United Therapeutics Corporation (UTHR) Q2 2013 Earnings Report, Transcript and Summary

Good morning. My name is Charlotte, and I will be your conference operator today. At this time, I would like to welcome everyone to the United Therapeutics Corporation's Second Quarter Earnings Conference Call. [Operator Instructions] Remarks today concerning United Therapeutics will include forward-looking statements which represent United Therapeutics' expectations or beliefs regarding future events based on current assumptions. United Therapeutics cautions that such statements involve risks and uncertainties that may cause actual results to differ materially from those forward-looking statements. Consequently, all such forward-looking statements are qualified by the reports filed at -- with the SEC. There can be no assurance that the actual results, events or developments referenced in such forward-looking statements will occur or be realized. United Therapeutics assumes no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes in factors affecting such forward-looking statements. Thank you. Dr. Rothblatt, you may begin your conference.

Thank you, operator. And good morning to everybody joining our call. I'm pleased to share with everybody our second quarter 2013 financial results. I'm joined on the call this morning with 3 of my colleagues: Dr. Roger Jeffs, the company's President and the Chief Operating Officer; Mr. John Ferrari, the company's Chief Financial Officer; and Mr. Andy Fisher, the company's Chief Strategy Officer. The top line information for me to report this morning is that total revenues hit $280 million for the second quarter of 2013. These revenues are very consistent with the $1 billion guidance that we have given for this year. So when you add these results to our previous quarter results, we are strongly on that $1 billion revenue run rate, which is of course a -- quite an exciting high watermark for our company. Earnings per share, $1.60 and -- per basic share. And the best operating measure of our company, earning before noncash charges, $3.29 per basic share, $3.11 per diluted share. So certainly, these results give me great pleasure to report and clearly indicate the strong growth of our core business. We continue to assist more patients than ever to -- in managing their pulmonary hypertension. And in fact, United Therapeutics helps more patients with PAH, or pulmonary arterial hypertension, in the U.S.A. than any other company. We also are not resting on these nice laurels, but we're looking forward. The lead pole position in our pipeline is in the implantable Remodulin pump. And I'm pleased to report that, during the past period, the implantable Remodulin pump clinical trial, which we conduct together with Medtronic, has reached its complete patient and number of patient days accrual point. So the data will be read out from that study within the next 30 to 45 days. The study was conducted, really, quite elegantly, without any hitch and certainly with no red flags. So we're looking forward quite optimistically to the reporting-out of that data this summer. Well, I'm -- I think that, that gives everybody a good flavor for what a positive and exciting second quarter it's been. So let me now open up the phone lines to any questions for myself, Roger, John or Andy. Operator? Operator, you could open up the phone lines to any questions.

Certainly. Our first question comes from the line of Mark -- of -- I apologize, of Phil Nadeau of Cowen and Company.

Martine, a question on the dynamics in the quarter. It looks like, if I project just flat revenue for the back half of the year at Q2 levels, you'd come in a bit above your current guidance. So was there anything in this quarter that was lumpy? Any inventory changes or patient dynamics that were lumpy where we should model sequentially down quarters in the back half of the year?

Let me ask John to provide some insight on the inventory question, Phil. And then after John answers, I can give a little bit more global insight in terms of just the nature of our revenues when you're dealing with a couple of major customers, which is our case in terms of the specialty pharmaceutical -- specialty pharmacy companies. John?

Thank you, Martine. For the quarter, there wasn't really anything unusual with the inventory. We saw a slight increase in the Remodulin inventory in both dollar value and patient days. But for Tyvaso, there was a very small increase in dollar value. But the patient days of inventory remained the same, there was no change in that.

Thanks, John. Phil, as you can see, we had really nice year-over-year growth as well as sequential quarter growth. For example, Remodulin, up for the quarter year-over-year 12.6%; Tyvaso, up, year-over-year up 34.8%; and Adcirca, up year-over-year 44.7%. This is overwhelmingly due to the fact that as physicians acquire more and more experience with our drugs in treating outpatients, they tend to move into the top-end and preferred positions. For example, with regard to, let's say Adcirca, during the past quarter or 2, we have reached the position where probably more than 1/2 of all pulmonary hypertension patients are on Adcirca. And to give you a feel for the historic nature of that: I don't believe, at any time during the past decade, there has been any drug that ever was being taken by more than 1/2 of all the pulmonary hypertension patients. The market was always fragmented in some different way. It's still very fragmented, but 1 drug is now taken by more than 1/2 of the patients, and that's our Adcirca. That trend, Phil, is not likely to dissipate. Adcirca is on a strong road. We have seen no effect of, for example, generic sildenafil, on us. Nor would we because they're 2 completely different drugs: One you'd have to take 3 times a day, generic sildenafil; missing doses is problematic because the disease can claim more pulmonary vascular space due to poor compliance; whereas ours is just once daily, and it doesn't get much better than that. With regard to Tyvaso, we have during the past quarter increased the size of our cardiopulmonary specialist force that details Remodulin and Tyvaso, reaching out to more and more physicians. As the field matures and as our Tyvaso delivery system continues to mature, physicians who may not be at some of the top university centers with a large support network find that they too can actually manage patients on Tyvaso. And this is very important because it allows Tyvaso to move down into, say, like the seventh, sixth, fifth decile of PAH subscribers and, there too, augering for continued growth. If you take a look at the trend lines on Tyvaso and the sequentials, you can see that it's closing the gap with Remodulin. And in the foreseeable future, leaving aside the advent of implantable Remodulin, Tyvaso would probably begin to lap Remodulin. But that actually brings us to Remodulin, which is, again, the preferred drug for the patients at the late stage of their disease. Far more patients are placed on Remodulin than on epoprostenol, Veletri or the generic forms of Flolan. And the reason for this are the numerous convenience and safety advantages of having a long half-life on a drug when you're talking about a parental, "24 hour a day" lifelong delivery system, interruption of which is associated with rebound and potentially fatal rebound hypertension. So there is really nothing in the offing that indicates any quarter-to-quarter declines coming up in the future. In fact, as I mentioned in my quote at the beginning, the core business is going very strongly. $1 billion is the very definition of a round number. And that was the intention in coming up with that figure for guidance: it was a round number. And a round number is necessary in this kind of a market because our revenues come overwhelmingly from a couple of major specialty pharmacies. Those are our customers. We also have the x U.S. revenues, but most of them come from the U.S. specialty pharmacies. So it's very possible, as we've mentioned several times in the -- over the past few years, for revenues to be lumpy from 1 quarter to next. And it's not that we see that coming, we don't, but we've given the bracket of a plus-or-minus 5% on the $1 billion figure to provide an envelope, which would include continued growth at the current rate.

The next question comes from the line of Salveen Richter from Canaccord.

This is Andrew Goldsmith, on the line for Salveen. I was just wondering if you might give us an update on the lawsuit with Sandoz following the Markman hearing, and your plans forward there.

Sure. Thanks for the question. It sounds like somebody has read the Markman ruling. And fortunately, we have Andy Fisher, who's our Chief Strategy Officer and is -- also is the second-highest lawyer in the company, the individual responsible for managing all of the IP litigation. So Andy, can you provide some -- shed some light on that question?

Thanks, Martine. Happy to do that. So yes, Andrew, as you've correctly noted, the Markman took place back in May. And we received a decision on the Markman, I think it was, late June, early July. And the judge's order in the Markman largely followed the claimed constructions that we had proposed in the briefing documents for the court in that Markman, so that's good. The path of the case from here on out will be the conclusion of discovery over the next few months, including whatever depositions and expert witness discovery that needs to take place. I think there's a deadline for summary judgment motions in January. And then while the trial date hasn't been set yet, we're expecting it to take place sometime in the middle of next year. So that's pretty much the breakdown of where the case is headed from here. Is that responsive to your question?

Yes, that's great. Is there a second trial ongoing? Am I correct there?

There are 2 separate cases going right now, but they're calendared fairly similarly. They're almost identical. The -- there are some technical disagreements between the parties that have basically prevented the 2 cases from actually being officially combined, but they're on a very similar calendar at the moment.

Thanks for the question. And I'd just like to give a shoutout to Andy, to everybody on the call: That litigation is a really big undertaking with multiple law firms that we're funding and working for us. And Sandoz is own law-firmed. We have numerous patents both covered by that litigation and uncovered new patents pending approval and issuance as well. And it's just really impressive to me that Andy is able to manage all of that intellectual property litigation, on top of all of the other strategic affairs that he's doing. And as we know, that -- the result from Markman could not have been better. We were very pleased with that. So way to go, Andy.

Our next question comes from the line of Michael Yee from RBC Capital.

This is John, on behalf of Michael Yee. First, for Remodulin, could you just give more color on how much the EU IV formulation may have contributed to the growth this Q? And second, how do you consider the new potential competitive drugs from Bayer and Actelion? And what is your expectation for their impact on franchise, especially given, I think, there, next week, it is expected to have an advisory trial?

Sure. Thanks for the question. So with regard to the first part of the question, I don't think that IV EU Remodulin had any material effect on the revenues from this quarter at all. Once you get regulatory approval, there's been another pretty much 6 to 12 months process of working out the pricing in the EU system, and we have to do that country by country. So it's a really good thing, it's great for the patient. We do expect ultimately that IV on Remodulin Europe can get us up to about twice the level of revenues from Europe, so as subscu is delivering in Europe. But that will have to happen over a period of at least 2 to 3 years. And not anything to discern out of this quarter. With regard to the -- you asked about Riociguat, the Bayer drug, that drug is -- for those on the call who may be a little bit newer to the PAH space, there are 3 pathways that are used to address pulmonary hypertension. And it's probably because people with pulmonary hypertension have had sort of 3 strikes, 1 in each pathway, that ultimately results in their disease having a mean survival of only 5 years. One pathway is called the PDE-5 pathway, which is a -- which basically relates to how the pulmonary vascular bed handles nitric oxide. And the second pathway is the prostacyclin pathway. That is known as the most potent and wide ranging because it deals both with faster dilation, as well as with the stickiness of the tiny pulmonary arteries. And it also controls growth factors which lead to overgrowth of the artery wall into the ruminal space. And then the third pathway is the endothelin receptor antagonist pathway. That's the pathway that has been addressed so beautifully by Letairis. So those are the 3 pathways. Now, so when the new drug comes into the market, be it the Riociguat from Bayer or the second-generation endothelin receptor antagonist from Actelion, you have to ask which pathway does that address. So the Bayer drug addresses the nitric oxide pathway. It addresses it in a slightly different way than the PDE-5 addresses, such as our own Adcirca or a generic sildenafil. The data that came out from the Bayer study showed a particular promise in a very small subset of pulmonary hypertension called chronic thromboembolic pulmonary hypertension, which goes by the acronym of CTEP, for short. And this subset represents less than 5% of all the pulmonary hypertension patients. So it's a very small subset, but it's been a subset that unfortunately has been very resistant to any other kind of treatments and generally has a worse prognosis than most of the other subsets of pulmonary hypertension. So there's considerable hope that the Riociguat could provide some assistance to this small subset with CTEP disease. Now the Bayer drug has to be taken 3 times a day, whereas are our Adcirca is just taken once daily. The Riociguat is a brand-new chemical entity, it's one that's never been seen in humans before outside of the clinical trial work that Bayer has been done; whereas our Adcirca is a branded form of tadalafil, just as Cialis is a branded from of tadalafil. And this drug is, of course, one of the most widely consumed drugs in the world with the countless millions of human exposures. So I think it's quite improbable that there is -- that you're going to see any kind of lack of a growth in Adcirca as a consequence of Riociguat's approval, should that come to pass. It really just makes no logical sense to get somebody a Riociguat instead of Adcirca, at least if they don't have chronic thromboembolic pulmonary hypertension. With regard to the Actelion drug, that is -- works in the endothelin receptor pathway, just as their current drug Tracleer does. And the likely course of events is that the expected label for Actelion would be that this would be the first endothelin receptor antagonist that has clinical trial data demonstrating a positive effect on indicators of morbidity and mortality. So now, that's probably very much a consequence of the clinical trial design because it was a clinical trial designed not for the standard 6-Minute Walk improvement in 3 to 4 months, but it was a clinical trial designed that stretched out over 2-plus years, designed to look at placebo versus active patients, was there a difference in morbidity and mortality. And of course, all of us in the field ordinarily thought that if your active patient does better in 12 weeks or 16 weeks, they are probably going to be better over 1 or 2 years. But nobody had ever proved that before Actelion undertook this study. And so that will certainly be a strong argument for people to take a good look at Actelion's new drug, should it be approved, in lieu of continuing on their oral drug Traclear. But there is really no data, no indication, that the results of that clinical study would make that drug preferred at the -- for addressing the other pathways, the prostacyclin pathway or the PDE-5 pathway, which, in fact, it doesn't address those pathways at all. It's in the -- clearly in the endothelin receptor antagonist category. So it's more of a competitive swap-out for Tracleer or something that the -- that doctors will have to choose Letairis versus it. Again, it's a brand-new chemical entity. It's going to have the issues, the safety questions in doctors' minds that new chemical entities always do compare to the long, positive history with Letairis. But in any event, we do not see it as a competitive factor vis-à-vis our portfolio of Remodulin, Tyvaso and Adcirca.

Our next question comes from the line of Mark Schoenebaum from ISI Group.

Martine, John, Andy, this is Salim on behalf of Mark. I just had a few questions. Just to get a little more clarity, Martine, on the guidance: You said there was nothing lumpy going on in the quarter, but to Phil's point, if you hold it flat, you do see the guidance of a -- I just want to get some clarity: Are you being conservative, then, with your guidance since you said that you do not see -- foresee, a decline in the second half? And then just on oral Remodulin, did you end up having a second end-of-review meeting after the second CRL? And then last and final question, on the implantable pump, can you just go through a little bit on the barriers that, I guess, you plan on putting in place, if that -- it would make it difficult for a generic Remodulin to be used with that implantable pump?

Okay. So first, Roger, why don't you talk about the oral question first?

Yes. There might be 2 things for the question, Salim. Yes, we did have end-of-review meeting, responsive to the -- complete response letter that we received the 22nd of March, and that end-of-review meeting was the 3rd of May. Following that meeting, there was some request from -- for additional analyses, which we presented at the end-of-review meeting, as well as some other contextual information about combination studies in the field, not just the ones that we conducted. The FDA is still reviewing that submission. And it was really -- it wasn't a formal submission that's responsive to the second complete response letter, it was more of a request for information or supplement to the filed NDA. Nonetheless, it's obviously an important piece of information that they're looking at and they're reviewing. And we're waiting to hear back about the results of that review. So that -- those are the material meeting events that happened during the period. So we're still in the sort of the same place that we were in the first quarter in the sense that we're working towards approval based on the NDA submission with the successful monotherapy results and the trending combination study results. If that fails at the divisional level, then we would appeal to the office level. And I will point out that the office directors did attend the end-of-review meeting, which I think is a positive and favorable thing in the sense that they are already very much in the know about the NDA submission. But then if both the submission or the appeal failed, then we are working at -- 100% at full steam ahead to enroll the FREEDOM EV study, which would then allow us to resubmit with additional information. And again, as we've said previously, we're working to have a data readout on FREEDOM EV in 2016. And the FREEDOM EV study is very analogous to the study that Martine described for Macitentan that Actelion conducted in that it's a long-term follow-up morbidity and mortality study and certainly would be supportive of approval, if successful. So those are the material advances in the second quarter.

Thanks, Roger. Appreciate that update a lot. Salim, since your third question is related to the intellectual property issue, maybe I can have our IP guru, Andy, address that one, on the implantable pump.

Sure. I'll take that one, Martine. Thanks. Salim, your question was how we would -- at -- I think your question was basically how we would prevent generic treprostinil, if it were on the market, from being used in the implantable pump. We're not really in the business of preventing anyone from doing anything. Instead, I would prefer to characterize it as we have an exclusive relationship with Medtronic and the exclusive right to use any form of treprostinil in their pump. And those pumps will only be sold to us or to our patients with our drug. We obviously have funded clinical trials using the pump and have a vested interest in maintaining that exclusivity. So we intend to enforce that exclusivity that we're entitled to.

Thanks, Andy. And let's see, your third question, Salim, related to the guidance: As I mentioned to the -- to Phil, I think, $1 billion is a round figure. And we've had that guidance actually, like, 3 years ago. So that's -- the benefit of using round numbers is it's easier to pretty much, like, hit things when you've taken view from, like, 3 years ago. And that's, frankly speaking, to me, is one of the happiest things I've done as CEO, as I've been able to, like, correctly guess what revenues would be from a -- 3 years out. But it is a round number, and we realize that people may have invested 3 years ago based on that guidance. And we're very cautious about going ahead and changing guidance that -- without being very, very comfortable in the new number because we realize that people are making financial decisions about that. So we will continue internally to review the appropriate course to take with regard to guidance, but for the moment, as mentioned in the earlier remarks, we are standing by that number, plus-or-minus 5%.

All right, the last question comes from the line of Terence Flynn from Goldman Sachs.

This is Lisa, in for Terence Flynn. My question is, how much of your buyback did you work through in the second quarter? And how much is remaining?

Thank you. Fortunately, we have our chief money counter on the phone, our Chief Financial Officer John Ferrari. So John, can you give a accounting on the buyback?

I'd be happy to, Martine. We've purchased back about 600,000 shares during the second quarter and for about -- and so far, we've spent about $42 million in the program, about 10% of the program. So where's -- our stock price is currently, we are not actively buying back the stock. We're -- effectively, we're at all-times high now for our stocks. So we believe that we're at -- currently, we have -- the shareholders are getting value from the depreciation of our stock since the beginning of the year.

Thanks, John. So I think John really gave me the right TF for wrapping-up the conference call. The company's stock price is at its all-time high. Our revenues are at their all-time high. Our profitability is at its all-time high. Our pipeline is at its all-time best perspective, with the implantable pump queued up for beta release this summer. And if successful, in the words of many pulmonary hypertension providers: implantable pump can double the number of patients using Remodulin. So that's -- if you take a look at the Remodulin revenue run rate and you double that, that's a beautiful thing to be coming out of the pipeline right there, upwards of $0.5 billion a year in revenue potential. Tyvaso, continuing to grow. We have a new Phase III trial involving Tyvaso together with add-on therapy that is also going to be a long-term morbidity-and-mortality type of design, also, if successful, augering for a doubling of Tyvaso usage. Tyvaso is closing in on a $500 million revenue run rate and probably be there in a couple of years, if not sooner. And so another doubling of that is another $0.5 billion coming out of our pipeline. And then we have the very exciting news that Roger shared with us earlier in the call about the continued progress of oral treprostinil at the FDA. This is the drug that -- for so many people, the pulmonary hypertension field has been the holy grail of pulmonary hypertension: the power of prostacyclin in the convenience of a pill. And the market forecast for that particular modality are actually double the ones that I just gave a few moments ago. So all told, never before has our pipeline been so mature with about $2 billion in revenue potential, on top of the $1 billion, that revenue run rate that we're putting out to date. Best of all times at United Therapeutics. We're continuing to work very hard. We realize that we've got twice as good a future in the next few years as -- even a very good position than we're at today. And we're all working as hard as we can to make that twice-as-good future come true as soon as possible. So thanks for all of your participation in the conference call this morning. And we look forward to seeing you at upcoming health care conferences. Operator, you can conclude the call.