United Therapeutics Corp (UTHR) 2007 Q2 法說會逐字稿

Good morning. My name is Amarcus, and I will be your conference operator today. At this time we would like to welcome everybody to United Therapeutics Corporation 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 in the forward-looking statements. Consequently, all such forward-looking statements are qualified by the cautionary language and the risk factors set forth in the United Therapeutics' periodic and other reports filed with the SEC. There is no assurance that the actual results, events or developments referenced in such forward-looking statements will alter or be realized. United Therapeutics assumes no obligation to update those forward-looking statements to reflect actual results, changes in assumptions or change in factors affecting such forward-looking statements.

Thank you. Dr. Rothblatt, you may begin your conference.

Thank you, Operator, and good morning, everyone. Thanks for joining us for United Therapeutics second quarter 2007 conference call. I am Martine Rothblatt, the Chairman and CEO, and I'm joined on the call this morning with our President and Chief Operating Officer, Dr. Roger Jeffs, and our Chief Financial Officer, John Ferrari. We're pleased to report this morning that United Therapeutics has surpassed $50 million in quarterly revenues for the second quarter. Net income for the quarter was $5.8 million, or $0.28 per basic share.

For those of you who have been following United Therapeutics for a number of years, this is a big milestone for us because it's the first time that we've passed $50 million in quarterly revenue, and we feel very happy that that kind of sets us solidly on this growth curve that we've been on for the past few years of plus or minus 40% annual growth in revenue. So, we are really excited to stay right in that band.

More particularly, revenues grew to $51.8 million in the second quarter, as compared with $40 million in the second quarter of 2006. Gross margins from sales were $45.8 million in the second quarter of 2007, compared to just $36 million in the second quarter of 2006. Our increases in revenues and gross margins resulted primarily from growth in sales of Remodulin, our lead product, which is approved for both intravenous and subcutaneous delivery.

Net income was $5.8 million, or $0.28 per basic share in the second quarter of 2007, as compared to net income of 7.7 million, or $0.33 per basic share in the second quarter of 2006.

Before moving into the question-and-answer session of the call, I'd like to just make a couple of points sort of from the 30,000 foot level here. The first one is that these second quarter results clearly demonstrate that we have a very solid core business going with quarter after quarter of predictable revenues and nice growth. So, it's just certainly a pleasure to be in the biotech business with such a solid core business upon which to grow upon.

Now, in addition to that, what I think is tremendously exciting is that the news flow we're looking to at United Therapeutics over the next 12 months includes three pivotal trial unblindings. And even as exciting a field as biotechnology is, I think it's kind of rare for a company to have this level of news flow within a 12-month period.

The three unblindings are, of course, the unblinding of our pivotal trial for inhaled treprostinil, that's the TRIUMPH trial. And then the next unblinding is the unblinding of our trial for OvaRex in ovarian cancer. That's our monoclonal antibody treatment for ovarian cancer. And then the third unblinding would be the unblinding of our two pivotal studies, Phase III studies of oral treprostinil, the FREEDOM studies, one of oral treprostinil as monotherapy, and the other as combination therapy.

In fact, these three unblindings really constitute five separate Phase III studies. And I really just want to make a huge call out to all of the [unitheorians] on the phone from across the world to say managing five Phase III studies in tandem to completion during the next 12-month period is just a beautiful accomplishment, and I want to thank all of you.

From the standpoint of all of our investors listening in on the call, the impact of this news flow over the next 12 months is that each of these three studies, each of these three registration unblindings have the potential to fundamentally transform the core business I mentioned at the beginning of the call.

So, I think that there is really a real great -- two things to be excited about here -- one, the core business, and, two, three separate opportunities to transform the core business into something much larger.

With that 30,000-foot view, I'd like to now open up the lines on the call for any questions related to either the clinical, financial, or other aspects of our business, and I'll either distribute those questions to Roger, John or myself, depending on what they are. So, operator, please feel free to begin taking questions as they come.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from Matt Kaplan with Punk Ziegel.

Good morning, Martine. A couple of questions. Could you first on the numbers side, expenses increased during the quarter in G&A and some of the R&D, it seems as though with the three projects that you're talking about ongoing right now and expecting those to complete a wrap-up in the near term, do you think R&D expenses will go down in the future? And then, also, maybe a comment on the G&A and the SG&A expenses, and where you think those are going to go? And then I've got a couple of questions with respect to I wanted to get updates on the FREEDOM trials, and then any timing and update on the TRIUMPH study as well.

Okay, Matt, it looks like you've asked questions for about five people. Let's see how we can do here. First of all, with regard to the expense structure, as you know, we tried to -- we have a pretty transparent budgeting and expense management algorithm here at United, and it's pretty much that we try to spend each year a bit less than we made the previous year, and give based on our premise of growing revenues equity, we can also lock in a growing bottom line.

In terms of the makeup of that between R&D and G&A, what we do in the Company is we pretty much divide up our budget into the different areas, and we have different people responsible for it. For example, Roger is primarily responsible for the R&D budget, John is primarily responsible for the G&A budget. Generally speaking, I would not want to hold out any particular hope that R&D or G&A expenses would go down in the future, because we do expect our revenues to continue to grow and hence we would expect our G&A and R&D expenses to continue to grow.

Quarter to quarter, it's never that easy to predict what they'll be, and that's just because of the nature of payouts for clinical trial enrollment. When there's a whole bunch of enrollment you have to pay out more money. Or when we order a bunch of drugs for R&D purposes, we have to pay a big lump sum in that quarter. So, quarter-to-quarter there could definitely be some big oscillations, but on an annualized basis, I think you can pretty predictably look at our level of R&D expenses as a percentage of revenues as being consistent year-to-year, and ditto for G&A.

Now, in terms of the status of the FREEDOM trials and the TRIUMPH trials, perhaps Roger, if you could give us an update on those two trials?

Certainly, Martine. Good morning, Matt. I'll start with TRIUMPH first. We closed enrollment on July 13, with 235 patients enrolled. So, given that last patient end date, the last patient out would be October 5. There is a one-week plus or minus treatment assessment window around that. But based on that, we think we should be able to provide a top line primary efficacy result in early November, around the AHA meeting, and it's our -- we're in discussions with Lou Rubin on how to coordinate that at the AHA meeting. And then with the positive result, we would then hope to file in the U.S. in the second quarter of 2008, and in Europe in the fourth quarter of 2008. So, those are the tentative timelines that we have for ourselves internally.

With regard to the FREEDOM trials, again, also making very good progress on enrollment. We have 115 patients in the combination therapy trials. That's 115 of 300 with an interim analysis tentatively set at 150 patients completing enrollment -- or completing the study. And in the monotherapy trial, we have 62 of the 150 patients enrolled, and that trial has an interim assessment point at 90 patients.

So, based on those interim analyses, when Martine speaks to another potential unblinding of pivotal trials, it would be based on the interim analysis unblinding and success at those interim events. I'm happy to clarify further, Matt, if you need me to.

No, that's what I was looking for.

Thanks, Matt. Next question, please?

Your next question comes from Jim Birchenough with Lehman Brothers.

Hey, Martine. A couple of questions, just one wasn't clear to me from the press release whether the adjusted EPS included stock options expense. Could you break that out for us? And then secondarily just trying to get a sense of the strength in the quarter for Remodulin, whether that was true end-user demand or if it was related to any inventory stock?

Okay, I think -- thanks for those good questions, Jim. I think John would be the best person to field both of those questions. John?

Hey, Jim. On the Remodulin side, the inventory was flat from Q1 to Q2, so there weren't any significant changes with that. The pro forma that we provided in the earnings release does not include stock options. It's very similar to what we did in Q1, in which we just noted the Toray license, stock issued for a Toray license and the HeartBar from 2006.

And what was the contribution from stock options expense?

If you take a look at the table, the tables that we provided in MD&A, the stock option expense for Q2 was 5.7 million for SG&A, and under 3 million for R&D. So, about 8.7 million.

And just a follow-up question on Remodulin trends during the quarter, I'm just wondering if you can lay out where the business is coming from, presumably from Flolan, which is -- I'm just wondering when you look at the existing Flolan market, how much do you see as still available for IV Remodulin, and where do you see the impact of the inhaled Remodulin if the TRIUMPH study is successful?

Sure, Jim, I'm happy to address those questions. There is tremendous potential for growth, still, from the Flolan franchise into the IV and subcu Remodulin franchises. We don't have exact numbers, but a reasonable round figure working assumption is that there is probably something like 1500 patients still on Flolan, representing perhaps something like $150 million in revenue. That may be off some single digit tens of millions of dollars either way, but something like that.

So, for example, with us now at a $200 million revenue run rate, the Flolan transition potential alone can propel another year of revenue growth even if all of the growth was solely from that source. So, that alone is good news, is very good news. However, in fact, we don't get -- we don't get all or even barely half of our revenue growth from Flolan transitions. As many, if not perhaps a bit more of the patients are basically Vantavis failures or straight oral failures, or newly presenting patients. People in any of those three categories that come directly to subcu or to IV Remodulin. As there are ever growing numbers of patients on Revatio and on Tracleer, there's inevitably ever growing numbers of patients who fail those therapies.

If you look back to their registration studies, somewhere between a third and a half of the patients on those therapies didn't improve while they were on the therapies. And being stuck as a Class III or even worse, Class IV pH patient is definitely not a good place to be stuck.

So, those patients need to move forward to parenteral Prostacyclin treatment, and Remodulin with its IV and its subcu and its numerous advantages is a good option.

So, we feel pretty confident that we can continue to grow the parenteral franchise, not only from Flolan transitions, but also from new patients who are newly diagnosed at the latter stages, or from patients who are not improving on Ventavis or not improving on Ventavis plus oral drugs.

Now, what that means in terms of the inhaled treprostinil or Viveta franchise is that there is an even larger opportunity than what is available for the parenteral franchise, because the beauty of the Viveta franchise is that that will be able to be offered to patients that are not yet so sick as they are willing to accept the huge inconveniences and frankly quality of life compromises associated with having an indwelling catheter and an ambulatory pump that you have to walk around all the time with.

So, we intentionally developed inhaled treprostinil, or Viveta. We intentionally developed that in patients who were already not well optimized on either Tracleer or Revatio, and to the best of our number keeping, there are over 20,000 such patients currently on those drugs. So, literally more than 10 times the number of Flolan patients. And it's to all of those many thousands of patients who are not well optimized on either Revatio or Tracleer that we would naturally think to be the first users of Viveta and hence it provides an entirely new market opportunity above and beyond the core business that's being addressed by parenteral Remodulin.

Great. Thanks.

Next question please?

Your next question comes from Bret Holley with [CIBS] World Markets.

Hi. Thanks for taking my questions. I had a question, I guess maybe for Roger. I was wondering if there is any additional information out there that you've been able to gather on the possible reason for increased infection risk with IV Remodulin, whether there is additional evidence to support the theory that it's just patient compliance that's the principal reason for the infections?

Yes, thanks, Bret. There is really no new evidence. I think it's certainly something that we're desperate to study. We have had discussions with the scientific leadership committee of PHA, principally Mike McGoon and Dave Badesch, as well as [Rena Algetti], to have a discussion about a prospective protocol that they would like to conduct looking at both Remodulin and Flolan, and doing a comparative analysis of bacterial infection rates both Gram-negative and Gram-positive. And importantly with proper adjustment for covariates, such as etiology, other comorbidities, bathing and swimming habits, concomitant meds, and things like that.

In our discussions with them, they want to conduct this as an independent effort. They don't want sponsor bias, so-to-speak, involved in this. We will contribute all the scientific information that we have at the Company to them, and I think their primary goal is to write an NIH grant to fund what would be a fairly large effort. You're talking hundreds if not a thousand patients followed longitudinally for maybe two to three years given the very low event rates. And I think one thing we know from our own post-marketing safety surveillance, while there continues to be Gram-negative infections, the overall event rate remains very, very low and rare. So, there doesn't seem to be an overt risk beyond what is expected and it's certainly well described for central venous indwelling catheters in other settings. So, nothing has changed sort of epidemiologically.

I think the other thing in terms of new information, there was a publication from a Japanese group. It was Akagi, et al. It was in this circulation journal in 2007, showing that the use of what's called a closed hub catheter system prevented inpatients receiving Flolan almost an order of magnitude decrease in the infection rate that was occurring with Flolan from 0.89 per thousand days to 0.1 per thousand days.

What the closed hub system is, is a way to perhaps provide a more watertight seal between the Hickman catheter connection and the pump infusion catheter connection. Given the Gram-negative infections are waterborne, it is believe that it's intrusion of water, particularly during showering, bathing or swimming, that would lead to a Gram-negative infection risk. And certainly without a contamination point, there would be no infection.

So, we are doing a number of studies in transition patients, in particular, patients switched from Flolan to Remodulin, where we're employing the closed hub system, and these are both in pediatric and adult patients. We're collecting this data prospectively, and what we hope to see is that by preventing bacterial invasion through the connection site that we will dramatically decrease any further the rare incidents of Gram-negative infection.

So, while I don't think there is any new science around the infection and what causes it, I think all would agree that if one could prevent a contamination there would be no infection. So, that's where we're really focusing our own attention at this point along with working with the SLC on their perspective study grant.

So, that's all I have to say about that.

Okay. And then another question and obviously maybe you don't have any information about this. Have you heard anything in the prescribing community about the potential for new and improved Ventavis formulations?

I know that's a goal of Actelion's. It was a goal of CoTherix previously. I haven't heard anything to date about that. I think one of the issues that's going to compromise that is the fact the half life of that therapy is about 20 minutes, whereas, the half life of treprostinil is 4.5 hours. So, we have an innate advantage to begin with.

So, any extension that they would apply obviously would rapidly apply to our drug as well and would only further provide a distinguishing characteristic. But I don't know what their efforts are in that regard. We have our own efforts, for sure, but I think four times a day inhalation therapy is an attractive route of administration. In fact, we just had a meeting with the steering committee for the inhaled program, and one of the things that they told us is that all of their Ventavis patients are clamoring to go on inhaled treprostinil, and we're holding off on that until we have a result. But certainly once we have a positive result, we will begin a Ventavis transition study.

So, I think we're so far ahead in the game from an innate characteristic of the molecule that it's going to be difficult to catch up with.

Okay. Thanks very much for answering my questions.

Next question, please?

Your next question comes from Jonathan Aschoff with Brean Murray Carrett.

Hi, thanks. I was wondering, what's the new stock option run rate? Is 2Q '07 representative or is it kind of high?

John, do you want to answer that?

Be happy to. We have something, in Q2, if you have read our proxies, our prior proxies, our CEO is entitled to stock option grant at year-end based upon the increase in our market capitalization from December 31 of the prior year to December 31 in the current year. When we adopted FASB 123(R), which required expensing of stock option expense, based on the type of contractual agreement we have, employment agreement we have with Martine, we have to start accruing for that year-end stock option grant based on the changes in our market capitalization.

For the first time since the adoption of the new accounting literature, our market cap has increased from December 31 through a reporting period. So, as a result, we did accrue about $2.3 million towards expense representing the fair market value of the options that could be due at year-end based on the increase in market capitalization. That could lead to some fluctuation in the stock option expense line item from quarter to quarter just, again, depending on what happens with our market capitalization.

Right. I was looking at the 232 that you put into the TRIUMPH trial. How many people overall did you screen for that trial?

Roger, do you have that number?

I don't have a -- it was actually 235 that was the final enrollment number. It typically, you screen ten times the amount for the number enrolled. Because the centers will have hundreds of patients and they'll screen every patient there through a cursory review to see if they meet the criteria. So, again, it depends on how you define screening. But in general, one screens ten times the number of patients who enrolled.

I guess maybe I was thinking of a definition more in line with you made it through the first couple of rounds and you're coming to the end. What's the differential there between 235 and how many kind of made it to the last step or two?

Not that many. I'm not sure I understand what you're asking.

You kind of go through initial screening, it sounds like, and you screen a little further, and the number keeps dropping after that. Which starts out it's like tenfold, but then it's clearly less than tenfold as you get closer to finally coming into the trial.

Yes, and what happens is patients that fail screening, they may fail because they don't meet the intracriteria for (inaudible), for example, but then over time they worsen and now qualify for the study. So, they continually get re-screened. I think it's more an issue of that than -- as well as new patients presenting to the center. But, you're right, the metric does change. I think the ratio going forward, it goes from an initial 10-to-1 down to maybe 3-to-1.

Okay. Thanks a lot.

Next question, please?

Your next question comes from Lucy Lu with Citigroup.

Thank you. Just a couple of questions. The first one is if you have top line results before you go to Remodulin study in November, I'm just wondering when do you think you can file for it at NDA? And also by then, what would be the patient numbers, based on the number of patients that have been treated for at least six months and one year?

Okay, Lucy. Roger had mentioned a few moments ago that our target for NDA filing would be by sometime around the second quarter of next year. And, again, we have yet to unblind the study and collect all the data. So, that's not a hard number, but that's consistent with our usual time frame of around six months for putting together the NDA.

And in terms of the question of by -- you're asking by that time how many patients would have been on inhaled treprostinil for six months and for one year?

Right.

Well, there would have been -- I mean, we don't usually give out that level of detailed information, but generally speaking about a year from now there would have been at minimum the 235 patients that, plus or minus, that we have in the study who have been on the drug for a year.

The study has actually been going on about two years, so there are some of those patients who will have been on for three years. And even before the study started, there were other patients.

As you may know, we did a large amount of Phase I, Phase II work with Dr. Rubin at UCFD, and Dr. [Verner Seager] and [Alchuski] at University of (inaudible) Medical Center. About 200 patients were involved in those earlier studies. Many of them acute, but some of them chronic. So, some of those patients are also still on the drug and they're going out four or possibly even five years at a time of NDA filing.

Okay. Sorry I missed the first part.

No problem.

And then speaking of the oral Remodulin FREEDOM trials, I'm just wondering what is the level of statistical significance required to actually claim that these are positive trials, physicians to start -- you know, continuing the trial at interim analysis?

Right, right. Roger, do you want to address that question?

Sure. For the interim, obviously it's a very high statistical hurdle and it would be below 01 level, because to file on a single study you would want to have a result below the 01 level. I won't get into the details of what we actually our test statistic is, but it's below 01 for both trials.

The combination therapy trial at 300, I believe that is 90% powered at the 01 level. The monotherapy trial of 150 patients is 90% powered at the 05 level. And the rationale for that is we felt that the combination trial would complete first, and that the monotherapy trial would be a second trial.

So, let's say, for example, that the combination trial with less than 05, and if we needed a second study, we only needed a second study less than 05. So, that's the thinking. But then if the combination trial finished first and it was less than 01, we would trial based on that result. So, trying to take a tactical approach in terms of our powering and statistical sampling for the trials as well, and that's the general background for how we powered the studies.

Okay. And then just a last quick question. What is the expected tax rate going forward? And, also, what would be the real tax rate when the net operating loss carry forwards are used up? Thank you.

Great, Lucy, and you managed to get a question for each of the three of us, and also nice to hear your affiliation with Citigroup, that's great. John, can you answer Lucy's question there about the tax rate?

Yes. The current effective tax rate for June 30 is approximately 35%. And that is an estimate just based on our projections on both income and our permanent book to tax differences. I won't go through that calculation. I mean, if everything held true to our projections, at year end our tax rate would be around 35%. But it went up from 34% in Q1. We'll do another set of projections and evaluate the effective tax rate again on Q3 and, of course, at year-end. So, it's something that could fluctuate from period to period, but under the accounting rules for interim reporting, we give our best estimate each marking period.

Great. Thanks, John. Thank you, Lucy. Next question, please?

Your next question comes from Geoff Meacham with JPMorgan.

Hi, guys. Thanks for taking the question and congratulations on the good quarter.

Thanks, Geoff. Glad you got your question in.

Thank you.

There are over 150 people on the line, so you've got to have a certain inherent luck or skill to get your question in, so good work.

Thank you. A question for you on TRIUMPH. I guess to ask Lucy's question a different way. What percent of the patients in TRIUMPH have gone on to the extension phase? And then if you guys could provide the reasons for the dropouts in the trial, though obviously it was much lower than you guys expected at the onset?

Yes, Geoff, we actually don't go into that level of detail in the trials. As you can probably appreciate, we have to set a certain filter or else we create a very confused situation of disseminating so much detailed information and it's contrary to what the steering committee for the study and the clinicians involved in the study really appreciate. So, we don't go into that level of detail. But we did announce that the dropout rate was substantially less than we had expected, and virtually all of the patients go on to the extension phase of the study and we continue to support them with the nebulizers and the supply kits and everything. So, the answer is virtually all of them.

Okay. And then just a follow-up, I guess kind of a big picture question. Martine, you mentioned earlier in your prepared remarks about your rate of operating expense growth, and if you fast-forward after you release these three Phase III studies for TRIUMPH, the two FREEDOM studies, and the OVAREX. What's kind of your overall take on where R&D expenses could go, because this is sort of the vast majority of your expenses today? Clearly there is a lot of leverage in the model and obviously SG&A will go up pretty dramatically to support commercialization, but I just want to kind of get sort of your longer term view on what's next?

Sure. It's a great, great question, because it's one that we spiritly debate here at UTHR quite a bit. We started off as a very small company and even now we pinch ourselves that we're spending on the order of $100 million a year in R&D and related expenditures. And then we say could we spend 200, 300? Well, of course, we never wanted to spend money just to spend money, but it's also the case that we are kind of in an embarrassment of riches here in terms of our pipeline. There is a lot more R&D activity that we could be doing that we actually throttled back because of our budgeting algorithm, which is not to spend more money than we're making.

So, just a couple of snapshot examples, behind the OVAREX MAB, we've got MABs for prostate cancer, colon cancer, pancreatic cancer, breast cancer, but we're not spending on those things because first we want to wait and see how does the OVAREX trial turn out?

Another example, we are well along, as Roger kind of alluded to earlier, in the MDI development of our inhaled treprostinil. Well, again, we're kind of ratcheting back on that spending because we would like to, of course, see how the TRIUMPH study turns out.

Then we have this entire third platform, which is the glycobiolgy platform based on the approved drug miglustat, which is known by the trade name of Zavesca. We've done a lot of great work in partnership with Oxford University demonstrating broad antiviral capability of these glycobiologicals such as miglustat and some of its analogs.

Again, that's an area that could -- one could spend tens of millions of dollars on in talking about developing antivirals and especially for broader populations. But we feel that we're not yet the size of the company and we don't have in our budget the ambit for spending that sort of money.

As our revenues take off with inhaled treprostinil and with oral treprostinil and with ovarian cancer, we'll have more profits that can be used to both reward shareholders with a growing share price, but also we'll have more profits that we can pile back into continuing to grow the United Therapeutics' brand into a larger and larger company. We've never been shy about our ambition being ultimately to be the Amgen or the Genentech of the East, and we're going to continue to strive toward that goal.

Okay. Thanks a lot.

Sure. Well, I'd like to thank everybody for joining the conference call this morning. It's been an exciting quarter for us with our record quarterly revenues achieved here. I really thank all of the expert analysts and researchers who could pose the excellent questions to John, Roger and I. It helps make our job a lot more fun and interesting knowing that there are those of you out there who know our business so very well, know the space very well. I think it's great that all of us are part of a common community in the biotech space with both rewarding shareholders with better returns than can be found in other segments of the economy, and at the same time doing a great thing by helping people live longer, happier lives. So, thanks to all of you and have a great week, and look forward to seeing you at the upcoming meetings in the fall. Thank you.

Thank you for participating in today's United Therapeutics Corporation second quarter earnings conference call. This call will be available for replay beginning at 11:35 a.m. Eastern Standard Time through 11:59 p.m. Eastern Standard Time on Tuesday, August 7, 2007. The conference ID number for the replay is 10881078. Again, the conference ID number is 10881078. The number for the dial, the replay is 1-800-642-1687, or 706-645-9291. Thank you.