UNITED THERAPEUTICS Corp - FORM 10-Q

Attached files

file	filename
EX-10.2 - EX-10.2 - UNITED THERAPEUTICS Corp	a15-17842_1ex10d2.htm
EX-32.1 - EX-32.1 - UNITED THERAPEUTICS Corp	a15-17842_1ex32d1.htm
EX-31.3 - EX-31.3 - UNITED THERAPEUTICS Corp	a15-17842_1ex31d3.htm
EX-31.1 - EX-31.1 - UNITED THERAPEUTICS Corp	a15-17842_1ex31d1.htm
EX-32.3 - EX-32.3 - UNITED THERAPEUTICS Corp	a15-17842_1ex32d3.htm
EX-31.2 - EX-31.2 - UNITED THERAPEUTICS Corp	a15-17842_1ex31d2.htm
EX-32.2 - EX-32.2 - UNITED THERAPEUTICS Corp	a15-17842_1ex32d2.htm
EX-10.3 - EX-10.3 - UNITED THERAPEUTICS Corp	a15-17842_1ex10d3.htm

Table of Contents

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, 2015

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, 2015 was 45,629,412.

Table of Contents

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	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	39

Part II.	OTHER INFORMATION	40

Item 1.	Legal Proceedings	40

Item 1A.	Risk Factors	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58

Item 6.	Exhibits	58

SIGNATURES		59

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	September 30, 2015			December 31, 2014
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	765,205		$	397,697
Marketable investments	156,630			297,842
Accounts receivable, net of allowance of none for 2015 and 2014	179,642			162,287
Inventories, net	80,844			66,927
Other current assets	46,202			49,444
Total current assets	1,228,523			974,197
Marketable investments	91,706			122,658
Goodwill and other intangibles, net	28,533			29,465
Property, plant and equipment, net	474,770			478,421
Deferred tax assets, net	182,600			181,721
Other assets	153,101			97,948
Total assets	$	2,159,233		$	1,884,410

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	113,346		$	85,382
Convertible notes	30,017			126,414
Share tracking awards plan	214,017			282,101
Other current liabilities	199,962			10,413
Total current liabilities	557,342			504,310
Other liabilities	122,522			114,526
Total liabilities	679,864			618,836
Commitments and contingencies:
Temporary equity	12,499			23,218
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, 68,460,587 and 65,988,561 shares issued, and 45,583,017 and 47,107,709 shares outstanding at September 30, 2015 and December 31, 2014, respectively	685			660
Additional paid-in capital	1,723,888			1,376,141
Accumulated other comprehensive loss	(21,930		)	(16,734		)
Treasury stock, 22,877,570 and 18,880,852 shares at September 30, 2015 and December 31, 2014, respectively	(1,850,882		)	(1,185,825		)
Retained earnings	1,615,109			1,068,114
Total stockholders’ equity	1,466,870			1,242,356
Total liabilities and stockholders’ equity	$	2,159,233		$	1,884,410

See accompanying notes to consolidated financial statements.

Table of Contents

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Unaudited)						(Unaudited)
Revenues:
Net product sales	$	384,708		$	328,269		$	1,056,374		$	934,152
Other	1,513			1,681			4,512			8,004
Total revenues	386,221			329,950			1,060,886			942,156
Operating expenses:
Research and development	9,527			118,876			169,150			171,067
Selling, general and administrative	(17,276		)	202,507			304,051			300,753
Cost of product sales	6,891			40,803			43,727			110,113
Total operating expenses	(858		)	362,186			516,928			581,933
Operating income (loss)	387,079			(32,236		)	543,958			360,223
Other (expense) income:
Interest expense	(834		)	(4,709		)	(4,189		)	(14,065		)
Other, net	618			1,112			(1,364		)	4,258
Gain on sale of intangible asset	350,000			—			350,000			—
Total other income (expense), net	349,784			(3,597		)	344,447			(9,807		)
Income (loss) before income taxes	736,863			(35,833		)	888,405			350,416
Income tax (expense) benefit	(272,438		)	10,596			(341,410		)	(126,277		)
Net income (loss)	$	464,425		$	(25,237	)	$	546,995		$	224,139
Net income (loss) per common share:
Basic	$	10.20		$	(0.53	)	$	11.86		$	4.63
Diluted	$	9.24		$	(0.53	)	$	10.58		$	4.12
Weighted average number of common shares outstanding:
Basic	45,531			47,297			46,105			48,427
Diluted	50,239			47,297			51,715			54,360

See accompanying notes to consolidated financial statements.

Table of Contents

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Unaudited)						(Unaudited)
Net income (loss)	$	464,425		$	(25,237	)	$	546,995		$	224,139
Other comprehensive income (loss):
Foreign currency translation loss	(2,107		)	(2,538		)	(3,660		)	(2,156		)
Defined benefit pension plan:
Prior service cost arising during period, net of tax	—			—			—			(2,415		)
Actuarial (loss) gain arising during period, net of tax	—			—			(2,110		)	221
Less: amortization of actuarial loss and prior service cost included in net periodic pension cost, net of tax	148			226			629			678
Total defined benefit pension plan, net	148			226			(1,481		)	(1,516		)
Unrealized (loss) gain on available-for-sale securities, net of tax	(41		)	9			(55		)	(75		)
Other comprehensive loss, net of tax	(2,000		)	(2,303		)	(5,196		)	(3,747		)
Comprehensive income (loss)	$	462,425		$	(27,540	)	$	541,799		$	220,392

See accompanying notes to consolidated financial statements.

Table of Contents

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months Ended September 30,
	2015			2014
	(Unaudited)
Cash flows from operating activities:
Net income	$	546,995		$	224,139
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	24,960			23,313
Share-based compensation expense	162,886			157,730
Gain on sale of intangible asset	(350,000		)	—
Amortization of debt discount and debt issue costs	5,508			9,968
Amortization of discount or premium on investments	1,866			4,195
Other	(1,528		)	1,478
Excess tax benefits from share-based compensation	(31,379		)	(23,183		)
Changes in operating assets and liabilities:
Accounts receivable	(17,356		)	(13,324		)
Inventories	(7,784		)	(16,870		)
Accounts payable and accrued expenses	25,825			35,855
Other assets and liabilities	(2,747		)	(138,647		)
Net cash provided by operating activities	357,246			264,654

Cash flows from investing activities:
Purchases of property, plant and equipment	(18,256		)	(45,157		)
Purchases of held-to-maturity investments	(62,781		)	(115,170		)
Maturities of held-to-maturity investments	232,424			491,833
Gain on sale of intangible asset	350,000			—
Purchase of investments under the cost method, net	(54,217		)	(45,000		)
Net cash provided by investing activities	447,170			286,506

Cash flows from financing activities:
Principal payments of debt	(107,116		)	—
Payments to repurchase common stock	(394,484		)	(403,158		)
Proceeds from line of credit	—			140,000
Payments on the line of credit	—			(140,000		)
Proceeds from the exercise of stock options	33,019			39,391
Issuance of stock under employee stock purchase plan	3,954			3,329
Excess tax benefits from share-based compensation	31,379			23,183
Net cash used in financing activities	(433,248		)	(337,255		)

Effect of exchange rate changes on cash and cash equivalents	(3,660		)	(872		)
Net increase in cash and cash equivalents	367,508			213,033
Cash and cash equivalents, beginning of period	397,697			284,258
Cash and cash equivalents, end of period	$	765,205		$	497,291

Supplemental schedule of cash flow information:
Cash paid for interest	$	957		$	4,743
Cash paid for income taxes	$	116,906		$	177,683
Non-cash investing activities and financing activities:
Non-cash additions to property, plant and equipment	$	2,428		$	3,298
Issuance of common stock upon conversion of convertible notes	$	270,573		$	—

See accompanying notes to consolidated financial statements.

Table of Contents

UNITED THERAPEUTICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(UNAUDITED)

1. Organization and Business Description

United Therapeutics Corporation is a biotechnology company focused on the development and commercialization of innovative products to address the unmet medical needs of patients with chronic and life-threatening cardiovascular and infectious diseases and cancer. 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), Orenitram® (treprostinil) Extended-Release Tablets (Orenitram) and UnituxinTM (dinutuximab) Injection (Unituxin). Remodulin has also been approved for distribution in various countries outside the United States, and Unituxin was granted marketing authorization by the European Medicines Agency in August 2015. We commenced commercial sales of Orenitram and Unituxin in the U.S. during the second quarter of 2014 and third quarter of 2015, respectively.

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, 2014, as filed with the SEC on February 24, 2015.

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, 2015, statements of operations and comprehensive income for the three- and nine-month periods ended September 30, 2015 and September 30, 2014 and cash flows for the nine-month periods ended September 30, 2015 and September 30, 2014. Interim results are not necessarily indicative of results for an entire year. In the operating section of our statement of cash flows, we reclassified the prior period amount within “current and deferred income tax expense” to “other assets and liabilities” to conform with the current period presentation.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 will eliminate transaction-specific and industry-specific revenue recognition guidance under current GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. ASU 2014-09 also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. ASU 2014-09 allows for either full retrospective or modified retrospective adoption. On July 9, 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606); Deferral of the Effective Date, which (a) delays the effective date of ASU 2014-09 by one year to annual periods beginning after December 15, 2017 and (b) allows early adoption of the ASU by all entities as of the original effective date for public entities. We are evaluating the transition method we will elect and the effects of the adoption of this ASU on our financial statements.

Table of Contents

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 requires retrospective adoption and will be effective for us beginning in our first quarter of 2016. Early adoption is permitted. We do not expect the adoption of ASU 2015-03 to have a material impact on our financial statements.

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, 2015		December 31, 2014
Raw materials	$	23,316	$	21,317
Work-in-progress	24,092		15,994
Finished goods	33,436		29,616
Total inventories	$	80,844	$	66,927

4. Fair Value Measurements

We account for certain assets and liabilities at fair value and rank these assets within a fair value hierarchy (Level 1, Level 2 or Level 3). Our other current assets and our current liabilities have fair values that approximate their carrying values. Assets and liabilities subject to fair value measurements are as follows (in thousands):

	As of September 30, 2015
	Level 1		Level 2		Level 3		Balance
Assets
Money market funds(1)	$	452,662	$	—	$	—	$	452,662
Federally-sponsored and corporate debt securities(2)	—		248,566		—		248,566
Total assets	$	452,662	$	248,566	$	—	$	701,228
Liabilities
Convertible notes due 2016(3)	$	90,370	$	—	$	—	$	90,370
Contingent consideration(4)			—		9,700		9,700
Total liabilities	$	90,370	$	—	$	9,700	$	100,070

Table of Contents

	As of December 31, 2014
	Level 1		Level 2		Level 3		Balance
Assets
Money market funds(1)	$	298,416	$	—	$	—	$	298,416
Federally-sponsored and corporate debt securities(2)	—		420,731		—		420,731
Total assets	$	298,416	$	420,731	$	—	$	719,147
Liabilities
Convertible notes due 2016(3)	$	388,153	$	—	$	—	$	388,153
Contingent consideration(4)	—		—		11,502		11,502
Total liabilities	$	388,153	$	—	$	11,502	$	399,655

(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 principally measured or corroborated by trade data for identical securities in which related trading activity is not sufficiently frequent to be considered a Level 1 input or comparable securities that are more actively traded. See also Note 5—Investments—Marketable Investments—Held-to-Maturity Investments to these consolidated financial statements.

(3) Included in convertible notes on the accompanying consolidated balance sheets. The fair value of our 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. As of September 30, 2015 and December 31, 2014, 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.

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. Refer to Note 8—Debt.

Table of Contents

5. Investments

Marketable Investments

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

As of September 30, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Government-sponsored enterprises	$	72,473	$	56	$	(10	)	$	72,519
Corporate notes and bonds	175,863		191		(7		)	176,047
Total	$	248,336	$	247	$	(17	)	$	248,566
Reported under the following captions on the consolidated balance sheet:
Current marketable investments	$	156,630
Noncurrent marketable investments	91,706
	$	248,336

As of December 31, 2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Government-sponsored enterprises	$	127,212	$	118	$	(39	)	$	127,291
Corporate notes and bonds	293,288		260		(108		)	293,440
Total	$	420,500	$	378	$	(147	)	$	420,731
Reported under the following captions on the consolidated balance sheet:
Current marketable investments	$	297,842
Noncurrent marketable investments	122,658
	$	420,500

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, 2015					As of December 31, 2014
	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss
Government-sponsored enterprises:
Continuous unrealized loss position less than one year	$	9,990	$	(10	)	$	15,293	$	(39	)
Continuous unrealized loss position greater than one year	—		—			—		—
	9,990		(10		)	15,293		(39		)
Corporate notes and bonds:
Continuous unrealized loss position less than one year	23,442		(7		)	86,824		(97		)
Continuous unrealized loss position greater than one year	—		—			3,443		(11		)
	23,442		(7		)	90,267		(108		)
Total	$	33,432	$	(17	)	$	105,560	$	(147	)

Table of Contents

We attribute gross unrealized losses pertaining to our held-to-maturity securities as of September 30, 2015 and December 31, 2014 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 do not believe that these securities 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, 2015
	Amortized Cost		Fair Value
Due in less than one year	$	156,630	$	156,774
Due in one to two years	91,706		91,792
Due in three to five years	—		—
Due after five years	—		—
Total	$	248,336	$	248,566

Investments Held at Cost

As of September 30, 2015, we hold non-controlling equity investments of $137.2 million in privately-held corporations, including a $100.0 million investment in the preferred stock of Synthetic Genomics Inc., which we purchased in separate $50.0 million transactions in May 2014 and September 2015. 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, 2015, 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.

6. Goodwill and Other Intangible Assets

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

	As of September 30, 2015							As of December 31, 2014
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Goodwill	$	10,264	$	—		$	10,264	$	10,264	$	—		$	10,264
Other intangible assets:
Technology, patents and trade names	6,494		(4,660		)	1,834		6,494		(4,100		)	2,394
In-process, research and development	15,500		—			15,500		15,500		—			15,500
Customer relationships and non-compete agreements	4,369		(3,434		)	935		4,369		(3,062		)	1,307
Contract-based	1,270		(1,270		)	—		1,270		(1,270		)	—
Total	$	37,897	$	(9,364	)	$	28,533	$	37,897	$	(8,432	)	$	29,465

In September 2015, we sold the Rare Pediatric Priority Review Voucher (PPRV) we received from the FDA in connection with the approval of our Biologics License Application for Unituxin. In exchange for the voucher we received $350.0 million from AbbVie Ireland Unlimited Company (AbbVie), a wholly-owned subsidiary of AbbVie Inc. The proceeds from the sale of the PPRV were recognized as a gain on the sale of an intangible asset, as the PPRV did not have a carrying value on our consolidated balance sheet at the time of sale.

Table of Contents

7. Share Tracking Award Plans

We previously issued awards under 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 expire on the tenth anniversary of the date of grant, and in most cases they vest in equal increments on each anniversary of the grant date over a four-year period. We discontinued the issuance of STAP awards on June 26, 2015, when our shareholders approved a broad-based stock incentive plan enabling us to grant stock options and other forms of equity compensation to our employees. See Note 10—Stockholders’ Equity to these consolidated financial statements for information on the stock incentive plan.

The aggregate STAP liability balance was $268.5 million and $322.7 million at September 30, 2015 and December 31, 2014, respectively, of which $54.5 million and $40.6 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, 2015		September 30, 2014
Expected volatility	34.5	%	34.9	%
Risk-free interest rate	1.2	%	1.3	%
Expected term of awards (in years)	4.1		3.9
Expected forfeiture rate	9.6	%	9.9	%
Expected dividend yield	0.0	%	0.0	%

Table of Contents

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, 2015	7,716,424		$	62.59
Granted	1,655,388		159.68
Exercised	(1,942,757	)	56.15
Forfeited	(176,722	)	88.93
Outstanding at September 30, 2015	7,252,333		$	85.83	7.5	$	375,648
Exercisable at September 30, 2015	2,416,505		$	66.02	6.3	$	161,321
Expected to vest at September 30, 2015	4,363,029		$	96.11	8.2	$	191,867

The weighted average grant-date fair value of STAP awards granted during the nine-month periods ended September 30, 2015 and September 30, 2014 was $58.52 and $33.61, respectively.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Research and development	$	(31,090	)	$	82,404		$	57,132		$	56,659
Selling, general and administrative	(82,384		)	100,541			99,654			66,530
Cost of product sales	(8,129		)	8,779			2,762			5,432
Share-based compensation (benefit) expense before taxes	(121,603		)	191,724			159,548			128,621
Related income tax benefit (expense)	45,914			(69,596		)	(60,241		)	(46,689		)
Share-based compensation (benefit) expense, net of taxes	$	(75,689	)	$	122,128		$	99,307		$	81,932
Share-based compensation expense capitalized as part of inventory	$	664		$	467		$	4,578		$	1,028

Cash paid to settle STAP awards exercised during the nine-month periods ended September 30, 2015 and September 30, 2014 was $218.2 million and $97.9 million, respectively.

8. 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 may be increased by up to an additional $75.0 million provided certain conditions are met. At our option, amounts borrowed under this 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. In July 2015, we amended the Credit Agreement solely to extend its maturity to September 30, 2017. Amounts borrowed under the credit agreement are secured by certain of our marketable investments. As of September 30, 2015, we had no outstanding balance on the facility. This credit agreement does not contain any financial covenants.

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.

Table of Contents

At September 30, 2015, the aggregate conversion value of the Convertible Notes exceeded their par value by $55.4 million using a conversion price of $131.24, the closing price of our common stock on September 30, 2015.

During the three-month period ended September 30, 2015, we settled conversion requests representing $2.9 million in principal value of our Convertible Notes. We paid $2.9 million in principal and issued 43,000 shares of our common stock during the settlement process. We received 43,000 shares of our common stock under our note hedge from Deutsche Bank AG London (DB London) which we placed into our treasury stock account. We recognized a $60,000 extinguishment loss with the settlement of these conversions. As of September 30, 2015, there were 663,000 shares of our common stock that could be issued upon future conversions of our outstanding Convertible Notes.

We have received additional conversion requests representing $26.0 million in principal value of our Convertible Notes, which will settle in the fourth quarter of 2015. Based on our stock price as of September 30, 2015, we expect that the full $26.0 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 with DB London and to recognize an estimated $395,000 extinguishment loss upon settlement of these conversions.

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,
	2015		2014		2015		2014
Contractual coupon rate of interest	$	63	$	582	$	390	$	1,832
Discount amortization	411		2,989		2,833		8,856
Interest expense—convertible notes	$	474	$	3,571	$	3,223	$	10,688

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

	September 30, 2015			December 31, 2014
Principal balance	$	31,634		$	138,750
Discount, net of accumulated amortization of $5,714 and $19,819	(1,617		)	(12,336		)
Carrying amount	$	30,017		$	126,414

9. 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, 2015		December 31, 2014
Reclassification of Equity Component(1)	$	1,617	$	12,336
Common stock subject to repurchase(2)	10,882		10,882
Total	$	12,499	$	23,218

(1) Represents the reclassification of the Equity Component equal to the unamortized debt discount of our Convertible Notes as of September 30, 2015 and December 31, 2014, respectively, 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 8—Debt—Convertible Notes Due 2016.

(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 require us to repurchase the shares at a price of $27.21 per share.

Table of Contents

10. 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,
	2015		2014			2015		2014

Net income (loss) (numerator)	$	464,425	$	(25,237	)	$	546,995	$	224,139
Denominator:
Weighted average outstanding shares — basic	45,531		47,297			46,105		48,427
Effect of dilutive securities(1):
Convertible notes(2)	479		—			1,141		2,753
Warrants	3,034		—			3,076		1,715
Stock options and employee stock purchase plan	1,195		—			1,393		1,465
Weighted average shares — diluted	50,239		47,297			51,715		54,360
Earnings (loss) per common share:
Basic	$	10.20	$	(0.53	)	$	11.86	$	4.63
Diluted	$	9.24	$	(0.53	)	$	10.58	$	4.12

Stock options, warrants, and shares of our common stock issued under our Convertible Notes excluded from calculation(2)	3,026		15,589			4,112		9,769

(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.

Table of Contents

Stock Options

As of September 30, 2015, we have two shareholder-approved equity incentive plans: the United Therapeutics Corporation Amended and Restated Equity Incentive Plan (the 1999 Plan) and the United Therapeutics Corporation 2015 Stock Incentive Plan (the 2015 Plan). The 2015 Plan was approved by our shareholders on June 26, 2015 and provides for the issuance of up to 6,150,000 shares of our common stock pursuant to awards granted under the 2015 Plan. No further awards will be granted under the 1999 Plan.

Although the terms of the 1999 Plan and the 2015 Plan contemplate a variety of awards, to date all awards granted under these plans have been in the form of stock options. 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 price of our common stock, the expected volatility of our common stock, the risk-free interest rate, the expected term of stock option awards and the expected dividend yield. We did not grant any stock options under the 1999 Plan during the nine-month periods ended September 30, 2015 and September 30, 2014. From June 26, 2015, the date the 2015 Plan was approved, through September 30, 2015, we have granted 162,250 stock options under the 2015 Plan. There have been no exercises or forfeitures under the 2015 Plan. The stock options granted under the 2015 Plan through September 30, 2015 have a weighted average grant-date fair value of $60.77. We recorded $2.5 million in share-based compensation expense for the nine-months ended September 30, 2015 related to stock options granted under the 2015 Plan. The share-based compensation expense related to stock options granted under the 2015 Plan is reflected in selling, general and administrative within the statement of operations.

The table below includes the assumptions used to measure the fair value of the stock options granted under the 2015 Plan:

	September 30, 2015
Expected volatility	33.1	%
Risk-free interest rate	2.0	%
Expected term of awards (in years)	5.8
Expected forfeiture rate	1.0	%
Expected dividend yield	0.0	%

A summary of the activity and status of stock options under both the 1999 Plan and the 2015 Plan during the nine-month period ended September 30, 2015 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, 2015	4,054,771		$	76.83
Granted	162,250		174.57
Exercised	(806,755	)	40.90
Forfeited	—		—
Outstanding at September 30, 2015	3,410,266		$	89.99	6.5	$	147,715
Exercisable at September 30, 2015	3,248,016		$	85.76	6.4	$	147,715
Expected to vest at September 30, 2015	161,300		$	174.68	9.8	$	—

Table of Contents

Stock option exercise data is summarized below (dollars in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Number of options exercised	210,256		460,600		807,755		1,177,797
Cash received	$	8,574	$	17,220	$	33,019	$	39,391

Share Repurchases

In June 2014, our Board of Directors authorized the repurchase of up to $500.0 million of our common stock. This program became effective on August 1, 2014, and remained open for one year. During the quarter ended September 30, 2015 we acquired approximately 337,000 shares of our common stock at an aggregate cost of $57.6 million under this repurchase program. In the aggregate, we repurchased approximately 3.3 million shares of common stock under this repurchase program for $500.0 million.

In October 2015, our Board of Directors authorized a new program for the repurchase of up to $500.0 million of our common stock in open or privately negotiated transactions, at our discretion. This program will be effective from January 1, 2016 to December 31, 2016.

11. Accumulated Other Comprehensive Loss

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

	Defined Benefit Pension Plan			Foreign Currency Translation Losses			Unrealized Gains (Losses) on Available-for- Sale Securities			Total
Balance, January 1, 2015	$	(6,957	)	$	(9,858	)	$	81		$	(16,734	)
Other comprehensive loss before reclassifications	(2,110		)	(3,660		)	(55		)	(5,825		)
Amounts reclassified from accumulated other comprehensive loss	629			—			—			629
Net current-period other comprehensive loss	(1,481		)	(3,660		)	(55		)	(5,196		)
Balance, September 30, 2015	$	(8,438	)	$	(13,518	)	$	26		$	(21,930	)

Table of Contents

12. Income Taxes

Income tax expense for the three- and nine-month periods ended September 30, 2015 and September 30, 2014 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, 2015 and September 30, 2014 were approximately 38 percent and approximately 36 percent, respectively. Our 2015 estimated annual effective tax rate increased as of September 30, 2015 primarily due to a decrease in the estimated general business credits as compared to the prior year.

The increase in the other current liabilities account as of September 30, 2015 as compared to the balance as of December 31, 2014 is due to additional state and federal income taxes payable as a result of the increase in the amount of income before income taxes. The gain on the sale of our PPRV to AbbVie for $350.0 million in cash resulted in a $132.1 million tax liability, which is included in the other current liabilities balance as of September 30, 2015. See Note 6—Goodwill and Other Intangible Assets to these consolidated financial statements for information on the PPRV.

We are subject to federal and state taxation in the United States and various foreign jurisdictions. Currently, our 2011 to 2014 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 twelve months.

Table of Contents

13. 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 five commercial products.

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,
	Remodulin			Tyvaso		Adcirca		Orenitram		Unituxin			Total
2015
Net revenues	$	150,075		$	121,718	$	73,797	$	34,389	$	4,729		$	384,708
Cost of product sales	(2,242		)	3,517		4,555		2,084		(1,023		)	6,891
Gross profit	$	152,317		$	118,201	$	69,242	$	32,305	$	5,752		$	377,817

2014
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

	Nine Months Ended September 30,
	Remodulin		Tyvaso		Adcirca		Orenitram		Unituxin		Total
2015
Net revenues	$	432,313	$	350,939	$	187,248	$	81,145	$	4,729	$	1,056,374
Cost of product sales	7,105		15,936		11,242		7,556		1,888		43,727
Gross profit	$	425,208	$	335,003	$	176,006	$	73,589	$	2,841	$	1,012,647

2014
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

For the three-month periods ended September 30, 2015 and September 30, 2014, net revenues from our U.S.-based distributors represented 72 percent and 75 percent, respectively, of our total net operating revenues.

For each of the nine-month periods ended September 30, 2015 and September 30, 2014, net revenues from our U.S.-based distributors represented 74 percent and 75 percent, respectively, of our total net operating revenues.

14. Litigation

Sandoz Inc.

In February 2012, we received a Paragraph IV certification notice 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 expired 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 FDA’s Orange Book, which contains a listing of patents covering a drug or biologic or its method of use, and which have been submitted to the FDA by the filer of a New Drug Application or Biologics License Application.

Table of Contents

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 (the First Action). 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 (the Second Action). 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, 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 that it would not be infringed by Sandoz’s generic product.

Sandoz 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 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 notice 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 (the Third Action).

On September 29, 2015, we entered into a Settlement Agreement with Sandoz (the Settlement Agreement) to settle all ongoing litigation between the parties (all three lawsuits described above, including pending appeals) concerning Remodulin patents. Under the Settlement Agreement, we granted Sandoz a non-exclusive license to manufacture and commercialize in the United States the generic version of Remodulin described in Sandoz’s ANDA filing beginning on June 26, 2018, although Sandoz may be permitted to enter the market earlier under certain circumstances. The Settlement Agreement does not grant Sandoz a license to manufacture a generic version of any other product, such as Tyvaso or Orenitram, nor does it grant any rights with respect to any technology associated with the Remodulin Implantable System we are developing in conjunction with Medtronic Inc., or the pre-filled semi-disposable pump system we are developing with DEKA Research & Development Corp. The Settlement Agreement does not grant Sandoz any rights other than those required to launch Sandoz’s generic version of Remodulin.

In accordance with the terms of the Settlement Agreement, the parties have submitted the Settlement Agreement to the U.S. Federal Trade Commission and the U.S. Department of Justice for review. The parties are also taking certain procedural steps to terminate the appeal relating to the First Action and the Second Action. The parties’ claims in the Third Action have been dismissed with prejudice.

Teva Pharmaceuticals USA, Inc.

On July 21, 2014, we received a Paragraph IV certification 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.

Table of Contents

In its 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, as 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 has filed its answer to our complaint, and has also filed a counterclaim 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 Teva’s ANDA submission. We have filed an answer to the counterclaim. The parties are conducting discovery in this lawsuit, and trial is scheduled to commence in 2016.

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 U.S. District Court decision that is adverse to us, whichever occurs first.

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

Watson Laboratories, Inc.

In June 2015, we received a Paragraph IV certification notice letter from Watson Laboratories, Inc. (Watson) indicating that Watson has submitted an ANDA to the FDA to market a generic version of Tyvaso. In its notice letter, Watson states that it intends to market a generic version of Tyvaso before the expiration of U.S. Patent Nos. 6,521,212 and 6,756,033, each of which expires in November 2018; and U.S. Patent No. 8,497,393, which expires in December 2028. Watson’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 Watson’s ANDA submission. We responded to the Watson notice letter by filing a lawsuit on July 22, 2015 against Watson in the U.S. District Court for the District of New Jersey alleging infringement of U.S. Patent Nos. 6,521,212, 6,756,033, and 8,497,393. Under the Hatch-Waxman Act, the FDA is automatically precluded from approving Watson’s ANDA for up to 30 months from receipt of Watson’s notice letter or until the issuance of a U.S. District Court decision that is adverse to us, whichever occurs first. On September 1, 2015, Watson filed (1) a motion to dismiss some, but not all, counts of the complaint, and (2) its answer to the complaint as well as certain counterclaims against us. On September 25, 2015, we filed our answer to Watson’s counterclaims. The Court has not held a scheduling conference and no trial date has been set.

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

SteadyMed Ltd.

On October 1, 2015, SteadyMed Ltd. (SteadyMed) filed a petition with the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office for inter partes review (the IPR Petition) of U.S. Patent No. 8,497,393 (the ‘393 Patent), which is owned by United Therapeutics. In its IPR Petition, SteadyMed seeks to invalidate ‘393 Patent, which expires in December 2028 and covers a method of making treprostinil, which is the active pharmaceutical ingredient in our Remodulin, Tyvaso and Orenitram products. The ‘393 Patent was also the subject of the recently-settled Sandoz litigation, and remains the subject of our pending litigation with Teva and Watson, described above. We are currently reviewing the IPR Petition and intend to vigorously defend the ‘393 Patent. SteadyMed has announced that it is developing a product called TrevyentTM, which is a single-use, pre-filled pump it plans to seek FDA approval for delivery of a two-day supply of treprostinil subcutaneously using its PatchPump® technology.

Table of Contents

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, 2014, 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, 2014, 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 esuberaprost, formally called 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;

· Monoclonal antibody for oncologic applications (UnituxinTM, formerly called ch14.18): an antibody that binds to cancerous tumors and destroys the cancer cells by a mechanism called antibody-dependent cell mediated toxicity;

· Glycobiology antiviral agents: a novel class of small, sugar-like molecules that have shown antiviral activity in a range of preclinical 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. Through our wholly-owned subsidiary, Lung Biotechnology PBC, we are also developing technologies aimed at improving outcomes for lung transplant recipients and increasing the supply of donor lungs through ex-vivo lung perfusion.

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 has also been approved in various countries outside of the United States.

Table of Contents

· 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. 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.

· Unituxin (dinutuximab) Injection (Unituxin). In March 2015, the FDA approved Unituxin in combination with granulocyte-macrophage colony-stimulating factor (GM-CSF), interleukin-2 (IL-2), and 13-cis-retinoic acid (RA), for the treatment of pediatric patients with high-risk neuroblastoma who achieve at least a partial response to prior first-line multiagent, multimodality therapy. We commenced U.S. sales of Unituxin in the third quarter of 2015. We received European Medicines Agency (EMA) approval during the third quarter of 2015.

Revenues

Our net product revenues consist entirely of net sales of our five commercial products: Remodulin, Tyvaso, Adcirca, Orenitram and Unituxin.

We have entered into separate, non-exclusive distribution agreements with Accredo Health Group, Inc. (Accredo) and CVS Caremark (Caremark) to distribute Remodulin, Tyvaso and Orenitram in the United States. We also sell Remodulin and Tyvaso to distributors internationally. Under our distribution agreements, we sell each of our treprostinil-based products to these distributors at a transfer price that we establish. We pay Accredo and Caremark fees for services provided in connection with the distribution and support of these products. We have generally increased the price of Tyvaso annually by 4.9 percent, and the last price increase became effective January 1, 2015. The price of Remodulin has not been increased since 2010.

We sell Adcirca through Lilly’s pharmaceutical wholesaler network at a price determined by Lilly, which Lilly generally increases two or three times per year. Most recently, Lilly increased the price of Adcirca by 9.9 percent effective May 14, 2015.

In the second quarter of 2015, we entered into an exclusive distribution agreement with ASD Specialty Healthcare, Inc., an affiliate of AmerisourceBergen Corporation (Amerisource), to distribute Unituxin in the United States. Under this Agreement, we sell Unituxin to Amerisource at a transfer price that we establish, and we pay Amerisource fees for services provided in connection with the distribution and support of Unituxin.

We recognize revenues for the sale of Remodulin, Tyvaso, Orenitram, Adcirca and Unituxin net of estimated rebates, prompt pay discounts, allowances for sales exchanges and returns, and distributor fees.

Generic Competition

We disclose in Part II, Item 1.—Legal Proceedings of this Quarterly Report on Form 10-Q (and in Note 14 -Litigation, to our consolidated financial statements included with this Quarterly Report on Form 10-Q), that we recently settled litigation with Sandoz Inc. (Sandoz) relating to Sandoz’s abbreviated new drug application (ANDA) seeking FDA approval to market a generic version of Remodulin before the expiration of certain of our U.S. patents in October 2017, September 2028, December 2028, and March 2029. Under the terms of this settlement, Sandoz will be permitted to market its generic version of Remodulin in the United States beginning in June 2018, although Sandoz may be permitted to enter the market earlier under certain circumstances. We also disclose that we are engaged in litigation with Teva Pharmaceuticals USA, Inc. (Teva) relating to a similar ANDA to market a generic version of Remodulin, as well as litigation against Watson Laboratories, Inc. (Watson), contesting its ANDA to market a generic version of Tyvaso before the expiration of certain of our U.S. patents in November 2018 and December 2028. Finally, we also disclose that SteadyMed Ltd. (SteadyMed) has recently filed a petition for inter partes review seeking to invalidate one of our patents that expires in December 2028 and covers a method of making treprostinil, which is the active ingredient in Remodulin, Tyvaso and Orenitram. SteadyMed has announced that it is developing a product called TrevyentTM, which is a single-use, pre-filled pump it plans to seek FDA approval to deliver a two-day supply of treprostinil subcutaneously using its PatchPump® technology.

Table of Contents

As a result of our settlement with Sandoz, we expect to see generic competition for Remodulin in June 2018, and that this increased competition could reduce our sales. In addition, while we intend to vigorously enforce our intellectual property rights relating to Tyvaso and Orenitram, 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 these products. Our 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 pressure from payers to use generic products within the same class of therapy initially, which 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 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 PAH 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.

Operating Expenses

Our operating expenses include the following costs:

Research and Development

Our research and development expenses primarily include costs associated with the research and development of products and post-marketing research commitments. These costs generally include share-based compensation and salary-related expenses for research and development functions, professional fees for preclinical and clinical studies, costs associated with clinical manufacturing, facilities-related expenses and regulatory costs. Expenses also include costs for third-party arrangements, including upfront fees and milestones paid in connection with license arrangements for therapies under development.

Selling, General and Administrative

Our selling, general and administrative expenses primarily include costs associated with the commercialization of approved products and general and administrative costs to support our operations. Selling expenses generally include share-based compensation, salary-related expenses, product marketing and sales operations costs, and other costs incurred to support our sales efforts. General and administrative expenses include our core corporate support functions such as human resources, finance and legal, as well as external costs such as insurance premiums, legal fees and other professional service fees.

Table of Contents

Cost of Product Sales

Our cost of product sales primarily include costs to manufacture and acquire products sold. These costs generally include share-based compensation and salary-related expenses for manufacturing personnel, commercial distribution and support functions, direct materials and supplies, depreciation, building and overhead expenses and royalty payments under licensing agreements. Expenses also include the cost to warehouse, transfer and distribute products to customers.

We began selling Orenitram during 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 similar to our other treprostinil-based commercial products.

Share-Based Compensation

As discussed above, our operating expenses, and thus 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), 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 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.

In June 2015, our shareholders approved the United Therapeutics Corporation 2015 Stock Incentive Plan (the 2015 Plan). With the approval of the 2015 Plan, which authorizes the grant of up to 6,150,000 shares of our common stock, we have ceased granting STAP awards and have modified our equity compensation programs to grant stock options going forward to employees and non-employee directors who previously received STAP awards. No further awards will be granted under the 1999 Plan.

Through December 31, 2014, we were contractually obligated to award stock options each year to our Chairman and Co-Chief Executive Officer, Dr. Rothblatt, based on a formula tied to the growth (if any) in our market capitalization. These awards were granted at year-end under our Amended and Restated Equity Incentive Plan (the 1999 Plan), and vested immediately upon grant. We accrued compensation expense for Dr. Rothblatt’s estimated stock option grant when we determined that it was probable that the performance criteria would be met. Beginning in 2015, Dr. Rothblatt’s long term incentive compensation will be similar to other employees in that she will be eligible for an annual grant of performance-based stock options based on the achievement of our annual corporate milestones, which will vest over a four-year period from the grant date. Accordingly, there will be no share-based compensation expense recorded in calendar year 2015 for Dr. Rothblatt as the annual grant of performance-based stock options will be granted in calendar year 2016, if earned, based upon 2015 performance.

Major Research and Development Projects

Our major research and development projects focus on: (1) the use of prostacyclin analogues and other therapies, as well as lung transplantation technologies, to treat cardiopulmonary diseases; (2) monoclonal antibodies to treat cancer; and (3) glycobiology antiviral agents to treat infectious diseases.

Table of Contents

Cardiopulmonary Disease Projects

Remodulin Implantable System

In 2009, we entered into an agreement with Medtronic, Inc. (Medtronic) providing us exclusive rights in the United States, the United Kingdom, Canada, France, Germany, Italy and Japan to develop Medtronic’s proprietary intravascular infusion catheter to be used with its SynchroMed® II implantable infusion pump and related infusion system components (together referred to as the Remodulin Implantable System) in order to deliver Remodulin for the treatment of PAH. If the Remodulin Implantable System is successful, it could reduce many of the patient burdens and other complications associated with the use of external pumps to administer prostacyclin analogues. With our funding, Medtronic completed the DelIVery clinical trial, in order to study the safety of the Remodulin Implantable System while administering Remodulin. The primary objective was to demonstrate a rate of catheter-related complications below 2.5 per 1,000 patient-days while using the Remodulin Implantable System to deliver Remodulin. In September 2013, Medtronic informed us that this primary objective was met (p<0.0001). In December 2014, Medtronic completed other stability, compatibility and technical assessments of the Remodulin Implantable System, including modifications to its hardware and software, and submitted a premarket approval application (PMA) seeking FDA approval for the catheter and labeling changes. Medtronic received notification that the PMA was accepted for review in January 2015. Medtronic is responsible for responding to any FDA requests for additional information concerning the use of the Remodulin Implantable System with Remodulin.

In January 2015, we submitted a supplemental New Drug Application (NDA) with new labeling requesting FDA approval to allow the use of Remodulin with the Remodulin Implantable System. The FDA has indicated that our submission will be treated as a new NDA and asked us to resubmit the supplement as a new NDA.

In March 2015, the FDA requested that Medtronic amend its PMA for the Remodulin Implantable System to reflect an amendment to the SynchroMed II PMA separately submitted by Medtronic’s neuromodulation business unit, and issued a refuse-to-file letter with respect to our NDA for the Remodulin Implantable System. FDA has asked Medtronic to amend its PMA to include additional information. Once Medtronic’s amended PMA has been submitted and accepted by FDA, and our resubmission has been submitted and accepted, we anticipate a ten-month review process by FDA.

In April 2015, the FDA filed a consent decree requiring Medtronic to stop manufacturing, designing and distributing SynchroMed II implantable infusion pump systems, except in limited circumstances, citing violations of the quality system regulation for medical devices. The consent decree will remain in effect until the FDA has determined that Medtronic has met all the provisions listed in the consent decree. We are currently assessing the impact of this consent decree on our program to develop the Remodulin Implantable System.

Subcutaneous Remodulin Administered via Pre-Filled, Semi-Disposable Pump

In December 2014, we entered into an exclusive agreement with DEKA Research & Development Corp. (DEKA) to develop a pre-filled, semi-disposable pump system for subcutaneous delivery of Remodulin. Under the terms of the agreement, we will fund the development costs related to the semi-disposable pump system and will pay product fees and a single-digit royalty to DEKA based on commercial sales of the system and the Remodulin sold for use with the system. Our goal is to be in a position to receive FDA approval for this delivery system by the end of 2018.

Tyvaso

We are developing further enhancements intended to make the Tyvaso Inhalation System easier to use. In addition, we are studying Tyvaso in combination with esuberaprost, as discussed below, and planning further studies of Tyvaso.

Table of Contents

Orenitram

In December 2013, the FDA approved Orenitram for the treatment of PAH in WHO Group 1 patients to improve exercise capacity. The primary study that supported efficacy of Orenitram was a 12-week monotherapy study (FREEDOM-M) in which PAH patients were not on any approved background therapy.

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 (also known as “time to clinical worsening”) in patients who are on an approved oral background therapy. As such, we are enrolling up to 610 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 completion of the FREEDOM-EV study. In 2005, the 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. We are also planning further studies of Orenitram.

Esuberaprost (formally called 314d)

We have been studying various formulations of beraprost since 2000, under a license agreement with Toray Industries, Inc. (Toray). In July 2012, we completed a phase I safety trial of esuberaprost, a reformulated, single-isomer version of beraprost, and the data suggested that dosing esuberaprost four times a day was safe. We believe that esuberaprost 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 that inhaled treprostinil and esuberaprost have complimentary pharmacokinetic and pharmacodynamic profiles, which indicate that 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 esuberaprost 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. If we are not successful in securing FDA approval of esuberaprost in combination with Tyvaso following the BEAT study, we expect to terminate our license agreement with Toray.

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. We believe that fewer than 100 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 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 and September 2015, we completed separate $50.0 million investments in the preferred stock of Synthetic Genomics Inc. (SGI), for a total investment, as of September 30, 2015, of $100.0 million. In addition, we entered into a separate multi-year research and development collaboration agreement with SGI in May 2014, whereby SGI will develop engineered primary pig cells with modified genomes for use in our xenotransplantation program. This collaboration was initially focused primarily on lungs and was expanded in September 2015 to include an additional focus on kidneys. Under this agreement, each party assumes its own research and development costs and SGI may receive royalties and milestone payments from development and commercialization of organs.

Table of Contents

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. We have commenced a phase II clinical trial in the United States to study the use of ex-vivo lung perfusion technology originally developed in Canada (where it is already used commercially) to provide extended preservation and assessment of donated lungs that are initially rejected for transplantation.

In 2014, we completed the construction of the only laboratory facility in the United States devoted to performing ex-vivo lung perfusion on a fee-for-service basis. In June 2015, we entered into a collaboration agreement with the Mayo Clinic in Jacksonville, Florida (Mayo) to build and operate a second such facility. We are responsible for nearly all costs associated with the construction of the facility on Mayo’s campus, as well as the ongoing operating expenses for the facility. Construction of the facility is expected to be completed in late 2017. Under our collaboration agreement, we may also establish similar facilities at Mayo Clinic’s campuses in Arizona and Minnesota.

Cancer-Related Projects

Unituxin (formerly called ch14.18)

In March 2015, the FDA approved our Biologics License Application (BLA) for Unituxin, in combination with granulocyte-macrophage colony-stimulating factor (GM-CSF), interleukin-2 (IL-2), and 13-cis-retinoic acid (RA), for the treatment of pediatric patients with high-risk neuroblastoma who achieve at least a partial response to prior first-line multiagent, multimodality therapy. We commenced sales of Unituxin in the third quarter of 2015. We received European Commission approval during the third quarter of 2015, and plan to commence commercial sales in individual European countries following pricing and reimbursement approvals on a country-by-country basis.

We previously received orphan drug designation for Unituxin from both the FDA and the EMA. Orphan designation, coupled with FDA approval of our BLA, confers an exclusivity period through March 2022, during which the FDA may not approve any application to market the same drug for the same indication, except in limited circumstances. In lieu of a royalty payment to the NCI, we have an ongoing obligation to provide the NCI with Unituxin for its studies free of charge.

Under our BLA approval for Unituxin, the FDA has imposed certain post-marketing requirements and post-marketing commitments on us. We are conducting additional clinical and non-clinical studies to satisfy these requirements and commitments.

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 stages of testing for the treatment of a wide 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 we continue to synthesize new agents that we may elect to test.

Table of Contents

In 2011, we were awarded a cost plus fixed fee contract 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. The award consists of a base award and 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 $28.1 million. The aggregate value of the contract assuming the exercise of all eight options is $45.6 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.

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. In November 2014, the FDA granted orphan drug designation for UV-4B for the treatment of acute dengue illness. We are also performing preclinical studies of UV-4B for the treatment of patients with influenza.

Future Prospects

The extent of our future success is dependent on, among other things, how well we achieve the following objectives: (1) in the near term, continued sales growth of our current commercial products (including, in particular, Orenitram) by increasing our market share and launching enhancements designed to improve patient care, such as new delivery systems for Remodulin; (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 esuberaprost in combination with Tyvaso 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 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) the price of our products and the 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 challenges to our Remodulin, Tyvaso and Orenitram patents and the expected launch of Sandoz’s generic version of Remodulin in the United States in 2018; and (8) the risks identified in Part II, Item 1A—Risk Factors, included in this Quarterly Report on Form 10-Q.

We will need to construct additional facilities to support the development and commercialization of our products and services. We are currently planning construction of a facility in Jacksonville, Florida, which will serve as a lung restoration center performing ex-vivo lung perfusion services. We are also in the final planning stages for a building in Silver Spring, Maryland, to house additional laboratory and office space adjacent to our existing co-headquarters. In addition, the development and commercialization 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.

Table of Contents

Financial Position

Cash, cash equivalents and marketable securities at September 30, 2015 and December 31, 2014 (excluding restricted amounts of $5.4 million) were $1,008.1 million and $812.8 million, respectively. The increase of $195.3 million in unrestricted cash, cash equivalents and marketable securities resulted primarily from the $357.2 million of cash generated from operating activities. Additionally, there was a cash inflow from investing activities of $350.0 million related to the sale of our PPRV that we received from the FDA in connection with our BLA for Unituxin. These increases were partially offset by the use of $394.5 million to repurchase shares of our common stock and the use of $107.1 million to settle early conversions of our Convertible Notes.

Convertible Notes decreased by $96.4 million, from $126.4 million at December 31, 2014, to $30.0 million at September 30, 2015, as a result of the early conversions of $107.1 million of our Convertible Notes during the nine months ended September 30, 2015, net of amortization of $10.7 million for the unamortized discount of which $7.9 million was related to the early conversions of our Convertible Notes. Refer to Note 8—Debt—Convertible Notes Due 2016 to our consolidated financial statements.

The STAP liability decreased by $54.2 million, from $322.7 million at December 31, 2014, to $268.5 million at September 30, 2015. The decrease of the liability resulted from cash paid to settle STAP awards exercised during the nine-month period ending September 30, 2015 of $218.2 million, partially offset by the vesting of STAP awards.

Additional paid-in capital was $1,723.9 million at September 30, 2015, compared to $1,376.1 million at December 31, 2014. The $347.7 million increase in additional paid-in capital primarily consisted of $64.4 million in proceeds from stock option exercises and related tax benefits and $273.2 million related to the common stock issued in connection with the early conversion of $107.1 million of our Convertible Notes based on the value of the closing price of our common stock on the date the shares were issued.

The $665.1 million increase in treasury stock from $1,185.8 million at December 31, 2014 to $1,850.9 million at September 30, 2015, was driven by our repurchase of approximately 2.4 million shares of our common stock at a cost of $394.5 million during the nine months ended September 30, 2015 and $270.6 million reflecting the value of the receipt of approximately 1.6 million shares from our note hedge in connection with the early conversion of $107.1 million of our Convertible Notes based on the closing price of our common stock on the date the shares were received during the nine months ended September 30, 2015. Refer to Note 10—Stockholders’ Equity—Share Repurchases and Note 8—Debt—Convertible Notes Due 2016 to our consolidated financial statements.

Table of Contents

Three Months Ended September 30, 2015 and September 30, 2014

Revenues

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

	Three Months Ended September 30,				Percentage
	2015		2014		Change
Net product revenues:
Remodulin	$	150,075	$	142,877	5.0	%
Tyvaso	121,718		119,685		1.7	%
Adcirca	73,797		51,247		44.0	%
Orenitram	34,389		14,460		137.8	%
Unituxin	4,729		—		N/A
Other	1,513		1,681		(10.0	)%
Total net revenues	$	386,221	$	329,950	17.1	%

Revenues for the three months ended September 30, 2015 increased by $56.3 million, compared to the three months ended September 30, 2014. The growth in revenues primarily resulted from: (1) a $22.6 million increase in Adcirca revenues, driven by price increases, which are determined by Lilly, and by an increase in the number of Adcirca bottles sold; and (2) a $19.9 million increase in Orenitram revenues due to an increase in the number of patients being treated. In addition, $4.7 million of the increase in revenue during the three months ended September 30, 2015 was due to our first commercial sales of Unituxin. For the three months ended September 30, 2015 and September 30, 2014, approximately 72 percent and 75 percent, respectively, of total net revenues were derived from our U.S.-based specialty pharmaceutical distributors.

The tables below include a reconciliation of the accounts associated with estimated rebates, prompt-pay discounts, sales allowances and distributor fees (in thousands):

	Three Months Ended September 30, 2015
	Rebates			Prompt Pay Discounts			Allowance for Sales Returns			Distributor Fees			Total
Balance, July 1, 2015	$	40,953		$	3,600		$	4,674		$	1,418		$	50,645
Provisions attributed to sales in:
Current period	40,032			8,673			715			3,052			52,472
Prior periods	968			—			—			35			1,003
Payments or credits attributed to sales in:
Current period	(7,166		)	(5,219		)	—			(985		)	(13,370		)
Prior periods	(34,889		)	(3,477		)	(578		)	(1,453		)	(40,397		)
Balance, September 30, 2015	$	39,898		$	3,577		$	4,811		$	2,067		$	50,353

Table of Contents

	Three Months Ended September 30, 2014
	Rebates			Prompt Pay Discounts			Allowance for Sales Returns			Distributor Fees			Total
Balance, July 1, 2014	$	26,316		$	3,018		$	3,366		$	739		$	33,439
Provisions attributed to sales in:
Current period	32,197			7,331			430			2,224			42,182
Prior periods	902			—			—			(388		)	514
Payments or credits attributed to sales in:
Current period	(1,122		)	(4,567		)	—			(426		)	(6,115		)
Prior periods	(30,946		)	(3,011		)	(234		)	(1,495		)	(35,686		)
Balance, September 30, 2014	$	27,347		$	2,771		$	3,562		$	654		$	34,334

Research and Development Expense

The table below summarizes research and development expense by major project and non-project component (dollars in thousands):

	Three Months Ended September 30,					Percentage
	2015			2014		Change
Project and non-project component:
Cardiopulmonary	$	34,020		$	28,423	19.7	%
Share-based compensation (benefit) expense	(31,042		)	82,513		(137.6	)%
Other	6,549			7,940		(17.5	)%
Total research and development expense	$	9,527		$	118,876	(92.0	)%

Share-based compensation. The decrease in share-based compensation of $113.6 million for the three months ended September 30, 2015, compared to the same three-month period in 2014, was primarily due to a 25 percent decrease in our stock price during the quarter ended September 30, 2015, compared to a 45 percent increase during the same quarter in 2014.

Selling, General and Administrative Expense

The table below summarizes selling, general and administrative expense by major category (dollars in thousands):

	Three Months Ended September 30,				Percentage
	2015		2014		Change
Category:
General and administrative	$	41,016	$	53,781	(23.7	)%
Sales and marketing	21,488		19,719

UNITED THERAPEUTICS Corp - FORM 10-Q - October 27, 2015

Attached files