UNITED THERAPEUTICS Corp - FORM 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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 September 30, 2014

o 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

(Exact Name of Registrant as Specified in Its Charter)

Delaware		52-1984749
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

1040 Spring Street, Silver Spring, MD		20910
(Address of Principal Executive Offices)		(Zip Code)

(301) 608-9292

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares outstanding of the issuer’s common stock, par value $.01 per share, as of October 21, 2014 was 47,508,910.

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INDEX

		Page

Part I.	FINANCIAL INFORMATION (UNAUDITED)	3

Item 1.	Consolidated Financial Statements	3

	Consolidated Balance Sheets	3

	Consolidated Statements of Operations	4

	Consolidated Statements of Comprehensive Income	5

	Consolidated Statements of Cash Flows	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

Item 4.	Controls and Procedures	40

Part II.	OTHER INFORMATION	41

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59

Item 4.	Mine Safety Disclosures	59

Item 6.	Exhibits	59

SIGNATURES		60

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PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	September 30, 2014			December 31, 2013
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	497,291		$	284,258
Marketable investments	270,372			409,645
Accounts receivable, net of allowance of none for 2014 and 2013	139,903			126,297
Inventories, net	63,669			47,758
Other current assets	107,250			46,424
Total current assets	1,078,485			914,382
Marketable investments	205,953			448,134
Goodwill and other intangibles, net	14,499			14,115
Property, plant and equipment, net	481,049			464,950
Deferred tax assets, net	193,653			192,718
Other assets	98,411			53,268
Total assets	$	2,072,050		$	2,087,567

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	127,961		$	92,244
Convertible notes	224,701			215,845
Share tracking awards plan	301,853			287,956
Line of credit and mortgages payable—current	66,614			66,614
Other current liabilities	39,519			25,015
Total current liabilities	760,648			687,674
Other liabilities	94,843			95,582
Total liabilities	855,491			783,256
Commitments and contingencies:
Temporary equity	36,180			45,037
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, 245,000,000 shares authorized, 64,236,646 and 63,013,192 shares issued, and 47,436,015 and 50,388,140 shares outstanding at September 30, 2014 and December 31, 2013, respectively	642			630
Additional paid-in capital	1,161,083			1,057,224
Accumulated other comprehensive loss	(16,930		)	(13,183		)
Treasury stock at cost, 16,800,631 and 12,625,052 shares at September 30, 2014 and December 31, 2013, respectively	(916,595		)	(513,437		)
Retained earnings	952,179			728,040
Total stockholders’ equity	1,180,379			1,259,274
Total liabilities and stockholders’ equity	$	2,072,050		$	2,087,567

See accompanying notes to consolidated financial statements.

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UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(Unaudited)						(Unaudited)
Revenues:
Net product sales	$	328,269		$	300,006		$	934,152		$	820,647
Other	1,681			2,219			8,004			7,320
Total revenues	329,950			302,225			942,156			827,967
Operating expenses:
Research and development	118,876			72,749			171,067			177,796
Selling, general and administrative	202,507			94,111			300,753			236,832
Cost of product sales	40,803			30,716			110,113			92,349
Total operating expenses	362,186			197,576			581,933			506,977
Operating (loss) income	(32,236		)	104,649			360,223			320,990
Other (expense) income:
Interest expense	(4,709		)	(4,540		)	(14,065		)	(13,496		)
Other, net	1,112			1,070			4,258			3,039
Total other expense, net	(3,597		)	(3,470		)	(9,807		)	(10,457		)
(Loss) income before income taxes	(35,833		)	101,179			350,416			310,533
Income tax benefit (expense)	10,596			(38,494		)	(126,277		)	(105,659		)
Net (loss) income	$	(25,237	)	$	62,685		$	224,139		$	204,874
Net (loss) income per common share:
Basic	$	(0.53	)	$	1.25		$	4.63		$	4.10
Diluted	$	(0.53	)	$	1.17		$	4.12		$	3.90
Weighted average number of common shares outstanding:
Basic	47,297			50,014			48,427			50,007
Diluted	47,297			53,688			54,360			52,570

See accompanying notes to consolidated financial statements.

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UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(Unaudited)						(Unaudited)
Net (loss) income	$	(25,237	)	$	62,685		$	224,139		$	204,874
Other comprehensive (loss) income:
Foreign currency translation (loss) gain	(2,538		)	1,809			(2,156		)	(854		)
Defined benefit pension plan:
Prior service cost arising during period, net of tax	—			—			(2,415		)	—
Actuarial gain arising during period, net of tax	—			—			221			51
Less: amortization of actuarial gain and prior service cost included in net periodic pension cost, net of tax	226			255			678			767
Total defined benefit pension plan, net	226			255			(1,516		)	818
Unrealized gain (loss) on available-for-sale securities, net of tax	9			(12		)	(75		)	(70		)
Other comprehensive (loss) gain, net of tax	(2,303		)	2,052			(3,747		)	(106		)
Comprehensive (loss) income	$	(27,540	)	$	64,737		$	220,392		$	204,768

See accompanying notes to consolidated financial statements.

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UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months Ended September 30,
	2014			2013
	(Unaudited)
Cash flows from operating activities:
Net income	$	224,139		$	204,874
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	23,313			23,506
Current and deferred income tax expense	126,277			105,659
Share-based compensation expense	157,730			142,584
Amortization of debt discount and debt issue costs	9,968			9,412
Amortization of discount or premium on investments	4,195			3,066
Other	1,478			1,108
Excess tax benefits from share-based compensation	(23,183		)	(5,807		)
Changes in operating assets and liabilities:
Accounts receivable	(13,324		)	(15,244		)
Inventories	(16,870		)	(11,634		)
Other assets	4,055			4,554
Accounts payable and accrued expenses	35,855			12,633
Other liabilities	(268,979		)	(153,865		)
Net cash provided by operating activities	264,654			320,846

Cash flows from investing activities:
Purchases of property, plant and equipment	(45,157		)	(18,497		)
Purchases of held-to-maturity investments	(115,170		)	(438,633		)
Maturities of held-to-maturity investments	491,833			349,275
Purchase of investments under the cost method, net	(45,000		)	(30,766		)
Net cash provided by (used in) investing activities	286,506			(138,621		)

Cash flows from financing activities:
Payments to repurchase common stock	(403,158		)	(42,438		)
Proceeds from line of credit	140,000			—
Payments on the line of credit	(140,000		)	—
Proceeds from the exercise of stock options	39,391			19,896
Issuance of stock under employee stock purchase plan	3,329			2,734
Excess tax benefits from share-based compensation	23,183			5,807
Net cash used in financing activities	(337,255		)	(14,001		)

Effect of exchange rate changes on cash and cash equivalents	(872		)	(24		)
Net increase in cash and cash equivalents	213,033			168,200
Cash and cash equivalents, beginning of period	284,258			154,030
Cash and cash equivalents, end of period	$	497,291		$	322,230

Supplemental schedule of cash flow information:
Cash paid for interest	$	4,743		$	4,782
Cash paid for income taxes	$	177,683		$	119,632
Non-cash investing activities:
Non-cash investing activity: Non-cash additions to property, plant and equipment	$	3,298		$	3,054

See accompanying notes to consolidated financial statements.

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UNITED THERAPEUTICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

(UNAUDITED)

1. Organization and Business Description

United Therapeutics Corporation is a biotechnology company focused on the development and commercialization of unique products to address the unmet medical needs of patients with chronic and life-threatening conditions. As used in these notes to the consolidated financial statements, unless the context otherwise requires, the terms “we”, “us”, “our,” and similar terms refer to United Therapeutics Corporation and its consolidated subsidiaries.

We have approval from the United States Food and Drug Administration (FDA) to market the following therapies: Remodulin® (treprostinil) Injection (Remodulin), Tyvaso® (treprostinil) Inhalation Solution (Tyvaso), Adcirca® (tadalafil) Tablets (Adcirca) and Orenitram® (treprostinil) Extended-Release Tablets (Orenitram). We commenced commercial sales of Orenitram during the second quarter of 2014. Remodulin has also been approved in various countries outside the United States.

2. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information required by United States generally accepted accounting principles (GAAP) for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC on February 25, 2014.

In our management’s opinion, the accompanying consolidated financial statements contain all adjustments, including normal, recurring adjustments, necessary to fairly present our financial position as of September 30, 2014, results of operations and comprehensive income for the three- and nine-month periods ended September 30, 2014 and 2013, and cash flows for the nine-month periods ended September 30, 2014 and 2013. Interim results are not necessarily indicative of results for an entire year. We have reclassified certain amounts in prior periods to conform to the current year presentation.

3. Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market (current replacement cost) and consist of the following, net of reserves (in thousands):

	September 30, 2014		December 31, 2013
Raw materials	$	21,693	$	18,377
Work-in-progress	14,964		11,802
Finished goods	27,012		17,579
Total inventories	$	63,669	$	47,758

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4. Fair Value Measurements

Assets and liabilities subject to fair value measurements are required to be disclosed within a fair value hierarchy. The fair value hierarchy ranks the quality and reliability of inputs used to determine fair value. Accordingly, assets and liabilities carried at, or permitted to be carried at, fair value are classified within the fair value hierarchy in one of the following categories based on the lowest level input that is significant in measuring fair value:

Level 1—Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.

Level 2—Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets. Related inputs can also include those used in valuation or other pricing models such as interest rates and yield curves that can be corroborated by observable market data.

Level 3—Fair value is determined by using inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgment.

Assets and liabilities subject to fair value measurements are as follows (in thousands):

	As of September 30, 2014
	Level 1		Level 2		Level 3		Balance
Assets
Money market funds (1)	$	369,042	$	—	$	—	$	369,042
Federally-sponsored and corporate debt securities (2)			476,667		—		476,667
Total assets	$	369,042	$	476,667	$	—	$	845,709
Liabilities
Convertible notes due 2016 (3)	$	686,840	$	—	$	—	$	686,840
Contingent consideration (4)			—		4,736		4,736
Total liabilities	$	686,840	$	—	$	4,736	$	691,576

	As of December 31, 2013
	Level 1		Level 2		Level 3		Balance
Assets
Money market funds (1)	$	145,194	$	—	$	—	$	145,194
Federally-sponsored and corporate debt securities (2)	—		857,711		—		857,711
Total assets	$	145,194	$	857,711	$	—	$	1,002,905
Liabilities
Convertible notes due 2016 (3)	$	593,750	$	—	$	—	$	593,750
Contingent consideration (4)	—		—		6,616		6,616
Total liabilities	$	593,750	$	—	$	6,616	$	600,366

(1) Included in cash and cash equivalents on the accompanying consolidated balance sheets.

(2) Included in current and non-current marketable investments on the accompanying consolidated balance sheets. The fair value of these securities is primarily measured or corroborated by trade data for identical securities or comparable securities in which related trading activity is not sufficiently frequent to be considered a Level 1 input. See also Note 5—Investments—Marketable Investments—Held-to-Maturity Investments to these consolidated financial statements.

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(3) Included in convertible notes on the accompanying consolidated balance sheets. The fair value of our 1.0 percent Convertible Senior Notes due September 15, 2016 (Convertible Notes) is estimated using Level 1 observable inputs since our Convertible Notes are trading with sufficient frequency such that we believe related pricing can be used as the primary basis for measuring their fair value. At both September 30, 2014 and December 31, 2013, the fair value of the Convertible Notes was substantially higher than their book value. This was primarily due to the excess conversion value of the notes compared to the notes’ par value, and the fact that any such excess would be paid in shares of our common stock.

(4) Included in other liabilities on the accompanying consolidated balance sheets. The fair value of contingent consideration has been estimated using probability weighted discounted cash flow models (DCF). The DCFs incorporate Level 3 inputs including estimated discount rates that we believe market participants would consider relevant in pricing and the projected timing and amount of cash flows, which are estimated and developed, in part, based on the requirements specific to each acquisition agreement. We analyze and evaluate these fair value measurements quarterly to determine whether valuation inputs continue to be relevant and appropriate or whether current period developments warrant adjustments to valuation inputs and related measurements. Any increases or decreases in discount rates would have an inverse impact on the corresponding fair value, while increases or decreases in expected cash flows would result in corresponding increases or decreases in fair value. As of both September 30, 2014 and December 31, 2013, the cost of debt and weighted average cost of capital used to discount projected cash flows relating to our contingent consideration ranged from 8.7 percent to 16.5 percent, respectively.

A reconciliation of the beginning and ending balances of Level 3 liabilities for the three- and nine-month periods ended September 30, 2014 is presented below (in thousands):

	Contingent Consideration
Balance, July 1, 2014—Asset (Liability)	$	(4,777	)
Transfers into Level 3	—
Transfers out of Level 3	—
Total gains/(losses) realized/unrealized:
Included in earnings	—
Included in other comprehensive income	41
Purchases	—
Sales	—
Issuances	—
Settlements	—
Balance September 30, 2014—Asset (Liability)	$	(4,736	)
Amount of total gains/(losses) for the three-month period ended September 30, 2014 included in earnings that are attributable to the change in unrealized gains or losses related to outstanding liabilities	$	—

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	Contingent Consideration
Balance January 1, 2014—Asset (Liability)	$	(6,616	)
Transfers into Level 3	—
Transfers out of Level 3	—
Total gains/(losses) realized/unrealized:
Included in earnings	1,132
Included in other comprehensive income	64
Purchases	—
Sales	—
Issuances	—
Settlements	684
Balance September 30, 2014—Asset (Liability)	$	(4,736	)
Amount of total gains/(losses) for the nine-month period ended September 30, 2014 included in earnings that are attributable to the change in unrealized gains or losses related to outstanding liabilities	$	1,132

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value because of their short maturities. The fair values of our marketable investments and our Convertible Notes are reported above within the fair value hierarchy. The carrying value of our Wells Fargo mortgage loan approximates its fair value as it bears a variable rate of interest that we believe approximates the market rate of interest for debt with similar credit risk profiles, terms and maturities (Level 2 in the fair value hierarchy). Refer to Note 9—Debt.

5. Investments

Marketable Investments

Held-to-Maturity Investments

Marketable investments classified as held-to-maturity consist of the following (in thousands):

As of September 30, 2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Government-sponsored enterprises	$	151,256	$	188	$	(18	)	$	151,426
Corporate notes and bonds	324,802		505		(66		)	325,241
Total	$	476,058	$	693	$	(84	)	$	476,667
Reported under the following captions on the consolidated balance sheet:
Current marketable investments	$	270,372
Noncurrent marketable investments	205,686
	$	476,058

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As of December 31, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Government-sponsored enterprises	$	445,939	$	257	$	(77	)	$	446,119
Corporate notes and bonds	411,455		300		(163		)	411,592
Total	$	857,394	$	557	$	(240	)	$	857,711
Reported under the following captions on the consolidated balance sheet:
Current marketable investments	$	409,645
Noncurrent marketable investments	447,749
	$	857,394

The following table summarizes gross unrealized losses and the length of time marketable investments have been in a continuous unrealized loss position (in thousands):

	As of September 30, 2014					As of December 31, 2013
	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss
Government-sponsored enterprises:
Continuous unrealized loss position less than one year	$	13,747	$	(18	)	$	76,651	$	(77	)
Continuous unrealized loss position greater than one year	—		—			—		—
	13,747		(18		)	76,651		(77		)
Corporate notes and bonds:
Continuous unrealized loss position less than one year	67,964		(66		)	168,669		(163		)
Continuous unrealized loss position greater than one year	—		—			—		—
	67,964		(66		)	168,669		(163		)
Total	$	81,711	$	(84	)	$	245,320	$	(240	)

We attribute gross unrealized losses pertaining to our held-to-maturity securities as of September 30, 2014 and December 31, 2013 to the variability in related market interest rates. We do not intend to sell these securities, nor is it more likely than not that we will be required to sell them prior to the end of their contractual terms. Furthermore, we believe these securities do not expose us to undue market risk or counterparty credit risk. As such, we do not consider these securities to be other than temporarily impaired.

The following table summarizes the contractual maturities of held-to-maturity marketable investments (in thousands):

	September 30, 2014
	Amortized Cost		Fair Value
Due in less than one year	$	270,372	$	270,695
Due in one to two years	161,066		161,356
Due in three to five years	44,620		44,616
Due after five years	—		—
Total	$	476,058	$	476,667

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Investments Held at Cost

As of September 30, 2014, we maintain in the aggregate, non-controlling equity investments of $83.0 million in privately-held corporations, including a $50.0 million investment in preferred stock of Synthetic Genomics Inc. (SGI), which we purchased in May 2014. We account for these investments under the cost method since we do not have the ability to exercise significant influence over these companies and their fair values are not readily determinable. The fair value of these investments has not been estimated at September 30, 2014, as we have not identified any events or developments indicating that their carrying amounts may be impaired. We include these investments within other assets on our accompanying consolidated balance sheets.

In addition to the SGI investment noted above, we entered into a separate multi-year research and development collaboration agreement whereby SGI will develop engineered primary pig cells with modified genomes for use in our xenotransplantation program, which is primarily focused on lungs. Under this agreement, each party will assume its own research and development costs and SGI may receive royalties and milestone payments from the development and commercialization of organs.

6. Goodwill and Other Intangible Assets

Goodwill and other intangible assets comprise the following (in thousands):

	As of September 30, 2014							As of December 31, 2013
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Goodwill (1)	$	10,362	$	—		$	10,362	$	10,703	$	—		$	10,703
Other intangible assets (1):
Technology, patents and trade names	6,676		(4,049		)	2,627		5,049		(3,730		)	1,319
Customer relationships and non-compete agreements	4,559		(3,049		)	1,510		4,947		(2,886		)	2,061
Contract-based	2,020		(2,020		)	—		2,020		(1,988		)	32
Total	$	23,617	$	(9,118	)	$	14,499	$	22,719	$	(8,604	)	$	14,115

(1) Includes foreign currency translation adjustments.

7. Supplemental Executive Retirement Plan

We maintain the United Therapeutics Corporation Supplemental Executive Retirement Plan (SERP) to provide retirement benefits to certain senior members of our management team. To help fund our expected obligations under the SERP, we maintain the United Therapeutics Corporation Supplemental Executive Retirement Plan Rabbi Trust Document (Rabbi Trust). The balance in the Rabbi Trust was $5.1 million as of September 30, 2014 and December 31, 2013. The Rabbi Trust is irrevocable and SERP participants have no preferred claim on, nor any beneficial ownership interest in, any assets of the Rabbi Trust.

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Net periodic pension cost consists of the following (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Service cost	$	1,379	$	1,352	$	4,138	$	4,055
Interest cost	592		396		1,775		1,188
Amortization of prior service cost	309		207		925		621
Amortization of net actuarial loss	52		199		158		596
Net pension expense	$	2,332	$	2,154	$	6,996	$	6,460

Reclassifications related to the SERP from accumulated other comprehensive loss to the statement of operations by line item and the tax impact of these reclassifications is presented below (in thousands):

Component Reclassified from Accumulated Other	Three Months Ended September 30,						Nine Months Ended September 30,
Comprehensive Loss (1)	2014			2013			2014			2013
Amortization of prior service cost:
Research and development	$	102		$	79		$	305		$	234
Selling, general and administrative	207			128			620			387
Total	309			207			925			621

Amortization of net actuarial loss:
Research and development	17			75			52			224
Selling, general and administrative	35			124			106			372
Total	52			199			158			596

Total amortization of prior service cost and net actuarial loss:	361			406			1,083			1,217
Tax benefit	(131		)	(134		)	(384		)	(404		)
Total, net of tax	$	230		$	272		$	699		$	813

(1) Refer to Note 12—Accumulated Other Comprehensive Loss.

8. Share Tracking Award Plans

We maintain the United Therapeutics Corporation Share Tracking Awards Plan, adopted in June 2008 (2008 STAP) and the United Therapeutics Corporation 2011 Share Tracking Awards Plan, adopted in March 2011 (2011 STAP). We refer to the 2008 STAP and the 2011 STAP collectively as the “STAP” and awards granted and/or outstanding under either of these plans as “STAP awards.” STAP awards convey the right to receive in cash an amount equal to the appreciation of our common stock, which is measured as the increase in the closing price of our common stock between the dates of grant and exercise. STAP awards generally vest in equal increments on each anniversary of the grant date over a four-year period and expire on the tenth anniversary of the date of grant.

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The aggregate STAP liability balance was $336.8 million and $305.2 million at September 30, 2014 and December 31, 2013, respectively, of which $34.9 million and $17.2 million, respectively, have been classified as non-current liabilities under the caption “other liabilities” on our consolidated balance sheets based on their vesting terms.

Estimating the fair value of STAP awards requires the use of certain inputs that can materially impact the determination of fair value and the amount of compensation expense (benefit) we recognize. Inputs used in estimating fair value include the price of our common stock, the expected volatility of the price of our common stock, the risk-free interest rate, the expected term of STAP awards, the expected forfeiture rate and the expected dividend yield. The fair value of the STAP awards is measured each financial reporting period because the awards are settled in cash.

The table below includes the assumptions used to measure the fair value of STAP awards:

	September 30, 2014		September 30, 2013
Expected volatility	34.9	%	34.2	%
Risk-free interest rate	1.3	%	1.1	%
Expected term of awards (in years)	3.9		4.1
Expected forfeiture rate	9.9	%	9.4	%
Expected dividend yield	0.0	%	0.0	%

A summary of the activity and status of STAP awards is presented below:

	Number of Awards		Weighted- Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (in Thousands)
Outstanding at January 1, 2014	8,734,901		$	52.75
Granted	1,564,650		94.65
Exercised	(1,987,179	)	48.23
Forfeited	(220,811	)	62.71
Outstanding at September 30, 2014	8,091,561		$	61.69	7.6	$	541,821
Exercisable at September 30, 2014	2,939,094		$	52.02	6.1	$	225,237
Expected to vest at September 30, 2014	4,636,133		$	67.46	8.5	$	283,676

The weighted average grant-date fair value of STAP awards granted during the nine-month periods ended September 30, 2014 and September 30, 2013 was $33.61 and $24.70, respectively.

Share-based compensation expense recognized in connection with the STAP is as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Research and development	$	82,404		$	30,463		$	56,659		$	58,027
Selling, general and administrative	100,541			29,945			66,530			59,706
Cost of product sales	8,779			1,064			5,432			2,381
Share-based compensation expense before taxes	191,724			61,472			128,621			120,114
Related income tax benefit	(69,596		)	(20,593		)	(46,689		)	(40,238		)
Share-based compensation expense, net of taxes	$	122,128		$	40,879		$	81,932		$	79,876
Share-based compensation capitalized as part of inventory	$	467		$	358		$	1,028		$	681

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Cash paid to settle STAP awards exercised during the nine-month periods ended September 30, 2014 and September 30, 2013 was $97.9 million and $31.2 million, respectively.

9. Debt

Line of Credit

In September 2013, we entered into a Credit Agreement with Wells Fargo Bank, National Association (Wells Fargo) providing us a $75.0 million revolving loan facility, which could be increased by up to an additional $75.0 million provided certain conditions are met (the 2013 Credit Agreement). At our option, amounts borrowed under the 2013 Credit Agreement bear interest at either the one-month LIBOR rate plus a 0.50 percent margin, or a fluctuating base rate excluding any margin. In addition, we are subject to a monthly commitment fee of 0.06 percent per annum on the average daily unused balance of the facility. Amounts borrowed under the 2013 Credit Agreement are secured by certain of our marketable investments. As of September 30, 2014, we had no outstanding principal balance under the 2013 Credit Agreement. We drew on the revolving loan facility during 2014, in part, to fund share repurchases executed during the second quarter of 2014. The 2013 Credit Agreement does not subject us to any financial covenants. In July 2014, we amended the 2013 Credit Agreement solely to extend its maturity date from September 26, 2014 to September 30, 2015.

Convertible Notes Due 2016

In October 2011, we issued $250.0 million in aggregate principal value 1.0 percent Convertible Senior Notes due September 15, 2016 (Convertible Notes). The Convertible Notes are unsecured, unsubordinated debt obligations that rank equally with all of our other unsecured and unsubordinated indebtedness. We pay interest semi-annually on March 15 and September 15 of each year. The initial conversion price is $47.69 per share and the number of underlying shares used to determine the aggregate consideration upon conversion is approximately 5.2 million shares.

Conversion can occur: (1) any time after June 15, 2016; (2) during any calendar quarter that follows a calendar quarter in which the price of our common stock exceeds 130 percent of the conversion price for at least 20 days during the 30 consecutive trading-day period ending on the last trading day of the quarter; (3) during the ten consecutive trading-day period following any five consecutive trading-day period in which the trading price of the Convertible Notes is less than 95 percent of the closing price of our common stock multiplied by the then current number of shares underlying the Convertible Notes; (4) upon specified distributions to our shareholders; (5) in connection with certain corporate transactions; or (6) in the event that our common stock ceases to be listed on the NASDAQ Global Select Market, the NASDAQ Global Market or the New York Stock Exchange, or any of their respective successors.

The closing price of our common stock exceeded 130 percent of the conversion price of the Convertible Notes for more than 20 trading days during the 30 consecutive trading day period ended September 30, 2014. Consequently, the Convertible Notes are convertible at the election of their holders. As this conversion right is outside of our control, the Convertible Notes are classified as a current liability on our consolidated balance sheet at September 30, 2014. We are required to calculate this contingent conversion provision at the end of each quarterly reporting period. Therefore, the convertibility and classification of our Convertible Notes may change depending on the price of our common stock.

At September 30, 2014, the aggregate conversion value of the Convertible Notes exceeded their par value by $424.4 million using a conversion price of $128.65, the closing price of our common stock on September 30, 2014.

Upon conversion, holders of our Convertible Notes are entitled to receive: (1) cash equal to the lesser of the par value of the notes or the conversion value (the number of shares underlying the Convertible Notes multiplied by the then current conversion price per share); and (2) to the extent the conversion value exceeds the par value of the notes, shares of our common stock. In the event of a change in control, as defined in the indenture under which the Convertible Notes have

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been issued, holders can require us to purchase all or a portion of their Convertible Notes for 100 percent of the notes’ par value plus any accrued and unpaid interest.

During the three-month period ended September 30, 2014, we received conversion requests representing $101.3 million in principal value of our Convertible Notes. These conversion requests will be settled in October 2014. Based on our current stock price, we expect that the full $101.3 million of principal will be paid in cash to the converting note holders, and that we will be required to issue shares of our common stock. We expect to receive an equal number of shares of our common stock under our note hedge (discussed below under Convertible Note Hedge and Warrant Transactions) from Deutsche Bank AG London (DB London). We expect to recognize an estimated $4.0 million extinguishment loss upon settlement of these conversions.

The terms of the Convertible Notes provide for settlement wholly or partially in cash. Consequently, we are required to account for their liability and equity components separately so that the subsequent recognition of interest expense reflects our non-convertible borrowing rate. Accordingly, we estimated the fair value of the Convertible Notes without consideration of the conversion option as of the date of issuance (Liability Component). We recorded the excess of the proceeds received over the estimated fair value of the Liability Component totaling $57.9 million as the conversion option (Equity Component) and recognized a corresponding offset as a discount to the Convertible Notes to reduce their net carrying value. We reclassified a portion of the Equity Component equal to the unamortized discount as of September 30, 2014 to temporary equity because one of the contingent conversion criteria had been met at September 30, 2014, as disclosed above. Refer to Note 10—Temporary Equity. We are amortizing the debt discount over the five-year period ending September 15, 2016 (the expected life of the Liability Component) using the interest method and an effective rate of interest of 6.7 percent, which corresponded to our estimated non-convertible borrowing rate at the date of issuance.

Interest expense incurred in connection with our convertible notes consisted of the following (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Contractual coupon rate of interest	$	582	$	625	$	1,832	$	1,875
Discount amortization	2,989		2,801		8,856		8,300
Interest expense—convertible notes	$	3,571	$	3,426	$	10,688	$	10,175

Components comprising the carrying value of the Convertible Notes include the following (in thousands):

	September 30, 2014			December 31, 2013
Principal balance	$	250,000		$	250,000
Discount, net of accumulated amortization of $32,639 and $23,783	(25,299		)	(34,155		)
Carrying amount	$	224,701		$	215,845

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Convertible Note Hedge and Warrant Transactions

In connection with the issuance of our Convertible Notes, we entered into separate convertible note hedge and warrant transactions with DB London to reduce the potentially dilutive impact of the conversion of our convertible notes. Pursuant to the convertible note hedge, we purchased call options to acquire up to approximately 5.2 million shares of our common stock with a strike price of $47.69. The call options become exercisable upon conversion of the Convertible Notes, and will terminate upon the maturity of the Convertible Notes or the first day the Convertible Notes are no longer outstanding, whichever occurs first. We also sold DB London warrants to acquire up to approximately 5.2 million shares of our common stock with a strike price of $67.56. The warrants will expire incrementally on a series of expiration dates subsequent to the September 15, 2016 maturity date of our Convertible Notes. Both the convertible note hedge and warrant transactions will be settled on a net-share basis. If the conversion price of our Convertible Notes is between the strike prices of the call options and warrants on the expiration dates of the warrants, our shareholders will not experience any dilution in connection with the conversion of our Convertible Notes; however, to the extent that the price of our common stock exceeds the strike price of the warrants on any or all of the series of related incremental expiration dates, we will be required to issue shares of our common stock to DB London.

Mortgage Financing

In December 2010, we entered into a Credit Agreement with Wells Fargo and Bank of America, N.A., pursuant to which we obtained a $70.0 million mortgage loan (the 2010 Credit Agreement). The 2010 Credit Agreement matures in December 2014 and is secured by certain of our facilities in Research Triangle Park, North Carolina and Silver Spring, Maryland. The outstanding debt bears a floating rate of interest per annum based on the one-month LIBOR, plus a credit spread of 3.75 percent, or approximately 3.90 percent as of September 30, 2014. We have the option to change the rate of interest charged on the loan to 2.75 percent plus the greater of: (1) Wells Fargo’s prime rate, or (2) the federal funds effective rate plus 0.05 percent, or (3) LIBOR plus 1.0 percent. We can prepay the loan balance without being subject to a prepayment premium or penalty. As of September 30, 2014, the principal balance under the 2010 Credit Agreement was $66.5 million and is included within line of credit and mortgages payable—current as the outstanding balance will be due in December 2014. The 2010 Credit Agreement contains financial covenants, and as of September 30, 2014, we were in compliance with these covenants.

10. Temporary Equity

Temporary equity includes securities that: (1) have redemption features that are outside our control; (2) are not classified as an asset or liability; (3) are excluded from permanent stockholders’ equity; and (4) are not mandatorily redeemable. Amounts included in temporary equity relate to securities that are redeemable at a fixed or determinable price.

Components comprising the carrying value of temporary equity include the following (in thousands):

	September 30, 2014		December 31, 2013
Reclassification of Equity Component (1)	$	25,298	$	34,155
Common stock subject to repurchase (2)	10,882		10,882
Total	$	36,180	$	45,037

(1) Represents the reclassification of the Equity Component equal to the unamortized debt discount of our Convertible Notes as of September 30, 2014 and December 31, 2013 from additional paid-in capital to temporary equity as our Convertible Notes were convertible at the election of their holders as noted above in Note 9—Debt—Convertible Notes Due 2016.

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(2) In connection with our amended 2007 agreement with Toray Industries Inc. (Toray), we issued 400,000 shares of our common stock and provided Toray the right to request that we repurchase the shares at a price of $27.21 per share.

11. Stockholders’ Equity

Earnings Per Common Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period, adjusted for the potential dilutive effect of other securities if such securities were converted or exercised.

The components of basic and diluted earnings per common share comprised the following (in thousands, except per share amounts):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014		2013

Net (loss) income (numerator)	$	(25,237	)	$	62,685	$	224,139	$	204,874
Denominator:
Weighted average outstanding shares — basic	47,297			50,014		48,427		50,007
Effect of dilutive securities (1):
Convertible notes (2)	—			1,822		2,753		1,389
Warrants	—			397		1,715		—
Stock options and employee stock purchase plan	—			1,455		1,465		1,174
Weighted average shares — diluted	47,297			53,688		54,360		52,570
(Loss) earnings per common share:
Basic	$	(0.53	)	$	1.25	$	4.63	$	4.10
Diluted	$	(0.53	)	$	1.17	$	4.12	$	3.90

Stock options and warrants excluded from calculation (2)	15,589			10,088		9,769		10,485

(1) Calculated using the treasury stock method.

(2) Certain stock options and warrants were excluded from the computation of diluted earnings per share because their impact would be anti-dilutive. Under our convertible note hedge agreement, we are entitled to receive shares required to be issued to investors upon conversion of our Convertible Notes. Since related shares used to compute dilutive earnings per share would be anti-dilutive, they have been excluded from the calculation above.

Stock Option Plan

We may grant stock options to employees and non-employees under our equity incentive plan. We estimate the fair value of stock options using the Black-Scholes-Merton valuation model, which requires us to make certain assumptions that can materially impact the estimation of fair value and related compensation expense. These assumptions used to estimate fair value include the expected volatility of our common stock, the risk-free interest rate, the expected term of stock option awards and

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the expected dividend yield. We did not grant any stock options during the three- and nine-month periods ended September 30, 2014 and 2013.

A summary of the activity and status of employee stock options during the nine-month period ended September 30, 2014 is presented below:

	Number of Options		Weighted- Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2014	4,749,449		$	56.06
Granted	—		—
Exercised	(1,129,797	)	33.22
Forfeited	(218	)	11.35
Outstanding and exercisable at September 30, 2014	3,619,434		$	63.20	5.7	$	236,908

Total share-based compensation expense related to employee stock options is as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Selling, general and administrative	$	28,309		$	12,709		$	28,309		$	21,875
Related income tax benefit	(10,276		)	(4,258		)	(10,276		)	(7,328		)
Share-based compensation expense, net of taxes	$	18,033		$	8,451		$	18,033		$	14,547

Employee and non-employee stock option exercise data is summarized below (dollars in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Number of options exercised	460,600		310,673		1,177,797		665,363
Cash received	$	17,220	$	9,799	$	39,391	$	19,896

Employee Stock Purchase Plan

In June 2012, our shareholders approved the United Therapeutics Corporation Employee Stock Purchase Plan (ESPP), which has been structured to comply with Section 423 of the Internal Revenue Code. The ESPP provides eligible employees the right to purchase shares of our common stock at a discount through elective accumulated payroll deductions at the end of each offering period. Offering periods occur in consecutive six-month periods commencing in September and March of each year. During the nine-month period ended September 30, 2014, we issued approximately 45,660 shares of our common stock for $3.3 million in employee contributions. Eligible employees may contribute up to 15 percent of their base salary, subject to certain annual limitations as defined in the ESPP. The purchase price of the shares is equal to the lower of 85 percent of the closing price of our common stock on either the first or last trading day of a given offering period. In addition, the ESPP provides that no eligible employee may purchase more than 4,000 shares during any offering period. The ESPP has a 20-year term and limits the aggregate number of shares that can be issued to 3.0 million.

Share-based compensation expense related to the ESPP for the three-month periods ended September 30, 2014 and 2013 was $292,700 and $204,100, respectively, and for the nine-month periods ended September 30, 2014 and 2013 was $800,200 and $594,300, respectively.

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We estimate the fair value of the shares of our common stock to be purchased under the ESPP using the Black-Scholes-Merton model. Our approach in determining and estimating inputs for the ESPP is similar to the methodology we employ in valuing our STAP awards.

Share Repurchases

In February 2013, our Board of Directors authorized a share repurchase program for up to $420.0 million in aggregate repurchases of our common stock. We completed this repurchase program during the quarter ended June 30, 2014 and acquired 4.6 million shares of our common stock in the aggregate under the program.

In June 2014, our Board of Directors authorized the repurchase of up to an additional $500.0 million of our common stock in open market or privately negotiated transactions, at our discretion (the 2014 Repurchase Program). This program became effective on August 1, 2014, and will remain open for up to one year. During the quarter ended September 30, 2014, we acquired 274,236 shares of our common stock at an aggregate cost of $25.6 million under the 2014 Repurchase Program.

12. Accumulated Other Comprehensive Loss

The following table includes changes in accumulated other comprehensive (loss) income by component, net of tax (in thousands):

	Defined Benefit Pension Plan(1)			Foreign Currency Translation Losses			Unrealized Gains (Losses) on Available- for-Sale Securities			Total
Balance, January 1, 2014	$	(8,445	)	$	(5,069	)	$	331		$	(13,183	)
Other comprehensive (loss) income before reclassifications	(2,194		)	(2,156		)	(75		)	(4,425		)
Amounts reclassified from accumulated other comprehensive loss	678			—			—			678
Net current-period other comprehensive (loss) income	(1,516		)	(2,156		)	(75		)	(3,747		)
Balance, September 30, 2014	$	(9,961	)	$	(7,225	)	$	256		$	(16,930	)

(1) Refer to Note 7—Supplemental Executive Retirement Plan which identifies the captions within our consolidated statement of operations where reclassification adjustments were recognized and their associated tax impact.

13. Income Taxes

Income tax expense for the three- and nine-month periods ended September 30, 2014 and 2013 is based on the estimated effective tax rate for the entire year. The estimated annual effective tax rate can be subject to adjustment in subsequent quarterly periods if components used in its estimation are updated or revised. The estimated annual effective tax rates as of September 30, 2014 and 2013 were 36 percent and 34 percent, respectively. Our 2014 estimated annual effective tax rate increased as of September 30, 2014 primarily due to a reduction in the amount of business tax credits we expect to generate during 2014, compared to our estimate at September 30, 2013 for the 2013 tax year.

We are subject to federal and state taxation in the United States and various foreign jurisdictions. Currently, our 2010 to 2013 tax years are subject to examination by the Internal Revenue Service and by state taxing authorities.

We are unaware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next 12 months.

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In September 2013, the Internal Revenue Service issued final regulations regarding the deduction and capitalization of expenditures related to tangible property. These final regulations apply to amounts paid to acquire, produce, or improve tangible property as well as dispositions of such property and are generally effective for tax years beginning on or after January 1, 2014. We have evaluated these regulations and determined they will not have a material impact on our consolidated results of operations, cash flows or financial position.

14. Segment Information

We currently operate as one operating segment. However, our chief operating decision makers regularly review revenues, cost of product sales and gross profit data as a primary measure of performance for each of our four commercial products. We commenced sales of Orenitram during the second quarter of 2014.

Net revenues, cost of product sales and gross profit for each of our commercial products were as follows (in thousands):

	Three Months Ended September 30,
2014	Remodulin		Tyvaso		Adcirca		Orenitram		Total
Net revenues	$	142,877	$	119,685	$	51,247	$	14,460	$	328,269
Cost of product sales	16,915		16,878		3,087		3,923		40,803
Gross profit	$	125,962	$	102,807	$	48,160	$	10,537	$	287,466

2013
Net revenues	$	132,322	$	120,306	$	47,378	$	—	$	300,006
Cost of product sales	13,549		14,245		2,922		—		30,716
Gross profit	$	118,773	$	106,061	$	44,456	$	—	$	269,290

	Nine Months Ended September 30,
2014	Remodulin		Tyvaso		Adcirca		Orenitram		Total
Net revenues	$	417,137	$	347,997	$	147,926	$	21,092	$	934,152
Cost of product sales	44,522		50,076		9,070		6,445		110,113
Gross profit	$	372,615	$	297,921	$	138,856	$	14,647	$	824,039

2013
Net revenues	$	371,314	$	324,409	$	124,924	$	—	$	820,647
Cost of product sales	40,439		44,125		7,785		—		92,349
Gross profit	$	330,875	$	280,284	$	117,139	$	—	$	728,298

For the three-month periods ended September 30, 2014 and 2013, net revenues from our U.S.-based distributors represented 75 percent and 76 percent, respectively, of our total net operating revenues.

For the nine-month periods ended September 30, 2014 and 2013, net revenues from our U.S.-based distributors represented 75 percent and 77 percent, respectively, of our total net operating revenues.

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15. Litigation

Department of Health and Human Services Subpoena

In December 2013, we received a subpoena from the Office of the Inspector General (OIG) of the Department of Health and Human Services in connection with a civil investigation by the United States Department of Justice, principally represented by the United States Attorney’s Office for the District of Maryland. The subpoena requests documents regarding Remodulin, Tyvaso and Adcirca, including our marketing practices relating to these products. We are cooperating with the investigation. We are not aware that a claim, litigation or assessment has been asserted in connection with the subpoena. However, we cannot predict what actions, if any, may be taken by the OIG, the Department of Justice, other governmental entities, or any third parties in connection with such investigation.

Sandoz Inc.

In February 2012, we received a Paragraph IV certification letter (the Original Notice Letter) from Sandoz Inc. (Sandoz) advising that Sandoz had submitted an abbreviated new drug application (ANDA) to the FDA requesting approval to market a generic version of the 10 mg/mL strength of Remodulin. In December 2012, we received notice (the Second Notice Letter) that Sandoz had amended its previously filed ANDA to request additional approval to market generic versions of the 1 mg/mL, 2.5 mg/mL, and 5 mg/mL strengths of Remodulin. In the Original Notice Letter and the Second Notice Letter, Sandoz stated that it intends to market a generic version of Remodulin before the expiration of the following patents relating to Remodulin: U.S. Patent No. 5,153,222, which expires in October 2014; U.S. Patent No. 6,765,117, which expires in October 2017; and U.S. Patent No. 7,999,007, which expires in March 2029. Each of these patents is listed in the Orange Book.

We responded to the Original Notice Letter by filing a lawsuit in March 2012 against Sandoz in the U.S. District Court for the District of New Jersey alleging patent infringement. We responded to the Second Notice Letter by filing an additional lawsuit in January 2013 for patent infringement in the U.S. District Court for the District of New Jersey. Sandoz filed counterclaims in each action alleging that the patents at issue in the litigation are invalid or will not be infringed by the commercial manufacture, use or sale of the proposed product described in Sandoz’s ANDA submission. Shortly before trial, Sandoz withdrew its request to market a generic version of Remodulin before the expiration of U.S. Patent No. 5,153,222, but maintained its request to market a generic version of Remodulin before the expiration of the other two patents. The trial for both lawsuits, limited to U.S. Patent Nos. 6,765,117 and 7,999,007, occurred in May and June 2014 and we received the Court’s decision in August 2014. In that decision, with respect to U.S. Patent No. 6,765,117 the Court both ruled that the patent is valid and enforceable against Sandoz, Inc., and enjoined Sandoz from marketing its generic product until the expiration of that patent in October 2017. With respect to U.S. Patent No. 7,999,007, the Court ruled that the patent is valid, but would not be infringed by Sandoz’ generic product.

Sandoz has appealed the ruling that U.S. Patent No. 6,765,117 is valid and would be infringed, and that U.S. Patent No. 7,999,007 is valid. We have filed a cross-appeal challenging the Court’s ruling that U.S. Patent No. 7,999,007 would not be infringed by Sandoz’s generic version of Remodulin.

In July 2014, we received an additional Paragraph IV certification letter (Third Notice Letter) from Sandoz, seeking permission to market and sell its generic version of Remodulin before the expiration of U.S. Patent No. 8,497,393, which expires in December 2028 and is also listed in the Orange Book. We responded to Sandoz’s Third Notice Letter by filing a lawsuit in September 2014 in the U.S. District Court for the District of New Jersey for patent infringement with respect to U.S. Patent No. 8,497,393.

We intend to vigorously enforce our intellectual property rights relating to Remodulin.

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Teva Pharmaceuticals USA, Inc.

On July 21, 2014, we received a Paragraph IV certification letter (Teva’s Notice Letter) from Teva Pharmaceuticals USA, Inc. (Teva) advising that Teva had submitted an ANDA to the FDA requesting approval to market a generic version of Remodulin.

In Teva’s Notice Letter, Teva states that it intends to market a generic version of Remodulin before the expiration of U.S. Patent Nos. 6,765,117 and 8,497,393, both of which are also the subject of Paragraph IV certifications by Sandoz, discussed above. Teva’s Notice Letter states that the ANDA contains a Paragraph IV certification alleging that these patents are not valid, not enforceable and/or will not be infringed by the commercial manufacture, use or sale of the proposed product described in Teva’s ANDA submission.

We responded to Teva’s Notice Letter by filing a lawsuit in September 2014 against Teva in the U.S. District Court for the District of New Jersey alleging infringement of U.S. Patent Nos. 6,765,117, 7,999,007 and 8,497,393, as well as infringement of U.S. Patent Nos. 8,653,137 and 8,658,694, both of which expire in September 2028. Teva requested and obtained an extension of the deadline to file its answer to our complaint.

Under the Hatch-Waxman Act, the FDA is automatically precluded from approving Teva’s ANDA for up to 30 months from receipt of Teva’s Notice Letter or until the issuance of a District Court decision that is adverse to us, whichever occurs first. We intend to vigorously enforce our intellectual property rights relating to Remodulin.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013, and the consolidated financial statements and accompanying notes included in Part I, Item I of this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995, including the statements listed in the section below entitled Part II, Item 1A—Risk Factors. These statements are based on our beliefs and expectations about future outcomes, and are subject to risks and uncertainties that could cause our actual results to differ materially from anticipated results. Factors that could cause or contribute to such differences include those described in Part II, Item 1A—Risk Factors of this Quarterly Report on Form 10-Q; factors described in our Annual Report on Form 10-K for the year ended December 31, 2013, under the section entitled Part I, Item 1A—Risk Factors—Forward-Looking Statements; and factors described in other cautionary statements, cautionary language and risk factors set forth in other filings with the Securities and Exchange Commission (SEC). We undertake no obligation to publicly update these forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

Our key therapeutic products and product candidates include:

· Prostacyclin analogues (Remodulin®, Tyvaso®, Orenitram® and 314d): stable synthetic forms of prostacyclin, an important molecule produced by the body that has powerful effects on blood vessel health and function;

· Phosphodiesterase type 5 (PDE-5) inhibitor (Adcirca®): a molecule that acts to inhibit the degradation of cyclic guanosine monophosphate (cyclic GMP) in cells. Cyclic GMP is activated by nitric oxide (NO), a naturally occurring substance in the body that mediates the relaxation of vascular smooth muscle;

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· Monoclonal antibody for oncologic applications (ch14.18 MAb): an antibody that treats cancer by activating the immune system;

· Glycobiology antiviral agents: a novel class of small, sugar-like molecules that have shown antiviral activity in a range of pre-clinical settings;

· Cell-based therapy: a cell-based product known as PLacental eXpanded (PLX) cells we are developing for the treatment of pulmonary hypertension; and

· Lung transplantation: engineered lungs and lung tissue, which we are developing using xenotransplantation and regenerative medicine technologies, for transplantation in patients suffering from pulmonary arterial hypertension (PAH) and other lung diseases. We are also developing technologies aimed at improving outcomes for lung transplant recipients.

We concentrate substantially all of our research and development efforts on the preceding key therapeutic programs. We currently market and sell the following commercial products:

· Remodulin (treprostinil) Injection (Remodulin). Remodulin, a continuously-infused formulation of the prostacyclin analogue treprostinil, is approved by the United States Food and Drug Administration (FDA) for subcutaneous (under the skin) and intravenous (in the vein) administration. Remodulin is indicated to diminish symptoms associated with exercise in World Health Organization (WHO) Group 1 PAH patients. Remodulin is also approved for the treatment of patients requiring transition from Flolan® (epoprostenol sodium) for Injection. Remodulin has also been approved in various countries outside of the United States. In the second and third quarters of 2014, we commenced sales of Remodulin to distributors in China and Japan, respectively. Remodulin is sold in Japan under the brand name Treprost™.

· Tyvaso (treprostinil) Inhalation Solution (Tyvaso). Tyvaso, an inhaled formulation of treprostinil, is approved by the FDA to improve exercise ability in WHO Group 1 PAH patients.

· Orenitram (treprostinil) Extended-Release Tablets (Orenitram). In December 2013, the FDA approved Orenitram, a tablet dosage form of treprostinil, for the treatment of PAH in WHO Group 1 PAH patients to improve exercise capacity. Orenitram’s label provides for dosing either twice per day (BID) or three times per day (TID), and we anticipate that TID dosing may lead to a more favorable pharmacokinetic profile than BID, although TID dosing was not studied in our pivotal trial. We commenced sales of Orenitram during the second quarter of 2014.

· Adcirca (tadalafil) Tablets (Adcirca). We acquired exclusive commercialization rights to Adcirca, an oral PAH therapy, in the United States and Puerto Rico from Eli Lilly and Company (Lilly). Adcirca is approved by the FDA to improve exercise ability in WHO Group 1 PAH patients.

Revenues

Sales of Remodulin, Tyvaso and Adcirca comprise substantially all of our revenues. Despite commencing Orenitram sales during the second quarter of 2014, we remain substantially reliant on sales of Remodulin, Tyvaso and Adcirca as our principal sources of revenue.

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We have entered into separate, non-exclusive distribution agreements with Accredo Health Group, Inc. (Accredo) and CVS Health Corporation (CVS) to distribute Remodulin, Tyvaso and Orenitram in the United States. We sell these products to Accredo and CVS under terms and conditions that are materially similar to one another. We also sell Remodulin and Tyvaso to various distributors internationally. We sell Adcirca through Lilly’s pharmaceutical wholesaler network at a wholesale price determined by Lilly, which Lilly generally increases twice per year. Most recently, Lilly increased the wholesale price of Adcirca by 9.1 percent effective July 2, 2014.

We require our specialty pharmaceutical distributors to maintain reasonable levels of inventory reserves as the interruption of Remodulin, Tyvaso or Orenitram therapy can be life threatening. Our specialty pharmaceutical distributors typically place monthly orders based on estimates of future demand and contractual minimum inventory requirements. As a result, sales of Remodulin and Tyvaso, our most significant sources of revenue, can vary depending on the timing and magnitude of these orders and may not precisely reflect patient demand.

We recognize revenues net of: (1) estimated rebates; (2) prompt pay discounts; (3) allowances for sales returns; and (4) distributor fees. We estimate our liability for rebates based on an analysis of historical levels of rebates to both Medicaid and commercial third-party payers and consider the impact of sales trends, changes in government and commercial rebate programs and any anticipated changes in our products’ pricing. In addition, we determine our obligation for prescription drug discounts required for Medicare Part D patients within the coverage gap based on estimates of the number of Medicare Part D patients and the period such patients will remain within the coverage gap. We provide prompt pay discounts to customers that pay amounts due within a specific time period and base related estimates on observed historical customer payment behavior. We derive estimates relating to our allowance for returns of Adcirca from actual return data accumulated since the drug’s launch in 2009. We also compare patient prescription data for Adcirca to sales on a quarterly basis to ensure a reasonable relationship between prescription and sales trends. To date, we have not identified any unusual patterns in the volume of prescriptions relative to sales that would necessitate an alternative method to estimate our reserve for returns. Tyvaso, Remodulin and Orenitram are distributed under separate contracts with substantially similar terms, which include exchange rights in the event that product is damaged during shipment or expires. The allowance for exchanges for Remodulin and Tyvaso is based on the historical rate of product exchanges, which has been immaterial. Furthermore, we anticipate minimal exchange activity in the future for Tyvaso, Remodulin and Orenitram since we typically sell these products with a remaining shelf life in excess of one year and our distributors generally carry a thirty- to sixty-day supply of our products at any given time. As a result, we do not record reserves for exchanges for Tyvaso, Remodulin and Orenitram at the time of sale. Lastly, we pay our distributors for contractual services rendered and accrue for related fees based on contractual rates applied to the estimated units of service provided by distributors for a given financial reporting period.

Generic Competition

We disclose in Part II, Item 1.—Legal Proceedings of this Quarterly Report on Form 10-Q that we are engaged in litigation with Sandoz Inc. (Sandoz) and Teva Pharmaceuticals USA, Inc. (Teva), contesting their abbreviated new drug applications (ANDAs) seeking FDA approval to market generic versions of Remodulin before the expiration of certain of our U.S. patents in October 2017, December 2028, March 2029 and (in the case of Sandoz’s ANDA) September 2028.

We intend to vigorously enforce our intellectual property rights relating to Remodulin. However, there can be no assurance that we will prevail in defending our patent rights, or that additional challenges from other ANDA filers or other challengers will not surface with respect to Remodulin or our other treprostinil-based products. Our existing patents could be invalidated, found unenforceable or found not to cover one or more generic forms of Remodulin, Tyvaso or Orenitram. If any ANDA filer were to receive approval to sell a generic version of Remodulin, Tyvaso or Orenitram and/or prevail in any patent litigation, the affected product(s) would become subject to increased competition which could reduce our sales.

Certain patents for Revatio®, a PDE-5 inhibitor marketed by Pfizer, Inc. for treatment of PAH, expired in 2012, leading several manufacturers to launch generic formulations of sildenafil citrate, the active ingredient in Revatio. Generic sildenafil’s lower price relative to Adcirca could lead to an erosion of Adcirca’s market share and limit its potential sales. Although we believe Adcirca’s once-daily dosing regimen provides a significant competitive advantage over generic sildenafil’s multiple

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dosing regimen, we believe that government payers and private insurance companies may favor the use of less expensive generic sildenafil over Adcirca. Thus far, we have not observed any measurable impact of generic sildenafil on sales of Adcirca; however, circumstances could change over time and our revenues could be adversely impacted. The U.S. patent for Adcirca for the treatment of pulmonary hypertension will expire in November 2017.

Patent expiration and generic competition for any of our commercial products could have a significant, adverse impact on the magnitude of our revenues, which is inherently difficult to predict. For additional discussion, refer to the risk factor entitled, Our intellectual property rights may not effectively deter competitors from developing competing products that, if successful, could have a material adverse effect on our revenues and profits, contained in Part II, Item 1A—Risk Factors included in this Quarterly Report on Form 10-Q.

Cost of Product Sales

Cost of product sales comprise: (1) costs to produce and acquire products sold to customers; (2) royalty payments under license agreements granting us rights to sell related products; and (3) direct and indirect distribution costs incurred in the sale of products. We acquired the rights to sell our commercial products through license and assignment agreements with the original developers of these products. These agreements obligate us to pay royalties based on specified percentages of our net revenues from the related products. Currently, we pay GlaxoSmithKline PLC a royalty of ten percent of net sales of our treprostinil-based products (Remodulin, Tyvaso and Orenitram). This royalty obligation expired in October 2014. As a result, we anticipate that gross margins on all three of our treprostinil-based products will increase. Going forward, we have no royalty obligations for Remodulin or Tyvaso, and our only remaining royalty obligation on Orenitram sales will be a single-digit royalty relating to technology used in its formulation. We pay a five percent royalty to Lilly on net sales of Adcirca.

We produce Remodulin, Tyvaso and Orenitram, and the active ingredients for each, in our own facilities. We contract with third party contract manufacturers to supplement our Remodulin and Tyvaso production capacity and mitigate the risk of shortages and supply interruptions, and we are pursuing similar arrangements for Orenitram.

We began selling Orenitram during the second quarter of 2014. Typical of the initial commercial activities of a newly-launched product, Orenitram’s cost of product sales as a percentage of its net revenue is significantly higher than that of our other commercial products. We expect that as Orenitram’s revenues increase, its cost of product sales as a percentage of net revenue will decrease to levels more comparable to our other commercial products.

Lilly manufactures Adcirca. We take title to Adcirca upon its manufacture and bear any losses related to the storage, distribution and sale of Adcirca.

Operating Expenses

Since our inception, we have devoted substantial resources to our various clinical trials and other research and development efforts, which we have conducted both internally and through third parties. From time to time, we also license or acquire additional technologies and compounds to be incorporated into our development pipeline.

Share-Based Compensation

Our operating expenses and net income are often materially impacted by the recognition of share-based compensation expense (benefit) associated with awards granted under our share tracking award plans (STAP) and potential stock option grants containing a market or performance condition, as the fair value of these awards varies with the changes in our stock price. The fair values of STAP awards and potential stock option grants are measured using inputs and assumptions under the Black-Scholes-Merton model that can materially impact the amount of compensation expense (benefit) for a given period.

We account for STAP awards as liabilities because they are settled in cash. As such, we must re-measure the fair value of outstanding STAP awards at the end of each financial reporting period until the awards are no longer outstanding. Changes in

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our STAP-related liability resulting from such re-measurements are recorded as adjustments to share-based compensation expense (benefit) and can create substantial volatility within our operating expenses from financial reporting period to period. The following factors, among others, have a significant impact on the amount of share-based compensation expense (benefit) recognized in connection with the STAP from period to period: (1) volatility in the price of our common stock (specifically, increases in the price of our common stock will generally result in an increase in our STAP liability and related compensation expense, while decreases in our stock price will generally result in a reduction in our STAP liability and related compensation expense); (2) changes in the number of outstanding awards; (3) changes in the number of vested and partially vested awards; and (4) the probability of meeting the relevant performance criteria.

If we meet annual contractual performance requirements tied to growth in our market capitalization, our Chief Executive Officer will be granted stock options at year-end, which vest immediately upon grant. We accrue compensation expense for our Chief Executive Officer’s estimated stock option grant when we determine that it is probable that the performance criteria will be met.

Major Research and Development Projects

Our major research and development projects focus on: (1) the use of prostacyclin analogues, a cell-based therapy and lung transplantation technologies to treat cardiopulmonary diseases; (2) a monoclonal antibody to treat high-risk neuroblastoma; and (3) glycobiology antiviral agents to treat infectious diseases.

Cardiopulmonary Disease Projects

Remodulin

In 2009, we entered into an agreement with exclusive rights in the United States, United Kingdom, France, Germany, Italy and Japan, with Medtronic, Inc. (Medtronic) to develop its proprietary intravascular infusion catheter to be used with Medtronic’s SynchroMed® II implantable infusion pump and related infusion system components (collectively referred to as the “Medtronic System”) in order to deliver Remodulin for the treatment of PAH. If the Medtronic System is successful, it could reduce many of the patient burdens and other complications associated with infused prostacyclin analogues. With our funding, Medtronic conducted the DelIVery clinical trial in order to study the safety of the Medtronic System while administering Remodulin. The primary objective of this study was to demonstrate a rate of catheter-related complications below 2.5 per 1,000 patient-days while using the Medtronic System to deliver Remodulin. In September 2013, Medtronic informed us that it met this primary objective (p<0.0001). In addition to the clinical study, Medtronic must complete other stability, compatibility and technical assessments of the Medtronic System, including modifications to its hardware and software, and address any outstanding regulatory issues. Upon completion of these activities by Medtronic, we anticipate Medtronic will make preparations to file a premarket approval application seeking FDA approval for the catheter and labeling changes to enable the use of the Medtronic System with Remodulin. In tandem, we plan to seek FDA approval of a supplement to Remodulin’s label to allow the use of Remodulin with the Medtronic System.

Tyvaso

In connection with Tyvaso’s approval from the FDA, we agreed to a post-marketing requirement (PMR) obligating us to conduct an additional study to continue to assess the safety of Tyvaso. In accordance with this PMR, we recently completed enrollment of patients in a long-term observational study the United States that will include 1,000 patient years of follow-up in patients treated with Tyvaso and 1,000 patient years of follow-up in control patients receiving other PAH treatments. We are required to update the FDA annually on our PMR and to submit the results of the study by June 30, 2015.

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Orenitram

In December 2013, the FDA approved Orenitram for the treatment of PAH in WHO Group 1 patients to improve exercise capacity. Orenitram’s label notes that Orenitram has not been shown to improve exercise capacity in patients on background vasodilator therapy, and that Orenitram is probably most useful to replace subcutaneous, intravenous, or inhaled treprostinil, but that these uses have not been studied.

We believe that in order for Orenitram to reach its full commercial potential, we need to complete further studies to support an amendment to Orenitram’s label to indicate that Orenitram delays morbidity and mortality in patients who are on an approved oral background therapy. As such, we are enrolling up to 858 patients in a phase IV clinical trial called FREEDOM-EV, which began in 2012. FREEDOM-EV is a placebo-controlled study of patients who enter the study on an approved background therapy, and one of the two primary endpoints of the study is the time to clinical worsening.

We expect to seek approval of Orenitram in Europe upon the successful completion of the FREEDOM-EV study. In 2005, the European Medicines Agency (EMA) announced that Orenitram had been designated an orphan medicinal product for the treatment of PAH. A request for orphan drug designation for Orenitram is pending before the FDA.

314d

We have been studying various formulations of beraprost since 2000. We completed a phase I safety trial of a reformulated, single-isomer version of beraprost (314d) in July 2012, and the data suggested that dosing 314d four times a day was safe. We believe that 314d and treprostinil have differing prostacyclin receptor-binding profiles and thus could provide benefits to certain groups of patients with differing sets of safety and efficacy profiles. We also believe inhaled treprostinil and 314d have complimentary pharmacokinetic and pharmacodynamic profiles, which indicates they should provide greater efficacy in combination. As a result, in 2013 we began enrolling a phase III study called BEAT (BEraprost 314d Add-on to Tyvaso) to evaluate the clinical benefit and safety of 314d in combination with Tyvaso for patients with PAH who show signs of deterioration on inhaled treprostinil or have a less than optimal response to inhaled treprostinil treatment. We intend to enroll 240 patients in the study, which will have a primary endpoint of time to clinical worsening.

Cell-Based Therapy

In 2011, we entered into a license agreement with Pluristem Ltd. (Pluristem) to develop and commercialize a cell-based product for the treatment of PAH using Pluristem’s proprietary cell technology known as PLacental eXpanded (PLX) cells. We commenced a phase I clinical study in Australia in 2013.

Lung Transplantation

The only reported cure for PAH is a lung transplant. Only a few hundred PAH patients receive a lung transplant each year due to the shortage of available lungs for transplant and the demand for transplantable lungs in patients with PAH and other end-stage pulmonary diseases, such as chronic obstructive pulmonary disease and idiopathic pulmonary fibrosis.

In 2011, we acquired all of the outstanding stock of Revivicor, Inc., a company focused on developing genetic biotechnology platforms to provide alternative tissue sources for the treatment of human degenerative disease through tissue and organ xenotransplantation. We are focused on this platform with the goal of providing transplantable lungs for human patients.

In May 2014, we closed on a $50.0 million preferred stock investment in Synthetic Genomics Inc. (SGI). In addition, we entered into a separate multi-year research and development collaboration agreement whereby SGI will develop engineered primary pig cells with modified genomes for use in our xenotransplantation program, which is principally focused on lungs. Under this agreement, each party will assume its own research and development costs and SGI may receive royalties and milestone payments from development and commercialization of organs.

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We are also engaged in preclinical development of several regenerative technologies for creating transplantable lung tissue and whole lungs for patients with end-stage lung disease, as well as other technologies intended to improve outcomes for lung transplant recipients.

From inception to September 30, 2014, we have spent $1.1 billion on all of our current and former cardiopulmonary disease programs.

Cancer-Related Projects

Ch14.18 Antibody

In 2010, we entered into a Cooperative Research and Development Agreement (CRADA) with the National Cancer Institute (NCI) of the United States National Institutes for Health (NIH) to collaborate on the late-stage development and regulatory approval process for Chimeric Monoclonal Antibody 14.18 (ch14.18) for children with high-risk neuroblastoma and patients with other forms of cancer. Ch14.18 is an antibody that has shown potential in the treatment of neuroblastoma by targeting GD2, a glycolipid on the surface of tumor cells. Under the terms of the CRADA, the NCI has completed necessary studies and we have developed the ability to produce ch14.18 on a commercial scale. Collectively, related NCI-supported studies and our production data were used as the foundation for our marketing authorization application, which the EMA accepted in December 2013, and a biologics license application, which the FDA accepted in June 2014 under a six-month review process. We previously received orphan drug designation for ch14.18 from both the FDA and the EMA.

We have spent $120.3 million from inception to September 30, 2014, on all of our current and former cancer programs.

Infectious Disease Projects

Pursuant to our research agreement with the University of Oxford (Oxford), we have the exclusive right to commercialize a platform of glycobiology antiviral drug candidates in various preclinical and clinical stages of testing for the treatment of a variety of viruses. Through our research agreement with Oxford, we are also supporting the research of new glycobiology antiviral drug candidates and technologies. We are currently testing many of these compounds in preclinical studies and Oxford continues to synthesize new agents that we may elect to test.

In 2011, we were awarded a cost plus fixed fee contract with an aggregate value of up to $45.0 million under a Broad Agency Announcement from the National Institute of Allergy and Infectious Diseases (NIAID) of the NIH for studies directed toward the development of a broad spectrum antiviral drug with a primary indication for dengue and a secondary indication for influenza, based on our glycobiology antiviral platform. There are eight milestone-based options to expand the project and funding under the contract. To date, we have received contract modifications exercising five of these options, increasing total committed contract funding to $27.8 million. We recognize revenue under this contract to the extent of allowable costs incurred, plus a proportionate amount of fees earned. Related revenues are included under the caption Other Revenues on our consolidated statements of operations.

Pursuant to our contract with NIAID, we began enrolling a phase I clinical trial of our lead antiviral candidate, an alpha-glucosidase inhibitor called UV-4B, for the treatment of dengue in the third quarter of 2014.

From inception to September 30, 2014, we have spent $83.4 million on all of our current and former infectious disease programs.

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Future Prospects

The extent of our future success is dependent, among other things, on how well we achieve the following objectives: (1) in the near term, continued sales growth of our current commercial products by increasing our market share and launching enhancements designed to improve patient care, such as implantable pumps for Remodulin, and growing sales of our recently-launched product, Orenitram, including through positive prescriber experience with dosing three times per day; and (2) in the medium term, augmenting our near-term product growth through: (a) the successful launch of Orenitram for use in combination with other oral therapies following positive FREEDOM-EV results, and (b) the launch of 314d following positive results of the BEAT study; and (3) in the long term, supplementing our oral, inhaled and infused PAH therapy revenues by introducing transplantable cells, tissues and organs that may prove effective in treating PAH and other end-stage lung diseases.

Our ability to achieve these objectives and sustain our growth and profitability will depend on many factors, including among others: (1) the timing and outcome of clinical trials and regulatory approvals for products we develop; (2) the timing of and the degree of success related to the commercial launch of new products; (3) the demand for our products; (4) pricing and reimbursement of our products by public and private health insurance organizations; (5) the competition we face within our industry; (6) our ability to effectively manage our business in an increasingly complex legal and regulatory environment; (7) our ability to defend against generic competition and challenges to our patents, including the ongoing challenge to our Remodulin patents by two generic drug companies; and (8) the risks identified in Part II, Item 1A—Risk Factors, included in this Quarterly Report on Form 10-Q.

We may need to construct additional facilities to support the development and commercialization of our products. For example, the development of broad-spectrum anti-viral drugs, cell therapies and transplantable lungs and lung tissues will require the design and construction of sophisticated facilities that will need to comply with stringent regulatory requirements related to these programs, some of which have not yet been developed or adopted by the relevant government agencies. The extent to which we fully develop any of these facilities will depend on the progress of our pre-clinical and clinical development in various earlier stage programs.

We operate in a highly competitive market in which a small number of pharmaceutical companies control a majority share of available PAH therapies. These pharmaceutical companies are well established in the market and possess greater financial, technical and marketing resources than we do. In addition, there are a number of investigational products in late-stage development that, if approved, may erode the market share of our existing commercial therapies and make market acceptance more difficult to achieve for any therapies we attempt to market in the future.

Financial Position

Cash, cash equivalents and marketable securities at September 30, 2014 and December 31, 2013 (excluding restricted amounts of $5.4 million) were $968.2 million and $1,136.7 million, respectively. The decrease of $168.5 million in unrestricted cash, cash equivalents and marketable securities resulted largely from the use of $403.2 million to repurchase shares of our common stock, $177.7 million for 2014 estimated tax payments and $97.9 million for the exercise of cash-settled STAP awards, during the nine months ended September 30, 2014. These payments were offset by an estimated $540.3 million of cash generated from operations and $39.4 million of cash received from the exercise of stock options.

Other current assets increased by $60.8 million from $46.4 million at December 31, 2013 to $107.3 million at September 30, 2014. The increase resulted primarily from the reclassification of $68.2 million from other current liabilities representing the excess tax payments we made during the nine months ended September 30, 2014 net of the taxes that would be due based on our interim financial results during this period using our estimated annual effective tax rate.

Property, plant and equipment, net at September 30, 2014 was $481.0 million, compared to $465.0 million at December 31, 2013. The $16.1 million increase was due to $38.3 million incurred on construction projects offset by $22.2 million of depreciation expense during the nine months ended September 3, 2014.

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Other assets increased by $45.1 million during the nine months ended September 30, 2014, to $98.4 million at September 30, 2014, primarily as a result of our $50.0 million investment in SGI, offset in part by our sale at par of $5.0 million of stock we held in another private company.

Accounts payable and accrued expenses at September 30, 2014 totaled $128.0 million, compared to $92.2 million at December 31, 2013. The increase in accounts payable and accrued expenses of $35.7 million related to a $26.8 million increase in accounts payable due to the timing and volume of invoices being processed for payment and an $8.7 million increase in accrued expenses, primarily related to an increase in royalties and government and commercial rebates.

The STAP liability (current) increased by $13.9 million, from $288.0 million at December 31, 2013, to $301.9 million at September 30, 2014. The increase of the liability resulted from a 14 percent increase in the price of our common stock during the year, offset partially by exercises and forfeitures of STAP awards.

Additional paid-in capital was $1,161.1 million at September 30, 2014, compared to $1,057.2 million at December 31, 2013. The $103.9 million increase in additional paid-in capital primarily consisted of the following components: (1) $62.6 million in proceeds from stock option exercises and related tax benefits; (2) $8.9 million from the reclassification of part of the equity component of our Convertible Notes (for further information, refer to Note 9—Debt—Convertible Notes Due 2016 to our consolidated financial statements included in this Quarterly Report on Form 10-Q); (3) $28.3 million of share-based compensation, recognized in connection with our Chief Executive Officer’s potential year-end stock option award; and (4) $3.3 million in proceeds from the issuance of approximately 45,660 shares of our common stock under our employee stock purchase plan.

The $403.2 million increase in treasury stock to $916.6 million at September 30, 2014, from $513.4 million at December 31, 2013, reflects the cost to repurchase approximately 4.2 million shares of our common stock during the nine months ended September 30, 2014.

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Three Months Ended September 30, 2014 and 2013

Revenues

The following table sets forth the components of net revenues (dollars in thousands):

	Three Months Ended September 30,				Percentage
	2014		2013		Change
Cardiopulmonary products:
Remodulin	$	142,877	$	132,322	8.0	%
Tyvaso	119,685		120,306		(0.5	)%
Adcirca	51,247		47,378		8.2	%
Orenitram	14,460		—		100.0	%
Other	1,681		2,219		(24.2	)%
Total net revenues	$	329,950	$	302,225

UNITED THERAPEUTICS Corp - FORM 10-Q - October 28, 2014

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