United Therapeutics Corp (UTHR) 2017 Q4 法說會逐字稿

Good morning, my name is Nicole. I'll be your conference operator today. At this time, I would like to welcome everyone to the United Therapeutics Corporation Fourth Quarter and Annual 2017 Financial Results. (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 risks and uncertainties that may cause actual results to differ materially. Please see the company's latest SEC filings, including Form 10-K and 10-Q for additional information on these risks and uncertainties. The company assumes no obligation to update forward-looking statements.

Today's remarks may also include financial measures that were not prepared in accordance with the U.S. Generally Accepted Accounting Principles. Reconciliations of non-GAAP financial measures to most directly comparable U.S. GAAP financial measures can be found in our earnings release available on our website at w.unither.com (sic) [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 the FDA-approved labeling or to provide all available information regarding the products, their risks or related clinical trial results. Anyone seeking information regarding the use of the company's products should consult the full prescribing information for the product available on the company's website at ww.unither.com (sic) www.unither.com . Thank you.

Dr. Rothblatt, you may begin your conference.

Thank you, operator. Good morning, everyone. Welcome to the United Therapeutics' 2017 Fourth Quarter and Annual Financial Results Conference Call.

Our fourth quarter net revenues reached $465 million and our annual net revenues reached $1.7 billion, our highest quarterly and annual net revenue ever. Orenitram's fourth quarter net revenues grew by 25% as compared to the same period in the prior year, representing our third consecutive quarter of greater than 20% net revenue growth for this therapy and confirming our belief in the organic growth opportunity for Orenitram, which is still the only true oral prostacyclin analogue therapy for the large and increasing number of pulmonary arterial hypertension patients. These financial results strengthen our ability to develop and advance our drilling product pipeline, which currently includes 7 Phase III programs and multiple next-generation treprostinil drug delivery systems as well as investigative regenerative medicine and organ manufacturing programs, which we hope will ultimately provide a cure for pulmonary hypertension and many other end-stage organ diseases.

Let me provide a little bit more color on these introductory remarks by delving into the 7 Phase III programs and multiple next-generation treprostinil drug delivery systems as well as the investigative regenerative medicine and organ manufacturing programs. I think by reviewing these multiple projects in our pipeline, we'll be able to see that a good kind of mantra for United Therapeutics going into 2018 is growth and goals. We have a lot of exciting things that will continue to grow our treprostinil franchise and as we grow this treprostinil franchise, we'll become ever more able to achieve our ultimate goal of a cure for pulmonary arterial hypertension as well as other end-stage lung diseases.

The first of these 7 Phase III trials I'd like to talk about is the FREEDOM-EV trial. This study was scheduled to enroll approximately 600 patients and substantially over roll -- over enroll that number of patients due to the rush of physicians trying to put more and more patients into the study as we approach our ending date. We currently are accruing the -- a record set number of events, whether of one sort or another that prescribe the date of which we unblind that study. And at the current accrual rate for events in the FREEDOM-EV study, we remain confident that the study should unblind prior to the end of 2018.

The second Phase III study that I'd like to talk about is our BEAT study using esuberaprost in combination with Tyvaso to achieve a reduction in morbidity and mortality for pulmonary arterial hypertension. I'd like to remind some of the listeners that esuberaprost is a derivation of the beraprost molecule that we in-licensed from Toray Industries of Japan several years ago. However, esuberaprost is 4 times more potent than beraprost because we successfully isolated the single active isomer out of a racemix mixture, which was the gist of the IP we licensed from Toray. When taken together with Tyvaso, we believe that esuberaprost, by working with a complementary and different set of prostacyclin receptors than [does] treprostinil, the active pharmaceutical ingredient in Tyvaso, will achieve a synergistic effect. The pulmonary artery vasodilation, platelet aggregation, neointimal proliferation and through the -- these 3 different mechanisms of actions will be the (inaudible) reduction in morbidity/mortality in pulmonary hypertension. In addition, there's a very significant pharmacokinetic synergy between Tyvaso and esuberaprost because Tyvaso is inhaled briefly 4 times a day, therefore, has a set of peaks and troughs 4 times a day. And the pharmacokinetics of esuberaprost are complementary to the peaks and troughs of Tyvaso, providing an equivalent 0 order release or level type of release of active pharmaceutical drug substance in the patient's body. That study is also now fully enrolled.

And by the way, the BEAT study was one of the FDA's preferred type of enrichment clinical trial designs, where the study was enriched for those type of patients most likely to see additional benefit or enough benefit from the results of the study. And as a result, we are expecting a unblinding by the end of this year as well. It too is accumulating events at a predicted rate, which is consistent with unblinding by the end of this year.

I'd like to now turn to the third Phase III study, which we're conducting. I'm going to shift diseases for a while and move in to our distinct study of hemotuximab -- dinutuximab, excuse me, brand name, Unituxin, in small cell lung cancer. And this study is now enrolling patients throughout the world in its combination study for the treatment of small cell lung cancer in patients who have proven refractory to first-line therapy. I can't be exactly confident of when this study will enroll. It will unblind, of course, it too is an event-driven study. But based on our anticipations, we would expect that within the next couple of years, we should be able to fully enroll and constantly unblind that study.

Now I'd like to move to the other different disease, which is the idiopathic pulmonary fibrosis disease. And that's the disease that we have inhaled treprostinil as Tyvaso, the -- rapidly being used in a study that we call INCREASE. Now in this study, which is well over a third enrolled at current, and we can pretty confidently predict that it should reach its full enrollment, I would say, 12 months plus or minus 3 to 6, you decide. That will then give us an entrée into the first therapy to treat pulmonary hypertension that is incident to pulmonary fibrosis. A huge unmet medical need, a type of pulmonary hypertension that has no FDA-approved drugs to treat it whatsoever. It's called the Group III pulmonary hypertension. So that study is going very, very well and also a near-term unblinding, a complete perfect example of what could be called an unmet medical need being addressed by United Therapeutics products.

I'd now like to move into the fifth, if I'm keeping my mental counting going correct, Phase III trial, which is called SOUTHPAW. This is the trial of our oral prostacyclin analogue, Orenitram, in patients with congestive heart failure and in particular a form of congestive heart failure, which is of course a huge and pretty much dominant cause of morbidity/mortality in the U.S. known as HFpEF, which is heart failure, that's the HF, H, F; in the presence of a preserved, that's the P; ejection, that's the E; and fraction, which is the last F. So a very large population of patients, numbering in the hundreds of thousands, who have absolutely no therapy approved by the FDA to treat it. The World Health Organization calls this Class II or Group II type of pulmonary hypertension. We are -- based on very strong early data that shows that in this HFpEF population with a left ventricular diastolic dysfunction, if you give them treprostinil or a prostacyclin analogue, you could have a significant improvement on their exercise ability. We have begun enrolling the study and I -- again, with all studies that are in process, we can't be really in process of enrollment as opposed to fully enrolled and just waiting for events. We can't be exactly clear when the enrollment would be complete, but I think I would be -- it would be similar to the time frame that I have laid out for our distinct study in small cell lung cancer.

Now let me go on to the sixth Phase III study we have underway, which is our SAPPHIRE study of gene therapy for the treatment of pulmonary arterial hypertension. This is a very high-tech therapy in which we take a patient's own cells, the so-called autologous cells, one's own cells from their own body, and we turn these cells into little medicine-making factories, microscopic medicine-making factories that make the STAP molecules that the patients are short of and in this case, it's nitric oxide synthase, endogenous nitric oxide synthase. So we genetically manipulate the patient's own cells to make them into super powerful little medicine factories. We then ship those cells back to the patient's hospital from the centralized, super pure, super high-level sterility factory where we do this. And then the cells are reinfused into the patients every -- periodically, every month, every 3 months. And with the goal of showing a significant improvement in this patient's pulmonary arterial hypertension, there's even an extension phase of this study that some patients will continue to receive the infusion, some won't. So there's the prospect that this kind of gene therapy could actually cure pulmonary hypertension for these patients.

It's funny, I can't help but tell this little story at this point that some people have said to me, "Martine, you have a pharmaceutical company, a full-process pharmaceutical company. If you cure the patients who have pulmonary hypertension, where are the company's revenues going to come from?" And it just seemed kind of funny to me because I thought, wow, if we are able to actually cure an incurable disease that the greatest pharmaceutical companies of the world, like Johnson & Johnson and SmithKline Glaxo (sic) [GlaxoSmithKline] and Bayer have not been able to cure, if we're able to cure this disease with our proprietary technology of converting autologous cells into little medicine-making factories, how many other diseases are there that we will also be able to apply the same technology to? And of course, you can be sure we are already engaging in early preclinical and Phase I work in these other diseases. So far from being the -- a great story that diminishes revenue, it's a great story that [other hearkens] a huge explosion of positive opportunities for United Therapeutics.

I don't want to ramble on too long now, but let me just get to my seventh study, which is underway, which is the PERFECT study. And it's called PERFECT because it's an acronym for use of inhaled treprostinil in patients that have COPD. And COPD -- I've got friends with COPD. Perhaps, many of you on the call have uncles or a relative, this is -- but it's a devastating condition. And it actually robs the patient's breath. There has been no therapy ever approved by the FDA for the pulmonary hypertension, which is incidentally, so many of these are COPD patients. And I really want to salute Dr. Waxman and the great team at the Boston, Brigham and Women's and the hospitals in that area who have brought this unmet medical need to our attention, who developed a terrific track record of being able to treat COPD patients with Tyvaso when the insurance companies were kind enough to go along with that even though it was an experimental therapy, demonstrated improvement in 6-minute block, which were literally off the charts compared to anything that we have ever experienced in idiopathic pulmonary hypertension, Group I pulmonary hypertension. So it's based on this very strong Phase II data that we designed, this PERFECT study. It too is an enrichment trial design, the FDA's new preferred trial design. And it's -- again, with studies that are in the enrollment phase, it's impossible for me to really predict exactly when it will be fully enrolled. But I would say it's in the same ballpark with DISTINCT and with SOUTHPAW in terms of studies that are going to enroll, and then we'll have a rebound shortly thereafter. (inaudible) I really wanted to talk about the goals portion. This is all the growth portion, the 7 Phase III studies [that's part in] our tremendous growth. But very briefly, on the goals portion, let me simply say that we continue every virtually single week to save lives with our manufactured organs from our ex-vivo lung perfusion fusion facility here in Silver Spring. The stories are remarkable. Transplant centers send us their lungs from all over the U.S. They're -- they send them to us because there's nothing that we can do with them and unfortunately, the patient has died. The patient was benevolent enough to be an organ donor. Over and over and over again, we restore these lungs to pristine shape and show the transplant surgeon the results of our high-speed data and video network, real-time bronchoscopy, real-time X-ray imagery. Moving equipment around [there's a transplant that wants]. For once in your life, the poor transplant docs don't have to get on a plane and come and retrieve the lungs, they can see through our real-time network what good shape these manufactured lungs are in. They accept them 100% of the time that the doctors have remotely accepted our lungs, those ones who have gone on to be transplanted into the patients and the patients have gone on to walk out of the hospital without the need for their oxygen bottles or other medications that are treating their end-stage lung disease. So it is a kind of a technological miracle, what we're creating here on the organ manufacturing side. And our goal is to take that from where it is right now to actually double and then triple the number of lung transplants that are done in the United States and then extend that to doubling and then tripling the number of kidney transplants and the number of heart transplants that are being done.

Operator, with those introductory remarks, I'd now like to open the call for questions.

(Operator Instructions) Our first question comes from the line of Liana Moussatos of Wedbush Securities.

Before you cure for pulmonary hypertension with gene therapy, can you tell us what are the next steps to the launch of RemoPro? And are we waiting on Medtronic or the FDA to do anything?

Sure. Well, we are -- the good news is, when you always keep the FDA busy with submissions, then you're always going to be waiting on the FDA. And it's not a bad waiting, it's a good waiting. So we definitely are waiting on the FDA. And as well when you work with great partners as we do with Medtronic and DEKA and other companies, then there's always a research and development involves a certain amount of waiting. But again, it's a good waiting. It's a kind of waiting like when you're baking a pie and you're waiting for the pie to be ready. So let me go through some of those waitings, it's an excellent question. So start with the Implantable System for Remodulin, the acronym, ISR, just like the Israeli acronym for the Olympics, ISR. The ISR system is now before the FDA. We submitted the drug portion of the ISR at the end of January. And we expect to learn by the end of February whether or not it will be a 1 or 2 submission. And depending on that is whether it's a shorter or a little bit of a longer review. But in either event, the review period would be consistent with our being able to get approval and launch the product in the next calendar year. So everything is on schedule. Everything is consistent with what we previously advised, that 2017 -- 2018 is the year that we expect the ISR to be approved, and we continue to be very optimistic and bullish about that. I'd have to leave it to our legal experts as to exactly when to provide advice as to the type of approval process -- review process, excuse me, that the FDA will go through 1 or 2 for ISR. But certainly, I know that's something that's obviously important to you and to other people, and I'm sure that at minimum, there would be an update of our SEC filings. I'm sure to say what type of review process the FDA decided to put that through. So that's definitely on the checklist for a new product launch. And within the next 12 months, we will be there. We'll be there -- not (inaudible) everything's going okay with the FDA, we should be there with the launch of ISR. If they -- it is a revolutionary product. It is -- you've never heard me -- anybody who says to me -- and I've been on this phone for like more than 15 years, I think. You've never heard me say this before with any other products, I have not seen more physician excitement and anticipation over any product than the ISR system, which is a little bit surprising to me because when you get into the nitty-gritty details of it, which I am that type of a manager, it's pretty high-tech and amazing. You're talking about over a foot of a medical-based capillary inside of a patient's body connected to a machine, it's a pump, but it's a machine, that has to work automatically for years upon years, 4 years without any failure or anything, and then have it rate of flow beat controls through the electromagnetic spectrum, okay, through wireless connections. This is pretty Star Trek, futuristic, sci-fi technology. And yet, there are dozens of patients who feel that this is the therapy that gave them their lives back, life back. It was not getting put on IV or subcu of Remodulin after they were panting for breath and couldn't make it up the stairs that got them their life back. It was getting rid of the [pus], having everything internal. So there was nothing they had to do every day. That's what's got them their life back and that's what we hear from every one of the physicians involved in the ISR program. And I've heard from multiple patients sending me YouTubes of gratitude and that sort of thing. So 12 months to launch there. The next one that you talked about was the RemUnity. And on the RemUnity, we expect to file the 510(k) for its approval this month. So again, we'll knock on wood because that's a big filing, a lot of parts and pieces going together. So RemUnity should do for subcu what the ISR does for IP. That's the easy way to think of it. And hopefully, that too will be a rapid review at the FDA. 510(k)s are usually pretty rapid reviews just because it's a rapid reviews, no guarantees that there's not going to be any need for back-and-forth. And everything the FDA is looking out for our safety and our efficacy and we are thankful for that. But that is on track for filing this month, the first time you've heard me say that. And also, I would say that means that it is in our planning and on track for a commercial launch this calendar year. So that's 2 additional commercial launches that I'm able to talk about on this call. So those are the main things that we're waiting for, either the FDA or for other partners. Thank you for your question. Operator, could you queue up the next question, please?

Our next question comes from the line of Jessica Fye of JPMorgan.

Great. Martine, just wanted to clarify on the RemUnity 510(k) filing coming up. Is this version of the RemUnity pump the kind with the semi-disposable cartridges? Or is this a patient-filled pump?

Yes, no. This is not going to be patient-filled. These are all prefilled. Next question, please?

Our next question comes from the line of Chris Shibutani of Cowen.

Yes. Martine, could you help us a little bit understand the pattern of the operating expense components? There seemed to be a step-up both from the COGS, R&D, SG&A. Your scripted remarks highlighted your multiple ongoing clinical trials. Can you give us a little bit of a sense for whether the fourth quarter that you just reported reflects some sort of a trend that we should be pulling forward as we think about your operating expenses this year and next?

Well, thank you for the question. I'm fortunate to have our Chief Financial Officer sitting right next to me here in Silver Spring. And James, could you kindly field that question?

Sure. Chris, thanks for the question. So there was 2. There was 1 about COGS and there was a step-up in COGS this quarter reflective of the increased royalty that we paid to [Lilly] associated with the new contract. So the -- there was probably about a $20 million increase in COGS there. With respect to the general spend levels, specifically to R&D, as you asked, there was about a $100 million increase year-over-year. And if you recall back to the start of this year, our expectation that we communicated was that there will be an increase of R&D to advance our expanding product pipeline that we talked about in our opening remarks. The increase that we anticipate going forward will be at these levels. But again, we don't want to get into a quarterly discussion because of the starting and stopping of studies, the starting and stopping of research projects just within a calendar year. So it's best to look at it overall. And we don't want to get into a quarterly discussion as you brought up. But I would expect going forward, the R&D expenses to continue at an elevated level just with the large amount of pipeline products that Martine talked about and that are reflected in the pipeline chart on our website.

Our next question comes from the line of Geoff Meacham of Barclays.

This is Jason on for Geoff. In terms of looking at the FREEDOM-EV study, I mean, what do you see as a kind of a reasonable bar for commercial viability versus the competition? Does it matter if a patient is on 1 or more therapies? I just kind of want to understand the -- your sense of combination therapies moving forward.

Thanks, Jason, for your question. I think the bar for the competition is actually pretty low. As according to the label on Uptravi, which would be the closest comparable drug to Orenitram, about half of the patients fail the Uptravi therapy within 3 years. So that's a lot of patients. I mean, with -- we're looking at here, 30,000, 40,000 patients with pulmonary arterial hypertension. If only the half that failed within 3 years ended up on Orenitram, which would be the logical thing to do once you failed 1 oral therapy, you'd go to another oral therapy before you take on more invasive therapies, it would be well north of about 10,000 patients coming on to Orenitram. So that part of therapy -- for competition right there is pretty low. It's actually lower than that because in the real world, one never sees results as good as the -- I won't say never, but I rarely see results as good as in a (inaudible) controlled clinical trial where you have a lot of forces kind of making people stick to the therapy that they're on instead of switching to another therapy as soon as the patient is not doing as well. And in fact, as highlighted in my introductory remarks, we see Orenitram growing quarter-after-quarter, third consecutive growth -- quarter growth of greater than 20%. And this is reflective of the fact that ever more patients are failing AMBITION therapy, are failing Uptravi therapy and are coming on to Orenitram therapy. Now Orenitram has a beautiful characteristic that neither AMBITION nor Uptravi can match. And that is, it's titratable. It's titratable as titratable really as is a (inaudible) therapy, such as Remodulin. So this is a fantastic skill set that is resident within Orenitram that allows it to hold on to its patient for a much longer period of time because you can continue to titrate the therapy. I think it's on top of all of that, which has led us to have approximately a 1/3 versus 2/3 market share of Uptravi as of right now without the readout of the EV therapy, without any data in combination therapy, without a label showing the equivalent morbidity/mortality. We've got like 1/3 market share right now without any of that stuff. I think that once we report our data showing a improvement in morbidity/mortality from Orenitram that there will be no competitive difference in terms of anything that advantages Uptravi. And in fact, there'll be a significant competitive advantage towards Orenitram, which is its titratability and which is the -- also the efficacy inherent in being the only true prostacyclin oral analogue. Operator, can you queue up the next -- this I guess would be the last question?

Our last question comes from the line of Terence Flynn of Goldman Sachs.

This is Holly on for Terence. Just one from us is, has U.S. corporate tax reform changed your thoughts on capital allocation priorities? And can you rank those priorities in order of importance?

Yes. Thank you very much for the question. Again, on a day of the -- accompanied by our great CFO, James Edgemond. So James, if you could perhaps talk a little bit about what tax reform has done for United Therapeutics' effective tax rates. I think that's something that people are very, very interested in.

Sure. Thank you for the question. U.S. tax reform offers many benefits to UT. But by far, the biggest benefit from tax reform in 2018 will be the lowering -- we will recognize the benefit of the lowering of the Federal rates to 21% from 35%, which will result in improved after-tax cash flows going forward. Keep in mind, we as well as others in the biotech and pharma industry will lose some benefits with respect to the domestic manufacturing deduction as well as some other research credits. But like many other companies, one thing you will note in our financial statements for 2017 is that we [didn't] need to recognize the benefit of this lower rates and revalue our existing deferred tax assets and liabilities, which represented to us a noncash charge of about $71 million. But these benefits that we will recognize going forward, as I just talked about, will be at these lower rates. With respect to capital allocation priorities, which was the second part of your question, our priorities really remain unchanged. We will continue to invest in R&D products and research activities that Dr. Rothblatt talked about at the opening part of the call. And then the next, we will evaluate and continue to look at value-creating M&A opportunities. Our third priority would be share repurchases from time to time, if appropriate, but if only mission-critical R&D and M&A opportunities do not avail themselves to us. So thank you for the question.

Thank you very much. Operator, you can now wrap up the call.

Thank you for participating in today's United Therapeutics Corporation conference call. A rebroadcast will be available for replay for 1 week by dialing 1 (855) 859-2056. With international callers, please dial 1 (404) 537-3406, and using access code 229-6917. Thank you. And everyone, have a great day.