SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
| (Mark One) | ||
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |
For the quarterly period ended June 30, 2003
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from _____________ to ____________
Commission file number 0-26301
United Therapeutics Corporation
| Delaware | 52-1984749 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
| 1110 Spring Street, Silver Spring, MD | 20910 | |
| (Address of Principal Executive Offices) | (Zip Code) | |
(301) 608-9292
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares outstanding of the issuer’s common stock, par value $.01 per share, as of August 5, 2003 was 21,224,465.
INDEX
| Page | ||||
| Part I. FINANCIAL INFORMATION (UNAUDITED) | ||||
| Item 1. Financial Statements (Unaudited) | ||||
Consolidated Balance Sheets
|
1 | |||
Consolidated Statements of Operations
|
2 | |||
Consolidated Statements of Cash Flows
|
3 | |||
Notes to Consolidated Financial Statements
|
4 | |||
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 9 | |||
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 16 | |||
| Item 4. Controls and Procedures | 17 | |||
| Part II. OTHER INFORMATION | ||||
| Item 1. Legal Proceedings | 17 | |||
| Item 6. Exhibits and Reports on Form 8-K | 17 | |||
| SIGNATURES | 18 | |||
PART I. FINANCIAL INFORMATION
UNITED THERAPEUTICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
| June 30, | December 31, | ||||||||||
| 2003 | 2002 | ||||||||||
Assets |
|||||||||||
Current assets: |
|||||||||||
Cash and cash equivalents |
$ | 91,067 | $ | 122,655 | |||||||
Accounts receivable, net of allowance of $198 for
2003 and $268 for 2002 |
10,111 | 9,649 | |||||||||
Interest receivable |
340 | 10 | |||||||||
Prepaid expenses |
1,596 | 1,234 | |||||||||
Inventories (note 5) |
7,510 | 7,164 | |||||||||
Other current assets |
578 | 1,145 | |||||||||
Total current assets |
111,202 | 141,857 | |||||||||
Marketable investments (note 4) |
38,792 | 10,000 | |||||||||
Certificate of deposit |
— | 641 | |||||||||
Goodwill, net |
7,465 | 7,465 | |||||||||
Other intangible assets, net (note 6) |
6,878 | 7,001 | |||||||||
Property, plant and equipment, net (note 11) |
11,183 | 9,120 | |||||||||
Investments in affiliates (note 8) |
6,866 | 6,388 | |||||||||
Due from affiliate |
433 | 433 | |||||||||
Note receivable from employee and other assets |
1,849 | 1,661 | |||||||||
Total assets |
$ | 184,668 | $ | 184,566 | |||||||
Liabilities and Stockholders’ Equity |
|||||||||||
Current liabilities: |
|||||||||||
Accounts payable |
$ | 3,042 | $ | 2,988 | |||||||
Accounts payable to affiliate |
14 | — | |||||||||
Accrued expenses |
7,221 | 4,451 | |||||||||
Due to affiliates |
1,036 | 1,706 | |||||||||
Current portion of notes and leases payable (note 11) |
1,095 | 111 | |||||||||
Other current liabilities |
58 | 51 | |||||||||
Total current liabilities |
12,466 | 9,307 | |||||||||
Notes and leases payable, excluding current portion |
1,739 | 1,767 | |||||||||
Due to affiliates |
889 | 1,813 | |||||||||
Other liabilities |
108 | 21 | |||||||||
Total liabilities |
15,202 | 12,908 | |||||||||
Stockholders’ equity: |
|||||||||||
Preferred stock, par value $.01, 10,000,000 shares
authorized, no shares issued |
— | — | |||||||||
Series A junior participating preferred stock, par
value $ .01, 100,000 shares authorized, no shares issued |
— | — | |||||||||
Common stock, par value $.01, 100,000,000 shares
authorized, 21,692,902 and 21,449,470 shares issued
at June 30, 2003 and December 31, 2002,
respectively, and 21,166,302 and 20,922,870
outstanding at June 30, 2003 and December 31, 2002,
respectively |
217 | 215 | |||||||||
Additional paid-in capital |
366,569 | 364,130 | |||||||||
Accumulated other comprehensive income (note 10) |
783 | 8 | |||||||||
Accumulated deficit |
(191,229 | ) | (185,821 | ) | |||||||
Treasury stock, at cost, 526,600 shares |
(6,874 | ) | (6,874 | ) | |||||||
Total stockholders’ equity |
169,466 | 171,658 | |||||||||
Total liabilities and stockholders’ equity |
$ | 184,668 | $ | 184,566 | |||||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
1
UNITED THERAPEUTICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Revenues: |
||||||||||||||||||
Net product sales |
$ | 13,071 | $ | 10,597 | $ | 22,831 | $ | 11,241 | ||||||||||
Service sales |
906 | 967 | 1,885 | 1,729 | ||||||||||||||
Total revenues |
13,977 | 11,564 | 24,716 | 12,970 | ||||||||||||||
Operating expenses: |
||||||||||||||||||
Research and development |
8,791 | 7,275 | 16,243 | 11,783 | ||||||||||||||
Selling, general and
administrative |
5,994 | 3,755 | 10,983 | 6,858 | ||||||||||||||
Cost of product sales |
1,623 | 1,500 | 2,894 | 1,891 | ||||||||||||||
Cost of service sales |
397 | 413 | 856 | 792 | ||||||||||||||
Total operating expenses |
16,805 | 12,943 | 30,976 | 21,324 | ||||||||||||||
Loss from operations |
(2,828 | ) | (1,379 | ) | (6,260 | ) | (8,354 | ) | ||||||||||
Other income (expense) |
||||||||||||||||||
Interest income |
660 | 1,859 | 1,207 | 3,859 | ||||||||||||||
Interest expense |
(32 | ) | (30 | ) | (63 | ) | (65 | ) | ||||||||||
Equity loss in affiliate |
(212 | ) | (67 | ) | (407 | ) | (144 | ) | ||||||||||
Other, net |
28 | (2 | ) | 115 | (55 | ) | ||||||||||||
Loss on marketable investments |
— | (3,561 | ) | — | (4,100 | ) | ||||||||||||
Total other income (expense) |
444 | (1,801 | ) | 852 | (505 | ) | ||||||||||||
Loss before income tax |
(2,384 | ) | (3,180 | ) | (5,408 | ) | (8,859 | ) | ||||||||||
Income tax |
— | — | — | — | ||||||||||||||
Net loss |
$ | (2,384 | ) | $ | (3,180 | ) | $ | (5,408 | ) | $ | (8,859 | ) | ||||||
Net
loss per common share – basic and diluted |
$ | (0.11 | ) | $ | (0.16 | ) | $ | (0.26 | ) | $ | (0.43 | ) | ||||||
Weighted average number of
common shares outstanding – basic and diluted |
21,081,970 | 20,521,215 | 21,004,103 | 20,374,035 | ||||||||||||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
UNITED THERAPEUTICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Six months ended June 30, | |||||||||||
| 2003 | 2002 | ||||||||||
Cash flows from operating activities: |
|||||||||||
Net loss |
$ | (5,408 | ) | $ | (8,859 | ) | |||||
Adjustments to reconcile net loss to net cash used in operating activities: |
|||||||||||
Depreciation and amortization |
1,128 | 1,007 | |||||||||
Provision for bad debt |
(69 | ) | — | ||||||||
Provision for inventory obsolescence |
156 | 300 | |||||||||
Loss on disposals of equipment |
4 | — | |||||||||
Stock and options issued in exchange for services |
89 | 153 | |||||||||
Amortization of discount or premium on investments |
(12 | ) | 1,071 | ||||||||
Write down of marketable investments |
— | 4,100 | |||||||||
Equity loss in affiliate |
407 | 144 | |||||||||
Changes in operating assets and liabilities: |
|||||||||||
Accounts receivable |
(393 | ) | (9,090 | ) | |||||||
Interest receivable |
(330 | ) | 168 | ||||||||
Inventories |
(331 | ) | (1,175 | ) | |||||||
Prepaid expenses |
(362 | ) | (870 | ) | |||||||
Other assets |
683 | (1,526 | ) | ||||||||
Accounts payable |
55 | (592 | ) | ||||||||
Accounts payable due to affiliate |
14 | — | |||||||||
Accrued expenses |
2,770 | (614 | ) | ||||||||
Due to affiliates |
(171 | ) | — | ||||||||
Other liabilities |
7 | (48 | ) | ||||||||
Net cash used in operating activities |
(1,763 | ) | (15,831 | ) | |||||||
Cash flows from investing activities: |
|||||||||||
Purchases of property, plant and equipment |
(2,223 | ) | (637 | ) | |||||||
Investment in Northern Therapeutics, Inc. |
(1,500 | ) | — | ||||||||
Investment in AltaRex |
— | (2,846 | ) | ||||||||
Proceeds from disposals of property, plant and equipment |
3 | 1 | |||||||||
Acquisition of patent rights |
(300 | ) | — | ||||||||
Purchases of investments and certificate of deposit |
(34,767 | ) | (1,218 | ) | |||||||
Maturities of investments |
6,641 | 11,727 | |||||||||
Net cash provided by (used in) investing activities |
(32,146 | ) | 7,027 | ||||||||
Cash flows from financing activities: |
|||||||||||
Proceeds from the exercise of stock options |
2,351 | 10 | |||||||||
Principal payments on notes payable and capital lease obligations |
(30 | ) | (33 | ) | |||||||
Net cash provided by (used in) financing activities |
2,321 | (23 | ) | ||||||||
Net decrease in cash and cash equivalents |
(31,588 | ) | (8,827 | ) | |||||||
Cash and cash equivalents, beginning of period |
122,655 | 24,373 | |||||||||
Cash and cash equivalents, end of period |
$ | 91,067 | $ | 15,546 | |||||||
Supplemental schedule of cash flow information: |
|||||||||||
Cash paid for interest |
$ | 51 | $ | 69 | |||||||
Noncash investing and financing activities – note payable issued for building and land |
$ | 974 | $ | — | |||||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
UNITED THERAPEUTICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
| 1. | ORGANIZATION AND BUSINESS DESCRIPTION |
United Therapeutics Corporation (United Therapeutics) is a biotechnology company focused on the development and commercialization of unique therapeutic products to treat patients with chronic and life-threatening cardiovascular, infectious and oncological diseases. United Therapeutics was incorporated on June 26, 1996 under the laws of the State of Delaware and has the following wholly owned subsidiaries: Lung Rx, Inc., Unither Pharmaceuticals, Inc. (UPI), Unither Telemedicine Services Corp. (UTSC), United Therapeutics Europe, Ltd., Unither Pharma, Inc., Medicomp, Inc. and Unither Nutriceuticals, Inc.
United Therapeutics’ lead product is Remodulin®. On May 21, 2002, the United States Food and Drug Administration (FDA) approved Remodulin (treprostinil sodium) Injection for the treatment of pulmonary arterial hypertension in patients with NYHA class II-IV symptoms to diminish symptoms associated with exercise. United Therapeutics agreed with the FDA that it would perform a post-marketing phase IV clinical study to further assess the clinical benefits of Remodulin. The phase IV study commenced in late 2002 and must be completed within 24 months from the May 2002 approval. Continued FDA approval is conditioned on the completion and outcome of the phase IV study. The phase IV study is currently being enrolled. International applications are pending and there can be no assurance that these applications will be approved. United Therapeutics has generated pharmaceutical revenues from sales of Remodulin to United States based distributors and on a government-reimbursed basis in certain European countries, arginine product sales, chemical synthesis services and the resale of Remodulin delivery pumps and certain medical supplies used for its pharmaceutical products. In addition, United Therapeutics has generated non-pharmaceutical revenues from telemedicine products and services. United Therapeutics has funded its operations primarily from the proceeds of sales of its common stock.
| 2. | BASIS OF PRESENTATION |
The consolidated financial statements included herein have been prepared, without audit, pursuant to Regulation S-X of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto contained in United Therapeutics’ Annual Report on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission.
Certain reclassifications have been made in the consolidated financial statements for the three and six month periods ended June 30, 2002 to conform to the 2003 presentation.
In the opinion of United Therapeutics’ management, the accompanying unaudited consolidated financial statements contain all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the financial position as of June 30, 2003 and results of operations and cash flows for the three and six month periods ended June 30, 2003 and 2002. Interim results are not necessarily indicative of results for an entire year.
| 3. | STOCKHOLDERS’ EQUITY |
Loss per Common Share
Basic loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the respective periods. Options and warrants that could potentially dilute loss per share in the future were not included in the computation of diluted loss per share because to do so would have been antidilutive for the periods presented. As of June 30, 2003, these options and warrants covered approximately 876,000 shares of common stock. Accordingly, diluted loss per common share is the same as basic loss per common share.
4
Stock Option Plan
United Therapeutics applies the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to account for its stock options. SFAS No. 123 allows companies to continue to apply the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and provide pro forma net income and pro forma earnings per share disclosures for employee stock options granted as if the fair-value-based method defined in SFAS No. 123 had been applied. United Therapeutics has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures of SFAS No. 123. United Therapeutics accounts for non-employee stock option awards in accordance with SFAS No. 123.
As a result of applying APB Opinion No. 25 and related interpretations, no stock-based employee compensation cost is reflected in net loss, as all stock options granted to employees had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and net loss per share if United Therapeutics had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except per share amounts):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net loss, as reported |
$ | (2,384 | ) | $ | (3,180 | ) | $ | (5,408 | ) | $ | (8,859 | ) | |||||
Less total stock-based employee compensation
expense determined under fair value
based method
for all awards |
(3,119 | ) | (4,486 | ) | (6,238 | ) | (8,972 | ) | |||||||||
Pro forma net loss |
$ | (5,503 | ) | $ | (7,666 | ) | $ | (11,646 | ) | $ | (17,831 | ) | |||||
Basic and diluted net loss per common share: |
|||||||||||||||||
As reported |
$ | (0.11 | ) | $ | (0.16 | ) | $ | (0.26 | ) | $ | (0.43 | ) | |||||
Pro forma |
$ | (0.26 | ) | $ | (0.37 | ) | $ | (0.55 | ) | $ | (0.88 | ) | |||||
| 4. | MARKETABLE INVESTMENTS |
United Therapeutics’ marketable investments are considered held-to-maturity securities. Held-to-maturity securities are those securities which United Therapeutics has the ability and intent to hold until maturity and are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective interest method. Declines in market values below amortized cost that are considered other-than-temporary are reported in the statement of operations as losses. Marketable investments at June 30, 2003 consist of federally sponsored debt securities. The fair market value of this portfolio at June 30, 2003 was approximately $38.9 million, based on quoted market prices.
For the six months ended June 30, 2002, a loss on marketable investments totaling approximately $4.1 million was reported. This loss was comprised of a $538,000 write-down related to an other-than-temporary decline in value of one marketable investment in March 2002 and a $3.6 million write-down necessary to adjust the carrying value of United Therapeutics’ marketable investments to their fair values based on quoted market prices at June 30, 2002. For the six months ended June 30, 2003, there were no losses on marketable investments.
5
| 5. | INVENTORIES |
United Therapeutics manufactures certain compounds and purchases medical supplies for use in its product sales and ongoing clinical trials. United Therapeutics purchases components and assembles cardiac monitoring equipment. United Therapeutics contracts with a third party manufacturer to make the HeartBar® products. These inventories are accounted for under the first-in, first-out method.
At June 30, 2003 and December 31, 2002, inventories consisted of the following (in thousands):