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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, 2018

 

OR

 

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 every Interactive Data File required to be submitted 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 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

 

 

 

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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 24, 2018 was 43,587,178.

 

 

 


Table of Contents

 

INDEX

 

 

 

 

 

Page

 

 

 

 

 

Part I.

 

FINANCIAL INFORMATION (UNAUDITED)

 

 

 

 

 

 

 

Item 1.

 

Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

 

 

 

 

 

 

Part II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

 

 

 

 

 

 

SIGNATURES

 

 

 

 

2


Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  CONSOLIDATED FINANCIAL STATEMENTS

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

 

 

 

September 30,
2018

 

December 31,
2017

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

656.0

 

$

705.1

 

Marketable investments

 

581.6

 

222.3

 

Accounts receivable, no allowance for 2018 and 2017

 

215.2

 

297.1

 

Inventories, net

 

101.0

 

107.9

 

Other current assets

 

54.9

 

115.5

 

Total current assets

 

1,608.7

 

1,447.9

 

Marketable investments

 

595.9

 

502.7

 

Goodwill and other intangible assets, net

 

167.7

 

45.6

 

Property, plant and equipment, net

 

665.2

 

545.7

 

Deferred tax assets, net

 

112.9

 

113.4

 

Other non-current assets

 

261.7

 

224.1

 

Total assets

 

$

3,412.1

 

$

2,879.4

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

204.8

 

$

171.1

 

Share tracking awards plan

 

89.7

 

240.1

 

Other current liabilities

 

77.9

 

33.5

 

Total current liabilities

 

372.4

 

444.7

 

Line of credit

 

250.0

 

250.0

 

Other non-current liabilities

 

77.7

 

63.7

 

Total liabilities

 

700.1

 

758.4

 

Commitments and contingencies

 

 

 

 

 

Temporary equity

 

19.2

 

19.2

 

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, 70,205,250 and 69,858,840 shares issued, and 43,586,034 and 43,239,624 shares outstanding at September 30, 2018 and December 31, 2017, respectively

 

0.7

 

0.7

 

Additional paid-in capital

 

1,924.0

 

1,854.3

 

Accumulated other comprehensive loss

 

(22.2

)

(19.6

)

Treasury stock, 26,619,216 shares at September 30, 2018 and December 31, 2017

 

(2,579.2

)

(2,579.2

)

Retained earnings

 

3,369.5

 

2,845.6

 

Total stockholders’ equity

 

2,692.8

 

2,101.8

 

Total liabilities and stockholders’ equity

 

$

3,412.1

 

$

2,879.4

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(Unaudited)

 

(Unaudited)

 

Revenues:

 

 

 

 

 

 

 

 

 

Net product sales

 

$

412.7

 

$

445.5

 

$

1,246.4

 

$

1,260.6

 

Total revenues

 

412.7

 

445.5

 

1,246.4

 

1,260.6

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of product sales

 

51.9

 

19.5

 

166.8

 

52.7

 

Research and development

 

101.1

 

55.0

 

219.1

 

151.0

 

Selling, general and administrative

 

110.1

 

47.2

 

186.6

 

171.0

 

Loss contingency

 

 

 

 

210.0

 

Total operating expenses

 

263.1

 

121.7

 

572.5

 

584.7

 

Operating income

 

149.6

 

323.8

 

673.9

 

675.9

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

7.9

 

2.2

 

19.9

 

5.7

 

Interest expense

 

(4.1

)

(3.3

)

(9.6

)

(5.5

)

Other, net

 

(0.9

)

1.1

 

(4.8

)

2.0

 

Impairment of investment in privately-held company

 

(12.4

)

(3.1

)

(12.4

)

(49.6

)

Total other expense, net

 

(9.5

)

(3.1

)

(6.9

)

(47.4

)

Income before income taxes

 

140.1

 

320.7

 

667.0

 

628.5

 

Income tax expense

 

(33.6

)

(44.4

)

(143.1

)

(229.6

)

Net income

 

$

106.5

 

$

276.3

 

$

523.9

 

$

398.9

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

2.44

 

$

6.37

 

$

12.04

 

$

9.00

 

Diluted

 

$

2.42

 

$

6.27

 

$

11.91

 

$

8.83

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

43.6

 

43.4

 

43.5

 

44.3

 

Diluted

 

44.0

 

44.1

 

44.0

 

45.2

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(Unaudited)

 

(Unaudited)

 

Net income

 

$

106.5

 

$

276.3

 

$

523.9

 

$

398.9

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation gains

 

 

 

 

0.2

 

Defined benefit pension plan:

 

 

 

 

 

 

 

 

 

Actuarial loss arising during period, net of tax

 

 

 

 

(0.1

)

Amortization of actuarial gain and prior service cost included in net periodic pension cost, net of tax

 

0.4

 

0.1

 

1.0

 

0.4

 

Total defined benefit pension plan, net of tax

 

0.4

 

0.1

 

1.0

 

0.3

 

Unrealized loss on available-for-sale securities, net of tax

 

(0.7

)

(0.3

)

(3.6

)

(0.5

)

Other comprehensive (loss) income, net of tax

 

(0.3

)

(0.2

)

(2.6

)

 

Comprehensive income

 

$

106.2

 

$

276.1

 

$

521.3

 

$

398.9

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

 

 

Nine Months Ended
September 30,

 

 

 

2018

 

2017

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

523.9

 

$

398.9

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

25.4

 

23.3

 

Share-based compensation benefit

 

(29.2

)

(45.0

)

Impairment of investment in privately-held company

 

12.4

 

49.6

 

Loss contingency

 

 

210.9

 

Other

 

4.4

 

(9.2

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

81.9

 

(37.3

)

Inventories

 

4.2

 

(17.0

)

Accounts payable and accrued expenses

 

21.9

 

37.9

 

Other assets and liabilities

 

15.1

 

(52.1

)

Net cash provided by operating activities

 

660.0

 

560.0

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(132.6

)

(58.5

)

Proceeds from sale of property, plant and equipment

 

 

8.3

 

Purchases of held-to-maturity and other investments

 

(63.4

)

(51.8

)

Maturities of held-to-maturity investments

 

53.0

 

52.6

 

Purchases of available-for-sale investments

 

(618.5

)

(452.6

)

Sales/maturities of available-for-sale investments

 

175.2

 

 

Purchase of investment in privately-held company

 

(5.0

)

(55.3

)

Consolidation of variable interest entity

 

 

0.1

 

Acquisition, net of cash acquired

 

(124.1

)

 

Net cash used in investing activities

 

(715.4

)

(557.2

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from line of credit

 

250.0

 

250.0

 

Repayment of line of credit

 

(250.0

)

 

Payments of debt issuance costs

 

(13.2

)

(0.7

)

Payments to repurchase common stock

 

 

(250.0

)

Proceeds from the exercise of stock options

 

15.5

 

38.2

 

Proceeds from the issuance of stock under employee stock purchase plan

 

3.9

 

4.0

 

Net cash provided by financing activities

 

6.2

 

41.5

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

0.1

 

0.2

 

Net (decrease) increase in cash and cash equivalents

 

(49.1

)

44.5

 

Cash and cash equivalents, beginning of period

 

705.1

 

1,023.0

 

Cash and cash equivalents, end of period

 

$

656.0

 

$

1,067.5

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

6.9

 

$

3.8

 

Cash paid for income taxes

 

$

52.1

 

$

250.6

 

Non-cash investing and financing activities:

 

 

 

 

 

Non-cash additions to property, plant and equipment

 

$

18.2

 

$

7.7

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

UNITED THERAPEUTICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(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, 2017, as filed with the SEC on February 21, 2018 (our “Annual Report”).

 

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, 2018 and December 31, 2017, statements of operations and comprehensive income for the three- and nine-month periods ended September 30, 2018 and September 30, 2017 and statements of cash flows for the nine-month periods ended September 30, 2018 and September 30, 2017. Interim results are not necessarily indicative of results for an entire year.

 

Significant Accounting Policies Update

 

Our significant accounting policies are detailed in Note 2—Summary of Significant Accounting Policies to the consolidated financial statements included in our Annual Report. Significant changes to our accounting policies as a result of adopting Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), are discussed below.

 

Revenue Recognition

 

On January 1, 2018, we adopted Topic 606 using the modified retrospective approach applied to those contracts in effect as of January 1, 2018. Under this transition method, results for reporting periods beginning after January 1, 2018 are presented under the new standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 605, Revenue Recognition. See the Recently Issued Accounting Standards section below for further discussion of the adoption of Topic 606, including the impact on our 2018 financial statements.

 

To determine revenue recognition for contractual arrangements that we determine are within the scope of Topic 606, we perform the following five steps: (i) identify each contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to our performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy the relevant performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer.

 

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We generate revenues from the sale of our five commercially approved products: Remodulin, Tyvaso, Orenitram, Unituxin and Adcirca. We recognize revenue when we transfer control of our products to our distributors, as our contracts have a single performance obligation (delivery of our product). Except for Adcirca sales, the performance obligation is generally satisfied when our products are delivered to the distributor’s designated location. We recognize revenue from Adcirca sales upon shipment from an Eli Lilly and Company (Lilly) distribution center. Future revenue from delivery of our products will be based on purchase orders provided to us by our distributors. We are not required to disclose the value of unsatisfied performance obligations as our contracts have a noncancelable duration of one year or less.

 

See Note 12—Segment Information, for information on revenues disaggregated by commercial product, geographic area and customer.

 

Gross-to-Net Deductions

 

As is customary in the pharmaceutical industry, our product sales are recorded net of various forms of gross-to-net deductions. These deductions vary the consideration we are entitled to in exchange for the sale of our products to our distributors, and include reserves for: (1) rebates and chargebacks; (2) prompt payment discounts; (3) allowances for product returns; and (4) distributor fees and other allowances. We estimate these reserves in the same period that we recognize revenue for product sales to distributors. The net product sales amount recognized represents the amount we believe will not be subject to a significant future reversal of revenue.

 

Estimating gross-to-net deductions involves the use of significant assumptions and judgments, as well as information obtained from external sources. For our rebate and chargeback liabilities, in particular, the time lag experienced in the payment of the rebate or chargeback may result in revisions of these accruals in future periods. However, based on our significant history and experience estimating these accruals and our development of these accruals based on the expected value method, we do not believe there will be significant changes to our estimates recorded during the period of sale. For all types of gross-to-net deductions, for the three- and nine-month periods ended September 30, 2018, we recognized an aggregate reduction of our net product sales of $2.1 million and $3.4 million, respectively, related to revenue recognized from product sales in prior periods. These reductions were primarily due to adjustments to accruals for prior periods related to our participation in state Medicaid programs and contracts with commercial payers.

 

Rebates and chargebacks. Allowances for rebates include mandated discounts due to our participation in various government health care programs and contracted discounts with commercial payers. We estimate our rebate liability on a product-by-product basis, considering actual revenue, contractual discount rates, expected utilization under each contract and historical payment experience. We also consider changes in our product pricing and information regarding changes in program regulations and guidelines. Our chargebacks represent contractual discounts payable to distributors for the difference between the invoice price paid to us by the distributor for a particular product and the contracted price that the distributor’s customer pays for that product. Our chargebacks primarily relate to sales of Adcirca. We estimate our chargeback liability on a product-by-product basis, primarily considering historical payment experience. Although we accrue a liability for rebates and chargebacks in the same period the product is sold, third-party reporting and payment of the rebate or chargeback amount occur on a time lag, with the majority of rebates and chargebacks paid within six months from date of sale. Our liability for rebates and chargebacks is included in accounts payable and accrued expenses on our consolidated balance sheets.

 

Prompt payment discounts. We offer prompt pay discounts to many of our distributors, typically for payments made within 30 days. Prompt pay discounts are estimated in the period of sale based on our experience with sales to eligible distributors. Our domestic distributors have routinely taken advantage of these discounts and we expect them to continue to do so. Prompt pay discounts are recorded as a deduction to the accounts receivable balance presented on our consolidated balance sheets.

 

Product returns. The sales terms for Adcirca and Unituxin include return rights that extend throughout the distribution channel. For Adcirca, we recognize an allowance for returns as customers have the right to return expired product for up to 12 months past the product’s expiration date. Returned product is destroyed. Regulatory exclusivity for Adcirca expired in May 2018, and a generic version of Adcirca became available for purchase in the third quarter of 2018. Due to the availability of the generic version, we expect a significant decline in Adcirca demand, which will result in inventory held by distributors and other downstream customers expiring unsold. As a result, we increased our allowance for product returns for Adcirca from $7.2

 

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million as of December 31, 2017 to $23.0 million as of September 30, 2018. We developed our returns liability as of September 30, 2018, based on our estimates of the amount of Adcirca inventory in the downstream channel and the amount of that inventory that will not be dispensed to patients, using forecasted sales and demand estimates. The estimates were developed using reports from our distributors and third-party data, including the historical impact of generic entrants on other branded products that we deemed comparable to Adcirca.

 

For Unituxin, we ship product with shorter expiration dates (generally nine to 14 months after the initial sale), but our historical returns have not been material and we therefore do not record a returns allowance. For sales of our other commercial products, we do not offer our customers a general right of return. We record our allowance for product returns in other current and non-current liabilities on our consolidated balance sheets.

 

Distributor fees and other allowances. Distributor fees include distribution and other service fees paid to certain distributors. These fees are based on contractual amounts or rates applied to purchases of our product or units of service provided in a given period. Our liability for distributor fees is included in accounts payable and accrued expenses on our consolidated balance sheets.

 

Trade Receivables

 

We invoice and receive payment from our customers after we recognize revenue, resulting in receivables from our customers that are presented as accounts receivable on our consolidated balance sheets. Accounts receivable consist of short-term amounts due from our distributors (generally 30 to 90 days) and are stated at the amount we expect to collect. We establish an allowance for doubtful accounts based on our assessment of the collectability of specific distributor accounts. No impairment losses were recognized as of September 30, 2018 and September 30, 2017. Changes in accounts receivable are primarily due to the timing and magnitude of orders of our products, the timing of when control of our products is transferred to our distributors and the timing of cash collections.

 

Adcirca

 

Adcirca is manufactured for us by Lilly and distributed through its pharmaceutical wholesaler network. Specifically, Lilly handles all of the administrative functions associated with the sale of Adcirca on our behalf, including the receipt and processing of customer purchase orders, shipment to customers, and invoicing and collection of customer payments. We recognize sales of Adcirca on a gross basis (net of reserves for gross-to-net deductions) based on our determination that we are acting as a principal due to our control of the product prior to its transfer to our customers. Our control is evidenced by our substantive ownership of product inventory, the fact that we bear all inventory risks, our primary responsibility for the acceptability of the product to our customers, and our ability to influence net product sales through our contracting decisions with commercial payers and participation in governmental-funded programs.

 

Recently Issued Accounting Standards

 

Accounting Standards Adopted During the Period

 

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). The new standard supersedes the revenue recognition requirements in Topic 605, Revenue Recognition (Topic 605), and requires entities to recognize revenue when control of the promised goods or services is transferred to customers. Revenue is recognized at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted the new standard on January 1, 2018, using the modified retrospective approach, applied only to contracts in effect as of January 1, 2018. Upon adoption, we changed the timing of revenue recognition for sales of Adcirca to recognize revenue when control of Adcirca is transferred to a distributor upon shipment from a Lilly distribution center, which occurs at the time Adcirca is shipped. Previously, we recognized sales of Adcirca when Adcirca was delivered to distributors. This change did not result in an adjustment to amounts previously recognized as revenue under Topic 605 as all shipments had reached the distributor as of December 31, 2017. Overall, adoption of the new standard did not have a material impact on the amounts reported in our financial statements and there were no other significant changes impacting the timing or measurement of our revenue or our business processes and controls. We have included additional disclosures related to our adoption of Topic 606 above, under Revenue Recognition.

 

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In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), 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 a new measurement alternative for equity investments without readily determinable fair values. These investments are measured at cost, less any impairment, adjusted for observable price changes. ASU 2016-01 requires separate presentation of the financial assets and liabilities by category and form. ASU 2016-01 should be applied prospectively and is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. We adopted the new standard on January 1, 2018, with no material impact to our financial statements. Effective January 1, 2018, we elected to record our equity investments in privately-held companies that do not have readily determinable fair values using the alternative measurement method.

 

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 reduces existing diversity in the classification of certain cash receipts and cash payments on the statements of cash flows. ASU 2016-15 should be applied retrospectively and is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. We adopted the new standard on January 1, 2018, with no material impact to our financial statements.

 

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes—Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16), which requires that an entity recognize the income tax consequences of an intra-entity transfer of assets other than inventory when the transfer occurs. ASU 2016-16 is effective for annual reporting periods beginning after December 15, 2017. We adopted the new standard on January 1, 2018 using a modified retrospective approach, with no material impact to our financial statements.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations-Clarifying the Definition of a Business (ASU 2017-01). This update narrows the definition of a business by providing a screen to determine when an integrated set of assets and activities is not a business. The screen specifies that an integrated set of assets and activities is not a business if substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single asset or a group of similar identifiable assets. ASU 2017-01 should be applied prospectively and is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those fiscal years. We adopted the new standard on January 1, 2018, with no material impact to our financial statements.

 

In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07), which requires the service cost component to be reported separately from the other components of net pension cost. Service cost will be presented in the same line item as other employer compensation costs within operating expenses. The other components of net pension cost are required to be presented outside of operations and will be presented in “Other, net” on our consolidated statements of operations. Only the service cost component will be eligible for asset capitalization. Companies are required to apply the change in income statement presentation retrospectively, and the change in capitalized benefit cost prospectively. We adopted the new standard on January 1, 2018, with no material impact to our financial statements.

 

Accounting Standards Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU 2016-02), which requires that assets and liabilities arising under leases be recognized 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. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842)—Targeted Improvements (ASU 2018-11). ASU 2018-11 allows entities to elect an optional transition method, allowing for application of ASU 2016-02 at the adoption date, with recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Early adoption and the use of practical expedients to measure the effect of adoption are permitted. We have elected not to early adopt the standard, and therefore we will adopt the standard on January 1, 2019. We have identified all leases involved in the relevant timeframe. We continue to determine if we will elect to use the practical expedients permitted by the guidance and continue to gather data required to comply with the guidance. Based on the work completed to date, we are considering the implications of adopting the new standard, including

 

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the discount rate to be used in valuing new and existing leases and all applicable financial statement disclosures required by the new guidance. We are continuing to evaluate the effect of adoption and anticipate that we will recognize additional assets and corresponding liabilities related to our existing leases on our consolidated balance sheet. We are assessing any potential impacts on our internal controls, business processes, and accounting policies related to both the implementation of, and ongoing compliance with, the new guidance.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment (ASU 2017-04), which simplifies how an entity is required to test goodwill for impairment. A goodwill impairment will be measured by the amount by which a reporting unit’s carrying value exceeds its fair value, with the amount of impairment not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, and must be adopted on a prospective basis. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our financial statements.

 

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). The standard provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect (or portion thereof) of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (Tax Reform) is recorded. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our financial statements.

 

In August 2018, the FASB issued ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Topic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14). The standard modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our financial statements.

 

3.     Acquisition

 

SteadyMed Merger

 

On April 29, 2018, we entered into an Agreement and Plan of Merger (Merger Agreement) with SteadyMed Ltd. (SteadyMed) and Daniel 24043 Acquisition Corp Ltd., our wholly-owned subsidiary (Merger Sub). The Merger Agreement provides for the merger of Merger Sub with and into SteadyMed (the Merger), with SteadyMed surviving the Merger as our wholly-owned subsidiary.

 

On August 30, 2018, we completed the Merger. At the effective time of the Merger, each SteadyMed ordinary share was converted into the right to receive (i) $4.46 in cash, representing aggregate consideration payable to former holders of SteadyMed securities of approximately $141 million; and (ii) one contingent value right, representing the right to receive $2.63 in cash upon the achievement of 3,000 patients having initiated treatment using SteadyMed’s Trevyent® product on a commercial basis on or before August 30, 2023 (the Milestone). Aggregate contingent consideration of $75.0 million will become payable if the Milestone is achieved.

 

Trevyent is a post-phase III, development-stage drug-device combination product that combines SteadyMed’s two-day, single-use, disposable PatchPump® technology with treprostinil, for the subcutaneous treatment of pulmonary arterial hypertension (PAH).

 

Following the acquisition, the operating results of SteadyMed have been included in our consolidated financial statements. For the period from the acquisition date through September 30, 2018, SteadyMed contributed revenues and loss before income taxes of zero and $1.7 million, respectively.

 

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Preliminary Purchase Price Allocation

 

The Merger meets the definition of a business combination in accordance with ASC 805, Business Combinations, and as such we applied the acquisition method to account for the transaction, which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the closing date. The aggregate preliminary purchase price noted above was allocated to the major categories of assets acquired and liabilities assumed based upon their estimated fair values at the closing date using primarily Level 2 and Level 3 inputs. These Level 2 and Level 3 valuation inputs include an estimate of future cash flows and discount rates. Additionally, estimated fair values are based, in part, upon third-party valuations of certain assets, including specifically-identified intangible assets.

 

The allocation of the purchase price to the assets acquired and liabilities assumed, including the residual amount allocated to goodwill, is based upon preliminary information and is subject to change within the measurement period (up to one year from the closing date) as additional information concerning final asset and liability valuations is obtained. The primary elements of this preliminary purchase price allocation that are not yet finalized relate to the forecast of future cash flows utilized in the valuation of the acquired in-process research and development intangible asset and the contingent value right as well as our assessment of tax attributes. During the measurement period, if we obtain new information about facts and circumstances that existed as of the closing date that, if known, would have resulted in revised estimated values of those assets or liabilities as of that date, we will revise the preliminary purchase price allocation. The effect of measurement period adjustments on the estimated fair values will be reflected as if the adjustments had been completed on the closing date. The impact of all changes that do not qualify as measurement period adjustments will be included in current period earnings. The following table summarizes the consideration paid for the acquisition and the amounts of the assets acquired and liabilities assumed as of the closing date, which have been allocated on a preliminary basis.

 

Preliminary Purchase Price Allocation

 

 

 

Fair Value

 

 

 

(in millions)

 

Cash

 

$

17.1

 

Intangible assets:

 

 

 

In-process research and development

 

107.3

 

Goodwill(1)

 

14.6

 

Trademark

 

0.2

 

Property, plant and equipment

 

6.2

 

Other assets

 

0.4

 

Total fair value of assets acquired

 

$

145.8

 

Accounts payable and accrued expenses

 

4.2

 

Other liabilities

 

0.4

 

Total fair value of liabilities assumed

 

$

4.6

 

Total purchase price

 

$

141.2

 

 


(1)                     We expect the full amount of goodwill to be deductible for income tax purposes over the next 15 years.

 

We determined the fair value of in-process research and development (IPR&D) using the multi-period earnings method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated by the IPR&D, less charges representing the required return on other assets to sustain those cash flows.

 

We ascribed no value to the contingent value rights based on a probability weighted discounted cash flow model, utilizing probability adjusted expectations for achieving the Milestone. In making this determination we considered expectations regarding the timing and probability of FDA approval of Trevyent, the potential patient population, and estimates of product penetration and uptake by August 30, 2023. As of September 30, 2018, there have been no material changes in assumptions used as of the closing date and, therefore, no changes to the value of the contingent consideration.

 

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Acquisition-related costs

 

Costs incurred to complete the Merger and integrate SteadyMed into our business were expensed as incurred and included within selling, general and administrative costs on our consolidated statements of operations. During the three and nine months ended September 30, 2018, we recognized $2.5 million and $5.0 million of acquisition-related costs, respectively. These costs represent transaction costs, legal fees and professional third-party service fees.

 

4.     Investments

 

Available-for-Sale Investments

 

Marketable investments classified as available-for-sale consisted of the following (in millions):

 

As of September 30, 2018

 

Amortized
Cost

 

Gross
Unrealized
Losses

 

Fair
Value

 

U.S. government and agency securities

 

$

1,072.1

 

$

(6.2

)

$

1,065.9

 

Corporate notes and bonds

 

72.4

 

(0.4

)

72.0

 

Total

 

$

1,144.5

 

$

(6.6

)

$

1,137.9

 

Reported under the following captions on our consolidated balance sheet:

 

 

 

 

 

 

 

Current marketable investments

 

 

 

 

 

544.4

 

Non-current marketable investments

 

 

 

 

 

593.5

 

Total

 

 

 

 

 

$

1,137.9

 

 

As of December 31, 2017

 

Amortized
Cost

 

Gross
Unrealized
Losses

 

Fair
Value

 

U.S. government and agency securities

 

$

726.5

 

$

(3.0

)

$

723.5

 

Corporate notes and bonds

 

13.9

 

 

13.9

 

Total

 

$

740.4

 

$

(3.0

)

$

737.4

 

Reported under the following captions on our consolidated balance sheet:

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

$

41.7

 

Current marketable investments

 

 

 

 

 

 

194.6

 

Non-current marketable investments

 

 

 

 

 

501.1

 

Total

 

 

 

 

 

$

737.4

 

 

The following table summarizes the contractual maturities of available-for-sale marketable investments (in millions):

 

 

 

September 30, 2018

 

 

 

Amortized
Cost

 

Fair
Value

 

Due in less than one year

 

$

546.4

 

$

544.4

 

Due in one to three years

 

598.1

 

593.5

 

Total

 

$

1,144.5

 

$

1,137.9

 

 

 

 

December 31, 2017

 

 

 

Amortized
Cost

 

Fair
Value

 

Due within one year

 

$

236.7

 

$

236.3

 

Due in one to three years

 

503.7

 

501.1

 

Total

 

$

740.4

 

$

737.4

 

 

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Investments in Privately-Held Companies

 

As of September 30, 2018, we maintained non-controlling equity investments in privately-held companies of approximately $176.6 million in the aggregate. Upon adoption of ASU 2016-01 on January 1, 2018, we began to measure these investments using the measurement alternative because the fair values of these investments are not readily determinable. Under this alternative, the investments are measured at cost, less any impairment, adjusted for any observable price changes. During the three- and nine-month periods ended September 30, 2018, we paid zero and $5.0 million, respectively, for an investment in a privately-held company. We include our investments in privately-held companies within other non-current assets on our consolidated balance sheets. These investments are subject to a periodic impairment review and if impaired, the investment is measured and recorded at fair value in accordance with ASC 820, Fair Value Measurements.

 

During the quarter ended September 30, 2018, one of the privately-held companies in which we have invested underwent a significant change in management and a change in business outlook and strategy, all of which triggered our review of the recoverability of our investment in the company. We determined the fair value of our investment as of September 30, 2018 considering an income approach based on the company’s discounted projected cash flows. We corroborated the implied revenue multiples from the income approach with the observed revenue multiples of comparable public companies. We concluded that the fair value of our investment as of September 30, 2018 was lower than its carrying value, resulting in an impairment charge of $12.4 million. As of September 30, 2018, the adjusted carrying value of our investment in this company was $41.1 million.

 

During the quarter ended June 30, 2017, this same privately-held company sought to raise additional funding, which triggered our review of the recoverability of our investment in the company. We determined the non-recurring fair value of our investment as of June 30, 2017 utilizing Level 2 and 3 inputs that considered both (1) an income approach based on the company’s discounted projected cash flows; and (2) a market approach based on the revenue multiples of comparable public companies. We concluded that the fair value of our investment as of June 30, 2017 was lower than its carrying value, resulting in an impairment charge of $46.5 million. As of June 30, 2017, the adjusted carrying value of our investment in this company was $53.5 million.

 

During the quarter ended September 30, 2017, we recorded an impairment charge of $3.1 million for our investment in a different privately-held company.

 

Variable Interest Entity

 

In April 2017, we made a $7.5 million minority investment in a privately-held company. In addition to our investment, we entered into an exclusive license, development and commercialization agreement (the License Agreement) with this company. The License Agreement provides us certain control rights and, as a result, we are required to consolidate the balance sheet and results of operations of this company. The control rights relate to additional research and development funding that we may provide to this company over a period of six years. We are also entitled to representation on a joint development committee that approves the company’s use of funding provided by us. For further details regarding this investment, refer to Note 4—Investments—Variable Interest Entity to the consolidated financial statements included in our Annual Report.

 

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5.     Fair Value Measurements

 

We account for certain assets and liabilities at fair value and classify these assets and liabilities within a fair value hierarchy (Level 1, Level 2 or Level 3). Our other current assets and other 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, 2018

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

234.3

 

$

 

$

 

$

234.3

 

Time deposits(2)

 

 

35.6

 

 

35.6

 

U.S. government and agency securities(2)

 

 

1,065.9

 

 

1,065.9

 

Corporate debt securities(2)

 

 

76.0

 

 

76.0

 

Total assets

 

$

234.3

 

$

1,177.5

 

$

 

$

1,411.8

 

Liabilities

 

 

 

 

 

 

 

 

 

Contingent consideration(3)

 

 

 

12.8

 

12.8

 

Total liabilities

 

$

 

$

 

$

12.8

 

$

12.8

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

217.9

 

$

 

$

 

$

217.9

 

Time deposits(2)

 

 

25.2

 

 

25.2

 

U.S. government and agency securities(2)

 

 

723.5

 

 

723.5

 

Corporate debt securities(2)

 

 

18.0

 

 

18.0

 

Total assets

 

$

217.9

 

$

766.7

 

$

 

$

984.6

 

Liabilities

 

 

 

 

 

 

 

 

 

Contingent consideration(3)

 

 

 

12.8

 

12.8

 

Total liabilities

 

$

 

$

 

$

12.8

 

$

12.8

 

 


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

 

(2)       Included in cash equivalents and 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 non-current liabilities on the accompanying consolidated balance sheets. The fair value of contingent consideration has been estimated using probability-weighted discounted cash flow models (DCFs). 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.

 

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 are reported above within the fair value hierarchy. Refer to Note 4—Investments. The carrying value of our debt is a reasonable estimate of the fair value of the outstanding debt based on the variable interest rate of the debt.

 

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6.     Inventories

 

Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value and consist of the following, net of reserves (in millions):

 

 

 

September 30,
2018

 

December 31,
2017

 

Raw materials

 

$

26.0

 

$

27.9

 

Work-in-progress

 

25.6

 

24.1

 

Finished goods

 

49.4

 

55.9

 

Total inventories

 

$

101.0

 

$

107.9

 

 

7.     Goodwill and Other Intangible Assets

 

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

 

 

 

As of September 30, 2018

 

As of December 31, 2017

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

 

Goodwill

 

$

28.3

 

$

 

$

28.3

 

$

13.7

 

$

 

$

13.7

 

Other intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology, patents and trade names

 

6.7

 

(5.0

)

1.7

 

6.5

 

(5.0

)

1.5

 

In-process research and development

 

137.7

 

 

137.7

 

30.4

 

 

30.4

 

Total

 

$

172.7

 

$

(5.0

)

$

167.7

 

$

50.6

 

$

(5.0

)

$

45.6

 

 

For more information, refer to Note 3—Acquisition.

 

8.     Debt

 

Unsecured Revolving Credit Facility — 2018 Credit Agreement

 

In June 2018, we entered into a Credit Agreement (the 2018 Credit Agreement) with Wells Fargo Bank, National Association (Wells Fargo), as administrative agent and a swingline lender, and various other lender parties, providing for (i) an unsecured revolving credit facility of up to $1.0 billion; and (ii) a second unsecured revolving credit facility of up to $500.0 million (which facilities may, at our request, be increased by up to $300 million in the aggregate subject to obtaining commitments from existing or new lenders for such increase and other conditions). The facilities will mature five years after the closing date of the 2018 Credit Agreement, 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 2018 Credit Agreement, up to a maximum of two such extensions.

 

At our option, amounts borrowed under the 2018 Credit Agreement 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 2018 Credit Agreement).

 

On June 27, 2018, we borrowed $250.0 million under the 2018 Credit Agreement, and used the funds to repay outstanding indebtedness under the 2016 Credit Agreement as discussed below under Unsecured Revolving Credit Facility — 2016 Credit Agreement.

 

The 2018 Credit Agreement contains customary events of default and customary affirmative and negative covenants. As of September 30, 2018, we were in compliance with these covenants. Lung Biotechnology PBC is our only subsidiary that guarantees our obligations under the Credit Agreement though, from time to time, one or more of our other subsidiaries may be required to guarantee our obligations.

 

In connection with the 2018 Credit Agreement, we incurred debt issuance costs of $13.2 million. We capitalized $12.6 million of these costs. As of September 30, 2018, $2.4 million is recorded in other current assets and $9.6 million in other

 

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non-current assets on our consolidated balance sheet. These debt issuance costs are being amortized to interest expense over the contractual term of the 2018 Credit Agreement.

 

Unsecured Revolving Credit Facility — 2016 Credit Agreement

 

In January 2016, we entered into a credit agreement (the 2016 Credit Agreement) with 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. On June 1, 2017, we borrowed $250.0 million under this facility and used the funds to initiate an accelerated share repurchase program. Refer to Note 10—Stockholders’ Equity—Share Repurchase.

 

On June 27, 2018, we repaid in full all our obligations under the 2016 Credit Agreement in connection with the termination of the 2016 Credit Agreement and our entry into the 2018 Credit Agreement. There were no penalties associated with the early termination of the 2016 Credit Agreement.

 

9.     Share-Based Compensation

 

As of September 30, 2018, 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 Amended and Restated 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. On June 26, 2018, our shareholders approved an amendment and restatement of the 2015 Plan to increase the maximum number of shares of our common stock that may be issued under the 2015 Plan by 2,900,000 shares. As a result of the approval of the 2015 Plan, no further awards have been or will be granted under the 1999 Plan. Currently, we grant equity-based awards including stock options and restricted stock units under the 2015 Plan. Refer to the sections entitled Employee Stock Options and Restricted Stock Units below.

 

We previously issued awards under the United Therapeutics Corporation Share Tracking Awards Plan (2008 STAP) and the United Therapeutics Corporation 2011 Share Tracking Awards Plan (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.” Refer to the section entitled Share Tracking Awards Plans below. We discontinued the issuance of STAP awards in June 2015.

 

In 2012, our shareholders approved the United Therapeutics Corporation Employee Stock Purchase Plan (ESPP), which is structured to comply with Section 423 of the Internal Revenue Code. Refer to the section entitled Employee Stock Purchase Plan below.

 

The following table reflects the components of share-based compensation expense (benefit) recognized in our consolidated statements of operations (in millions):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Stock options

 

$

16.6

 

$

13.1

 

$

44.8

 

$

29.9

 

Restricted stock units

 

2.4

 

0.6

 

5.3

 

1.6

 

STAP awards

 

32.2

 

(38.0

)

(80.1

)

(77.5

)

Employee stock purchase plan

 

0.2

 

0.3

 

0.8

 

1.0

 

Total share-based compensation expense (benefit) before tax

 

$

51.4

 

$

(24.0

)

$

(29.2

)

$

(45.0

)

 

Employee 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. 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.

 

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In March 2017, we began issuing stock options with performance vesting conditions to certain executives. These stock options have vesting conditions tied to the achievement of specified performance criteria, which have target performance levels that span from one to three years. Upon the conclusion of the performance period, the performance level achieved is measured and the ultimate number of shares that may vest is determined. Share-based compensation expense for these awards is recorded ratably over their vesting period, depending on the specific terms of the award and anticipated achievement of the specified performance criteria. During the nine-month period ended September 30, 2018, we granted 0.9 million stock options with performance vesting conditions with a total grant date fair value of $23.7 million based on achievement of target performance levels. During the three- and nine-month periods ended September 30, 2018, we recorded $11.3 million and $29.2 million of share-based compensation expense related to stock options with performance vesting conditions.

 

The table below includes the weighted-average assumptions used to measure the fair value of all stock options (including both stock options with time-based vesting and performance-based vesting conditions) granted during the nine-month periods ended September 30, 2018 and September 30, 2017:

 

 

 

September 30,
2018

 

September 30,
2017

 

Expected volatility

 

36.2

%

35.7

%

Risk-free interest rate

 

2.7

%

2.2

%

Expected term of awards (in years)

 

6.3

 

6.1

 

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, 2018 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, 2018

 

5,878,323

 

$

119.61

 

 

 

 

 

Granted

 

985,215

 

111.05

 

 

 

 

 

Exercised

 

(287,760

)

53.82

 

 

 

 

 

Forfeited/canceled

 

(144,062

)

128.87

 

 

 

 

 

Outstanding at September 30, 2018

 

6,431,716

 

$

121.03

 

7.0

 

$

85.4

 

Exercisable at September 30, 2018

 

3,450,717

 

$

113.78

 

5.7

 

$

64.1

 

Unvested at September 30, 2018

 

2,980,999

 

$

129.43

 

8.6

 

$

21.3

 

 

The weighted average fair value of a stock option granted during each of the nine-month periods ended September 30, 2018 and September 30, 2017, was $45.02 and $56.07, respectively. These stock options have an aggregate grant date fair value of $44.3 million and $109.8 million, respectively. The total fair value of stock options that vested during the nine-month periods ended September 30, 2018 and September 30, 2017 was $33.9 million and $13.1 million, respectively.

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Cost of product sales

 

$

0.2

 

$

0.4

 

$

0.7

 

$

0.9

 

Research and development

 

0.9

 

1.0

 

2.8

 

2.6

 

Selling, general and administrative

 

15.5

 

11.7

 

41.3

 

26.4

 

Share-based compensation expense before taxes

 

16.6

 

13.1

 

44.8

 

29.9

 

Related income tax benefit

 

(3.8

)

(4.8

)

(10.3

)

(11.0

)

Share-based compensation expense, net of taxes

 

$

12.8

 

$

8.3

 

$

34.5

 

$

18.9

 

 

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As of September 30, 2018, unrecognized compensation cost was $98.4 million. Unvested outstanding stock options as of September 30, 2018 had a weighted average remaining vesting period of 1.9 years.

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Number of options exercised

 

4,857

 

40,565

 

287,760

 

428,541

 

Cash received

 

$

0.6

 

$

1.6

 

$

15.5

 

$

38.2

 

Total intrinsic value of options exercised

 

$

0.1

 

$

3.5

 

$

17.0

 

$

27.0

 

 

Restricted Stock Units

 

In June 2016, we began issuing restricted stock units to our non-employee directors. In October 2017, we also began issuing restricted stock units to our employees. Each restricted stock unit entitles the recipient to one share of our common stock upon vesting. We measure the fair value of restricted stock units using the stock price on the date of grant. Share-based compensation expense for the restricted stock units is recorded ratably over their vesting period.

 

A summary of the activity with respect to, and status of, restricted stock units under the 2015 Plan during the nine-month period ended September 30, 2018 is presented below:

 

 

 

Number of
Restricted
Stock Units

 

Weighted-
Average
Grant
Price

 

Weighted
Average
Remaining
Contractual
Term (Years)

 

Aggregate
Intrinsic
Value
(in millions)

 

Unvested at January 1, 2018

 

23,040

 

$

128.98

 

 

 

 

 

Granted

 

191,028

 

112.20

 

 

 

 

 

Vested

 

(17,942

)

132.16

 

 

 

 

 

Forfeited/canceled

 

(10,856

)

111.11

 

 

 

 

 

Unvested at September 30, 2018

 

185,270

 

$

112.42

 

9.5

 

$

23.7

 

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Cost of product sales

 

$

0.1

 

$

 

$

0.3

 

$

 

Research and development

 

0.5

 

 

1.1

 

 

Selling, general and administrative

 

1.8

 

0.6

 

3.9

 

1.6

 

Share-based compensation expense before taxes

 

2.4

 

0.6

 

5.3

 

1.6

 

Related income tax benefit

 

(0.5

)

(0.2

)

(1.2

)

(0.6

)

Share-based compensation expense, net of taxes

 

$

1.9

 

$

0.4

 

$

4.1

 

$

1.0

 

 

As of September 30, 2018, unrecognized compensation cost related to the grant of restricted stock units was $17.0 million. Unvested outstanding restricted stock units as of September 30, 2018 had a weighted average remaining vesting period of 2.36 years.

 

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Share Tracking Awards Plans

 

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.

 

The aggregate STAP liability balance was $89.7 million and $241.3 million at September 30, 2018 and December 31, 2017, respectively, of which zero and $1.2 million, respectively, have been classified as other non-current 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, and the expected dividend yield. The fair value of the STAP awards is measured at the end of 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 outstanding STAP awards:

 

 

 

September 30,
2018

 

September 30,
2017

 

Expected volatility

 

33.4

%

32.8

%

Risk-free interest rate

 

2.5

%

1.4

%

Expected term of awards (in years)

 

0.9

 

1.9

 

Expected dividend yield

 

%

%

 

The closing price of our common stock was $127.88 and $117.19 on September 30, 2018 and September 30, 2017, respectively. The closing price of our common stock was $147.95 on December 31, 2017.

 

A summary of the activity and status of STAP awards during the nine-month period ended September 30, 2018 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, 2018

 

4,096,394

 

$

95.60

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

(1,060,073

)

57.64

 

 

 

 

 

Forfeited

 

(75,634

)

153.94

 

 

 

 

 

Outstanding at September 30, 2018

 

2,960,687

 

$

107.71

 

5.2

 

$

99.8

 

Exercisable at September 30, 2018

 

2,712,516

 

$

103.23

 

5.1

 

$

99.0

 

Unvested at September 30, 2018

 

248,171

 

$

156.61

 

6.3

 

$

0.8

 

 

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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,

 

 

 

2018

 

2017

 

2018

 

2017

 

Cost of product sales

 

$

2.0

 

$

(2.1

)

$

(4.0

)

$

(4.7

)

Research and development

 

6.8

 

(8.2

)

(15.2

)

(16.9

)

Selling, general and administrative

 

23.4

 

(27.7

)

(60.9

)

(55.9

)

Share-based compensation expense (benefit) before taxes

 

$

32.2

 

$

(38.0

)

$

(80.1

)

$

(77.5

)

Related income tax (benefit) expense

 

(7.4

)

13.9

 

18.3

 

28.4

 

Share-based compensation expense (benefit), net of taxes

 

$

24.8

 

$

(24.1

)

$

(61.8

)

$

(49.1

)

 

Cash paid to settle STAP awards exercised during the nine-month periods ended September 30, 2018 and September 30, 2017 was $71.5 million and $54.1 million, respectively.

 

Employee Stock Purchase Plan

 

In June 2012, our shareholders approved the United Therapeutics Corporation Employee Stock Purchase Plan (ESPP), which is structured to comply with Section 423 of the Internal Revenue Code. The ESPP provides eligible employees with the right to purchase shares of our common stock at a discount through elective accumulated payroll deductions at the end of each offering period. Offering periods, which began in 2012, occur in consecutive six-month periods commencing on September 5th and March 5th of each year. Eligible employees may contribute up to 15 percent of their base salary, subject to certain annual limitations as defined in the ESPP. The purchase price of the shares is equal to the lower of 85 percent of the closing price of our common stock on either the first or last trading day of a given offering period. In addition, the ESPP provides that no eligible employee may purchase more than 4,000 shares during any offering period. The ESPP has a 20-year term and limits the aggregate number of shares that can be issued under the ESPP to 3.0 million.

 

10.  Stockholders’ Equity

 

Earnings Per Common Share

 

Basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common 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,

 

 

 

2018

 

2017

 

2018

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

106.5

 

$

276.3

 

$

523.9

 

$

398.9

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares — basic

 

43.6

 

43.4

 

43.5

 

44.3

 

Effect of dilutive securities(1):

 

 

 

 

 

 

 

 

 

Warrants

 

 

 

 

0.1

 

Stock options, restricted stock units and employee stock purchase plan

 

0.4

 

0.7

 

0.5

 

0.8

 

Weighted average shares — diluted(2)

 

44.0

 

44.1

 

44.0

 

45.2

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

2.44

 

$

6.37

 

$

12.04

 

$

9.00

 

Diluted

 

$

2.42

 

$

6.27

 

$

11.91

 

$

8.83

 

 

 

 

 

 

 

 

 

 

 

Stock options and warrants excluded from calculation(2)

 

4.5

 

3.7

 

4.6

 

3.1

 

 

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(1)       Calculated using the treasury stock method.

 

(2)       Certain stock options, restricted stock units, and warrants have been excluded from the computation of diluted earnings per share because their impact would be anti-dilutive for the three- and nine-month periods ended September 30, 2018 and September 30, 2017.

 

Share Repurchase

 

In April 2017, our Board of Directors approved a share repurchase program authorizing up to $250.0 million in aggregate repurchases of our common stock. Pursuant to this authorization, in May 2017 we paid $250.0 million to enter into an accelerated share repurchase agreement (ASR) with Citibank, N.A. (Citibank). Pursuant to the terms of the ASR, in June 2017 Citibank delivered to us approximately 1.7 million shares of our common stock, representing the minimum number of shares we were entitled to receive under the ASR. Upon termination of the ASR in September 2017, Citibank delivered to us approximately 0.3 million additional shares of our common stock. The ASR was accounted for as an equity transaction and the shares we repurchased under the ASR were included in treasury stock when the shares were received.

 

11.  Income Taxes

 

Our effective income tax rate (ETR) for the nine months ended September 30, 2018 and September 30, 2017 was 21 percent and 37 percent, respectively. Our ETR for the nine months ended September 30, 2018 decreased, as compared to the same period in 2017, due to the impacts of The Tax Cuts and Jobs Act (Tax Reform), the nondeductible portion of an accrual in the second quarter of 2017 in connection with a civil settlement with the Department of Justice, and a decrease in impairment charges not currently meeting the criteria for tax deductibility.

 

Tax Reform was enacted on December 22, 2017 and has multiple provisions that impact our tax expense. The significant impacts of Tax Reform on our 2018 tax expense include a reduction in the U.S. federal corporate tax rate from 35 percent to 21 percent, a reduction of the Orphan Drug Credit, and the repeal of the Section 199 deduction for domestic manufacturing activities.

 

On December 22, 2017, the SEC staff issued SAB 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of Tax Reform. As a result of changes under Tax Reform, we recognized a provisional amount of $71.0 million of additional tax expense in our consolidated financial statements for the year ended December 31, 2017. The additional tax expense is primarily due to the revaluing of our ending net deferred tax assets at December 31, 2017 because of the reduction in the U.S. corporate income tax rate under Tax Reform. While we have substantially completed our provisional analysis of the income tax effects of Tax Reform, and recorded a reasonable estimate of such effects in our consolidated financial statements for the year ended December 31, 2017, the ultimate impact may differ from these provisional amounts, possibly materially, due to additional U.S. Internal Revenue Service (IRS) guidance and any related analysis and refinement of our calculations.  During the nine months ended September 30, 2018, we did not make any material adjustments to the provisional amounts we previously recorded.

 

As of both September 30, 2018 and 2017, our uncertain tax positions were $0.9 million and $0.5 million, respectively. Unrecognized tax benefits as of both September 30, 2018 and 2017, included $0.7 million and $0.3 million, respectively of tax benefits that, if recognized, would impact our ETR. We record interest and penalties related to uncertain tax positions as a component of income tax expense. As of September 30, 2018 and 2017, we have not accrued any material interest expense related to uncertain tax positions. We are unaware of any material 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.

 

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Table of Contents

 

12.  Segment Information

 

We currently operate as one operating segment with a focus on the development and commercialization of products to address the unmet needs of patients with chronic and life-threatening conditions. Our Chief Executive Officer, as our chief operating decision maker, manages and allocates resources to the operations of our company on a consolidated basis. This enables our Chief Executive Officer to assess our overall level of available resources and determine how best to deploy these resources across functions, therapeutic areas, and research and development projects in line with our long-term company-wide strategic goals.

 

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,

 

2018

 

Remodulin

 

Tyvaso

 

Adcirca

 

Orenitram

 

Unituxin

 

Total

 

Net product sales

 

$

153.6

 

$

107.8

 

$

74.6

 

$

53.8

 

$

22.9

 

$

412.7

 

Cost of product sales

 

4.4

 

6.9

 

32.5

 

3.9

 

4.2

 

51.9

 

Gross profit

 

$

149.2

 

$

100.9

 

$

42.1

 

$

49.9

 

$

18.7

 

$

360.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product sales

 

$

187.3

 

$

88.9

 

$

99.8

 

$

52.5

 

$

17.0

 

$

445.5

 

Cost of product sales

 

4.0

 

2.2

 

5.6

 

3.9

 

3.8

 

19.5

 

Gross profit

 

$

183.3

 

$

86.7

 

$

94.2

 

$

48.6

 

$

13.2

 

$

426.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

2018

 

Remodulin

 

Tyvaso

 

Adcirca

 

Orenitram

 

Unituxin

 

Total

 

Net product sales

 

$

439.9

 

$

308.3

 

$

282.0

 

$

155.5

 

$

60.7

 

$

1,246.4

 

Cost of product sales

 

10.8

 

14.3

 

121.9

 

9.9

 

9.9

 

166.8

 

Gross profit

 

$

429.1

 

$

294.0

 

$

160.1

 

$

145.6

 

$

50.8

 

$

1,079.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product sales

 

$

490.8

 

$

280.5

 

$

300.4

 

$

137.8

 

$

51.1

 

$

1,260.6

 

Cost of product sales

 

9.9

 

7.9

 

16.9

 

10.7

 

7.3

 

52.7

 

Gross profit

 

$

480.9

 

$

272.6

 

$

283.5

 

$

127.1

 

$

43.8

 

$

1,207.9

 

 

Geographic revenues are determined based on the country in which our customers (distributors) are located. Total revenues from external customers by geographic area are as follows (in millions):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

United States

 

$

389.0

 

$

385.5

 

$

1,177.1

 

$

1,133.0

 

Rest-of-World(1)

 

23.7

 

60.0

 

69.3

 

127.6

 

Total

 

$

412.7

 

$

445.5

 

$

1,246.4

 

$

1,260.6

 

 

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Table of Contents

 


(1)       Primarily Europe.

 

We recorded revenue from two specialty pharmaceutical distributors in the United States comprising 52 percent and 18 percent, respectively, of total revenues during the three-month period ended September 30, 2018, 45 percent and 15 percent, respectively, of total revenues during the three-month period ended September 30, 2017, 50 percent and 17 percent, respectively, of total revenues during the nine-month period ended September 30, 2018, and 47 percent and 15 percent, respectively, of total revenues during the nine-month period ended September 30, 2017. All of our revenues for Adcirca are generated by sales made through Lilly’s pharmaceutical wholesaler network.

 

13.  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 U.S. Patent Nos. 6,521,212, 6,756,033, and 8,497,393. Under the Hatch-Waxman Act, the FDA was automatically precluded from approving Watson’s ANDA for up to 30 months from receipt of Watson’s notice letter (which period expired in December 2017) or until the issuance of a U.S. District Court decision that is adverse to us, whichever occurs first. In June 2016, Watson sent us a second Paragraph IV certification notice letter addressing two new patents, U.S. Patent Nos. 9,339,507 (the ‘507 patent) and 9,358,240 (the ‘240 patent), which expire in March and May 2028, respectively. In June 2016, we filed an amended complaint against Watson asserting these two additional patents. In June 2017, Watson filed petitions with the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office for inter partes review (IPR), seeking to invalidate the ‘507 patent and ‘240 patent. On January 11, 2018, the PTAB issued decisions to institute IPR proceedings with respect to both patents.

 

On August 8, 2018, we entered into a settlement agreement with Watson resolving the ongoing litigation, including the IPR proceedings, concerning Watson’s ANDA for a generic version of Tyvaso. Under the settlement agreement, we granted to Watson a license under our patent rights to manufacture and commercialize the generic version of Tyvaso described in its ANDA filings in the United States beginning on January 1, 2026, although Watson may be permitted to enter the market earlier under certain circumstances. The license included in the settlement agreement does not permit Watson to manufacture a generic version of any other product, such as Remodulin or Orenitram. The settlement agreement does not grant Watson any rights other than those required to launch Watson’s generic version of Tyvaso. The IPR proceedings and District Court litigation have been dismissed.

 

14.  Subsequent Events

 

License and Collaboration Agreement with MannKind Corporation

 

In September 2018, we entered into a worldwide exclusive license and collaboration agreement with MannKind Corporation (MannKind) for the development and commercialization of a dry powder formulation of treprostinil called Treprostinil Technosphere®, which is a phase III-ready development-stage product currently being evaluated in clinical trials for the treatment of PAH. The agreement became effective on October 15, 2018, upon expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Under the agreement, we are responsible for global development, regulatory and commercial activities relating to Treprostinil Technosphere. We and MannKind will share responsibility for manufacturing clinical supplies and initial commercial supplies of Treprostinil Technosphere. We will manufacture long-term commercial supplies. Under the terms of the agreement, we paid MannKind $45.0 million following the effectiveness of the

 

24


Table of Contents

 

agreement in October 2018, and we are required to make potential milestone payments of up to $50.0 million upon the achievement of specific development targets. MannKind is also entitled to receive low double-digit royalties on our net sales of the product. In addition, we have the option in our sole discretion to expand the license to include other active ingredients for the treatment of pulmonary hypertension. Each product added pursuant to the option would be subject to the payment to MannKind of up to $40.0 million in additional option exercise and development milestone payments, as well as a low double-digit royalty on our net sales of any such product.

 

We also entered into a research agreement for the conduct of research by MannKind for products outside the scope of the licensing and collaboration agreement. MannKind received an initial payment of $10.0 million in consideration for its performance under the research agreement. The $10.0 million payment is included within research and development costs on our consolidated statements of operations for the three and nine months ended September 30, 2018.

 

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, 2017, 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 (the Exchange Act) 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, 2017, 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 our 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 PAH patients.

 

·                  Orenitram® (treprostinil) Extended-Release Tablets (Orenitram). Orenitram, a tablet dosage form of treprostinil, is approved by the FDA to improve exercise ability in PAH patients.

 

·                  Adcirca® (tadalafil) Tablets (Adcirca). We acquired exclusive U.S. commercialization rights to Adcirca, an oral phosphodiesterase type 5 (PDE-5) inhibitor therapy for PAH, 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 PAH patients.

 

·                  Unituxin® (dinutuximab) Injection (Unituxin). In March 2015, the FDA approved our Biologics License Application (BLA) for Unituxin in combination with granulocyte-macrophage colony-stimulating factor, interleukin-2, and 13-cis-

 

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retinoic acid, for the treatment of patients with high-risk neuroblastoma (a rare form of pediatric cancer) who achieve at least a partial response to prior first-line multi-agent, multimodality therapy. Unituxin is a chimeric, monoclonal antibody composed of a combination of mouse and human proteins that induces antibody-dependent cell-mediated cytotoxicity, a form of cell-mediated immunity whereby the immune system actively targets a cell that has been bound by specific antibodies. We received orphan drug designation for Unituxin from the FDA, conferring exclusivity through March 2022, during which period 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. In addition, approval of our BLA conferred a 12-year exclusivity period through March 2027, during which the FDA may not approve a biosimilar for Unituxin.

 

Revenues

 

Our net product sales consist of sales of the five commercial products noted above. We have entered into separate, non-exclusive distribution agreements with Accredo Health Group, Inc. and its affiliates, including Curascript SD Specialty Distribution (Accredo), and CVS Caremark, Inc. (Caremark) to distribute Remodulin, Tyvaso and Orenitram in the United States, and we have 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. We sell Adcirca through Lilly’s pharmaceutical wholesale network. To the extent we have increased the price of any of these products, increases have typically been in the single-digit percentages per year, except for Adcirca, the price of which is set solely by Lilly. In 2018, we anticipate revenues will decrease as compared to 2017 given the launch of a generic version of Adcirca in August 2018, a reduction in the price at which we sell Remodulin to an international distributor, and reimbursement challenges for our oral therapies leading to increased utilization of our patient assistance programs. We are investing in the development of new products and label expansions for existing products, which we expect to result in a return to revenue growth over the longer term.

 

We require our specialty pharmaceutical distributors to maintain reasonable levels of inventory reserves because the interruption of Remodulin, Tyvaso or Orenitram therapy 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 do not precisely reflect changes in patient demand.

 

Generic Competition

 

We settled litigation with each of Sandoz, Inc. (Sandoz), Teva Pharmaceuticals USA, Inc. (Teva), Par Sterile Products, LLC (Par) and Dr. Reddy’s Laboratories, Inc. (Dr. Reddy’s), 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 can market its generic version of Remodulin in the United States beginning as early as June 2018, and Teva, Par and Dr. Reddy’s can each launch their generic versions in the United States beginning in December 2018. We also settled litigation with Actavis Laboratories FL, Inc. (Actavis) relating to its ANDA seeking FDA approval to market a generic version of Orenitram before the expiration of certain of our U.S. patents. Under the settlement agreement, Actavis can market its generic version of Orenitram in the United States beginning in June 2027, although Actavis may be permitted to enter the market earlier under certain circumstances. We also settled litigation with Watson Laboratories, Inc. (Watson) relating to its ANDA seeking FDA approval to market a generic version of Tyvaso before the expiration of certain of our U.S. patents. Under the settlement agreement, Watson can market its generic version of Tyvaso in the United States beginning in January 2026, although Watson may be permitted to enter the market earlier under certain circumstances.

 

As a result of our settlements with Sandoz, Teva, Par and Dr. Reddy’s, we expect to see generic competition for Remodulin from these companies in the United States beginning sometime in 2018. To date, only Sandoz has received tentative approval for its ANDA, but to our knowledge, Sandoz has not yet begun to sell its generic version of Remodulin. As a result of our settlements with Watson and Actavis, we expect to see generic competition for Tyvaso and Orenitram in the United States beginning as early as 2026 and 2027, respectively. Competition from these generic companies 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

 

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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 our products. 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.

 

A U.S. patent for Adcirca for the treatment of pulmonary hypertension expired in November 2017, and two remaining patents have been invalidated. In May 2017, we amended our license agreement with Lilly relating to Adcirca to extend the term of the agreement through December 2020 and to amend the economic terms of the agreement following the expiration of a patent covering Adcirca in November 2017. As a result of this amendment, beginning December 1, 2017, our royalty rate on net product sales of Adcirca increased from five percent to ten percent, and we are required to make milestone payments to Lilly equal to $325,000 for each $1,000,000 in net product sales. Adcirca’s cost of product sales as a percentage of Adcirca’s net product sales has increased significantly since December 1, 2017 due to these cost increases. In August 2018, Mylan N.V. announced the launch of its generic version of Adcirca, which resulted in a material adverse impact on Adcirca net product sales, driven by a greater than 40% reduction in the number of bottles of Adcirca sold to distributors during the first full month following the availability of the generic version. In addition, we expect declines in patient demand to cause Adcirca inventory held by distributors and other downstream customers to expire unsold. Our allowance for product returns was $23.0 million and $7.2 million as of September 30, 2018 and December 31, 2017, respectively.

 

In April 2018, a generic version of Remodulin was approved in Germany, Italy and France. The launch of a generic version in these countries, expected sometime in 2018, will likely lead to a decline in our international Remodulin revenues due to increased competition and a contractual reduction in our transfer price of Remodulin to an international distributor for sales into Germany, Italy and France, as well as other countries in which the pricing of Remodulin is impacted by reference pricing. Approval of the generic version of Remodulin in other countries may follow. Our non-U.S. net product sales for Remodulin were $66.1 million and $125.5 million for the nine months ended September 30, 2018 and 2017, respectively.

 

Patent expiration, patent litigation and generic competition for any of our commercial PAH products could have a significant, adverse impact on our revenues, profits and stock price, and 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 IIItem 1A—Risk Factors included in this Quarterly Report on Form 10-Q.

 

Acquisition of SteadyMed Ltd.

 

On April 29, 2018, we entered into an Agreement and Plan of Merger (Merger Agreement) with SteadyMed Ltd. (SteadyMed) and Daniel 24043 Acquisition Corp Ltd., our wholly-owned subsidiary (Merger Sub). The Merger Agreement provided for the merger of Merger Sub with and into SteadyMed (the Merger), with SteadyMed surviving the Merger as our wholly-owned subsidiary.

 

On August 30, 2018, we completed the Merger. At the effective time of the merger, each SteadyMed ordinary share was converted into the right to receive (i) $4.46 in cash, representing aggregate consideration payable to former holders of SteadyMed securities of approximately $141 million; and (ii) one contingent value right, representing the right to receive $2.63 in cash upon the achievement of 3,000 patients having initiated treatment using SteadyMed’s Trevyent product on a commercial basis on or before August 30, 2023 (the Milestone). Aggregate contingent consideration of $75.0 million will become payable if the Milestone is achieved. Refer to Note 3—Acquisition for additional information.

 

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:

 

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Cost of Product Sales

 

Our cost of product sales primarily includes costs to manufacture and acquire products sold to customers, royalty and milestone 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 also 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. Our cost of product sales for Adcirca increased significantly as a percentage of Adcirca revenues beginning December 1, 2017 as a result of the increased royalty and milestone payments, from five percent to an effective rate of approximately 42.5 percent, contained in our amended license agreement with Lilly.

 

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 also 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. We have incurred, and expect to continue to incur, increased clinical trial-related expenses, driven by the recent expansion of our pipeline programs, which we expect will result in the enrollment of several large clinical studies.

 

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 also 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 also include our core corporate support functions such as human resources, finance and legal, external costs to support our core business such as insurance premiums, legal fees and other professional service fees. To the extent that we make charitable grants to non-affiliated, non-profit organizations, these are also included within general and administrative expenses.

 

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, and in June 2018, our shareholders approved a 2,900,000 share increase in the number of shares issuable under the 2015 Plan. 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 and non-employee directors. In June 2016 and October 2017, we also began issuing restricted stock units to non-employee directors and employees, respectively. The grant date fair values of stock options and restricted stock units are recognized as share-based compensation expense ratably over their vesting periods.

 

The fair values of STAP awards and stock options are measured using inputs and assumptions under the Black-Scholes-Merton model. The fair value of restricted stock units is measured using our stock price on the date of grant.

 

Although we no longer grant STAP awards, we still had approximately 3.0 million STAP awards outstanding as of September 30, 2018. 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 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 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 STAP awards from period to period: (1) volatility in our stock price (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

 

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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.

 

Research and Development

 

We focus most of our research and development efforts on the following near-term pipeline programs (intended to result in product launches in the 2018-2021 timeframe) and medium-term pipeline programs (intended to result in product launches in the 2022-2025 timeframe). We are also engaged in a variety of additional medium- and long-term research and development efforts, including technologies designed to increase the supply of transplantable organs and tissues and improve outcomes for transplant recipients through regenerative medicine, xenotransplantation, biomechanical lungs and ex-vivo lung perfusion.

 

Near-Term Pipeline Programs (2018-2021)

 

Product

 

Mode of Delivery

 

Indication

 

Current Status
STUDY NAME

 

Our Territory

Implantable System for Remodulin

 

Continuous intravenous via implantable pump

 

PAH

 

FDA approval received July 30, 2018; U.S. launch pending

 

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

 

 

 

 

 

 

 

 

 

RemUnity™

(treprostinil)

 

Continuous subcutaneous via pre-filled, semi-disposable system

 

PAH

 

510(k) application process ongoing with FDA

 

Worldwide

 

 

 

 

 

 

 

 

 

Orenitram in combination with approved background therapy

 

Oral

 

PAH

(decrease morbidity and mortality)

 

Phase IV

FREEDOM-EV Study completed, primary endpoint met; FDA supplement in preparation

 

Worldwide

 

 

 

 

 

 

 

 

 

Trevyent® (treprostinil)

 

Continuous subcutaneous via pre-filled, disposable PatchPump® system

 

PAH

 

NDA to be resubmitted to FDA

 

Worldwide, subject to out-licenses granted in Europe, Canada and the Middle East

 

 

 

 

 

 

 

 

 

Tysuberprost™

(esuberaprost in combination with Tyvaso)

 

Oral (esuberaprost)

Inhaled (Tyvaso)

 

PAH

(decrease morbidity and mortality)

 

Phase III

BEAT

 

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

 

 

 

 

 

 

 

 

 

RemoPro™ (pain-free subcutaneous Remodulin prodrug)

 

Continuous subcutaneous

 

PAH

 

Phase I

 

Worldwide

 

 

 

 

 

 

 

 

 

Dinutuximab

 

Intravenous

 

Small cell lung cancer

 

Phase II/III DISTINCT

 

Worldwide

 

 

 

 

 

 

 

 

 

Tyvaso (treprostinil)

 

Inhaled

 

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

 

Phase III

INCREASE

 

Worldwide

 

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Medium-Term Pipeline Programs (2022-2025)

 

Product

 

Mode of Delivery

 

Indication

 

Current Status 

STUDY NAME

 

Our Territory

Tyvaso (treprostinil)

 

Inhaled

 

Pulmonary hypertension associated with chronic obstructive pulmonary disease (WHO Group 3)

 

Phase III

PERFECT

 

 

Worldwide

 

 

 

 

 

 

 

 

 

Treprostinil Technosphere®

 

Inhaled dry powder

 

PAH

 

Phase III

 

Worldwide

 

 

 

 

 

 

 

 

 

Orenitram

(treprostinil)

 

Oral

 

Pulmonary hypertension associated with left ventricular diastolic dysfunction

(WHO Group 2)

 

Phase III

SOUTHPAW

 

Worldwide

 

 

 

 

 

 

 

 

 

Aurora-GT™

(eNOS gene therapy)

 

Intravenous

 

PAH

 

Phase II/III

SAPPHIRE

 

United States

 

 

 

 

 

 

 

 

 

SM04646

 

Inhaled

 

Idiopathic pulmonary fibrosis

 

Phase I

 

United States and Canada

 

Implantable System for Remodulin

 

On July 30, 2018, we obtained the final FDA approval necessary to launch the Implantable System for Remodulin in the United States. This system has been developed in collaboration with Medtronic, Inc. (Medtronic) and incorporates a proprietary Medtronic intravascular infusion catheter with its SynchroMed® II implantable infusion pump and related infusion system components (together referred to as the Implantable System for Remodulin) in order to deliver Remodulin for the treatment of PAH. We believe this 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. To launch the Implantable System for Remodulin in the United States, we pursued parallel regulatory filings with Medtronic relating to the device and the drug, respectively. Medtronic’s premarket approval application (PMA) for the device was approved by the FDA in December 2017, and on July 30, 2018, the FDA approved our NDA for the use of Remodulin in the implantable pump.

 

Prior to launch, we must enter into a commercialization agreement with Medtronic. Our ability to commercialize the system is entirely dependent on Medtronic’s ability and willingness to manufacture the system on commercially reasonable terms, which is outside of our control. In addition, launch preparation for an implantable system is inherently complicated and the generation of significant incremental revenues from the use of the Implantable System for Remodulin could take longer than anticipated. The Implantable System for Remodulin is a complex program, requiring precision and care to ensure that implant surgeons, refill centers, reimbursement pathways, and other health care service organizations are adequately prepared, established and trained. We plan to approach the launch in a careful and deliberate manner to ensure the safety of patients and the long-term success of the program. In addition, Medtronic has informed us that it has fewer than 100 pumps available for initial launch, and that it may be unable to manufacture additional pumps until the FDA approves a next-generation system incorporating a variety of quality enhancements, which is anticipated in late 2019 but may take longer. We anticipate that the initial pump supply will enable us to launch the Implantable System for Remodulin in late 2018 or early 2019 at the ten clinical trial sites that participated in the DelIVery study. We plan to initiate a broader launch with the next-generation system.

 

Medtronic is entirely responsible for regulatory approvals and all manufacturing and quality systems related to its infusion pump and related components. Medtronic entered into a consent decree citing violations of the quality system regulation for medical devices and requiring it to stop manufacturing, designing and distributing SynchroMed II implantable infusion pump systems, except in limited circumstances, until the FDA determines that Medtronic has met all the provisions listed in the

 

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consent decree. During the fourth quarter of 2017, Medtronic was notified by the FDA that these provisions had been satisfied, and Medtronic was therefore permitted to recommence the manufacture and sale of the systems without limitation, but certain other elements of the consent decree remain in effect, such as the requirements to comply with a remediation plan and to submit to periodic auditing of Medtronic’s quality systems. Any non-compliance by Medtronic with its consent decree could interrupt its manufacture and sale of the device.

 

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 system for subcutaneous delivery of treprostinil, which we call the RemUnity system. Under the terms of the agreement, we are funding 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. The RemUnity system consists of a small, lightweight, durable pump that is intended to have a service life of at least three years. The RemUnity system uses disposable cartridges pre-filled with treprostinil, which can be connected to the pump with less patient manipulation than is typically involved in filling currently-available subcutaneous pumps.

 

DEKA is working with FDA with the goal of obtaining 510(k) clearance of the RemUnity system. Initially, we plan to launch the system with disposable components to be pre-filled with Remodulin by our specialty pharmacy distributors. We are also engaged in further development efforts intended to enable us ultimately to submit a new drug application for a version of the system that includes disposable components that are pre-filled as part of the manufacturing process.

 

We are also conducting phase I studies to develop a new prodrug of treprostinil called RemoPro, which is intended to enable subcutaneous delivery of treprostinil therapy without the site pain currently associated with subcutaneous Remodulin. RemoPro is designed to be inactive in the subcutaneous tissue, which should decrease or eliminate site pain, and to metabolize into treprostinil once it is absorbed into the blood.

 

Trevyent

 

In August 2018, we completed the acquisition of SteadyMed, which is developing Trevyent, a post-phase III development-stage drug-device combination product that combines SteadyMed’s two-day, single use, disposable PatchPump technology with treprostinil, for the subcutaneous treatment of PAH. In August 2017, SteadyMed received a refuse-to-file letter from FDA with respect to its 505(b)(2) NDA for Trevyent. SteadyMed met with the FDA in November 2017, and the FDA indicated that SteadyMed does not need to conduct any clinical trials to prove the safety or efficacy of Trevyent. We are completing certain additional non-clinical activities, and anticipate resubmitting the NDA during the first half of 2019. These activities include design verification testing on the final to-be-marketed Trevyent product, pharmacokinetic modeling and process validation.

 

Orenitram

 

In 2013, the FDA approved Orenitram for the treatment of PAH 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. In August 2018, we announced that our phase IV study of Orenitram called FREEDOM-EV had met its primary endpoint of delayed time to first clinical worsening event. In particular, the preliminary results showed that Orenitram, when taken with an oral PAH background therapy, decreased the risk of a morbidity/mortality event versus placebo by 26% (p=0.0391). We plan to seek FDA approval for a label amendment reflecting the FREEDOM-EV results, and we are evaluating whether the results could support marketing applications for Orenitram outside the United States.

 

We are also enrolling patients in a study of Orenitram (SOUTHPAW) to treat WHO Group 2 pulmonary hypertension (specifically associated with left ventricular diastolic dysfunction). There are presently no FDA approved therapies indicated for treatment of WHO Group 2 pulmonary hypertension.

 

Tysuberprost

 

In 2012, we completed a phase I safety study of esuberaprost, a single-isomer orally bioavailable prostacyclin analogue, and the data suggested that dosing esuberaprost four times a day was tolerable. We believe that esuberaprost and treprostinil

 

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have differing prostacyclin receptor-binding profiles and are studying the potential safety and efficacy benefits for patients when used in combination. We also believe that inhaled treprostinil and oral esuberaprost have complementary pharmacokinetic and pharmacodynamic profiles, which indicate that they should provide greater efficacy in combination. In March 2017, we completed enrollment of our 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 Tyvaso or have a less than optimal response to Tyvaso treatment. We refer to the resulting use of esuberaprost and Tyvaso therapies in combination with each other as Tysuberprost. The FDA has granted orphan drug designation for esuberaprost, which we expect would yield seven years of regulatory exclusivity if the FDA approves an esuberaprost NDA following successful study results. We also have one U.S. patent expiring in 2031, covering a method of treating pulmonary hypertension using oral and inhaled prostacyclin therapies in combination, which we expect should be eligible for listing in the Orange Book if the FDA approves esuberaprost.

 

Unituxin

 

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