United Therapeutics Corp

NASDAQ:UTHR

Earnings Call Transcript 2017-Q4

[Operator]

Good morning. My name is Nichole. I will be your conference operator today. At this time, I would like to welcome everyone to the United Therapeutics Corporation Fourth Quarter and Annual 2017 Financial Results. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. [Operator Instructions] Remarks today concerning United Therapeutics will include forward-looking statements representing the Company's expectations or beliefs regarding future events. The Company cautions that these statements involve risks and uncertainties that may cause actual results to differ materially. Please see the Company's latest SEC filings, including Form 10-K and 10-Q for additional information on these risks and uncertainties. The Company assumes no obligation to update forward-looking statements.

Today's remarks may also include financial measures that were not prepared in accordance with the U.S. Generally Accepted Accounting Principles. Reconciliations of non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found in our earnings release available on our website at www.unither.com.

Finally, please note that today's remarks may include reporting on the progress and results of clinical trials or other developments with respect to the Company's products. These remarks are intended solely to educate investors about the Company, and are not intended to promote the Company's products, to suggest that they are safe and effective for any use other than what is consistent with their FDA approved labeling or to provide all available information regarding the products, their risks or related clinical trial results. Anyone seeking information regarding the use of one of the Company's products should consult the full prescribing information for the product available on the Company's website at www.unither.com.

Thank you. Dr. Rothblatt, you may begin your conference.

[Martine Rothblatt, Founder, Chairman & CEO]

Thank you, operator. Good morning, everyone. Welcome to the United Therapeutics' 2017 Fourth Quarter and Annual Financial Results Conference Call. Our fourth quarter net revenues reached $465 million and our annual net revenues reached $1.7 billion, our highest quarterly and annual net revenues ever.

Orenitram's fourth quarter net revenues grew by 25%, as compared to the same period in the prior year, representing our third consecutive quarter of greater than 20% net revenue growth for this therapy and confirming our belief in the organic growth opportunity for Orenitram, which is still the only true oral prostacyclin analogue therapy for the large and increasing number of pulmonary arterial hypertension patients.

These financial results strengthen our ability to develop and advance our growing product pipeline, which currently includes seven phase III programs and multiple next-generation treprostinil drug delivery systems, as well as investigative regenerative medicine and organ manufacturing programs, which UTHR provide a cure for pulmonary hypertension and many other end-stage organ diseases.

Let me provide a little bit more color on these introductory remarks by delving into the seven phase III programs and multiple next-generation treprostinil drug delivery systems, as well as the investigative regenerative medicine and organ manufacturing programs.

I think by reviewing these multiple projects in our pipeline, we’ll be able to see that’s a good kind of mantra for United Therapeutics going into 2018 is growth and goals. We have a lot of exciting things that will continue to grow our Treprostinil franchise and as we grow this Treprostinil franchise, we will become ever more able to achieve our ultimate goal of a cure for pulmonary arterial hypertension, as well as other end-stage lung diseases.

The first of these seven phase III trials I’d like to talk about is the FREEDOM-EV trial. This study was scheduled to enroll approximately 600 patients and substantially overenrolled that number of patients due to the rush of physicians trying to put more and more patients into the study as we approached our ending date.

We currently are accruing the requisite number of events whether of one source or another that prescribe the date at which we unblind that study and at the current approval rate for events in the FREEDOM-EV study, we remain confident that the study should unblind prior to the end of 2018.

The second phase III study that I’d like to talk about is our BEAT study using Esuberaprost in combination with Tyvaso to achieve a reduction in morbidity and mortality for pulmonary arterial hypertension. I’d like to remind some of the listeners that Esuberaprost is a derivation of the Beraprost molecule that we in-licensed from Toray Industries of Japan several years ago.

However, Esuberaprost is four times more potent than Beraprost, because we successfully isolated the single active isomer out of an ischemic mixture which was the zest of the IP we licensed from Toray.

When taken together with Tyvaso, we believe that Esuberaprost by working with a complementary and different set of prostacyclin receptors than that of treprostinil the active pharmaceutical ingredient in Tyvaso will achieve a synergistic effect on the pulmonary artery vasodilation, platelet aggregation, neointimal proliferation and through these three different mechanisms of actions we will be able to have a reduction in morbidity and mortality in pulmonary hypertension.

In addition, there is a very significant pharmacokinetic synergy between Tyvaso and Esuberaprost because Tyvaso is inhaled briefly four times a day, therefore has a set of peaks and troughs four times a day and the pharmacokinetics of Esuberaprost are complementary to the peaks and troughs of Tyvaso providing an equivalent zero odor release of level type of release of active pharmaceutical drug substance in the patient’s body.

That study is also now fully enrolled. And by the way, the BEAT study was one of the FDA’s preferred type of EnRichment clinical trial designs where the study was enriched for those type of patients most likely to see a digital benefit or not benefit from the results of the study. And as a result, we are expecting a unblinding by the end of this year as well; it too is accumulating events at a predicted rate which is consistent with unblinding by the end of this year.

I’d like to now turn to the third phase III study which we are conducting under a renewed shift diseases for a while and use them to our DISTINCT study of Unituximab – dinutuximab, excuse me, brand name Unituxin in small cell lung cancer. And this study is now enrolling patients throughout the world and it’s a combination study for the treatment of small cell lung cancer in patients who have proven refractory to first-line therapy.

I can’t be exactly confident of when this study will enroll. It will unblind, of course it too is an event-driven study. But based on our anticipations, we would expect that within the next couple of years, we should be able to fully enroll and consequently unblind that study.

Now I would like to move to yet a different disease, which is the Idiopathic Pulmonary Fibrosis disease and that’s the disease that we have inhale treprostinil as Tyvaso. The rapidly being used in a study that we call INCREASE.

Now, in this study, which is well over a third enrolled at current and we can pretty confidently predict that it should reach its full enrollment, I would say, 12 months plus or minus three to six either side. That will then give us an entry into the first therapy to treat pulmonary hypertension that is incident to pulmonary fibrosis, a huge unmet medical need. A type of pulmonary hypertension that has no FDA approved drug to treat it whatsoever, that’s called a Group 3 pulmonary hypertension.

Well, that study is going very, very well and also a near-term ublinding. A complete perfect example of what would be called an unmet medical need being addressed by United Therapeutics products.

I’d now like to move into the steps if I am keeping my mental counting going correct, phase III trial which is called SOUTHPAW. This is a trial of our oral prostacyclin analogue Orenitram in patients with congestive heart failure and particularly a form of congestive heart failure which is of course a huge and pretty much dominant cause of morbidity and mortality in the U.S. known as HFpEF which is heart failure, that’s the HF, HF, in the presence of Preserve that’s the P, Ejection that’s the E, and Fraction which is the last F.

So there are a large population of patients numbering in the hundreds of thousands who have absolutely no therapy approved by the FDA to treat it. The World Health Organization calls it Class II or Group II type of pulmonary hypertension.

We are – based on very strong early data that shows that in this HFpEF population with Left Ventricular Diastolic Dysfunction if you give them treprostinil or a prostacyclin analogue, you can have a significant improvement under exercisability. We have begun enrolling this study and I am again - with all studies that are in process, we can’t see really in process of enrollment as opposed to fully enrolled and just looking for events.

We can’t be exactly clear when the enrollment would be complete. But I think I would be – it would be similar to the timeframe that I have laid out for our DISTINCT study in small cell lung cancer.

Now let me go on to the sixth phase III study we have underway, which is our SAPPHIRE study of gene therapy for the treatment of pulmonary arterial hypertension. This is a very high-tech therapy in which we take a patient’s own cell, the so-called Autologous cells, one’s own cells from their own body and we turn these cells into little medicine-making factories, microphytic medicine-making factories that make the exact molecule that the patients are short of and in this case, it’s nitric oxide synthase – endogenous nitric oxide synthase.

So we genetically manipulate the patients’ own cells to make them into super powerful little medicine factories. We then ship those cells back to the patient’s hospital from the centralized super pure, super high-level delivery factory where we do this and then the cells are reinfused into the patients every – periodically every month, every three months and with the goal of showing a significant improvement in these patients’ pulmonary arterial hypertension, there is even an extension phase of this study that some patients will continue to receive the infusion, some won’t.

So there is the prospect that this kind of gene therapy could actually cure pulmonary hypertension for these patients.

It’s funny I can’t help or tell this little story at this point that some people have said to me, Martine, you have a pharmaceutical company, for profit pharmaceutical company. If you cure the patients with pulmonary hypertension, where are the – where the company’s revenue is going to come from? And it’s just being kind of funny to me, because I thought, wow, if we are able to actually cure an incurable disease that the greatest pharmaceutical companies of the world like Johnson & Johnson, and SmithKline Glaxo and Bayer have not been able to cure.

If we are able to cure this disease with our proprietary technology of converting Autologous cells into little medicine-making factories, how many other diseases are there that we will also be able to apply the same technology to. And of course, you can be sure we already reaching in early, preclinical and phase I work in these other diseases. So, far from being the – a great story that diminishes revenues, it’s a great story that harkens a huge explosion of positive opportunities for United Therapeutics.

I don’t want to ramble on too long now, but let me just get to my seventh study, which is underway which is the PERFECT study. And it’s called PERFECT because it’s an acronym for use of inhaled treprostinil in patients that have COPD. And COPD, I’ve got sensitive COPD, perhaps many of you on the call have ambulatory or relative with this. But it’s a devastating condition and it actually robs the patients’ breath. There has been no therapy ever proved by the FDA for the pulmonary hypertension, which is incident to so many of these COPD patients. And I really want to salute Dr. Waxman and the great team up at Boston Brigham and Women's and the hospitals in that area who have brought this unmet medical need to our attention who developed a terrific track record of being able to treat COPD patients with Tyvaso when the insurance companies were kind enough to go along with that even though with some experimental therapy demonstrated improvements in six minutes walk, which were literally off the charts compared to anything that’d be ever experienced in idiopathic pulmonary - idiopathic pulmonary hypertension or Group 1 pulmonary hypertension. So, based on its very strong phase II data that we designed this PERFECT study, it too is an EnRichment trial design. The FDA’s new preferred trial design and it’s again with studies that are in the enrollment phase, it’s impossible for me to really predict exactly when it will be fully enrolled. But I would say it’s in the same ballpark with DISTINCT and with SOUTHPAW in terms of studies that are going to enroll and then we’ll have a readout shortly thereafter.

I really wanted to talk about the goals portion, this is now the growth portion, these seven phase III studies that’s causing us tremendous growth, but very briefly on the goals portion what we simply say that we continued – firstly every single week to save lives with our manufactured organs from our ex-vivo lung perfusion facility here in Silver Spring.

The story is our remarkable transplant centers – centers their lungs from all over the U.S. Are they send them to us because it’s nothing that we can do with them and unfortunately the patients have died, the patients with the Netherlands that has to be a organ donor. Over and over and over again, we restore these lungs to pristine shape and show the transplant surgeons the results over our high speed data and video network, real-time bronchoscopy, real-time X-ray imagery, moving the equipment around this at transplant.lung.

So once in your life the poor transplant doc have to get on a plane and coming to treat their lungs they can see to our real-time network, what good shape these manufactured lungs are in. If they accept them, 100% of the time that the doctors have remotely accepted our lungs, those lungs have call on to be transplant into the patients and the patients have gone on to walk out of the hospital without the need for their oxygen bottle for other medications with treating their end-stage lung disease. So, it is a kind of technological miracle that we are creating here on the organ manufacturing side.

And our goal is to take that from where it is right now to actually double and then triple the number of lung transplants that are done in the United States and then extend that to doubling and then tripling the number of kidney transplants and a number of heart transplants that are being done.

Operator, with those introductory remarks, I’d now like to open the call for questions.

[Operator]

Thank you [Operator Instructions] Our first question comes from the line of Liana Moussato of Wedbush Securities. Your line is now open.

[Liana Moussato, Wedbush Securities]

Thank you for taking my question. Before you cure pulmonary hypertension with gene therapy, can you tell us what are the next steps to the launch of RemoPro and are you waiting on Medtronic or the FDA to do anything?

[Martine Rothblatt, Founder, Chairman & CEO]

Sure. Well, the good news is when you always keep the FDA busy with submissions, then you are always going to be waiting on the FDA. And it’s not a bad waiting, it’s a good waiting. So, we definitely are waiting on the FDA and as well, when you work with great partners as we do Medtronic and Deca and other companies, then there is always a research and development involved to certain amount of waiting.

But again it’s good waiting. It’s the kind of waiting like when you are baking a pie and you are waiting for the pie to be ready. So let me go through some of those waitings, It’s an excellent question. So, start with the Implantable System for Remodulin, the acronym ISR, just like the Israeli acronym for the ISR, the ISR system is now before the FDA.

We submitted the drug portion of the ISR at the end of January and we expect to learn by the end of February whether or not it will be a one or two submission. And depending on that is whether it’s a shorter or a little bit of a longer review, but in either event, the review period would be consistent with our being able to get approved for and launch the product in the next calendar year. So, everything is on schedule.

Everything is consistent with what we previously cite that 2017 – 2018 is the year that we expect the ISR to be approved and we continue to be very optimistic and boast without doubt. I have to leave it to our legal experts as to exactly when to provide advice as to the type of approval process, review process that the FDA will go through one or two for ISR.

But certainly, I know that’s something that’s obviously important to you and other people and I am sure that at minimum there would be an update of our SEC filings I am sure to say what type of review process the FDA decided to put that through. So that’s definitely on the checklist for a new product launch and within the next twelve months, we will be there. We will be there, knock on wood, everything going okay with the FDA, we should be there with the launch of ISR.

It is a revolutionary product. It is – you’ve never heard me – and you been used listen to me, I’ve been on these phones like more than 15 years I think, you’ve never heard me say this before with any other product.

I have not seen more physicians excitement and anticipation over any product than the ISR system, which is a little bit surprising to me, because when you get into the nitty gritty details of it, which I am that type of a manager, it’s pretty high tech and amazing, you are talking about over a flip of a medical-grade catheter inside of a patient’s body connected to a machine.

It’s a pump but it’s a machine that has to work automatically for years upon years, four years without any failure anything and then have its rate of flow be controlled through the electromagnetic spectrum, through wireless connection. This is, you know, pretty star trek futuristic sci-fi technology. And yet, there are dozens of patients who feel that this is the therapy that gave them their lifestyle, life back.

It was not getting put on icy or subcue Remodulin after they were panting for breathe and couldn’t be deductive. There is that something their life back. It was getting rid of the pump having everything internal.

So there is nothing to have to do every day. That’s what’s got them to their life back and that’s what we hear from every one of the physicians involved in the ISR program and I prove some multiple patient sending new YouTubes of gratitude and that sort of thing.

So, much to launch there. The next one that you talked about was the RemUnity. And on the RemUnity, we expect to file the 510(NYSE:K) for – if approved for this month. So, again we are knock on wood, because that’s a big filing, a lot of parts and pieces going together. The RemUnity should do for subcue what the ISR does for IP, that’s the easy way to think of this.

And hopefully, that too will be a rapid review at the FDA 510(K), a usually pretty rapid review, just because it’s a rapid review, there is no guarantee that there is not going to be any need for back and forth and everything the FDA is looking at for our safety and our efficacy and we are thankful for that. But that is on track for filing this month, before 24 we say that.

And also I would say that means that it is in our planning and on track for commercial launch this calendar year. So that’s two additional commercial launches that I am able to talk about on this call. So those are the main things that we are waiting for you there the FDA for other partners.

Thank you for your question. Operator, could you queue up the next question please?

[Operator]

Our next question comes from the line of Jessica Fye of JPMorgan. Your line is now open.

[Jessica Fye, JPMorgan]

Great. Thanks for taking my question. Martine, just wanted to clarify on the RemUnity 510(K) filing coming up. Is this version of the RemUnity pump, the kind with the semi-disposable cartridges or is this a patient filled pump? Thank you.

[Martine Rothblatt, Founder, Chairman & CEO]

Yes, no, this is not going to be patient-filled. These are all pre-filled.

[Jessica Fye, JPMorgan]

Thank you.

[Martine Rothblatt, Founder, Chairman & CEO]

Next question please?

[Operator]

Thank you. Our next question comes from the line of Chris Shibutani of Cowen. Your line is now open.

[Chris Shibutani, Cowen]

Yes, hi, Martine. Could you help us a little bit understand the pattern of the operating expense components? There seem to step-up both from the COGS, R&D, SG&A, your scripted remarks highlighted your multiple ongoing clinical trials. Can you give us a little bit of a sense for whether the fourth quarter that you just reported reflects some sort of a trend that we should be pulling forward as we think about operating expenses this year and next? Thank you.

[Martine Rothblatt, Founder, Chairman & CEO]

Well, thank you for the question. I am fortunate to have our Chief Financial Officer sitting right next to me here in Silver Spring. And James, could you kind of field that question?

[James Edgemond, Chief Financial Officer & Treasurer]

Sure, great, thanks for the question. So there was two. There was one about COGS and there was a step-up in COGS this quarter reflective of the increased royalty that we paid to Lilly associated with the new contract. So there was probably about a $20 million increase in COGS there. With respect to the general spend levels, specifically to R&D as you ask, there was about $100 million increase year-over-year and if you recall back to the start of this year, our expectation that we communicated was that there will be an increase of R&D to advance our expanding product pipeline that we talked about in our opening remarks.

The increase that we anticipate going forward will be at these levels, but again we don’t want to get into a quarterly discussion because of the starting and stopping of studies, the starting and stopping of research projects just within a calendar year. So it’s best to look at it overall and we don’t want to get into a quarterly discussion as you brought up.

But I would expect going forward the R&D expenses to continue at an elevated level just with the large amount of pipeline products that Martine talked about and that are reflected in the pipeline chart on our website.

[Martine Rothblatt, Founder, Chairman & CEO]

Thanks, James. Operator, could you please queue up the next question?

[Operator]

Our next question comes from the line of Geoff Meacham of Barclays. Your line is now open.

[Unidentified Analyst]

Hi, thanks so much for taking our questions. This is Jason on for Geoff. Yes, in terms of looking at the FREEDOM EV study, I mean, what do you see as a kind of a reasonable bar for commercial viability versus the competition? Does it matter for patients to one or more therapies? Just kind of want to understand your sense of combination therapies moving forward? Thank you.

[Martine Rothblatt, Founder, Chairman & CEO]

Thanks, Jason for your questions. I think the bar for the competition is actually pretty low. According to the label UPTRAVI, which would be the closest comparable drug to Orenitram, about half of the patients fail the UPTRAVI therapy within three years. So that’s a lot of patients. We are looking at here 30,000, 40,000 patients with pulmonary arterial hypertension.

If only the half that failed within three years ended up on Orenitram which would be the logical thing to do once you failed one oral therapy, go to another oral therapy before you take on more invasive therapies, it would be well north of 10,000 patients coming on to Orenitram. So, that bar for therapy – for competition right there is pretty low.

It’s actually lower than that because in the real world one never sees results as good as – I won’t say never, but rarely see results that could helping controls, clinical trial where you have a lot of forces kind of making people fit for the therapy that they are on instead of switching to another therapy that benefits the patient that’s not doing as well.

And in fact as highlighted in my introductory remarks, we see Orenitram growing quarter-after-quarter, third consecutive growth - quarter growth of greater than 20% and this is reflective of the fact that ever more patients are failing Ambition therapy, are failing UPTRAVI therapy and are coming on to Orenitram therapy.

Now Orenitram has a beautiful characteristic that neither Ambition nor UPTRAVI can match and that is it’s titratable, it’s titratable as titratable really as is a primal therapy such as Remodulin. So, this is a fantastic skill set that is resident within Orenitram that allows us to hold on to its patients for a much longer period of time, because you can continue to titrate the therapy.

I think is on top of all of that, which has led us to have approximately a one-third versus two-thirds market share UPTRAVI as of right now without the readout of the EV therapy, without any data in combination therapy, without a label showing equivalent morbidity and mortality, which got like a third market share right now without any events up.

I think that once we report out data showing a improvement in morbidity and mortality from Orenitram that there will be no competitive difference in terms of anything that advantages UPTRAVI and in fact significant competitive advantage towards Orenitram which is its titratability and which is the also the efficacy inherent and be the only true prostacyclin oral analogue.

Operator, can you please queue up the next – this I guess would be the last question.

[Operator]

Yes. Our last question comes from the line of Terence Flynn of Goldman Sachs. Your line is now open.

[Holly Wright, Goldman Sachs]

Hi, thank you for the question. This is Holly on for Terrance. Just one from us is, has U.S. corporate tax reform changed your thoughts on capital allocation priorities? And can you write those priorities in order of importance? Thanks.

[Martine Rothblatt, Founder, Chairman & CEO]

Yes, thank you very much for the question. Again, I’m honored to be accompanied by our great CFO, James Edgemond. So, James, if you could perhaps talk a little bit about what tax reform had done for United Therapeutics effective tax rate?

[James Edgemond, Chief Financial Officer & Treasurer]

Sure.

[Martine Rothblatt, Founder, Chairman & CEO]

I think that’s something that people are very, very interested in.

[James Edgemond, Chief Financial Officer & Treasurer]

Sure. Thank you for the question. U.S. tax reform offers many benefits to UT, but by far the biggest benefit from tax reform in 2018 will be the lowering – we will recognize the benefit of the lowering of the federal rate to 21% from 35%, which will result in improved after-tax cash flows going forward. Keep in mind, we as well as others in the biotech and pharma industry will lose some benefits with respect to the domestic manufacturing deduction as well as some other research credit.

But like many other companies, one thing you will note in our financial statements for 2017 is that we did need to recognize the benefit of these lower rates and we value our existing deferred tax assets and liabilities, which represented to us the non-cash charge of about $71 million. But these benefits that we will recognize going forward as I just talked about will be at these lower rates.

With respect to capital allocation priorities, which was the second part of your question, our priorities really remain unchanged. We will continue to invest in R&D products and research activities that Dr. Rothblatt talked about at the opening part of the call and then the next we will evaluate and continue to look at value-creating M&A opportunities. Our third priority will be share repurchases from time-to-time if appropriate, but if only mission-critical R&D and M&A opportunities do not avail themselves to us. So thank you for the question.

[Martine Rothblatt, Founder, Chairman & CEO]

Thank you very much. Operator, you can now wrap up the call.

[Operator]

Thank you for participating in today's United Therapeutics Corporation Conference Call. A rebroadcast will be available for replay for one week by dialing 1 855-859-2056 with international callers please dial 1 404-537-3406, and using access code 2296917. Thank you and everyone have a great day.