United Therapeutics Corp (UTHR) 2015 Q2 法說會逐字稿

Good morning. My name is Tamara and I will be your conference operator today. At this time, I'd like to welcome everyone to United Therapeutics Corporation second-quarter 2015 financial results conference call.

(Operator Instructions)

Remarks today concerning United Therapeutics will include forward-looking statements representing the Company's expectations or beliefs regarding future events. The Company cautions that these statements involve risk and uncertainties that may cause actual results to differ materially. Please see the Company's latest SEC filings and for including Form 10-K and 10-Q for additional information on these risks and uncertainties. The Company assumes no obligations to update forward-looking statements.

Today' s remarks may also include financial measures that were not prepared in accordance with the US generally accepted accounting principles. Reconciliations of non-GAAP financial measure to the most greatly comparable US GAAP financial measures can be found in our earnings release available on our website at www.unither.com.

Finally, please note that today's remarks may include reporting on the progress and results of clinical trials or other developments with respect to the Company's products. These remarks are intended solely to educate investors about the Company and are not intended to promote the Company's products; to suggest that they are safe and effective for any use other than what is consistent with their FDA-approved labeling; or to provide all available information regarding the products, their risk, or related clinical trial results. Anyone seeking information regarding the use of one of the Company's products should consult the full prescribing information for the product available on Company's website at www.unither.com.

Thank you. Dr. Jeffs, you may begin.

Thank you, operator. Good morning everyone and welcome to United Therapeutics' second-quarter earnings call. I'm Roger Jeffs, President and Co-CEO. I'm pleased to be joined on the call today by James Edgemond, our Chief Financial Officer; Dr. David Zaccardelli, our Chief Operative Officer and EVP, Product Development; and Andy Fisher, Deputy General Counsel and Chief Strategy Officer. James, David, and Andy will assist me with answering questions related to the respective area of expertise and finance development and legal, respectively. No doubt, many of you are now wondering, where's Martine? Well Martine sends along her regrets for not being able to participate today, but she is away on an international business trip and not able to join today's call.

So I'd like to take the opening time period to provide a summary across three main areas. Firstly, I'll review our quarterly financial results. Secondly, I'll provide specific detail with regard to Orenitram performance. Thirdly, I'll highlight other material achievements during the quarter. Starting with the financials, we continued to see year-over-year, as well as quarter-over-quarter total revenue growth, with the increase driven primarily by Orenitram sales growing nearly 300% as compared to the second quarter of 2014 when the product was first launched, and Orenitram growth of 24% when compared to Q1 of this year. This growth in Orenitram is principally a result of increased patient demand. And I'll specifically unpack the Orenitram number in more detail in a minute given the keen interest in the performance of this brand.

In addition, second-quarter revenues also benefited from the growth of Adcirca sales, which grew 23% as compared to the second quarter of 2014. Much of this growth is related to price increases. Remodulin and Tyvaso revenue were sustained year-over-year. As we have previously mentioned, it is best to view our revenue trends over the longer-term as it better reflects our overall growth and takes out some of the revenue volatility resulting from monthly ordering patterns of our domestic and international distributors. This longer lens provides a better viewpoint of the impact of the launch of Orenitram across the suite of treprostinil products. Reported GAAP net income was $99.2 million or $1.91 per diluted share for the quarter ended June 30, 2015 as compared to $111.9 million or $2.10 per diluted share in the second quarter of 2014.

Non-GAAP earnings for the quarter ended June 30 grew 12% to $132.5 million, or $2.55 per diluted share, as compared to $118.7 million or $2.23 per diluted share in the second quarter of 2014, primarily driven by an increase in total product sales and the expiration of our royalty obligation to GlaxoSmithKline in October of 2014. As mentioned in prior calls, we report non-GAAP earnings to take out the impact of certain items, including our share-based compensation. The significant non-GAAP earnings adjustment is for the share-based compensation expense. Within the quarter, we recognized approximately $47 million of employee share-based compensation expense.

As Martine outlined in the Q1 conference call, we have a share tracking awards program, which are essentially stock options settled in cash, and when these awards are mark-to-market at each reporting period end, the increase or decrease in our share price introduces volatility into our reported GAAP earnings. The additional share tracking award expense recognized during this quarter is attributable to the additional vesting of STAP awards, the actual additional gain that employee recognized upon exercise of the STAP awards at prices above the prior quarter and share price, and finally, the increase in the share price.

Turning to the balance sheet and statement of cash flow, which in the 10-Q represented on a six-month basis, cash and cash equivalents and marketable securities as of June 30, 2015 and December 31, 2014 were $562 million and $818 million, respectively. The decrease of $256 million in cash, cash equivalents, and marketable securities resulted primarily from both the use of $337 million to repurchase shares of our common stock and the use of $104 million to settle early conversions of our convertible notes. These uses were offset by $150 million of cash generated from operating activities.

I also want to take a brief moment to update you on our share repurchase activity during the quarter. As mentioned, we spent $337 million to repurchase shares of our common stock since year-end and about $185 million of this amount occurred in the second quarter of 2015 when we repurchased over 1 million shares of our common stock. By the end of July, we expect to fully complete the $500 million share repurchase program that was authorized by our Board late last year in August of 2014.

As promised now, I'll switch gears and spend a little time unpacking the Orenitram numbers in more detail. The granularity will provide great insight and enthusiasm that the brand is achieving its goals. As already mentioned, Orenitram continues to grow with Q2 being our strongest revenue quarter yet, having achieved 24% greater revenue than in Q1. Orenitram revenues were driven principally by new patient starts, with the number of patients starts exceeding 1,000 patients since launch, thus achieving our patient target for year one. A mirror into future revenues can be predicted by the number patient referrals. Q2 referrals were 21% higher than Q1, which obviously bodes well for Orenitram performance in Q3.

In fact, June was our highest referral month ever, which gives us confidence that Q3 will come in north of $30 million if the July revenue number remains consistent for August and September. The growth in new patient starts is driven principally by the increase in the breadth of prescribers. Since launch, over 400 prescribers have started a patient on Orenitram; in fact, we are averaging 24 new prescribers per month. To date, 70% of the starts in Q2 were from patients new to Prostacyclin, with 30% being transitions from Tyvaso or Remodulin. And while this has kept the growth of Remodulin and Tyvaso relatively flat, it is important to note that the total number of patients on any form of treprostinil continues to grow, which again achieves our stated objective of treating more and more patient with one of our available forms of treprostinil.

Importantly, we are seeing a nice uptake in the community centers, where we feel is the largest opportunity for growth given the low utilization of Prostacyclin therapy in the community setting. In fact, recent trends show a higher percentage of utilization of Orenitram in the community centers. For example, the split of starts in June was 55% community-based and 45% center-based, which demonstrates the positive inroads we're making with Orenitram with the community physicians. While patient number is certainly the key driver of revenue in this initial phase of launch, another important driver of Orenitram performance is related to dose achieved as its cost and thus the revenue is based on milligrams used.

Like parenteral therapies, Orenitram is progressively titratable to achieve a balance of maximal benefit and tolerability, a hallmark of Prostacyclin therapy and a key class trait. The average total daily dose for all patients is currently 10.2 milligrams. The average dose is obviously impacted downward by new starts that begin at the lower end of the dose spectrum. We now have enough patient sample across the first year to provide insight into longitudinal trends of dose versus time on therapy. The average total daily dose across all patients is approximately 8 milligrams at 3 months, 10 milligrams at 5 months, and 12 milligrams at 10 months.

This suggests that dose titration is most aggressive in the early titration phase, and then continues at a slower pace as the balance of benefit to risk is achieved, but nonetheless titration is as expected -- it continues as expected and has been shown historically, is required for this class of therapy -- progressive dosing for a progressive disease, so to speak. There will obviously be a greater and greater impact of dose on revenues, as patients increase their duration on therapy, further leveraging the increasing patients on therapy impact.

Finally, I'd like to provide a few brief highlights of a few other important achievements in the quarter. Most importantly, we launched Unituxin, and in fact, we have fulfilled initial distribution orders and treated our first patients. We are very excited about being able to serve this community of children who need treatment for high risk neuroblastoma. In addition, in May, the EMA's Committee for Medicinal Products for Human Use issued a positive opinion, recommending approval of our marketing authorization application for Unituxin. We expect to receive European Commission approval during the early part of the third quarter of 2015, and thereafter plan to commence commercial sales in individual European countries, following pricing and reimbursement approvals on a country-by-country basis. We continue to favorably progress enrollment in our large pivotal Phase 3 morbidity mortality endpoint trials, with FREEDOM-EV approaching 60% enrollment and the BEAT study approaching 50% enrollment.

With those opening remarks, I would now like to open lines up to callers for questions for myself, James, Dave, or Andy. Operator, first caller, please.

Geoff Meacham, Barclays.

Great. Thanks for taking the question and thanks a lot, Roger, for the great detail on Orenitram. I wanted to go a little bit more on that vein. Could you give us a perspective on duration of therapy, how you see persistent rates playing out over the next, say -- what's happened historically and over the next, say, 6 to12 months? And then what does your market research tell you about the meds that patients have had before on Orenitram, just to get a sense for where we are in the sequencing of therapy? Thanks a lot.

Yes, good morning, Geoff. Thanks for the question. In terms of more detail, it's a very hard to give a duration and persistence because obviously we have only launched last June, so the persistence at best would be 12 months for the first patient in, commercially. We do have a little insight, however, from our open-label controlled, clinical study where patients exited the control portion and went into the open-label portion, and there we saw that the patients had a persistence well over two years. Early suggestions are, is that this is tracking very similarly to Tyvaso in terms of tolerability and persistence, so we do lose some of the starts. Some of the patients die, unfortunately. There is some intolerance, mostly due to headache, nausea, and GI distress, which is typical of Prostacyclins, but the large majority of patients stay on the therapy and continue.

The advantage of that, as you've heard in the opening comments, is that as they stay on therapy, the dose escalates with time, as they continue to try to titrate the drug to maximal benefit and tolerability. One of the questions we have for ourselves is where is dose heading? If it's 12 milligrams as a total daily dose at 10 months, where will it end up? And one potential window into that aspect is, if you look at those patients that were in the open-label clinical trial who have now transferred to commercial product, so there's a subset of our commercial patients, but they are the patients that have been on the therapy the longest, their average dose is about 20 milligrams as a total daily dose. So it's our expectation that, of all the patients that we have, if they stay on therapy for a longer period of time, they will also begin to approximate that level of dosing, which will then obviously [port] a higher level of revenues per patient.

That's the leverage aspect that I mentioned in the openings is that, it is not just the numbers of patients, but it's the dose that will drive the upside. So hopefully that answers your question about duration and persistence. In terms of market research or market feedback, we do find a couple of things. We find that about 70% of the patients are on three times a day dosing versus twice a day. That seems to be the preferred route. In terms of use on top of background therapies, we don't promote it that way, which is promoted as a front-line use -- the Prostacyclin a first choice, so to speak, but a lot of patients are on background therapy and that doesn't seem to be a hindrance at all in terms of prescription behavior or payer behavior. So I think a lot of use is follow-on therapy to the other oral therapies. Thank you, Geoff. Next caller, please.

Thanks.

Mark Schoenebaum, Evercore ISI.

Hey, Roger, and hey, guys. This is Salim in for Mark. Thanks so much again for the color, Roger. It was super helpful. Just one critical question and then two quick ones if I may. On the patient numbers, I know last quarter you mentioned there were 800 patients. This quarter, you mentioned there was 1,000 and last quarter you said there was 100 net new adds. So is that slowing down? And then the high-dose patients, you mentioned last quarter, I believe, that 20 per month were rolling off, so could you just give us some more clarity if that's still occurring and how many high-dose patients remain and where are they going? And then the two quick ones, on the share repo, would you guys be willing to consider a Dutch tender and be more aggressive in the share buybacks? And then on Unituxin, do you expect any competition there from products in development? Thank you.

(Caller Instructions)

In terms of the patients on therapy, the starts since launch have been well over 1,000. If you looked at the number of patients on and pending, then we have about 1,000 patients in our census. That's to answer that. In terms of dropout, patients drop out across all spectrums of dosing, and all spectrums of time. There can be -- death can occur. That's one of the largest reasons for a discontinuation of any treprostinil therapy, or they drop out due to intolerance. Intolerance would typically happen early, so that gets filtered out very quickly and has less impact, obviously, then, on revenues going forward because they're not on therapy and on higher doses, but the patients that discontinue, who have been on at a higher dose have a greater impact on the revenue number.

I'll touch on Unituxin and then I'll punt to James on the share repurchase question. On Unituxin, there is a company in Europe that is developing a -- basically a 1418-like, very similar product that is manufactured differently. It's a CHO cell-based manufacturing production. It has different glycosylation features. They are developing it with a different cytokine adjunct of therapy regimen. We think that the regimen that was developed by NCI and CIG was the right regimen, and certainly, that was borne out in clinical trials, where you saw both event-free survival significantly improved, as well as overall survival. We don't view the other product as competitive because they haven't unblinded their study so we don't know if their regimen will work.

It's a similar product but we do have orphan designations, so in Europe that has potential to negate their ability to commercialize, although again it's not something I don't think we'll defend aggressively in Europe. The only issue we will have in Europe as we begin to commercialize ourselves is that, that therapy has been tested in a lot of the main centers and it may infringe on some of our commercial updates because they are going to be using the clinical trial material from that trial. But other than that, our stated expectation that the global-revenue expectations for Unituxin is between $75 million and $100 million remains true and holds the same. James, if you could answer the question on share repurchase?

Sure. Yes, thanks, Roger. Good morning, Salim. As you know, Salim, historically, we repurchase shares and we've done the accelerated share repurchase and we've also done it through open market. So we have been committed to share repurchase. I don't want to say whether we would or wouldn't consider going forward other mediums or other vehicles. The thing to keep in mind for us is we have the open-share repurchase program right now and we are committed to completing that by the end of the month, so thank you very much.

Thanks so much.

Liana Moussatos, Wedbush Securities.

Thank you for taking my question. Can you talk about the earlier stage pipeline implantable pump and behind that and what kind of catalysts we can expect between now and year end and 2016? Thank you

Thanks for the question, Liana. I'm very pleased to introduce Dr. David Zaccardelli to this earnings call. Dave was promoted to Chief Operating Officer in January. Dave has been with United Therapeutics almost 10 years and has been pivotal to our success. Dave, if you would answer that pipeline question, I would appreciate it.

Thank you, Roger, and thanks very much for the question. I'm happy to comment on the implantable pump program and also our other pump program with DEKA. As you may know, we have a collaboration that's been in place with Medtronic to progress their SynchroMed II pump into the marketplace for use with treprostinil for pulmonary hypertension. That has progressed substantially to the point where a PMA was submitted by Medtronic. An MDA also was supplement and then was submitted by UT in order to support that. We have subsequently received a Refusal of File on the NDA and have been in communication with the agency as well as Medtronic has received some comments on their PMA. Both of those have to progress at the same time in order to complete that. We're working with the agency and Medtronic to sort that out.

Hopefully in 2015, we will be able to provide the agency the information they request and then look forward to hopefully progressing that to an approval sometime in 2016, is our current plan. But as you know, that program has substantially been with Medtronic and so we rely on them for the responses and for their collaboration, but we're working very closely with them, and very closely with the agency to get that done. I'm also pleased to say that we have a collaboration with DEKA Research in order to progress a proprietary-based, small-pump platform for subcutaneous administration. The teams are working very closely together now to work with putting treprostinil in that pump platform and we are working at making a submission which would be a combination drug-device submission to the agency sometime in early 2017 and look for an approval of that later 2017 or early 2018. So both of those are pump platform play for progressing treprostinil with an easier to use pump platform.

Great. Thanks for that really great answer, Dave. Operator, we'll take another caller, please.

Phil Nadeau, Cowen and Company.

Good morning. Thanks for taking my question. Roger, follow-up on your Orenitram comments, just doing the math here. If we assume 900 patients on therapy on average for the quarter, times 90 days in the quarter, at 10.2 milligrams and $39 per milligram, would get to $32 million in revenue. Obviously, you reported $25 million, so that implies maybe a 22% gross-to-net adjustment. Is my gross-to-net assumption accurate or is my math in some other way flawed that is not taking into account some other element that we should be considering?

Yes, it's not as simple as doing the math the way you're doing it. The purchases by the specialty pharmacies are based on a past month's census and knowledge of what the referral rate is, so they order towards a future inventory level to meet a minimum requirement. So the math doesn't always work out as nicely and cleanly as you articulated. Your math does accurately predict where we are headed, but it doesn't say why we have -- the revenue isn't what you just described it to be within the current quarter. Obviously, we also start patients within the quarter so that we don't -- there's different levels of inventory required for those patients, as well. It's really a flux based on past active census and referrals and an expectation also of discontinuation. So they do that calculus. They have a formula and then we audit that they maintain minimum inventory levels, so it's more done that way.

So when we try to predict revenue, what is the true patient number that the specialty pharmacies will be looking at? Is it a couple month lag or--?

Yes. In general, it's a 30- to 60-day lag is what happens, which is as I noted in the opening, with referrals being robust in Q2, that bodes very well for Q3, which is why we are confident in predicting where revenues will head in the next quarter if things hold true, which we expect they will. In fact, we should continue to add patients and we can improve upon that. So you're right, the lag is 30 to 60 days, in general, and it's why there's lumpiness in the numbers. That's why it's better -- when you look at it quarter to quarter, it's always better to look at our business as year over year is a more predictable way to look at treprostinil revenues then quarter over quarter, particularly in such an early phase of launch, which Orenitram is still in. Thank you. Operator, we will take another caller, please.

Michael Eye (sic), RBC Capital Markets.

Hey, it's Mike Yee from RBC. I wanted to ask a bigger picture question for you. Obviously, you have done a ton of great things with treprostinil. Just want to understand, given your balance sheet, you're flushed with cash, very profitable, how you're looking at thinking about bringing in maybe new things in licensing, things commercial, things that could leverage your commercial infrastructure and all the things you've done already in the past. We haven't really heard of that with you and maybe thinking about the opportunities for you to bring stuff in. Are you thinking about that or you're not thinking about that or you want early stage pipeline stuff? How should we think about building out beyond treprostinil? Thanks.

Thank you for the question, Michael. It's one that's at the forefront out of our minds. We've recently hired a Director of Business Development because we are trying to be much more active in our strategic-acquisition investigation. So our development efforts are really focused on areas where we can leverage our infrastructure and expertise and rapidly develop and commercialize high-impact medications. Our emphasis, in terms of where we're looking, to answer your question, is on orphan indications that are poorly addressed by current therapies, particularly in the pulmonary- and oncology-therapeutic areas where we have strong platforms in place. We've been engaged in active discussions with companies ranging from start-ups to top 10 drug companies looking to either acquire or in-license assets.

It's a pretty robust time in oncology but we think, particularly in pediatric oncology, we can be a major player and there's ways to leverage not only Unituxin but our presence in that space and our ability to serve that community, to help out some of the other successful compounds that are being developed for adults and partner with companies to do that as a specific, A-priority objective. It reminds me of the blank white space that pulmonary hypertension was when we first started here at United Therapeutics. There was very little interest in pulmonary hypertension, and since that time, obviously, this indication has exploded. We think pediatric oncology has the potential to be a similar growth opportunity.

In pulmonary conditions, particularly pulmonary hypertension, I think we're the go-to Company. If somebody has something for pulmonary hypertension, they usually call us, so there's a lot of inbound activity to us for new targets for pulmonary hypertension. Our emphasis there, though, is that we want something that is interesting in the sense that it should be disease modifying. We don't want another add-on, vasodilator-type therapy. There is enough of those, so to speak. So for us to get engaged in something, as a small molecule or a biologic therapeutic, it would have to be disease modifying. We started that a few years ago when we did our collaboration with Pluristem, with the PLX, or the mesenchymal stem cell-like therapy which is in Phase 1 in Australia. But we are engaged in other interesting opportunities there.

Having said that, if it's an orphan and unmet need and there's a potential for a high-impact medication and the science is supportive, we will look outside of pulmonary hypertension and we will look outside of oncology, if it makes sense to do so. Most of what we're looking at, though, is in the pre-clinical or early development stage, and we haven't -- we are not looking at, currently, at more of a product acquisition opportunity. So that's, in a nutshell, what we're trying to do with our business-development platform. We are very active. We have probably had 30 active products just within the past six months. About one third of those, we have taken to a higher level of due diligence, and again, many of those remain active. So we are looking to enhance and build our portfolio of products. Having said that, we have a lot of pipeline opportunity with our follow-on study with Orenitram, the FREEDOM-EV.

We think to port the full value of Orenitram, we need to complete successfully the FREEDOM-EV study. As Dave mentioned, that's well on track to about 60% enrolled, and it's moving towards completion in late 2016 and unblinding in 2017. BEAT is also another shot-on-goal for a morbidity/mortality endpoint study with a new therapeutic option for patients with an oral Prostacyclin.

So that's a rich Phase 3 pipeline there, but we would like to build out some earlier-stage pipeline opportunities, which could then grow into later-term revenue opportunities and they would supplement revenues streams prior to our xenotransplantation and regenerative medicine opportunities coming to fruition.

Operator, that's it for calls. We appreciate everybody calling in today and joining us for the second-quarter earnings call and we look forward to speaking to you at the next earnings call. Thank you very much.

Thank you for participating in today's United Therapeutics Corporation conference call. A rebroadcast will be available for replay for one week by dialing 1-855-859-2056, with international callers dialing 1-404-537-3406 and using access code 72033077.