10-Q 1 a18-14085_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 June 30, 2018

 

OR

 

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

 

For the transition period from                to

 

Commission file number 0-26301

 

United Therapeutics Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

52-1984749

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

1040 Spring Street, Silver Spring, MD

 

20910

(Address of Principal Executive Offices)

 

(Zip Code)

 

(301) 608-9292

(Registrant’s Telephone Number, Including Area Code)

 

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,  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

 

 

 

(do not check if a smaller reporting company)

 

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 July 25, 2018 was 43,563,026.

 

 

 



Table of Contents

 

INDEX

 

 

 

 

Page

 

 

 

 

Part I.

 

FINANCIAL INFORMATION (UNAUDITED)

 

 

 

 

 

Item 1.

 

Consolidated Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets

 

 

 

 

 

 

 

Consolidated Statements of Operations

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

Notes to 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

 

 

 

 

 

SIGNATURES

 

 

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PART I.  FINANCIAL INFORMATION

 

Item 1.  CONSOLIDATED FINANCIAL STATEMENTS

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

 

 

 

June 30,
2018

 

December 31,
2017

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

745.9

 

$

705.1

 

Marketable investments

 

467.1

 

222.3

 

Accounts receivable, no allowance for 2018 and 2017

 

251.3

 

297.1

 

Inventories, net

 

102.7

 

107.9

 

Other current assets

 

57.2

 

115.5

 

Total current assets

 

1,624.2

 

1,447.9

 

Marketable investments

 

578.3

 

502.7

 

Goodwill and other intangible assets, net

 

45.6

 

45.6

 

Property, plant and equipment, net

 

626.1

 

545.7

 

Deferred tax assets, net

 

113.4

 

113.4

 

Other non-current assets

 

257.3

 

224.1

 

Total assets

 

$

3,244.9

 

$

2,879.4

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

216.0

 

$

171.1

 

Share tracking awards plan

 

71.7

 

240.1

 

Other current liabilities

 

62.3

 

33.5

 

Total current liabilities

 

350.0

 

444.7

 

Line of credit

 

250.0

 

250.0

 

Other non-current liabilities

 

60.1

 

63.7

 

Total liabilities

 

660.1

 

758.4

 

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, 70,181,559 and 69,858,840 shares issued, and 43,562,343 and 43,239,624 shares outstanding at June 30, 2018 and December 31, 2017, respectively

 

0.7

 

0.7

 

Additional paid-in capital

 

1,903.0

 

1,854.3

 

Accumulated other comprehensive loss

 

(21.9

)

(19.6

)

Treasury stock, 26,619,216 shares at June 30, 2018 and December 31, 2017

 

(2,579.2

)

(2,579.2

)

Retained earnings

 

3,263.0

 

2,845.6

 

Total stockholders’ equity

 

2,565.6

 

2,101.8

 

Total liabilities and stockholders’ equity

 

$

3,244.9

 

$

2,879.4

 

 

See accompanying notes to consolidated financial statements.

 

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UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(Unaudited)

 

(Unaudited)

 

Revenues:

 

 

 

 

 

 

 

 

 

Net product sales

 

$

444.5

 

$

444.6

 

$

833.7

 

$

815.1

 

Total revenues

 

444.5

 

444.6

 

833.7

 

815.1

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of product sales

 

61.7

 

18.9

 

114.9

 

33.2

 

Research and development

 

82.3

 

59.8

 

118.0

 

96.0

 

Selling, general and administrative

 

83.1

 

67.4

 

76.5

 

123.8

 

Loss contingency

 

 

210.0

 

 

210.0

 

Total operating expenses

 

227.1

 

356.1

 

309.4

 

463.0

 

Operating income

 

217.4

 

88.5

 

524.3

 

352.1

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

Interest expense

 

(2.9

)

(1.4

)

(5.5

)

(2.2

)

Other, net

 

3.4

 

3.6

 

8.1

 

4.4

 

Impairment of investment in privately-held company

 

 

(46.5

)

 

(46.5

)

Total other income (expense), net

 

0.5

 

(44.3

)

2.6

 

(44.3

)

Income before income taxes

 

217.9

 

44.2

 

526.9

 

307.8

 

Income tax expense

 

(45.0

)

(100.2

)

(109.5

)

(185.2

)

Net income (loss)

 

$

172.9

 

$

(56.0

)

$

417.4

 

$

122.6

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

4.01

 

$

(1.25

)

$

9.62

 

$

2.74

 

Diluted

 

$

3.98

 

$

(1.25

)

$

9.51

 

$

2.68

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

43.1

 

44.9

 

43.4

 

44.7

 

Diluted

 

43.4

 

44.9

 

43.9

 

45.7

 

 

See accompanying notes to consolidated financial statements.

 

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UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(Unaudited)

 

(Unaudited)

 

Net income (loss)

 

$

172.9

 

$

(56.0

)

$

417.4

 

$

122.6

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation gains

 

 

0.2

 

 

0.2

 

Defined benefit pension plan:

 

 

 

 

 

 

 

 

 

Actuarial loss arising during period, net of tax

 

 

 

 

(0.1

)

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

 

0.3

 

0.2

 

0.6

 

0.3

 

Total defined benefit pension plan, net of tax

 

0.3

 

0.2

 

0.6

 

0.2

 

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

 

(0.5

)

(0.3

)

(2.9

)

(0.2

)

Other comprehensive (loss) income, net of tax

 

(0.2

)

0.1

 

(2.3

)

0.2

 

Comprehensive income (loss)

 

$

172.7

 

$

(55.9

)

$

415.1

 

$

122.8

 

 

See accompanying notes to consolidated financial statements.

 

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UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

 

 

Six Months Ended
June 30,

 

 

 

2018

 

2017

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

417.4

 

$

122.6

 

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

 

 

 

 

 

Depreciation and amortization

 

16.0

 

15.6

 

Share-based compensation benefit

 

(80.6

)

(21.0

)

Impairment of investment in privately-held company

 

 

46.5

 

Loss contingency

 

 

210.0

 

Other

 

(2.1

)

(9.9

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

45.8

 

(59.4

)

Inventories

 

8.9

 

(14.8

)

Accounts payable and accrued expenses

 

39.9

 

20.8

 

Other assets and liabilities

 

10.2

 

(8.9

)

Net cash provided by operating activities

 

455.5

 

301.5

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(91.1

)

(36.5

)

Purchases of held-to-maturity and other investments

 

(37.7

)

(25.1

)

Maturities of held-to-maturity investments

 

27.6

 

26.1

 

Purchases of available-for-sale investments

 

(438.5

)

(296.5

)

Sales/maturities of available-for-sale investments

 

126.2

 

 

Purchase of investment in privately-held company

 

(5.0

)

(25.1

)

Consolidation of variable interest entity

 

 

0.1

 

Net cash used in investing activities

 

(418.5

)

(357.0

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from line of credit

 

250.0

 

250.0

 

Repayment of line of credit

 

(250.0

)

 

Payments of debt issuance costs

 

(13.2

)

(0.7

)

Payments to repurchase common stock

 

 

(250.0

)

Proceeds from the exercise of stock options

 

14.9

 

36.6

 

Proceeds from the issuance of stock under employee stock purchase plan

 

2.1

 

2.1

 

Net cash provided by financing activities

 

3.8

 

38.0

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

0.4

 

Net increase (decrease) in cash and cash equivalents

 

40.8

 

(17.1

)

Cash and cash equivalents, beginning of period

 

705.1

 

1,023.0

 

Cash and cash equivalents, end of period

 

$

745.9

 

$

1,005.9

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

4.5

 

$

1.6

 

Cash paid for income taxes

 

$

31.5

 

$

157.9

 

Non-cash investing and financing activities:

 

 

 

 

 

Non-cash additions to property, plant and equipment

 

$

17.4

 

$

7.0

 

 

See accompanying notes to consolidated financial statements.

 

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UNITED THERAPEUTICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(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), Adcirca® (tadalafil) Tablets (Adcirca), Orenitram® (treprostinil) Extended-Release Tablets (Orenitram) and Unituxin® (dinutuximab) Injection (Unituxin). 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, 2017, as filed with the SEC on February 21, 2018 (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 June 30, 2018 and December 31, 2017, statements of operations and comprehensive income for the three- and six-month periods ended June 30, 2018 and June 30, 2017 and statements of cash flows for the six-month periods ended June 30, 2018 and June 30, 2017. Interim results are not necessarily indicative of results for an entire year.

 

Significant Accounting Policies Update

 

Our significant accounting policies are detailed in Note 2—Summary of Significant Accounting Policies to the consolidated financial statements included in our Annual Report. Significant changes to our accounting policies as a result of adopting Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), are discussed below.

 

Revenue Recognition

 

On January 1, 2018, we adopted Topic 606 using the modified retrospective approach applied to those contracts in effect as of January 1, 2018. Under this transition method, results for reporting periods beginning after January 1, 2018 are presented under the new standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 605, Revenue Recognition. See the Recently Issued Accounting Standards section below for further discussion of the adoption of Topic 606, including the impact on our 2018 financial statements.

 

To determine revenue recognition for contractual arrangements that we determine are within the scope of Topic 606, we perform the following five steps: (i) identify each contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to our performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy the relevant performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer.

 

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We generate revenues from the sale of our five commercially approved products: Remodulin, Tyvaso, Orenitram, Unituxin and Adcirca. We recognize revenue when we transfer control of our products to our distributors, as our contracts have a single performance obligation (delivery of our product). Except for Adcirca sales, the performance obligation is generally satisfied when our products are delivered to the distributor’s designated location. We recognize revenue from Adcirca sales upon shipment from an Eli Lilly and Company (Lilly) distribution center. Future revenue from delivery of our products will be based on purchase orders provided to us by our distributors. We are not required to disclose the value of unsatisfied performance obligations as our contracts have a noncancelable duration of one year or less.

 

See Note 10—Segment Information, for information on revenues disaggregated by commercial product, geographic area and customer.

 

Gross-to-Net Deductions

 

As is customary in the pharmaceutical industry, our product sales are recorded net of various forms of gross-to-net deductions. These deductions vary the consideration we are entitled to in exchange for the sale of our products to our distributors, and include reserves for: (1) rebates and chargebacks; (2) prompt payment discounts; (3) allowance for product returns; and (4) distributor fees and other allowances. We estimate these reserves in the same period that we recognize revenue for product sales to distributors. The net product sales amount recognized represents the amount we believe will not be subject to a significant future reversal of revenue.

 

Estimating gross-to-net deductions involves the use of significant assumptions and judgments, as well as information obtained from external sources. For our rebate and chargeback liabilities, in particular, the time lag experienced in the payment of the rebate or chargeback may result in revisions of these accruals in future periods. However, based on our significant history and experience estimating these accruals and our development of these accruals based on the expected value method, we do not believe there will be significant changes to our estimates recorded during the period of sale. For all types of gross-to-net deductions, for the three- and six-month periods ended June 30, 2018, we recognized an aggregate reduction of our net product sales of $2.6 million and $3.3 million, respectively, related to revenue recognized from product sales in prior periods. These reductions were primarily due to adjustments to accruals for prior periods related to our participation in state Medicaid programs and contracts with commercial payers.

 

Rebates and chargebacks. Allowances for rebates include mandated discounts due to our participation in various government health care programs and contracted discounts with commercial payers. We estimate our rebate liability on a product-by-product basis, considering actual revenue, contractual discount rates, expected utilization under each contract and historical payment experience. We also consider changes in our product pricing and information regarding changes in program regulations and guidelines. Our chargebacks represent contractual discounts payable to distributors for the difference between the invoice price paid to us by the distributor for a particular product and the contracted price that the distributor’s customer pays for that product. Our chargebacks primarily relate to sales of Adcirca. We estimate our chargeback liability on a product-by-product basis, primarily considering historical payment experience. Although we accrue a liability for rebates and chargebacks in the same period the product is sold, third-party reporting and payment of the rebate or chargeback amount occur on a time lag, with the majority of rebates and chargebacks paid within six months from date of sale. Our liability for rebates and chargebacks is included in accounts payable and accrued expenses on our consolidated balance sheets.

 

Prompt payment discounts. We offer prompt pay discounts to many of our distributors, typically for payments made within 30 days. Prompt pay discounts are estimated in the period of sale based on our experience with sales to eligible distributors. Our domestic distributors have routinely taken advantage of these discounts and we expect them to continue to do so. Prompt pay discounts are recorded as a deduction to the accounts receivable balance presented on our consolidated balance sheets.

 

Product returns. The sales terms for Adcirca and Unituxin include return rights that extend throughout the distribution channel. For Adcirca, customers have the right to return expired product for up to 12 months past the product’s expiration date. Returned product is destroyed. We recognize an allowance for returns of Adcirca based on our historical returns experience and considering expiration dates of product shipped (generally 24 to 36 months after the initial sale). To date, actual returns have not differed materially from our estimates. Regulatory exclusivity for Adcirca expired in May 2018, and we anticipate launch of a generic version of Adcirca in 2018. A decline in Adcirca demand as a result of a generic launch could cause Adcirca inventory

 

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held by distributors and other downstream customers to expire unsold, which could increase our liability for product returns. We assessed the potential impact of a generic launch on the amount of Adcirca held by our customers that could expire unsold and be returned, and determined it is not probable that there will be a significant reversal of the revenue recognized as of June 30, 2018.

 

For Unituxin, we ship product with shorter expiration dates (generally nine to 14 months after the initial sale), but our historical returns have not been material and we therefore do not record a returns allowance. For sales of our other commercial products, we do not offer our customers a general right of return. We record our allowance for product returns in other current and non-current liabilities on our consolidated balance sheets.

 

Distributor fees and other allowances. Distributor fees include distribution and other service fees paid to certain distributors. These fees are based on contractual amounts or rates applied to purchases of our product or units of service provided in a given period. Our liability for distributor fees is included in accounts payable and accrued expenses on our consolidated balance sheets.

 

Trade Receivables

 

We invoice and receive payment from our customers after we recognize revenue, resulting in receivables from our customers that are presented as accounts receivable on our consolidated balance sheets. Accounts receivable consist of short-term amounts due from our distributors (generally 30 to 90 days) and are stated at the amount we expect to collect. We establish an allowance for doubtful accounts based on our assessment of the collectability of specific distributor accounts. No impairment losses were recognized as of June 30, 2018 and June 30, 2017. Changes in accounts receivable are primarily due to the timing and magnitude of orders of our products, the timing of when control of our products is transferred to our distributors and the timing of cash collections.

 

Adcirca

 

Adcirca is manufactured for us by Lilly and distributed through its pharmaceutical wholesaler network. Specifically, Lilly handles all of the administrative functions associated with the sale of Adcirca on our behalf, including the receipt and processing of customer purchase orders, shipment to customers, and invoicing and collection of customer payments. We recognize sales of Adcirca on a gross basis (net of reserves for gross-to-net deductions) based on our determination that we are acting as a principal due to our control of the product prior to its transfer to our customers. Our control is evidenced by our substantive ownership of product inventory, the fact that we bear all inventory risks, our primary responsibility for the acceptability of the product to our customers, and our ability to influence net product sales through our contracting decisions with commercial payers and participation in governmental-funded programs.

 

Recently Issued Accounting Standards

 

Accounting Standards Adopted During the Period

 

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). The new standard supersedes the revenue recognition requirements in Topic 605, Revenue Recognition (Topic 605), and requires entities to recognize revenue when control of the promised goods or services is transferred to customers. Revenue is recognized at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted the new standard on January 1, 2018, using the modified retrospective approach, applied only to contracts in effect as of January 1, 2018. Upon adoption, we changed the timing of revenue recognition for sales of Adcirca to recognize revenue when control of Adcirca is transferred to a distributor upon shipment from a Lilly distribution center, which occurs at the time Adcirca is shipped. Previously, we recognized sales of Adcirca when Adcirca was delivered to distributors. This change did not result in an adjustment to amounts previously recognized as revenue under Topic 605 as all shipments had reached the distributor as of December 31, 2017. Overall, adoption of the new standard did not have a material impact on the amounts reported in our financial statements and there were no other significant changes impacting the timing or measurement of our revenue or our business processes and controls. We have included additional disclosures related to our adoption of Topic 606 above, under Revenue Recognition.

 

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In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which requires equity investments to be measured at fair value through net income. Equity investments that are accounted for under the equity method are not impacted. ASU 2016-01 provides a new measurement alternative for equity investments without readily determinable fair values. These investments are measured at cost, less any impairment, adjusted for observable price changes. ASU 2016-01 requires separate presentation of the financial assets and liabilities by category and form. ASU 2016-01 should be applied prospectively and is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. We adopted the new standard on January 1, 2018, with no material impact to our financial statements. Effective January 1, 2018, we elected to record our equity investments in privately-held companies that do not have readily determinable fair values using the alternative measurement method.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows—Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which reduces existing diversity in the classification of certain cash receipts and cash payments on the statements of cash flows. ASU 2016-15 should be applied retrospectively and is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. We adopted the new standard on January 1, 2018, with no material impact to our financial statements.

 

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes—Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16), which requires that an entity recognize the income tax consequences of an intra-entity transfer of assets other than inventory when the transfer occurs. ASU 2016-16 is effective for annual reporting periods beginning after December 15, 2017. We adopted the new standard on January 1, 2018 using a modified retrospective approach, with no material impact to our financial statements.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations-Clarifying the Definition of a Business (ASU 2017-01). This update narrows the definition of a business by providing a screen to determine when an integrated set of assets and activities is not a business. The screen specifies that an integrated set of assets and activities is not a business if substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single asset or a group of similar identifiable assets. ASU 2017-01 should be applied prospectively and is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those fiscal years. We adopted the new standard on January 1, 2018, with no material impact to our financial statements.

 

In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07), which requires the service cost component to be reported separately from the other components of net pension cost. Service cost will be presented in the same line item as other employer compensation costs within operating expenses. The other components of net pension cost are required to be presented outside of operations and will be presented in “Other, net” on our consolidated statements of operations. Only the service cost component will be eligible for asset capitalization. Companies are required to apply the change in income statement presentation retrospectively, and the change in capitalized benefit cost prospectively. We adopted the new standard on January 1, 2018, with no material impact to our financial statements.

 

Accounting Standards Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU 2016-02), which requires that assets and liabilities arising under leases be recognized on the balance sheet. ASU 2016-02 also requires additional quantitative and qualitative disclosures that provide the amount, timing, and uncertainty of cash flows relating to lease arrangements. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, using a modified retrospective approach. The modified retrospective approach requires retrospective application to the earliest period presented in the respective financial statements. This approach also provides certain practical expedients related to leases that commenced prior to the effective date and allows the use of hindsight when evaluating lease options. While early adoption is permitted, we have elected not to early adopt the standard and will adopt on January 1, 2019. We continue to identify all leases involved in the relevant timeframe, determine if we will elect to utilize the practical expedients, and gather data required to comply with the guidance. Based on the work completed to date, we are considering the implications of adopting the new standard, including the discount rate to be

 

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used in valuing new and existing leases and all applicable financial statement disclosures required by the new guidance. We are continuing to evaluate the effect of adoption on our financial statements.

 

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 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 in the Tax Cuts and Jobs Act (Tax Reform) is recorded. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our financial statements.

 

3.              Investments

 

Available-for-Sale Investments

 

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

 

As of June 30, 2018

 

Amortized
Cost

 

Gross
Unrealized
Losses

 

Fair
Value

 

U.S. government and agency securities

 

$

1,016.5

 

$

(5.6

)

$

1,010.9

 

Corporate notes and bonds

 

66.8

 

(0.3

)

66.5

 

Total

 

$

1,083.3

 

$

(5.9

)

$

1,077.4

 

Reported under the following captions on our consolidated balance sheet:

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

$

71.2

 

Current marketable investments

 

 

 

 

 

431.7

 

Non-current marketable investments

 

 

 

 

 

574.5

 

Total

 

 

 

 

 

$

1,077.4

 

 

As of December 31, 2017

 

Amortized
Cost

 

Gross
Unrealized
Losses

 

Fair
Value

 

U.S. government and agency securities

 

$

726.5

 

$

(3.0

)

$

723.5

 

Corporate notes and bonds

 

13.9

 

 

13.9

 

Total

 

$

740.4

 

$

(3.0

)

$

737.4

 

Reported under the following captions on our consolidated balance sheet:

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

$

41.7

 

Current marketable investments

 

 

 

 

 

194.6

 

Non-current marketable investments

 

 

 

 

 

501.1

 

Total

 

 

 

 

 

$

737.4

 

 

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

 

 

 

June 30, 2018

 

 

 

Amortized
Cost

 

Fair
Value

 

Due in less than one year

 

$

504.5

 

$

502.9

 

Due in one to three years

 

578.8

 

574.5

 

Total

 

$

1,083.3

 

$

1,077.4

 

 

 

 

December 31, 2017

 

 

 

Amortized
Cost

 

Fair
Value

 

Due within one year

 

$

236.7

 

$

236.3

 

Due in one to three years

 

503.7

 

501.1

 

Total

 

$

740.4

 

$

737.4

 

 

Investments in Privately-Held Companies

 

As of June 30, 2018, we maintained non-controlling equity investments in privately-held companies of approximately $189.0 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. During the three- and six-month periods ended June 30, 2018, we paid zero and $5.0 million, respectively, for an investment in a privately-held company. 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.

 

During the quarter ended June 30, 2017, one of the privately-held companies in which we have invested sought to raise additional funding, which triggered our review of the recoverability of our investment in the company. We determined the fair value of our investment as of June 30, 2017 considering both (1) an income approach based on the company’s discounted projected cash flows; and (2) a market approach based on the revenue multiples of comparable public companies. We concluded that the fair value of our investment as of June 30, 2017 was lower than its carrying value, resulting in an impairment charge of $46.5 million. As of June 30, 2017, the adjusted carrying value of our investment in this company was $53.5 million. The carrying value of this asset has not been further adjusted since June 30, 2017.

 

Variable Interest Entity

 

In April 2017, we made a $7.5 million minority investment in a privately-held company. In addition to our investment, we entered into an exclusive license, development and commercialization agreement (the License Agreement) with this company. The License Agreement provides us certain control rights and, as a result, we are required to consolidate the balance sheet and results of operations of this company. The control rights relate to additional research and development funding that we may provide to this company over a period of six years. We are also entitled to representation on a joint development committee that approves the company’s use of funding provided by us. For further details regarding this investment, refer to Note 4—Investments—Variable Interest Entity to the consolidated financial statements included in our Annual Report.

 

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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 June 30, 2018

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

313.8

 

$

 

$

 

$

313.8

 

Time deposits(2)

 

 

35.4

 

 

35.4

 

U.S. government and agency securities(2)

 

 

1,010.9

 

 

1,010.9

 

Corporate debt securities(2)

 

 

70.3

 

 

70.3

 

Total assets

 

$

313.8

 

$

1,116.6

 

$

 

$

1,430.4

 

Liabilities

 

 

 

 

 

 

 

 

 

Contingent consideration(3)

 

 

 

12.8

 

12.8

 

Total liabilities

 

$

 

$

 

$

12.8

 

$

12.8

 

 

 

 

As of December 31, 2017

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

217.9

 

$

 

$

 

$

217.9

 

Time deposits(2)

 

 

25.2

 

 

25.2

 

U.S. government and agency securities(2)

 

 

723.5

 

 

723.5

 

Corporate debt securities(2)

 

 

18.0

 

 

18.0

 

Total assets

 

$

217.9

 

$

766.7

 

$

 

$

984.6

 

Liabilities

 

 

 

 

 

 

 

 

 

Contingent consideration(3)

 

 

 

12.8

 

12.8

 

Total liabilities

 

$

 

$

 

$

12.8

 

$

12.8

 

 


(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 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.

 

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.

 

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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):

 

 

 

June 30,
2018

 

December 31,
2017

 

Raw materials

 

$

27.1

 

$

27.9

 

Work-in-progress

 

25.9

 

24.1

 

Finished goods

 

49.7

 

55.9

 

Total inventories

 

$

102.7

 

$

107.9

 

 

6.              Debt

 

Unsecured Revolving Credit Facility — 2018 Credit Agreement

 

In June 2018, we entered into a Credit Agreement (the 2018 Credit Agreement) with Wells Fargo Bank, National Association (Wells Fargo), as administrative agent and a swingline lender, and various other lender parties, providing for (i) an unsecured revolving credit facility of up to $1.0 billion; and (ii) 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 after the closing date of the 2018 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 2018 Credit Agreement, up to a maximum of two such extensions.

 

At our option, amounts borrowed under the 2018 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 2018 Credit Agreement).

 

On June 27, 2018, we borrowed $250.0 million under the 2018 Credit Agreement, and used the funds to repay outstanding indebtedness under the 2016 Credit Agreement as discussed below under Unsecured Revolving Credit Facility — 2016 Credit Agreement.

 

The 2018 Credit Agreement contains customary events of default and customary affirmative and negative covenants. As of June 30, 2018, 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.

 

In connection with the 2018 Credit Agreement, we incurred debt issuance costs of $13.2 million. We capitalized $12.6 million of these costs, which are recorded in other current assets and other non-current assets on our consolidated balance sheets and will be amortized to interest expense over the contractual term of the 2018 Credit Agreement.

 

Unsecured Revolving Credit Facility — 2016 Credit Agreement

 

In January 2016, we entered into a credit agreement (the 2016 Credit Agreement) with Wells Fargo, as administrative agent and a swingline lender, and various other lender parties, providing for an unsecured revolving credit facility of up to $1.0 billion. On June 1, 2017, we borrowed $250.0 million under this facility and used the funds to initiate an accelerated share repurchase program. Refer to Note 8—Stockholders’ Equity—Share Repurchase.

 

On June 27, 2018, we repaid in full all our obligations under the 2016 Credit Agreement in connection with the termination of the 2016 Credit Agreement and our entry into the 2018 Credit Agreement. There were no penalties associated with the early termination of the 2016 Credit Agreement.

 

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7.              Share-Based Compensation

 

As of June 30, 2018, 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 was approved by our shareholders in June 2015 and provides for the issuance of up to 6,150,000 shares of our common stock pursuant to awards granted under the 2015 Plan. On June 26, 2018, our shareholders approved an amendment and restatement of the 2015 Plan to increase the maximum number of shares of our common stock that may be issued under the 2015 Plan by 2,900,000 shares. As a result of the approval of the 2015 Plan, no further awards have been or will be granted under the 1999 Plan. Currently, we grant equity-based awards including stock options and restricted stock units under the 2015 Plan. Refer to the sections entitled Employee 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 granted and/or 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):

 

 

 

Three Months Ended 
June 30,

 

Six Months Ended
June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Stock options

 

$

15.5

 

$

12.2

 

$

28.2

 

$

16.8

 

Restricted stock units

 

2.0

 

0.5

 

2.9

 

1.0

 

STAP awards

 

2.7

 

(14.9

)

(112.3

)

(39.5

)

Employee stock purchase plan

 

0.3

 

0.3

 

0.6

 

0.7

 

Total share-based compensation expense (benefit) before tax

 

$

20.5

 

$

(1.9

)

$

(80.6

)

$

(21.0

)

 

Employee 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.

 

In March 2017, we began issuing stock options with performance vesting conditions to certain executives. These stock options have vesting conditions tied to the achievement of specified performance criteria, which have target performance levels that span from one to three years. Upon the conclusion of the performance period, the performance level achieved is measured and the ultimate number of shares that may vest is determined. Share-based compensation expense for these awards is recorded ratably over their vesting period, depending on the specific terms of the award and anticipated achievement of the specified performance criteria. During the six-month period ended June 30, 2018, we granted 0.9 million stock options with performance vesting conditions with a total grant date fair value of $23.7 million based on achievement of target performance levels. During the three- and six-month periods ended June 30, 2018, we recorded $10.3 million and $17.9 million of share-based compensation expense related to stock options with performance vesting conditions.

 

The table below includes the weighted-average assumptions used to measure the fair value of all stock options (including both stock options with time-based vesting and performance-based vesting conditions) granted during the six-month periods ended June 30, 2018 and June 30, 2017:

 

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June 30,
2018

 

June 30,
2017

 

Expected volatility

 

36.2

%

35.7

%

Risk-free interest rate

 

2.7

%

2.2

%

Expected term of awards (in years)

 

6.3

 

6.1

 

Expected dividend yield

 

0.0

%

0.0

%

 

A summary of the activity and status of stock options under our equity incentive plans during the six-month period ended June 30, 2018 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, 2018

 

5,878,323

 

$

119.61

 

 

 

 

 

Granted

 

985,215

 

111.05

 

 

 

 

 

Exercised

 

(282,903

)

52.68

 

 

 

 

 

Forfeited/canceled

 

(121,483

)

127.04

 

 

 

 

 

Outstanding at June 30, 2018

 

6,459,152

 

$

121.09

 

7.3

 

$

37.9

 

Exercisable at June 30, 2018

 

3,452,439

 

$

113.79

 

5.9

 

$

35.5

 

Unvested at June 30, 2018

 

3,006,713

 

$

129.48

 

8.9

 

$

2.4

 

 

The weighted average fair value of a stock option granted during each of the six-month periods ended June 30, 2018 and June 30, 2017, was $45.02 and $56.12, respectively. These stock options have an aggregate grant date fair value of $44.3 million and $109.3 million, respectively. The total fair value of stock options that vested during the six-month periods ended June 30, 2018 and June 30, 2017 was $33.6 million and $12.9 million, respectively.

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Cost of product sales

 

$

0.2

 

$

0.3

 

$

0.5

 

$

0.5

 

Research and development

 

1.0

 

1.1

 

1.9

 

1.6

 

Selling, general and administrative

 

14.3

 

10.8

 

25.8

 

14.7

 

Share-based compensation expense before taxes

 

15.5

 

12.2

 

28.2

 

16.8

 

Related income tax benefit

 

(3.6

)

(4.5

)

(6.5

)

(6.2

)

Share-based compensation expense, net of taxes

 

$

11.9

 

$

7.7

 

$

21.7

 

$

10.6

 

 

As of June 30, 2018, unrecognized compensation cost was $113.0 million. Unvested outstanding stock options as of June 30, 2018 had a weighted average remaining vesting period of 2.1 years.

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Number of options exercised

 

108,608

 

53,911

 

282,903

 

387,976

 

Cash received

 

$

5.7

 

$

3.6

 

$

14.9

 

$

36.6

 

Total intrinsic value of options exercised

 

$

6.5

 

$

3.2

 

$

16.9

 

$

23.5

 

 

Restricted Stock Units

 

In June 2016, we began issuing restricted stock units to our non-employee directors. In October 2017, we also began issuing restricted stock units to our employees. Each restricted stock unit entitles the recipient to one share of our common

 

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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 six-month period ended June 30, 2018 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, 2018

 

23,040

 

$

128.98

 

 

 

 

 

Granted

 

176,911

 

111.26

 

 

 

 

 

Vested

 

(17,820

)

132.30

 

 

 

 

 

Forfeited/canceled

 

(5,970

)

111.00

 

 

 

 

 

Unvested at June 30, 2018

 

176,161

 

$

111.46

 

9.7

 

$

19.9

 

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Cost of product sales

 

$

0.2

 

$

 

$

0.2

 

$

 

Research and development

 

0.5

 

 

0.6

 

 

Selling, general and administrative

 

1.3

 

0.5

 

2.1

 

1.0

 

Share-based compensation expense before taxes

 

2.0

 

0.5

 

2.9

 

1.0

 

Related income tax benefit

 

(0.5

)

(0.2

)

(0.7

)

(0.4

)

Share-based compensation expense, net of taxes

 

$

1.5

 

$

0.3

 

$

2.2

 

$

0.6

 

 

As of June 30, 2018, unrecognized compensation cost related to the grant of restricted stock units was $17.7 million. Unvested outstanding restricted stock units as of June 30, 2018 had a weighted average remaining vesting period of 2.5 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. We recognize expense for awards that are expected to vest during the vesting period.

 

The aggregate STAP liability balance was $71.7 million and $241.3 million at June 30, 2018 and December 31, 2017, respectively, of which zero and $1.2 million, respectively, have been classified as other non-current liabilities on our consolidated balance sheets based on their vesting terms.

 

Estimating the fair value of STAP awards requires the use of certain inputs that can materially impact the determination of fair value and the amount of compensation expense (benefit) we recognize. Inputs used in estimating fair value include the price of our common stock, the expected volatility of the price of our common stock, the risk-free interest rate, the expected term of STAP awards, and the expected dividend yield. The fair value of the STAP awards is measured at the end of each financial reporting period because the awards are settled in cash.

 

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The table below includes the weighted-average assumptions used to measure the fair value of outstanding STAP awards:

 

 

 

June 30,
2018

 

June 30,
2017

 

Expected volatility

 

33.8

%

35.5

%

Risk-free interest rate

 

2.3

%

1.4

%

Expected term of awards (in years)

 

1.1

 

2.1

 

Expected dividend yield

 

%

%

 

The closing price of our common stock was $113.15 and $129.73 on June 30, 2018 and June 30, 2017, respectively. The closing price of our common stock was $147.95 on December 31, 2017.

 

A summary of the activity and status of STAP awards during the six-month period ended June 30, 2018 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, 2018

 

4,096,394

 

$

95.60

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

(821,485

)

55.79

 

 

 

 

 

Forfeited

 

(55,548

)

150.78

 

 

 

 

 

Outstanding at June 30, 2018

 

3,219,361

 

$

104.81

 

5.4

 

$

86.7

 

Exercisable at June 30, 2018

 

2,956,948

 

$

100.39

 

5.2

 

$

85.9

 

Unvested at June 30, 2018

 

262,413

 

$

154.56

 

6.6

 

$

0.8

 

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Cost of product sales

 

$

0.2

 

$

(0.9

)

$

(6.0

)

$

(2.6

)

Research and development

 

1.6

 

(2.9

)

(22.0

)

(8.7

)

Selling, general and administrative

 

0.9

 

(11.1

)

(84.3

)

(28.2

)

Share-based compensation expense (benefit) before taxes

 

$

2.7

 

$

(14.9

)

$

(112.3

)

$

(39.5

)

Related income tax (benefit) expense

 

(0.6

)

5.5

 

25.7

 

14.5

 

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

 

$

2.1

 

$

(9.4

)

$

(86.6

)

$

(25.0

)

 

Cash paid to settle STAP awards exercised during the six-month periods ended June 30, 2018 and June 30, 2017 was $57.4 million and $44.5 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.

 

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8.              Stockholders’ Equity

 

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 other securities if such securities were converted or exercised. The components of basic and diluted earnings per common share comprised the following (in millions, except per share amounts):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

172.9

 

$

(56.0

)

$

417.4

 

$

122.6

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares — basic

 

43.1

 

44.9

 

43.4

 

44.7

 

Effect of dilutive securities(1):

 

 

 

 

 

 

 

 

 

Warrants

 

 

 

 

0.1

 

Stock options, restricted stock units and employee stock purchase plan

 

0.3

 

 

0.5

 

0.9

 

Weighted average shares — diluted(2)

 

43.4

 

44.9

 

43.9

 

45.7

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

4.01

 

$

(1.25

)

$

9.62

 

$

2.74

 

Diluted

 

$

3.98

 

$

(1.25

)

$

9.51

 

$

2.68

 

 

 

 

 

 

 

 

 

 

 

Stock options and warrants excluded from calculation(2)

 

5.5

 

4.5

 

4.7

 

2.8

 

 


(1)                     Calculated using the treasury stock method.

 

(2)                     Certain stock options, restricted stock units, and warrants have been excluded from the computation of diluted earnings per share because their impact would be anti-dilutive for the three- and six-month periods ended June 30, 2018 and June 30, 2017.

 

Share Repurchase

 

In April 2017, our Board of Directors approved a share repurchase program authorizing up to $250.0 million in aggregate repurchases of our common stock. Pursuant to this authorization, in May 2017 we paid $250.0 million to enter into an accelerated share repurchase agreement (ASR) with Citibank, N.A. (Citibank). Pursuant to the terms of the ASR, in June 2017 Citibank delivered to us approximately 1.7 million shares of our common stock, representing the minimum number of shares we were entitled to receive under the ASR. Upon termination of the ASR in September 2017, Citibank delivered to us approximately 0.3 million additional shares of our common stock. The ASR was accounted for as an equity transaction and the shares we repurchased under the ASR were included in treasury stock when the shares were received.

 

9.              Income Taxes

 

Our effective income tax rate (ETR) for the six months ended June 30, 2018 and June 30, 2017 was 21 percent and 60 percent, respectively. Our ETR for the six months ended June 30, 2018 decreased, as compared to the same period in 2017, due to the impacts of The Tax Cuts and Jobs Act (Tax Reform) as well as a $210.0 million accrual in connection with a civil settlement with the U.S. Department of Justice and a $46.5 million impairment charge recorded in the second quarter of 2017 that did not meet the criteria for tax deductibility at that time.

 

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Tax Reform was enacted on December 22, 2017 and has multiple provisions that impact our tax expense. The significant impacts of Tax Reform on our 2018 tax expense include a reduction in the U.S. federal corporate tax rate from 35 percent to 21 percent, a reduction of the Orphan Drug Credit, and the repeal of the Section 199 deduction for domestic manufacturing activities.

 

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of Tax Reform. As a result of changes under Tax Reform, we recognized a provisional amount of $71.0 million of additional tax expense in our consolidated financial statements for the year ended December 31, 2017. The additional tax expense is primarily due to the revaluing of our ending net deferred tax assets at December 31, 2017 because of the reduction in the U.S. corporate income tax rate under Tax Reform. While we have substantially completed our provisional analysis of the income tax effects of Tax Reform, and recorded a reasonable estimate of such effects in our consolidated financial statements for the year ended December 31, 2017, the ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, further refinement of our calculations, additional analysis, changes in assumptions, additional IRS guidance, and actions we may take as a result of Tax Reform.  During the six months ended June 30, 2018, we did not make any adjustments to the provisional amounts we previously recorded.

 

As of both June 30, 2018 and June 30, 2017, our uncertain tax positions were $0.5 million. Unrecognized tax benefits as of both June 30, 2018 and June 30, 2017, 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 June 30, 2018 and June 30, 2017, we have not accrued any interest expense related to uncertain tax positions. We are unaware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

 

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10.       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 June 30,

 

2018

 

Remodulin

 

Tyvaso

 

Adcirca

 

Orenitram

 

Unituxin

 

Total

 

Net product sales

 

$

159.5

 

$

105.9

 

$

109.8

 

$

49.5

 

$

19.8

 

$

444.5

 

Cost of product sales

 

3.4

 

4.4

 

47.5

 

3.0

 

3.4

 

61.7

 

Gross profit

 

$

156.1

 

$

101.5

 

$

62.3

 

$

46.5

 

$

16.4

 

$

382.8

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product sales

 

$

157.7

 

$

104.2

 

$

120.6

 

$

46.0

 

$

16.1

 

$

444.6

 

Cost of product sales

 

3.9

 

2.9

 

6.7

 

4.0

 

1.4

 

18.9

 

Gross profit

 

$

153.8

 

$

101.3

 

$

113.9

 

$

42.0

 

$

14.7

 

$

425.7

 

 

 

 

Six Months Ended June 30,

 

2018

 

Remodulin

 

Tyvaso

 

Adcirca

 

Orenitram

 

Unituxin

 

Total

 

Net product sales

 

$

286.3

 

$

200.5

 

$

207.4

 

$

101.7

 

$

37.8

 

$

833.7

 

Cost of product sales

 

6.4

 

7.4

 

89.4

 

6.0

 

5.7

 

114.9

 

Gross profit

 

$

279.9

 

$

193.1

 

$

118.0

 

$

95.7

 

$

32.1

 

$

718.8

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product sales

 

$

303.5

 

$

191.6

 

$

200.6

 

$

85.3

 

$

34.1

 

$

815.1

 

Cost of product sales

 

5.9

 

5.7

 

11.3

 

6.8

 

3.5

 

33.2

 

Gross profit

 

$

297.6

 

$

185.9

 

$

189.3

 

$

78.5

 

$

30.6

 

$

781.9

 

 

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 June 30,

 

Six Months Ended June 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

United States

 

$

422.3

 

$

408.0

 

$

788.1

 

$

747.5

 

Rest-of-World(1)

 

22.2

 

36.6

 

45.6

 

67.6

 

Total

 

$

444.5

 

$

444.6

 

$

833.7

 

$

815.1

 

 


(1)                     Primarily Europe.

 

We recorded revenue from two specialty pharmaceutical distributors in the United States comprising 48 percent and 17 percent, respectively, of total revenues during the three-month period ended June 30, 2018, 47 percent and 14 percent, respectively, of total revenues during the three-month period ended June 30, 2017, 48 percent and 17 percent, respectively, of total revenues during the six-month period ended June 30, 2018, and 48 percent and 15 percent, respectively, of total revenues during the six-month period ended June 30, 2017. All of our revenues for Adcirca are generated by sales made through Lilly’s pharmaceutical wholesaler network.

 

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11.       Litigation

 

Watson Laboratories, Inc.

 

In June 2015, we received a Paragraph IV certification notice letter from Watson Laboratories, Inc. (Watson) indicating that Watson has submitted an abbreviated new drug application (ANDA) to the FDA to market a generic version of Tyvaso. In its notice letter, Watson states that it intends to market a generic version of Tyvaso before the expiration of U.S. Patent Nos. 6,521,212 and 6,756,033, each of which expires in November 2018; and U.S. Patent No. 8,497,393, which expires in December 2028. Watson’s notice letter states that the ANDA contains a Paragraph IV certification alleging that these patents are not valid, not enforceable, and/or will not be infringed by the commercial manufacture, use or sale of the proposed product described in Watson’s ANDA submission. We responded to the Watson notice letter by filing a lawsuit in July 2015 against Watson in the U.S. District Court for the District of New Jersey alleging infringement of U.S. Patent Nos. 6,521,212, 6,756,033, and 8,497,393. Under the Hatch-Waxman Act, the FDA was automatically precluded from approving Watson’s ANDA for up to 30 months from receipt of Watson’s notice letter (which period expired in December 2017) or until the issuance of a U.S. District Court decision that is adverse to us, whichever occurs first. In September 2015, Watson filed (1) a motion to dismiss some, but not all, counts of the complaint; (2) its answer to our complaint; and (3) certain counterclaims against us. The District Court granted Watson’s motion to dismiss certain counts of our complaint. In September 2015, we filed our answer to Watson’s counterclaims. In June 2016, Watson sent us a second Paragraph IV certification notice letter addressing two new patents, U.S. Patent Nos. 9,339,507 (the ‘507 patent) and 9,358,240 (the ‘240 patent), which expire in March and May 2028, respectively. In June 2016, we filed an amended complaint against Watson asserting these two additional patents. In June 2017, Watson filed petitions with the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office for inter partes review (IPR), seeking to invalidate the ‘507 patent and ‘240 patent. On January 11, 2018, the PTAB issued decisions to institute IPR proceedings with respect to both patents.

 

Trial in the District Court on all of the asserted patents was scheduled to take place in September 2017. The parties, however, asked the District Court to stay the case until 14 days after the PTAB resolves Watson’s IPR petitions either by declining to institute the IPRs or by issuing a final written decision on the merits. The District Court granted the request staying the case, and as such trial will not occur until sometime after the stay is lifted. The stay will not be lifted until there is a final written decision by the PTAB, which we expect by January 2019.

 

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

 

12.       Acquisition

 

SteadyMed Merger Agreement

 

On April 29, 2018, we entered into an Agreement and Plan of Merger (Merger Agreement) with SteadyMed Ltd. (SteadyMed) and Daniel 24043 Acquisition Corp Ltd., our wholly-owned subsidiary (Merger Sub). The Merger Agreement provides for the merger of Merger Sub with and into SteadyMed (the Merger), with SteadyMed surviving the Merger as our wholly-owned subsidiary.

 

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each SteadyMed ordinary share will be converted into the right to receive (i) $4.46 in cash; and (ii) one contractual contingent value right representing the right to receive a contingent cash payment of $2.63 upon the achievement of a specified milestone relating to the commercialization of SteadyMed’s Trevyent® product. The aggregate amount of cash consideration to be paid to holders of SteadyMed securities at the closing of the Merger is expected to be approximately $141.0 million, and the aggregate amount of contingent consideration to be paid, if payable, will equal $75.0 million.

 

On July 20, 2018, we announced the termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which was one of the conditions to closing the transaction. In addition, SteadyMed’s shareholders approved the acquisition on July 30, 2018. Assuming that all remaining conditions to closing of this transaction will be satisfied or waived, we expect the Merger to be completed in the third

 

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quarter of this year. Under Israeli law, closing may not occur until at least thirty days have passed since the SteadyMed shareholders approved the transaction.

 

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, 2017, 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, 2017, 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® (treprostinil) Injection (Remodulin). Remodulin, a continuously-infused formulation of the prostacyclin analogue treprostinil, is approved by the U.S. Food and Drug Administration (FDA) for subcutaneous (under the skin) and intravenous (in the vein) administration. Prostacyclin analogues are stable synthetic forms of prostacyclin, an important molecule produced by the body that has powerful effects on blood vessel health and function. Remodulin is indicated to diminish symptoms associated with exercise in patients with World Health Organization (WHO) Group 1 pulmonary arterial hypertension (PAH). Remodulin has also been approved in various countries outside of the United States.

 

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

 

·                  Orenitram® (treprostinil) Extended-Release Tablets (Orenitram). Orenitram, a tablet dosage form of treprostinil, is approved by the FDA to improve exercise ability in PAH patients.

 

·                  Adcirca® (tadalafil) Tablets (Adcirca). We acquired exclusive U.S. commercialization rights to Adcirca, an oral phosphodiesterase type 5 (PDE-5) inhibitor therapy for PAH, from Eli Lilly and Company (Lilly). PDE-5 inhibitors inhibit the degradation of cyclic guanosine monophosphate (cyclic GMP) in cells. Cyclic GMP is activated by nitric oxide (NO), a naturally occurring substance in the body that mediates the relaxation of vascular smooth muscle. Adcirca is approved by the FDA to improve exercise ability in PAH patients.

 

·                  Unituxin® (dinutuximab) Injection (Unituxin). In March 2015, the FDA approved our Biologics License Application (BLA) for Unituxin in combination with granulocyte-macrophage colony-stimulating factor, interleukin-2, and 13-cis-retinoic acid, for the treatment of patients with high-risk neuroblastoma (a rare form of pediatric cancer) who achieve at least a partial response to prior first-line multi-agent, multimodality therapy. Unituxin is a chimeric, monoclonal antibody composed of a combination of mouse and human proteins that induces antibody-dependent cell-mediated cytotoxicity, a form of cell-mediated immunity whereby the immune system actively targets a cell that has been bound by specific antibodies. We received orphan drug designation for Unituxin from the FDA, conferring exclusivity through March 2022, during which period the FDA may not approve any application to market the same drug for the same indication, except in limited circumstances such as a showing of clinical superiority. In addition, approval of our BLA conferred a 12-year exclusivity period through March 2027, during which the FDA may not approve a biosimilar for Unituxin.

 

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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, including Curascript SD Specialty Distribution (Accredo), and CVS Caremark, Inc. (Caremark) 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 2018, we anticipate revenues will decrease as compared to 2017 given the anticipated impact of generic competition for Adcirca, which we expect to begin sometime in 2018, as well as reimbursement challenges for our oral therapies leading to increased utilization of our patient assistance programs. We are investing in the development of new products and label expansions for existing products, which we expect to result in a return to revenue growth.

 

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 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 can market its generic version of Remodulin in the United States beginning as early as June 2018, and Teva, Par and Dr. Reddy’s can each launch their generic versions in the United States beginning in December 2018. 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 are engaged in litigation with Watson Laboratories, Inc. (Watson), based on its ANDA seeking to market a generic version of Tyvaso before the expiration of certain of our U.S. patents at various dates from November 2018 through December 2028. In addition, Watson filed inter partes review (IPR) petitions seeking to invalidate the claims of two of our patents that expire in 2028 and relate to Tyvaso, and on January 11, 2018, the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office (USPTO) issued decisions to institute IPR proceedings with respect to both patents. For further details regarding the Watson matter, please see Note 11—Litigation, to our consolidated financial statements.

 

As a result of our settlements with Sandoz, Teva, Par and Dr. Reddy’s, we expect to see generic competition for Remodulin from these companies in the United States beginning sometime in 2018. To date only Sandoz has received tentative approval for its ANDA, but to our knowledge Sandoz has not yet launched the sale of its generic version of Remodulin. As a result of our settlement with Actavis, we expect to see generic competition for Orenitram from Actavis in the United States beginning as early as 2027. 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 Remodulin, Tyvaso or Orenitram and/or prevail in any patent litigation, the affected product(s) would become subject to increased competition, which could reduce our net product sales and profits.

 

A U.S. patent for Adcirca for the treatment of pulmonary hypertension expired in November 2017. Lilly had two additional patents expiring in April and November 2020, respectively, covering Adcirca and claiming pharmaceutical compositions and

 

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free drug particulate forms. The PTAB has issued a Final Written Decision finding these patents invalid as the result of an IPR proceeding initiated by Actelion Pharmaceuticals Ltd., a Janssen pharmaceutical company of Johnson and Johnson (Actelion). Lilly appealed the PTAB’s decision, and in April 2018 the United States Court of Appeals for the Federal Circuit affirmed the PTAB’s decision. Lilly has declined to petition the Federal Circuit for a rehearing of the decision, or to petition the Supreme Court to review the decision. In May 2017, we amended our license agreement with Lilly relating to Adcirca to clarify and extend the term of the agreement and to amend the economic terms of the agreement following the expiration of a patent covering Adcirca in November 2017. As a result of this amendment, beginning December 1, 2017, our royalty rate on net product sales of Adcirca increased from five percent to ten percent, and we are required to make milestone payments to Lilly equal to $325,000 for each $1,000,000 in net product sales. Adcirca’s cost of product sales as a percentage of Adcirca’s net product sales has increased significantly since December 1, 2017 due to these cost increases. Lilly’s FDA-conferred regulatory exclusivity for Adcirca expired in May 2018 and the FDA has tentatively approved ANDAs filed by at least two generic companies to market generic versions of Adcirca. To our knowledge, no generic version of Adcirca has been launched yet, but we anticipate generic launch sometime in 2018, which will likely result in decreased Adcirca sales, and a material adverse impact on Adcirca revenue. A decrease in Adcirca demand could also cause Adcirca inventory held by distributors and other downstream customers to expire unsold, which could increase our liability for product returns. The term of our amended license agreement with Lilly will expire on December 31, 2020.

 

In April 2018, a generic version of Remodulin was approved in Germany, Italy and France. The launch of a generic in these countries, expected sometime in 2018, will likely lead to a decline in our international Remodulin revenues due to increased competition and a contractual reduction in our transfer price of Remodulin to an international distributor for sales into Germany, Italy and France, as well as other countries in which the pricing of Remodulin is impacted by reference pricing. Approval in other countries may follow. Our non-U.S. net product sales for Remodulin were $43.7 million and $66.5 million for the six months ended June 30, 2018 and 2017, 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.

 

Pending Acquisition of SteadyMed Ltd.

 

On April 29, 2018, we entered into an Agreement and Plan of Merger (Merger Agreement) with SteadyMed Ltd. (SteadyMed) and Daniel 24043 Acquisition Corp Ltd., our wholly-owned subsidiary (Merger Sub). The Merger Agreement provides for the merger of Merger Sub with and into SteadyMed (Merger), with SteadyMed surviving the Merger as our wholly-owned subsidiary. In January 2016, SteadyMed announced that the FDA had granted orphan drug designation for Trevyent®, which is a single-use, pre-filled pump intended to deliver a two-day supply of treprostinil subcutaneously using SteadyMed’s PatchPump® technology. In June 2017, SteadyMed submitted an NDA to the FDA seeking approval of Trevyent for the treatment of PAH. In August 2017, SteadyMed announced receipt of a refuse-to-file letter from the FDA, in which the FDA refused to accept SteadyMed’s NDA for review, requested further information on certain device specifications and required performance testing and additional design verification and validation testing on the final, to-be-marketed Trevyent product. SteadyMed has indicated it plans to resubmit its NDA by the end of 2018.

 

The aggregate amount of cash consideration to be paid to holders of SteadyMed securities at the closing of the Merger is expected to be approximately $141.0 million, and the aggregate amount of contingent consideration to be paid, if payable, will equal $75.0 million. The contingent consideration will be payable if a specified milestone relating to the commercialization of Trevyent is achieved. On July 20, 2018, we announced the termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which was one of the conditions to closing the transaction. In addition, SteadyMed’s shareholders approved the acquisition on July 30, 2018. Assuming that all remaining conditions to closing of this transaction will be satisfied or waived, we expect the Merger to be completed in the third quarter of this year. Under Israeli law, closing may not occur until at least thirty days have passed since the SteadyMed

 

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shareholders approve the transaction. Refer to Note 12—Acquisition for additional information.

 

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. Our cost of product sales for Adcirca increased significantly as a percentage of Adcirca revenues beginning December 1, 2017, as a result of the increased royalty and milestone payments, from five percent to an effective rate of approximately 42.5 percent, contained in our amended license agreement with Lilly.

 

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, finance and legal, external costs to support our core business such as insurance premiums, legal fees and other professional service fees. To the extent that we make charitable grants to non-affiliated, non-profit organizations, these are also included within general and administrative expenses.

 

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 authorizes the issuance of up to 6,150,000 shares of our common stock, and in June 2018, our shareholders approved a 2,900,000 share increase in the number of shares issuable under the 2015 Plan. Following approval of the 2015 Plan, we ceased granting awards under the STAP and the 1999 Plan, and we modified our equity compensation programs to grant stock options to employees and non-employee directors. In June 2016 and October 2017, we also began issuing restricted stock units to non-employee directors and employees, respectively. The grant date fair values of stock options and restricted stock units are recognized as share-based compensation expense ratably over their vesting periods.

 

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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 3.2 million STAP awards outstanding as of June 30, 2018. 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 (benefit) expense 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 (benefit) expense recognized in connection with STAP awards from period to period: (1) volatility in our stock price (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.

 

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 2018-2021 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 (2018-2021)

 

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

 

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

 

 

 

 

 

 

 

 

 

RemUnity™
(treprostinil)

 

Continuous subcutaneous via pre-filled, semi-disposable system

 

PAH

 

510(k) application pending with FDA

 

Worldwide

 

 

 

 

 

 

 

 

 

OreniPlus™
(Orenitram in combination with approved background therapy)

 

Oral

 

PAH
(decrease morbidity and mortality)

 

Phase IV
FREEDOM-EV

 

Worldwide

 

 

 

 

 

 

 

 

 

Tysuberprost™
(esuberaprost in combination with Tyvaso)

 

Oral (esuberaprost)
Inhaled (Tyvaso)

 

PAH
(decrease morbidity and mortality)

 

Phase III
BEAT

 

North America, Europe, Mexico, South America, Egypt, India, Israel, South Africa and Australia

 

 

 

 

 

 

 

 

 

RemoPro™ (pain-free subcutaneous Remodulin prodrug)

 

Continuous subcutaneous

 

PAH

 

Pre-Clinical

 

Worldwide

 

 

 

 

 

 

 

 

 

Dinutuximab

 

Intravenous

 

Small cell lung cancer

 

Phase II/III DISTINCT

 

Worldwide

 

 

 

 

 

 

 

 

 

Tyvaso-ILD™
(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

 

 

 

 

 

 

 

 

 

Aurora-GT™
(eNOS gene therapy)

 

Intravenous

 

PAH

 

Phase II/III
SAPPHIRE

 

United States

 

 

 

 

 

 

 

 

 

OreniLeft™
(treprostinil)

 

Oral

 

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

 

Phase III
SOUTHPAW

 

Worldwide

 

Implantable System for Remodulin

 

On July 30, 2018, we obtained the final FDA approval necessary to launch the Implantable System for Remodulin in the United States. This system has been developed in collaboration with Medtronic, Inc. (Medtronic) and incorporates a proprietary Medtronic intravascular infusion catheter with its 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. In order to launch the Implantable System for Remodulin in the United States, we pursued parallel regulatory filings with Medtronic relating to the device and the drug, respectively. Medtronic’s premarket approval application (PMA) for the device was approved by the FDA in December 2017, and on July 30, 2018, the FDA approved our NDA for the use of Remodulin in the implantable pump.

 

Prior to launch, we must enter into a commercialization agreement with Medtronic. Our ability to commercialize the system is entirely dependent on Medtronic’s ability and willingness to manufacture the system on commercially reasonable terms, which will be outside of our control. In addition, launch preparation for an implantable system is inherently complicated and the generation of significant incremental revenues from the use of the Implantable System for Remodulin could take longer than anticipated. The Implantable System for Remodulin is a complex program, requiring precision and care to ensure that implant surgeons, refill centers, reimbursement pathways, and other health care service organizations are adequately prepared, established and trained. 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. In addition, Medtronic has informed us that it has fewer than 100 pumps available for initial launch, and that it may be unable to manufacture additional pumps until the FDA approves a next-generation system incorporating a variety of quality enhancements, which is anticipated in late 2019 but may take longer. We anticipate that the initial pump supply will enable us to launch the Implantable System for Remodulin in late 2018 or early 2019 at the ten clinical trial sites that participated in the DelIVery study. We plan to initiate a broader launch with the next-generation system.

 

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 citing violations of the quality system regulation for medical devices and requiring it to stop manufacturing, designing and distributing SynchroMed II implantable infusion pump systems, except in limited circumstances, until the FDA determines that Medtronic has met all the provisions listed in the consent decree. During the fourth quarter of 2017, Medtronic was notified by the FDA that these provisions had been satisfied, and Medtronic was therefore permitted to recommence the manufacture and sale of the systems without limitation, but certain other elements of the consent decree remain in effect, such as the requirements to comply with a remediation plan and to submit to periodic auditing of Medtronic’s quality systems. Any non-compliance by Medtronic with its consent decree could interrupt its manufacture and sale of the device.

 

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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.

 

In February 2018, DEKA submitted a 510(k) application to the FDA to clear the RemUnity system. If approved, this 510(k) application is intended to enable disposable components to be pre-filled with Remodulin by our specialty pharmacy distributors. We are also engaged in further development efforts intended to enable us ultimately to submit a new drug application for a version of the system that includes disposable components that are pre-filled as part of the manufacturing process.

 

We are also engaged in pre-clinical development of 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. 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.

 

Orenitram, OreniPlus and OreniLeft

 

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 order for Orenitram to reach its full commercial potential, we believe we need to complete successfully further studies to support an amendment to Orenitram’s label to indicate that Orenitram delays morbidity and/or mortality (also known as “time to clinical worsening”) in PAH patients who are on an approved oral background therapy. We refer to this initiative to amend Orenitram’s label as OreniPlus. As such, we are conducting a phase IV registration study called FREEDOM-EV, which is intended to support such a label amendment if successful. Enrollment of this study was completed in December 2017, and we anticipate full results of the study will be available during the fourth quarter of 2018.

 

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), which we refer to as OreniLeft. There are presently no FDA approved therapies indicated for treatment of WHO Group 2 pulmonary hypertension.

 

Tysuberprost

 

In 2012, we completed a phase I safety study of esuberaprost, a single-isomer orally bioavailable prostacyclin analogue, and the data suggested that dosing esuberaprost four times a day was tolerable. We believe that esuberaprost and treprostinil have differing prostacyclin receptor-binding profiles and are studying the potential safety and efficacy benefits for patients when used in combination. We also believe that inhaled treprostinil and oral esuberaprost have complementary pharmacokinetic and pharmacodynamic profiles, which indicate that they should provide greater efficacy in combination. In March 2017, we completed enrollment of our phase III registration study called BEAT (BEraprost 314d Add-on to Tyvaso) to evaluate the clinical benefit and safety of esuberaprost in combination with Tyvaso for patients with PAH who show signs of deterioration on Tyvaso or have a less than optimal response to Tyvaso treatment. We refer to the resulting use of esuberaprost and Tyvaso therapies in combination with each other as Tysuberprost.

 

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

 

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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. We are also conducting preclinical research to determine Unituxin’s potential activity against other GD2-expressing tumor types. 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 and Tyvaso-ILD

 

In October 2017, the FDA approved a supplement to our NDA for Tyvaso, covering a new inhalation device as part of the Tyvaso Inhalation System. The new device, called the TD-300/A, was designed based on physician and prescriber feedback, and is intended to aid patient compliance and enhance ease of use. We began commercial distribution of the TD-300/A in June 2018. We believe the design enhancements integrated into the TD-300/A will help reduce the rate of Tyvaso discontinuation associated with the prior device. In addition to the TD-300/A, we are engaged in research and development efforts into new devices to further optimize the delivery of inhaled treprostinil.

 

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), which we refer to as Tyvaso-ILD. We are also enrolling a phase III registration study called PERFECT (Pulmonary hypertension EnRichment study For the Evaluation of COPD with Tyvaso), 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 treatment of WHO Group 3 pulmonary hypertension.

 

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 entirely 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.

 

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

 

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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.”

 

Future Prospects

 

As noted above, in 2018 we expect revenues will decrease as compared to 2017, given the impact of anticipated generic competition for Adcirca expected to begin in the second half of 2018, as well as reimbursement challenges for our oral therapies leading to increased utilization of our patient assistance programs. A generic version of Remodulin may become available in the United States and certain countries in Europe during 2018, which could negatively impact our Remodulin revenues. Our strategy is to resume revenue growth over the longer term through the approval of new and/or improved indications, formulations and delivery devices. These and other research and development efforts are designed to provide revenue growth in the near and medium term, while efforts are under way to develop technologies in organ manufacturing in the longer term.

 

Our ability to achieve these objectives and sustain our growth and profitability will depend on many factors, including among others: (1) the timing and outcome of preclinical research, clinical trials and regulatory approvals for products we develop; (2) the timing and degree of success related to the commercial launch of new products; (3) the demand for our products; (4) the price of our products and the reimbursement of our products by public and private health insurance organizations; (5) the competition we face within our industry, 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; (8) the success of our efforts to develop technologies in organ manufacturing; and (9) the risks identified in Part II, Item 1A—Risk Factors, included in this Quarterly Report on Form 10-Q.

 

We believe the increased use of dual-upfront oral therapy (tadalafil and ambrisentan) following positive results of Gilead Sciences, Inc.’s AMBITION study of ambrisentan and tadalafil as an up-front combination therapy for PAH, combined with Actelion’s launch of Uptravi, an oral IP-receptor agonist, has delayed many patients’ initiation of inhaled or infused prostacyclin therapies, which we believe has impacted our sales of Tyvaso and Remodulin. In addition, Uptravi competes directly with our oral prostacyclin therapy, Orenitram, which we believe has limited our sales of Orenitram. Given the progressive nature of PAH, we believe many patients will begin taking Orenitram, Tyvaso or Remodulin after their disease progresses while on these or other oral therapies, leading to additional revenue from these three products.

 

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.

 

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Results of Operations

 

Three and Six Months Ended June 30, 2018 and June 30, 2017

 

Revenues

 

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

 

 

 

Three Months Ended
June 30,

 

Percentage

 

Six Months Ended
June 30,

 

Percentage

 

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

Net product sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Remodulin

 

$

159.5

 

$

157.7

 

1

%

$

286.3

 

$

303.5

 

(6

)%

Tyvaso

 

105.9

 

104.2

 

2

%

200.5

 

191.6

 

5

%

Adcirca

 

109.8

 

120.6

 

(9

)%

207.4

 

200.6

 

3

%

Orenitram

 

49.5

 

46.0

 

8

%

101.7

 

85.3

 

19

%

Unituxin

 

19.8

 

16.1

 

23

%

37.8

 

34.1

 

11

%

Total revenues

 

$

444.5

 

$

444.6

 

%

$

833.7

 

$

815.1

 

2

%

 

Revenues for the three months ended June 30, 2018 decreased by $0.1 million and revenues for the six months ended June 30, 2018 increased by $18.6 million, as compared to the same periods in 2017.

 

Remodulin net product sales increased by $1.8 million for the three months ended June 30, 2018 and decreased by $17.2 million for the six months ended June 30, 2018, as compared to the same periods in 2017. For the three and six months ended June 30, 2018, U.S. Remodulin net product sales increased by $16.7 million and $5.6 million, respectively, as compared to the same periods in 2017 due to: (1) an increase in quantities ordered from our U.S. distributors, which do not precisely reflect underlying patient demand; and (2) a price increase implemented in April 2018, which was the first price increase for Remodulin since 2010. For the six months ended June 30, 2018, the impact of the increase in quantities ordered and the price increase was partially offset by the one-time impact of a change in contractual minimum inventory levels with a U.S. distributor, as discussed below. For the three and six months ended June 30, 2018, international Remodulin net product sales declined by $14.9 million and $22.8 million, respectively, compared to the same periods in 2017, primarily due to a reduction in the price at which we sell Remodulin to an international distributor in connection with a transfer of additional regulatory and commercial responsibilities to that distributor in 2017.

 

Tyvaso net product sales increased by $1.7 million for the three months ended June 30, 2018 and increased by $8.9 million for the six months ended June 30, 2018, as compared to the same periods in 2017. These increases were primarily due to price increases. For the six months ended June 30, 2018, the impact of the price increases was partially offset by the one-time impact of a change in contractual minimum inventory levels with a U.S. distributor, as discussed below.

 

Adcirca net product sales decreased by $10.8 million for the three months ended June 30, 2018 and increased by $6.8 million for the six months ended June 30, 2018, as compared to the same periods in 2017. For the three months ended June 30, 2018, Adcirca net product sales decreased due to a decrease in the number of bottles sold, partially offset by price increases implemented by Lilly. For the six months ended June 30, 2018, Adcirca net product sales increased due to price increases implemented by Lilly, partially offset by a decrease in the number of bottles sold.

 

Orenitram net product sales increased by $3.5 million for the three months ended June 30, 2018 and increased by $16.4 million for the six months ended June 30, 2018, as compared to the same periods in 2017. These increases were primarily due to an increase in the number of patients being treated with Orenitram and, for the six months ended June 30, 2018, the one-time impact of a change in contractual minimum inventory levels with a U.S. distributor, as discussed below.

 

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Unituxin net product sales increased by $3.7 million for both the three and six months ended June 30, 2018, as compared to the same periods in 2017. These increases were due to an increase in the number of vials sold and a price increase implemented in 2017.

 

During the fourth quarter of 2017, we amended our agreements with one of our U.S. specialty pharmacy distributors, in part to make the monthly minimum inventory days-on-hand requirement consistent across Remodulin, Tyvaso, and Orenitram. This change resulted in a one-time decrease in total net product sales of $4.3 million as the distributor adjusted to the new contractual inventory requirement levels in the first quarter of 2018. On an individual product basis, in the first quarter of 2018, net product sales of Remodulin decreased by $4.5 million, net product sales of Tyvaso decreased by $3.5 million, and net product sales of Orenitram increased by $3.7 million.

 

We recognize revenues net of gross-to-net deductions, including: (1) rebates and chargebacks; (2) prompt pay discounts; (3) allowance for product returns; and (4) distributor fees. Our reserves for gross-to-net deductions are based on historical experiences and contractual and statutory requirements. The tables below include a reconciliation of the liability accounts associated with these deductions (in millions):

 

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Table of Contents

 

 

 

Three Months Ended June 30, 2018

 

 

 

Rebates and
Chargebacks

 

Prompt Pay
Discounts

 

Product
Returns

 

Distributor
Fees

 

Total

 

Balance, April 1, 2018

 

$

83.4

 

$

4.0

 

$

7.3

 

$

5.8

 

$

100.5

 

Provisions attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

67.0

 

10.8

 

0.4

 

5.2

 

83.4

 

Prior periods

 

2.5

 

 

 

0.1

 

2.6

 

Payments or credits attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

(11.7

)

(6.0

)

 

(1.1

)

(18.8

)

Prior periods

 

(56.0

)

(3.7

)

(0.8

)

(4.0

)

(64.5

)

Balance, June 30, 2018

 

$

85.2

 

$

5.1

 

$

6.9

 

$

6.0

 

$

103.2

 

 

 

 

Three Months Ended June 30, 2017

 

 

 

Rebates and
Chargebacks

 

Prompt Pay
Discounts

 

Product
Returns

 

Distributor
Fees

 

Total

 

Balance, April 1, 2017

 

$

49.5

 

$

3.8

 

$

6.2

 

$

2.5

 

$

62.0

 

Provisions attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

55.5

 

10.2

 

1.4

 

3.5

 

70.6

 

Prior periods

 

(1.4

)

 

 

(0.2

)

(1.6

)

Payments or credits attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

(7.3

)

(4.9

)

 

(1.0

)

(13.2

)

Prior periods

 

(46.2

)

(3.5

)

(0.5

)

(2.2

)

(52.4

)

Balance, June 30, 2017

 

$

50.1

 

$

5.6

 

$

7.1

 

$

2.6

 

$

65.4

 

 

 

 

Six Months Ended June 30, 2018

 

 

 

Rebates and
Chargebacks

 

Prompt Pay
Discounts

 

Product
Returns

 

Distributor
Fees

 

Total

 

Balance, January 1, 2018

 

$

74.0

 

$

4.7

 

$

7.2

 

$

3.4