 Enter Agreement, Off-BS Arrangement
DVN Devon Energy 12,980
NYT New York Times 5,780
SNV Synovus Financial 5,650
PDFS PDF Solutions 416
BLFS Biolife Solutions 313
STXB Spirit of Texas Bancshares 310
ALDX Aldeyra Therapeutics 221
CBIO Catalyst Biosciences 104
DLHC DLH Holdings 73
OMEX Odyssey Marine Exploration 46
UTHR 2019-03-31
Part I. Financial Information
Item 1. Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 a19-7386_1ex31d1.htm
EX-31.2 a19-7386_1ex31d2.htm
EX-32.1 a19-7386_1ex32d1.htm
EX-32.2 a19-7386_1ex32d2.htm

United Therapeutics Earnings 2019-03-31

UTHR 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a19-7386_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2019

 

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 every Interactive Data File required to be submitted 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 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

 

 

 

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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

 

The number of shares outstanding of the issuer’s common stock, par value $.01 per share, as of April 24, 2019 was 43,810,915.

 

 

 


Table of Contents

 

INDEX

 

 

 

Page

 

 

 

Part I.

FINANCIAL INFORMATION (UNAUDITED)

3

 

 

 

Item 1.

Consolidated Financial Statements

3

 

 

 

 

Consolidated Balance Sheets

3

 

 

 

 

Consolidated Statements of Operations

4

 

 

 

 

Consolidated Statements of Comprehensive Income

5

 

 

 

 

Consolidated Statements of Stockholders’ Equity

6

 

 

 

 

Consolidated Statements of Cash Flows

7

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

Item 2.

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

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

Part II.

OTHER INFORMATION

36

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

 

 

 

Item 6.

Exhibits

53

 

 

 

SIGNATURES

54

 

2


Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  CONSOLIDATED FINANCIAL STATEMENTS

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

 

 

 

March 31,
2019

 

December 31,
2018

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

790.6

 

$

669.2

 

Marketable investments

 

814.5

 

746.7

 

Accounts receivable, no allowance for 2019 and 2018

 

159.8

 

175.7

 

Inventories, net

 

96.2

 

101.0

 

Other current assets

 

81.4

 

75.4

 

Total current assets

 

1,942.5

 

1,768.0

 

Marketable investments

 

411.3

 

442.6

 

Goodwill and other intangible assets, net

 

170.8

 

170.8

 

Property, plant and equipment, net

 

701.2

 

699.7

 

Deferred tax assets, net

 

265.5

 

95.7

 

Other non-current assets

 

235.4

 

224.2

 

Total assets

 

$

3,726.7

 

$

3,401.0

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

139.4

 

$

166.1

 

Share tracking awards plan

 

77.5

 

72.2

 

Other current liabilities

 

53.1

 

38.3

 

Total current liabilities

 

270.0

 

276.6

 

Line of credit

 

1,050.0

 

250.0

 

Other non-current liabilities

 

68.5

 

66.6

 

Total liabilities

 

1,388.5

 

593.2

 

Commitments and contingencies

 

 

 

 

 

Temporary equity

 

19.2

 

19.2

 

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, 70,424,937 and 70,207,581 shares issued, and 43,805,721 and 43,588,365 shares outstanding at March 31, 2019 and December 31, 2018, respectively

 

0.7

 

0.7

 

Additional paid-in capital

 

1,967.6

 

1,940.2

 

Accumulated other comprehensive loss

 

(5.2

)

(7.9

)

Treasury stock, 26,619,216 shares at March 31, 2019 and December 31, 2018

 

(2,579.2

)

(2,579.2

)

Retained earnings

 

2,935.1

 

3,434.8

 

Total stockholders’ equity

 

2,319.0

 

2,788.6

 

Total liabilities and stockholders’ equity

 

$

3,726.7

 

$

3,401.0

 

 

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
March 31,

 

 

 

2019

 

2018

 

 

 

(Unaudited)

 

Revenues:

 

 

 

 

 

Net product sales

 

$

362.6

 

$

389.2

 

Total revenues

 

362.6

 

389.2

 

Operating expenses:

 

 

 

 

 

Cost of product sales

 

29.1

 

53.2

 

Research and development

 

897.4

 

35.7

 

Selling, general and administrative

 

92.0

 

(6.6

)

Total operating expenses

 

1,018.5

 

82.3

 

Operating (loss) income

 

(655.9

)

306.9

 

Other income (expense):

 

 

 

 

 

Interest income

 

9.8

 

5.3

 

Interest expense

 

(10.3

)

(2.6

)

Other, net

 

5.8

 

(0.6

)

Total other income, net

 

5.3

 

2.1

 

(Loss) income before income taxes

 

(650.6

)

309.0

 

Income tax benefit (expense)

 

156.0

 

(64.5

)

Net (loss) income

 

$

(494.6

)

$

244.5

 

Net (loss) income per common share:

 

 

 

 

 

Basic

 

$

(11.32

)

$

5.65

 

Diluted

 

$

(11.32

)

$

5.57

 

Weighted average number of common shares outstanding:

 

 

 

 

 

Basic

 

43.7

 

43.3

 

Diluted

 

43.7

 

43.9

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

 

 

(Unaudited)

 

Net (loss) income

 

$

(494.6

)

$

244.5

 

Other comprehensive income:

 

 

 

 

 

Defined benefit pension plan:

 

 

 

 

 

Amortization of actuarial gain and prior service cost included in net periodic pension cost, net of tax

 

0.1

 

0.3

 

Total defined benefit pension plan, net of tax

 

0.1

 

0.3

 

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

 

2.6

 

(2.4

)

Other comprehensive income (loss), net of tax

 

2.7

 

(2.1

)

Comprehensive (loss) income

 

$

(491.9

)

$

242.4

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions)

 

 

 

Three Months Ended March 31, 2019

 

 

 

(Unaudited)

 

 

 

Common Stock

 

Additional
Paid-in

 

Accumulated
Other
Comprehensive

 

Treasury

 

Retained

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Loss

 

Stock

 

Earnings

 

Equity

 

Balance, January 1, 2019

 

70.2

 

$

0.7

 

$

1,940.2

 

$

(7.9

)

$

(2,579.2

)

$

3,434.8

 

$

2,788.6

 

Net loss

 

 

 

 

 

 

(494.6

)

(494.6

)

Unrealized gain on available-for-sale securities

 

 

 

 

2.6

 

 

 

2.6

 

Defined benefit pension plan

 

 

 

 

0.1

 

 

 

0.1

 

Shares issued under employee stock purchase plan

 

 

 

2.2

 

 

 

 

2.2

 

Restricted stock units withheld for taxes

 

 

 

(1.9

)

 

 

 

(1.9

)

Exercise of stock options

 

0.2

 

 

8.8

 

 

 

 

8.8

 

Share-based compensation

 

 

 

18.3

 

 

 

 

18.3

 

Cumulative effect of accounting change

 

 

 

 

 

 

(5.1

)

(5.1

)

Balance, March 31, 2019

 

70.4

 

$

0.7

 

$

1,967.6

 

$

(5.2

)

$

(2,579.2

)

$

2,935.1

 

$

2,319.0

 

 

 

 

Three Months Ended March 31, 2018

 

 

 

(Unaudited)

 

 

 

Common Stock

 

Additional
Paid-in

 

Accumulated
Other
Comprehensive

 

Treasury

 

Retained

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Loss

 

Stock

 

Earnings

 

Equity

 

Balance, January 1, 2018

 

69.9

 

$

0.7

 

$

1,854.3

 

$

(19.6

)

$

(2,579.2

)

$

2,845.6

 

$

2,101.8

 

Net income

 

 

 

 

 

 

244.5

 

244.5

 

Unrealized loss on available-for-sale securities

 

 

 

 

(2.4

)

 

 

(2.4

)

Defined benefit pension plan

 

 

 

 

0.3

 

 

 

0.3

 

Shares issued under employee stock purchase plan

 

 

 

2.1

 

 

 

 

2.1

 

Exercise of stock options

 

0.2

 

 

9.2

 

 

 

 

9.2

 

Share-based compensation

 

 

 

13.9

 

 

 

 

13.9

 

Balance, March 31, 2018

 

70.1

 

$

0.7

 

$

1,879.5

 

$

(21.7

)

$

(2,579.2

)

$

3,090.1

 

$

2,369.4

 

 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

Net (loss) income

 

$

(494.6

)

$

244.5

 

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

10.3

 

7.9

 

Share-based compensation expense (benefit)

 

29.2

 

(101.1

)

Other

 

6.7

 

(0.1

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

16.0

 

86.0

 

Inventories

 

1.7

 

6.4

 

Accounts payable and accrued expenses

 

(27.7

)

22.0

 

Other assets and liabilities

 

(169.0

)

10.1

 

Net cash (used in) provided by operating activities

 

(627.4

)

275.7

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(25.1

)

(37.6

)

Purchases of held-to-maturity and other investments

 

 

(26.9

)

Sales/maturities of held-to-maturity investments

 

37.4

 

26.8

 

Purchases of available-for-sale investments

 

(379.5

)

(86.0

)

Sales/maturities of available-for-sale investments

 

313.9

 

70.0

 

Purchase of investments in privately-held companies

 

(7.0

)

(5.0

)

Net cash used in investing activities

 

(60.3

)

(58.7

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from line of credit

 

800.0

 

 

Payments of debt issuance costs

 

 

(0.7

)

Proceeds from the exercise of stock options

 

8.8

 

9.2

 

Proceeds from the issuance of stock under employee stock purchase plan

 

2.2

 

2.1

 

Restricted stock units withheld for taxes

 

(1.9

)

 

Net cash provided by financing activities

 

809.1

 

10.6

 

Net increase in cash and cash equivalents

 

121.4

 

227.6

 

Cash and cash equivalents, beginning of period

 

669.2

 

705.1

 

Cash and cash equivalents, end of period

 

$

790.6

 

$

932.7

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

9.2

 

$

2.3

 

Cash paid for income taxes

 

$

0.9

 

$

0.2

 

Non-cash investing and financing activities:

 

 

 

 

 

Non-cash additions to property, plant and equipment

 

$

5.8

 

$

13.9

 

 

See accompanying notes to consolidated financial statements.

 

7


Table of Contents

 

UNITED THERAPEUTICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(UNAUDITED)

 

1.     Organization and Business Description

 

United Therapeutics Corporation is a biotechnology company focused on the development and commercialization of innovative products to address the unmet medical needs of patients with chronic and life-threatening conditions.

 

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), Orenitram® (treprostinil) Extended-Release Tablets (Orenitram), Unituxin® (dinutuximab) Injection (Unituxin) and Adcirca® (tadalafil) Tablets (Adcirca). Our only significant revenues outside the United States are derived from sales of Remodulin in Europe.

 

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, 2018, as filed with the SEC on February 27, 2019 (our “Annual Report”).

 

In our management’s opinion, the accompanying consolidated financial statements contain all adjustments, including normal, recurring adjustments, necessary to fairly present our financial position as of March 31, 2019 and December 31, 2018, statements of operations, comprehensive income, stockholders’ equity, and cash flows for the three-month periods ended March 31, 2019 and 2018. Interim results are not necessarily indicative of results for an entire year.

 

Recently Issued Accounting Standards

 

Accounting Standards Adopted During the Period

 

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (ASU 2016-02), which requires that assets and liabilities arising under leases be recognized on the balance sheets. ASU 2016-02 also requires additional quantitative and qualitative disclosures of the amount, timing and uncertainty of cash flows relating to lease arrangements. ASU 2016-02 was effective for annual reporting periods beginning after December 15, 2018. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842)—Targeted Improvements (ASU 2018-11). ASU 2018-11 allowed entities to elect a simplified transition method, allowing for application of ASU 2016-02 at the adoption date, with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We adopted this standard on January 1, 2019 using the simplified transition method, allowing us to not restate comparative periods and apply ASC 842 on a prospective basis, resulting in a balance sheet presentation that is not comparable to the prior period in the first year of adoption. We elected the practical expedient package permitted under the transition guidance within the new standard, which among other things, allows us to carry forward historical lease classifications. We also elected the lessee component election, allowing us to account for the lease and non-lease components as a single lease component. As the majority of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. We made an accounting policy election to keep leases with an initial term of 12 months or less off of our consolidated balance sheets. We recognize lease payments for such leases in the consolidated statements of operations on a straight-line basis over the lease term.

 

8


Table of Contents

 

We adopted this standard on a prospective basis and, as such, prior periods have not been restated. Upon adoption, we recognized a right-of-use asset and lease liability, each of $8.2 million and related to our operating leases as of January 1, 2019. In addition, we recognized a cumulative-effect adjustment for the de-recognition of our build-to-suit leases as these leases no longer qualify for build-to-suit accounting and have instead been recognized as operating leases under ASC 842. The adjustment resulted in a decrease to retained earnings of $5.1 million, which is net of a tax benefit. At adoption, our weighted-average remaining lease term was 3.0 years and our weighted-average discount rate was 4.9%.

 

Supplemental balance sheet information related to operating leases was as follows (in millions):

 

Operating Leases

 

Financial Statement Line Item on the
Consolidated Balance Sheets

 

March 31,
2019

 

January 1,
2019

 

Right-of-use assets

 

Other non-current assets

 

$

7.1

 

$

8.2

 

Current lease liabilities

 

Other current liabilities

 

$

3.4

 

$

4.1

 

Non-current lease liabilities

 

Other non-current liabilities

 

3.7

 

4.1

 

Total operating lease liabilities

 

 

 

$

7.1

 

$

8.2

 

 

We recorded $1.4 million and $1.2 million in operating lease expense during the three months ended March 31, 2019 and 2018, respectively. The amounts recorded in operating lease expense include short-term leases and variable lease costs, which are immaterial.

 

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). The standard provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect (or portion thereof) of the change in the U.S. federal corporate income tax rate under the Tax Cuts and Jobs Act (Tax Reform) is recorded. We adopted the new standard on January 1, 2019. Adoption of this standard did not have a material impact on our financial statements.

 

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, to eliminate or modify certain disclosure rules that are redundant, outdated, or duplicative of U.S. GAAP or other regulatory requirements. Among other changes, the amendments eliminated the annual requirement to disclose the high and low trading prices of our common stock. In addition, the amendments expanded the disclosure requirements related to the analysis of shareholders’ equity for interim financial statements. An analysis of the changes in each caption of shareholders’ equity presented in the balance sheet must be provided in a note or separate statement, and we have provided this disclosure in a separate statement (Consolidated Statements of Stockholders’ Equity) beginning in the first quarter of 2019.

 

Accounting Standards Not Yet Adopted

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment (ASU 2017-04), which simplifies how an entity is required to test goodwill for impairment. A goodwill impairment will be measured by the amount by which a reporting unit’s carrying value exceeds its fair value, with the amount of impairment not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, and must be adopted on a prospective basis. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our financial statements.

 

In August 2018, the FASB issued ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Topic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14). The standard modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. ASU 2018-14 is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our financial statements.

 

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3.     Investments

 

Available-for-Sale Investments

 

Marketable investments classified as available-for-sale consisted of the following (in millions):

 

As of March 31, 2019

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

U.S. government and agency securities

 

$

1,111.8

 

$

1.3

 

$

(2.0

)

$

1,111.1

 

Corporate debt securities

 

111.2

 

0.5

 

 

111.7

 

Total

 

$

1,223.0

 

$

1.8

 

$

(2.0

)

$

1,222.8

 

Reported under the following captions on the consolidated balance sheet:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

$

5.9

 

Current marketable investments

 

 

 

 

 

 

 

806.4

 

Non-current marketable investments

 

 

 

 

 

 

 

410.5

 

 Total

 

 

 

 

 

 

 

$

1,222.8

 

 

As of December 31, 2018

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

U.S. government and agency securities

 

$

1,077.4

 

$

0.7

 

$

(3.9

)

$

1,074.2

 

Corporate debt securities

 

72.3

 

 

(0.3

)

72.0

 

Total

 

$

1,149.7

 

$

0.7

 

$

(4.2

)

$

1,146.2

 

Reported under the following captions on the consolidated balance sheet:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

$

 

Current marketable investments

 

 

 

 

 

 

 

705.8

 

Non-current marketable investments

 

 

 

 

 

 

 

440.4

 

 Total

 

 

 

 

 

 

 

$

1,146.2

 

 

The following table summarizes the contractual maturities of available-for-sale marketable investments (in millions):

 

 

 

As of March 31, 2019

 

 

 

Amortized
Cost

 

Fair
Value

 

Due within one year

 

$

813.4

 

$

812.3

 

Due in one to three years

 

409.6

 

410.5

 

Total

 

$

1,223.0

 

$

1,222.8

 

 

 

 

As of December 31, 2018

 

 

 

Amortized
Cost

 

Fair
Value

 

Due within one year

 

$

708.2

 

$

705.8

 

Due in one to three years

 

441.5

 

440.4

 

Total

 

$

1,149.7

 

$

1,146.2

 

 

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Investments in Privately-Held Companies

 

As of March 31, 2019, we maintained non-controlling equity investments in privately-held companies of approximately $142.5 million in the aggregate. Upon adoption of ASU 2016-01 on January 1, 2018, we began to measure these investments using the measurement alternative because the fair values of these investments are not readily determinable. Under this alternative, the investments are measured at cost, less any impairment, adjusted for any observable price changes. There were no observable price changes in our investments in privately-held companies during the three months ended March 31, 2019. We include our investments in privately-held companies within other non-current assets on our consolidated balance sheets. These investments are subject to a periodic impairment review and if impaired, the investment is measured and recorded at fair value in accordance with ASC 820, Fair Value Measurements.

 

4.     Fair Value Measurements

 

We account for certain assets and liabilities at fair value and classify these assets and liabilities within a fair value hierarchy (Level 1, Level 2 or Level 3). Our other current assets and other 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 March 31, 2019

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

437.6

 

$

 

$

 

$

437.6

 

Time deposits(2)

 

 

38.4

 

 

38.4

 

U.S. government and agency securities(3)

 

 

1,111.1

 

 

1,111.1

 

Corporate debt securities(3)

 

 

111.7

 

 

111.7

 

Equity securities(4)

 

6.5

 

 

 

6.5

 

Total assets

 

$

444.1

 

$

1,261.2

 

$

 

$

1,705.3

 

Liabilities

 

 

 

 

 

 

 

 

 

Contingent consideration(5)

 

 

 

13.4

 

13.4

 

Total liabilities

 

$

 

$

 

$

13.4

 

$

13.4

 

 

 

 

As of December 31, 2018

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

247.6

 

$

 

$

 

$

247.6

 

Time deposits(2)

 

 

35.9

 

 

35.9

 

U.S. government and agency securities(3)

 

 

1,074.2

 

 

1,074.2

 

Corporate debt securities(3)

 

 

75.7

 

 

75.7

 

Equity securities(4)

 

3.5

 

 

 

3.5

 

Total assets

 

$

251.1

 

$

1,185.8

 

$

 

$

1,436.9

 

Liabilities

 

 

 

 

 

 

 

 

 

Contingent consideration(5)

 

 

 

13.4

 

13.4

 

Total liabilities

 

$

 

$

 

$

13.4

 

$

13.4

 

 


(1)                     Included in cash and cash equivalents on the accompanying consolidated balance sheets.

 

(2)                     Included in cash equivalents and 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 cash equivalents and current and non-current marketable investments on the accompanying consolidated balance sheets. Refer to Note 3—Investments—Available-for-Sale Investments for further information. The fair value of

 

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these securities is principally measured or corroborated by trade data for identical securities for which related trading activity is not sufficiently frequent to be considered a Level 1 input or comparable securities that are more actively traded.

 

(4)                     Included in current marketable investments on the accompanying consolidated balance sheets. The fair value of these securities is based on quoted market prices for identical instruments in active markets.

 

(5)                     Included in non-current liabilities on the accompanying consolidated balance sheets. The fair value of contingent consideration has been estimated using probability-weighted discounted cash flow models (DCFs). 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. The change in the fair value of contingent consideration for the three months ended March 31, 2019 was not material.

 

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 are reported above within the fair value hierarchy. Refer to Note 3—Investments. The carrying value of our debt is a reasonable estimate of the fair value of the outstanding debt based on the variable interest rate of the debt.

 

5.     Inventories

 

Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value and consist of the following, net of reserves (in millions):

 

 

 

March 31,
2019

 

December 31,
2018

 

Raw materials

 

$

22.3

 

$

24.3

 

Work-in-progress

 

26.3

 

28.0

 

Finished goods

 

47.6

 

48.7

 

Total inventories

 

$

96.2

 

$

101.0

 

 

6.     Goodwill and Other Intangible Assets

 

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

 

 

 

As of March 31, 2019

 

As of December 31, 2018

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

 

Goodwill

 

$

31.5

 

$

 

$

31.5

 

$

31.5

 

$

 

$

31.5

 

Other intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology, patents and trade names

 

6.7

 

(5.1

)

1.6

 

6.7

 

(5.1

)

1.6

 

In-process research and development

 

137.7

 

 

137.7

 

137.7

 

 

137.7

 

Total

 

$

175.9

 

$

(5.1

)

$

170.8

 

$

175.9

 

$

(5.1

)

$

170.8

 

 

7.     Debt

 

Unsecured Revolving Credit Facility — Credit Agreement

 

In June 2018, we entered into a credit agreement (the Credit Agreement) with Wells Fargo Bank, National Association (Wells Fargo), as administrative agent and a swingline lender, and various other lender parties, providing for (1) an unsecured revolving credit facility of up to $1.0 billion; and (2) a second unsecured revolving credit facility of up to $500.0 million (which facilities may, at our request, be increased by up to $300 million in the aggregate subject to obtaining commitments from existing or new lenders for such increase and other conditions). The facilities will mature five years

 

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after the closing date of the Credit Agreement, 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 Credit Agreement, up to a maximum of two such extensions.

 

At our option, amounts borrowed under the Credit Agreement 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 Credit Agreement). To date, we have elected to calculate interest on the outstanding balance at LIBOR plus an applicable margin. In connection with the Credit Agreement, we incurred debt issuance costs in June 2018 of $13.2 million, $12.6 million of which were capitalized and are being amortized over the term of the Credit Agreement.

 

On January 24, 2019, we paid an upfront payment of $800.0 million related to our exclusive license agreement with Arena Pharmaceuticals, Inc. (Arena) and funded the payment by borrowing $800.0 million under the Credit Agreement. This brought our aggregate outstanding balance under the Credit Agreement to $1,050.0 million as of March 31, 2019. As we do not intend to repay the full outstanding balance within one year, the outstanding balance has been classified as long-term within the consolidated balance sheet.

 

The Credit Agreement contains customary events of default and customary affirmative and negative covenants. As of March 31, 2019, we were in compliance with these covenants. Lung Biotechnology PBC is our only subsidiary that guarantees our obligations under the Credit Agreement though, from time to time, one or more of our other subsidiaries may be required to guarantee our obligations.

 

During the three months ended March 31, 2019, we recorded $10.3 million of interest expense related to the Credit Agreement. During the same period in 2018, we recorded $2.6 million of interest expense related to a prior credit agreement.

 

8.     Share-Based Compensation

 

As of March 31, 2019, 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 Amended and Restated 2015 Stock Incentive Plan (the 2015 Plan). The 2015 Plan and an amendment and restatement of the 2015 Plan were approved by our shareholders in June 2015 and June 2018, respectively. The 2015 Plan, as amended, provides for the issuance of up to 9,050,000 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 have been or will be granted under the 1999 Plan. We also have one equity incentive plan, the United Therapeutics Corporation 2019 Inducement Stock Incentive Plan (the 2019 Inducement Plan), that has not been approved by our shareholders, in accordance with Nasdaq Stock Market rules. The 2019 Inducement Plan was approved by our Board of Directors in February 2019 and provides for the issuance of up to 99,000 shares of our common stock under awards granted to newly-hired employees. Currently, we grant equity-based awards to employees and members of our Board of Directors in the form of stock options and restricted stock units under the 2015 Plan, and we grant restricted stock units to newly-hired employees under the 2019 Inducement Plan. Refer to the sections entitled Stock Options and Restricted Stock Units below.

 

We previously issued awards under the United Therapeutics Corporation Share Tracking Awards Plan (2008 STAP) and the United Therapeutics Corporation 2011 Share Tracking Awards Plan (2011 STAP). We refer to the 2008 STAP and the 2011 STAP collectively as the “STAP” and awards outstanding under either of these plans as “STAP awards.” Refer to the section entitled Share Tracking Awards Plans below. We discontinued the issuance of STAP awards in June 2015.

 

In 2012, our shareholders approved the United Therapeutics Corporation Employee Stock Purchase Plan (ESPP), which is structured to comply with Section 423 of the Internal Revenue Code. Refer to the section entitled Employee Stock Purchase Plan below.

 

The following table reflects the components of share-based compensation expense (benefit) recognized in our consolidated statements of operations (in millions):

 

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Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Stock options

 

$

15.7

 

$

12.7

 

Restricted stock units

 

2.2

 

0.9

 

STAP awards

 

11.0

 

(115.0

)

Employee stock purchase plan

 

0.3

 

0.3

 

Total share-based compensation expense (benefit) before tax

 

$

29.2

 

$

(101.1

)

 

Stock Options

 

We estimate the fair value of stock options using the Black-Scholes-Merton valuation model, which requires us to make certain assumptions that can materially impact the estimation of fair value and related compensation expense. 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.

 

The table below includes the weighted-average assumptions used to measure the fair value of all stock options granted during the three-month periods ended March 31, 2019 and March 31, 2018:

 

 

 

March 31,
2019

 

March 31,
2018

 

Expected volatility

 

33.9

%

36.1

%

Risk-free interest rate

 

2.4

%

2.7

%

Expected term of awards (in years)

 

5.8

 

6.3

 

Expected dividend yield

 

0.0

%

0.0

%

 

A summary of the activity and status of stock options under our equity incentive plans during the three-month period ended March 31, 2019 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, 2019

 

6,299,803

 

$

120.78

 

 

 

 

 

Granted

 

2,011,667

 

126.54

 

 

 

 

 

Exercised

 

(166,508

)

53.10

 

 

 

 

 

Forfeited/canceled

 

(77,200

)

130.73

 

 

 

 

 

Outstanding at March 31, 2019

 

8,067,762

 

$

123.52

 

7.0

 

$

38.6

 

Exercisable at March 31, 2019

 

3,885,475

 

$

119.05

 

5.8

 

$

32.8

 

Unvested at March 31, 2019

 

4,182,287

 

$

127.67

 

8.1

 

$

5.8

 

 

The weighted average fair value of a stock option granted during each of the three-month periods ended March 31, 2019 and March 31, 2018, was $40.03 and $45.00, respectively. These stock options have an aggregate grant date fair value of $80.5 million and $42.5 million, respectively. The total fair value of stock options that vested during the three-month periods ended March 31, 2019 and March 31, 2018 was $33.7 million and $31.1 million, respectively.

 

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

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Cost of product sales

 

$

0.2

 

$

0.3

 

Research and development

 

0.9

 

0.9

 

Selling, general and administrative

 

14.6

 

11.5

 

Share-based compensation expense before taxes

 

15.7

 

12.7

 

Related income tax benefit

 

(3.5

)

(2.9

)

Share-based compensation expense, net of taxes

 

$

12.2

 

$

9.8

 

 

As of March 31, 2019, unrecognized compensation cost relating to stock options was $143.4 million. Unvested outstanding stock options as of March 31, 2019 had a weighted average remaining vesting period of 2.8 years.

 

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

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Number of options exercised

 

166,508

 

174,295

 

Cash received

 

$

8.8

 

$

9.2

 

Total intrinsic value of options exercised

 

$

10.3

 

$

10.4

 

 

Restricted Stock Units

 

Each restricted stock unit entitles the recipient to one share of our common stock upon vesting. We measure the fair value of restricted stock units using the stock price on the date of grant. Share-based compensation expense for the restricted stock units is recorded ratably over their vesting period. A summary of the activity with respect to, and status of, restricted stock units under the 2015 Plan during the three-month period ended March 31, 2019 is presented below:

 

 

 

Number of
Restricted
Stock Units

 

Weighted-
Average
Grant
Price

 

Weighted
Average
Remaining
Contractual
Term (Years)

 

Aggregate
Intrinsic
Value
(in millions)

 

Unvested at January 1, 2019

 

186,255

 

$

112.48

 

 

 

 

 

Granted

 

196,489

 

117.75

 

 

 

 

 

Vested

 

(46,027

)

111.04

 

 

 

 

 

Forfeited/canceled

 

(4,373

)

119.39

 

 

 

 

 

Unvested at March 31, 2019

 

332,344

 

$

115.71

 

9.6

 

$

39.0

 

 

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

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Cost of product sales

 

$

0.2

 

$

 

Research and development

 

0.7

 

0.1

 

Selling, general and administrative

 

1.3

 

0.8

 

Share-based compensation expense before taxes

 

2.2

 

0.9

 

Related income tax benefit

 

(0.5

)

(0.2

)

Share-based compensation expense, net of taxes

 

$

1.7

 

$

0.7

 

 

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Table of Contents

 

As of March 31, 2019, unrecognized compensation cost related to the grant of restricted stock units was $35.6 million. Unvested outstanding restricted stock units as of March 31, 2019 had a weighted average remaining vesting period of 2.6 years.

 

Share Tracking Awards Plans

 

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.

 

The aggregate STAP liability balance was $77.5 million and $72.2 million at March 31, 2019 and December 31, 2018, respectively, all of which was classified as a current liability on our consolidated balance sheets because all STAP awards are either vested or expected to vest within one year based on their vesting terms.

 

Estimating the fair value of STAP awards requires the use of certain inputs that can materially impact the determination of fair value and the amount of compensation expense (benefit) we recognize. Inputs used in estimating fair value include the price of our common stock, the expected volatility of the price of our common stock, the risk-free interest rate, the expected term of STAP awards, and the expected dividend yield. Prior to December 31, 2018, we used historical data to develop the expected term input for our STAP awards. As of December 31, 2018, we no longer believed historical exercise data was a reasonable approach to determine the expected exercise behavior of outstanding STAPs given the prolonged volatility of the price of our common stock. As such, we determined the expected term assumption as of March 31, 2019 using the weighted average midpoint of the remaining contractual term for outstanding awards and expect to continue to use this methodology until circumstances dictate otherwise.

 

The fair value of the STAP awards is measured at the end of 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 outstanding STAP awards:

 

 

 

March 31,
2019

 

March 31,
2018

 

Expected volatility

 

29.3

%

33.3

%

Risk-free interest rate

 

2.2

%

2.1

%

Expected term of awards (in years)

 

2.4

 

1.2

 

Expected dividend yield

 

%

%

 

The closing price of our common stock was $117.37 and $112.36 on March 31, 2019 and March 31, 2018, respectively. The closing price of our common stock was $108.90 on December 31, 2018.

 

A summary of the activity and status of STAP awards during the three-month period ended March 31, 2019 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, 2019

 

2,867,979

 

$

107.85

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

(109,667

)

61.19

 

 

 

 

 

Forfeited

 

(65,067

)

163.22

 

 

 

 

 

Outstanding at March 31, 2019

 

2,693,245

 

$

108.42

 

4.8

 

$

72.9

 

Exercisable at March 31, 2019

 

2,675,745

 

$

108.41

 

4.8

 

$

72.3

 

Unvested at March 31, 2019

 

17,500

 

$

109.29

 

4.8

 

$

0.6

 

 

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Table of Contents

 

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

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Cost of product sales

 

$

0.7

 

$

(6.2

)

Research and development

 

1.9

 

(23.6

)

Selling, general and administrative

 

8.4

 

(85.2

)

Share-based compensation expense (benefit) before taxes

 

11.0

 

(115.0

)

Related income tax (benefit) expense

 

(2.5

)

26.3

 

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

 

$

8.5

 

$

(88.7

)

 

Cash paid to settle STAP exercises during the three-month periods ended March 31, 2019 and March 31, 2018 was $5.8 million and $43.6 million, respectively.

 

Employee Stock Purchase Plan

 

In June 2012, our shareholders approved the United Therapeutics Corporation Employee Stock Purchase Plan (ESPP), which is structured to comply with Section 423 of the Internal Revenue Code. The ESPP provides eligible employees with the right to purchase shares of our common stock at a discount through elective accumulated payroll deductions at the end of each offering period. Offering periods, which began in 2012, occur in consecutive six-month periods commencing on September 5th and March 5th of each year. Eligible employees may contribute up to 15 percent of their base salary, subject to certain annual limitations as defined in the ESPP. The purchase price of the shares is equal to the lower of 85 percent of the closing price of our common stock on either the first or last trading day of a given offering period. In addition, the ESPP provides that no eligible employee may purchase more than 4,000 shares during any offering period. The ESPP has a 20-year term and limits the aggregate number of shares that can be issued under the ESPP to 3.0 million.

 

9.     Earnings Per Common Share

 

Basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common 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 our outstanding stock options, as if such options were exercised.

 

For the three months ended March 31, 2019, we had a net loss, and as such, all outstanding stock options and restricted stock units were excluded from our calculation of diluted (loss) earnings per share. The components of basic and diluted (loss) earnings per common share comprised the following (in millions, except per share amounts):

 

 

 

Three Months Ended
March 31,

 

 

 

2019

 

2018

 

Numerator:

 

 

 

 

 

Net (loss) income

 

$

(494.6

)

$

244.5

 

Denominator:

 

 

 

 

 

Weighted average outstanding shares — basic

 

43.7

 

43.3

 

Effect of dilutive securities(1):

 

 

 

 

 

Stock options, restricted stock units and employee stock purchase plan

 

 

0.6

 

Weighted average shares — diluted(2)

 

43.7

 

43.9

 

Net (loss) income per common share:

 

 

 

 

 

Basic

 

$

(11.32

)

$

5.65

 

Diluted

 

$

(11.32

)

$

5.57

 

 

 

 

 

 

 

Stock options and restricted stock units excluded from calculation(2)

 

5.3

 

3.9

 

 

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(1)                     Calculated using the treasury stock method.

 

(2)                     The common shares underlying certain stock options and restricted stock units have been excluded from the computation of diluted earnings per share because their impact would be anti-dilutive for the three-month periods ended March 31, 2019 and March 31, 2018.

 

10.  Income Taxes

 

Our effective income tax rate (ETR) for the three months ended March 31, 2019 and 2018 was 24 percent and 21 percent, respectively. We recognized a loss before income taxes, and a corresponding income tax benefit, for the three months ended March 31, 2019, as a result of the one-time $800 million payment to Arena in January 2019. As a result of this loss, our anticipated tax credits, partially offset by non-deductible compensation expense, increased our tax benefit and resulting ETR for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. Deferred tax assets increased by $169.8 million as of March 31, 2019 compared to December 31, 2018 primarily due to the amount of the Arena payment that will not be deductible for tax purposes in 2019.

 

As of March 31, 2019 and 2018, our unrecognized tax benefits were $0.5 million, and included $0.3 million of tax benefits that, if recognized, would impact our ETR. We record interest and penalties related to uncertain tax positions as a component of income tax expense. As of March 31, 2019 and 2018, we have not accrued any material interest expense related to uncertain tax positions. We are unaware of any material positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

 

11.  Segment Information

 

We currently operate as one operating segment with a focus on the development and commercialization of products to address the unmet needs of patients with chronic and life-threatening conditions. Our Chief Executive Officer, as our chief operating decision maker, manages and allocates resources to the operations of our company on a consolidated basis. This enables our Chief Executive Officer to assess our overall level of available resources and determine how best to deploy these resources across functions, therapeutic areas, and research and development projects in line with our long-term company-wide strategic goals.

 

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

 

 

 

Three Months Ended March 31,

 

2019

 

Remodulin

 

Tyvaso

 

Orenitram

 

Unituxin

 

Adcirca

 

Total

 

Net product sales

 

$

155.5

 

$

103.8

 

$

58.4

 

$

24.9

 

$

20.0

 

$

362.6

 

Cost of product sales

 

6.1

 

4.4

 

4.8

 

5.1

 

8.7

 

29.1

 

Gross profit

 

$

149.4

 

$

99.4

 

$

53.6

 

$

19.8

 

$

11.3

 

$

333.5

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product sales

 

$

126.8

 

$

94.6

 

$

52.2

 

$

18.0

 

$

97.6

 

$

389.2

 

Cost of product sales

 

3.0

 

3.0

 

3.0

 

2.3

 

41.9

 

53.2

 

Gross profit

 

$

123.8

 

$

91.6

 

$

49.2

 

$

15.7

 

$

55.7

 

$

336.0

 

 

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Geographic revenues are determined based on the country in which our customers (distributors) are located. Total revenues from external customers by geographic area are as follows (in millions):

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

United States

 

$

329.5

 

$

365.8

 

Rest-of-World(1)

 

33.1

 

23.4

 

Total

 

$

362.6

 

$

389.2

 

 


(1)                     Primarily Europe.

 

We recorded revenue from two specialty pharmaceutical distributors in the United States comprising 58 percent and 20 percent, respectively, of total revenues during the three-month period ended March 31, 2019 and 48 percent and 16 percent, respectively, of total revenues during the three-month period ended March 31, 2018. All of our revenues for Adcirca are generated by sales made through Lilly’s pharmaceutical wholesaler network.

 

12.  Litigation

 

On April 16, 2019, Sandoz Inc. (Sandoz) and RareGen, LLC (RareGen) filed a complaint in the U.S. District Court for the District of New Jersey against us and Smiths Medical ASD, Inc. (Smiths Medical), alleging that we and Smiths Medical engaged in anticompetitive conduct in connection with plaintiffs’ efforts to launch their generic version of Remodulin. In particular, the complaint alleges that we and Smiths Medical unlawfully impeded competition by entering into an agreement to produce CADD-MS®3 cartridges specifically for the delivery of subcutaneous Remodulin, without making these cartridges available for the delivery of Sandoz’s generic version of Remodulin. The lawsuit seeks, among other things, injunctive relief, unspecified damages, treble damages and attorneys’ fees. Plaintiffs have filed a motion to expedite discovery in anticipation of a forthcoming motion seeking unspecified preliminary injunctive relief. We believe these claims to be meritless and intend to vigorously defend the litigation. However, due to the inherent uncertainty in any litigation, we cannot guarantee that an adverse outcome will not result. Any litigation of this nature could involve substantial cost, and an adverse outcome could result in substantial monetary damages and/or injunctive relief adverse to our business.

 

13.  Arena License Agreement

 

On November 15, 2018, we entered into an exclusive license agreement with Arena related to ralinepag, a next-generation, oral, selective and potent prostacyclin receptor agonist being developed for the treatment of PAH. On January 24, 2019, in connection with the closing of the transactions contemplated by the license agreement, (1) Arena granted to us perpetual, irrevocable and exclusive rights throughout the universe to develop, manufacture and commercialize ralinepag; (2) Arena transferred to us certain other assets related to ralinepag, including, among others, related domain names and trademarks, permits, certain contracts, inventory, regulatory documentation, Investigational New Drug (IND) Application No. 109021 (related to ralinepag) and non-clinical, pre-clinical and clinical trial data; (3) we assumed certain limited liabilities from Arena, including, among others, all obligations arising after the closing under the assumed contracts and the IND described above; and (4) we paid Arena an upfront payment of $800.0 million, which was expensed as acquired in-process research and development and included within research and development expenses on our consolidated statements of operations for the three months ended March 31, 2019. We will also pay Arena (1) a one-time payment of $250.0 million for the first, if any, marketing approval we receive in the United States for an inhaled version of ralinepag to treat PAH; (2) a one-time payment of $150.0 million for the first, if any, marketing approval we receive in any of Japan, France, Italy, the United Kingdom, Spain or Germany for an oral version of ralinepag to treat any indication; and (3) low double-digit, tiered royalties on net sales of any pharmaceutical product containing ralinepag as an active ingredient, subject to certain adjustments for third party license payments.

 

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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, 2018, 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 (the Exchange Act) 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, 2018, 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 our 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 of Marketed Products

 

We currently market and sell the following commercial products:

 

·                  Remodulin, a continuously-infused formulation of the prostacyclin analogue treprostinil, approved by the FDA for subcutaneous and intravenous administration to diminish symptoms associated with exercise in patients with pulmonary arterial hypertension (PAH). Remodulin has also been approved in various countries outside of the United States.

 

·                  Tyvaso, an inhaled formulation of treprostinil, approved by the FDA and regulatory authorities in Argentina and Israel to improve exercise ability in PAH patients.

 

·                  Orenitram, a tablet dosage form of treprostinil, approved by the FDA to improve exercise capacity in PAH patients.

 

·                  Unituxin, a monoclonal antibody approved by the FDA and Health Canada for the treatment of high-risk neuroblastoma.

 

·                  Adcirca, an oral PDE-5 inhibitor approved by the FDA to improve exercise ability in PAH patients.

 

Revenues

 

Our net product sales consist of sales of the five commercial products noted above. We have entered into separate, non-exclusive distribution agreements with Accredo Health Group, Inc. and its affiliates (Accredo) and Caremark, L.L.C. (CVS Specialty) to distribute Remodulin, Tyvaso and Orenitram in the United States, and we have 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 Remodulin and Tyvaso to distributors internationally. We sell Adcirca through Lilly’s pharmaceutical wholesale network. To the extent we have increased the price of any of these products, increases have typically been in the single-digit percentages per year, except for Adcirca, the price of which is set solely by Lilly. In 2019, we anticipate revenues will decrease as compared to 2018 because generic Adcirca will be available for the full year in 2019, as compared to only the last four months of 2018. We may experience additional pressure on 2019 revenues to a lesser degree, from the launch of a generic version of Remodulin in the United States in late March 2019 and in Austria in January 2019, and the anticipated launch of generic versions of Remodulin in 2019 in other countries in Europe. Longer term, we believe our pipeline of new products and potential label expansions for existing products should result in a return to revenue growth potentially as soon as 2020, although the precise timing depends on a number of factors, including factors that we cannot control. Refer to the risks identified in Part II, Item 1A—Risk Factors, included in this Quarterly Report on Form 10-Q.

 

We require our specialty pharmaceutical distributors to maintain reasonable levels of inventory reserves because the interruption of Remodulin, Tyvaso or Orenitram therapy can be life threatening. Our specialty pharmaceutical distributors

 

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typically place monthly orders based on current utilization trends and contractual minimum inventory requirements. As a result, sales of Remodulin, Tyvaso and Orenitram can vary depending on the timing and magnitude of these orders and do not precisely reflect changes in patient demand.

 

Generic Competition

 

We settled litigation with each of Sandoz, Inc. (Sandoz), Teva Pharmaceuticals USA, Inc. (Teva), Par Sterile Products, LLC (Par) and Dr. Reddy’s Laboratories, Inc. (Dr. Reddy’s), relating to their abbreviated new drug applications (ANDAs) seeking FDA approval to market generic versions of Remodulin before the expiration of certain of our U.S. patents. Under the terms of our settlement agreements, Sandoz has been permitted to market its generic version of Remodulin in the United States since June 2018, and Teva, Par and Dr. Reddy’s have been permitted to launch their generic versions in the United States since December 2018. On March 25, 2019, Sandoz announced the availability of its generic product in the United States, and that it is entitled to six months of marketing exclusivity before other companies are permitted to market their generic versions of Remodulin in the United States. Par has received tentative FDA approval for its ANDA, but to our knowledge neither Teva’s ANDA nor Dr. Reddy’s ANDA has been approved by the FDA. These remaining companies could launch their generic products as early as September 2019.

 

Internationally, generic versions of Remodulin launched in Austria in January 2019 and have been approved in various other countries in Europe. We believe that our international Remodulin revenues will decline in 2019 because of the launch of generic versions in Austria and the expected launch in these other countries, which will likely lead to increased competition and a contractual reduction in our transfer price for Remodulin sold by an international distributor for sales in countries in which the pricing of Remodulin is impacted by the launch of a generic version of Remodulin. The approval and launch of a generic version of Remodulin in other countries where it has not yet been approved may follow. Our non-U.S. net product sales for Remodulin were $32.3 million and $22.3 million for the three months ended March 31, 2019 and 2018, respectively.

 

We also settled litigation with Actavis Laboratories FL, Inc. (Actavis) relating to its ANDA seeking FDA approval to market a generic version of Orenitram before the expiration of certain of our U.S. patents. Under the settlement agreement, Actavis can market its generic version of Orenitram in the United States beginning in June 2027, although Actavis may be permitted to enter the market earlier under certain circumstances. We also settled litigation with Watson Laboratories, Inc. (Watson) relating to its ANDA seeking FDA approval to market a generic version of Tyvaso before the expiration of certain of our U.S. patents. Under the settlement agreement, Watson can market its generic version of Tyvaso in the United States beginning in January 2026, although Watson may be permitted to enter the market earlier under certain circumstances. As a result of our settlements with Watson and Actavis, we expect to see generic competition for Tyvaso and Orenitram in the United States beginning as early as 2026 and 2027, respectively. Competition from these generic companies 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 our products. If any ANDA filer were to receive approval to sell a generic version of our products 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.

 

A U.S. patent for Adcirca for the treatment of pulmonary hypertension expired in November 2017, and FDA-conferred regulatory exclusivity expired in May 2018, leading to the launch of a generic version of Adcirca by Mylan N.V. in August 2018, and by additional companies in February 2019. Generic competition for Adcirca has had a material adverse impact on Adcirca net product sales. In addition, we expect declines in patient demand will increase the amount of Adcirca inventory held by distributors and other downstream customers that expires unsold. Our allowance for product returns was $22.8 million and $22.4 million as of March 31, 2019 and December 31, 2018, respectively.

 

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

 

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Exclusive License Agreement with Arena Pharmaceuticals, Inc. (Arena)

 

On November 15, 2018, we entered into an exclusive license agreement with Arena related to ralinepag, a next-generation, oral, selective and potent prostacyclin receptor agonist in development for the treatment of PAH. On January 24, 2019, in connection with the closing of the transactions contemplated by the license agreement, (1) Arena granted to us perpetual, irrevocable and exclusive rights throughout the universe to develop, manufacture and commercialize ralinepag; (2) Arena transferred to us certain other assets related to ralinepag, including, among others, related domain names and trademarks, permits, certain contracts, inventory, regulatory documentation, Investigational New Drug (IND) Application No. 109021 (related to ralinepag) and non-clinical, pre-clinical and clinical trial data; (3) we assumed certain limited liabilities from Arena, including, among others, all obligations arising after the closing under the assumed contracts and the IND described above; and (4) we paid Arena an upfront payment of $800.0 million, which we expensed as acquired in-process research and development and included within research and development expenses on our consolidated statements of operations for the three months ended March 31, 2019. We will also pay Arena (1) a one-time payment of $250.0 million for the first, if any, marketing approval we receive in the United States for an inhaled version of ralinepag to treat PAH; (2) a one-time payment of $150.0 million for the first, if any, marketing approval we receive in any of Japan, France, Italy, the United Kingdom, Spain or Germany for an oral version of ralinepag to treat any indication; and (3) low double-digit, tiered royalties on net sales of any pharmaceutical product containing ralinepag as an active ingredient, subject to certain adjustments for third party license payments.

 

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 includes costs to manufacture and acquire products sold to customers, royalty and milestone 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 also 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 also 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 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. We have incurred, and expect to continue to incur, increased clinical trial-related expenses, driven by the recent expansion of our pipeline programs, which we expect will result in the enrollment of several large clinical studies.

 

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 also 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 also include our core corporate support functions such as human resources,

 

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finance and legal, external costs to support our core business such as insurance premiums, legal fees 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 Plans (STAP). In June 2015, our shareholders approved the United Therapeutics Corporation 2015 Stock Incentive Plan (the 2015 Plan), which, following an amendment and restatement approved by our shareholders in June 2018, provides for the issuance of up to 9,050,000 shares of our common stock pursuant to awards granted under the 2015 Plan. Following approval of the 2015 Plan, we ceased granting awards under the STAP and the 1999 Plan. In February 2019, our Board of Directors approved the 2019 Inducement Stock Incentive Plan (the 2019 Inducement Plan), which provides for the issuance of up to 99,000 shares of our common stock pursuant to awards granted to newly-hired employees. We currently issue stock options and restricted stock units under the 2015 Plan, and restricted stock units to newly-hired employees under the 2019 Inducement Plan. The grant date fair values of stock options and restricted stock units are recognized as share-based compensation expense ratably over their vesting periods.

 

The fair values of STAP awards and stock options are measured using inputs and assumptions under the Black-Scholes-Merton model. The fair value of restricted stock units is measured using our stock price on the date of grant.

 

Although we no longer grant STAP awards, we still had approximately 2.7 million STAP awards outstanding as of March 31, 2019. 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 liability resulting from such re-measurements are recorded as adjustments to share-based compensation expense (benefit) and can create substantial volatility within our operating expenses from period to period. The following factors, among others, have a significant impact on the amount of share-based compensation expense (benefit) recognized in connection with STAP awards 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.

 

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Research and Development

 

We focus most of our research and development efforts on the following near-term pipeline programs (intended to result in product launches in the 2019-2021 timeframe) and medium-term pipeline programs (intended to result in product launches in the 2022-2025 timeframe). We are also engaged in a variety of additional medium- and long-term research and development efforts, including technologies designed to increase the supply of transplantable organs and tissues and improve outcomes for transplant recipients through regenerative medicine, xenotransplantation, biomechanical lungs, and ex-vivo lung perfusion.

 

Near-Term Pipeline Programs (2019-2021)

 

Product

 

Mode of Delivery

 

Indication

 

Current Status
STUDY NAME

 

Our Territory

Implantable System for Remodulin

 

Continuous intravenous via implantable pump

 

PAH

 

FDA approval received July 30, 2018; U.S. launch pending satisfaction of further regulatory requirements by Medtronic

 

United States, United Kingdom, Canada, France, Germany, Italy and Japan

RemUnity™
(treprostinil)

 

Continuous subcutaneous via pre-filled, semi-disposable system

 

PAH

 

510(k) application process ongoing with FDA

 

Worldwide

Orenitram (treprostinil) in combination with approved background therapy

 

Oral

 

PAH
(decrease morbidity and mortality)

 

Phase IV
FREEDOM-EV Study completed, primary endpoint met; NDA supplement submitted to FDA December 2018

 

Worldwide

Trevyent® (treprostinil)

 

Continuous subcutaneous via pre-filled, disposable PatchPump® system

 

PAH

 

NDA to be resubmitted to FDA

 

Worldwide, subject to out-licenses granted in Europe, Canada and the Middle East

RemoPro™ (pain-free subcutaneous Remodulin prodrug)

 

Continuous subcutaneous

 

PAH

 

Phase I

 

Worldwide

Unituxin (dinutuximab)

 

Intravenous

 

Small cell lung cancer

 

Phase II/III DISTINCT (fully enrolled)

 

Worldwide

Tyvaso (treprostinil)

 

Inhaled

 

Pulmonary hypertension associated with idiopathic pulmonary fibrosis

(WHO Group 3)

 

Phase III
INCREASE

 

Worldwide

 

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Medium-Term Pipeline Programs (2022-2025)

 

Product

 

Mode of Delivery

 

Indication

 

Current Status
STUDY NAME

 

Our Territory

Tyvaso (treprostinil)

 

Inhaled

 

Pulmonary hypertension associated with chronic obstructive pulmonary disease (WHO Group 3)

 

Phase III
PERFECT

 

Worldwide

Treprostinil Technosphere®

 

Inhaled dry powder

 

PAH

 

Phase III
BREEZE

 

Worldwide

Orenitram
(treprostinil)

 

Oral

 

Pulmonary hypertension associated with left ventricular diastolic dysfunction
(WHO Group 2)

 

Phase III
SOUTHPAW

 

Worldwide

Ralinepag (IP receptor agonist)

 

Oral

 

PAH

 

Phase III ADVANCE studies

 

Worldwide, excluding the People’s Republic of China and certain other Asian territories that have been outlicensed to Everest Medicines

Aurora-GT™
(eNOS gene therapy)

 

Intravenous

 

PAH

 

Phase II/III
SAPPHIRE

 

United States

SM04646 (Wnt pathway inhibitor)

 

Inhaled

 

Idiopathic pulmonary fibrosis

 

Phase I

 

United States and Canada

 

Implantable System for Remodulin

 

On July 30, 2018, we obtained FDA approval of the Implantable System for Remodulin in the United States. We developed this system in collaboration with Medtronic, Inc. (Medtronic). The system incorporates a proprietary Medtronic intravascular infusion catheter with Medtronic’s SynchroMed® II implantable infusion pump and related infusion system components (together referred to as the Implantable System for Remodulin) in order to deliver Remodulin for the treatment of PAH. We believe this technology has the potential to reduce many of the patient burdens and other complications associated with the use of external pumps to administer prostacyclin analogues. The FDA approved Medtronic’s premarket approval application (PMA) for the device in December 2017, and our NDA for the use of Remodulin in the implantable pump in July 2018. Medtronic must satisfy certain conditions to its PMA approval before we can launch the Implantable System for Remodulin. We have no control over when or whether these conditions will be met.

 

In February 2019, we entered into a commercialization agreement under which Medtronic will manufacture and supply the Implantable System for Remodulin, and we will manufacture and supply Remodulin for use in the system. Each party will perform certain additional activities to support the commercialization of the Implantable System for Remodulin, and we will reimburse Medtronic’s costs to provide such support. We will pay Medtronic a royalty equal to ten percent of our net sales of Remodulin administered via the Implantable System for Remodulin. We have entered into an agreement with CVS Specialty to provide refills of implanted pumps at its infusion centers. Once Medtronic satisfies its remaining PMA conditions, we plan to approach the launch in a careful and deliberate manner to ensure the safety of patients and the long-term success of the program. Medtronic has agreed to produce a supply of pumps for the initial launch that we believe will be sufficient to provide the system to any eligible PAH patient in the United States currently receiving intravenous prostacyclin therapy. We anticipate that the initial pump supply will enable us to launch the Implantable System for Remodulin in 2019 at the ten clinical trial sites that participated in the pivotal DelIVery clinical study of the Implantable System for Remodulin, and subsequently commence a broader launch in up to approximately 100 additional sites by the end of the year. These timelines are subject to a number of factors outside our control, including Medtronic’s satisfaction of its PMA conditions and the ability of hospitals to complete training and other necessary preparations. We are also working with Medtronic to develop a next-generation system incorporating various enhancements.

 

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Medtronic is entirely responsible for regulatory approvals and all manufacturing and quality systems related to its infusion pump and related components. Medtronic entered into a consent decree with the FDA in April 2015, which required Medtronic to complete certain corrections and enhancements to the SynchroMed II pump and the associated quality system. The consent decree restricted Medtronic’s ability to manufacture and distribute the SynchroMed II infusion system, unless specific conditions were met, including retention of a third-party expert to inspect the affected quality system and certify that the quality system complies with the requirements of the consent decree. Medtronic completed the third-party certification audits in January 2017 and successfully completed an FDA inspection in June 2017. After the inspection, FDA lifted the consent decree restrictions on manufacturing, distribution and design in September 2017. The consent decree remains in effect, with ongoing obligations for annual third-party audits continuing until September 2020. Non-compliance by Medtronic with its consent decree could interrupt the manufacture and sale of the Implantable System for Remodulin.

 

RemUnity and RemoPro

 

In December 2014, we entered into an exclusive agreement with DEKA Research & Development Corp. (DEKA) to develop a pre-filled, semi-disposable system for subcutaneous delivery of treprostinil, which we call the RemUnity system. Under the terms of the agreement, we are funding 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. The RemUnity system consists of a small, lightweight, durable pump that is intended to have a service life of at least three years. The RemUnity system uses disposable cartridges pre-filled with treprostinil, which can be connected to the pump with less patient manipulation than is typically involved in filling currently-available subcutaneous pumps.

 

DEKA is working with the FDA to obtain 510(k) clearance of the RemUnity system. Initially, we plan to launch the system with disposable components to be pre-filled with Remodulin by our specialty pharmacy distributors. We are also developing a version of the system that includes disposable components that are pre-filled as part of the manufacturing process.

 

We are also conducting phase I studies to develop a new prodrug of treprostinil called RemoPro, which is intended to enable subcutaneous delivery of treprostinil therapy without the site pain currently associated with subcutaneous Remodulin. As a prodrug, RemoPro is designed to be inactive in the subcutaneous tissue, which should decrease or eliminate site pain, and to metabolize into treprostinil once it is absorbed into the blood.

 

Trevyent

 

In August 2018, we acquired SteadyMed Ltd. (SteadyMed), which is developing Trevyent, a post-phase III development-stage drug-device combination product that combines SteadyMed’s two-day, single use, disposable PatchPump technology with treprostinil, for the subcutaneous treatment of PAH. In August 2017, SteadyMed received a refuse-to-file letter from the FDA with respect to its 505(b)(2) NDA for Trevyent. SteadyMed met with the FDA in November 2017, and the FDA indicated that SteadyMed does not need to conduct any clinical trials to prove the safety or efficacy of Trevyent. We are completing certain additional non-clinical activities related to Trevyent, and anticipate resubmitting the NDA during the first half of 2019. These activities include design verification testing on the final to-be-marketed Trevyent product, pharmacokinetic modeling and process validation.

 

Orenitram

 

In 2013, the FDA approved Orenitram for the treatment of PAH 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. In August 2018, we announced that our phase IV study of Orenitram called FREEDOM-EV had met its primary endpoint of delayed time to first clinical worsening event. In particular, the preliminary results showed that Orenitram, when taken with an oral PAH background therapy, decreased the risk of a morbidity/mortality event versus placebo by 26 percent (p=0.0391). In December 2018, we submitted a supplement to our NDA to the FDA seeking approval for a label amendment reflecting the FREEDOM-EV results, and we are evaluating whether the results could support marketing applications for Orenitram outside the United States. Additional FREEDOM-EV data were presented at a medical conference in January 2019, including data showing a 61 percent decrease in the risk of disease progression for patients taking Orenitram, when compared to placebo (p=0.0002). In addition, in participants for which data are available (89 percent),

 

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Orenitram was associated with a 37 percent decreased risk of mortality compared with placebo (p=0.0324) at study closure (which includes additional data accrued in the open-label extension study).

 

We are also enrolling patients in a study of Orenitram (SOUTHPAW) to treat WHO Group 2 pulmonary hypertension (specifically associated with left ventricular diastolic dysfunction). There are presently no FDA approved therapies indicated for treatment of WHO Group 2 pulmonary hypertension.

 

Unituxin

 

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 conducting a study (DISTINCT) of Unituxin in adult patients with small cell lung cancer, which is another GD2-expressing cancer. During the fourth quarter of 2017, we completed the phase II portion of the study, and commenced the phase III portion of the study following an interim safety review. The phase III portion of the DISTINCT study is now fully enrolled with 472 patients, and we expect to announce the results by the first quarter of 2020. We are also conducting preclinical research to determine Unituxin’s potential activity against other types of GD2-expressing tumors. These research and development efforts into new indications for Unituxin have been substantially outsourced to a contract research organization called Precision Oncology, LLC.

 

Unituxin therapy is associated with severe side effects, including infections, infusion reactions, hypokalemia, hypotension, pain, fever, and capillary leak syndrome. In post-approval use of Unituxin, the adverse reactions of prolonged urinary retention, transverse myelitis, and reversible posterior leukoencephalopathy syndrome have been observed. Unituxin’s label also includes a boxed warning related to serious infusion reactions and neurotoxicity.

 

Finally, we are developing a fully humanized (non-chimeric) version of dinutuximab, the active ingredient in Unituxin. We expect this new version to reduce some of the side effects associated with Unituxin, which is a chimeric composed of a combination of mouse and human proteins.

 

Tyvaso

 

We are enrolling a phase III registration study called INCREASE, which is a study of Tyvaso in patients with WHO Group 3 pulmonary hypertension associated with interstitial lung disease (specifically associated with idiopathic pulmonary fibrosis or combined pulmonary fibrosis and emphysema). The study is now over 80 percent enrolled. We are also enrolling a phase III registration study called PERFECT, which is a study of Tyvaso in patients with WHO Group 3 pulmonary hypertension associated with chronic obstructive pulmonary disease. There are presently no FDA approved therapies indicated for the treatment of WHO Group 3 pulmonary hypertension.

 

In addition, we are developing new devices to further optimize the delivery of inhaled treprostinil, including a pro re nata (as needed) device called Spiresta™.

 

Treprostinil Technosphere

 

In September 2018, we entered into a worldwide, exclusive license and collaboration agreement with MannKind Corporation (MannKind) for the development and commercialization of a dry powder formulation of treprostinil called Treprostinil Technosphere for the treatment of PAH. The agreement became effective on October 15, 2018. Treprostinil Technosphere incorporates the dry powder formulation technology and Dreamboat® inhalation device technology used in MannKind’s Afrezza® (insulin human) Inhalation Powder product, which was approved by the FDA in 2014. If the FDA approves Treprostinil Technosphere, we believe this new inhaled treprostinil therapy will provide substantial lifestyle benefits to PAH patients, as compared with Tyvaso therapy, because it will be: (1) less time consuming to administer and easier to maintain as the device and drug will be provided in a pre-filled, single use disposable cassette eliminating the need for cleaning and filling; and (2) mobile and more convenient, as the compact design of the Dreamboat device and drug cassettes used with

 

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Treprostinil Technosphere can easily fit into the patient’s pocket and do not require electricity. We also have the right to develop a single-use device based on MannKind’s Cricket® design. The Cricket device would come pre-loaded with treprostinil and would be discarded immediately after use. In contrast, we envision each Dreamboat device would be re-usable.

 

Under our agreement with MannKind, we are responsible for global development, regulatory and commercial activities related to Treprostinil Technosphere, and we share manufacturing responsibilities with MannKind. We plan to commence a clinical study (called BREEZE) during the first half of 2019 to evaluate the safety and pharmacokinetics of switching PAH patients from Tyvaso to Treprostinil Technosphere, as well as a pharmacokinetic study in healthy volunteers. The FDA has indicated that these two studies, if successful, will be the only clinical studies necessary to support FDA approval. We will manufacture long-term commercial supplies. Under the terms of the agreement, we paid MannKind $45.0 million following the effectiveness of the agreement in October 2018, and we are required to make potential milestone payments to MannKind of up to $50.0 million upon the achievement of specific development targets. The first $12.5 million of these milestone payments became due and was paid in March 2019. MannKind is also entitled to receive low double-digit royalties on our net sales of the product. In addition, we have the option, in our sole discretion, to expand the license to include other active ingredients for the treatment of pulmonary hypertension. We will pay MannKind up to $40.0 million in additional option exercise and development milestone payments for each product (if any) added to the license pursuant to this option, as well as a low double-digit royalty on our net sales of any such product.

 

We also entered into a research agreement with MannKind under which MannKind will conduct research related to products outside the scope of the licensing and collaboration agreement. We paid MannKind $10.0 million in the third quarter of 2018 in consideration for its performance under the research agreement.

 

Aurora-GT

 

We are enrolling a phase II/III study (called SAPPHIRE) of a gene therapy product called Aurora-GT, in which a PAH patient’s own endothelial progenitor cells are isolated, transfected with the gene for human endothelial NO-synthase (eNOS), expanded ex-vivo and then delivered to the same patient. This product is intended to rebuild the blood vessels in the lungs that are destroyed by PAH. This study is being conducted in Canada, and is sponsored by Northern Therapeutics, Inc., a Canadian entity in which we have a 49.7 percent voting stake and a 71.8 percent financial stake. We have the exclusive right to pursue this technology in the United States, and plan to seek FDA approval of Aurora-GT if SAPPHIRE is successful.

 

SM04646

 

In September 2018, we entered into an exclusive license agreement with Samumed LLC (Samumed) providing us exclusive U.S. and Canadian rights to SM04646, a phase I development-stage Wnt pathway inhibitor being developed for the treatment of idiopathic pulmonary fibrosis (IPF). The Wnt pathway is one of the primary signaling pathways essential for the normal development of all multicellular animals, and for the growth and maintenance of various adult tissues. Recent evidence suggests that aberrant Wnt signaling may be involved in the pathogenesis of chronic lung disease such as IPF. SM04646 is currently undergoing a phase I clinical trial. The FDA has granted orphan drug designation for SM04646 for the treatment of IPF. Under our agreement with Samumed, we paid Samumed $10 million up-front, and we will pay Samumed additional consideration of up to $340 million in developmental milestone payments, plus up to low double-digit royalties on our net sales of the product. Under the terms of the agreement, our subsidiary, Lung Biotechnology PBC, will conduct and fund all development, regulatory and commercialization activities for SM04646 in the United States and Canada. Samumed retains development and commercialization rights for SM04646 for all markets outside of these two countries.

 

Ralinepag

 

In January 2019, our license agreement with Arena became effective, providing us with exclusive, worldwide rights to ralinepag, a next-generation, oral, selective and potent IP prostacyclin receptor agonist being developed for the treatment of PAH. We are continuing the ongoing phase III ADVANCE OUTCOMES study initiated by Arena, which is an event-driven study of ralinepag in PAH patients, with a primary endpoint of time to first clinical event. We are also planning two additional phase III studies, called ADVANCE CAPACITY and ADVANCE ENDURANCE, studying the effect of ralinepag on exercise capacity in PAH patients (with primary endpoints of change in peak oxygen uptake via cardiopulmonary exercise test and

 

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change in six-minute walk distance, respectively). All three of these studies are global, multi-center, placebo-controlled trials of patients on approved oral background PAH therapies. These studies collectively provide us with multiple potential avenues for FDA approval of ralinepag.

 

Organ Manufacturing

 

Each year, end stage organ failure kills millions of people. A significant number of these patients could have benefited from an organ transplant. Unfortunately, the number of usable, donated organs available for transplantation has not grown significantly over the past half century while the need has soared. Our long-term goals are aimed at addressing this shortage. With advances in technology, we believe that creating an unlimited supply of tolerable manufactured organs is now principally an engineering challenge, and we are dedicated to finding engineering solutions. Since 2011, we have been engaged in research and development of a variety of technologies designed to increase the supply of transplantable organs and tissues and to improve outcomes for transplant recipients. These programs include preclinical research and development of alternative tissue sources through tissue and organ xenotransplantation, regenerative medicine, biomechanical lungs, and other technologies to create engineered organs and organ tissues. Although our primary focus is on engineered lungs, we are also developing technology for other engineered organs, such as kidneys and hearts, and our manufactured lungs, kidneys and hearts have set records for viability in FDA-required animal models. In February 2018 we reached a significant milestone by achieving 30-day survival of our genetically modified porcine lungs in FDA-required animal models. 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. While we continue to develop and commercialize therapies for rare and life-threatening conditions, we view organ manufacturing as the ultimate technology solution for a broad array of diseases, many of which (such as PAH) have proven incurable thus far through more traditional pharmaceutical and biologic therapies. For this reason, in 2015 we created a wholly-owned public benefit corporation called Lung Biotechnology PBC, chartered with the express purpose of “address[ing] the acute national shortage of transplantable lungs and other organs with a variety of technologies that either delay the need for such organs or expand the supply.”

 

Tysuberprost

 

In April 2019, we announced that our phase III BEAT study of esuberaprost in PAH patients on a stable dose of inhaled treprostinil and oral background therapy failed to meet its primary endpoint of time to first clinical worsening event. As a result, we have discontinued further development of esuberaprost and have terminated our license agreement with Toray Industries, Inc.

 

Future Prospects

 

As noted above, in 2019 we expect revenues will decrease as compared to 2018, largely due to the anticipated impact of a full year of competition from generic versions of Adcirca, the first of which launched in August 2018. We believe we will return to revenue growth by commercializing six key therapeutic platforms in our pipeline, each of which is comprised of multiple enabling technologies:

 

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Platform

 

Enabling Technologies

Remodulin (parenteral treprostinil)

 

RemUnity, Implantable System for Remodulin, Trevyent, RemoLife

Tyvaso (inhaled treprostinil)

 

INCREASE study, PERFECT study, Spiresta, Treprostinil Technosphere

Orenitram (oral treprostinil)

 

FREEDOM-EV results, SOUTHPAW study

Unituxin (dinutuximab)

 

DISTINCT study (small cell lung cancer), humanized dinutuximab, and additional GD2-expressing tumors

New Chemical Entities and New Biologics

 

ralinepag, SM04646, SAPPHIRE study (gene therapy), Unexisome™ (exosome product for the treatment of bronchopulmonary dysplasia)

Organ Manufacturing and Transplantation

 

xenotransplantation, three-dimensional organ printing, regenerative medicine, ex-vivo lung perfusion

 

We believe this diverse portfolio of six therapeutic platforms, each with multiple enabling technologies, will lead to significant revenue growth over the medium- and longer-term. For further details regarding our research and development initiatives, refer to the section above entitled Research and Development.

 

Our ability to achieve these objectives, grow our business and maintain 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 and degree of our success in commercially launching 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, including competition from generic companies; (6) our ability to effectively manage our business in an increasingly complex legal and regulatory environment; (7) our ability to defend against 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 operate in a highly competitive market in which a small number of large 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 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.

 

Results of Operations

 

Three Months Ended March 31, 2019 and March 31, 2018

 

Revenues

 

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

 

 

 

Three Months Ended
March 31,

 

Percentage

 

 

 

2019

 

2018

 

Change

 

Net product sales:

 

 

 

 

 

 

 

Remodulin

 

$

155.5

 

$

126.8

 

23

%

Tyvaso

 

103.8

 

94.6

 

10

%

Orenitram

 

58.4

 

52.2

 

12

%

Unituxin

 

24.9

 

18.0

 

38

%

Adcirca

 

20.0

 

97.6

 

(80

)%

Total revenues

 

$

362.6

 

$

389.2

 

(7

)%

 

Revenues for the three months ended March 31, 2019 decreased by $26.6 million as compared to the same period in 2018.

 

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Remodulin net product sales for the three months ended March 31, 2019 increased by $28.7 million as compared to the same period in 2018. U.S. Remodulin net product sales increased by $18.8 million, primarily due to an increase in the number of patients being treated with Remodulin and a price increase implemented in April 2018, which was the first price increase for Remodulin since 2010. International Remodulin net product sales increased by $9.9 million, primarily due to an increase in quantities shipped to international distributors.

 

Tyvaso net product sales for the three months ended March 31, 2019 increased by $9.2 million as compared to the same period in 2018. This increase was primarily due to an increase in the number of patients being treated with Tyvaso and a price increase implemented in January 2019.

 

Orenitram net product sales for the three months ended March 31, 2019 increased by $6.2 million as compared to the same period in 2018. This increase was primarily due to an increase in the number of patients being treated with Orenitram and a price increase implemented in January 2019.

 

Unituxin net product sales for the three months ended March 31, 2019 increased by $6.9 million as compared to the same period in 2018. This increase was primarily due to an increase in the number of vials sold.

 

Adcirca net product sales for the three months ended March 31, 2019 decreased by $77.6 million as compared to the same period in 2018. This decrease was due to a decrease in bottles sold following the onset of generic competition for Adcirca beginning in August 2018.

 

We recognize revenues net of: (1) rebates and chargebacks; (2) prompt pay discounts; (3) allowances for sales returns; and (4) distributor fees. These are referred to as gross-to-net deductions and are primarily based on estimates reflecting historical experiences as well as contractual and statutory requirements. We currently estimate our allowance for sales returns using reports from our distributors and available industry data, including our estimates of inventory remaining in the distribution channel. The tables below include a reconciliation of the liability accounts associated with these deductions (in millions):

 

 

 

Three Months Ended March 31, 2019

 

 

Rebates and
Chargebacks

 

Prompt Pay
Discounts

 

Allowance for
Sales Returns

 

Distributor
Fees

 

Total

 

Balance, January 1, 2019

 

$

54.7

 

$

3.2

 

$

22.4

 

$

4.8

 

$

85.1

 

Provisions attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

45.5

 

7.6

 

0.9

 

3.8

 

57.8

 

Prior periods

 

0.4

 

 

 

 

0.4

 

Payments or credits attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

(4.3

)

(4.8

)

 

(1.2

)

(10.3

)

Prior periods

 

(40.7

)

(3.0

)

(0.5

)

(4.5

)

(48.7

)

Balance, March 31, 2019

 

$

55.6

 

$

3.0

 

$

22.8

 

$

2.9

 

$

84.3

 

 

 

 

Three Months Ended March 31, 2018

 

 

 

Rebates and
Chargebacks

 

Prompt Pay
Discounts

 

Allowance for
Sales Returns

 

Distributor
Fees

 

Total

 

Balance, January 1, 2018

 

$

74.0

 

$

4.7

 

$

7.2

 

$

3.4

 

$

89.3

 

Provisions attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

60.0

 

8.9

 

0.7

 

4.6

 

74.2

 

Prior periods

 

3.1

 

 

 

 

3.1

 

Payments or credits attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

(8.0

)

(5.0

)

 

(1.1

)

(14.1

)

Prior periods

 

(45.7

)

(4.6

)

(0.6

)

(1.1

)

(52.0

)

Balance, March 31, 2018

 

$

83.4

 

$

4.0

 

$

7.3

 

$

5.8

 

$

100.5

 

 

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Cost of Product Sales

 

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

 

 

 

Three Months Ended
March 31,

 

Percentage

 

 

 

2019

 

2018

 

Change

 

Category:

 

 

 

 

 

 

 

Cost of product sales

 

$

28.0

 

$

59.1

 

(53

)%

Share-based compensation expense (benefit)(1)

 

1.1

 

(5.9

)

119

%

Total cost of product sales

 

$

29.1

 

$

53.2

 

(45

)%

 


(1)                     Refer to Share-Based Compensation section below for discussion.

 

Cost of product sales, excluding share-based compensation. The decrease in cost of product sales of $31.1 million for the three months ended March 31, 2019, as compared to the same period in 2018, was primarily attributable to a $32.8 million decrease in royalty expense for Adcirca because fewer bottles were sold due to the launch of generic versions of Adcirca beginning in August 2018.

 

Research and Development

 

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

 

 

 

Three Months Ended
March 31,

 

Percentage