United Therapeutics Corporation
Q4 2016 Earnings Call Transcript

Published: 22 Feb 2017

[Operator:]

Good morning. My name is Gracie, and I'll be the conference operator today. At this time, I would like to welcome everyone to United Therapeutics Corporation 2016 Fourth Quarter and Annual Financial Results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. 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 are not prepared in accordance with U.S. generally accepted accounting principles. Reconciliations of the non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found in our earnings releases 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 product, 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 www.unither.com. Thank you. Dr. Rothblatt, you may begin your conference.

[Martine A. Rothblatt:]

Thank you, operator. Good morning, everybody. I'm joined this morning by James Edgemond, our Chief Financial Officer. And I'm pleased to report our 2016 fourth quarter and annual financial results. Our annual 2016 financial results reflect continued growth as net revenues reached $1.6 billion and earnings exceeded $700 million. These financial results strengthen our ability to develop and advance our growing product pipeline, which includes seven Phase III programs and multiple second generation Remodulin drug delivery systems. Just a moment, I'll open up the lines for any questions directed to James or myself. But first, let me provide three highlights of the past quarter and year. Those three highlights I'll talk about are quarterly trends, pipeline progress, and the acquisition of our largest competitor by Johnson & Johnson. So, first, with quarterly trends. The quarterly trends for the fourth quarter were down from the third quarter, but this is a typical quarterly choppiness that we see with our sales. In fact, I look back five years and for the past five years every single quarter, third quarter or the fourth quarter, Remodulin and Tyvaso were sequentially down before turning back around again in the subsequent year. So there is nothing interesting to be read into that. More generally in terms of quarterly trends, growth is still slower than we would like as a result of the backlog of patients who are still doing adequately well on either Adcirca, Letairis and more generally, the combination of Adcirca plus Letairis, which is known as the AMBITION protocol or selexipag. You may notice a large increase in Adcirca sales over the past year and this is because more and more patients are taking Adcirca in combination with Letairis for longer and longer periods since the AMBITION study showed that the combination of Adcirca plus Letairis reduced morbidity and mortality from pulmonary hypertension. So it's only natural that while before those drugs were out, patients would move on to Orenitram, Tyvaso and Remodulin more rapidly. Now, the movement is more slow, because the patients are doing better for a longer period of time on Adcirca, Letairis and then most recently selexipag. However, once the patients do get on to Tyvaso and Remodulin, their length of time on that – on those drugs has stayed about the same. So, what you have is a mathematical situation where the rate of patients coming on to Tyvaso and Remodulin is slower than or not as fast as it used to be, but the rate of people going off of Tyvaso and Remodulin is the same as it used to be, and hence there is a temporary, short-term slowing of growth and even decline in the case of Tyvaso. However, we're entirely confident that this matter will resolve, because neither Adcirca, Letairis nor selexipag are in any way, shape or form cures for pulmonary hypertension. In fact, mortality on selexipag, while not statistically significant, was actually higher in the treated group than in the control group. So there's nobody claiming that those oral drugs are cures and hence as the patient's disease progresses, the only place for them to go are on to the inhaled and the parenteral therapy of which United Therapeutics drugs have roughly 70%, 80% market share between Tyvaso and Orenitram. We expect this backlog to resolve later on in 2017 and in fact, it will cross a bolus of growth to Orenitram, Tyvaso and Remodulin as we move from 2017 into 2018. The more patients that are captured up on the oral drugs, the more patients it will be – that will be progressed on to Orenitram, Tyvaso and Remodulin. So, first point, quarterly trends temporary, reflecting backlog will resolve in 2017. Second point, we had a tremendous amount of progress in annual 2016 that reaffirms and I think strengthens in many ways our confidence that four of the drugs in our pipeline have $1 billion peak revenue potential

[Operator:]

Thank you. And our first question comes from Liana Moussatos from Wedbush Securities. Your line is now open.

[Liana Moussatos:]

Thanks for taking my question and congratulations on all your progress. The only question I have left now is what are the next products to enter the clinic? You've mentioned in the past eNOS gene therapy for PAH, RemoLiv for liver transplant tolerance and a bunch of other stuff. So what's coming in next?

[Martine A. Rothblatt:]

Yes. Thank you for your question, Liana. So one of the – one I didn't have time to talk about but I think exemplifies of our (27

[Operator:]

Our next question comes from Geoff Meacham from Barclays. Your line is now open.

[Evan Seigerman:]

Hi, all. This is Evan on for Geoff. Thanks so much for taking the question. One on FREEDOM-EV, you had mentioned that you believe you'll be able to potentially accrue the number of events necessary for an interim look over the summer. I guess, could you just give us some more detail on the powering, and I guess the likelihood of success that you'll hit over the summer? And if you do, would you be able to potentially file for a label expansion soon thereafter?

[Martine A. Rothblatt:]

Yeah. I think the answers to your questions are all pretty much in the affirmative. I do believe that we'll accrue to 154 by sometime during the summer. It's not a scientific arc here and it depends on ultimately Mother Nature really. So I wouldn't like – I wouldn't break that as a break line definitely positively, but that's the center of the curve based on the number of events that verified now (31

[Evan Seigerman:]

And then...

[Martine A. Rothblatt:]

Actually, it's not the right way to a label change. I'm going to preempt your follow-on because there is like this long queue behind you.

[Evan Seigerman:]

Okay. Thanks for taking the question. Appreciate it.

[Martine A. Rothblatt:]

Next question.

[Operator:]

Our next question comes from Mark Schoenebaum from Evercore ICI (sic) [ISI] (33

[Regina Grebla:]

Hi, thanks for taking the call. This is Regina Grebla on for Mark. Back in the summer you mentioned looking at different companies in terms of possible M&A. Are you still open to M&A and can you provide some color on what you would be interested in? If not, do you think you can grow up your current revenue base without BD?

[Martine A. Rothblatt:]

Thanks, Regina. So we are and I can't really go into a lot of details on like a gigantic conference call like this. But one of the main reasons why we did not re-up right away the stock buyback after we successfully completed purchasing the last tranche of – was it a $500 million – how many?

[Unknown Speaker:]

$500 million.

[Martine A. Rothblatt:]

Yeah. $0.5 billion share buyback which has – the shareholders on the phone, I think, will be very pleased to know that the average price of that shares bought back was...

[Unknown Speaker:]

$119.

[Martine A. Rothblatt:]

$119 a share. So, I think we did good for the shareholders on that buyback. But one of the reasons we've paused is, as you can see, we've gone much more aggressively on R&D and biz dev in the second half of 2016. And we are looking at opportunities that could use up substantially all of the borrowing authority or cash in the bank that we have right now. So we still would be very cautious about spending $1 billion plus on an acquisition. But if something looks to us like it's going to be accretive for our shareholders and specifically more beneficial than using that cash to buy back the shares, then I think it would be more sense to use that cash for biz dev. So, we are looking in – at biz dev opportunities that are even twice as large as the amounts that we've asked them for the buyback. Next question?

[Operator:]

Our next question comes from Chris Shibutani from Cowen. Your line is now open.

[Chris Shibutani, M.D.:]

Yes, thanks for taking the question. On the implantable pump and RemUnity as well, can you remind us what kind of commercial infrastructure you have in place and how we should be thinking about the pace of the ramp? I realize that in the past you've talked about being reluctant to give, kind of, quarterly metrics. But particularly during the initial year there are issues about just getting a physician started, commercial sales force in place, reimbursement. Just give us a sense for what you think the shape could be in that initial period so that we can help think about what the modeling implications will be? Thanks.

[Martine A. Rothblatt:]

Yeah. Thanks for your question. If you don't mind, James, if you'd be willing, I'd like if – because you are a little bit closer to the reimbursement situation than I am, if you wouldn't mind, and I know you're briefed from the commercialization team on the RemoSynch startup phase and launch. Maybe if you could take this question?

[James Christopher Edgemond:]

Sure, I'll be glad to. Hi, Chris, thanks for your note. I think the important thing is – within your question is to think about reimbursement, for example, RemoSynch. And from a reimbursement perspective, there are many reimbursement channels, and it's really difficult to predict exactly which channel a hospital or a physician will ultimately seek reimbursement. But we currently expect the codes for pain management really to be used for the pump and the reimbursement of the pump at this point. And so from a reimbursement perspective, we think what's existing and what is in place will be used by the physicians in the hospitals from that perspective.

[Martine A. Rothblatt:]

Okay. Thanks, James. Next question, please?

[Operator:]

Our next question comes from Terence Flynn from Goldman Sachs. Your line is now open.

[Terence Flynn:]

Hi. Thanks for taking the question. Maybe just, Martine, you mentioned the backlog of patients that could come off of some of the oral products and go on to your franchises in 2017. Can you be more specific about when exactly you expect that to happen? And then the second part of my question is just any thoughts on prospects of any changes to Medicare, I know there's a lot of commentary coming out of D.C. these days, but you did you mention Part B versus Part D drugs and differences but any thoughts just on changes to Medicare? Thanks.

[Martine A. Rothblatt:]

Sure. So with regard to the rate, basically everybody in the pulmonary hypertension space is doing a little bit of a natural experiment in terms of rate of progression of patients on either AMBITION or on selexipag. The best data-driven result I would give you is to go to the well-controlled studies which for AMBITION, has been published in a leading journal and I believe Gilead is in the process of having it added to the Letairis label. So you can go there, and you could see specifically and quantifiably what percent of patients progress on the active drug. And you can do the same thing with the Uptravi label which from my recollection was about something like one out of 14% or 15% of the patients per year progressed. So, that basically at three to four years, half of the patients who had started selexipag have already progressed onwards. Generally speaking, clinical trials are best cases for drugs because patients are seeing doctors constantly, and they're being encouraged to stick with the protocol. So in real life, the results are almost always worse, that patients will progress on any given drug more rapidly than they will in the clinical trial. So all you have to do is just take that – those rates for AMBITION and for Uptravi and multiply them by the number of patients on those drugs, and then you will have the size of the backlog. Right now, I have been doing that kind of number crunching, and it looks to me that there is a backlog on the order of about 2,000 patients right now that will be progressing on to Tyvaso and Remodulin. Of course, not realistic that could I predict exactly which quarter in 2017 those progressions would occur. And as to the Medicare question, from – I'm no guru about healthcare policy or anything like that, but I do believe that United Therapeutics would be looked at as a pretty good poster child for anything that was being done on the Medicare side. For example, Remodulin, which is our principal Part B, as in Bravo, reimbursed drug, has not increased its price. We have not increased the price of Remodulin in five years. And that's well-known to all the DMERCs, which is the regional Medicare people who define these things, and much appreciated by them. So I think that whatever is going to go on at Medicare, I think it's quite unlikely that it would have an adverse effect on UT. Looks like we have time for one last question.

[Operator:]

Our next question comes from Hartaj Singh from Oppenheimer. Your line is now open.

[Hartaj Singh:]

Hi, thank you. Thanks for the question. Just want a quick question probably on your margin progression for the rest of the year with R&D, SG&A and then also Adcirca, potentially towards the end of this year. Any commentary there would be really helpful. Thank you.

[James Christopher Edgemond:]

Hi, Hartaj, it's James. How are you?

[Hartaj Singh:]

Good, James. Thank you.

[James Christopher Edgemond:]

Good. Just from a margin perspective, I will kind of back into your answer by looking at budgets overall, which I think is part of your question about the significant increase we've talked about in R&D spend. But we develop our internal annual operating budgets not to exceed 50% of our prior year revenues. So regardless of the large number of clinical trials that we're starting, we're going to stay within that framework. And whether that framework kind of ebbs and flows between SG&A and R&D, we know from a budgetary perspective we're not going to exceed that metric. And so from a budgeting and control standpoint on costs, you can expect us to continue to grow revenues while managing our expenses and growing the bottom line.

[Martine A. Rothblatt:]

Thank you very much, James. I would like to thank everybody for their participation in our 2016 fourth quarter and annual financial results. James and I look forward to meeting many of you at our upcoming Healthcare Conferences where we will be presenting, Cowen in Boston on March 6 and Barclays in Florida on March 14. Operator, you can conclude the call.

[Operator:]

Thank you for participating in today's United Therapeutics Corporation Conference Call. A rebroadcast will be available for replay one week by dialing 1-855-859-2056, with international callers dialing 1-404-537-3406 and using access code 59599305.