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, 2004
[ ]
|
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 2, 2004 was 21,453,171.
INDEX
| Page |
||||||
| Part I. FINANCIAL INFORMATION (UNAUDITED) | ||||||
Item 1.
|
Financial Statements | |||||
| 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 | 20 | ||||
Item 4.
|
Controls and Procedures | 20 | ||||
| Part II. OTHER INFORMATION | ||||||
Item 4.
|
Submission of Matters to a Vote of Security Holders | 21 | ||||
Item 6.
|
Exhibits and Reports on Form 8-K | 21 | ||||
SIGNATURES
|
22 | |||||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED THERAPEUTICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| June 30, | December 31, | |||||||
| 2004 |
2003 |
|||||||
| (Unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 74,481 | $ | 68,562 | ||||
Accounts receivable, net of allowance of $41 for 2004
and $119 for 2003 |
9,703 | 10,151 | ||||||
Interest receivable |
465 | 461 | ||||||
Prepaid expenses |
1,738 | 1,874 | ||||||
Inventories |
7,326 | 8,116 | ||||||
Due from affiliate |
31 | 81 | ||||||
Other current assets |
1,647 | 476 | ||||||
Total current assets |
95,391 | 89,721 | ||||||
Marketable investments |
38,686 | 48,775 | ||||||
Marketable investments — restricted |
9,953 | — | ||||||
Goodwill, net |
7,465 | 7,465 | ||||||
Other intangible assets, net |
6,206 | 6,446 | ||||||
Property, plant and equipment, net |
17,175 | 15,225 | ||||||
Investments in affiliates |
5,902 | 7,221 | ||||||
Note receivable from affiliates |
433 | 433 | ||||||
Note receivable from employee and other assets |
2,039 | 4,216 | ||||||
Total assets |
$ | 183,250 | $ | 179,502 | ||||
Liabilities and Stockholders’ Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 2,643 | $ | 4,324 | ||||
Accounts payable to affiliates |
— | 2 | ||||||
Accrued expenses |
7,593 | 5,459 | ||||||
Due to affiliates |
984 | 1 | ||||||
Current portion of notes and capital leases payable |
20 | 773 | ||||||
Other current liabilities |
62 | 59 | ||||||
Total current liabilities |
11,302 | 10,618 | ||||||
Notes and capital leases payable, excluding current portion |
16 | 25 | ||||||
Due to affiliates |
— | 946 | ||||||
Other liabilities |
1,347 | 148 | ||||||
Total liabilities |
12,665 | 11,737 | ||||||
Commitments and contingencies |
||||||||
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 authorized, no shares issued |
— | — | ||||||
Common stock, par value $.01, 100,000,000 shares authorized,
21,957,863 and 21,836,342 shares issued at June 30, 2004 and
December 31, 2003, respectively, and 21,431,263 and 21,309,742
outstanding at June 30, 2004 and December 31, 2003,
respectively |
220 | 218 | ||||||
Additional paid-in capital |
370,260 | 368,537 | ||||||
Accumulated other comprehensive income |
476 | 1,674 | ||||||
Treasury stock at cost, 526,600 shares |
(6,874 | ) | (6,874 | ) | ||||
Accumulated deficit |
(193,497 | ) | (195,790 | ) | ||||
Total stockholders’ equity |
170,585 | 167,765 | ||||||
Total liabilities and stockholders’ equity |
$ | 183,250 | $ | 179,502 | ||||
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, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Revenues: |
||||||||||||||||
Net product sales |
$ | 17,329 | $ | 13,071 | $ | 29,975 | $ | 22,831 | ||||||||
Service sales |
970 | 906 | 2,007 | 1,885 | ||||||||||||
Total revenues |
18,299 | 13,977 | 31,982 | 24,716 | ||||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
7,327 | 8,791 | 15,779 | 16,243 | ||||||||||||
Selling, general and
administrative |
5,358 | 5,994 | 11,168 | 10,983 | ||||||||||||
Cost of product sales |
1,603 | 1,623 | 2,942 | 2,894 | ||||||||||||
Cost of service sales |
440 | 397 | 896 | 856 | ||||||||||||
Total operating expenses |
14,728 | 16,805 | 30,785 | 30,976 | ||||||||||||
Income (loss) from operations |
3,571 | (2,828 | ) | 1,197 | (6,260 | ) | ||||||||||
Other income (expense): |
||||||||||||||||
Interest income |
674 | 660 | 1,323 | 1,207 | ||||||||||||
Interest expense |
— | (32 | ) | (2 | ) | (63 | ) | |||||||||
Equity loss in affiliate |
(111 | ) | (212 | ) | (238 | ) | (407 | ) | ||||||||
Other, net |
6 | 28 | 13 | 115 | ||||||||||||
Total other income (expense) |
569 | 444 | 1,096 | 852 | ||||||||||||
Income (loss) before income
tax |
4,140 | (2,384 | ) | 2,293 | (5,408 | ) | ||||||||||
Income tax |
— | — | — | — | ||||||||||||
Net income (loss) |
$ | 4,140 | $ | (2,384 | ) | $ | 2,293 | $ | (5,408 | ) | ||||||
Net income (loss) per common
share — basic
|
$ | 0.19 | $ | (0.11 | ) | $ | 0.11 | $ | (0.26 | ) | ||||||
Net income (loss) per common
share — diluted |
$ | 0.18 | $ | (0.11 | ) | $ | 0.10 | $ | (0.26 | ) | ||||||
Weighted average number of
common shares outstanding –
basic
|
21,390,727 | 21,081,970 | 21,360,112 | 21,004,103 | ||||||||||||
Weighted average number of
common shares outstanding –
diluted |
23,145,525 | 21,081,970 | 23,070,059 | 21,004,103 | ||||||||||||
See accompanying notes to consolidated financial statements.
2
UNITED THERAPEUTICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Six months ended June 30, |
||||||||
| 2004 |
2003 |
|||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 2,293 | $ | (5,408 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities: |
||||||||
Depreciation and amortization |
1,137 | 1,128 | ||||||
Provision for bad debt |
40 | (69 | ) | |||||
Provision for inventory obsolescence |
172 | 156 | ||||||
Loss on disposals of equipment |
— | 4 | ||||||
Stock and options issued in exchange for services |
207 | 89 | ||||||
Amortization of discount or premium on investments |
(52 | ) | (12 | ) | ||||
Equity loss in affiliate |
238 | 407 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
408 | (393 | ) | |||||
Interest receivable |
(5 | ) | (330 | ) | ||||
Inventories |
572 | (331 | ) | |||||
Prepaid expenses |
136 | (362 | ) | |||||
Other assets |
2,459 | 683 | ||||||
Accounts payable |
(1,680 | ) | 55 | |||||
Accounts payable due to affiliate |
(2 | ) | 14 | |||||
Accrued expenses |
2,134 | 2,770 | ||||||
Due to (from) affiliates |
50 | (171 | ) | |||||
Other liabilities |
(283 | ) | 7 | |||||
Net cash provided by (used in) operating activities |
7,824 | (1,763 | ) | |||||
Cash flows from investing activities: |
||||||||
Purchases of property, plant and equipment |
(3,663 | ) | (2,223 | ) | ||||
Investment in Northern Therapeutics, Inc. |
— | (1,500 | ) | |||||
Proceeds from disposals of property, plant and equipment |
816 | 3 | ||||||
Acquisition of patent rights |
— | (300 | ) | |||||
Purchases of investments and certificate of deposit |
(29,813 | ) | (34,767 | ) | ||||
Maturities of investments |
30,000 | 6,641 | ||||||
Net cash used in investing activities |
(2,660 | ) | (32,146 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from the exercise of stock options |
1,517 | 2,351 | ||||||
Principal payments on notes payable and capital lease obligations |
(762 | ) | (30 | ) | ||||
Net cash provided by financing activities |
755 | 2,321 | ||||||
Net increase (decrease) in cash and cash equivalents |
5,919 | (31,588 | ) | |||||
Cash and cash equivalents, beginning of period |
68,562 | 122,655 | ||||||
Cash and cash equivalents, end of period |
$ | 74,481 | $ | 91,067 | ||||
Supplemental schedule of cash flow information: |
||||||||
Cash paid for interest |
$ | 1 | $ | 51 | ||||
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, 2004
(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), Unither.com, Inc., United Therapeutics Europe, Ltd., Unither Pharma, Inc., Medicomp, Inc., Unither Nutriceuticals, Inc. and Lung Rx, Ltd.
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 the final study report must be submitted to the FDA by December 2005. Continued FDA approval is conditioned on the completion and outcome of the Phase IV study. International applications for the approval of Remodulin are pending. United Therapeutics has generated pharmaceutical revenues from sales of Remodulin and arginine products in the United States and Europe. In addition, United Therapeutics has generated non-pharmaceutical revenues from telemedicine products and services in the United States.
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, 2003 as filed with the Securities and Exchange Commission.
In the opinion of United Therapeutics’ management, any adjustments contained in the accompanying unaudited consolidated financial statements are of a normal recurring nature, necessary to present fairly the financial position as of June 30, 2004 and results of operations and cash flows for the three and six-month periods ended June 30, 2004 and 2003. Interim results are not necessarily indicative of results for an entire year.
3. STOCKHOLDERS’ EQUITY
Earnings (Loss) per Common Share
Basic earnings (loss) per common share is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding during the respective periods. Diluted earnings (loss) per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period plus the effects of outstanding stock options that could potentially dilute earnings per share in the future. The effects of potentially dilutive stock options were calculated using the treasury stock method. Diluted earnings per share for the periods in 2004 also include the effects of 591,832 shares of common stock that will be issued in 2004 to the sellers of Medicomp, Inc. and Telemedical Procedures LLC. The effects of outstanding stock options were not included in the computation of diluted loss per share in 2003 because to do so would have been antidilutive for the periods presented. As of June 30, 2003, those options totaled approximately 876,000 shares. The components of basic and dilutive earnings (loss) per share are as follows (in thousands, except per share amounts):
4
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, |
June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net income (loss) |
$ | 4,140 | $ | (2,384 | ) | $ | 2,293 | $ | (5,408 | ) | ||||||
Weighted average outstanding shares of common
stock |
21,391 | 21,082 | 21,360 | 21,004 | ||||||||||||
Dilutive effect of stock options and other items |
1,755 | — | 1,710 | — | ||||||||||||
Common stock and common stock equivalents |
23,146 | 21,082 | 23,070 | 21,004 | ||||||||||||
Earnings (loss) per share |
||||||||||||||||
Basic |
$ | 0.19 | $ | (0.11 | ) | $ | 0.11 | $ | (0.26 | ) | ||||||
Diluted |
$ | 0.18 | $ | (0.11 | ) | $ | 0.10 | $ | (0.26 | ) | ||||||
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 and EITF 96-18, Accounting for Equity Instruments that are Issued to Other than Employees.
As a result of applying APB Opinion No. 25 and related interpretations, no stock-based employee compensation expense 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. In accordance with SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, 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 is as follows (in thousands, except per share amounts):
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net income (loss), as reported |
$ | 4,140 | $ | (2,384 | ) | $ | 2,293 | $ | (5,408 | ) | ||||||
Less total stock-based employee compensation
expense determined under fair value
based method
for all awards |
(1,774 | ) | (3,119 | ) | (3,548 | ) | (6,238 | ) | ||||||||
Pro forma net income (loss) |
$ | 2,366 | $ | (5,503 | ) | $ | (1,255 | ) | $ | (11,646 | ) | |||||
Basic net income (loss) per common share: |
||||||||||||||||
As reported |
$ | 0.19 | $ | (0.11 | ) | $ | 0.11 | $ | (0.26 | ) | ||||||
Pro forma |
$ | 0.11 | $ | (0.26 | ) | $ | (0.06 | ) | $ | (0.55 | ) | |||||
Diluted net income (loss) per common share: |
||||||||||||||||
As reported |
$ | 0.18 | $ | (0.11 | ) | $ | 0.10 | $ | (0.26 | ) | ||||||
Pro forma |
$ | 0.10 | $ | (0.26 | ) | $ | (0.05 | ) | $ | (0.55 | ) | |||||
During the six months ended June 30, 2004, options to purchase 121,521 shares were exercised.
4. INVENTORIES
United Therapeutics manufactures certain compounds and purchases medical supplies for use in its product sales and ongoing clinical trials. United Therapeutics purchases cardiac monitoring equipment and supplies and also contracts with a third party manufacturer to make the HeartBar® products. These inventories are accounted for under the first-in, first-out method and are carried at lower of cost or market.
5
At June 30, 2004 and December 31, 2003, inventories consisted of the following, net of reserves of approximately $365,100 and $321,000 at June 30, 2004 and December 31, 2003, respectively (in thousands):
| June 30, | December 31, | |||||||
| 2004 |
2003 |
|||||||
Remodulin: |
||||||||
Raw materials |
$ | 477 | $ | 172 | ||||
Work in progress |
4,256 | 4,971 | ||||||
Finished goods |
1,160 | 921 | ||||||
Remodulin delivery pumps and medical supplies |
1,002 | 1,544 | ||||||
Cardiac
monitoring components and supplies |
64 | 211 | ||||||
HeartBar product line |
367 | 297 | ||||||
Total inventories |
$ | 7,326 | $ | 8,116 | ||||
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets were comprised as follows (in thousands):
| As of June 30, 2004 |
As of December 31, 2003 |
|||||||||||||||||||||||
| Accumulated | Accumulated | |||||||||||||||||||||||
| Gross |
Amortization |
Net |
Gross |
Amortization |
Net |
|||||||||||||||||||
Goodwill |
$ | 9,072 | $ | (1,607 | ) | $ | 7,465 | $ | 9,072 | $ | (1,607 | ) | $ | 7,465 | ||||||||||
Intangible assets: |
||||||||||||||||||||||||
Noncompete agreements |
$ | 273 | $ | (273 | ) | $ | — | $ | 273 | $ | (273 | ) | $ | — | ||||||||||
Trademarks |
2,802 | (861 | ) | 1,941 | 2,802 | (738 | ) | 2,064 | ||||||||||||||||
Technology and patents |
6,164 | (1,899 | ) | 4,265 | 6,164 | (1,782 | ) | 4,382 | ||||||||||||||||
Total intangible assets |
$ | 9,239 | $ | (3,033 | ) | $ | 6,206 | $ | 9,239 | $ | (2,793 | ) | $ | 6,446 | ||||||||||
Total amortization expense for the six-month periods ended June 30, 2004 and 2003 was approximately $240,000 and $423,000, respectively. As of January 1, 2004, the aggregate amortization expense related to these intangible assets for each of the following five years is estimated as follows (in thousands):
| Year ending | ||||
| December 31, | ||||
2004 |
$ | 479 | ||
2005 |
479 | |||
2006 |
479 | |||
2007 |
432 | |||
2008 |
432 | |||
6
6. SEGMENT INFORMATION
United Therapeutics has two reportable business segments. The pharmaceutical segment includes all activities associated with the research, development, manufacture and commercialization of therapeutic products. The telemedicine segment includes all activities associated with the research, manufacture and delivery of patient monitoring services. The telemedicine segment is managed separately because diagnostic services require different technology and marketing strategies.
Segment information as of and for the three months ended June 30, 2004 and 2003 was as follows (in thousands):
| Three Months Ended June 30, |
||||||||||||||||||||||||
| 2004 |
2003 |
|||||||||||||||||||||||
| Consolidated | Consolidated | |||||||||||||||||||||||
| Pharmaceutical |
Telemedicine |
Totals |
Pharmaceutical |
Telemedicine |
Totals |
|||||||||||||||||||
Revenues from external customers |
$ | 16,979 | $ | 1,320 | $ | 18,299 | $ | 12,947 | $ | 1,030 | $ | 13,977 | ||||||||||||
Income (loss) before income tax |
4,286 | (146 | ) | 4,140 | (1,534 | ) | (850 | ) | (2,384 | ) | ||||||||||||||
Interest income |
672 | 2 | 674 | 658 | 2 | 660 | ||||||||||||||||||
Interest expense |
— | — | — | (31 | ) | (1 | ) | (32 | ) | |||||||||||||||
Depreciation and amortization |
(395 | ) | (133 | ) | (528 | ) | (303 | ) | (276 | ) | (579 | ) | ||||||||||||
Equity loss in affiliate |
(111 | ) | — | (111 | ) | (212 | ) | — | (212 | ) | ||||||||||||||
Total investment in equity method
investees |
3,344 | — | 3,344 | 4,033 | — | 4,033 | ||||||||||||||||||
Expenditures for long-lived assets |
3,059 | 140 | 3,199 | 1,153 | 9 | 1,162 | ||||||||||||||||||
Goodwill, net |
1,287 | 6,178 | 7,465 | 1,287 | 6,178 | 7,465 | ||||||||||||||||||
Total assets |
173,593 | 9,657 | 183,250 | 174,353 | 10,315 | 184,668 | ||||||||||||||||||
Segment information as of and for the six months ended June 30, 2004 and 2003 was as follows (in thousands):
| Six Months Ended June 30, |
||||||||||||||||||||||||
| 2004 |
2003 |
|||||||||||||||||||||||
| Consolidated | Consolidated | |||||||||||||||||||||||
| Pharmaceutical |
Telemedicine |
Totals |
Pharmaceutical |
Telemedicine |
Totals |
|||||||||||||||||||
Revenues from external customers |
$ | 29,495 | $ | 2,487 | $ | 31,982 | $ | 22,586 | $ | 2,130 | $ | 24,716 | ||||||||||||
Income (loss) before income tax |
2,971 | (678 | ) | 2,293 | (3,831 | ) | (1,577 | ) | (5,408 | ) | ||||||||||||||