UNITED THERAPEUTICS Corp - FORM 10-Q

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EX-10.1 - EX-10.1 - UNITED THERAPEUTICS Corp	a16-17213_1ex10d1.htm
EX-32.2 - EX-32.2 - UNITED THERAPEUTICS Corp	a16-17213_1ex32d2.htm
EX-32.1 - EX-32.1 - UNITED THERAPEUTICS Corp	a16-17213_1ex32d1.htm
EX-31.2 - EX-31.2 - UNITED THERAPEUTICS Corp	a16-17213_1ex31d2.htm
EX-31.1 - EX-31.1 - UNITED THERAPEUTICS Corp	a16-17213_1ex31d1.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2016

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 20, 2016 was 42,415,478.

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INDEX

		Page

Part I.	FINANCIAL INFORMATION (UNAUDITED)	3

Item 1.	Consolidated Financial Statements	3

	Consolidated Balance Sheets	3

	Consolidated Statements of Operations	4

	Consolidated Statements of Comprehensive Income	5

	Consolidated Statements of Cash Flows	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	33

Part II.	OTHER INFORMATION	34

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 6.	Exhibits	49

SIGNATURES		50

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PART I. FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

	September 30, 2016			December 31, 2015
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	953.0		$	831.8
Marketable investments	79.6			122.0
Accounts receivable, net of allowance of none for 2016 and 2015	224.6			192.8
Inventories, net	92.4			81.3
Other current assets	36.4			47.4
Total current assets	1,386.0			1,275.3
Marketable investments	2.3			38.0
Goodwill and other intangible assets, net	34.0			28.4
Property, plant, and equipment, net	488.4			495.8
Deferred tax assets, net	188.8			192.7
Other assets	169.7			154.2
Total assets	$	2,269.2		$	2,184.4

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	119.0		$	103.4
Share tracking awards plan	134.7			274.5
Other current liabilities	60.9			62.8
Total current liabilities	314.6			440.7
Other liabilities	105.0			144.0
Total liabilities	419.6			584.7
Commitments and contingencies
Temporary equity	10.9			11.1
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, 69,294,345 and 68,987,919 shares issued, and 42,662,031 and 45,760,845 shares outstanding at September 30, 2016 and December 31, 2015, respectively	0.7			0.7
Additional paid-in capital	1,836.7			1,790.6
Accumulated other comprehensive loss	(16.8		)	(20.4		)
Treasury stock, 26,632,314 and 23,227,074 shares at September 30, 2016 and December 31, 2015, respectively	(2,305.1		)	(1,902.1		)
Retained earnings	2,323.2			1,719.8
Total stockholders’ equity	1,838.7			1,588.6
Total liabilities and stockholders’ equity	$	2,269.2		$	2,184.4

See accompanying notes to consolidated financial statements.

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UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(Unaudited)						(Unaudited)
Revenues:
Net product sales	$	408.2		$	384.7		$	1,189.8		$	1,056.4
Other	—			1.5			—			4.5
Total revenues	408.2			386.2			1,189.8			1,060.9
Operating expenses:
Cost of product sales	23.6			6.9			44.3			43.7
Research and development	45.9			9.6			80.7			169.2
Selling, general and administrative	100.1			(17.3		)	177.3			304.0
Total operating expenses	169.6			(0.8		)	302.3			516.9
Operating income	238.6			387.0			887.5			544.0
Other income (expense):
Interest expense	(0.5		)	(0.8		)	(1.7		)	(4.2		)
Gain on sale of intangible asset	—			350.0			—			350.0
Other, net	1.0			0.6			2.9			(1.4		)
Total other income, net	0.5			349.8			1.2			344.4
Income before income taxes	239.1			736.8			888.7			888.4
Income tax expense	(77.3		)	(272.4		)	(285.3		)	(341.4		)
Net income	$	161.8		$	464.4		$	603.4		$	547.0
Net income per common share:
Basic	$	3.75		$	10.20		$	13.62		$	11.86
Diluted	$	3.50		$	9.24		$	12.76		$	10.58
Weighted average number of common shares outstanding:
Basic	43.2			45.5			44.3			46.1
Diluted	46.2			50.2			47.3			51.7

See accompanying notes to consolidated financial statements.

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UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(Unaudited)						(Unaudited)
Net income	$	161.8		$	464.4		$	603.4		$	547.0
Other comprehensive (loss) income:
Foreign currency translation loss	(1.0		)	(2.1		)	(2.8		)	(3.7		)
Defined benefit pension plan:
Actuarial (loss) gain arising during period, net of tax	(1.2		)	—			5.9			(2.1		)
Less: amortization of actuarial gain and prior service cost included in net periodic pension cost, net of tax	0.1			0.1			0.5			0.6
Total defined benefit pension plan, net	(1.1		)	0.1			6.4			(1.5		)
Other comprehensive (loss) income, net of tax	(2.1		)	(2.0		)	3.6			(5.2		)
Comprehensive income	$	159.7		$	462.4		$	607.0		$	541.8

See accompanying notes to consolidated financial statements.

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UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

	Nine Months Ended September 30,
	2016			2015
	(Unaudited)
Cash flows from operating activities:
Net income	$	603.4		$	547.0
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	23.8			25.0
Share-based compensation (benefit) expense	(93.2		)	162.9
Gain on sale of intangible asset	—			(350.0		)
Other	2.5			5.9
Excess tax benefits from share-based compensation	(4.6		)	(31.4		)
Changes in operating assets and liabilities:
Accounts receivable	(31.7		)	(17.4		)
Inventories	(12.9		)	(7.8		)
Accounts payable and accrued expenses	13.9			25.8
Other assets and liabilities	(21.0		)	(2.7		)
Net cash provided by operating activities	480.2			357.3

Cash flows from investing activities:
Purchases of property, plant and equipment	(23.3		)	(18.3		)
Purchases of held-to-maturity investments	(0.8		)	(62.8		)
Maturities of held-to-maturity investments	78.8			232.4
Gain on sale of intangible asset	—			350.0
Purchase of investments under the cost method, net	(7.6		)	(54.2		)
Purchase of investments under the equity method	(2.1		)	—
Intangible assets acquired	(5.2		)	—
Net cash provided by investing activities	39.8			447.1

Cash flows from financing activities:
Principal payments of debt	(8.8		)	(107.1		)
Payments of debt issuance costs	(6.8		)	—
Payments to repurchase common stock	(395.5		)	(394.5		)
Proceeds from the exercise of stock options	6.2			33.0
Issuance of stock under employee stock purchase plan	4.3			4.0
Excess tax benefits from share-based compensation	4.6			31.4
Net cash used in financing activities	(396.0		)	(433.2		)

Effect of exchange rate changes on cash and cash equivalents	(2.8		)	(3.7		)
Net increase in cash and cash equivalents	121.2			367.5
Cash and cash equivalents, beginning of period	831.8			397.7
Cash and cash equivalents, end of period	$	953.0		$	765.2

Supplemental cash flow information:
Cash paid for interest	$	0.1		$	1.0
Cash paid for income taxes	$	283.7		$	116.9
Non-cash investing and financing activities:
Non-cash additions to property, plant and equipment	$	3.2		$	2.4
Issuance of common stock upon conversion of convertible notes	$	7.5		$	270.6

See accompanying notes to consolidated financial statements.

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UNITED THERAPEUTICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(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 conditions.

We have approval from the U.S. 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 Unituxin® (dinutuximab) Injection (Unituxin). Our only significant revenues outside the United States are derived from sales of Remodulin in Europe.

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.

2. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information required by U.S. 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, 2015, as filed with the SEC on February 25, 2016.

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, 2016, statements of operations and comprehensive income for the three-and nine-month periods ended September 30, 2016 and September 30, 2015 and cash flows for the nine-month periods ended September 30, 2016 and September 30, 2015. Interim results are not necessarily indicative of results for an entire year. In the current liabilities section of our balance sheet, we reclassified the prior period amount within “convertible notes” to “other current 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 (1) delays the effective date of ASU 2014-09 by one year to annual periods beginning after December 15, 2017; and (2) 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.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11), which requires that inventory be measured at the lower of cost or net realizable value for entities using first-in, first-out or average cost methods. ASU 2015-11 should be applied prospectively and will be effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years, with early adoption permitted. We are evaluating the effect of adoption on our financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments to be measured at fair value through net income. Equity investments that are accounted for under the equity method are not impacted. ASU 2016-01 provides that equity

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investments without readily determinable fair values can be valued at cost minus impairment with a simplified impairment assessment using qualitative assessments. ASU 2016-01 requires separate presentation of the financial assets and liabilities by category and form. ASU 2016-01 should be applied prospectively and will be effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption is not permitted except in limited circumstances. We are evaluating the effect of adoption on our financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU 2016-02), which requires that organizations recognize lease assets and lease liabilities on the balance sheet. ASU 2016-02 also requires additional quantitative and qualitative disclosures that provide the amount, timing, and uncertainty of cash flows relating to lease arrangements. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018 using a modified retrospective approach. The modified retrospective approach requires retrospective application to the earliest period presented in the respective financial statements, provides certain practical expedients related to leases that commenced prior to the effective date and allows the use of hindsight when evaluating lease options. Early adoption is permitted. We are evaluating the effect of adoption on our financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (ASU 2016-09), which serves to simplify the accounting for share-based payment transactions. ASU 2016-09 includes guidance on several aspects of the accounting for share-based payments, including the income tax consequences, forfeitures and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. Early adoption is permitted. We are evaluating the effect of adoption on our financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows—Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which serves to reduce existing diversity in the classification of certain cash receipts and cash payments on the Statement of Cash Flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption is permitted. We are evaluating the effect of adoption on our financial statements.

3. Investments

Marketable Investments

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

As of September 30, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Government-sponsored enterprises	$	44.2	$	—	$	—	$	44.2
Corporate notes and bonds	37.7		—		—		37.7
Total	$	81.9	$	—	$	—	$	81.9
Reported under the following captions on the consolidated balance sheet:
Current marketable investments	$	79.6
Noncurrent marketable investments	2.3
	$	81.9

As of December 31, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Government-sponsored enterprises	$	53.3	$	—	$	(0.2	)	$	53.1
Corporate notes and bonds	106.7		—		—			106.7
Total	$	160.0	$	—	$	(0.2	)	$	159.8
Reported under the following captions on the consolidated balance sheet:
Current marketable investments	$	122.0
Noncurrent marketable investments	38.0
	$	160.0

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

	As of September 30, 2016				As of December 31, 2015
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
Government-sponsored enterprises:
Continuous unrealized loss position less than one year	$	—	$	—	$	48.1	$	(0.2	)
Continuous unrealized loss position greater than one year	—		—		—		—
	—		—		48.1		(0.2		)
Corporate notes and bonds:
Continuous unrealized loss position less than one year	7.0		—		63.8		—
Continuous unrealized loss position greater than one year	—		—		—		—
	7.0		—		63.8		—
Total	$	7.0	$	—	$	111.9	$	(0.2	)

We attribute gross unrealized losses pertaining to our held-to-maturity securities as of December 31, 2015 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 millions):

	September 30, 2016
	Amortized Cost		Fair Value
Due in less than one year	$	79.6	$	79.6
Due in one to two years	2.3		2.3
Total	$	81.9	$	81.9

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 millions):

	As of September 30, 2016
	Level 1		Level 2		Level 3		Balance
Assets
Money market funds(1)	$	662.3	$	—	$	—	$	662.3
Federally-sponsored and corporate debt securities(2)	—		81.9		—		81.9
Total assets	$	662.3	$	81.9	$	—	$	744.2
Liabilities
Contingent consideration(4)	—		—		10.3		10.3
Total liabilities	$	—	$	—	$	10.3	$	10.3

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	As of December 31, 2015
	Level 1		Level 2		Level 3		Balance
Assets
Money market funds(1)	$	496.4	$	—	$	—	$	496.4
Federally-sponsored and corporate debt securities(2)	—		159.8		—		159.8
Total assets	$	496.4	$	159.8	$	—	$	656.2
Liabilities
Convertible notes(3)	$	16.0	$	—	$	—	$	16.0
Contingent consideration(4)	—		—		9.4		9.4
Total liabilities	$	16.0	$	—	$	9.4	$	25.4

(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.

(3) Included in other current liabilities on the accompanying consolidated balance sheets. The Convertible Notes matured on September 15, 2016. The carrying value of the Convertible Notes as of December 31, 2015 was $5.4 million. The fair value of our Convertible Notes was estimated using Level 1 observable inputs since our Convertible Notes were trading with sufficient frequency such that we believed related pricing could be used as the primary basis for measuring their fair value. As of December 31, 2015, 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 3—Investments—Marketable Investments and Note 8—Debt—Convertible Notes.

5. 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 millions):

	September 30, 2016		December 31, 2015
Raw materials	$	24.7	$	23.1
Work-in-progress	26.2		22.5
Finished goods	41.5		35.7
Total inventories	$	92.4	$	81.3

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6. Goodwill and Other Intangible Assets

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

	As of September 30, 2016							As of December 31, 2015
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Goodwill	$	10.3	$	—		$	10.3	$	10.3	$	—		$	10.3
Other intangible assets:
Technology, patents and trade names	6.5		(4.7		)	1.8		6.5		(4.7		)	1.8
In-process, research and development	21.5		—			21.5		15.5		—			15.5
Customer relationships and non-compete agreements	4.3		(3.9		)	0.4		4.3		(3.5		)	0.8
Contract-based	1.3		(1.3		)	—		1.3		(1.3		)	—
Total	$	43.9	$	(9.9	)	$	34.0	$	37.9	$	(9.5	)	$	28.4

7. Share Tracking Awards 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 grant date, and in most cases they vest in equal increments on each anniversary of the grant date over a four-year period. The STAP liability includes vested awards and awards that are expected to vest. We recognize expense for awards that are expected to vest during the vesting period. We discontinued the issuance of STAP awards in June 2015, when our shareholders approved the United Therapeutics Corporation 2015 Stock Incentive Plan (the 2015 Plan), a broad-based stock incentive plan enabling us to grant stock options and other forms of equity compensation to our employees. See Note 9—Stockholders’ Equity to these consolidated financial statements for information on the 2015 Plan.

The aggregate STAP liability balance was $184.7 million and $354.7 million at September 30, 2016 and December 31, 2015, respectively, of which $50.0 million and $80.2 million, respectively, has 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 weighted-average assumptions used to measure the fair value of the outstanding STAP awards:

	September 30, 2016		September 30, 2015
Expected volatility	35.5	%	34.5	%
Risk-free interest rate	0.9	%	1.2	%
Expected term of awards (in years)	2.8		4.1
Expected forfeiture rate	10.2	%	9.6	%
Expected dividend yield	0.0	%	0.0	%

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The closing price of our common stock was $118.08 and $131.24 on September 30, 2016 and September 30, 2015, respectively.

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 millions)
Outstanding at January 1, 2016	6,845,163		$	86.86
Granted	—		—
Exercised	(914,642	)	61.41
Forfeited	(544,507	)	94.00
Outstanding at September 30, 2016	5,386,014		$	90.46	6.7	$	208.2
Exercisable at September 30, 2016	2,797,117		$	86.50	6.2	$	113.5
Expected to vest as of September 30, 2016	2,316,622		$	94.33	7.2	$	85.4

The weighted average grant-date fair value of STAP awards granted during the nine-month period ended September 30, 2015 was $58.52. No STAP awards were granted during the nine-month period ended September 30, 2016.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Cost of product sales	$	3.5		$	(8.1	)	$	(8.7	)	$	2.8
Research and development	8.1			(31.1		)	(31.6		)	57.1
Selling, general and administrative	34.2			(82.4		)	(76.2		)	99.7
Share-based compensation expense (benefit) before taxes	$	45.8		$	(121.6	)	$	(116.5	)	$	159.6
Related income tax (expense) benefit	(17.1		)	45.9			42.6			(60.2		)
Share-based compensation expense (benefit), net of taxes	$	28.7		$	(75.7	)	$	(73.9	)	$	99.4

Cash paid to settle STAP awards exercised during the nine-month periods ended September 30, 2016 and September 30, 2015 was $52.7 million and $218.2 million, respectively.

8. Debt

Unsecured Revolving Credit Facility

In January 2016, we entered into a Credit Agreement (the 2016 Credit Agreement) with Wells Fargo Bank, National Association (Wells Fargo), as administrative agent and a swingline lender, and various other lender parties, providing for an unsecured revolving credit facility of up to $1.0 billion (the Revolving Facility), which is available to refinance certain of our existing indebtedness and/or for working capital and other general corporate purposes. The Revolving Facility will mature in January 2021, subject to the lenders’ ability to extend the maturity date by one year if we request such an extension in accordance with the terms of the 2016 Credit Agreement.

At our option, amounts borrowed under the Revolving Facility will bear interest at either the LIBOR rate or a fluctuating base rate, in each case, plus an applicable margin determined on a quarterly basis based on our consolidated ratio of total indebtedness to EBITDA (as calculated in accordance with the 2016 Credit Agreement).

The 2016 Credit Agreement contains customary events of default and customary affirmative and negative covenants. As of September 30, 2016, we were in compliance with such covenants and we had not drawn any amounts on the Revolving Facility. Lung Biotechnology PBC is our only subsidiary that guarantees our obligations under the 2016 Credit Agreement though, from time to time, one or more of our other subsidiaries may be required to guarantee such obligations.

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Convertible Notes

In October 2011, we issued $250.0 million in aggregate principal value 1.0 percent Convertible Senior Notes due September 15, 2016 (Convertible Notes). Upon maturity of the Convertible Notes in September 2016, we fulfilled all remaining settlement and repayment obligations.

In connection with the issuance of the Convertible Notes, we sold to DB London warrants to acquire up to approximately 5.2 million shares of our common stock at a strike price of $67.56 per share. The warrants will expire incrementally on a series of expiration dates beginning in December 2016 and ending in January 2017. The warrants will be settled on a net-share basis.

9. 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 millions, except per share amounts):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Numerator:
Net income	$	161.8	$	464.4	$	603.4	$	547.0
Denominator:
Weighted average outstanding shares — basic	43.2		45.5		44.3		46.1
Effect of dilutive securities(1):
Warrants	2.3		3.0		2.3		3.1
Stock options, restricted stock units and employee stock purchase plan	0.7		1.2		0.7		1.4
Convertible notes	—		0.5		—		1.1
Weighted average shares — diluted(2)	46.2		50.2		47.3		51.7
Earnings per common share:
Basic	$	3.75	$	10.20	$	13.62	$	11.86
Diluted	$	3.50	$	9.24	$	12.76	$	10.58

Stock options and warrants excluded from calculation(2)	5.3		3.0		5.3		4.1

(1) Calculated using the treasury stock method.

(2) Certain convertible notes, stock options and warrants have been excluded from the computation of diluted earnings per share because their impact would be anti-dilutive. Under our convertible note hedge agreement, we were 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.

Equity Incentive Plans

As of September 30, 2016, 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 in June 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. As a result of the approval of 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, through May 2016, all awards granted under these plans were in the form of stock options. In June 2016, we began issuing awards under the 2015 Plan to non-employee directors in the form of restricted stock units because the non-employee director compensation program had been amended to permit directors to elect to receive initial and annual equity grants in the form of stock options, restricted

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stock units, or a combination of both. Each restricted stock unit entitles the director to receive one share of our common stock upon vesting, subject to the director’s election to defer receipt of shares to a later date.

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. The 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 measure the fair value of restricted stock units using the stock price on the date of grant. We did not grant any awards under the 1999 Plan during the nine-month periods ended September 30, 2016 and September 30, 2015. During the nine-months ended September 30, 2016 and September 30, 2015, we granted 1.6 million and 0.2 million stock options under the 2015 Plan with a weighted average grant date fair value of $42.54 and $60.77, respectively. These stock options have an aggregate grant date fair value of $69.1 million and $9.9 million, respectively. During the nine-months ended September 30, 2016, we granted 20,960 restricted stock units under the 2015 Plan with a weighted average grant date fair value $101.80. The restricted stock units have an aggregate grant date fair value of $2.1 million. Share-based compensation expense is recorded ratably over the vesting period of the stock option or restricted stock unit.

The table below includes the weighted-average assumptions used to measure the fair value of the stock options granted during the nine-month period ended September 30, 2016:

	September 30, 2016		September 30, 2015
Expected volatility	34.8	%	33.1	%
Risk-free interest rate	1.6	%	2.0	%
Expected term of awards (in years)	5.8		5.8
Expected forfeiture rate	5.4	%	1.0	%
Expected dividend yield	0.0	%	0.0	%

A summary of the activity and status of stock options under our equity incentive plans during the nine-month period ended September 30, 2016 is presented below:

	Number of Options		Weighted- Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2016	3,247,438		$	93.09
Granted	1,625,552		119.33
Exercised	(196,984	)	31.73
Forfeited	(165,492	)	120.78
Outstanding at September 30, 2016	4,510,514		$	104.21	7.2	$	83.3
Exercisable at September 30, 2016	3,278,204		$	98.49	6.3	$	81.9
Expected to vest as of September 30, 2016	1,152,335		$	119.30	9.5	$	1.4

The total fair value of employee stock options that vested during the nine months ended September 30, 2016 was $19.9 million.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Number of options exercised	42,443		210,256		196,984		807,755
Cash received	$	1.2	$	8.6	$	6.2	$	33.0
Total intrinsic value of options exercised	$	3.9	$	25.3	$	17.3	$	101.1

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Total share-based compensation expense relating to stock options and restricted stock units is as follows (in millions):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Cost of product sales	$	0.1		$	—		$	0.3		$	—
Research and development	0.5			—			1.0			—
Selling, general and administrative	3.2			2.5			21.0			2.5
Share-based compensation expense before taxes	3.8			2.5			22.3			2.5
Related income tax benefit	(1.4		)	(0.9		)	(8.2		)	(0.9		)
Share-based compensation expense, net of taxes	$	2.4		$	1.6		$	14.1		$	1.6

Selling, general and administrative expense for the nine-month period ended September 30, 2016 includes approximately $9.8 million of costs related to the accelerated vesting of stock options associated with the departure of a company officer during the second quarter of 2016.

As of September 30, 2016, unrecognized compensation cost was $44.1 million, which includes $2.3 million related to the grant of stock options and restricted stock units to non-employee directors in June 2016 and $41.7 million related to unvested stock options awarded to employees. Unvested outstanding stock options and restricted stock units as of September 30, 2016 had a weighted average remaining vesting period of 3.3 years.

Share Repurchases

In October 2015, our Board of Directors authorized the repurchase of up to $500.0 million of our common stock in open market or privately negotiated transactions, or otherwise, at our discretion. This repurchase program is effective from January 1, 2016 through December 31, 2016. The specific timing, amount and other terms of any repurchases will depend on market conditions, corporate and regulatory requirements and other factors. During the three and nine months ended September 30, 2016, we acquired approximately 1.1 million and 3.3 million shares, respectively, of our common stock at an aggregate cost of $135.8 million and $395.5 million, respectively, under this repurchase program.

10. Accumulated Other Comprehensive Loss

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

	Defined Benefit Pension Plan			Foreign Currency Translation Losses			Total
Balance, January 1, 2016	$	(5.3	)	$	(15.1	)	$	(20.4	)
Other comprehensive income (loss)	6.4			(2.8		)	3.6
Current-period other comprehensive gain (loss)	6.4			(2.8		)	3.6
Balance, September 30, 2016	$	1.1		$	(17.9	)	$	(16.8	)

11. Income Taxes

Our effective income tax rate (ETR) for the nine months ended September 30, 2016 and 2015 was 32 percent and 38 percent, respectively. Our 2016 ETR decreased compared to 2015 primarily due to a decrease in non-deductible share-based compensation, which was driven largely by a decrease in our stock price during 2016 compared to 2015.

We are subject to federal and state taxation in the United States as well as various foreign jurisdictions. We are no longer subject to income tax examinations by the Internal Revenue Service and substantially all other major jurisdictions for tax years prior to 2011.

As of September 30, 2016 and 2015, our uncertain tax positions are approximately $0.5 million and $1.5 million, respectively, and we are unaware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change within the next twelve months.

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12. Employee Benefit Plans

Supplemental Executive Retirement Plan

During the second quarter of 2016, certain participants in the United Therapeutics Corporation Supplemental Executive Retirement Plan (SERP) departed prior to reaching retirement age under the terms of the SERP. As a result, we remeasured the benefit obligation under the SERP as of June 30, 2016 and recorded a $7.1 million reduction to the benefit obligation with a corresponding increase to “Actuarial gain arising during period, net of tax” within “Accumulated other comprehensive loss.” As part of the re-measurement of the benefit obligation, we updated the discount rate we use to measure our SERP obligation to 3.36 percent. The discount rate as of December 31, 2015 was 3.82 percent.

13. Segment Information

We currently operate as one operating segment. Our chief operating decision maker regularly reviews net product sales, cost of product sales and gross profit data as a primary measure of performance for each of our five commercial products.

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

	Three Months Ended September 30,
	Remodulin			Tyvaso		Adcirca		Orenitram		Unituxin			Total
2016
Net product sales	$	152.4		$	101.8	$	96.0	$	40.7	$	17.3		$	408.2
Cost of product sales	3.7			5.8		5.5		5.2		3.4			23.6
Gross profit	$	148.7		$	96.0	$	90.5	$	35.5	$	13.9		$	384.6

2015
Net product sales(1)	$	150.1		$	121.7	$	73.8	$	34.4	$	4.7		$	384.7
Cost of product sales	(2.2		)	3.5		4.5		2.1		(1.0		)	6.9
Gross profit	$	152.3		$	118.2	$	69.3	$	32.3	$	5.7		$	377.8

	Nine Months Ended September 30,
	Remodulin			Tyvaso		Adcirca		Orenitram		Unituxin			Total
2016
Net product sales	$	451.1		$	311.0	$	259.5	$	118.9	$	49.3		$	1,189.8
Cost of product sales	4.3			12.9		15.0		7.9		4.2			44.3
Gross profit	$	446.8		$	298.1	$	244.5	$	111.0	$	45.1		$	1,145.5

2015
Net product sales(1)	$	432.3		$	350.9	$	187.3	$	81.2	$	4.7		$	1,056.4
Cost of product sales	7.1			15.9		11.2		7.6		1.9			43.7
Gross profit	$	425.2		$	335.0	$	176.1	$	73.6	$	2.8		$	1,012.7

(1) Unituxin was approved by the FDA in March 2015 and we commenced sales of Unituxin in the third quarter of 2015.

For the three-month periods ended September 30, 2016 and September 30, 2015, net product sales from our U.S.-based distributors represented 68 percent and 72 percent, respectively, of total revenues. For the nine-month periods ended September 30, 2016 and September 30, 2015, net product sales from our U.S.-based distributors represented 70 percent and 74 percent, respectively, of total revenues. Remaining revenues were derived primarily from net product sales of Adcirca and net product sales of Remodulin, Tyvaso, and Unituxin to our international distributors.

14. Litigation

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 abbreviated new drug application (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 in July 2015 against Watson in the U.S. District Court for the District of New Jersey alleging infringement of each of the patents noted above. Under the Hatch-

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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 with respect to all patents noted above, whichever occurs first. In September 2015, Watson filed (1) a motion to dismiss some, but not all, counts of the complaint; (2) its answer to the complaint; and (3) certain counterclaims against us. The Court granted Watson’s motion to dismiss certain counts of our complaint. In September 2015, we filed our answer to Watson’s counterclaims.

The U.S. Patent and Trademark Office issued to us U.S. Patent Nos. 9,339,507 (the ’507 patent) and 9,358,240 (the ’240 patent) in May 2016 and June 2016, respectively. The ’507 patent is directed to a kit for treating pulmonary hypertension and expires in March 2028. The ’240 patent is directed to a method of treating pulmonary hypertension and expires in May 2028. Both patents have been listed in FDA’s Approved Drug Products with Therapeutic Equivalents publication (also known as the Orange Book) in connection with Tyvaso. On June 21, 2016, we filed an amended complaint against Watson asserting infringement of both of these patents, as well as all of the originally asserted patents. On June 30, 2016, we received a second Paragraph IV certification notice letter from Watson relating to the previously submitted ANDA, which addresses the ’507 and ’240 patents.

The parties are currently engaged in discovery, and trial on all patent infringement claims is scheduled to take place in September 2017.

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

Actavis Laboratories FL, Inc.

In February 2016, we received a Paragraph IV certification notice letter (the First Actavis Notice Letter) from Actavis Laboratories FL, Inc. (Actavis) indicating that Actavis has submitted an ANDA to the FDA to market a generic version of the 2.5 mg strength of Orenitram. The First Actavis Notice Letter states that Actavis intends to market a generic version of the 2.5 mg strength of Orenitram before the expiration of the following patents, all of which are listed in the Orange Book:

U.S. Patent No.		Expiration Date
8,252,839		May 2024
9,050,311		May 2024
7,544,713		July 2024
7,417,070		July 2026
8,497,393		December 2028
8,747,897		October 2029
8,410,169		February 2030
8,349,892		January 2031

The First Actavis 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 Actavis’ ANDA submission. We responded to the First Actavis Notice Letter by filing a lawsuit (the First Actavis Action) against Actavis in March 2016 in the U.S. District Court for the District of New Jersey alleging infringement of each of the patents noted above and one additional patent, U.S. Patent No. 9,278,901 (the ’901 patent), which expires in May 2024 and is also now listed in the Orange Book. Under the Hatch-Waxman Act, the FDA is automatically precluded from approving Actavis’ ANDA with respect to the 2.5 mg strength of Orenitram for up to 30 months from receipt of Actavis’ notice letter or until the issuance of a U.S. District Court decision that is adverse to us with respect to all of the eight patents listed in the table above, whichever occurs first. In June 2016, we filed an amended complaint against Actavis, Actavis filed its answer and counterclaims to that amended complaint, and we filed our answer to those counterclaims.

In May 2016, we received a second Paragraph IV certification notice letter from Actavis (the Second Actavis Notice Letter) indicating that Actavis has amended its ANDA to include its generic version of the 0.25 mg and 1.0 mg strengths of Orenitram, in addition to the 2.5 mg strength identified in the First Actavis Notice Letter. We responded to the Second Actavis Notice Letter by filing an additional lawsuit against Actavis (the Second Actavis Action) on June 17, 2016 in the U.S. District Court for the District of New Jersey alleging infringement of the same patents asserted in the First Actavis Action. The Second Actavis Action triggered an additional 30-month stay with respect to the 0.25 mg and 1.0 mg strengths. Specifically, the FDA is automatically precluded from approving Actavis’ ANDA with respect to the 0.25 mg and 1.0 mg strengths of Orenitram for up to 30 months from receipt of the Second Actavis Notice Letter or until the issuance of a U.S. District Court decision that is adverse to us with respect to all of the eight patents listed in the table above and the ’901 patent, whichever occurs first.

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The Court has consolidated the First Actavis Action and the Second Actavis Action. The parties are currently engaged in discovery, and trial is scheduled for February 2018.

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

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 we own. In its IPR Petition, SteadyMed seeks to invalidate the claims of the ’393 Patent, which expires in December 2028 and describes a method of making treprostinil, which is the active pharmaceutical ingredient in our Remodulin, Tyvaso and Orenitram products. We filed a response to the IPR Petition in January 2016. In April 2016, the PTAB instituted an inter partes review of the ’393 Patent on the basis of SteadyMed’s IPR Petition. The PTAB has preliminarily agreed with SteadyMed’s arguments concerning invalidity, and has initially found that there is a reasonable likelihood that SteadyMed would prevail in challenging the ’393 patent. The ’393 Patent was also the subject of the recently-settled litigation with Sandoz, Inc. and Teva Pharmaceuticals USA, Inc. regarding their ANDAs relating to generic forms of Remodulin, and remains the subject of our pending litigation with Watson and Actavis, described above. We intend to vigorously defend the ’393 Patent. SteadyMed has announced that it is developing a product called Trevyent®, which is a single-use, pre-filled pump for which it plans to seek FDA approval for delivery of a two-day supply of treprostinil subcutaneously using its PatchPump® technology. SteadyMed has announced plans to file an NDA for Trevyent during the first quarter of 2017, and launch the product in late 2017.

Department of Justice Subpoena

In May 2016, we received a subpoena from the U.S. Department of Justice requesting documents regarding our support of 501(c)(3) organizations that provide financial assistance to patients taking our medicines. Other companies have received similar inquiries. We are cooperating with this inquiry.

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, 2015, 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, 2015, 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 of Marketed Products

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 U.S. Food and Drug Administration (FDA) for subcutaneous (under the skin) and intravenous (in the vein) administration. Prostacyclin analogues are stable synthetic forms of prostacyclin, an important molecule produced by the body that has powerful effects on blood vessel health and function. Remodulin is indicated to diminish symptoms associated with exercise in patients with World Health Organization (WHO) Group 1 pulmonary arterial hypertension (PAH). Remodulin has also been approved in various countries outside of the United States.

· 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 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.

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· Adcirca® (tadalafil) Tablets (Adcirca). We acquired exclusive commercialization rights to Adcirca, an oral PDE-5 inhibitor therapy for PAH, in the United States from Eli Lilly and Company (Lilly). PDE-5 inhibitors 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. 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. Unituxin is a chimeric antibody that binds to the antigen called GD2, which is expressed on the surface of some types of cancerous tumors, and destroys the cancer cells through a mechanism called antibody-dependent cell mediated cytotoxicity. We commenced U.S. sales of Unituxin in the third quarter of 2015. We received orphan drug designation for Unituxin from the FDA, conferring 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 such as a showing of clinical superiority.

Revenues

Our net product sales consist entirely of 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, and we entered into an exclusive distribution agreement with ASD Specialty Healthcare, Inc. (ASD), an affiliate of AmerisourceBergen Corporation, to distribute Unituxin in the United States. We also sell Remodulin and Tyvaso to distributors internationally. Price increases on these products generally have been in the single percentage digits, except for Adcirca, the price of which is set by Lilly.

We require our specialty pharmaceutical distributors to maintain reasonable levels of inventory reserves because the interruption of Remodulin, Tyvaso or Orenitram can be life threatening. Our specialty pharmaceutical distributors typically place monthly orders based on current utilization trends and contractual minimum inventory requirements. As a result, sales of Remodulin, Tyvaso and Orenitram can vary depending on the timing and magnitude of these orders and may not precisely reflect changes in patient demand.

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

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distributors for contractual services rendered and accrue for related fees based on contractual rates applied to the estimated units of service provided by distributors for a given financial reporting period.

Generic Competition

We settled litigation with Sandoz, Inc. (Sandoz) and Teva Pharmaceuticals USA, Inc. (Teva) relating to their abbreviated new drug applications (ANDAs) seeking FDA approval to market generic versions of Remodulin before the expiration of certain of our U.S. patents. Under the terms of our settlement agreements, Sandoz and Teva will be permitted to market their generic versions of Remodulin in the United States beginning in June 2018 and December 2018, respectively, although they may be permitted to enter the market earlier under certain circumstances.

In October 2016, we received a Paragraph IV Certification Notice Letter (the Notice Letter) that another generic drug company, Par Sterile Products, LLC (Par), also filed an ANDA seeking FDA approval to market a generic version of Remodulin. In the Notice Letter, Par states that it intends to market a generic version of Remodulin before the expiration of U.S. Patent No. 8,497,393, which expires in December 2028, and U.S. Patent No. 9,199,908, which expires in May 2024. Par’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 Par’s ANDA submission. We are currently reviewing the Notice Letter. If we commence a patent infringement lawsuit against Par within 45 days from receipt of the Notice Letter, the FDA would be precluded from approving Par’s ANDA for up to 30 months or until the issuance of a district court decision that is adverse to us, whichever occurs first.

We are engaged in litigation with Watson Laboratories, Inc. (Watson), contesting its ANDA to market a generic version of Tyvaso before the expiration of certain of our U.S. patents expiring at various dates from November 2018 through December 2028. The U.S. Patent and Trademark Office issued to us two new patents covering Tyvaso, U.S. Patent Nos. 9,339,507 (the ’507 patent) and 9,358,240 (the ’240 patent) in May and June 2016, respectively. The ’507 patent is directed to a kit for treating pulmonary hypertension and expires in March 2028, and the ’240 patent is directed to a method of treating pulmonary hypertension and expires in May 2028. Both patents are now listed in the Orange Book for Tyvaso. In addition, we have filed an amended complaint against Watson asserting infringement of these two new patents.

We are also engaged in litigation with Actavis Laboratories FL, Inc. (Actavis), contesting its ANDA to market a generic version of the 0.25 mg, 1.0 mg and 2.5 mg strengths of Orenitram before the expiration of certain of our U.S. patents expiring at various dates from 2024 through 2031.

Finally, SteadyMed Ltd. (SteadyMed) has filed a petition for inter partes review seeking to invalidate the claims of one of our patents that expires in December 2028 and relates to treprostinil (U.S. Patent No. 8,497,393, which we refer to as the ’393 Patent), which is the active ingredient in Remodulin, Tyvaso and Orenitram. In April 2016, the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office instituted an inter partes review of the ’393 Patent on the basis of SteadyMed’s petition. The PTAB has preliminarily agreed with SteadyMed’s arguments concerning invalidity, and has initially found that there is a reasonable likelihood that SteadyMed would prevail in challenging the ’393 patent. SteadyMed has announced that it is developing a product called Trevyent®, which is a single-use, pre-filled pump being developed to deliver a two-day supply of treprostinil subcutaneously using its PatchPump® technology. In January 2016, SteadyMed announced that Trevyent has been granted orphan drug designation by the FDA for the treatment of PAH. As a result, if Trevyent obtains FDA approval prior to FDA approval of our RemUnity pre-filled, semi-disposable treprostinil pump or RemoSynch, our implantable intravenous treprostinil delivery system, SteadyMed could have seven years of exclusivity during which the FDA may be prevented from approving these products except in limited circumstances such as a showing of clinical superiority. SteadyMed has announced plans to file an NDA for Trevyent during the first quarter of 2017, and launch the product in late 2017.

For further details regarding the Watson, Actavis and SteadyMed matters, please see Note 14—Litigation, to our consolidated financial statements.

As a result of our settlements with Sandoz and Teva, we expect to see generic competition for Remodulin from these companies beginning in the United States in June 2018 and December 2018, respectively (or earlier under certain circumstances). This increased competition could reduce our net product sales and profits. In addition, while we intend to vigorously enforce our intellectual property rights relating to our products, 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 our 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 net product sales and profits.

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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 erode Adcirca’s market share and limit its potential sales. Although we believe Adcirca’s once-daily dosing regimen provides a significant advantage over generic sildenafil’s multiple dosing regimen, 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, following which we expect to see generic competition for Adcirca.

Patent expiration and generic competition for any of our commercial PAH products could have a significant, adverse impact on our revenues and profits, and is inherently difficult to predict. For additional discussion, please 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

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

Our operating expenses include the following costs:

Cost of Product Sales

Our cost of product sales primarily include costs to produce and acquire products sold to customers, royalty payments under license agreements granting us rights to sell related products, direct and indirect distribution costs incurred in the sale of products, and the costs of inventory reserves for current and projected obsolescence. These costs generally include share-based compensation and salary-related expenses for direct manufacturing and indirect support personnel, quality review and release for commercial distribution, direct materials and supplies, depreciation, facilities-related expenses and other overhead 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, regulatory costs and costs associated with pre-FDA approval payments to third-party contract manufacturers. Expenses also include costs for third-party arrangements, including upfront fees and milestone payments required under 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, external costs such as insurance premiums, legal fees, grants to non-affiliated, not-profit organizations, and other professional service fees.

Share-Based Compensation

Historically, we granted stock options under our Amended and Restated Equity Incentive Plan (the 1999 Plan) and awards under our Share Tracking Awards Plans (STAP). In June 2015, our shareholders approved the United Therapeutics Corporation 2015 Stock Incentive Plan (the 2015 Plan), which authorizes the issuance of up to 6,150,000 shares of our common stock. Following approval of the 2015 Plan, we ceased granting awards under the STAP and the 1999 Plan, and we modified our equity compensation programs to grant stock options to employees who previously received STAP awards, and to grant stock options and restricted stock units to non-employee directors. The grant date fair value of stock options and restricted stock units are recognized as share-based compensation expense ratably over their vesting period.

Although we have ceased granting STAP awards, we still have a significant number of STAP awards outstanding. Our operating expenses and net income are often materially impacted by the recognition of share-based compensation (benefit)

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expense associated with outstanding STAP awards as the fair value of these awards varies with the changes in our stock price. The fair values of STAP awards and stock option grants are measured using inputs and assumptions under the Black-Scholes-Merton model that can materially impact the amount of share-based compensation (benefit) expense for a given period. The fair value of restricted stock units is measured using our stock price on the date of grant.

We account for STAP awards as liabilities because they are settled in cash. As such, we must re-measure the fair value of 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 (benefit) expense and can create substantial volatility within our operating expenses from financial reporting period to period. The following factors, among others, have a significant impact on the amount of share-based compensation (benefit) expense recognized in connection with the STAP from period to period: (1) volatility in the price of our common stock (specifically, increases in the price of our common stock will generally result in an increase in our STAP liability and related compensation expense, while decreases in our stock price will generally result in a reduction in our STAP liability and related compensation expense); (2) changes in the number of outstanding awards; and (3) changes in the number of vested and unvested awards.

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Major Research and Development Projects

Our major research and development projects focus on the following pipeline programs:

Product

Mode of Delivery

Indication

Current Status
STUDY NAME CAPS

Target FDA
Approval
Date

Our Territory

Target U.S.
Patient
Population
Size

RemoSynch™
(Implantable System for Remodulin)

Continuous intravenous via implantable pump

WHO Group 1 pulmonary arterial hypertension (PAH)

PMA resubmitted by Medtronic Oct. 2016. NDA to be resubmitted by UT early 2017.

2017

United States, United Kingdom, Canada, France, Germany, Italy and Japan

6,000

RemUnity™
(treprostinil)

Continuous subcutaneous via pre-filled, semi-disposable pump

PAH

Pre-NDA

2018

Worldwide

6,000

Dinutuximab

Injection or infusion

Multiple GD2 expressing cancers

Phase II/III

2019-2023 for accelerated approval and other regulatory pathways

Worldwide

12,000

RemoPro™ (pain-free subcutaneous Remodulin® prodrug)

Continuous subcutaneous

PAH

Pre-clinical

2019

Worldwide

9,000

OreniPlus™
(Orenitram in combination with approved background therapy)

Oral

PAH
(decrease morbidity and mortality)

Phase IV
FREEDOM-EV

2019

Worldwide

15,000

Ex-Vivo Lung Perfusion

Pre-transplant service providing extended preservation and assessment of donor lungs

End-stage lung disease

Phase II

2019

United States

8,000

Tysuberprost™
(esuberaprost in combination with Tyvaso)

Oral (esuberaprost)
Inhaled (Tyvaso)

PAH
(decrease morbidity and mortality)

Phase III
BEAT

2019

North America, Europe, Mexico, South America, Egypt, India, South Africa and Australia

10,000

Tyvaso-ILD™
(treprostinil)

Inhaled

Pulmonary hypertension associated with idiopathic pulmonary fibrosis (WHO Group 3)

Phase III
INCREASE

2020

Worldwide

27,500

Aurora-GT™
(eNOS gene therapy)

Intravenous injection

PAH

Phase II/III
SAPPHIRE

2020

United States

10,000

RemoLiv™
(treprostinil)

Continuous intravenous

Liver transplant tolerance

Phase III
STARZL

2020

Worldwide

5,000

OreniLeft™
(treprostinil)

Oral

Pulmonary hypertension associated with left ventricular diastolic dysfunction
(WHO Group 2)

Phase III
SOUTHPAW

2021

Worldwide

50,000

Unexisome™
(exosome stem cell)

Infusion

Bronchopulmonary dysplasia

Pre-clinical

2022

Worldwide

12,000

OreniCell™
(treprostinil)

Oral

Reduce morbidity and mortality in patients with pulmonary hypertension associated with sickle cell disease
(WHO Group 5)

Phase II/III
IRONS

2022

Worldwide

25,000

Manufactured Organs

Transplant

End-stage organ failure

Pre-Clinical

2023

Worldwide

> 30,000

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RemoSynch (Implantable System for Remodulin)

We are working with Medtronic, Inc. (Medtronic) on a program 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 Implantable System for Remodulin, or RemoSynch) in order to deliver Remodulin for the treatment of PAH. If the Implantable System for Remodulin is approved, the technology has the potential to reduce many of the patient burdens and other complications associated with the use of external pumps to administer prostacyclin analogues. In order to launch RemoSynch in the United States, Medtronic and we are pursuing parallel regulatory filings relating to the device and the drug, respectively. Most recently, on October 10, 2016, Medtronic submitted additional information to supplement its premarket approval application (PMA) with FDA to address all the issues raised in a March 2016 letter from the FDA indicating that Medtronic’s PMA was not approvable. We anticipate that the FDA will review the PMA within 180 days, but approval, within a specific timeframe or at all, is not assured. Medtronic is responsible for responding to any FDA requests for additional information concerning its PMA.

In December 2015, we submitted an NDA requesting FDA approval to allow the use of Remodulin with the Implantable System for Remodulin. On October 13, 2016, the FDA issued a complete response letter indicating that it could not approve our NDA prior to approval of the Medtronic PMA. As such, we anticipate either resubmitting our NDA for 60 day review in early 2017, or receiving approval of our NDA at the time the Medtronic PMA is approved.

RemUnity and RemoPro

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 treprostinil, which we call the RemUnity system. Under the terms of the agreement, we will fund the development costs related to the RemUnity system and will pay product fees and a single-digit royalty to DEKA based on commercial sales of the system and the treprostinil drug product sold for use with the system. Currently, we are undertaking engineering, design and development work to optimize the RemUnity pump to deliver a preservative-free formulation of treprostinil in pre-filled reservoirs, and intend to conduct human factor studies in healthy volunteers and functionality testing in patients before submitting an application to the FDA to approve the pre-filled RemUnity pump.

We are also engaged in pre-clinical development of a new prodrug formulation of Remodulin called RemoPro, which is intended to enable subcutaneous delivery without the site pain currently associated with subcutaneous Remodulin. A prodrug is a metabolically inactive compound that, after administration, is metabolized into an active compound. In the case of RemoPro, the prodrug is intended to be inactive in the subcutaneous tissue, which should eliminate site pain, and once absorbed into the blood is metabolized into treprostinil.

Tyvaso and Tyvaso-ILD

We are developing further enhancements intended to make the Tyvaso Inhalation System easier to use. In addition, we have commenced a phase III registration study called INCREASE, which is a study of inhaled treprostinil in patients with WHO Group 3 pulmonary hypertension associated with interstitial lung disease (specifically associated with idiopathic pulmonary fibrosis or emphysema), a product called Tyvaso-ILD.

Orenitram, OreniCell, OreniLeft and OreniPlus

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 PAH 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 PAH patients who are on an approved oral background therapy, at which time we plan to seek FDA approval to re-brand Orenitram as OreniPlus. As such, we are enrolling patients in a phase IV registration study called FREEDOM-EV, which is intended to support such a label amendment if successful.

We are also planning studies of oral treprostinil in patients with WHO Group 2 pulmonary hypertension (specifically associated with left ventricular diastolic dysfunction), a product called OreniLeft, and WHO Group 5 pulmonary hypertension (specifically associated with sickle cell disease), a product called OreniCell. Finally, we are planning a clinical study to assess the efficacy of Orenitram in patients being treated with a combination of both ambrisentan and tadalafil background therapies.

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Tysuberprost

In July 2012, we completed a phase I safety trial of esuberaprost, a single-isomer orally bioavailable prostacyclin analogue, 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 oral 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 registration 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 refer to the resulting combination product as Tysuberprost.

Unituxin

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 U.S. sales of Unituxin in the third quarter of 2015.

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. While we believe we will be able to complete these studies, any failure to satisfy these requirements or commitments could result in penalties, including fines or withdrawal of Unituxin from the market, unless we are able to demonstrate good cause for the failure.

In addition, we are planning studies of dinutuximab, the active ingredient in Unituxin, in adult patients with additional forms of GD2-expressing cancers, such as small cell lung cancer and other high-risk forms of cancer with GD2 expressing cell tumors. Finally, we are working on the development of a humanized version of dinutuximab, which is intended to reduce the side effects associated with the existing, chimeric form of the drug.

Unexisome

In 2016, we discovered derivatives of certain types of stem cells called exosomes, which demonstrated regenerative properties in animal models of different diseases. We have selected a product candidate for bronchopulmonary dysplasia from these derivatives, referred to as Unexisome™, which we are planning to advance into clinical development.

Aurora-GT

We are planning a phase II/III study of an autologous gene therapy product called Aurora-GT for PAH.

Organ Transplantation

We are engaged in research and development into a variety of technologies designed to increase the supply of transplantable organs and tissues and improve outcomes for transplant recipients. These programs include preclinical research and development of alternative tissue sources through tissue and organ xenotransplantation, as well as regenerative medicine to create engineered organs and organ tissues. Although our primary focus is on engineered lungs, we are also developing technology for other engineered organs, such as kidneys and hearts. Through our wholly-owned subsidiary, Lung Biotechnology PBC, we are also developing technologies to improve outcomes for lung transplant recipients and to increase the supply of donor lungs through ex-vivo lung perfusion. Finally, we are planning a study of Remodulin used post-operatively in patients undergoing orthotopic liver transplants, which we refer to as the RemoLiv program.

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; and (2) in the medium term, augmenting our near-term product growth through further development of our pharmaceutical pipeline for cardiopulmonary and oncologic indications.

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 preclinical research, 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

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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; 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 have budgeted for capital expenditures of approximately $275 million over the next three years.

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

Financial Position

Cash and cash equivalents and marketable investments (both current and long-term) at September 30, 2016 and December 31, 2015 were $1,034.9 million and $991.8 million, respectively. The increase of $43.1 million resulted primarily from $480.2 million of cash generated from operations, partially offset by the use of $395.5 million to repurchase shares of our common stock and the use of $38.2 million in other investing activities for the purchase of property, plant and equipment, cost method investments, and intangible assets.

Accounts receivable at September 30, 2016 and December 31, 2015 were $224.6 million and $192.8 million, respectively. The increase of $31.8 million was primarily due to the timing of sales and cash receipts.

STAP liabilities classified as current liabilities at September 30, 2016 and December 31, 2015 were $134.7 million and $274.5 million, respectively. The decrease of $139.8 million corresponded to a 25 percent decrease in the price of our common stock during the nine months ended September 30, 2016 and exercises and forfeitures of STAP awards during the same period.

Other liabilities at September 30, 2016 and December 31, 2015 were $105.0 million and $144.0 million, respectively. The decrease of $39.0 million was primarily due to (1) a decrease of $30.2 million in our STAP liability classified as non-current, which corresponded to a 25 percent decrease in the price of our common stock during the nine months ended September 30, 2016 and forfeitures of STAP awards during the nine months ended September 30, 2016; and (2) a $9.1 million net decrease in our SERP liability primarily as a result of the second quarter 2016 re-measurement of our SERP following the departure of certain SERP participants before retirement age. STAP liabilities classified as non-current liabilities at September 30, 2016 and December 31, 2015 were $50.0 million and $80.2 million, respectively. Refer to Note 7—Share Tracking Award Plans and Note 12—Employee Benefit Plans—Supplemental Executive Retirement Plan to our consolidated financial statements.

Additional paid-in capital at September 30, 2016 and December 31, 2015 was $1,836.7 million and $1,790.6 million, respectively. The increase of $46.1 million primarily consisted of $21.7 million in share-based compensation expense and $10.8 million in proceeds from stock option exercises including excess tax benefits. Refer to Note 9—Stockholders’ Equity—Equity Incentive Plans.

Treasury stock at September 30, 2016 and December 31, 2015 was $2,305.1 million and $1,902.1 million, respectively. The increase of $403.0 million primarily consisted of $395.5 million in expenditures to repurchase approximately 3.3 million shares of our common stock. Refer to Note 9—Stockholders’ Equity—Share Repurchases to our consolidated financial statements.

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Three Months Ended September 30, 2016 and September 30, 2015

Revenues

The following table presents the components of total revenues (dollars in millions):

	Three Months Ended September 30,				Percentage
	2016		2015		Change
Net product sales:
Remodulin	$	152.4	$	150.1	1.5	%
Tyvaso	101.8		121.7		(16.4	)%
Adcirca	96.0		73.8		30.1	%
Orenitram	40.7		34.4		18.3	%
Unituxin	17.3		4.7		268.1	%
Other	—		1.5		(100.0	)%
Total revenues	$	408.2	$	386.2	5.7	%

Revenues for the three months ended September 30, 2016 increased by $22.0 million compared to the same period in 2015. The growth in revenues primarily resulted from the following: (1) a $22.2 million increase in Adcirca net product sales due to an increase in the number of Adcirca bottles sold and price increases, which were determined by Lilly; (2) a $12.6 million increase in Unituxin net product sales due to an increase in number of vials sold, compared to the third quarter of 2015, when we launched commercial sales of Unituxin in the United States; (3) a $6.3 million increase in Orenitram net product sales due to an increase in the number of patients being treated with Orenitram; and (4) a $2.3 million increase in Remodulin net product sales due to an increase in the number of patients being treated with Remodulin. These increases were partially offset by a $19.9 million decrease in Tyvaso net product sales.

We recognize revenues net of: (1) estimated rebates; (2) prompt pay discounts; (3) allowances for sales returns; and (4) distributor fees. These are referred to as gross-to-net deductions and are based on historical experiences and contractual and statutory requirements. The tables below include a reconciliation of the accounts associated with these deductions (in millions):

	Three Months Ended September 30, 2016
	Rebates			Prompt Pay Discounts			Allowance for Sales Returns		Distributor Fees			Total
Balance, July 1, 2016	$	46.0		$	4.9		$	6.3	$	2.8		$	60.0
Provisions attributed to sales in:
Current period	57.0			9.5			0.4		3.4			70.3
Prior periods	(0.2		)	—			—		(0.1		)	(0.3		)
Payments or credits attributed to sales in:
Current period	(8.9		)	(5.4		)	—		(1.0		)	(15.3		)
Prior periods	(43.2		)	(4.5		)	—		(2.5		)	(50.2		)
Balance, September 30, 2016	$	50.7		$	4.5		$	6.7	$	2.6		$	64.5

	Three Months Ended September 30, 2015
	Rebates			Prompt Pay Discounts			Allowance for Sales Returns			Distributor Fees			Total
Balance, July 1, 2015	$	41.0		$	3.7		$	4.7		$	1.3		$	50.7
Provisions attributed to sales in:
Current period	40.0			8.6			0.7			3.1			52.4
Prior periods	1.0			—			—			—			1.0
Payments or credits attributed to sales in:
Current period	(7.2		)	(5.2		)	—			(1.0		)	(13.4		)
Prior periods	(34.9		)	(3.5		)	(0.6		)	(1.4		)	(40.4		)
Balance, September 30, 2015	$	39.9

UNITED THERAPEUTICS Corp - FORM 10-Q - October 27, 2016

Attached files